Tax Court Rejects Deduction for Poorly Documented NOLs from Restaurant Franchises

(Parker Tax Publishing December 2022)

The Tax Court held that net operating losses (NOLs) from several Fuddruckers restaurant franchises owned by an accomplished and well-respected CPA were not deductible on her 2014 and 2015 tax returns because she failed to establish the basis for the underlying NOLs. The court also upheld the IRS's assessment of accuracy-related penalties. Amos, T.C. Memo. 2022-109.

Background

Betty Amos is an accomplished Miami CPA and restaurateur. She graduated from the University of Miami in 1973, receiving a Bachelor of Business Administration degree magna cum laude with a major of accounting. After graduation, Amos passed the Florida CPA exam and earned her Master of Business Administration (again from the University of Miami) in 1976, which allowed her to practice as a CPA. During her time in school, Amos worked as a financial analyst. She later transitioned to the role of tax adviser and investment manager for certain high net-worth individuals, including one of the founders of Burger King. Amos owned her own accounting firm and was active in both the AICPA and the Florida Institute of CPAs.

While living in Miami, Amos became acquainted with Nick Buoniconti, a retired National Football League (NFL) Hall of Famer who had played football both for the University of Notre Dame and the Miami Dolphins. Buoniconti was looking for investment opportunities and decided to invest in the restaurant industry with Amos, who had gleaned insights into it from her clients. Amos and Buoniconti ultimately settled on the Fuddruckers restaurant chain after being alerted to it by another retired NFL player, Fred Willis. Thereafter, Amos, Buoniconti, and Willis formed Abkey Partnership (Abkey) to become Fuddruckers franchisees in Florida and signed a multirestaurant development deal.

Amos and Buoniconti subsequently bought out Willis's interest in the partnership. Although Buoniconti was not actively involved in the Fuddruckers venture, he did maintain a stake in the business. Despite the loss of active participation of her partners, Amos pressed ahead, opening her first Fuddruckers in 1984.

Over the next 27 years, Amos ran a total of 15 different Fuddruckers restaurants in Florida and Tennessee. She operated her Fuddruckers enterprise through several partnerships and subchapter S corporations, each bearing some variation of the Abkey name. For her efforts, Amos was honored in 1993 by the National Association of Women Business Owners as its Outstanding Woman Business Owner. She was named to the board of trustees of the University of Miami in 1997, serving as the chair of the audit and compliance committee.

Amos's business fortunes began to decline in the late 1990s after Buoniconti brought a lawsuit relating to the business, which led to his receiving a hefty settlement payment. In 1999, Amos was forced to close one of her Fuddruckers locations. Her business fortunes continued to decline over the next decade, and she closed her last Fuddruckers restaurant in 2011.

Tax Return Reporting

For the 1999 and 2000 tax years, Amos and her then husband, Dr. Righetti, filed joint income tax returns, which were prepared by an accounting firm. On their 1999 return, the couple claimed a refund of almost $90,000. They reported adjustable gross income of negative $1.448 million and a loss of over $1.8 million from the Fuddruckers enterprise. The couple calculated an NOL of almost $1.5 million (based upon their negative gross income and deductions) and included on their tax return an election under Code Sec. 172(b)(3) to forgo the two-year carryback period. They also attached an "NOL carryover worksheet," which set forth the reported NOL amount and identified it as originating in 1999.

On their 2000 return, the couple claimed a refund of over $75,000. They reported adjustable gross income of negative $1.8 million which included losses of almost $700,000 from the Fuddruckers enterprise, and their 1999 NOL carryforward of almost $1.5 million. The couple claimed an NOL deduction for their 2000 tax year of almost $372,000, again electing to forgo the NOL carryback period. They also recorded their 2000 NOL on an NOL carryover worksheet, which reflected that they had a total NOL available (from 1999 and 2000) of almost $1.9 million.

The IRS audited the couple's 2000 return as well as the 2000 return of Abkey Management Corp. (one of Amos's companies that managed some of her Fuddruckers establishments) and ultimately agreed that there was no deficiency in the couple's 2000 tax. By the time Amos filed her 2008 tax return, the NOL carryforward had ballooned to more than $5.7 million. The NOL carryforwards reported on Amos' tax returns exceeded $5.2 million for each of the next three years. For 2012 and 2013, the NOL carryforwards dipped to approximately $4.4 and $4.3 million, respectively.

Amos prepared and filed her 2014 tax return herself. She reported an NOL carryforward deduction of approximately $4.2 million. On an attached net operating loss carryforward deduction statement, Amos stated that the carryforwards were from losses incurred before 2012. Amos also prepared and filed her own 2015 return and claimed an NOL carryforward deduction of approximately $4.1 million resulting in a negative adjusted gross income of more than $4 million. She again reported that her total tax due was zero. And she attached another "net operating loss carryforward deduction statement," which explained only that the carryover from 2014 was accumulated from prior years.

In February of 2018, the IRS sent Amos a notice of deficiency in which it disallowed the claimed NOL deductions of more than $4 million for 2014 and 2015 on the ground that Amos had not established that she sustained the loss in prior years or that any loss was available to be carried over to 2014 and 2015. The notice also determined penalties under Code Sec. 6662(a). Amos filed a timely petition with the Tax Court challenging the IRS's disallowance of the NOL deductions as reflected in the notice of deficiency, as well as the accuracy-related penalties.

Analysis

The Tax Court held that Amos was not entitled to the NOL carryforward deductions because (1) she failed to provide sufficient evidence of the underlying NOLs in 1999 and 2000, and (2) she failed to show that any NOL was available to carry forward to the years at issue. As an initial matter, the court said, Amos failed to establish that she incurred NOLs in 1999 and 2000. The court observed that she relied primarily on her tax returns, as well as her own testimony, to establish these losses. Citing its decision in Bulakites v. Comm'r, T.C. Memo. 2017-79, the Tax Court noted that it has previously held similar proof to be insufficient to substantiate a taxpayer's entitlement to a loss carryforward as prior tax returns show only that the taxpayers claimed NOL carryforward deductions, but do not provide evidence that the taxpayers are entitled to them.

More specifically, the court said, Amos failed to adduce evidence that would give a full picture of her gross income and deductions as necessary to substantiate the claimed losses for 1999 and 2000. Although the record contained some documents (such as tax returns for the year 2000 from various Abkey entities, business ledgers, and documentation of loan defaults) that supported her claim of losses, the court found that Amos failed to link these documents to the purported NOLs either at trial or in her posttrial briefing.

Even assuming arguendo that Amos incurred the purported losses in 1999 and 2000, the court found that she nonetheless failed to establish her entitlement to NOL carryforward deductions for 2014 and 2015. To start, Amos did not include with the returns at issue (or the returns for earlier years for which an NOL carryforward deduction had been claimed) either a concise statement that set forth the material and relevant facts or a detailed schedule showing a computation of the NOL amount. The court said that the fragmentary record before it was inadequate to establish Amos's 1999 and 2000 income and deductions so as to substantiate the NOLs at issue.

Additionally, the court observed, Amos failed to establish how much of the claimed 1999 and 2000 NOLs had been absorbed before the years at issue because she did not introduce a complete set of her 2001 - 13 tax returns which could have allowed the court to determine how much of the purported NOL had been used. The court noted that, while Amos provided the first two pages of each of her tax returns from 2008 - 13, these snippets, lacking in context, gave the court no insight into the absorption of the 1999 and 2000 NOLs during this period.

Finally, the court upheld the penalty assessments after finding that the IRS met its burden of proof. The court rejected Amos's claims that she acted with reasonable cause and in good faith and that it was reasonable for her to claim the deductions because the IRS had allowed similar deductions in prior years. More significantly, the court stated, as a longtime CPA who has worked for high-profile clients, who owned her own accounting firm, and who had been involved with national and state CPA associations, it defied credulity that she would be unaware that each tax year stands alone and that it was her responsibility to demonstrate her entitlement to the deductions she claimed.

For a discussion of the reporting of NOL deductions and carryforwards, see Parker Tax ¶99,120.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com