Kurata v. Commissioner

T.C. Memo. 1997-252

UNITED STATES TAX COURT

SHIZUO GEORGE KURATA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5515-95. Filed June 4, 1997.

1. Held: Gain recognized because P failed to
prove sec. 1033, I.R.C., involuntary conversion of
property.
2. Held, further, deductions denied for
miscellaneous employee business expenses and for moving
expenses because P failed to substantiate such
expenditures.
3. Held, further, sec. 6651(a)(1), I.R.C.,
addition to tax for failure to file timely return
sustained.
4. Held, further, sec. 6662(a), I.R.C., accuracy
related penalty imposed for negligence or disregard of
rules or regulations.

Shizuo George Kurata, pro se.
 - 2 -

Shari C. Mauney, J. Robert Cuatto, and Rick V. Hosler, for

respondent.

MEMORANDUM OPINION

HALPERN, Judge: By notice of deficiency dated January 26,

1995, respondent determined a deficiency in, an addition to, and

a penalty on petitioner's Federal income tax as follows:

Addition to Tax Penalty Under
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1989 $34,821 $8,276 $6,964

Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the year in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

The issues for decision are (1) the amount of gain realized

by petitioner upon the sale of certain rental properties and

whether petitioner is entitled to nonrecognition of that gain

under section 1033(a), (2) whether petitioner is entitled to

certain disallowed Schedule A deductions, and (3) whether

petitioner is liable for the addition to tax and penalty. The

parties have stipulated various facts, which we so find. The

stipulations of facts filed by the parties and accompanying

exhibits are incorporated herein by this reference. Although the

issues for decision are principally factual, we need find few

facts in addition to those stipulated by the parties.

Accordingly, we shall not separately set forth our findings of
 - 3 -

fact and opinion, and the additional findings of fact that we

must make are contained in the discussion that follows. After

setting forth certain background information, we shall address

(1) the adjustments made by respondent that are in dispute and

(2) the addition to tax and penalty that are in dispute.

Petitioner bears the burden of proof on all questions of fact.

Rule 142(a).

I. Background

Petitioner maintained his legal residence in Phoenix,

Arizona, at the time the petition in this case was filed.

During 1989, petitioner was a consulting engineer and a

general partner with TQA Associates, a Texas based consulting

firm.

Petitioner is a calendar year taxpayer. Petitioner filed an

Application for Automatic Extension of Time to File U.S.

Individual Income Tax Return for 1989 requesting an extension of

time to August 15, 1990. Petitioner also filed an Application

for Additional Extension of Time to File U.S. Individual Income

Tax Return for 1989 requesting an extension of time to

September 15, 1990. Petitioner filed a U.S. Individual Income

Tax Return, Form 1040, for 1989 (the 1989 tax return), which was

received by the Internal Revenue Service Ogden Service Center on

August 22, 1991. The envelope used by petitioner to mail the

1989 tax return is postmarked August 20, 1991.
 - 4 -

II. Disputed Adjustments

A. Sale of Mukilteo Condominiums

On or about November 13, 1981, petitioner purchased five

condominium units located in Mukilteo, Washington (the five

units). Petitioner owned those units as rental properties. On

or about January 25, 1989, petitioner transferred the five units

to Great American First Savings Bank (Great Bank) in conjunction

with the settlement of potential litigation regarding purported

soil erosion affecting those properties. Attached to the 1989

tax return is a “Statement of Involuntary Conversion”, which

relates to the five units. That statement shows a gain in the

amount of $89,3391 on the disposition of the five units and

provides that the taxpayer intends to acquire replacement

property and “to defer the gain realized by the involuntary

conversion” of the five units.

In the notice of deficiency, respondent adjusted the amount

realized on the sale of the five units by increasing the amount

of the settlement proceeds from $206,009 to $210,500 and adjusted

petitioner's adjusted basis in the five units by decreasing

petitioner's initial, cost basis from $228,067 to $222,242.

Respondent determined that, after taking into account

depreciation and other items, petitioner realized gain on the

1
For simplicity, figures have been rounded to the nearest
dollar, and, thus, in some of the calculations to follow, there
are some minor discrepancies.
 - 5 -

sale of the five units in the amount of $111,568, and respondent

adjusted petitioner's gross income accordingly because petitioner

had failed to establish that he was entitled to gain deferral on

the basis of an involuntary conversion of the five units. After

making a negative adjustment for an operating loss carryover,

respondent increased petitioner's taxable income by $99,656.

As a threshold matter, we must determine the amount of gain

realized on the sale of the five units and, in turn, the

adjustments to petitioner's gross and taxable income that are in

issue. Section 1001(a) provides, in part, that “gain from the

sale or other disposition of property shall be the excess of the

amount realized therefrom over the adjusted basis”. Although,

initially, the parties may have disputed the cost of the five

units, it appears that the parties are now in agreement that

petitioner paid a total of $228,067 for the five units, which

amount constitutes petitioner's cost basis in the units. The

parties also agree on the adjustments to petitioner's basis in

the five units: (1) capital expenditures of $3,266 and

(2) depreciation on buildings and personal properties of

$129,483. Therefore, the parties agree that petitioner's

adjusted basis in the five units is $101,850 ($101,850 = $228,067

+ $3,266 - $129,483).

The parties, however, disagree on the amount realized by

petitioner from the sale of the five units. Petitioner reports
 - 6 -

the sale as follows: (1) gross settlement proceeds of $212,861,

(2) settlement charges of $6,852, (3) legal costs of $2,907, and

(4) operating loss carryover of $11,912. From those figures,

petitioner calculates an amount realized of $191,189 ($191,189 =

$212,861 - $6,852 - $2,907 - $11,912). In calculating an amount

realized of $207,593 from the sale of the five units, respondent

argues that $210,500 is the correct figure for settlement

proceeds, subtracts legal costs of $2,907 ($207,593 = $210,500

- $2,907), and does not consider the $6,852 in settlement charges

claimed by petitioner. Only after calculations for the amount

realized and gain realized are complete (and the gain is included

as an item of gross income; see section 61(a)(3)), does

respondent subtract the operating loss carryover of $11,912 in

arriving at taxable income (see sections 161, 172). The

difference between the parties' figures for the amount realized,

thus, results from a disagreement over the correct amount of

settlement proceeds and charges to be considered in calculating

the amount realized, as well as the placement of the operating

loss carryover in the computations.

First, we agree with respondent that the operating loss

carryover should properly be considered, if at all, only in

determining taxable income and not in the separate, and

preceding, operation of determining gain realized. Compare

secs. 61(a)(3) and 1001 with secs. 161 and 172. Since the
 - 7 -

parties agree with regard to the $2,907 in legal costs, we shall

focus on the proper amount to be considered as (1) settlement

proceeds and (2) settlement charges. The settlement statements

(HUD-1s) indicate a total sales price for the five units in the

amount of $210,500. We agree with respondent that that figure is

the proper starting point for calculating amount realized. The

HUD-1s also indicate that petitioner incurred total settlement

charges of $6,248. Of that amount, $1,250 represents additional

attorney's fees, $1,229 represents amounts paid for title

insurance, and the remainder apparently represents unspecified

amounts petitioner owed to Great Bank. We believe that the only

settlement charges that can reduce the amount realized from the

sale of the five units are the payments for additional attorney's

fees and title insurance.2 Petitioner has failed to persuade us

2
Expenses incurred in selling property generally reduce the
gain realized. See, e.g., United States v. General Bancshares
Corp., 388 F.2d 184, 187 (8th Cir. 1968) (“selling expenses
incurred in the sale of a capital asset are treated as capital in
nature and chargeable only against the capital proceeds”). We
are satisfied that the payments for additional attorney's fees
and title insurance are expenses incurred in selling the five
units because those charges appear on the settlement statements;
however, the presence on the settlement statements alone of
unspecified amounts petitioner owed to Great American First
Savings Bank does not persuade us that those amounts constitute
expenses incurred in selling the five units.

In addition, it should be noted that appeal in this case
would lie to the Court of Appeals for the Ninth Circuit, and that
circuit may account for the selling expenses incurred on the sale
of the five units by increasing petitioner's adjusted basis, as
opposed to reducing the amount realized. See Kirschenmann v.
(continued...)
 - 8 -

that unspecified amounts owed to Great Bank constitute settlement

charges that properly reduce the amount realized from the sale of

the five units; indeed, petitioner has not produced any evidence

on that issue. In sum, we find that the sale of the five units

produced settlement proceeds of $210,500 and settlement charges

of $2,479.

Therefore, the amount realized by petitioner on the sale of

the five units is $205,114, and the gain realized is $103,264.

The adjustment to petitioner's gross income that is in issue is

$103,264, and, after making a negative adjustment for the

undisputed operating loss carryover, $91,352 is the adjustment to

petitioner's taxable income that is in issue. Those calculations

are as follows:

Purchase price $228,067 Settlement proceeds $210,500
Capital expenditures 3,266 Legal costs (2,907)
Depreciation (129,483) Settlement charges (2,479)
Adjusted basis 101,850 Amount realized 205,114

Amount realized $205,114
Less adjusted basis (101,850)
Equals gain realized 103,264
Adjustment to gross income in issue 103,264
Operating loss carryover (11,912)

2
(...continued)
Commissioner, 488 F.2d 270 (9th Cir. 1973), revg. 57 T.C. 524
(1972). We believe, however, that we need not address whether
selling expenses properly reduce amount realized or increase
adjusted basis because, under either approach, the gain realized
by petitioner in the present case would be the same amount.
Since the parties agree on the figure for petitioner's adjusted
basis in the five units, we shall, purely for convenience, not
disturb that figure and adjust the amount realized for the
expenses incurred on the sale of the five units.
 - 9 -

Adjustment to taxable income in issue 91,352

Now that we have determined the adjustments to petitioner's gross

and taxable income that are in issue as a result of the sale of

the five units, we must decide whether those adjustments are

correct.

Petitioner asserts that the five units, along with 80 other

similar properties, which were part of a 300-unit condominium

complex located in Mukilteo, Washington (the Mukilteo complex),

were damaged beyond repair as a result of soil erosion caused by

drainage diffusion and saturated soil. A homeowner's association

representing the interests of the condominium owners, including

petitioner, retained a law firm that initiated legal proceedings

against Great Bank, which, according to petitioner, acquired the

bank that had sold the properties to the condominium owners.

After negotiations, the homeowner's association entered into a

group settlement agreement with Great Bank on January 15, 1989.

Pursuant to that agreement, petitioner transferred the five units

to Great Bank in exchange for cash and debt forgiveness.

Petitioner claims that the five units were destroyed beyond

repair and, as a result of the interlocking ownership structure

of the Mukilteo condominium properties, “the group settlement was

the only practical recourse available to the individual owners”.

On that basis, petitioner claims that the five units were

involuntarily converted. Petitioner contends that he applied the
 - 10 -

proceeds received from the sale of the five units towards the

purchase of qualifying replacement property located in Glendale,

Arizona, on January 31, 1991, and, therefore, is entitled to

nonrecognition of gain on the sale of the five units.

Section 1033(a), among other things, allows nonrecognition

of gain to the extent that proceeds received from the compulsory

or involuntary conversion of property are used to purchase other

property similar or related in service or use to the property so

converted (qualifying replacement property). Involuntary

conversions resulting from the destruction of property in whole

or in part are specifically enumerated as a type of disposition

that qualifies under the statute. Sec. 1033(a). “[C]onversions

or sales of property where the owner had a choice of keeping the

property or converting or selling it” do not qualify for

nonrecognition treatment. C.G. Willis, Inc. v. Commissioner,

41 T.C. 468, 474 (1964), affd. 342 F.2d 996 (3d Cir. 1965).

Therefore, petitioner must prove that, as a result of the

destruction of the five units in whole or in part, the five units

were involuntarily converted and that the purchase of property

located in Glendale, Arizona, on January 31, 1991, constituted

the purchase of qualifying replacement property.

In this case, petitioner has failed to prove that the five

units were destroyed in whole or in part as that phrase is used

in section 1033(a). At trial, petitioner offered only his
 - 11 -

uncorroborated testimony that the five units “were damaged beyond

repair”. Petitioner did not support that assertion with any

pictures, documentary evidence, or the testimony of any third

party. We need not, and decline to, accept petitioner's

assertion at face value given his failure to corroborate. See,

e.g., Day v. Commissioner, 975 F.2d 534, 538 (8th Cir. 1992),

affg. in part, revg. in part T.C. Memo. 1991-140; Liddy v.

Commissioner, 808 F.2d 312, 315 (4th Cir. 1986), affg. T.C. Memo.

1985-107.

Respondent, however, presented the testimony of James

Bennett, the building official for the City of Mukilteo,

Washington, since July 1986 to the time of trial. Mr. Bennett

directed building inspection functions for the City of Mukilteo,

including structural nuisance inspections, abatement actions, and

condemnations. Mr. Bennett stated that no order of condemnation

was ever issued to any of the properties in the Mukilteo complex.

In addition, Mr. Bennett stated that, in 1996, when he visited

the Mukilteo complex, he observed that the buildings that housed

the individual condominium units were occupied and performing.

Petitioner did not attempt to refute any of Mr. Bennett's

statements. Indeed, petitioner has not been back to Mukilteo,

Washington, since the sale of the five units to Great Bank.

Mr. Bennett's testimony coupled with petitioner's failure to

rebut that testimony is inconsistent with petitioner's assertion
 - 12 -

that the five units were destroyed in whole or in part. We are

not persuaded by petitioner's unsupported assertions, and we find

that the five units were not destroyed in whole or in part.

Our finding that the five units were not destroyed in whole

or in part precludes nonrecognition treatment under section

1033(a). We also note, however, that petitioner has failed to

submit any evidence, other than his uncorroborated assertions at

trial, that he was compelled to enter into the group settlement

agreement with Great Bank or that petitioner acquired property

similar or related in service or use to the five units.

Petitioner's attempt to introduce evidence in his brief, filed

July 1, 1996, to support his claim under section 1033(a) is

rejected. See Rule 143(b). Thus, respondent's adjustment

increasing petitioner's gross income for the gain realized on the

sale of the five units is sustained to the extent of $103,264,

and, accordingly, respondent's adjustment increasing petitioner's

taxable income is sustained to the extent of $91,352.

B. Employee Business Expenses

Petitioner claimed on the 1989 tax return a miscellaneous

deduction in the amount of $20,388 for unreimbursed employee

business expenses. In the notice of deficiency, respondent

disallowed $19,978 of that deduction and increased petitioner's

taxable income accordingly. Respondent explained that petitioner

was not entitled to the disallowed deduction because he failed to
 - 13 -

establish that the deduction was for an ordinary and necessary

business expense or was expended for the purpose designated on

the 1989 tax return. The 1989 tax return indicates that

petitioner claimed the deduction for vehicle expenses, travel

expenses, and meal and/or entertainment expenses.

Section 162(a)(2) permits a deduction for traveling

expenses, including amounts expended for meals and lodging,

incurred by a taxpayer while away from home in the pursuit of a

trade or business. The taxpayer must demonstrate that the

expenses were (1) reasonable and necessary traveling expenses,

(2) incurred “while away from home”, and (3) incurred in the

pursuit of business. See, e.g., Commissioner v. Flowers, 326

U.S. 465, 470 (1946). In addition, section 274(d) imposes strict

substantiation requirements. Section 274(d) provides that, with

certain inapplicable exceptions, no deduction for traveling

expenses (or similar items) shall be allowed

unless the taxpayer substantiates by adequate records
or by sufficient evidence corroborating the taxpayer's
own statement (A) the amount of such expense or other
item, (B) the time and place of the travel,
entertainment, amusement, recreation, or use of the
facility or property, or the date and description of
the gift, (C) the business purpose of the expense or
other item, and (D) the business relationship to the
taxpayer of persons entertained, using the facility or
property, or receiving the gift. * * *

At trial, petitioner stated that, in 1989, he maintained

“tax homes” in Arlington, Texas, and Everett, Washington, while

working as a contract engineer in California. Petitioner claims
 - 14 -

that he is entitled to deduct travel and travel related expenses

incurred in California in the pursuit of his business as a

contract engineer. Respondent asserts that petitioner did not

maintain a tax home during 1989. In addition, respondent

contends that petitioner's claimed expenses are not ordinary and

necessary business expenses under section 162 and that petitioner

has failed to meet the substantiation requirements of section

274(d).

Petitioner testified that he incurred the claimed business

expenses and that he provided the required substantiation to the

Internal Revenue Service. Petitioner, however, has failed to

corroborate his testimony. The record is barren of the type of

substantiation required by section 274(d). Petitioner did not

provide the Court with any records or other evidence setting

forth the amount, time, place, and business purpose of the

expenditures claimed. See sec. 1.274-5, Income Tax Regs. So,

even if the Court were to assume, arguendo, that petitioner's

travel and travel related expenditures are deductible under

section 162(a)(2), petitioner's failure to substantiate any of

those expenses pursuant to section 274(d) requires disallowance

of the claimed deduction. Thus, respondent's adjustment

increasing petitioner's taxable income as a result of the

disallowed employee business expense deduction is sustained.
 - 15 -

C. Moving Expenses

Petitioner claimed on the 1989 tax return a moving expense

deduction in the amount of $1,322. In the notice of deficiency,

respondent disallowed that deduction in full and increased

petitioner's taxable income accordingly. Respondent explained

that petitioner was not entitled to the deduction because he was

not a full-time employee in the general location of his new

principal place of work for at least 39 weeks during the 12-month

period immediately following his arrival in such location. See

sec. 217(c)(2).

In his brief, petitioner concedes that he erred in reporting

the claimed expenses as moving expenses under section 217. He

argues, instead, that the claimed expenses should be deductible

as employee business expenses under section 162(a)(2).

Petitioner's assertion is not supported by the type of

substantiation required under section 274(d). See supra

sec. II.B. Thus, respondent's adjustment increasing petitioner's

taxable income for the disallowed moving expense deduction is

sustained.

III. Additions to Tax

A. Section 6651(a)(1)

Section 6651(a)(1) imposes an addition to tax for failure to

file a timely return (determined with regard to any extension of
 - 16 -

time for filing), unless it is shown that such failure is due to

reasonable cause and not due to willful neglect. Petitioner

bears the burden of proof as to reasonable cause and the absence

of willful neglect. See Rule 142(a).

In the notice of deficiency, respondent determined that the

1989 tax return was due on October 15, 1990, and that petitioner

filed that return on August 22, 1991. Petitioner does not

dispute those facts. Petitioner did not present any testimony or

other evidence to explain his failure to file the 1989 tax return

in a timely manner. Petitioner's attempt to introduce evidence

in his brief is rejected. See Rule 143(b). Petitioner has not

carried his burden of proof. Respondent's determination of an

addition to tax under section 6651(a)(1) is sustained, except to

the extent that it relates to the difference between our

calculation of the adjustments to income arising from the sale of

the five units and respondent's calculation (the section II.A.

difference, supra).

B. Section 6662(a)

Section 6662(a) provides for an accuracy related penalty in

the amount equal to 20 percent of the portion of an underpayment

of tax attributable to, among other things, negligence or

disregard of rules or regulations. Sec. 6662(a) and (b)(1). The

term “negligence” includes any failure to make a reasonable
 - 17 -

attempt to comply with the provisions of the internal revenue

laws, and the term “disregard” includes any careless, reckless,

or intentional disregard. Sec. 6662(c).

In the notice of deficiency, respondent determined that the

entire underpayment of tax for the 1989 taxable year was due to

petitioner's negligence or intentional disregard of rules and

regulations. Petitioner bears the burden of proving that

respondent's determination is erroneous. See Rule 142(a). On

the record before us, we find that respondent's determination of

a penalty under section 6662(a) is correct, except to the extent

that it relates to the section II.A. difference, supra.

IV. Conclusion

Respondent's determinations of a deficiency in, an addition

to, and a penalty on petitioner's Federal income tax for the 1989

taxable year are sustained to the extent set forth in this

report.

Decision will be entered

under Rule 155.