T.C. Memo. 1998-263
UNITED STATES TAX COURT
DONNA M. NEIGHBORS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27654-96. Filed July 20, 1998.
David W. Freese, for petitioner.
Lisa M. Oshiro, for respondent.
MEMORANDUM OPINION
LARO, Judge: This case was submitted to the Court fully
stipulated. See Rule 122. Petitioner petitioned the Court to
redetermine respondent's determination of a $20,488 deficiency in
her 1991 Federal income tax and a $4,098 accuracy-related penalty
under section 6662(a). We must decide whether petitioner
realized a $92,388 gain on the sale of her personal residence
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(the residence). We hold she did. We also must decide whether
petitioner is liable for the accuracy-related penalty for
negligence determined by respondent. We hold she is.
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the subject year. Rule
references are to the Tax Court Rules of Practice and Procedure.
Dollar amounts are rounded to the nearest dollar.
Background
All facts are stipulated. The stipulations of fact and the
exhibits submitted therewith are incorporated herein by this
reference. Petitioner resided in Edmonds, Washington, when she
petitioned the Court. She purchased the residence during 1968,
and she sold the residence on March 6, 1991.
On or about January 19, 1987, petitioner commenced a
bankruptcy proceeding (the proceeding) under Chapter 7 of the
Bankruptcy Code, listing First Nationwide Bank (the Bank) as one
of her creditors; the Bank was the initial mortgagee on the
residence. When the proceeding began, the residence was worth
$103,000, and petitioner owed the Bank $84,290 on the note (the
Note) underlying the mortgage. On April 28, 1989, petitioner
received a discharge of debt under 11 U.S.C. sections 523 and
727. Included in this discharge was her personal obligation to
pay the Bank the amount of the Note.
On March 6, 1991, petitioner sold the residence for
$131,737; her basis in the residence was $38,000. First
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Northwest, the assignee of the Note and mortgage, received
$86,300 of the sales proceeds in satisfaction of the Note, and
other proceeds of the sale were used to pay some of petitioner's
liabilities. One of these liabilities was $1,349 of legal fees
which were incurred in connection with the sale. Petitioner
received $18,651 of the sales proceeds, exclusive of amounts paid
on her behalf.
Petitioner filed a 1991 Form 1040, U.S. Individual Income
Tax Return. Included therewith was a 1991 Form 2119, Sale of
Your Home, which reported that petitioner realized a $93,737 gain
on the sale of the residence and that she would be purchasing
another residence within the "replacement period" in order to
defer the gain. Petitioner computed her gain by subtracting her
$38,000 basis in the residence from its selling price of
$131,737.
Petitioner did not replace the residence within the
"replacement period". On or about August 28, 1996, petitioner
amended her 1991 Form 1040 by filing Form 1040X, Amended U.S.
Individual Income Tax Return. The Form 1040X reported that the
selling price of the residence was $29,402, that petitioner's
basis therein was zero, and that her gain on the sale was
$29,402.
Respondent determined that petitioner realized a $93,737
gain on the sale of the residence and that this gain was taxable
in 1991. Respondent asserts in brief that the determination of
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petitioner's gain should take into account the legal expenses of
$1,349, and that petitioner's gain is $92,388.
Discussion
Petitioner argues that she had a gain of $29,402 on the
sale. Petitioner cites no case law to support her argument, but
relies mainly on her interpretation of selected provisions of the
Internal Revenue and Bankruptcy Codes. The gist of petitioner's
argument is that the amount of the Note is not included in the
amount realized on the sale because she was discharged from
liability on it. Petitioner does not explain the computation of
her proffered $29,402 gain, but we surmise it represents the sum
of the following items: (1) Legal fees of $1,349, (2) settlement
proceeds of $18,651 received by petitioner at settlement, and
(3) $9,402 that was paid at settlement to discharge a Federal tax
lien on the residence. Petitioner does not explain the $16,035
difference between the $131,737 selling price and the $115,702
amount that we derive from adding petitioner's proffered gain of
$29,402 to the $86,300 that was paid at settlement in order to
satisfy the Note.
We reject petitioner's argument. Petitioner does not
dispute the fact that her gross income for 1991 includes her gain
on the sale, see sec. 61(a)(3), or that her gain must be
recognized in 1991, see sec. 1001(c). Nor does she dispute the
fact that her gain is computed by subtracting her adjusted basis
in the residence from the amount realized on its sale. See sec.
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1001(a). Petitioner disputes whether the amount of the Note is
included in the amount realized, given the fact that she was not
personally liable on it.
The amount of the Note is included in the amount realized on
the residence's sale. The amount realized on a sale is computed
by adding the amount of money received to the fair market value
of other property received. Sec. 1001(b). Any liability, let it
be recourse or nonrecourse, that attaches to the subject property
is included in the amount realized to the extent that the
liability is discharged by the sale. Crane v. Commissioner,
331 U.S. 1, 12-14 (1947); sec. 1.1001-2(a)(1), Income Tax Regs.
As to the Note, the amount thereof is included in the amount
realized because, even though petitioner was not personally
liable on it at the time she sold the residence, First Northwest
had a legally enforceable right to receive, and actually did
receive, proceeds from the sale equal to the amount that it was
owed under the Note. In re Isom, 901 F.2d 744 (9th Cir. 1990);
see also Long v. Bullard, 117 U.S. 617 (1886).
In sum, the amount realized on the sale of the residence was
$131,737, and petitioner’s basis therein was $38,000. Given the
additional fact that petitioner may take into account the $1,349
of legal fees, we hold that petitioner realized, and must
recognize in 1991, a gain of $92,388 on the residence's sale.
As to the accuracy-related penalty, petitioner has not
addressed this issue on brief. As applicable herein, section
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6662(a) imposes an accuracy-related penalty equal to 20 percent
of the portion of an underpayment that is attributable to
negligence, and petitioner will avoid this charge only if the
record shows that she was not negligent; i.e., she made a
reasonable attempt to comply with the provisions of the Internal
Revenue Code, and she was not careless, reckless, or in
intentional disregard of rules or regulations. Sec. 6662(c);
Drum v. Commissioner, T.C. Memo. 1994-433, affd. without
published opinion 61 F.3d 910 (9th Cir. 1995); see also Allen v.
Commissioner, 925 F.2d 348, 353 (9th Cir. 1991) (negligence
defined as a lack of due care or a failure to do what a
reasonable and prudent person would do under similar
circumstances), affg. 92 T.C. 1 (1989). Because the record does
not show that petitioner was not negligent, we sustain
respondent's determination on the applicability of this penalty.
In reaching our holdings herein, we have considered all
arguments by petitioner for contrary holdings, and, to the extent
not discussed above, find those arguments to be irrelevant or
without merit. To reflect respondent's concession,
Decision will be entered
under Rule 155.