T.C. Summary Opinion 2010-174
UNITED STATES TAX COURT
ROBIN GAIL TORASSA AND MICHAEL SINTEF, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21044-08S. Filed December 20, 2010.
Robin Gail Torassa and Michael Sintef, pro sese.
Melissa C. Quale, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect when the petition was filed. Pursuant to
section 7463(b), the decision to be entered is not reviewable by
any other court, and this opinion shall not be treated as
precedent for any other case. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
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effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
Respondent determined a $7,569 deficiency and a $1,513.80
accuracy-related penalty in petitioners’ 2005 Federal income tax.
Respondent also determined a $6,689 deficiency and a $1,337.80
accuracy-related penalty in petitioners’ 2006 Federal income tax.
After concessions, the issues for decision are: (1) Whether
petitioners are entitled to a casualty loss deduction for taxable
year 2005, (2) whether petitioners are entitled to carry over any
unused portion of the casualty loss deduction to taxable year
2006, and (3) whether petitioners are liable for an accuracy-
related penalty under section 6662(a) for 2005 and/or 2006.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioners resided in California. Hereinafter the
term “petitioner” refers solely to petitioner-wife.
Before 2005 petitioner’s sister (Ulysses) purchased property
in Marin County, California. The property consists of land and
an apartment building with four units, two on the upper level and
two on the lower level. On November 23, 2005, Ulysses
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transferred the property1 by grant deed to herself and petitioner
as tenants in common. On December 31, 2005, the lower two units
sustained flood damage. Petitioner lived in one of the two lower
units. On February 3, 2006, the President of the United States
designated Marin County a federally declared disaster area.
Petitioners and Ulysses agreed that Ulysses would arrange
for and coordinate the cleanup and repair of the property. On
March 3, 2006, Ulysses and petitioner applied for a disaster home
loan with the U.S. Small Business Administration (SBA). An SBA
employee examined the property, assessed the damage, and
estimated the cost of repairs. The SBA provided a detailed
35-page report which contained the estimated cost of repairs.
The report concluded that petitioner and Ulysses together were
eligible for a loan of up to $159,900.
Ulysses managed the repair of the property and provided
information about the cost of repairs to the units. Ulysses
claimed a casualty loss on her 2005 tax return. The IRS
questioned the casualty loss, and ultimately Ulysses and the IRS
1
The deed describes the transfer of four parcels of real
property, including six numbered lots and two lots with only a
legal description.
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agreed that she was entitled to a casualty loss of approximately
$50,000.2
On petitioners’ timely filed 2005 Federal income tax return,
petitioners claimed a casualty loss of $87,000. Petitioners also
claimed a casualty loss of $75,089 on their 2006 Federal income
tax return, purportedly as the unused portion of the casualty
loss from the 2005 return.
On July 23, 2008, respondent issued to petitioners a notice
of deficiency disallowing the 2005 casualty loss deduction in
full and determining a deficiency and an accuracy-related
penalty. Similarly, on August 7, 2008, respondent issued to
petitioners a notice of deficiency disallowing the 2006 casualty
loss deduction in full and determining a deficiency and an
accuracy-related penalty. Petitioners filed a petition disputing
respondent’s determinations for 2005 and 2006.
Discussion
I. Burden of Proof
In general, the Commissioner’s determination set forth in a
notice of deficiency is presumed correct, and the taxpayer bears
the burden of showing that the determination is in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions
are a matter of legislative grace. Deputy v. du Pont, 308 U.S.
2
A stipulation of settled issues was filed in docket No.
5900-09 wherein the parties agreed that Ulysses had established a
casualty loss of $50,012.
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488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435,
440 (1934). A taxpayer bears the burden of proving entitlement
to any deduction claimed. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, supra;
Wilson v. Commissioner, T.C. Memo. 2001-139. A taxpayer is
required to maintain records sufficient to substantiate
deductions claimed on his or her income tax return. Sec. 6001;
sec. 1.6001-1(a), (e), Income Tax Regs.
Pursuant to section 7491(a), the burden of proof as to
factual matters shifts to the Commissioner under certain
circumstances. Petitioners have neither alleged that section
7491(a) applies nor established their compliance with the
substantiation and recordkeeping requirements. See sec.
7491(a)(2)(A) and (B). Petitioners therefore bear the burden of
proof. See Rule 142(a).
II. Casualty Loss
A. In General
Section 165(a) allows as a deduction any loss sustained
during the taxable year and not compensated for by insurance or
otherwise. Section 165(c) limits the allowance of losses in the
case of individuals. A casualty loss is allowable to a taxpayer
for a loss of property not connected with a trade or business if
the loss results from “fire, storm, shipwreck, or other
casualty”. Sec. 165(c)(3). Pursuant to section 165(h)(2), a net
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casualty loss is allowed only to the extent it exceeds 10 percent
of adjusted gross income.
In the case of property held for personal use, the
deductible amount is governed by section 1.165-7(b)(1), Income
Tax Regs., which provides that the amount of the loss to be taken
into account for purposes of section 165(a) shall be the lesser
of: (1) The amount which is equal to the fair market value of
the property immediately before the casualty reduced by the fair
market value of the property immediately after the casualty, or
(2) the amount of the adjusted basis for determining the loss
from the sale or other disposition of the property involved.
Only the amount of the loss resulting from physical damage to
property is deductible under section 165. Squirt Co. v.
Commissioner, 51 T.C. 543, 547 (1969), affd. 423 F.2d 710 (9th
Cir. 1970).
The method of valuation to be used in determining a casualty
loss is prescribed in section 1.165-7(a)(2), Income Tax Regs.,
which provides as follows:
(i) In determining the amount of loss deductible under
* * * [section 165], the fair market value of the property
immediately before and immediately after the casualty shall
generally be ascertained by competent appraisal. This
appraisal must recognize the effects of any general market
decline affecting undamaged as well as damaged property
which may occur simultaneously with the casualty, in order
that any deduction under * * * [section 165] shall be
limited to the actual loss resulting from damage to the
property.
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(ii) The cost of repairs to the property damaged is
acceptable as evidence of the loss of value if the taxpayer
shows that (a) the repairs are necessary to restore the
property to its condition immediately before the casualty,
(b) the amount spent for such repairs is not excessive, (c)
the repairs do not care for more than the damage suffered,
and (d) the value of the property after the repairs does not
as a result of the repairs exceed the value of the property
immediately before the casualty.
B. Petitioner’s Basis in the Property
Petitioner provided the grant deed in which Ulysses
transferred the property to herself and petitioner as tenants in
common. Respondent does not dispute the nature of this
ownership. Petitioner received a one-half undivided interest in
the property conveyed by the deed. See Rich v. Smith, 148 P. 545
Cal. Ct. App. 1915) (a deed conveying land to two grantees,
without designating the portions conveyed to each, presumptively
conveys to each an undivided one-half interest). The deed
conveys “all of that certain real property” in four parcels.
Petitioner, therefore, was granted a one-half interest in the
land and buildings on the property described in the deed.
The grant deed does not list the value of the property
Ulysses transferred to herself and petitioner, but the deed does
list an amount of documentary transfer tax paid on the value of
the property of $419.65. Cal. Rev. & Tax. Code sec. 11911(a)
(West 2010) provides that when the value of the property
transferred exceeds $100, a county may impose a tax of 55 cents
per $500 on a deed for realty. Additionally, the parties agreed
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that the transfer tax rate was $1.10 per $1,000 of the value of
the property transferred. Therefore, the value of the property
transferred shortly before the flood was $381,500 and the value
of petitioner’s undivided one-half interest was $190,750. There
is no evidence that any improvements were made to the building
during the month between the transfer and the flood; thus, there
are no adjustments to basis.
C. Amount of Loss
The parties agree that petitioners’ property was in a
federally declared disaster area and that it sustained damage
from the flood in December 2005. Petitioners did not provide
receipts for repairs made to their home and instead rely
primarily on a disaster loan appraisal3 to substantiate the
amount of the loss.
Petitioner and Ulysses jointly applied for a disaster loan
in order to become eligible for a loan to make repairs to the two
lower units of the complex, one occupied by Ulysses and one
occupied by petitioners. Respondent presented Ulysses as a
witness at trial. Ulysses testified to her loss and her efforts
to make repairs. Structurally, the damaged apartments are
3
In certain circumstances the Internal Revenue Code and
regulations permit a disaster loan appraisal to be considered for
purposes of substantiating the amount of the loss. Sec. 165(i).
Even though petitioner did not make an election under sec.
165(i)(1), the appraisal is probative.
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virtually identical. Ulysses and petitioner were eligible for a
$159,900 loan to make repairs ($119,900 was allocated to real
property and $40,000 was allocated to personal property).
Petitioner’s one-half ownership of the two damaged apartments
qualified her for eligibility for at least one-half of the loan
as it relates to real property ($119,900 ÷ 2), or $59,950.
Presumably, petitioner would also be entitled to some portion of
the funds allocated to personal property damage.
D. Estimated Loss
Section 6001 and the regulations promulgated thereunder
require taxpayers to maintain records sufficient to permit
verification of income and expenses. As a general rule, if the
trial record provides sufficient evidence that the taxpayer has
incurred a deductible loss but the taxpayer is unable to
substantiate adequately the precise amount of the deduction to
which he or she is otherwise entitled, the Court may estimate the
amount of the deductible loss, bearing heavily against the
taxpayer whose inexactitude in substantiating the amount of the
expense is of his own making, and allow the deduction to that
extent. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930); see also Johnson v. Commissioner, T.C. Memo. 1981-55.
However, in order for the Court to estimate the amount of an
expense, the Court must have some basis upon which an estimate
may be made. Vanicek v. Commissioner, 85 T.C. 731, 742-743
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(1985). Without such a basis for an estimate, any allowance
would amount to unguided largesse. Williams v. United States,
245 F.2d 559, 560-561 (5th Cir. 1957).
Respondent agreed that the other joint tenant was entitled
to claim a casualty loss of $50,012 which “reflects [Ulysses’]
50% ownership of the damaged property located at [the address of
the property Ulysses owns with petitioner]”.4 As outlined above,
petitioner’s basis in the property is $190,750. According to the
disaster loan appraisal, wherein a Federal employee from the SBA
estimated the damage and cost of repairs of the entire property,
petitioner would have been eligible for an undivided one-half of
the $159,900 loan to make repairs to one of the lower level
units. The lower level units were structurally similar, and the
estimated cost to repair each apartment was $59,950. There is no
evidence that either unit required more repairs than the other.
Bearing heavily against petitioners whose inexactitude is of
their own making, and considering the estimates of repair by the
SBA, we conclude that petitioners sustained a casualty loss in
2005 of $50,012.
4
See supra note 2.
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III. Net Operating Loss
A deduction for a casualty loss allowable under section
165(c)(3) shall be treated as attributable to the taxpayer’s
trade or business. See sec. 172(d)(4)(c). Generally, before a
net operating loss (NOL) may be carried forward, it must be
carried back (carryback rule). See sec. 172(b); sec. 1.172-
4(b)(1) and (2), Income Tax Regs. In the case of a casualty
loss, the carryback period is 3 years. Sec. 172(b)(1)(F). On a
timely filed return, a taxpayer may elect to waive application of
the carryback rule and instead carry the loss forward. See sec.
172(b)(3); see also sec. 301.9100-12T(d), Temporary Proced. &
Admin. Regs., 57 Fed. Reg. 43896 (Sept. 23, 1992) (redesignating
section 7.0(d), Temporary Income Tax Regs., 42 Fed. Reg. 1470
(Jan. 7, 1977)). However, it appears that petitioners failed to
make an election to waive the carryback and therefore must carry
back any unused casualty loss.
It appears from our conclusions herein that the loss was
fully absorbed in 2005. Even if the loss was not fully absorbed
in 2005, petitioners must establish that the loss was not
absorbed by their gross income in the prior 3 years in order to
carry any loss forward to 2006. See sec. 172(b)(1)(A); Jones v.
Commissioner, 25 T.C. 1100, 1104 (1956), revd. in part and
remanded on other grounds 259 F.2d 300 (5th Cir. 1958); sec.
1.172-4(b)(1) and (2), Income Tax Regs. The record does not
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contain information about petitioners’ previous returns.
Accordingly, we sustain respondent’s determination with respect
to petitioner’s NOL carryover for 2006.
IV. Accuracy-Related Penalty
Section 6662(a) and (b)(1) and (2) imposes a penalty equal
to 20 percent of any underpayment of tax that is attributable to
negligence or a disregard of rules or regulations or to a
substantial understatement of income tax. Negligence includes
any failure to keep adequate books and records or to substantiate
items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. An
understatement is substantial if it exceeds the greater of:
(1) 10 percent of the tax required to be shown on the return for
the taxable year, or (2) $5,000. Sec. 6662(d)(1)(A).
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment if it is shown that there
was reasonable cause for, and that the taxpayer acted in good
faith with respect to, such portion. Sec. 6664(c)(1). Although
the Commissioner bears the burden of production under section
7491(c), the taxpayer bears the burden of proving reasonable
cause under section 6664(c). Higbee v. Commissioner, 116 T.C.
438, 446-447 (2001). Respondent has met his burden of production
by showing that petitioners did not provide documentation
substantiating the amount of their disaster loss.
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The determination of whether the taxpayer acted with
reasonable cause and in good faith depends on the pertinent facts
and circumstances, including the taxpayer’s efforts to assess the
proper tax liability; the knowledge and the experience of the
taxpayer; and the reliance on the advice of a professional, such
as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.
Reliance upon expert advice will not exculpate a taxpayer who
supplies the return preparer with incomplete or inaccurate
information. Lester Lumber Co. v. Commissioner, 14 T.C. 255, 263
(1950). Tax preparation software “is only as good as the
information one inputs into it.” Bunney v. Commissioner, 114
T.C. 259, 267 (2000). Reliance on a preparer or software is not
reasonable where even a cursory review of the return would reveal
inaccurate entries. See Pratt v. Commissioner, T.C. Memo. 2002-
279.
We reject petitioners’ claimed reliance on tax preparation
software, since a cursory review would show petitioners’ attempt
to deduct the entire amount of the casualty loss in each of the
years 2005 and 2006. Thus, petitioners’ reliance on the software
was not reasonable for 2006. Also, on the basis of our findings,
petitioners claimed deductions for amounts substantially greater
than they were entitled to in 2005. We conclude that petitioners
neither acted with reasonable cause nor established their good
faith reliance on the tax preparation software. Petitioners do
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not qualify for the reasonable cause exception of section 6664.
Therefore, we sustain respondent’s determination that petitioners
are liable for the accuracy-related penalty pursuant to section
6662 for 2006. We also sustain respondent’s determination that
petitioners are liable for the accuracy-related penalty to the
extent there remains a deficiency for 2005.
To reflect the foregoing,
Decision will be entered under
Rule 155.