T.C. Summary Opinion 2011-35
UNITED STATES TAX COURT
JOHN L. AND MYRNA L. PARSLEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17864-09S. Filed March 24, 2011.
John L. and Myrna L. Parsley, pro se.
Archana Ravindranath, for respondent.
DEAN, 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 effect for the year at issue,
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and Rule references are to the Tax Court Rules of Practice and
Procedure.
Respondent determined for 2006 a deficiency in petitioners’
Federal income tax of $33,571 and an accuracy-related penalty
under section 6662(a) of $6,714.20.
The parties agree that petitioners are entitled to deduct
the car and truck expenses claimed on their respective Schedules
C, Profit or Loss From Business. The parties also agree that
petitioners are not entitled to deduct other expenses of $25,360
on Schedule E, Supplemental Income and Loss.
Petitioners failed to offer any evidence or argument to
contest respondent’s adjustments to their deduction for personal
exemptions and their itemized deductions. Thus, petitioners are
deemed to have conceded these issues. See, e.g., Bradley v.
Commissioner, 100 T.C. 367, 370 (1993); Sundstrand Corp. & Subs.
v. Commissioner, 96 T.C. 226, 344 (1991); Rybak v. Commissioner,
91 T.C. 524, 566 n.19 (1988).
The issues remaining for decision are whether petitioners
properly reported their capital gain income for the year and
whether petitioners are liable for the accuracy-related penalty
under section 6662(a).
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received in evidence
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are incorporated herein by reference. Petitioners resided in
Ohio when the petition was filed.
Background
Myrna L. Parsley (petitioner) has been a real estate agent
for more that 30 years. Petitioner in 1999 or 2000 took classes
to learn about section 1031, involving so-called like-kind
exchanges. She takes continuing education courses to maintain
her real estate license and is a member of various real estate
professional associations. Petitioner married her current
husband, petitioner John Parsley, in 2000. He is also in the
real estate business.
Petitioner’s ex-husband, Joseph Benedict (Benedict), was a
real estate broker. While married to petitioner Benedict
purchased commercial property on Agler Road (the property) in his
name only in June 1990. Petitioner learned of the purchase in
1992. After petitioner confronted Benedict with her discovery,
he deeded to her an undivided interest in the property as a
tenant in common. At that time petitioner was not engaged in the
sale of commercial property. In January 1998 petitioner and
Benedict divorced.
As part of the 1998 divorce settlement, Benedict was ordered
to deed to petitioner his remaining ownership interest in the
property, making her sole owner of the property. In September
2000 the State court caused Benedict to issue a quitclaim deed to
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petitioner for the property. Petitioners sold the property in
February 2006 for $700,000. Petitioners reported a capital gain
of $256,272 from the sale on their 2006 Federal income tax
return. Petitioners calculated their gain using a basis of
$502,205. Benedict purchased the property for $320,000.
Respondent computed a capital gain on the sale of $488,071. The
record does not reflect the extent to which depreciation affects
the parties’ calculations of basis and gain.
Discussion
Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer has the burden
of proving that those determinations are erroneous. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In some
cases the burden of proof with respect to relevant factual issues
may shift to the Commissioner under section 7491(a). Petitioners
did not argue or present evidence that they satisfied the
requirements of section 7491(a). Therefore, the burden of proof
does not shift to respondent.
Capital Gain Income
Petitioners argue that they relied on their tax adviser in
reporting the tax attributes of the property. Petitioner
testified that in 1998 her adviser asked her what her cost basis
in the property was and she told him she did not know. According
to petitioner, the adviser told her that the “regulations”
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allowed her to use the then fair market value (FMV) of the
building, about $500,000, as the basis for depreciating the
property. Petitioner further testified that the adviser
cautioned her to use the 1998 FMV as her basis in the property if
she were to sell it.
The tax adviser who prepared the 2006 return was not the
same tax adviser who gave petitioner the advice on the proper
basis for depreciating and selling the property. Petitioners
told the “new” adviser that their basis in the property was the
approximately $500,000 on which they had been taking
depreciation. In response to a question from respondent,
petitioner testified that during the period 1998 through 2006 she
never called the county auditor’s office to determine Benedict’s
actual cost basis in the property.
Benedict deeded undivided interests in the property to
petitioner and himself as tenants in common in 1992. Absent
evidence to the contrary, petitioner and Benedict then became
owners of equal undivided interests in the property. See Bryan
v. Looker, 640 N.E.2d 590, 592-593 (Ohio Ct. App. 1994); Spector
v. Giunta, 405 N.E.2d 327 (Ohio Ct. App. 1978).
Generally, a taxpayer’s basis in property is the cost of the
property. Sec. 1012. Benedict’s cost basis in the property was
$320,000. Transfers of property between an individual and a
spouse, however, are treated as gifts, and the basis of the
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transferee in the “gifted” property is the same as the adjusted
basis of the transferor. Sec. 1041(a) and (b). There is no
evidence in the record to show that the adjusted basis of the
property was different from its cost basis. See sec. 1016.
After the transfer in 1992 the two cotenants, petitioner and
Benedict, held the property with a total basis of $320,000.
There was a subsequent transfer of the property between the
cotenants. As part of the 1998 divorce settlement, Benedict was
required to deed to petitioner his remaining ownership interest
in the property. Petitioner testified that although ordered in
1998 to make the transfer, Benedict did not provide her with a
deed for the property in her name until September 2000. Section
1041(a) and (b) provides that a transfer to a former spouse
incident to their divorce is also treated as though the
transferee has received a gift. But the transfer must occur
within 1 year after the date of the cessation of the marriage or
must be “related to the cessation of the marriage.” Sec.
1041(c).
The Court finds that the transfer of Benedict’s undivided
interest in the property to petitioner was related to the
cessation of their marriage. Upon that transfer, petitioner’s
basis in the property was that of the two undivided interests,
Benedict’s total adjusted basis in the property. See sec.
1041(a) and (b). The only relevant evidence in the record points
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to a total basis in the property of $320,000. Lacking any
evidence of depreciation or capital improvements to the property
before its transfer in 2000, we conclude petitioner’s adjusted
basis was at most $320,000 and not the then FMV of the property.
See secs. 167(c), 1011.
The gain from the sale or other disposition of property is
the excess of the amount realized over the adjusted basis of the
property. Sec. 1001(a). By using the larger amount, FMV, as
their adjusted basis petitioners improperly diminished their
gain. Respondent’s determination on this issue is sustained.
Accuracy-Related Penalty
Section 7491(c) imposes on the Commissioner the burden of
production in any court proceeding with respect to the liability
of any individual for penalties and additions to tax. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001); Trowbridge v.
Commissioner, T.C. Memo. 2003-164. In order to meet the burden
of production under section 7491(c), the Commissioner need only
make a prima facie case that imposition of the penalty or the
addition to tax is appropriate. Higbee v. Commissioner, supra at
446.
Respondent determined that for 2006, petitioners underpaid a
portion of their income tax due to: (1) Negligence or
intentional disregard of rules and regulations; (2) a substantial
understatement of income tax; or (3) a substantial valuation
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misstatement. Section 6662(a) imposes a 20-percent penalty on
the portion of an underpayment of tax attributable to any one of
various factors, including negligence or disregard of rules or
regulations and a substantial understatement of income tax. See
sec. 6662(b)(1) and (2). “Negligence” includes any failure to
make a reasonable attempt to comply with the provisions of the
Internal Revenue Code, including any failure to keep adequate
books and records or to substantiate items properly. See sec.
6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.
A “substantial understatement” includes an understatement of
tax that exceeds the greater of 10 percent of the tax required to
be shown on the return or $5,000. See sec. 6662(d); sec.
1.6662-4(b), Income Tax Regs.
Section 6664(c)(1) provides that the penalty under section
6662(a) shall not apply to any portion of an underpayment if the
taxpayer shows that there was reasonable cause for the taxpayer’s
position and that the taxpayer acted in good faith with respect
to that portion. Higbee v. Commissioner, supra at 448. The
determination of whether a taxpayer acted with reasonable cause
and in good faith is made on a case-by-case basis, taking into
account all the pertinent facts and circumstances. Sec.
1.6664-4(b)(1), Income Tax Regs. The most important factor is
the extent of the taxpayer’s effort to assess his proper tax
liability for the year. Id.
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Petitioners have a substantial understatement of income tax
for 2006 since the understatement amount will exceed the greater
of 10 percent of the tax required to be shown on the return or
$5,000. Petitioners also failed to substantiate items properly,
claimed itemized deductions and business expenses to which they
were not entitled, and failed to report a portion of their income
from capital gain. The Court concludes that respondent has
produced sufficient evidence to show that the accuracy-related
penalty under section 6662(a) is appropriate.
The accuracy-related penalty will apply unless petitioners
demonstrate that there was reasonable cause for the underpayment
and that they acted in good faith with respect to the
underpayment. See sec. 6664(c). Section 1.6664-4(b)(1), Income
Tax Regs., specifically provides: “Circumstances that may
indicate reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable in light of
all of the facts and circumstances, including the experience,
knowledge, and education of the taxpayer.”
Petitioner’s experience, knowledge, and education strongly
suggest that she either knew or should have known that the basis
on which petitioners computed their gain from the sale of the
property in 2006 was inflated. And the Court is convinced that
petitioners, by the use of the tools of their profession, could
have determined the correct basis from which to compute their
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gain for 2006. Petitioners offered no explanation to the Court
for the other adjustments to expenses and deductions.
Petitioners did not show that their underreporting of income
and overreporting of deductions were actions taken with
reasonable cause and in good faith. Respondent’s determination
of the accuracy-related penalty under section 6662(a) for 2006 is
sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.