T.C. Memo. 2013-9
UNITED STATES TAX COURT
TERRY D. ALBRIGHT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7250-12. Filed January 14, 2013.
Terry D. Albright, pro se.
Kelley Andrew Blaine, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: Respondent determined the following income tax
deficiencies and additions to tax and penalties for petitioner’s 2006 and 2008 tax
years:
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[*2] Penalty Addition to tax
Year Deficiency sec. 6662(a) sec. 6651(a)(1)
2006 $122,145.00 $24,429.00 $6,105.75
20081 2,288.00 457.60 ---
1
The 2008 tax year is in controversy solely because of computational
adjustments caused by an increase in petitioner’s adjusted gross income for 2006
which eliminated some portion of a net operating loss that had been carried over
from 2006.
FINDINGS OF FACT1
Petitioner resided in Idaho at the time his petition was filed. Petitioner sold
his residence in Middletown, Idaho, on September 28, 2006, for $1,490,000. He
did not report any of the gross sale price or resulting gain on his 2006 Federal
income tax return. After an examination, respondent determined that petitioner had
an $866,331 capital gain from the sale of his residence. Respondent computed the
gain by taking into account basis, exclusions, capital losses, and other adjustments
as follows:
Gross proceeds from sale of residence $1,490,000.00
Less:
Sales expenses (115,860.00)
Cost of home (85,368.50)
Improvements (12,000.00)
Gain on sale of residence 1,276,771.50
Exclusion from gain on sale of residence (250,000.00)
Taxable gain from sale of residence 1,026,771.50
1
The parties’ stipulated facts and exhibits are incorporated by this reference.
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[*3] Less:
Long-term capital loss carryover (34,492.00)
from 2005
Capital loss attributable to a 2006 (128,949.00)
partnership loss
Net long-term capital gain 863,330.50
Plus $3,000 claimed by petitioner against
2006 ordinary income based on
2005 capital loss carryover 3,000.00
Total adjustment determined by respondent 866,330.50
Petitioner does not dispute that he had capital gain from the sale of his residence.
Instead he contends that respondent erroneously failed to allow additional amounts
of basis and losses to further reduce the amount of taxable capital gain. In
particular petitioner had a $100,639.96 home equity loan secured by his residence.
When the residence was sold, proceeds were used to pay off the home equity loan.
Petitioner used the $100,639.96 proceeds for operating capital with respect to his
business enterprises. Because the business records are not available to him, he is
unable to show that the expenditures resulted in a deductible loss that would
further reduce his taxable income for 2006. Petitioner asserts that he expended
approximately $8,664 in attorney’s fees in connection with his attempt to gain
access to his business records and to address issues concerning the trust which
held his residence. He contends that his capital gain should also be reduced by
this amount. Of the $8,664, $2,265 represented attorney’s fees to resolve the
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[*4] issues related to the trust and the sale of his house. The remaining $6,399 was
used to pay petitioner’s bankruptcy attorney in connection with the chapter 13
bankruptcy he filed in 2005. Petitioner has not substantiated these amounts.
Petitioner obtained an extension of time to file his 2006 income tax return to
October 15, 2007. However, the 2006 return was not signed by petitioner until
October 25, 2007, and was not filed with respondent until October 30, 2007.
OPINION
Petitioner does not dispute that he had a gain from the sale of his residence
during 2006. He sold his residence, which originally cost a little more than
$85,000, for almost $1,500,000. He failed to include the proceeds or any gain from
the sale on his 2006 income tax return. After petitioner filed a late return for the
2006 year, his return was selected for audit; and, ultimately, respondent issued a
notice of deficiency in which the sale proceeds were adjusted (reduced) by
allowance of additional basis and an exclusion under section 121.2 Finally,
losses were applied against the taxable gain from the sale of the residence, with a
small adjustment, to arrive at net unreported capital gain of $866,330.50. That
2
Section references are to the Internal Revenue Code in effect for the taxable
years under consideration. Rule references are to the Tax Court Rules of Practice
and Procedure.
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[*5] unreported income was the source of petitioner’s 2006 income tax deficiency
and the computational adjustment that generated a 2008 income tax deficiency.
Petitioner contends that respondent’s determinations are in error because
respondent failed to reduce the amount of capital gain by three items. The first of
petitioner’s contentions is that his $100,639.96 home equity loan secured by his
residence and which was paid off from the proceeds of the sale should be subtracted
from the amount of gain. Petitioner’s theory is that he had used the proceeds from
the home equity loan to operate his business, which had a net loss. Unfortunately,
petitioner did not have the records that would show any amount of loss and/or that
the proceeds of the loan were connected with the loss. Petitioner bears the burden3
of showing his entitlement to the loss, which he has failed to do. See Rule 142(a).
Next, petitioner contends that he is entitled to deduct $8,664 in attorney’s
fees. Respondent contends that to the extent that petitioner can show that he
actually paid attorney’s fees, he has not shown that they were not already allowed
by respondent as part of the expenses in connection with the sale of his residence.
3
No issue has been raised by the parties concerning sec. 7491 or whether
there has been a shift in the burden of proof or going forward with the evidence.
Accordingly, petitioner has not established his entitlement to any such shift in the
burden of proof under sec. 7491(a) regarding his liability for the deficiencies.
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[*6] Through documentary evidence and testimony, petitioner has shown that of the
$8,664 claimed, $2,265 represented attorney’s fees to resolve issues related to the
sale of his residence and in connection with the trust in which title to the residence
was held. He has also shown that this amount was not already allowed by
respondent. Accordingly, the 20064 income tax deficiency should be reduced or
adjusted to reflect a $2,265 reduction of capital gain from the sale of petitioner’s
residence.
Lastly, petitioner contends that the capital gain should be reduced by $6,399
representing fees that he claims he paid to his bankruptcy attorney in connection
with handling his chapter 13 bankruptcy proceeding. Even if petitioner were able to
substantiate the amount of that payment, he has not explained or shown why any
payment to an attorney who represented him in a business-related chapter 13
bankruptcy proceeding in 2005 would result in a reduction of the sale proceeds or
gain from the sale of his personal residence in 2006.
Respondent determined that petitioner was liable for the section 6651(a)(1)
addition to tax for failure to timely file his 2006 income tax return. That section
provides for an addition of 5% per month, up to 25%, for late filing. Petitioner’s
4
To the extent that a reduction in the 2006 deficiency causes a computational
adjustment to the 2008 income tax deficiency, we leave that computation to the
parties.
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[*7] 2006 income tax return was filed with respondent on October 30, 2007, 15
days after the October 15, 2007, extended deadline that petitioner had obtained.
Petitioner bears the burden of providing an explanation or showing that there was
reasonable cause for the late filing. See Rule 142(a); Higbee v. Commissioner, 116
T.C. 438 (2001). Petitioner has not provided any explanation or shown reasonable
cause for the late filing and is accordingly liable for the section 6651(a)(1) addition
to tax.
Respondent also determined that petitioner was liable for the section 6662(a)
accuracy-related penalty, alternatively due to either negligence or a substantial
understatement of income tax. See sec. 6662(a) and (b)(1) and (2). Negligence is
defined to include any failure to make a reasonable attempt to comply with the
Internal Revenue Code. A substantial understatement of income tax exists if an
understatement exceeds the greater of 10% of the tax required to be shown on the
return or $5,000. Sec. 6662(d).
Petitioner’s failure to report the $1,490,000 proceeds from the sale of his
residence resulted in a sizable income tax deficiency for his 2006 tax year.
Petitioner did not provide any explanation as to why he did not report the proceeds
from the sale of his residence. Further, he did not show reasonable cause for his
failure. Under those circumstances, we hold that petitioner is liable for the section
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[*8] 6662(a) accuracy-related penalty on the resulting underpayment for his 2006
tax year.
With respect to the 2008 tax year, it appears that there was no substantial
understatement of income tax. Accordingly we must consider whether the
underpayment for 2008 was due to negligence. The 2008 underpayment was
attributable to changes in capital loss carryovers and technical adjustments that
caused a recomputation of his 2008 tax liability. Under those circumstances, we do
not find that petitioner failed to make a reasonable attempt to comply with the
Internal Revenue Code. We accordingly hold that petitioner is not liable for the
section 6662(a) accuracy-related penalty for 2008.
To reflect the foregoing,
Decision will be entered
under Rule 155.