T.C. Summary Opinion 2014-89
UNITED STATES TAX COURT
THOMAS J. SULLIVAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18578-12S. Filed September 4, 2014.
Thomas J. Sullivan, pro se.
Mark H. Howard, for respondent.
SUMMARY OPINION
VASQUEZ, Judge: This case was heard pursuant to the provisions of
section 7463 of the Internal Revenue Code in effect when the petition was filed.1
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
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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.
Respondent determined a deficiency of $6,500 and an accuracy-related
penalty of $650 in petitioner’s Federal income tax for 2009. The issues for
decision are: (1) whether petitioner is entitled to a $6,500 first-time homebuyer
credit (FTHBC) for 2009; and (2) whether petitioner is liable for an accuracy-
related penalty under section 6662(a) for 2009.
Background
Some of the facts have been stipulated and are so found. We incorporate by
reference the stipulated facts and the related exhibits. Petitioner resided in Nevada
at the time he filed the petition.
On October 8, 1989, petitioner married Teri A. Howley in Nevada.
Approximately two years later they purchased a home on West King Street in
Carson City, Nevada. The home was originally titled in petitioner’s and his
mother’s names, but petitioner’s mother’s name was removed from the title
sometime thereafter. In 2003 Ms. Howley’s name was added to the title when she
and petitioner refinanced the mortgage on the home. At that point petitioner and
Ms. Howley each had a 50% interest in the home.
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Petitioner and Ms. Howley lived in the home together until their divorce.
On January 12, 2010, as part of the property settlement agreement with respect to
the divorce, Ms. Howley quitclaimed her 50% interest in the home to petitioner.
On January 15, 2010, petitioner and Ms. Howley were granted a divorce by the
First Judicial District Court of the State of Nevada in and for Carson City in an
uncontested action. Petitioner continued to live in the home after the divorce.
Petitioner filed a Form 1040, U.S. Individual Income Tax Return, for 2009.
On his Form 1040, he reported a filing status of married filing separate. He also
reported (1) total income of $50,424; (2) total tax of $6,281; (3) tax withheld of
$4,298; (4) a first-time homebuyer credit of $6,500; (5) a making work pay and
government retiree credit of $400; and (6) an overpayment of $4,917. He claimed
a refund of $4,917.
On June 2, 2010, petitioner filed an amended return changing his filing
status to single. On May 25, 2012, respondent issued petitioner a notice of
deficiency for 2009 disallowing the $6,500 FTHBC and determining an accuracy-
related penalty of $650 under section 6662(a). Petitioner timely filed a petition
with this Court in response to the notice of deficiency.
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Discussion
Generally, the Commissioner’s determination of a deficiency is presumed
correct, and the taxpayer has the burden of proving it incorrect. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 7491(a)(1) provides an
exception that shifts the burden of proof to the Commissioner as to any factual
issue relevant to a taxpayer’s liability for tax if: (1) the taxpayer introduces
credible evidence with respect to that issue; and (2) the taxpayer satisfies certain
other conditions, including substantiation of any item and cooperation with the
Government’s requests for witnesses, documents, other information, and meetings.
Sec. 7491(a)(2); see also Rule 142(a)(2); Higbee v. Commissioner, 116 T.C. 438,
440-441 (2001). The taxpayer bears the burden of proving that he or she has met
the requirements of section 7491(a). Rolfs v. Commissioner, 135 T.C. 471, 483
(2010), aff’d, 668 F.3d 888 (7th Cir. 2012). Because we decide the factual issues
in the instant case on the preponderance of the evidence, the allocation of the
burden of proof is immaterial. See Knudsen v. Commissioner, 131 T.C. 185, 189
(2008).
I. FTHBC
Section 36(a) allows a credit for a first-time homebuyer of a principal
residence. A first-time homebuyer is any individual (including an individual’s
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spouse) having no present ownership interest in a principal residence for three
years before the date of purchase of a principal residence. Sec. 36(c)(1). For
purposes of the FTHBC, section 36(c)(2) provides that the term “principal
residence” has the same meaning as in section 121. Section 36(c)(6) expands the
scope of the FTHBC by making it available to “long-time residents” who have
owned and lived in the same principal residence for at least five consecutive years
during the eight-year period ending on the date of the “purchase of a subsequent
principal residence.”
Petitioner argues that he is entitled to an FTHBC under the “long-time
residents” exception because he purchased Ms. Howley’s 50% interest in the
home. Respondent argues that petitioner did not purchase a subsequent principal
residence.
We conclude that petitioner’s acquisition of Ms. Howley’s 50% interest in
the home was not a “purchase” within the meaning of section 36(c)(3). An
acquisition does not qualify as a purchase if the basis of the property acquired is
determined “in whole or in part by reference to the adjusted basis of * * * [the]
property in the hands of the person from whom acquired”. Sec. 36(c)(3)(A)(ii)(I).
Section 1041(a) provides that no gain or loss is recognized on the transfer of
property from a spouse to his or her former spouse if the transfer is incident to a
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divorce.2 A transfer will be treated as incident to a divorce if the transfer occurs
within one year after the parties cease to be married or is related to a divorce. Sec.
1041(c). Section 1041(b)(2) provides that in the case of a transfer of property
described in section 1041(a), the transferee’s basis in the transferred property is
the same as the transferor’s adjusted basis.3
Three days before signing the divorce decree, Ms. Howley quitclaimed her
50% interest in the home to petitioner as part of the property settlement agreement
2
In general, sec. 1041 is effective for transfers after July 18, 1984, in
taxable years ending after that date. See Deficit Reduction Act of 1984, Pub. L.
No. 98-369, sec. 421(a), 98 Stat. at 793-795. Prior law provided that the transfer
of appreciated property incident to a divorce resulted in the recognition of gain to
the transferor, and the transferee received a basis equal to the asset’s fair market
value at the time of transfer. Godlewski v. Commissioner, 90 T.C. 200, 203
(1988).
3
Sec. 1041(b)(1) provides that for Federal income tax purposes, such
transfers are treated as gifts. See Balding v. Commissioner, 98 T.C. 368, 371-372
(1992). This nonrecognition rule applies whether the transfer is for the
relinquishment of marital rights, for cash or other property, for the assumption of
liabilities in excess of basis, or for other consideration and is intended to apply to
any indebtedness which is discharged. Id. at 372. Thus, uniform Federal income
tax consequences will apply to these transfers notwithstanding that the property
may be subject to differing State property laws. Id. The regulations provide
specific guidance regarding such a transfer of property. Sec. 1.1041-1T(d), Q&A-
10, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984), provides
that the transferor of property under sec. 1041 recognizes no gain or loss on the
transfer even if the transfer was in exchange for the release of marital rights or
other consideration, regardless of whether the property is separately owned or is a
division of community property.
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with respect to the divorce. We find that the transfer of Ms. Howley’s 50%
interest in the home to petitioner was incident to their divorce. It follows that
petitioner took a transferred basis in Ms. Howley’s 50% interest. Therefore,
petitioner did not “purchase” her interest within the meaning section 36(c)(3). We
hold that petitioner is not entitled to an FTHBC for 2009.
II. Accuracy-Related Penalty
Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer may be liable for
a penalty on 20% of the portion of an underpayment of tax due to: (1) negligence
or disregard of rules or regulations or (2) a substantial understatement of income
tax. “Negligence” is defined as any failure to make a reasonable attempt to
comply with the provisions of the Code; this includes a failure to keep adequate
books and records or to substantiate items properly. Sec. 6662(c); sec. 1.6662-
3(b)(1), Income Tax Regs. Negligence has also been defined as the failure to
exercise due care or the failure to do what a reasonable person would do under the
circumstances. See Allen v. Commissioner, 92 T.C. 1, 12 (1989), aff’d, 925 F.2d
348, 353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947 (1985).
“Disregard” means any careless, reckless, or intentional disregard. Sec. 6662(c).
“Understatement” means the excess of the amount of the tax required to be shown
on the return over the amount of the tax imposed which is shown on the return,
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reduced by any rebate. Sec. 6662(d)(2)(A). A “substantial understatement” of
income tax is defined as an understatement of tax that exceeds the greater of 10%
of the tax required to be shown on the tax return or $5,000. Sec. 6662(d)(1)(A).
The Commissioner bears the initial burden of production. Sec. 7491(c). If
the Commissioner satisfies his burden, the taxpayer then bears the ultimate burden
of persuasion. Higbee v. Commissioner, 116 T.C. at 446-447. The accuracy-
related penalty is not imposed with respect to any portion of the underpayment as
to which the taxpayer shows that he or she acted with reasonable cause and in
good faith. Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 448.
The decision as to whether the taxpayer acted with reasonable cause and in
good faith is made on a case-by-case basis, taking into account the pertinent facts
and circumstances, including the taxpayer’s knowledge, education, and
experience, as well as the taxpayer’s reliance on professional advice. Thomas v.
Commissioner, T.C. Memo. 2013-60; see Neonatology Assocs., P.A. v.
Commissioner, 115 T.C. 43, 99 (2000) (providing a three-prong test to establish
reasonable reliance on professional advice), aff’d, 299 F.3d 221 (3d Cir. 2002);
sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most important factor is the
extent of the taxpayer’s effort to assess his or her proper tax liability. Humphrey,
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Farrington & McClain, P.C. v. Commissioner, T.C. Memo. 2013-23; sec. 1.6664-
4(b)(1), Income Tax Regs.
Regardless of whether respondent has met his burden of production, we find
that petitioner is not liable for an accuracy-related penalty for 2009 because he
meets the reasonable cause and good faith exception. It is clear from the record
that petitioner is not experienced in tax matters. Petitioner made an honest
mistake in believing that he was entitled to the FTHBC under the “long-time
residents” exception. Although we ultimately disagree with petitioner, the
FTHBC is a complicated provision, and we find that it was reasonable under the
circumstances for him to believe in good faith that he met the statute’s
requirements. See sec. 1.6664-4(b), Income Tax Regs. (stating that an honest
mistake of law may indicate reasonable cause and good faith).
In reaching our holdings, we have considered all arguments made, and to
the extent not mentioned, we consider them irrelevant, moot, or without merit. To
reflect the foregoing,
An appropriate decision
will be entered.