T.C. Memo. 2017-163
UNITED STATES TAX COURT
ROBERT FISCALINI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 30464-15. Filed August 24, 2017.
Robert Fiscalini, pro se.
Bryant W. Smith, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined a deficiency in, an addition
under section 6651(a)(1)1 to, and an accuracy-related penalty under section
1
All section references are to the Internal Revenue Code (Code) in effect for
the year at issue. All Rule references are to the Tax Court Rules of Practice and
(continued...)
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[*2] 6662(a) on petitioner’s Federal income tax (tax) for his taxable year 2007 of
$278,186, $69,845.25, and $55,637.20, respectively.
The issues remaining for decision for petitioner’s taxable year 2007 are:
(1) Is petitioner required to recognize certain long-term capital gain from
the sale of his personal residence? We hold that he is.
(2) Is petitioner liable for the addition to tax under section 6651(a)(1)? We
hold that he is.
(3) Is petitioner liable for the accuracy-related penalty under section
6662(a)? We hold that he is.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioner, Robert Fiscalini, resided in California at the time he filed the
petition.
At all relevant times, including during 2007, the year at issue, petitioner
operated a cement contracting business and built swimming pool decks (collec-
tively, petitioner’s construction business).
1
(...continued)
Procedure.
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[*3] On March 31, 1993, petitioner and his parents, Robert Fiscalini, Sr., and
Kathleen Fiscalini (sometimes collectively, the Fiscalinis), purchased a house at
1591 McCloskey Road, Hollister, California (sometimes, McCloskey Road
property) for $274,312. Petitioner’s parents paid $40,000 for their interest in the
McCloskey Road property, and petitioner paid $234,312 for his interest. In order
to finance the purchase of his interest in the McCloskey Road property, petitioner
borrowed $234,312. That loan was secured by a mortgage on the McCloskey
Road property. (We shall refer to the loan secured by a mortgage that petitioner
had obtained with respect to the McCloskey Road property as petitioner’s mort-
gage loan.)
From the purchase of the McCloskey Road property until at least August 1,
2007, petitioner resided on that property. (We shall sometimes refer to the
McCloskey Road property where petitioner resided as petitioner’s residence.)
During 2002, petitioner made certain improvements to the McCloskey Road
property, including building a swimming pool on the property with certain
equipment that he used in petitioner’s construction business. Petitioner also
converted a detached garage on the McCloskey Road property into a game room.
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[*4] On April 29, 2003, the Fiscalinis transferred their interest in the McCloskey
Road property to petitioner. Petitioner did not give them any cash or other
property in return for that interest.
On several occasions not established by the record before August 1, 2007,
petitioner refinanced petitioner’s mortgage loan on the McCloskey Road property.
During 2007, petitioner was unable to make certain loan payments that became
due with respect to that property. Around August 1, 2007, in order to avoid
foreclosure on the McCloskey Road property, petitioner sold that property to his
parents.
In order to finance the purchase of the McCloskey Road property, the
Fiscalinis borrowed $682,500 from Downey Savings. They used most of those
borrowed funds to discharge the balances totaling $505,753.39 and $158,295.04,
respectively, of two loans that petitioner had outstanding with respect to the
McCloskey Road property. (We shall sometimes refer to the balances totaling
$505,753.39 and $158,295.04, respectively, of two loans that petitioner had
outstanding with respect to the McCloskey Road property and that his parents
discharged when they acquired that property as petitioner’s discharged liabilities
of $664,048.43.) The respective closing statements of the seller, petitioner, and
the buyers, the Fiscalinis, with respect to the sale and the purchase of the
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[*5] McCloskey Road property showed that they had agreed that the “Total
Consideration” for that sale and that purchase was $975,000 and that petitioner
was making a “Gift of Equity To Buyer [the Fiscalinis]” of $295,655.35. The
buyer’s closing statement also showed that petitioner incurred settlement charges
totaling $16,751.24 (petitioner’s settlement costs).
Alliance Title Co. issued for taxable year 2007 Form 1099-S, Proceeds
From Real Estate Transactions, to petitioner, as the transferor of property at 1591
McCloskey Road, Hollister, California, that showed “Gross Proceeds” of
$975,000 and that “Property or Services [Were] Not Received”.
Petitioner did not file timely a tax return for his taxable year 2007 because
he was unable to pay any tax due for that year. In June 2013, petitioner filed Form
1040, U.S. Individual Income Tax Return, for his taxable year 2007 (2007 return).
Petitioner did not report in that return any gain from the sale of petitioner’s
residence to the Fiscalinis.
Respondent issued a notice of deficiency (notice) to petitioner with respect
to his taxable year 2007. In that notice, respondent determined that petitioner
must recognize $975,000 of long-term capital gain from “the sale of capital
assets”, i.e., petitioner’s residence. Respondent also determined in the notice that
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[*6] petitioner is liable for his taxable year 2007 for the addition to tax under
section 6651(a)(1) and the accuracy-related penalty under section 6662(a).
OPINION
Petitioner bears the burden of proving that respondent’s determinations in
the notice are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933).
We address first whether petitioner is required to recognize any long-term
capital gain from the sale of petitioner’s residence. It is petitioner’s position that
he is required to recognize only $70,487 of long-term capital gain from that sale.
It is respondent’s position that petitioner must recognize $473,536.76 of long-term
capital gain from the sale of petitioner’s residence.
Respondent concedes that, in determining the amount of any capital gain
that petitioner realized from the sale of the McCloskey Road property, he is
entitled to reduce the amount realized from that sale, as determined under section
1001(b), by petitioner’s settlement costs of $16,751.24. Respondent also concedes
that petitioner is entitled under section 121 to exclude from gross income
$250,000 of the capital gain that he realized from the sale of petitioner’s residence,
as determined under section 1001(a) and (b).
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[*7] The parties disagree over the amount of capital gain that petitioner realized
from the sale of the McCloskey Road property. That is because they disagree over
petitioner’s adjusted basis in, and the amount realized from the sale of, that
property. According to petitioner, his adjusted basis in the McCloskey Road
property when he sold it was $329,687. According to respondent, petitioner’s
adjusted basis in that property at that time was $234,312. According to petitioner,
the amount realized from the sale of petitioner’s residence is $650,199. According
to respondent, the amount realized from that sale is $975,000 reduced by peti-
tioner’s settlement costs of $16,751.24.2
Before turning to the parties’ disagreements, we summarize the pertinent
Code and regulatory provisions which, when applied to the facts that we have
found, will resolve those disagreements. Section 1001(a) provides that the gain
from the sale of property is the excess of the amount realized therefrom over the
adjusted basis of the property provided in section 1011. Section 1.1001-1(e)(1),
Income Tax Regs., provides that where a transfer of property is in part a sale and
2
For convenience, we shall generally not restate respondent’s concession
regarding petitioner’s settlement costs throughout our discussion and resolution of
the dispute between the parties over the amount realized from the sale of the
McCloskey Road property.
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[*8] in part a gift the transferor has a gain to the extent that the amount realized
exceeds the transferor’s adjusted basis in the property.
Section 1001(b) provides that the amount realized from the sale of property
is the sum of any money received plus the fair market value of property other than
money that is received. Section 1.1001-2(a)(1), Income Tax Regs., provides that
generally the amount realized from the sale of property includes the amount of
liabilities from which the transferor is discharged as a result of the sale. Section
1001(c) provides that, except as otherwise allowed by the Code,3 the entire amount
of the gain determined under section 1001 on the sale of property is to be recog-
nized.
Section 1011(a) provides that the adjusted basis for determining gain from
the sale of property is the basis determined under section 1012 or other applicable
sections of subchapter O of the Code (e.g., section 1015), adjusted as provided in
section 1016. Section 1012(a) provides that generally the basis of property is the
cost of the property. Section 1015(a) provides that generally the basis of property
acquired by gift is to be the same as it would be in the hands of the donor. Section
3
As respondent concedes, sec. 121 is an exception to the rule in sec. 1001(c)
that is applicable here.
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[*9] 1016(a)(1) provides that in all cases there is to be a proper adjustment to the
basis of property for expenditures properly chargeable to capital account.
We consider now the parties’ dispute over petitioner’s adjusted basis in the
McCloskey Road property. Petitioner first argues that, in determining his adjusted
basis in that property when he sold it to his parents in 2007, his cost basis of
$234,312 in that property4 should have already been increased in 2003 by the cost
basis of $40,000 that the Fiscalinis had in their interest in that property. That is
because, according to petitioner, his parents made a gift of that interest to him in
2003. Respondent disagrees. The only argument that respondent advances in
support of respondent’s disagreement is that “coowners of an asset only have a
cost basis in the amount each has paid” for the asset.
We reject respondent’s argument. That argument disregards the facts and
the applicable law. We have found on the record before us that petitioner did not
give his parents any cash or other property in return for their interest in the
McCloskey Road property when they transferred that interest to him in 2003. In
other words, we have found that in 2003 the Fiscalinis made a gift of their interest
in that property to petitioner. Pursuant to section 1015(a), petitioner’s basis in the
4
Respondent agrees that petitioner’s cost basis in the McCloskey Road
property is $234,312, the amount that he paid for his interest in that property when
he and the Fiscalinis purchased it in 1993.
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[*10] interest in the McCloskey Road property that his parents gave to him in
2003 is the same as their cost basis in that interest, namely, $40,000.
On the record before us, we find that in 2003, after the Fiscalinis gave
petitioner their interest in the McCloskey Road property, his basis in that property
was equal to the sum of his cost basis of $234,312 in the interest in that property
that he purchased in 1993 and his basis of $40,000 in his parents’ interest in that
property which they gave to him in 2003, or $274,312.
Petitioner further argues that, in determining his adjusted basis in the
McCloskey Road property when he sold it to his parents in 2007, his basis of
$274,312 in that property should also be increased under section 1016(a)(1) by
total costs of $50,000 that he claims he incurred in building a swimming pool on
the property with certain equipment that he used in petitioner’s construction
business and converting a detached garage on the property into a game room. In
support of his argument regarding those claimed costs of $50,000, petitioner relies
on his self-serving, uncorroborated, and general testimony regarding the amount of
those claimed costs. We are unwilling to, and we shall not, rely on petitioner’s
testimony to establish the costs of the improvements to the McCloskey Road
property that he claims he incurred. See Tokarski v. Commissioner, 87 T.C. 74,
77 (1986).
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[*11] On the record before us, we find that petitioner has failed to carry his
burden of establishing that, in determining his adjusted basis in the McCloskey
Road property when he sold it to his parents in 2007, his basis of $274,312 should
also be increased under section 1016(a)(1) by total costs of $50,000 that he claims
he incurred in building a swimming pool on the property with certain equipment
that he used in petitioner’s construction business and converting a detached garage
on the property into a game room.
Based upon our examination of the entire record before us, we find that
petitioner’s adjusted basis in the McCloskey Road property when he sold it to his
parents in 2007 was $274,312.
We consider next the parties’ disagreement over the amount realized from
petitioner’s sale of the McCloskey Road property to his parents. The parties agree
that the amount realized from that sale includes petitioner’s discharged liabilities
of $664,048.43. See sec. 1.1001-2(a)(1), Income Tax Regs.5 They disagree over
whether the amount realized includes any other amount. According to petitioner,
the amount realized should include no other amount because his sale of the
McCloskey Road property to the Fiscalinis was in part a sale and in part a gift to
them. Petitioner maintains that the amount of that gift is the difference between
5
See supra note 2.
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[*12] the total consideration for the sale of that property (i.e., $975,000) shown in
the respective closing statements of the seller, petitioner, and the buyer, the
Fiscalinis, and petitioner’s discharged liabilities of $664,048.43 (i.e.,
$310,951.57). Respondent disagrees. As we understand respondent’s argument in
support of respondent’s disagreement, the total consideration of $975,000 shown
in the respective closing statements of petitioner and the Fiscalinis controls the
determination of the amount realized under section 1001(b). In advancing that
argument, respondent states: “Petitioner and his parents, in full knowledge of the
relevant facts agreed to a sales price of $975,000.00, which is, by definition, the
fair market value of the McCloskey [Road] Property on that date [of sale].”
We reject respondent’s argument. That argument disregards the definition
of the term “amount realized” in section 1001(b), the regulations thereunder, and
pertinent caselaw. As discussed above, section 1001(b) provides that the amount
realized from the sale of property is the sum of any money received plus the fair
market value of property other than money that is received. Section 1.1001-
2(a)(1), Income Tax Regs., provides in pertinent part that generally the amount
realized from the sale of property includes the amount of liabilities from which the
transferor is discharged as a result of the sale. The Fiscalinis acquired from
petitioner the McCloskey Road property that respondent concedes had a fair
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[*13] market value of $975,000 at the time they acquired it. Petitioner received no
cash and no other property from his parents as a result of the sale of that property
to them although they did discharge certain mortgage loans that he had with
respect to that property at the time of that sale, namely, petitioner’s discharged
liabilities of $664,048.43. What respondent disregards or fails to understand is
that petitioner’s sale of the McCloskey Road property to his parents was a transfer
of property that was in part a sale and in part a gift. See sec. 1.1001-1(e)(1),
Income Tax Regs.
Based upon our examination of the entire record before us, we find that the
amount realized, before taking into account respondent’s concession regarding
petitioner’s settlement costs of $16,751.24, from petitioner’s sale of the
McCloskey Road property to his parents is $664,048.43, the total amount of the
two mortgage loans that he had with respect to that property at the time of that sale
and that his parents discharged. After we take into account respondent’s
concession regarding petitioner’s settlement costs of $16,751.24, the amount
realized is $647,297.19.
Based upon our examination of the entire record before us and taking into
account respondent’s concession with respect to petitioner’s settlement costs of
$16,751.24, we find that for his taxable year 2007 the amount of capital gain from
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[*14] petitioner’s sale of the McCloskey Road property is $372,585.19. Taking
into account respondent’s concession with respect to the $250,000 exclusion from
gross income under section 121, we find that petitioner is required to recognize for
that year $122,585.19 of long-term capital gain from that sale.
We consider finally the addition to tax under section 6651(a)(1) and the
accuracy-related penalty under section 6662(a) that respondent determined in the
notice. Respondent bears the burden of production with respect to that addition to
tax and that accuracy-related penalty. See sec. 7491(c); Higbee v. Commissioner,
116 T.C. 438, 446-447 (2001). To satisfy respondent’s burden of production,
respondent must come forward with sufficient evidence showing that it is
appropriate to impose the addition to tax and the accuracy-related penalty that are
at issue. See Higbee v. Commissioner, supra at 446. Although respondent bears
the burden of production with respect to the addition to tax under section
6651(a)(1) and the accuracy-related penalty under section 6662(a), respondent
“need not introduce evidence regarding reasonable cause, substantial authority, or
similar provisions. * * * the taxpayer bears the burden of proof with regard to
those issues.” Id.
With respect to the addition to tax under section 6651(a)(1), that section
imposes an addition to tax for failure to file timely a tax return. Petitioner filed his
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[*15] 2007 return in June 2013. On the record before us, we find that respondent
has satisfied respondent’s burden of production under section 7491(c) with respect
to the addition to tax under section 6651(a)(1) that respondent determined.
The addition to tax under section 6651(a)(1) does not apply if the failure to
file timely is due to reasonable cause and not to willful neglect. See sec.
6651(a)(1). At trial, petitioner testified, and we have found, that he did not file
timely a tax return for his taxable year 2007 because he was unable to pay any tax
due for that year. A taxpayer’s inability to pay tax does not constitute reasonable
cause for the taxpayer’s failure to file timely a tax return. See Mali v.
Commissioner, T.C. Memo. 2011-121, 2011 WL 2162913, at *5. On the record
before us, we find that petitioner’s failure to file timely his 2007 return was due to
willful neglect and not to reasonable cause.
Based upon our examination of the entire record before us, we find that
petitioner is liable for his taxable year 2007 for the addition to tax under section
6651(a)(1).
With respect to the accuracy-related penalty under section 6662(a), that
section imposes an accuracy-related penalty of 20 percent of the underpayment to
which section 6662 applies. Section 6662 applies to the portion of any underpay-
ment which is attributable to, inter alia, negligence or disregard of rules or
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[*16] regulations, sec. 6662(b)(1), or a substantial understatement of tax, sec.
6662(b)(2).
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).
In his 2007 return that he filed late, petitioner did not include in gross
income any gain from the sale of the McCloskey Road property. He failed to do
so even though he knew that when his parents acquired that property they had
discharged the balances totaling $505,753.39 and $158,295.04, respectively, of
two loans that he had outstanding with respect to that property. On the record
before us, we find that respondent has satisfied respondent’s burden of production
under section 7491(c) with respect to the accuracy-related penalty under section
6662(a) that respondent determined.
The record is devoid of reliable evidence and sound argument as to why
respondent’s determination under section 6662(a) should not be sustained. At
trial, petitioner merely indicated that if we should find that he has no gain from the
sale of the McCloskey Road property, he would not be liable for the accuracy-
related penalty.
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[*17] On the record before us, we find that petitioner made no attempt to comply
with the requirements of the Code in determining the amount of any gain from the
sale of petitioner’s residence and that consequently he failed to do what a
reasonable person would do under the circumstances. On that record, we further
find that petitioner was negligent and disregarded regulations.
On the record before us, we also find that there was no reasonable cause for,
and that petitioner did not act in good faith with respect to, the underpayment for
his taxable year 2007.
Based upon our examination of the entire record before us, we find that
petitioner is liable for his taxable year 2007 for the accuracy-related penalty under
section 6662(a).
We have considered all of the parties’ respective contentions and arguments
that are not discussed herein, and we find them to be without merit, irrelevant,
and/or moot.
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.