DocketNumber: Docket No. 5515-95
Citation Numbers: 1997 T.C. Memo. 252, 73 T.C.M. 2929, 1997 Tax Ct. Memo LEXIS 286
Judges: HALPERN
Filed Date: 6/4/1997
Status: Non-Precedential
Modified Date: 4/18/2021
*286 Decision will be entered under Rule 155.
1.
2.
3.
4.
MEMORANDUM OPINION
HALPERN,
Addition to Tax | Penalty Under | ||
Year | Deficiency | Sec. 6651(a)(1). | Sec. 6662(a) |
1989 | $ 34,821 | $ 8,276 | $ 6,964 |
*288 Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues for decision are (1) the amount of gain realized by petitioner upon the sale of certain rental properties and whether petitioner is entitled to nonrecognition of that gain under
I.
Petitioner maintained his legal residence in Phoenix, Arizona, at the time the petition in this case was filed.
During 1989, petitioner was a consulting engineer and a general partner with TQA Associates, a Texas based consulting firm.
Petitioner is a calendar year taxpayer. Petitioner filed an Application for Automatic Extension of Time to File U.S. Individual Income Tax Return for 1989 requesting an extension of time to August 15, 1990. Petitioner also filed an Application for Additional Extension of Time to File U.S. Individual Income Tax Return for 1989 requesting an extension of time to September 15, 1990. Petitioner filed a U.S. Individual Income Tax Return, Form 1040, for 1989 (the 1989 tax return), which was received by the Internal Revenue Service Ogden Service Center on August 22, 1991. The envelope used by petitioner to mail the 1989 tax return is postmarked August 20, 1991.
II.
A.
On or about November 13, 1981, petitioner purchased five condominium units located in Mukilteo, Washington*291 (the five units). Petitioner owned those units as rental properties. On or about January 25, 1989, petitioner transferred the five units to Great American First Savings Bank (Great Bank) in conjunction with the settlement of potential litigation regarding purported soil erosion affecting those properties. Attached to the 1989 tax return is a "Statement of Involuntary Conversion", which relates to the five units. That statement shows a gain in the amount of $ 89,339 1 on the disposition of the five units and provides that the taxpayer intends to acquire replacement property and "to defer the gain realized by the involuntary conversion" of the five units.
In the notice of deficiency, respondent adjusted the amount realized on the sale of the five units by increasing the amount of the settlement proceeds from $ 206,009 to $ 210,500 and adjusted petitioner's adjusted*292 basis in the five units by decreasing petitioner's initial, cost basis from $ 228,067 to $ 222,242. Respondent determined that, after taking into account depreciation and other items, petitioner realized gain on the sale of the five units in the amount of $ 111,568, and respondent adjusted petitioner's gross income accordingly because petitioner had failed to establish that he was entitled to gain deferral on the basis of an involuntary conversion of the five units. After making a negative adjustment for an operating loss carryover, respondent increased petitioner's taxable income by $ 99,656.
As a threshold matter, we must determine the amount of gain realized on the sale of the five units and, in turn, the adjustments to petitioner's gross and taxable income that are in issue.
The parties, however, disagree on the amount realized by petitioner from the sale of the five units. Petitioner reports the sale as follows: (1) gross settlement proceeds of $ 212,861, (2) settlement charges of $ 6,852, (3) legal costs of $ 2,907, and (4) operating loss carryover of $ 11,912. From those figures, petitioner calculates an amount realized of $ 191,189 ($ 191,189 = $ 212,861 - $ 6,852 - $ 2,907 - $ 11,912). In calculating an amount realized of $ 207,593 from the sale of the five units, respondent argues that $ 210,500 is the correct figure for settlement proceeds, subtracts legal costs of $ 2,907 ($ 207,593 = $ 210,500 - $ 2,907), and does not consider the $ 6,852 in settlement charges claimed by petitioner. Only after calculations for the amount realized and gain realized are complete (and the gain is included as an item of gross*294 income; see
First, we agree with respondent that the operating loss carryover should properly be considered, if at all, only in determining taxable income and not in the separate, and preceding, operation of determining gain realized. Compare
*296 Therefore, the amount realized by petitioner on the sale of the five units is $ 205,114, and the gain realized is $ 103,264. The adjustment to petitioner's gross income that is in issue is $ 103,264, and, after making a negative adjustment for the undisputed operating loss carryover, $ 91,352 is the adjustment to petitioner's taxable income that is in issue. Those calculations are as follows:
Purchase price | $ 228,067 | Settlement proceeds | $ 210,500 |
Capital expenditures | 3,266 | Legal costs | (2,907) |
Depreciation | (129,483) | Settlement charges | (2,479) |
Adjusted basis | 101,850 | Amount realized | 205,114 |
Amount realized | $ 205,114 |
Less adjusted basis | (101,850) |
Equals gain realized | 103,264 |
Adjustment to gross income in issue | 103,264 |
Operating loss carryover | (11,912) |
Adjustment to taxable income in issue | 91,352 |
Now that we have determined the adjustments to petitioner's gross and taxable income that are in issue as a result of the sale of the five units, we must decide whether those adjustments are correct.
Petitioner asserts that the five units, along with 80 other similar properties, which were part of a 300-unit condominium complex located in Mukilteo, Washington*297 (the Mukilteo complex), were damaged beyond repair as a result of soil erosion caused by drainage diffusion and saturated soil. A homeowner's association representing the interests of the condominium owners, including petitioner, retained a law firm that initiated legal proceedings against Great Bank, which, according to petitioner, acquired the bank that had sold the properties to the condominium owners. After negotiations, the homeowner's association entered into a group settlement agreement with Great Bank on January 15, 1989. Pursuant to that agreement, petitioner transferred the five units to Great Bank in exchange for cash and debt forgiveness. Petitioner claims that the five units were destroyed beyond repair and, as a result of the interlocking ownership structure of the Mukilteo condominium properties, "the group settlement was the only practical recourse available to the individual owners". On that basis, petitioner claims that the five units were involuntarily converted. Petitioner contends that he applied the proceeds received from the sale of the five units towards the purchase of qualifying replacement property located in Glendale, Arizona, on January 31, 1991, and, *298 therefore, is entitled to nonrecognition of gain on the sale of the five units.
In this case, petitioner*299 has failed to prove that the five units were destroyed in whole or in part as that phrase is used in
Respondent, however, presented the testimony of James Bennett, the building official for the City of Mukilteo, Washington, since July 1986 to the time of trial. Mr. Bennett directed building inspection functions for the City of Mukilteo, including structural nuisance inspections, abatement actions, and condemnations. Mr. Bennett stated that no order of condemnation was ever issued to any of the properties in the Mukilteo*300 complex. In addition, Mr. Bennett stated that, in 1996, when he visited the Mukilteo complex, he observed that the buildings that housed the individual condominium units were occupied and performing. Petitioner did not attempt to refute any of Mr. Bennett's statements. Indeed, petitioner has not been back to Mukilteo, Washington, since the sale of the five units to Great Bank. Mr. Bennett's testimony coupled with petitioner's failure to rebut that testimony is inconsistent with petitioner's assertion that the five units were destroyed in whole or in part. We are not persuaded by petitioner's unsupported assertions, and we find that the five units were not destroyed in whole or in part.
Our finding that the five units were not destroyed in whole or in part precludes nonrecognition treatment under
B.
Petitioner claimed on the 1989 tax return a miscellaneous deduction in the amount of $ 20,388 for unreimbursed employee business expenses. In the notice of deficiency, respondent disallowed $ 19,978 of that deduction and increased petitioner's taxable income accordingly. Respondent explained that petitioner was not entitled to the disallowed deduction because he failed to establish that the deduction was for an ordinary and necessary business expense or was expended for the purpose designated on the 1989 tax return. The 1989 tax return indicates that petitioner claimed the deduction for vehicle expenses, travel expenses, and meal and/or entertainment expenses.
unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift. * * *
At trial, petitioner stated that, in 1989, he maintained "tax homes" in Arlington, Texas, and Everett, Washington, while working as a contract*303 engineer in California. Petitioner claims that he is entitled to deduct travel and travel related expenses incurred in California in the pursuit of his business as a contract engineer. Respondent asserts that petitioner did not maintain a tax home during 1989. In addition, respondent contends that petitioner's claimed expenses are not ordinary and necessary business expenses under
Petitioner testified that he incurred the claimed business expenses and that he provided the required substantiation to the Internal Revenue Service. Petitioner, however, has failed to corroborate his testimony. The record is barren of the type of substantiation required by
C.
Petitioner claimed on the 1989 tax return a moving expense deduction in the amount of $ 1,322. In the notice of deficiency, respondent disallowed that deduction in full and increased petitioner's taxable income accordingly. Respondent explained that petitioner was not entitled to the deduction because he was not a full-time employee in the general location of his new principal place of work for at least 39 weeks during the 12-month period immediately following his arrival in such location. See sec. 217(c) (2).
In his brief, petitioner concedes that he erred in reporting the claimed expenses as moving expenses under section 217. He argues, instead, that the claimed expenses should be deductible as employee business expenses under
III.
A.
In the notice of deficiency, respondent determined that the 1989 tax return was due on October 15, 1990, and that petitioner filed that return on August 22, 1991. Petitioner does not dispute those facts. Petitioner did not present any testimony or other evidence to explain his failure to file the 1989 tax return in a timely manner. Petitioner's attempt to introduce evidence in his brief is rejected. See Rule 143(b). Petitioner has not carried his burden of proof. Respondent's determination of an addition to tax under
B.
In the notice of deficiency, respondent determined that the entire underpayment of tax for the 1989 taxable year was due to petitioner's negligence or intentional disregard of rules and regulations. Petitioner bears the burden of proving that respondent's determination is erroneous. See
IV.
Respondent's determinations of a deficiency in, an addition to, and a penalty on petitioner's Federal income tax for the 1989 taxable year are sustained *307 to the extent set forth in this report.
1. For simplicity, figures have been rounded to the nearest dollar, and, thus, in some of the calculations to follow, there are some minor discrepancies.↩
2. Expenses incurred in selling property generally reduce the gain realized. See, e.g.,
In addition, it should be noted that appeal in this case would lie to the Court of Appeals for the Ninth Circuit, and that circuit may account for the selling expenses incurred on the sale of the five units by increasing petitioner's adjusted basis, as opposed to reducing the amount realized. See
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