                        T.C. Memo. 2011-50



                      UNITED STATES TAX COURT



          BENGT N. AND JUDY H. BENGTSON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11093-08.                 Filed March 1, 2011.



     Bengt N. and Judy H. Bengtson, pro sese.

     Julie A. Jebe, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   After concessions, the issues for decision

are whether petitioners are entitled to a long-term capital loss

and liable for a section 6662(a) accuracy-related penalty

relating to their income tax for 2005.1

     1
      Unless otherwise indicated, all section references are to
                                                   (continued...)
                               - 2 -

                        FINDINGS OF FACT

     During the years in issue, Bengt Bengtson was a computer

consultant and his wife, Judy Bengtson, was a homemaker.   In the

late 1990s petitioners agreed with Joan Thomley, Mrs. Bengtson’s

sister, to invest in stocks.   In 1999, 2000, and 2001,

petitioners provided funds to Mrs. Thomley, who in turn purchased

stock in Maintenance Depot, Inc. (Maintenance), Sideware, Inc.

(Sideware), and other companies.    Mrs. Thomley made the purchases

through her brokerage account, and all shares were purchased and

held in her name.

     In 2000, Mrs. Thomley informed petitioners that her 1999

stock transactions had resulted in a taxable gain, asked

petitioners for money to pay the taxes relating to the

transactions, and told petitioners that the proceeds of the

transactions would be reinvested.   In 2000, petitioners sent Mrs.

Thomley funds to pay the tax relating to the transactions.

Maintenance in 2001 was taken off the exchange on which it was

traded and in 2005 repurchased its outstanding shares.    In 2003,

Sideware sold its assets and ceased operations.

     On their 2005 joint Federal income tax return (2005 return),

petitioners reported a long-term capital loss relating to 29,488



     1
      (...continued)
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.
                               - 3 -

shares of Maintenance and 3,680 shares of Sideware.   Petitioners

also reported a long-term capital gain relating to the exercise

of International Business Machines Corp. stock options.    Before

filling out their 2005 return, Mr. Bengtson read Internal Revenue

Service (IRS) publications, attempted to determine the

appropriate tax treatment of the options, and sought to obtain

from Mrs. Thomley information relating to the Maintenance and

Sideware stocks.   Mrs. Thomley did not comply with petitioners’

requests for information.

     Respondent began an audit of petitioners’ 2005 return in

2007.   During the audit, respondent asserted that the Maintenance

and Sideware stocks became worthless in 2001 and 2002.    On

February 6, 2008, respondent issued petitioners a notice of

deficiency (notice) relating to 2005.   In the notice, respondent

determined that petitioners failed to substantiate their claimed

deductions; were not entitled to a long-term capital loss;

erroneously reported gain from the exercise of stock options as

long-term capital gain rather than ordinary income; and were

liable for an accuracy-related penalty pursuant to section

6662(a).   Petitioners concede that the exercise of the stock

options produced ordinary income.   On May 12, 2008, petitioners,

while residing in Illinois, filed their petition with the Court.

     In 2009, petitioners, taking a position consistent with

respondent’s assertion that the Maintenance and Sideware stocks
                                   - 4 -

became worthless in 2001 and 2002, filed amended returns relating

to 2001 and 2002 (amended returns).         On the amended returns,

petitioners reported a loss relating to 11,000 shares of

Maintenance stock and 49,500 shares of Sideware stock.

                                  OPINION

       Section 165(g) allows a deduction for any loss resulting

from stock that becomes worthless during the taxable year.         A

taxpayer must, however, maintain sufficient records to

substantiate the loss.       Sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.       There is insufficient evidence in the record to establish

the ownership, bases, and dates of worthlessness relating to the

Maintenance and Sideware stocks for which petitioners claimed a

long-term capital loss.2      Accordingly, petitioners are not

entitled to deduct a loss relating to the stocks.

       Section 6662(a) imposes a penalty equal to 20 percent of the

amount of any underpayment attributable to various factors

including negligence or a substantial understatement of income

tax.       See sec. 6662(b)(1) and (2).    Section 6664(c)(1), however,

provides that no penalty shall be imposed if a taxpayer




       2
      Pursuant to sec. 7491(a), petitioners have the burden of
proof unless they introduce credible evidence relating to the
issue that would shift the burden to respondent. See Rule
142(a). Our conclusions, however, are based on a preponderance
of the evidence, and thus the allocation of the burden of proof
is immaterial. See Martin Ice Cream Co. v. Commissioner, 110
T.C. 189, 210 n.16 (1998).
                                 - 5 -

demonstrates that there was reasonable cause for the underpayment

and the taxpayer acted in good faith.

     Petitioners failed to substantiate the loss relating to the

Maintenance and Sideware stocks and incorrectly characterized the

income relating to an exercise of stock options.    They are not,

however, liable for the section 6662(a) accuracy-related penalty

with respect to these items because they, in good faith, took

reasonable steps to accurately report them.    Petitioners

reasonably believed that they had an agreement with Mrs. Thomley,

that Mrs. Thomley purchased the Maintenance and Sideware stocks

on their behalf, and that they were entitled to a loss deduction

for 2005.    In addition, petitioners read IRS publications,

attempted to apply relevant rules and accounting principles, and

earnestly sought to retrieve as much information as possible from

Mrs. Thomley.    See sec. 1.6664-4(b)(1), Income Tax Regs.

     Contentions we have not addressed are irrelevant, moot, or

meritless.

     To reflect the foregoing,


                                           Decision will be entered

                                      under Rule 155.
