                               T.C. Memo. 2018-65



                        UNITED STATES TAX COURT



        TRIUMPH MIXED USE INVESTMENTS III, LLC, FOX RIDGE
        INVESTMENTS, LLC, TAX MATTERS PARTNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20412-14.                         Filed May 15, 2018.



      Michael C. Walch, for petitioner.

      Rebekah A. Myers, Charles B. Burnett, and S. Mark Barnes, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      BUCH, Judge: Triumph Mixed Use Investments III, LLC (Triumph), is

subject to the partnership provisions of the Tax Equity and Fiscal Responsibility

Act of 1982, Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648. Triumph was one of

a group of entities that were developing a master-planned community on their real
                                         -2-

[*2] property in Lehi, Utah, during 2010 and 2011, the years in issue. In an earlier

agreement with the city of Lehi, Triumph’s parent entities received additional

development credits (rights to develop units), which doubled the number of units

that they could develop. However, to develop these additional units, these entities

were required to follow the city of Lehi’s development procedures and receive

specific development approvals from the city council. In following these

development procedures the entities’ development plan was approved by the city

council. However, the city council’s approval was contingent on the parent

entities’ dedicating real property to the city and reducing density. Triumph

subsequently transferred 746.789 acres and 1,958 development credits to the city

of Lehi. After the transfer the entities received another development approval,

which allowed them to develop some of the additional units pursuant to the earlier

agreement with the city. On its 2011 return Triumph claimed an $11,040,000

charitable contribution deduction for the transfer.

      The Commissioner issued a notice of final partnership administrative

adjustment (FPAA) for Triumph’s 2010 and 2011 returns. The Commissioner

determined that Triumph could not deduct the charitable contribution reported for

2011. The Commissioner also determined that Triumph had unreported gross

receipts and net earnings from self-employment in the same amount for 2010 and
                                            -3-

[*3] 2011. The Commissioner determined that Triumph could not deduct a long-

term capital loss or a bad debt for 2011. The Commissioner also determined that

section 6662(a) and (b) accuracy-related penalties should apply for the years in

issue.1

          Triumph is not entitled to a charitable contribution deduction for 2011.

Triumph transferred the real property and development credits in exchange for a

development plan approval and with the expectation of a future development plan

approval. Because these benefits have substantial value and the tax matters

partner did not report or value these benefits, Triumph is not entitled to a

charitable contribution deduction.

          With respect to the other adjustments we find that the Commissioner failed

to show some substantive evidence of unreported gross receipts for 2010, and

therefore Triumph does not have unreported gross receipts for 2010. Conversely,

the gross receipts were reported for 2011, and we find that the tax matters partner

failed to meet its burden to show that Triumph did not have taxable gross receipts.

Because the tax matters partner failed to establish the basis of the property


          1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
                                          -4-

[*4] transferred in a settlement, Triumph is not entitled to a long-term capital loss

deduction. However, Triumph is entitled to a bad debt deduction because the debt

was proximately related to Triumph’s trade or business and became worthless.

Because Triumph had gross receipts for 2011 that were not reported as net

earnings from self-employment, Triumph must recognize the gross receipts as net

earnings from self-employment. With respect to the accuracy-related penalty the

Commissioner established that Triumph acted negligently with respect to the

portion of the underpayment attributable to the charitable contribution deduction,

but the Commissioner did not show that it acted negligently with respect to the

other adjustments. The penalty for an underpayment due to a substantial

understatement of income tax is applicable as it relates to an adjustment to

partnership items if the statutory threshold for that penalty is met at the partner

level. The tax matters partner did not show that Triumph had reasonable cause

and acted in good faith.

                                FINDINGS OF FACT

      Triumph’s principal place of business was in Utah when it timely petitioned.

I.    The Traverse Entities

      During the years in issue Triumph was one of a group of related companies

that were developing real property (Traverse property) in Lehi, Utah. Triumph
                                        -5-

[*5] was a limited liability company organized in the State of Utah. Triumph was

formed in 2003 to “own, purchase, acquire, and finance commercial real estate

projects”. Fox Ridge Investments, LLC (Fox Ridge), is the tax matters partner of

Triumph. Triumph was owned 99.8548% by Fox Ridge and .1452% by Mountain

Home Development Corp. (Mountain Home). Fox Ridge was a limited liability

company that was classified as a partnership, and Mountain Home was a

corporation. Ted Heap was the chief executive officer of Triumph, Fox Ridge,

and Mountain Home.2 Triumph owned 97.89% of Mountain Cove Investments II,

LLC (Mountain Cove).

      Triumph, Fox Ridge, and Mountain Home (collectively Traverse entities)

owned the Traverse property. The Traverse property consisted of approximately

2,800 acres, which encompassed a mixture of relatively flat land, gentle rolling

foothills, and steep mountains including a central canyon, which was in the center

of the Traverse property.

      The Traverse entities were developing the Traverse property into a master-

planned community in a multiyear development that became known as the

“Traverse Mountain Development”. The Traverse property was zoned as a

planned community.

      2
          Mr. Heap indirectly owned 16%-17% of Fox Ridge and Mountain Home.
                                        -6-

[*6] II.     The City of Lehi Development Procedures

       Planned community zones are reserved for large master-planned areas that

have a mixture of land uses, including commercial and mixed residential.

       When the city of Lehi zones an area as a planned community, the developers

must follow a set of procedures before developing the property. For instance, the

property cannot exceed a maximum density of 4.2 units per acre. Additionally, the

property must maintain at least 10% as open space, which is defined as

undeveloped, natural grounds. The city of Lehi’s preference is for the property

owner to contribute open space to the city; however, other options are available

for open space.

       The city council must approve development plans. The Development

Review Committee and the Planning Commission first review the plans before

they are submitted to the city council. The Development Review Committee

reviews, comments on, and recommends suggestions for the proposed plan. The

proposed plan version is then sent to the Planning Commission. The Planning

Commission reviews applications, hears testimony, and recommends to the city

council whether to approve the proposed plan. The city council reviews the

proposed plan submitted by the Planning Commission and then makes a

determination.
                                           -7-

[*7] Developers must have three plans approved by the city council before they

can develop a property: a concept plan, an area plan, and a subdivision plat or site

plan.

        A concept plan is a basic, general land use guide for the property. The

concept plan sets the density of the residential areas, commercial areas, and open

space areas. The city of Lehi’s policy is to take a concept plan through a public

hearing process, which allows residents to voice their concerns, because it sets the

framework for the future development. After the concept plan is approved, a

developer can proceed with an area plan.

        An area plan is a detailed and technical land use plan. It is based on an

approved concept plan. The area plan uses maps, figures, and tables to show the

specific residential uses, commercial uses, and open space. Area plans lay out the

density levels in each development zone. Every zone has a maximum number of

units that can be built. This number cannot be changed unless the zone is a “flex

zone”. A flex zone is an area where the lot size is not defined and the number of

units allocated to it can be transferred to a different part of the area plan.

Transferring credits from a flex zone to another designated area or changing the

layout of a flex zone are the only revisions that can be made to an area plan

without the city council’s approval.
                                         -8-

[*8] After the city council has adopted the area plan, a developer can prepare a

subdivision plat or site plan. The subdivision plats or site plans are the most

detailed; they define the boundaries for streets and lots for the development. After

these plans are approved, the developer can move forward with construction.

III.   Purchase of the Property

       In 2000 Fox Ridge purchased the Traverse property and other

noncontiguous property from Utah Valley Land Co. for $29,606,962. When Fox

Ridge purchased the Traverse property, Fox Ridge and Mountain Home succeeded

Utah Valley Land Co. under its annexation and development agreement with the

city of Lehi. In this agreement the city of Lehi annexed the property and zoned it

as a planned community. The city of Lehi agreed that the property owner could

develop 3,500 residential units and 370,000 square feet of commercial space. The

parties attached a concept plan to the annexation and development agreement,

which followed the parties’ agreement.

IV.    Development of the Property

       After purchasing the Traverse property, the Traverse entities frequently

interacted with the city of Lehi and the city council regarding the development of

the Traverse property. Mountain Home represented Triumph before the city.
                                        -9-

[*9] A.      The 2000 Area Plan

      In 2000 the city council approved and adopted the Traverse entities’ area

plan (2000 area plan). The 2000 area plan reflected a master-planned

development. The plan designated the land to be developed in different phases

and included areas designated as commercial, mixed-residential, community-

facility, and open space.

      The 2000 area plan showed that approximately half of the Traverse property

would be developed into residential and commercial use and that the other half of

the property would remain open space. The plan used all 3,500 units in a mixture

of low-, medium-, and high-density development, primarily in the lower, flat half

of the property. The plan also provided roughly 1,450 acres of open space in the

northern portion of the property. The central canyon was carved out of the open

space and designated for 903 high- and low-density residential units.

      In approving the 2000 area plan the city council provided that “[i]f a

conflict exists between the Annexation and Development Agreement and this Area

Development Plan, the Area Development Plan controls.”
                                         -10-

[*10] B.       The Cabela’s Retail, Inc. Deal

      After purchasing the Traverse property, the Traverse entities wanted an

initial buyer to start the commercial portion of the development. They found

Cabela’s Retail, Inc. (Cabela’s). The Traverse entities, Cabela’s, and the city of

Lehi entered into an agreement in which the Traverse entities transferred real

property to Cabela’s.3 After this transfer, Fox Ridge, Mountain Home, and the city

of Lehi amended the annexation and development agreement. By this amendment,

the city of Lehi increased the Traverse entities’ development credits. Fox Ridge,

Mountain Home, and the city of Lehi agreed that the Traverse property had 1,595

acres approved for development and that Fox Ridge and Mountain Home could

develop 6,700 residential units with an additional 1,000 bonus units if the units

were developed in the commercial area.

      The city council increased the density again in approving two new concept

plans for the Traverse property in 2007 and 2008. In the amended concept plans

Fox Ridge and Mountain Home received additional acreage and development

credits. The two concept plans increased the total acreage to 2,801 and the total

number of units to 7,982.




      3
          Mr. Heap believed the real property to be worth $20 million.
                                        -11-

[*11] By 2011 the Traverse entities had either built or platted 1,900 units. The

Traverse entities had received loans, totaling more than $8,992,307, to develop

these units from a group of entities collectively called the “Perry entities”.4 These

loans were secured by trust deeds, which encumbered portions of the Traverse

property.

      C.     Approval of the New Concept Plan

      The Traverse entities needed a new concept plan to develop the additional

development credits granted in connection with the Cabela’s deal. By 2011 Fox

Ridge and Mountain Home had rights to develop 7,982 units; however, the 2000

area plan approved only 3,500 units for development. To develop the additional

units the Traverse entities were required to follow the development procedures.

      To comply with the development procedures, Mountain Home created a

new concept plan in 2011 (2011 concept plan). The 2011 concept plan proposed

to develop 7,025 units. In this plan the central canyon was designated as a “flex”

area, meaning that units could be transferred to the central canyon from other

designated areas.


      4
        The Perry entities consisted of L.H. Perry Investments, LLC, L.R.H. Perry
Investment, LLC, Perry Homes Utah, Inc., Perry Development, LLC, Perryhomes,
Inc., Perry & Associates, Inc., and Perry & Associates, Inc. Employee Profit
Sharing Plan.
                                          -12-

[*12] During a meeting on June 1, 2011,5 Mountain Home requested that the

Development Review Committee review the 2011 concept plan. After reviewing

the 2011 concept plan, the Development Review Committee stated that the city of

Lehi wanted “all open space areas [to] be dedicated to the City and [the areas] will

be defined by the Area Plan - the open space dedication should occur concurrently

with the recording of the new area plan.”

      Following that meeting the city of Lehi residents emailed the city’s planning

director for the project to convey their objections to the 2011 concept plan. The

residents were upset because the 2011 concept plan doubled the number of units

from the 2000 area plan. Mr. Heap viewed the residents’ concerns as typical of

residents in a master-planned development because they “don’t want anybody else

to develop after their house is built.”

      On July 14, 2011, the Planning Commission met but did not approve the

2011 concept plan. Dozens of the residents of the Traverse Mountain

development attended and spoke in opposition to the 2011 concept plan. One

resident brought a petition with 150 to 200 signatures of residents opposing the


      5
       The record is inconsistent regarding when the 2011 concept plan was
reviewed by the Development Review Committee. The parties stipulated that the
review took place at the June 1, 2011, meeting. Because of the discrepancies, we
will use the date in the parties’ stipulation.
                                         -13-

[*13] 2011 concept plan. The Planning Commission tabled the item to allow time

to understand the issues better.

      Mountain Home created an amended 2011 concept plan (amended 2011

concept plan). Mr. Heap believed that the concept plan needed to decrease density

in order to move forward. The amended 2011 concept plan included the same

units as the original plan, but it provided that if the Traverse entities decided to

transfer units into the flex area, the total units would not exceed 6,024.

      Two weeks later the Planning Commission reconvened and approved the

recommendation for the city council to approve the amended 2011 concept plan.

The Planning Commission agreed to recommend approval of the amended 2011

concept plan with a total density of up to 6,024 units in accordance with the

proposed plan and with the following recommendations: (1) “the City look into a

density ‘buy down’ over a twenty year period” and (2) “[t]he approximate 1,000

acres of open space identified in the Concept Plan, * * * be dedicated to the city

for open space and passive recreation such as hiking”.

      On August 9, 2011, the city council held a hearing at which it discussed the

amended 2011 concept plan. Mr. Heap believed that “the only thing that matters

is the city council approval.” During this meeting Mr. Heap explained that he was
                                         -14-

[*14] trying to find the best solution for everyone. He stated that he had been

working on the new area plan since 2010 and needed to start construction.

      The city council approved the amended 2011 concept plan. However, in

approving the plan the city council explicitly rejected Mountain Home’s request to

exceed 6,024 units if no units were transferred into the flex area. Instead, the city

council approved the amended 2011 concept plan based on the following

conditions:

      1) That the open space in the canyon areas be dedicated to the City as
      proposed in the Development Review Committee’s General Comment
      * * * and by the Planning Commission. * * *
      2) That the total number of units is not to exceed 6,024, which
      number is to be used in totality even if units are transferred to the
      business park/flex area. If any units are transferred to the business
      park/flex area, those units are to be taken from the Central Canyon
      area.

      At the time the city council granted conditional approval, all of the Traverse

entities’ loans from the Perry entities were in default. The Traverse entities

entered into a global settlement agreement with the Perry entities on September

23, 2011. In the global settlement agreement the Perry entities agreed to not

foreclose and to discharge all of the Traverse entities’ obligations in exchange for

conveyance of the encumbered property. In the agreement the Traverse entities

agreed to “diligently pursue the completion and approval by Lehi city (with a goal
                                         -15-

[*15] of achieving final approval prior to December 31, 2011) of the new Area

Plan * * * in accordance with the approved Concept Land Use Plan”. And they

agreed that if the Traverse entities failed to receive approval within eight months,

the Perry entities could take over the area plan process.

      Fox Ridge, Mountain Home, and the city of Lehi negotiated and agreed to

decrease density in exchange for water rights to the Traverse Mountain

development. They amended their annexation and development agreement on

October 18, 2011. The parties submitted that they “have worked together to

reduce the overall density in the Traverse Mountain Area Plan in exchange for the

City’s agreement to provide water rights for additional residential dwelling units

within the Traverse Mountain Project.”6 They agreed that “[t]he number of

residential units in the Traverse Mountain Concept Plan adopted by the Lehi City

Council * * * are hereby reduced from 6,024 to 5,812”, a 212-unit reduction. The

city of Lehi agreed to increase the water rights to the units in the Traverse

Mountain development from 3,227 to 5,812 units.




      6
       Fox Ridge, Mountain Home, and the city of Lehi entered into several
agreements related to water rights for the units in the Traverse Mountain
development. The city of Lehi agreed in September 2010 to provide water for up
to 3,227 units.
                                        -16-

[*16] Mountain Home finished its amended area plan (2012 area plan), and the

Traverse entities needed to get that plan approved. The 2012 area plan provided

that the development would not exceed 5,812 units. Mr. Heap believed that the

2012 area plan gave the developer the right to start developing the Traverse

property. He explained that the Traverse entities “want[ed] to move forward, but

it was difficult”. He said that he “wanted to end any conflicts in the City and those

relating issues.”

      The Planning Commission met on December 8, 2011, and approved the

recommendation for the city council to approve the 2012 area plan. During this

meeting Mr. Heap explained that “[w]e are desperately trying to move this

forward; it’s in everybody’s best interest to move this forward--there are

significant financial impacts.” At trial Mr. Heap explained that his desperation

was also related to wanting to “make sure that the residents were happy.” At the

end of the meeting the Planning Commission agreed to approve Mountain Home’s

request for the 2012 area plan if the 2012 area plan included all revised

Development Review Committee comments.7 The Traverse entities submitted the

2012 area plan to the city council.


      7
      The revised Development Review Committee comments are not in
evidence.
                                           -17-

[*17] D.        Transfer to the City of Lehi

      On December 29, 2011, the following transactions occurred:

      • Fox Ridge, Mountain Home, and the city of Lehi amended their

annexation and development agreement. They agreed that the October 18, 2011,

amendment contained factual errors in that the parties agreed only to reduce the

number of units by 212. They agreed that the correct number of units immediately

following the October 18, 2011, amendment was 7,770 units.

      • Fox Ridge transferred 63.052 acres to Triumph.8

      • The Traverse entities and the city of Lehi entered into an agreement for a

charitable donation, describing the terms of the agreement. In this agreement the

Traverse entities recited that Triumph owns real property and that the Traverse

entities have

      disposed of portions of the Traverse Property and Units, and have
      now determined to seek approval of plans for development of their
      property which would not use all of the Units remaining available to
      them for such development, and although such Units have value and
      could be so used, the Traverse Entities now desire to cause the
      Property to be donated to the City in connection and together with an
      agreed upon reduction of the Units available for development of the

      8
       The tax matters partner submitted various deeds showing Triumph’s
ownership of the Traverse property. Triumph owned parcel No. 11-013-0139. We
take judicial notice of the Utah County Parcel Maps. See Fed. R. Evid. 201(b)(2).
We find that following the transfer from Fox Ridge, Triumph owned the Traverse
property transferred to the city of Lehi.
                                           -18-

[*18] Traverse Property of 1,958 (the “Donated Units”), and the City
      wishes to accept the Property and the Donated Units from the
      Traverse Entities * * *[9]

The city of Lehi and the Traverse entities did not include any value for any

consideration received and instead stated that the Traverse entities received “[n]o

consideration.” This “no consideration” clause provided:

      The donation of the Property and the Donated Units by Triumph
      Mixed Use to the City is a voluntary charitable donation. None of the
      Traverse Entities nor any party related to any of the Traverse Entities
      has received, is receiving, or proposes to receive any compensation,
      development benefits, concessions, or approvals of any kind
      whatsoever, including enhancement of any land owned by any of
      them, from the City as consideration for Triumph Mixed Use’s
      donation of the Property and the Donated Units. Approval of plans
      for development of real property other than the Property by the
      Traverse Entities is in no way contingent upon or subject to the
      donation of the Property or the Donated Units to the City.

      Under the terms of the documents, the city of Lehi did not incur any

obligations in connection with the transfer and the Traverse entities did not have

any recourse if they did not get plan approvals. The attorney for the city of Lehi

agreed that the city did not incur any obligations to provide future approvals to the

property owner.

      • Triumph executed three quitclaim deeds to the city of Lehi, by which it

transferred 746.789 acres to the city of Lehi.

      9
          This transfer returned the units to 5,812.
                                         -19-

[*19] • The Traverse entities and the city of Lehi entered into an assignment of

development rights agreement. In this agreement the Traverse entities agreed that

Mountain Home and Fox Ridge were joining “to the extent of any interest any of

them hold or may hold in the Donated Units, and agree and represent to the City

that Triumph Mixed Use is the sole owner of the Donated Units with full rights to

transfer same to the City”.

      With the completion of all of these events, Fox Ridge and Mountain Home

had returned their development credits to 7,700 from 5,812; Fox Ridge transferred

real property to Triumph; and Triumph transferred 746.789 acres and 1,958

development credits to the city of Lehi, which had the effect of returning the

development credits to 5,812. The contingencies of the amended 2011 concept

plan being satisfied, the amended 2011 concept plan was approved.

      E.     Approval of the Area Plan

      On January 24, 2012, the city council held a hearing in which it approved

the 2012 area plan after a finding that the 2012 area plan was consistent with the

amended 2011 concept plan and the numerous items to be accomplished as part of

approving the 2012 area plan.
                                        -20-

[*20] V.    Appraisal of the Transfer

      In January 2012 Triumph retained J. Philip Cook & Associates, LLC, to

appraise the transfer. J. Philip Cook and Travis E. Reeves prepared an appraisal,

dated February 1, 2012. They concluded that as of December 29, 2011, the market

value of the property and the development credits was $11,040,000 using the

“before and after” approach for valuation. They did not include any value for

consideration received.

VI.   Triumph’s Other Business Transactions

      Triumph made deals with other corporations involved in the development of

the Traverse property while awaiting approval of the 2012 area plan. In 2010

Triumph pledged its separately owned property to the Perry entities to enable

Mountain Home to receive a loan. Triumph transferred this property to the Perry

entities when Mountain Home defaulted on this loan in 2011.

      In 2011 Triumph made payments on behalf of Mountain Cove for property

taxes and settlement costs. Mountain Cove gave Triumph a promissory note in the

amount of $51,868, certifying it would repay Triumph. Later in 2011 Mountain

Cove’s property was foreclosed upon. Mountain Cove did not repay Triumph.
                                          -21-

[*21] VII.     Return Preparation and Returns

      In 2011 Triumph turned to its accountant to file its returns. Scott Rasmuson

had been preparing Triumph’s Forms 1065, U.S. Return of Partnership Income,

since 2005. He has 25 years of experience as a public accountant and is a certified

public accountant. His clients include real estate developers and construction

contractors.

      To prepare Triumph’s returns Mr. Rasmuson reviewed Triumph’s general

ledger, its trial balances, and its subsidiaries’ and parent entities’ returns. He also

discussed the returns with Triumph’s internal accounting team.

      A.       2010 Return

      Several entries on Triumph’s 2010 return are relevant to issues before us.

On its 2010 Form 1065 Triumph reported that it was an investor and that its

principal investment was real estate. Triumph reported a capital contribution of

$8,833,645. It did not report gross receipts or net earnings from self-employment.

      On a previous 2008 return Triumph had reported a $12,145,000 installment

sale. For 2010 Triumph did not report any payment with respect to that

installment sale. Mr. Rasmuson testified that this installment sale had been

improperly reported on Triumph’s 2008 return. He claimed that no sale ever

occurred and that Triumph’s books and records did not reflect such sale.
                                         -22-

[*22] B.     2011 Return

      As with its 2010 return, several entries on Triumph’s 2011 return are

relevant to issues before us. On its 2011 Form 1065 Triumph reported that it was

an investor and that its principal investment was real estate.

             1.    Charitable Contribution

      Triumph included a Form 8283, Noncash Charitable Contributions. On the

Form 8283 Triumph claimed an $11,040,000 noncash charitable contribution

deduction for transferring 746.789 acres and 1,958 development credits to the city

of Lehi. Triumph attached the appraisal report prepared by J. Philip Cook &

Associates, LLC, to its 2011 return. Triumph did not report any consideration

received.

             2.    Gross Receipts

      Triumph did not report gross receipts or net earnings from self-employment.

Triumph included a Form 6252, Installment Sale Income, and reported that it sold

real estate on December 31, 2007, that it had acquired in 2005. Triumph reported

that it had $332,054 of installment income based on a $586,800 payment and a

computed gross profit percentage of 56.587%. Triumph also reported that it

received investment income of $48,648. Triumph had previously reported on its
                                         -23-

[*23] 2010 return that it sold this property to Mountain Home and that Triumph

had a cost basis of $254,746.

      During trial Mr. Rasmuson testified that the transaction was not an

installment sale between Triumph and a related party; instead, as he saw it, it was

a transaction between a related party and Chapel Ridge Investments III (Chapel

Ridge) and the obligation was contributed to Triumph as a capital contribution in

2010. He explained that in 2011 the installment obligation was paid by a property

transfer that satisfied the installment obligation with principal and interest. The

tax matters partner did not provide any documentation regarding this transaction.

             3.    Long-Term Capital Loss

      Triumph included a Schedule D, Capital Gains and Losses, on which it

reported an $806,745 long-term capital loss. Triumph reported that it acquired the

real property in 2000, that the property had a cost basis of $873,897, and that it

sold it on September 15, 2011, for $67,152. Triumph used the $806,745 loss to

offset the installment sale income of $332,054. Thus, Triumph reported a

$474,691 net long-term capital loss.

      This loss relates to the real property that Triumph had pledged to the Perry

entities in 2010 as collateral that enabled Mountain Home to receive a loan from

the Perry entities. Mountain Home defaulted on the loan in 2011, and the Traverse
                                        -24-

[*24] entities (and related parties) and the Perry entities entered into an agreement

whereby Triumph transferred the pledged property to the Perry entities in 2011.

             4.    Short-Term Capital Loss

      Triumph reported a $51,869 short-term capital loss on the Schedule D. This

loss relates to a bad debt deduction. In 2011 Triumph made payments on behalf of

Mountain Cove. In exchange Triumph received a promissory note. Mountain

Cove defaulted on that note. Triumph claimed a short-term capital loss deduction

in the amount of the promissory note.

VIII. FPAA

      On June 5, 2014, the Commissioner issued an FPAA for 2010 and 2011 to

Triumph’s tax matters partner. In the FPAA the Commissioner made various

adjustments and determined penalties. For 2010 the Commissioner increased

gross receipts by $8,833,645 and increased net earnings from self-employment by

the same amount. For 2011 the Commissioner disallowed a charitable

contribution deduction of $11,040,000, increased gross receipts by $636,608 and

increased net earnings from self-employment by the same amount, disallowed a

long-term capital loss deduction of $541,843, and disallowed a short-term capital

loss deduction of $51,869. The Commissioner also determined that accuracy-
                                        -25-

[*25] related penalties apply. The tax matters partner timely filed a petition

disputing each adjustment.

IX.   Trial

      Trial was held in Salt Lake City, Utah, on October 25 and 26, 2016. At trial

the Court recognized Jeremie Snowder as a real estate valuation expert. Mr.

Snowder submitted an expert report in which he concluded that the value of the

property transferred was $5,050,000. During trial the tax matters partner

submitted copies of certain of Triumph’s accounting records to show tax bases of

its property. However, these records combine the tax bases of all the property

owned by the entities.

                                     OPINION

      With respect to the charitable contribution deduction, the parties principally

dispute whether Triumph had the requisite donative intent. We must also decide

whether Triumph had unreported gross receipts; whether Triumph had a long-term

capital loss; whether Triumph was entitled to a bad debt deduction; whether

Triumph failed to report net earnings from self-employment; and whether Triumph

is liable for accuracy-related penalties. We address each in turn.
                                         -26-

[*26] I.       Burden of Proof

      In general, the Commissioner’s determinations are presumed correct, and a

taxpayer bears the burden of proving otherwise.10 The burden of proof includes

the burden of proving entitlement to any claimed deduction.11

      When a case involves unreported income, the U.S. Court of Appeals for the

Tenth Circuit, to which this case is appealable, has held that the Commissioner’s

determination of unreported income is entitled to a presumption of correctness

once some substantive evidence is introduced demonstrating that the taxpayer

received unreported income.12 Once the Commissioner introduces some

substantive evidence linking the taxpayer with the income, the presumption of

correctness applies and the burden shifts to the taxpayer to produce substantial

evidence overcoming it.13



      10
           Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
      11
        Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992)
(explaining that deductions are a matter of legislative grace).
      12
       United States v. McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991);
Erickson v. Commissioner, 937 F.2d 1548, 1551 (10th Cir. 1991), aff’g T.C.
Memo. 1989-552; Green v. Commissioner, T.C. Memo. 2016-67, at *24; Lamb v.
Commissioner, T.C. Memo. 2013-155, at *13.
      13
       McMullin, 948 F.2d at 1192; Erickson v. Commissioner, 937 F.2d at 1551;
Green v. Commissioner, at *24; Lamb v. Commissioner, at *13.
                                        -27-

[*27] Section 7491(a) provides an exception that shifts the burden of proof to the

Commissioner as to any factual issue relevant to a taxpayer’s liability if the

taxpayer provides credible evidence with respect to that issue and also

substantiates the item, maintains records, and cooperates with the Commissioner’s

reasonable requests for information. Taxpayers bear the burden of proving that

they have met the section 7491(a) requirements.14

      The tax matters partner raised section 7491 for the first time in its reply

brief. Its attempt to raise this argument on reply brief is untimely and thus

prejudicial to the Commissioner.15 Moreover, even if the tax matters partner had

properly raised this argument, the tax matters partner has not shown that Triumph

has met the requirements of section 7491(a), and therefore the tax matters partner

has not met its burden.16




      14
        Rolfs v. Commissioner, 135 T.C. 471, 483 (2010), aff’d, 668 F.3d 888 (7th
Cir. 2012).
      15
       Kansky v. Commissioner, T.C. Memo. 2007-40, 93 T.C.M. (CCH) 921,
924 (2007).
      16
       By separate order dated May 7, 2018, denying a motion to reopen the
record we have addressed the effect of section 7491(c) on this case.
                                           -28-

[*28] II.        Charitable Contribution

        Triumph claimed a charitable contribution deduction of $11,040,000. We

must determine whether Triumph actually made a charitable contribution or

whether the transfer was part of a quid pro quo arrangement as the Commissioner

alleges. If Triumph is entitled to the deduction, we must determine the value of

that transfer.

        A.       Charitable Contribution Principles

        Section 170(a)(1) provides that a taxpayer may deduct any charitable

contribution made in the taxable year. A charitable contribution is defined as a

contribution or gift to or for the use of a qualified recipient.17

        If a taxpayer makes a charitable contribution of property other than money,

the amount of the contribution is the fair market value of the property at the time

of the contribution.18 The fair market value is equal to the price at which the

property would change hands between a willing buyer and willing seller having no




        17
        Sec. 170(c). The parties do not dispute that the city of Lehi is a qualified
recipient.
        18
             Rolfs v. Commissioner, 135 T.C. at 480; sec. 1.170A-1(c)(1), Income Tax
Regs.
                                         -29-

[*29] obligation to buy or sell and having reasonable knowledge of the relevant

facts.19

       A contribution of property generally will not “constitute a charitable

contribution if the contributor expects a substantial benefit in return.”20 However,

a taxpayer may still deduct a contribution of property if (1) the value of the

property transferred to charity exceeds the fair market value of any goods or

services received in exchange and (2) the excess payment is made “with the

intention of making a gift.”21

       If the taxpayer claims a deduction for a charitable contribution, then the

taxpayer must meet substantiation requirements. If the value of the property

contributed is $250 or more, then the contribution must be substantiated with a

contemporaneous written acknowledgment from the qualified recipient.22 The

doctrine of substantial compliance does not apply to excuse compliance with the


       19
       Rolfs v. Commissioner, 135 T.C. at 480-481; sec. 1.170A-1(c)(2), Income
Tax Regs.
       20
        United States v. Am. Bar Endowment, 477 U.S. 105, 116-118 (1986)
(“The sine qua non of a charitable contribution is a transfer of money or property
without adequate consideration.”); Rolfs v. Commissioner, 135 T.C. at 480.
       21
        Am. Bar Endowment, 477 U.S. at 117; Rolfs v. Commissioner, 135 T.C. at
486; sec. 1.170A-1(h)(1), Income Tax Regs.
       22
            Sec. 170(f)(8)(A).
                                         -30-

[*30] substantiation requirements of section 170(f)(8)(B).23 Moreover, if the

contributed property is valued in excess of $500,000, the taxpayer must obtain a

qualified appraisal and attach the appraisal to the return.24

      The Commissioner challenges Triumph’s deduction on several grounds,

asserting: (1) the transfer was not a charitable contribution in that it was part of a

quid pro quo arrangement in which the Traverse entities received development

approvals; (2) the transfer was not valid because Triumph did not own the

property or development credits; (3) the contemporaneous written

acknowledgment was not valid because it did not value the consideration received;

(4) the appraisal was not a qualified appraisal; and (5) the value of the transfer was

overstated. The tax matters partner disagrees with the Commissioner’s arguments

and alleges that Triumph is entitled to the deduction. Because we find that the

transfer to the city of Lehi was part of a quid pro quo arrangement and that

Triumph has not proven that it made any excess payment, the transfer does not

qualify as a charitable contribution. Therefore, we do not need to address the

other grounds raised by the Commissioner.


      23
        15 West 17th St. LLC v. Commissioner, 147 T.C. 557, 562-563 (2016);
Durden v. Commissioner, T.C. Memo. 2012-140, 103 T.C.M. (CCH) 1762, 1764
(2012).
      24
           Sec. 170(f)(11).
                                         -31-

[*31] B.       Quid Pro Quo Exchange

      In determining whether a payment is a contribution or gift, the relevant

inquiry is whether the transaction in which the payment is involved is structured as

a quid pro quo exchange.25 In ascertaining whether a given payment was made

with the expectation of any quid pro quo, courts examine the external features of

the transaction.26 This determination avoids the imprecise inquiry into the

subjective motivations of the taxpayer.27

      “The relevant question is whether the taxpayer expected a benefit in return

for the payment; deductibility does not depend on what type of benefit the

taxpayer received.”28 Moreover, “in determining whether a quid pro quo existed

that defeats donative intent,” we will not disregard consideration actually received




      25
        Hernandez v. Commissioner, 490 U.S. 680, 701-702 (1989); Rolfs v.
Commissioner, 135 T.C. at 480; McGrady v. Commissioner, T.C. Memo. 2016-
233, at *20.
      26
     Hernandez v. Commissioner, 490 U.S. at 690-691; Christiansen v.
Commissioner, 843 F.2d 418, 420 (10th Cir. 1988).
      27
     Hernandez v. Commissioner, 490 U.S. at 690-691; Christiansen v.
Commissioner, 843 F.2d at 420; Seventeen Seventy Sherman St., LLC v.
Commissioner, T.C. Memo. 2014-124, at *24.
      28
           Christiansen v. Commissioner, 843 F.2d at 420.
                                         -32-

[*32] simply because it is hard to quantify.29 On the other hand mere incidental

benefits will not defeat a charitable contribution deduction.30

      The benefit that the taxpayer receives does not have to be financial.31 We

have observed that medical, educational, scientific, religious, or some other

benefits or privileges may constitute consideration that defeats charitable intent.32

We have found that a transfer of real property in exchange for development

approvals or the expectation of future development approvals is a benefit and

precludes a finding of the requisite donative intent for a charitable gift.33

      In Seventeen Seventy Sherman St., LLC v. Commissioner, T.C. Memo.

2014-124, we denied a taxpayer’s charitable contribution deduction because the

taxpayer received a zoning change and because the taxpayer expected that a

recommendation from the community planning agency would increase the

      29
       Derby v. Commissioner, T.C. Memo. 2008-45, 95 T.C.M. (CCH) 1177,
1190 (2008).
      30
     Sutton v. Commissioner, 57 T.C. 239, 243 (1971); McGrady v.
Commissioner, at *25.
      31
           Seventeen Seventy Sherman St., LLC v. Commissioner, at *23-*24.
      32
           Seventeen Seventy Sherman St., LLC v. Commissioner, at *23-*24.
      33
       See Pettit v. Commissioner, 61 T.C. 634, 640-641 (1974); Sutton v.
Commissioner, 57 T.C. at 243; Seventeen Seventy Sherman St., LLC v.
Commissioner, T.C. Memo. 2014-124; Pollard v. Commissioner, T.C. Memo.
2013-38; Forkan v. Commissioner, T.C. Memo. 1977-195.
                                        -33-

[*33] likelihood that the taxpayer would receive a plan approval. In that case, the

taxpayer owned both a shrine that had previously been designated a landmark and

a nearby parking lot. The taxpayer wanted to develop the parking lot for

commercial use but needed new zoning permits to do so. The community

planning agency and the taxpayer negotiated and agreed that the community

planning agency would recommend approval of a zoning change to allow the

taxpayer to develop the parking lot. They further agreed that if the zoning change

was approved, the taxpayer would grant conservation easements to preserve the

shrine. The zoning application was approved, and the taxpayer executed a

conservation easement.

      We denied a deduction for the conservation easement because the taxpayer

granted the easement in exchange for zoning changes and with the expectation that

the planning agency’s recommendation would substantially increase the likelihood

that the planning board would approve the permit.34 We found that the taxpayer

highly valued and negotiated for this recommendation and used the easement as

leverage to obtain it. Because the taxpayer did not value the benefit as part of the

quid pro quo exchange, we denied the taxpayer’s deduction.




      34
           Seventeen Seventy Sherman St., LLC v. Commissioner, at *30-*31.
                                         -34-

[*34] Likewise, in Pollard v. Commissioner, T.C. Memo. 2013-38, we denied the

taxpayer’s charitable contribution deduction because the external features of the

transaction showed that the taxpayer granted the easement in exchange for

approval for his subdivision exemption request. In Pollard the taxpayer wanted to

develop a second home on his property. Because building a new home would

increase the density beyond what was allowed, the taxpayer first needed

subdivision exemption approval. Before the Board of County Commissioners

would approve the exemption plat documents, the taxpayer had to grant

conservation easements. The taxpayer granted the easements, and the county

exempted his land and approved the development of a second home. Although the

approval of the request was not the final step in the subdivision exemption

process, the taxpayer conveyed the easements in order to get this approval. The

Court held that the taxpayer’s contribution was part of a quid pro quo exchange

and was conveyed as a bargaining chip for approval of the subdivision

exemption.35

      Upon finding that a taxpayer has received a benefit in exchange for the

transfer, we employ a two-part test to determine whether the taxpayer may claim

any portion as a deduction: We must value the transfer, and we must value the

      35
           Pollard v. Commissioner, at *20-*21.
                                        -35-

[*35] consideration received in exchange.36 But if a taxpayer fails to specify the

value of any benefit received, then the taxpayer fails to comply with section 170

and the regulations, and no deduction is allowed.37 Because we find that

Triumph’s transfer was part of a quid pro quo arrangement in which Triumph

received substantial value, and the tax matters partner failed to value the

consideration received, we hold that Triumph is not entitled to a deduction.

             1.    The External Factors Demonstrate Consideration

      The tax matters partner argues that Triumph is entitled to a deduction

because it transferred the 746.785 acres of real property and 1,958 development

credits without consideration. The tax matters partner argues that the agreement

for charitable contribution demonstrates that Triumph did not receive any

consideration, or that even if Triumph did receive some consideration, it was

incidental. We disagree. In exchange for transferring this property, Triumph

received the city council’s approval of the concept plan and the expectation that

the city council would approve the area plan.



      36
      See Rolfs v. Commissioner, 135 T.C. at 488-489; Seventeen Seventy
Sherman St., LLC v. Commissioner, at *27; sec. 1.170A-1(h)(1), Income Tax
Regs.
      37
     Seventeen Seventy Sherman St., LLC v. Commissioner, at *27; Pollard v.
Commissioner, at *19 n.9; Derby v. Commissioner, 95 T.C.M. (CCH) at 1189.
                                        -36-

[*36] The transfer of real property and development credits was integral to the

city council’s approval of both plans.38 The external features of the transaction

demonstrate that the real property and development credits were transferred in

exchange for the concept plan approval. The Traverse entities desperately wanted

to have their new area plan approved to allow them to develop the additional units

received in the Cabela’s deal. However, before the city council would approve the

area plan, the Traverse entities needed to get a new concept plan approved.

      When the Traverse entities submitted the new concept plan, they were met

with public opposition and resistance from the Planning Commission. The

obstacles that the Traverse entities needed to overcome were the demands for

more open space and a reduction in density. The city council’s solution was to

require the Traverse entities to dedicate open space and reduce density before the

concept plan was approved.

      After receiving contingent approval, the Traverse entities finished the area

plan; and the Planning Commission approved the Traverse entities’ request for




      38
        Although Triumph was a distinct entity from Mountain Home, which was
presenting the plans to the city of Lehi, Mountain Home represented Triumph
before the city. Moreover, the record demonstrates that the Traverse entities were
working together to develop the Traverse property.
                                        -37-

[*37] recommendation of area plan approval.39 Triumph subsequently executed

the agreement for charitable contribution thus satisfying the city council’s demand

for more open space.40 At its next meeting the city council approved the 2012 area

plan. Thus, the Traverse entities’ entire course of dealing with the city of Lehi

shows that Triumph transferred the real property and development credits as part

of a negotiation in which the city of Lehi received open space and the Traverse

entities received as a quid pro quo concept plan approval.

      Triumph also transferred the real property and development credits with the

expectation that the Traverse entities would receive an area plan approval.

Because an area plan was required to closely follow the concept plan, the Traverse



      39
       The tax matters partner argues that the city council’s condition was
dropped because it was not re-raised at this hearing. We disagree. The amended
2011 concept plan was explicitly approved with conditions. Moreover, the
Traverse entities completed the contingencies, which shows that they did not treat
the condition as having been dropped.
      40
         The Commissioner has a continuing objection to Exhibit 10-P, the
December 29, 2011, amended annexation and development agreement. The
Commissioner argues that this document lacks authenticity. We follow the
Federal Rules of Evidence. Sec. 7453; see also Rule 143(a). Fed. R. Evid.
901(b)(1) provides that testimony of a witness with knowledge satisfies the
authentication requirements. Both Mr. Heap and the attorney for the city of Lehi
identified this document. The document is admitted.
       The Commissioner’s remaining evidentiary objections are not discussed in
his briefs. We deem these objections abandoned. See Rybak v. Commissioner, 91
T.C. 524, 566 n.19 (1988).
                                         -38-

[*38] entities expected the city council to approve the area plan after satisfaction

of the contingencies that they had negotiated for the concept plan. Indeed, the city

council approved the area plan on the finding that the Traverse entities had

satisfied the contingencies in the concept plan approval. Accordingly, we also

find that the Traverse entities transferred the real property and development credits

because they believed that this transfer would lead to the city council’s approving

their area plan.

      The linchpin of the tax matters partner’s argument is that the agreement for

charitable contribution provides that Triumph received no consideration.41 We

give little or no weight to this provision. As explained above, we do not look only

to the transfer documents; we examine the external features of the transaction.42

And the external features of this transaction leave no doubt that Triumph




      41
         The tax matters partner asserts that the witnesses’ testimony shows that
Triumph did not receive any consideration. Mr. Heap and the attorney for the city
of Lehi testified that the city council was not required to approve the Traverse
entities’ development plans. We are not persuaded. We look to the external
features of the transaction to see whether the taxpayer received consideration.
Hernandez v. Commissioner, 490 U.S. at 690-691; Christiansen v. Commissioner,
843 F.2d at 420.
      42
     Hernandez v. Commissioner, 490 U.S. at 690-691; Christiansen v.
Commissioner, 843 F.2d at 420.
                                        -39-

[*39] transferred the real property and the development credits for consideration in

the form of approval of the concept plan and the 2012 area plan.

      The tax matters partner argues that, even if we find that Triumph received a

benefit in exchange for the transfer, we should find that it was an incidental

benefit of little or no value. The tax matters partner relies on McGrady v.

Commissioner, T.C. Memo. 2016-233, in which we held that the gift was not

conditioned on a return benefit. In McGrady, the taxpayers owned two parcels

that were surrounded by three other parcels that would be developed into

residential units. A township in Bucks County, Pennsylvania, was committed to

conserving the land. The taxpayers, the township, the owner of the surrounding

land, and a developer discussed conservation and development plans. Following

these negotiations, the parties executed a six-step plan in which the taxpayers

granted a conservation easement on the parcel that held their residence, made a

contribution to a qualified recipient of the second parcel, and bought back a

U-shaped portion of conserved land that surrounded their residence. We found

that the taxpayers were entitled to the deduction because they did not receive any

return benefit.43 We held that the Township acted single-mindedly for a

conservation purpose and the taxpayers had no power to manipulate the

      43
           McGrady v. Commissioner, at *21.
                                         -40-

[*40] negotiation.44 We explained that “[w]henever a homeowner places a

conservation easement over his property * * *, the homeowner in a sense

‘benefits’ by having natural landscapes rather than suburban sprawl in his

immediate surroundings * * * [b]ut petitioners were mere incidental beneficiaries

of this action.”45

       We disagree that the benefit Triumph received was merely incidental. In

McGrady the only benefit we found was that the taxpayer received a small benefit

of privacy.46 In this case the Traverse entities requested and received approval of

their concept plan and expected that their area plan would be approved. This is a

benefit of considerable value to a real estate developer.

       Thus, we conclude that Triumph transferred the real property and the

development credits to the city of Lehi in exchange for the benefit of their concept

plan’s approval and the expectation that it would lead to approval of their area

plan. We find that this benefit was not incidental to the transfer.




       44
            McGrady v. Commissioner, at *23.
       45
            McGrady v. Commissioner, at *24-*25.
       46
            McGrady v. Commissioner, at *24-*25.
                                           -41-

[*41]            2.    Value of the Consideration Received

        When a taxpayer makes a charitable contribution and receives a benefit, the

taxpayer’s deduction is limited to the portion of the payment that exceeds the fair

market value of the goods or services received.47 The tax matters partner argues

that the plan approvals had no value and that the transfer reduced the value of their

property. We disagree.

        The immediate approval of the concept plan and the ensuing approval of the

2012 area plan had significant value. The concept plan approval was necessary to

enable the Traverse entities to develop additional units. The approval of the

concept plan moved the Traverse entities closer to developing the units they

acquired in the Cabela’s deal. Indeed, Mr. Heap explained that the transaction was

beneficial because it was “good to move forward.” The Traverse entities also

anticipated that their donation to the city would ensure approval of the area plan.

This approval also had significant value. The area plan approval would allow the

Traverse entities to develop 5,812 units instead of 3,500 units. And following the

transfer, the area plan was approved. Because we find that Triumph received a

significant benefit and the tax matters partner failed to report or establish the value


        47
             Rolfs v. Commissioner, 135 T.C. at 486; sec. 1.170A-1(h)(1), Income Tax
Regs.
                                         -42-

[*42] of the consideration received, we find that Triumph is not entitled to a

charitable contribution deduction.48

       In conclusion, the Traverse entities’ entire course of dealings with the city

of Lehi demonstrates that Triumph received a development plan approval and the

expectation of a future development plan approval in exchange for transferring the

real property and development credits. We find that Triumph received a

substantial benefit and also failed to show the value of the consideration. Thus

Triumph may not deduct a charitable contribution.

III.   Gross Receipts

       Triumph did not report gross receipts on its 2010 return and did not report

the disputed gross receipts for 2011 as taxable on its 2011 return. In the FPAA the

Commissioner adjusted Triumph’s gross receipts by $8,833,645 and $636,608 for

2010 and 2011, respectively.




       48
         In failing to value the consideration received, Triumph may not have
satisfied the requirements of section 170(f)(8)(B)(ii). See Viralam v.
Commissioner, 136 T.C. 151, 170-171 (2011) (denying a charitable contribution
deduction for failure to comply with section 170(f)(8) when the taxpayer received
goods or services but the contemporaneous written acknowledgment did not report
any consideration received).
                                         -43-

[*43] A.    2010 Unreported Income

      The tax matters partner alleges that Triumph had no gross receipts for 2010.

When a case involves unreported income, the U.S. Court of Appeals for the Tenth

Circuit requires the Commissioner to provide substantive evidence that the

taxpayer received unreported income.49

      The Commissioner determined that Triumph had unreported income for

2010 of $8,833,645.50 The Commissioner contends that a $12,145,000 installment

sale occurred in 2008. At trial Mr. Rasmuson testified that he improperly reported

that amount as an installment sale in 2008 and that Triumph’s books and records

did not reflect the sale. The Commissioner alleges in his answering brief that

Triumph’s general ledger shows that in 2010 Triumph’s receivables from

Mountain Home were reduced from $12,731,800 to $2,183,793. The

Commissioner explains that the FPAA erroneously determined that the amount of

the reduction was $8,833,645; the reduction was actually $10,548,007.




      49
       McMullin, 948 F.2d at 1192; Erickson v. Commissioner, 937 F.2d at 1551;
Green v. Commissioner, at *24; Lamb v. Commissioner, at *13.
      50
        This is the same amount as a capital contribution that Triumph reported on
its 2010 return. The parties do not raise any arguments that the capital
contribution should be adjusted.
                                        -44-

[*44] We disagree with the Commissioner. There is no evidence of unreported

income whether $10,548,007 or $8,833,645 or some other amount for 2010.

Moreover, there is no evidence of a 2008 transaction that would lead to this

income. The only discussion of the adjustment comes from Mr. Rasmuson who

credibly testified that he improperly reported an installment sale but that

Triumph’s books and records did not reflect the sale. We hold that the

Commissioner did not provide substantive evidence linking Triumph with any

unreported income. Accordingly, Triumph does not have unreported gross

receipts for 2010.

      B.     2011 Additional Income

      The tax matters partner alleges that Triumph has no unreported gross

receipts for 2011. The Commissioner determined that Triumph had unreported

gross receipts of $636,608 for 2011 from the sale of property to Mountain Home

and that the tax matters partner did not establish any basis in the property. The tax

matters partner acknowledges that in 2011 there was a transfer of property to

Triumph for $636,608 and that Triumph reported the payment as installment sale

income and interest. The parties agree this payment stems from a 2007 installment

sale of real property for $585,000. However, the tax matters partner claims that
                                         -45-

[*45] the 2007 installment sale occurred between a related party and Chapel Ridge

and that the indebtedness on that sale was contributed to Triumph in 2010.

      We find that the tax matters partner has not met its burden. Although the

tax matters partner alleges that Triumph was not involved in the installment sale

until the obligation was contributed to Triumph in 2010, the tax matters partner

did not produce any evidence other than uncorroborated testimony of Mr.

Rasmuson. We are not required to accept such testimony.51 The tax matters

partner did not produce any evidence of a novation of the installment obligation or

any evidence that Triumph replaced the seller in the transaction. Thus, we find

that the tax matters partner has not met its burden. We sustain the Commissioner’s

determination.

IV.   Long-Term Capital Loss

      The tax matters partner alleges that Triumph sustained a long-term capital

loss in 2011. Section 165(a) generally permits taxpayers to deduct “any loss

sustained during the taxable year and not compensated for by insurance or

otherwise.” Section 1001(a) provides that the loss is the excess of the adjusted

basis over the amount realized. Losses from sales or exchanges of capital assets




      51
           See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
                                         -46-

[*46] are allowed as deductions only to the extent provided in sections 1211 and

1212.52

      The tax matters partner asserts that Triumph had a long-term capital loss of

$806,745 in 2011. The tax matters partner alleges that Triumph is entitled to

deduct a long-term capital loss because it provided Mountain Home real property

to be used as collateral, Mountain Home defaulted on that loan, the Perry entities

went to foreclose, and Triumph conveyed the property in lieu of foreclosure.

      We disagree. Triumph is not entitled to a long-term capital loss deduction

because the tax matters partner did not establish Triumph’s basis. To claim a loss

deduction the taxpayer must establish its basis.53 Although the tax matters partner

alleges that it tracked basis, the evidence shows total basis tracked by entity rather

than by specific properties. There is no evidence of Triumph’s basis in the

property transferred to the Perry entities. Triumph may not deduct the loss.

V.    Bad Debt Deduction

      The tax matters partner asserts that Triumph had a short-term capital loss of

$51,868 in 2011 from worthlessness of a promissory note executed in its favor by




      52
           Sec. 165(f).
      53
           Sec. 1001(a).
                                           -47-

[*47] Mountain Cove.54 Section 166(a) allows taxpayers to deduct any debt that

becomes worthless within the taxable year.55 Section 166(d) limits the general rule

and provides that noncorporate taxpayers must treat nonbusiness bad debts as

losses from the sale or exchange of a short-term capital asset and can claim the

loss only for the year in which the debt becomes wholly worthless.56

        The parties agree that the Mountain Cove note was a nonbusiness debt. For

Triumph to be entitled to a deduction, the tax matters partner must show

identifiable events occurred to render the debt worthless during the year for which

Triumph claimed the deduction.57 Whether a debt has become worthless is a facts

and circumstances determination.58 Legal action to enforce payment is not




        54
        In his answering brief the Commissioner conceded that the transfer was a
loan rather than a capital contribution.
        55
             Sec. 166(a)(1).
        56
             Secs. 166(d)(1)(B), 1211(b), 1212(b); sec. 1.166-5(a)(2), Income Tax
Regs.
        57
             See Am. Offshore, Inc. v. Commissioner, 97 T.C. 579, 593 (1991).
        58
       Am. Offshore, Inc. v. Commissioner, 97 T.C. at 594-595; see also sec.
1.166-2(a), Income Tax Regs.
                                         -48-

[*48] required where the surrounding circumstances indicate that a debt is

worthless and legal action would likely not result in satisfactory relief.59

      The tax matters partner showed identifiable events that rendered the debt

worthless. Mr. Rasmuson explained that Mountain Cove went out of existence in

2011. He determined that the debt was worthless on the basis of his familiarity

with the books and records of Mountain Cove. He reviewed the entries for both

entities to make sure they reflected the same information. We find his testimony

credible. Accordingly, we hold that Triumph may deduct the loss.

VI.   Self-Employment Tax

      The Commissioner asserts that Triumph should have reported the $636,608

of gross receipts attributable to the sale of property to Mountain Home in 2011 as

self-employment income instead of installment income. Section 1401(a) and (b)

imposes a tax on self-employment income. “Self-employment income” generally

means “net earnings from self-employment”,60 which in turn includes gross

income from a taxpayer’s trade or business.61 Triumph excluded the 2011 gross


      59
       Am. Offshore, Inc. v. Commissioner, 97 T.C. at 595; sec. 1.166-2(b),
Income Tax Regs.
      60
           Sec. 1402(b).
      61
           Sec. 1402(a); see also SI Boo, LLC v. Commissioner, T.C. Memo. 2015-
                                                                     (continued...)
                                         -49-

[*49] receipts from the net earnings computation and reported the sale as

generating a capital gain.62

      The tax matters partner argues, in one sentence in its reply brief, that

Triumph held property for investment instead of in its trade or business. We

disagree. The Traverse entities were actively engaged in the Traverse Mountain

development during 2011; by the end of that year they had developed 1,900 units.

On the basis of our finding that Triumph had income from the proceeds of sale of

real property in 2011, which was related to its trade or business, we hold that

Triumph should have included that income in its reported net earnings from self-

employment.

VII. Accuracy-Related Penalties

      Section 6221 provides that the applicability of any penalty that relates to an

adjustment to a partnership item is determined at the partnership level.63 The

determination of partnership items in a partnership-level proceeding is




      61
        (...continued)
19, at *33.
      62
       Because we find that Triumph did not have unreported gross receipts for
2010, Triumph did not fail to report net earnings from self-employment for 2010.
      63
           See also sec. 6226(f); sec. 301.6221-1(c), Proced. & Admin. Regs.
                                          -50-

[*50] conclusive.64 But a partner may file a claim for refund to challenge the

amount of the computational adjustment or to assert any partner-level defenses

that may apply.65

      Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty

on any portion of an underpayment of tax that is due to, among other things, any

negligence or disregard of rules or regulations or a substantial understatement of

income tax. The term “negligence” includes any failure to make a reasonable

attempt to comply with the provisions of the Code, and the term “disregard”

includes any careless, reckless, or intentional disregard.66 A taxpayer is negligent

if he fails to maintain sufficient records to substantiate the items in question.67

Negligence is strongly indicated where a taxpayer fails to make a reasonable

attempt to ascertain the correctness of a deduction, credit, or exclusion on a return

that would seem to a reasonable and prudent person to be “too good to be true”




      64
           Sec. 6230(c)(4).
      65
           Sec. 301.6221-1(c) and (d), Proced. & Admin. Regs.
      66
           Sec. 6662(c); Higbee v. Commissioner, 116 T.C. 438, 448 (2001).
      67
       See Higbee v. Commissioner, 116 T.C. at 449; sec. 1.6662-3(b)(1), Income
Tax Regs.
                                         -51-

[*51] under the circumstances.68 An understatement of income tax is “substantial”

when it exceeds the threshold set forth in section 6662(d)(1).

      Triumph acted negligently or with disregard of the requirements of section

170 and the regulations thereunder. We have found that the transfer to the city of

Lehi was a quid pro quo exchange. Triumph received the concept plan approval

and expected approval of its area plan. Nevertheless, Triumph reported that the

transfer was a charitable contribution at a fair market value determined by an

appraisal with no adjustment for the significant consideration received in the

development approvals. Accordingly, we find that Triumph did not make a

reasonable attempt to ascertain the correctness of the charitable contribution

deduction because it did not adjust the deduction for the consideration received.69

      The substantial understatement penalty is applicable as it relates to an

adjustment to partnership items.70 Whether the understatement exceeds the

applicable threshold for a substantial understatement of income tax is a




      68
           Sec. 1.6662-3(b)(1)(ii), Income Tax Regs.
      69
           See Seventeen Seventy Sherman St., LLC v. Commissioner, at *42-*43.
      70
       Sec. 6221; VisionMonitor Software, LLC v. Commissioner, T.C. Memo.
2014-182, at *16.
                                         -52-

[*52] computational determination based on the partners’ information.71

Accordingly, we sustain the Commissioner’s section 6662(b)(2) accuracy-related

penalty on any portion of an underpayment of tax that is due to a substantial

understatement of income tax.

      The accuracy-related penalty will not apply to any portion of the

underpayment where the taxpayer establishes that it had reasonable cause for that

portion and acted in good faith.72 The tax matters partner alleges that Triumph had

reasonable cause and acted in good faith. However, the tax matters partner failed

to present any evidence that Triumph had reasonable cause and acted in good

faith. Accordingly, we find that the tax matters partner did not establish

reasonable cause and good faith at the partnership level.

      To reflect the foregoing,


                                                Decision will be entered

                                       under Rule 155.




      71
           Sec. 301.6221-1(c) and (d), Proced. & Admin. Regs.
      72
        Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 448; Neonatology
Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff’d, 299 F.3d 221 (3d
Cir. 2002).
