                                      T.C. Memo. 2013-9



                            UNITED STATES TAX COURT



                     TERRY D. ALBRIGHT, Petitioner v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



         Docket No. 7250-12.                          Filed January 14, 2013.



         Terry D. Albright, pro se.

         Kelley Andrew Blaine, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


         GERBER, Judge: Respondent determined the following income tax

deficiencies and additions to tax and penalties for petitioner’s 2006 and 2008 tax

years:
                                            -2-

[*2]                                            Penalty            Addition to tax
  Year                Deficiency              sec. 6662(a)         sec. 6651(a)(1)

  2006                $122,145.00              $24,429.00             $6,105.75
  20081                  2,288.00                  457.60                 ---

      1
       The 2008 tax year is in controversy solely because of computational
adjustments caused by an increase in petitioner’s adjusted gross income for 2006
which eliminated some portion of a net operating loss that had been carried over
from 2006.

                                   FINDINGS OF FACT1

      Petitioner resided in Idaho at the time his petition was filed. Petitioner sold

his residence in Middletown, Idaho, on September 28, 2006, for $1,490,000. He

did not report any of the gross sale price or resulting gain on his 2006 Federal

income tax return. After an examination, respondent determined that petitioner had

an $866,331 capital gain from the sale of his residence. Respondent computed the

gain by taking into account basis, exclusions, capital losses, and other adjustments

as follows:

      Gross proceeds from sale of residence                    $1,490,000.00
      Less:
        Sales expenses                                                     (115,860.00)
        Cost of home                                                         (85,368.50)
        Improvements                                                          (12,000.00)
      Gain on sale of residence                                           1,276,771.50
      Exclusion from gain on sale of residence                              (250,000.00)
      Taxable gain from sale of residence                                 1,026,771.50

      1
          The parties’ stipulated facts and exhibits are incorporated by this reference.
                                         -3-

[*3] Less:
       Long-term capital loss carryover                                   (34,492.00)
         from 2005
       Capital loss attributable to a 2006                               (128,949.00)
         partnership loss
     Net long-term capital gain                                           863,330.50
     Plus $3,000 claimed by petitioner against
       2006 ordinary income based on
       2005 capital loss carryover                                          3,000.00
         Total adjustment determined by respondent                        866,330.50

Petitioner does not dispute that he had capital gain from the sale of his residence.

Instead he contends that respondent erroneously failed to allow additional amounts

of basis and losses to further reduce the amount of taxable capital gain. In

particular petitioner had a $100,639.96 home equity loan secured by his residence.

When the residence was sold, proceeds were used to pay off the home equity loan.

Petitioner used the $100,639.96 proceeds for operating capital with respect to his

business enterprises. Because the business records are not available to him, he is

unable to show that the expenditures resulted in a deductible loss that would

further reduce his taxable income for 2006. Petitioner asserts that he expended

approximately $8,664 in attorney’s fees in connection with his attempt to gain

access to his business records and to address issues concerning the trust which

held his residence. He contends that his capital gain should also be reduced by

this amount. Of the $8,664, $2,265 represented attorney’s fees to resolve the
                                          -4-

[*4] issues related to the trust and the sale of his house. The remaining $6,399 was

used to pay petitioner’s bankruptcy attorney in connection with the chapter 13

bankruptcy he filed in 2005. Petitioner has not substantiated these amounts.

      Petitioner obtained an extension of time to file his 2006 income tax return to

October 15, 2007. However, the 2006 return was not signed by petitioner until

October 25, 2007, and was not filed with respondent until October 30, 2007.

                                      OPINION

      Petitioner does not dispute that he had a gain from the sale of his residence

during 2006. He sold his residence, which originally cost a little more than

$85,000, for almost $1,500,000. He failed to include the proceeds or any gain from

the sale on his 2006 income tax return. After petitioner filed a late return for the

2006 year, his return was selected for audit; and, ultimately, respondent issued a

notice of deficiency in which the sale proceeds were adjusted (reduced) by

allowance of additional basis and an exclusion under section 121.2 Finally,

losses were applied against the taxable gain from the sale of the residence, with a

small adjustment, to arrive at net unreported capital gain of $866,330.50. That



      2
       Section references are to the Internal Revenue Code in effect for the taxable
years under consideration. Rule references are to the Tax Court Rules of Practice
and Procedure.
                                         -5-

[*5] unreported income was the source of petitioner’s 2006 income tax deficiency

and the computational adjustment that generated a 2008 income tax deficiency.

      Petitioner contends that respondent’s determinations are in error because

respondent failed to reduce the amount of capital gain by three items. The first of

petitioner’s contentions is that his $100,639.96 home equity loan secured by his

residence and which was paid off from the proceeds of the sale should be subtracted

from the amount of gain. Petitioner’s theory is that he had used the proceeds from

the home equity loan to operate his business, which had a net loss. Unfortunately,

petitioner did not have the records that would show any amount of loss and/or that

the proceeds of the loan were connected with the loss. Petitioner bears the burden3

of showing his entitlement to the loss, which he has failed to do. See Rule 142(a).

      Next, petitioner contends that he is entitled to deduct $8,664 in attorney’s

fees. Respondent contends that to the extent that petitioner can show that he

actually paid attorney’s fees, he has not shown that they were not already allowed

by respondent as part of the expenses in connection with the sale of his residence.



      3
       No issue has been raised by the parties concerning sec. 7491 or whether
there has been a shift in the burden of proof or going forward with the evidence.
Accordingly, petitioner has not established his entitlement to any such shift in the
burden of proof under sec. 7491(a) regarding his liability for the deficiencies.
                                         -6-

[*6] Through documentary evidence and testimony, petitioner has shown that of the

$8,664 claimed, $2,265 represented attorney’s fees to resolve issues related to the

sale of his residence and in connection with the trust in which title to the residence

was held. He has also shown that this amount was not already allowed by

respondent. Accordingly, the 20064 income tax deficiency should be reduced or

adjusted to reflect a $2,265 reduction of capital gain from the sale of petitioner’s

residence.

      Lastly, petitioner contends that the capital gain should be reduced by $6,399

representing fees that he claims he paid to his bankruptcy attorney in connection

with handling his chapter 13 bankruptcy proceeding. Even if petitioner were able to

substantiate the amount of that payment, he has not explained or shown why any

payment to an attorney who represented him in a business-related chapter 13

bankruptcy proceeding in 2005 would result in a reduction of the sale proceeds or

gain from the sale of his personal residence in 2006.

      Respondent determined that petitioner was liable for the section 6651(a)(1)

addition to tax for failure to timely file his 2006 income tax return. That section

provides for an addition of 5% per month, up to 25%, for late filing. Petitioner’s

      4
        To the extent that a reduction in the 2006 deficiency causes a computational
adjustment to the 2008 income tax deficiency, we leave that computation to the
parties.
                                            -7-

[*7] 2006 income tax return was filed with respondent on October 30, 2007, 15

days after the October 15, 2007, extended deadline that petitioner had obtained.

Petitioner bears the burden of providing an explanation or showing that there was

reasonable cause for the late filing. See Rule 142(a); Higbee v. Commissioner, 116

T.C. 438 (2001). Petitioner has not provided any explanation or shown reasonable

cause for the late filing and is accordingly liable for the section 6651(a)(1) addition

to tax.

          Respondent also determined that petitioner was liable for the section 6662(a)

accuracy-related penalty, alternatively due to either negligence or a substantial

understatement of income tax. See sec. 6662(a) and (b)(1) and (2). Negligence is

defined to include any failure to make a reasonable attempt to comply with the

Internal Revenue Code. A substantial understatement of income tax exists if an

understatement exceeds the greater of 10% of the tax required to be shown on the

return or $5,000. Sec. 6662(d).

          Petitioner’s failure to report the $1,490,000 proceeds from the sale of his

residence resulted in a sizable income tax deficiency for his 2006 tax year.

Petitioner did not provide any explanation as to why he did not report the proceeds

from the sale of his residence. Further, he did not show reasonable cause for his

failure. Under those circumstances, we hold that petitioner is liable for the section
                                         -8-

[*8] 6662(a) accuracy-related penalty on the resulting underpayment for his 2006

tax year.

      With respect to the 2008 tax year, it appears that there was no substantial

understatement of income tax. Accordingly we must consider whether the

underpayment for 2008 was due to negligence. The 2008 underpayment was

attributable to changes in capital loss carryovers and technical adjustments that

caused a recomputation of his 2008 tax liability. Under those circumstances, we do

not find that petitioner failed to make a reasonable attempt to comply with the

Internal Revenue Code. We accordingly hold that petitioner is not liable for the

section 6662(a) accuracy-related penalty for 2008.

      To reflect the foregoing,


                                                         Decision will be entered

                                                  under Rule 155.
