                               T.C. Memo. 2017-163



                         UNITED STATES TAX COURT



                   ROBERT FISCALINI, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 30464-15.                          Filed August 24, 2017.



      Robert Fiscalini, pro se.

      Bryant W. Smith, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      CHIECHI, Judge: Respondent determined a deficiency in, an addition

under section 6651(a)(1)1 to, and an accuracy-related penalty under section


      1
       All section references are to the Internal Revenue Code (Code) in effect for
the year at issue. All Rule references are to the Tax Court Rules of Practice and
                                                                       (continued...)
                                         -2-

[*2] 6662(a) on petitioner’s Federal income tax (tax) for his taxable year 2007 of

$278,186, $69,845.25, and $55,637.20, respectively.

      The issues remaining for decision for petitioner’s taxable year 2007 are:

      (1) Is petitioner required to recognize certain long-term capital gain from

the sale of his personal residence? We hold that he is.

      (2) Is petitioner liable for the addition to tax under section 6651(a)(1)? We

hold that he is.

      (3) Is petitioner liable for the accuracy-related penalty under section

6662(a)? We hold that he is.

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found.

      Petitioner, Robert Fiscalini, resided in California at the time he filed the

petition.

      At all relevant times, including during 2007, the year at issue, petitioner

operated a cement contracting business and built swimming pool decks (collec-

tively, petitioner’s construction business).




      1
      (...continued)
Procedure.
                                        -3-

[*3] On March 31, 1993, petitioner and his parents, Robert Fiscalini, Sr., and

Kathleen Fiscalini (sometimes collectively, the Fiscalinis), purchased a house at

1591 McCloskey Road, Hollister, California (sometimes, McCloskey Road

property) for $274,312. Petitioner’s parents paid $40,000 for their interest in the

McCloskey Road property, and petitioner paid $234,312 for his interest. In order

to finance the purchase of his interest in the McCloskey Road property, petitioner

borrowed $234,312. That loan was secured by a mortgage on the McCloskey

Road property. (We shall refer to the loan secured by a mortgage that petitioner

had obtained with respect to the McCloskey Road property as petitioner’s mort-

gage loan.)

      From the purchase of the McCloskey Road property until at least August 1,

2007, petitioner resided on that property. (We shall sometimes refer to the

McCloskey Road property where petitioner resided as petitioner’s residence.)

During 2002, petitioner made certain improvements to the McCloskey Road

property, including building a swimming pool on the property with certain

equipment that he used in petitioner’s construction business. Petitioner also

converted a detached garage on the McCloskey Road property into a game room.
                                         -4-

[*4] On April 29, 2003, the Fiscalinis transferred their interest in the McCloskey

Road property to petitioner. Petitioner did not give them any cash or other

property in return for that interest.

      On several occasions not established by the record before August 1, 2007,

petitioner refinanced petitioner’s mortgage loan on the McCloskey Road property.

During 2007, petitioner was unable to make certain loan payments that became

due with respect to that property. Around August 1, 2007, in order to avoid

foreclosure on the McCloskey Road property, petitioner sold that property to his

parents.

      In order to finance the purchase of the McCloskey Road property, the

Fiscalinis borrowed $682,500 from Downey Savings. They used most of those

borrowed funds to discharge the balances totaling $505,753.39 and $158,295.04,

respectively, of two loans that petitioner had outstanding with respect to the

McCloskey Road property. (We shall sometimes refer to the balances totaling

$505,753.39 and $158,295.04, respectively, of two loans that petitioner had

outstanding with respect to the McCloskey Road property and that his parents

discharged when they acquired that property as petitioner’s discharged liabilities

of $664,048.43.) The respective closing statements of the seller, petitioner, and

the buyers, the Fiscalinis, with respect to the sale and the purchase of the
                                         -5-

[*5] McCloskey Road property showed that they had agreed that the “Total

Consideration” for that sale and that purchase was $975,000 and that petitioner

was making a “Gift of Equity To Buyer [the Fiscalinis]” of $295,655.35. The

buyer’s closing statement also showed that petitioner incurred settlement charges

totaling $16,751.24 (petitioner’s settlement costs).

      Alliance Title Co. issued for taxable year 2007 Form 1099-S, Proceeds

From Real Estate Transactions, to petitioner, as the transferor of property at 1591

McCloskey Road, Hollister, California, that showed “Gross Proceeds” of

$975,000 and that “Property or Services [Were] Not Received”.

      Petitioner did not file timely a tax return for his taxable year 2007 because

he was unable to pay any tax due for that year. In June 2013, petitioner filed Form

1040, U.S. Individual Income Tax Return, for his taxable year 2007 (2007 return).

Petitioner did not report in that return any gain from the sale of petitioner’s

residence to the Fiscalinis.

      Respondent issued a notice of deficiency (notice) to petitioner with respect

to his taxable year 2007. In that notice, respondent determined that petitioner

must recognize $975,000 of long-term capital gain from “the sale of capital

assets”, i.e., petitioner’s residence. Respondent also determined in the notice that
                                         -6-

[*6] petitioner is liable for his taxable year 2007 for the addition to tax under

section 6651(a)(1) and the accuracy-related penalty under section 6662(a).

                                      OPINION

      Petitioner bears the burden of proving that respondent’s determinations in

the notice are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).

      We address first whether petitioner is required to recognize any long-term

capital gain from the sale of petitioner’s residence. It is petitioner’s position that

he is required to recognize only $70,487 of long-term capital gain from that sale.

It is respondent’s position that petitioner must recognize $473,536.76 of long-term

capital gain from the sale of petitioner’s residence.

      Respondent concedes that, in determining the amount of any capital gain

that petitioner realized from the sale of the McCloskey Road property, he is

entitled to reduce the amount realized from that sale, as determined under section

1001(b), by petitioner’s settlement costs of $16,751.24. Respondent also concedes

that petitioner is entitled under section 121 to exclude from gross income

$250,000 of the capital gain that he realized from the sale of petitioner’s residence,

as determined under section 1001(a) and (b).
                                         -7-

[*7] The parties disagree over the amount of capital gain that petitioner realized

from the sale of the McCloskey Road property. That is because they disagree over

petitioner’s adjusted basis in, and the amount realized from the sale of, that

property. According to petitioner, his adjusted basis in the McCloskey Road

property when he sold it was $329,687. According to respondent, petitioner’s

adjusted basis in that property at that time was $234,312. According to petitioner,

the amount realized from the sale of petitioner’s residence is $650,199. According

to respondent, the amount realized from that sale is $975,000 reduced by peti-

tioner’s settlement costs of $16,751.24.2

      Before turning to the parties’ disagreements, we summarize the pertinent

Code and regulatory provisions which, when applied to the facts that we have

found, will resolve those disagreements. Section 1001(a) provides that the gain

from the sale of property is the excess of the amount realized therefrom over the

adjusted basis of the property provided in section 1011. Section 1.1001-1(e)(1),

Income Tax Regs., provides that where a transfer of property is in part a sale and




      2
       For convenience, we shall generally not restate respondent’s concession
regarding petitioner’s settlement costs throughout our discussion and resolution of
the dispute between the parties over the amount realized from the sale of the
McCloskey Road property.
                                         -8-

[*8] in part a gift the transferor has a gain to the extent that the amount realized

exceeds the transferor’s adjusted basis in the property.

         Section 1001(b) provides that the amount realized from the sale of property

is the sum of any money received plus the fair market value of property other than

money that is received. Section 1.1001-2(a)(1), Income Tax Regs., provides that

generally the amount realized from the sale of property includes the amount of

liabilities from which the transferor is discharged as a result of the sale. Section

1001(c) provides that, except as otherwise allowed by the Code,3 the entire amount

of the gain determined under section 1001 on the sale of property is to be recog-

nized.

         Section 1011(a) provides that the adjusted basis for determining gain from

the sale of property is the basis determined under section 1012 or other applicable

sections of subchapter O of the Code (e.g., section 1015), adjusted as provided in

section 1016. Section 1012(a) provides that generally the basis of property is the

cost of the property. Section 1015(a) provides that generally the basis of property

acquired by gift is to be the same as it would be in the hands of the donor. Section




         3
        As respondent concedes, sec. 121 is an exception to the rule in sec. 1001(c)
that is applicable here.
                                         -9-

[*9] 1016(a)(1) provides that in all cases there is to be a proper adjustment to the

basis of property for expenditures properly chargeable to capital account.

      We consider now the parties’ dispute over petitioner’s adjusted basis in the

McCloskey Road property. Petitioner first argues that, in determining his adjusted

basis in that property when he sold it to his parents in 2007, his cost basis of

$234,312 in that property4 should have already been increased in 2003 by the cost

basis of $40,000 that the Fiscalinis had in their interest in that property. That is

because, according to petitioner, his parents made a gift of that interest to him in

2003. Respondent disagrees. The only argument that respondent advances in

support of respondent’s disagreement is that “coowners of an asset only have a

cost basis in the amount each has paid” for the asset.

      We reject respondent’s argument. That argument disregards the facts and

the applicable law. We have found on the record before us that petitioner did not

give his parents any cash or other property in return for their interest in the

McCloskey Road property when they transferred that interest to him in 2003. In

other words, we have found that in 2003 the Fiscalinis made a gift of their interest

in that property to petitioner. Pursuant to section 1015(a), petitioner’s basis in the

      4
       Respondent agrees that petitioner’s cost basis in the McCloskey Road
property is $234,312, the amount that he paid for his interest in that property when
he and the Fiscalinis purchased it in 1993.
                                        - 10 -

[*10] interest in the McCloskey Road property that his parents gave to him in

2003 is the same as their cost basis in that interest, namely, $40,000.

      On the record before us, we find that in 2003, after the Fiscalinis gave

petitioner their interest in the McCloskey Road property, his basis in that property

was equal to the sum of his cost basis of $234,312 in the interest in that property

that he purchased in 1993 and his basis of $40,000 in his parents’ interest in that

property which they gave to him in 2003, or $274,312.

      Petitioner further argues that, in determining his adjusted basis in the

McCloskey Road property when he sold it to his parents in 2007, his basis of

$274,312 in that property should also be increased under section 1016(a)(1) by

total costs of $50,000 that he claims he incurred in building a swimming pool on

the property with certain equipment that he used in petitioner’s construction

business and converting a detached garage on the property into a game room. In

support of his argument regarding those claimed costs of $50,000, petitioner relies

on his self-serving, uncorroborated, and general testimony regarding the amount of

those claimed costs. We are unwilling to, and we shall not, rely on petitioner’s

testimony to establish the costs of the improvements to the McCloskey Road

property that he claims he incurred. See Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).
                                        - 11 -

[*11] On the record before us, we find that petitioner has failed to carry his

burden of establishing that, in determining his adjusted basis in the McCloskey

Road property when he sold it to his parents in 2007, his basis of $274,312 should

also be increased under section 1016(a)(1) by total costs of $50,000 that he claims

he incurred in building a swimming pool on the property with certain equipment

that he used in petitioner’s construction business and converting a detached garage

on the property into a game room.

      Based upon our examination of the entire record before us, we find that

petitioner’s adjusted basis in the McCloskey Road property when he sold it to his

parents in 2007 was $274,312.

      We consider next the parties’ disagreement over the amount realized from

petitioner’s sale of the McCloskey Road property to his parents. The parties agree

that the amount realized from that sale includes petitioner’s discharged liabilities

of $664,048.43. See sec. 1.1001-2(a)(1), Income Tax Regs.5 They disagree over

whether the amount realized includes any other amount. According to petitioner,

the amount realized should include no other amount because his sale of the

McCloskey Road property to the Fiscalinis was in part a sale and in part a gift to

them. Petitioner maintains that the amount of that gift is the difference between

      5
          See supra note 2.
                                         - 12 -

[*12] the total consideration for the sale of that property (i.e., $975,000) shown in

the respective closing statements of the seller, petitioner, and the buyer, the

Fiscalinis, and petitioner’s discharged liabilities of $664,048.43 (i.e.,

$310,951.57). Respondent disagrees. As we understand respondent’s argument in

support of respondent’s disagreement, the total consideration of $975,000 shown

in the respective closing statements of petitioner and the Fiscalinis controls the

determination of the amount realized under section 1001(b). In advancing that

argument, respondent states: “Petitioner and his parents, in full knowledge of the

relevant facts agreed to a sales price of $975,000.00, which is, by definition, the

fair market value of the McCloskey [Road] Property on that date [of sale].”

      We reject respondent’s argument. That argument disregards the definition

of the term “amount realized” in section 1001(b), the regulations thereunder, and

pertinent caselaw. As discussed above, section 1001(b) provides that the amount

realized from the sale of property is the sum of any money received plus the fair

market value of property other than money that is received. Section 1.1001-

2(a)(1), Income Tax Regs., provides in pertinent part that generally the amount

realized from the sale of property includes the amount of liabilities from which the

transferor is discharged as a result of the sale. The Fiscalinis acquired from

petitioner the McCloskey Road property that respondent concedes had a fair
                                        - 13 -

[*13] market value of $975,000 at the time they acquired it. Petitioner received no

cash and no other property from his parents as a result of the sale of that property

to them although they did discharge certain mortgage loans that he had with

respect to that property at the time of that sale, namely, petitioner’s discharged

liabilities of $664,048.43. What respondent disregards or fails to understand is

that petitioner’s sale of the McCloskey Road property to his parents was a transfer

of property that was in part a sale and in part a gift. See sec. 1.1001-1(e)(1),

Income Tax Regs.

      Based upon our examination of the entire record before us, we find that the

amount realized, before taking into account respondent’s concession regarding

petitioner’s settlement costs of $16,751.24, from petitioner’s sale of the

McCloskey Road property to his parents is $664,048.43, the total amount of the

two mortgage loans that he had with respect to that property at the time of that sale

and that his parents discharged. After we take into account respondent’s

concession regarding petitioner’s settlement costs of $16,751.24, the amount

realized is $647,297.19.

      Based upon our examination of the entire record before us and taking into

account respondent’s concession with respect to petitioner’s settlement costs of

$16,751.24, we find that for his taxable year 2007 the amount of capital gain from
                                         - 14 -

[*14] petitioner’s sale of the McCloskey Road property is $372,585.19. Taking

into account respondent’s concession with respect to the $250,000 exclusion from

gross income under section 121, we find that petitioner is required to recognize for

that year $122,585.19 of long-term capital gain from that sale.

      We consider finally the addition to tax under section 6651(a)(1) and the

accuracy-related penalty under section 6662(a) that respondent determined in the

notice. Respondent bears the burden of production with respect to that addition to

tax and that accuracy-related penalty. See sec. 7491(c); Higbee v. Commissioner,

116 T.C. 438, 446-447 (2001). To satisfy respondent’s burden of production,

respondent must come forward with sufficient evidence showing that it is

appropriate to impose the addition to tax and the accuracy-related penalty that are

at issue. See Higbee v. Commissioner, supra at 446. Although respondent bears

the burden of production with respect to the addition to tax under section

6651(a)(1) and the accuracy-related penalty under section 6662(a), respondent

“need not introduce evidence regarding reasonable cause, substantial authority, or

similar provisions. * * * the taxpayer bears the burden of proof with regard to

those issues.” Id.

      With respect to the addition to tax under section 6651(a)(1), that section

imposes an addition to tax for failure to file timely a tax return. Petitioner filed his
                                        - 15 -

[*15] 2007 return in June 2013. On the record before us, we find that respondent

has satisfied respondent’s burden of production under section 7491(c) with respect

to the addition to tax under section 6651(a)(1) that respondent determined.

      The addition to tax under section 6651(a)(1) does not apply if the failure to

file timely is due to reasonable cause and not to willful neglect. See sec.

6651(a)(1). At trial, petitioner testified, and we have found, that he did not file

timely a tax return for his taxable year 2007 because he was unable to pay any tax

due for that year. A taxpayer’s inability to pay tax does not constitute reasonable

cause for the taxpayer’s failure to file timely a tax return. See Mali v.

Commissioner, T.C. Memo. 2011-121, 2011 WL 2162913, at *5. On the record

before us, we find that petitioner’s failure to file timely his 2007 return was due to

willful neglect and not to reasonable cause.

      Based upon our examination of the entire record before us, we find that

petitioner is liable for his taxable year 2007 for the addition to tax under section

6651(a)(1).

      With respect to the accuracy-related penalty under section 6662(a), that

section imposes an accuracy-related penalty of 20 percent of the underpayment to

which section 6662 applies. Section 6662 applies to the portion of any underpay-

ment which is attributable to, inter alia, negligence or disregard of rules or
                                        - 16 -

[*16] regulations, sec. 6662(b)(1), or a substantial understatement of tax, sec.

6662(b)(2).

      The accuracy-related penalty under section 6662(a) does not apply to any

portion of an underpayment if it is shown that there was reasonable cause for, and

that the taxpayer acted in good faith with respect to, such portion. Sec.

6664(c)(1).

      In his 2007 return that he filed late, petitioner did not include in gross

income any gain from the sale of the McCloskey Road property. He failed to do

so even though he knew that when his parents acquired that property they had

discharged the balances totaling $505,753.39 and $158,295.04, respectively, of

two loans that he had outstanding with respect to that property. On the record

before us, we find that respondent has satisfied respondent’s burden of production

under section 7491(c) with respect to the accuracy-related penalty under section

6662(a) that respondent determined.

      The record is devoid of reliable evidence and sound argument as to why

respondent’s determination under section 6662(a) should not be sustained. At

trial, petitioner merely indicated that if we should find that he has no gain from the

sale of the McCloskey Road property, he would not be liable for the accuracy-

related penalty.
                                        - 17 -

[*17] On the record before us, we find that petitioner made no attempt to comply

with the requirements of the Code in determining the amount of any gain from the

sale of petitioner’s residence and that consequently he failed to do what a

reasonable person would do under the circumstances. On that record, we further

find that petitioner was negligent and disregarded regulations.

      On the record before us, we also find that there was no reasonable cause for,

and that petitioner did not act in good faith with respect to, the underpayment for

his taxable year 2007.

      Based upon our examination of the entire record before us, we find that

petitioner is liable for his taxable year 2007 for the accuracy-related penalty under

section 6662(a).

      We have considered all of the parties’ respective contentions and arguments

that are not discussed herein, and we find them to be without merit, irrelevant,

and/or moot.

      To reflect the foregoing and the concessions of the parties,


                                                      Decision will be entered

                                                 under Rule 155.
