PURSUANT TO INTERNAL REVENUE CODE
 SECTION 7463(b),THIS OPINION MAY NOT
  BE TREATED AS PRECEDENT FOR ANY
            OTHER CASE.
                          T.C. Summary Opinion 2013-26



                         UNITED STATES TAX COURT



                   PAUL ROGER TSAI, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 1450-12S.                        Filed March 28, 2013.



      Paul Roger Tsai, pro se.

      Rollin G. Thorley, for respondent.



                              SUMMARY OPINION


      ARMEN, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the petition
                                             -2-

was filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable

by any other court, and this opinion shall not be treated as precedent for any other

case.

        Respondent determined the following income tax deficiencies and penalties in

regard to petitioner’s 2008 and 2009 tax years:

                                                             Penalty
                     Year          Deficiency              sec. 6662(a)

                     2008            $1,746                 $349.20
                     2009             4,323                  864.60

        After concessions by petitioner,2 the issues remaining for decision are:

        (1) Whether petitioner is entitled to a deduction for legal fees he paid in 2008

and 2009;

        1
         Unless otherwise indicated, all subsequent section references are to the
Internal Revenue Code in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
        2
        Petitioner concedes that he is not entitled to the following deductions
claimed on his Schedules C, Profit or Loss From Business, for tax years 2008 and
2009:

                 Adjustment to Income              2008            2009

              Schedule C -- other expenses         $ 764         $1,227.00
              Schedule C -- car and truck          1,329          1,566.91
              Schedule C -- contract labor           ---          4,500.00
              Schedule C -- depreciation           2,177          2,998.00
                                          -3-

        (2) whether petitioner is entitled to a dependency exemption deduction with

respect to his son for tax years 2008 and 2009;3

        (3) whether petitioner is entitled to a dependency exemption deduction with

respect to his daughter for tax year 2009;

        (4) whether petitioner qualifies for head of household filing status for 2009;

and

        (5) whether petitioner is liable for accuracy-related penalties for 2008 and

2009.

                                      Background

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

incorporate by reference the parties’ stipulation of facts and accompanying exhibits.

        Petitioner resided in the State of Nevada when the petition was filed.

Legal Fees

        On July 28, 1979, petitioner and his former spouse (Ms. Hsu) married. The

former couple had two children: a son and a daughter.




        3
        Petitioner did not claim dependency exemption deductions for his son on
his 2008 and 2009 tax returns; however, this issue was tried to the Court by the
consent of the parties. See Rule 41(b)(1).
                                          -4-

      In 1991 during their marriage, petitioner and Ms. Hsu purchased 2.5 acres of

undeveloped land in Las Vegas, Nevada, for $55,000 (property).

      By May 1995 petitioner and Ms. Hsu were in the midst of a divorce and

petitioner had hired an attorney to represent him in the divorce proceedings (divorce

attorney).

      Beginning on July 13, 1995, petitioner and Ms. Hsu attended numerous

hearings conducted by the District Court for Clark County, Nevada, Family Division

(family court), during which the former couple reached agreement regarding child

custody, child support, and the division of community property in connection with

their divorce.

      On April 10, 1996, the family court filed an order (1996 order) stating that the

former couple would share joint legal custody of their children, with Ms. Hsu having

primary physical custody. The 1996 order further states that petitioner shall pay

child support of $650 per month to Ms. Hsu. The 1996 order also states that the

property “shall be placed in trust for the children and that the * * * [former couple]

will be co-trustees of that property”. Moreover, the 1996 order states that “should

the property sell[,] the proceeds from the property shall be either placed in trust or

reinvested for the benefit of the children; a Quit Claim Deed shall be signed by * * *
                                            -5-

[the former couple] placing the property in the children’s names with * * * [the

former couple] as Trustees”.

       On or around May 1, 1996, and in accordance with the 1996 order, petitioner

and Ms. Hsu executed a quitclaim deed and placed the property in trust for the

benefit of their children (children’s trust).

       On or around June 1, 2007, over a decade after the children’s trust was

created, the property was sold for $2,025,000. When Ms. Hsu attempted to place

the proceeds from the sale into the children’s trust, petitioner refused, arguing that

the value of the children’s trust exceeded the funds needed to finance the children’s

education and that any funds not used for the children’s education should be equally

divided between petitioner and Ms. Hsu. Petitioner also argued that the sale

proceeds for his children’s education should be split between two trusts with

petitioner and Ms. Hsu each maintaining his or her own trust for the children.

       On October 3, 2007, the family court issued findings of fact, conclusions of

law, and an order (2007 order), holding, inter alia, that petitioner and Ms. Hsu

never intended to retain an interest in the property; rather, they both agreed to

transfer “all the right, title, and interest” in the property to their children’s trust in
                                           -6-

1996. Accordingly, the family court ordered that all of the sale proceeds be

distributed to the children’s trust.

       Petitioner appealed the 2007 order to the Supreme Court of the State of

Nevada (Nevada Supreme Court). On appeal petitioner claimed that the family

court erred: (1) By concluding that the former couple agreed to transfer their entire

interest in the property to their children’s trust in 1996; (2) by permitting the trust to

reimburse Ms. Hsu for the children’s primary and secondary education in private

schools, arguing that such payments constituted an improper retroactive

modification to his child support obligations; and (3) by concluding that the family

court had jurisdiction to clarify the children’s trust where neither he nor Ms. Hsu

joined the children’s trust as a party to the litigation. The Nevada Supreme Court

affirmed the family court’s decision.

       Petitioner paid legal fees to his divorce attorney in 2008 and 2009 for

appealing the 2007 order.

Dependency Exemption Deductions and Filing Status

       In 2008 and 2009 petitioner resided in Las Vegas, Nevada. During those

years petitioner’s son was a full-time college student and resided in California alone

or with college roommates.
                                          -7-

      In 2009 from January until August, petitioner’s daughter resided with Ms.

Hsu in Hong Kong. In August petitioner’s daughter reached the age of 18 and

moved from Hong Kong to New York to attend college full time, residing in on-

campus housing at the college for the remainder of 2009. From January to July

2009, petitioner paid $680 per month of child support for his daughter.

Petitioner’s Tax Returns

      Petitioner timely prepared and filed his 2008 and 2009 Federal income tax

returns claiming head of household filing status and a dependency exemption

deduction with respect to his daughter. Attached to his 2008 return was a Schedule

A, Itemized Deductions, on which petitioner claimed a deduction for legal fees of

$8,378. Attached to his 2009 return was a Schedule A on which petitioner claimed

a deduction of $10,055 described as “SFTY BOX/LEGL/ INVSMT EXPENSES

etc.”, almost all of which were for legal fees.

      In a notice of deficiency respondent disallowed, inter alia, the 2008 claimed

deduction for legal expenses and $10,010 of the 2009 claimed deduction for “SFTY

BOX/LEGL/INVSMT EXPENSES etc”, allowing a $45 deduction for expenses

associated with petitioner’s safety deposit box. Respondent further disallowed

petitioner’s claimed dependency exemption deduction with respect to his daughter

for 2009. In addition, respondent determined that petitioner did not qualify for head
                                         -8-

of household filing status in 2009 because petitioner “did not furnish more than

one-half the total cost of keeping up a home for * * * [himself] and a dependent” in

that year.4

                                     Discussion

       In general the Commissioner’s determinations in a notice of deficiency are

presumed correct, and the burden is on the taxpayer to show that the determinations

are erroneous.5 See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter

of legislative grace, and a taxpayer bears the burden of proving that the taxpayer is

entitled to any deduction claimed. Deputy v. du Pont, 308 U.S. 488, 493 (1940);

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).




       4
          For 2008, however, respondent did not adjust petitioner’s claimed
dependency exemption deduction for his daughter or his claimed head of household
filing status.
       5
         Pursuant to sec. 7491(a)(1), the burden of proof as to factual matters may
shift from the taxpayer to the Commissioner under certain circumstances. However,
petitioner neither alleges that sec. 7491(a)(1) applies nor has established that he
complied with the requirements of sec. 7491(a)(2). Accordingly, the burden of
proof remains on petitioner.
                                          -9-

I. Legal Fees

      Petitioner contends that the legal expenses he reported on his 2008 and 2009

returns were paid in connection with litigation to collect income and are therefore

deductible under section 212.

      Respondent maintains, however, that petitioner’s claimed legal expenses are

nondeductible because those expenses derive from a suit that originated in a

personal or family matter and therefore are personal, living, or family expenses

within the meaning of section 262. We agree with respondent.

      Ordinary and necessary expenses paid for the production or collection of

income are generally deductible by taxpayers.6 Sec. 212(1). On the other hand,

personal, living, and family expenses are generally not deductible. Sec. 262(a).

Moreover, legal fees paid or incurred in perfecting title to a capital asset are

nondeductible capital expenditures. Sec. 263; Woodward v. Commissioner, 397

U.S. 572, 575-577 (1970).




      6
          Petitioner does not argue that the legal expenses he reported were paid for
the management, conservation, or maintenance of property held for the production
of income. See sec. 212(2). Moreover, the record does not support such an
argument. See Duntley v. Commissioner, T.C. Memo. 1987-579 (acknowledging
that the terms “management”, “conservation”, and “maintenance” do not refer to a
taxpayer’s efforts to retain an ownership in land).
                                         - 10 -

      Whether legal fees are deductible under section 212, or nondeductible under

section 262 or 263, depends on the origin and character of the underlying claim, not

on its potential effects on the fortunes of the taxpayer or the taxpayer’s purpose for

undertaking the litigation. See Woodward v. Commissioner, 397 U.S. at 577-578

(rejecting a subjective test founded on the motive or purpose of the taxpayer in

undertaking litigation); United States v. Gilmore, 372 U.S. 39, 48-49 (1963). Legal

fees paid or incurred in connection with a divorce are generally nondeductible

because the claims underlying the legal fees typically originate from personal or

family matters, not from an income-producing activity. United States v. Patrick, 372

U.S. 53, 57 (1963); Gilmore, 372 U.S. at 51; Fleischman v. Commissioner, 45 T.C.

439, 446 (1966).

      However, a deduction for legal expenses is not necessarily precluded simply

because the taxpayer’s underlying claim arose in a divorce action. Hahn v.

Commissioner, T.C. Memo. 1976-113. Rather, we must identify the underlying

claim that gave rise to the legal expenses at issue and then determine whether the

origin of that claim is personal in nature. See Peters, Gamm, West & Vincent, Inc.

v. Commissioner, T.C. Memo. 1996-186; see also Keller Street Dev. Co. v.

Commissioner, 688 F.2d 675, 678 (9th Cir. 1982) (setting forth a two-step test in

the Ninth Circuit requiring the court to (1) identify the transaction or event from
                                          - 11 -

which the claim originated and then to (2) characterize that transaction or event),

aff’g T.C. Memo. 1978-350.

      Petitioner primarily argues that the legal expenses he claimed were paid for

the purpose of collecting a portion of the property sale proceeds, i.e., to collect

income, and are therefore deductible under section 212. This argument is misplaced

because, as previously stated, the tax treatment of the legal expenses at issue hinges

on the origin and character of petitioner’s claims, not the possible consequences on

his fortunes if those claims were to prove successful or his purpose for undertaking

the litigation. See Woodward v. Commissioner, 397 U.S. at 577-578; Gilmore, 372

U.S. at 48-49.

      Petitioner further argues that because the claims underlying his legal expenses

derive from the property sale in 2007, over a decade after his divorce, those claims

were not personal, living, or family expenses under section 262(a). We disagree.

      The parties stipulated that the 2008 and 2009 legal expenses at issue were

paid to petitioner’s divorce attorney for appealing the 2007 order entered by the

family court. In his appeal of the 2007 order to the Nevada Supreme Court,

petitioner claimed that the family court erred: (1) By concluding that the former

couple agreed to transfer their entire interest in the property to their children’s trust
                                          - 12 -

in 1996; (2) by permitting the trust to reimburse Ms. Hsu for the children’s primary

and secondary education in private schools, arguing that such payments constituted

an improper retroactive modification to his child support obligations; and (3) by

concluding that the family court had jurisdiction to clarify the children’s trust

where neither he nor Ms. Hsu joined the children’s trust as a party to the

litigation.

       We agree with petitioner that the property sale was “the event that prompted”

him to bring suit. See Keller Street Dev. Co. v. Commissioner, 688 F.2d at 681.

However, the record establishes, and we conclude, that the property sale was

personal in character.

       Petitioner and Ms. Hsu purchased the property as husband and wife.

Pursuant to their child custody, child support, and community property agreement,

as well as the 1996 order, petitioner and Ms. Hsu placed the property in their

children’s trust to provide funds for their children’s education. The former couple

sold the property in their capacities as cotrustees of their children’s trust.

Furthermore, interest petitioner might have retained in the property would have been

acquired during and because of his marriage to Ms. Hsu. See Smith v.

Commissioner, T.C. Memo. 1980-182. Moreover, petitioner has provided no

evidence that the property sale was associated with a profit-seeking activity. See
                                         - 13 -

Gilmore, 372 U.S. at 51. Rather, the evidence indicates that the property sale was

personal in character. Although the property sale occurred over a decade after the

former couple’s divorce, the record establishes that the personal character of the

transaction was not changed by the passage of time. See Smith v. Commissioner,

T.C. Memo. 1980-182. Therefore, we conclude on the basis of the record as a

whole that petitioner’s legal fees originated from a personal and family matter

stemming from his marital relationship with Ms. Hsu.

      We do not question whether petitioner believed he retained an ownership

interest in the property and thus was entitled to a portion of the property sale

proceeds. However, even if petitioner could point us to an income-producing

activity from which his ownership claim arose, such claim is fundamentally an

attempt to perfect or establish title to the property and, therefore, any legal fees

incurred with respect thereto would be characterized as nondeductible capital

expenditures. See Woodward v. Commissioner, 397 U.S. at 576; Spangler v.

Commissioner, 323 F.2d 913, 919 (9th Cir. 1963), aff’g T.C. Memo. 1961-341.

Furthermore, the claims underlying petitioner’s legal expenses not only relate to

perfecting title to the property but also involve retroactive modification of child

support and the family court’s jurisdiction over the children’s trust. Petitioner

provided no evidence regarding what portion of the legal fees was paid to
                                         - 14 -

specifically address his claim to perfect title to the property, and thus we would be

unable to determine what portion would be capitalized if the matter affected

redetermination of the deficiency for either year in issue. See Hill v. Commissioner,

T.C. Memo. 2010-268. In any event, because petitioner was unsuccessful in

perfecting title, he has no asset against which to capitalize any portion of the

claimed legal expenses. See Kellner v. Commissioner, T.C. Memo. 1982-729.

      In sum, petitioner has not met his burden of proving that he is entitled to a

deduction for any portion of the legal fees at issue. Instead, the record indicates that

petitioner’s claims underlying the legal expenses at issue originated from a personal

and family matter and are therefore nondeductible. Accordingly, we sustain

respondent’s disallowance of petitioner’s claimed deductions for legal fees for 2008

and 2009.

II. Dependency Exemption Deduction for Petitioner’s Son

      In general, a taxpayer may claim a dependency exemption deduction “for

each individual who is a dependent (as defined in section 152) of the taxpayer for

the taxable year.” Sec. 151(a), (c). As relevant herein, section 152(a) defines a

dependent to include a “qualifying child” of the taxpayer. An individual must

meet all of the following conjunctive tests to be a qualifying child: (1)
                                         - 15 -

Relationship test; (2) residency test; (3) age test; and (4) support test. Sec.

152(c)(1).

      The parties agree that petitioner’s son satisfies the relationship test in section

152(c)(1)(A) and the age test in section 152(c)(1)(C). The parties disagree as to

whether petitioner’s son meets the residency test in section 152(c)(1)(B) and the

support test in section 152(c)(1)(D).

      Under the residency test, a qualifying child must share the same principal

place of abode as the taxpayer for more than one-half of each year in issue.7 Sec.

152(c)(1)(B). Petitioner and his son did not share the same principal place of

abode for more than one-half of 2008 or 2009 because his son resided in

California alone or with college roommates and petitioner resided in Las Vegas,

Nevada, during those years. See id. Thus, petitioner’s son was not a qualifying

child under section 152(c) for 2008 or 2009. Accordingly, we hold that




      7
         In the case of divorced parents, and only under certain limited
circumstances, a noncustodial parent may be permitted to claim a child as a
“qualifying child” even though the residency test has not been satisfied, if the
custodial parent signs a written release of the claim to the dependency exemption
deduction. See sec. 152(e). We note, however, that even if sec. 152(e) were to
apply in the instant case, petitioner has provided no evidence that Ms. Hsu signed a
written release with respect to their son or daughter for 2008 or 2009.
                                          - 16 -

petitioner is not entitled to a dependency exemption deduction with respect to his

son for the years in issue.8

III. Dependency Exemption Deduction for Petitioner’s Daughter

      In the notice of deficiency, respondent disallowed petitioner’s claimed

dependency exemption deduction with respect to his daughter for 2009. Like

petitioner’s son, the parties agree that petitioner’s daughter satisfies the relationship

test in section 152(c)(1)(A) and the age test in section 152(c)(1)(C). The parties

disagree, however, as to whether petitioner’s daughter meets the residency test in

section 152(c)(1)(B) and the support test in section 152(c)(1)(D).

      The record establishes that petitioner’s daughter, like his son, did not share

with petitioner the same principal place of abode for more than one-half of 2009

because she resided in Hong Kong with her mother from January until July and

subsequently resided at her college in New York for the remainder of the year.9

Therefore, we hold that petitioner’s daughter was not a qualifying child under

section 152(a) in 2009 and we sustain respondent’s disallowance of the

dependency exemption deduction petitioner claimed for her for 2009.



      8
        Because of our holding and the conjunctive nature of the requirements in
sec. 152(c)(1), we need not address the support test provided by sec. 152(c)(1)(D).
      9
          Insofar as sec. 152(e) may otherwise apply, see supra note 7.
                                          - 17 -

IV. Head of Household Filing Status for 2009

        As relevant herein, section 2(b)(1)(A)(i) provides that a taxpayer qualifies as

a head of a household if he maintains as his home a household that constitutes the

principal place of abode of a qualifying child for more than one-half of the taxable

year.

        Respondent disallowed petitioner’s claimed head of household filing status

for 2009. We have previously held that petitioner is not entitled to a dependency

exemption deduction for his son or daughter for 2009 because neither is a qualifying

child. Accordingly, we hold that petitioner is not entitled to elect head of household

filing status for 2009.

V. Accuracy-Related Penalty

        Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the amount of

any portion of an underpayment attributable to negligence or disregard of rules or

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

attempt to comply with tax laws, and “disregard” includes any careless, reckless, or

intentional disregard of rules or regulations. Sec. 6662(c). Negligence also includes

any failure to keep adequate books and records or to substantiate items properly.

Sec. 1.6662-3(b)(1), Income Tax Regs.
                                         - 18 -

      Section 6664(c)(1) provides an exception to the imposition of the accuracy-

related penalty with respect to any portion of an underpayment if the taxpayer

establishes that (1) there was reasonable cause for such portion and (2) the taxpayer

acted in good faith with respect to such portion. The decision as to whether the

taxpayer acted with reasonable cause and in good faith is made on a case-by-case

basis, taking into account the pertinent facts and circumstances. Sec.

1.6664-4(b)(1), Income Tax Regs. Circumstances indicating that a taxpayer acted

with “reasonable cause and good faith include an honest misunderstanding of fact or

law that is reasonable in light of all of the facts and circumstances, including the

experience, knowledge, and education of the taxpayer.” Id.

      Section 7491(c) places on the Commissioner the burden of production with

respect to any penalty, thereby requiring the Commissioner to come forward with

sufficient evidence indicating that it is appropriate to impose the penalty. Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). Once the Commissioner meets his

burden of production, the taxpayer must come forward with persuasive evidence

that the Commissioner’s determination is incorrect. See id.; see also Rule 142(a);

Welch v. Helvering, 290 U.S. at 115.

      The record indicates that petitioner’s underpayment was generally attributable

to negligence, either because of his failure to properly substantiate items or his
                                        - 19 -

failure to comply with tax laws. Accordingly, we hold that respondent has satisfied

his burden of production.

      The record establishes that petitioner failed to properly substantiate the

following items:10

                     Adjustment                       2008              2009

             Schedule C -- other expenses             $ 764         $1,227.00
             Schedule C -- car and truck              1,329          1,566.91
             Schedule C -- contract labor                ---         4,500.00
             Legal fees                                  ---         4,500.24

      Petitioner concedes that he is liable for the accuracy-related penalty with

respect to these items.

      Petitioner argues, however, that he had reasonable cause for, and acted in

good faith with respect to, the following claimed deductions:

                     Adjustment                    2008          2009

             Legal fees                          $8,377.95     $5,509.76
             Schedule C -- depreciation           2,177.00      2,998.00
             Dependency exemption                    ---        3,650.00

      The single largest item (by dollar amount) adjusted by respondent for each

year in issue was petitioner’s claimed deduction for legal fees, and we

      10
         Respondent concedes that petitioner paid all of the $8,377.95 of legal fees
claimed on his 2008 return and $5,509.76 of the legal fees claimed on his 2009
return but maintains that the legal fees were nevertheless nondeductible personal
expenses.
                                          - 20 -

acknowledge that a determination as to whether he is entitled to that deduction rests

heavily on the particular facts of his case. On the basis of his testimony and the

evidence presented at trial, we are satisfied that petitioner, whose command of the

English language is limited, made a good-faith effort to determine his proper tax

liability with respect to the above items and that his underpayment attributable

thereto results from an honest misunderstanding of law that was reasonable under

the circumstances.11 Likewise, we are satisfied that, on basis of the particular facts

of this case, petitioner had reasonable cause for, and acted in good faith with respect

to, his claimed head of household filing status for 2009. Accordingly, we hold that

petitioner is not liable for the accuracy-related penalty with respect to the portion of

the underpayment attributable to the aforementioned items he claimed.

                                      Conclusion

      We have considered all of the arguments advanced by the parties, and, to the

extent not expressly addressed, we conclude that those arguments do not support a

result contrary to our decision herein.


      11
           For instance, petitioner substantiated much of his depreciation expenses
during respondent’s examination of his 2008 and 2009 returns but was unaware that
he was required to capitalize expenses associated with certain types of tools he used
in his business. Moreover, for 2008, respondent allowed both a head of household
filing status and a dependency exemption deduction for petitioner’s daughter, and
petitioner continued to pay child support for his daughter until August 2009.
                                        - 21 -

      To give effect to our disposition of the disputed issues as well as

petitioner’s concessions,


                                                       Decision will be entered

                                                 under Rule 155.
