                  T.C. Summary Opinion 2002-62



                     UNITED STATES TAX COURT



          ROBERT LEE AND REBECCA WATERS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11643-00S.                Filed May 30, 2002.


     Robert Lee Waters, pro se.

     Alexandra E. Nicholaides, for respondent.


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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1   The decision to

be entered in this case is not reviewable by any other court, and

this opinion should not be cited as authority.



     1
       All subsequent section references are to the Internal
Revenue Code in effect for 1997, the taxable year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 2 -

     Respondent determined a deficiency in petitioners’ Federal

income tax, an accuracy-related penalty, and an addition to tax

for 1997 as follows:


                              Penalty     Addition to tax
         Year   Deficiency   Sec. 6662    Sec. 6651(a)(1)
         1997     $7,889     $1,577.80         $441



     After concessions by petitioners,2 the issues for decision

are as follows:

     (1) Whether for 1997, the taxable year in issue, petitioners

are entitled to a deduction under section 165(c)(2) for a loss

attributable to (a) the unauthorized removal of furnishings and

fixtures from an apartment building in 1996 and (b) the

foreclosure on such building in 1996.    We hold that they are not.

     (2) Whether petitioners are liable for the accuracy-related

penalty under section 6662(a) for negligence or intentional

disregard of rules or regulations.     We hold that they are to the

extent provided herein.



     2
       In the petition, petitioners disputed the entire
deficiency determined by respondent in the notice of deficiency.
However, petitioners did not assign any error or allege any facts
with respect to respondent’s determinations regarding: (1) The
receipt of unreported nonemployee compensation in the amount of
$3,525; (2) the imposition of self-employment tax on such
nonemployee compensation; and (3) the disallowance of itemized
deductions for charitable contributions and unreimbursed employee
expenses. Moreover, at trial, petitioners did not dispute any of
these adjustments. Accordingly, we regard petitioners as having
conceded these matters.
                                - 3 -

     (3) Whether petitioners are liable for an addition to tax

under section 6651(a)(1) for failure to timely file an income tax

return.   We hold that they are.

                             Background

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

found.    Petitioners resided in Southfield, Michigan, at the time

that their petition was filed with the Court.

A.   Petitioners

     During 1997, the taxable year in issue, petitioner Robert

Lee Waters (petitioner) was employed full-time as a teacher by

the Board of Education of Detroit, Michigan.    During that same

year, petitioner Rebecca Waters was a housewife.

B.   Acquisition of the Hazelwood Property

     In June 1986, a group of six individuals (the land contract

vendees) purchased a parcel of improved real estate in Detroit,

Michigan (the Hazelwood property), under a land contract.      The

land contract vendees included petitioners, petitioner’s father,

Marland and Dortha Moore, and Marland Moore’s mother.    The

Hazelwood property consisted of a 38-unit, 4-story apartment

building with an elevator.   The memorandum of land contract that

was recorded with the Register of Deeds for Wayne County,

Michigan, did not disclose the purchase price of the Hazelwood

property.
                               - 4 -

     In March 1987, the land contract vendees received a warranty

deed to the Hazelwood property.   The warranty deed recites that

the Hazelwood property was conveyed for the “full consideration”

of $55,000.

     In October 1988, Marland and Dortha Moore and Marland

Moore’s mother conveyed their interest in the Hazelwood property

to petitioners and petitioner’s father.   According to the quit

claim deed, the conveyance was for the “full consideration” of

$50,000.

C.   Mortgage on the Hazelwood Property

     In February 1990, a loan in the amount of $70,000 was

obtained from First Independence National Bank of Detroit (First

Independence).   As security for the loan, petitioners and

petitioner’s father gave First Independence a mortgage on the

Hazelwood property.

D.   Rental of the Hazelwood Property

     In or about May 1994, petitioner3 purportedly entered into a

lease with a nonprofit housing corporation, operated by Reverend

Jim Holley, which converted the Hazelwood property into a

homeless shelter.   This arrangement allegedly ended in February

or March 1996, at which time petitioner took back possession of



     3
        For the sake of convenience, we may sometimes refer to
petitioner as the owner of the Hazelwood property even though
petitioners and petitioner’s father were the record owners of the
property.
                                - 5 -

the building only to discover that “Everything had been trashed.”

In this regard, petitioner testified at trial as follows:

           And see, in these apartments I had 38 stoves, 38
      refrigerators, and like that. All this was gone. When
      I came back there was no stoves, no refrigerators, no
      faucets, no shower heads, no knobs on the door. I mean
      everything. No light fixtures in the hall and
      whatever, and this is what I came back to and I had to
      try to refurbish.

      Petitioner did not maintain insurance on the Hazelwood

property, and at trial he made no mention of ever having filed

any police report.    Regardless, petitioner never pursued any

recovery against either the nonprofit housing corporation or its

operator because they were insolvent.

E.   Foreclosure and Mortgage Sale of the Hazelwood Property

      As early as 1991, petitioner began having difficulty in

making payments to First Independence.    Indeed, in June 1991,

First Independence filed a lis pendens with the Register of Deeds

for Wayne County, Michigan.

      Petitioner continued having difficulty in making payments to

First Independence.    In particular, petitioner did not make all

payments in 1995, and he did not make any payment in 1996.

      Foreclosure proceedings against the Hazelwood property were

commenced by First Independence in 1996.    The proceedings

culminated on June 27, 1996, with a mortgage foreclosure sale.4


      4
        The outstanding balance at that time was $70,686,
consisting of principal of $58,148, interest of $11,214, and an
                                                   (continued...)
                               - 6 -

At that time, First Independence, as highest bidder with an offer

of $50,000 at public auction, received a sheriff’s deed dated

June 27, 1996 (the sheriff’s deed).

     The sheriff’s deed gave notice, in part, that “During the

six months immediately following the sale, the property may be

redeemed”.

     Neither petitioner nor petitioner Rebecca Waters nor

petitioner’s father redeemed the Hazelwood property.

     In March 1997, First Independence conveyed the Hazelwood

property by warranty deed to an unrelated third-party.

F.   Petitioners’ Income Tax Return

     On May 27, 1998, respondent received petitioners’ U.S.

Individual Income Tax Return, Form 1040, for 1997.    The return

was signed by petitioners and dated April 28, 1998.    Petitioners

did not apply for, or receive, any extension of time to file.

     On their return, petitioners reported adjusted gross income

of $64,806.99 and taxable income of zero.   Petitioners reported

no tax liability and claimed a refund in the amount of the tax

that had been withheld from petitioner’s wages as a teacher.

     Petitioners itemized their deductions for 1997.    In this

regard, petitioners attached Schedule A, Itemized Deductions, to

their return and claimed total itemized deductions of $311,514.



     4
      (...continued)
escrow deficiency of $1,324.
                                - 7 -

Of this amount, $295,000 was claimed for a casualty or theft loss

in respect of the Hazelwood property.

      In support of their claimed casualty or theft loss,

petitioners attached Form 4684, Casualties and Thefts, to their

return.    In Section B, Business and Income-Producing Property,

petitioners computed their claimed loss as follows:

      Cost or adjusted basis                     $300,000
      Less: insurance or other reimbursement        -0-
      Fair market value before casualty/theft     360,000
      Fair market value after casualty/theft       65,000
      Diminution in fair market value             295,000
      Lesser of: cost or adjusted basis or
         Diminution in fair market value          295,000
      Casualty or theft loss                      295,000



                             Discussion

A.   Loss Deduction5

      1.   The Parties’ Contentions

      Petitioners contend they are entitled to a casualty or theft

loss based on theft of the furnishings and fixtures of the

Hazelwood property and the subsequent foreclosure on the property

itself.    Petitioners further contend that they are entitled to

deduct the loss in 1997 because that was the year in which they

surrendered possession of the Hazelwood property.    In this

regard, petitioners allege that after the foreclosure sale on


      5
       We decide this issue without regard to the burden of
proof. Accordingly, we need not decide whether the general rule
of sec. 7491(a)(1) is applicable to this issue. See Higbee v.
Commissioner, 116 T.C. 438 (2001).
                                - 8 -

June 27, 1996, they remained in possession of the Hazelwood

property until mid-January 1997, when, for the first time since

the foreclosure sale, they were contacted by First Independence

and told that the bank would immediately take possession of the

property.

     Respondent acknowledges that a theft loss may be deductible,

as may be a loss attributable to the foreclosure of property.

However, respondent contends that any loss to which petitioners

may be entitled is deductible in 1996, the year in which any

theft was allegedly discovered and the year in which petitioners’

equity of redemption was extinguished.

     2.   Deductibility of Losses, in General

     As a general rule, section 165(a) allows as a deduction any

loss sustained during the taxable year and not compensated for by

insurance or otherwise.    However, in the case of an individual,

section 165(c) limits the deduction to: (1) Losses incurred in a

trade or business; (2) losses incurred in any transaction entered

into for profit; and (3) losses of property not connected with a

trade or business or with a transaction entered into for profit,

if such losses arise from fire, storm, shipwreck, or other

casualty, or from theft.

     A loss is “treated as sustained during the taxable year in

which the loss occurs as evidenced by closed and completed

transactions and as fixed by identifiable events occurring in
                                 - 9 -

such taxable year.”     Sec. 1.165-1(d)(1), Income Tax Regs; see

also sec. 1.165-1(b), Income Tax Regs.     However, if there exists

a claim for reimbursement with respect to which there is a

reasonable prospect of recovery, no portion of a loss with

respect to which reimbursement may be received is “sustained”

until it can be ascertained with reasonable certainty whether or

not such reimbursement will be received.     Sec. 1.165-1(d)(2)(i),

Income Tax Regs.

     3.     Casualty and Theft Losses

     Under section 165(a), a loss arising from theft is sustained

during the taxable year in which the taxpayer discovers the loss.

See sec. 165(e); sec. 1.165-1(d)(3), Income Tax Regs; sec. 1.165-

8(a)(2), Income Tax Regs.     The term theft includes, but is not

limited to, larceny, embezzlement, and robbery.     See sec. 1.165-

8(d), Income Tax Regs.     Whether a theft exists “depends upon the

law of the jurisdiction wherein the particular loss occurred.”

Manteleone v. Commissioner, 34 T.C. 688, 692 (1960).

     Petitioner urges us to find that the theft6 of the

furnishings and fixtures of the Hazelwood property occurred in

1997.     At trial, however, petitioner candidly admitted that he

discovered the loss of such furnishings and fixtures early in

1996 when he regained possession of the building from his tenant.


     6
        In order to expedite our discussion, we shall accept that
any unauthorized removal of furnishings and fixtures from the
Hazelwood property constituted a theft under Michigan law.
                                  - 10 -

Petitioner’s testimony at trial graphically illustrates this

admission:

          Q: Okay.       But the damage occurred prior to ‘97.
     Correct?

            A:   Yes.

            Q:   And the foreclosure occurred in ‘96.

            A:   It started –- yes.

          Q: Okay. So there was no event –- no damage or
     vandalization in ‘97 that gave rise to the loss?

            A:   No.    The rise to the loss happened in ‘96, not

     ‘97.

     It is clear, therefore, that any casualty or theft loss that

petitioner may have sustained from an unauthorized removal of

furnishings and fixtures from the Hazelwood property was not

sustained in 1997 but in an earlier year(s).      See sec. 165(e);

sec. 1.165-1(d)(3), Income Tax Regs; sec. 1.165-8(a)(2), Income

Tax Regs.    Thus, not only did petitioner discover the loss, at

the latest, in February or March 1996, but no reasonable prospect

of reimbursement existed at that time that would have served to

defer recognition of the loss to 1997.

     Equally unpersuasive is petitioners’ related contention that

the foreclosure of the Hazelwood property was tantamount to a

casualty loss.     Rather, the disposition of mortgaged property

at a foreclosure sale is treated as a sale or exchange from which

the mortgagor may realize gain or loss under section 1001.       See
                                - 11 -

Helvering v. Hammel, 311 U.S. 504 (1941).    We therefore turn to

that matter.

     4.   Foreclosure Loss

     Petitioner contends that the foreclosure loss occurred in

1997 because “That’s when the bank came and said: 'This is my

building now'.”   Respondent contends that the loss occurred in

1996, the year in which the period of redemption expired and the

sheriff’s deed became final.

     In Michigan, the period of redemption from a foreclosure

sale depends on a number of factors, including the type and size

of the property, the date of the mortgage, and the amount of the

debt owed.   As applicable herein, a 6-month period of redemption

applies for mortgages executed on or after January 1, 1965, on

multifamily residential property in excess of four units and not

more than 3 acres in size if more than two-thirds of the mortgage

debt remains outstanding.    Mich. Comp. Laws Ann. sec.

600.3240(7), (8) (West 2000).

     Because the right to redeem is statutory, the redemption

period may not be extended by a court, absent unusual

circumstances such as fraud.    Flynn v. Korneffel, 451 Mich. 186,

207 (1996); see Cameron v. Adams, 31 Mich. 426, 428 (1875)

(refusing to extend the redemption period despite the fact that

the mortgagor had paid part of the redemption amount and a

serious illness had prevented him from conducting his personal
                              - 12 -

business during the redemption period).

     When the redemption period expires, both legal title and the

right to possession vest in the purchaser.     Mich. Comp. Laws Ann.

sec. 600.3236 (West 2000); Bankers Trust Co. v. Rose, 322 Mich.

256, 259 (1948); Shelby Co. v. Dickinson, 259 Mich. 197, 198

(1932).   Possession of the property by the mortgagor after the

redemption period expires is unlawful, and no notice to quit is

necessary.   Shelby Co. v. Dickinson, supra.

     In view of the foregoing, it is clear that upon the

expiration of the 6-month redemption period on December 27, 1996,

petitioner no longer had any ownership right or possessory

interest in the Hazelwood property.    Equally clear is the fact

that any delay by First Independence to take actual possession of

the property is without legal consequence.     Thus, by virtue of

Michigan law, any loss that petitioner may have sustained from

the foreclosure on the Hazelwood property was sustained in 1996,

the year in which petitioner’s equity of redemption was

extinguished.   See sec. 1.165-1(d)(1), Income Tax Regs; see also

sec. 1.165-1(b), Income Tax Regs.

     5.   Conclusion

     Because no loss was sustained in 1997, the only taxable year

before the Court, we hold that the deduction in issue is not

allowable for that year.
                                - 13 -

B.   Accuracy-related Penalty

       Next, we consider whether petitioners are liable for the

accuracy-related penalty under section 6662(a).

       Section 6662(a) and (b)(1) provides that if any portion of

an underpayment of tax is attributable to negligence or disregard

of rules or regulations, then there shall be added to the tax an

amount equal to 20 percent of the amount of the underpayment that

is so attributable.    The term “negligence” includes any failure

to make a reasonable attempt to comply with the provisions of the

internal revenue laws, and the term “disregard” includes any

careless, reckless, or intentional disregard.    Sec. 6662(c); see

sec. 1.6662-3(b)(2), Income Tax Regs.     However, no penalty shall

be imposed with respect to any portion of an underpayment if it

is shown that there was a reasonable cause for such portion and

that the taxpayer acted in good faith with respect to such

portion.    Sec. 6664(c).

       Applicable to court proceedings arising in connection with

examinations commencing after July 22, 1998, section 7491(c)

places on the Commissioner the burden of production with respect

to a taxpayer’s liability for any penalty or addition to tax.

See Internal Revenue Service Restructuring and Reform Act of

1998, Pub. L. 105-206, sec. 3001(a), (c)(1), 112 Stat. 685, 726,

727.    However, the taxpayer still bears the burden of proving

that the negligence penalty is inapplicable.    Rule 142(a);
                              - 14 -

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933); Higbee v. Commissioner, 116

T.C. 438, 446-447 (2001).

     As we see it, the principal issue in this case involves an

issue of timing; i.e., the year in which a loss may properly be

deducted.   We have decided that issue in respondent’s favor.

However, we can appreciate how petitioner might have concluded

that the foreclosure of the Hazelwood property was not complete

until January 1997, since that is when he apparently surrendered

possession of the property.   Similarly, although petitioner may

have discovered the unauthorized removal of furnishings and

fixtures in 1996, we can appreciate how he might have concluded

that such removal was inextricably connected with the ultimate

fate of the Hazelwood property, which, at the time, was either in

or on the verge of foreclosure proceedings.

     In view of the foregoing, we do not sustain respondent’s

determination of the penalty under section 6662(a) to the extent

that the underpayment of tax in this case is attributable to the

loss deduction under section 165(c)(2).

     In contrast, we sustain respondent’s determination of the

penalty under section 6662(a) to the extent that the underpayment

of tax in this case is attributable to the adjustments conceded

by petitioners.   See supra note 2.    In this regard, we observe

that a taxpayer’s failure to keep adequate books and records or
                              - 15 -

to properly substantiate items constitutes negligence.    Sec.

1.6662-3(b)(1), Income Tax Regs.    In addition, negligence is

strongly indicated where a taxpayer fails to include on an income

tax return an amount of income shown on an information return.

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

C.   Addition To Tax Under Section 6651(a)(1)

      Finally, we consider whether petitioners are liable for an

addition to tax under section 6651(a)(1).

      Section 6651(a)(1) imposes an addition to tax for failure to

timely file an income tax return.    The addition to tax may be

avoided if the failure to timely file is due to reasonable cause

and not willful neglect.   “Reasonable cause” contemplates that

the taxpayer exercised ordinary business care and prudence and

was nonetheless unable to file a return within the prescribed

time.   United States v. Boyle, 469 U.S. 241, 246 (1985); sec.

301.6651-1(c)(1), Proced. & Admin. Regs.    “Willful neglect” means

a conscious, intentional failure or reckless indifference.

United States v. Boyle, supra at 245.

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

production with respect to a taxpayer’s liability for any penalty

or addition to tax.   However, as previously mentioned, the

taxpayer still has the burden of proving that the Commissioner's

determination of the addition to tax is erroneous.    Rule 142(a);

INDOPCO, Inc. v. Commissioner, supra; Welch v. Helvering, supra;
                                 - 16 -

Higbee v. Commissioner, supra; BJR Corp. v. Commissioner, 67 T.C.

111, 131 (1976); Bebb v. Commissioner, 36 T.C. 170 (1961).

       Absent an extension of time to file, petitioners’ 1997

income tax return was required to be filed by Wednesday, April

15, 1998.    See sec. 6072(a).   However, petitioners did not apply

for, or receive, any extension of time to file, and their tax

return (bearing their signatures and the date of April 28, 1998)

was not received by respondent until May 27, 1998.       Such evidence

satisfies respondent’s burden of production under section

7491(c).

       At trial, petitioners did not introduce any evidence

regarding reasonable cause or lack of willful neglect.       Indeed,

apart from arguing that there is no deficiency in income tax,

petitioners have not argued that they should be excused from

liability for the addition to tax.        Finally, there is nothing in

the record to suggest that petitioners’ failure to timely file

was due to reasonable cause and not willful neglect.

Accordingly, we sustain respondent’s determination on this is

sue.


D.   Conclusion

       Reviewed and adopted as the report of the Small Tax Case

Division.
                             - 17 -

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

well as petitioners’ concessions, see supra note 2,



                                        Decision will be entered

                                   under Rule 155.
