                  T.C. Summary Opinion 2005-72



                     UNITED STATES TAX COURT



                SHANNON D. MULLINS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5144-04S.            Filed June 6, 2005.


     Shannon D. Mullins, pro se.

     Lauren B. Epstein, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect when the petition was filed.   The decision

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

opinion should not be cited as authority.   Unless otherwise

indicated, all subsequent section references are to the Internal

Revenue Code in effect at relevant times, and all subsequent Rule

references are to the Tax Court Rules of Practice and Procedure.
                                - 2 -

     Respondent determined a deficiency of $6,532 in petitioner’s

Federal income tax for 2001, a section 6651(a)(1) addition to tax

of $1,568, and a section 6662(a) accuracy-related penalty of

$1,306.    Following concessions, the issues for decision are:   (1)

Whether petitioner received unreported income as a shareholder in

an S corporation, as reported on Schedule K-1; (2) whether

petitioner received capital gain income from the sale of his

shares in an S corporation; (3) whether petitioner is liable for

an addition to tax under section 6651(a)(1); and (4) whether

petitioner is liable for an accuracy-related penalty under

section 6662.

                             Background

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

found.    The stipulation of facts and the attached exhibits are

incorporated by this reference.    At the time of filing the

petition, petitioner resided in Cape Coral, Florida.

     Petitioner and Rolan Taylor (Mr. Taylor) were each 50-

percent shareholders in Edgington, Mullins, & Taylor Funeral

Home, Inc. (Edgington Mullins), an S corporation doing business

in Winchester, Kentucky.    Petitioner was also employed by

Edgington Mullins as an embalmer.

     Petitioner purchased his one-half interest in Edgington

Mullins from Betty Edgington for approximately $35,000 in 1998.

Petitioner’s business relationship with Mr. Taylor deteriorated,
                               - 3 -

and in February 2001, they began discussing the termination of

their association.   As petitioner testified:    “After my business

relationship started to dissolve with my business partner, I

approached him, either you buy me out or I buy him out”.

     The parties agreed that Mr. Taylor would purchase

petitioner’s one-half interest in Edgington Mullins for $40,000,

effective on April 3, 2001.   On February 14, 2001, petitioner

faxed a letter to the Kentucky Board of Embalmers and Funeral

Directors and notified them that “an upcoming sale of the

business is pending” and that he would not be operating the

Edgington Mullins funeral business as of April 3, 2001.     The

parties did not enter into a written agreement evidencing the

sale of petitioner’s stock to Mr. Taylor at that time.

     Petitioner did not receive any payment of the purchase price

from Mr. Taylor on April 3, 2001.    According to petitioner, Mr.

Taylor was unable to secure the financing he needed to purchase

petitioner’s shares.   Although petitioner did not receive any

payment for his shares, he discontinued all his daily activities

for the business and claimed that he did not receive any profits

from the business after that date.     As petitioner testified:

“Your Honor, the deal was done April 3.     The only outstanding

issue was for him to get financing and pay me.     I reiterate, I

had nothing to do with this business whatsoever after April 3.      I
                               - 4 -

didn’t mow the grass.   I didn’t pull in the parking lot.    I

didn’t embalm a body, nothing whatsoever”.

     By the fall of 2001, petitioner still had not received any

payment of the purchase price from Mr. Taylor.

     On October 17, 2001, the parties entered into a written

agreement regarding the sale of petitioner’s stock (stock

purchase agreement).1   According to the stock purchase agreement,

Mr. Taylor agreed to purchase petitioner’s shares of Edgington

Mullins stock for an aggregate sales price of $40,000 on an

undefined “Closing Date”.   Attached to the stock purchase

agreement was a letter from petitioner to Mr. Taylor, dated

October 15, 2001, in which petitioner agreed to accept

installment payments of the $40,000 purchase price, as follows:

     $7,500 will [be] paid upon receipt of this letter with
     the balance payable when you have received financing
     for the payoff of Betty Edgington and myself.
     According to you, financing should be achieved within
     120 days of this letter. Rolan, can we please put this
     business matter to rest. It would be in the best
     interest to both of us to do so.




     1
        The copy of the stock purchase agreement introduced into
the record was not signed by the parties. Petitioner testified:
“As you can see, you do not see anything with Rolan Taylor’s
signature on it. He was very difficult to deal with. This
dragged on for a very long time. The deal was done. He wouldn’t
sign anything. Finally when I did get the monies, he said, ‘By
you signing this check, that makes our agreement -- I own your
interest in the funeral home’”.
                                - 5 -

On or around October 26, 2001, petitioner received a payment of

$8,000 from Mr. Taylor.    Petitioner did not receive any payment

of the remaining $32,000 in taxable year 2001.

     In an agreement dated March 28, 2002, petitioner agreed to

accept a lump sum payment of $20,000 from Mr. Taylor in lieu of

the $32,000 owed to him under the terms of their stock purchase

agreement.   On April 2, 2002, petitioner received a final payment

from Mr. Taylor of $20,000.

     For taxable year 2001, Edgington Mullins prepared and sent

to petitioner a Schedule K-1 (Form 1120S), Shareholder’s Share of

Income, Credits, Deductions, etc.   The Schedule K-1 computed

petitioner’s share of Edgington Mullins’ income, credits and

deductions as if he was a 50-percent shareholder for the entire

taxable year as follows:   Ordinary income of $25,686, ordinary

dividends of $100, and a section 179 expense deduction of

$6,282.2

     On his individual return for 2001, petitioner did not report

any of the items of income or deductions from the Schedule K-1.

Further, petitioner did not report a gain or loss from the sale



     2
        The Schedule K-1 relating to petitioner’s share of
income, credits, and deductions also reported a charitable
contribution deduction of $725 and an investment expense
deduction of $100. These items are deductible on a shareholder’s
Schedule A, Itemized Deduction. However, petitioner claimed the
applicable standard deduction of $3,800 on his 2001 return, and
since these items would not provide petitioner any tax benefit,
they are not at issue.
                               - 6 -

of his stock in Edgington Mullins.     Petitioner’s return was

prepared by a professional tax return preparer, but petitioner

acknowledged that he did not inform his tax return preparer that

he sold his stock in Edgington Mullins.     The return was signed by

the tax return preparer on August 5, 2002, and by petitioner on

August 10, 2002, but was not received by the Internal Revenue

Service until November 2, 2002.

     By notice of deficiency dated December 22, 2003, respondent

determined a deficiency of $6,532, as well as an addition to tax

for filing a delinquent return under section 6651(a)(1) and an

accuracy-related penalty under section 6662(a).    Respondent

determined the deficiency based upon petitioner’s receiving

unreported income reflected on the Schedule K-1.     At trial,

respondent conceded that petitioner sold his stock in Edgington

Mullins during 2001 and is responsible for only a pro rata share

of the items of income and deductions reported on the Schedule K-

1.   Respondent, however, asserts that petitioner received

unreported capital gains from the sale of his Edgington Mullins

stock, and this new issue was tried by the consent of the

parties.   See Rule 41(b).

                             Discussion

     In general, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears

the burden of showing that the determinations are in error.      Rule
                               - 7 -

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).   Pursuant

to section 7491, the burden of proof as to factual matters shifts

to the Commissioner under certain circumstances.   Petitioner has

neither alleged that section 7491(a) applies nor established his

compliance with the requirements of section 7491(a)(2)(A) and (B)

to substantiate items, maintain records, and cooperate fully with

respondent’s reasonable requests.   Therefore, the burden of proof

remains on petitioner with respect to the issues set forth in the

notice of deficiency.

      As to the new issue tried by the consent of the parties,

the burden of proof is on respondent.    Rule 142(a); Wott v.

Commissioner, T.C. Memo. 1986-319, affd. without published

opinion 819 F.2d 1143 (7th Cir. 1987).   In addition, respondent

has the burden of production under section 7491(c) with respect

to the addition to tax and penalty.

A.   Petitioner’s Pro Rata Share of Income From Edgington Mullins

      In determining his or her income tax, a shareholder in an S

corporation must take into account his or her pro rata share of

the S corporation’s “nonseparately computed income or loss”.

Sec. 1366(a)(1)(B).   A selling shareholder’s pro rata share of S

corporation income for a taxable year is calculated by allocating

an equal portion of the corporation’s items to each day in the
                                - 8 -

year.3   Sec. 1377(a)(1).   Under this method, a selling

shareholder’s pro rata share of income for the year of sale will

be affected by corporate items realized after the sale date,

because a portion of such items will be allocated to his or her

period of ownership.

     In the present case, petitioner admits that he owes taxes

for a portion of the items of S corporation income and deductions

reported on the Schedule K-1, but he argues that his pro rata

share should be computed with a date of sale of April 3, 2001.

Respondent contends that the date of sale occurred on October 26,

2001, the date on which petitioner received his first payment for

his stock.

     Although petitioner claims that “the deal was done” on April

3, 2001, there was no written agreement evidencing a sale of the

shares to Mr. Taylor, and petitioner did not receive any payment

for his shares.   The only evidence introduced by petitioner was a

letter faxed to the Kentucky Board of Embalmers and Funeral

Directors on February 14, 2001, which informed the Commonwealth’s

licensing agency of an “upcoming sale of the business”.    This




     3
        Under some circumstances, a selling shareholder may elect
to compute the selling shareholder’s pro rata share as if the
taxable year terminated on the sale date. Sec. 1377(a)(2).
Petitioner did not make such an election to “close the books” on
the date of sale.
                                 - 9 -

letter, however, does not represent evidence of a consummation of

a sale of petitioner’s shares.

      Petitioner and Mr. Taylor did not enter into a written stock

purchase agreement until October 17, 2001.   The stock purchase

agreement provided that Mr. Taylor would pay petitioner an agreed

upon purchase price on an undefined “Closing Date”.   Mr. Taylor’s

first payment to petitioner for his shares occurred on October

26, 2001, when petitioner received a check for $8,000.   The

payment of the first installment of the purchase price in this

case is the best evidence of the sale of petitioner’s shares.

      Accordingly, we conclude that petitioner sold his shares of

Edgington Mullins stock on October 26, 2001, for purposes of

computing petitioner’s pro rata share of the S corporation’s

items of income, credits, and deductions.

B.   Capital Gain or Loss From Sale of Edgington Mullins Stock

      The gain or loss realized from the sale of property is

measured by the “amount realized” less the “adjusted basis” of

the property sold.   Sec. 1001(a).   The amount realized consists

of “the sum of any money received plus the fair market value of

the property (other than money) received”.   Sec. 1001(b).   A

shareholder’s adjusted basis in his or her S corporation stock is

determined under section 1367, which provides a list of the

positive and negative adjustments to the shareholder’s basis in

his or her stock for items of income, loss, and deductions of an
                                 - 10 -

S corporation during the year.     Since petitioner held his shares

of Edgington Mullins stock as a capital asset, any gain or loss

from the sale of the shares will be characterized as a capital

gain or loss.   See sec. 1221.

     A taxpayer must generally recognize the entire amount of the

realized gain or loss.   Sec. 1001(c).    However, where there was

an “installment sale”, a taxpayer can use the installment method

to defer recognition of income.4     See sec. 453.   An installment

sale is a “disposition of property where at least 1 payment is to

be received after the close of the taxable year in which the

disposition occurs”.   Sec. 453(b)(1).    Under the installment

method, a taxpayer recognizes a proportion of the payment

received in any given year commensurate with the percentage that

the gross profit bears to the total contract price.      Sec. 453(c);

Raymond v. Commissioner, T.C. Memo. 2001-96.

     As discussed herein, petitioner sold his shares of Edgington

Mullins stock on October 26, 2001, for a total of $40,000.5

Petitioner’s adjusted basis in his shares of Edgington Mullins




     4
        Generally, income from an installment sale is determined
under the installment method unless a taxpayer elects out of the
installment method. Sec. 453(d).
     5
        The total sales price was later reduced in taxable year
2002 to $28,000 when petitioner agreed to accept a payment of
$20,000 for the $32,000 still owed him under the stock purchase
agreement.
                               - 11 -

stock on the date of disposition was $9,2576, and petitioner

would have a realized and recognized capital gain of $30,743

under section 1001 for 2001.    However, since petitioner received

a payment of $8,000 from Mr. Taylor in 2001, and a payment of

$20,000 in 2002, the amount of income petitioner must take into

account for 2001 from the sale of his shares of Edgington Mullins

stock should be computed under the installment method as

described herein.7

C.   Addition to Tax

     1.   Failure To File Under Section 6651(a)(1)

     Generally, income tax returns made on the basis of the

calendar year must be filed on or before the 15th day of April

following the close of the calendar year.   Sec. 6072(a).   Section

6651(a)(1) imposes an addition to tax for a taxpayer’s failure to

file a required return on or before the specified filing due

date, including extensions.    The amount of the addition is equal

to 5 percent of the tax required to be shown on the return if the



     6
        Petitioner’s Schedule K-1, which was prepared on the
basis that petitioner was a 50-percent shareholder for the entire
taxable year 2001, reflected a stock basis at the end of 2001 of
$7,525. In Respondent’s Memorandum of Authorities, filed
posttrial on Nov. 16, 2004, respondent conceded that petitioner
had a basis in his shares of Edgington Mullins stock of $9,257 on
the date of sale.
     7
        A Rule 155 computation will be required in order to
calculate the (1) pro rata share of petitioner’s S corporation
income and (2) the gain or loss from the sale of his interest in
the S corporation.
                                - 12 -

failure to file is for not more than 1 month, with an additional

5 percent for each additional month or fraction thereof during

which a return is not filed, not to exceed 25 percent in the

aggregate.   Sec. 6651(a)(1).   An addition to tax under section

6651(a)(1) is inapplicable, however, if the taxpayer’s failure to

file the return was due to reasonable cause and not due to

willful neglect.   Id.

     Respondent has introduced evidence sufficient to establish

the appropriateness of imposing additions to tax under section

6651(a)(1), and petitioner has the burden of proving that

respondent’s determination is incorrect.    See Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001).

     Petitioner’s 2001 return was prepared by a professional tax

return preparer on August 5, 2002, and signed by petitioner on

August 10, 2002.   Petitioner admits that he did not file an

extension of time for filing a return.    Petitioner did not argue

that his failure to file a timely return was due to reasonable

cause, only that he filed it earlier than the date that

respondent received it.   Petitioner testified that he mailed the

return on or around August 10, 2002, and could not explain why

respondent did not receive it until November 2, 2002.

     Petitioner failed to introduce any credible evidence that he

mailed his 2001 return on or around August 10, 2002, and we are

not required to accept petitioner’s uncorroborated testimony.
                                - 13 -

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).     As such, we

sustain respondent’s determination that petitioner is liable for

an addition to tax under section 6651(a)(1), and we conclude that

the amount of the addition should be computed based upon a filing

date of November 2, 2002.

     2.     Accuracy-related Penalty Under Section 6662

     Section 6662(a) provides that a taxpayer may be liable for a

penalty of 20 percent of the portion of an underpayment of tax

attributable to (1) a substantial understatement of tax or (2)

negligence or disregard of rules or regulations.     Sec. 6662(a)

and (b)(1) and (2).     The accuracy-related penalty does not apply

to any portion of an underpayment of tax if it is shown that

there was reasonable cause for such portion and that the taxpayer

acted in good faith.     Sec. 6664(c)(1).

     An “understatement of tax” is substantial if it exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000.     Sec. 6662(d)(1) and (2).

     “Negligence” is defined as any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code.     Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

Generally, a taxpayer is negligent if he or she fails to make a

reasonable attempt to ascertain the correctness of a deduction,

credit, or exclusion on a tax return that would seem to a

reasonable and prudent person to be “too good to be true”.      Sec.
                                - 14 -

1.6662-3(b)(1)(ii), Income Tax Regs.       “Disregard” includes any

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

     Respondent has introduced evidence sufficient to establish

the appropriateness of imposing an accuracy-related penalty under

section 6662.    Higbee v. Commissioner, supra at 446-447.

Petitioner has the burden of proving that respondent’s

determination is incorrect with respect to the portion of the

underpayment of tax attributable to items set forth in the notice

of deficiency.    Id.   Respondent has the burden of proof in regard

to the portion of the underpayment attributable to the new issue

(the capital gain income).    Rule 142(a); Harrison v.

Commissioner, T.C. Memo. 1994-268.       The facts of this case permit

us to opine on this issue on the merits without regard to which

party has the burden of proof.

     Respondent contends that petitioner was negligent both in

failing to report both his pro rata share of income and

deductions from Edgington Mullins, as reported on Schedule K-1,

and in failing to report capital gains from the sale of his

shares of Edgington Mullins stock.       We agree.   Petitioner’s only

argument at trial was that he believed that he sold his Edgington

Mullins stock at a loss because he originally purchased his

shares for $35,000 and only received $28,000 when he sold the

shares to Mr. Taylor.    Petitioner admits that he did not inform

his tax preparer that he sold his interest in Edgington Mullins
                             - 15 -

in 2001, and it is unclear whether petitioner provided the

preparer with a copy of the Schedule K-1.   Petitioner made no

attempt to ascertain the correct amount of tax.   Petitioner owned

his interest in the S corporation since 1998,8 and even if he

sold the business in April 2001 as he contends, a reasonable

taxpayer would have known he was responsible for a pro rata share

of the S corporation’s income.   Further, even if petitioner

believed that he incurred a loss from the sale of his Edgington

Mullins stock, a reasonable taxpayer would have reported the

transaction as a capital loss.   Accordingly, we sustain a penalty

under section 6662.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,


                                         Decision will be

                                    entered under Rule 155.




     8
        In his Memorandum of Authorities, respondent stated that
petitioner reported losses from Edgington Mullins for all years
prior to 2001 and that petitioner must have known that Schedule
K-1 items are reportable on his individual return.
