                  T.C. Summary Opinion 2004-174



                     UNITED STATES TAX COURT



          NASSER AND SHAHPAR GOLSHANI, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11286-03S.           Filed December 27, 2004.


     Michael D. Daniels, for petitioners.

     Valeri L. Makarewicz, 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 at the time 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, subsequent section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule

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

     Respondent determined that petitioners are liable for a

deficiency in their 1999 Federal income tax of $4,009, an

addition to tax under section 6651(a)(1) of $1,002.25, and a

penalty pursuant to section 6662(a) of $801.80.    The issues for

decision are:    (1) Whether petitioners are entitled to deduct a

net operating loss carryover attributable to losses from the

expropriation of four parcels of property by the Iranian

Government; (2) whether petitioners are liable for the

delinquency addition to tax under section 6651(a)(1); and (3)

whether petitioners are liable for the accuracy-related penalty

under section 6662(a).

                             Background

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

found.    The stipulation of facts and attached exhibits are

incorporated herein by this reference.    At the time the petition

was filed, petitioners resided in Los Angeles, California.

     Petitioners were citizens and residents of Iran prior to

1988.    Petitioner, Nasser Golshani (hereinafter petitioner),

worked as a civilian engineer in Iran prior to 1970.    In the

early 1970s petitioner formed Fabris Construction Co. (Fabris)

with two other individuals.1   Fabris did business with the

Government of Iran.   From approximately 1970 through 1975,


     1
        While the record is not entirely clear, the parties
appear to assume that Fabris was a joint venture in which
petitioner had a one-third interest.
                                - 3 -

petitioner and his associates purchased four business properties

in Iran for development.   Petitioner invested substantial sums of

money for purchase of the properties and for improvements and

equipment.   While the cost of the properties and improvements is

not entirely clear, petitioner asserts that the fair market value

of his one-third investment interest in the properties exceeded

one million dollars in 1994/1995.

     In 1979 the Shah of Iran was deposed in a revolution.     The

Ayatollah Khomeini was installed as the new leader of Iran.2     The

Iran-Iraq war commenced in 1981 and ended in approximately 1988.

About that time, petitioners and their children escaped from Iran

and gained political asylum in the United States.

     There were dramatic changes in petitioner’s business after

the 1979 revolution and during the Iran-Iraq war.   As a person of

Jewish faith, he was excluded from business opportunities with

any governmental units.    Additionally, revolutionaries occupied

some of the land and improvements and also appropriated

equipment.   With respect to one of the parcels of property in

Mobarak Abad (Tehran), persons began building homes on the land

in approximately 1981 and 1982.   Petitioner and his associates

were unable to prevent the occupation or remove persons from the


     2
        A detailed account of the events in Iran is set forth in
Continental Ill. Corp. v. Commissioner, 94 T.C. 165 (1990);
Halliburton Co. v. Commissioner, 93 T.C. 758 (1989), affd. 946
F.2d 395 (5th Cir. 1991); and Moshrefzadeh-Sani v. Commissioner,
T.C. Memo. 1992-592.
                               - 4 -

property.   One of the other parcels of property, next to a

railroad station, was taken over by the Government and a deed was

changed in 1984 to reflect new ownership.   Petitioner was also

investigated by the revolutionary government for a few years

after 1979.

     During the period after 1979 through the early 1990s

petitioner, through his business associates, continued attempts

to obtain access to the properties.    The attempts included, among

other things, payments of large amounts of cash to persons having

some power in the revolutionary government.   Petitioner continued

to stay in contact with his former business partners even after

he came to the United States in 1988 in the hope of reclaiming

the expropriated properties or receiving some compensation.

Petitioner knew of some property owners who were successful in

having their property returned after the revolution.

     Petitioner and his business associates were unsuccessful in

their attempts to reclaim the properties.   Petitioner has not

received any compensation relating to his interest in the four

parcels of property expropriated by the Iranian Government.

Petitioner did not institute any court action in an attempt to

regain the expropriated properties.

     On December 10, 2000, petitioners filed their 1999 Federal

income tax return.   Petitioners received an automatic 4-month

extension of the required filing date until August 15, 2000, but
                                - 5 -

did not request any further extensions.    On their 1999 return,

petitioners deducted a net operating loss (NOL) carryover in the

amount of $813,814.    An NOL worksheet attached to the 1999 return

reported that the NOL in the amount of $929,297 had been carried

forward from tax year 1995 and that portions of the NOL had been

previously used in tax years 1996, 1997, and 1998.3   Although not

specifically stated in either their 1995 or 1999 returns, there

is no dispute that the NOL was attributable to losses claimed

from the expropriation of their properties in Iran.

     On May 13, 2003, respondent issued to petitioner a notice of

deficiency for 1999.   Respondent disallowed the NOL carryover,

and determined a deficiency of $4,009.    Respondent further

determined that petitioners were liable for the delinquency

addition to tax and the negligence penalty.


     3
        At trial, petitioners asserted that they initially
claimed the expropriation losses in 1991 instead of 1995.
Petitioners filed a motion to dismiss for lack of jurisdiction
(motion), arguing that the notice of deficiency for 1999 was
invalid because it incorrectly determined that the NOL carryover
on their 1999 return originated in 1995 rather than in 1991. The
Court denied petitioners’ motion. Petitioners’ 1991 return was
not made part of the record in this case, and their assertion
that the losses originated in 1991 was unsubstantiated and
contradicted by statements in their 1995 return. E.g., Statement
1 attached to their 1995 return provided: “the taxpayer hereby
elects to relinquish the entire carryback period with respect to
the net operating loss incurred in the taxable year ending
December 31, 1995.” In any event, even if petitioners did
initially claim the losses on the 1991 return, the notice of
deficiency was sufficient to give petitioners notice that
respondent was disallowing the NOL that petitioners carried
forward to their 1999 return.
                               - 6 -

                            Discussion

     The issue for decision is whether petitioners sustained

losses in 1995 from the expropriation of four parcels of

property.   Section 165(a) provides for the deduction of losses

sustained during the taxable year for which no compensation is

received.   In the case of individuals, section 165(c) limits the

deduction to losses incurred in a trade or business or in any

transaction entered into for profit.4    In order to be deductible,

a loss must be evidenced by a closed and completed transaction,

fixed by identifiable events, and actually sustained during the

taxable year.   Boehm v. Commissioner, 326 U.S. 287, 291-292

(1945); sec. 1.165-1(b), Income Tax Regs.     A loss is only

deductible for the taxable year in which such loss is sustained.

Sec. 1.165-1(d)(1), Income Tax Regs.     The determination of

whether a loss occurred during a particular taxable year is

purely one of fact.   Korn v. Commissioner, 524 F.2d 888, 890 (9th

Cir. 1975), affg. T.C. Memo. 1973-258.     A critical inquiry is to

focus on the year that the taxpayer loses control over and

possession of the property at issue.     United States v. S.S. White

Dental Mfg. Co., 274 U.S. 398 (1927).

     In general a taxpayer bears the burden of proof.     See Rule

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



     4
        Expropriation losses are not casualty or theft losses for
purposes of sec. 165. Powers v. Commissioner, 36 T.C. 1191,
1192-1193 (1961).
                              - 7 -

as to a factual issue relevant to the liability for tax may shift

to the Commissioner if the taxpayer introduces credible evidence

and satisfies the requirements under section 7491(a)(2) to

substantiate items, maintain required records, and fully

cooperate with respondent’s reasonable requests.   Sec. 7491(a).

In the present case, the burden of proof remains on petitioners

because they have not established that they have complied with

the requirements of section 7491(a).   In any event, the

disposition of this case does not depend upon the burden of

proof.

     Petitioners assert that the Iranian revolutionary government

expropriated the properties in 1979.   Petitioners remained in

Iran until they came to the United States in 1988.   Petitioners

assert that as a result of their continuing efforts to reclaim

the properties, the losses actually occurred at a later date.    We

have no doubt that petitioners sustained losses upon the

expropriation of the properties, and the question arises as to

the amount of the losses and the year or years of the losses.5

     Section 1.165-1(d)(2)(i), Income Tax Regs., provides that if

a casualty or other event occurs which may result in a loss and



     5
        While the record does not establish the exact amount of
petitioners’ losses, petitioner presented copies of deeds and
credible testimony as to the cost of the properties involved.
However, as a result of our conclusion that the losses occurred
prior to the year in which they were claimed, and are therefore
not deductible, we need not reach any conclusion as to the amount
of the loss.
                                - 8 -

there exists a claim for reimbursement with respect to which

there is a reasonable prospect of recovery, no portion of the

loss is sustained under section 165 until it can be ascertained

with reasonable certainty whether such reimbursement will be

received.   Whether a reasonable prospect of recovery exists is a

question of fact.   See Halliburton Co. v. Commissioner, 93 T.C.

758, 770 (1989), affd. 946 F.2d 395 (5th Cir. 1991); Colish v.

Commissioner, 48 T.C. 711, 715 (1967); sec. 1.165-1(d)(2)(i),

Income Tax Regs.    The prospect of recovery must be based upon a

legal right to claim reimbursement from a third party in the year

the loss occurs.    Halliburton Co. v. Commissioner, supra at 772;

Colish v. Commissioner, supra at 717; sec. 1.165-1(d)(2)(i),

Income Tax Regs.    In this connection we note that we concluded in

Halliburton Co. v. Commissioner, supra at 780, as follows:

          As of December 31, 1979, Iranian political power
     was in a state of disarray, and the United States had
     been unable even to commence negotiations with Iran to
     resolve the crisis even though a principal stumbling
     block had been removed, i.e., the Shah had left the
     United States for Panama. Not until the fall of 1980,
     after a series of events occurred in 1980, including
     the Iranian clerical faction’s assumption of power, the
     outbreak of the Iran-Iraq war, increased United States
     economic sanctions against Iran, the failed American
     rescue mission, the death of the Shah, and the
     impending change in the U.S. Administration, did Iran
     make overtures to settle the crisis. If anything,
     these critical events are so clearly independent of the
     factual circumstances that existed as of December 31,
     1979, as to reinforce the conclusion that the elements
     of a reasonable prospect of recovery were absent,
     rather than present, as of that date. Equally clearly,
     the fact that the Algiers Accords came into being in
     1981 is not, in and of itself, an indication that such
                               - 9 -

     a prospect of recovery existed. Colish v.
     Commissioner, supra at 717; Estate of Fuchs v.
     Commissioner, supra at 508.

     Whether petitioners claimed the losses in 1991, as argued in

the motion to dismiss, or in 1995 as it appears in this record,

we conclude that the losses occurred at a date well before that

time.   Respondent’s determination is sustained as to the

deficiency.

Addition to Tax for Failure To File Timely Under Section 6651(a)

     The Commissioner has the “burden of production in any court

proceeding with respect to the liability of any individual for

any * * * addition to tax” under section 6651(a).   Sec. 7491(c).

To meet this burden, the Commissioner must come forward with

sufficient evidence indicating that it is appropriate to impose

the relevant penalty or addition to tax.    Higbee v. Commissioner,

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

of production, the taxpayer must come forward with evidence

sufficient to persuade a court that the Commissioner’s

determination is incorrect.   Id. at 447.   The taxpayer also bears

the burden of proof with regard to issues of reasonable cause,

substantial authority, or similar provisions.    Id. at 446.

     In the present case, respondent has satisfied his burden of

production under section 7491(c) by establishing that

petitioners’ 1999 income tax return was not timely filed.      In

this connection petitioners do not assert, nor did they present
                              - 10 -

any evidence, that the 1999 return was received or mailed before

the due date, as extended.

     Section 6651(a)(1) imposes an addition to tax of 5 percent

per month of the amount of tax required to be shown on the

return, not to exceed 25 percent, for failure to timely file a

return.   The addition to tax under section 6651(a)(1) is imposed

unless the taxpayer establishes that the failure was due to

reasonable cause and not willful neglect.

     The record is clear that the return was not timely filed and

there is no evidence that would establish that the failure to

timely file was due to reasonable cause and not willful neglect.

Respondent is sustained on this issue.

Accuracy-Related Penalty Under Section 6662(a)

     The Commissioner also has the “burden of production in any

court proceeding with respect to the liability of any individual

for any penalty” under section 6662(a).   Sec. 7491(c); Higbee v.

Commissioner, supra at 446-447.   Once the Commissioner meets his

burden of production, the taxpayer has the responsibility to come

forward with evidence sufficient to persuade the Court that the

Commissioner’s determination is incorrect.   Higbee v.

Commissioner, supra at 447.

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

penalty of 20 percent of the portion of an underpayment of tax
                               - 11 -

attributable to negligence or disregard of rules or regulations.6

Sec. 6662(a), (b)(1) and (2). “Negligence” is any failure to make

a reasonable attempt to comply with the provisions of the

internal revenue laws.   See sec. 6662(c); sec. 1.6662-3(b)(1),

Income Tax Regs.   Moreover, negligence is the failure to exercise

due care or the failure to do what a reasonable and prudent

person would do under the circumstances.    Neely v. Commissioner,

85 T.C. 934, 947 (1985).    “Disregard” includes any careless,

reckless, or intentional disregard of rules or regulations.      See

sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.

Notwithstanding section 6662(a), no penalty will 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)(1).

     Respondent determined that petitioners are liable for an

accuracy-related penalty attributable to negligence or disregard

of rules and regulations.

     On the basis of the record, we conclude that petitioners

made a reasonable attempt to comply with the Internal Revenue


     6
       Other types of underpayments that may give rise to the
imposition of an accuracy-related penalty under sec. 6662(a) and
(b) do not apply in this case. Respondent did not present
evidence that there was either a substantial or gross “valuation
misstatement” under sec. 6662(b)(3), (e), and (h), and we did not
make any conclusions as to the value of the expropriated
properties. See supra note 5.
                               - 12 -

Code and that the underpayment of tax was not attributable to

negligence.   Petitioners claimed an NOL loss carryover in the

amount of $813,814 on the 1999 return.   We have concluded that

petitioners incurred a loss from the expropriation of four

parcels of property by the Iranian revolutionary government

sometime in the late 1970s or early 1980s.   The issue in this

case is one of timing.   Having reviewed the documentary evidence

in this case and considered the testimony of petitioner, we are

satisfied that he reasonably believed that there was some hope in

recovering some of the expropriated properties or of receiving

some compensation for same.    While we have concluded that there

was not a reasonable prospect of recovery in 1995, that

conclusion is based on an analysis of legal precedent relating to

the 1979 revolution in Iran.   We do not believe petitioners acted

recklessly or intentionally disregarded the tax laws in a manner

sufficient to apply the accuracy-related penalty.   Accordingly,

we hold for petitioners on the section 6662(a) penalty.
                            - 13 -

    Reviewed and adopted as the report of the Small Tax Case

Division.

    To reflect the foregoing,

                                     Decision will be entered for

                                respondent as to the deficiency and

                                addition to tax under section

                                6651(a)(1), and for petitioners as

                                to the penalty under section

                                6662(a).
