                   T.C. Summary Opinion 2006-152



                      UNITED STATES TAX COURT



            ROBERT G. AND LANA L. GALE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2088-06S.              Filed September 14, 2006.



     Robert G. and Lana L. Gale, pro sese.

     R. Craig Schneider, for respondent.



     DAWSON, Judge:   This case was heard pursuant to section 7463

of the Internal Revenue Code in effect when the petition was

filed.1   The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.




     1
      Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 2 -

     Respondent determined a $6,860 deficiency in petitioners’

Federal income tax and a $1,372 accuracy-related penalty under

section 6662(a) for 2003.   The primary issue for decision is

whether petitioners were insolvent within the meaning of section

108(a)(1)(B) when the $39,274.90 second mortgage on their home

was canceled following the sale of the home in 2003 caused by the

default on the first mortgage.2

                            Background

     Some of the facts were stipulated and are so found.   The

stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.   Petitioners resided in

Layton, Utah, when they filed the petition in this case.

     Mrs. Gale is a homemaker and earns no income.   Mr. Gale is

employed by the Bureau of Land Management.

     In 2003, Mr. Gale had back surgery and was out of work for

several weeks.   He did not receive a pay check for some weeks.

Consequently, petitioners were unable to make the payments on two

loans secured by mortgages on their home, a first mortgage held

by First National Mortgage (First National) and a second mortgage

held by Citibank.   First National notified petitioners that it




     2
      In the notice of deficiency, respondent also made
adjustments to deductions for medical and dental expenses
petitioners reported on Schedule A, Itemized Deductions, that are
computed on the basis of the increase in petitioners’ adjusted
gross income.
                                - 3 -

intended to foreclose on the loan and suggested that they contact

a real estate broker to arrange a short sale.3

     On June 23, 2003, petitioners sold the house for $68,500.

They incurred and paid settlement costs and taxes totaling

$1,954.50, paid the total $61,615.50 balance outstanding on the

first mortgage, and paid $1,500 of the total $40,775 balance

outstanding on the second mortgage.     Citibank forgave the

remaining $39,275 outstanding on the second mortgage.

     Petitioners’ records show that petitioners’ assets and

liabilities before the sale of the house were as follows:

         Assets                           Totals
          House                           $68,500
          Blazer                           25,000
          Cash accounts                     1,068
          Investments                         -0-
          Jewelry                           1,500
          Computer                            400
          Furniture/appliances              2,000
          CSRS pension                        NA
          Thrift savings account              NA




     3
      A short   sale in real estate occurs when the outstanding
loans against   a property are greater than what the property is
worth and the   lender agrees to accept less than it is owed to
permit a sale   of the property which secures its note.
                                - 4 -

       Liabilities                       Totals
        1st mortgage                     61,616
        2nd mortgage                     40,774
        RC Willey                         1,300
        Providian                         2,250
        Chase Mastercard                  5,000
        AmeriCredit                      32,465
        Medical                             550
        Medicine                            900
        Discover card                     2,500
        Texaco                            1,500
        Mrs. Gale’s student loan          6,000
        Dentist                           1,100

     Petitioners purchased the 2001 Blazer in January 2001 for

$32,000.   Mr. Gale estimated that the Blazer was worth $25,000

when the second mortgage was canceled.   He did not consult any

publication showing used car values.

     Petitioners’ records do not show the value of Mr. Gale’s

CSRS pension benefit or thrift savings account at the time the

second mortgage was canceled.   Mr. Gale believed that had he

retired in 2003, his CSRS pension benefit would have been

approximately $858 per month.   Mr. Gale contributed to a thrift

savings account from about 1984 to 1990.   He did not make any

contributions to his thrift savings account after 1990.   In 1998,

Mr. Gale borrowed from his thrift savings account to make the

downpayment on the house.

     Petitioners employed Julie K. Young of JKY Tax Service to

prepare their 2003 Form 1040, U.S. Individual Income Tax Return.

Petitioners jointly filed the return prepared by Ms. Young.
                               - 5 -

Petitioners did not report the $39,275 discharge of indebtedness

as income on the return.

     Citibank sent petitioners a Form 1099-C, Cancellation of

Debt, reporting the $39,275 discharge of indebtedness.    After

petitioners received the Form 1099-C, Ms. Young prepared and

petitioners filed an amended return that reported the $39,275 as

gain on the sale of their residence that was excludable from

income.

                            Discussion

A. Deficiency

     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 such determinations are in error.

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

Section 7491(a)(1) provides that the burden of proof as to

factual matters shifts to the Commissioner under certain limited

circumstances.   Petitioners do not fall within these limited

circumstances, and therefore the burden of proof remains with

them.

     Generally, discharge of indebtedness gives rise to gross

income to the obligor.   Sec. 61(a)(12); see Gitlitz v.

Commissioner, 531 U.S. 206, 213 (2001).    Section 108 provides

certain exceptions to this general rule.   Pursuant to one of

these exceptions, income from discharge of indebtedness is
                                - 6 -

excluded from gross income if the discharge occurs when the

taxpayer is insolvent.   The amount of income from discharge of

indebtedness excluded under section 108(a)(1)(B) is not to exceed

the amount by which the taxpayer is insolvent.   Sec. 108(a)(3).

For purposes of section 108, the term “insolvent” means the

excess of liabilities over the fair market value of assets.    Sec.

108(d)(3).   Whether the taxpayer is insolvent, and the amount by

which the taxpayer is insolvent, is determined on the basis of

the taxpayer’s assets and liabilities immediately before the

discharge.

     Petitioners did not submit to respondent or to the Court any

contemporaneous records or documents to establish the value of

their assets or liabilities at the time the second mortgage was

canceled.    The night before the trial petitioners created a list

of their assets and liabilities from information stored on their

computer.    Petitioners relied upon that list and Mr. Gale’s oral

testimony as evidence of the value of assets owned and

liabilities owed in 2001 immediately before the discharge.

Having observed Mr. Gale’s appearance and demeanor at trial, we

find his testimony to be honest, forthright, and credible.

Immediately before the discharge of indebtedness, without regard

to Mr. Gale’s CSRS pension benefit and thrift savings account,

petitioners had liabilities of $92,839 which exceeded the $29,968

value of their assets by $62,871, shown as follows:
                               - 7 -

      Assets
       Blazer                  $25,000
       Cash accounts             1,068
       Investments               -0-
       Jewelry                   1,500
       Computer                    400
       Furniture/appliances      2,000
        Total assets                           $29,968

      Liabilities
        2nd mortgage            39,274
        RC Willey                1,300
        Providian                2,250
        Chase Mastercard         5,000
        AmeriCredit             32,465
        Medical                    550
        Medicine                   900
        Discover card            2,500
        Texaco                   1,500
        Mrs. Gale’s stud.        6,000
        Dentist                  1,100
         Total liabilities                     (92,839)
      Net liabilities                          (62,871)

     Although Mr. Gale believes that his CSRS pension benefit

would have been about $858 per month had he retired in 2003, he

did not provide any statements related to the value of that

pension or his thrift savings account on the date the second

mortgage was canceled.   We have no way to accurately estimate the

value of those assets on the date the second mortgage was

canceled, and petitioners have not established that the combined

value of Mr. Gale’s thrift savings account and CSRS pension

benefit was less than $62,871 on that date.   Consequently,

petitioners have failed to establish that they were insolvent
                                - 8 -

when the debt was canceled and that the insolvency exception of

section 108(a)(1)(B) applies.

      We hold that petitioners’ income for 2003 includes $39,274

from the discharge of indebtedness that was not reported on their

2003 return.

B.   Accuracy-Related Penalty

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

Commissioner with respect to the liability of any individual for

any penalty, addition to tax, or additional amount.

      Respondent contends that petitioners are liable for an

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

the burden of production under section 7491(c) and must come

forward with evidence sufficient for us to sustain the section

6662(a) penalty.    See Higbee v. Commissioner, 116 T.C. 438,

446-447 (2001).    As pertinent here, section 6662(a) imposes a

20-percent penalty on the portion of an underpayment attributable

to negligence or disregard of rules or regulations, sec.

6662(b)(1), or a substantial understatement of tax, sec.

6662(b)(2).    Negligence includes any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code, including any failure to keep adequate books and records or

to substantiate items properly.    Sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs.    An “understatement” is the

excess of the amount of tax required to be shown on the tax
                               - 9 -

return over the amount of tax shown on the tax return, sec.

6662(d)(2)(A), and is “substantial” in the case of an individual

if the understatement exceeds the greater of 10 percent of the

tax required to be shown or $5,000, sec. 6662(d)(1)(A).

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

portion of an understatement of tax if it is shown that there was

reasonable cause for the taxpayer’s position and that the

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

6664(c)(1).   Reasonable cause requires that the taxpayer exercise

ordinary business care and prudence as to the disputed item.    See

United States v. Boyle, 469 U.S. 241 (1985).   The good faith

reliance on the advice of an independent, competent professional

as to the tax treatment of an item may meet this requirement.

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 98

(2000), affd. 299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(b),

Income Tax Regs.   To show good faith reliance, the taxpayer must

show that the return preparer was supplied with all the necessary

information and the incorrect return was a result of the

preparer’s mistakes.   Neonatology Associates, P.A. v.

Commissioner, supra at 99; Pessin v. Commissioner, 59 T.C. 473,

489 (1972); sec. 1.6664-4(c)(1)(i), Income Tax Regs.

     We are convinced that petitioners provided Ms. Young with

all the necessary information concerning the sale of their home

and the cancellation of the second mortgage by Citibank.
                             - 10 -

Petitioners reasonably relied on Ms. Young.   Consequently, we

hold that petitioners are not liable for the section 6662(a)

accuracy-related penalty.

     To reflect the foregoing,


                                        Decision will be entered

                                   for respondent with respect to

                                   the deficiency and for

                                   petitioners with respect to

                                   the section 6662(a) accuracy-

                                   related penalty.
