                  T.C. Summary Opinion 2001-32



                     UNITED STATES TAX COURT



               CONRAD GEORGE OLSEN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16178-99S.                    Filed March 19, 2001.


     Bradley S. Shannon, for petitioner.

     Gregory M. Hahn, for respondent.


     GOLDBERG, 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 as

amended and in effect for the year at issue, and all Rule

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

       Respondent determined a deficiency in petitioner’s Federal

income tax in the amount of $25,179 for the 1994 tax year, an

addition to tax under section 6651(a) in the amount of $6,295,

and an accuracy-related penalty under section 6662(a) in the

amount of $5,036.

       The issues for decision are:   (1) Whether proceeds from a

sale of petitioner’s property qualify for nonrecognition

treatment under section 1041(a)(2); (2) whether petitioner is

liable for an addition to tax for failure to timely file his

return under section 6651(a); and (3) whether petitioner is

liable for an accuracy-related penalty under section 6662(a) for

the year in issue.

       This case was submitted fully stipulated pursuant to Rule

122.    The stipulation of facts and the attached exhibits are

incorporated herein by this reference.     At the time of filing the

petition, petitioner resided in Onalaska, Washington.

       Petitioner and Leah Helen Olsen (Ms. Olsen) were married on

December 2, 1969.    Shortly thereafter, they purchased a home

situated on 30 acres of timberland located at 235 Tryon Road,

Onalaska, Washington (Tryon Road property).

       In 1993, petitioner and Ms. Olsen separated and divorced.    A

Property Settlement Agreement (agreement) was executed by the

parties on November 10, 1993.    Pursuant to the agreement,

petitioner received specified personal property and the Tryon
                               - 3 -

Road property as his sole and separate property.    Ms. Olsen

received specified personal property, real estate located at 211

Tryon Road (211 Tryon Road property), and real estate located in

Cosmopolis, Washington (Cosmopolis property).   On November 10,

1993, petitioner and Ms. Olsen conveyed and quitclaimed all of

their respective interests in the Tryon Road property, the 211

Tryon Road property, and the Cosmopolis property to the other

party, according to the agreement.

     In order to equalize the property division, the agreement

required petitioner to pay $103,000 to Ms. Olsen as follows:

$51,500 no later than May 10, 1994, and an additional $51,500,

plus interest, no later than November 10, 1994.    To secure the

obligation petitioner owed to Ms. Olsen, petitioner conveyed a

deed of trust on the Tryon Road property to Title Guaranty

Company of Lewis County.   Immediately prior to the conveyance of

the deed of trust on November 10, 1993, petitioner held legal

title to the Tryon Road property free and clear of any liens,

mortgages, or other encumbrances on the property.    The agreement

did not require petitioner to sell any portion of the Tryon Road

property to satisfy the $103,000 obligation owed to Ms. Olsen.

     On February 17, 1994, petitioner sold 17 acres of the 30

acres of land and timber located on the Tryon Road property to

North Fork Timber Company for $175,000.   Of that amount,
                               - 4 -

$103,203.221 was paid directly by North Fork Timber Company to

Ms. Olsen in satisfaction of petitioner’s obligation under the

agreement.   Petitioner received a note receivable (note) for the

balance of the purchase price, or $65,000, from North Fork Timber

Company.   The terms of the note stated an 8-percent interest rate

and payments of $1,586.84 per month, payable over 48 months

beginning on March 17, 1994, and ending on February 8, 1998.

     At the time the Tryon Road property was sold to North Fork

Timber Company on February 17, 1994, Ms. Olsen did not have any

outstanding liabilities payable to, or other obligations owed, to

North Fork Timber Company, Title Guaranty Company of Lewis

County, or petitioner, nor did the sale of the Tryon Road

property to North Fork Timber Company relieve Ms. Olsen from any

obligations owed to North Fork Timber Company, Title Guaranty

Company of Lewis County, or petitioner.

     During the taxable year 1994 petitioner received $3,981.05

in interest income.   Petitioner also received a 1994 Form 1099-S,

Proceeds From Real Estate Transactions, from Title Guaranty

Company of Lewis County which reported real estate sales proceeds

in 1994 of $175,000 from the sale of the Tryon Road property.

Petitioner contends that he did not realize a taxable gain on the

sale of the Tryon Road property, and, based upon this belief, did



1
     This amount represents the $103,000 obligation plus
interest.
                                - 5 -

not file a 1994 return to report the $3,981.05 in interest income

he received in 1994.    Petitioner did not personally perform any

research or other investigation to confirm his belief that he did

not realize a taxable gain on the sale of the Tryon Road property

or that he was not required to file a tax return for the 1994

taxable year.

     Petitioner did not file a Federal income tax return for the

taxable year 1994 until November 30, 1998, after the Internal

Revenue Service had inquired why he had not filed a tax return.

On his 1994 Federal income tax return, petitioner reported

$3,981.05 of taxable interest and a capital loss of $453.59 from

the sale of the Tryon Road property.      Petitioner calculated the

capital loss from the sale of the Tryon Road property by

increasing his cost basis in the Tryon Road property by

$103,203.22.    The following is a summary of petitioner’s loss

calculation:

    Sales price                  $175,018.13
    Selling charges             (   4,756.51)
    Adjusted sale price          $170,261.62

    Purchase price                  $ 65,092.99
    Logging permit                        50.00
    Surveys                            2,369.00
    Adjusted basis                  $ 67,511.99

    Preliminary gain             $102,749.63
    Payment to Ms. Olsen        ( 103,203.22)
    Reported loss on sale       ($    453.59)
                               - 6 -

     In the notice of deficiency, respondent determined that

petitioner realized a gain of $102,728 on the sale of the 17

acres of the Tryon Road property as calculated below:

    Sales price                  $175,018.13
    Selling charges            (    4,756.51)
    Adjusted sale price          $170,261.62

    Purchase price              $ 65,092.99
    Logging permit                    50.00
    Surveys                        2,369.00
    Adjusted basis              $ 67,511.99

    Preliminary gain            $102,749.63
    Other                             21.63
    Adjusted gain on sale       $102,728.00
    Reported loss on sale      ($    453.59)
    Proposed adjustment         $102,274.41

Section 1041(a)(2)

     Section 1041(a)(2) provides for nonrecognition of gain or

loss on a transfer of property from an individual to a former

spouse provided that the transfer to the former spouse is

incident to the divorce.2   For a transaction to be considered


2
     Although section 1041 applies to both spouses and former
spouses, only “former spouse” will be used in the discussion of
the statute.

          SEC. 1041.   TRANSFERS OF PROPERTY BETWEEN SPOUSES OR
                       INCIDENT TO DIVORCE.

               (a) General Rule.--No gain or loss shall be
          recognized on a transfer of property from an individual
          to (or in trust for the benefit of)--
                    (1) a spouse, or
                    (2) a former spouse, but only if the transfer
               is incident to the divorce.
                                                   (continued...)
                               - 7 -

“incident to divorce”, it must: (1) Occur within 1 year after the

date on which the marriage ceases, or (2) is related to the

cessation of marriage.   Sec. 1041(c)(1) and (2).   If the transfer

of the Tryon Road property had been directly between petitioner

and Ms. Olsen, section 1041(a)(2) and (c)(1) would be satisfied

because the transfer occurred within 4 months of the agreement.

See Godlewski v. Commissioner, 90 T.C. 200, 204 n.7 (1988).

However, because the transfer did not occur directly between

petitioner and Ms. Olsen, but rather between petitioner and North

Fork Timber Company, a third party, the transfer must be “on

behalf of” the former spouse within the meaning of section

1.1041-1T(c), Q&A-9, Temporary Income Tax Regs., 49 Fed. Reg.

34452 (Aug. 31, 1984) (Q&A-9), in order to qualify for

nonrecognition treatment.   A transfer of property to a third

party “on behalf of” a former spouse will qualify under section

1041 in three situations:   (1) Where the transfer to the third

party is required by a divorce or separation instrument; (2)

where the transfer to the third party is pursuant to the written

request of the former spouse; or (3) where the transferor


2
 (...continued)
                    *    *    *    *    *     *   *
               (c) Incident to Divorce.--For purposes of
          subsection (a)(2), a transfer of property is incident
          to the divorce if such transfer--
                    (1) occurs within 1 year after the date on
               which the marriages ceases, or
                    (2) is related to the cessation of the
               marriage.
                                 - 8 -

receives from the former spouse a written consent or ratification

of the transfer to the third party.      See id.   In the three

situations described above, the transfer of property will be

treated as made directly to the nontransferring former spouse and

the nontransferring former spouse will be treated as immediately

transferring the property to the third party.      See id.   The

deemed transfer from the nontransferring former spouse does not

fall under section 1041 and is a taxable transaction to the

nontransferring former spouse.    See id.

     In order to prevail, petitioner must show that the transfer

of the Tryon Road property qualifies as one of the three

situations described in Q&A-9.    Petitioner has failed to do so.

Petitioner’s sale of the Tryon Road property was not pursuant to

the terms of the agreement as required under the first situation

described in Q&A-9.   In fact, petitioner stipulated that the

agreement “did not require petitioner to sell any portion of the

Tryon Road property to satisfy the $103,000 obligation owed to

Ms. Olsen.”   Petitioner was free to sell other assets or obtain a

loan rather than sell the Tryon Road property to satisfy his

separate monetary obligation to Ms. Olsen.     Moreover, petitioner

failed to show that the transfer of the Tryon Road property falls

under the second or third situation described in Q&A-9.      The

record contains no evidence showing either a written request by
                               - 9 -

Ms. Olsen to sell the property to a third party, or a written

consent or ratification of the transfer to a third party.

     Petitioner cites Read v. Commissioner, 114 T.C. 14 (2000),

to support his contention that the transfer of the Tryon Road

property to North Fork Timber Company was on behalf of Ms. Olsen.

We find petitioner’s reliance on Read misplaced.    In Read, we

held that Ms. Read’s transfer of MMP3 stock to MMP was “on behalf

of” Mr. Read (the nontransferring spouse) because it qualified

under the first situation described in Q&A-9.    Id. at 37-38.

According to the divorce agreement in that case, Mr. Read, or at

his election MMP or MMP’s ESOP, was obligated to purchase Ms.

Read’s MMP stock.   See id. at 17-19.   As stated above, petitioner

failed to show that any of the three situations described in Q&A-

9 were satisfied.

     In Ingham v. United States, 167 F.3d 1240 (9th Cir. 1999),

the Court of Appeals for the Ninth Circuit4 held that transfers

of property to a third party on behalf of a former spouse qualify

for nonrecognition if the transfer satisfied an obligation or a




3
     MMP was a corporation wholly owned by Mr. Read and Ms. Read.
4
     According to the rule set forth in Golsen v. Commissioner,
54 T.C. 742, 756-757 (1970), affd. 445 F.2d 985 (10th Cir. 1971),
we are obligated to follow the law as stated by the Court of
Appeals in the circuit to which a case would be appealable.
Accordingly, we are bound by the reasoning in Ingham v. United
States, 167 F.3d 1240 (9th Cir. 1999).
                                - 10 -

liability of the nontransferring former spouse.5    See id. at

1244.   In Ingham and the instant case, the sale of the property

did not relieve the nontransferring former spouse of any

obligation or liability that the nontransferring former spouse

owed to the transferring former spouse or the third party.       The

Court of Appeals stated:   “The sale merely allowed * * * [Ms.

Ingham] to satisfy the debt that she owed to her former husband

under their property settlement.”    Id. at 1244.   Similarly,

petitioner’s sale of the Tryon Road property satisfied the debt

that he owed to Ms. Olsen, rather than satisfy an obligation owed

by Ms. Olsen to North Fork Timber Company, the third party, or

petitioner as required under Ingham, supra at 1244, and Read v.

Commissioner, supra at 35-36.

     After reviewing the record, we find that petitioner has

failed to show that the transfer of the Tryon Road property to

North Fork Timber Company was “on behalf of” Ms. Olsen.

Therefore, we conclude that the gain from the transfer of the

Tryon Road property to North Fork Timber Company does not fall

under section 1041(a) and is taxable to petitioner.

Section 6651(a)

     Respondent determined an addition to tax as a result of

petitioner’s failure to timely file his tax return for 1994.



5
     We note that this standard was also applied in Read v.
Commissioner, 114 T.C. 14, 35-36 (2000).
                                 - 11 -

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

timely file a tax return.     The addition to tax is equal to 5

percent of the amount of the tax required to be shown on the

return if the failure to file is not for more than 1 month.       See

sec. 6651(a)(1).   An additional 5 percent is imposed for each

month or fraction thereof in which the failure to file continues,

to a maximum of 25 percent of the tax.     See id.

     The addition is applicable unless petitioner establishes

that his failure to file was due to reasonable cause and not

willful neglect.   See id.    If petitioner exercised ordinary

business care and prudence and was nonetheless unable to file his

return within the date prescribed by law, then reasonable cause

exists.   See sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

“Willful neglect” means a “conscious, intentional failure or

reckless indifference.”      United States v. Boyle, 469 U.S. 241,

245 (1985).

     Petitioner’s 1994 Federal income tax return was due on April

17, 1995.   Petitioner did not file his 1994 Federal income tax

return until November 30, 1998, after the commencement of the

audit.

     Petitioner contends that he was not required to file a 1994

return to report the $3,981.05 in interest income because he

relied on information provided in Table 1-1, 1994 Filing

Requirement Chart for Most Taxpayers, of the 1994 Federal income
                              - 12 -

tax instructions.   Table 1-1 informed petitioner that a single

taxpayer under the age of 65 with a gross income of at least

$6,250 must file a tax return.   Petitioner believed that he was

not required to file a 1994 tax return because his gross income,

which incorrectly did not include the gain from the sale of the

Tryon Road property, was under $6,250.

     However, Table 1-1 also provides the following information:

“Gross income means all income you received in the form of money,

goods, property, and services that is not exempt from tax,

including any gain on the sale of your [main] home (even if you

may exclude or postpone part or all of the gain).”

     Petitioner received a Form 1099-S, Proceeds From Real Estate

Transactions, from Title Guaranty Company of Lewis County

reporting the real estate sale proceeds in 1994 of $175,000.

Petitioner stipulated that he did not make any attempt to

determine whether he should report the amount shown on the Form

1099-S on his 1994 Federal income tax return.   Petitioner has

failed to show us that he exercised ordinary care and prudence in

this case.   Respondent is sustained on this issue.

Section 6662(a)

     The last issue for decision is whether petitioner is liable

for an accuracy-related penalty pursuant to section 6662(a).

Section 6662(a) imposes a penalty of 20 percent of the portion of

the underpayment which is attributable to negligence or disregard
                               - 13 -

of rules or regulations.    See sec. 6662(b)(1).   Negligence is the

“‘lack of due care or failure to do what a reasonable and

ordinarily prudent person would do under the circumstances.’”

Neely v. Commissioner, 85 T.C. 934, 947 (1985)(quoting Marcello

v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. 43 T.C.

168 (1964) and T.C. Memo. 1964-299).     Negligence also includes

any failure by the taxpayer to keep adequate books and records or

to substantiate items properly.    See sec. 1.6662-3(b)(1), Income

Tax Regs.    The term “disregard” includes any careless, reckless,

or intentional disregard.    Sec. 6662(c).   No penalty shall be

imposed if it is shown that there was reasonable cause for the

underpayment and the taxpayer acted in good faith with respect to

the underpayment.    See sec. 6664(c).   The determination of

whether a taxpayer acted with reasonable cause and good faith

within the meaning of section 6662(c) is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances.    See sec. 1.6664-4(b)(1), Income Tax Regs.

     Petitioner failed to show that he had a reasonable basis for

his belief that the gain from the Tryon Road property was not

taxable.    He failed to make reasonable inquiries as to whether

the income reported on a Form 1099-S was taxable.     See Rosenbaum

v. Commissioner, T.C. Memo. 1992-287, affd. 998 F.2d 1016 (7th

Cir. 1993).
                             - 14 -

     On the basis of the record, we hold that petitioner is

liable for an accuracy-related penalty under section 6662(a) for

the 1994 tax year.

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

extent not discussed above, conclude that they are irrelevant or

without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                        Decision will be entered

                                   for respondent.
