                  T.C. Summary Opinion 2008-61



                      UNITED STATES TAX COURT



              GERARD EUGENE STEVENS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13218-06S.             Filed June 3, 2008.



     Gerard Eugene Stevens, pro se.

     Julie Jebe, 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.   Pursuant to section

7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent

for any other case.   Unless otherwise indicated, subsequent

section references are to the Internal Revenue Code (hereafter
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Code) in effect for the year in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

     Respondent determined a $21,323 deficiency in petitioner’s

Federal income tax for 2003 and a $4,264 accuracy-related penalty

under section 6662(a).

     The issues for decision are:   (1) Whether petitioner failed

to include in income for 2003 income from discharge of

indebtedness and (2) whether petitioner is liable for the

accuracy-related penalty under section 6662(a).

                            Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

     Petitioner resided in Illinois when he filed his petition.

Sometime in either January or February 2002 petitioner and his

former spouse, Sharon Stevens (the Stevenses), purchased real

property located at 5015 South Wabash Avenue, Chicago, Illinois.

The property purchased was a two-story residence in need of

rehabilitation.   The Stevenses purchased the property for

investment purposes and intended to rehabilitate the dwelling and

either rent the property or sell it thereafter.    Petitioner and

Sharon Stevens (Ms. Stevens) were married at the time the real

property was purchased, and they resided in Evergreen Park,

Illinois.   The purchase price of the property was approximately
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$256,000.   The Stevenses financed the purchase by borrowing money

from Homecomings Financial.   The Stevenses executed a note and

deed of trust/mortgage with Homecomings Financial and held title

to the property as joint tenants.   The record does not contain

the note and deed of trust/mortgage.

     Sometime later in 2002 the Stevenses found themselves unable

to make the mortgage payments on the property.   In order to avoid

a foreclosure, which would have adversely affected their credit

rating, they decided to sell the property in a short sale1 with

the approval of Homecomings Financial.

     On January 3, 2003, the Stevenses (sellers) entered into a

purchase agreement with Jemal King (buyer) to sell the property

for $200,000.   At that time the unpaid balance of the mortgage

was greater than the selling price.

     On February 14, 2003, the Stevens separated.   Petitioner

moved from the marital residence in Evergreen Park, Illinois, to

Chicago, Illinois.

     The short sale occurred on or about March 20, 2003.   The

property was conveyed to Jemal King by warranty deed executed by

the Stevenses and recorded with the Cook County Recorder of Deeds

on April 28, 2003.



     1
       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 that secures its note.
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     Homecomings Financial approved the “short sale” subject to

the following terms and conditions:    (1) Homecomings Financial

was to receive no less than $181,461.31 for satisfaction of the

debt, (2) certified payoff funds were to be received no later

than March 24, 2003, (3) Homecomings Financial was to receive a

certified copy of the final HUD settlement statement showing all

taxes as paid, (4) the Stevenses were to receive no sale proceeds

in the transaction and any excess funds were to be forwarded to

Homecomings Financial, (5) the sale price was to be $200,000, (6)

real estate commissions were not to exceed $10,000, and (7)

closing costs, including taxes and repairs, were not to exceed

$8,538.69.   These terms and conditions extended only to the short

sale of the property to Jemal King by the purchase agreement

dated January 3, 2003.

     Additionally, if the foregoing conditions were not met,

Homecomings Financial reserved the right to return the payoff

funds and require payment in full in accordance with the original

terms of the note and deed of trust/mortgage.    Homecomings

Financial also noted that it might report the amount of the

“discount” to the Internal Revenue Service.

     Homecomings Financial subsequently mailed a Form 1099-C,

Cancellation of Debt, to petitioner at his previous address in

Evergreen Park, Illinois.   The Form 1099-C stated that the

mortgage loan debt of $74,494.96 was canceled by Homecomings
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Financial on March 27, 2003.      A duplicate Form 1099-C was mailed

to Ms. Stevens also at the Evergreen Park, Illinois, address,

reporting the same information as on the Form 1099-C mailed to

petitioner.    On March 27, 2003, petitioner resided at the Chicago

address and Ms. Stevens resided at the Evergreen Park address.

Ms. Stevens received both copies of the Form 1099-C and notified

petitioner that she was in receipt of his copy.

     Neither petitioner nor Ms. Stevens included the $74,494.96

resulting from the cancellation of mortgage loan debt in income

for 2003 when they filed their respective Federal income tax

returns.    Further, neither petitioner nor Ms. Stevens reported

the sale of the property on their respective 2003 income tax

returns.

                                Discussion

     In general, the Commissioner’s determination as set forth in

a notice of deficiency is presumed correct, and the burden of

proof is on the taxpayer to prove otherwise.      Rule 142(a)(1);

Welch v. Helvering, 290 U.S. 111, 115 (1933).      However, under

certain circumstances the burden shifts where a taxpayer

introduces credible evidence with respect to any factual issue

relevant to ascertaining the income tax liability of the

taxpayer.    Sec. 7491(a)(1).    The resolution of whether petitioner

had cancellation of indebtedness income does not depend on which

party has the burden of proof.      For the reasons discussed
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infra we conclude that petitioner has failed to prove that he did

not receive income from the relief of indebtedness.

     Furthermore, section 6201(d), as pertinent here, provides

that in any court proceeding, if a taxpayer asserts a reasonable

dispute with respect to any item of income reported on an

information return such as a Form 1099 filed by a third party and

the taxpayer has fully cooperated with the Internal Revenue

Service, the Commissioner has the burden of producing reasonable

and probative information concerning the deficiency in addition

to information on the return itself.    Petitioner does not dispute

the information contained on the Form 1099-C filed by Homecomings

Financial.    Therefore, there is no burden of production on

respondent.

     Generally, a taxpayer must include income from the discharge

of indebtedness.    See sec. 61(a)(12); sec. 1.61-12(a), Income Tax

Regs.   However, there are exceptions to this general rule.

Section 108(a) provides that a taxpayer may exclude income from

the discharge of indebtedness if the discharge occurs in a

bankruptcy case, or when the taxpayer is insolvent, or if the

indebtedness is qualified farm or business real estate debt.

Although the real estate property was held by the Stevenses as

investment property for the production of income, we cannot, for

lack of sufficient facts, determine whether the exclusion for

qualified real property indebtedness under section 108(a)(1)(D)
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might apply.   Likewise, the record is devoid of sufficient facts

upon which we may determine whether the exclusion for insolvency

under section 108(a)(1)(B) might apply.    The record is similarly

devoid of evidence suggesting that Homecomings Financial intended

to make a gift to the Stevenses and to petitioner, specifically.

     Where property subject to recourse debt is disposed of in

satisfaction of the debt, the debt is deemed discharged.    The

disposition by the mortgagor of the property for a release of

liability is treated as a sale or exchange upon which gain or

loss is realized.   Frazier v. Commissioner, 111 T.C. 243, 245

(1998).   The amount of gain realized is the excess of the amount

realized over the taxpayer’s adjusted basis in the property, and

correspondingly the amount of loss realized is the excess of the

adjusted basis over the amount realized.   Sec. 1001(a).   The

amount realized is defined by section 1001(b) as the sum of any

money received plus the fair market value of the property

received.

     Petitioner’s gain or loss on the short sale of the South

Wabash Avenue property is computed pursuant to section 1001.      As

a general rule, the amount realized includes the full amount of

the remaining debt if the debt is nonrecourse.   Sec. 1.1001-

2(a)(1), Income Tax Regs.   Section 1.1001-2(a)(2), Income Tax

Regs., however, provides:   “The amount realized on a sale or

other disposition of property that secures a recourse liability
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does not include amounts that are (or would be if realized and

recognized) income from the discharge of indebtedness under

section 61(a)(12).”

      This regulation actually bifurcates a transaction such as

the present one into a taxable sale of property and a taxable

discharge of indebtedness.   Cf. Michaels v. Commissioner, 87 T.C.

1412, 1415 (1986).    Accordingly, under this regulation, each part

should be treated as a separate transaction for tax purposes.

Id.

      While the Stevenses’ amount realized for the South Wabash

Avenue property would be $255,956.27,2 the application of section

1.1001-2(a)(2), Income Tax Regs., reduces that sum by the amount

of income received from discharge of indebtedness.   Although the

note and deed of trust/mortgage is not in evidence, on the basis

of the record we feel confident that the Note was a recourse

liability.   Therefore, the Stevenses’ amount realized for the

property was $181,461.31. Accordingly, the Stevenses realized no

capital loss on the sale of the South Wabash Avenue property.

See sec. 1001(a).    The Stevenses realized $74,494.96 of ordinary

income from discharge of indebtedness.   See sec. 61(a)(12); sec.

1.61-12(a), Income Tax Regs.   Since petitioner has not proven


      2
        This amount represents the sum of $181,461.31 (the net
amount to be received at closing and accepted by Homecomings
Financial on the short sale) and $74,494.96, the amount
characterized as income from cancellation of debt on the Form
1099-C that Homecomings Financial issued to the Stevenses.
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that any of the aforementioned exceptions under section 108(a)

applies to his case, we hold that petitioner’s income for 2003

includes the $74,494.96 from the discharge of indebtedness that

was not reported on his 2003 return.3

Section 6662(a) Accuracy-Related Penalty

     In the notice of deficiency, respondent determined that

petitioner was liable for the accuracy-related penalty under

section 6662(a) for underpayment of tax.   Section 6662(a) imposes

a 20-percent penalty with respect “to any portion of an

underpayment of tax required to be shown on a return”.     This

penalty applies to underpayments attributable to any substantial

understatement of income tax.   Sec. 6662(a) and (b)(2).

     An “understatement” of income tax is defined as the excess

of the tax required to be shown on the return over the tax

actually shown on the return.   Sec. 6662(d)(2)(A).   An

understatement 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)(A).




     3
       Under the applicable Illinois statute, as joint tenants
the Stevenses are jointly and severally liable for all debts and
obligations arising from their ownership of the South Wabash
Avenue property. 765 Ill. Comp. Stat. Ann. 1005/3 (West 2001).
Accordingly, and in light of our decision, petitioner might look
to a civil remedy against Ms. Stevens (either under Illinois law
or pursuant to sec. 6015) for contribution as to the amount of
tax due as a result of the income from cancellation of
indebtedness for 2003.
                                - 10 -

     Section 6664 provides a defense to the accuracy-related

penalty if a taxpayer establishes that there was reasonable cause

for any portion of the underpayment and that he or she acted in

good faith with respect to that portion.   Sec. 6664(c)(1); sec.

1.6664-4(a), Income Tax Regs.    Although not defined in the Code,

“reasonable cause” is determined under the regulations on a case-

by-case basis, taking into account all the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.   The

taxpayer’s education, experience, and knowledge are considered in

determining reasonable cause and good faith.    Id.   And,

generally, the most important factor is the extent of the

taxpayer’s effort to assess his or her proper tax liability.      Id.

     Respondent determined an accuracy-related penalty under

section 6662(a) to be applicable because petitioner understated

his income tax by $21,323 on his return.   Because petitioner’s

understatement of tax was greater than 10 percent of the tax

required to be shown on the return or $5,000, the understatement

was a substantial understatement of income tax pursuant to

section 6662(d)(1)(A).

     Petitioner argues that he should not be held liable for the

penalty because of his reliance on Ms. Stevens to report all of

the Form 1099-C income from the cancellation of indebtedness on

her income tax return since both Forms 1099-C were mailed to her

address.
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     Respondent carries the burden of production under section

7491(c) with respect to the accuracy-related penalty under

section 6662.   To meet that burden, respondent must come forward

with sufficient evidence indicating that it is appropriate to

impose the penalty.   The burden of proof to establish reasonable

cause remains with petitioner.   See Higbee v. Commissioner, 116

T.C. 438, 446 (2001).

     We conclude that petitioner has failed to show that his

reliance on Ms. Stevens’s reporting the full amount of income and

paying the requisite tax on that income was reasonable.

Petitioner admitted that he knew Ms. Stevens had received both

Forms 1099-C and that the amount at issue, $74,494.96, should

have been reported--either in full or in part--on one of or both

of the Stevenses’ returns for that year.   The record is silent as

to any facts that would have led to a reasonable assumption on

the part of petitioner that he was not responsible for reporting

the amount contained on the Form 1099-C in income.   Petitioner

has, therefore, failed to carry his burden of showing any

reasonable cause for the underpayment of tax for 2003.    See sec.

6664(c)(1).

     On the entire record before us, we hold that petitioner has

failed to carry his burden of proving that he is not liable for

an accuracy-related penalty for 2003 under section 6662(a).    We
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accordingly sustain respondent’s determination with respect to

that issue.


                                        Decision will be entered

                                   for respondent.
