                        T.C. Memo. 2009-246



                      UNITED STATES TAX COURT



            JEFFREY C. AND RENEE M. MILTON, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15875-08.                 Filed October 28, 2009.




     Robert J. Gumser, for petitioners.

     Heather K. McCluskey, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined an $86,767 deficiency

in petitioners’ Federal income tax for 2005 and a $17,353
                                  -2-

accuracy-related penalty under section 6662(a).1     After

concessions,2 we are asked to decide whether petitioners

underreported their distributive share from Renee Milton, Inc.

(RMI), an S corporation, for 2005.      Respondent disallowed RMI’s

claimed deduction for an abandoned partnership interest.     We hold

that RMI was not entitled to a deduction and therefore

petitioners underreported their income.     We further find that the

accuracy-related penalty applies.

                          FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Petitioners resided in San

Diego, California, at the time they filed the petition.

RMI

      Renee M. Milton (petitioner) was the president and sole

shareholder of RMI, a real estate business, during 2005.

Petitioner, a real estate professional, entered into real estate

purchasing and selling agreements for RMI’s clients.




      1
      All section references are to the Internal Revenue Code in
effect for the year at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
      2
      Petitioner conceded Renee Milton, Inc. had $4,488.50 of
unreported gross receipts or sales and it is not entitled to a
deduction for outside services of $100,000. Respondent conceded
that petitioners are entitled to $40,152 of other deductions.
                                 -3-

KM Welding Transaction

     Petitioner’s handyman approached her in 2004 about a

business opportunity involving his son, Donald Purscelley (Mr.

Purscelley), who worked as a welder for Kearney Mesa Welding (KM

Welding).    Salvatore Peluso, the owner of KM Welding, was

considering retirement, and Mr. Purscelley expressed an interest

in purchasing the business.    Mr. Purscelley lacked any funds to

purchase KM Welding on his own, so his father asked petitioner if

she would be interested in participating in Mr. Purscelley’s

purchase of the business.    Petitioner was interested but only to

obtain the right of first refusal to purchase the leased property

on which KM Welding operated its business.

     Mr. Purscelley and his father negotiated the price for KM

Welding with Mr. Peluso, and the deal was consummated with a

handshake.    Petitioner was aware that neither Mr. Purscelley nor

his father would be able to contribute money towards the purchase

price.   Petitioner gave Mr. Purscelley’s father a check payable

to Mr. Peluso for $90,000 and instructed the father to purchase

KM Welding.    She used money she had earned from RMI that she had

in her savings account.

     Petitioner’s purchase check, dated February 17, 2004, is the

only document memorializing the transaction.    The only

documentation of the transaction petitioner received was a KM

Welding sticker for her car.    Petitioner “knew that * * * [the
                                -4-

Purscelleys] would let * * * [her] have * * * [the] first right

to buy [the] land” so she did not need any documentation.

Petitioner’s name, however, was not on the lease for the

property, nor was petitioner’s “right” ever put in writing.

Operation of KM Welding

     Petitioner discussed forming a business entity with Mr.

Purscelley and his father to purchase KM Welding.   Ownership of

the business was to be divided into thirds among petitioner, Mr.

Purscelley, and his father.   Mr. Purscelley initially created an

LLC, but he dissolved it in 2005 because of administrative

difficulties.   Mr. Purscelley operated KM Welding as a sole

proprietorship during 2005.

     Mr. Purscelley made no distributions in 2004 or 2005, nor

did he believe he was obligated to share the profits with

petitioner or his father.   Furthermore, petitioner expected to

receive only the lease and, potentially, some of the profits once

the business was sold.

RMI’s Purported Abandonment of its Partnership Interest

     Petitioner became concerned in 2005 that KM Welding was not

completing projects or paying its bills.   She was worried that

her involvement with KM Welding would ruin her reputation and

potentially affect the financial health of RMI.   Neither

petitioner nor RMI was obligated to pay anything additional to KM
                                    -5-

Welding or its creditors.      In fact, KM Welding is still operating

at the same location today as in 2005.

       Mr. Purscelley was unresponsive when petitioner questioned

him about her ownership interest in KM Welding and requested

Schedules K-1.       Petitioner’s CPA advised her at that time that it

would be better to abandon the KM Welding partnership interest

rather than to continue risking her reputation and her business,

RMI.       Petitioner did not inform her purported partners, however,

that she was abandoning her interest in KM Welding.       Petitioner

also did not give public notice that she was no longer associated

with KM Welding.

       RMI claimed a $100,000 abandonment loss on its Form 1120S,

U.S. Income Tax Return for an S Corporation, that passed through

to petitioner as the sole shareholder in 2005.3      The loss was

identified as an abandonment of a partnership interest.      RMI’s

balance sheet for 2005, however, does not list a partnership

interest as of the beginning of the year for RMI.

       Respondent issued a deficiency notice to petitioners

disallowing the abandonment loss and adjusting petitioner’s

distributive share from RMI accordingly.      Petitioners timely

filed a petition.




       3
      Petitioners concede in their brief that the amount claimed
should have been $90,000 rather than $100,000.
                                  -6-

                                OPINION

     We are asked to decide whether petitioners underreported the

distributive share from RMI because RMI was not entitled to

deduct an abandonment loss.    Respondent argues that petitioner

did not establish that an abandonment occurred entitling RMI to a

deduction.   Respondent also argues that the accuracy-related

penalty should be imposed.

I. Abandonment Loss Deduction

     We begin with the general rules for deducting abandonment

losses.   A taxpayer is entitled to deduct uncompensated losses

during a given tax year.    Sec. 165(a).   Deductions are a matter

of legislative grace, however, and the taxpayer must show that he

or she is entitled to any deduction claimed.4    Rule 142(a);

Deputy v. du Pont, 308 U.S. 488, 493 (1940).     This includes the

burden of substantiation.     Hradesky v. Commissioner, 65 T.C. 87,

89-90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).    The

Court need not accept the taxpayer’s self-serving testimony when

the taxpayer fails to present corroborative evidence.     Beam v.

Commissioner, T.C. Memo. 1990-304 (citing Tokarski v.


     4
      Sec. 7491(a) shifts the burden of proof to the Commissioner
in certain circumstances provided the taxpayer complies with
substantiation requirements, maintains all required records, and
cooperates with the Commissioner’s reasonable requests.
Petitioners did not seek to shift the burden. In addition,
petitioners have failed to substantiate the abandonment loss
deduction and maintain the required records, and therefore we
decline to shift the burden. See sec. 7491(a)(2)(A) and (B).
                                -7-

Commissioner, 87 T.C. 74, 77 (1986)), affd. without published

opinion 956 F.2d 1166 (9th Cir. 1992).

     A taxpayer must prove he or she owned the property abandoned

to claim an abandonment loss deduction.     JHK Enters., Inc. v.

Commissioner, T.C. Memo. 2003-79.     Petitioner has not proven that

RMI owned the partnership interest it purported to abandon in

2005.   There is no evidence that the conversations among

petitioner, Mr. Purscelley, and his father resulted in RMI’s

owning a partnership interest in KM Welding.    Petitioner has not

provided an asset purchase agreement or any other document to

substantiate the transaction.   Petitioner even failed to

substantiate that the funds were RMI’s rather than hers

individually.   Moreover, the purported partnership interest in KM

Welding was not listed as an asset on RMI’s beginning-of-the-year

balance sheet for 2005.   We find that RMI did not own a

partnership interest in KM Welding in 2005.

     In addition, the taxpayer must also establish to claim an

abandonment loss that he or she (1) intended to abandon the

property and (2) took affirmative action to abandon the property.

Citron v. Commissioner, 97 T.C. 200, 208-209 (1991).    The intent

to abandon and the affirmative action are to be ascertained from

the facts and circumstances surrounding the abandonment.     United

Cal. Bank v. Commissioner, 41 T.C. 437 (1964), affd. per curiam

340 F.2d 320 (9th Cir. 1965).   An abandonment occurs where the
                                 -8-

taxpayer has relinquished the asset as well as any future claims

to the asset.    Tsakopoulos v. Commissioner, T.C. Memo. 2002-8,

affd. without published opinion 63 Fed. Appx. 400 (9th Cir.

2003).    Some express manifestation of abandonment is required

when the asset is an intangible property interest, such as a

partnership interest.    Citron v. Commissioner, supra at 209-210.

     Petitioner testified that she intended to abandon her

purported partnership interest in KM Welding to avoid damage to

her reputation and to her business, RMI.    The record does not

contain any independent evidence, however, to support her alleged

intent.    There is no evidence, other than petitioner’s self-

serving testimony, that petitioner would be held liable for any

debts of KM Welding.    Moreover, petitioner did not provide any

independent evidence of the financial health of KM Welding in

2005, the year RMI “abandoned” the partnership interest.

Petitioner also did not provide evidence that KM Welding was not

completing projects or timely paying its bills.    In fact, KM

Welding continued operations after 2005.

     Furthermore, petitioner testified she decided, upon her

CPA’s advice, to abandon the purported partnership interest.      Yet

petitioner did not provide evidence of the conversations she had

with her CPA.    Additionally, she admitted at trial that if she

received any profits from KM Welding in the future, she would

report the income.    Petitioner’s remarks suggest that she
                                -9-

believed there was still a possibility she would receive a return

on her investment.   Accordingly, we find that petitioner did not

truly intend to abandon any interest in KM Welding.

     Petitioner did not take any affirmative action in 2005 to

abandon the purported partnership interest in KM Welding.

Petitioner was unable to provide the date on which she abandoned

the interest.   Petitioner testified that she did not file any

public document indicating that she was no longer associated with

KM Welding.   Additionally, there is no evidence that petitioner

informed her purported partners that she was abandoning the

partnership interest.   We find that petitioner did not take

sufficiently identifiable steps to abandon the interest in KM

Welding to thereby be entitled to an abandonment loss deduction.

II. Accuracy-Related Penalty

     We turn now to respondent’s determination in the deficiency

notice that petitioners are liable for the accuracy-related

penalty under section 6662(a) and (b)(1).   Respondent has the

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

with sufficient evidence that it is appropriate to impose the

penalty.   See Higbee v. Commissioner, 116 T.C. 438, 446-447

(2001).

     A taxpayer is liable for an accuracy-related penalty for any

portion of an underpayment of income tax attributable to

negligence or disregard of rules and regulations, unless he or
                                -10-

she establishes that there was reasonable cause for the

underpayment and that he or she acted in good faith.   Secs.

6662(a) and (b)(1), 6664(c)(1).   Negligence is defined as any

failure to make a reasonable attempt to comply with the

provisions of the Code and includes any failure by the taxpayer

to keep adequate books and records or to substantiate items

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

     RMI did not maintain any books or records to substantiate

the abandonment loss claimed on RMI’s return for 2005.    We find

it incredible that petitioner, who is in the business of entering

into contracts, would not request written documentation of the KM

Welding transaction.    Furthermore, uncorroborated self-serving

testimony was the only evidence petitioner presented regarding

the abandonment of the purported partnership interest in KM

Welding.    We find that petitioners acted negligently in failing

to substantiate the abandonment loss, and respondent has met his

burden of production.

     Notwithstanding that petitioners were negligent, they may

avoid the imposition of a penalty if they are able to show that

there was a reasonable cause for, and that they acted in good

faith with respect to, the underpayment.   See sec. 6664(c).   The

determination of whether the taxpayer acted with reasonable cause

and in good faith is made by taking into account all the
                               -11-

pertinent facts and circumstances.    See sec. 1.6664-4(b)(1),

Income Tax Regs.

     Petitioner testified that she abandoned the KM Welding

partnership interest and claimed a loss deduction for 2005 on the

advice of her CPA.   We do not even have the name of her CPA, nor

do we know what information petitioner provided to the CPA.

Petitioner failed to give us adequate evidence that she acted in

good-faith reliance.   Accordingly, we hold that petitioners are

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

(b)(1) for 2005.

     In reaching our holding, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing and the concessions of the parties,


                                           Decision will be entered

                                      under Rule 155.
