                  T.C. Summary Opinion 2010-174



                     UNITED STATES TAX COURT



      ROBIN GAIL TORASSA AND MICHAEL SINTEF, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21044-08S.               Filed December 20, 2010.



     Robin Gail Torassa and Michael Sintef, pro sese.

     Melissa C. Quale, 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 when 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 in
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effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

     Respondent determined a $7,569 deficiency and a $1,513.80

accuracy-related penalty in petitioners’ 2005 Federal income tax.

Respondent also determined a $6,689 deficiency and a $1,337.80

accuracy-related penalty in petitioners’ 2006 Federal income tax.

After concessions, the issues for decision are:    (1) Whether

petitioners are entitled to a casualty loss deduction for taxable

year 2005, (2) whether petitioners are entitled to carry over any

unused portion of the casualty loss deduction to taxable year

2006, and (3) whether petitioners are liable for an accuracy-

related penalty under section 6662(a) for 2005 and/or 2006.

                            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.   At the time the petition

was filed, petitioners resided in California.     Hereinafter the

term “petitioner” refers solely to petitioner-wife.

     Before 2005 petitioner’s sister (Ulysses) purchased property

in Marin County, California.   The property consists of land and

an apartment building with four units, two on the upper level and

two on the lower level.   On November 23, 2005, Ulysses
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transferred the property1 by grant deed to herself and petitioner

as tenants in common.   On December 31, 2005, the lower two units

sustained flood damage.   Petitioner lived in one of the two lower

units.   On February 3, 2006, the President of the United States

designated Marin County a federally declared disaster area.

     Petitioners and Ulysses agreed that Ulysses would arrange

for and coordinate the cleanup and repair of the property.      On

March 3, 2006, Ulysses and petitioner applied for a disaster home

loan with the U.S. Small Business Administration (SBA).      An SBA

employee examined the property, assessed the damage, and

estimated the cost of repairs.    The SBA provided a detailed

35-page report which contained the estimated cost of repairs.

The report concluded that petitioner and Ulysses together were

eligible for a loan of up to $159,900.

     Ulysses managed the repair of the property and provided

information about the cost of repairs to the units.    Ulysses

claimed a casualty loss on her 2005 tax return.    The IRS

questioned the casualty loss, and ultimately Ulysses and the IRS




     1
      The deed describes the transfer of four parcels of real
property, including six numbered lots and two lots with only a
legal description.
                                - 4 -

agreed that she was entitled to a casualty loss of approximately

$50,000.2

     On petitioners’ timely filed 2005 Federal income tax return,

petitioners claimed a casualty loss of $87,000.     Petitioners also

claimed a casualty loss of $75,089 on their 2006 Federal income

tax return, purportedly as the unused portion of the casualty

loss from the 2005 return.

     On July 23, 2008, respondent issued to petitioners a notice

of deficiency disallowing the 2005 casualty loss deduction in

full and determining a deficiency and an accuracy-related

penalty.    Similarly, on August 7, 2008, respondent issued to

petitioners a notice of deficiency disallowing the 2006 casualty

loss deduction in full and determining a deficiency and an

accuracy-related penalty.    Petitioners filed a petition disputing

respondent’s determinations for 2005 and 2006.

                             Discussion

I.   Burden of Proof

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

notice of deficiency is presumed correct, and the taxpayer bears

the burden of showing that the determination is in error.     Rule

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

are a matter of legislative grace.      Deputy v. du Pont, 308 U.S.


     2
      A stipulation of settled issues was filed in docket No.
5900-09 wherein the parties agreed that Ulysses had established a
casualty loss of $50,012.
                                  - 5 -

488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934).     A taxpayer bears the burden of proving entitlement

to any deduction claimed.     Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, supra;

Wilson v. Commissioner, T.C. Memo. 2001-139.      A taxpayer is

required to maintain records sufficient to substantiate

deductions claimed on his or her income tax return.     Sec. 6001;

sec. 1.6001-1(a), (e), Income Tax Regs.

      Pursuant to section 7491(a), the burden of proof as to

factual matters shifts to the Commissioner under certain

circumstances.     Petitioners have neither alleged that section

7491(a) applies nor established their compliance with the

substantiation and recordkeeping requirements.     See sec.

7491(a)(2)(A) and (B).     Petitioners therefore bear the burden of

proof.     See Rule 142(a).

II.   Casualty Loss

      A.     In General

      Section 165(a) allows as a deduction any loss sustained

during the taxable year and not compensated for by insurance or

otherwise.     Section 165(c) limits the allowance of losses in the

case of individuals.      A casualty loss is allowable to a taxpayer

for a loss of property not connected with a trade or business if

the loss results from “fire, storm, shipwreck, or other

casualty”.     Sec. 165(c)(3).   Pursuant to section 165(h)(2), a net
                               - 6 -

casualty loss is allowed only to the extent it exceeds 10 percent

of adjusted gross income.

      In the case of property held for personal use, the

deductible amount is governed by section 1.165-7(b)(1), Income

Tax Regs., which provides that the amount of the loss to be taken

into account for purposes of section 165(a) shall be the lesser

of:   (1) The amount which is equal to the fair market value of

the property immediately before the casualty reduced by the fair

market value of the property immediately after the casualty, or

(2) the amount of the adjusted basis for determining the loss

from the sale or other disposition of the property involved.

Only the amount of the loss resulting from physical damage to

property is deductible under section 165.   Squirt Co. v.

Commissioner, 51 T.C. 543, 547 (1969), affd. 423 F.2d 710 (9th

Cir. 1970).

      The method of valuation to be used in determining a casualty

loss is prescribed in section 1.165-7(a)(2), Income Tax Regs.,

which provides as follows:

      (i) In determining the amount of loss deductible under
      * * * [section 165], the fair market value of the property
      immediately before and immediately after the casualty shall
      generally be ascertained by competent appraisal. This
      appraisal must recognize the effects of any general market
      decline affecting undamaged as well as damaged property
      which may occur simultaneously with the casualty, in order
      that any deduction under * * * [section 165] shall be
      limited to the actual loss resulting from damage to the
      property.
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     (ii) The cost of repairs to the property damaged is
     acceptable as evidence of the loss of value if the taxpayer
     shows that (a) the repairs are necessary to restore the
     property to its condition immediately before the casualty,
     (b) the amount spent for such repairs is not excessive, (c)
     the repairs do not care for more than the damage suffered,
     and (d) the value of the property after the repairs does not
     as a result of the repairs exceed the value of the property
     immediately before the casualty.

     B.    Petitioner’s Basis in the Property

     Petitioner provided the grant deed in which Ulysses

transferred the property to herself and petitioner as tenants in

common.   Respondent does not dispute the nature of this

ownership.   Petitioner received a one-half undivided interest in

the property conveyed by the deed.       See Rich v. Smith, 148 P. 545

Cal. Ct. App. 1915) (a deed conveying land to two grantees,

without designating the portions conveyed to each, presumptively

conveys to each an undivided one-half interest).      The deed

conveys “all of that certain real property” in four parcels.

Petitioner, therefore, was granted a one-half interest in the

land and buildings on the property described in the deed.

     The grant deed does not list the value of the property

Ulysses transferred to herself and petitioner, but the deed does

list an amount of documentary transfer tax paid on the value of

the property of $419.65.   Cal. Rev. & Tax. Code sec. 11911(a)

(West 2010) provides that when the value of the property

transferred exceeds $100, a county may impose a tax of 55 cents

per $500 on a deed for realty.    Additionally, the parties agreed
                                - 8 -

that the transfer tax rate was $1.10 per $1,000 of the value of

the property transferred.   Therefore, the value of the property

transferred shortly before the flood was $381,500 and the value

of petitioner’s undivided one-half interest was $190,750.      There

is no evidence that any improvements were made to the building

during the month between the transfer and the flood; thus, there

are no adjustments to basis.

     C.   Amount of Loss

     The parties agree that petitioners’ property was in a

federally declared disaster area and that it sustained damage

from the flood in December 2005.   Petitioners did not provide

receipts for repairs made to their home and instead rely

primarily on a disaster loan appraisal3 to substantiate the

amount of the loss.

     Petitioner and Ulysses jointly applied for a disaster loan

in order to become eligible for a loan to make repairs to the two

lower units of the complex, one occupied by Ulysses and one

occupied by petitioners.    Respondent presented Ulysses as a

witness at trial.    Ulysses testified to her loss and her efforts

to make repairs.    Structurally, the damaged apartments are



     3
      In certain circumstances the Internal Revenue Code and
regulations permit a disaster loan appraisal to be considered for
purposes of substantiating the amount of the loss. Sec. 165(i).
Even though petitioner did not make an election under sec.
165(i)(1), the appraisal is probative.
                               - 9 -

virtually identical.   Ulysses and petitioner were eligible for a

$159,900 loan to make repairs ($119,900 was allocated to real

property and $40,000 was allocated to personal property).

Petitioner’s one-half ownership of the two damaged apartments

qualified her for eligibility for at least one-half of the loan

as it relates to real property ($119,900 ÷ 2), or $59,950.

Presumably, petitioner would also be entitled to some portion of

the funds allocated to personal property damage.

     D.   Estimated Loss

     Section 6001 and the regulations promulgated thereunder

require taxpayers to maintain records sufficient to permit

verification of income and expenses.   As a general rule, if the

trial record provides sufficient evidence that the taxpayer has

incurred a deductible loss but the taxpayer is unable to

substantiate adequately the precise amount of the deduction to

which he or she is otherwise entitled, the Court may estimate the

amount of the deductible loss, bearing heavily against the

taxpayer whose inexactitude in substantiating the amount of the

expense is of his own making, and allow the deduction to that

extent.   Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930); see also Johnson v. Commissioner, T.C. Memo. 1981-55.

However, in order for the Court to estimate the amount of an

expense, the Court must have some basis upon which an estimate

may be made.   Vanicek v. Commissioner, 85 T.C. 731, 742-743
                               - 10 -

(1985).   Without such a basis for an estimate, any allowance

would amount to unguided largesse.      Williams v. United States,

245 F.2d 559, 560-561 (5th Cir. 1957).

     Respondent agreed that the other joint tenant was entitled

to claim a casualty loss of $50,012 which “reflects [Ulysses’]

50% ownership of the damaged property located at [the address of

the property Ulysses owns with petitioner]”.4     As outlined above,

petitioner’s basis in the property is $190,750.     According to the

disaster loan appraisal, wherein a Federal employee from the SBA

estimated the damage and cost of repairs of the entire property,

petitioner would have been eligible for an undivided one-half of

the $159,900 loan to make repairs to one of the lower level

units.    The lower level units were structurally similar, and the

estimated cost to repair each apartment was $59,950.     There is no

evidence that either unit required more repairs than the other.

     Bearing heavily against petitioners whose inexactitude is of

their own making, and considering the estimates of repair by the

SBA, we conclude that petitioners sustained a casualty loss in

2005 of $50,012.




     4
      See supra note 2.
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III. Net Operating Loss

     A deduction for a casualty loss allowable under section

165(c)(3) shall be treated as attributable to the taxpayer’s

trade or business.   See sec. 172(d)(4)(c).   Generally, before a

net operating loss (NOL) may be carried forward, it must be

carried back (carryback rule).    See sec. 172(b); sec. 1.172-

4(b)(1) and (2), Income Tax Regs.    In the case of a casualty

loss, the carryback period is 3 years.    Sec. 172(b)(1)(F).   On a

timely filed return, a taxpayer may elect to waive application of

the carryback rule and instead carry the loss forward.    See sec.

172(b)(3); see also sec. 301.9100-12T(d), Temporary Proced. &

Admin. Regs., 57 Fed. Reg. 43896 (Sept. 23, 1992) (redesignating

section 7.0(d), Temporary Income Tax Regs., 42 Fed. Reg. 1470

(Jan. 7, 1977)).   However, it appears that petitioners failed to

make an election to waive the carryback and therefore must carry

back any unused casualty loss.

     It appears from our conclusions herein that the loss was

fully absorbed in 2005.   Even if the loss was not fully absorbed

in 2005, petitioners must establish that the loss was not

absorbed by their gross income in the prior 3 years in order to

carry any loss forward to 2006.    See sec. 172(b)(1)(A); Jones v.

Commissioner, 25 T.C. 1100, 1104 (1956), revd. in part and

remanded on other grounds 259 F.2d 300 (5th Cir. 1958); sec.

1.172-4(b)(1) and (2), Income Tax Regs.    The record does not
                                 - 12 -

contain information about petitioners’ previous returns.

Accordingly, we sustain respondent’s determination with respect

to petitioner’s NOL carryover for 2006.

IV.   Accuracy-Related Penalty

      Section 6662(a) and (b)(1) and (2) imposes a penalty equal

to 20 percent of any underpayment of tax that is attributable to

negligence or a disregard of rules or regulations or to a

substantial understatement of income tax.      Negligence includes

any failure to keep adequate books and records or to substantiate

items properly.   Sec. 1.6662-3(b)(1), Income Tax Regs.      An

understatement is substantial if it exceeds the greater of:

(1) 10 percent of the tax required to be shown on the return for

the taxable year, or (2) $5,000.     Sec. 6662(d)(1)(A).

      The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.      Sec. 6664(c)(1).   Although

the Commissioner bears the burden of production under section

7491(c), the taxpayer bears the burden of proving reasonable

cause under section 6664(c).     Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001).   Respondent has met his burden of production

by showing that petitioners did not provide documentation

substantiating the amount of their disaster loss.
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       The determination of whether the taxpayer acted with

reasonable cause and in good faith depends on the pertinent facts

and circumstances, including the taxpayer’s efforts to assess the

proper tax liability; the knowledge and the experience of the

taxpayer; and the reliance on the advice of a professional, such

as an accountant.    Sec. 1.6664-4(b)(1), Income Tax Regs.

Reliance upon expert advice will not exculpate a taxpayer who

supplies the return preparer with incomplete or inaccurate

information.    Lester Lumber Co. v. Commissioner, 14 T.C. 255, 263

(1950).    Tax preparation software “is only as good as the

information one inputs into it.”    Bunney v. Commissioner, 114

T.C. 259, 267 (2000).    Reliance on a preparer or software is not

reasonable where even a cursory review of the return would reveal

inaccurate entries.    See Pratt v. Commissioner, T.C. Memo. 2002-

279.

       We reject petitioners’ claimed reliance on tax preparation

software, since a cursory review would show petitioners’ attempt

to deduct the entire amount of the casualty loss in each of the

years 2005 and 2006.    Thus, petitioners’ reliance on the software

was not reasonable for 2006.    Also, on the basis of our findings,

petitioners claimed deductions for amounts substantially greater

than they were entitled to in 2005.     We conclude that petitioners

neither acted with reasonable cause nor established their good

faith reliance on the tax preparation software.    Petitioners do
                              - 14 -

not qualify for the reasonable cause exception of section 6664.

Therefore, we sustain respondent’s determination that petitioners

are liable for the accuracy-related penalty pursuant to section

6662 for 2006.   We also sustain respondent’s determination that

petitioners are liable for the accuracy-related penalty to the

extent there remains a deficiency for 2005.

     To reflect the foregoing,


                                     Decision will be entered under

                                 Rule 155.
