                                T.C. Memo. 2013-233



                        UNITED STATES TAX COURT



             PHILIP D. LONG a.k.a. PHIL LONG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 26552-10.                         Filed October 21, 2013.



      Philip D. Long, pro se.

      Kimberly A. Daigle, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MORRISON, Judge: The respondent issued a notice of deficiency

determining a $1,430,743 deficiency in the petitioner’s federal income tax and a

$286,148.60 accuracy-related penalty under section 6662(a) for the 2006 tax year.

Unless otherwise indicated, all section references are to the Internal Revenue Code
                                            -2-

[*2] as in effect for the 2006 tax year, and all Rule references are to the Tax Court

Rules of Practice and Procedure. The respondent is referred to as the IRS. The

petitioner is referred to as Long.

      The only issues remaining to be resolved are:

      (1)    Is Long entitled to a deduction for $238,543.71 in legal fees in

             addition to the $829,922 in legal fees determined to be deductible in

             the notice of deficiency? (At trial Long waived the issue of the

             deductibility of the $238,543.71 in legal fees; he is therefore not

             entitled to that deduction.)

      (2)    Of the $5.75 million that Long received from Louis P. Ferris, Jr., is

             $600,000 excludable from Long’s income on the theory that this

             amount was the share of earnings attributable to Long’s alleged joint

             venture partner, Steelervest, Inc.? (We find there was no joint

             venture; Long must therefore include the $600,000 in his income.)

      (3)    Is the character of the $5.75 million received by Long capital or

             ordinary? (We hold that the income is ordinary.)

      (4)    Is Long entitled to cost of goods sold of $2,440,861, as claimed on

             his return, or $1,655,562, as determined in the notice of deficiency?

             (We hold that the allowable amount is $1,655,562.)
                                          -3-

[*3] (5)       Is Long liable for the accuracy-related penalty pursuant to section

               6662(a)? (We hold that he is liable.)

                                 FINDINGS OF FACT

         The parties stipulated some facts; those facts are so found. Long resided in

Fort Lauderdale, Florida, at the time the petition was filed.

         Long was married to Susan Long until their divorce in September 2006.

         Long was involved in various entities that conducted real estate

development projects in Florida. The development projects often spanned several

years.

         Long owned and operated Las Olas Tower Co., Inc. (hereinafter “LOT”).

LOT was incorporated in 1994 as a Delaware corporation. Long never filed any

corporate income tax returns for LOT and treated the entity as a sole

proprietorship, reporting its income and deductions on his Schedule C, “Profit or

Loss From Business”.1 Long created LOT to design and build a luxury high-rise

condominium building called the Las Olas Tower. The Las Olas Tower was to be

built on land to be purchased from Las Olas Riverside Hotel (hereinafter “LOR”).




         1
       Neither Long nor the IRS urges that LOT be treated as other than a sole
proprietorship for federal income tax purposes.
                                        -4-

[*4] The land was on Las Olas Boulevard in Fort Lauderdale, Florida. In 1994,

LOT began negotiations to purchase the land from LOR.

      In 1995, LOT borrowed $300,000 from Steelervest, Inc., a corporation

owned by Henry J. Langsenkamp III (hereinafter “Langsenkamp”). In addition to

agreeing to repay the principal on the loan, LOT granted Steelervest an option to

acquire 10% of an entity to which LOT promised to transfer ownership of the

building to be constructed on Las Olas Boulevard. The loan agreement provided

that if the 10% option was exercised by Steelervest, any distributions Steelervest

received from the entity would reduce the loan principal LOT owed. Steelervest

never exercised the 10% option. At some point, Steelervest made other loans to

LOT beyond the initial $300,000. By 2001, the balances of all of Steelervest’s

loans to Long amounted to $748,000.

      From 1997 through 2003, Long owned Alhambra Partners, Inc. (hereinafter

“Alhambra”). Alhambra was formed to construct a luxury condominium building

on Birch Road in Fort Lauderdale, Florida. To facilitate the project, Alhambra

entered into a joint venture, called Alhambra Joint Venture, with Steelervest.2


      2
        The parties stipulated the existence of the Alhambra Joint Venture. The
second issue for decision relates to Long’s assertion that there was a different joint
venture with respect to the Las Olas Tower, which would allow him to exclude
part of the $5.75 million received from Ferris.
                                        -5-

[*5] Alhambra Joint Venture was responsible for constructing the Birch Road

condominium building and selling the condominium units to customers.

      From 1997 to 2001, Alhambra Joint Venture suffered significant losses.

Steelervest lent $3,203,409.81 to Alhambra Joint Venture. The loan was

guaranteed by Long and Susan Long.

      In 2001, Steelervest entered into an agreement that restructured its legal and

financial arrangements with the Longs and their related entities (i.e., LOT,

Alhambra, and Alhambra Joint Venture). The agreement had four components:

      !      Steelervest forgave the $748,000 in loans it had made to LOT.3

      !      Steelervest released the Longs from their personal guaranties of the

             $3,203,409.81 loan Steelervest made to Alhambra Joint Venture.

      !      Alhambra, which was owned entirely by Long, transferred its interest

             in Alhambra Joint Venture to Steelervest, thus leaving Steelervest as

             the sole owner of Alhambra Joint Venture.

      !      Long agreed to pay Steelervest either (a) $600,000 in the event he

             sold his interest in LOT, or (b) 20% of LOT’s net profits from the




      3
       It is unclear from the record whether the agreement terminated
Steelervest’s option under the 1995 agreement to acquire 10% of the entity to be
formed by LOT.
                                         -6-

[*6] development of the property on Las Olas Boulevard, if he did not sell

         his interest.

         By the end of 2001, the units in the condominium building Alhambra Joint

Venture developed on Birch Road were sold.

         On June 20, 2002, LOT and LOR signed a contract, known as “the

Riverside Agreement”, obligating LOR to sell the property on Las Olas Boulevard

to LOT for $8,282,800. The closing date of the contract was December 31, 2004.4

The contract required LOT to use the property for no other purpose than as a

multiunit residential building with at least 120,000 square feet of residential units

and a height of at least 225 feet. When the contract was executed, Long intended

that LOT would construct a condominium building and sell the condominium

units.

         Even before the December 31, 2004 closing date of the Riverside

Agreement, the condominium building to be constructed on Las Olas Boulevard

became Long’s full-time project. Long hired architects to prepare the plans for the

building. He sought to obtain a zoning permit from the city. He printed


         4
       LOT had the option of accelerating the closing date to a date not earlier
than June 4, 2003, provided it gave LOR nine months’ written notice of the new
closing date.
                                        -7-

[*7] promotional materials about the building. Operating out of his business

office, Long negotiated contracts with purchasers of condominium units. He

obtained deposits for 20% of the units in the building.

      Before the closing date of the Riverside Agreement, the president of LOR

died. His heirs did not wish to go through with the Riverside Agreement. They

terminated it in February 2004.

      In March 2004, LOT sued LOR in the 17th Judicial Circuit Court for

Broward County, Florida, to enforce its rights under the Riverside Agreement.

The suit against LOR included claims for specific performance of the Riverside

Agreement, damages incident to a decree of specific performance, declaratory

relief, and tortious interference with contract. By the time of the lawsuit, Long

had decided that instead of constructing the condominium building, LOT would

sell the land, ready for construction, to a purchaser. Langsenkamp filed a motion

to intervene in the suit in order to be kept apprised of its status. On November 21,

2005, the 17th Judicial Circuit Court for Broward County, Florida, found in favor

of LOT on all claims except tortious interference. The state court ordered specific

performance and required LOR to close the contract within 326 days. In addition,

it ordered LOR to pay monetary damages to LOT, the amount of which was to be

determined later. The order explained that the purpose of the monetary damages
                                        -8-

[*8] was to compensate LOT for the delay between the original closing date

(December 31, 2004), and the earliest date that LOR would be compelled to fulfill

its obligations under the Riverside Agreement (326 days from November 21,

2005). LOR, dissatisfied with the outcome of the suit, appealed the decision.

During the appeal Louis P. Ferris, Jr. (hereinafter “Ferris”), offered to purchase

LOT’s position in the lawsuit against LOR.

      Meanwhile, in August 2006 Long and Steelervest renegotiated the fourth

component of their 2001 agreement. Long agreed that LOT would pay Steelervest

50% of the proceeds of the first $1.75 million, up to a maximum of $875,000, of

any moneys received by LOT as a result of LOT’s lawsuit against LOR or the

development of the condominium building on Las Olas Boulevard. In a separate

agreement, Steelervest lent Susan Long $200,000. The loan was secured by a

mortgage on real property owned by Long and Susan Long. The $200,000 loan

agreement is not in the record. From the testimony, it appears to us that

Steelervest and Long agreed that Long’s repayment of the $200,000 loan would

reduce the amount Long owed under the August 2006 agreement. Thus, if Long

were to repay the $200,000 loan, the maximum amount he would owe under the

August 2006 agreement would be $675,000, not $875,000.
                                        -9-

[*9] On September 13, 2006, LOT assigned its position in its lawsuit against

LOR, and all rights arising under the Riverside Agreement, to Ferris for a

purchase price of $5.75 million.5 In this agreement (hereinafter the “Ferris-LOT

assignment agreement”), Ferris and LOT “acknowledge that $650,000 of the

purchase price [i.e., $650,000 of the $5.75 million] is allocated towards

reimbursement of attorneys’ fees incurred by Seller [i.e., by LOT].” Earlier the

same day, the Longs, who were then in divorce proceedings, entered into an

agreement to resolve their respective claims to each other’s assets. This agreement

(hereinafter the “marital settlement agreement”) was contingent on the execution

of the Ferris-LOT assignment agreement. Pursuant to the marital settlement

agreement, Susan Long released any interest in LOT that she had acquired because

of her marriage to Long. In exchange, Long agreed to pay Susan Long $2 million

from the $5.75 million payment from Ferris. Long also agreed to make an

additional $1,963,828 in payments to various third parties,6 including $800,000 to

Steelervest.




      5
       The parties to the Ferris-LOT assignment agreement were LOT and Ferris,
although Long signed in both his individual capacity and as president of LOT.
      6
      Long agreed to pay certain creditors and have them release Susan Long
from any claims.
                                        - 10 -

[*10] At the time that LOT sold its lawsuit to Ferris, Long was the sole owner of

LOT. After the sale Ferris dropped the appeal; and the 17th Judicial Circuit Court

of Broward County, Florida, entered an order (1) vacating its earlier judgment and

(2) dismissing the lawsuit with prejudice.

      As agreed in the Ferris-LOT assignment agreement, Ferris paid Long $5.75

million for LOT’s position in the lawsuit and its rights in the Riverside contract.

As required by the marital settlement agreement, Long paid Susan Long $2 million

and various third parties $1,963,828. These payments included an $800,000

payment to Steelervest. In consideration of the $800,000 payment, Steelervest

executed an agreement releasing the Longs and LOT from any claims, including

any claims based on the August 2006 agreement and the $200,000 loan.

      Long filed a Form 1040, “U.S. Individual Income Tax Return”, for 2006.

He attached a Schedule C to report the income and expenses of LOT. The

Schedule C stated that Long’s trade or business was “real estate developer”. On

the Schedule C, Long reported $1,896,824 of the $5.75 million payment as

ordinary income; he did not report the remaining $3,853,176. On the Schedule C,

Long reported cost of goods sold of $2,440,681. He did not claim a deduction for

legal-and-professional-services expenses on his return. He reported that his tax
                                       - 11 -

[*11] liability for the year was zero. Long discussed the ordinary character of the

$5.75 million payment with his accountant, but no other aspects of the return.

      The IRS timely issued a notice of deficiency on September 2, 2010,

determining a deficiency in tax for 2006 of $1,430,743. The notice made the

following noncomputational adjustments to the amount Long reported as income

on his return:

                                             Amount of
                     Amount reported        adjustment in
                      by Long on his          notice of        Adjusted amount in
       Item               return             deficiency        notice of deficiency
 Schedule C
  gross receipts       $1,896,824          $3,853,176             $5,750,000
 Schedule C cost
  of goods sold         2,440,681           -1,655,562               785,119
 Schedule C
  legal-and-
  professional-
  services
  deduction                 -0-                 829,922              829,922

      In his petition, Long made a blanket statement disputing the deficiency and

penalty determined in the notice of deficiency. In addition, the petition contained

the following specific allegations:
                                        - 12 -

[*12] !      The $5.75 million payment from Ferris is excludable from Long’s

             income to the extent of $600,000 he paid to Steelervest.7

      !      The IRS erred in adjusting the cost of goods sold to $1,655,562.

      !      Long is entitled to deduct $238,543.71 in legal fees (in addition to the

             $829,922 determined to be allowable as a deduction in the notice of

             deficiency).

      At trial Long asserted that the character of any income from the $5.75

million payment was capital, not ordinary. At trial Long waived his claim that he

is entitled to deduction of $238,543.71 for legal fees.8

                                     OPINION

      The taxpayer generally bears the burden of proving that the determinations

in the notice of deficiency are erroneous. Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933). Pursuant to section 7491(a), the burden of proof may be

shifted to the IRS. However, Long has not established that he has met the




      7
      Long paid Steelervest a total of $800,000, which included the $200,000
mortgage loan repayment for Susan Long. Long asserted that only $600,000 of his
payment to Steelervest should be excluded from income.
      8
       At the end of trial the IRS moved to amend its answer to assert that Long
earned $75,000 in cancellation-of-indebtedness income. We denied this motion in
a separate order.
                                        - 13 -

[*13] conditions for such a shift. See sec. 7491(a)(1) and (2); Rolfs v.

Commissioner, 135 T.C. 471, 483 (2010), aff’d, 668 F.3d 888 (7th Cir. 2012).

Consequently, he still bears the burden of proof.

1.    Deductions for legal fees

      In his petition, Long sought a deduction for $238,543.71 in legal fees, in

addition to the $829,922 in legal fees determined to be allowable as a deduction in

the notice of deficiency. At trial, Long conceded the issue of the deductibility of

the $238,543.71 in legal fees by stating: “I’ve agreed to give up on the additional

legal fees.” On brief, Long attempted to revive his claim that he was entitled to

the $238,543.71 deduction.

      A concession made on the record by a taxpayer during trial is the equivalent

of a stipulation. Church of Scientology v. Commissioner, 83 T.C. 381, 524 (1984)

(“[A] concession in open court * * * [is] the equivalent of a stipulation.”), aff’d,

823 F.2d 1310 (9th Cir. 1987). A taxpayer is bound by his or her stipulations.

Dorchester Indus., Inc. v. Commissioner, 108 T.C. 320, 330 (1997), aff’d without

published opinion, 208 F.3d 205 (3d Cir. 2000). Thus, Long’s concession is

binding.

      Even if Long had not conceded the issue, his claim for a deduction for

$238,543.71 in legal fees would have failed for lack of proof. Taxpayers are
                                        - 14 -

[*14] required to maintain records sufficient to establish the amounts of allowable

deductions and to enable the IRS to determine the correct tax liability. Sec. 6001;

Shea v. Commissioner, 112 T.C. 183, 186 (1999). It is a general rule, established

in Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), that if the trial

record provides sufficient evidence that the taxpayer has incurred a deductible

expense, but the taxpayer is unable to fully substantiate the precise amount of the

deduction, the Court may estimate the amount of the deductible expense and allow

a deduction to that extent. In making such estimates, the Court may bear heavily

against the taxpayer, who caused the inexactitude. Id. at 544. For the Court to

estimate the amount of an expense, there must be some basis on which an estimate

may be made. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957);

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Because the IRS has

already determined that Long is entitled to a deduction for $829,922 in legal fees,

Long’s assertion that he is entitled to an additional $238,543.71 in legal fees is

tantamount to a claim that he is entitled to a deduction of legal fees of

$1,068,465.71 (the sum of $829,922 and $238,543.71). There is some evidence in

the record that $650,000 in legal expenses was incurred in relation to LOT’s

lawsuit against LOR. Long also moved the admission of a letter from his law firm

referring to $238,543 in fees. However, the letter was not a business record and
                                       - 15 -

[*15] was excluded from evidence. Long testified about the $238,543, but the

testimony was too vague and inconsistent to establish a basis for estimating what

he spent on legal fees. See Williams, 245 F.2d at 560; Vanicek v. Commissioner,

85 T.C. at 742-743. We hold that no deduction for legal expenses is available to

Long beyond the $829,922 determined in the notice of deficiency.

2.    The excludability from income of $600,000 of the $5.75 million Long
      received from Steelervest

      In 2006, Long agreed that LOT would pay Steelervest 50% of the proceeds

of the first $1.75 million, up to a maximum of $875,000, of any moneys LOT

received as a result of LOT’s lawsuit against LOR or the development of the

condominium building on Las Olas Boulevard. Later in 2006, Long received

$5.75 million from Ferris and paid Steelervest $600,000 of the proceeds. The

$200,000 loan to Susan Long was also repaid to Steelervest. Long now claims

that his August 2006 agreement with Steelervest created a joint venture and that

the $600,000 portion of the $5.75 million was Steelervest’s taxable share of the

income of the joint venture.9 The IRS contends that there was no joint venture




      9
        Implicitly, Long argued that the $5.75 million payment was income of the
joint venture and that $5.15 million of the joint venture’s income was his taxable
share. His express contention was that $600,000 of the $5.75 million payment is
Steelervest’s income, not his.
                                        - 16 -

[*16] between Long and Steelervest. In its view, the entire $5.75 million is the

income of Long.

      A joint venture “has been defined as a ‘special combination of two or more

persons, where in some specific venture a profit is jointly sought without any

actual partnership or corporate designation,’ and also as ‘an association of persons

to carry out a single business enterprise for profit.’” Beck Chem. Equip. Corp. v.

Commissioner, 27 T.C. 840, 848-849 (1957) (citing 48 C.J.S. Joint Adventures,

secs. 1 and 2, Estate of Koen v. Commissioner, 14 T.C. 1406 (1950), and Osborn

v. Commissioner, 22 B.T.A. 935, 945 (1931)). The existence of a joint venture “is

a question of fact to be determined by reference to the same principles that govern

the question of whether persons have formed a partnership * * * for tax purposes.”

Luna v. Commissioner, 42 T.C. 1067, 1077 (1964). The required inquiry for

determining the existence of a partnership for federal income tax purposes is

whether the parties “really and truly intended to join together for the purpose of

carrying on business and sharing in the profits or losses or both.” Commissioner

v. Tower, 327 U.S. 280, 287 (1946). The parties’ intentions are a matter of fact,

“to be determined from testimony disclosed by their ‘agreement, considered as a

whole, and by their conduct in execution of its provisions.’” Id. (quoting Drennen

v. London Assurance Co., 113 U.S. 51, 56 (1885)). The Court in Luna v.
                                       - 17 -

[*17] Commissioner, 42 T.C. at 1077-1078, distilling the principles established in

Tower and Commissioner v. Culbertson, 337 U.S. 733 (1949), held that the

following factors are relevant in evaluating whether parties intend to create a

partnership for federal income tax purposes:

      [1] The agreement of the parties and their conduct in executing its
      terms; [2] the contributions, if any, which each party has made to the
      venture; [3] the parties’ control over income and capital and the right
      of each to make withdrawals; [4] whether each party was a principal
      and coproprietor, sharing a mutual proprietary interest in the net
      profits and having an obligation to share losses, or whether one party
      was the agent or employee of the other, receiving for his services
      contingent compensation in the form of a percentage of income; [5]
      whether business was conducted in the joint names of the parties; [6]
      whether the parties filed Federal partnership returns or otherwise
      represented to respondent [i.e., the IRS] or to persons with whom they
      dealt that they were joint venturers; [7] whether separate books of
      account were maintained for the venture; and [8] whether the parties
      exercised mutual control over and assumed mutual responsibilities for
      the enterprise.

No single factor is conclusive of the existence of a partnership. Burde v.

Commissioner, 352 F.2d 995, 1002 (2d Cir. 1965), aff’g 43 T.C. 252 (1964);

McDougal v. Commissioner, 62 T.C. 720, 725 (1974). Examining each Luna

factor, we determine that Long and Steelervest did not engage in a joint venture

regarding LOT:
                                        - 18 -

[*18] 1. The August 2006 agreement provided only that Steelervest would receive

a share of Long’s profits from LOT. Neither this agreement nor any prior

agreements purported to create a joint venture.

      2. Steelervest did contribute money.

      3. Besides its profit share, Steelervest had no right to control LOT’s assets

or to receive money from LOT.

      4. Steelervest’s interest in LOT’s profits was capped at $875,000 and it had

no liability for LOT’s losses.

      5. Neither Long’s ownership of LOT nor LOT’s operations were conducted

in Steelervest’s name.

      6. Long and Steelervest did not file partnership returns or otherwise

represent to the IRS or others that there was a joint venture.

      7. No evidence shows that separate books of account of any joint venture

were maintained.

      8. Long possessed all control over his ownership interest in LOT and over

LOT’s operations; there was no control by Steelervest.

      On the basis of these factors, we find that Steelervest was not in a joint

venture with Long regarding Long’s investment in LOT or in LOT’s operations.
                                        - 19 -

[*19] Thus, Long must include the entire $5.75 million payment in his income.

See sec. 61(a).

3.    Capital-versus-ordinary character of the $5.75 million payment

      Pursuant to the Ferris-LOT assignment agreement, LOT sold its position in

its lawsuit against LOR, and all rights arising under the Riverside Agreement, to

Ferris. In exchange it received $5.75 million from Ferris.

      In its suit, LOT requested specific performance of a sales contract for the

property on Las Olas Boulevard. The Florida court awarded specific performance,

ordering LOR to sell the property to LOT. In exchange for this right of specific

performance, LOT received $5.75 million. Therefore, the character of the $5.75

million in income depends upon whether Long intended to acquire the Las Olas

Boulevard property for investment.

      The IRS contends that Long intended to have LOT construct a

condominium building on the land and sell condominium units. The IRS asserts

that the condominium units are not capital assets under section 1221(a)(1), which

provides that “property held by the taxpayer primarily for sale to customers in the

ordinary course of * * * [the taxpayer’s] trade or business” is not a capital asset.

Long argues that he intended to sell the land to a “developer”, which seems to

mean he expected the purchaser to construct the building.
                                        - 20 -

[*20] A threshold question regarding the application of section 1221(a)(1) is

whether the “property” Long intended to sell is (1) the land, (2) the land plus the

building, or (3) the individual condominium units. As discussed, the IRS contends

that Long intended to sell the condominium units. Long contends that he intended

to sell the land (ready for construction). While we agree with Long that he

intended to sell the land (ready for construction), we hold that the character of the

income is ordinary. Recall that:

      !      In 1999 LOT began negotiations to buy the land from LOR.

      !      In June 2002 LOR agreed to sell the land to LOT with a closing date

             of December 2004.

      !      In February 2004 LOR terminated the Riverside Agreement.

      !      LOT sued LOR for specific performance of the Riverside Agreement.

As of June 2002, Long’s intention was that LOT would construct the building and

sell the units. However, by the time LOT filed suit against LOR, Long had

changed his mind and decided to have LOT sell the property before completion of

the building. It was Long’s intent at this time that informs our view of the nature

of the claims asserted in the lawsuit. See Rice v. Commissioner, T.C. Memo.

2009-142 (looking to the taxpayer’s intent at the time property was disposed of);

Raymond v. Commissioner, T.C. Memo. 2001-96. At the time he sold his rights
                                         - 21 -

[*21] under the Riverside Agreement and to the lawsuit to Ferris, Long intended

to sell the land to another developer. Therefore, the applicability of section

1221(a)(1) depends on whether Long intended to sell the land to customers in the

ordinary course of his business.

      Income from the sale of a capital asset is capital in character. See sec. 1221;

sec. 1.1221-1(a) and (b), Income Tax Regs. Under section 1221(a)(1), property is

not a capital asset if it is “stock in trade of the taxpayer or other property of a kind

which would properly be included in the inventory of the taxpayer * * * or

property held by the taxpayer primarily for sale to customers in the ordinary

course of his trade or business”. The Supreme Court has defined “primarily” in

this context to mean “principally” or “of first importance”. Malat v. Riddell, 383

U.S. 569, 572 (1966); see also Biedenharn Realty Co. v. United States, 526 F.2d

409, 422-423 (5th Cir. 1976). The question of whether property is held primarily

for sale to customers in the ordinary course of a taxpayer’s business requires a

factual analysis. Pritchett v. Commissioner, 63 T.C. 149, 162 (1974). Typically,

the factors in making this determination include: (1) the taxpayer’s purpose in

acquiring the property; (2) the purpose for which the property was subsequently

held; (3) the taxpayer’s everyday business and the relationship of the income from

the property to the taxpayer’s total income; (4) the frequency, continuity, and
                                        - 22 -

[*22] substantiality of sales of property; (5) the extent of developing and

improving the property to increase the sales revenue; (6) the extent to which the

taxpayer used advertising, promotion, or other activities to increase sales; (7) the

use of a business office for sale of property; (8) the character and degree of

supervision or control the taxpayer exercised over any representative selling the

property; and (9) the time and effort the taxpayer habitually devoted to sales of

property. Biedenharn Realty Co., 526 F.2d at 415-422; United States v.

Winthrop, 417 F.2d 905, 910-911 (5th Cir. 1969). The frequency and

substantiality of sales is especially probative. Suburban Realty Co., 615 F.2d 171,

178 (5th Cir. 1980). The purpose of the section 1221(a)(1) exclusion is to

“differentiate between gain derived from the everyday operations of a business and

gain derived from assets that have appreciated in value over a substantial period of

time.” McManus v. Commissioner, 65 T.C. 197, 212 (1975) (citing Malat, 383

U.S. at 572), aff’d, 583 F.2d 443 (9th Cir. 1978).

      We first examine Long’s purpose for attempting to acquire the property on

Las Olas Boulevard. At the time of the lawsuit Long intended that LOT would

acquire the Las Olas Boulevard property, develop a condominium building (i.e.,

design the building and navigate the zoning-approval process), and then sell the

land to a purchaser. This intention is consistent with the proposition that the Las
                                        - 23 -

[*23] Olas Boulevard property, like the units in the condominium building on

Birch Road (which Long had bought and sold), would be held by Long primarily

for sale to his customers. See Sykes v. Commissioner, 57 T.C. 618, 625 (1972)

(“Nor does the fact that nearly half of petitioner’s sales in 1967 and 1968 were

made to one customer preclude his being engaged in a business.”); see also Pointer

v. Commissioner, 48 T.C. 906, 917 (1967) (finding a limited customer base, such

as two customers, meets the requirements under section 1221), aff’d, 419 F.2d 213

(9th Cir. 1969).

      We also consider the taxpayer’s everyday business and the relationship of

the income from the property to the taxpayer’s total income. Long’s full-time

activity was developing the land for the condominium building on Las Olas

Boulevard. Although this activity was interrupted by the termination of the

Riverside Agreement, which required Long to divert his energies to supervising

LOT’s lawsuit against LOR, Long presumably would have soon gone back to

developing the condominium building had he not struck a deal with Ferris.

      We also consider the frequency, continuity, and substantiality of Long’s

sales. We believe that Long initially intended to sell all the units in the yet-to-be-

constructed condominium building. He received deposits for 20% of the units.

Although Long changed his plans and decided to sell the land ready for
                                        - 24 -

[*24] construction of a building--and not the building units--this does not alter our

view that Long held the land primarily for sale to customers in the ordinary course

of business. The sale of a parcel of land (ready for construction) would result in a

large profit from a single-sale transaction. The profit would have been from

Long’s efforts to develop the land, not from the mere passage of time.

      We consider the extent to which the taxpayer developed and improved the

property. Long used substantial efforts to develop the property: he hired

architects, he obtained a zoning permit, he printed promotional materials, he

negotiated contracts with residential customers, and he obtained deposits.

      We consider the extent to which the taxpayer used advertising, promotion,

or other activities to increase sales. Through his sales efforts, Long received

deposits on 20% of the units. Had Long sold the land to a single buyer, we believe

he would have overseen the sale.

      We consider whether a business office was used. Long used a business

office to sell the condominium units. However, he may not have used a business

office to effect a sale of the land.

      We consider the character and degree of supervision or control Long

exercised over any representative selling the property. Long would have been
                                        - 25 -

[*25] primarily responsible for selling the land (if he had not sold the rights under

the Riverside Agreement and the lawsuit).

      We also consider the time and effort the taxpayer habitually devoted to sales

of property. Long was a professional in the real-estate industry. His full-time

business was developing and selling condominium properties.

      On the basis of our consideration of these factors, we find that the

preponderance of evidence demonstrates that Long intended that the land subject

to the Riverside Agreement would have been property held by Long primarily for

sale to his customers in the course of his business. Thus, if Long had not sold

LOT’s rights under the Riverside agreement and lawsuit against LOR, he would

have earned ordinary income through LOT after the state court had ordered

specific performance of the Riverside Agreement. Accordingly, we hold that the

$5.75 million payment is correctly treated as giving rise to ordinary income.

4.    Cost of goods sold

      The notice of deficiency determined that cost of goods sold should be

$1,655,562 rather than the $2,440,681 amount reported on Long’s return. Long’s

petition challenged this $785,119 reduction. But at trial he provided no evidence

to support the disputed cost-of-goods-sold amount. Consequently, we hold that

cost of goods sold is $1,655,562.
                                        - 26 -

[*26] 5.     Accuracy-related penalty pursuant to section 6662(a)

      Section 6662(a) and (b)(2) imposes an “accuracy-related penalty” of 20% of

the portion of the underpayment of tax attributable to any substantial

understatement of income tax. By definition, an understatement of income tax for

an individual is substantial if it exceeds the greater of $5,000 or 10% of the tax

required to be shown on the return. Sec. 6662(d)(1). Under section 7491(c), the

IRS bears the burden of production and must produce sufficient evidence that the

imposition of the penalty is appropriate in this case. See Higbee v. Commissioner,

116 T.C. 438, 446 (2001). Once the IRS meets this burden, the taxpayer must

come forward with persuasive evidence that the IRS’s determination is incorrect.

See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 447. A taxpayer who is

otherwise liable for the accuracy-related penalty may avoid the liability with

respect to a portion of an underpayment if the taxpayer can show, under section

6664(c)(1), that the taxpayer had reasonable cause for that portion and

that the taxpayer acted in good faith with respect to that portion. Section 1.6664-

4(b)(1), Income Tax Regs., provides:

      The determination of whether a taxpayer acted with reasonable cause
      and in good faith is made on a case-by-case basis, taking into account
      all pertinent facts and circumstances. * * * Generally, the most
      important factor is the extent of the taxpayer’s effort to assess the
      taxpayer’s proper tax liability. Circumstances that may indicate
                                        - 27 -

[*27] reasonable cause and good faith include an honest misunderstanding
      of fact or law that is reasonable in light of all of the facts and
      circumstances, including the experience, knowledge, and education of
      the taxpayer. An isolated computational or transcriptional error
      generally is not inconsistent with reasonable cause and good faith.
      * * * Reliance on * * * professional advice * * * constitutes
      reasonable cause and good faith if, under all the circumstances, such
      reliance was reasonable and the taxpayer acted in good faith. * * *

      Whether the taxpayer acted with reasonable cause and in good faith thus

depends on the pertinent facts and circumstances, including the taxpayer’s efforts

to assess the proper tax liability, the taxpayer’s knowledge and experience, and the

extent to which the taxpayer relied on the advice of a tax professional.

      There are other defenses to the penalty: section 6662(d)(2)(B) provides that

an understatement is reduced, first, where there is substantial authority for the

taxpayer’s treatment of any item giving rise to the understatement or, second,

where the relevant facts affecting the treatment of any item giving rise to the

understatement are adequately disclosed in the return and the taxpayer had a

reasonable basis for the treatment of that item.

      Long understated his 2006 income tax liability by $1,430,743, an amount

which is greater than 10% of the amount required to be shown on his return,

$143,074, which is greater than $5,000. Therefore, the IRS has met its burden of

producing evidence that imposing the penalty is appropriate.
                                        - 28 -

[*28] The evidence does not provide grounds for the reasonable-cause,

substantial-authority, or reasonable-basis defenses. Long consulted with his tax

return preparer about the character of the income (i.e., ordinary versus capital)

from the $5.75 million payment. The two decided to report the income as

ordinary, but that is not the aspect of the return that the IRS challenged. With

respect to the challenged portions of his return (the portions that we hold result in

the underpayment) the evidence does not show that (1) he provided enough

information to his return preparer or that (2) he relied on his return preparer’s

judgment. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99

(2000), aff’d, 299 F.3d 221 (3d Cir. 2002). Accordingly, we hold that Long is

liable for the section 6662(a) penalty for 2006 because he substantially

understated his income tax.

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

extent that we have not discussed them, we find them to be moot, irrelevant, or

without merit.

      To reflect the foregoing,


                                                       Decision will be entered for

                                                 respondent.
