                            T.C. Summary Opinion 2014-76



                            UNITED STATES TAX COURT



                 DOLOROSA LUCIANO-SALAS, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 10926-12S.                            Filed August 11, 2014.



      Dolorosa Luciano-Salas, pro se.

      Cassidy B. Collins, Donna L. Crosby, and Cory H. Ellenson, for respondent.



                                 SUMMARY OPINION


      GUY, 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.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by


      1
          Unless otherwise indicated, section references are to the Internal Revenue
                                                                          (continued...)
                                          -2-

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

case.

        Respondent determined a deficiency of $10,820 in petitioner’s Federal

income tax for 2008 and an accuracy-related penalty of $2,164 pursuant to section

6662(a). Petitioner filed a timely petition for redetermination with the Court

pursuant to section 6213(a). At the time the petition was filed, petitioner resided

in California.

        The issues for decision are whether petitioner is: (1) entitled to a deduction

for $24,144 of the home mortgage interest claimed on Schedule A, Itemized

Deductions; (2) entitled to a deduction for a rental real estate loss of $25,000

claimed on Schedule E, Supplemental Income and Loss; and (3) liable for an

accuracy-related penalty under section 6662(a). To the extent not discussed

herein, other adjustments are computational and flow from our decision in this

case.




        1
       (...continued)
Code (Code), as amended and in effect for 2008, and Rule references are to the
Tax Court Rules of Practice and Procedure. Monetary amounts are rounded to the
nearest dollar.
                                         -3-

                                    Background

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

facts and the accompanying exhibits are incorporated herein by this reference.

I. The Duplex

       During 2008 petitioner resided in a duplex at the corner of Haynes Street

and Cedros Avenue in Van Nuys, California (duplex or property).2 Petitioner’s

sister, Caridad Salas Hileman, had acquired the duplex for $540,000 on November

9, 2006, financing the purchase by obtaining first and second mortgages of

$417,000 and $123,000, respectively. The first mortgage was serviced by

Indymac Federal Bank Home Loan Servicing (Indymac). The parties agree that

Ms. Hileman was the responsible party on both mortgages.

      On September 17, 2007, Ms. Hileman obtained a third mortgage loan of

$150,000 from Wells Fargo Bank (Wells Fargo). To secure repayment of the loan,

Wells Fargo obtained and recorded a “short form deed of trust” in which

Ms. Hileman granted the bank a security interest in the duplex with the power to

sell the property.




      2
        Because the duplex is on a street corner, the two units are assigned separate
street addresses: 14658 Haynes Street and 6518 Cedros Avenue.
                                           -4-

         Petitioner contends that she is the true owner of the duplex and that Ms.

Hileman, who purportedly resides with her husband in Arizona, owns the property

in name only. Petitioner testified that, because her credit rating was poor, Ms.

Hileman agreed to assist her by acting as the purchaser of the property. Petitioner

and Ms. Hileman did not have a written agreement memorializing the ownership

arrangement described above, and petitioner did not call Ms. Hileman to testify at

trial.

II. Mortgage Payments

         Petitioner maintains that she made the mortgage payments on the duplex.

The record as it relates to the amount and source of mortgage payments is best

characterized as muddled.

         Petitioner produced receipts showing that Indymac received three separate

mortgage payments of $2,172 during 2007. One of the receipts shows petitioner’s

name, but the other two were either illegible or merely showed Ms. Hileman’s loan

account number.

         Indymac issued an annual account statement to Ms. Hileman crediting her

with total mortgage payments of $28,297 for 2008. Petitioner’s bank records

reflect that she transferred $2,192 and $2,187 directly to Ms. Hileman’s Indymac

loan account on April 25 and September 17, 2008, respectively.
                                        -5-

      Two mortgage payments were made during 2009. The record does not

reflect the source of these payments.

      Petitioner made three and four mortgage payments during 2010 and 2011,

respectively.

III. Additional Expenses

      Petitioner asserts that she paid additional expenses related to the duplex

during 2008 including taxes, insurance premiums, and gardening expenses.

Petitioner did not offer any records, such as receipts or canceled checks, to show

that she paid any of the additional expenses.

IV. Rental Activities

      The record includes month-to-month lease agreements indicating that

petitioner (as “landlord”) rented out the Cedros Avenue unit for the period May 1

to June 30, 2007, and for the period beginning June 1, 2011. Petitioner reported

on her 2007 and 2010 Federal income tax returns that she received rental income

of $1,300 and $11,000, respectively.3 Petitioner alleges that she renovated the

duplex during 2008 and that she did not have any tenants that year.




      3
       The record does not include a lease agreement for 2010, and there is no
indication whether petitioner reported rental income for 2011.
                                         -6-

V. Petitioner’s 2008 Tax Return

      Petitioner filed a Form 1040, U.S. Individual Income Tax Return, for 2008

reporting wage income of $75,749 and attaching Schedules A and E. On Schedule

A she claimed a mortgage interest deduction of $25,717, including $24,144 that

she attributes to the duplex.4 On Schedule E she claimed a deduction for a rental

real estate loss of $25,000 in respect of the duplex, an amount that she carried over

to line 17 on Form 1040.5 She reported no rental income and the following

expenses on Schedule E:

                          Item                 Amount

                   Insurance                     $200
                   Mortgage interest           12,667
                   Taxes                        2,546
                   Gardening                      600
                   Depreciation expenses        9,817

                      Total                    25,830




      4
       Respondent does not dispute that petitioner is entitled to a Schedule A
deduction of $1,573 for mortgage interest that she paid to Wyndham Resort
Development during the year in issue.
      5
      Petitioner maintains that she properly claimed mortgage interest deductions
on Schedules A and E because she used approximately 66% of the duplex as her
personal residence and 34% of the duplex as a rental property.
                                          -7-

VI. Tax Return Preparation

       Alan Forrester, an attorney and a certified public accountant, prepared

petitioner’s tax return for 2008. Petitioner testified that Mr. Forrester had

prepared and filed her tax returns since 2005. Petitioner provided Mr. Forrester

with her tax records and trusted him to properly prepare her tax return. She did

not review the return for accuracy before it was filed. Petitioner testified that

Mr. Forrester did not return her tax records after filing her return for 2008.

Mr. Forrester did not testify at trial.

VII. Ms. Hileman’s Bankruptcy Proceedings

       On December 1, 2009, Ms. Hileman filed a chapter 13 bankruptcy petition,

including various schedules described below, with the U.S. Bankruptcy Court for

the Central District of California (bankruptcy court). Ms. Hileman identified the

duplex as her home address in the bankruptcy petition. She reported on Schedule

A - Real Property that she owned an equitable interest in the duplex, that the

property’s fair market value was $350,000, and that the property was subject to

secured claims totaling $574,000. On Schedule B - Personal Property

Ms. Hileman reported that she owned furniture at the duplex worth $2,300. On

Schedule C - Property Claimed as Exempt she claimed that the duplex and the

furniture were exempt from inclusion in property of the bankruptcy estate pursuant
                                           -8-

to 11 U.S.C. sec. 522(b)(3) (2006). On Schedule D - Creditors Holding Secured

Claims she reported that Indymac and Wells Fargo held mortgages on the duplex.6

On Schedule I - Current Income of Individual Debtor(s) she reported receiving

$2,200 of monthly income from real property, and on Schedule J - Current

Expenditures of Individual Debtor(s) she reported monthly rent or mortgage

payments of $2,172.7 The bankruptcy court dismissed petitioner’s case in March

2010 after conducting a confirmation hearing.

        Ms. Hileman filed second and third bankruptcy petitions on April 12, 2010,

and September 22, 2013, respectively. The latter petitions were similar in all

material respects to her original 2009 bankruptcy petition described above. In

2011 the bankruptcy court awarded Ms. Hileman damages when One West Bank8

attempted to foreclose the mortgage on the duplex while her chapter 13 payment

plan remained in effect.



        6
       On Schedule H - Codebtors Ms. Hileman did not identify petitioner or any
other person or entity that might be liable on the debts to Indymac and Wells
Fargo.
        7
       We infer that the rental income and mortgage payments that Ms. Hileman
reported are attributable to the duplex--the only real estate asset listed in her
bankruptcy petition.
        8
            We take judicial notice that Indymac was acquired by One West Bank in
2009.
                                        -9-

VIII. Notice of Deficiency

      Respondent issued petitioner a notice of deficiency disallowing $24,144 of

the $25,717 deduction for mortgage interest that she claimed on Schedule A and

the $25,000 deduction (rental real estate loss) that she claimed on Schedule E.

Respondent determined that petitioner failed to show that the duplex was used as a

rental property or that she was otherwise entitled to the disallowed deductions.

IX. Petition for Redetermination

      Petitioner alleged in her petition that she received a Form 1098, Mortgage

Interest Statement, issued to Ms. Hileman reporting mortgage interest payments of

$37,524 for 2008, that Ms. Hileman did not claim a deduction for mortgage

interest on her Federal income tax return for 2008, and, inasmuch as she is the

equitable owner of the duplex, the deductions that she claimed on Schedules A

and E should be allowed.9

                                    Discussion

      As a general rule, the Commissioner’s determination of a taxpayer’s liability

in a notice of deficiency is presumed correct, and the taxpayer bears the burden of

proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290


      9
       Petitioner did not produce the Form 1098 at trial. Nor did she provide a
copy of Ms. Hileman’s 2008 tax return.
                                       -10-

U.S. 111, 115 (1933). Tax deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving entitlement to any deduction claimed. Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). A taxpayer must substantiate

deductions claimed by keeping and producing adequate records that enable the

Commissioner to determine the taxpayer’s correct tax liability. Sec. 6001;

Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d

821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).

      Under certain circumstances, the burden of proof with respect to relevant

factual issues may shift to the Commissioner under section 7491(a). Petitioner has

neither alleged that section 7491(a) applies nor established her compliance with

the requirements of section 7491(a)(2)(A) and (B) to substantiate items, maintain

records, and cooperate fully with respondent’s reasonable requests. Therefore, the

burden does not shift to respondent under sec. 7491(a). See Higbee v.

Commissioner, 116 T.C. 438, 442-443 (2001).

      When a taxpayer establishes that he or she paid or incurred a deductible

expense but fails to establish the amount of the deduction, the Court normally may

estimate the amount allowable as a deduction. Cohan v. Commissioner, 39 F.2d

540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743
                                        -11-

(1985). There must be sufficient evidence in the record, however, to permit the

Court to conclude that a deductible expense was paid or incurred in at least the

amount allowed. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).

I. Mortgage Interest Deduction

      Section 163(a) provides the general rule that there shall be allowed as a

deduction all interest paid or accrued within the taxable year on indebtedness.

Section 163(h)(1), however, provides that, in the case of a taxpayer other than a

corporation, no deduction shall be allowed for personal interest. Interest paid on a

mortgage secured by a qualified residence is excluded from the definition of

personal interest and is therefore deductible. See sec. 163(h)(2) and (3).

      To meet the requirements of section 163, the mortgage must be the

obligation of the taxpayer claiming the deduction, not the obligation of another.

Golder v. Commissioner, 604 F.2d 34, 35 (9th Cir. 1979), aff’g T.C. Memo. 1976-

150; Hynes v. Commissioner, 74 T.C. 1266, 1287 (1980). However, section

1.163-1(b), Income Tax Regs., provides in relevant part: “Interest paid by the

taxpayer on a mortgage upon real estate of which he is the legal or equitable

owner, even though the taxpayer is not directly liable upon the bond or note

secured by such mortgage, may be deducted as interest on his indebtedness.” We

have disallowed a deduction for mortgage interest where the taxpayer is unable to
                                        -12-

establish legal, equitable, or beneficial ownership of mortgaged property. See

Daya v. Commissioner, T.C. Memo. 2000-360; Song v. Commissioner, T.C.

Memo. 1995-446.

      The parties agree that Ms. Hileman was the responsible party on the first

and second mortgages, and there is no evidence that anyone other than

Ms. Hileman was financially responsible for the Wells Fargo mortgage. Likewise,

the objective evidence in the record, including the deed of trust Ms. Hileman

granted to Wells Fargo and the various schedules she filed with the bankruptcy

court, point to Ms. Hileman as the holder of legal title to the property. Therefore,

to be entitled to claim a deduction for mortgage interest, petitioner must show that

she is a beneficial or equitable owner of the duplex. See Daya v. Commissioner,

T.C. Memo. 2000-360; Trans v. Commissioner, T.C. Memo. 1999-233; Uslu v.

Commissioner, T.C. Memo. 1997-551.

      State law determines the nature of property rights, and Federal law

determines the tax consequences of those rights. United States v. Nat’l Bank of

Commerce, 472 U.S. 713, 722 (1985); Blanche v. Commissioner, T.C. Memo.

2001-63, aff’d, 33 Fed. Appx. 704 (5th Cir. 2002). Cal. Evid. Code sec. 662

(West 1995) provides that “[t]he owner of the legal title to property is presumed to

be the owner of the full beneficial title. This presumption may be rebutted only by
                                         -13-

clear and convincing proof.” See Puentes v. Commissioner, T.C. Memo. 2013-

277, at *5. A taxpayer becomes the equitable owner of property when he or she

assumes the benefits and burdens of ownership. See Baird v. Commissioner, 68

T.C. 115, 124 (1977); Blanche v. Commissioner, T.C. Memo. 2001-63.

      Although petitioner contends that she held an equitable ownership interest

in the duplex, we conclude otherwise. The record shows that petitioner made a

few sporadic mortgage payments over the course of several years. There is no

objective evidence, however, that Ms. Hileman, the legal owner of the duplex,

entered into an agreement vesting petitioner with any ownership interest in the

property. There is no evidence that petitioner had any duty or obligation to

maintain or insure the property or that she was responsible for real estate taxes.10

To the contrary, Ms. Hileman steadfastly maintained in numerous bankruptcy

filings that she resided in and owned the duplex. She also exercised her rights

under Federal bankruptcy law to protect the property from foreclosure. Against

this backdrop, we are left doubting petitioner’s story and troubled that she did not


      10
        This case is readily distinguishable from cases in which we have held that
a taxpayer was entitled to a deduction for mortgage interest, even though a family
member secured the mortgage as an accommodation, because the taxpayer
exclusively had, and was intended to have, the benefits and burdens of ownership.
See Trans v. Commissioner, T.C. Memo. 1999-233; Uslu v. Commissioner, T.C.
Memo. 1997-551.
                                         -14-

call Ms. Hileman as a witness at trial to explain the stark discrepancies in her trial

testimony and the objective evidence in the record. Considering all the

circumstances, we conclude that petitioner was not an equitable owner of the

duplex during 2008, and we sustain respondent’s determination disallowing so

much of the mortgage interest deduction as petitioner claimed on Schedule A in

respect of the duplex.

II. Rental Real Estate Loss

      Petitioner claimed a deduction for a rental real estate loss of $25,000--an

amount derived from expenses totaling $25,830 that she attributed to the duplex,

including insurance charges of $200, mortgage interest of $12,667, taxes of

$2,546, gardening expenses of $600, and depreciation expenses of $9,817.

      As previously discussed, Ms. Hileman was the legal owner of the duplex,

and she informed the bankruptcy court that she received rental income in respect

of the property during 2009. There is no objective evidence that Ms. Hileman

entered into any agreement to permit petitioner to lease any part of the property at

any time. Although petitioner produced lease agreements indicating that she had

acted as lessor in respect of the duplex at various times before and after 2008, she

admitted that she did not have a tenant during 2008.
                                         -15-

      Short of engaging in a detailed analysis of the passive loss rules prescribed

in section 469,11 we simply note that, consistent with petitioner’s admission that

she did not rent out the property during 2008, she was not engaged in a rental

activity and is not entitled to claim a deduction for a rental real estate loss under

the provisions of section 469(i). See sec. 1.469-1T(e)(3)(i)(A), (ii)(A), Temporary

Income Tax Regs., 53 Fed. Reg. 5702 (Feb. 25, 1988); see also Hoskins v.

Commissioner, T.C. Memo. 2013-36, at *10.

      Equally important, petitioner failed to provide the Court with persuasive

evidence that she was liable for, and in fact paid, the expenses in question.

Consistent with the foregoing, we sustain respondent’s determination disallowing

the deduction petitioner claimed for a rental real estate loss of $25,000.

III. Accuracy-Related Penalty

      Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the amount of

any underpayment attributable to negligence or disregard of rules or regulations.

The term “negligence” includes any failure to make a reasonable attempt to

comply with tax laws, and “disregard” includes any careless, reckless, or

      11
         Sec. 469(a) generally disallows passive activity losses and credits.
Although rental activity is generally treated as a passive activity regardless of
whether the taxpayer materially participates, see sec. 469(c)(2), (4), the Code
provides exceptions and special rules for taxpayers engaged in rental real estate
activities, see sec. 469(c)(7), (i).
                                        -16-

intentional disregard of rules or regulations. Sec. 6662(c). Negligence also

includes any failure to keep adequate books and records or to substantiate items

properly. Sec. 1.6662-3(b)(1), Income Tax Regs.; see Olive v. Commissioner, 139

T.C. 19, 43 (2012).

      With respect to a taxpayer’s liability for any penalty, section 7491(c) places

on the Commissioner the burden of production, thereby requiring the

Commissioner to come forward with sufficient evidence indicating that it is

appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. at 446-447.

Once the Commissioner meets his burden of production, the taxpayer must come

forward with persuasive evidence that the Commissioner’s determination is

incorrect. Id. at 447; see Rule 142(a); Welch v. Helvering, 290 U.S. at 115.

Respondent discharged his burden of production under section 7491(c) by

showing that petitioner failed to keep adequate records and properly substantiate

her claimed expenses. See sec. 1.6662-3(b)(1), Income Tax Regs.

      Section 6664(c)(1) provides an exception to the imposition of the accuracy-

related penalty if the taxpayer establishes that there was reasonable cause for, and

the taxpayer acted in good faith with respect to, the underpayment. Sec. 1.6664-

4(a), Income Tax Regs. The determination of whether the taxpayer acted with

reasonable cause and in good faith is made on a case-by-case basis, taking into
                                          -17-

account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax

Regs.

        A taxpayer may be able to demonstrate reasonable cause and good faith (and

thereby escape the accuracy-related penalty of section 6662) by showing reliance

on professional advice. See id. However, reliance on professional advice is not an

absolute defense to the section 6662(a) penalty. Freytag v. Commissioner, 89 T.C.

849, 888 (1987), aff’d, 904 F.2d 1011 (5th Cir. 1990), aff’d, 501 U.S. 868 (1991).

A taxpayer asserting reliance on professional advice must prove that: (1) the

adviser was a competent professional with sufficient expertise to justify reliance;

(2) the taxpayer provided the adviser necessary and accurate information; and (3)

the taxpayer actually relied in good faith on the adviser’s judgment. See

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299

F.3d 221 (3d Cir. 2002). As a defense to the penalty, petitioner bears the burden

of proving that she acted with reasonable cause and in good faith. See Higbee v.

Commissioner, 116 T.C. at 446.

        Petitioner relied on Mr. Forrester, a certified public accountant and an

attorney, who had prepared her tax returns in previous years, to prepare a complete

and correct return for the year in issue. However, the record shows that

Mr. Forrester did not review the return with petitioner, nor did she review the
                                          -18-

return on her own. Taxpayers have a duty to review their tax returns before

signing and filing them, and the duty of filing accurate returns cannot be avoided

by placing responsibility on a tax return preparer. Metra Chem Corp. v.

Commissioner, 88 T.C. 654, 662 (1987); Magill v. Commissioner, 70 T.C. 465,

479-480 (1978), aff’d, 651 F.2d 1233 (6th Cir. 1981). Moreover, the record does

not reflect whether petitioner provided Mr. Forrester with necessary and accurate

information. Petitioner did not call Mr. Forrester to testify at trial.

      In sum, we are unable to conclude that petitioner acted with reasonable

cause and in good faith within the meaning of section 6664(c)(1). Accordingly,

respondent’s determination that petitioner is liable for an accuracy-related penalty

under section 6662(a) is sustained.

      To reflect the foregoing,


                                                 Decision will be entered

                                         for respondent.
