T.C. Summary Opinion 2011-35



                      UNITED STATES TAX COURT



           JOHN L. AND MYRNA L. PARSLEY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17864-09S.             Filed March 24, 2011.



     John L. and Myrna L. Parsley, pro se.

     Archana Ravindranath, for respondent.



     DEAN, 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 effect for the year at issue,
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and Rule references are to the Tax Court Rules of Practice and

Procedure.

     Respondent determined for 2006 a deficiency in petitioners’

Federal income tax of $33,571 and an accuracy-related penalty

under section 6662(a) of $6,714.20.

     The parties agree that petitioners are entitled to deduct

the car and truck expenses claimed on their respective Schedules

C, Profit or Loss From Business.   The parties also agree that

petitioners are not entitled to deduct other expenses of $25,360

on Schedule E, Supplemental Income and Loss.

     Petitioners failed to offer any evidence or argument to

contest respondent’s adjustments to their deduction for personal

exemptions and their itemized deductions.   Thus, petitioners are

deemed to have conceded these issues.   See, e.g., Bradley v.

Commissioner, 

, 370 (1993); Sundstrand Corp. & Subs.

v. Commissioner, 

, 344 (1991); Rybak v. Commissioner,

, 566 n.19 (1988).

     The issues remaining for decision are whether petitioners

properly reported their capital gain income for the year and

whether petitioners are liable for the accuracy-related penalty

under section 6662(a).

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

The stipulation of facts and the exhibits received in evidence
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are incorporated herein by reference.     Petitioners resided in

Ohio when the petition was filed.

                             Background

     Myrna L. Parsley (petitioner) has been a real estate agent

for more that 30 years.   Petitioner in 1999 or 2000 took classes

to learn about section 1031, involving so-called like-kind

exchanges.   She takes continuing education courses to maintain

her real estate license and is a member of various real estate

professional associations.   Petitioner married her current

husband, petitioner John Parsley, in 2000.    He is also in the

real estate business.

     Petitioner’s ex-husband, Joseph Benedict (Benedict), was a

real estate broker.   While married to petitioner Benedict

purchased commercial property on Agler Road (the property) in his

name only in June 1990.   Petitioner learned of the purchase in

1992.   After petitioner confronted Benedict with her discovery,

he deeded to her an undivided interest in the property as a

tenant in common.    At that time petitioner was not engaged in the

sale of commercial property.   In January 1998 petitioner and

Benedict divorced.

     As part of the 1998 divorce settlement, Benedict was ordered

to deed to petitioner his remaining ownership interest in the

property, making her sole owner of the property.    In September

2000 the State court caused Benedict to issue a quitclaim deed to
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petitioner for the property.    Petitioners sold the property in

February 2006 for $700,000.     Petitioners reported a capital gain

of $256,272 from the sale on their 2006 Federal income tax

return.   Petitioners calculated their gain using a basis of

$502,205.   Benedict purchased the property for $320,000.

Respondent computed a capital gain on the sale of $488,071.    The

record does not reflect the extent to which depreciation affects

the parties’ calculations of basis and gain.

                              Discussion

     Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer has the burden

of proving that those determinations are erroneous.    See Rule

142(a); Welch v. Helvering, 

, 115 (1933).     In some

cases the burden of proof with respect to relevant factual issues

may shift to the Commissioner under section 7491(a).    Petitioners

did not argue or present evidence that they satisfied the

requirements of section 7491(a).    Therefore, the burden of proof

does not shift to respondent.

Capital Gain Income

     Petitioners argue that they relied on their tax adviser in

reporting the tax attributes of the property.    Petitioner

testified that in 1998 her adviser asked her what her cost basis

in the property was and she told him she did not know.    According

to petitioner, the adviser told her that the “regulations”
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allowed her to use the then fair market value (FMV) of the

building, about $500,000, as the basis for depreciating the

property.   Petitioner further testified that the adviser

cautioned her to use the 1998 FMV as her basis in the property if

she were to sell it.

     The tax adviser who prepared the 2006 return was not the

same tax adviser who gave petitioner the advice on the proper

basis for depreciating and selling the property.   Petitioners

told the “new” adviser that their basis in the property was the

approximately $500,000 on which they had been taking

depreciation.   In response to a question from respondent,

petitioner testified that during the period 1998 through 2006 she

never called the county auditor’s office to determine Benedict’s

actual cost basis in the property.

     Benedict deeded undivided interests in the property to

petitioner and himself as tenants in common in 1992.   Absent

evidence to the contrary, petitioner and Benedict then became

owners of equal undivided interests in the property.   See Bryan

v. Looker, 

, 592-593 (Ohio Ct. App. 1994); Spector

v. Giunta, 

(Ohio Ct. App. 1978).

     Generally, a taxpayer’s basis in property is the cost of the

property.   Sec. 1012.   Benedict’s cost basis in the property was

$320,000.   Transfers of property between an individual and a

spouse, however, are treated as gifts, and the basis of the
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transferee in the “gifted” property is the same as the adjusted

basis of the transferor.   Sec. 1041(a) and (b).   There is no

evidence in the record to show that the adjusted basis of the

property was different from its cost basis.   See sec. 1016.

After the transfer in 1992 the two cotenants, petitioner and

Benedict, held the property with a total basis of $320,000.

     There was a subsequent transfer of the property between the

cotenants.   As part of the 1998 divorce settlement, Benedict was

required to deed to petitioner his remaining ownership interest

in the property.   Petitioner testified that although ordered in

1998 to make the transfer, Benedict did not provide her with a

deed for the property in her name until September 2000.    Section

1041(a) and (b) provides that a transfer to a former spouse

incident to their divorce is also treated as though the

transferee has received a gift.   But the transfer must occur

within 1 year after the date of the cessation of the marriage or

must be “related to the cessation of the marriage.”    Sec.

1041(c).

     The Court finds that the transfer of Benedict’s undivided

interest in the property to petitioner was related to the

cessation of their marriage.   Upon that transfer, petitioner’s

basis in the property was that of the two undivided interests,

Benedict’s total adjusted basis in the property.    See sec.

1041(a) and (b).   The only relevant evidence in the record points
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to a total basis in the property of $320,000.      Lacking any

evidence of depreciation or capital improvements to the property

before its transfer in 2000, we conclude petitioner’s adjusted

basis was at most $320,000 and not the then FMV of the property.

See secs. 167(c), 1011.

       The gain from the sale or other disposition of property is

the excess of the amount realized over the adjusted basis of the

property.    Sec. 1001(a).   By using the larger amount, FMV, as

their adjusted basis petitioners improperly diminished their

gain.    Respondent’s determination on this issue is sustained.

Accuracy-Related Penalty

       Section 7491(c) imposes on the Commissioner the burden of

production in any court proceeding with respect to the liability

of any individual for penalties and additions to tax.        Higbee v.

Commissioner, 

, 446 (2001); Trowbridge v.

Commissioner, T.C. Memo. 2003-164.       In order to meet the burden

of production under section 7491(c), the Commissioner need only

make a prima facie case that imposition of the penalty or the

addition to tax is appropriate.     Higbee v. Commissioner, supra at

446.

       Respondent determined that for 2006, petitioners underpaid a

portion of their income tax due to:      (1) Negligence or

intentional disregard of rules and regulations; (2) a substantial

understatement of income tax; or (3) a substantial valuation
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misstatement.   Section 6662(a) imposes a 20-percent penalty on

the portion of an underpayment of tax attributable to any one of

various factors, including negligence or disregard of rules or

regulations and a substantial understatement of income tax.         See

sec. 6662(b)(1) and (2).   “Negligence” includes any failure to

make a reasonable attempt to comply with the provisions of the

Internal Revenue Code, including any failure to keep adequate

books and records or to substantiate items properly.    See sec.

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

     A “substantial understatement” includes an understatement of

tax that exceeds the greater of 10 percent of the tax required to

be shown on the return or $5,000.    See sec. 6662(d); sec.

1.6662-4(b), Income Tax Regs.

     Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment if the

taxpayer shows that there was reasonable cause for the taxpayer’s

position and that the taxpayer acted in good faith with respect

to that portion.   Higbee v. Commissioner, supra at 448.      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 the pertinent facts and circumstances.    Sec.

1.6664-4(b)(1), Income Tax Regs.    The most important factor is

the extent of the taxpayer’s effort to assess his proper tax

liability for the year.

     Petitioners have a substantial understatement of income tax

for 2006 since the understatement amount will exceed the greater

of 10 percent of the tax required to be shown on the return or

$5,000.   Petitioners also failed to substantiate items properly,

claimed itemized deductions and business expenses to which they

were not entitled, and failed to report a portion of their income

from capital gain.   The Court concludes that respondent has

produced sufficient evidence to show that the accuracy-related

penalty under section 6662(a) is appropriate.

     The accuracy-related penalty will apply unless petitioners

demonstrate that there was reasonable cause for the underpayment

and that they acted in good faith with respect to the

underpayment.   See sec. 6664(c).   Section 1.6664-4(b)(1), Income

Tax Regs., specifically provides:    “Circumstances that may

indicate 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.”

     Petitioner’s experience, knowledge, and education strongly

suggest that she either knew or should have known that the basis

on which petitioners computed their gain from the sale of the

property in 2006 was inflated.    And the Court is convinced that

petitioners, by the use of the tools of their profession, could

have determined the correct basis from which to compute their
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gain for 2006.   Petitioners offered no explanation to the Court

for the other adjustments to expenses and deductions.

     Petitioners did not show that their underreporting of income

and overreporting of deductions were actions taken with

reasonable cause and in good faith.    Respondent’s determination

of the accuracy-related penalty under section 6662(a) for 2006 is

sustained.

     To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.