T.C. Memo. 1998-263

UNITED STATES TAX COURT

DONNA M. NEIGHBORS, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 27654-96. Filed July 20, 1998. 

David W. Freese, for petitioner.

Lisa M. Oshiro, for respondent.

MEMORANDUM OPINION

LARO, Judge: This case was submitted to the Court fully

stipulated. See Rule 122. Petitioner petitioned the Court to

redetermine respondent's determination of a $20,488 deficiency in

her 1991 Federal income tax and a $4,098 accuracy-related penalty

under section 6662(a). We must decide whether petitioner

realized a $92,388 gain on the sale of her personal residence
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(the residence). We hold she did. We also must decide whether

petitioner is liable for the accuracy-related penalty for

negligence determined by respondent. We hold she is.

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the subject year. Rule

references are to the Tax Court Rules of Practice and Procedure. 

Dollar amounts are rounded to the nearest dollar.

Background

All facts are stipulated. The stipulations of fact and the

exhibits submitted therewith are incorporated herein by this

reference. Petitioner resided in Edmonds, Washington, when she

petitioned the Court. She purchased the residence during 1968,

and she sold the residence on March 6, 1991.

On or about January 19, 1987, petitioner commenced a

bankruptcy proceeding (the proceeding) under Chapter 7 of the

Bankruptcy Code, listing First Nationwide Bank (the Bank) as one

of her creditors; the Bank was the initial mortgagee on the

residence. When the proceeding began, the residence was worth

$103,000, and petitioner owed the Bank $84,290 on the note (the

Note) underlying the mortgage. On April 28, 1989, petitioner

received a discharge of debt under 11 U.S.C. sections 523 and

727. Included in this discharge was her personal obligation to

pay the Bank the amount of the Note.

On March 6, 1991, petitioner sold the residence for

$131,737; her basis in the residence was $38,000. First
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Northwest, the assignee of the Note and mortgage, received

$86,300 of the sales proceeds in satisfaction of the Note, and

other proceeds of the sale were used to pay some of petitioner's

liabilities. One of these liabilities was $1,349 of legal fees

which were incurred in connection with the sale. Petitioner

received $18,651 of the sales proceeds, exclusive of amounts paid

on her behalf.

Petitioner filed a 1991 Form 1040, U.S. Individual Income

Tax Return. Included therewith was a 1991 Form 2119, Sale of

Your Home, which reported that petitioner realized a $93,737 gain

on the sale of the residence and that she would be purchasing

another residence within the "replacement period" in order to

defer the gain. Petitioner computed her gain by subtracting her

$38,000 basis in the residence from its selling price of

$131,737.

Petitioner did not replace the residence within the

"replacement period". On or about August 28, 1996, petitioner

amended her 1991 Form 1040 by filing Form 1040X, Amended U.S.

Individual Income Tax Return. The Form 1040X reported that the

selling price of the residence was $29,402, that petitioner's

basis therein was zero, and that her gain on the sale was

$29,402.

Respondent determined that petitioner realized a $93,737

gain on the sale of the residence and that this gain was taxable

in 1991. Respondent asserts in brief that the determination of
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petitioner's gain should take into account the legal expenses of

$1,349, and that petitioner's gain is $92,388.

Discussion

Petitioner argues that she had a gain of $29,402 on the

sale. Petitioner cites no case law to support her argument, but

relies mainly on her interpretation of selected provisions of the

Internal Revenue and Bankruptcy Codes. The gist of petitioner's

argument is that the amount of the Note is not included in the

amount realized on the sale because she was discharged from

liability on it. Petitioner does not explain the computation of

her proffered $29,402 gain, but we surmise it represents the sum

of the following items: (1) Legal fees of $1,349, (2) settlement

proceeds of $18,651 received by petitioner at settlement, and

(3) $9,402 that was paid at settlement to discharge a Federal tax

lien on the residence. Petitioner does not explain the $16,035

difference between the $131,737 selling price and the $115,702

amount that we derive from adding petitioner's proffered gain of

$29,402 to the $86,300 that was paid at settlement in order to

satisfy the Note.

We reject petitioner's argument. Petitioner does not

dispute the fact that her gross income for 1991 includes her gain

on the sale, see sec. 61(a)(3), or that her gain must be

recognized in 1991, see sec. 1001(c). Nor does she dispute the

fact that her gain is computed by subtracting her adjusted basis

in the residence from the amount realized on its sale. See sec.
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1001(a). Petitioner disputes whether the amount of the Note is

included in the amount realized, given the fact that she was not

personally liable on it.

The amount of the Note is included in the amount realized on

the residence's sale. The amount realized on a sale is computed

by adding the amount of money received to the fair market value

of other property received. Sec. 1001(b). Any liability, let it

be recourse or nonrecourse, that attaches to the subject property

is included in the amount realized to the extent that the

liability is discharged by the sale. Crane v. Commissioner,

331 U.S. 1, 12-14 (1947); sec. 1.1001-2(a)(1), Income Tax Regs. 

As to the Note, the amount thereof is included in the amount

realized because, even though petitioner was not personally

liable on it at the time she sold the residence, First Northwest

had a legally enforceable right to receive, and actually did

receive, proceeds from the sale equal to the amount that it was

owed under the Note. In re Isom, 901 F.2d 744 (9th Cir. 1990);

see also Long v. Bullard, 117 U.S. 617 (1886).

In sum, the amount realized on the sale of the residence was

$131,737, and petitioner’s basis therein was $38,000. Given the

additional fact that petitioner may take into account the $1,349

of legal fees, we hold that petitioner realized, and must

recognize in 1991, a gain of $92,388 on the residence's sale.

As to the accuracy-related penalty, petitioner has not

addressed this issue on brief. As applicable herein, section
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6662(a) imposes an accuracy-related penalty equal to 20 percent

of the portion of an underpayment that is attributable to

negligence, and petitioner will avoid this charge only if the

record shows that she was not negligent; i.e., she made a

reasonable attempt to comply with the provisions of the Internal

Revenue Code, and she was not careless, reckless, or in

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

Drum v. Commissioner, T.C. Memo. 1994-433, affd. without

published opinion 61 F.3d 910 (9th Cir. 1995); see also Allen v.

Commissioner, 925 F.2d 348, 353 (9th Cir. 1991) (negligence

defined as a lack of due care or a failure to do what a

reasonable and prudent person would do under similar

circumstances), affg. 92 T.C. 1 (1989). Because the record does

not show that petitioner was not negligent, we sustain

respondent's determination on the applicability of this penalty.

In reaching our holdings herein, we have considered all

arguments by petitioner for contrary holdings, and, to the extent

not discussed above, find those arguments to be irrelevant or

without merit. To reflect respondent's concession,

Decision will be entered

under Rule 155.