1 5 6 T.C. No . 1 2

UNITED STATES TAX COURT
RICHARD S. HUSSEY, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 9 2 49 -1 8
. Fi l edJ u n e 2 4 , 2 0 2 1
.

In 2 0 1 2 P s o l d 1 6 i n v es t m en tp ro p ert i es an drecei vedfro m th e m o rt g ag e l en der a d i s ch arg e o f i n d eb t ed n es s t ot al in g $ 7 5 4 ,0 5 4 fo r 1 5 o f t h o se p ro p ert i es . In2 0 1 3 P s o l ds ev en i n ves t m en tp ro p ert ies . P d i dn o trecei v e fro m

th e l en d er a d i sch arg e o f i n d eb ted n es s rel at i n g t o th e 2 0 1 3 p ro p ert y

s al es . Th e p art i es ag ree t h ati n 2 0 1 2 P recei v eda d i s ch arg e o f qu al ifi edreal p ro p ert y

b u s in es s i n d eb t ed nes s (QRPBI). Th e d i s ch arg e o f QRPBI m ay b e ex cl ud edfro m i n co m e i f t h e t ax p ay er’ s b as es i n d ep reci ab l e real p ro p ert i es are red uced b y th e am o u n to f t h e d eb t d i s ch arg e. I.R.C. s ec. 1 0 8 (a)(1 )(D), (c)(1 ). A b as i s redu ct i o n o ccu rs o n l y

t o the ex ten tth atth e t ax p ay er’ s ag g reg at e b as es i n d ep reci ab l e real p ro p ert i es equ al o r ex ceed th e am o u n t o f d eb t d i s ch arg ed . I.R.C. s ec. 1 0 8 (c)(2 )(B). P’ s ag greg at edb as es ex ceed ed th e am o u nto f QRPBI i n 2 0 12
.

Served 06/24/21-2
- Th e b as i s redu ct i o n g en eral l y o ccu rs i n the y ear fo l lo wi n g th e d i s ch arg e o f i nd eb t ed n es s . I.R.C. s ec. 1 01 7 (a). Ho wev er, as an ex cep t i on t o th atg en eral ru l e, t h e b as i s redu ct i o n fo r d i s ch arg e o f QRPBI o ccu rs i n th e s am e y ear as th e s al e o f “ p ro p erty t ak en i n t o acco u n tu n d er I.R.C. s ec. 1 0 8 (c)(2 )(B)”. I.R.C. s ec. 1 0 1 7 (b )(3 )(F)(i i i). Th u s , the b as i s redu ct io n o ccu rs i n t h e y ear t h e d eb t i s d i sch arg edi f t h e t ax p ay er s el l s , i n th e s am e y ear as the d i s ch arg e, d ep reci ab l e real p ro pert y th ath adb een u s edt o p ro v e t he t ax p ay er h adag g reg at edb as es thatex ceed edth e d is ch arg e am o u n t . P’ s Fo rm 1 0 40 X, Am en d ed U.S. In d iv idu al In co m e Tax Retu rn , fo r 2 01 2 an dh i s Fo rm s 1 0 4 0, U.S. In di v i du al In co m e Tax Retu rn , fo r t he y ears ati s s u e, 2 0 1 3 an d2 0 1 4, were p rep aredb y a t ax l aw fi rm t o wh i ch P was referred wi th th e as si s t an ce o f h i s l o ng -t i m e fi nan ci al ad v i s er an da l arg e acco u nt i n g fi rm . Th e p art i es d i s p ut e h o w p ro v i s i o n s rel at i ng t o th e t im in g o f th e b as i s ad j u s t m en t fo r d i s ch arg e o f QRPBI i n I.R.C. s ecs . 1 0 8 an d 1 01 7 ap p l y ; wh eth er t h e l en di n g b an kd i s ch arg edan y o f P’ s d eb ti n 2 0 1 3; an dwh et her P i s l i ab l e fo r accu racy -rel at edp en al t i es u n d er I.R.C. s ec. 6 6 6 2 fo r 2 0 1 3 an d 2 0 1 4. 1
. Hel d: P i s req u i redt o redu ce t h e b as es o f d ep reci ab l e real p ro p ert ies i n 2 0 12 . See I.R.C. s ec. 1 0 1 7 (b )(3 )(F)(i i i ). 2
. Hel d, fu rt h er, t h e l en d i n g b an kd i dn ot d i s ch arg e an y o f P’ s QRPBI i n 2 0 1 3. 3
. Hel d, fu rt h er, P i s n o t l i ab l e fo r accu racy -rel at edp en al t i es u n d er I.R.C. s ec. 6 6 6 2 fo r 2 01 3 an d2 0 14 b ecau s e h e rel iedi n g o od fai th o n p ro fes s io n al t ax ad v i ce i n p rep ari n g h i s retu rn s fo r t h o s e y ears .-3
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Cat h eri n e E. Ch o l l et , fo r p et i t i o n er. 1 Cat h eri n e S. Ty s o n an dPh i l i p EdwardBl o nd i n , fo r res p o nd en t .
OPINION COLVIN, J u dg e: Res p o n d en td et erm i nedth atp et it i o n er h adi n co m e t ax d efi ci en ci es an di s l i ab l e fo r p en al t ies fo r t ax ab l e y ears 2 0 1 3 an d2 0 1 4 as fo l l o ws : 2

Year Defi ci en cy Pen al ty sec. 6 6 6 2 2 0 1 3 $ 5 9 ,9 0 5 $ 1 1 ,9 8 1 2 0 1 4 3 3 ,9 6 9 6 ,7 9 4 Th e i s s u es fo r d eci si o n are: 1 . Wh et h er, u n d er s ect i o n s 1 0 1 7 (a) an d(b )(3 )(F)(i i i) an d 1 0 8 (c)(2 )(B), p et i t i o n er m

u s tredu ce h i s b as es i n real p ro pert i es fo r 2 0 1 2 o r 2 0 1 3 as a res u l to f h i s s al e o f d ep reci ab l e real p ro p ert i es i n 2 0 1 2
. W e h o l dthatth e b as i s ad ju s t m en t s
m u stb e m ad e fo r 2 0 1 2
.

1 Th o m as J . Carn es ap p eared o n l y fo r a p ro cedu ral i s s u e p ri o r t o th e tri al o f th e t ax i ss u e.

2 Un l es s o th erwi s e i nd i cat ed , s t atu t o ry referen ces are t o th e In t ern al Rev en u e Co d e, Ti t l e 2 6 , U.S.C., i n effect fo r t h e y ears i n i s s u e, an dRu l e referen ces are t o th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re.-4
-

2 . Wh et h er p et i t i on er recei v eda d i s ch arg e o f d eb ti n 2 0 1 3
. W e h o l dth ath e d i dn o t. 3 . Wh et h er p et i t i on er i s l i ab l e fo r accu racy -rel at edp en al t i es u n d er s ect i o n 6 6 6 2 fo r t ax ab l e y ear 2 0 1 3 o r 2 0 1 4 . W e h ol dth ath e i s n o t . Back gro u n d So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. A. Pet i t i o ner’ s In ves tm en tPro p ert i es In 2 0 0 9 p et i t i o n er p u rch as ed 3 2 7 i n v es t m en tp ro p ert i es o n wh i ch h e
as s u m edo u t s t an d i ng l o an s t o t al i n g $ 1 ,7 1 4 ,5 20 . Al l o f t h e l o an s were h el db y th e
s am e b an k(t h e l en di n g b an k ). By 2 0 1 2 p et i t i o n er was s tru g g l i n g t o m ak e p aym en t s o n th e l o an s . In 2 0 1 2 p et i t i o n er s o ld1 6 o f t h e p ro pert i es , 1 5 o f wh i ch h e “ so l ds h o rt ”, i
. e.,
s o l data l o s s. Th e t o t al s al e p ro ceed s fo r t h e 1 6 p ro p ert ies were $ 2 4 1 ,8 61 . Aft er th e s al es , p et i t i o n er’ s l oan s were m o d i fi edan d rep l aced wi th two n o t es : No t e A, t o t al i n g $ 2 6 5 ,6 0 0 , wh i ch rep l aced th e o ri g i n al l o an as s u m p t io n ; an d No t e B,

3 Th e p ro p ert i es were p u rch as edb y Co b ri el , LLC, a M i s s o u ri l i m i t edl i ab il i ty co m p an y (LLC), o f wh i ch p et i t i o n er i s the o n l y m em b er. Becau s e t h ere i s o n l y o n e m em b er, an d b ecau s e t h e LLC h as n ev er fi l edFo rm 8 8 3 2, En t it y Cl as s i fi cat i o n El ect i o n , s ee Cas t el l o v . Co m m is s i o n er, T.C. M em o . 2 0 1 6-1 8 4 , at* 1 0 , th e LLC i s d i sreg ard ed fo r t ax p u rp o s es , s ee s ecs . 3 0 1 .7 7 01 -1 , 3 01 .7 7 0 1 -2 , an d 3 0 1 .7 7 0 1 -3 , Pro ced . & Ad m i n . Reg s . Herei n we treat th e p ro p ert i es as o wn ed b y p et i t i o n er as an i n d iv i du al
.-5
-

t o t al i n g $ 5 7 5 ,8 6 4 , wh i ch rep l aced a l i n e o f cred i tp et i t i o n er h ades t ab l i s h edwi t h th e l en d i n g b an k . Th e l en d i n g b an ki s s u edt o p et it i o n er 1 5 Fo rm s 1 0 9 9 -C, Can cel lat i o n o f Deb t , fo r 2 0 1 2 (o n e fo r each p ro p ert y s o l d ata l o s s ), wh i ch s t at ed th ath e h ada t ot al d i sch arg e o f d eb to f $ 7 5 4 ,0 5 4. In 2 0 1 3 p et i t i o n er s o l ds h o rt
s ev en o f t h e rem ai n i n g p ro p ert i es fo r $ 2 4 1 , 5 0 0 . Aft er t h e s al es , p et i t i o n er req u es t edan dth e b an kag reedt o a l o an m o d i fi cat i on , p urs u an t t o wh i ch $ 1 0 ,2 0 0 fro m No t e B was tran s ferred t o a n ew n ot e, No t e C. Atth att i m e, $ 5 3 9 , 3 41
rem ai n edo n No t e B an dth e b an kd o cu m en t edth atNo te B was “ [r] ep l aced wi t h No t e C - n o m o re p aym en ts o n No t e B.” Ban kreco rd s s h o wed th atth ere was a

“NetCh arg e-Off” o f $ 5 29 ,6 6 5 fo r No t e B, an dal s o that“ [p ] aym en t s recei v ed(up t o $ 5 2 9,6 6 [5 ] ) wi l l b e p os t edas a[n ] LLR [Lo an Lo ss Res erv e] Reco v ery ”. Th e l en d i n g b an kd i dn o ti ss ue an y Fo rm s 1 0 9 9 -C t o p et i t i o n er fo r 2 0 1 3 . Aro u n d Oct o b er 2 5 , 2 0 1 5 , th e b an kwro t e t h at“ $ 4 9 3 ,1 4 1 [] i s th e rem ai ni n g am o u ntt o b e b o o k edas an LLR Reco veryas o f: 1 0 / 2 / 20 1 5”.-6
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B. Pet i t i o ner’ s 2 0 1 2 -1 4 Tax Return s 1
. Ori g i n al an dAm en d ed2 0 1 2 Tax Retu rn 4 Pet i t i o ner, t h ro u gh h is th en acco u n t an t, fi l edh i s Fo rm 1 04 0 , U.S. In d i v i du al In co m e Tax Return , fo r 2 0 12 o n Oct o b er 1 3 , 2 0 1 3 . Th e Fo rm 4 7 9 7 , Sal es o f Bu s i nes s Pro p ert y , fi l edwi th th atretu rn , s t at edth atp et i t i o n er h ads o l d1 7 i n v es t m en tp ro p ert ies (1 6 as s o ci at edwi th th e l en d i n g b an kan d1 h e h adp urch as ed earl ier) fo r a g ai n t o t al i ng $ 8 3 , 6 7 5
. Pet i t i o ner h as n o b ack g ro u n di n t ax o r acco un t i n g . Wh en p et i t i o n er
s u s p ect edth at h i s o ri g i n al retu rn fo r 2 0 1 2 was i n co rrect , h e co n t act edh is l o n g -t i m e fi n an ci al ad v i s er t o s eekh i s o pi n io n . Hi s fi n an ci al ad v i ser t o ld p et i t i o n er t h ath e al s o b el i ev edth atth e ret u rn was n o tco rrect . Th e ad v i ser cal l ed
an acq u ai n t an ce wh o was a cert i fi edp ub li c acco un t an t (C.P.A.) ata l arg e
acco u n t in g fi rm an ds ch edu l edan ap p o in t m en tfo r p et i t i o n er. Pet i ti o n er an dh i s fi nan ci al ad v i s er m etwi th th at i n d i v i du al , wh o rev i ewed p et it i on er’ s 2 0 12 t ax retu rn . Th e i n di v i du al s tat edth at h e b el iev edth e ret u rn was i n co rrect an d
reco m m en d edth atp et i t i o n er m eetwi th a t ax at t orn ey atth e Ko h n Part n ers h i p b ecau s e o f t h e co m

pl ex i ty o f th e i s s ues rel at i n g t o t h atretu rn .

4 Fact s rel at in g t o t h e 2 0 1 2 retu rn are i n cl u d edb ecau s e t h ey rel at e t o p et i t i o n er’ s 2 0 13 an d2 0 1 4 t ax y ears .-7
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Pet i t i o ner an d h i s fi n an ci al ad v i s er m etwi th M i ch ael Ko h n o f t he Ko h n Part ners h i p . M r. Ko h n h adm ore t h an 3 0 y ears o f ex p eri en ce as a p ract ici n g t ax at t o rn ey . Duri n g th e m eet i n g M r. Ko hn d es cri b ed wh ath e s ai dwere v ari ou s
erro rs o n p et i t i o n er’ s 2 0 12 t ax retu rn . He al s o d es cri b edh o w h e b el i ev ed t ax l aw ap p li edt o p et i t i o n er’ s real es tat e t ran s act i o n s ati ss u e h ere. As a res u l to f th i s
m eet i n g , p et i t i on er h i redth e Ko h n Part ners h i p t o p rep are Fo rm 1 0 4 0 X, Am en d ed U.S. In d i v i dual In co m e Tax Retu rn , fo r 2 0 1 2 an dt o p rep are h i s Fo rm s 1 0 4 0 fo r t ax ab l e y ears 2 0 1 3 an d2 0 1 4
. M r. Ko h n cal ledp et it i on er s ev eral t i m es t o req u es t d o cu m en t s wh i l e h e wo rk edo n p et i t i o n er’ s t ax retu rn s. Pet i t i o ner p ro v i d edth e req u es t edd o cu m en t s . Pet i t i o ner fi l edthe Fo rm

1 0 40 X fo r 2 0 1 2 p rep aredb y th e Ko h n Part n ers h i p
o n J an uary1 4 , 2 0 1 5
. Th e Fo rm 4 7 9 7 at tach edt o th e am en dedretu rn s t at edth at p et i t i o n er h ads o l d 1 7 p ro p ert i es fo r a l o s s t o tal i ng $ 6 1 3,2 6 3 . OnFo rm 9 8 2 , Reduct i on o f Tax At tri b u t es Du e t o Di s ch arg e o f In d eb t ed n es s (an dSect i o n 1 0 8 2 Bas is Ad ju s t m en t ), p et i t i o n er rep o rt edth ath e h adex cl u d ab l e i n co m e o f $ 6 8 5 ,2 81

“ fo r a d i s ch arg e o f qu al ifi edreal p ro p ert y b u s i nes s i n deb t ed nes s ap p l i edt o redu ce th e b as i s o f d ep reci ab l e real p ro p ert y ” (i
. e., the d eb t d i sch arg edfro m th e l en d i n g b an k).-8
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2
. 2 01 3 Tax Retu rn OnOct o b er 1 5 , 2 01 4 , p et i t i on er fi l edh i s Fo rm 1 0 40 fo r 2 0 1 3 , wh ich h ad b een prep aredb y th e Ko h n Part n ers h i p . Onth e Fo rm 4 7 9 7 i n cl u d edwi th th at retu rn p et i t i o n er rep o rt edth ati n 2 0 1 3 h e h ads o l ds i x i n v es t m en tp ro p ert i es 5 an d h i s p ri m ary

res i den ce (wh i ch was al s o l i s t ed as an i n v es t m en t p ro p ert y ) fo r a l o s s t o t al i n g $ 4 9 9 ,4 1 7 ($ 43 7 ,6 5 0 fo r t h e i n ves t m en tp ro p ert i es an d$ 6 1 ,7 6 7 fo r h i s p ri m ary res i d en ce). 3
. 2 01 4 Tax Retu rn OnOct o b er 1 5 , 2 01 5 , p et i t i on er fi l edh i s Fo rm 1 0 40 fo r 2 0 1 4 , wh ich h ad b een prep aredb y th e Ko h n Part n ers h i p . Pet i ti o n er rep o rt eda n eto p erat i n g l o s s carry fo rwardo f $ 4 23 ,4 31 fro m 2 0 1 3 . OnFo rm

9 82 p et i t i o n er rep ort edh e h ad
ex cl u d ab l e i n co m e o f $ 6 5 ,9 1 4 fro m a d i s ch arg e o f qual i fi edreal p ro p ert y b u s i n es s i n d eb t ed n es s (QRPBI). A Fo rm 1 0 9 9-C s h o ws thatp et i t i o n er recei v eda d i s ch arg e
o f d eb t o f $ 6 5 ,9 14 fro m

th e 2 0 1 4 s al e o f h is p ri m ary res id en ce (t he s am e res i d en ce rep o rt edas s o l di n h i s 2 01 3 t ax retu rn ).

5 Th e reco rdes t ab l i s h es th at p et i t i o n er s o l ds ev en (n o ts i x ) i n ves t m en t p ro p ert i es i n 2 0 13 . Th e i n v es t m en tp ro p ert y n o trep o rt edo n th e 2 01 3 retu rn i s i d en t i fi edi n th e reco rdas 4 31 5 Gan n et t .-9
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C. No t i ce o f Defi ci en cy OnJ u ly 3 , 2 0 1 8, res p o n den ti s s u eda n o t i ce o f d efi ci en cy t o p et i t i o ner fo r t ax ab l e y ears 2 0 1 3 an d2 0 1 4
. Fo r 2 0 1 3 res p o nd en t d i s al l o wedthe l os s d edu ct i o n s cl ai m edo n p et it i o n er’ s Fo rm 4 7 9 7 . Fo r 2 01 4 res p on d en td is al lo wedth e l o s s carry o ver d edu ct i o n fro m 2 0 13
. 6 Di s cu ss i o n Th e t ax ab l e y ears at is s u e are 2 0 1 3 an d2 0 1 4
. Th e i s s u es fo r d eci si on are (1 ) wh en (i .e., i n wh i ch y ear), u n d er s ect i o n s 1 0 8 an d 1 01 7 , p et i ti o n er i s req u i red t o redu ce t he b as es i n h i s d ep reci ab l e real p ro p ert i es fo r s al es o f t h o s e p ro p ert i es i n 2 0 1 2; (2 ) wh et h er t h e l en d i n g b an k d i s ch arg edan y o f p et i t io n er’ s QRPBI i n 2 0 1 3 ; an d(3 ) wh et h er p et i t i o n er i s l i ab l e fo r accu racy -rel at edp en al t i es u n d er
s ect i on 6 6 6 2
. A. Wh et h er Pet it i o n er Is Req u i redTo Redu ce Hi s Bas es fo r t h e Year t he Deb t W as Di s ch arg edo r fo r t he Su b s equ en tYear W e n ex td eci d e wh en --t h ati s , wh et h er fo r 2 0 1 2 o r 2 0 1 3 --p et it i on er m u s t
m ak e b as i s redu ct io n s as a res u l to f t h e b an k ’ s d is ch arg e o f QRPBI an dh i s s al es
o f d ep reci ab le real p ro p ert i es i n 2 0 1 2 . Whi l e p et i t i on er’ s t ax y ear 2 0 1 2 i s n o t

6 Becau s e res p o n d en t ’ s d et erm i nat i o n fo r 2 0 1 4 d ep en d s up on o u r an al y s i s o f th e 2 0 13 t ax ab l e y ear, wh eth er t h e carry o v er i s al l o wedi s a co m p u tat i o n al ad ju s t m en tan dn o tan i s s u e fo r d eci s i on .-1 0
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b efo re u s i n t h is cas e, we m u s td eci d e t h i s i s s u e i n o rd er t o d eci d e t h e am o u n to f p et i t i o n er’ s t ax l i ab il i ty

fo r 2 01 3 . See s ec. 6 2 1 4(b ); Hi ll v . Co m m i s s i o n er, 9 5 T.C. 4 3 7 , 4 3 9 -4 4 0 (1 9 90 ). Sect io n s 6 1 (a)(1 0 ) an d1 0 8 (a)(1 )(D) p ro v i d e an ex cl u s i o n fro m i n co m e fo r fo rg i ven es s o f QRPBI. W h en th atex cl u s i o n ap p l i es , th e t ax p ay er m u s t redu ce h i s
o r h er b as es i n the d ep reci ab l e real p ro p ert i es . Sec. 1 08 (c)(1 ). Th e p art i es ag ree th atp et i t i o n er’ s i n d eb t ed nes s o n th e 1 5 i n v es t m en tp ro p ert i es s o l ds h o rti n 2 0 1 2
was QRPBI. See s ec. 1 08 (c)(1 ). Th e p art i es al so ag ree t hatp et i t i o n er m ay
ex cl u d e t h e d i s ch arg e o f h i s QRPBI fro m i nco m e. See s ecs . 6 1 (a)(1 0 ), 1 0 8 (a)(1 )(D). Fi n al l y , th e p art i es ag ree t h atp et i t i on er m u s t redu ce h i s b as es i n th e d ep reci ab l e real p ro p ert i es as a res u l to f t h atex cl u s i o n . See s ec. 1 0 8 (c)(1 ). Ho wev er, th e p art i es d i s p u te t h e y ear fo r wh i ch th e b as i s redu ct i o ns m u st b e m ad e. Pet i t io n er co n ten d s th atth e b as i s redu ct i o n s m u s t b e m ad e fo r 2 0 1 3 . Res p o n d en t
co n ten d s t h ey

m u stb e m ad e fo r 2 01 2
. Pet i t i o ner p o i n t s o u tth ats ect i o n 1 0 1 7(a) s t at es g en eral l y th atb as i s redu ct i o n s res ul t i n g fro m th e d i s ch arg e o f QRPBI are m ad e t he y ear aft er t h e d eb t i s d i s ch arg ed . If s ect i o n 1 0 1 7 (a) ap pl i es h ere, t h e b as i s ad ju s tm en t s at i ss u e
wo u l d , as p et i t i o n er co n t en d s , b e m ad e i n 2 0 1 3 . Ho wev er, s ect i on 1 0 1 7(b )(3 )(F) p ro v id es th ree ad d i t i o nal ru l es wh i ch g o v ern reduct i o n o f b as i s fo l l o wi n g-1 1
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d i s ch arg e o f QRPBI. 7 Fi rs t , real p ro p erty , th e ag g reg at e b as es o f wh i ch are
co n si d eredu n der s ect i o n 1 0 8 (c)(2 )(B), i n cl u d es o n l y d ep reci ab l e real p ro p ert y . Sec. 1 0 17 (b )(3 )(F)(i ). Seco n d, th e d ep reci ab l e real p ro p ert y m ay n o tb e h el das i n v en t o ry . Sec. 1 0 17 (b )(3 )(F)(i i ). Th i rd , s ect io n 1 0 1 7 (b )(3 )(F)(i i i ) p ro v i d es th at , i n th e cas e o f “ pro p ert y t ak en i n t o acco u n tu n d er s ect i on 1 08 (c)(2 )(B), t h e [b as i s ] redu ct i o n wi th res p ectt o s u ch p ro p erty s h al l b e m ad e as o f t h e t i m e i m m ed i at el y b efo re [t h e] d i s p o s it i on i f earl ier t h an th e t i m e u n d er” s ect i o n 1 0 1 7 (a) (i .e., th e y ear fo l l o wi n g t h e d is ch arg e). Ap p l i cat i o n o f t h i s th i rdru l e req u i res co n s i d erat i o n o f wh et h er “ p ro pert y [was ] t ak en i n t o acco u n tu n d er s ect i o n 1 0 8 (c)(2 )(B)”; an di f i twas , th en the “ redu ct i o n wi th res p ect t o s u ch p ro p erty s h al l b e m ad e as o f t h e t i m e i m m ed i at el y b efo re [t h e] d i s p o s i t i on [e.g
. , s al e] i f earl i er t h an th e t i m e u n d er” s ect i o n 1 0 1 7 (a). Th u s we m

u std eci d e wh et h er, as s t at edi n th e t h i rd ru l e, s ect i o n 1 0 1 7 (b )(3 )(F)(i i i), p ro p ert y was t ak en i n t o acco u n t u n d er s ect i on 1 0 8 (c)(2 )(B). Sect i o n 1 0 8 (c)(2 )(B) p ro v i d es : Ov eral l l i m i t at i o n .--Th e am o u n tex cl u d edu n d er s ubp arag rap h (D) o f s ub s ect i o n (a)(1 ) [d i s ch arg e o f QRPBI] s h al l n otex ceed th e ag g reg at e

7 Wh ere t wo p ro v i s i on s o v erl ap i n ap p l i cat i o n , h ere, s ec. 1 0 1 7 (a) an d (b )(3 )(F), t h e m o re s p eci fi c p ro v i s io n (s ec. 1 01 7 (b )(3 )(F)) t ak es p reced en ce o v er th e m o re g en eral p ro v is i o n. Bu l o v a W at ch Co . v . Un i t edSt at es , 3 6 5 U.S. 7 5 3 , 7 5 8 (1 96 1 ).-1 2
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ad ju st edb as es o f d ep reci ab l e real p ro p ert y (d et erm i nedaft er an y redu ct i o n s u n d er s ub s ect i o n s (b ) an d(g )) h el d b y th e t ax pay er i m m ed i at el y b efo re t h e d i s ch arg e (o th er t h an d ep reci ab l e real p ro p ert y acq ui redi n co n t em

p l at io n o f s u ch d i s ch arg e). In o th er wo rd s , th e am o u n to f d i s ch arg edQRPBI ex cl u d edfro m a t ax p ay er’ s i n co m e m ay

n o tex ceedth e ag g reg at e b as es o f t h e t ax p ay er’ s d ep reci ab l e real p ro p ert i es h el di m m ed iat el y b efo re t he d i s ch arg e. Th e b an k d i s ch arg ed$ 7 54 ,0 5 4 o f p et i t i o n er’ s QRPBI i n 2 01 2 . Th e reco rd s ug g es ts , an dth e p art i es d o n o t d i s p u t e, thatp et it i o n er’ s ag g reg at e b as es i n d ep reci ab l e real p ro p ert i es fo r 2 0 1 2 i m

m ed i at el y b efo re t he d i s ch arg e ex ceed edth e $ 7 5 4 ,0 5 4 d i s ch arg e o f QRPBI. Sect io n 1 0 1 7 (b )(3 )(F)(i ii ) al s o p ro v i d es thati n the cas e o f “ p ro p ert y t ak en i n t o acco u n tu n d er s ect i on 1 08 (c)(2 )(B)” (i .e., d ep reci ab l e real p ro p ert y wh i ch was
u s ed to s h o w thath e h adag g reg at edb as es i n ex ces s o f t h e d i sch arg e am o u n t ) i n th e s am e y ear as th e d i s ch arg e, t h e b as i s redu ct i o ns m u s t o ccu r i m

m ed iat el y b efo re th e s al es o f th e p ro p ert i es an dn o ti n t h e y ear fo l l o wi n g th e s al es . Becau s e i n 2 01 2 p et i t i o n er (1 ) recei v eda d i s ch arg e o f QRPBI an d(2 ) s o l dp ro p ert i es th e b as es o f wh i ch were u s edt o s h o wh e h adag g reg at edb as es thatex ceed th e d i s ch arg e
am ou n t , h e was req u iredt o redu ce h i s b as es i n th e d i sp o s edp ro pert i es i m m ed i at el y b efo re t h e s al es o f t h o s e p ro p ert ies i n 2 0 1 2 , n o t i n 2 0 1 3 . Hi s rep o rt ed-1 3
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b as es fo r t h e p ro p ert i es s o l di n 2 0 1 2 s h o u l dh av e refl ect edth es e redu ct i o n s , an d
an y rem ai n i n g redu ct i o n s s h o u l dh av e b een refl ect edi n th e b as es o f h i s rem ai n i ng p ro p ert i es fo r 2 0 1 3
. 8 Ou r an al y s i s o f t h e qu es t i o n wh en th e b as i s ad ju s t m en ti s req u i redt o b e
m ad e b eg i ns wi th the g o v ern i n g s t atu t o ry t ex t . See, e.g ., Al l en v . Co m m i s s i o n er, 1 1 8 T.C. 1 , 7 (2 0 0 2 ). Ev en tho u g h we s ee n o am b i g u i ty i n t h e ap p l icat i o n h ere o f th att ex t , we fi ndi th el p fu l t o rev i ew Co n g res s ’ s tat em en t ab o u t th e s t atut e’ s p u rp os e i n th e l eg is l at i v e h is t o ry acco m p an y i ng th e en act m en t o f t h es e p ro v i s i on s i n 1 9 9 3. See Un i t edSt at es v . Am . Tru ck i n g As s ’ n s , In c., 3 1 0 U.S. 5 3 4 , 5 4 3 -5 4 4 (1 9 4 0). Leg i s l at i v e h i s t o ry s h o ws th atth e p ro vi s i o n s cen tral t o t h i s cas e were
en act edi n 1 9 9 3 t o p ro v i d e rel i ef t o o wn ers o f cert ai n real es t at e wh i ch h ad d ecl i nedi n v al u e. Co n s is t en twi th t h i s p u rp o s e, s ect i o n 1 0 8 (c)(2 )(A) l i m i t s th e i n co m e ex cl u s i o n t o th e am o u ntb y wh ich th e v al u e o f th e p ro pert y i s l es s th an th e i n d eb t ed n es s o n th e p ro p ert y (i .e., th e am ou n tth e p ro p erty i s “ u n d erwat er”). Th e

8 “ [F] o r b as i s redu ct i o n s u n d er s ect i on 1 0 8 (c), a t ax p ay er m u s tredu ce th e ad ju s t edb as is o f t h e qu al ify i ng real p ro p ert y t o th e ex t en t o f t h e d i s ch arg ed qu al i fi edreal p ro p ert y

b u s i nes s i n d eb t ed nes s b efo re redu ci n g t h e ad ju s t edb as es o f o th er d ep reci ab l e real p ro p ert y .” Sec. 1 .1 0 1 7 -1 (c)(1 ), In co m e Tax Reg s . Th e p art i es d o n o t co n ten dth atp et i t i o ner h ads u ffi ci en tb as es i n th e p ro p ert i es s o l di n 2 0 1 2 t o co v er t h e 2 01 2 d eb td i s ch arg e; th erefo re, t h e b as i s redu ct i o n s i n ex ces s o f th o s e ap p l i edt o th e p ro p ert i es s o l di n 2 0 1 2 s ho u l db e refl ect ed i n p ro p ert i es o wn edatth e b eg i n n i ng o f 2 0 1 3
.-1 4
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fo rm o f rel i ef was t o co nv ert th e co n s equ en ce o f t h e d i s ch arg e o f cert ai n i n d eb t ed n es s (QRPBI) fro m in co m e, as wo u l d g en eral ly res u l tu n d er s ect i o n 1 0 8 , t o a b as i s ad

j u st m en t . Th es e p ro v i s i o n s al s o d et erm i n e t h e t i m i n g o f t h e b as i s ad ju s t m en t s b y

t ak i n g i n t o acco u n t th e am ou n t s o f t h e t ax p ay er’ s b as es i n real
es t at e atth e t i m e o f d i sch arg e o f t h e QRPBI. Th e Rep o rto f th e Ho u s e Bu d g et Co m m i t t ee fo r t he Om

n i b u s Bu d g etReco n ci l i at i o n Acto f 1 9 9 3 9 acco m p an y i n g th e en act m en to f t h o s e s ect io n s s tat es : Th e co m m i tt ee b el i ev es th atwh ere an i n d i v i dual h as d i s ch arg e o f i n d eb t ed n es s thatres u l t s fro m a d ecl in e i n v al u e o f b us i n es s real p ro p ert y s ecu ri n g th ati n d eb t edn es s [i .e., QRPBI] , i ti s ap pro p ri at e t o p ro v i d e fo r d eferral , rat her t h an cu rren ti n cl u s i o n , o f t h e res u l t i n g i n co m e. Gen eral ly , thatd eferral s h ou l d n o tex t en d b ey o n dth e p eri o d th atth e t ax p ay er o wn s the p ro pert y . * * * * * * * Th e am ou n to f d eb td i s ch arg e ex cl u d edu n d er t he p ro v i si o n i s ap p l ied , u s i n g th e ru l es o f s ect i o n 1 0 1 7 (as m o d i fi edb y th e p ro v i s i o n ), t o reduce t he b as i s o f b u si nes s real p ro p ert y h el db y th e t ax p ay er atth e b eg in n i n g o f t h e t ax ab l e y ear fo l l o w i n g th e t ax ab l e y ear i n wh i ch th e d i s ch arg e o ccu rs . Th e el ect i o n u n d er s ec. 1 0 1 7 (b )(3 ) t o treat i n ven t o ry as qual i fi edp ro p ert y

d o es n o tap p l y . If th e t ax p ay er d is p os es o f real p ro p ert y (i n th e t ran s act io n th atg av e ri s e t o th e d i s ch arg e o r o th erwi s e) p ri o r t o t h e fi rs td ay o f th e n ex tt ax ab l e y ear, t h en th e redu ct io n i n b as i s o f s u ch p ro p ert y i s m ad e as o f t h e t i m e i m m ed i at el y b efo re t h e d i s p o si t io n .

9 Th e Ho u s e W ay s an dM ean s Co m m i t t ee p ro v i dedth e t ex tfo r t h e t ax p ro v is i o n s i n th e Rep o rt . See H.R. Rep t . No
. 1 0 3 -1 1 1 , at5 9 3 (1 9 9 3 ), 1 9 9 2 U.S.C.C.A.N. 3 7 8 , 8 2 4
.-1 5
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H.R. Rep t . No . 1 0 3 -1 1 1 , at6 2 3 -6 2 4 (1 9 9 3 ), 1 9 9 3 U.S.C.C.A.N. 3 7 8 , 8 5 4
- 8 5 5 (em p h as i s ad ded ). 1 0 As s t at edi n th e Co m m i t t ee Rep o rt , th e t ax p ay er m u s t
m ak e a b as i s ad

ju s t m en tfo r t h e y ear d ep reci ab l e real p ro p erty i s s o l di f t h e p ro p erty i s s o l di n th e s am e y ear as th e d i s ch arg e. Pet i t i o ner co n ten d s , h o wev er, t h atb ecau s e th e ag greg at edb as es i n h i s
rem ai n i n g p ro p ert i es (i .e., th e u n s o l dp ro pert i es ) i n 2 01 2 ex ceed edth e d i s ch arg ed
am ou n t , h e d idn o tn eedt o redu ce h i s b as es u n t i l th e fo l l o w i n g y ear. Pet i t i o n er’ s arg u m en tm i s co n st ru es s ect i o n s 1 0 8 (c)(2 )(B) an d1 0 1 7 (b )(3 )(F)(i i i ). Th e p ro p ert y referred t o i n s ect i o n 1 0 8 (c)(2 )(B) i s as cert ai n edb efo re t h e d eb t i s d i s ch arg ed
. Wh en s ect i o n 1 0 1 7 (b )(3 )(F)(i i i ) refers t o the p ro p ert i es i d en t ifi edi n s ect io n 1 0 8 (c)(2 )(B), t h atreferen ce i s t o a s etg ro up o f p ro p ert i es thati s fi x edo n ce t h e d eb t i s d i s ch arg ed . Sel l i n g p ro p ert i es fro m thatg ro up t ri g gers s ect i o n 1 0 1 7 (b )(3 )(F)(i i i) wi th res p ectt o th e b as es o f t h e p ro p ert i es s o l dreg ard les s o f t h e
rem ai n i n g b as es i n t h e p ro p ert i es n o ts o ld . No wh ere i n s ect i o n 1 0 1 7 (b )(3 )(F)(i i i )
o r s ect i o n 1 0 8(c)(2 )(B) i s th ere a referen ce t o the “ rem ai n in g ” b as es aft er t h e s al e

1 0 See al s o Geral dJ . Ro b i n s o n , Fed eral In co m e Tax at i o n o f Real Es t at e, p ara. 9 .0 6[4 ] [b ] (2 02 1), W es tl aw FITRE W GL (“ If t h e t ax p ay er d i s p o s es o f d ep reci ab l e real p ro p ert y , ei th er i n th e t ran s act i o n g i v i ng ri s e t o t h e d i s ch arg e o f i n d eb t ed n es s o r o th erwi s e, p ri o r t o th e fi rs t d ay o f t h e n ex tt ax ab l e y ear, t h e redu ct i o n i n b as i s i s accel erat ed : Iti s m ad e as o f t he t i m e i m m ed i at el y b efo re t h e d i s p o s i t i on .”).-1 6
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(i
. e., d i sp o si t io n ) o f p ro p ert i es . Thu s , p et i t i o n er was req u ired u n d er s ect i o n 1 0 1 7 (b )(3 )(F)(i i i) t o redu ce h i s b as es i m m ed i at el y b efo re th e s al e o f t h e i n v es t m en tp ro p ert ies in 2 0 12
. B. Wh et h er Pet it i o n er Had Di s ch arg e o f In d eb t ed n es s i n 2 0 1 3 1
. Wh et h er Pet it i o n er M ay Cl ai m Th atth e Len d i n g Ban kDi dNo t Di s ch arg e Deb ti n 2 0 1 3 Res p o n d en tco n t en d s th atp et i t i o n er m ay n o tcl ai m th atthe l en d i ng b an kd i d
n o td i s ch arg e an y o f h i s d eb ti n co n n ect i o n wi th th e s al e o f s ev en p ro pert i es i n 2 0 1 3 b ecau s e p et i t i o n er d i dn o trai s e t h i s i s s u e i n t h e p et i t i o n . See Ru l e 3 4 (b )(4 ). Pet i t io n er rai s edth is i s s u e fo r t h e fi rs tt im e b efo re t h e Co u rti n h i s p ret ri al
m em o ran du m , an dh e h adp rev i o us l y rai sedi t wi th res p o n d en t . W e d i s ag ree wi t h
res p o n d en t’ s co n t en t i o n b ecau s e res p on d en th as fu ll y ad dres s edp et i t i o n er’ s cl ai m
o n s ev eral o ccas i o n s . W e m ay refu s e t o co n s i d er an i s s u e n o t rai s edi n the p l ead i n gs an d rai s ed wi th th e Co u rtfo r t h e fi rs tt i m e i n th e p art y ’ s p ret ri al m em o ran dum , i f o u r
co n si d erat io n o f t h e i s s u e wo u l ds u rp ri s e o r p reju d i ce t he o p po s in g p arty . Fo x Ch ev ro l et , In c. v . Co m

m i s s i o n er, 7 6 T.C. 7 0 8, 7 3 3 -7 36 (1 9 8 1 ). Res p o n den td o es
n o tcl ai m s u rp ri s e o r p reju d i ce fro m p et i t io n er’ s arg u m en t. In s t ead , res p o n d en t
m erel y o b ject s t o t h e t i m i n g o f p et i t io n er’ s rai s in g o f th is i s s u e. A rev i ew o f t h e-1 7
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reco rds h o ws th atres p o n d en twas wel l aware o f t h i s arg um en tb efo re i twas p res en t edt o th e Co u rtb ecau s e res p o n d en t’ s p ret ri al m em o ran du m ad dres s edth e arg u m en ti n fu ll . Res p o n den th as h adam p le o p p o rtu n i ty

t o d ev el op an arg u m en t
an d ad dres s th i s i ss u e. Res p on d en td o es n otco n t en d , n o r d o es i tap p ear, t h at
res p o n d en t was u n ab l e t o fi n dan dp ro v i d e ev id en ce reg ard i n g thi s i s s u e. Res po n d en t ’ s arg um en tfu l ly rel i es up o n ev i d en ce p ro ffered b y the p art ies earl y i n th i s cas e. Th erefo re, we d en y res p o n d en t’ s o b

ject i o n an dwe p ro ceed t o th e m eri t s
o f t h e p art i es ’ arg u m en ts o n wh et h er t h e l en d i n g b an kd i s ch arg edan y o f p et i t i o n er’ s d eb ti n 2 0 1 3
. 2
. Wh et h er t he Len d i n g Ban kDi s ch arg edAn y o f Pet i ti o n er’ s Deb ti n 2 01 3 Res p o n d en tco n t en d s th atth e l en d i n g b an kd i s ch arg eds o m e o f p et it i o n er’ s QRPBI i n 2 0 1 3 b ecau s e p et i t i o n er’ s d eb t was res tru ctu red i n 2 0 1 3 an dthe b an k ch arg ed off (i .e., co n s i d eredu n l i k el y t o b e p ai d ) t h e rem ai ni n g am o u n to n No t e B (i
. e., $ 5 2 9 ,6 6 5 ). If we ag reedwi th res p o n d en t , we wo u l dd eci d e wh et h er p et i t i o n er h adfo r 2 0 13 a b as i s redu ct i o n fro m th e d eb td i s ch arg e an d th e s al es o f p ro p ert i es i n 2 0 13 . See s up ra Part A. Aft er co n s i d eri n g o th er ev i d en ce i n th e
reco rdo n thi s i s s u e, we co n cl ud e t h atth e b an kd i dn o td i sch arg e an y o f p et i t i o n er’ s d eb ti n 2 0 1 3
.-1 8
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Fi rs t , res p o n d en t rel i es o n th e b an k ’ s reco rd s , wh ich s t at e t h atth e d eb to n No t e B was “ ch arg edo ff”. Ho wev er, i n th e l ig h to f o th er fact s p res en th ere, t h i s
en try d o es n o tes t ab l is h d i s ch arg e o f i n d eb t ed n es s i n co m e. Kl eb er v . Co m m i s s i o n er, T.C. M em o . 2 0 1 1 -2 3 3 , 2 0 11 W L 4 4 8 5 0 37 , at* 3 (ci t i n g Co zzi v . Co m m i s s i o n er, 8 8 T.C. 4 35 , 4 4 5 (1 9 8 7 )). Ad d i t i o nal l y , i f an am o u ntch arg edo ff i s ret ai n edo n a cred i t o rs b o o k s (i
. e., m o v ed t o a res erv e acco u nt ), th e ch arg e-o ff i s
n o ta d is ch arg e o f i nd eb t ed n es s . See In t ’ l Pro p ri et ari es , In c. v . Co m m is s i o n er, 1 8 T.C. 1 3 3 , 1 3 9 (1 9 5 2 ) (“ [T] here i s n o au th o ri zat io n fo r a t ax p ay er[-cred i t o r] t o u s e atthe s am e t i m e a ch arg e-o ff an da res erv e m et h o d fo r t he d educt i on o f b ad d eb ts .” (qu o t in g Co m

m erci al Ban ko f Daws o n v . Co m m i s s io n er, 4 6 B.T.A. 5 2 6 , 5 3 0 (1 94 2 ))). Wh i l e t h e b an k reco rd eda “ n etch arg e o ff” o f $ 5 2 9,6 6 5 i n 2 0 1 3 , i t al s o reco rd edth atp aym en t s up t o $ 5 2 9 ,6 6 5 “ w il l b e p o s t edas LLR [Lo an Lo s s Res erv e] Reco v ery .” Becau s e t h e l en d i n g b an kreco rd edb o th a n etch arg e-o ff an d a l oan l o s s res erv e reco v ery o f $ 5 2 9 ,6 6 5 , th e p res en ce o f th e res erv e acco un t
s u g g es t s th atth e l en di ng b an kd i dn o ti n t en dt o d is ch arg e t he d eb t. Th e t erm “ l o an l o s s res erv e” i s fam il i ar t o th is Co u rt . See, e.g ., Ban kOn e Co rp . v . Co m

m i ss i o n er, 1 2 0 T.C. 1 7 4 (2 0 03 ) (d i s cu ss i n g “ l o an l os s res erv e”), aff’ di n p art , v acat edi n p art , an drem an d eds ub n o m . J P M o rg an & Ch as e Co . v . Co m m i s s i o n er, 4 5 8 F.3 d5 6 4 (7 th Ci r. 2 0 06 ); Cen t . Pa. Sav . As s ’ n & Sub s . v .-1 9
-

Co m m i s s i o n er, 1 0 4 T.C. 3 8 4 (1 9 9 5) (s am e), s up p l em en t edb y T.C. M em o . 1 9 9 6
- 1 7 2 ; Ko s m an v . Co m

m i s s i o n er, T.C. M em o . 1 9 9 6-1 1 2 (s am e). “ [L] os s res erv e” i s d efi n edas , i nt er al i a, “ [a] b an k ’ s res erv e s etas i d e t o co v er p o ss i b l e l o s s es , as fro m d efau l t i n g l o an s .” Bl ack ’ s Law Di ct i o n ary 1 4 2 2 (9 th ed . 2 0 0 9 ). 1 1 Itap p ears th at th e l en d i n g b an km erel y

m o v edth e “ n etch arg e o ff” am o un tfro m o n e p o ck et (No te B) t o an o th er p o ck et (t h e LLR Reco v ery ). W e b el i ev e t h atth e l en di n g b an k
wo u l dn o td i s ch arg e d eb tan ds i m u l t an eo u s l y

i n creas e b y

th e s am e am o un tth e LLR, wh i ch i s an acco u n t u s edt o s etas i d e m o n ey i n an t i ci p at i o n o f a d efau l t . Seco n d , th e b an kd idn o t i s s u e Fo rm s 1 0 99 -C t o p et i ti o n er s h o wi n g th at d eb t h adb een d i s ch arg edi n 2 0 1 3 . Th e n o n i s s u an ce o f Fo rm s 1 0 99 -C d o es n o t
n eces s ari l y

i n d i cat e t h atd eb th adn o tb een d i s ch arg ed , s ee Vau g h n v . Co m m i s s i o n er, T.C. M em o . 1 9 9 2 -3 1 7 , aff’ dwi th ou tp ub l i s h edo p i n i o n , 1 5 F.3 d 1 0 9 5 (9 th Ci r. 1 99 3 ), b u th ere i ti s p ers u as i v e ev i d en ce o f t h atfactb ecau s e fo r t h e p ri o r y ear, 2 0 1 2 , th e b an ki s s u edFo rm s 1 0 9 9 -C s h o wi ng th e d i s ch arg e i n 2 0 1 2 o f p et i t i o n er’ s d eb to n th e i n v es t m en tp ro p ert i es .

1 1 W e o ft en ci t e Bl ack ’ s Law Di ct i o n ary , s ee, e.g ., M o n ey gram In t ’ l , In c. v . Co m m i s s i o n er, 1 5 3 T.C. 1 8 5 , 2 2 6 (2 0 1 9) (q uo t i n g Bl ack ’ s Law Di ct i o n ary ), aff’ d,

_ _ F.3 d_ _ , 2 0 2 1 W L 2 2 0 12 7 7 (5 th Ci r. J u n e 1 , 2 0 2 1 ); Bl u e Lak e Ran ch eri a Eco n . Dev
. Co rp . v . Co m

m is s i o n er, 1 5 2 T.C. 9 0, 1 1 3-1 1 4 (2 0 1 9 ) (s am e); Dy nam o Ho l di n g s Lt d. P’ s h i p v . Co m m i s s io n er, 1 5 0 T.C. 2 2 4 , 2 3 4 (2 0 1 8 ) (s am e), an di t s u s e h ere i s n ot s pecu l at i v e b u t , rat h er, fo u n d at i o n al i n u n d ers t an d i n g th e cas e b efo re u s .-2 0
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Res p o n d en tco n t en d s th atth e fact th atp et i t i o n er m ad e s ho rts al es i n 2 0 1 3
s h o ws th atth e b an ki n t en dedt o d i s ch arg e t h e d eb ti n 2 0 1 3 , ci t i n g Lo wry v . Co m m i s s i o n er, T.C. M em o . 2 0 0 1 -2 3 8 , 2 0 01 W L 1 0 7 8 1 10 , as s up p o rt . InLo wry , a t ax p ay er s ol da p ro p ert y en cu m b eredb y d eb t . Id ., 2 0 0 1 W L 1 0 7 81 1 0 , at* 1
. Befo re t h e s al e, th e t ax p ay er an dth e cred i t o r h o ld i n g th e d eb ten t eredi n t o an ag reem en tth ata d i s ch arg e o f i n d eb t ed nes s wo ul do ccu r up o n t h e co n v ey an ce (i .e.,
s al e) o f t h e p ro p ert y . Id
. at * 2 . W e h el dth at , b ecau s e t h e d i sch arg e was
co n ti n g en tup o n th e s al e o f t h e p ro p erty , i to ccu rredwh en th e p ro pert y was s o l d
an d n o tb efo re. Id . Inth e cas e b efo re u s , h o w ev er, t h e reco rdd o es n o ti n cl u d e a
co n tract o r o th er d ocu m en t at io n s h o wi n g wh en (o r wh et h er) t he d eb two ul db e d i s ch arg ed . Wh il e s h o rts al es are o b ject i v el y i d en t i fi ab l e ev en t s, th ey

al o ne d o n o t
es t ab l i s h th atth e l en d i n g b an k i n t en d edt o d i s ch arg e t h e rem ai n i n g p o rt i o n o f No t e B. Onth e b as is o f th e fo reg o i n g , th e reco rds h o w s th atth e l en d i ng b an kd i d
n o ti n t en dt o d i s ch arg e an y o f p et i ti o n er’ s d eb ti n 2 01 3 . Th erefo re, we h ol dth at p et i t i o n er d i dn o th av e a d i s ch arg e o f i n d eb t ed n es s fo r 2 0 13
. C. Wh et h er Pet it i o n er Is Li ab l e fo r Accu racy -Rel at edPen al t i es Res p o n d en td et erm i n edan dco n t en d s t h atp et i t io n er i s l i ab l e fo r t h e
accu racy -rel at edp en al ti es u n d er s ect i o n 6 6 6 2(a) an d(b )(1 ) an d (2 ) fo r t ax y ears-2 1
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2 0 1 3 an d2 0 1 4 du e t o a s ub s t an t i al u n d ers t at em en to f i n co m e t ax o r, al t ern at i v el y , n eg li g en ce o r d i sreg ardo f ru les o r reg u l at i o ns . Pet it i on er co n ten d s th ath e i s n o t l i ab l e fo r t hes e p en al ti es o n th e g ro u n d s t hath e h adreas o n ab l e cau s e an d act edi n g o o dfai th rel i an ce o n a qu al i fi edt ax l aw fi rm t o p rep are h i s am en d ed 2 0 1 2 retu rn
an d h i s 2 0 13 an d2 01 4 retu rn s . W e co n cl u de t h at p et i t i o n er’ s cl ai m o f g o o dfai t h rel i an ce i s ju s t i fi ed
. Tax p ay ers are n o tl iab l e fo r p en al ti es u n der s ect i o n 6 6 6 2 fo r an y p arto f an
u n d erp aym en t i f t h e t ax p ay er h adreas o n ab l e cau s e an dact edi n g oo dfai th . Sec. 6 6 6 4 (c)(1 ). Rel ian ce o n th e ad v i ce o f a p ro fes s i o n al t ax ad v is er m ay d em o n s trat e
reas on ab l e cau s e an dg o o d fai th . Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . W e m ay
reco g n ize reas o nab l e rel i an ce o n p ro fes s i o n al ad v ice i f t he t ax p ay er s h o w s th at : (1 ) t h e ad v is er was a co m p et en tp ro fes s i o n al wh o h ads u ffi ci en t ex p ert i se t o ju s t i fy th e t ax p ay er’ s rel i an ce o n h i m o r h er; (2 ) t h e t ax p ay er p ro v i d edn eces s ary an d
accu rat e i n fo rm at i o n t o th e ad v i s er; an d(3 ) t h e t ax p ay er act u al l y rel iedi n g o o d fai th on th e ad vi s er’ s ju dg m en t . Neo nat o l o g y As s o cs ., P.A. v . Co m m i s s i on er, 1 1 5 T.C. 4 3 , 9 9 (2 00 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 0 2 ); s ee al s o Es t at e o f Tem p l e
v . Co m m i s s i o n er, 6 7 T.C. 1 4 3, 1 6 2 (1 9 7 6 ). Th e p art i es ag ree t h atp et i t i o n er s at is fi es the fi rs tan ds eco n dreq ui rem en t s . Pet i t io n er’ s t ax lawy er h ere, M r. Ko h n , h adm o re t h an3 0 y ears o f t ax an dl eg al-2 2
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ex p eri en ce wh en p et i t i o n er s o ug h th i s ad v i ce. Pet i t i o n er p ro v i d edM r. Ko h n wi t h th e i n fo rm at i o n th e Ko h n fi rm n eed edt o p rep are p et i t i on er’ s t ax retu rn s . In d i s p u t e, h o wev er, i s wh et h er p et i t i o n er act u al l y rel i edi n g o o d fai th o n th e ad v is er’ s ju d gm en t . W e d eci d e wh eth er a t ax p ay er rel i edi n g o o d fai th b y co ns i d eri n g al l o f t h e fact s an dci rcu m s t an ces , i n cl u d i n g th e t ax p ay er’ s “ ex p eri en ce, kn o wl ed g e, an d edu cat i o n ”. Sec. 1 .6 66 4 -4 (b )(1 ), In co m e Tax Reg s . Pet i t io n er, s u s p ect in g th ath i s 2 0 1 2 t ax retu rn was p rep aredi n co rrect l y , co n s ul t edh is fi n an ci al ad v i s er wh o ag reedwi th p et i t io ner t h ath i s retu rn s eem edi n co rrect l y p rep ared . Th e fi n an ci al ad v is er arran g edfo r p et it i o n er t o m eetwi th a C.P.A. at a l arg e acco u nt i n g fi rm , wh o al s o ag reedth at p et i t io n er’ s 2 0 12 t ax retu rn was n o tp rep aredco rrect l y . Th e C.P.A. referred p et i t i o n er t o M r. Ko h n , wh o al so t o l dp et i ti o n er th ath e b el i ev ed th ath i s 2 0 1 2 t ax retu rn was i nco rrect , an dd es cri b edwh ath e t ho u g h tth e erro rs
were. Pet i t i o ner h as n o b ack g ro u n di n t ax o r acco un t i n g , an d , th erefo re, s o u g h tth e ad v ice o f i nd i v i du al s h e b el i ev edwo u l dh av e th e kn o wl ed g e n eed edt o p ro v i d e h el p . Pet i t i o n er reas o n ab l y b el i ev edM r. Ko h n ’ s ex p l an at io n was co rrect , an dh e rel i edo n M r. Ko h n ’ s ad v ice i n g o o dfai th . See Sch wal b ach v . Co m m i s s i on er, 1 1 1 T.C. 2 1 5 , 2 3 0 -2 31 (1 9 9 8).-2 3
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Res p o n d en ts u gg es t s , wi th n o b as i s i n th e reco rdan dco n traryt o p et i t i o n er’ s
u n d i s p u t edt es ti m on y , th atp et i t i o n er’ s d es cri p ti o n o f h o w h e was referred t o M r. Ko h n was u n tru e an dth ath e was s h o p p i n g fo r a fav o rab le t ax res u lt . W e d i s ag ree
an d fi n dp et i t i o n er’ s t es ti m on y cred i b l e. Res p o n d en tco n t en d s th atp et i t i o n er d i dn o trel y up o n M r. Ko h n ’ s ad v i ce i n g o o dfai th b ecau s e h e kn ew o r s h o u l dh av e kn o wnth atth e t ax res u l twas “ t o o g o o dt o b e t ru e”. Whi l e t hatp hras e h as b een ap p l i edi n ap p ro p ri at e s i tuat i on s , we b el i ev e i td o es n o tap p l y

h ere b ecau s e o f t h e ex t en s i v e s tep s p et i t i o n er t oo kt o
en s u re h e was recei vi n g ad equ at e p ro fes s i o n al ad vi ce. Res p o n d en tp o i n t s o u tth atth ere are erro rs o n p et i t i o ner’ s retu rn s p rep ared b y th e Ko h n Fi rm . Fo r ex am pl e, t h e b as es i n real p ro p ert i es ret ai n edb y p et i t i o n er i n 2 0 1 3 h adn o tb een redu cedo n p et i t i o n er’ s 2 0 1 3 return ev en tho u g h th ey s h o u l d h av e b een u n d er M r. Ko h n ’ s an al y s i s . Res p o n d en tal s o p oi n t s o u tth atp et i t i o n er’ s h o m e was erro n eo u s l y l i s tedas an i nv es t m en t p ro p ert y s o l di n 2 0 1 3 an dth en
reco rd edth ati th adb een s o l dag ai n i n 2 01 4 wh en rep o rt i n g d eb tcan cel lat i o n o n a Fo rm 9 8 2 . Res p o n d en tco n t en d s th es e erro rs s h o w th atp et i t i o n er was n o tact i n g i n g o o d fai th . W e d i sag ree. W e d o n otb el i ev e p et it i o n er i s res p on s ib l e fo r d et ect i n g erro rs o f t h is n atu re i n the rep o rt in g o f co m p li cat edt ax tran sact i o n s . Tak in g i nt o acco un t al l o f t h e fact s an dci rcu m st an ces , we co n cl u d e t hatp et i t i o n er-2 4
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rel i edi n g o o dfai th o n th e Ko h n fi rm t o p rep are h i s am en ded2 0 12 an dh i s 2 0 1 3
an d 2 0 1 4 t ax retu rn s , an d t h ath e i s n o t l i ab l e fo r p en al t i es u n d er s ect i o n 6 66 2
. To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.