1

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year at issue. All Rule

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

T.C. Summary Opinion 2001-99

UNITED STATES TAX COURT

THOMAS F. HALE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5099-00S. Filed June 27, 2001.

Thomas F. Hale, pro se.

S. Mark Barnes, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463.1

 The decision to be entered is not

reviewable by any other court, and this opinion should not be

cited as authority.
- 2 -

2

At trial, petitioner conceded the disallowance in the notice

of deficiency of $3,154 of miscellaneous itemized deductions

relating to a payment of $5,000 by petitioner for settlement of

litigation that had been instituted against him by a credit

union. Additionally, at trial, the parties reached a basis of

settlement in connection with $8,840 in rental expenses claimed

by petitioner on Schedule E, Supplemental Income and Loss, of his

1996 return.

Respondent determined a deficiency in Federal income tax of

$2,344 and a penalty under section 6662(a) in the amount of $469

with respect to petitioner's 1996 tax year.

After concessions by the parties, the issues for decision

are: (1) Whether petitioner, under section 1211(b), has

established his entitlement to a deduction of $3,000 as a longterm capital loss, and (2) whether petitioner is liable for the

penalty under section 6662(a).2

Some of the facts were stipulated. Those facts, with the

exhibits annexed thereto, are so found and are made part hereof

by reference. At the time the petition was filed, petitioner's

legal residence was Pocatello, Idaho.

Petitioner was a professor of European history at Idaho

State University at Pocatello, Idaho. Petitioner is also an

attorney and was a member of the bars of the States of Idaho and

Oregon. He was admitted to practice before various courts. 

However, petitioner was engaged only minimally in the practice of

law.
- 3 -

On Schedule D, Capital Gains and Losses, of his 1996 Federal

income tax return, petitioner reported a long-term capital loss

of $20,475.44 from the sale of real estate located at Lava,

Idaho, approximately 37 miles from Pocatello. The pertinent

information on the return relative to this transaction was as

follows:

 Date acquired 8/11/89

 Date sold 11/7/96

 Sales price $21,000

 Cost or other basis $41,475.44

 Loss ($20,475.44)

On the return, petitioner claimed a loss of $3,000 pursuant to

the limitation of section 1211(b)(1). In the notice of

deficiency, respondent disallowed the claimed $3,000 long-term

capital loss for the reason that the property was not used in a

trade or business or held for the production of income.

The subject property consisted of two adjoining lots at

Lava, Idaho, on which was situated a building that originally was

a residence but which petitioner contends he used on a part-time

basis in connection with his limited law practice.

At trial, petitioner readily acknowledged that his claimed

basis of $41,475.44 for the property was incorrect. Petitioner

presented documentation showing his acquisition of the property

on August 11, 1989, for $20,000. He contends that he incurred

additional costs over the years totaling $12,537 for improvements
- 4 -

to the property. At trial, petitioner presented several

receipts, invoices, and contracts purporting to relate to

improvements to the property, which petitioner contended

substantiated $9,158 for improvements. Thus, petitioner took the

position at trial that his adjusted basis in the property was

$29,158. For the reasons stated hereinafter, the Court need not

address whether the documentation establishes the $9,158 claimed

by petitioner for these improvements.

Following his 1989 acquisition of the property, petitioner

and his wife divorced. In April 1993, petitioner's former spouse

executed a quitclaim deed in favor of petitioner for her interest

in the property. Also, during 1993, petitioner entered into a

transaction with an individual, Peter Walker Burns (Mr. Burns),

in which petitioner conveyed the subject property to Mr. Burns

for what petitioner testified was payment of an indebtedness that

petitioner owed to Mr. Burns, an attorney, for certain legal

services Mr. Burns had provided to petitioner. However,

petitioner contends that he was given an option to repurchase the

property from Mr. Burns. Although an option contract or

agreement was never prepared or executed by petitioner and Mr.

Burns, petitioner executed a promissory note dated October 6,

1993, in favor of Mr. Burns in the principal amount of $21,000

bearing 8.5 percent per annum interest and payable in monthly

installments of $206.80 on the sixth day of each month until
- 5 -

3

As the Court understands petitioner's testimony, the

consideration paid by Mr. Burns was $21,000, evidenced by a

cancellation of the $21,000 note. There is no evidence that the

$21,000 note was returned to petitioner.

October 6, 2008. No evidence was presented at trial to show

whether petitioner ever made any payments on this note. 

Petitioner contends, however, that this note evidenced or

constituted an option in his favor, and, presumably, upon payment

of the note or an election by petitioner to exercise the option,

Mr. Burns would convey title to the property to petitioner.

On February 2, 1996, petitioner executed a document wherein

he relinquished his option to purchase the property from Mr.

Burns. That document makes no reference to the $21,000

promissory note. However, petitioner contends that, when he

relinquished his option to purchase the property in 1996, that

relinquishment constituted a sale of the property to Mr. Burns,

in which the consideration or selling price was the $21,000

note.3 It is on this set of facts that petitioner reported the

transaction as the sale of a capital asset on his 1996 income tax

return (acknowledging at trial that the claimed basis was in

error and that the basis should have been $29,158, comprising the

$20,000 paid in 1989 and $9,158 in improvements). Thus,

petitioner contends he realized the claimed long-term capital

loss in 1996. Petitioner acknowledged that, after he sold the

property to Mr. Burns in 1993, he no longer used the property as
- 6 -

he had in the past, although he "looked after" the property for

Mr. Burns.

Section 1221 provides:

For purposes of this subtitle, the term "capital asset"

means property held by the taxpayer (whether or not

connected with his trade or business), but does not

include--

(1) stock in trade of the taxpayer * * *;

(2) property, used in his trade or business, of a

character * * * subject to * * * depreciation * * *;

(3) a copyright * * *;

(4) accounts or notes receivable acquired in the

ordinary course of * * * business * * *;

(5) a publication of the United States Government

* * *;

Section 1222(3) provides: "The term 'long-term capital

gain' means gain from the sale or exchange of a capital asset."

(Emphasis added.)

There was no sale or exchange of any property by petitioner

during 1996. The title to the property discussed above had been

transferred, sold, or conveyed by petitioner to Mr. Burns in

1993. What occurred during 1996 between petitioner and Mr. Burns

was the relinquishment by petitioner of what petitioner contended

was an option for purchase of the property. That option was

predicated on a promissory note of $21,000 that petitioner had

executed in favor of Mr. Burns during 1993. There is no evidence
- 7 -

that petitioner paid any amounts on this note, nor is there any

evidence that Mr. Burns paid any amount to petitioner for

relinquishment of the option. The Court concludes that

petitioner did not engage in a sale or exchange during 1996, nor

did petitioner engage in any other transaction with Mr. Burns

during 1996 that resulted in the realization of either gain or

loss. Respondent, therefore, is sustained on this issue.

Respondent determined that petitioner is liable for the

penalty under section 6662(a) for negligence or disregard of

rules or regulations under section 6662(b)(1).

Section 6662(a) provides that, if it is applicable to any

portion of an underpayment in taxes, there shall be added to the

tax an amount equal to 20 percent of the portion of the

underpayment to which section 6662 applies. Under section

6664(c), no penalty shall be imposed under section 6662(a) with

respect to any portion of an underpayment if it is shown that

there was a reasonable cause for such portion, and that the

taxpayer acted in good faith with respect to such portion.

Section 6662(b)(1) provides that section 6662 shall apply to

any underpayment attributable to negligence or disregard of rules

or regulations. Section 6662(c) provides that the term

"negligence" includes any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue laws, and the

term "disregard" includes any careless, reckless, or intentional
- 8 -

disregard of rules or regulations. Negligence is the lack of due

care or failure to do what a reasonable and ordinarily prudent

person would do under the circumstances. See Neely v.

Commissioner, 85 T.C. 934, 947 (1985). It is well established

that the taxpayer bears the burden of proof on this issue. See

Bixby v. Commissioner, 58 T.C. 757, 791 (1972).

In the notice of deficiency, respondent determined a

deficiency based on three adjustments to petitioner's tax return

for 1996. At trial, petitioner conceded one of the adjustments,

and the parties reached a basis of settlement for another

adjustment. Petitioner presented no evidence as to these two

adjustments showing that he had reasonable cause for the

underpayment relating thereto. The other adjustment related to a

claimed capital loss, discussed in detail above. The Court finds

that the underpayment as to this adjustment was also due to a

careless, reckless, or an intentional disregard of rules or

regulations. Respondent, therefore, is sustained on the entire

amount of petitioner's underpayment with respect to the penalty

under section 6662(a).

Reviewed and adopted as the report of the Small Tax Case

Division.

 Decision will be entered

 under Rule 155.