TAX COURT OPINION

Case: Ann Bowie Love
Docket Number: 18086-10
Judge: Gustafson
Opinion Type: bench
Filed: 01/04/2012
Pages: 14

UNITED STATES TAX COURT WASHINGTON, DC 20217 RMM ANN BOWIE LOVE, Petitioner, Docket No. 18086-10. COMMISSIONER OF INTERNAL REVENUE, Respondent O R D E R Pursuant to Rule 152 (b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of in the above case before Judge David transcript of Gustafson at Columbia, South Carolina, on December 13, 2011, 2010, containing his oral at the conclusion of findings of the pages of the the trial the trial. fact and opinion rendered In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. January 4, 2012 SERVED Jan 04 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Judge David Gustafson December 13, 2011 Ann Bowie Love v. Commissioner Docket No. 18086-10 THE COURT: Thë Court has decided to render oral Findings of . Fact and Opinion in this case. The following represents the Court's oral Findings of Fact and _Opinion, which shall not be relied on as precedent in any other case . This Bench OpiÀion is made pursuant to the authority granted by section 7459 (b) of the Internal Revenue Code, and Rule 1$2 of the Tax Court Rules of Practice and .Procedure . By a statutoryinotice of deficiency dated May 17, 2010 . (Ex. 4aJ) , the Internal Revenue Service ("IRS") determined a deficiency in.the Federal income tax of petitioner Ann Bowie Love for tax year 2006, in the amount of $124,840, plus additions to tax under sections 6651 (a) (1) and Í(a) (2) and 6654 (a) . After concessions by ·both parties (see Stip. 15, 22, 23) , the principal issue in dispute .is whether Ms. Love is entitled to like-kind-exchange treatment of a real estate transaction. For the reasons explained hereafter, we decide that issue in Ms. Love's favor, but she .is liable for additions to tax. Trial of this case was conducted on Heritage Reporting Corporation (202) 628-4888 1 2 3. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 . 22 23 24 25 4 December 12, 2011, in Columbia, South Carolina. The parties' Stipulation of Facts, with Exhibits 1-J through 19-J, was admitted into ev.idence and is incorporated herein. Ms. Love testified, and her testimony. was forthright and credible. We find the following facts: Findings of Fact At the time she filed her petition, Ms. Love resided in South Carolina. For much of her professional life, Ms . Love worked in the. real estatë business . Prior to the year at issue, Ms . Love livedi near the South Carolina coast . She acquired a small two-bedroom house in Surfside Beach, South Carolina, which she occasionally rented out. Her cost basis in the house was $20,497. Her own residence was near the ocean, and she did not use the Surf side .Beach house herself . She eventually moved about 250 miles inland to Taylors, South Carolina, but she retained the Surf side Beach house as an inve s tment . In 2006 Ms. Love earned wages totaling $20,476 (Stip. 4, 22), and from those wages her . employer withheld $1, 966 in Federal income tax (Ex. 3-J) . In that same year McQuiddy Properties of South Carolina, LLC, proposed to Ms. Love the following Heritage Repo ting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 deal, to which she agreed and which they effected: She subdivided the lot. on which her Surfside Beach house stood, and she sold one. of the two resulting lots to the realtor for $400,000. The realtor demolished the original house and built a larger house on each of the.two lots. The realtor got one of the two new properties (i.e., a new house on the subdivided.lot).and Ms'. Love got the other. Her sale price of $400,000 was used to pay to build the new, larger house (which had 4 bedrooms, 4. and a half baths, and parking for 4 cars _(Ex. 17-J)), except that $27,163 was used to pay off Ms. Love's mortgage on the original house. In sum,; she relinquished the old house on the larger lot for a superior replacement house on half of the divided lot. T6e deal was structured to be conducted as a like-kind exchange qualifying under section 1031 (discussed below), so that Ms. Love would not recognize taxable gain. (See Stip. 6-12; Exs. 5-J to 11aJ.) We need not desc ibe the actual details of the transaction, because the IRS concedes that it meets the qualifications of section 1031 (Stip. 13), except that the IRS contends. she did not hold the property "for productive use in at trade or business or for investment", for purpose(cid:0)541of section 1031(a) (1). As Heritage Reporting Corporation (202); 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to that -qualification, hbwever, we find that Ms. Love considered the new house, like the original house, to be an investment for her retirement. She did not ever reside in the new house, and her only overnight stays in it were incidental to her working on the house, to get it ready.for rental. At thë time of the transaction Ms.. Love was 63. She hoped that the new house would eventually generate rental income that she could live on -- both weekly summer rentals and, more important, long-term non summer rentals to "snowbird" retirees. Construction of the new house was finished in 2007, but Ms. Love's preparations to make it ready for rental were delayed. In May 200'7 she had a mishap in which she broke her kñeecap. In 2008 she was diagn.osed with cancer and began debilitating chemotherapy. After the house was ready for rental, she made only intermittent efforts to rent it out, and her rentals were few. The lack of frequent rentals was due to her modest efforts and to her unwillingness to rent the house to complete strangers with no connection to herself or her family and friends. When Ms. Love's 2006 return was due in April 2007, she obtained an extension to file the return in October 2007. However, she did not ever file a Heritage Reporting Corporation (202) 628-4888 7 return. (Stip. 2.). Ms.. Love's explanation of this non-filing was to the effect that she simply did not think about it again; and when her chemotherapy began in. the next year, she.became forgetful and exhausted. Pursuant to section 6020 (b), the IRS prepared a substitute for return ("SFR") on March 15, 2010 (Ex. 2-J), on which it included in her gross income both thé wages she had earned and her $400,000 gross revenue from the real estate transaction. The IRS then issued to Ms..Love a notice of deficiency (Ex. 4-J), determining that Ms. Love is liable for. the resulting deficiency of income tax and that she is liable for additions to tax for failure to file and failure to pay, under section 6651(a) (1) and (a) (2). (It also determined an addition to tax under section 6654 (a), but it now concedes that item.) Ms. Love filed a timely petition with this Court on August 12, 2010, challenging those determinations. Opinion 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 .20 I . Burden of proof 21 22 23 24 25 The IR$'s determinations are presumed correct,·and generally the taxpayer bears the burden to prove that they are incorrect. Rule 142(a); Welch v.. Helvering, 290 U.S. 111, 115 (1933). Ms. Love does not contend that the burden of proof has ·shifted under Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 section 7491(a), and we assume that it has not. II. Like=kind exchange A. General principles Section 1031(a) provides that no galn or loss shall be recognized" on the exchange of property .held for productive use in a trade or business or for investment if the property is exchanged solely.for property of a like kind that is to be held either for productive use in a trade or business or for · investment. The statute includes several prerequisites for like-kind-exchange treatment under section 1031, but the IRS's only challenge in this case is to Ms. Love's holding of the original house and the replacement house for investment. A taxpayer's intent to hold a property for productive use in a trade or business or for .investment is a question of fact.that must be determined at the time of the exchange. The taxpayer bears the burden of proving that she had.the requisite investment intent. See Goolsby v. Commissioner, T.C. Memo. 2010-64, and cases cited therein. B. Analysis We hold that Ms. Love carried her burden of proof. Her credible testimony is that her investment in the original Surfside Beach house began before the Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 .8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 . year in suit when she lived nearby -- and when she plainly had no need for a beach house for her own use. The wisdom of her investment decisïon was resoundingly vindicated in 2006 when McQuiddy offered to purchase half of her property for $400, 000 in value, for a gain of nearly $380,000. She decided to keep that value in the equivalent investment -- a replacement Surfside Beach house, but one that wa(cid:0)541newer and larger. Since Ms . Love never made any personal use of her Surfside Beach houses, there is.no evidence for any non-investment. personal motive for her transactions, and such a non-investment motive can only be speculated -- though it is difficult even to speculate such a motive. The desire to realize capital gain is an investment purpose, see Lindslev v. Commissioner, T.C. Memo. 1983-729; the desire to realize capital gain to pass on to one's children is, likewise, an investment purpose. The IRS's principal contention, however, is simply that her lack of zeal for developing rentals of the new house contradicts her alleged intention to use .it to make rental income . However, there are. three effective answers to the IRS's contention: First, Ms. Love's health issues interrupted her plans and explain her relative inactivity. We exam.ine her motive at the time of the Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 .7 8 9 10 11 12 13 14 1$ 16 17 18 19 20 21 22 23 24 25 10 like-kind exchange, and the character of the exchange is not altered by subsequent events . Second, the hopedffor stream of rental income was something she needed not in 2007 but for retirement, and she did not plan to retire in her early 60s. Third, the appréciating value .of the property always made gain likely, even without rentals. On the facts proved at trial, Ms. Love held the original house and acquired the new house for investment purposes. C. "Boot" In an otherwise qualifying like-kind exchange, a taxpayer's realized gain is recognized to the extent that the consideration the taxpayer receives includes unqualified, non-like-kind property (called "boot ) " . Sec . 1031 (b) ; 26 C . F . R . sec . 1. 1031 (a) -1 (a) (2) , Income Tax Regs . The transaction was structured so that when she sold her original house she would get not only the new house (the like-kind property) but also the $27,163 that was used to pay off Ms . Love ' s mortgage on the original house . This amount constitutes boot and was taxable income, the recognition of which .is not relieved by section 1031. // // Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11 III. Additions to tax A.· Section 6651(a) (1): failure to.file Section 6651(a) (1) authorizes the imposition of an addition to tax for failure to file a timely return, unless the taxpayer proves that such failure is due to reasonable cause and is not due to willful neglect. See also United States v. Boyle, 469 U.S. 241, 245 (1985). The parties' stipulation that Ms. Love filed no 2006 return (see Stip. 2) satisfies respondent's burden of production under section 7491(c). The addition to tax applies "unless it is shown that such failure is due to reasonable cause and not due to willful neglect". Ms. Love argues that her health problems constituted reasonable cause, but wë cannot agree. She brokè her kneecap. in May 2007, and her return was not due (after an extension).for another five months, in October 2007. Her cancer issues did not arise until 2008, and one of the perils of neglecting one's necessary business is that it may become more difficult to attend to. Problems that arose in the year after a tax return was due may explain why.one failed to cure her prior lapse, but they do not.explain or excuse the prior lapse. .Moreover, even though we accept Ms., Love's testimony Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 12 that chemotherapy greatly weakened and troubled her, we note that she continued to work off and on during this difficult time. . We cannot say that her health problems constituted reasonable cause for her non-filing. B. Section 6651(a) (2) : failure to pay Section 6651(a) (2) imposes an additión to tax for failure to pay the amount of tax shown on a return. The addition to tax under section 6651(a) (2). applies only. when an .amount of tax is shown on a return. Cabirac v. Commissioner, 120. T.C. 163, 170 (2003) . The Commissioner's burden of production with respect to the section 6651(a) (2) addition to tax requires him to introduce evidence that a return showing the.taxpayer's tax liability was filed for the year in question. Wheeler v. Commissioner, 127 T.C. 200, 210 (2006) , affd. 521 F.3d 1289 (10th Cir. 2008) . In a case such as this one, where the taxpayer did not timely file a return for the tax year at issue, the Commissioner must introduce evidence that a valid substitute for return was made pursuant to section 6020 (b) . Sec. 6651(g) (2) . To constitute a valid substitute for return under section 6020 (b), "the return must be subscribed, it must contain sufficient information from which to compute the Heritage Reporting Corporation (202). 628-4.888 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 taxpayer's tax liability, and the :return form and any attachments must purport to be a 'return'." Spurlock . v. Commissioner, T.C. Memo. 2003-124. The SFR attached to the parties' stipulation (Ex. 2-J) satisfies section 6020 (b), and respondent has therefore satisfied his burden of production under . section 7.491(c) with respect to the section 6651(a) (2) addition to tax. Under section 6651(b) (2), the addition to tax is imposed on the net amount of tax due after withholding credits, so to the.extent that a non-filer's income tax liability was covered by withholding from her wages (in Ms. Love's case, $1,966), she will not owe the addition to tax on that part of the deficiency. As with the addition under section 6651(a) (1), the addition under section 6651(a) (2) applies "unless it ïs shown that such failure is due to reasonable cause and not due to willful neglect", and Ms. Love asserts reasonable cause, again arising from her health problems. A failure to pay is due to reasonable cause if the taxpayer "exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship * * * Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 14 if he paid on the due date:" 26 C.F.R. sec. 301.6651- 1 (c) (1) , Proced . & Admin . Regs . I f we look to the facts at the time of the due date in 2007, however, the health problems do not. explain or excuse the non-payment . Ms . Love showed her medical bills (Ex . 19-J) and made general statements of financial strain, but she did not give even a general depiction of her overall financial circumstances at any time, and not in 2007. We cannot say that her health problems constituted reasonable cause for her non-payment. Ms. Love stresses that she relied on McQuiddy's advice .that the transaction qualified for like=kind-exchange treatment, and she may mean that she was advised that none of the proceeds were recognized, not even the portion used to pay off the mortgage on the relinquished house . If she means to defend against the failure-to-pay addition bý asserting reliance on advice as reasonable cause, the defense cannot avail. The accuracy-related penalty of section 6662 (not ^at issue here) is subject to a similar defense of reasonable cause and good faith (see sec. 6664(c) (1)) that can be based on a taxpayer's reliance on professional advice, see 26 C. F.R. sec. 1. 6664-4 (b) (1) . However, in this case the advisor was not a tax lawyer, accountant, or even a Heritage Reporting Corporation (202) 628-4888 . 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 15 tax return preparer. Moreover, the advisor was someone with a personal stake in the transaction.at issue. Such advice cannot support "reasonable cause" under section 6664 (c) (1), see 106 Ltd. v. Commissioner, 136 T.C. 67 (2011), and it cannot support "reasonable cause" under section 6651(a) (2). Conclusion Ms. Love is not required to recognize the gain that she realized on the transaction, except to the extent of the $27,163 that was used to pay off her mortgage on the original.house. She will owe the additions to tax for non-filing and non-paying, although those additions will be measured against the reduced, redetermined deficiency. To give effect to these holdings and the parties' concessions, decision will be entered under Rule 155. . This concludes the Courtis oral Findings of Fact and Opinion in this case. (Whereupon, at 9:35 a.m, the bench opinion in the above-entitled matter was concluded.) // // // // // Heritage Reporting Corporation (202) 628-4888