TAX COURT OPINION

Case: Richard A. Forde
Docket Number: 1280-16
Judge: Gustafson
Opinion Type: bench
Filed: 11/15/2017
Pages: 14

28 JRN UNITED STATES TAX COURT WASHINGTON, DC 20217 RICHARD A. FORDE, Petitioner, v. ) ) ) ) Docket No. 1280-16. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b) of the 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 the pages of the transcript of the proceedings in the above case before the undersigned judge at Washington, D.C., containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. 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. November 15, 2017 SERVED Nov 15 2017 Bench Opinion by Judge David Gustafson 3 October 20, 2017 Forde v. Commissioner Docket No. 1280-16 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This opinion ähall not be relied on as precedent in any other case. This Bench Opinion is made pursuant to the 1 2 3 4 5 6 7 8 9 10 authority granted by Section 7459(b) of the Internal 11 Revenue Code and Rule 152 of the Tax Court Rules of 12 Practice and Procedure. 13 14 15 By notice of deficiency dated October 28, 2015, (Ex. 9-R), the Internal Revenue Service ("IRS") determined a deficiency in the Federal income tax of petitioner 16 Richard A. Forde for the year 2002, plus an addition to 17 tax for late filing and an accuracy-related penalty. 18 Trial of this case was conducted on October 17-18, 2017, 19 in Washington, D.C. Mr. Forde represented himself, and 20 respondent was represented by William J. Gregg. 21 22 After Mr. Forde's concession that his filing status should be married filing separately, the principal 23 issue for decision is whether ànd to what extent Mr. Forde 24 25 understated his capital gain on the sale of a house. \\ FINDINGS 4 Leigh Mill House In 1998, Mr. Forde and his wife acquired a house on Leigh Mill Road in Great Falls, Virginia (Stip. 3; Ex. 1-P), for a purchase price of $835,000 (Stip. 23, Ex. 41- P.) Mr. Forde then undertook to demolish the main house, live in the guesthouse, build on the property a 16,000- square-foot house with two swimming pools, and then renovate the guesthouse. The demolition.of the main house took place, and construction on the new house began. Mr. Forde and his 1 2 3 4 5 6 7 8 9 10 11 12 wife moved into the guesthouse. Substantial progress was 13 made on the new house, but we are unable to tell when or 14 15 even whether it was fully completed. Invoking the burden-of-proof principles 16 discussed below, we find that Mr. Forde paid, toward the 17 demolition and construction costs, a total of $300,575 to 18 19 various contractors in 2001 (Exs. 32-P, 33-P, 40-P, 42-C), and through a -closing described below, $383,273 to Oxford 20 Construction in 2002 (Ex. 34-P), which amounts increase 21 his basis in the Leigh Mill property. 22 Bankruptcy and Fraud 23 In 2001, Mr. Forde was facing substantial 24 financial problems. He tried unsuccessfully to refinance 25 his mortgage on the Leigh Mill house and filed a Chapter 1 2 3 4 5 6 7 8 9 11 bankruptcy petition on May 25, 2011. In the fall of 2001, he was on the verge of losing the Leigh Mill house. He then entered into a conspiracy to commit bankruptcy fraud and bank fraud. He engineered a sale transaction in which an unwitting lender was induced to lend $3,896,750 to a buyer who was a friend of Mr. Forde. The lender was told (among other erroneous facts) that the sale price would be almost $6 million, that there would be a large down payment (which would not 10 in fact be made), that the buyer would execute in favor of 11 Mr. Forde a note for the balance of the purchase price 12 13 (which neither Mr. Forde nor the buyer actually intended to be paid), and that at settlement, some of the purchase 14 price would pay off a mortgage that did not actually 15 exist. 16 Using this scheme, loan proceeds would be 17 surreptitiously paid over to Mr. Forde, who would use the 18 19 borrowed funds to pay the mortgage of the lender from whom they had been borrowed. The bankruptcy court's approval 20 of the sale was obtained by telling the court (falsely) 21 that the (nonexistent) down payment and the buyer's 22 payments dh the note (which payments would never be made) 23 would be available to Mr. Forde's creditors (Ex. 27-R at 24 2-4.) 25 \\ 6 1 2 3 4 5 6 7 8 9 Sale in June 2002 The transaction that Mr. Forde had arranged took place in June 2002 (Stip. 5.) The lender paid $3,896,750 into the closing. The parties have agreed that this amount constituted Mr. Forde's proceeds for his sale of the Leigh Mill house (Stip. 22), and we accept their stipulation. Respondent also concedes that there were paid out of the closing (a) a sales commission of $359,700 and (b) legal fees of $24,000, and that these amounts 10 constituted additional basis in the property for Mr. Forde 11 12 13 14 15 16 17 (i.e., a reduction of his gain), and we accept those concessions. . Mr. Forde's lawyer (and co-conspirator) prepared a HUD-1 statement for the settlement of the sale (Ex. 16-P), and it reflected (among other things) the fictitious down payment and the payoff of a false mortgage (Ex. 27-R at 4-5.) It also reflected a supposed $400,000 18 as a payoff to Oxford Construction, but as is noted above, 19 we find instead that $383,273 was paid to Oxford 20 Construction (Ex. 34-P.) 21 22 The Unraveling Mr. Forde remained in the house after the sale. 23 The buyer never took possession. The buyer did not make 24 payments on his note to Mr. Forde, and Mr. Forde did not 25 pay rent for his retained possession after the sale. ribers 1 2 3 4 5 6 7 8 9 Payments toward the new lender's mortgage loan were made for some time (from the borrowed funds), but eventually the mortgage went into default, the bankruptcy proceedings were converted to Chapter 7, and civil and criminal actions were brought against Mr. Forde. He and his co- conspirators were convicted. Mr. Forde was sentenced to 42 months imprisonment (Ex. 27-R at 5-7.) Tax Return, SNOD, and Petition Mr. Forde filed his 2002 tax return nine years 10 late in April 2012 (Stip. 24.) On that return (Ex. 7-P), 11 12 13 14 15 he did not report any gain from the sale of the Leigh Mill house. (He defends this reporting position by contending that his basis in the property exceeded his amount realized from the sale transaction. See Ex. 41-P.) The IRS examined Mr. Forde's 2002 return and 16 determined that he realized capital gain on the sale in 17 18 19 the amount of $2,422,055, taking into account the stipulated sale price ($3,896,750) minus (a) Mr. Forde's 1998 acquisition cost of $835,000, (b).closing costs of 20 $389,695 (apparently consisting of the commission, the 21 attorney fees, and an unspecified additional amount), and 22 (c) the Section 121 exclusion of $250,000 (Stip. 23.) On 23 October 28, 2015, the IRS issued to Mr. Forde the SNOD 24 25 determining the resulting tax deficiency (Ex. 9-R). On January 19, 2016, Mr. Forde timely filed his í973)406Ò2 Ojoperati söhéÍbe twür.esalbe det petition in this Court. At that time he resided in 8 Virginia (Stip. 1.) I. Burden of Proof OPINION The IRS's determination is presumed correct, and the taxpayer generally bears the burden to prove his entitlement to any deduction he claims; Rule 142(a). Deductions are a matter of legislative grace, and taxpayers must satisfy the specific requirements for any 1 2 3 4 5 6 7 8 9 10 deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 11 U.S. 79, 84 (1992.) Furthermore, taxpayers are required 12 13 14 15 16 17 18 to maintain records sufficient to substantiate their claimed deductions. See Section 6001; 26 C.F.R. Sec. 1.6001-1(a). II. Gain on the Sale of the Leigh Mill House A. Computing Gain Under Section 1001(a), gain consists of the excess of the "amount realized" (here, the stipulated 19 purchase price) over the seller's basis in the property 20 sold. Under Section 1012, the seller's adjusted basis 21 22 consists of "the cost of such property", which the parties agree would consist of (a) the $835,000 that Mr. Forde 23 paid to acquire the house in 1998 and (b) any subsequent 24 amounts he paid for construction costs (i.e., to demolish 25 the old house and build the new house.) 9 However, on the factual issue of what construction costs have been substantiated, the parties disagree. Mr. Forde contends that they total $2,355,700 (see Ex. 41-P), but the Commissioner contends that they are zero, i.e., that none have been substantiated. That disagreement is the crux of this case. B. Construction costs 1. The Fact of Demolition and Construction Mr. Forde put on a convincing case that the old house on.the Leigh Mill property was demolished, that a new and very large house was constructed (see, e.g., Ex. 28-P), and that very substantial cost would have to be incurred to make that happen. However, assuming that to be true, what Mr. Forde needed to prove was that he paid that very substantial cost. He did not produce any cancelled checks, bank records showing transfers, nor any 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 other equivalent proof of payment. H.e did not even 18 provide receipts from contractors showing amounts paid. 19 Instead, he relied on certificates of satisfaction of 20 lien, certificates of release of mechanics liens filed in 21 22 23 the county land records, and amounts stated in the HUD-1. 2. Certificates of Release of Mechanics Liens The certificates of'release of mechanics liens 24 state an amount claimed by the contractor, assert that the 25 lien is released, are signed by the contractor, and are 10 1 2 3 4 5 6 7 8 9 10 11 notarized. Ordinarily, this should mean that the contractor releases his lien because he has been paid the amount he claims, and we think such certificates do have some probative value of payment. On the other hand however, the certificate does not literally confirm payment of the stated amount. 1 A certificate of release of a lien might be signed simply as an accommodation to the debtor in order to facilitate a sale of property where, for example, the- contractor has not yet been paid but hopes to be paid from the sale proceeds (and is willing to risk nonpayment.) Or it might be signed by a contractor 12 willing to take immediate payment of a substantially 13 discounted amount. Or it might be signed by a colluding 14 party with a bogus lien who participated in a fraudulent 15 closing. 16 17 18 However, we do find that Mr. Forde probably did pay to nine contractors the amounts listed on Exhibit 42-C (whose certificates appear in Exhibits 32-P, 33-P, and 40- 19 P.) Their certificates were for relatively small amounts, 20 were signed in 2001 (most of them before his bankruptcy 21 petition), were signed for construction companies, and . 22 show no signs of collusion with Mr. Forde. These amounts, 23 totaling $300,575, should increase Mr. Forde's basis. 24 25 3. Certificates of Satisfaction On the "Certificates of Satisfaction", a lender 11 1 2 3 4 5 6 7 8 9 . "certif[ies] that the [stated amount of a loan) has been paid in full". This should constitute actual evidence of payment. Such certificates for $100,000 and $1,300,000 were signed for "Instant Money, Inc." on July 3, 2002 (Exs. 35-P, 39-P), and they correspond to a payoff of $1,553,114 indicated as a "first mortgage loan" by Instant Money on the HUD-1, presumably reporting the payoff of a mortgage loan secured by the Leigh Mill property. However, Mr. Forde offered no evidence that he had used the loan 10 proceeds he obtained from Instant Money to pay for 11 12 construction costs, rather than for living expenses or anything else. Similarly, such certificates signed by 13 Alfonzo Smith for $151,500 and $72,500 on July 7, 2002 14 15 (Exs. 37-P, 38-P), may correspond to payoffs of larger amounts ($252,000 and $75,000) on the HUD-1 (Ex. 16-P); 16 and if we assume that they do reflect the actual payoff of 17 18 bona fide loan debt, nonetheless, Mr. Forde did not show that he spent the loan proceeds he obtained from Alfonzo 19 Smith on construction costs. Proving loans and payoffs -- 20 without more -- does not increase Mr. Forde's basis in the 21 Leigh Mill property. 22 We view differently the certificate of 23 satisfaction signed for Oxford Construction on July 2, 24 25 2002, which reflects the satisfaction of a note dated in June 2000 with an amount of $383,273 (Ex. 34-P.) A 12 1 2 3 4 5 6 7 8 9 principal of Oxford Construction testified at trial, credibly and in detail, about work done on the Leigh Mill property and about Oxford's cost-plus-20-percent arrangement with Mr. Forde. The witness was candid about his nonrecall of the dollar amounts, but he confirmed the reasonableness of the ballpark amount of $400,000. (The HUD-1 does include a payoff amount of $400,000 to Oxford, but we adopt the slightly smaller amount on the certificate of satisfaction, since we cannot eliminate the 10 possibility that -- in the otherwise fraudulent closing -- 11 Mr. Forde and his attorney might have retained the 12 difference rather than actually paying .it over to Oxford.) 13 We conclude that Oxford probably did receive $383,273 for 14 work done on the Leigh Mill property, and this should 15 16 17 18 increase Mr. Forde's basis. 4. Other Expenses Mr. Forde has also asserted that his gain should be reduced by selling expenses of $332,995 and mortgage 19 points of $172,534 (see Ex. 41-P.) However, he put on no 20 supporting evidence, testimonial or documentary, for the 21 selling expenses, and for the mortgage points, his only 22 documentary.evidence is the HUD-1 statement (Ex. 16-P), 23 which is unreliable for the reasons we have already 24 stated. We therefore do not reduce his gain by these 25 amounts. 13 1 2 3 4 5 6 7 8 9 III. Addition to Tax The Commissioner has the burden of production, see Section 7491(c), to show that Mr. Forde is liable for the additi.on to tax determined against him in the SNOD for failure to timely file his return, under Section 6651(a)(1). The Commissioner fulfilled that burden by the stipulated fact that Mr. Forde filed his return nine years late, and Mr. Forde made no argument as to reasonable cause for the untimeliness. The addition to tax is, 10 therefore, sustained. 11 12 13 IV. Accuracy-Relat-ed Penalty The Commissioner determined that Mr. Forde is liable for a 20 percent accuracy-related penalty under 14 Section 6662(a) because the deficiency he determined 15 16 (i.e., $429,169; see Ex. 9-R) is great enough that the resulting underpayment is "substantial" for purposes of 17 Section 6662(b)(2) and (d)(1)(A), i.e., it exceeds $5,000 18 19 and it exceeds by more than 10 percent the tax liability that th:. Forde reported (i.e., zero; see Ex. 7-P.) The 20 Commissioner showed compliance with Section 6751(b); (see 21 Ex. 10-R.) Although we do not sustain in full the 22 Commissioner's determination on the principal issue in 23 this case, we sustain it in large part, and it is clear 24 that the actual deficiency, yet to be recomputed under 25 Rule 155, wi.ll be "substantial". The Commissioner has ribers 1 2 3 4 5 6 7 8 9 10 11 carried his burden. Mr. Forde made no showing of reasonable cause for his underpayment, and he will therefore be liable for the accuracy-related penalty on the recomputed amount. The IRS's notice of deficiency is upheld in part, to the extent shown above. So that the liability can be recalculated, decision will be entered pursuant to Rule 155. This concludes the Court ' s oral Findings of Fact and Opinion in this case. (Whereupon, at 2:46 p.m., the above-entitled 12 matter was concluded.) 13 14 15 16 17 18 19 20 21 22 23 24 25 Exhibit 42-C Exhibit(s) Lienholder 32-P, 40-P Owen Companies, LLC Bell Pump & Well, Inc. Amount $8,930.00 1,509.77 33-P 40-P 40-P 40-P 40-P 40-P 40-P 40-P Total A&N Mechanical Coñtractors 26,850.00 A&S Construction D.J. Bittner Construction Carpet Gallery Dolphin Plumbing ~ Escobar Inc. Hammer Corporation 95,010.00 8,180.00 33,657.00 23,600.00 65,038.44 37,800.00 300,575.21