TAX COURT OPINION

Case: Jeffrey C. & Renee M. Milton
Docket Number: 15875-08
Judge: Kroupa
Opinion Type: memo
Filed: 10/28/2009
Pages: 11

T .C . Memo . 2009-24 6 UNITED STATES TAX COURT °-JEFFREY C . AND RENEE M . MILTON, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 15875-08 . Filed October 28, 2009 . Robert J . Gumser, for petitioners . Heather K . McCluskey , for respondent . MEMORANDUM FINDINGS OF FACT AND OPINIO N KROUPA, Judge : Respondent determined an $86,767 deficiency in petitioners' Federal income tax for 2005 and-a-$17,35 3 SERVED OCT 2 8 2009 -2- accuracy-related penalty under section 6662(a) .' After concessions,2 we are asked to decide whether petitioners underreported their distributive share from Renee Milton, Inc . (RMI), S corporation, for 2005 . Respondent disallowed RMI's claimed deduction for an abandoned partnership interest . We hol d { that RMI was not entitled to a deduction and therefor e petitioners, underreport ed their income . We further find that th e accuracy-related penalty applies . FINDINGS OF FACT Some of the facts have been stipulated and are, so found . The stipulation of fac t s and the accompanying exhibits are ..,incorporated by_this re ference . Petitioners resided in Sa n Diego, California, at trhe time they filed the petition . RMI Renee M . Milton (petitioner) was the president and sole shareholder of RMI, a real estate business , during 2005 . J Petitioner, a real estate professional, entered into real estat e purchasing and selling agreements for RMI's clients . . 'All section references are to the Internal Revenue Code in effect for the year at-issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwis e indicated . 2Petitioner conceded Renee Milton, Inc . had $4,488 .50 .of unreported gross receipts or sales and it is not entitled to a deduction for outside services of $100,000 . Respondent conceded that petitioners are entitled to $40,152 of other deductions . KM Welding Transactio n -3- Petitioner's handyman approached her in 2004 about a business opportunity involving his son, Donald Purscelley (Mr . Purscelley),-who worked as a welder for Kearney Mesa Welding (KM Welding) . Salvatore Peluso, the owner of KM Welding, wa s considering retirement, and Mr . Purscelley expressed an interes t in purchasing the business . Mr . Purscelley lacked any funds to purchase KM Welding, on his own so his father asked petitioner if she would be interested in participating-in Mr . Purscelley's purchase of the business . Petitioner was interested but only to obtain the right of first refusal to purchase the leased property on which KM Welding operated its business . Mr . Purscelley and his father negotiated the price for KM Welding with Mr . Peluso, and the deal was consummated with a handshake . Petitioner was aware that neither Mr . Purscelley nor his father would be able to contribute money towards the purchase price . Petitioner gave Mr . Purscelley's father a check payable to Mr . Peluso for $90,000 and instructed the father to purchase KM Welding . She used money she had earned from RMI that she had in her savings account . Petitioner's purchase check, dated February 17, 2004, is the only document memorializing the transaction . The only documentation of the transaction petitioner received was a KM Welding sticker for her car . Petitioner "knew that * * * [the to buy .[ the] _ : land" so she did not need any documentation . Petitioner's name, however, was not on the lease for th e property, nor was petitoner's "right" ever put in writing . Operation of-KM Weldin g Purscelley and ..his efatY er (cid:127)to purchase KM Welding . Ownership o f divided into thirds among"petitioner, Mr . Mr . Purscelley :-initially created an celley operated KM Welding as a sol e proprietorship during 21005 . Mr .Purscelley made no distributions in 2004 or 2005, no r did he believe he .was obligated to share ,the profits 'with petitioner or his father . Furthermore, petitioner'expected°to- ."'(cid:127) rece-ive only the leaseland, potentially, some of "the profits onc e the business was sold . RMI's Purported Abandonment of .its~Partnership Interest . concerned in 2005 that KM Welding was not paying its bills . She was worried that , her involvement with KM Welding would ruin her reputation an d potentially affect theUll :financial health of-RMI . Neithe r petitioner nor RMI was~~.obligated to pay anything-additionalto -5- Welding or its creditors . In fact, KM Welding is still operating at the same location today as in 2005 : Mr . Purscelley was unresponsive when petitioner questioned him about-her ownership interest in KM Welding and requested Schedules K-1 . Petitioner's CPA advised her at that time that it would be better to abandon the KM Welding partnership interest rather than to continue risking her reputation and her business, RMI . Petitioner did not inform her purported partners, however, that she was abandoning her interest in KM Welding . Petitione r also did not give public notice that she was no longer associate d with KM Welding . RMI claimed a $100,000 abandonment loss on its Form 1120S, U .S . Income Tax Return for an S Corporation, that passed through to petitioner as the sole shareholder in 2005 .3 The loss was identified as an abandonment of a partnership interest . RMI's balance sheet for 2005, however, does not list a partnership interest as . of the beginning of the year for RMI . Respondent issued a deficiency notice to petitioners disallowing the abandonment loss and adjusting petitioner's distributive share from RMI accordingly . Petitioners timely filed a petition . 3Petitioners concede in their brief that the amount claimed should have been $90,000 rather than $100,000 . -6- OPINION We are asked to decide whether petitioners underreported 'the distributive share from RMI because RMI was not -entitled t deduct an .abandonmentfoss . Respondent argues that petitioner . did not establish that'[an abandonment ; occurred entitling RMI to a deduction . Respondent, ; 11 1 also argues that the accuracy-related .. penalty should(cid:127) be imposied .' I . Abandonment Loss' -Deductio n We ._begin with the general rules for deducting abandonment, losses . A taxpayer'isi'lentitled to deduct uncompensated .-losses during'a given tax year . Sec . 165(a) . Deductions are,,a matter of,,legislative grace, however, and ..-the taxpayer must show that he or she is entitled to any deduction claimed .4 Rule 142(a) ; Deputy v . du' Pont , 3081U .S . 488, 493 (1940) . This includes the burden of,substantiation . Hradesky v . Commissioner , 65 T .C.,_87 , 89- 90 (19,75) affd . per curiam 540 F .2d 821 (5th Cir . ° 1976) . .' The Court need not accept the taxpayer's self-serving testimony .whe n the taxpayer,fails~to present'corroborative evidence . Beam v . Commissioner , T .C :-Memo . 1990-304 (citing Tokarski v .- 'Sec . 7491(a) shifts the burden of proof to the Commissioner in certain circumstances provided .the taxpayer complies with substantiation requirements, maintains all required : records, and cooperates with the Commissioner's reasonable requests . Petitioners did not .seek to shift the burden . In addition, petitioners have failed to substantiate the abandonment loss deduction and maintaindthe required records, and therefore w e decline to shift the burden . See sec .. 7491(a) " (2) (A) and : .(B) -7- Commissioner , 87 T .C . 74, 77 (1986)), affd . without published opinion 956 F .2d 1166 (9th Cir 1992) . A taxpayer must prove he or she owned the property-abandoned to claim an abandonment loss deduction . JHK Enters ., Inc . v . Commissioner , T .C . Memo . 2003-79 . Petitioner has not proven that RMI owned the partnership interest it purported to abandon in 2005 . There is no evidence that the conversations among petitioner, Mr . Purscelley, and his father' resulted in RMI's . owning a partnership interest in KM Welding . Petitioner has not provided an asset purchase agreement or any other document to substantiate the transaction . Petitioner even failed to substantiate that the funds were RMI's rather than hers individually. Moreover, the purported partnership interest in KM Welding was not listed as an asset on RMI's beginning-of-the-year balance sheet-for 2005 . We find that RMI did not own a partnership interest in KM Welding in 2005 . In addition, the taxpayer must also establish to claim an abandonment loss that he or she (1),intended to abandon the property and (2) took affirmative action to abandon the property . Citron v . Commissioner , 97 T .C . 200, 208-209 (1991) . The intent to abandon and the affirmative action are to be ascertained from the facts and circumstances surrounding the abandonment . United Cal . Bank v . Commissioner , 41 T .C . 437 ( .1964), affd . per curiam 34 .0 F .2d 320 (9th Cir . 1965) . An abandonment occurs where the 8- taxpayer has relinquished the asset as well as any future claims Ih to the asset . Tsakopoullos v . Commissioner ,, T .,C : .Memo . 2002-8, affd .r without published1opinion 63 Fed : Appx . 400 .(9th Cir . 2003) . Some. express,manifestaton of abandonment is require d when the asset is an intangible property interest, such as a partnership interest . ,~ICitron v . Commissioner ,-, supra at,209-210 . II Petitioner testifi ed . that she intended .to=abandon he r purported partnership interest in KM Welding to avoid damage . t o her reputation and to h~er .business,-- : RMI . The record does .not contain any independent evidence ; however, to support her alleged intent . There is no evidence, other than petitioner's self- serving testimony, that petitioner would be held liable for any. debts of KM'Welding . ,Moreover, . petitioner did not provide any independent evidence of the financial health .of KM Welding i n 2005, the year RMI "abandoned" the partnership interest . Petitioner also did noti provide evidence that-KM Welding .was no t completing projects ore ; timely paying its bills . In fact, KM Welding continued . operations after 20,05 . Furthermore , petitioner testified she decided , upon her CPA's advice , to abandon the purportedtpartnership ' interest .' Yet petitioner did . not provide evidence of the conversations she ha d with her CPA . .Additionally, she admitted at trial that if she received any-profits from KM Welding in the future, she, would .. . report the income . Petitioner' s remarks suggest~'that-she . -9- believed there was still,a possibility she would receive a return on her investment . Accordingly, we find that petitioner did not truly intend to abandon any interest in KM Welding . Petitioner did not take any affirmative . action in 2005 to abandon the purported partnership interest in KM Welding . Petitioner was unable to provide the date on which she abandoned the interest . Petitioner testified that she did not file any public document indicating that she was no longer associated with KM Welding . Additionally, there is,n.o evidence that petitioner informed her purported partners that she was abandoning the partnership interest . We find that petitioner did not take sufficiently identifiable steps to abandon the interest in KM Welding to thereby be entitled to an abandonment loss deduction . II . Accuracy-Related Penalty We turn now to respondent's determination in the deficiency notice that petitioners are liable for the accuracy-related penalty under section 6662(a) and (b)(1) . Respondent has the burden of production under section 7491(c) and must come forward with sufficient evidence that it is appropriate to impose the penalty . See Higbee v . Commissioner , 116 T .C . 438, 446-447 (2001) . A taxpayer,is liable for an accuracy-related penalty for any portion of an underpayment of income tax attributable . to negligence or disregard of rules and regulations, unless he or -10- she ; -establishes that there was reasonable -cause for -th e underpayment and that h e or she acted :;-in good faith . Secs .- 6662 (a) and (b) (1) , 666 ,4(c)(1)%, Negligence is defined 'as an y failure to make-a reasonable attempt to comply'with the" dC provisions of the Cod e and includes any failure by the taxpaye r to keep-adequate books and records-or-to substantiate item s properly . Sec . 6662 ( c)sec . 1 .6662 - 3(b)(1), Income Tax Regs . RMI'dd not maintain any books -or-records to substantiate , the abandonment loss .cl aimed on RMI's .return -for 2005 . We find it incredible that petitioner, who is in the business of entering into . contracts, would not .request written documentation, of*the KM Welding transaction . FUrthermore,'uncorroborated self-serving . testimony "was the only evidence petitioner presented regarding the abandonment of the [purported partnership interest in°KM ., .° Welding . We find that petitioners acted negligently in failing to substantiate the abandonment loss, and respondent has met hi s .burden of production . Notwithstanding that petitioners were negligent, theymay' avoid the imposition of :-a .penalty if they are-able to show tha t there was a reasonable ' cause for, and-that they acted in good' faith with respect to, the underpayment . See sec . 6664(c) . : , ,The ' determination of whether the taxpayer acted with reasonable cause and in good faith is made by taking- .into account all the t -11- pertinent facts and circumstances . See sec .-1 .6664-4(b)(1), Income Tax Regs' . Petitioner testified that she abandoned the KM Welding partnership interest and claimed a loss deduction for-2005 on the advice of her CPA . We do not even have the name of her CPA, nor do we know what information petitioner provided to the CPA . Petitioner failed to give us adequate evidence that she acted in good-faith reliance . Accordingly, we hold that petitioners are liable for the accuracy-related penalty under section 6662(a) and (b) (1) for 2005 . In reaching our holding, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit . To reflect the foregoing and the concessions of the parties , Decision will be entere d under Rule 155 .