TAX COURT OPINION

Case: Bengt N. & Judy H. Bengtson
Docket Number: 11093-08
Judge: Foley
Opinion Type: memo
Filed: 03/01/2011
Pages: 5

T.C. Memo. 2011-50 UNITED STATES TAX COURT BENGT N. AND JUDY H. BENGTSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 11093-08. Filed March 1, 2011. Bengt N. and Judy H. Bengtson, pro sese. Julie A. Jebe, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION FOLEY, Judge: After concessions, the issues for decision are whether petitioners are entitled to a long-term capital loss and liable for a section 6662 (a) accuracy-related penalty relating to their income tax for 2005. Únless otherwise indicated, all section references are to . (continued . . ) RVED MAR - 1 2011 - 2 - FINDINGS OF FACT During the years in issue, Bengt Bengtson was a computer consultant and his wife, Judy Bengtson, was a homemaker. In the late 1990s petitioners agreed with Joan Thomley, Mrs. Bengtson's sister, to invest in stocks.l In 1999, 2000, and 2001, petitioners provided funds to Mrs. Thomley, who in turn purchased stock in Maintenance Depot, Inc. (Maintenance), Sideware, Inc. (Sideware), and other companies. Mrs. Thomley made the purchases through her brokerage account and all shares were purchased and held in her name. In 2000, Mrs. Thomley informed petitioners that her 1999 stock transactions had resulted in a taxable gain, asked petitioners for money to pay the taxes relating to the transactions, and told petitioners that the proceeds of the transactions would be reinvešted. In 2000,, petitioners sent Mrs. Thomley funds to pay the taxirelating to the transactions. Maintenance in 2001 was taken off the exchange on which it was traded and in 2005 repurchased its outstanding shares. In 2003, Sideware sold its assets and ceased operations. On their 2005 joint Federal income tax return (2005 return), petitioners reported a long term capital loss relating to 29,488 1(...continued) the Internal Revenue Code in effect f.or the year in -issue, and all Rule references are to the Tax Court Rules of Practice and Procedüre. - 3 - shares of Maintenance and 3, 680 shares of Sideware Petitioner's also eported adlong-term capital gain relating to the exežbise of Int erhational, Business Machines' Corpo stock options. Before fillir g out their 2005 return, Mr.a Bengtson read Intei-nal Revenue Servi e (IRS) publications, attenípted to determine the appro riate tax treatment sof"theroptions;- and sought to obtain from lvirs Thomley information relating to- the Maintènance ând Sideware stocks./Mrsl. Thomley, did not domply withs petitioners'' requests for information. Pespondent began an audit ofs petitioners 2005 return in 2007. During the audit, respondent asserted that the Maintenance and Sideware sto'cks became worthless in 2001 and 2002 On February 6, 2008, respondent issued petitioners -a notice of deficiency (notice) relating to 2005. In tihe notice, respondent determined that petitioners;,failed to substantiate their claimed deductions; were not entitled to a long term capital loss; errone usly reported gain from the exercise of astock options as long-t rm capital gain rather than ordinary income; and- were liable for an accuracy-related penalty pursuant to sectión 6662 (a) . Petitioners concede that the exercise of the stock options produced ordinary income. On May 127 2008, petitioners, while esiding in Illiriois, filed their petition with the Court. , In 2009, petitioners taking a position consistent with respondent's assertion that the Maintenance and Sideware stocks - 4 - became worthless in 2001 and 2002, filed amended.returns relating tos 2001 and 2002 (amended returns). On the amended returns, petitioners reported a loss relating to 11,000 shares of Maintenance stock and 49,500 shares.of Sideware stock. OPINION Section 165(g) allows a deduction for any loss resulting from stock ,that becomes worthless during the taxable year. A taxpayer must, however, main ain sufficient records to substantiate the loss. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. There is insufficient evidence in the record to establish the ownership, bases, and dates of worthlessness relating to the Maintenance and Sideware sto ks for which petitioners claimed a long-term capital losss2 Accordingly,; petitioners'are not entitled to deduct a loss relating to the stocks. Section 6662(a) imposes a penalty equal to 20 percent-of the amount of any underpayment attributable to various factors including negligence or a substantial-understatement of income tax. See sec. 6662(b) (1) and (2). Section.6664(c) (1), however, provides that no penalty shall be imposed if a taxpayer 2Pursuant to sec. 7491(à), petitioners have the burden of proof unless they introduce credible evidence relating to the issue that would shift the burden to respondent. 142(a). Our conclusions, however, are based on a preponderance of the burden of proof is immaterial. T.C. 189, 210 n.16 (1998). See Martin Ice Cream Co. v. Commissioner, 110 the evidence, and thus the allocation of See Rule demonstrates that there was reasonable cause for the underpayment and t e taxpayer acted in good faith. etitioners failed to substantiate the loss relating to the Maintènance and Sideware stocks and incorrectly characterized the income relating to an exercise of stock options. They are not, howev r, liable for the section 6662 (a) accuracy-related penalty witli espect to these items because they, in good- faith, took reasor able steps to accurately report them. Petitioners reasor ably believed that they had an agreement with Mrs . Thomley, that Ivrs . Thomley purchased the Maintenance and Sideware stocks on th ir behalf , and that they were entitled to a loss deduction for 2005. In addition, petitioners read IRS publications, attempted to apply relevant rules and accounting principles, and earnestly sought to retrieve as much information as possible from Mrs. Thomley. See sec. 1.6664-4 (b) (1) , Income Tax Regs. Contentions we have not addressed are irrelevant, moot, or meritl ss. To reflect the foregoing, Decision will be entered under Rule 155.