t c memo united_states tax_court paul d and joyce e krause petitioners v commissioner of internal revenue respondent docket no filed date paul d krause pro_se ann m welhaf for respondent memorandum opinion couvillion special_trial_judge respondent determined a deficiency of dollar_figure in petitioners' federal_income_tax and an addition_to_tax under sec_6651 of dollar_figure respondent conceded the addition_to_tax under sec_6651 petitioners conceded all other adjustments in the unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue notice_of_deficiency the sole issue for decision is whether petitioners are entitled to report gain realized from the sale of real_estate under the installment_method pursuant to sec_453 when petitioners on their income_tax return reported the gain in full as a completed sale some of the facts were stipulated those facts with the annexed exhibits are so found and are incorporated herein by reference at the time the petition was filed petitioners' legal residence was albuquergue new mexico during petitioners sold three real_estate properties the consideration for which was to be paid to them for a period or periods extending beyond the year_of_sale the parties stipulated that these properties were sold under an installment_method on their federal_income_tax return for petitioners reported the sales on a schedule d capital_gains_and_losses as long-term_capital_gains their tax_liability for was based upon the entire gain realized from the sales of their properties respondent determined that petitioners underreported the gain realized from one of the properties and petitioners have conceded that determination as noted above petitioners chose to include the entire gains realized from the sales of their real_estate properties on their return because they had incurred and claimed a sec_179 expense during of dollar_figure that would substantially offset or mitigate the tax on the gains realized from their real_estate sales respondent however determined in the notice_of_deficiency that petitioners were not entitled to a sec_179 expense deduction and therefore disallowed that expense petitioners conceded that adjustment and now seek the benefit of sec_453 to have their real_estate gains taxed under the installment_method respondent challenges their right to do so sec_453 provides that income from an installment_sale is accounted for under the installment_method see 92_tc_303 an installment_sale is defined as a disposition of property where at least one payment is to be received after the close of the taxable_year in which the disposition occurs see sec_453 income from an installment_sale is automatically to be taken into account as installment income under sec_453 unless the taxpayer elects not to have the method apply see sec_453 d bolton v commissioner supra pincite generally an election by the taxpayer not to report a disposition of property on the installment_method is made by the due_date of the taxpayer's return for the year in which the disposition occurs and in the manner prescribed by the appropriate tax forms for that return see bolton v commissioner supra sec_15a_453-1t d temporary income_tax regs fed reg date specifically a taxpayer who reports an amount_realized which equals the selling_price and includes the full face_amount of any installment_obligations received in connection with the sale is considered to have made an effective election that the installment_sales provisions of sec_453 are not applicable see sec_15a_453-1t d temporary income_tax regs supra generally such an election is irrevocable and may only be revoked with the secretary's permission see sec_15a 1t d temporary income_tax regs supra here petitioners never applied to the commissioner to have their election revoked and to have real_estate gains at issue taxed under the sec_453 installment_method petitioners admittedly now seek the benefits of the installment_method because a substantial sec_179 expense claimed on their income_tax return was disallowed thus they have been deprived of a deduction that would have substantially offset those gains sec_15a d temporary income_tax regs supra provides generally that an election not to have the installment_method apply will not be revoked when one of the purposes for the revocation is the avoidance of federal income taxes stated another way the election is not generally revocable where the taxpayer's desire for the revocation is based on hindsight rather than foresight the court therefore rejects petitioners’ claim to have their real_estate gains taxed under the sec_453 installment_method decision will be entered for respondent for the deficiency in tax and for petitioners for the addition_to_tax


noe sey wes pe ree division department of the treasury internal_revenue_service washington d c ull no third party contacts release number release date date contact person identification_number telephone number employer_identification_number legend xx dear this is in response to your ruling_request dated date that certain changes in your organizational structure and activities will not adversely affect your exempt status under sec_501 of the internal code you are exempt under sec_501 of the code and classified as an organization other than a private_foundation under sec_509 you were formed for charitable and other exempt purposes and engaged in providing housing for persons of low and moderate income and to elderly and handicapped persons through direct ownership of department of housing and urban development hud insured properties your original charter and bylaws provided that your sole member is x an organization exempt under sec_501 you have amended your charter and bylaws removing x as your sole member and deleting all references to the power and authority of x over you instead the amended charter provides that you shall have no members and your amended bylaws provide that your governance is vested in your board_of directors the direct ownership entity of hud insured properties your amended charter also reflects that you will no longer be in compliance with the third party lender's and hud's single purpose entity requirements you will create a limited_liability_company llc as owner of each acquired hud insured property in providing affordable housing to your state residents you will be the sole member of each such single purpose llc which is treated a disregarded_entity for federal tax purposes you will provide funding for the single member llcs through the issuance of c bonds upon your dissolution or termination each llc shall terminate and your membership interest therein shall be transferred to an organization exempt under sec_501 of the code you have represented that the llcs are not the series_llc type and will not include other investors in addition you have represented that your housing activities and operations through direct ownership of the hud insured properties by the llc will continue to be conducted along the guidelines set forth in revproc_96_32 1996_1_cb_717 sec_501 of the code provides for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable and other exempt purposes sec_1_501_c_3_-1 of the income_tax regulations the regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section not exempt if an organization fails to meet either the organizational_test or the operational_test it is sec_1_501_c_3_-1 of the regulations provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities which in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 in its generally accepted legal sense and includes relief of the poor and distressed or of the underprivileged lessening of the burdens of government and promotion of social welfare by organizations designed to accomplish any of the above purposes rev_proc supra provides guidelines for housing organizations in determining qualification for exemption under sec_501 of the code that include the following a safe_harbor under which organizations that provide low-income_housing will be considered charitable for relieving the poor and distressed as described in sec_1 c -i d of the regulations a facts_and_circumstances_test for determining whether organizations that fall outside the safe_harbor relieve the poor and distressed as charitable organizations and the reliance on other charitable purposes described in sec_1 c - -1 d you have amended your charter and bylaws to remove a sole member and instead will have no members and will be governed by a board_of directors we find that such amendments to your creating and governing documents do not change your charitable purpose or empower you to engage in activities not in furtherance of an exempt_purpose we also find that your housing activities with the creation of single member llcs as direct entity owners of properties that will be used in such activities will continue to further charitable purposes described in sec_1 c -1 d of the regulations given your representation that such activities will comply with the guidelines set forth in rev_proc as such you remain organized and operated exclusively for one or more exempt purposes pursuant to sec_1_501_c_3_-1 and sec_1 c -1 c of the regulations therefore we conclude that the organizational structure and activity changes as described above will not adversely affect your exempt status under sec_501 of the code this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice deletions you should follow the instructions in notice if you disagree with our proposed this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely s ronald j shoemaker manager exempt_organizations technical group enclosure notice


internal_revenue_service department of the treasury number release date index number washington d c person to contact refer reply to cc te_ge eo2 - plr-123401-00 date telephone number april legend transit parent state city county dear this is in response to your letter dated date and subsequent correspondence requesting a ruling on behalf of transit we have been requested to rule that income of transit will be excluded from gross_income under sec_115 of the internal_revenue_code facts transit is a captive_insurance_company incorporated under the laws of state transit was organized as a nonprofit corporation for the sole purpose of providing workers’ compensation general and auto liability insurance and otherwise insuring the excess losses of its sole member parent through the purchase of commercial reinsurance policies parent is organized under state law as a nonprofit corporation and is the transit management services contractor for city and county parent manages operates and maintains city and county’s bus system and special transit service transit is governed by a board_of directors composed of individuals appointed by parent parent’s income has been ruled to be excludable under sec_115 of the code transit’s board_of directors have general charge of the affairs funds and property of transit transit uses a servicing company to administer its claims and loss control services all the funds necessary for the initial capitalization of transit as well as the purchase of reinsurance policies and payment of operating and administrative expenses are provided by parent transit’s income is used to cover its administrative expenses purchase reinsurance policies and pay claims and expenses associated with claims of parent transit’s articles of incorporation provide that no part of the assets funds or earnings_of the corporation shall inure to the benefit of any member director or private person upon dissolution or liquidation any remaining assets must be distributed to parent or if parent no longer exists or is no longer an organization whose income is excludable from gross_income under sec_115 to city and county or to its successor_in_interest provided that the income of the successor_in_interest is excludable from gross_income under sec_115 applicable law sec_115 of the code provides that gross_income does not include income derived from the exercise of any essential_governmental_function and accruing to a state or a political_subdivision of a state in revrul_77_261 1977_2_cb_45 income from a fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its political subdivisions was excludable from gross_income under sec_115 that ruling reasoned that the investment of positive cash balances by a state or political_subdivision thereof in order to receive yield on the funds until needed to meet expenses is a necessary incident of the power of the state or political_subdivision to collect taxes or other revenue for use in meeting governmental expenses in addition the ruling also provided that because the state and its participating political subdivisions had an unrestricted right to their proportionate share of the investment fund’s income the fund’s income accrues to them within the meaning of sec_115 revrul_77_261 pointed out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out those projects desirable from the standpoint of the state government which on a broad consideration of the question may be the function of the sovereign to conduct revrul_90_74 1990_2_cb_34 holds that income of an organization formed operated and funded by political subdivisions of a state to pool their casualty risks is excluded from gross_income under sec_115 the ruling also holds that income of such an organization formed to pool risks in lieu of purchasing insurance to cover their public liability workers’ compensation or employees’ health obligations is excluded under sec_115 if private interests do not except for incidental_benefits to employees of the participating state and political subdivisions participate in or benefit from the organizations parent may take steps to protect its financial security transit was created to provide insurance and reinsurance for parent with respect to workers’ compensation and general and auto liabilities thus transit is performing an essential_governmental_function that is within the scope of sec_115 transit’s income will be used to provide benefits to its sole member the parent in the event of the dissolution of transit all its remaining assets after the payment of debts and obligations shall be distributed to its parent so long as parent’s income is excludable from gross_income under sec_115 if the parent is no longer in existence or if its income is no longer excludable from gross_income under sec_115 the assets shall be distributed to city and county or to its successor_in_interest provided that the income of the successor_in_interest is excludable from gross_income under sec_115 conclusion transit’s income is excludable from gross_income under sec_115 of the code no opinion is expressed or implied as to the federal tax consequences of the arrangement described above under any other provision of the code specifically no opinion is expressed whether the transit is an instrumentality of a state or political_subdivision for purposes of sec_103 in addition because we have concluded that sec_115 is applicable to transit no determination has been made and no opinion is expressed whether transit meets the definition of an insurance_company under sec_1_801-3 and sec_1_831-1 of the income_tax regulations or within the meaning of sec_816 or sec_831 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file we are sending a copy of this letter to your representative sincerely elizabeth purcell chief exempt_organizations branch division counsel associate chief_counsel tax exempt and government entities enclosures cc


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division sep - uniform issue list he lf hi mts legend taxpayer a amount d amount e ira x company a bank b date date dear you through your in letters dated authorized representative requested a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code and the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a maintained an individual_retirement_account ira ira x with company a on or about date taxpayer a withdrew amount d from her ira x and deposited said amount d into a checking account with bank b taxpayer a through her authorized representative asserts that based on her experience with a prior distribution rollover transaction she believed she had days within which to roll over or redeposit amount d into an ira taxpayer a ‘s authorized representative also asserts that at the time of withdrawal taxpayer a advised an employee of company a into the ira within days to avoid any that she would be redepositing said amount d penalties and that the employee did not give her any contradictory information which confirmed her belief that the rollover period wa sec_90 and not days a on or about date which was approximately days after date taxpayer a attempted to roll over amount e a portion of amount d into her ira with company a company a refused to accept said contribution since over days had expired since taxpayer a had received her ira x distribution based on the facts and representations you request that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount e because the failure to waive such requirement would be a hardship and against equity or good conscience with respect to your ruling_request sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if - the entire amount received including money and any other_property is paid into i an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any _amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 a i from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides in general that paragraph d does not apply to any amount required to be distributed under subsection a sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 il r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred is granted a period of days measured from the date of the the information presented by taxpayer a demonstrates a failure on the part of taxpayer a to accomplish her intended rollover because of a misunderstanding as to the proper time-frame within which a tax-deferred rollover is required to be completed which erroneous belief was based on a prior experience and a conversation she had with a representative of company a further taxpayer a acted in conformance with her belief and attempted to redeposit amount e into her ira within days of the date of distribution but company a which held taxpayer a’s ira x refused to accept her rollover since the requisite 60-day rollover period had expired therefore pursuant to code sec_408 the service hereby waives the 60-day rollover requirement with respect to the withdrawal of amount e pursuant to this ruling letter taxpayer a issuance of this letter_ruling to make a rollover_contribution of an amount not to exceed amount e to an ira or iras described in code sec_408 provided all other requirements of code sec_408 except the 60-day requirement are met with respect to such ira contribution the contribution will be considered a rollover_contribution within the meaning of code sec_408 note that pursuant to code sec_408 this letter_ruling does not authorize the rollover of any amounts required to be distributed in accordance with code sec_401 made applicable to iras pursuant to code sec_408 if any no opinion is expressed as to the tax treatment of the transaction described herein ' under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent you wish to inquire about this ruling please contact i lf ee p25 address all correspondence to se t ep ra t3 a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file in this office sincerely yours rances v sloané manager ae ae employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose


t c memo united_states tax_court burton f tucker petitioner v commissioner of internal revenue respondent docket no 4865-11l filed date burton f tucker pro_se kristina l rico for respondent memorandum opinion ruwe judge this matter is before the court on respondent’s motion for summary_judgment motion pursuant to rule respondent contends that no genuine issue exists as to any material fact and that the determination to collect petitioner’s income_tax_liability by levy should be upheld we will grant respondent’s motion background at the time the petition was filed petitioner resided in pennsylvania petitioner filed delinquent income_tax returns for taxable_year sec_2001 sec_2002 and years at issue on date but failed to pay the liabilities reported on the returns on the basis of petitioner’s delinquent returns respondent assessed the tax shown on the returns respondent made assessments or abatements of tax in order to correct numerous math errors on petitioner’s tax returns on date respondent issued petitioner a letter final notice_of_intent_to_levy and notice of your right to a hearing informing him 1unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code as amended that respondent intended to levy to collect the unpaid tax_liabilities interest and penalties for the years at issue on date respondent received petitioner’s form request for a collection_due_process_hearing in the form petitioner did not contest the underlying liabilities for the years at issue nor did he propose any collection alternatives instead petitioner requested that he be given an unbiased and fair hearing in which the errors mistakes and fraud on the part of the irs would be acknowledged in an attachment to form petitioner challenged the validity of the underlying assessments and claimed that respondent did not follow his procedures on date an officer of respondent sent petitioner a letter acknowledging his timely request for a hearing and scheduling a telephone conference for date the letter informed petitioner that a face-to- face hearing would be available provided that he was in compliance and returned a completed form 433-a collection information statement for wage earners and self-employed individuals in response petitioner sent a letter to respondent requesting that the conference be held by correspondence informing respondent that he intended to challenge the appropriateness of the collection action and arguing that administrative procedures had not been met pursuant to sec_6330 c and e on date respondent sent petitioner a letter warning him that issues he raised in his hearing request were frivolous and failure to withdraw the frivolous issues in writing within days from the date of the letter could result in a dollar_figure penalty under sec_6702 the letter also rescheduled the telephone conference in response petitioner sent a letter to respondent withdrawing his frivolous position and stating i respect your information and if a frivolous position was taken or used then i was mistaken or overlooked the issue and use this letter as my withdrawal of the frivolous filing to avoid imposition of a penalty however the letter further indicated that petitioner still intended to challenge the appropriateness of the collection action and argued that administrative procedures had not been met pursuant to sec_6330 and e petitioner failed to provide the appeals officer with any additional information or correspondence and made no further challenges to the proposed collection action respondent issued petitioner a notice_of_determination concerning collection action s under sec_6320 and or dated date determining not to grant relief under sec_6330 and sustaining the levy action on date petitioner filed a petition with this court discussion summary_judgment is designed to expedite litigation and to avoid unnecessary and expensive trials 61_tc_861 a motion for summary_judgment is granted where the pleadings and other materials show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b 98_tc_518 aff’d 17_f3d_965 7th cir the burden is on the moving party to demonstrate that no genuine issue as to any material fact remains and that he is entitled to judgment as a matter of law 116_tc_73 in all cases the evidence is viewed in the light most favorable to the nonmoving party 100_tc_32 however the nonmoving party is required to go beyond the pleadings and by his own affidavits or by the ‘depositions answers to interrogatories and admissions on file ’ designate ‘specific facts showing that there is a genuine issue for trial ’ 477_us_317 see also 119_tc_157 115_tc_554 petitioner failed to file a response to respondent’s motion for summary_judgment despite an order from this court requiring that he do so thus petitioner has failed to designate any specific facts in dispute that would indicate that there is a genuine issue for trial therefore we conclude that there is no issue as to any material fact and that a decision may be rendered as a matter of law if a taxpayer’s underlying liability is properly at issue the court reviews any determination regarding the underlying liability de novo 114_tc_176 petitioner has the burden_of_proof regarding his underlying tax_liabilities see rule a smith v commissioner tcmemo_2008_229 sec_6330 contemplates consideration by an appeals officer of issues raised by the taxpayer at the hearing thus if an issue is never raised at the hearing it cannot be part of the appeals officer’s determination see 129_tc_107 see also sec_301_6330-1 proced admin regs petitioner made no specific arguments and presented no evidence to bring into doubt the correctness of the underlying tax_liabilities as calculated by respondent therefore petitioner’s underlying liabilities are not at issue and we review for an abuse_of_discretion only the office of appeals’ determination to uphold the levy see goza v commissioner t c pincite the determination of an appeals officer must take into consideration the verification that the requirements of applicable law and administrative procedure have been met issues raised by the taxpayer and whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary sec_6330 see also 117_tc_183 petitioner failed to raise any collection alternatives to the proposed levy in his petition petitioner contends that t he irs has not followed their required procedures with regard to the procedures involved in the assessment and collection of the taxes at issue the assessments in the case before us are based solely on petitioner’s self-assessed liabilities on his delinquently filed income_tax returns which he failed to pay petitioner’s position seems to be that he received the form assessment records which were not signed nor certified and that without the assessment by the secretary_of_the_treasury no proceeding in court without assessment for the collection of such tax shall begun a form_4340 certificate of assessments payments and other specified matters constitutes presumptive evidence that a tax has been validly assessed pursuant to sec_6203 115_tc_35 carillo v commissioner tcmemo_2005_290 consequently absent a showing by the taxpayer of some irregularity in the assessment procedure that would raise a question about the validity of the assessments a form_4340 reflecting that tax_liabilities were assessed and remain unpaid is sufficient to support collection action under sec_6330 davis v commissioner t c pincite this court has specifically held that it is not an abuse_of_discretion for an appeals officer to rely on the form_4340 or a computer transcript of account to comply with sec_6330 118_tc_162 davis v commissioner t c pincite schroeder v commissioner tcmemo_2002_190 mann v commissioner tcmemo_2002_48 the record contains forms for each of the taxable years at issue indicating that assessments were made and that tax_liabilities remain unpaid petitioner has cited no particular irregularities in the assessment procedure a taxpayer receiving a copy of form_4340 has been provided with all the documentation to which he or she is entitled under sec_6203 118_tc_365 aff’d 329_f3d_1224 11th cir because petitioner received forms and failed to raise any bona_fide issues related to the assessment procedure we find that valid assessments were made and respondent did not abuse his discretion by seeking collection of the taxes assessed see holliday v commissioner tcmemo_2005_240 the record indicates that respondent’s appeals_office considered all of petitioner’s contentions verified compliance with all applicable laws and regulations and considered whether the proposed collection actions balanced the need for efficient tax collection with petitioner’s concern that they be no more intrusive than necessary we conclude that the appeals_office did not abuse its discretion in sustaining the levy and as a result respondent may proceed with collection action as determined in the notice_of_determination upon which this case is based to reflect the foregoing an appropriate order and decision will be entered


t c memo united_states tax_court james s callahan and carol s callahan petitioners v commissioner of internal revenue respondent docket no filed date p-w was facing foreclosure on two pieces of real_property she discussed the matter with a promoter of certain sale-leaseback transactions who informed p-w that the transactions could save her properties from foreclosure p-w entered into the transactions under which p-w sold each property to the promoter’s designee and leased the property back for a year with an option to purchase the property upon expiration of the lease the loan on the first property florida property was fully paid the loan on the second property new jersey property was partially paid and the balance of the loan was forgiven p-w’s payment of rent on the florida property was prepaid using proceeds of the sale of that property p-w’s payment of rent on the new jersey property was prepaid in part using the proceeds of the sale of that property ps now claim that the promoter defrauded p-w on the sale of the new jersey property and that the sale is therefore not a sale for federal_income_tax purposes ps note that a new jersey court has since voided the sale of the new jersey property ps also claim that the amount that r determined that p-w realized on each sale was less than the amounts that p-w actually realized held the sale of the new jersey property was a sale for federal_income_tax purposes held further p-w realized both capital_gain income and discharge_of_indebtedness ordinary_income on the sale of the new jersey property in the amounts indicated held further p-w realized gain on the sale of the florida property in the amount indicated held further ps are liable for an accuracy-related_penalty under sec_6662 mark k silver and sheila mints for petitioners erik m sternberg and patricia young taylor for respondent memorandum findings_of_fact and opinion laro judge respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 respondent’s amended answer alleges that the deficiency i sec_1 unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue and rule references are to the tax_court rules_of_practice and procedure and dollar amounts are rounded dollar_figure an increase of dollar_figure and that the accuracy-related_penalty is dollar_figure an increase of dollar_figure respondent’s increased amounts relate solely to the sale of the new jersey property discussed below the tax effects of which were not reflected in the notice_of_deficiency we decide the following issues whether carol s callahan realized income on the sale of two pieces of real_property we hold she did to the extent stated whether petitioners may deduct charitable_contributions and qualified_residence_interest in amounts greater than respondent allows we hold they may to the limited extent stated and whether petitioners are liable for the accuracy-related_penalty under sec_6662 we hold they are petitioners initially challenged respondent’s determinations that they failed to report dollar_figure of gambling winnings and dollar_figure of wages and that they were not entitled to deduct dollar_figure of residence mortgage interest and dollar_figure of state_and_local_income_taxes we reject respondent’s determination as to the gambling winnings because the parties have since stipulated that petitioners did report the dollar_figure as income we sustain respondent’s determinations as to the wages and to the referenced deductions because petitioners have advanced no argument in brief challenging those determinations see 121_tc_308 noting that arguments not advanced on brief may be considered abandoned 117_tc_117 n same findings_of_fact i preliminaries some facts were stipulated and we incorporate the parties’ stipulated facts and their accompanying exhibits into our findings petitioners resided in new jersey when they filed the petition they filed a joint federal_income_tax return for petitioners provided the court with a certified copy of a new york state court opinion and order showing that ronald losner was disbarred in and they ask the court to take judicial_notice of his disbarment we will do so see fed r evid a b and c providing that courts may take judicial_notice of adjudicative facts that are not open to dispute because they are supported by sources whose accuracy cannot reasonably be questioned we note however that this fact is of little if any relevance to our decisions today ii florida property a sale before date ms callahan owned a condominium in palm beach florida florida property the florida property was encumbered by a dollar_figure note fremont note payable to fremont investment loan ms callahan was personally liable on the fremont note ms callahan and her mother purchased the florida property before as joint_tenants with rights of survivorship her mother died in and her mother’s joint interest passed to ms callahan by operation of law ms callahan’s basis in the florida property was increased by dollar_figure as a result of her mother’s death at the start of ms callahan was in default on the fremont note and she received an unsolicited mailing from mr losner through his controlled_entity real_estate international rei the mailing offered to help individuals like ms callahan save their real_property from foreclosure ms callahan telephoned rei and spoke with mr losner who recommended that she participate in a lease buyback program to save her florida property mr losner explained that the program involved his acquiring the florida property from the lender through a short_sale his then leasing the florida property to ms callahan for one year and his then reconveying the property to ms callahan at the end of the year mr losner later introduced ms callahan to his mother shirley losner who eventually became the purchaser of record of the florida property ms losner’s involvement in the transaction was necessary because she had the required creditworthiness to obtain the requisite financing ms callahan voluntarily entered into the promoted transaction as to her florida property under the transaction she transferred that property to ms losner on or about date the hud-1 settlement statement florida hud-1 stated that the sale price was dollar_figure million and indicated that the dollar_figure million was paid primarily through ms losner’s payment of dollar_figure and her financing of the balance with washington mutual bank washington mutual but ms losner never actually used any of her funds to acquire the florida property instead the dollar_figure came from robert lucas and charles cueno in early date messrs lucas and cueno respectively wired dollar_figure and dollar_figure a total of dollar_figure to the escrow account of clear title abstract llc clear title account with the understanding that the wired funds would be repaid with a premium immediately after the sale closed washington mutual wired the loan proceeds of dollar_figure to the clear title account on date the florida hud-1 shows that dollar_figure of the sale proceeds was distributed as follows charges to ms callahan amount dollar_figure payoff of fremont note big_number ms callahan’s settlement charges big_number estimated_tax big_number taxes ms callahan’s closing cost contribution big_number county taxes to big_number big_number total the florida hud-1 also shows that dollar_figure of the sale proceeds was to be distributed to ms callahan the dollar_figure was not actually distributed to ms callahan instead on date dollar_figure was transferred from the clear title account to mr cueno’s escrow account the money borrowed from messrs lucas and cueno was then immediately returned to them from that escrow account with a premium dollar_figure was disbursed to mr lucas and dollar_figure was disbursed to mr cueno of the remaining proceeds dollar_figure was disbursed to rei and dollar_figure was disbursed to ms callahan b lease as part of the sale-leaseback transaction ms losner and mr losner entered into a one-year residential lease florida lease with ms callahan the florida lease began on date and ended on date and provided that ms callahan would pay mr losner monthly rent of dollar_figure all rent due under the florida lease was prepaid using funds from the sale of the florida property under the florida lease ms callahan was responsible for all maintenance_expenses related to the florida property the florida lease gave ms callahan the option to purchase the florida property at the end of the one-year term for dollar_figure million but ms callahan could at her option reduce the purchase_price to an amount no less than the amount of the landlord’s mortgage to wit dollar_figure by remitting the difference to the landlord the florida lease provided that in consideration for granting ms callahan the option to purchase the florida property and as a condition to the florida lease ms callahan had to pay an option_price of dollar_figure at the signing of the lease if ms callahan eventually exercised the option she would be responsible for paying all taxes and ms losner’s costs associated with the option purchase if ms callahan chose not to exercise the option the florida lease provided that she could extend the lease for six months and if she paid an extension fee of dollar_figure she could extend the lease for an additional six months while the term of the lease is actually longer than one year the parties refer to this lease as a one-year lease so do we the florida lease provided that the term of the lease could not exceed months ms callahan never extended the lease or exercised the option iii new jersey property a sale during all relevant times ms callahan and her husband lived in a home in montclair new jersey new jersey property ms callahan acquired the new jersey property in from her father for dollar_figure in date ms callahan obtained a dollar_figure million loan from wall street mortgage inc wall street note secured_by the new jersey property ms callahan was personally liable for the payment of the wall street note the wall street note was assigned to u s bank n a u s bank in date at or about that time the wall street note was in default for nonpayment and the servicing agent select portfolio servicing select portfolio had issued to ms callahan a delinquency_notice as of date the amount due under the wall street note was dollar_figure and interest was accruing daily at dollar_figure ms callahan made a payment of dollar_figure to select portfolio on date as of date the amount due under the wall street note was dollar_figure on date u s bank commenced an action in the superior court of new jersey chancery division in essex county chancery court to foreclose its mortgage on the new jersey property ms callahan first tried unsuccessfully to modify the loan and to refinance the new jersey property she then turned to mr losner for help to avoid foreclosure of the mortgage on the new jersey property mr losner negotiated with select portfolio for a short_sale of the new jersey property he then informed ms callahan that he would execute another lease buyback arrangement with her similar to what they did with the florida property by a letter dated date addressed to ms callahan and in response to her request select portfolio agreed to a short_sale for dollar_figure short_sale price in full discharge of the wall street note the agreement with select portfolio which did not identify the would-be purchaser required ms callahan to turn over to select portfolio any surplus funds received in excess of the short_sale price which select portfolio would apply to reduce the principal balance of the wall street note the agreement also required ms callahan to waive her rights to any escrowed funds or refunds from prepaid expenses select portfolio required that a copy of the hud-1 settlement statement be faxed to it at least hours before closing for its approval the letter stated the mortgage would be discharged and any foreclosure action against the new jersey property would be dismissed upon the satisfaction of all terms under the short_sale agreement the letter stated that no release of mortgage would be provided if select portfolio did not approve the hud- settlement statement or if funds remitted through closing did not agree with the approved hud-1 settlement statement on date ms callahan signed a contract to sell the new jersey property to mr losner’s associate alon wolkowitz for dollar_figure5 million the contract stated that mr wolkowitz paid a dollar_figure deposit on the date the contract was executed on date ms callahan executed a deed to transfer the new jersey property to a_trust for which she was the grantor and melanie wohl was the trustee immediately thereafter ms wohl as trustee transferred the new jersey property to mr wolkowitz for dollar_figure5 million the accompanying hud-1 settlement statement new jersey hud-1 showed a total_contract_price of dollar_figure5 million which mr wolkowitz financed partly through a mortgage loan from washington mutual for dollar_figure the new jersey hud-1 showed the following charges to ms callahan charges to ms callahan amount payoff of wall street note deposit placed with ms callahan ms callahan’s settlement charges total dollar_figure big_number big_number big_number after applying the charges the new jersey hud-1 showed that dollar_figure dollar_figure - dollar_figure was the cash to seller as a result of the transaction ms callahan was relieved of all of her liability for the wall street note secured_by the new jersey property at closing stefan siminou acting as the attorney and the closing agent for washington mutual oversaw the disbursements of the loan proceeds the following individuals appeared at the closing mr losner mr wolkowitz alyssa azran and an individual who purported to be ms callahan the loan proceeds were distributed in the following manner distributee amount siminou associates p c pan am mortgage select portfolio servicing equity settlement services inc victory blvd corp real_estate international alyssa azran total dollar_figure big_number big_number big_number big_number big_number big_number -13- panam acted as the mortgage broker in the transaction and it received dollar_figure as a commission mr losner was the principal_owner of this entity victory boulevard was the listed address of rei of mr wolkowitz’s employer and of ms losner this is not the full dollar_figure loan amount because the borrower paid the lender a fee in the amount of the difference ms callahan signed a form 1099-s proceeds from real_estate transactions dated date which stated that the sale price was dollar_figure5 million she also received a substitute form_1098 mortgage interest statement for from select portfolio the substitute form_1098 showed that ms callahan paid select portfolio dollar_figure in mortgage interest and dollar_figure in principal a total of dollar_figure b lease as part of the sale-leaseback transaction ms callahan executed a use and occupancy agreement new jersey lease dated date by which mr wolkowitz agreed to lease the new jersey property to ms callahan for residential purposes for a term of months the 12-month_period was from date until date and the stated monthly rent was dollar_figure the new jersey lease also stated that ms callahan would pay an upfront fee of dollar_figure and prepay dollar_figure of rent the new jersey lease required mr wolkowitz to pay for certain utilities and maintenance_expenses that were listed in the lease the new jersey lease also provided that mr wolkowitz was entitled to reimbursement for the cost of carrying any homeowner’s property insurance if all of the new jersey property was condemned or subject_to a government taking ms callahan’s rights under the new jersey lease would end on the date of the taking of title if the property was partially condemned mr wolkowitz could cancel the lease and demand the return of the property with rent due to the cancellation date in either case mr wolkowitz was entitled to the entire award of any taking to which ms callahan waived all claims the new jersey lease did not provide for any indemnification by ms callahan against any loss mr wolkowitz might suffer from a condemnation_award being less than mr wolkowitz’s purchase_price the new jersey lease gave ms callahan an option to purchase the new jersey property at the end of the lease’s one-year term at a price of dollar_figure5 million ms callahan could at her option reduce the purchase_price to an amount no less than the amount of the mr wolkowitz’s mortgage to wit dollar_figure by remitting the difference to mr wolkowitz as part of any such purchase of the new jersey property ms callahan was responsible for paying any taxes and fees that mr wolkowitz incurred in connection with the purchase ms callahan could extend the lease for six additional months in lieu of exercising her option for a fee of dollar_figure by date ms callahan had defaulted on the new jersey lease for nonpayment of rent by a letter dated date mr wolkowitz demanded a payment of dollar_figure including late charges to cure the default ms callahan wired that amount on date ms callahan never extended the lease or exercised the option under the new jersey lease petitioners continued to live at the new jersey property c chancery court proceedings on date jp morgan chase n a chase as successor to washington mutual and as the then-existing mortgage holder for the new jersey property commenced a foreclosure action in the chancery court chase alleged that mr wolkowitz executed a nonpurchase money mortgage on the new jersey property in favor of washington mutual on date and had defaulted for failing to make the promised monthly mortgage payments as early as date the chancery court eventually allowed ms callahan to intervene and in evidence are two versions of the same lease but showing different option prices each version was signed by both parties to the lease the second version of the lease indicated that the option_price was dollar_figure or dollar_figure if ms callahan remitted the difference ms callahan was unable to explain why there were two identical leases listing different option prices stayed the proceeding ms callahan alleged in her intervening complaint that title to the new jersey property was taken from her by fraud and that mr wolkowitz lacked a proper legal_title to execute and convey the mortgage on the new jersey property ms callahan commenced a separate but related lawsuit against mr wolkowitz alleging that he mr losner ms wohl and ms azran defrauded ms callahan of valid title to the new jersey property mr wolkowitz failed to answer ms callahan’s complaint in that lawsuit and on date the chancery court entered a default judgment against mr wolkowitz march judgment the march judgment voided the transfer of the new jersey property to the trust and the trust’s transfer of the property to mr wolkowitz and it restored the legal_title of the new jersey property to ms callahan subject_to the chase mortgage the chancery court did not rule on the merits of ms callahan’s fraud claim and did not find any specific instances of fraud on date ms callahan remitted to chase approximately dollar_figure million and paid off the mortgage ms callahan funded the remittance with a new mortgage note of dollar_figure and cash for the remaining amount iv ms callahan’s bank accounts at all relevant times ms callahan had a personal bank account with td bank td bank account the deposits into that account during the relevant times were mainly monthly payments of dollar_figure to dollar_figure from a_trust and the dollar_figure that ms callahan received from the florida transaction none of the other proceeds from either of the two property transactions was transferred to the td bank account monthly transfers of dollar_figure the amount of monthly rent due under the new jersey lease were wired from the td bank account to another account beginning date v disputed deductions on their return petitioners claimed a deduction for dollar_figure in residence mortgage interest_paid on the wall street note the payment of this interest was reported to them on the substitute form_1098 discussed above petitioners also claimed a dollar_figure deduction for cash charitable_contributions they aim to substantiate this deduction by way of a receipt reporting that they made dollar_figure of charitable_contributions i introduction opinion respondent argues that petitioners are taxable on ms callahan’s sale of both subject properties to that end respondent asserts ms callahan voluntarily entered into the promoted sale-leaseback transactions as to the properties she executed documents for the sale of the properties to avoid foreclosure and she leased the properties in part with prepaid rent funded by loan proceeds from the sales respondent concludes that ms callahan realized dollar_figure million and dollar_figure5 million from the respective sales of the florida property and the new jersey property as reported on the settlement statements petitioners do not dispute that both the florida property and the new jersey property were in fact sold in they argue that the court should disregard the sale of the new jersey property because they state the chancery court voided the sale ab initio they argue alternatively as to the sale of the new jersey property and argue exclusively as to the sale of the florida property that respondent’s calculation of the amounts ms callahan realized on each sale is too high petitioners argue that the amounts that ms callahan realized as to the sale of the new jersey property were the dollar_figure from the short_sale of the new jersey property and the dollar_figure of cancellation_of_indebtedness_income with respect to the forgiven portion of the wall street note petitioners argue that the amount that ms callahan realized on the sale of the florida property was dollar_figure consisting of the dollar_figure of the fremont note which was paid off with the sale proceeds and the dollar_figure ms callahan received we agree with respondent that each sale was a taxable_event we conclude however that the amounts that ms callahan realized on each sale were less than respondent asserts ii burden_of_proof as to the deficiency we begin our analysis with a discussion of the burden_of_proof as to the deficiency generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and taxpayers bear the burden of proving those determinations wrong rule a 290_us_111 where however a case involves unreported income and is appealable to the court_of_appeals for the third circuit which is the case here absent a contrary written stipulation see sec_7482 the commissioner must produce foundational evidence linking the taxpayers to the tax-generating activity in order the commissioner bears the burden of proving any assertion that a deficiency is greater than that determined in the notice_of_deficiency see rule a thus respondent bears the burden of proving the increased deficiency that he seeks on account of ms callahan’s sale of the new jersey property to benefit from the presumption of correctness as to those items see 794_f2d_884 3d cir citing 552_f2d_549 3d cir aff’g in part rev’g in part and remanding t c memo vacating and remanding tcmemo_1985_ respondent’s primary determination in the notice_of_deficiency involved income from ms callahan’s sale of the florida property respondent is entitled to the presumption of correctness as to this determination because he has produced foundational evidence linking ms callahan to income from the transfer of the florida property in evidence are a wage and income transcript from the internal_revenue_service which shows that clear title issued ms callahan a form 1099-s for reporting a sale of real_estate property for dollar_figure million and a deed ms callahan executed to transfer title of the florida property to ms losner the sale proceeds reported on the form 1099-s formed the basis of respondent’s initial determination of deficiency given that petitioners failed to report any gain on the sale of the florida property respondent’s remaining disputed determinations relating to the notice_of_deficiency concern the disallowance of deductions claimed for charitable_contributions and qualified_residence_interest the deficiency_notice is naturally entitled to a presumption of correctness as to these items petitioners thus bear the burden of proving the deficiency determination incorrect absent an exception to the general_rule petitioners point to the exception in sec_7491 and ask the court to place the burden_of_proof on respondent pursuant thereto we need not decide whether that exception applies because the parties have provided sufficient evidence for us to decide the factual issues in dispute without regard to the burden_of_proof see 131_tc_185 citing 394_f3d_1030 8th cir aff’g t c memo we decide those issues accordingly iii sales of real properties a background the supreme court has defined income as undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 for a cash_basis taxpayer gross_income includes any amount that the taxpayer actually or constructively receives sec_1_451-1 income_tax regs income not actually reduced to a taxpayer’s possession is constructively received by a taxpayer in the year during which the income is credited to an account set apart or otherwise made available so that the taxpayer may draw upon it at any time sec_1_451-2 income_tax regs income is not constructively received if its control is subject_to substantial limitations or restrictions id b new jersey property march judgment petitioners argue that the march judgment voided ab initio the transfers of title to the new jersey property and that res_judicata precludes this court from recognizing ms callahan’s sale of the new jersey property as a sale for federal_income_tax purposes alternatively petitioners argue the chancery court’s finding in the march judgment of fraud as to the transfers of the new jersey property allows ms callahan to rescind her contract to sell that property petitioners conclude that the transfers of the new jersey property are considered never to have happened with ms callahan retaining title to that property at all times we disagree with petitioners’ argument and conclusion under the doctrine_of res_judicata or claim preclusion a final judgment on the merits in a prior suit bars a second suit involving the same cause of action and the same parties or their privies 439_us_322 n because respondent was neither a party nor in privity with a party to the proceeding in the chancery court petitioners’ reliance on res_judicata is misplaced nor from a factual point of view did the march judgment void the sale of the new jersey property ab initio as petitioners claim the state court entered a default judgment against mr wolkowitz after he failed to answer ms callahan’s complaint deeming the transfers to be void subject_to chase’s mortgage and the resulting mortgage lien the judgment did not state that the transfers were void ab initio the fact that the chancery court voided the transfers subject_to chase’s existing mortgage suggests that the court was mindful that voiding the transactions from the beginning could nullify all transactions that followed the initial transfers including the mortgaging of the property by chase as a successor to washington mutual implicit in the chancery court’s order voiding the transfers subject_to the existing mortgage was that chase’s mortgage interest in the property was valid as a corollary the chancery court did not void the transfers from the beginning for the same reason the march judgment does not allow ms callahan to equitably rescind her contract to sell the new jersey property as a fraudulent conveyance under new jersey law equitable fraud provides a basis for a party to rescind a contract which voids the contract ab initio meaning that it is considered ‘null from the beginning’ and treated as if it does not exist for any purpose first am tit ins co v lawson a 2d n j emphasis added quoting black’s law dictionary 7th ed the march judgment however was not predicated on a finding of equitable fraud nor did the chancery court specifically make any finding of fact or render any opinion on the merits of the fraud claim we shall recognize ms callahan’s sale of the new jersey property as such and turn to determine the amounts that she realized on that sale capital_gain income according to the new jersey hud-1 the contract sale price was dollar_figure5 million of that amount dollar_figure was financed through a loan with washington mutual and mr wolkowitz purportedly paid the rest in cash on the basis of the evidence before us including her bank statements we find that ms callahan did not actually or constructively receive the portion of the contract_price mr wolkowitz purportedly paid in cash and thus she did not receive income to that extent as to the dollar_figure in loan proceeds it is undisputed that ms callahan realized at least dollar_figure that was applied to the wall street note we also find that ms callahan realized an additional dollar_figure from her constructive receipt of the portion of the sale proceeds that was used to pay the settlement charges shown on the new jersey hud-1 on her behalf see sec_1_451-2 income_tax regs while the list of checks that mr siminou provided does not show he made a disbursement out of the loan proceeds to pay the settlement charges we find that one of the entities related to mr losner paid the settlement charges on ms callahan’s behalf in order to close the transaction we also find that ms callahan realized an additional dollar_figure from the constructive receipt of the rent prepaid on her behalf in addition to the new jersey lease and the list of checks from mr siminou’s closing files we note a letter faxed to ms azran dated date in which ms callahan wrote i am responding to the selection of payments towards use and occupancy of my new jersey property after working numbers i have decided to credit the dollar_figure remaining towards may’s use and occupancy please tell me how to send the balance of dollar_figure remaining for use and occupancy and all future payments it is apparent from the letter that by credit the dollar_figure remaining towards may’s use and occupancy ms callahan was referring to the dollar_figure prepaid rent because dollar_figure of rent was prepaid ms callahan was not required to make rent payments for the first four months in dollar_figure x dollar_figure however the remaining prepaid amount of dollar_figure dollar_figure - dollar_figure would be insufficient to pay for the entire month of may this explains why ms callahan asked for a dollar_figure credit towards may’s rent and paid only dollar_figure in addition to the credit dollar_figure dollar_figure dollar_figure ms callahan testified that she was told there was extra money available in the transactions to apply towards rent together the evidence shows that dollar_figure in rent was prepaid and it came from mr wolkowitz’s loan proceeds that went to the entities mr losner ostensibly either owned or controlled ie rei equity settlement services inc and victory blvd corp we further find that ms callahan did not realize any part of the dollar_figure fee referred to in the lease from the sale of the new jersey property the only evidence relating to the fee is the provision in the new jersey lease and there is no evidence showing the fee was actually paid we further find that ms callahan did not actually or constructively receive any other amount from the new jersey transaction ms callahan’s bank statements do not show she actually received any of the proceeds of the new jersey sale indeed the evidence shows the loan proceeds were distributed to other individuals and entities unrelated to ms callahan further if ms callahan knew that there were more proceeds available from the sale and that they were being the bank statements of the td bank account show dollar_figure was transferred out of the account on date held by mr losner in trust for her use she would not have asked in her letter to ms azran that she be credited only dollar_figure the fact that ms callahan thought she only had dollar_figure credit in her account shows there was nothing else from the sale of the new jersey property that was set apart for her or otherwise made available so that she may draw upon it at any time see sec_1_451-2 income_tax regs moreover ms callahan began making her monthly rent payments of dollar_figure in date if there were more money left from the new jersey transaction or even from the florida transaction set_aside for ms callahan and she knew about it it would make little sense for her to start making monthly rent payments as early as date to recapitulate ms callahan realized the following amounts from her sale of the new jersey property applied to wall street note settlement charges prepaid rent total dollar_figure big_number big_number big_number ms callahan’s basis in the new jersey property the parties stipulated that ms callahan’s basis in the new jersey property immediately before the sale was dollar_figure the basis_reduction required under sec_108 does not apply because as we will explain more fully below petitioners may not exclude any portion of the discharge of her mortgage indebtedness under sec_108 further no adjustment under sec_1016 is required accordingly ms callahan’s adjusted_basis in the new jersey property for determining the amount of her gain under sec_1001 is dollar_figure see also sec_1 ordinary_income from cancellation of indebtedness gross_income includes the amount of discharged debt sec_61 thus in addition to her capital_gain income ms callahan also realized ordinary_income from the cancellation of a portion of the wall street note unless a statutory exclusion applies otherwise see sec_61 sec_108 sec_1 a income_tax regs in their brief petitioners appear to be claiming that any debt_cancellation income is considered capital_gain income the amount_realized on the sale of property that secures a recourse_liability however does not include amounts that are or would be if realized and recognized income from the discharge of that petitioners asserted for the first time on brief that ms callahan’s basis in the new jersey property includes dollar_figure in litigation costs that she incurred to regain title to the property other than ms callahan’s vague and conclusory testimony at trial that she spent over dollar_figure in litigation costs to regain title to that property the record contains no evidence to substantiate petitioners’ assertion moreover we note any such fees would have been incurred by ms callahan in a taxable_year after the sale of the property in liability under sec_61 sec_1_1001-2 income_tax regs see also 461_us_300 o’connor j concurring noting commissioner’s longstanding position reflected in sec_1_1001-2 income_tax regs income realized on the discharge of such debt is ordinary_income taxed at ordinary rates the total amount due on the recourse note on the date of the sale was dollar_figure and the lender accepted dollar_figure in settlement of that debt the lender thus discharged dollar_figure of the debt dollar_figure - dollar_figure ms callahan realized ordinary_income of dollar_figure on that discharge unless one or more of the exclusions under sec_108 applies petitioners argue only that the exclusion for qualified_principal_residence_indebtedness applies see sec_108 h qualified_principal_residence_indebtedness means indebtedness incurred in acquiring constructing or substantially improving a taxpayer’s principal we observe that this amount included accrued mortgage interest of dollar_figure select portfolio reported on the substitute form_1098 for that ms callahan paid dollar_figure in mortgage interest which subsumes the dollar_figure mortgage interest we determine sec_108 and h was added by the mortgage forgiveness debt relief act of pub_l_no sec_2 and b stat pincite and applies to discharges of indebtedness on or after date residence to the extent it does not exceed dollar_figure million for married individuals filing a joint_return sec_108 sec_163 such acquisition_indebtedness that was subsequently refinanced continues to be qualified indebtedness for the purpose of sec_108 see sec_163 a taxpayer claiming the exclusion must reduce his or her basis in the principal_residence by the amount excluded from gross_income under sec_108 sec_108 petitioners claim that a portion of the wall street note dollar_figure was attributable to qualified_principal_residence_indebtedness under sec_108 the record before us does not support such claim there is no evidence showing any part of ms callahan’s original purchase_price of dollar_figure was financed with a mortgage loan that was then refinanced with the wall street note in date the record also does not show ms callahan used any of the proceeds from the wall street note to finance the construction or substantial_improvement of the new jersey property or to refinance a debt that she incurred for such construction or improvement thus the record does not support a conclusion that any portion of the wall street note was qualified_principal_residence_indebtedness within the meaning of sec_108 see sec_108 accordingly petitioners must recognize dollar_figure in ordinary_income for from the discharge of that portion of ms callahan’s wall street note c florida transaction amount_realized petitioners argue that ms callahan realized from the sale of the florida property an amount equal to the sum of the satisfaction of her fremont note dollar_figure and the dollar_figure she received respondent counters that ms callahan realized the dollar_figure million shown on the hud-1 settlement statement plus the rent prepaid on her behalf under the florida lease the recording stamp on the deed and the florida hud-1 show a contract_price of dollar_figure million of that amount dollar_figure5 million was financed with ms losner’s mortgage loan from washington mutual and the rest ostensibly with cash but the evidence shows that ms losner’s purported cash contribution to the transaction was in fact only the proceeds of the two short-term loans from messrs lucas and cueno that were immediately repaid to them after closing thus ms losner never contributed any cash of her own and ms callahan did not receive income to that extent correspondingly the issue is how much of the proceeds from ms losner’s mortgage note ie dollar_figure should be included in the amount ms callahan realized of the loan proceeds dollar_figure was used to pay off ms callahan’s fremont note and dollar_figure was actually disbursed to her thus it cannot be disputed--in fact petitioners have conceded on brief--that they realized at least these amounts at trial ms callahan admitted that the rent for the florida property was prepaid for the whole year and that she did not pay it out of her own pocket thus the prepaid rent could only have come from the dollar_figure of the loan proceeds from ms losner’s mortgage note that was distributed to mr losner’s rei because the greater weight of the evidence shows that dollar_figure was paid to rei and credited to ms callahan’s account in to prepay 12-month’s rent for the florida property we find that ms callahan constructively received that amount from the sale of the florida property see sec_1_451-2 income_tax regs petitioners argue that the prepaid rent should not be treated as constructively received by ms callahan because as she claims she did not have access to the florida property after the parties completed the transaction this argument is a red herring the evidence shows that dollar_figure was credited to ms callahan’s account and unconditionally set apart for her to prepay months of rent at the commencement of the florida lease in even if for the sake of argument ms callahan were subsequently denied access to the florida property when she had a right to access under the florida lease this would have nothing to do with her constructive receipt of the amount in prepaid rent ms callahan was entitled to dollar_figure of the loan proceeds upon the sale of the florida property in and mr losner or ms losner applied those proceeds toward her obligation to pay rent under the florida lease as to the charges to ms callahan shown on the florida hud-1 the evidence establishes that she constructively received the following items of income dollar_figure in settlement charges to her and dollar_figure of county real_estate tax she owed for january through date that was paid on her behalf the florida hud-1 shows that the settlement charges imposed on ms callahan included different types of fees and the title insurance premium paid to clear title--an entity not implicated in petitioners’ fraud allegation--as well as the deed transfer_tax paid to the state because the record does not show that petitioners paid these settlement charges or the prorated county tax out of their own pocket we infer that they were paid using ms losner’s loan proceeds for ms callahan’s benefit accordingly we conclude that they constituted ms callahan’s constructive receipt of income cf sec_1001 with respect to estimated_tax seller closing cost contribution and taxes the record does not provide any information as to what these payments were and whom they were paid to without having any reasonable factual basis in the record to at least infer that these were payments actually made for ms callahan’s benefit we decline to conclude that she constructively received any income relating thereto on the dollar_figure option_price stated in the florida lease there is no evidence showing the dollar_figure option_price was ever paid and even if it was paid there is no evidence showing it was paid with any of the sale proceeds to recapitulate ms callahan realized the following amounts in on the sale of the florida property see sec_1001 payoff of fremont note disbursement prepaid rent settlement charges county taxes total dollar_figure big_number big_number big_number big_number big_number ms callahan’s basis in the florida property we next determine ms callahan’s basis in the florida property at the time of the sale the parties agree that ms callahan’s basis was increased by dollar_figure when her mother died the parties dispute whether ms callahan’s basis was dollar_figure before her mother died as petitioners assert we conclude that it was ms callahan testified that she and her mother together paid dollar_figure in the aggregate for the florida property that she provided of the downpayment and that she made of all mortgage payments on the basis of that testimony ms callahan now claims the additional basis of dollar_figure we find ms callahan’s testimony on this matter credible even though the florida property was purchased years ago one does not usually forget how much he or she paid for a house thus we find that there is a sufficient evidentiary foundation for us to conclude that ms callahan had an additional dollar_figure basis in the florida property we conclude that ms callahan’s adjusted_basis in the florida property for determining the amount of her gain under sec_1001 was dollar_figure dollar_figure dollar_figure when she sold it see sec_1016 see also sec_1 iv deductions a charitable_contributions the parties stipulated that petitioners claimed deductions for cash charitable_contributions of dollar_figure and provided a receipt for dollar_figure to substantiate that claim respondent concedes that petitioners may deduct dollar_figure of the dollar_figure as a charitable_contribution because nothing in the record shows that petitioners have met the requirements under sec_170 and the regulations under that section to substantiate a deduction in excess of dollar_figure we hold that petitioners’ deduction for cash charitable_contributions is limited to dollar_figure b qualified_residence_interest deduction respondent disallowed petitioners’ mortgage interest_expense_deduction of dollar_figure the parties have stipulated that petitioners substantiated the payment of dollar_figure on which petitioners based the claimed deduction we understand respondent to continue to argue that petitioners are not entitled to deduct any of that amount under sec_163 deductions including those for qualified_residence_interest are a matter of legislative grace 292_us_435 the burden is upon the taxpayers to prove that they are entitled to the deductions claimed 503_us_79 under sec_163 qualified_residence_interest is deductible the term qualified_residence_interest means any interest_paid or accrued during the taxable_year on acquisition_indebtedness or home_equity_indebtedness with respect to a qualified_residence sec_163 the term acquisition_indebtedness means any debt that is secured_by the residence and that is incurred to acquire construct or substantially improve a taxpayer’s qualified_residence sec_163 refinanced acquisition_indebtedness continues to be acquisition_indebtedness for the purposes of sec_163 the term home_equity_indebtedness means any debt secured_by the qualified_residence to the extent the aggregate amount of the indebtedness does not exceed the taxpayer’s equity in the residence ie the fair_market_value of the qualified_residence reduced by the acquisition_indebtedness of the residence sec_163 the aggregate amount that may be treated as acquisition_indebtedness for any period is generally limited to dollar_figure million and the aggregate amount that may be treated as home_equity_indebtedness for any period is generally limited to dollar_figure sec_163 c ii because ms callahan acquired the new jersey property from her father in and obtained the dollar_figure million wall street note in the wall street note could not be acquisition_indebtedness on the basis that it was incurred to acquire the new jersey property as we discussed earlier the record does not show ms callahan originally purchased the property with a loan that was later refinanced by the wall street note petitioners also have failed to show that any of the proceeds from the wall street note were used to finance the construction or substantial_improvement of any part of the new jersey property or were used to refinance a debt incurred for such construction or improvement thus petitioners have failed to show that any portion of the wall street note was acquisition_indebtedness under sec_163 the wall street note however was home_equity_indebtedness within the meaning of sec_163 the note was secured_by the new jersey property the parties do not dispute that the new jersey property was a qualified_residence and the record supports such a finding see sec_163 it also appears that the amount of the wall street note did not exceed ms callahan’s equity in the property in any event the aggregate amount that may be treated as home_equity_indebtedness is limited to dollar_figure well below the principal_amount of the note accordingly we find that petitioners are entitled to deduct dollar_figure of mortgage interest_paid but only to the extent that it is attributable to dollar_figure of the wall street note the parties should determine this amount in their rule computation v accuracy-related_penalty respondent determined that petitioners are liable for an accuracy-related_penalty because they substantially understated their income_tax or alternatively were negligent or disregarded rules or regulations see sec_6662 and b and petitioners will have a substantial_understatement_of_income_tax if the amount of the understatement exceeds the greater of of the tax required to be shown on their return or dollar_figure see sec_6662 alternatively we will sustain respondent’s determination to impose an accuracy-related_penalty if we decide that petitioners failed to make a reasonable attempt to comply with provisions of the internal revenue laws or disregarded rules or regulations by acting carelessly recklessly or with intentional disregard sec_6662 sec_1_6662-3 and income_tax regs only one accuracy-related_penalty may be imposed for a given portion of an underpayment even though that portion implicates more than one form of misconduct described in sec_6662 sec_1_6662-2 income_tax regs under sec_7491 respondent bears the burden of production with respect to petitioners’ liability for the accuracy-related_penalty to meet this burden respondent must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty see higbee v commissioner t c pincite once respondent sustains his burden of production the burden_of_proof falls upon petitioners except for the increased portion of the accuracy- related penalty raised in the amended answer see id pincite petitioners may satisfy their burden of proving that the penalty is unwarranted by establishing an affirmative defense such as reasonable_cause or substantial_authority see id pincite respondent has met his burden of production by showing that petitioners acted negligently when they failed to ascertain the extent of their tax_liabilities resulting from the new jersey transaction and the florida transaction with respect to the new jersey transaction the record shows petitioners received a substitute form_1098 which reported that during ms callahan had paid dollar_figure of interest and dollar_figure of loan principal as to that property although petitioners claimed the mortgage interest_deduction consistent with what was reported on the substitute form_1098 they did not report the payoff of the principal balance of their mortgage that was also stated on that document this type of cherrypicking shows petitioners were acting with the intentional disregard of their responsibility to comply with the federal tax statutes with respect to the florida transaction petitioners claim they never received a form 1099-s or a form_1098 but ms callahan must have been aware that the fremont note was paid off after the florida transaction was completed to be sure the fact that ms callahan was relieved of her mortgage liability should have at least prompted her to inquire whether the immediate and direct economic benefit that she enjoyed was taxable further the substitute form_1098 for her new jersey property should have raised questions about the taxability of the respondent’s burden of production also is met if the rule computation shows that petitioners had a substantial_understatement_of_income_tax see eg jarman v commissioner tcmemo_2010_285 100_tcm_599 prince v commissioner tcmemo_2003_247 86_tcm_283 florida transaction her failure to ask the necessary questions is indicative of her negligencedollar_figure we now turn to petitioners’ claimed defense their sole defense in brief is that they had reasonable_cause and acted in good_faith as to their return because ms callahan did not understand that the transactions resulted in the transfer of title to the properties the record leads us to find to the contrary ms callahan knew that the transactions involved the sales of her properties to be sure ms callahan was seeking a way to avoid foreclosure of the mortgages on her properties and knew the lease buyback program that mr losner offered involved short_sale of her properties and her signing various documents moreover petitioners were able to enjoy the immediate impact of the economic benefits resulting from the transactions one day ms callahan was facing foreclosure and the next day she was able to keep her properties with rent prepaid and not having to worry about making mortgage payments for an entire year even if she discerned in date that she was possibly a victim of fraud that fact would not excuse petitioners’ reporting responsibility when they filed their federal_income_tax return months earlier petitioners also acted negligently when they failed to report certain items of income and claimed deductions without maintaining adequate books_and_records to substantiate their amounts see sec_1_6662-3 income_tax regs we sustain respondent’s determination that the accuracy-related_penalty is applicable to the full amount of the deficiency including the portion asserted in the amended answer vi epilogue we have considered all of the parties’ arguments and all arguments not discussed herein have been rejected as moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service washington d c government entities ko dé acy tep rats uniform issue list legend irax iray amount a period company b company e financial_institution d date date date date dear this is in response to a request submitted on your behalf by your authorized representative dated date as supplemented by additional correspondence submitted from date through date in which you request a waiver of the 60-day rollover requirement contained in sec_408 d of the intemal revenue code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested page you are years old you had an individual_retirement_arrangement ira ira x which was maintained by company b you represent that during august of you transferred amount a to financial_institution d you assert that your failure to accomplish a rollover of amount a within the 60-day period prescribed by sec_408 d was due to an error committed by financial_institution d you represent that amount a has not been used for any other purpose amount a was distributed fram ira x on date and deposited into a non-ira account with financial_institution d on date amount a remained in a non-1ra account with financial_institution d during period period represents the time from date to the day prior to date during period you attempted to execute what would have been a timely rollover of amount a you have provided documentation that representatives from financial_institution d you have provided documentation dissuaded you from accomplishing a timely rollover reflecting that representatives of financial_institution d knew amount a represented ira funds you have provided documentation that details a long-standing banking relationship with financial_institution d based upon your history with financial_institution d you relied upon their advice and continued to maintain a non-ira account with financial_institution d during period you maintained an account with financial_institution d until you were able to collect without penalty periodic interest upon amount a and then you transferred amount a to company e on date you transferred amount a into ira y an ira you established with company e on date you assert that you did not become aware of a 60-day rollover period requirement until after date when you were notified of the same by your accountant based on the facts and representations you request a ruling that the intemal revenue service waive the 60-day rollover requirement with respect to the distribution of amount a contained in sec_408 d of the gode in this instance sec_408 d of the code provides that except as otherwise provided in sec_408 d any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distribute as the case may be in the manner provided under sec_72 of the code sec_408 d of the code defines and provides the rules applicable to ira_rollovers sec_408 d a of the code provides that sec_408 d of the code does not apply to any amount_paid or distributed aut of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or page li the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into ‘such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 d only distributions that occurred after date are eligible for sec_408 d b of the code provides that sec_408 does not apply to any amount described in sec_408 d a i received by an individual from an ira if at any time during the -year period ending on the day of such receipt such individual received any other amount described in sec_408 d a i from an ira which was not includible in gross_income because of the application of sec_408 a sec_408 d e of the code provides that the rollover provisions of sec_408 d do not apply to any amount required to be distributed under sec_408 a sec_408 d i of the code provides that the secretary may waive the 60-day requirement under sec_408 a a of the code where the failure to waive such requirement would be against equity or goad conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement the waiver under sec_408 d i of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 d i of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation you submitted is consistent with your assertion that your failure to accomplish a timely rollover was caused by an erfor committed by a financial representative of financial_institution d therefore pursuant to sec_408 d i of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from ira x provided all other requirements of sec_408 d of the code except the 60-day requirement are met with respect fo such contribution amount a will be considered a rollover_contribution within the meaning of sec_408 d of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the cade or regulations which may be applicable thereto requirements of sec_408 of the code this letter expresses no opinion as to whether ira x satisfied the page this letter is directed only to the taxpayer who requasted it sec_6110 k of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact please address all correspondence to se-t ep rats technical group enclosures deleted copy of ruling letter notice of intention to disclose cc