                         T.C. Memo. 1998-322



                       UNITED STATES TAX COURT



       DOUGLASS H. AND SUZANNE M. BARTLEY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No.   14941-97.               Filed September 10, 1998.



     Douglass H. and Suzanne M. Bartley, pro sese.

     Frederic J. Fernandez and Mark J. Miller, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:    Respondent determined a $12,952 deficiency in

petitioners'   1993   Federal    income   tax   and   a   section   6662(a)

accuracy-related penalty.       Following concessions by petitioners,

the issues for decision are (1) whether petitioners must include as

income the gain realized from the sale of their residence in 1993,
                                        - 2 -


and (2) if that gain is includable in petitioners' 1993 income,

then whether petitioners' failure to report it subjects petitioners

to liability for the section 6662(a) accuracy-related penalty.1

     Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

                                   FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulation of

facts       is   incorporated      in   our    findings      by   this       reference.

Petitioners resided in Ely, Minnesota, at the time they filed their

petition.

Background

        Douglass H. Bartley (petitioner) received a bachelor of arts

degree in business administration from the University of Arizona in

1970 and a juris doctor degree from the University of Arizona Law

School      in   1973.      Petitioner    had    a    private     law    practice     in

Milwaukee,       Wisconsin,     until   1980;    at   that    time,     he    moved   to

Washington, D.C., and began working at Washington Gaslight Co.                        In

approximately       1983,     he    returned    to    his   private      practice     in

Milwaukee.



        1
          On May 5,         1998, respondent filed a motion to impose a
sec. 6673 penalty.          On July 10, 1998, respondent filed a motion
to withdraw the May         5 motion. On July 14, 1998, we granted
respondent's motion         to withdraw the motion to impose a sec. 6673
penalty.
                                     - 3 -


     In April 1987, the Governor of Wisconsin appointed petitioner

a commissioner (the equivalent of a State tax court judge) to the

Wisconsin Tax Appeals Commission (the commission).                    This was a

part-time position.      (As a part-time commissioner, petitioner was

permitted    to    maintain    his   private       law   practice.)   Petitioner

received $50,000 in yearly compensation as a commissioner.                    In

1992, he was appointed to a full-time position on the commission to

fill the remainder of an unexpired term (March 31, 1993) of a

commissioner      who   had    resigned.     (By    accepting   the    full-time

position, petitioner was required to abandon his private law

practice.)        Petitioner was not reappointed at the end of the

interim term, and he thereafter returned to private practice,

spending a substantial amount of his practice on Federal and State

tax law issues.

Sale of Residence

     On September 28, 1987, petitioners purchased a house in

Mequon, Wisconsin (the Mequon residence), for $155,000.                  In late

1987, they built an addition to the Mequon residence (which was

completed in January 1988) costing $48,606, so that petitioner's

mother could live with them.         She paid rent to petitioners.

     Petitioners used 83 percent of the Mequon residence for

personal purposes and 17 percent for rental purposes.

     In 1991, petitioners spent $9,475 on further improvements to

the Mequon residence.         Between 1988 and 1992, petitioners claimed
                                    - 4 -


depreciation    of   $4,913   on    the   rental   portion   of   the   Mequon

residence.

     As    a   consequence     of    petitioner's    departure     from    the

commission, petitioners could no longer afford the monthly mortgage

payments; thus petitioners sold their Mequon residence for $270,000

on June 15, 1993.

     The parties stipulated that the adjusted basis of the Mequon

residence on the date of sale was $213,582, and that the selling

expenses   totaled   $21,191    (of   which   $17,588   was    allocated   as

personal expenses and $3,603 as rental expenses).2            Thus, the gain

on the sale of petitioners' Mequon residence was $40,140. (The

amount of gain is not in dispute.)

     In June 1993, petitioners purchased land in Ely, Minnesota,

and built a cabin thereon (the Ely residence), costing $66,588.

They began living there in October 1993.             On February 1, 1994,

petitioners sold the Ely residence for $66,588. Subsequently, they

moved into a rental apartment.

Federal Income Tax Return

     Petitioners neither reported any capital gain on the sale of

their Mequon residence on their 1993 Federal income tax return nor

attached thereto a Form 2119, Sale of Your Home.



     2
          At closing, after subtracting the unpaid balances of
three mortgages totaling $192,251 and the selling expenses,
petitioners received $50,533 of the proceeds.
                                   - 5 -


     During 1996, petitioners were audited by one of respondent's

agents.     The auditor requested information from petitioners with

respect to the sale of their Mequon residence.                 On September 16,

1996, petitioners provided Form 2119 and Form 4797, Sales of

Business Property, to the Internal Revenue Service auditor assigned

to their case. However, petitioners did not execute either form.

Notice of Deficiency

     In the notice of deficiency, respondent determined that the

capital gain petitioners received from the sale of their Mequon

residence     was   includable   in    their     1993     income.     Respondent

calculated petitioners' capital gain in the following manner:

                                                     Personal         Business
                                      Total             83%              17%

Sale price                         $270,000          $224,100         $45,900

Add: Depreciation allowed               4,913            ---            4,913

Less: Adjusted basis in            (213,582)         (177,273)        (36,309)
  property

Selling expenses                      (21,191)        (17,588)         (3,603)

Capital gain on sale of property       40,140    =      29,239    +    10,901

                                 OPINION

Issue 1.     Gain From Sale of Home

     The first issue is whether petitioners must include as income

the capital gain realized from the sale of their Mequon residence

in 1993.     Respondent maintains that because petitioners failed to

satisfy the requirements of section 1034, they should have reported
                                  - 6 -


the   capital    gain.    Petitioners,      on    the   other   hand,   advance

constitutional and equitable arguments as to why the capital gain

is not includable in income.

      a.   Section 1034

      Generally,    sections   1001   and    61    require      a   taxpayer   to

recognize in the year of the sale gain realized on the sale of

property.       Section 1034,3 which provides an exception to this

general rule, allows a taxpayer, in certain circumstances, to defer

recognition of all gain realized on the sale of the taxpayer's

principal residence (referred to as the old residence) if (1) other

property (referred to as the new residence) is purchased and used

by the taxpayer as a new principal residence within the period

beginning 2 years before the date of the sale and ending 2 years

after the date, and (2) the           adjusted sale price of the old


      3
          Sec. 1034 was repealed by sec. 312(b) of the Taxpayer
Relief Act of 1997, Pub. L. 105-34, 111 Stat. 839, generally
effective for sales and exchanges of principal residences after
May 6, 1997. (The repeal of sec. 1034 was part of the capital
gains relief provided to individual taxpayers by the Taxpayer
Relief Act of 1997.) The sec. 1034 rollover provision was
replaced by an expanded and revised sec. 121, which generally
provides for the nonrecognition of up to $500,000 of gain
realized from the sale of a principal residence by married
taxpayers filing a joint return, and up to $250,000 of gain
realized by all other individual taxpayers, if during the 5-year
period ending on the date of the sale or exchange, the property
has been owned and used by the taxpayer as the taxpayer's
principal residence for a period aggregating 2 or more years.
This exclusion is not predicated on the reinvestment of gain in a
new home.
     References hereinafter to sec. 1034 are to that provision as
in effect during the year in issue, 1993.
                                - 7 -


residence is less than the cost of the new residence.           Sec.

1034(a), (c). Section 1034(b)(1) defines "adjusted sales price" as

the amount realized on the sale of the old residence (selling price

minus selling expenses) reduced by expenses of fixing up the

residence in preparation for sale.      Thus, if the cost of the new

residence equals or exceeds the adjusted sale price of the old

residence, the entire gain on the sale of the old residence must be

deferred. (We note that section 1034 is mandatory, so that a

taxpayer cannot elect to have gain recognized where the section is

applicable.     Sec. 1.1034-1(a), Income Tax Regs.)   If the cost of

the new residence is less than the adjusted sale price of the old

residence, gain must be recognized to the extent the adjusted sale

price of the old residence exceeds the cost of the new residence,

but not greater than the amount realized on the sale.   Sec. 1.1034-

1(a), Income Tax Regs.     The deferral of gain is accomplished by

reducing the basis of the new residence by the amount of gain not

recognized on the sale of the old residence (i.e., the unrecognized

gain is rolled over into a lower basis for the new residence).

Sec. 1034(e).    Finally, pursuant to section 1.1034-1(i)(1), Income

Tax Regs., any gain recognized from the sale of the old residence

is includable in gross income for the taxable year in which the

gain was realized.    (Section 1034 does not apply to losses; losses

are recognized or not recognized without regard to the provisions

of section 1034.)
                                         - 8 -


     Petitioners bear the burden of showing their entitlement to

the nonrecognition of income benefits of section 1034 by proving

that they have satisfied all of the section's requirements.                       Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).                           Income tax

provisions which exempt taxpayers under given circumstances from

paying       taxes   or   permit    them    to    postpone      taxes   are   narrowly

construed.        Commissioner v. Schleier, 515 U.S. 323, 328 (1995);

Commissioner v. Baertschi, 412 F.2d 494, 499 (6th Cir. 1969), revg.

and remanding 49 T.C. 289 (1967).                    In fact, this Court has

indicated that section 1034 must be strictly construed. See, e.g.,

Boesel       v.   Commissioner,     65     T.C.   378,    390    (1975);      Lokan   v.

Commissioner, T.C. Memo. 1979-380.

     Although petitioners purchased the Ely residence within 2

years of selling the Mequon residence, the adjusted sale price of

the Mequon residence ($248,809) exceeded the cost of the Ely

residence by $182,221, which in turn exceeded the $40,140 gain

realized on the sale.         Thus, because petitioners did not meet the

requirements of section 1034, they must include the $40,140 gain

realized in their 1993 income.

        b.    Constitutional Arguments

     Petitioners contest the constitutionality of any statutory

provisions or Internal Revenue Service (IRS) actions (or inactions)

which    result      in   capital   gain     from   the   sale     of   their   Mequon

residence, arguing as follows:               (1) The capital gain respondent
                                 - 9 -


determined is a violation of their equal protection and due process

rights   because    section   1034   favors   wealthy   taxpayers   and

discriminates on the basis of age; (2) the gain from the sale of

their Mequon residence is "fictitious", resulting solely from

inflation, and because there was no "real gain", there is no income

subject to taxation; and (3) because the IRS does not recognize

either nominal or real losses on the sale of a residence, gain from

the sale of a residence cannot be taxed.4           Not surprisingly,

     4
           In their petition, petitioners state as follows:

               a. Taxing "gain" on the sale of our
          residence has no rational basis and violates
          the Equal Protection component of the 5th
          Amendment Due Process Clause because:

                    (1) The tax invidiously
               discriminates in favor of wealthy
               homeowners and against those less
               fortunate. The wealthier
               homeowner, who trades up to a more
               expensive house, has no taxable
               gain. In contrast, the less
               affluent homeowner, who can't
               afford a more expensive house or
               must move into rental quarters,
               gets taxed merely because he can't
               come up with enough to buy anything
               or because he can't afford to buy a
               house of equivalent or greater
               price.

                    (2) The tax also invidiously
               discriminates on the basis of age.
               Those who are 55 or older get an
               exclusion that no one else
               qualifies for.

               b.    Taxing the "gain" violates the Due
                                                     (continued...)
                              - 10 -


respondent disagrees with each of petitioners' arguments. We agree

with respondent.

     First, we do not agree that taxing the capital gain realized

on the sale of petitioners' Mequon residence is a violation of

petitioners' equal protection rights.    The Fifth Amendment to the

Constitution protects against the deprivation of life, liberty, or

property without due process of law.   The Due Process Clause of the

Fifth Amendment provides protection against Federal discriminatory

action "so unjustified as to be violative of due process".   Shapiro

v. Thompson, 394 U.S. 618, 642 (1969); Bolling v. Sharpe, 347 U.S.

497-499 (1954); Ward v. Commissioner, 608 F.2d 599 (5th Cir. 1979),

affg. per curiam T.C. Memo. 1979-39.      Further, the Due Process

Clause of the 5th Amendment has been held to incorporate the Equal


     4
      (...continued)
          Process Clause of the 5th Amendment, because
          it transforms a real loss into a fictitious
          gain and creates phantom income or distorts
          income beyond any reasonable proportions.
          IRS wrongfully fails to recognize the
          phenomenon of inflation, as explained more
          fully below.

               c. The house "gain" taxing scheme
          violates the Equal Protection component of
          the 5th Amendment for an additional reason,
          namely because IRS refuses to recognize
          either nominal or real losses on the sale of
          a residence, even though it readily taxes
          nominal gains. That results in disparate
          treatment as between homeowners who cannot
          deduct losses and businesses which can
          because businesses can deduct those losses.
                                           - 11 -


Protection Clause of the 14th Amendment.                      Johnson v. Robison, 415

U.S.   361,    364-365         n.4   (1974);     Ward       v.    Commissioner,       supra;

Stevenson v. Commissioner, T.C. Memo. 1981-127.

       Under equal protection analysis, a classification in a Federal

statute is subject to strict scrutiny only if it interferes with

the exercise of a fundamental right or operates to the peculiar

disadvantage       of      a    suspect    class.           Regan    v.    Taxation    with

Representation, 461 U.S. 540, 547 (1983); Massachusetts Bd. of

Retirement v. Murgia, 427 U.S. 307, 312 (1976); San Antonio Indep.

Sch.   Dist.    v.      Rodriguez,        411   U.S.    1,       16-17    (1973).   Neither

circumstance       is    present     here.      Wealth      discrimination      alone    is

insufficient to require strict scrutiny; such review of wealth

classifications has been applied only where the discrimination

affects an important individual interest.                        See, e.g., San Antonio

Indep. Sch. Dist. v. Rodriguez, supra at 24, 29; Harper v. Virginia

State Bd. of Elections, 383 U.S. 663 (1966).

       Where   a     tax       statute    results      in    differing      treatment    of

different classes of persons, the statute generally is not in

violation of the Fifth Amendment because of the different treatment

if it has a rational basis. Regan v. Taxation with Representation,

supra; United States v. Maryland Savings-Share Ins. Corp., 400 U.S.

4 (1970).      Furthermore, it is especially difficult to demonstrate

that no rational basis exists for a classification in a revenue

measure for which the presumption that an act of Congress is
                              - 12 -


constitutional is particularly strong.      Black v. Commissioner, 69

T.C. 505, 507-508 (1977); Nammack v. Commissioner, 56 T.C. 1379,

1383 (1971), affd. per curiam 459 F.2d 1045 (2d Cir. 1972).

Legislatures   have   particularly     broad   latitude   in   creating

classifications and distinctions in tax statutes.5

     In the case before us, no denial of the equal protection or

due process provisions of the Constitution has occurred.       Section

1034 has a rational basis as enacted by Congress in the Revenue Act

of 1951, ch. 521, 65 Stat. 452.      Congress enacted section 112(n),

the predecessor to section 1034, as an amendment to the 1939

     5
          The wide scope of powers of the legislature under the
14th Amendment in the matter of classification was discussed at
length by the Supreme Court in Carmichael v. Southern Coal & Coke
Co., 301 U.S. 495, 509-510 (1937):

          It is inherent in the exercise of the power
          to tax that a state be free to select the
          subjects of taxation and to grant exemptions.
          Neither due process nor equal protection
          imposes upon a state any rigid rule of
          equality of taxation. This Court has
          repeatedly held that inequalities which
          result from a singling out of one particular
          class for taxation or exemption, infringe no
          constitutional limitation.

               Like considerations govern exemptions
          from the operation of a tax imposed on the
          members of a class. A legislature is not
          bound to tax every member of a class or none.
          It may make distinctions of degree having a
          rational basis, and when subjected to
          judicial scrutiny they must be presumed to
          rest on that basis if there is any
          conceivable state of facts which would
          support it. [Citations omitted.]
                                  - 13 -


Internal Revenue Code, recognizing that the disposition of one

residence and the acquisition of another were often necessitated by

a change in the size of the taxpayer's family, a change in the

taxpayer's place of employment, or other circumstances beyond the

taxpayer's control.      As the Ways and Means Committee report, H.

Rept. 586, 82d Cong., 1st Sess. (1951), 1951-2 C.B. 357, 377-378,

explained:

               H.   Gain From Sale Or Exchange Of The
          Taxpayer's Residence.

          this bill amends the present provisions
          relating to a gain on the sale of a taxpayer's
          principal residence so as to eliminate a
          hardship under existing law which provides that
          when a personal residence is sold at a gain the
          difference between its adjusted basis and the
          sale price is taxed as a capital gain.      The
          hardship is accentuated when the transactions
          are necessitated by such facts as an increase
          in the size of the family or a change in the
          place of the taxpayer's employment. In these
          situations the transaction partakes of the
          nature of an involuntary conversion. * * *

See Clapham v. Commissioner, 63 T.C. 505, 511 (1975); see also S.

Rept. 781, 82d Cong., 1st Sess. (1951), 1951-2 C.B. 458, 482-484,

566-570; Staff of Joint Comm. on Taxation, Summary of Provisions of

the Revenue Act of 1951, at 389-310 (J. Comm. Print 1951), 1951-2

C.B. 287, 309-310.

      Over the years, the governing Code provision has changed

slightly. See H. Rept. 1337, 83d Cong., 2d Sess. A268-A269 (1954).

The   rules   under   section   1034   during   the   year   in   issue   are

substantially similar to those Congress adopted in 1951. The major
                                   - 14 -


change to section 1034 (other than its repeal) has been the

extension of the period for acquisition or construction of a new

residence from 1 year to 18 months by the Tax Reduction Act of

1975, Pub. L. 94-12, sec. 207(a), 89 Stat. 32, and then to 2 years

by the Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec.

122(b), 95 Stat. 197.

       It is clear from the legislative history that Congress viewed

the deferral of capital gains tax as a means to alleviate hardships

for growing families purchasing a new home and for taxpayers

changing employment and thus needing to purchase a new residence.

Because a rational basis exists for the gain deferral under section

1034,    this   provision   is   constitutional     and   does   not   violate

petitioners' equal protection rights.

       In repealing section 1034 in the Taxpayer Relief Act of 1997,

sec.    312(b),   it   appears   that   Congress    addressed    petitioners'

concern that the "poor" were penalized through section 1034:

                 To postpone the entire capital gain from
            the sale of a principal residence, the
            purchase price of a new home must be greater
            than the sales price of the old home. This
            provision of present law encourages some
            taxpayers   to  purchase   larger  and   more
            expensive houses than they otherwise would in
            order to avoid tax liability, particularly
            those who move from areas where housing costs
            are high to lower-cost areas. This promotes
            an inefficient use of taxpayer's financial
            resources.

H. Rept. 105-148, at 761-762 (1997).               Thus, in 1997, Congress

repealed section 1034 and revised section 121 because, among other
                                - 15 -


things, section 1034 was generally more useful when trading up a

residence.   As the excerpt above illustrates, presumably Congress

realized that section 1034 favored wealthy taxpayers.     However,

this does not equate to a constitutional violation.     See, e.g.,

Black v. Commissioner, supra.

     We now turn to petitioners' age discrimination argument.

Section 121,6 a companion to section 1034,7 permitted taxpayers 55

and older to exclude from gross income up to $125,000 of gain from

the sale of property which they had owned and used as their

principal residence for 3 or more of the 5 years immediately before

the sale. The purpose of the section 121 exclusion rule was to

enable an older taxpayer to sell his home without being required to

pay tax on the realized appreciation or invest all the proceeds

from the old residence in a new residence. Congress concluded that

although section 1034 generally provided adequately for the younger

taxpayer who changed residences, it did not provide adequate tax

benefits for the taxpayer whose family had grown up and who no

     6
          The one-time exclusion for gain on the sale of
residences applied to homes sold before May 7, 1997. Sec. 121
was amended by sec. 312(a) and (d)(1), Taxpayer Relief Act of
1997, 111 Stat. 836, 839.
     7
          Sec. 121 differed from sec. 1034 as follows: (1) Under
sec. 121, a $125,000 ceiling existed on the amount of gain
excludable ($62,500 in the case of a separate return by a married
individual); (2) sec. 121 permanently excluded the gain from
income instead of only postponing recognition and could be used
only once in a lifetime; (3) sec. 121 was available only to
taxpayers over 55 years old; and (4) the sec. 121 exclusion was
elective and did not require the purchase of a new residence.
                              - 16 -


longer needed the family homestead.8   See, e.g., H. Rept. 749, 88th

Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 125, 169-171, 284-

288; S. Rept. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part


     8
          In adopting this one-time exclusion provision,
Congress' intent was as follows:

               The Congress believed that the taxes
          imposed upon an individual with respect to
          gain that he or she realizes on the sale or
          exchange of his or her principal residence,
          in many instances, may be unduly high,
          especially in view of recent inflation
          levels and the increasing cost of housing.
          The Congress believed that, in most
          situations, the nonrecognition provisions of
          present law operate adequately to allow
          individuals to move from one residence to
          another without recognition of gain or
          payment of tax. However, where an
          individual has owned his or her principal
          residence for a number of years and sells it
          either to purchase a smaller, less expensive
          dwelling, or to move into rental quarters,
          any tax due on the gain realized may be too
          high. While the provisions of prior law
          relating to the exclusion of gain by
          taxpayers who attained the age of 65 may
          ameliorate this situation somewhat, the
          Congress believed that the prior dollar
          limits and age restriction were unrealistic
          in view of increasing housing costs and
          decreasing retirement ages. In addition,
          the Congress believed that the holding
          period of a principal residence which is
          involuntarily converted should be tacked to
          that of a replacement residence for purposes
          of meeting the use and occupancy
          requirements needed to qualify for the
          exclusion upon a sale of the replacement
          residence.

Staff of Joint Comm. on Taxation, General Explanation of the
Revenue Act of 1978, at 255-256 (J. Comm. Print 1979).
                               - 17 -


2) 505, 555-557.   Congress believed that a rollover under section

1034 may not be feasible because the older taxpayer often wants to

purchase a less expensive home or move to a rented residence at

another location and may also need the proceeds from the sale of

the old residence to meet living expenses in the retirement years.

     In Woolf v. Commissioner, T.C. Memo. 1981-286, we held that a

rational basis existed for allowing the section 121 exclusion, and

thus the exclusion did not result in any constitutional violations.

We reasoned that in the case of certain older individuals, Congress

made a reasonable attempt to provide for those individuals who,

because of their age and particular situation in life, may wish to

change   residences.   We   stated:     "We,   accordingly,   find    no

constitutional violation resulting from the fact that * * * [the

taxpayers'] tax consequences may have been different from those of

other individuals who sold their personal residences".9       Id.    "'No

     9
          In fact, there were a number of other sections in the
Internal Revenue Code that provided for differing tax treatment
depending upon the taxpayer's age. For instance, a taxpayer who
attained age 25 before the close of the computation year and was
not a full-time student during the 4 taxable years commencing
upon attaining the age of 21 and ending with the computation year
would be eligible for income averaging. Former sec.
1303(c)(2)(A) (Tax Reform Act of 1986, Pub. L. 99-514, sec.
141(a), 100 Stat. 2117, repealed sec. 1303, applicable to tax
years beginning after Dec. 31, 1986); see Baldwin v.
Commissioner, 84 T.C. 859, 869 (1985).
     In addition, if a taxpayer fails to roll over distributed
retirement funds within 60 days, and the distribution is made
before the date the taxpayer attains the age of 59-1/2, and none
of the other exceptions in sec. 72(t)(2) applies, the tax on the
distribution is increased by an amount equal to 10 percent of the
                                                   (continued...)
                                       - 18 -


scheme of taxation, whether the tax is imposed on property, income,

or purchases of goods and services, has yet been devised which is

free of all discriminatory impact.'" Druker v. Commissioner, 77

T.C. 867, 872 (1981) (quoting San Antonio Indep. Sch. Dist. v.

Rodriguez, 411 U.S. at 42), affd. in part on this issue and revd.

in part on another issue 697 F.2d 46 (2d Cir. 1982).

       In sum, we hold that no denial of the equal protection or due

process provisions of the Constitution has occurred herein.

       c.     Equitable Arguments

       Petitioners maintain that to tax the gain from the sale of

their Mequon residence because they could not afford to purchase

another house of equal or greater value constitutes "blatant

discrimination on the basis of wealth."                Petitioners' economic

hardship situation does not alleviate their obligation to report

the gain on the sale of their Mequon residence, as required by

section 1034.        To petitioners this result may appear inequitable.

Petitioners essentially are requesting the Court to ignore the

plain language of the statute and rewrite the statute to achieve

what       they   regard   as   an   equitable   result.   See   Hildebrand   v.

Commissioner, 683 F.2d 57, 58-59 (3d Cir. 1982), affg. T.C. Memo.

1980-532.         This we cannot do.      We cannot alter the plain reading

of the statute.        Petitioner has not cited any authority for us to


       9
      (...continued)
portion includable in gross income.              Sec. 72(t).
                                       - 19 -


provide   the    relief    he     requests.     "The   proper      place   for    a

consideration of petitioner's complaint is the Halls of Congress,

not here [Tax Court]."          Hays Corp. v. Commissioner, 40 T.C. 436,

443 (1963), affd. 331 F.2d 422 (7th Cir. 1964).

       In addition, petitioners argue that taxpayers are unfairly

treated   when    the   value     of    their   home   increases     because     of

inflation.    They contend that

           The $40,140 of alleged gain is fictitious, for
           the IRS gain computation assumes that the
           taxpayers'    1987    purchase   dollars   are
           equivalent   to   1993   sale  dollars.     If
           equivalent dollars are used to compute gain
           here, the $40,140 "gain" becomes a loss of
           $8,397. An income tax may not be imposed on a
           loss without violating IRC § 61 and the Due
           Process Clause of the Fifth Amendment.

       Other taxpayers have raised the argument of inflation as

grounds for      failing   to    report    income.     We   have    consistently

rejected this argument.         See Hellermann v. Commissioner, 77 T.C.

1361   (1981);    Milkowski     v.     Commissioner,   T.C.   Memo.    1981-225;

Downing v. Commissioner, T.C. Memo. 1983-97.                  The taxpayers in

Hellermann made arguments similar to those advanced by petitioners:

That gain from the sale of their buildings was due to inflation;

that their gain was nominal; and that the portion of their nominal

gain that was due to inflation does not constitute taxable income.

77 T.C. at 1362-1363. The taxpayers therein also used the Consumer

Price Index to illustrate the effects of inflation and what was

alleged to be their nominal gain.           Id. at 1362.    Responding to that
                                 - 20 -


argument, we therein stated "that we have several times denied

taxpayers deductions for losses due to inflation, on grounds that

the tax law is not written to account for inflation."                 Id. at

1363.10   We further determined that nominal gain is taxable because

of (1) the doctrine "that Congress has the power and authority to

establish the dollar as a unit of legal value with respect to the

determination of taxable income, independent of any value the

dollar might also have as a commodity" (citations omitted), and (2)

the doctrine of common interpretation, which defines income on the

basis of the understanding of a lay person, not an economist.            Id.

at 1364, 1366.    We held in the Commissioner's favor, concluding

that (1) the taxpayers' use of the Consumer Price Index (including

any other method measuring inflation) to calculate taxable income

is irrelevant, and (2) nominal gain is taxable income.                Id. at

1363-1364; see also Sibla v. Commissioner, 68 T.C. 422, 430-431

(1977) (holding    that   the   taxpayer   was   neither   entitled    to   a

deduction nor any other adjustment to his gross income because of

the fact that the value of a dollar may have declined in relation

to silver or gold), affd. 611 F.2d 1260 (9th Cir. 1980); Gajewski

v. Commissioner, 67 T.C. 181, 194-195 (1976) (holding that the

value of the dollar is "irrelevant for purposes of computing * * *

[a taxpayer's] taxable income", and "for purposes of the tax law,


     10
          We note that when Congress desires to take inflation
into account, it does so by statute. See, e.g., secs. 1(f), 151.
                                  - 21 -


a dollar is what Congress says it is, without regard to intrinsic

value or lack thereof"), affd. without published opinion 578 F.2d

1383 (8th Cir. 1978); Notter v. Commissioner, T.C. Memo. 1982-96.

Accordingly, we dismiss petitioners' argument with regard to the

effect of inflation.

       Finally, petitioners argue that because section 1034 does not

apply to losses, there is "disparate treatment" between homeowners

and businesses.        We recognize that because a residence is, by

definition, for personal use, a loss incurred on its sale is not

deductible.      See secs. 165, 262.   However, a loss is recognizable

on the sale of a home if it was converted to rental property prior

to its sale.      See sec. 165(c).

       Although petitioners' nominal gain may or may not equal their

real gain in an economic sense, neither the Constitution nor tax

laws "embody perfect economic theory".         See Weiss v. Wiener, 279

U.S. 333, 335 (1929).

       d.   Conclusion

       On the basis of the foregoing analysis, we hold that the gain

realized from the sale of petitioners' Mequon residence is taxable

in 1993.    Moreover, respondent's computation of gain is sustained.

Issue 2.     Section 6662(a) Accuracy-Related Penalty

       The second issue is whether petitioners are liable for the

section 6662(a) accuracy-related penalty for negligence.          Section

6662   imposes    an   accuracy-related    penalty   for   negligence   and
                                   - 22 -


intentional disregard of rules and regulations.                   Negligence is

defined as   the   "`lack    of   due   care    or    failure    to    do    what     a

reasonable   and   ordinarily     prudent      person   would     do    under       the

circumstances.'"     See Neely v. Commissioner, 85 T.C. 934, 947

(1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th

Cir. 1967), affg. in part and remanding per curiam 43 T.C. 168

(1964)).

     Petitioners argue that the portion of the negligence penalty

attributable to the gain on the residence is "unjustified because

the gain is not taxable in the first place and because petitioners

were not negligent in any event in that they did report the sale

transaction and its details in a timely fashion."                We disagree.

     Petitioner    was   a    well-educated          attorney    who        spent     a

substantial part of his career in tax law.                      He is a former

Wisconsin Tax Appeals commissioner.             It is evident that he was

familiar with Federal and State tax law.             Although petitioner was

fully aware of petitioners' duty to report the capital gain on the

Mequon residence, petitioners failed to file Form 2119 with their

1993 income tax return.11         The taxpayer must file Form 2119 to

notify the IRS of the sale for the tax year in which the old

residence is sold, whether or not gain is realized.                   Sec. 1.1034-


     11
          Generally, cash basis taxpayers must include all items
of income in the gross income for the taxable year in which
actually or constructively received. Sec. 451(a); sec. 1.451-
1(a), Income Tax Regs.
                                  - 23 -


1(i), Income Tax Regs.      Furthermore, petitioners provided Forms

2119 and 4797 on September 16, 1996, only after being requested to

do so by the IRS auditor; but they failed to execute the forms.12

     Petitioners failed to satisfy the requirements of section

1034.     Petitioner, as a tax attorney and former Wisconsin Tax

Appeals commissioner, knew, or at least should have known, of the

section    1034   requirements;     he   chose   not   to   follow   them.

Petitioners failed to demonstrate that they were not negligent.

See, e.g., Milkowski v. Commissioner, T.C. Memo. 1983-406; Notter

v. Commissioner, T.C. Memo. 1982-96.       Indeed, the record indicates

that they were.

     Accordingly,    we   sustain   respondent's   determinations     with

respect to the section 6662(a) accuracy-related penalty.

     To reflect the foregoing and petitioners' concessions,



                                              Decision will be entered

                                         for respondent.




     12
          Petitioners argue that they filed a 1994 Form 2688,
Application for Additional Extension of Time To File U.S.
Individual Income Tax Return, which notified the IRS of the sale
of the Mequon residence. At most, Form 2688 notified respondent
that petitioners sold a residence in 1994, which would have been
their Ely residence.
