                     T.C. Summary Opinion 2002-60



                       UNITED STATES TAX COURT



             BILL L. AND NANCY L. TURNER, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18298-99S.             Filed May 28, 2002.


     Bill L. Turner, pro se.

     Stephen P. Baker, for respondent.



     VASQUEZ, Judge:    This case was heard pursuant to the

provisions of section 74631 in effect at the time petitioners

filed the petition.    The decision to be entered is not reviewable

by any other court, and this opinion should not be cited as

authority.


     1
        Unless otherwise indicated, all subsequent 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.
                                - 2 -

     Respondent determined a deficiency of $11,032, an addition

to tax pursuant to section 6651(a)(1) of $2,757, and a penalty

pursuant to section 6662(a) of $2,206 with respect to

petitioners’ 1994 Federal income tax.   After a concession by

petitioners,2 the issues for decision are:    (1) Whether

petitioners are entitled to deduct a loss pursuant to section 165

on the sale of their former residence in 1994; and (2) whether

petitioners are liable for the accuracy-related penalty for 1994.

     Some of the facts have been stipulated and are so found.

The stipulation of facts, the supplemental stipulation of facts,

and the attached exhibits are incorporated herein by this

reference.   At the time they filed the petition, petitioners

resided in Wasilla, Alaska.

Background

     In 1983, petitioners purchased a house located at 2041

Belair Drive in Anchorage, Alaska (the Belair property), for

$295,000.    From August 1983 to May 1994, petitioners’ principal

residence was the Belair property.

     In December 1993, petitioners purchased approximately 151

acres of land in Wasilla, Alaska (the Wasilla property).

     On February 24, 1994, petitioners listed the Belair property

for sale with Fortune Properties (Fortune).    Petitioners’ real


     2
        In their reply brief, petitioners concede that they are
liable for the addition to tax pursuant to sec. 6651(a)(1).
                               - 3 -

estate agent from Fortune suggested that the Belair property

would have a better chance of selling, and would sell for a

higher price, if petitioners renovated and upgraded the Belair

property.   The suggested repairs and upgrades included replacing

the carpeting and painting the house.   Petitioners, however,

decided to list the Belair property for sale “as is” for $288,000

and forgo renovating the Belair property.

     The listing agreement gave Fortune the exclusive right to

sell the Belair property and ran until July 1, 1994.3

Petitioners’ plan was to sell the Belair property as a personal

residence so that they could live elsewhere.

     In May 1994, petitioners moved out of the Belair property

and into a house located on the Wasilla property.   The listing

with Fortune expired without a sale.    Petitioners did not relist

the Belair property when the listing expired because they planned

to renovate and upgrade the Belair property in order to make it

more marketable.

     From June through August 1994, petitioners upgraded and

refurbished the Belair house in order to make it easier to sell.

Petitioners replaced carpets throughout the house, added tile

floor to the entryway, installed new kitchen counter tops,

removed wallpaper throughout the house, installed new vinyl



     3
         Fortune did not handle rental listings.
                                - 4 -

flooring, repaired drywall, and painted the interior and exterior

of the house.

     Around October 1994, petitioners decided to sell the Belair

property regardless of market conditions.    Petitioners listed the

Belair property with Jack White Realty for $275,000.    Within 1

week, petitioners received a full-price offer.    On December 5,

1994, the sale closed.    The settlement sheet for the sale of the

Belair property reflected that the purchasers paid an extra

$499.98 for 1-week’s early occupancy.

     Petitioners never placed a sign in front of the Belair

property nor ran any newspaper advertisements listing it for

rent.    Furthermore, the renovation of the Belair property

prevented it from being rented.    By the time petitioners could

have rented the Belair property, petitioners had decided “to get

rid of” the Belair property.    Petitioners never rented the Belair

property, and it remained unoccupied until the new owners moved

in on or about November 29, 1994.

     In December 1994, petitioners met with their tax accountant,

Fred M. Strand, to discuss their tax liability for 1994.4     Mr.

Strand and petitioners discussed the sale of the Belair property,

and Mr. Strand’s opinion was that they had converted the property



     4
        For more than 10 years, petitioners met with their tax
accountant at the end of the year to help prepare their taxes for
that year.
                                 - 5 -

to business property and the loss on the sale was a business

loss.

     Mr. Strand prepared petitioner’s 1994 return.     Petitioners

relied on Mr. Strand’s tax advice in the preparation of their

1994 return.     Petitioners reported the $499.98 they received on

the sale of the Belair property, for 1-week’s early occupancy, on

Schedule E, Supplemental Income and Loss, of their 1994 return as

rental income from the Belair property.     Petitioners also

reported a $35,428 loss on the sale of the Belair property on

Form 4797, Sales of Business Property, which they attached to

their 1994 return.     Petitioners filed their 1994 joint Federal

income tax return on December 8, 1997.

Discussion

I.   Loss on Sale of the Belair Property

     Deductions are a matter of legislative grace, and

petitioners have the burden of showing that they are entitled to

any deduction claimed.     Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).5

        Section 165(c) limits the deduction for losses pursuant to

section 165(a) by individuals to:

             (1) losses incurred in a trade or business;


     5
        Cf. sec. 7491(a), effective for court proceedings arising
in connection with examinations commencing after July 22, 1998.
Petitioners do not contend that their examination began after
July 22, 1998, or that sec. 7491(a) is applicable to their case.
                               - 6 -


          (2) losses incurred in any transaction entered
     into for profit, though not connected with a trade or
     business; and

          (3) * * * losses of property not connected with a
     trade or business, * * * if such losses arise from
     fire, storm, shipwreck, or other casualty, or from
     theft.

It is a long-settled principle that a loss incurred by a taxpayer

on the sale of his or her personal residence is not deductible

except where prior to the sale the taxpayer has abandoned the use

of the property as his or her personal residence and has

converted it to profit inspired use.   Melone v. Commissioner, 45

T.C. 501, 505 (1966); Leslie v. Commissioner, 6 T.C. 488 (1946);

sec. 1.165-9(a) and (b), Income Tax Regs.

     Petitioners concede that the $499.98 listed on their

settlement sheet was additional income paid to them by the

purchasers incident to the sale of the Belair property and not

rent.6   Petitioners argue, however, that they “otherwise

appropriated” the Belair property “to income-producing purposes”.

See sec. 1.165-9(b)(1), Income Tax Regs.

     For a conversion of use to have occurred, petitioners’ use

of the Belair property would have to have shifted from a personal

use to a business or profit-oriented purpose permitted under

section 165(c).   Henry v. Commissioner, T.C. Memo. 1983-277.    In



     6
        We note that rent paid as an interim measure until the
sale of a personal residence is completed is insufficient to
convert a personal residence to income-producing property.
Dawson v. Commissioner, T.C. Memo. 1972-4.
                                - 7 -

Newcombe v. Commissioner, 54 T.C. 1298, 1300-1301 (1970), the

Court set forth a number of factors to be considered to determine

whether a personal residence had been converted to property held

for the production of income.   In the case at bar, the relevant

factors are:   (1) Petitioners actually occupied the Belair

property as their personal residence; (2) the Belair property was

not occupied from the time petitioners moved out of it until its

subsequent sale and therefore was potentially available to

petitioners for their personal use throughout this period; and

(3) the Belair property was unavailable for rent, due to the

renovation, and by the time petitioners could have rented the

Belair property they had decided “to get rid of” the Belair

property.7   Id.; Henry v. Commissioner, supra.

     Merely offering the property for sale does not necessarily

convert it into property held for the production of income.

Newcombe v. Commissioner, supra at 1301.    Placing property on the

market for immediate sale, at or shortly after the time it is

abandoned as a residence, will ordinarily be strong evidence that

a taxpayer is not holding the property for postconversion

appreciation in value.   Id. at 1302.   Under such circumstances,

only a very exceptional situation will permit a finding that the



     7
        Furthermore, even if petitioners had attempted to rent
the Belair property, as they claimed, unsuccessful efforts to
rent property have been held to be insufficient to accomplish a
conversion. Gevirtz v. Commissioner, 123 F.2d 707 (2d Cir.
1941); Grammer v. Commissioner, 12 T.C. 34, 37 (1949).
                               - 8 -

taxpayer converted the property to income-producing purposes.

Id.

      We conclude that petitioners have failed to establish that

they converted their former residence, the Belair property, to

income-producing purposes.   Accordingly, the loss on its sale is

not deductible under section 165.

II.   Section 6662(a)

      Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent on the portion of an underpayment of tax

(1) attributable to a substantial understatement of tax or (2)

due to negligence or disregard of rules or regulations.     Sec.

6662(b).   Whether applied because of a substantial understatement

of tax or negligence or disregard of the rules or regulations,

the accuracy-related penalty is not imposed with respect to any

portion of the understatement as to which the taxpayer acted with

reasonable cause and in good faith.    Sec. 6664(c)(1).   The

decision as to whether the taxpayer acted with reasonable cause

and in good faith depends upon all the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.

      Reasonable and good faith reliance on the advice of an

accountant may offer relief from the imposition of the penalty.

Id.; United States v. Boyle, 469 U.S. 241, 250-251 (1985).

Petitioners agree with respondent that they reported the $499.98

on the wrong schedule; however, petitioners’ accountant was the
                                 - 9 -

one who decided to place the $499.98 on Schedule E.       Furthermore,

Mr. Turner testified and a letter dated April 30, 1997, from Mr.

Strand confirmed that petitioners deducted the loss on the sale

of the Belair property on their 1994 tax return based on Mr.

Strand’s advice that petitioners had converted the Belair

property to business property and the loss on the sale was a

business loss.

     We think the foregoing circumstances meet the standard

established in United States v. Boyle, supra at 251, where the

Supreme Court stated:   “When an accountant or attorney advises a

taxpayer on a matter of tax law, such as whether a liability

exists, it is reasonable for the taxpayer to rely on that

advice.”   We conclude that petitioners made a reasonable effort

to obtain advice with respect to the tax treatment of their sale

of the Belair property, and therefore they are not liable for the

section 6662(a) penalty.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent as to the

                                         deficiency and the addition

                                         to tax pursuant to section

                                         6651(a)(1), and for

                                         petitioners as to the penalty

                                         pursuant to section 6662.
