                           T.C. Memo. 1997-270



                         UNITED STATES TAX COURT



                  DONALD L. HEAD, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12675-94.                           Filed June 16, 1997.



     Donald L. Head, pro se.

     Michelle K. Loesch, for respondent.




               MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS,    Judge:      Respondent     determined    deficiencies      in

petitioner's   Federal    income   taxes   for   1986   and   1988   in   the

respective amounts of $6,551 and $3,043, and additions to tax for

1986 and 1988 under section 6651(a)(1) in the respective amounts of

$1,471 and $357.
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       Following a concession by petitioner, the issues for decision

are: (1) Whether petitioner is entitled to deduct $47,405 as a

business foreclosure loss in 1986; (2) whether petitioner                   is

entitled to a dependency exemption for his companion, Florence H.

Ratliff, in 1986; (3) whether petitioner is entitled to a $17,769

net operating loss carryover from 1983, 1984, and 1986 to 1988; and

(4) whether petitioner is liable for section 6651(a)(1) additions

to tax for failure to timely file his 1986 and 1988 Federal income

tax returns.

       All section references are to the Internal Revenue Code in

effect for the years in issue.          All Rule references are to the Tax

Court Rules of Practice and Procedure.

                             FINDINGS OF FACT

       Some   of   the   facts   have   been   stipulated    and   are   found

accordingly.       The stipulation of facts and the attached exhibits

are incorporated herein by this reference.

Background

       At the time he filed his petition, Donald L. Head (petitioner)

resided in Arlington, Washington.          Petitioner did not timely file

his 1986 and 1988 Federal income tax returns.

       Petitioner was married to Diyana A. Head (Ms. Head). They

separated sometime in 1985 and divorced in March 1992.

The Jensen Road Property

       In 1972, petitioner purchased property located at 2630 Jensen

Road    in    Bellingham,   Washington      (the   Jensen   Road   property).
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Petitioner and Ms. Head began building a residential structure for

investment speculation purposes on the Jensen Road property (the

Jensen Road house or house) in that year. During the construction,

petitioner and Ms. Head resided in a mobile home.           Construction of

the Jensen Road house was completed in September 1980.              The Jensen

Road house was immediately put up for sale; a potential purchaser

was located, but the anticipated sale did not materialize. Because

petitioner and Ms. Head had no other residence, and the house could

not be insured if vacant, they moved into the Jensen Road house in

late October 1980. Petitioner lived in the Jensen Road house until

June 1985.   Ms. Head lived in the Jensen Road house until May 1986.

The Norwest Commercial Bank Loans

     In January 1983, petitioner borrowed funds in the amounts of

$10,000 and $40,000 from Norwest Commercial Bank (NCB), securing

both loans with a mortgage against the Jensen Road house.              In May

1984, petitioner borrowed an additional $2,000 from NCB, again

securing the loan with a mortgage against the Jensen Road house.

     Petitioner used a portion of the loan proceeds to operate a

retail coin and stamp business and a portion of the loan proceeds

for personal purposes. He operated the coin and stamp business

until   April   or   May   1985.   In   June   1985,   petitioner    moved   to

California, where he began working for The Boeing Co.

The Foreclosure

     On May 27, 1986, NCB foreclosed upon its mortgages and took

possession of the Jensen Road property and house.          At this point in

time, Ms. Head moved out of the Jensen Road house.
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Petitioner's 1986 and 1988 Federal Income Tax Returns

     On Schedule C (relating to petitioner's retail coin and stamp

business) attached to petitioner's 1986 Federal income tax return,

petitioner deducted $54,0001 as a loss from "foreclosure to pay

business loan".

     On petitioner's 1986 return, petitioner claimed a dependency

exemption for Florence H. Ratliff, who was listed on the return as

petitioner's "companion".         Petitioner was not married to Florence

H. Ratliff (Ms. Ratliff) in 1986 or 1988, nor were they related.

     On his 1988 Federal income tax return, petitioner deducted

$17,769 as a net operating loss carryover from 1983, 1984, and

1986.

The Notice of Deficiency

     In the notice of deficiency, respondent disallowed $47,405 of

the claimed foreclosure loss, allowing the remaining $6,595 as an

interest     expense.      Respondent     also   disallowed     the   claimed

dependency     exemption    for     Ms.   Ratliff.   Finally,     respondent

disallowed the claimed $17,769 net operating loss carryover for

1988 on the basis that petitioner failed to timely elect to

carryforward his net operating losses from tax years 1983 and 1984.

Moreover, respondent determined that petitioner had not established

that any portion of those prior years' losses would be available

for 1988.      Respondent accordingly increased petitioner's 1988

taxable income by $17,769.


     1
          The record does not indicate how petitioner arrived at
the $54,000 figure; his borrowings from NCB totaled $52,000.
                                  - 5 -

                                 OPINION

Issue 1.   Foreclosure Loss

     The first issue we consider is whether petitioner is entitled

to the claimed foreclosure loss deduction in 1986.             Petitioner

argues that the Jensen Road property was constructed as a "spec"

house, and as such constituted business or investment property. He

asserts that even though the Jensen Road house was used as his and

Ms. Head's residence after the anticipated sale of the house fell

through, the house retained its business character because it was

used to obtain financing for his retail coin and stamp business.

Respondent disagrees, contending that once petitioner used the

Jensen Road house as his and Ms. Head's residence, the business or

investment    character,    if   any,   of   the   Jensen   Road   property

terminated.   Thus, respondent asserts, the foreclosure loss is not

deductible as it was sustained in connection with property held by

petitioner for personal purposes.

     Section 165(a) allows as a deduction any loss sustained by the

taxpayer during the taxable year not compensated for by insurance

or otherwise. However, section 165(c) limits deductions for losses

of individuals to those incurred in a trade or business, incurred

in a transaction for profit, or as a result of a casualty or theft.

     For tax law purposes, a foreclosure has the same effect as a

"sale or exchange".        Helvering v. Hammel, 311 U.S. 504 (1941);

Quinn v. Commissioner, T.C. Memo. 1983-485. Losses attributable to

the sale of a family residence are nondeductible personal losses.

Sec. 262; Austin v. Commissioner, 35 T.C. 221 (1960), affd. 298
                                       - 6 -

F.2d 583 (2d Cir. 1962); Doerries v. Commissioner, T.C. Memo. 1991-

396; sec. 1.262-1(b)(4), Income Tax Regs.               The burden of proving

that   petitioner     is    entitled    to     deduct   the    loss   rests   with

petitioner.    See Welch v. Helvering, 290 U.S. 111 (1933).

       While we accept petitioner's testimony that he originally

built the Jensen Road house for investment purposes, the investment

character     of    the    house   terminated       when      the   house    became

petitioner's       personal   residence      in   October     1980.    The    house

remained petitioner's and Ms. Head's residence for almost 5 years,

and the house was used as Ms. Head's residence after petitioner

separated from her until foreclosure of the property took place in

May 1986.

       Petitioner presented no evidence regarding the extent or

duration of his efforts to sell the Jensen Road property after the

house was used as his residence. We therefore conclude that the

Jensen Road property was held by petitioner for personal, and not

investment, purposes from October 1980 and at all relevant times

thereafter.

       Petitioner asserts that because the Jensen Road property was

used to secure a business loan, it should be characterized (for tax

purposes) as business property.          Although petitioner may have used

the equity in the Jensen Road property to secure a loan for

business purposes, that act in and of itself does not cause the

character of the property to change from a personal residence to

business property.         The personal use of the Jensen Road property

had to terminate in order to effectuate a change of the character
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of the property to a trade or business or profit-motivated use.

See McBride v. Commissioner, 50 T.C. 1, 7 (1968); Leslie v.

Commissioner, 6 T.C. 488, 493 (1946).

     Petitioner's coin and stamp business was not conducted on the

Jensen Road property, nor was the property used in connection with

that business. Moreover, petitioner did not terminate his personal

use of the property before or after obtaining the loan.             Petitioner

and Ms. Head resided in the Jensen Road house for more than 2 years

prior to obtaining the loan. They continued residing there during

the operation of petitioner's business, and even after petitioner's

business failed.       Further, the proceeds from the bank loans were

not used strictly for business purposes; a portion of the proceeds

was used for personal expenditures.

     To    conclude,    the   Jensen   Road   property     was   neither     an

investment nor business property at any time after October 1980.

Accordingly, petitioner's 1986 foreclosure loss was personal and is

not deductible under section 165(c).

Issue 2.   Dependency Exemption

     The second issue for consideration is whether petitioner is

entitled to    a   dependency   exemption     for   Ms.   Ratliff    in   1986.

Petitioner has the burden of proving that he is entitled to the

exemption claimed. Rule 142(a); Welch v. Helvering, supra.

     Section 151(c) provides an exemption for each of a taxpayer's

dependents.   Among other things, a taxpayer must provide over half

the support of any dependent during the calendar year in order to

claim the exemption.      Sec. 152(a).
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        Petitioner has failed to present any evidence on this issue.

Accordingly, petitioner is not entitled to the claimed dependency

exemption for Ms. Ratliff in 1986.

Issue 3.     Net Operating Loss Carryover

        The third issue for consideration is whether petitioner is

entitled to a $17,769 net operating loss carryover from 1983, 1984,

and 1986 to 1988.     Respondent claims that the net operating loss

carryover was fully absorbed in previous tax years.                    Petitioner

disagrees.

        Section 172(a) authorizes a net operating loss deduction.

Simply put, a net operating loss is the excess of a taxpayer's

deductions over his gross income, with certain modifications.

These    modifications,    which    are    enumerated       in   section   172(d),

include capital gains and losses, personal exemption deductions,

and nonbusiness deductions.         A net operating loss in a given year

may be carried back for the 3 preceding years and carried forward

for the 15 succeeding years.         Sec. 172(b).

        The taxpayer bears the burden of proving the fact and amount

of   the    loss.   Rule   142(a);        Ocean     Sands    Holding   Corp.    v.

Commissioner, T.C. Memo. 1980-423, affd. without published opinion

701 F.2d 163 (4th Cir. 1983).             Petitioner failed to present any

evidence    to   substantiate      the    claimed    carryover.     Accordingly,

petitioner failed to meet his burden of proof with respect to this

issue.     We therefore sustain respondent's determination.
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Issue 4.     Section 6651(a)(1) Additions to Tax

      Respondent determined additions to tax pursuant to section

6651(a)(1)     for    petitioner's      1986     and     1988     taxable       years.

Petitioner can avoid these additions to tax by proving that his

untimely filings were: (1) Due to reasonable cause, and (2) not due

to willful neglect.         Sec. 6651(a); Rule 142(a); United States v.

Boyle, 469 U.S. 241, 245-246 (1985); United States v. Nordbrock, 38

F.3d 440 (9th Cir. 1994).         "Reasonable cause" requires a taxpayer

to   demonstrate     that   he   exercised      ordinary       business       care   and

prudence and was nevertheless unable to file a return within the

prescribed time.        United States v. Boyle, supra at 246; sec.

301.6651-1(c)(1), Proced. & Admin. Regs.               Willful neglect means a

conscious, intentional failure to file or reckless indifference.

United States v. Boyle, supra at 245.

      Petitioner was required to timely file Federal income tax

returns for 1986 and 1988.         He filed those returns in April 1991.

Petitioner offered two explanations for untimely filing his 1986

return: (1) "[M]y records and personal papers were pretty scattered

at that time"; and (2) a house laborer mistakenly took the box

containing    petitioner's       records   to    the    garbage       dump,    forcing

petitioner to reconstruct important figures.

      Petitioner's justification is insufficient.                 Construction of

the house     was    completed    in   September       1980,    and    according     to

petitioner's testimony, he discovered the records were mistakenly

taken about a week or so after the incident occurred.                          The tax

return to which such documents might have related was petitioner's
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1986 return, which was due to be filed on April 15, 1987, almost 7

years after the records were "scattered".     Moreover, petitioner

failed to offer any explanation for his failure to timely file his

1988 Federal income tax return.

     Because petitioner has failed to show reasonable cause for the

late filing of either his 1986 or 1988 Federal income tax return,

we sustain respondent's determination of the section 6651(a)(1)

additions to tax.

     To reflect the foregoing,


                                         Decision will be entered

                                   for respondent.
