                          T.C. Memo. 1998-351



                        UNITED STATES TAX COURT



                DON AND MARGARET TAYLOR, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 21611-97.                Filed October 5, 1998.




        Noel Bisges, for petitioners.

        Douglas Polsky, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


        ARMEN, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

        1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
                                                   (continued...)
                               - 2 -


     Respondent determined deficiencies in petitioners' Federal

income taxes for the taxable years 1992 and 1994 in the amounts

of $1,234 and $5,262, respectively, as well as accuracy-related

penalties under section 6662(a) in the amounts of $68 and $175,

respectively.

     After concessions by petitioners,2 the only issue for

decision is whether petitioners are entitled to capital loss

carryovers for the years in issue based on the sale of a

residential property.   We hold that they are not.

                         FINDINGS OF FACT

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

Petitioners resided in Gravois Mills, Missouri, at the time that

their petition was filed with the Court.

     Petitioners are husband and wife.   Prior to February 1991,

petitioners resided and owned real property in Thousand Palms,

California (the Thousand Palms Property).   The Thousand Palms

Property included a single-family home, a work area (a 20-foot by

40-foot garage) used by petitioner Mr. Taylor in his construction

business, and a mobile home.   These structures were located on a




     1
      (...continued)
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
     2
       Petitioners have conceded the Schedule C adjustments for
the years in issue and the penalties under sec. 6662(a) relating
to these adjustments.
                                - 3 -


5 acre parcel of land.   For tax purposes, petitioners treated 25

percent of this property as used for business.

     Petitioners planned to move to Missouri for semiretirement.

In this regard, petitioners entered into a contract to purchase a

campground in Missouri (the Missouri Property) in October 1990.

Petitioners paid an $11,000 earnest money deposit toward this

contract.   Petitioners intended to use a portion of the Missouri

Property as a residence and to rent the other portions to

supplement their retirement income.

     Thereafter, in November 1990, petitioners listed the

Thousand Palms Property for sale at a listing price of $650,000.

Given its uniqueness, petitioners hoped that an individual in the

construction business would be interested in their property.

Sometime in January 1991, petitioners were contacted by a married

couple, Mr. and Mrs. Norris (the Norrises).   The Norrises

proposed a transaction to exchange properties with petitioners.

The Norrises owned a single-family home on a 1-acre lot in Palm

Springs, California (the Palm Springs House).    The Palm Springs

House was listed at $529,000 and had been on the market for more

than 4 months.

     Even though Palm Springs and Thousand Palms are neighboring

communities, their residential real estate markets are not

similar.    Palm Springs homes are typically larger and much more
                                - 4 -


expensive than the homes in Thousand Palms.    Petitioners had not

previously owned any property in Palm Springs.

     Petitioner Mr. Taylor investigated the Palm Springs

residential sales market to determine the value of the Palm

Springs House.   Subsequently, petitioners and the Norrises agreed

that they would treat the exchange of the two properties as two

separate sales, with a reduced selling price for each property of

$460,000.   The California residential real estate market declined

sometime in the early 1990's.    It is not clear whether

petitioners were aware of this decline at the time of this

transaction.

     Petitioners closed the sale of their Thousand Palms Property

in February 1991.   In consideration, petitioners received cash in

the amount of $150,000, unsecured notes in the amount of

$288,000, mortgage relief in the amount of $6,740, and a $15,260

payment to petitioners' real estate broker.    Petitioners paid for

their purchase of the Palm Springs House by obtaining a $300,000

mortgage and using the funds obtained therefrom to pay off the

Norrises' existing mortgage.    Petitioners did not pay out-of-

pocket cash or incur any other debt to pay for this purchase.

Petitioners satisfied the remaining $160,000 due by transferring

equity from the Thousand Palms Property to the Norrises.

     Within a few weeks after the sale/exchange of the Thousand

Palms Property, petitioners closed their purchase of the Missouri
                                 - 5 -


Property at a price of $132,500.    Petitioners used the cash

obtained from the Thousand Palms Property sale/exchange for the

Missouri Property purchase.    Upon obtaining the Missouri

Property, petitioners promptly moved to Missouri.

     At about the same time; i.e., immediately after obtaining

the Palm Springs House, petitioners listed the house for sale

with a real estate agent.    The list price for the Palm Springs

House was $525,000, but the listing stated that as petitioners

were absentee owners they would accept most offers.    In the

interim, petitioners did not offer the Palm Springs House for

rent.    The Palm Springs House had never been lived in, and

renting it might have caused a reduction in the value of the

house.    In the meanwhile, petitioners incurred mortgage interest

expense on the Palm Springs House mortgage.    Petitioners paid the

mortgage interest expense through an escrow account set up by

petitioners at the time of their purchase.    Petitioners

established the escrow account for their convenience because they

intended to sell the Palm Springs House immediately.

     Petitioner Mr. Taylor was a real estate agent.    However, he

used his real estate agent's license in the contracting business

and not in the sales business.    He was not the listing agent for

the sale of the Thousand Palms Property or subsequently for the

Palm Springs House.    However, petitioners had in the past: (1)

Purchased low cost residential properties in Thousand Palms,
                               - 6 -


rented the same, and subsequently sold such properties at a

profit; and (2) purchased raw land, cleaned and leveled off the

land, and resold the land at a profit.

     Petitioners sold the Palm Springs House in July 1991, only 5

months after purchasing it, for $377,500.   Petitioners claimed a

capital loss of $133,592 with respect to this sale.   On their

1991 Federal income tax return, petitioners offset the gain on

their sale of the Thousand Palms Property, and certain other

gains, against the capital loss claimed from the sale of the Palm

Springs House.   Having offset these gains, petitioners reported a

short-term capital loss carryover on their 1991 return in the

amount of $49,292.   Petitioners then utilized portions of the

loss carryover in the years in issue to offset certain capital

gains in those years.

     Respondent determined that petitioners did not incur a

capital loss on the sale of the Palm Springs House and therefore

disallowed the carryover to the years in issue.3



                              OPINION

Profit Motive

     Respondent's determination in the notice of deficiency

essentially embodies the notion that the loss from the sale of a

     3
        For reasons not discussed in the record, respondent did
not determine any deficiency for 1991; i.e., for the year of the
alleged loss.
                               - 7 -


personal residence is nondeductible, a principle which is

indisputable.   See sec. 1.165-9(a), Income Tax Regs.   Respondent

contends that the sale/exchange of the Thousand Palms Property

for the Palm Springs House and the immediate sale thereafter of

the Palm Springs House was in essence a means to enable

petitioners to complete the sale of their Thousand Palms

Property.   Consequently, respondent maintains that petitioners

did not purchase the Palm Springs House with the requisite profit

intent to claim a loss under section 165(c)(2).

     Petitioners contend that they did not purchase the Palm

Springs House as a personal residence, rather that they purchased

it as an investment.   Therefore, they maintain that the loss on

the sale of the Palm Springs House constitutes a loss incurred in

a transaction entered into for profit under section 165(c)(2) and

entitles them to a capital loss carryover for the years in issue.

We disagree with petitioners for the following reasons.

     Section 165(c)(2) provides that an individual is entitled to

claim a loss incurred in a transaction entered into for profit

even if the transaction is not connected with a trade or

business.

     Section 183 and the regulations promulgated thereunder

provide guidance as to whether a transaction is entered into for

profit.   The regulations set forth a nonexhaustive list of

factors that may be considered in deciding whether a profit
                                   - 8 -


objective exists.    Some of these factors include: (1) The manner

in which the taxpayer carries on the activity; (2) the expertise

of the taxpayer or the taxpayer's advisers; (3) the time and

effort expended by the taxpayer in carrying on the activity; (4)

the expectation that the assets used in the activity may

appreciate in value.   Sec. 1.183-2(b), Income Tax Regs.

     No single factor, nor even the existence of a majority of

factors, favoring or disfavoring the existence of a profit

objective is controlling.    Id.     Rather, the relevant facts and

circumstances of the case are determinative.       Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981).

     Furthermore, the existence of the requisite profit objective

is a question of fact that must be determined on the basis of the

entire record.   Benz v. Commissioner, 63 T.C. 375, 382 (1974).

In resolving this factual question, greater weight is accorded to

objective facts than a taxpayer's mere statement of intent.       Beck

v. Commissioner, 85 T.C. 557, 570 (1985); Engdahl v.

Commissioner, 72 T.C. 659, 667 (1979); Churchman v. Commissioner,

68 T.C. 696, 701 (1977); see sec. 1.183-2(a), Income Tax Regs.

     To be entitled to a loss under section 165(c)(2),

petitioners' "primary" motive for entering into the transaction

must have been to make a profit.       Fox v. Commissioner, 82 T.C.

1001, 1021 (1984).   The term "primary" is defined as "of first
                                - 9 -


importance" or "principally".   See Malat v. Riddell, 383 U.S.

569, 572 (1966); Fox v. Commissioner, supra; Surloff v.

Commissioner, 81 T.C. 210, 233 (1983).     Although profit need not

be the sole motive, if the taxpayer's intent to make a profit is

merely incidental, the taxpayer will not be entitled to the loss

under section 165(c)(2).   Cotner v. Commissioner, T.C. Memo.

1996-428.

     Consequently, if the taxpayer's overriding purpose for

purchasing the real estate is personal, the requisite profit

motive cannot be established.   See O'Neill v. Commissioner,     T.C.

Memo. 1985-92; Nicath Realty Co. v. Commissioner, T.C. Memo.

1966-246.   Also, if the taxpayer purchases property with the

expectation of making a profit on the sale after it has served

the personal purposes for which it was initially purchased, then

profit motive is not the primary motive.     Meyer v. Commissioner,

34 T.C. 528 (1960).

     We now analyze whether petitioners possessed the requisite

profit motive to claim a loss under section 165(c)(2).    We first

consider the relevant factors outlined under section 1.183-2(b),

Income Tax Regs.

     Our first inquiry is whether petitioners purchased the Palm

Springs House in a businesslike manner.    We find that

petitioners' behavior in purchasing the Palm Springs House was

not businesslike.   Petitioners were not aware of the Palm Springs
                                - 10 -


House until the same was brought to their attention by the

Norrises.    The Norrises proposed that they would purchase

petitioners' Thousand Palms Property only if petitioners would

purchase the Palm Springs House.

     We are guided in this regard by O'Neill v. Commissioner,

supra, where, in an analogous situation, the property had been

brought to the taxpayer's attention by her daughter.     There, the

taxpayer's daughter had been unable to obtain financing and

requested that the taxpayer purchase the property for the

daughter's rental use.     We held that the taxpayer had not

purchased the residential real property in a businesslike manner

and hence that the taxpayer did not possess the requisite profit

motive.     Similarly, we do not think that petitioners purchased

the Palm Springs House in a businesslike manner.

     We next find that the time and effort petitioners spent in

carrying on the activity is not indicative of a profit motive.

Petitioners point out that they took the time to investigate the

value of the Palm Springs House by looking at comparables.

However, any prudent purchaser of residential property would

investigate the value of comparable property.     Accordingly, such

action, in and of itself, is not indicative of a profit motive.

     Petitioners have not indicated that they spent any other

time or effort to ensure the profitability of their alleged

investment.     In fact, petitioners immediately listed the Palm
                               - 11 -


Springs House for resale and moved to Missouri for

semiretirement.   Once in Missouri, there is no indication that

petitioners engaged in any activity designed to enhance the

profitability of their alleged "investment".    Regarding the

rental business of residential property, we have previously held

that "Generally, residential property is not purchased for

investment purposes where the property is located in a distant

city if there are additional costs involved in its management."

O'Neill v. Commissioner, supra.    We think that given the

circumstances, the same principle applies here.    We find that the

amount of time petitioners spent on the purchase and resale of

the Palm Springs House indicates that petitioners did not possess

the requisite profit motive.

     As to petitioners' expertise, we find that although

petitioner Mr. Taylor was a real estate agent, he did not use his

expertise in this endeavor.    First, petitioner Mr. Taylor used

his real estate agent's license in the contracting business and

not in the sales business.    Next, any familiarity that petitioner

Mr. Taylor may have had with the residential real estate market

was limited to low-price housing and raw land in the Thousand

Palms locality.   The Palm Springs residential real estate market

was different from the Thousand Palms residential real estate

market.
                              - 12 -


     Furthermore, petitioner Mr. Taylor was not the listing agent

on the sale of the Palm Springs House.   Rather, petitioners moved

to Missouri immediately after the purchase of the house and

listed their house with another real estate agent.   Thus, even if

petitioner Mr. Taylor possessed any expertise in the residential

real estate activities, he did not utilize the same in the resale

of the Palm Springs House.

     We also believe that petitioners did not obtain the Palm

Springs House with the expectation that it might appreciate in

value.   Petitioners contend that they expected to make a quick

profit from the sale of the Palm Springs House.   Petitioners

purchased the Palm Springs House at a reduced price of $460,000

after the house had been on the market for 4 months.   This price

was $69,000 less than the price at which it was listed.

Petitioners maintain that they were not aware of any decline in

the real estate market at the time of their purchase of the Palm

Springs House, yet they were not alarmed that the Norrises had

been unable to sell the house during the 4-month listing period

or that they were willing to accept such a reduced price.

     Petitioners claim that they hoped to make a "quick" $60,000;

i.e, a 13 percent, profit.   We think that petitioners could not

realistically have had such expectations.   There is no reason to

surmise that petitioners were unaware of the costs, sometimes

exceeding 10 percent of the sales price, associated with the sale
                                - 13 -


of real estate through a third-party real estate agent.   In

addition, petitioners surely realized that they would incur

mortgage interest expense prior to the resale of the Palm Springs

House.   Any possible profit would have been eroded, if not

eliminated, by such expense.    Under these circumstances, we find

that petitioners did not obtain the Palm Springs House with the

expectation that they could benefit from a possible appreciation

in its value.

     Our examination of the relevant profit motive factors

delineated under section 1.183-2(b), Income Tax Regs., leads us

to conclude that although petitioners "hoped" for some profit,

they did not have the requisite profit motive to claim a loss

under section 165(c)(2).

     Rather, we agree with respondent that petitioners' primary

motive in purchasing the Palm Springs House was to get one step

closer to moving to Missouri.    We are persuaded by respondent's

argument that petitioners were eager to move to Missouri for

semiretirement, that they anticipated some difficulty in selling

the Thousand Palms Property, and that the sale/exchange with the

Norrises for a single-family home enabled them to: (1) Move to

Missouri, and be left with the less onerous task of selling a

single-family home in a more populated area; and (2) obtain the

additional cash required for their purchase of the Missouri

Property.
                              - 14 -


     Many factors support respondent's theory.   The Thousand

Palms Property was a highly specialized property.   The property

included a single-family home, a construction work area, and a

mobile home.   Petitioners realized that only a limited group of

individuals would be interested in such a property.    As

previously noted, it was the Norrises who contacted petitioners.

The Norrises were willing to purchase the Thousand Palms Property

if petitioners would purchase their home; i.e., the Palm Springs

House.   As a new single-family house, the Palm Spring House was

probably easier to sell.   Furthermore, the sale/exchange

transaction was designed in such a manner to provide petitioners

with the additional cash required to purchase the Missouri

Property.   In fact, petitioners used the cash thus obtained to

close their purchase of the Missouri Property.   Also, petitioners

immediately listed the Palm Springs House for resale in order to

complete the transaction and their move to Missouri.    Thus, we

view petitioners' sale/exchange of one property for another and

the immediate resale of the latter, as primarily motivated by

personal reasons.

     Hence, despite the fact that petitioners did not purchase

the Palm Springs House for use as their personal residence, we

think that petitioners' motive was more personal in nature.     See

O'Neill v. Commissioner, T.C. Memo. 1985-92; Nicath Realty Co.,

Inc. v. Commissioner, T.C. Memo. 1966-246.   Here, although we
                                - 15 -


find that the desire to make a profit was not completely lacking,

it was only incidental in nature.    Cotner v. Commissioner, T.C.

Memo. 1996-428.

     Petitioners cannot avoid the effect of the statute and the

regulations disallowing petitioners to claim a loss relating to

the sale of a residence by dividing the transaction into a series

of transactions.   Under these circumstances we shall consider the

transaction as a whole and shall not allow petitioners to claim a

loss under section 165(c)(2).    Cf. United States v. Kyle, 242

F.2d 825 (4th Cir. 1957); Quinn v. Commissioner, T.C. Memo. 1983-

485; Butrick v. Commissioner, T.C. Memo. 1972-59.

     Consequently, we hold that petitioners' primary motive in

purchasing the Palm Springs House was not profit and that

petitioners are therefore not entitled to capital loss carryovers

for the years in issue.

     To reflect our disposition of the disputed issue, as well as

petitioners' concessions,



                                          Decision will be entered

                                     for respondent.
