                      T.C. Memo. 2011-178



                    UNITED STATES TAX COURT



   LAWRENCE L. WICKERSHAM, DECEASED,1 AND MARY J. WICKERSHAM,
                         Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 25785-08.              Filed July 28, 2011.



    James R. Monroe and Jerrold A. Wanek, for petitioners.

    Stephen A. Haller, for respondent.




    1
      Petitioners’ counsel notified the Court that petitioner
Lawrence Wickersham died after the trial, on Feb. 21, 2011.
Petitioners’ counsel indicated that no estate will be opened
because all of his assets transferred to petitioner Mary
Wickersham upon his death. We changed the caption accordingly.
                                 - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined a $98,201 deficiency

in petitioners’ Federal income tax and a $19,6402 accuracy-

related penalty under section 6662(a)3 for 2005 regarding

petitioners’ sale of certain assets in that year.    We are asked

to decide the proper tax treatment of petitioners’ sales of

interests in their home and towing business, located on a 5-acre

parcel on Interstate 80 near a major intersection.     One such sale

was to Glen and Susan Mikel (the Mikels), and the other was of a

permanent easement to Polk County, Iowa (Polk County).    Resolving

these issues depends on the proper allocation of basis and sale

proceeds to distinct portions of the property.   We are also asked

to decide whether petitioners are subject to the accuracy-related

penalty under section 6662(a).    We determine the taxability of

assets sold to the Mikels and to Polk County, and find

petitioners are not liable for the penalty.

                         FINDINGS OF FACT

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

The stipulations of fact and the accompanying exhibits are




     2
      All amounts are rounded to the nearest dollar.
     3
      All section references are to the Internal Revenue Code
(Code) in effect for the year in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
                                 - 3 -

incorporated by this reference.    Petitioners resided in Colfax,

Iowa at the time they filed the petition.

     Petitioners, both in their second marriage, were married for

35 years at the time of trial.    Mr. Wickersham had a towing

business in Iowa and Mrs. Wickersham helped him with the business

during their 35-year marriage.    She has an eighth-grade level of

education.   Petitioners have seven children and 23 grandchildren.

Six of their children and 22 of their grandchildren live in the

Des Moines, Iowa area.

I. The Property and the Easement

     When first married, petitioners operated the towing

business, called I-80 Towing, from their farmhouse.    Petitioners

acquired a nearby cornfield, consisting of five acres.

Petitioners borrowed funds to acquire the cornfield.    Mrs.

Wickersham entered into a real estate contract for the five acres

of farm land in Bondurant, Iowa (the property) in 1986 for

$105,000.    Mrs. Wickersham received title to the property in

January 2000.

     Petitioners originally put a trailer house on the property.

As the towing business improved, petitioners dug a basement, put

a pre-fabricated residence on the property and resided there.

They improved the house by adding a garage, a water system and a

large party room.   They operated the towing business from a

building they constructed on part of the property.
                                - 4 -

     The house is located on the north side of the property and

the business structure is located on the south side.         A horseshoe

driveway connects these structures and provides two separate

accesses.   Petitioners used the land between the residence and

the business structure to store personal property and to shelter

their Saint Bernard dogs.

     The Mikels owned a competing towing business and sought to

acquire petitioners’ towing business and the five-acre parcel.

The Mikels could not afford, however, to purchase it outright at

the time.   Petitioners agreed to lease the business portion of

the property to the Mikels for a 5-year term starting September

2000.   The Mikels’ lease included an option to purchase the

towing business and the property including petitioners’ home (the

purchase option) at the end of the 5-year lease term.

Petitioners and the Mikels agreed that the $950,000 purchase

option would be allocated as follows:

         Towing business name                      $25,000
         Goodwill                                   25,000
         Residential property / building           150,000
         Commercial property / building            100,000
         Land                                      615,000
         Equipment and supplies                     10,000
         1987 Volvo Wrecker                         25,000
                                          TOTAL   $950,000
                                 - 5 -

They further agreed that rent payments made during the term of

the lease would be applied to the purchase price.

     Petitioners did not lease the residential portion of the

property to the Mikels.    Instead, petitioners continued to reside

in the house.    They lived in the main portion of the house and,

for a period of time, petitioners’ son and daughter-in-law

resided in the house’s basement.

     The Public Works Department of Polk County began a road

improvement project during the lease term.    Polk County sought to

acquire all or part of the property to widen the road.

Petitioners initially refused to grant or sell an easement to

Polk County.    After negotiations, Polk County threatened to

condemn the front portion of the property if petitioners did not

grant the easement.

     Petitioners granted Polk County an easement on the front

portion of the property, which was subject to the Mikels’ lease,

for $165,208 in January 2005.4    Polk County primarily sought to

purchase, and did acquire, a permanent right-of-way easement for

use as a public highway.    The sales contract provides that an

existing sign (presumably for I-80 Towing) could remain on the

     4
      The sale price of the easement was allocated as follows:

          Permanent easement (1.28 acres)       $131,000
          Temporary easement                       5,100
          New fence                                1,040
          Abstracting fees/general damages        20,000
          Corner posts                               168
                                - 6 -

land.   Petitioners had to remove, however, all trailers, vehicles

and other objects on the right of way.    In their return for 2005,

petitioners reduced their basis in the property by $160,108

attributable to the easement.

     The Mikels notified petitioners in 2005 they intended to

exercise the purchase option.    Petitioners began to pack and move

their possessions.    The Mikels’ business, G & S Service,

purchased the property and the towing business in October 2005,

subject to the permanent easement granted to Polk County.    The

Mikels subtracted $150,000 in rents and $131,000 for 1.28 acres

attributable to the permanent easement granted to Polk County

from the purchase option price, to reach a total sale price of

$669,000.

II. Orchard, Nebraska

     Mrs. Wickersham purchased a dance hall and bar (Utter Place)

in Orchard, Nebraska in March 1999, a year and a half before

leasing the towing business to the Mikels.    Her brother-in-law

and his girlfriend sought to sell Utter Place, and offered it to

petitioners for $10,000.    Utter Place was approximately five

hours or 305 miles from the property.

     Mrs. Wickersham applied for a liquor license for Utter Place

in 1999.    Nebraska liquor licenses are issued only to Nebraska

residents.    Mrs. Wickersham’s application showed her address as a

post office box in Orchard, Nebraska.    She renewed the liquor

license yearly.
                                - 7 -

     Petitioners opened Utter Place for occasional private

parties starting in February 2000.      Petitioners traveled to

Nebraska an average of once per month from 2000 through 2005 for

parties at Utter Place.    Petitioners had hoped that Utter Place

would pay for itself.    Utter Place was generally not a profitable

operation, however, and petitioners reported either a very small

net profit or a net loss yearly from 2000 through 2005.

     Petitioners purchased two dwellings in Nebraska, in 2000 and

2001, one of which was located immediately behind Utter Place.

III. Events, Medical Care and Items in Iowa

     Petitioners spent significant amounts of time in Iowa

despite having a business in Nebraska.      They were never gone from

Iowa for an extended period.    While in Iowa, they resided at the

property.

     Petitioners used the house as the family’s home.      They

hosted 15 to 20 familial parties each year.      They celebrated

holidays and birthdays with their six children and 22

grandchildren in Iowa.    Mrs. Wickersham helped her children in

Iowa with personal needs, such as moving and medical care.        She

babysat for her grandchildren, sometimes for extended periods.

Petitioners did their holiday shopping, paid their insurance

bills and purchased their many vehicles in Iowa.      They attended

their son’s car races in Iowa, as well as the yearly 10-day Iowa

State Fair.
                                 - 8 -

     Mr. Wickersham was diagnosed with throat cancer in December

2001 in Iowa.   After a month of testing, Mr. Wickersham had

throat surgery in Iowa.   After the surgery scars healed, he

received 36 radiation treatments.    He received all treatments in

Iowa.   The radiation treatments lasted until at least April 2002.

Mr. Wickersham also had hernia surgery in Iowa in August 2004.

IV. Taxes and Documentation

     Petitioners held Iowa driver’s licenses during the 5-year

term of the Mikels’ lease.    Their service-providers, including

doctors, lawyers and bookkeepers, were located in Iowa.      They

claimed homestead tax credits with respect to the property for

2000 through 2005, which they could legally do only as Iowa

residents.   Petitioners’ many vehicles were all registered,

licensed and located in Iowa except for one.    Petitioners

received mail, including physicians’ bills and bank statements,

in both Iowa and Nebraska.    Their credit card statements were

mailed to the property in Iowa.    Neither petitioner ever

registered to vote in either state.

     Petitioners’ Federal and Iowa State income tax returns for

2000 listed an Iowa address.    The returns for 2001 through 2004

listed an address in Nebraska.    Petitioners filed Nebraska State

tax returns for 2002 and 2003 as residents using a Nebraska

address.   They did not file a Nebraska State tax return for 2000,

2001, 2004 or 2005.   Petitioners’ Federal income tax return for

2005 listed an Iowa address.
                                 - 9 -

     Petitioners did not prepare their returns.    They reviewed

them only to note what they owed and to sign them.    Petitioners’

daughter organized their tax information and took it to Barbara

Walston (Ms. Walston) to prepare.    Petitioners paid Ms. Walston

to prepare the returns for 2000 through 2004.    Petitioners’

daughter or attorney then picked up the returns and delivered

them to petitioners at the property.     Petitioners never met with

Ms. Walston.

     Petitioners’ longtime attorney introduced them to another

tax preparer for 2005.   Linda Harris (Ms. Harris) advised them on

the sale of the property to the Mikels and prepared the return

for 2005.   Ms. Harris is an enrolled agent with the Internal

Revenue Service (IRS).   Her firm prepares approximately 1,300 tax

returns each year.   Petitioners did not know that Ms. Harris had

never prepared a return as complex as the return for 2005.

     Ms. Harris spoke with petitioners to prepare the return and

believed she had all of the information necessary.    Ms. Harris

rarely had any issues with the IRS on returns she prepared.      She

received feedback from the IRS only on fewer than 100 returns in

22 years of preparing returns.    The IRS audited fewer than 25 of

the returns she prepared.    Adjustments were made to only two

returns from those audits.    Petitioners’ return for 2005 was one.

Ms. Harris paid the $1,000 tax return preparer penalty assessed

for her errors in preparing the return for 2005.    This is the

only return preparer penalty assessed against Ms. Harris.
                               - 10 -

V. Subsequent Events

     Petitioners purchased a new personal residence in Colfax,

Iowa in October 2005.

     Respondent’s deficiency notice to petitioners determined the

deficiency and accuracy-related penalty against petitioners with

respect to the sale of certain business assets, the easement sale

and the sale of the property to the Mikels.    Petitioners timely

filed a petition.

                               OPINION

     We must decide the proper tax treatment of petitioners’

sales in 2005.   The first sale was of the towing business,

located on Interstate 80, including real estate upon which some

business property and petitioners’ house were located.    The

second sale was of the permanent easement petitioners sold to

Polk County.   We also must decide whether petitioners are subject

to the accuracy-related penalty under section 6662(a).    We must

determine the proper allocation to basis of the respective

portions as well as the proper allocation of the sales price to

the respective portions.5

     We begin with the burden of proof.    The taxpayer generally

bears the burden of proving the Commissioner’s determinations are

erroneous.   Rule 142(a).   The burden of proof may shift to the

     5
      Petitioners and respondent have both changed their views
from the original positions stated in petitioners’ tax return and
the deficiency notice. They have subsequently made agreed upon
calculations and allocations.
                                - 11 -

Commissioner if the taxpayer satisfies certain conditions.       Sec.

7491(a).   Our resolution of the issues is based on the

preponderance of the evidence, not on the allocation of the

burden of proof.    Therefore, we need not consider whether section

7491(a) would apply.    See Estate of Bongard v. Commissioner, 124

T.C. 95, 111 (2005).     We turn now to petitioners’ sales of

certain assets.

I. Sale of Business Assets

     Petitioners sold the towing business located on the property

to the Mikels.     Gain realized upon the disposition of property

must be recognized unless an exception applies.      Sec. 1001(c).

The amount of gain realized is the excess of the amount realized

over the taxpayer’s adjusted basis in the property.      Sec.

1001(a).   The amount realized is the sum of any money received

plus the fair market value of the property received.      Sec.

1001(b).

     Petitioners and the Mikels allocated the purchase price

among the various business assets the Mikels were to acquire when

they exercised the purchase option.      The purchase option

specified $10,000 for the equipment and supplies and $25,000 for

the wrecker.   The $950,000 purchase price was reduced, however,

by $150,000 in rent payments.     This 15.79-percent purchase price

reduction allocated among the acquired assets reduces the

purchase price of the equipment and supplies to $8,421 and the

wrecker to $21,053.
                              - 12 -

     The parties agree that the equipment and supplies had a zero

adjusted basis and the wrecker had a $4,099 adjusted basis.

Therefore, we subtract adjusted basis from the purchase price to

find that petitioners’ gain realized on the sale of the equipment

and supplies was $8,421 and for the wrecker was $16,954.

Petitioners and respondent agree that the gain recognized is

ordinary income.   Secs. 1221, 1231, 1245.   Accordingly,

petitioners had ordinary income of $25,375 from the sale of the

equipment and supplies and the wrecker.

II. Treatment of the Easement Sale

     We next consider petitioners’ easement sale to Polk County.

We must decide this matter before we consider sales of the rest

of the real estate including petitioners’ interests in the

property.   Petitioners’ permanent easement grant is a disposition

of a partial interest in property and therefore a realization

event.   See sec. 1.61-6(a), Income Tax Regs; Rev. Rul. 72-255,

1972-1 C.B. 221.   The sale of a perpetual easement is treated as

a sale of property if the taxpayer’s use of the property is

substantially reduced by the easement.    See Fasken v.

Commissioner, 71 T.C. 650, 656 (1979); Scales v. Commissioner, 10

B.T.A. 1024 (1928).   If the grant of the permanent easement does

not substantially reduce the taxpayer’s use of the property, then

the grant is not treated as a sale.    See Rev. Rul. 70-510, 1970-2

C.B. 159.
                               - 13 -

     Petitioners’ sale to Polk County included a permanent

easement on 1.28 acres across the front of their property for

$131,000.   This portion of the sale to Polk County was a

right-of-way easement for use as a public highway.   Indeed, Polk

County found this land so central to its public highway project

that it offered to purchase the entire 5-acre property and

threatened to condemn a portion of the property if petitioners

did not sell.   The easement sales contract allowed an existing

sign to remain on the land.    Petitioners had to remove, however,

all other property from the right of way including all trailers,

vehicles and other objects.    Polk County paid significant amounts

for new fences and for so-called general damages, including tree

removal.    The Mikels and petitioners subtracted the permanent

easement price from the purchase option price for the property.6

These facts suggest that petitioners’ use of the land subject to

the permanent easement was substantially reduced.    We hold that

petitioners’ sale of the permanent easement on 1.28 acres for

$131,000 is a sale of property.




     6
      They did not, however, subtract amounts that Polk County
paid to petitioners for a temporary easement, fencing,
abstracting fees and general damages.
                              - 14 -

III. Allocation of Proceeds and Basis

     We must next consider how much basis to allocate to the

business use of the real estate and how much basis to allocate to

the personal use, which includes petitioners’ house that may

qualify for exclusion as the sale of a principal residence under

section 121.   Petitioners’ tenant, Mr. Mikel, testified that he

leased one-quarter of the property for business purposes.    He

also testified that he was interested in the property for

business purposes, not for a place to live.   Mrs. Wickersham

testified that one-third of the property was business use and

two-thirds was residential.   Pictures of the property support

Mrs. Wickersham’s view.   Respondent determined that the business

portion and residential portion were equal.

     Petitioners sold mixed-use land.   A taxpayer who intends to

exclude gain from the sale of a principal residence must allocate

the basis and the amount realized between the residential and the

non-residential portions of the property using the same method of

allocation that the taxpayer used to determine depreciation

adjustments.   Sec. 1.121-1(e)(3), Income Tax Regs.   The parties

have not provided us with the depreciation allocations.     Despite

citing the depreciation allocation regulation, respondent

supports his allocation of business use and residential use with

discussions of the geography of the land.   The geography of the

land supports petitioners’ position, not respondent’s.

Accordingly, with respect to their basis in the land, we find
                               - 15 -

petitioners’ allocation of two-thirds for the residential

component and one-third for the business component to be

appropriate.

     We also need to determine basis so that gains on the sales

can be calculated.   We accept respondent’s determination of a

$25,000 basis for the house.    Petitioners argue that their basis

in the house is much larger, but have provided no

substantiation.7   The parties agree that the 5-acre parcel was

purchased for $105,000.   There was no residence on the property

when petitioners bought the land, so the $105,000 basis is

allocated to the land.    The basis in the land will be allocated

one-third to the business portion and two-thirds to the

residential portion.

     The permanent easement that was sold to Polk County ran

across the front of the property, affecting both the business

portion and the residential portion of the land.    As a result, we

find that the permanent easement is divided in the same way as

the rest of the property.    Specifically, we divide the permanent

     7
      We noted above that the taxpayer generally bears the burden
of proof, although it may shift to the Commissioner if the
taxpayer satisfies certain conditions. Sec. 7491(a); Rule
142(a). We did not consider whether sec. 7491(a) would apply
because our resolution of the issues is generally based on the
preponderance of the evidence. See Estate of Bongard v.
Commissioner, 124 T.C. 95, 111 (2005). We note here that, with
respect to petitioners’ basis in the house, the burden of proof
is relevant. Petitioners have introduced no evidence with
respect to their construction of and improvements to the house,
other than very general testimony about costs. Accordingly, we
find that sec. 7491(a) does not apply.
                                - 16 -

easement into a one-third business portion and a two-thirds

residential portion.

IV. Sales of the Business Portion

     We will now consider the extent to which petitioners must

recognize gain from these sales.     We begin by considering the

sale of the business portion of the property to the Mikels, even

though it occurred after and subject to the easement sale to Polk

County.

     A.      Business: Sale of the Property to the Mikels

     Petitioners and respondent agree that petitioners must

recognize gain on the sale of the business portion of the

property to the Mikels.    Petitioners argue that they must

recognize a section 1231 gain with respect to that sale.

Respondent argues that petitioners must recognize section 1250

gains with respect to that sale instead.      We will define those

terms and consider the parties’ arguments.

     The sale of certain property used in a trade or business is

accorded favorable tax treatment (section 1231 property).      Sec.

1231.     “Property used in a trade or business” means real property

used in a trade or business, held for more than a year, and

subject to the allowance for depreciation.      Sec. 1231(b)(1).   The

business portion of the property meets these criteria, and

therefore is section 1231 property.      The terms “section 1231

gain” and “section 1231 loss” refer to recognized gain or loss,

respectively, on the sale or exchange of property used in a trade
                               - 17 -

or business.    Sec. 1231(a)(3).   Petitioners’ section 1231 gains

exceed their section 1231 losses for 2005.      Thus, any gains on

the business portion are treated as long-term capital gains.

Sec. 1231(a)(1).   Accordingly, petitioners’ gain on the sale of

the business portion of the property is a long-term capital gain

under section 1231.

     The analysis, however, does not end there.     Certain gains on

the business portion sale subject to the allowance for

depreciation must be recaptured.    Section 1250 property is any

real property subject to the allowance for depreciation that is

not section 1245 property.    Sec. 1250(c).    The business portion

of the property was real property subject to the allowance for

depreciation.    Further, the property is not of a kind described

in section 1245(a)(3).   Therefore, the property is also section

1250 property.

     Gain realized on the disposition of section 1250 property is

recaptured as ordinary income, rather than capital gains, to the

extent that the depreciation amount allowed or allowable exceeds

the amount of depreciation that would have resulted under the

straight-line method.    See sec. 1250(a).    This section 1250 gain

is recognized as ordinary income notwithstanding any other

provisions of subtitle A of the Code.    Sec. 1250(a)(1)(A).    The

remaining depreciation claimed, after the section 1250 gain is

recaptured at ordinary income tax rates, is unrecaptured section

1250 gain taxed at the 25-percent rate.      Because petitioners’
                              - 18 -

business portion of the property is both section 1231 property

and section 1250 property, the amount of the long-term capital

gain under section 1231 must be reduced by the amount of section

1250 gain recaptured at ordinary rates and at the 25-percent

rate.8

     B.   Business: Sale of the Easement to Polk County

     Petitioners concede that they must recognize income on the

sale of the business portion of the easement to Polk County.

Sec. 1001(c).   They argue that the income they must recognize is

section 1231 gain.   Respondent does not dispute this argument.

Accordingly, we hold that petitioners must recognize gain with

respect to the business percentage of the sale of the easement,

treating the property as section 1231 property.

V. Sales of the Residential Portion

     We will next analyze the sales of the residential portion of

the property to the Mikels and the residential portion of the

permanent easement to Polk County.     As with the business portion,

we begin by analyzing the sale to the Mikels.




     8
      The parties have not provided sufficient information for us
to calculate the sec. 1231 gain and the sec. 1250 gain. We look
to the parties to calculate the appropriate tax in their Rule 155
computation.
                               - 19 -

     A.     Residence: Sale of the Property to the Mikels

     Petitioners and respondent disagree on whether petitioners

may exclude gain realized when they sold their house to the

Mikels.   Gain realized on the sale of property is generally

included in a taxpayer’s income.    Sec. 61(a)(3).   A taxpayer may,

however, exclude from income gain on the sale or exchange of

property if the taxpayer has owned and used the property as the

taxpayer’s principal residence for periods aggregating two of the

five years immediately preceding the sale.    Sec. 121(a).   A

married couple filing a joint return may claim a $500,000

exclusion on the sale or exchange of their principal residence if

certain conditions are met.    Sec. 121(b)(2).   The only condition

at issue in this case is whether petitioners used the property as

their principal residence for sufficient time between 2000 and

2005.

     Respondent contends that petitioners’ principal residence

was in Nebraska for the five years before the sale.    Respondent

therefore argues that petitioners do not qualify for the

exclusion with respect to their sale of the property.    To the

contrary, petitioners argue that their primary residence remained

in Iowa, despite their purchase of two residential properties in

Nebraska.

     The Code does not define “principal residence.”    Whether a

residence qualifies as the taxpayer’s principal residence for

purposes of section 121 is a question of fact that is resolved
                                - 20 -

with reference to all the facts and circumstances.     Sec.

1.121-1(b)(2), Income Tax Regs.; see also Farah v. Commissioner,

T.C. Memo. 2007-369.   Taxpayers must occupy the residence for 24

full months or for 730 days to meet the 2-year use requirement.

Sec. 1.121-1(c), Income Tax Regs.    Short temporary absences, such

as for vacation or other seasonal absence, are counted as periods

of use.    Id.

     If a taxpayer alternates between two properties, using each

as a residence for successive periods of time, the property that

the taxpayer uses a majority of the time during the year

ordinarily will be considered the taxpayer’s principal residence.

Sec. 1.121-1(b)(2), Income Tax Regs.     Besides the use of the

property, there are other relevant factors in determining a

taxpayer’s principal residence.    These relevant factors include

(I) the taxpayer’s place of employment, (ii) the principal place

of abode of the taxpayer’s family members, (iii) the address

listed on the taxpayer’s Federal and state tax returns, driver’s

license, automobile registration and voter registration card,

(iv) the taxpayer’s mailing address for bills and correspondence,

(v) the location of the taxpayer’s banks, and (vi) the location

of religious organizations and recreational clubs with which the

taxpayer is affiliated.   Id.   We will consider each of these

factors.

     The first factor is whether petitioners spent at least 730

days at the property between October 2000 and October 2005.
                               - 21 -

Although petitioners held parties at Utter Place, they spent

significant amounts of time in Iowa.     Indeed, they were never

gone from Iowa for an extended period.     While in Iowa, they

resided on the main floor of the property.     Their son and

daughter-in-law occupied the finished basement of the house.

     Petitioners used the house in Iowa as the family’s home.

They hosted 15 to 20 familial parties a year.     They celebrated

holidays and birthdays with their six children and 22

grandchildren in Iowa.    Mrs. Wickersham helped her children in

Iowa with personal needs, such as moving and medical care.       She

babysat for her grandchildren, sometimes for extended periods.

Petitioners did their holiday shopping, paid their insurance

bills and purchased vehicles in Iowa.     They attended the yearly

10-day Iowa State Fair and their son’s races in Iowa.

Petitioners’ personal and family events and obligations in Iowa

support their position.

     Mr. Wickersham was diagnosed with throat cancer in Iowa, had

throat surgery in Iowa and received 36 radiation treatments all

in Iowa.   Mr. Wickersham also had hernia surgery in Iowa during

the relevant time.

     Respondent argues that petitioners merely visited Iowa; they

resided in Nebraska.   It is our duty as the Court to listen to

testimony, observe witnesses, weigh the evidence and distill the

truth.   Diaz v. Commissioner, 58 T.C. 560, 564 (1972); Kropp v.

Commissioner, T.C. Memo. 2000-148.      We are not required to accept
                              - 22 -

testimony if it is improbable, unreasonable or questionable.

MacGuire v. Commissioner, 450 F.2d 1239, 1244-1245 (5th Cir.

1971), affg. T.C. Memo. 1970-89.   We may, however, accept a

taxpayer’s testimony if we find it credible.   See, e.g.,

Washington v. Commissioner, 120 T.C. 137, 150 (2003).

We find that petitioners’ testimony was credible in material

respects.   We find that petitioners did reside at the property

for the requisite period.

     The second factor is the taxpayer’s place of employment.

Petitioners did have a business, Utter Place, in Nebraska.     Mrs.

Wickersham credibly testified that they spent approximately a

weekend per month to operate Utter Place.   This factor is

neutral.

     A third factor is the principal place of abode of the

taxpayer’s family members.   Petitioners had 28 children and

grandchildren in Iowa.   This factor weighs in petitioners’ favor.

     The fourth, fifth and sixth factors consider the addresses

that the taxpayers provide and the location of their banks.

Petitioners did not provide specific information about their

banks, but generally stated that their service providers,

including doctors, lawyers and bookkeepers, were located in Iowa.

Petitioners held Iowa driver’s licenses during the 5-year lease

with the Mikels.   Petitioners’ vehicles were all registered,

licensed and located in Iowa except for one.   Petitioners

received mail, including physicians’ bills and bank statements,
                               - 23 -

both in Iowa and Nebraska.    Their credit card statements were

mailed to the house in Iowa.    Neither petitioner ever registered

to vote in either state.

     Petitioners’ Federal and Iowa State income tax returns for

2000 listed an Iowa address.    The returns for 2001 through 2004

listed an address in Nebraska.    Petitioners filed Nebraska State

tax returns for 2002 and 2003 as residents using a Nebraska

address.   They did not file a Nebraska State tax return for 2000,

2001, 2004 or 2005.

     Petitioners argue that we should disregard the addresses

they provided on tax forms, signed under penalties of perjury,

because they did not prepare or review their tax returns.    They

merely noted what they owed and signed them.    We should also

disregard them, they argue, because no amounts were due.    We take

seriously the address provided on the tax returns.

     Respondent seeks to prove that petitioners were Nebraska

residents because Mrs. Wickersham applied for and received a

Nebraska liquor license.    Nebraska liquor licenses are granted

only to Nebraska residents.    Petitioners counter that they also

claimed homestead tax credits on the property, which would be

available only to Iowa residents.    Petitioners were cavalier with

their representations about state residence.    These three factors

were a close call.    We find a majority of the factors, however,

are in petitioners’ favor.
                                - 24 -

     The final, nonexclusive factor is the location of religious

organizations and recreational clubs with which the taxpayer is

affiliated.     Mr. Wickersham has been a member of the Professional

Musicians and Entertainers Club of Iowa for 20 years.

Petitioners provided no meaningful information about Mr.

Wickersham’s level of involvement or time spent at this club.

This factor is neutral.

     In this case, we also consider petitioners’ replacement

home.     Petitioners purchased a nearby residence in Colfax, Iowa

after selling the property to the Mikels.     This subsequent

purchase, when viewed in conjunction with petitioners’ and their

witnesses’ testimony, suggests that petitioners never sought to

reside in Nebraska.     This additional factor favors petitioners.

     After weighing the testimony and evidence in this fact-

intensive case, we find on the preponderance of the evidence that

the house was petitioners’ principal residence.     Petitioners have

each met the requisite use requirement of section 121 and are

entitled to exclude up to $500,000 of gain from the sale of the

residential portion of the property to the Mikels.

     B.      Residence: Permanent Easement Sale to Polk County

        We now consider the proper treatment of the residential

portion of the permanent easement sale to Polk County.

Petitioners argue that involuntary conversion principles allow

them to defer gain on their easement sales to Polk County.       See

sec. 1033.     We need not decide this issue, however, because
                               - 25 -

petitioners’ income from the sale of the permanent easement

regarding the residential portion of the property is exempt under

section 121 up to $500,000.    Section 121 applies to the sale of

the residential portion of the permanent easement to Polk County

because petitioners sold the rest of the property to the Mikels

within two years of their sale to Polk County.    See sec.

1.121-1(b)(3), Income Tax Regs.    Accordingly, petitioners’ income

from their sale of the residential portion of the permanent

easement to Polk County is exempt to the extent permitted under

section 121.

VI. Accuracy-Related Penalty

       Finally, we will consider whether petitioners should be

subject to a penalty for underpaying their Federal income tax in

2005.    A taxpayer may be liable for a 20-percent penalty on any

underpayment of tax attributable to negligence or disregard of

rules or regulations or any substantial understatement of income

tax.    See sec. 6662(a) and (b)(1) and (2); sec. 1.6662-2(a)(1)

and (2), Income Tax Regs.    The accuracy-related penalty does not

apply, however, to any portion of an underpayment for which there

was reasonable cause and where the taxpayer acted in good faith.

See sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.

       Reasonable cause has been found when a taxpayer selects a

competent tax adviser, supplies the adviser with all relevant

information and, consistent with ordinary business care and

prudence, relies on the adviser’s professional judgment as to the
                               - 26 -

taxpayer’s tax obligations.    Sec. 6664(c)(1); Estate of Young v.

Commissioner, 110 T.C. 297 (1998); Am. Props., Inc. v.

Commissioner, 28 T.C. 1100 (1957), affd. 262 F.2d 150 (9th Cir.

1958).   All facts and circumstances are considered in determining

whether a taxpayer reasonably relied in good faith on

professional advice, including the taxpayer’s education,

sophistication and business experience.     Sec. 1.6664-4(a) and

(b), Income Tax Regs.

     Petitioners hired Ms. Harris, an enrolled agent, at the

recommendation of their longtime attorney.     Her firm prepares

approximately a thousand income tax returns each year.

Petitioners’ return was the most complex that she had ever

prepared.   Despite this fact, she failed to inform petitioners

she was unsure.   Ms. Harris further testified that the IRS

audited fewer than 25 of the returns she prepared in 22 years,

and changes were required on only two returns after audits.

Petitioners’ return was one.   Ms. Harris paid a $1,000 return

preparer penalty for errors in petitioners’ return for 2005.

This was the only time she had ever been assessed such a penalty.

We find that Ms. Harris had sufficient expertise to justify

petitioners’ reliance.

     We now turn to whether petitioners provided necessary and

accurate information to Ms. Harris.     Mrs. Wickersham testified

that petitioners did not understand taxes and that their daughter

gathered financial information needed for the accountants to
                              - 27 -

prepare the returns.   Ms. Harris testified that she spoke with

petitioners about the return for 2005 and believed she had all of

the information necessary to prepare it.   We find that

petitioners provided Ms. Harris with the necessary and accurate

information to prepare the tax return for 2005.

     Finally, we address whether petitioners relied in good faith

on Ms. Harris’ advice.   We find that petitioners did rely on her

advice.   Mrs. Wickersham testified that petitioners never

reviewed their tax returns as they were too complex.   We

acknowledge that Mrs. Wickersham’s education was only through the

eighth grade.   We also acknowledge that the sale of the mixed use

property requires a knowledge base and skill set different from

those generally used in petitioners’ business.    We do not sustain

respondent’s determination of the accuracy-related penalty

because petitioners chose a competent advisor, properly provided

information and relied in good faith on her advice.    Petitioners

accordingly had reasonable cause for, and acted in good faith

with respect to, the underpayment for 2005 and therefore are not

liable for the section 6662(a) accuracy-related penalty.

     We have considered all arguments made in reaching our

decision and, to the extent not mentioned, we conclude that they

are moot, irrelevant, or without merit.
                        - 28 -

To reflect the foregoing,


                                  Decision will be entered

                             under Rule 155.
