                   T.C. Summary Opinion 2002-155



                      UNITED STATES TAX COURT



         JAMES V. ABRAMS AND LAURIE ABRAMS, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10263-00S.              Filed December 19, 2002.


     David C. Johnston, for petitioners.

     Matthew J. Bailie, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1   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 1996,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                - 2 -

     Respondent determined a deficiency in petitioners’ Federal

income tax for the taxable year 1996 in the amount of $9,726.

     The only issue for decision is whether petitioners sustained

a deductible loss under section 165 on the sale of their former

residence.    We hold that they did not.

     An adjustment to the amount of petitioners’ allowable rental

loss deduction under section 469 is a purely computational

matter, the resolution of which is dependent on our disposition

of the disputed issue.

Background

     Some of the facts were stipulated, and they are so found.

Petitioners, who are married, resided in Modesto, California, at

the time that their petition was filed with the Court.

     At all relevant times, petitioner James V. Abrams (Mr.

Abrams) was employed as a district manager by Stewart Title Co.

Petitioner Laurie Abrams (Mrs. Abrams) has more than 20 years of

experience as a mortgage lender and listed her occupation as

“property manager” on petitioners’ joint Forms 1040, U.S.

Individual Income Tax Return, for the taxable years 1995 and

1996.

     In March 1991, petitioners purchased a house located at 504

Stewart Road, Modesto, California (Stewart property), for

$484,950.    The Stewart property is approximately 4,200 square

feet with four bedrooms, three baths, and a 1,000 square foot
                                - 3 -

basement, and is situated on approximately half an acre of land.

The property is located on a two-lane access road that leads into

the neighboring residential subdivision and into the Del Rio

Country Club, which is considered a prestigious section of

Modesto.    From March 1991 through June 1995, petitioners occupied

the Stewart property as their personal residence.     Mrs. Abrams

testified that during this period they expended approximately

$70,000 for improvements on the house, such as a swimming pool

and backyard landscaping, thereby increasing their total

investment in the property to approximately $554,950.

     In 1993, Mr. Abrams earned an annual income of approximately

$350,000.    Due to a decline in the real estate market, however,

Mr. Abrams’ salary decreased to approximately $230,000 in 1994

and approximately $150,000 in 1995.     As a result, sometime in

early 1995 petitioners determined that they could no longer

afford the $3,800 monthly mortgage on the Stewart property.

Petitioners attempted to sell the property themselves for several

months, but did not receive any offers.     At this time, the

Modesto real estate market was in the midst of a 5-year

downtrend.   Sales of high-end homes were particularly sluggish.

Thus, petitioners considered selling or leasing the property,

whichever opportunity presented itself.

     In June 1995, petitioners found a prospective tenant, Ms.

Elizabeth Szilagyi (lessee), to lease the property from July 1,
                                 - 4 -

1995 through June 30, 1996 with a move-in date of July 7, 1995.

The written lease agreement required the lessee to pay in advance

the annual rent of $28,000 as follows: $5,000 deposit due by June

8, 1995 and the remaining balance due by July 1, 1995.   The lease

further provided: (1) The property would remain on the market

with Prudential Real Estate; (2) the lessee would have the right

of first refusal or receive a prorated refund of the prepaid rent

if the property sold before the end of the lease term; (3) any

unused rents would be credited as a downpayment if the lessee

purchased the property before the end of the lease term; and (4)

the lease would run month-to-month at the end of the lease term

with a monthly rent of $2,300.

     By the end of June 1995, petitioners moved out of the

Stewart property and into another home, which they rented for

$1,000 per month.   Petitioners prepaid 6 months of this rent from

the funds received from the lessee and applied the remaining

funds toward the Stewart property mortgage.    Petitioners did not

obtain an appraisal of the Stewart property at any time before

they moved out nor at any time before the lease term began.    For

the taxable year 1995, petitioners claimed a depreciation

deduction on the Stewart property of $5,999.

     Also in June 1995, petitioners selected Dennis Lilly of

Prudential Real Estate (Mr. Lilly) to be their exclusive listing

agent for a 6-month period.   Mr. Lilly has been a real estate
                               - 5 -

agent in the Modesto area since about 1987.    Petitioners informed

Mr. Lilly that they already had a tenant in line to rent the

Stewart property.   On June 29, 1995, the Stewart property was

listed for sale at $484,900.   Sales efforts were unsuccessful,

which led to a reduction in the sales price over a 5-month period

as follows:

     Date Listed for Sale      Amount Listed for Sale
     July 12, 1995                   $469,000
     September 13, 1995               459,000
     November 3, 1995                 435,000

Throughout this period, Mr. Lilly held two open houses and showed

the property approximately six to nine times but never received

an offer.

     After the end of the lease term in June 1996, the lessee

continued to rent the Stewart property on a monthly basis from

July 1 through December 27, 1996.    On December 27, 1996,

petitioners sold the Stewart property under an installment land

contract to the lessee for $435,000.2

     Petitioners timely filed a joint Form 1040 for 1996.    On

their return, petitioners claimed a deduction for a $39,001 loss

on the sale of the Stewart property calculated as follows:

     Sales Price                          $435,000
     Less Accumulated Depreciation           5,999
     Less Basis                            480,000
     Total Loss                            (39,001)



     2
         So stipulated by the parties.
                              - 6 -

     In the notice of deficiency, respondent disallowed the loss

deduction resulting from the sale of the Stewart property because

petitioners did not establish that their basis in the property

exceeded the net proceeds from the sale.   In the alternative,

respondent disallowed the loss deduction on the ground that the

loss was not from a transaction entered into for profit, to wit:

temporarily renting the Stewart property while it was available

for sale.

     At trial, respondent introduced into evidence the

Residential Property Appraisal Record of the county assessor’s

office, which indicated the assessed value for tax purposes of

the Stewart property as follows:

                             Total
      Assessment Year    Real Estate     Land      Improvement
     1992                  $494,700    $122,400      $372,300
                           1
     1993                    440,000    120,000       320,000
                           2
     1994 through 1996       400,000     80,000       320,000

     1
       The phrase “Prop 8” appears above the amount of $440,000.
See infra p. 12.

     2
       The phrase “Prop 8” appears above the amount of $400,000.
See infra p. 12.

Discussion

     In general, the determinations of the Commissioner in a

notice of deficiency are presumed correct, and the burden is on

the taxpayer to show that the determinations are incorrect.    Rule
                                   - 7 -

142(a);3 Welch v. Helvering, 290 U.S. 111, 115 (1933).

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

during the taxable year and not compensated for by insurance or

otherwise.      As relevant to the present case, section 165(c)

limits the deduction for an individual taxpayer to losses either

incurred in a trade or business, or in any transaction entered

into for profit.      It is a long-settled principle that a loss

incurred by a taxpayer from the sale of his or her personal

residence is not deductible except where prior to the sale the

taxpayer abandons the use of the property as his or her personal

residence and converts it to a profit inspired use.       Melone v.

Commissioner, 45 T.C. 501, 505 (1966); Leslie v. Commissioner, 6

T.C. 488, 493 (1946); sec. 1.165-9(a) and (b)(1), Income Tax

Regs.; see Heiner v. Tindle, 276 U.S. 582, 584-585 (1928).

     The loss allowed upon the sale of residential property

converted to rental property is the excess of the adjusted basis

(as prescribed in section 1.1011-1, Income Tax Regs.) over the

amount realized from the sale.      Sec. 1.165-9(b)(2), Income Tax

Regs.       As relevant to this case, the adjusted basis is the lesser

of the following amounts at the time of conversion, reduced for


        3
        Sec. 7491 provides that, under certain circumstances, the
burden of proof is on the Secretary in court proceedings arising
in connection with examinations commencing after July 22, 1998.
Accordingly, sec. 7491 is inapplicable in the present case
because respondent commenced petitioners’ examination before July
22, 1998.
                               - 8 -

depreciation for the period after conversion: (1) the fair market

value (FMV), or (2) the adjusted cost basis, e.g., cost basis

plus improvements.   Heiner v. Tindle, supra at 587; Adams v.

Commissioner, T.C. Memo. 1995-142; Higgins v. Commissioner, T.C.

Memo. 1995-139; Frahm v. Commissioner, T.C. Memo. 1974-138; secs.

1.165-9(b)(2), 1.1011-1, Income Tax Regs.   Although the Internal

Revenue Code does not define the term “fair market value” for

purposes of section 165, the universally accepted definition of

this term has been the willing buyer-willing seller test under

which FMV is the price at which the property would change hands

between a willing buyer and a willing seller, neither being under

any compulsion to buy or to sell and both having reasonable

knowledge of relevant facts.   United States v. Cartwright, 411

U.S. 546, 551 (1973); Kolom v. Commissioner, 644 F.2d 1282, 1288

(9th Cir. 1981), affg. 71 T.C. 235 (1978); Gresham v.

Commissioner, 79 T.C. 322, 326 (1982), affd. 752 F.2d 518 (10th

Cir. 1985).

     Our first inquiry is whether petitioners converted the

Stewart property from personal use to an income-producing use.

Whether a former residence used for personal purposes has been

converted in the hands of the same taxpayer to property held for

the production of income is a question of fact to be resolved

with reference to the surrounding facts and circumstances.

Newcombe v. Commissioner, 54 T.C. 1298, 1300-1301 (1970).     We are
                               - 9 -

satisfied by the record that petitioners effectively converted

the Stewart property into rental property when it was leased in

July 1995, even though the lessee ultimately purchased it in

December 1996.   See Higgins v. Commissioner, supra (residence

effectively converted to rental property when it was leased to a

third party with the option to purchase);    Rechnitzer v.

Commissioner, T.C. Memo. 1967-55 (residence was effectively

converted to rental property under bona fide lease where the

lessee subsequently purchased the property).

     The next inquiry is whether petitioners sustained a loss on

the sale of the Stewart property.   Petitioners contend that the

FMV at the time of conversion was $480,000, whereas respondent

contends that the FMV was $435,000.    Because both of these

figures are lower than petitioners’ adjusted basis of $548,951,4

the determinative issue is what was the FMV of the Stewart

property as of July 1995.

     Petitioners argue that the final sales price of $435,000 in

December 1996 is not an accurate reflection of the FMV of the

Stewart property in July 1995 because the sales price was the

result of a distressed sale where petitioners were compelled to

sell quickly at a price far below its true FMV of $480,000.

Given the record before us, we disagree.


     4
        Calculated as: Cost basis plus improvements less
depreciation ($484,950 + 70,000 - 5,999).
                              - 10 -

     Petitioners’ claim of a distressed sale is unpersuasive

because at all relevant times they did not receive any offers for

the Stewart property.   Even assuming arguendo that petitioners

sold under distress, the record demonstrates that there was not a

willing buyer at any time between June through November 1995 when

the property was listed from $484,900, to $469,000, then

$459,000, and finally $435,000, which petitioners contend is a

price far below the purported FMV of $480,000.    Both Mrs. Abrams

and Mr. Lilly also testified that in 1995 real estate values were

at their lowest levels especially for high-end homes.    However,

Mr. Lilly testified that a house similar to the Stewart property

would have likely sold in a 6-month period of time if it were

listed at its FMV.   The fact that the property would not sell for

$435,000 in November 1995 and that it did sell for $435,000 in

December 1996 indicates that the Stewart property was worth at

least as much in 1996 as it had been in 1995.    Thus, we do not

find that the sales price of $435,000 was the result of a

distressed sale.   See Adams v. Commissioner, supra (held that the

property’s sales price was below FMV because the taxpayer was

under a threat of foreclosure, was 2 years behind in paying

property taxes and the buyers were taking subject to an existing

lease on the property).

     Further, petitioners bear the burden to prove what the FMV

of the property was in July 1995.   Petitioners did not obtain an
                             - 11 -

appraisal at the time of conversion, but Mrs. Abrams testified

that she based her professional opinion on such factors as the

sluggish real estate market, the home sales in the area as listed

in the multiple listing service, the fact that the Stewart

property was one of the most expensive houses in the county,

which would typically take months or years to sell, and the

prestigious location of the property.   While Mrs. Abrams may have

some knowledge of real estate values through her experience in

the mortgage lending business, we are not required to accept such

self-serving testimony without corroborating evidence.

Niedringhaus v. Commissioner, 99 T.C. 202 (1992).

     Mrs. Abrams offered no records of the alleged comparable

sales, nor any information or data therefrom and, as a

consequence, we have no way of knowing whether they would tend to

sustain or refute her stated opinion that the Stewart property’s

purported FMV in 1995 was $480,000 such that respondent’s

determination would be incorrect.   On the other hand, Mr. Lilly

testified that based on his evaluation of the prior sales of

comparable properties in the area, he thought the original list

price of $484,900 in July 1995 was a little high but hoped that a

buyer would purchase the home for more than what it was worth

because of the special financing terms that petitioners were

offering.

     The evidence also indicates that the Stewart property’s
                                - 12 -

assessed value for tax purposes in 1995 and 1996 was $400,000.

Under California law, however, assessment values may not be

determinative of FMV because the assessed value is generally

limited to a 1-percent increase on the property’s base year

value, i.e., the property’s 1975-76 market value level or

appraised value when purchased.    Cal. Const. art. XIII(A), secs.

1 and 2 (West 1996); Cal. Rev. & Tax Code, sec. 110(a) (West

1998).   However, when the property’s FMV falls below the base

year value, the assessed value for tax purposes would be based on

the property’s FMV until the base year value is restored.     Cal.

Const. art. XIII(A), sec. 2(b) (West 1996);5 Cal. Rev. & Tax

Code, sec. 51(a) (West 1998).     Thus, although the county

assessor’s appraisal record is not determinative of the Stewart

property’s FMV, it is persuasive evidence that petitioners’

estimate was overly inflated given the state of the real estate

market in 1995.

     The Court is satisfied from the record that the FMV of the

Stewart property in July 1995 was $435,000.     The fact that the

property languished on the market with an asking price of

$435,000 in November 1995 indicates that the value of the house


     5
        On Aug. 18, 1978, the Cal. Legislature adopted Senate
Const. Amend. No. 67, which was eventually designated as
Proposition 8 and placed on the ballot and submitted to electors
at the 1978 General Election. On Nov. 7, 1978, the voters
adopted Proposition 8, which amended Cal. Const. art. XIII(A),
sec. 2, specifically providing a temporary reduction in the base
year value to reflect a decline in real property value.
                             - 13 -

at the date of conversion was substantially less than

petitioners’ purported FMV of $480,000.   Further, the fact that

the property eventually sold for $435,000 in December 1996

indicates there had been little if any change in its FMV from

July 1995 until the date of its sale.

     For the above reasons, we hold that the FMV of the Stewart

property in July 1995 was $435,000, and, therefore, petitioners

did not sustain a loss on the subsequent sale of the Stewart

property on December 27, 1996, for $435,000.   Accordingly, we

sustain respondent’s determination on this issue.6

     We have considered all of the other arguments made by the

parties, and, to the extent that we have not specifically

addressed them, we conclude they are without merit.




     6
        Accordingly, petitioners have a gain in 1996 in the
amount of $5,999 calculated as follows:

     Sales Price                          $435,000
     Less Adjusted Basis ($435,000 FMV
        less $5,999 depreciation)          429,001
     Total Gain                              5,999

However, at trial respondent waived any increased deficiency for
1996.
                            - 14 -

    Reviewed and adopted as the report of the Small Tax Case

Division.

    To reflect the foregoing,



                                     Decision will be entered

                                for respondent.
