                          T.C. Memo. 1996-333



                      UNITED STATES TAX COURT



       DONALD D. BOWERS AND DEBORAH BOWERS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 558-94.                         Filed July 24, 1996.



     Donald D. Bowers, pro se.

     Judith C. Winkler, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PARKER, Judge:   Respondent determined a deficiency in

petitioners' Federal income tax for the year 1989 in the amount

of $38,758, an addition to tax under section 6651(a)(1) in the

amount of $1,868, and an accuracy-related penalty under section

6662 in the amount of $7,752.    By amendment to answer, respondent

asserted an increased deficiency in income tax to the amount of
                                - 2 -

$46,217, an increased addition to tax under section 6651(a)(1) to

the amount of $2,241, and an increased penalty under section 6662

to the amount of $9,243.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable year before

the Court, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     The issues to be decided in this case are:

     (1) Whether the Burlington, Connecticut, house was

petitioners' principal residence so that they may defer

recognition of the gain on the sale of that house in 1989 under

section 1034;

     (2) if not, what was the amount of petitioners' gain on the

sale of the Burlington house that must be recognized in 1989;1

     (3) whether petitioners are liable for the addition to tax

under section 6651(a)(1); and

     (4) whether petitioners are liable for the accuracy-related

penalty under section 6662.




     1
       The parties have phrased this issue as the determination
of petitioners' basis; however, both parties have presented
evidence and arguments concerning other elements of the
calculation of gain and treated these as components of basis.
Although the outcome will be the same, in the interest of
technical clarity, we shall treat this as a question of the
amount of gain.
                                 - 3 -

                          FINDINGS OF FACT

     Petitioners Donald D. Bowers (Mr. Bowers) and Deborah Bowers

are husband and wife.    They resided in Jacksonville, Florida, at

the time they filed their petition in this case.

Connecticut Residences

     Mr. Bowers was married to his former wife, Florence Bowers

Keegan (Florence), from June 1, 1968, to April 15, 1988.    They

had three sons:    Lonny, Kevin, and Duane.   On November 10, 1978,

Florence received title to certain improved property with the

address of 71 Nassahegan Drive, Burlington, Connecticut (the

Burlington house or property), for which Mr. Bowers and Florence

paid $122,000.    The Burlington property actually consisted of

three lots or parcels of land.

     Mr. Bowers and Florence had certain work performed on the

Burlington property.    Due to the limited water supply from the

existing well, they caused three additional wells to be dug.

They later sued the sellers of the Burlington property for the

cost of these additional wells and recovered a judgment of

$30,000.   Mr. Bowers and Florence had some landscaping done.

They converted one room from an office into a bedroom by adding

an additional wall and a closet.    They divided the basement to

provide a room for the live-in maid they employed at that time.

Mr. Bowers and Florence spent over $10,000 on wallpaper,

painting, window shades, cleaning the carpets, and replacement of

plumbing and lighting fixtures.    The record does not establish
                              - 4 -

whether any of this work constituted improvements that increased

their basis in the Burlington property or the amount of any such

increase; at the time the property was sold over 20 years later,

it was in a deteriorated, run-down condition.

     In October of 1987, Mr. Bowers and Florence separated, and

Mr. Bowers moved out of the Burlington house.   He initially

rented an apartment in Farmington, Connecticut, for the period

from October 7, 1987, to May 7, 1988, for a total rent of $5,250

(or, $750 per month).

     When Mr. Bowers and Florence were divorced on April 15,

1988, they agreed and the court ordered that:

          Real property located at 71 Nassahegan Drive,
     Burlington, Connecticut, and the adjoining lot shall
     remain with [Florence], as her residence, until sale,
     remarriage or at such time when the minor children
     reach the age of 18 years, whichever occurs first.
     [Florence] will not further encumber the property
     without [Mr. Bowers'] permission which must be
     requested and given in writing. An existing mortgage
     on the aforementioned property held by [Mr. Bowers] in
     the fact [sic] amount of $50,000.00 will be forgiven at
     the time of the sale assuming no further encumbrances
     are added by [Florence].[2] At the time the property is
     sold or when the youngest child reaches the age of 18
     years, or remarriage, whichever occurs first, the
     property will be sold and the equity shall be shared
     equally.

During the court proceedings regarding this divorce agreement,

Mr. Bowers represented that, in addition to the $50,000 mortgage,


     2
       The U.S. Bankruptcy Court, District of Connecticut, had
issued a judgment on July 6, 1987, that this same mortgage was
decreed avoided. That judgment was entered in the Burlington
land records on July 29, 1988.
                                       - 5 -

the Burlington property was encumbered by a first mortgage of

$60,000 and a second mortgage of $30,000.                   Florence was to make

the mortgage payments on these two loans.                   Neither Mr. Bowers nor

Florence was represented by counsel up through this point in

their divorce proceedings.

     The Burlington land records reflect the following

encumbrances on the Burlington property as of April 15, 1988:
       Type       Face Amount       Date                     In Favor of

     Mortgage       $70,000     Nov. 10, 1978   Hartford Natl. Bank & Trust Co.

     Mortgage        49,000     Mar. 21, 1980   United Bank & Trust Co.

     Mortgage       unknown     Apr. 23, 1980   Hartford Natl. Bank & Trust Co.

     Attachment     100,000     Aug. 20, 1980   United Bank & Trust Co.

     Attachment     100,000     Dec. 17, 1987   Citytrust

The land records also included two notices of lis pendens:                        one

dated September 8, 1980, by Hartford National Bank & Trust Co.

referencing the April 23, 1980, mortgage; and the second dated

October 28, 1980, by United Bank & Trust Co. referencing the

March 21, 1980, mortgage.

     For the period May 7, 1988, to May 31, 1989, Mr. Bowers

rented a two-bedroom condominium in Newington, Connecticut (the

condo), for $895 per month.           The lease included an option to

purchase the condo for $149,900, on the conditions that Mr.

Bowers notify the owners no later than August 30, 1988, of his

decision to exercise the option, and that closing occur no later

than November 30, 1988.         Mr. Bowers did not exercise this option.
                                 - 6 -

     During a portion of Mr. Bowers' tenancy, the condo contained

two bedroom sets, a dinette set, a sofa, a stereo, and sports and

exercise equipment.     The furniture was the type that had to be

assembled.    Mr. Bowers also kept his autographed boxing gloves,

his trophies, and his golf clubs at the condo.

     On November 21, 1988, Citytrust filed a release of

attachment with respect to its December 17, 1987, attachment of

the Burlington house.     On November 29, 1988, the Superior Court

for the Judicial District of Hartford/New Britain (the Superior

Court) entered a Stipulation as to Modification of Dissolution

Judgment.    That stipulation provided that:

          [Florence] shall sell the premises known as 71
     Nassahegan Drive, Burlington, Connecticut, and the
     adjoining lot and use her best efforts to receive the
     highest and most reasonable offer. The net proceeds
     from the sale shall be divided as follows:

            (a)   Seventy-five (75%) percent to [Florence]; and
            (b)   Twenty-five (25%) percent to [Mr. Bowers]

          The parties hereto shall use their best efforts to
     compromise the existing liens or encumbrances against
     the above-mentioned real estate including the claim by
     Citytrust Bank.

Other modifications to the original divorce judgment included

increased alimony for Florence, but only until the sale of the

Burlington house when all alimony would cease, and increased

child support for Kevin and Duane.       The Superior Court issued an

order on January 31, 1989, in accordance with a stipulation by

Mr. Bowers and Florence, that the mortgage held by Mr. Bowers was

released; this order was recorded in the land records on March
                                - 7 -

29, 1989.3    Mr. Bowers and Florence each were represented by

counsel in this modification action.

The Mandarin Residence

     On January 31, 1989, Mr. Bowers purchased a newly

constructed four-bedroom house located at 12476 Blueberry Woods

Circle West, Jacksonville, Florida (the Mandarin house or

property), for the price of $144,713.    Title to the Mandarin

property was placed in Mr. Bowers' name individually.    The sales

contract, which Mr. Bowers signed on December 27, 1988, included

the following extra features:    an upgraded lot ($2,000), brick

veneer ($6,300), additional phone, cable, and fan prewires ($20,

$25, and $60, respectively), three marble vanities ($600), pull-

down stairs ($175), shower door ($225), mantle ($150), and matrix

pad ($808).    The builder estimated that Mr. Bowers' monthly

payments, including amounts for the mortgage, insurance, and

taxes, would be $1,117.

     In order to buy the Mandarin property, Mr. Bowers obtained a

mortgage in the amount of $130,000.     On the mortgage application,

Mr. Bowers stated that he did not intend to occupy the property

as a primary residence.    On the mortgage application, he included

the Burlington property among his assets and indicated that the




     3
       Mr. Bowers later sued Florence on the purported underlying
debt, but the court ruled against him.
                                - 8 -

Burlington property was "pending sale".4    Other assets Mr. Bowers

disclosed on the application included $29,827.59 deposited with

the Federal Savings Bank in New Britain, Connecticut, and

$4,966.10 deposited with the Tust Company Bank [sic] in Augusta,

Georgia.

     On February 18, 1989, Mr. Bowers married Deborah Scavone,

now Deborah Bowers (Deborah).   Prior to their marriage, Deborah

resided with her parents in Augusta, Georgia, where she had been

attending Augusta College as a full-time student.     Petitioners'

wedding took place in Augusta, and they returned to Augusta after

their honeymoon.   Deborah spent about one-third to one-half of

her first year of marriage in Georgia.     She spent some time at

the Connecticut condo and some time at the Mandarin house in

Jacksonville, Florida.

     In the Mandarin house, the master bedroom was the only one

of the four bedrooms that was furnished at first; it contained a

bedroom set and a television.   This bedroom set was one of the

two from the Connecticut condo.   Petitioners later purchased a

brass bed and moved the first bed to another bedroom.     One of the

bedrooms contained Mr. Bowers' exercise equipment which

previously had been at the Connecticut condo.     Petitioners

purchased additional furniture for the master bedroom, and a

sectional sofa, table, and lamp for the family room; they also

     4
       Mr. Bowers listed the Burlington property as having a
present market value of $500,000 and a mortgage of only $67,633.
                                - 9 -

had a television in the family room.     At some point in 1989, Mr.

Bowers bought a 35-inch television for the Mandarin house.       By

the summer of 1989, petitioners had a leather sofa and chairs in

the living room.    A copper-tiered mirror hung in the foyer.     The

formal dining room was not furnished.     The kitchen had a dinette

set and matching bar stools of white rattan with pale blue

cushions; the table top was glass.      The refrigerator was a large

side-by-side model with ice and water dispenser in the door.       The

kitchen was wallpapered, as were at least two of the bathrooms.

Some of the rooms had fabric window treatments that matched the

decor of the room.    There was a kidney-shaped swimming pool in

the backyard.5

Sale of the Burlington House

     On March 23, 1989, Florence received a mortgage loan from

Connecticut National Bank in the amount of $45,921.30.     The

proceeds were used to pay off the loan on the Burlington house

borrowed from Hartford National Bank & Trust Co. on April 23,

1980.    This new loan was to be paid off in full on September 29,

1989.    United Bank & Trust Co. released its attachment of the

Burlington house on March 27, 1989.

     On July 6, 1989, Mr. Bowers applied to First Performance

Mortgage Corp. for a mortgage on the Burlington property in the


     5
       In 1990, Mr. Bowers transferred title to the Mandarin
property to Deborah by quitclaim deed. Petitioners sold the
Mandarin house in late 1992.
                               - 10 -

amount of $150,000.    At that time petitioners may have

contemplated the possibility of making the Burlington house their

future home.

     In mid-July of 1989, Florence moved out of the Burlington

house.   She held a tag or garage sale there shortly after moving

out and left in the house any items that did not sell.     Items

remaining in the Burlington house after the tag sale included

boxes of Kevin's personal items in the recreation room, some of

Mr. Bowers' personal items, and Lonny's bedroom furniture which

he later picked up.    Games and perhaps some clothes were left in

the garage.    The shed also contained boxes of Mr. Bowers'

clothes.   The record does not establish that any furniture was

moved into the Burlington house at any time from mid-July of 1989

through its ultimate sale in December of 1989, although some of

Mr. Bowers' personal items from the condo may have been moved

from the condo to the Burlington house in that period.

     On July 12, 1989, in Florida, Deborah signed an instrument

establishing a Grantor Trust for Deborah Bowers (the Trust).

Brian C. Carey, petitioners' attorney in Connecticut, was

appointed trustee.    Mr. Bowers was named as successor trustee, if

Mr. Carey could not serve.

     On or about July 25, 1989, petitioners placed $20,000 in

escrow with Mr. Carey.    On July 26, 1989, Florence transferred

title to the Burlington house by quitclaim deed to "Brian C.
                              - 11 -

Carey, Trustee" for the stated consideration of $20,000.6   This

transfer was subject to the existing mortgages on the property,

some of which mortgages were then in foreclosure proceedings.

Out of the $20,000 placed in escrow, Florence herself received

$14,223.60, $3,000 went to pay her bankruptcy attorney, and the

remainder went to pay taxes and fees on the transaction.    At this

time, the Burlington property was subject to three mortgages:

the original 1978 first mortgage,7 the March 21, 1980, mortgage

from United Bank & Trust Co., and the March 23, 1989, mortgage

from Connecticut National Bank.

     On July 27, 1989, Mr. Bowers entered into a contract with

Leaders Real Estate (Leaders) in Farmington, Connecticut, giving

the realty company exclusive right to sell the Burlington

property at a listed price of $279,900.   This contract was for

the period of July 27, 1989, through August 27, 1989 (the first

listing contract).   A second such contract was signed by Mr.

Bowers on August 30, 1989, for the period of August 28, 1989,

through September 28, 1989 (the second listing contract), with a

listed price of $289,900.   Under the second listing contract,

however, the parties agreed to allow an exclusion for a sale to

Mr. and Mrs. Zbigniew Janas (the Janases).   Thus, if petitioners


     6
       At that time, Florence thought that Mr. Carey was trustee
for Mr. Bowers.
     7
       At this time, the first mortgage, securing the loan from
Hartford National Bank & Trust Co., was held by Shawmut Bank.
                               - 12 -

sold the Burlington property to the Janases, Leaders would not

collect a commission.

     On July 31, 1989, the Superior Court entered its Judgment of

Foreclosure By Sale After Opening of Original Judgment, in favor

of United Bank & Trust Co.8   The Burlington property was to be

sold at public auction on September 30, 1989, unless the amount

due on the mortgage debt, plus interest and costs, was paid.      On

or about September 13, 1989, Mr. Carey received $32,500 from

petitioners.   On September 18, 1989, Mr. Carey paid United Bank

and Trust Co. $32,376.89, thus forestalling the foreclosure sale.

Mr. Carey's law firm was paid $123.11 with respect to the

satisfaction of this mortgage.

     On September 21, 1989, First Performance Mortgage Corp. sent

a notice rejecting Mr. Bowers' application for a mortgage on the

Burlington property.    Petitioners had had an indication by late

August that there were problems with the application and that the

mortgage would not be granted.    As will be discussed later,

petitioners, on October 1, 1989, signed a contract to purchase

the Jacksonville Golf and Country Club house.

     After the second listing contract expired on September 28,

1989, petitioners advertised the Burlington property as for sale

by owner.   One such advertisement, placed in the Hartford Courant

     8
       The parties in this action had appeared in Superior Court
on Nov. 25, 1980, Jan. 11, 1984, and Jan. 30, 1989. The original
judgment referred to is that of Jan. 11, 1984, for strict
foreclosure.
                              - 13 -

on October 13, 1989, described the Burlington property as 3 acres

offered for the price of $379,9009 and listed the following

telephone numbers:   evening & weekends 904-292-9419; weekdays

904-363-0833.   These phone numbers, respectively, are those of

the Mandarin house and Mr. Bowers' business, Technical Acoustics,

Inc., both located in Jacksonville, Florida.

     On October 17, 1989, Mr. Carey paid $2,000 to Connecticut

National Bank as good faith money to keep the bank from

foreclosing on the Burlington house.   This money was provided by

petitioners.

     On November 27, 1989, the Janases made a deposit in the

amount of $10,000 on the purchase of the Burlington property.     On

December 8, 1989, Mr. Carey transferred title to the Burlington

house to the Janases by warranty deed.   The Janases purchased the

Burlington property for $320,000.   They also paid $750 to the

settlement attorneys for settlement fees, title examination, and

document preparation.

     Proceeds from the sale of the Burlington property were used

to pay off the mortgage held by Shawmut Bank in the amount of

$67,598.56 and the mortgage held by Connecticut National Bank in

the amount of $33,367.72.   Settlement charges to the sellers

(petitioners), consisting of recording fees and taxes, totaled


     9
       This included all three lots comprising the Burlington
property, whereas the property that had been offered for sale
through Leaders had excluded one of those lots.
                                - 14 -

$2,037.   The amount of $5,000 was paid to Mr. Carey's law firm as

his fee for procuring the Burlington property, representing

petitioners in the negotiations with the lenders, sale of the

property, and preparation of documents.   The remaining balance of

$211,996.72 was paid to Deborah.

The Jacksonville Golf and Country Club Residence

     On October 1, 1989, petitioners had signed a contract to

purchase the house located at 13055 Sandwedge Court,

Jacksonville, Florida, at the Jacksonville Golf and Country Club

(the Jacksonville Golf house or property).   The Jacksonville Golf

house had four bedrooms, three bathrooms, a sauna, a fireplace,

and a swimming pool; it was the model house for that development

and thus was fully furnished.    The purchase price was $368,000.

On December 15, 1989, Deborah received title to the Jacksonville

Golf property.   Mr. Bowers is an entrepreneur involved in

numerous business activities and has always made it a practice to

title the family residence in his wife's name.

     Petitioners had applied to the Barnett Bank of Jacksonville

for a mortgage in the amount of $200,000 to purchase the

Jacksonville Golf property.    Mr. Bowers had met with the mortgage

officer on October 10, 1989.    The name of Mr. Bowers appears in

the Borrower section of the application, and that of Deborah in

the Co-Borrower section.   The Mandarin house address was given as

the present address for both petitioners, and the application

stated that both had lived at that address for 9 months.     The
                                   - 15 -

Burlington house was listed as the former address for both

petitioners, with Mr. Bowers' section stating he had lived at

that address for 11 years.10        The telephone numbers given for

Mr. Bowers were a home phone number of 292-9419 and a business

phone number of 363-0833.        Those phone numbers were to the

Mandarin house and Technical Acoustics, Inc., respectively.        Only

a home phone number was listed for Deborah; that number was 292-

9419.        Petitioners' assets as listed on the mortgage application

included $6,347.10 deposited in Barnett Bank of Jacksonville and

$5,588.34 in Enterprise National Bank of Jacksonville.

Petitioners listed no other bank accounts.        Petitioners indicated

that they intended to occupy the Jacksonville Golf house as their

primary residence.       Petitioners moved into the Jacksonville Golf

house on December 15, 1989.

Homestead Exemptions

        Florida residents are eligible for an exemption from Florida

property tax of $25,000 of the assessed value of their homes.

Petitioners did not file an application for the homestead

exemption for the Mandarin house for 1989.        For 1990 petitioners

filed applications for homestead exemptions for both the Mandarin

house and the Jacksonville Golf house.        Mr. Bowers completed the

application for the Mandarin house exemption, which was dated


        10
       The number of years given for Deborah's length of
residence at the Burlington house is illegible on the copy in
evidence.
                                - 16 -

February 27, 1990, giving the Mandarin house address as his last

year's (1989) address.    He indicated he had a Florida driver's

license issued March 16, 1989.    The Jacksonville Golf house

application, also dated February 27, 1990, was in Deborah's name.

It listed her last year's (1989) address merely as "5050 Old

Savannah Road", with no town or state.11    In the space for a

Florida driver's license, a number appears for Deborah, but the

date of issue was left blank.12

Business Activities of Mr. Bowers in 1989

     Mr. Bowers had an interest in, or was involved with, the

following businesses in 1989:     Bozak Manufacturers (Bozak), Tidon

Industries, DB Associates, Sound Ideas, World Class Boxing, and

Technical Acoustics, Inc.    Bozak, an electronic audio equipment

manufacturer, was located in New Britain, Connecticut.    Tidon

Industries was a window company located in the same building as

Bozak.    DB Associates, a holding company, owned this building

until some point during or around the year in issue.

     Sound Ideas was a retail store in Newington, Connecticut,

which sold consumer electronics.    Mr. Bowers and his brother,

William Bowers (Bill), each owned half of this company, but Bill

ran the business.    Mr. Bowers used the office at Sound Ideas to

     11
       Deborah's parents' address was 5032 (formerly 5050) Old
Savannah Road, Augusta, Georgia.
     12
       Deborah testified that she believed she had a Georgia
driver's license in 1989. She did not have a Connecticut
driver's license.
                               - 17 -

run his other businesses.    He was there intermittently, going

back and forth between Connecticut and Florida.    Mr. Bowers

received mail and had an answering machine there.

     World Class Boxing had its base of operations in

Connecticut.    Mr. Bowers served as a manager of fighters and did

some promotions.   Previously, Mr. Bowers had been involved with

Marlon Starling Enterprises, another fight concern.     George Cruz

trained fighters for Marlon Starling Enterprises and for World

Class Boxing.   Mr. Cruz often would contact Mr. Bowers through

Sound Ideas, because if Mr. Bowers were not there, someone at

Sound Ideas would know where to reach him.

     The only business that Mr. Bowers received any income from

in 1989 was Technical Acoustics, Inc. (TAI).    TAI assembled

equipment for sound reinforcement and telecommunication.     Mr.

Bowers was the sole owner of TAI, and he moved TAI from

Connecticut to Jacksonville, Florida, during late December of

1988 or early January of 1989.    The three TAI employees relocated

as well.   The same moving company moved TAI, Mr. Bowers, and his

three employees.   The items Mr. Bowers shipped to Florida

consisted mostly of clothes contained in several wardrobe boxes

and one bedroom set from the condo.     That bedroom set went to the

Mandarin house, which was purchased in late January of 1989

shortly after the TAI relocation to Florida.

     By mid-February 1989, TAI had opened a checking account with

Enterprise National Bank of Jacksonville, Florida.    TAI used a
                              - 18 -

payroll processing service, and around the same time, TAI changed

services and began to draw its paychecks on this new checking

account.   Prior to this, TAI had used a payroll service based in

Connecticut, and the paychecks had been drawn on Northwest Bank

for Savings, Avon, Connecticut.

     TAI used independent contractors operating under the name of

Robert Christopher Sales (RCS) to do its marketing; RCS served as

TAI's manufacturer representatives.    RCS was located in the New

England area.   Mr. Bowers would meet with the RCS principals both

in Florida and in New England.

     Sheldon Glick, an engineer, was in charge of all technical

aspects of the business and ran TAI in Mr. Bowers' absence.

Occasionally, he would call Mr. Bowers in Connecticut.13

Petitioners did not submit into evidence copies of any phone

bills to establish when or if calls were ever made to or from the

Burlington house.

Checking Accounts

     During 1989, petitioners had a joint checking account

(#10004262) with Enterprise National Bank of Jacksonville,

Florida (the Enterprise account).    Petitioners opened the

Enterprise account on January 25, 1989, under the names of Donald

D. Bowers and Deborah Ann Scavone.     The checks for the Enterprise

     13
       Mr. Glick had the phone number to the Burlington house
programmed into the speed dial function on his phone because that
number was unlisted, and, if he forgot the number, he would not
have been able to get it from information.
                                - 19 -

account were imprinted with the Mandarin house address.   At

first, the checks had only Mr. Bowers' name on them; later,

Deborah's name was added.   Bank statements dated from February

through May of 1989 were sent to "Donald D Bowers" and "Deborah

Ann Scavone" at 8933 Western Way, Suite 20, Jacksonville,

Florida, the address for TAI.    Beginning with the June 14, 1989,

statement, statements were sent to "Donald D Bowers" and "Deborah

Ann Bowers" at the Mandarin house address.   Mr. Bowers deposited

his TAI paychecks into this account.

     During the period February 6, 1989, through December 8,

1989, petitioners withdrew cash from the Enterprise account

through the use of automated teller machines (ATM's) on 81

occasions.   Of these, 79 withdrawals were from ATM's located in

Jacksonville, Florida, with the 2 remaining withdrawals occurring

at ATM's in Yulee, Florida.

     By October of 1989, Mr. Bowers had opened a second checking

account (#50001100) at Enterprise National Bank.   The checks were

imprinted with the Mandarin house address and Mr. Bowers' name.

Also by October of 1989, petitioners had opened a joint checking

account with Barnett Bank of Jacksonville, Florida.   These checks

were imprinted with the Mandarin house address and the names of

both petitioners.

     The record contains no evidence of personal bank accounts in

Connecticut, other than the reference to Federal Savings Bank on
                                - 20 -

Mr. Bowers' mortgage application for the purchase of the Mandarin

house.

Mr. Bowers' Children

     During 1989, Mr. Bowers' oldest son, Lonny, attended

college; he lived in the condo for awhile.    In the spring or

early summer of 1989, Lonny moved to West Palm Beach, Florida,

and began working for the GAP.    Mr. Bowers' middle son, Kevin,

who was then 16 years old, lived in the Burlington house with

Florence until April of 1989.    At that time, Florence took Kevin

to the airport to go to Florida to live with Mr. Bowers.

However, if Kevin went to Florida at that time, he shortly

returned to Connecticut.    Kevin spent most of the next few months

living with his uncle, Bill, in Newington, Connecticut.    In the

fall of 1989, Kevin went to live with Deborah's parents in

Augusta, Georgia.   Mr. Bowers' youngest son, Duane, lived with

Florence throughout 1989.   Lonny was the only one of Mr. Bowers'

three children who visited the Burlington house at any time after

Florence quitclaimed it to the Trust on July 26, 1989.

Leaders Real Estate

     Leaders was the realtor with which Mr. Bowers signed the two

listing contracts on the Burlington Property described above.

Leaders had the following telephone numbers at which to contact

petitioners:   904-363-0833 (office), 904-292-9419 (home), and
                                - 21 -

904-363-0848 (fax).14     The office and fax numbers belong to TAI;

the home number is that of the Mandarin house.    Both the first

and second listing contracts were faxed to Mr. Bowers in Florida.

The second listing contract was returned to Leaders by fax on

August 30, 1989, from TAI.    Leaders tried unsuccessfully to

extend the listing beyond September 28, 1989, and sent

correspondence to Mr. Bowers at the TAI fax number on October 9,

1989, and on October 10, 1989.

     Leaders prepared an appointment sheet for each property that

it listed, on which it would record each time the property was

shown by any real estate agent.    The showing instructions on the

appointment sheet for the Burlington house read "vacant lock

box".     It was Leaders' practice to have its agents meet and tour

each newly listed property on the Tuesday following receipt of

the listing.

     Barbara Brenneman (Ms. Brenneman) is a 50-percent owner of

Leaders and a licensed realtor in the State of Connecticut.     Ms.

Brenneman personally showed the Burlington property to potential

buyers on three occasions during August and September 1989.

Also, whenever she was in the neighborhood, she would enter the

Burlington house to check on it.15    On one occasion, she let a

     14
       The designations specified within the parentheses were
made by Barbara Brenneman, a 50-percent owner of Leaders.
     15
       It was Leaders' practice to check on the vacant listed
properties to make sure the properties were secure, that no
                                                   (continued...)
                                - 22 -

repairman into the house.    Ms. Brenneman observed some sports

equipment in one room of the Burlington house but saw no

furniture.    She saw some items in the garage and the shed.       She

noted that the property needed some repairs.        Prior to trial,

Ms. Brenneman had never met Mr. Bowers personally.16

Repairs to the Burlington House

     Allen Wilcox (Mr. Wilcox) is a building contractor who

performed repairs to the chimney and roof of the Burlington

house.17    Mr. Wilcox first visited the Burlington house in August

of 1989 and, on August 22, 1989, prepared a proposal for the

repair needed on the chimney.    No one was there when Mr. Wilcox

made his initial visit to the Burlington house.       He sent his

proposal to Mr. Bowers in Florida.       On August 30, 1989, Mr.

Bowers accepted the proposal and wrote a check to Mr. Wilcox in

the amount of $800 as a deposit for the work to be done.

     In early September after receiving Mr. Bowers' deposit, Mr.

Wilcox and his son performed the requested repairs.       No one was

present at the Burlington house, and the water supply to the

outside faucets was turned off.    Mr. Wilcox contacted a real



     15
      (...continued)
unauthorized persons had entered and damaged the properties, and
that the lights were turned off.
     16
       Mickey Wilcox was the listing agent. He showed the
Burlington house six times between July 27, 1989, and Aug. 5,
1989. Mickey Wilcox did not testify at the trial.
     17
          Allen Wilcox is Mickey Wilcox's uncle.
                                 - 23 -

estate agent to unlock the house in order to turn on the water,

which was needed to mix the mortar for the chimney.      The only

furniture Mr. Wilcox saw in the main living areas was a kitchen

table.18     On September 18, 1989, a bill was prepared reflecting

the work performed on the chimney and roof, with a balance due of

$767.      This bill was sent to Mr. Bowers at TAI's address in

Florida.       A second notice was sent on October 18, 1989.    On

November 3, 1989, Mr. Wilcox returned to the Burlington house to

apply silicon to the chimney.     The only people that Mr. Wilcox

saw during his visits to the Burlington property (other than his

son) were the real estate agent mentioned above and Mr. Janas.19

     Mr. Wilcox's telephone bill lists the following calls to

Jacksonville, Florida:

                                 Length of
            Date        Time        Call        Phone Number

     Aug. 29, 1989     7:54 PM   8 minutes      904-292-94191
     Oct. 18, 1989     9:53 AM   1 minute       904-363-08332
     Nov. 1, 1989      4:31 PM   5 minutes      904-363-0833

     1
          This is the phone number to the Mandarin house.
     2
          This is the phone number to TAI.




     18
          He did not go into the basement or bedrooms.
     19
       On Nov. 13, 1989, Mr. Wilcox sent a bill to Mr. Bowers at
the TAI address showing a previous balance of $767, a charge of
$85 for the recent silicon work, and a new balance of $852.
Subsequent bills for this balance were sent on Dec. 1, 1989, Dec.
19, 1989, and Jan. 15, 1990. Mr. Wilcox was never paid the
balance owed.
                              - 24 -

     From August 30, 1989, through October of 1989, petitioners

paid $4,650 for repairs to the Burlington house, including the

$800 deposit towards the repair of the chimney.   Some of the

amount paid was for repair of the decks.   These expenses were

paid by checks drawn on the Florida checking accounts mentioned

above.

Occupancy of the Burlington House

     Mr. Bowers never lived in the Burlington house on a regular

day-to-day basis at any time after he separated from Florence in

early October of 1987.   Deborah never lived in the Burlington

house on a regular day-to-day basis.

     Any time Mr. Bowers and Deborah spent at the Burlington

house in 1989 occurred between mid-July of 1989, when Florence

moved out of the house, and late August or early September, when

they learned Mr. Bowers' mortgage application would be rejected.

At that time, if not earlier, they began to look for a house in

Jacksonville, Florida, in a gated community on a golf course.

They signed the purchase contract on the Jacksonville Golf house

on October 1, 1989.   Any time petitioners spent at the Burlington

house in 1989 amounted to no more than a few days on a sporadic

and intermittent basis.20

     20
       The Court did not believe petitioners' testimony that
they actually moved into the Burlington house and made it their
home in 1989. The testimony of other witnesses, even that of Mr.
Bowers' brother, was too vague and uncertain as to time frame to
be helpful. Most of those witnesses could not even say when TAI
                                                   (continued...)
                               - 25 -

Tax Return

     Petitioners requested and received approval of their

Application for Additional Extension of Time To File their 1989

Federal income tax return until October 15, 1990.   The dates

appearing next to petitioners' signatures on the return are both

November 4, 1990.   The Internal Revenue Service (IRS) received

the return on November 13, 1990.

     Petitioners reported an adjusted gross income of $32,856,

which consisted of Mr. Bowers' wages from TAI of $27,600,

Schedule E income from TAI of $4,929, and $327 from Deborah's

modeling.    Petitioners reported no income from any of Mr. Bowers'

other business interests.   Mr. Bowers' Form W-2 from TAI shows

his address as that of the Mandarin house.

     Petitioners completed Form 2119 (Sale of Your Home) and

attached it to their return.   On this form, petitioners reported

the sale of the Burlington property for $320,000, an adjusted

basis in that property of $182,634, and a gain of $137,366.

Petitioners did not indicate any fixing-up expenses on the

Burlington house, nor any selling expenses.   They reported the

cost of a new residence as $370,273.

     The IRS examined petitioners' return and disallowed the

deferral of gain from the sale of the Burlington property on the

ground that petitioners had not shown that they used the

     20
      (...continued)
moved to Florida, let alone Mr. Bowers.
                               - 26 -

Burlington house as their principal residence.     On October 14,

1993, respondent issued the notice of deficiency.     Through

amended pleadings, respondent alleged that petitioners' basis in

the Burlington property was $160,030, not $182,634 as stated on

the return, and asserted corresponding increases in the

deficiency, addition to tax, and accuracy-related penalty.

Petitioners allege that their basis in the Burlington house was

greater than the amount claimed on their return.

                      ULTIMATE FINDINGS OF FACT

     1.   The Burlington house was not the principal residence of

either petitioner in 1989.

     2.   The gain in the amount determined below must be

recognized in 1989.

     3.   Petitioners' 1989 tax return was not timely filed, and

they are liable for the delinquency addition.

     4.   Petitioners were negligent and disregarded rules or

regulations in claiming deferral of the gain on the sale of the

Burlington house.

                               OPINION

     Generally, sections 1001 and 61 require a taxpayer to

recognize gain realized on the sale of property in the year of

the sale.   Section 1034, however, requires a taxpayer to defer

recognition of gain realized on the sale of the taxpayer's

principal residence in certain circumstances.     If the taxpayer

purchases and uses a new principal residence within the specified
                                  - 27 -

replacement period,21 the taxpayer will recognize gain on the

sale only to the extent that the taxpayer's adjusted sales

price22 of the old residence exceeds the taxpayer's cost of

purchasing the new residence.      Sec. 1034(a).   Thus, if the cost

of the new residence equals or exceeds the adjusted sales price

of the old residence, the entire gain will be deferred.      If the

cost of the new residence is less than the adjusted sales price

of the old residence, gain will be recognized to the extent of

the difference.    Sec. 1.1034-1(a), Income Tax Regs.    The deferral

of the gain is accomplished by reducing the basis of the new

residence by the amount of gain not recognized on the sale of the

old residence.    Sec. 1034(e).

The Burlington House as Principal Residence

     Whether a residence is used by a taxpayer as his or her

principal residence depends on all the facts and circumstances of

each case.   Thomas v. Commissioner, 92 T.C. 206, 242-243 (1989);

sec. 1.1034-1(c)(3)(i), Income Tax Regs.      Property is used by a

taxpayer as a residence if that taxpayer physically occupies or

lives in that property.    United States v. Sheahan, 323 F.2d 383,

386 (5th Cir. 1963); Bayley v. Commissioner, 35 T.C. 288, 295

     21
       The replacement period begins 2 years before and ends 2
years after the date of the sale of the old residence. Sec.
1034(a).
     22
       The adjusted sale price is the amount realized (selling
price minus selling expenses) reduced by any expenses of fixing
up the old residence in order to assist in its sale. Sec.
1034(b).
                                - 28 -

(1960).     The term "principal" means one's chief or main place of

residence.     Thomas v. Commissioner, supra at 243; Stolk v.

Commissioner, 40 T.C. 345, 356 (1963), affd. 326 F.2d 760 (2d

Cir. 1964).    In other words, the phrase "used by the taxpayer as

his principal residence" means "habitual use of the old residence

as the principal residence".     Stolk v. Commissioner, supra, at

355.

       The record clearly establishes petitioners' ties to and

presence in Florida throughout most of 1989.    This evidence

includes:    The purchase of the Mandarin house in Florida; the

relocation of TAI to Florida; the checking accounts in Florida;

the frequent ATM withdrawals in Florida; the Leaders appointment

sheet showing the Burlington house as vacant; the testimony of

Ms. Brenneman and Mr. Wilcox that the Burlington house was empty

and that their only contacts with petitioners were through phone

numbers or addresses in Florida; and the sales contract and

mortgage application for the Jacksonville Golf house.

       Deborah never lived in the Burlington house on a regular

basis; Mr. Bowers never lived there on a regular basis after he

separated from Florence in October of 1987.    In 1989 petitioners

physically occupied or lived in the Connecticut condo or the

Mandarin house most of the time.23    They signed the purchase

contract for the Jacksonville Golf house on October 1, 1989, and

       23
       Deborah spent one-third to one-half of her time with her
parents in Augusta, Georgia.
                               - 29 -

occupied that house on December 15, 1989.    Florence continued to

live in the Burlington house until mid-July of 1989, and any time

that petitioners spent in the Burlington house occurred between

mid-July and late August or early September of 1989.      The record

as a whole convinces the Court that any occupancy of the

Burlington house by petitioners was at most just a few days on a

sporadic and intermittent basis.     See supra note 20.

     Petitioners testified in an attempt to rebut such evidence

and to try to establish their use of the Burlington house.

Petitioners presented no witnesses or documentary evidence to

corroborate their self-serving testimony.    They alleged the

Mandarin house was purchased and used for business purposes.     We

found their testimony to be vague, inconsistent, and generally

not credible.   We are not required to accept such testimony.

Potito v. Commissioner, 534 F.2d 49, 51 (5th Cir. 1976), affg.

T.C. Memo. 1975-187; Tokarski v. Commissioner, 87 T.C. 74, 77

(1986).   See supra note 20.

     Based on all the facts and circumstances, we find that the

Burlington house was not used by either petitioner as a principal

residence after October of 1987.24    Therefore, section 1034 does

not apply to the sale of the Burlington house, and petitioners

must recognize the gain from that sale in 1989.

     24
       Since we reach this conclusion, we need not address
respondent's argument that only Deborah's principal residence is
at issue because Mr. Bowers had no legal or equitable title to
the Burlington property while the Trust had record title.
                               - 30 -

Gain on the Sale of the Burlington Property

     The gain from the sale of property shall be the excess of

the amount realized over the adjusted basis.      Sec. 1001(a).   The

adjusted basis for determining gain or loss from the sale of

property is the basis (cost) of such property, adjusted as

provided in section 1016.    Secs. 1011, 1012.    Section 1016

adjustments to basis pertinent to the basis of a personal

residence include increases due to capital expenditures, and

reductions due to nonrecognition of gain on a previous residence

under section 1034(e).   Sec. 1016(a).

     Petitioners (or the Trust) sold the Burlington property to

the Janases for $320,000.    Out of that amount, petitioners paid

$2,037 in closing costs.    Although petitioners placed at least

one advertisement in the Hartford Courant in connection with the

sale, the record does not establish the cost petitioners

incurred, and we decline to speculate.      Petitioners have alleged

they spent a total of $24,443 for repairs performed and carpeting

installed while the Trust held the Burlington property.      Most of

those claimed expenditures were wholly unsubstantiated.

Respondent allowed $4,650 for repairs in recalculating

petitioners' increased deficiency.      We have no evidence to

establish any greater amount for repairs or other selling

expenses in connection with the sale of the Burlington house.

     Petitioners paid Mr. Carey a total of $5,123.11 for his

legal services related to acquisition of the Burlington property.
                                     - 31 -

Some of this expense was related to acquisition of the Burlington

property from Florence, and some was related to its sale.           While

fees incurred in the acquisition of property are part of basis,

and those incurred during sale are a reduction in the amount

realized, either treatment reduces the amount of petitioners'

gain.

     Petitioners paid $20,000 in cash, plus releasing Florence

from the mortgage obligations, in consideration for Florence's

transferring title to the Trust.         On July 26, 1989, when Florence

transferred title, the Burlington property was subject to the

three outstanding mortgages.         The record is silent as to the

exact amount of these debts on that date.         However, petitioners

later made the following payments on these mortgages:

             Date           Amount               Lender

        Sept. 18, 1989    $32,376.89      United Bank & Trust Co.
        Oct. 17, 1989       2,000.00      Connecticut National Bank
        Dec. 8, 1989       67,598.56      Shawmut Bank
        Dec. 8, 1989       33,367.72      Connecticut National Bank
                         $135,343.17

These payments were a cost of acquisition as discussed below.

        Petitioners argue that their basis in the Burlington

property should include $50,000 for the mortgage from Florence to

Mr. Bowers that was released.         This debt was voided by the

Bankruptcy Court on July 6, 1987, as well as ordered released by

the Superior Court on January 31, 1989.         See supra notes 2, 3.

Mr. Bowers' inability to collect on this purported debt is not a
                                - 32 -

cost incurred in acquiring the Burlington property or a capital

expenditure; therefore, it cannot be included.

     Petitioners also argue that Mr. Bowers had a carryover basis

of $182,531,25 or, alternatively, that Deborah received a gift

from Mr. Bowers with a carryover basis of $91,265.    This,

petitioners argue, is in addition to the other items of basis

already mentioned, except to the extent that a portion of the

first mortgage would be double-counted.    The former argument is

the equivalent of saying that Mr. Bowers had a 100-percent

interest in the Burlington property just prior to Florence's

transferring title, that he is entitled to 100 percent of the

alleged carryover basis in the Burlington property at that time,

and that he continued to have an interest after Mr. Carey

acquired title for the Trust.    The alternative argument is

similar, except that Mr. Bowers purportedly gave a one-half

interest of the alleged carryover basis to Deborah.

     Respondent's position is that there is no carryover basis

from Mr. Bowers.   Respondent argues that Mr. Bowers did not have


     25
       Petitioners on brief calculated this carryover basis as
follows:

          Original purchase price         $125,000
          New well system                   40,000
          Original landscaping               7,500
          Initial improvements              10,031
               Total                      $182,531

The evidence of record does not support these figures.
                                - 33 -

an ownership interest, legal or equitable, in the Burlington

property after Mr. Carey received title, and any equitable

interest that Mr. Bowers may have had pursuant to the modified

divorce judgment was extinguished at the time Florence sold the

Burlington property to the Trust.

     Under Connecticut State law, neither the husband nor the

wife acquires, by virtue of the marriage, any interest in the

real or personal property of the other during the other's

lifetime.   Conn. Gen. Stat. Ann. sec. 46b-36 (West 1995); Tobey

v. Tobey, 165 Conn. 742, 748, 345 A.2d 21, 25 (1974).     If the

purchase price is paid by one spouse and the conveyance is taken

in the name of the other, there is a presumption that a gift to

the other spouse is intended.    Whitney v. Whitney, 171 Conn. 23,

33, 368 A.2d 96, 102 (1976) (citing Walter v. Home National Bank

& Trust Co., 148 Conn. 635, 638, 173 A.2d 503, 505 (1961)).

However, at the time of entering a divorce decree, "the superior

court may assign to either the husband or wife all or any part of

the estate of the other.   The court may pass title to real

property to either party or to a third person or may order the

sale of such real property * * *. "      Conn. Gen. Stat. Ann. sec.

46b-81 (West 1995).

     From November 10, 1978, until July 26, 1989, Florence held

legal title to the Burlington property in her name alone.

However, the April 15, 1988, divorce judgment provided that the

Burlington property would be sold at a future date, and the
                              - 34 -

equity divided equally upon that sale.    The November 29, 1988,

modification to the divorce judgment provided that Florence would

sell the Burlington property and that Mr. Bowers would receive 25

percent of the net proceeds and Florence 75 percent.    Thus, as of

November 29, 1988, Mr. Bowers had no more than a 25-percent

interest in the Burlington property.     Bachyrycz v. Gateway Bank,

30 Conn. App. 52, 618 A.2d 1371 (1993).

     Petitioners chose to have Florence transfer title to the

Trust.   They elected to style the Trust as one for the benefit of

Deborah, not for Mr. Bowers or for themselves jointly.    By doing

so, they caused Mr. Bowers' equitable interest to be extinguished

upon the transfer of title to the Trust.    In essence, Florence

transferred both her 75-percent interest and Mr. Bowers' 25-

percent interest to the Trust for the benefit of Deborah.    The

transfer to the Trust can be viewed as part gift and part sale.

Mr. Bowers received no cash, but realized (was relieved of) 25

percent of the liabilities to which the property was subject at

the time of transfer to the Trust.

     Where a transfer of property is in part a sale and in
     part a gift, the unadjusted basis of the property in
     the hands of the transferee is the sum of--

          (1) Whichever of the following is the greater:
             (i) The amount paid by the transferee for the
     property, or
             (ii) The transferor's adjusted basis for the
     property at the time of the transfer, and
          (2) The amount of increase, if any, in basis
     authorized by section 1015(d) for gift tax paid * * *.

Sec. 1.1015-4(a), Income Tax Regs.
                                      - 35 -

      The amount paid by the Trust for Mr. Bowers' interest was 25

percent of the liabilities, or $33,835.79 (25 percent of

$135,343.17).      Mr. Bowers' basis as transferor was 25 percent of

the basis of the Burlington property when Florence transferred

title.    Based on the record, we find that the basis of the

Burlington property at that time was $122,000, the original

purchase price of Mr. Bowers and Florence in 1978.                     Accordingly,

Mr. Bowers' basis would have been $30,500 (25 percent of

$122,000).     The greater of these is $33,835.79.                 No gift tax was

paid.    Accordingly, the Trust's basis in the 25 percent

transferred from Mr. Bowers was $33,835.79.                  The cost of

acquiring Florence's 75-percent interest was $121,507.38 ($20,000

paid in cash plus $101,507.37 (75 percent) of the liabilities).

      To summarize, the following items are to be used in

calculating petitioners' gain on the sale of the Burlington

property:
          Consideration received                  $320,000

          Closing costs                                           $2,037.00
          Repairs or selling expenses                              4,650.00
          Attorney fees                                            5,123.11
          Basis in interest from Mr. Bowers
                                                  1
                                                                  33,835.79
                                                              1
          Basis in interest from Florence                          121,507.38

                                                  $320,000    $167,153.28
   1
     Rather than the part gift-part sale analysis above, the Court would reach the
same result from the fact that the Trust paid $20,000 to Florence plus assuming
liabilities of $135,343.17 for the property for a total basis of $155,343.17.

Accordingly, the gain which petitioners must recognize in 1989 is

$152,846.72 ($320,000 minus $167,153.28).
                                - 36 -

Addition to Tax Under Section 6651(a)(1)

  Section 6651(a)(1) imposes an addition to tax for failure to

file a return on the date prescribed (determined with regard to

any extension of time for filing), unless it is shown that such

failure is due to reasonable cause and not due to willful

neglect.   The taxpayer has the burden of proof to show the

addition is improper.     United States v. Boyle, 469 U.S. 241, 245

(1985); Funk v. Commissioner, 687 F.2d 264, 266 (8th Cir. 1982),

affg. T.C. Memo. 1981-506.

  Petitioners received approval of their Application for

Additional Extension of Time To File until October 15, 1990.

Their signatures on the Form 1040 were dated November 4, 1990;

their 1989 return was received by the IRS on November 13, 1990.

Petitioners did not include this issue in their trial memorandum,

did not offer any evidence on the issue at trial, nor address it

in their briefs.   Their return was not timely filed, and we

consider petitioners to have conceded their liability for the

delinquency addition.26

Accuracy-related Penalty Under Section 6662

  Section 6662 imposes a penalty of 20 percent on any portion of

an underpayment of tax attributable to negligence or disregard of


     26
       Petitioners pleaded the statute of limitations as a
defense to the deficiency and additions, alleging that the notice
of deficiency, mailed Oct. 14, 1993, was issued more than 3 years
after the return was filed. The facts show that the return was
not filed until Nov. 13, 1990, and hence the notice of deficiency
was timely issued. We similarly consider petitioners to have
conceded this issue.
                              - 37 -

rules or regulations.   Sec. 6662(a) and (b)(1).   Negligence is

the lack of due care or the failure to do what a reasonable and

prudent person would do under the circumstances.    Neely v.

Commissioner, 85 T.C. 934, 947 (1985).   Negligence includes any

failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code, and disregard includes

any careless, reckless, or intentional disregard.    Sec. 6662(c).

No penalty shall be imposed with respect to any portion of an

underpayment if it is shown that there was a reasonable cause for

such portion and that the taxpayer acted in good faith with

respect to such portion.   Sec. 6664(c)(1).

  Petitioners were negligent in claiming that the Burlington

house was their principal residence and attempting to defer the

gain on its sale.   They have failed to provide any evidence that

they acted in good faith or had reasonable cause for claiming the

Burlington house as their principal residence in 1989.     See supra

note 20.   Thus, we hold for respondent on this issue.

  In keeping with the above holdings,


                                Decision will be entered

                            under Rule 155.
