                        T.C. Memo. 2002-8



                     UNITED STATES TAX COURT



          GEORGE TSAKOPOULOS AND DROUSOULA TSAKOPOULOS,
                          Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14050-98, 1131-00.         Filed January 9, 2002.


     John Gigounas, for petitioners.

     Daniel J. Parent, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge: Respondent determined the following

deficiencies in petitioners’ Federal income taxes:
                                - 2 -

                    Year        Deficiency

                    1993         $148,920
                    1994           78,684
                    1995          280,384
                    1996           62,439

     After concessions, the issues for decision are:      (1) Whether

a preliminary change of ownership report filed with the

Sacramento County Assessor’s Office is admissible; (2) whether

petitioners may take a deduction for an abandonment loss; (3)

whether petitioners must report income from cancellation of

indebtedness with regard to advances received; (4) whether

petitioners may deduct expenses incurred on work performed on the

roofs of their shopping centers; (5) whether petitioners may

deduct real estate taxes paid; and (6) whether petitioners may

deduct payments made to Royal Roofing, Inc., and Consolidated

Electrical Distributors.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

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

Procedure.

                           FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.      At the time they filed

their petition, George Tsakopoulos (hereinafter, petitioner) and

Drousoula Tsakopoulos resided in Carmichael, California.
                               - 3 -

     Petitioner moved to the Sacramento area in 1960 and began to

buy old houses, remodel them, and rent them.   Petitioner used

this rental income to pay the mortgages, to reinvest, and as a

source of income.   In 1965, petitioner began to purchase other

types of properties (e.g., ranches, farms, shopping centers).

Stockton/Elsie Property

     In 1989, petitioner purchased a 22.14-percent interest in

the Stockton/Elsie property (Stockton/Elsie) from SKK Exchange

for $390,867.1   At the time of purchase, Angelo Tsakopoulos

(hereinafter, Angelo), petitioner’s brother, already owned an

8.18-percent interest in Stockton/Elsie.2   From 1958 until 1989,

Stockton/Elsie operated as a gasoline and diesel dispensing

facility, a vehicle washing facility, and a mechanical repair and

maintenance operation facility.   Prior to 1979, other entities

held the interests in Stockton/Elsie, including Phillips

Petroleum Co., Lion Oil Co., and its successor Tosco Corp.     From

1979 to 1989, Angelo was principally responsible for managing the

property, although many other parties held ownership interests.




     1
         Amounts are rounded to the nearest dollar.
     2
        Angelo often conducted business under the name AKT
Development or AKT Investments.

     Other owners at petitioner’s time of purchase included SKK
Exchange, Inc. (14.68 percent), Jack Sioukas (17 percent), and
Eppie Johnson (38 percent).
                                - 4 -

By 1994, Angelo owned 77.86 percent of Stockton/Elsie, and

petitioner owned the remaining 22.14-percent interest.

     Angelo attempted to sell Stockton/Elsie in 1985; the sale,

however, did not occur because the prospective purchaser learned

that Stockton/Elsie would need to be cleaned up due to

contamination.    In 1987 and 1988, Angelo received reports which

confirmed contamination in Stockton/Elsie’s soil and groundwater.

On March 17, 1992, Angelo filed a lawsuit against several oil

companies, including Phillips Petroleum, former owners and

tenants, and insurance companies alleging that they were

responsible for the cleanup costs.      In 1993, the California

Regional Water Quality Control Board issued a cleanup and

abatement order on Stockton/Elsie to certain past and present

owners, including Angelo.   Petitioner deducted his share (i.e.,

22.14 percent) of these toxic cleanup expenses on his 1993 and

1994 tax returns, and respondent allowed these expenses.      Angelo

advanced these expenses to petitioner.      By 1995, petitioner had

not paid these amounts back to Angelo.

     On August 1, 1995, due to his health problems, financial

problems, and fear of potential lawsuits regarding the

contamination of Stockton/Elsie, petitioner deeded his entire

interest in this property to Angelo.      This deed was recorded on

January 21, 2000.   The deed indicated that there was no value to

Stockton/Elsie.
                                - 5 -

     On January 21, 2000, Karen Hayes, an escrow assistant at the

Placer Title Co., filed a preliminary change of ownership report

with the Sacramento County (the County) Assessor’s Office

regarding the transfer of Stockton/Elsie from petitioner to

Angelo.   This form must be filed whenever there is a conveyance

of title record in order for the office to assess the property.

The box on the report indicating that the transfer was a

“purchase” was checked, and the box for the total purchase price

was filled in with $291,483.    Angelo’s name on the report was

signed by Ms. Hayes.   No one from Angelo’s office advised Ms.

Hayes that the transfer was a “purchase”; however, she filled out

the form using the deed given to her by AKT and marked what she

believed was “appropriate”.    In addition, the purchase price,

which was provided by Angelo’s escrow coordinator, Jean Perry,

represented the assessed value of 100 percent of the property,

not solely petitioner’s 22.14-percent interest.

     On his 1995 tax return, petitioner claimed a $205,949 loss

for the abandonment of Stockton/Elsie.     The amount of the loss

represented petitioner’s basis in Stockton/Elsie as calculated by

petitioner’s tax preparer, Norman Marcoux.     In the notice of

deficiency, respondent disallowed the loss.     Respondent

determined that petitioner had not established an abandonment

loss, and the loss was not allowable because it was the result of

a transaction with a related party.     In addition, respondent
                              - 6 -

disallowed an additional deduction of $184,918 which petitioner

claimed on his amended return as part of the abandonment loss on

Stockton/Elsie.

     Respondent also determined that petitioner had $111,229 of

cancellation of indebtedness (COD) income from the discharge of

indebtedness upon the disposition of the property.   This amount

represents the advances from Angelo to petitioner for expenses

related to the cleanup.

Cirby/Sunrise Shopping Center Roof

     In May 1993, petitioner received a bid from Robert Graham of

Gudgel/Yancey Roofing, Inc., for the latter to perform work on

the roof of the Cirby/Sunrise Shopping Center (Cirby/Sunrise).

The bid proposed the following work:

     Remove the existing roof and haul same from the premises.
     Prepare the deck for the application of the new roof.

     Install a rosin sheet on the wood deck.

     Nail two layers of Malarkey Roofing Products #501 SBS
     base sheets to plywood deck, each layer embedded with
     asphalt.

     Apply one layer of Malarkey Roofing Products #601
     granulated SBS cap sheet in asphalt.

     Nail one layer of Malarkey Roofing Products #502 cap
     sheet and one layer of #601 cap sheet to existing
     stucco wall.

     Remove and reinstall existing cap metal.

     Replace cant strip as necessary.
                                - 7 -

The proposal was for the entire builtup roof, which represents

the top flat portion of the roof; the proposal did not cover any

work on the tile portion of the roof which bordered the builtup

roof, the plywood deck beneath the builtup roof, or the

supporting structures.    In June 1993, petitioner paid

Gudgel/Yancey Roofing $63,000 for this work.      Mr. Graham

inspected the completed work, which had a warranty of 10 years.

     On his 1993 return, petitioner claimed a deduction for

repairs to Cirby/Sunrise of $41,530.      Respondent disallowed

$31,5003 of this deduction and determined that this amount is a

capital expenditure.

Carmichael Village Shopping Center Roof

     In addition, petitioner contacted Mr. Graham because the

roof above 12 suites at the Carmichael Village Shopping Center

(Carmichael Village) was leaking.4      Mr. Graham determined that

the contractor that put on the original roof had done a poor job,

and he decided to tear off the original roof and put on a new

roof.    In August 1994, petitioner received a proposal from

Gudgel/Yancey Roofing to perform work on this roof.      The work

detailed in this proposal mirrored the proposal on Cirby/Sunrise

except that the roof jacks would be replaced, as necessary, and


     3
        The amount of $31,500 represented petitioner’s 50-percent
interest in the shopping center.
     4
        Suites 1 through 12 comprised about 10 percent of the
entire shopping center.
                                 - 8 -

the proposal did not include the work of applying one Malarkey

Roofing Products #502 cap sheet and one #601 sheet to existing

stucco walls.    In September 1994, petitioner paid Gudgel/Yancey

Roofing $27,000 for this work.    Mr. Graham inspected the

completed work, which had a warranty of 10 years.

       On his 1994 tax return, petitioner deducted $65,319 as

repairs to Carmichael Village.    Respondent disallowed $32,7325

and determined that these amounts were capital expenditures.

Payment to Royal Roofing, Inc.

       In November 1995, petitioner paid $30,000 to Royal Roofing,

Inc.

       On his 1995 tax return, petitioner deducted $84,815 as

repairs for Carmichael Village.    Respondent reduced this amount

by $72,887 and determined that petitioner had not established

that the expenses were ordinary and business expenses.    Of this

amount, respondent determined that the $30,000 paid to Royal

Roofing was not a “repair” because petitioner had not provided

sufficient documentation to establish the nature of the work.




       5
        This amount represented $27,000 paid to Gudgel/Yancey
Roofing plus $5,732 of other repairs, which the parties have
stipulated are not deductible as repairs or capital items in
1994.
                                - 9 -

Real Estate Taxes Paid in 1995 for Calvine 120/140

     In the late 1960s, petitioner purchased two properties

identified as Calvine 120 and Calvine 140 (Calvine 120/140).6

When he purchased Calvine 120/140, a dairy and two houses were

located on the properties.    Petitioner continued to rent Calvine

120/140 to the same tenant.    At the time of purchase, Calvine

120/140 was zoned for agricultural and residential development

purposes.   Petitioner purchased Calvine 120/140 for income

purposes.

     In 1975, the County condemned the dairy farm because cow

urine caused problems with a nearby stream, so petitioner used

Calvine 120/140 as a cow pasture.    The County did not fix the

drainage on Calvine 120/140; therefore, petitioner could not

develop these properties.

     In 1982, the County changed the zoning for Calvine 120/140

to light industrial.   In 1992, the County again changed the

zoning to special planned development (SPA).    The SPA zoning

allowed only certain areas of Calvine 120/140 to be zoned as

commercial, residential, and recreational.    Petitioner did not

advocate the zoning changes.    In 1995, however, petitioner

attempted to change the zoning from SPA to residential because



     6
        Calvine 120 consisted of approximately 120 acres at
Calvine Road, and Calvine 140 consisted of approximately 140
acres at Calvine Road.
                              - 10 -

the zoning restrictions were depressing the value of Calvine

120/140.   Petitioner filed a letter with the County outlining his

plans to subdivide Calvine 120/140 into 947 single-family lots

and other sites.

     On his 1995 tax return, petitioner deducted real estate

property taxes of $26,985 for Calvine 120, and $35,180 for

Calvine 140.   Respondent disallowed the deduction and determined

that the amounts were capital expenditures.

Payment to Consolidated Electrical Distributors

     On December 29, 1995, petitioner paid Consolidated

Electrical Distributors $7,472 from his Greenhaven Plaza bank

account.   On his 1995 tax return, petitioner deducted this amount

as a repairs expense with respect to his Greenhaven property.

Respondent disallowed this amount because petitioner did not

establish the amount as an ordinary and necessary business

expense.

                              OPINION

I.   Evidentiary Issue

     As a preliminary matter, petitioner objects to the admission

of the preliminary change of ownership report (the report) as

hearsay.   At trial, the Court admitted the exhibit under

advisement, reserving ruling on the objection until parties

briefed the issue.
                              - 11 -

     Respondent argues that the report is admissible under the

following hearsay exceptions of the Federal Rules of Evidence:

rule 803(6), Records of regularly conducted activity; rule

803(8), Public records and reports; and rule 803(15), Statements

in documents affecting an interest in property.

     Petitioner argues that the report cannot be admitted under

Fed. R. Evid. 803(15) because the report does not affect an

interest in property.

     Under Fed. R. Evid. 803(15), there are three elements for

its application:   (1) The document must purport to establish or

affect an interest in property; (2) the statement must be

relevant to the purpose of the document; and (3) subsequent

dealings with the property cannot be inconsistent with the truth

of the statement or the purport of the document.7

     The document affects an interest in property.   The Court has

held that statements, imprints, and notations of transfer tax


     7
         Fed. R. Evid. 803(15), provides:

          The following are not excluded by the hearsay
     rule, even though the declarant is available as a
     witness:

          (15) Statements in documents affecting an interest
     in property.--A statement contained in a document
     purporting to establish or affect an interest in
     property if the matter stated was relevant to the
     purpose of the document, unless dealings with the
     property since the document was made have been
     inconsistent with the truth of the statement or the
     purport of the document.
                                - 12 -

authorities on documents are admissible under Fed. R. Evid.

803(15) as statements in documents affecting an interest in

property.    deRochemont v. Commissioner, T.C. Memo. 1991-600.

Similarly, the report involves the assessment of taxes on the

property.    Further, the report is required to be filed in order

for the State authorities to assess tax on the property

concerned.    Cal. Rev. & Tax. Code sec. 480.3 (West 1998).

      The statements within the report are relevant to the purpose

of the document--to assess the correct tax.    In addition,

subsequent dealings with the property are not inconsistent with

the truth of the statement or purport of the document because

Angelo owns the entire property.

      Accordingly, we admit this document into evidence under rule

803(15) of the Federal Rules of Evidence.

II.   Stockton/Elsie Property

      A.    Abandonment Loss

      Respondent argues that petitioner is not entitled to the

deduction for an abandonment loss because:    (1) Petitioner

exchanged the property for Angelo’s guaranty that he would not be

responsible for any expenses that Angelo had already paid on the

property and future liabilities; (2) petitioner held the property

for the benefit of Angelo, and the property was, therefore, not

transferred to Angelo because Angelo already owned it; or (3)

petitioner did not abandon the property but transferred it to his
                              - 13 -

brother.   Petitioner argues that he is entitled to an abandonment

loss deduction for his interest in Stockton/Elsie property for

1995 in the amount of $390,867.

     Section 165(a) allows a deduction for any uncompensated loss

sustained during the taxable year.     This loss must be incurred in

a trade or business, in any transaction entered into for profit,

or in a casualty or theft.   Sec. 165(c).   The amount of the loss

is the adjusted basis of the property.    Sec. 165(b).

     To be entitled to an abandonment loss under section 165, a

taxpayer must show:   (1) An intention on the part of the owner to

abandon the asset, and (2) an affirmative act of abandonment.

Citron v. Commissioner, 97 T.C. 200, 208 (1991).     An affirmative

act of abandonment must be ascertained from all the facts and

circumstances, United Cal. Bank v. Commissioner, 41 T.C. 437, 451

(1963), affd. per curiam 340 F.2d 320 (9th Cir. 1965), and "the

Tax Court [is] entitled to look beyond the taxpayer's formal

characterization”, Laport v. Commissioner, 671 F.2d 1028, 1032

(7th Cir. 1982), affg. T.C. Memo. 1980-355.    The loss is allowed

for the year in which the act of abandonment takes place.    See

Buda v. Commissioner, T.C. Memo. 1999-132; sec. 1.165-1(d)(1),

Income Tax Regs.

     Petitioner transferred the property to Angelo by deed.

Under California law, a deed need not be recorded when delivered

to be effective.   Douglas v. Commissioner, T.C. Memo. 1989-592.
                              - 14 -

We have held that abandonment cannot occur if the transferor

intends for a particular person to be the transferee.

Strandquist v. Commissioner, T.C. Memo. 1970-84.    We stated:

      Abandonment must be made by the owner, without being
      pressed by any duty, necessity, or utility to himself,
      but simply because he no longer desires to possess the
      thing; and, further, it must be made without any desire
      that any other person shall acquire the same; for if it
      were made for a consideration it would be a sale or
      barter, and if without consideration, but with
      intention that some other person should become
      possessor, it would be a gift. * * * [Emphasis added.]

Id.   Similarly, the California Supreme Court has stated that

abandonment does not result when the property is delivered and

accepted by a donee.   Richardson v. McNulty, 24 Cal. 339, 344

(1864); see also Commissioner v. Estate of Bosch, 387 U.S. 456,

465 (1967) (The decisions of the State’s highest court are

conclusive as to that State’s law).    That court stated that “If

the gift be complete–-that is to say, if the thing given be

delivered, and accepted by the donee, a transfer is the result,

which transfer as much precludes the idea of abandonment as a

transfer resulting from a sale”.   Richardson v. McNulty, supra.

In addition, the court characterized “abandonment” as leaving the

property “free to the occupation of the next comer, whoever he

may be, without any intention to repossess or reclaim it for

himself in any event, and regardless and indifferent as to what

may become of it in the future”.   Id. at 345.
                                - 15 -

     Petitioner signed a deed conveying his interest in the

property to his brother, with the intent of his brother

possessing the property.    On the basis of the record before us,

we find that petitioner did not abandon the property.

Accordingly, we hold that petitioner is not entitled to a

deduction for an abandonment loss with regard to the

Stockton/Elsie property in 1995.

     B.   Cancellation of Indebtedness (COD) Income

     Respondent argues that petitioner must recognize income in

1995 of $111,229.   This amount is the total amount Angelo paid in

1993 and 1994 on behalf of petitioner with regard to cleanup

expenses related to the Stockton/Elsie property.    Respondent

contends that because petitioner has not repaid the amount and

Angelo has not attempted to collect it, petitioner should

recognize the amount as COD income in 1995, when the property was

transferred to Angelo.     Petitioner argues that the debt owed to

Angelo was outstanding in 1995 and petitioner had a “good faith

intent” to repay these advances.

     “Income from discharge of indebtedness” is included in gross

income.   Sec. 61(a)(12).   Petitioner and Angelo testified at

trial regarding these advances.    Having observed petitioner’s and

Angelo’s appearances and demeanors at trial, we find their

testimonies on this issue to be honest, forthright, and credible.
                             - 16 -

     Angelo testified that it was common for him to advance to

the other owners the funds to pay the expenses on a property.      He

further testified that he treated the advances as loans and

interest accrued on the advances.8    Angelo also stated that he

does not pursue collection on these loans actively.    For example,

Angelo testified:

          I got a call a few days ago from a fellow by the
     name of Sammy C. Actually, not him, got a call from an
     agent that says “Hey, Sammy has on his financial
     statement that he owes you money from 1985.”

          He says “What’s the deal?”    Said, “Gee whiz, he does owe it to me,

          But Sammy was–-couldn’t pay for a long time.
     “Well, is he going to pay you?”

          “Yeah, he’ll pay me.”

          “When?”

          “Well, when he can.” He’s not a relation or
     anything. I’ve never filed a lawsuit against him. He
     has sufficient money for me to go after him but I’m not
     going to break the guy to collection a few hundred
     thousand dollars.

     In addition, petitioner testified that he considered the

advances to be loans that he still owed and intended to pay back.

Upon the basis of the record, we find the amounts advanced to

petitioner by Angelo still owing.    Therefore, we hold that




     8
        Angelo’s accountant, Mark Enes, further testified that
Angelo did not favor petitioner on the interest rate charged to
petitioner.
                                - 17 -

petitioner does not have COD income in the amount of $111,229 for

1995.

III.    Shopping Center Roofs

        A.   Cirby/Sunrise Shopping Center Roof

        Respondent argues that the cost of replacing the roof on the

Cirby/Sunrise shopping center must be capitalized.     Respondent

contends that “An entire component of the building--the roof--was

removed and replaced”.     Respondent further argues that the new

roof prolonged the life of the property.     Petitioner argues that

the work on the roof was of the nature of a repair for the

purpose of keeping the roof in “ordinary operating condition”.

Petitioner argues that, because the work on the roof was repairs,

the cost could be deducted in the year paid.

        Section 162 allows the deduction of “all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business”.      Section 1.162-4, Income Tax

Regs., further provides:

        The cost of incidental repairs which neither materially
        add to the value of the property nor appreciably
        prolong its life, but keep it in an ordinarily
        efficient operating condition, may be deducted as an
        expense * * *. Repairs in the nature of replacements,
        to the extent that they arrest deterioration and
        appreciably prolong the life of the property, shall
        * * * be capitalized * * *.

        Section 263(a) provides that no deduction shall be allowed

for (1) “Any amount paid out for new buildings or for permanent
                                - 18 -

improvements or betterments made to increase the value of any

property or estate”, or (2) “Any amount expended in restoring

property or in making good the exhaustion thereof for which an

allowance is or has been made”.    Sec. 263(a)(1) and (2); Wolfsen

Land & Cattle Co. v. Commissioner, 72 T.C. 1, 14 (1979).       Within

the scope of section 263(a)(1) are those amounts paid or incurred

(1) to add to the value, or substantially prolong the useful

life, of property owned by the taxpayer, or (2) to adapt property

to a new or different use.    Sec. 1.263(a)-1(b), Income Tax Regs.

     An important factor in determining whether the appropriate

tax treatment is immediate deduction or capitalization is the

taxpayer's realization of benefits beyond the year in which the

expenditure is incurred.     INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 87 (1992); United States v. Wehrli, 400 F.2d 686, 689 (10th

Cir. 1968).   This is not an absolute rule, however, as the

benefits of expenditures considered to be currently deductible as

repairs sometimes extend beyond the current year, as would be

true, for example, of the cost of replacing a broken windowpane.

United States v. Wehrli, supra.

     Whether an expenditure may be deducted or must be

capitalized is a question of fact.       INDOPCO, Inc, v.

Commissioner, supra at 86.    Thus, “Courts have adopted a

practical case-by-case approach in applying the principles of

capitalization and deductibility.”       Norwest Corp. & Subs. v.
                              - 19 -

Commissioner, 108 T.C. 265, 280 (1977) (quoting Wolfsen Land &

Cattle Co. v. Commissioner, supra).

     Petitioner cited several cases to support his argument that

the nature of the work on the roof was repairs, including

Vanalco, Inc. v. Commissioner, T.C. Memo. 1999-265, Pierce

Estates, Inc. v. Commissioner, 16 T.C. 1020 (1951), Thurner v.

Commissioner, 11 T.C.M.(CCH) 42 (1952), Pontel Family Estate v.

Commissioner, T.C. Memo. 1981-303, and Rev. Rul. 2001-4.     In each

of these cases and in the revenue ruling, the Court held that

certain work performed should be characterized as repairs and

deducted rather than capitalized.   These situations are

distinguishable from the instant case because they involved

instances in which the repairs were of a recurring nature, part

of a regular maintenance program, or necessary due to storm

damage.   None of the situations in the cited cases or revenue

ruling is applicable in the instant case–-petitioner did not

offer evidence that he performed work on his roof on a recurring

basis or that the work was to repair damage caused by a storm.

Therefore, we find the cases and revenue ruling cited by

petitioner distinguishable from the instant case.

     Petitioner presented an expert witness, Robert Cox, who

testified that the entire roof was not replaced, that many

components were reused, and that the work was of poor quality so

that it did not prolong the life of the roof nor materially add
                              - 20 -

to its value.   Mr. Cox concluded that the work was “merely

incidental repairs”.

     Respondent presented Robert Graham from Gudgel/Yancey

Roofing, Inc., the person who supervised the roof work on the

Cirby/Sunrise shopping center.   We found Mr. Graham’s testimony

to be honest, forthright, and credible.     Mr. Graham testified

that the work was a “re-roofing project” in which:

     We go to a roofing system that’s old and needs to be
     replaced, and we go there and we tear it off. We
     remove the roofing from the existing plywood, and then
     by the time everything is torn off, we’ll be looking at
     old plywood.

     We replace whatever needs to be replaced in the way of
     plywood, and then we go–-start installing our roofing
     systems. * * *

Mr. Graham stated that he replaced the entire builtup portion of

the roof, but “that is the entire roof”.     Mr. Graham stated that

he reviewed the work during its application and on completion

with the representative of the roofing system manufacturer

because the new roof is under warranty for 10 years.

     After considering the work completed and Mr. Graham’s

credible testimony, we find that petitioner replaced the roof.

Additionally, the replacement roof is expected to last 10 years,

prolonging the roof’s useful life.     We believe that the

replacement of the builtup portion of the roof was of a
                                   - 21 -

substantial nature to render it a capital expenditure.9         See

Stark v. Commissioner, T.C. Memo. 1999-1.

       B.      Carmichael Village Shopping Center Roof

       Respondent argues that the cost of replacing the roof on the

Carmichael Village shopping center (suites 1-12) must be

capitalized.       Petitioner argues that the work was in the nature

of repairs for the purpose of keeping the roof in ordinary

operating condition.

       Mr. Graham, who also managed this roofing project, testified

as to the work completed.       Mr. Graham testified that the

contractor of the original roof had done a poor job, and “we had

no choice but to tear it off and completely put a new roof on

it”.       Mr. Graham further testified that “an entire roof” was

replaced, but only for 10 percent of the entire shopping center.

Mr. Graham stated that the new roof had a 10-year warranty.

       Petitioner contends that our holding in Vanalco, Inc. v.

Commissioner, supra, applies to the case in issue, pointing out

that the taxpayer in Vanalco replaced only 10.6 percent of the

roof.       We disagree.   The facts in Vanalco are distinguishable

from the instant case.       In Vanalco, there was no evidence that



       9
        Petitioner’s expert, Mr. Cox, testified that the tile
roof has a longer life expectancy than the builtup roof and
should not need to be replaced as often. The tile roof is a
separate component from the builtup portion with a different
useful life.
                               - 22 -

the work provided a functional improvement to the roof,

materially added to the value of the property, or would

appreciably prolong the life of the roof.    Id.   In the instant

case, Mr. Graham credibly testified that the new roof had a 10-

year warranty, prolonging the life of the property.

Additionally, in Vanalco, the work on the roof was performed

during ordinary maintenance which occurred almost every year.       In

the instant case, however, no evidence was presented to indicate

that the work performed on the roof was of a recurring nature.

     Although petitioner replaced the roof of 10 percent of the

entire shopping center, we note that the entire builtup roof of

that section was replaced.    This section encompassed the roof

above 12 separate suites.    After considering the evidence, we

hold that the cost of the work performed on the roof must be

capitalized because of the substantial nature of the work

performed and the work appreciably prolonged the life of the

roof.

     C.   Payment to Royal Roofing, Inc.

     Respondent argues that petitioner’s $30,000 payment to Royal

Roofing, Inc., should not be allowed as a deduction for 1995

because petitioner presented no evidence as to the business

purpose of the payment.   Petitioner argues that he established

the business nature of this payment and it is deductible.
                              - 23 -

      Deductions are a matter of legislative grace, and petitioner

bears the burden of proving that he is entitled to the deductions

claimed.   Rule 142(a); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934).   The taxpayer bears the burden of

substantiating the amount and purpose of the item for the claimed

deduction.   See Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),
affd. per curiam 540 F.2d 821 (5th Cir. 1976).

      Petitioner testified that he could not obtain the invoices

from Royal Roofing; he did not testify as to the purpose of the

payment.   Mr. Cox, petitioner’s expert, testified that Royal

Roofing performed the work because “someone” had told him that

Royal Roofing had done the work.    Mr. Cox did not talk to Royal

Roofing or see any invoices or proposals from Royal Roofing.

Accordingly, we do not place any weight on Mr. Cox’s testimony

regarding Royal Roofing.

      Petitioner has not established that the payment to Royal

Roofing was a business expense.    Accordingly, we sustain

respondent’s determination on this issue.

IV.   Payment of Real Estate Taxes on Calvine 120/140

      Respondent argues that petitioner must capitalize the real

estate taxes paid in 1995 on the Calvine 120/140 property

because, at the time they were incurred, it was reasonably likely

that petitioner would subsequently develop this property.

Petitioner counters that he is entitled to deduct the real estate

taxes because section 263A does not apply.    Petitioner contends
                              - 24 -

that he acquired and held the property for investment purposes,

there has been no physical change to the property, and it was not

reasonably likely that he would subsequently develop the property

once he acquired it.

     Section 263A provides:

          (a) Nondeductibility of Certain Direct and
     Indirect Costs.--

               (1) In general.–-In the case of any
          property to which this section applies, any
          costs described in paragraph (2)--

                    (A) in the case of property
               which is inventory in the hands of
               the taxpayer, shall be included in
               inventory costs, and

                    (B) in the case of any other
               property, shall be capitalized.

               (2) Allocable costs.–-The costs
          described in this paragraph with respect to
          any property are–

                    (A) the direct costs of such
               property, and

                    (B) such property’s proper
               share of those indirect costs
               (including taxes) part or all of
               which are allocable to such
               property.

Real estate taxes qualify as an “indirect cost” that must be

capitalized under section 263A if this section applies.     Sec.

1.263A-1(e)(3)(ii)(L), Income Tax Regs.   Section 263A applies to

property “produced” by the taxpayer.   Sec.   263A(b)(1).   Section

263A(g)(1) defines the term “produce” to include “construct,

build, install, manufacture, develop, or improve.”    Congress

intended the term “produce” to be broadly construed.    See Reichel
                               - 25 -

v. Commissioner, 112 T.C. 14, 17 (1999) (citing Von-Lusk v.

Commissioner, 104 T.C. 207, 215 (1995)).    Further, the

regulations provide:

     If property is held for future production, taxpayers
     must capitalize direct and indirect costs allocable to
     such property (e.g., purchasing, storage, handling, and
     other costs), even though production has not begun. If
     property is not held for production, indirect costs
     incurred prior to the beginning of the production
     period must be allocated to the property and
     capitalized if, at the time the costs are incurred, it
     is reasonably likely that production will occur at some
     future date. Thus, for example, a manufacturer must
     capitalize the costs of storing and handling raw
     materials before the raw materials are committed to
     production. In addition, a real estate developer must
     capitalize property taxes incurred with respect to
     property if, at the time the taxes are incurred, it is
     reasonably likely that the property will be
     subsequently developed. [Emphasis added.]

Sec. 1.263A-2(a)(3)(ii), Income Tax Regs.

     In 1995, the year in which the real estate taxes were paid,

petitioner filed a document with the County outlining plans to

subdivide the property.   Petitioner testified that he filed the

application to change the zoning of the property from SPA to

residential zoning because the SPA zoning was depressing the

value of his property.    Petitioner also testified:   “I filed this

application to give attention to County of Sacramento.     My

properties are ready to be developed”.

     We have rejected arguments that a physical change to the

property is required for the capitalization of costs.      See Von-

Lusk v. Commissioner, supra at 218.     In addition, we have held

that our determination as to whether development will occur is

unaffected by local regulations that may delay or eventually
                               - 26 -

preclude the development from going forward.    Id. at 220.   We

also note that we make this determination at the time the taxes

are paid or incurred, not at the time the taxpayer acquired the

property.   Sec. 1.263A-2(a)(3)(ii), Income Tax Regs.    Therefore,

it is not dispositive to our determination whether Calvine

120/140 had undergone physical changes as of the time those taxes

were paid, that the zoning restrictions may hinder or ultimately

prohibit development, or that petitioner initially acquired the

property for investment purposes.

     On the basis of the evidence, we conclude that it was

petitioner’s intention and reasonably likely that Calvine 120/140

would be subsequently developed when the taxes were paid in 1995.

Therefore, we hold that the amounts paid for real estate taxes

for the property must be capitalized during the 1995 taxable

year.

V.   Payment to Consolidated Electrical Distributors

     Respondent argues that petitioner may not deduct a $7,472

payment to Consolidated Electrical Distributors in 1995 because

petitioner did not present any evidence as to the business

purpose of the payment.   Although the payment was made from a

business account of petitioner’s, respondent points to instances

in which petitioner paid personal expenses from this bank

account.    Petitioner counters that there could have been no other

purpose for the payment but for a business purpose.     We agree

with respondent.
                              - 27 -

     Deductions are a matter of legislative grace, and petitioner

bears the burden of proving that he is entitled to the deductions

claimed.   Rule 142(a); New Colonial Ice Co. v. Helvering, 292

U.S. at 440.   Ordinarily, a taxpayer is permitted to deduct the

ordinary and necessary expenses that he pays or incurs during the

taxable year in carrying on a trade or business.    Sec. 162(a).     A

taxpayer, however, is required to maintain records sufficient to

establish the amounts of his deductions.    Sec. 6001; sec. 1.6001-

1(a), Income Tax Regs.

     Petitioner conceded that some expenses paid from his

business bank account were not for business purposes.    Petitioner

presented no evidence to establish the business purpose of this

payment.   Accordingly, we hold that petitioner is not allowed to

deduct the payment to Consolidated Electrical Distributors in

1995.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not herein

discussed, we find them to be irrelevant or without merit.

     To reflect the foregoing,

                                               Decisions will be

                                           entered under Rule 155.
