                          T.C. Memo. 1996-178



                        UNITED STATES TAX COURT


      ROBERT R. SKORNIAK AND MARY SKORNIAK, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 3269-95.                        Filed April 11, 1996.


     Robert R. Skorniak, pro se, and Elaine C. Tunzat, for

petitioners.1

     Catherine J. Caballero, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION

     CHIECHI, Judge:     Respondent determined a deficiency in

petitioners' Federal income tax for 1990 in the amount of

$39,705.

     The only issue remaining for decision is whether a house

1
   Petitioner Robert R. Skorniak represented himself and peti-
tioner Mary Skorniak at trial. Elaine C. Tunzat prepared the
briefs on behalf of petitioners.
                                - 2 -


constructed by petitioners during the years 1990 through 1992 was

used by them as their principal residence within the time pre-

scribed by section 1034(a).2    We hold that it was not.

                           FINDINGS OF FACT

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

     Petitioners resided in Salem, Oregon, at the time the

petition was filed.   Petitioners filed a joint Federal income tax

return for 1990.

     As of November 1988, petitioners owned a house (California

residence) that was located in San Jose, California (San Jose),

and that they occupied as their principal residence.       On January

31, 1990, petitioners sold their California residence for

$295,000.

     On November 5, 1988, petitioners purchased a house (3395

residence) located at 3395 13th Place S.E., Salem, Oregon

(Salem), for $79,788.50.    In November 1988, immediately after

their purchase of the 3395 residence, petitioners operated that

property as rental property by leasing it to an unrelated third

party who occupied it until July 1989.    In July 1989, petitioners

vacated their California residence, moved from San Jose to Salem,

and, upon their arrival in Salem, resided at the 3395 residence.

     In 1989, petitioners purchased for $16,561.50 a vacant lot

2
   All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
                                - 3 -


(3405 lot) for the purpose of constructing a house on it.    The

3405 lot was located at 3405 13th Place S.E., Salem, and adjoined

the 3395 residence.   During 1990, petitioners began construction

on the 3405 lot of a 9,000 square foot, two-story house (3405

house).   In November 1990, framing contractors, retained by

petitioners, commenced the framing work on the 3405 house.     In

addition, petitioners retained the services of their son Donald

C. Skorniak and the services of Michael D. Friederick, who

assisted with various construction work on that house, including

(1) installing the plumbing; (2) stuccoing the exterior walls;

and (3) sheetrocking, taping, texturing, and painting the inter-

ior walls and ceilings.

     As of January 31, 1992, the construction work on the 3405

house had not been completed.   That work was not completed until

May or June 1992.   Construction work with respect to the interior

of the 3405 house that was in progress during January 1992 and/or

was not completed by January 31, 1992, included (1) sheetrocking,

taping, texturing, and painting the walls and ceilings; (2) in-

stalling the flooring, including carpets and tiles; and (3) in-

stalling soffits in the recreation room.   Construction work with

respect to the exterior of the 3405 house that was not completed

by January 31, 1992, included certain unspecified work relating

to its outside structure that was done after January 31, 1992,

pouring concrete for its front steps that was done during Febru-
                               - 4 -


ary 1992, pouring concrete for its driveway that was done after

February 1992, and installing its garage door that was done

during April or May 1992.

     As of January 31, 1992, utility services, including water

and electricity, were not yet furnished to the 3405 house through

any public utility company.   On February 20, 1992, Portland

General Electric connected the electricity service, and on

February 22, 1992, the city of Salem connected the water service,

to the 3405 house.   On May 20, 1992, the city of Salem conducted

the final electrical inspection on the 3405 house and approved

the electrical wiring in that house.   Although Northwest Natural

Gas Company connected the gas service to the 3405 house on

January 29, 1992, that service was not used by petitioners until

some time after January 31, 1992.

     During 1990, petitioner Robert Skorniak (Mr. Skorniak)

connected a number 10-gauge wire from the 3395 residence to the

3405 house in order to provide electricity service to that house,

and he connected a water pipe from the 3395 residence to the 3405

house in order to provide water service to that house.   The

number 10-gauge wire that Mr. Skorniak connected to the 3405

house did not provide adequate power for the entire house and was

installed primarily for the purpose of operating power tools

during the course of the construction of that house.   As of

January 31, 1992, the only sources for heating the 3405 house
                               - 5 -


consisted of portable electric heaters and a wood-burning stove

located in the basement of the house.

     Petitioners resided at and used the 3395 residence before

and after January 31, 1992, during the course of the construction

of the 3405 house.   As of January 31, 1992, and for an unspeci-

fied period of time thereafter, petitioners continued to receive

mail, their personal possessions, including furniture, were

located, and they continued to use the laundry facilities, at the

3395 residence.   In June 1992, for the first time since they

moved into the 3395 residence in July 1989, petitioners resumed

operating that residence as a rental property by leasing it to an

unrelated third party.

     Petitioners included a Form 2119, "Sale of Your Home", as

part of the 1990 Federal income tax return they filed (1990 re-

turn) and did not report in that return any gain from the sale of

their California residence.   That form indicated that (1) peti-

tioners sold their California residence on January 31, 1990;

(2) its selling price was $295,000; (3) the selling expenses as-

sociated with that sale were $19,711; (4) petitioners' basis in

that residence was $61,325; and (5) their realized gain from that

sale was $213,964.   The Form 2119 included as part of petition-

ers' 1990 return also indicated that, as of October 15, 1991,

petitioners had not replaced their California residence and that

they planned to replace it within the "replacement period".
                               - 6 -


     The Internal Revenue Service assigned revenue agent Linda

Richards (Ms. Richards) to examine petitioners' 1990 return.

That examination focused on petitioners' sale of their California

residence and their deferral of the recognition of gain from that

sale.   In a meeting with Ms. Richards that took place on June 1,

1993, Mr. Skorniak informed Ms. Richards that he moved into the

3405 house in May or June 1992.   In January 1994, during a

telephonic discussion with Ms. Richards, Mr. Skorniak advised her

that he believed that the law with respect to the deferral of

gain recognition on the sale of a principal residence was "unfair

and that he would do anything that he could to see that it was

changed, which would include talking with accountants and legis-

lators."

     As of January 31, 1992, petitioners were not using the 3405

house as their principal residence.

                              OPINION

     Petitioners bear the burden of proving error in respondent's

determination regarding the gain from the sale of their Califor-

nia residence.   See Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933).

     Petitioners attempted to satisfy their burden of proof in

this case through the testimony of Mr. Skorniak, their son Donald
                               - 7 -


C. Skorniak, and Michael D. Friederick.3    We found the testimony

of each of those witnesses at times general, vague, conclusory,

and/or internally inconsistent.   Those witnesses also contra-

dicted each other with respect to the date of the completion of

certain construction work on the 3405 house and the date on which

petitioners moved into that house.     We also found their recollec-

tion of specific matters relating to those events to be poor or

at best hazy.   It is also significant that Mr. Skorniak's tes-

timony concerning when petitioners moved into the 3405 house was

inconsistent with prior statements that he had made to Ms.

Richards during the course of her examination of petitioners'

1990 return.4   Under the circumstances presented here, we are not

required to, and we generally do not, rely on the testimony of

the witnesses presented by petitioners to sustain their burden of

establishing error in respondent's determination relating to

section 1034.   See Lerch v. Commissioner, 877 F.2d 624, 631-632

(7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger v. Commis-

sioner, 440 F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam

T.C. Memo. 1969-159; Tokarski v. Commissioner, 87 T.C. 74, 77

(1986).

      Section 61(a)(3) provides that a taxpayer must include in


3
   Although petitioner Mary Skorniak was present during the
entire trial, she did not testify.
4
    We found Ms. Richards credible.
                               - 8 -


gross income gains derived from dealings in property.   Section

1001(c) generally requires a taxpayer to recognize the entire

amount of gain or loss realized on the sale or exchange of

property.   With respect to gain realized on the sale of a prin-

cipal residence, section 1034(a) provides the following exception

to that general rule:

     If property (in this section called "old residence")
     used by the taxpayer as his principal residence is sold
     by him and, within a period beginning 2 years before
     the date of such sale and ending 2 years after such
     date, property (in this section called "new residence")
     is purchased and used by the taxpayer as his principal
     residence, gain (if any) from such sale shall be recog-
     nized only to the extent that the taxpayer's adjusted
     sales price (as defined in subsection (b)) of the old
     residence exceeds the taxpayer's cost of purchasing the
     new residence.[5]

Section 1034(c)(2) provides that, for purposes of section 1034, a

residence any part of which was constructed or reconstructed by a

taxpayer shall be treated as being purchased by that taxpayer.

     The parties agree that (1) the California residence was

petitioners' "old residence" for purposes of section 1034;

(2) petitioners sold that residence on January 31, 1990; (3) they

realized a gain of $213,964 from that sale; (4) the adjusted

sales price of that residence does not exceed the total costs

incurred by petitioners in constructing the 3405 house; and

(5) they were required to use that house as their principal


5
   Any gain that is not recognized under sec. 1034 reduces the
taxpayer's basis in the "new residence". Sec. 1034(e).
                               - 9 -


residence on or before January 31, 1992, in order to qualify the

gain from the sale of their California residence for nonrecogni-

tion under section 1034.   The only dispute herein concerns the

date on which petitioners first used the 3405 house as their

principal residence.

     Petitioners contend that they used the 3405 house as their

principal residence by January 31, 1992, and that therefore the

gain from the sale of their California residence qualifies for

nonrecognition under section 1034.     Respondent disagrees.6

     The determinations of whether property (1) is used by a

taxpayer as his or her residence and (2) is used as his or her

principal residence depends upon all the facts and circumstances.

Sec. 1.1034-1(c)(3), Income Tax Regs.     For purposes of section

1034, property is "used" by a taxpayer as his or her new resi-

dence 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 (1960).     A resi-

dence is a taxpayer's "principal residence" if it is his or her

"chief or main" place of residence, considering all relevant

facts, including the amount of time the taxpayer spends at one


6
   Respondent determined in the notice of deficiency that the
3395 residence, and not the 3405 house, was petitioners' "new
residence" for purposes of sec. 1034 and that, accordingly,
petitioners should have recognized the gain realized on the sale
of the California residence to the extent that that gain exceeded
the purchase price of the 3395 residence.
                              - 10 -


residence as opposed to another.   See Stolk v. Commissioner, 40

T.C. 345, 351, 356 (1963), affd. 326 F.2d 760 (2d Cir. 1964).

     Of paramount importance in determining whether petitioners

were using the 3405 house as their principal residence by January

31, 1992, is Mr. Skorniak's admission to Ms. Richards on June 1,

1993, that petitioners moved into the 3405 house in May or June

1992.   That admission is borne out by additional facts we have

found based on other portions of the record herein.   We have

found that there was construction work with respect to the inter-

ior of the 3405 house that was in progress during January 1992

and/or was not completed by January 31, 1992, including (1)

sheetrocking, taping, texturing, and painting the walls and

ceilings; (2) installing the flooring, including carpets and

tiles; and (3) installing soffits in the recreation room.   We

have also found that there was construction work with respect to

the exterior of the 3405 house that was not completed by January

31, 1992, including certain unspecified work relating to its

outside structure that was done after January 31, 1992, pouring

concrete for its front steps that was done during February 1992,

pouring concrete for its driveway that was done after February

1992, and installing its garage door that was done during April

or May 1992.

     We have also found that on February 20, 1992, Portland

General Electric connected the electricity service, and on Febru-
                              - 11 -


ary 22, 1992, the city of Salem connected the water service, to

the 3405 house and that although Northwest Natural Gas Company

connected the gas service to that house on January 29, 1992, that

service was not used by petitioners until some time after January

31, 1992.   We have further found that the number 10-gauge wire

that was connected from the 3395 residence to the 3405 house was

installed primarily for the purpose of operating power tools

during the course of the construction of the 3405 house and did

not provide adequate power for the entire house.   Although we

have also found that, as of January 31, 1992, Mr. Skorniak had

connected a water pipe from the 3395 residence to the 3405 house

and that, as of that date, there were a wood-burning stove and

portable electric heaters located in that house, petitioners have

failed to persuade us that, as of January 31, 1992, those items

provided adequate water and heating for the 3405 house.

     Additional facts we have found that bear out Mr. Skorniak's

admission to Ms. Richards that petitioners moved into the 3405

house in May or June 1992 are that (1) petitioners resided at and

used the 3395 residence before and after January 31, 1992, during

the course of the construction of the 3405 house; (2) as of

January 31, 1992, and for an unspecified period of time there-

after, (a) petitioners continued to receive mail at the 3395

residence, (b) their personal possessions, including furniture,

were located at the 3395 residence, and (c) they continued to use
                              - 12 -


the laundry facilities at the 3395 residence; and (3) petitioners

ceased operating the 3395 residence as rental property from July

1989, when they moved from San Jose to Salem and began occupying

that residence, until June 1992, when they resumed leasing it.

     Based on our review of the entire record before us, we find

that petitioners have failed to establish that, as of January 31,

1992, they were using the 3405 house as their principal resi-

dence.   Accordingly, we sustain respondent's determination relat-

ing to section 1034.

     To reflect the foregoing and petitioners' concessions,


                                    Decision will be entered for

                               respondent.
