                         T.C. Memo. 1999-371



                       UNITED STATES TAX COURT



             MARK AND HELEN THOMSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23704-97.                  Filed November 8, 1999.



     Conrad D. Carnes, for petitioners.

     Jean Bass and Nguyen-Hong K. Hoang, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following defi-

ciencies in, and accuracy-related penalties under section

6662(a)1 on, petitioners' Federal income tax:



     1
      All section references are to the Internal Revenue Code
(Code) in effect for the years at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
                                 - 2 -

   Year             Deficiency           Accuracy-Related Penalty
   1993               $51,860                     $4,720
   1994               122,417                     10,647


     The issues remaining for decision are:

     (1)    Are petitioners required to utilize a 3-year recovery

period as contended by petitioners or a 5-year recovery period as

contended by respondent in calculating depreciation deductions

for the years at issue for certain aircraft parts purchased

during those years?    We hold that they are required to use a 5-

year recovery period.

     (2)    Are petitioners liable for the accuracy-related penalty

under section 6662(a) for each of the years at issue?     We hold

that they are.

                           FINDINGS OF FACT

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

addition, on December 1, 1998, respondent filed a request for

admissions with the Court, a copy of which the Court served on

petitioners on December 4, 1998.    On December 4, 1998, the Court

ordered petitioners to file a response to that request on or

before January 4, 1999.    Petitioners did not file any response to

respondent’s request for admissions.     As a result, each matter

set forth in respondent's request for admissions is deemed

admitted.     See Rule 90(c); Marshall v. Commissioner, 85 T.C. 267,

272 (1985).

     Petitioners resided in Adelanto, California, at the time
                               - 3 -

they filed the petition.

      During the years at issue, petitioner Mark Thomson (peti-

tioner or Mr. Thomson) operated a business known as Aviation

Warehouse (Aviation) which rented aircraft parts to motion

picture studios (movie studios) for use in film production.

Aviation also sold photocopies of pages from books on aircraft in

a library that it maintained for that purpose.

      During the years at issue, Mr. Thomson purchased most of the

aircraft parts and books used in Aviation’s business activities

at auctions held throughout the United States.   At those auc-

tions, petitioner usually obtained aircraft parts and books in

large quantities because he speculated that he would be able to

use at least some of those parts and books in those activities.

Mr. Thomson did not dispose of any of the aircraft parts and

books purchased at auctions that he found unsuitable for use in

Aviation’s business activities.

      After the conclusion of film production, the movie studios

returned to Aviation the aircraft parts that they had rented from

it.   Those parts were often returned to Aviation in a damaged

condition and sometimes with pieces missing.   After a movie

studio returned a damaged aircraft part to Aviation, Mr. Thomson

sometimes attempted to repair the part in order to make it

suitable to be rented again to a movie studio.   However, after

having been subjected to wear and tear from its use by movie
                                 - 4 -

studios, an aircraft part deteriorated over time, which varied

depending on the particular aircraft part and its treatment by

the movie studios during rental.

     During the years at issue, petitioner stored many of the

aircraft parts that he acquired outdoors on land that he owned in

the desert (desert property).    Exposure to the weather also

caused some of those parts to deteriorate and become useless to

Aviation’s business activities.    Mr. Thomson did not dispose of

any of those deteriorated aircraft parts.    Instead, he retained

them, together with the aircraft parts that he was holding for

rental, on his desert property.

     During the years at issue, Mr. Thomson did not maintain any

records showing (1) the specific aircraft parts rented by Avia-

tion to the movie studios, (2) when the aircraft parts were

returned by those movie studios, and (3) whether or not the

aircraft parts that were rented needed to be replaced or repaired

after those movie studios returned them to Aviation.

     Petitioners filed Form 1040, U.S. Individual Income Tax

Return, for each of the years 1993 and 1994.    Petitioners re-

ported certain income and claimed certain expenses from Avia-

tion's business activities in Schedule C of Form 1040 (Schedule

C) for each of those years.

                                OPINION

     Petitioners bear the burden of proving that the determina-
                                - 5 -

tions in the notice of deficiency (notice) are erroneous.    See

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

Depreciation Deductions for Aircraft Parts

     In the notice issued to petitioners, respondent disallowed

the cost, inter alia, of the aircraft parts which Mr. Thomson

acquired during 1993 and 1994 and which petitioners claimed as

cost of goods sold in Schedule C for each of those years.

Respondent further determined in the notice that petitioners are

entitled to depreciation deductions for each year at issue with

respect to the aircraft parts that Mr. Thomson purchased during

each such year.    Respondent calculated the depreciation deduc-

tions for certain of the aircraft parts in question over a 5-year

recovery period and for certain other such parts over a 7-year

recovery period.    Respondent concedes on brief that all of the

aircraft parts in question are depreciable over a 5-year recovery

period.

     Although not altogether clear, as we understand it, peti-

tioners are arguing for the first time on brief that the aircraft

parts2 that Mr. Thomson purchased during each of the years 1993

and 1994 are depreciable over a 3-year recovery period.3


     2
      Petitioners do not dispute respondent’s determinations
regarding the books that Mr. Thomson purchased and used in
Aviation’s business activities.
     3
      Petitioners contended at trial that for each year at issue
they are entitled to deduct as abandonment losses under sec.
165(a) the total amounts that Mr. Thomson spent during each such
                               - 6 -

     Section 167(a) permits a depreciation deduction for, inter

alia, property used in a trade or business.   Pursuant to section

168(a), the depreciation deduction for any tangible property

generally is to be determined by using the applicable deprecia-

tion method, the applicable convention, and the applicable

recovery period.   The parties’ dispute here is over the applica-

ble recovery period for the aircraft parts in question.

     For purposes of section 168, the applicable recovery period

in the case of 3-year property is 3 years, and the applicable

recovery period in the case of 5-year property is 5 years.    See

sec. 168(c).   Section 168(e)(1) classifies property as (1) 3-year

property if such property has a class life of 4 years or less and

(2) as 5-year property if such property has a class life of more

than 4 years but less than 10 years.

     As pertinent here, the term “class life” is defined by

section 168(i)(1), to mean, in general, the class life, if any,

which would be applicable with respect to any property as of

January 1, 1986, under section 167(m) (determined without regard

to section 167(m)(4) and as if the taxpayer had made an election

under section 167(m)), as in effect on the day prior to the date

of the enactment of the Omnibus Budget Reconciliation Act of



year to acquire various aircraft parts. On brief, petitioners do
not advance that argument. We therefore presume that petitioners
have abandoned their position at trial under sec. 165. See Rybak
v. Commissioner, 91 T.C. 524, 566 n.19 (1988).
                                 - 7 -

1990, Pub. L. 101-508, sec. 11812(a), 104 Stat. 1388, 1388-534

(former section 167(m)).   Former section 167(m) permitted depre-

ciation deductions to be determined with respect to a depreciable

asset on the basis of a class life prescribed for such asset by

the Secretary of the Treasury or his delegate    (Treasury).    The

class lives prescribed by the Treasury for various depreciable

assets are found in a series of revenue procedures issued by the

Commissioner of Internal Revenue.    See sec. 1.167(a)-

11(b)(4)(ii), Income Tax Regs.    The revenue procedure in effect

for the years at issue is Rev. Proc. 87-56, 1987-2 C.B. 674, as

clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785 (Rev.

Proc. 87-56).

     Rev. Proc. 87-56 divides depreciable assets into two broad

categories:   (1) Asset guideline classes (asset classes) 00.11

through 00.4, consisting of specific depreciable assets used in

all business activities (the asset category), and (2) asset

classes 01.1 through 80.0, consisting of depreciable assets used

in specific business activities (the activity category).    See

Rev. Proc. 87-56, 1987-2 C.B. at 676-687.    The same item of

depreciable property may be listed in both the asset category and

the activity category.   See, e.g., Rev. Proc. 87-56, supra at

681; see also Norwest Corp. v. Commissioner, 111 T.C. 105, 159

(1998).   In the event that a depreciable asset is listed in Rev.

Proc. 87-56 in both the asset category and the activity category,
                               - 8 -

the asset category takes priority over the activity category.

See Norwest Corp. v. Commissioner, supra at 162-164.    Any depre-

ciable asset which does not have a class life is classified as 7-

year property and has a recovery period of 7 years.    See sec.

168(e)(3)(C)(ii); Rev. Proc. 87-56, supra at 687.

     Petitioners contend on brief that the useful life of each of

the aircraft parts in question is less than 4 years and that

therefore they are entitled to depreciate those parts over a 3-

year recovery period.   The useful life of a particular asset is

not controlling in determining the applicable recovery period

under section 168.4   In any event, on the record before us, we

find that petitioners have failed to establish that the useful

life of each of the aircraft parts in question is less than 4

years.   We further find on that record that petitioners have

failed to establish that the class life of the aircraft parts in

question is 4 years or less.

     Based on our examination of the entire record in this case,

we find that petitioners have failed to satisfy their burden of

showing error in respondent’s determination, as modified on brief


     4
      Sec. 168 was enacted into the Code by the Economic Recovery
Tax Act of 1981, Pub. L. 97-34, sec. 201, 95 Stat. 172. One of
the purposes of sec. 168 was to simplify the depreciation rules
by eliminating the need to adjudicate matters such as useful
life, a concept which is inherently uncertain and results in
disagreements between taxpayers and the Internal Revenue Service.
See Simon v. Commissioner, 68 F.3d 41, 45 (1995) (citing S. Rept.
97-144 at 47 (1981), 1981-2 C.B. 412, 425), affg. 103 T.C. 247
(1994).
                               - 9 -

in petitioners’ favor, that the aircraft parts in question are

depreciable over a 5-year recovery period.

Accuracy-Related Penalty

     Respondent determined in the notice that petitioners are

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

each of the years 1993 and 1994 because their underpayment of tax

for each of those years was due to negligence or disregard of

rules or regulations.

     For purposes of section 6662(a), the term “negligence”

includes any failure to make a reasonable attempt to comply with

the Code, and “disregard” includes any careless, reckless, or

intentional disregard.   See sec. 6662(c).   Negligence has also

been defined as a lack of due care or failure to do what a

reasonable person would do under the circumstances.    See Leuhsler

v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992), affg. T.C.

Memo. 1991-179; Antonides v. Commissioner, 91 T.C. 686, 699

(1988), affd. 893 F.2d 656 (4th Cir. 1990).

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for such portion and that the taxpayer acted

in good faith.   See sec. 6664(c)(1).   The determination of

whether the taxpayer acted with reasonable cause and in good

faith depends on the pertinent facts and circumstances.    See sec.

1.6664-4(b)(1), Income Tax Regs.   The most important factor is
                              - 10 -

the extent of the taxpayer’s efforts to assess his or her proper

tax liability.   See id.

     Petitioners presented no evidence and make no argument

regarding the accuracy-related penalties determined by respondent

for 1993 and 1994.   On the record before us, we sustain respon-

dent’s determinations that petitioners are liable for each of the

years 1993 and 1994 for the accuracy-related penalty with respect

to their underpayment of tax for each of those years.

     To reflect the foregoing and the concessions of the parties,



                                    Decision will be entered under

                               Rule 155.
