                         T.C. Memo. 2010-162



                       UNITED STATES TAX COURT



          FOY D. AND BARBARA F. SMITH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1202-06.                Filed July 27, 2010.



     Foy D. and Barbara F. Smith, pro sese.

     Rebecca Dance Harris, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:    Respondent determined deficiencies of $966 and

$3,909 with respect to petitioners’ 2002 and 2003 Federal income

tax, respectively.   After concessions,1 the issues for decision

     1
      At the conclusion of the trial, petitioners asserted for
the first time that they were entitled to certain itemized
deductions that they had not claimed on their 2003 return. The
                                                   (continued...)
                                   - 2 -

are:       (1) Whether petitioners are entitled to depreciation

deductions for 2002 and 2003 in amounts greater than those

respondent allowed; (2) whether petitioners are entitled to a

$34,000 ordinary loss for 2003; (3) whether petitioners are

entitled to any additional itemized deduction for home mortgage

interest for 2003 beyond that conceded by respondent; (4) whether

petitioners are entitled to deduct additional amounts

attributable to loan transaction charges for rental real estate

for 2003; and (5) whether petitioners are entitled to any

additional itemized deductions for charitable contributions for

2003 beyond those respondent conceded.

       Unless otherwise noted, all section references are to the

Internal Revenue Code of 1986, as in effect for the years in

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

Practice and Procedure.       All dollar amounts have been rounded to

the nearest dollar.




       1
      (...continued)
Court directed the parties to confer after trial and to file
status reports concerning petitioners’ itemized deduction claims.
After reviewing petitioners’ substantiation, respondent concedes
that petitioners are entitled to deductions for State and local
taxes of $1,042, mortgage interest of $4,423, and charitable
contributions of $9,602. Respondent was unwilling to concede
$626 of petitioners’ claimed mortgage interest deduction and $948
of petitioners’ claimed charitable contribution deductions. We
accordingly address those issues hereinafter.
                               - 3 -

                         FINDINGS OF FACT

     Some facts are stipulated and are so found.   The stipulation

of facts, with accompanying exhibits, is incorporated herein by

this reference.   At the time the petition was filed, petitioners

resided in Tennessee.

Allocation of Value Between Land and Buildings

     Petitioners owned several rental real estate properties as

well as a mobile home during the years at issue.   These

properties were all in Rutherford County, Tennessee, and included

properties at the following addresses:   211-213 Edwards Street;

5116 A and B Colonial Circle; 2801 and 2803 Reynolds Drive; 2807

and 2809 Reynolds Drive; 107 and 109 Hickory Street (Hickory

Street properties); 301, 303, and 305 Pearcy Street (Pearcy

Street properties); and 1511 A and B Harrell Street (Harrell

Street property).   Petitioners claimed depreciation deductions

with respect to the properties based on allocations of value

between the land and the buildings that were estimated by their

return preparer, and for the mobile home on the basis of a 10-

year life.   Respondent determined in a timely notice of

deficiency that $2,353 and $1,863 of depreciation deductions for

2002 and 2003, respectively, should be disallowed because the

allocations to building values were excessive.   The notice

further disallowed $636 and $364 of depreciation deductions for

2002 and 2003, respectively, with respect to the mobile home.
                                - 4 -

HVAC Units

     Petitioners installed new HVAC units in the Harrell Street

and Hickory Street properties in 2002 and 2003 at a cost of

$3,813 and $6,990, respectively.   Petitioners claimed deductions

equal to the full cost of each unit as a “repair” expense in the

year of installation.   The notice of deficiency disallowed these

deductions, allowing instead depreciation deductions with respect

to the units of $121 and $139 for 2002 and 2003, respectively,

for the Harrell Street property, and $160 for 2003 for the

Hickory Street properties.

Pearcy Street Improvements

     Around 1996 or 1997 petitioners made improvements to the

Pearcy Street properties, including replacing roofs, installing

new carpets, and painting walls.   Petitioners claimed

depreciation deductions attributable to these improvements of

$1,332 for both 2002 and 2003, and respondent disallowed $73 of

these amounts for each year.

Trust Dealings

     In 1998 petitioners purchased an “offshore trust package”

from Global Prosperity Group.   In connection with this purchase,

petitioners paid $5,234 in September 1998 to Innovative Financial

Consultants for specified trust materials and made a wire

transfer of $32,000 in October 1998 to an account chosen by

Global Prosperity Group.   Innovative Financial Consultants
                                - 5 -

represented to petitioners that they could lawfully avoid income

taxes by placing their income and assets in an offshore trust.

     In 2003 respondent informed petitioners that the promoters

of an abusive trust scheme marketed under the name of Innovative

Financial Consultants had been indicted for, and one of the

promoters had already pleaded guilty to, conspiracy to defraud

the United States.   Petitioners claimed an ordinary loss of

$34,000 for 2003 that they maintain is attributable to their

dealings with Innovative Financial Consultants and Global

Prosperity Group.    The notice of deficiency disallowed the loss.

                               OPINION

Allocation of Value Between Land and Buildings

     Respondent disallowed depreciation deductions totaling

$2,353 and $1,863 for 2002 and 2003, respectively, on the grounds

that petitioners had apportioned too much of the total value of

certain residential rental real estate properties2 to depreciable

improvements rather than to nondepreciable land.   See sec.

1.167(a)-2, Income Tax Regs.

     Under section 1.167(a)-5, Income Tax Regs., the depreciation

allowance must be based on the proportionate value of the

building in relation to that of the land at the time of

acquisition.   Respondent’s determination apportioned value


     2
      The parties do not dispute that all of petitioners’ real
estate properties at issue (except a mobile home, discussed
hereinafter) were residential rental properties.
                                 - 6 -

between land and buildings on the basis of local property tax

assessments for 2001 which made such an apportionment.

Petitioners bear the burden of proving error in respondent’s

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

111, 115 (1933); see also INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934).3

     Except in the case of the Harrell Street property, which was

acquired in 2002, the 2001 local property tax assessments on

which respondent relied are in evidence.   Petitioner Foy D. Smith

(petitioner) testified that the allocations on the returns were

made by petitioners’ return preparer, who had extensive

experience in the area and made his calculations on the basis of

a standard he used for other properties in the area.     Petitioners

offered no further particulars regarding the basis for their

return preparer’s allocations.

     On this record, petitioners have failed to demonstrate error

in respondent’s determination.    We are persuaded that the

allocations made on the basis of the 2001 local property tax

assessment are the only reliable estimates of the depreciable


     3
      Petitioners have neither claimed nor shown entitlement to
any shift in the burden of proof to respondent under sec. 7491(a)
with respect to any factual issues in this case. See H. Conf.
Rept. 105-599, at 239-242 (1998), 1998-3 C.B. 747, 993-996.
(explaining that the taxpayer has the burden of proving that the
conditions for invoking sec. 7491(a) have been met).
                                   - 7 -

portions of the real properties at issue.      We therefore sustain

respondent’s determination to disallow petitioners’ claimed

depreciation deductions to the extent of $2,353 and $1,863 for

2002 and 2003, respectively.

Mobile Home Depreciation

     Respondent disallowed $636 and $364 of petitioners’ claimed

depreciation deductions in 2002 and 2003, respectively, for a

mobile home.    Respondent determined that the mobile home is

“residential rental property” which has a recovery period of 27.5

years.    See sec. 168(c).   Petitioners contend that they are

entitled to depreciate the mobile home over 10 years.

     “Residential rental property” is defined, for the purposes

of allowance for depreciation, as “any building or structure if

80 percent or more of the gross rental income from such building

or structure for the taxable year is rental income from dwelling

units.”    Sec. 168(e)(2)(A)(i).    Where a mobile home has been

permanently affixed to the land, the mobile home may be

“residential rental property” and thus depreciable using a 27.5-

year recovery period.    Rupert v. Commissioner, T.C. Memo. 2001-

179, affd. 57 Fed. Appx. 212 (5th Cir. 2003).     Petitioners

offered no evidence that the mobile home was readily movable in a

manner that would distinguish it from the mobile home at issue in

Rupert.    We accordingly sustain respondent’s determination that
                                 - 8 -

petitioners’ mobile home was “residential rental property”

depreciable over 27.5 years.

Depreciation of the HVAC Units

     Respondent disallowed the $3,813 and $6,990 deductions

petitioners claimed in connection with the installation of HVAC

units in 2002 at the Harrell Street property and in 2003 at the

Hickory Street properties.   Respondent determined that the

amounts petitioners claimed as “repair” expenses must be

depreciated and recovered over a period of 27.5 years, the

depreciation period of the rental properties at which the HVAC

units were installed.    Petitioners contend that the expenditures

may be deducted completely in the year that the HVAC units were

placed in service or, alternatively, that the units should be

depreciated over a period shorter than 27.5 years.

     Generally, additions to, or improvements of, property are

depreciated in the same manner as the underlying property.    See

sec. 168(i)(6).   The same recovery period and method must be

used, with the recovery period commencing on the later of the

date when the addition or improvement is placed in service or the

date when the underlying property is placed in service.    Id.   The

residential rental real properties at which the HVAC units were

installed are section 1250 class property because they are real

property, depreciable, and do not meet the requirements of

section 1245(a)(3)(C).   See sec. 1250(c).
                               - 9 -

      Neither section 168 nor the regulations thereunder define

additions to, or improvements of, property.    The caselaw looks to

the regulations promulgated under the former investment tax

credit; i.e., section 1.48-1, Income Tax Regs.      Hosp. Corp. of

Am. v. Commissioner, 109 T.C. 21, 56 (1997).     The distinction

turns on whether the property being considered is “tangible

personal property” (section 1245 property) or “structural

components of the buildings” (section 1250 property).     See id. at

56.   The regulations promulgated under section 1245 define

tangible personal property with regard to section 1.48-1, Income

Tax Regs.   Sec. 1.1245-3(b)(1), Income Tax Regs.    The regulations

promulgated under section 1250 incorporate the meanings for

“building” and “structural components” as defined by section

1.1245-3(c), Income Tax Regs., which in turn incorporate the

meanings for those terms as defined by section 1.48-1(e), Income

Tax Regs.   Sec. 1.1250-1(e)(3)(i), Income Tax Regs.    The

interaction of the statute and the regulations indicates that

Congress intended to retain the test under the former investment

tax credit for the purpose of determining whether property is

section 1245 property or section 1250 property.     Hosp. Corp. of

Am. v. Commissioner, supra at 55-56.

      The test under the investment tax credit is described in

section 1.48-1, Income Tax Regs.   The regulations state in part

that “The term ‘structural components’ includes * * * all
                               - 10 -

components (whether in, on, or adjacent to the building) of a

central air conditioning or heating system”.   Sec. 1.48-1(e)(2),

Income Tax Regs.   Respondent determined that the HVAC units

petitioners installed at the Harrell Street and Hickory Street

properties were central heating and air conditioning systems and

thus were structural components of a building.   Petitioners

failed to provide any evidence that the HVAC units were window

units or otherwise movable rather than part of a central system.

Consequently, we sustain respondent’s determination.

Depreciation of Improvements

     Respondent disallowed depreciation deductions of $73 for

both 2002 and 2003 with respect to improvements on the Pearcy

Street properties; namely, roof replacements, carpet

installation, and painting.    Respondent determined that the

improvements should be depreciated over a period of 27.5 years

(the period applicable to the underlying properties), whereas

petitioners contend that they are entitled to amounts greater

than those resulting from the use of the period determined by

respondent.   As with the HVAC units, the issue presented is

whether these improvements are structural components that must be

depreciated over the same period as the underlying property or

are instead tangible personal property.

     The roofs’ status is clear.    See sec. 1.48-1(e)(1), Income

Tax Regs. (“The term ‘building’ generally means any structure or
                                - 11 -

edifice * * * usually covered by a roof”).    Consequently, the

expenditures for roof replacements must be capitalized and

depreciated using the same 27.5-year period and method as the

underlying residential rental property, commencing when the

replacements were placed in service.     Even if it were conceded

that the repainting was a repair expense and the carpet was

tangible personal property, petitioners have provided no

breakdown of the respective costs for roof replacements, carpet

replacements, and repainting.    Accordingly, we sustain

respondent’s determination.

Loss From Offshore Trust

     Petitioners claimed a $34,000 ordinary loss on their 2003

return, which respondent disallowed.     Petitioner testified that

the loss was for moneys paid over to Global Prosperity Group and

Innovative Financial Consultants.    As reflected in our findings

of fact, petitioners made two payments to the foregoing entities

totaling $37,234 in 1998 in connection with establishing an

offshore trust.   Petitioners claimed a $34,000 loss for 2003,

representing the amount they claim had not been returned to them

when they learned from respondent that promoters of Innovative

Financial Consultants had been indicted.

     Petitioners have the burden of establishing their

entitlement to a deduction.     See Rule 142(a)(1); INDOPCO, Inc. v.

Commissioner, 503 U.S. at 84; New Colonial Ice Co. v. Helvering,
                              - 12 -

292 U.S. at 440.   The record is devoid of evidence that would

support petitioners’ claimed $34,000 loss.    While it has been

stipulated that petitioners paid out $37,234 in 1998 in

connection with their establishment of an offshore trust,

petitioner’s testimony concerning how that amount became a

$34,000 loss in 2003 was conclusory and uninformative,

notwithstanding the Court’s repeated questioning.    Whether

considered as a loss from a transaction entered into for profit,

see sec. 165(c)(2), or a theft loss, see sec. 165(e),

petitioners’ claim suffers the fatal defect of a failure to prove

their adjusted basis as of 2003, see sec. 165(b); Oates v.

Commissioner, 316 F.2d 56, 58-59 (8th Cir. 1963), affg. T.C.

Memo. 1962-77.   There is no evidence of petitioners’ dealings

with the trust between 1998 and 2003 that might affect basis or

explain the calculation of the claimed $34,000 loss.    Moreover,

insofar as a theft loss might be concerned, the evidentiary

vacuum for the years after 1998 casts substantial doubt upon

whether the purported theft was discovered, and any reasonable

prospect of recovery ceased to exist, in some year before 2003.

See sec. 165(e); Marine v. Commissioner, 92 T.C. 958, 975-976

(1989), affd. without published opinion 921 F.2d 280 (9th Cir.

1991); sec. 1.165-1(d)(3), Income Tax Regs.    We accordingly

sustain respondent’s determination disallowing petitioners’

$34,000 loss claimed for 2003.
                              - 13 -

Home Mortgage Interest

     After trial petitioners were afforded an opportunity to

substantiate certain itemized deductions claimed at trial.4

Petitioners claimed a $5,049 deduction for home mortgage

interest.   Respondent has accepted petitioners’ substantiation

and conceded all but $626 of the claimed deduction.   Respondent’s

position is that the disputed $626 is attributable to mortgage

interest for a rental property that is not properly deductible on

Schedule A, Itemized Deductions.

     Petitioners submitted a copy of a Form 1098, Mortgage

Interest Statement, issued by Bank of the South, showing two

separate mortgage interest payments of $2,800 and $2,249 (for a

total of $5,049) for 2003 relating to 108 Sunward Drive, La

Vergne, Tennessee, which has been stipulated as petitioners’

residence when they filed the petition.   We are satisfied that

petitioners have substantiated $5,049 of home mortgage interest

deductible pursuant to section 163(h)(3).5


     4
      See supra note 1.
     5
      Respondent based his decision to reject $626 of
petitioners’ claimed home mortgage interest deduction on a bank
document petitioners submitted showing $626 as attributable to
interest and loan charges for the Harrell Street property.
Respondent apparently believes this amount constitutes part of
petitioners’ claimed $5,049 in home mortgage interest. However,
the Form 1098 petitioners submitted reports both the $5,049 in
home mortgage interest paid with respect to petitioners’
residence and $2,886 of interest paid with respect to the Harrell
Street property. That amount, added to the $373 of interest
                                                   (continued...)
                              - 14 -

Loan Charges

     Petitioners have also claimed entitlement to a 2003

deduction for loan charges of $253 paid with respect to the

Harrell Street property.   However, loan charges may not be

deducted and must instead be capitalized and amortized over the

life of the loan.   Deputy v. du Pont, 308 U.S. 488, 497-498

(1940); Goodwin v. Commissioner, 75 T.C. 424, 440-442 (1980),

affd. without published opinion 691 F.2d 490 (3d Cir. 1982).    As

petitioners have provided no evidence regarding the life of the

underlying loan, they have not substantiated any deduction for

loan charges in 2003.

Charitable Contributions

     Petitioners’ posttrial claims also include $10,550 of

itemized charitable contribution deductions.   Respondent rejected

$948 of this amount, $142 as attributable to payment to an

individual and $806 for lack of substantiation.

     The $142 deduction is attributable to a check payable to the

order of “Jon Crump” with a memo line bearing the notation


     5
     (...continued)
shown as paid on the bank document ($253 of the $626 shown on the
bank document was attributable to loan charges rather than
interest), produces total interest paid of $3,259 for the Harrell
Street property. This latter amount is the amount shown on
petitioners’ Schedule E, Supplemental Income and Loss (from
rental real estate, royalties, partnerships, S corporations,
estates, trusts, REMICs, etc.), as mortgage interest paid for the
Harrell Street property. We conclude that the $626 in interest
not conceded by respondent has been accounted for on petitioners’
Schedule E.
                               - 15 -

“Children in Ukraine”.   In order to be deductible under section

170(a), a contribution must be “to or for the use of” certain

governmental entities or a “corporation, trust, or community

chest, fund, or foundation”.   Sec. 170(c).   Petitioners have

provided no evidence that Jon Crump was associated with any

charitable organization as an officer, director, or employee.

Therefore, petitioners have not shown entitlement to their

claimed charitable contribution deduction for $142 that

respondent has not accepted.

     Petitioners also claimed, and respondent rejected,

charitable contribution deductions for cash contributions

totaling $806 that petitioners describe in their posttrial

submission as made to “Church in Ukraine”.    Petitioners are

required to maintain appropriate records for all charitable

contributions.   See sec. 1.170A-13(a)(1), Income Tax Regs.

Petitioners have not provided any reliable records nor any

receipts from a donee organization that would substantiate their

claimed cash contributions.    See sec. 1.170A-13(a)(2)(i), Income

Tax Regs.6   Therefore, petitioners have not substantiated their


     6
      Petitioners contend that they are required to maintain
records only for contributions over $250 and thus are not
required to maintain records for each of the small cash
contributions they contend were made to “Church in Ukraine”.
Although sec. 170(f)(8) requires a contemporaneous written
acknowledgment for donations over $250, this requirement is in
addition to the requirement that all charitable contributions
satisfy recordkeeping requirements established by the Secretary.
                                                   (continued...)
                             - 16 -

claimed charitable contribution deduction of $806 for purported

cash contributions to “Church in Ukraine”.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.




     6
     (...continued)
See sec. 170(a)(1); sec. 1.170A-13, Income Tax Regs. While in
certain limited circumstances we have allowed a deduction for
small cash contributions to churches where there was credible
testimony corroborating the claimed deduction, see, e.g., Wasik
v. Commissioner, T.C. Memo. 2007-148; Fontanilla v. Commissioner,
T.C. Memo. 1999-156, petitioners raised this claim only after
trial, and there is no sworn testimony or other competent
evidence to support it.
