                        T.C. Memo. 2001-159



                      UNITED STATES TAX COURT



                   GEORGE VAJDA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

          THOROUGHBRED BREEDERS PARTNERSHIP, GEORGE VAJDA,
        TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket Nos. 5065-00, 5066-00.              Filed June 29, 2001.



     Kenneth R. Cohen, for petitioner.

     William T. Lyons, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   The docketed cases are before the Court

consolidated for trial, briefing, and opinion.    Respondent

determined deficiencies of $4,540, $1,849, and $1,204 in George

Vajda’s (petitioner’s) 1994, 1995, and 1996 Federal income taxes,
                                   - 2 -


respectively.      Respondent also determined that petitioner was

liable for section 6662(a) accuracy-related penalties of $908,

$370, and $241 for the respective years and a $120 addition to

his 1996 tax under section 6651(a)(1).1        Respondent’s

determinations stem in part from adjustments that respondent made

to depreciation deductions claimed by Thoroughbred Breeders

Partnership (TBP), a partnership in which petitioner is a

partner.       For 1994, TBP was subject to the Tax Equity and Fiscal

Responsibility Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat.

648.       Petitioner also petitioned the Court for that year in his

capacity as TBP’s tax matters partner.

       We decide first whether TBP may deduct the disputed

depreciation.       We hold it may not.    We decide second whether

petitioner had sufficient basis to deduct losses which passed

through to him from his wholly owned S corporation, Calvary

Equities, Inc. (Calvary).       We hold he did.2


       1
       Section references are to the Internal Revenue Code in
effect for the subject years. Rule references are to the Tax
Court Rules of Practice and Procedure. Dollar amounts are
rounded.
       2
       The pleadings in this case raise three additional issues:
(1) Whether petitioner is liable for the addition to tax under
sec. 6651(a), (2) whether petitioner is liable for the accuracy-
related penalties under sec. 6662(a), and (3) whether respondent
is barred by the period of limitation under sec. 6501 from
assessing tax for the subject years. As to the first of these
issues, we hold for petitioner on the basis of our finding that
he filed his 1994 return timely. As to the other two issues, we
                                                   (continued...)
                               - 3 -


                         FINDINGS OF FACT

     Many facts were stipulated.   The parties’ stipulation of

facts and the exhibits submitted therewith are incorporated

herein by this reference.   The stipulated facts are found

accordingly.   When petitioner’s petition was filed, his mailing

address was in Hackensack, New Jersey.   TBP’s mailing address was

also in Hackensack, New Jersey, when a petition was filed on its

behalf.

     In 1975, Alpha Farms, Inc. (Alpha), an entity whose

principal shareholder is petitioner, purchased 93.97 acres of

unimproved land (land) in Upper Freehold, New Jersey, for

$197,337.   The only structure on the land was a hay barn that was

built around 1900.   From 1978 to 1980, Alpha erected various

buildings (buildings) on the land to transform the land into a

horse breeding farm (collectively, the buildings and land are

referred to as the farm).   These buildings included:   (1) A two

bedroom, two bath house, (2) a grooms’ quarters and office

consisting of eight rooms and a double and single bath, (3) a

concrete barn with 16 stalls, (4) a steel barn with 22 stalls and

an x-ray room, (5) a training arena with 10 stalls and an indoor

exercise area with an artificial surface, (6) an equipment shed,


     2
      (...continued)
hold for respondent. The record contains no evidence that would
support a holding for petitioner as to those issues. See Rule
142(a).
                                 - 4 -


and (7) a concrete manure pit.    Alpha conveyed the farm to TBP in

1986, reflecting on the certified deed that the conveyance was

made in return for Alpha’s receipt of money in the amount of

$350,000.    TBP made no capital improvements to the farm

afterwards.

     For 1994 through 1996, petitioner filed timely individual

income tax returns, and TBP filed timely partnership returns of

income.   Each partnership return claimed a $48,763 depreciation

deduction for the buildings.    TBP’s 1994 return reported that the

buildings had been “placed in service” in 1986 and had a

depreciable basis of $926,500.3    TBP calculated this depreciation

using the straight line recovery method and a 19-year recovery

period.   As of December 31, 1993, TBP had claimed $390,104 of

depreciation on the buildings.

     Respondent determined that TBP was not entitled to deduct

any of the depreciation claimed for the subject years.      As stated

in the notice of deficiency issued to petitioner (and as stated

similarly in the FPAA issued to TBP for 1994):

     Thoroughbred Breeders Partnership is claiming a total
     basis in the 93 acre thoroughbred horse farm as
     follows:

            Land                         $300,000
            Buildings                     926,500


     3
       TBP’s 1995 and 1996 returns claimed on their face the same
$48,763 deduction for depreciation, but provided no specifics as
to that deduction.
                               - 5 -


           Fencing                        81,365
           Track System                  130,000
           Furniture & Equipment          62,135
           Total                       1,500,000

                *    *    *    *       *   *       *

     It is determined that the depreciation expense
     deductions of $48,763.00 claimed on the 1995 and 1996
     partnership returns are not allowed because the
     partnership claimed depreciation expenses deductions in
     excess of its basis due to overvaluation of the
     property. The deed for purchase of the entire farm
     from Alpha Farm, Inc. on November 3, 1986 shows a
     purchase price of $350,000.00 instead of $1,500,000.00
     as claimed. It has not been established the
     partnership completely paid $1,500,000.00 for the
     property or continued to be liable for any debt to pay
     such amount. Consequently, the original cost of the
     asset of $350,000.00 is allowed as a basis for
     depreciation. Since accumulated depreciation of
     $390,104.00 previously claimed for years 1986 through
     1993 exceeds the original cost, the asset is considered
     fully depreciated and no additional depreciation
     expenses deduction is allowable.

     For 1994, 1995, and 1996, petitioner claimed on his personal

returns respective losses of $35,654, $29,376, and $62,709 as

passthrough items from Calvary.    Respondent determined that

petitioner had insufficient basis in Calvary to deduct any of

these losses.   On or about July 15, 1993, petitioner borrowed

$250,000 from Fleet Bank and transferred this money to Calvary

either as a loan from him to Calvary or as a contribution to its

equity.   On June 17, 1996, Fleet filed a lawsuit against

petitioner for the $250,000, plus interest, late fees, collection

costs, and attorney’s fees, alleging that petitioner failed to
                                  - 6 -


make timely payments on the loan.      Fleet filed the lawsuit

against no other person or entity.

                                 OPINION

1.   Depreciation

      Respondent determined that TBP’s depreciable basis in the

buildings was $350,000 and that the buildings were fully

depreciated as of the beginning of the subject years.       Petitioner

argues that TBP’s depreciable basis in the buildings was $926,500

and that they were not fully depreciated during any of the

subject years.      We agree with respondent.

      The depreciable basis of property is generally its cost, see

secs. 167(g), 1011, and 1012; Weis v. Commissioner, 94 T.C. 473,

482 (1990), and a taxpayer such as petitioner bears the burden of

proving the depreciable basis in property, see Rule 142(a).4

Section 6001 mandates that taxpayers keep permanent records

sufficient to establish their claims to all deductions.

      Petitioner produced no records at trial establishing TBP’s

depreciable basis in the buildings.        He attempted to prove that

basis primarily through his testimony.       Petitioner testified

vaguely that the buildings cost Alpha “in excess of a million


      4
       Contrary to petitioner’s assertion on brief, we do not
find respondent’s determination arbitrary or without foundation.
We disagree with petitioner’s assertion on brief that “the
replacement cost figures introduced by respondent [at trial] were
so unrealistic that they amounted to an arbitrary and capricious
valuation”.
                                - 7 -


dollars” and that Alpha encountered “unusual circumstances” in

constructing the buildings resulting in this cost.   These

circumstances, petitioner testified, were due mainly to the need

to construct the buildings in accordance with expert

specifications, the unavailability of “competent tradespeople” in

the locale of the farm, and Alpha’s incurring of tremendous legal

expenses.    Petitioner provided no specifics as to the “in excess

of a million dollars” cost.   Nor did he provide any specific

dollar amount as to any of the costs attributable to the “unusual

circumstances”.

     Petitioner also relies on the testimony of his expert, Jess

A. Salmon.   Mr. Salmon testified that the estimated cost of the

buildings was $413,500, without regard to most of the “unusual

circumstances” described by petitioner, and attributed the

estimated cost to the following items, each of which he assumed

was built between 1978 and 1980:

        Items                      Cost

        House                   $81,200
        Quarters and office      74,800
        Concrete barn            85,700
        Steel barn               83,500
        Training area            72,800
        Hay barn                  7,237
        Equipment shed            7,163
        Manure pit                1,100
        Total                   413,500
                                 - 8 -


Petitioner concludes from Mr. Salmon’s testimony that the

$413,500 estimate is consistent with the claimed basis of

$926,500 when viewed in the light of the “unusual circumstances”.

     We disagree with petitioner for two reasons.   First,

petitioner focuses inappropriately on the construction costs to

ascertain TBP’s basis in the buildings.   Given the fact that all

of these costs were incurred between 1978 and 1980 and that TBP

did not purchase the farm from Alpha until 1986, none of these

costs enter into TBP’s depreciable basis in the buildings.   TBP’s

basis in the farm, which by our definition includes both the

buildings and the land, equals the amount that it paid Alpha for

the sale.   That amount is stated clearly in the deed as $350,000.

     Petitioner makes little attempt to explain the $350,000

price set forth in the deed other than to assert on brief that

the Court need not accept that figure as TBP’s depreciable basis.

In his petition, petitioner did allege that TBP received the farm

from Alpha in exchange for Alpha’s receipt of an interest in TBP

and, accordingly, that section 723 operated to give TBP a

transferred basis in the farm.    Respondent, however, denied that

allegation in answer.   The allegation, therefore, is not

evidence.   See Rule 143(b).   Petitioner’s counsel also informed

the Court during his opening statement at trial that petitioner

would show that he had caused Alpha to contribute the farm to TBP

in exchange for a partnership interest.   Petitioner never made
                               - 9 -


any such showing.   In fact, petitioner neither elicited any

testimony in support of his counsel’s statement, nor attempted to

introduce any other type of supporting evidence.

     Second, even if the construction costs had any bearing on

TBP’s depreciable basis, we disagree with petitioner that these

costs aggregated $926,500.   We do not rely on petitioner’s

testimony on this subject for it is vague, uncorroborated, and

self-serving.   See Diamond Bros. Co. v. Commissioner, 322 F.2d

725, 730-731 (3d Cir. 1963), affg. T.C. Memo. 1962-132; Tokarski

v. Commissioner, 87 T.C. 74, 77 (1986).     The only other evidence

on this subject, namely, the testimony of Mr. Salmon, does not

support petitioner’s claim to the $926,500 basis.     Mr. Salmon

testified that the estimated cost of the buildings was $413,500,

a figure that was inflated by $7,237 in that it incorrectly

included the cost of the hay barn.     The cost of the hay barn

should not have been included in his calculation because the hay

barn was constructed before even Alpha acquired the land.     We

also note an inconsistency between the cost factors used by Mr.

Salmon to perform his calculations and the factors used by

respondent's expert, Harriett Watts, to arrive at her conclusion

that the estimated cost of the buildings was $286,258.     Although

both experts used the same valuation guide to perform their

calculations, only Ms. Watts applied the cost factors for Newark,

New Jersey, a city which is proximate to the situs of the farm.
                              - 10 -


Mr. Salmon, on the other hand, applied the cost factors for the

eastern region of the United States, which were greater than the

Newark cost factors.   Mr. Salmon’s application of the greater

cost factors obviously resulted in his greater cost estimate.     We

believe that Mr. Salmon’s application of the greater cost factors

was wrong.

     We conclude that petitioner has failed to disprove

respondent’s determination that the depreciable basis of the

buildings at the start of the subject years was less than the

$390,014 of depreciation taken as of that date.   We sustain

respondent's determination on this issue.

2. $250,000 Loan

     We must determine whether petitioner has sufficient tax

basis in his Calvary stock to allow him to deduct the passthrough

losses.   A shareholder of an S corporation may utilize the losses

from an S corporation only to a limited extent.   The losses may

not exceed the sum of the adjusted basis of the shareholder’s

stock in the S corporation plus his or her adjusted basis of any

indebtedness of the S corporation to the shareholder.     See sec.

1366(d)(1).

     Petitioner again relies on his testimony to support his

assertion that the $250,000 loan from Fleet enters into this

computation.   In contrast with petitioner’s testimony on the

first issue, we find petitioner’s testimony on this issue is
                                - 11 -


adequately supported by other reliable evidence in the record.

The record as a whole establishes to our satisfaction that Fleet

lent the $250,000 to petitioner personally, that petitioner

transferred those proceeds to Calvary, that petitioner recorded

on Calvary’s books that it (and not he) had received those

proceeds directly from Fleet in the form of a loan, and that

petitioner erroneously recorded the loan as between Fleet and

Calvary.   We hold for petitioner on this issue.

     We have considered each of the parties’ arguments and have

rejected those arguments not discussed herein as irrelevant or

without merit.   Accordingly,

                                          Decisions will be entered

                                     under Rule 155.
