                        T.C. Memo. 1999-269



                      UNITED STATES TAX COURT



    MIGUEL ESPINOZA AND MARIACLARIZA MONTOYA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3556-98.                      Filed August 10, 1999.



     Miguel Espinoza Montoya and Mariaclariza Montoya, pro sese.

     Andrew R. Moore, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PARR, Judge:   Respondent determined deficiencies in, an

addition to, and an accuracy-related penalty on petitioners'
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Federal income taxes as follows:

                           Addition to tax      Accuracy-related penalty
Year       Deficiency         sec. 6651               sec. 6662(a)

1991        $18,438            $2,880                    $3,688
1992            868              --                        --
1993            582              --                        --


       Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable year in

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

Practice and Procedure.        All dollar amounts are rounded to the

nearest dollar.         References to petitioner are to Miguel Espinoza

Montoya.

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

Whether petitioners realized capital gain in 1991 from the

involuntary conversion of their property used in a trade or

business.      We hold they did to the extent set out below.        (2)

Whether petitioners are liable for the addition to tax for

failure to timely file their 1991 Federal income tax return.              We

hold they are.        (3) Whether petitioners are liable for the

accuracy-related penalty pursuant to section 6662(a) either for



       1
      Petitioners concede that they realized $18,517 of ordinary
income in 1991. This is the total amount of the depreciation
allowed previously on their involuntarily converted business
property. See sec. 1245. The parties have resolved the issue of
the amount of the Schedule F depreciation deduction that is
allowable with respect to each of petitioners' 1991, 1992, and
1993 taxable years.
                                - 3 -


negligence or disregard of rules or regulations or for the

substantial understatement of their 1991 income tax.      We hold

petitioners are liable for the penalty for negligence or

disregard of rules or regulations.

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

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.    At the time the petition

in this case was filed, petitioners resided in Kerman,

California.

                          FINDINGS OF FACT

      In the second half of the 1980's, petitioner was frequently

away from home while working in the construction industry.

Petitioner thought that it would be more economical to buy a used

Greyhound bus and convert it into a motor home, which he would

live in when he was working away from home, than to pay for

commercial lodging and food.    Accordingly, in March 1985,

petitioners purchased a previously owned 1962 GMC Coach (bus) for

$14,359.

     The bus required repairs to the clutch and transmission,

which were made shortly after purchase.      The first item that

petitioners purchased as part of the conversion process was a

generator.    During 1985, petitioner painted the body, completed

the bedroom, and added wood paneling, lights, curtains, chairs, a

couch, and bathroom plumbing, including holding tanks for potable
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and waste water.   By the end of 1986, petitioner had replaced the

front bumper, repainted the body, added a furnace, and completed

the bathroom and the kitchen, including cabinets.

     Petitioners placed the bus in service as a business vehicle

in 1985.   Petitioners reported that they made improvements

totaling $2,099 in 1985 and $2,883 in 1986.   Petitioners claimed

deductions totaling $18,517 between 1985 and 1989 for

depreciation, including a $2,099 deduction in 1985 pursuant to

section 179.

     In December 1990, the bus was destroyed by fire.    In early

1991, petitioners received $58,475 from their insurance provider

for the replacement value of the converted bus.   Rather than

repeat the conversion process on a different bus, petitioners

used the insurance proceeds to buy land.

     Petitioners filed their 1991 tax return on January 26, 1993.

Petitioners did not request an extension of time to file their

income tax return for the year in issue.   Petitioners never

reported any gain or loss from the disposition of the bus.

                            OPINION

Issue 1.   Whether Petitioners Realized Capital Gain

     Respondent determined that petitioners' adjusted basis in

the bus was $824, and that petitioners realized $18,517 of

section 1245 gain and $39,134 of capital gain from its

disposition.   Petitioners concede the section 1245 gain; however,
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they assert that they did not realize any capital gain from the

conversion as their basis in the bus was equal to the amount of

the insurance proceeds received.    Petitioners' argument

essentially is that their adjusted basis in their depreciable

property is not decreased by depreciation that they did not claim

as a deduction on their Federal income tax returns.

     Respondent's determinations of fact are presumptively

correct, and petitioners bear the burden of proving otherwise.

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

     Petitioner testified that he constantly made improvements to

the bus that he did not report or depreciate.    Petitioners kept

most of the receipts pertaining to the conversion in the bus.

Thus, when the bus burned, the receipts were destroyed.     However,

petitioners were able to submit a few receipts for materials used

in the conversion that total $2,231.02 for 19852 and $431.74 for

1986.    At trial, petitioners submitted a list they prepared of

the conversion items and their approximate costs.    We found




     2
      Petitioners submitted dated receipts for 1985 that totaled
$561.27 and an undated receipt for $1,669.75. The undated
receipt is from Kampers World and is made out to petitioner. One
of the items listed on the receipt is a generator for $1,590. As
petitioner testified that the first item that he purchased for
the conversion was a generator, we have assigned this cost to the
year 1985.
                               - 6 -


petitioner to be a credible witness and accept his testimony with

respect to these items and their cost.3

     Petitioners placed the bus in service in 1985.    According to

petitioner, most of the expenditures for the listed conversion

items were made in 1985.   The expenditures for the conversion

items in that year total $21,400; however, on their return

petitioners reported only $2,099 for improvements to the bus,

which they deducted pursuant to section 179.

     During 1986 petitioners expended a total of $4,600 to

recondition the front bumper, install the furnace, repaint the

body, and finish the kitchen and the bathroom.   On their return

for 1986, petitioners reported only $2,883 as the cost of

improvements made to the bus in that year.

     For purposes of calculating depreciation, petitioners' bus

is 5-year property.   See sec. 168(c)(2)(B), I.R.C. 1954 (as

amended);4 Rev. Proc. 83-35, 1983-1 C.B. 745, 746.    It appears


     3
      Petitioners' list included $780 for personal items that
were in the bus when it burned. We do not consider this amount
as it is not part of the basis of the bus. Petitioners' list
also included an acquisition cost for the bus that is slightly
higher than the amount stipulated. We reject the amount on
petitioners' list as it is contrary to the stipulated acquisition
cost.
     4
      The bus was placed in service in 1985; thus, the method of
accounting for the depreciation of the bus is the accelerated
cost recovery system (ACRS) as provided by I.R.C. 1954 (as
amended). Under ACRS, the depreciation deduction is calculated
by multiplying the asset's unadjusted basis by the appropriate
                                                   (continued...)
                               - 7 -


from the returns that petitioners' method of accounting for

depreciation was to recover the acquisition and improvement costs

reported in 1985 separately from the improvement costs reported

in 1986.   Petitioners expended a total of $40,359 during 1985 and

1986 to acquire and convert the bus into a motor home; however,

they claimed only $18,517 in total depreciation from 1985 through

1989.5

     Pursuant to section 1011(a), the adjusted basis for

determining the gain or loss from the sale or other disposition

of property is the cost of the property determined under section

1012 adjusted as provided in section 1016.   Section 1016(a)(2)

provides, in effect, that the basis of the property shall be

adjusted by the amount of depreciation previously allowed, but

not less than the amount allowable, with respect to the property.

Depreciation "allowed" is the amount actually deducted by the

taxpayer and not challenged by the Commissioner.   See Virginian

Hotel Corp. v. Helvering, 319 U.S. 523, 527 (1943).

Consequently, the taxpayer's basis in a depreciable asset is


     4
      (...continued)
recovery percentage obtained from statutory tables for the
taxable year in question. See sec. 168(b), I.R.C. 1954 (as
amended).
     5
      Petitioners did not claim a depreciation deduction for
1990, the year the motor home was destroyed. No ACRS deduction
is allowable for the taxable year in which a taxpayer disposes of
property that is not real property or low-income housing. See
sec. 168(d)(2)(B), I.R.C. 1954 (as amended).
                               - 8 -


reduced by the greater of the amount of depreciation that is

allowed or allowable in a tax year.

     The expenditures that petitioners made in 1985 to acquire

and improve the bus would have been recovered completely in 1989.

See sec. 168(b)(1), I.R.C. 1954 (as amended).   Although it may

seem a harsh result as petitioners did not claim the full amount

of depreciation allowable, these costs provide petitioners no

basis in 1990.   The expenditures that petitioners made in 1986 to

improve the bus would have been recovered completely in 1990;

however, as the bus was destroyed in that year, no deduction is

allowed.   See sec. 168(d)(2)(B), I.R.C. 1954 (as amended).

Accordingly, we find that petitioners had an adjusted basis in

the bus at the time of the involuntary conversion that is equal

to the percentage of the costs incurred during 1986 allowable for

recovery in 1990.   That basis and the consequent amount of gain

that petitioners must recognize can be determined by the parties

in their Rule 155 calculations.

Issue 2.   Addition to Tax for Failure To Timely File

     Respondent determined that petitioners are liable for the

addition to tax pursuant to section 6651(a)(1) for 1991.   Section

6651(a)(1) imposes an addition to tax for failure to file a

return on the date prescribed (determined with regard to any

extension of time for filing), unless the taxpayer can establish

that such a failure is due to reasonable cause and not due to
                               - 9 -


willful neglect.   The addition to tax is 5 percent of the amount

required to be reported on the return for each month or fraction

thereof during which such failure to file continues, but not to

exceed 25 percent in the aggregate.    See sec. 6651(a)(1).

Because petitioners are calendar year taxpayers, their 1991

return was due on April 15, 1992.   See sec. 6072(a).   Petitioners

stipulated that they did not request an extension of time to file

their 1991 income tax return and that it was filed on January 26,

1993. Petitioners' return was not timely filed.    Therefore,

unless petitioners can show that their failure to timely file

their return was due to reasonable cause and not due to willful

neglect, respondent's determination will be sustained.

     The term "reasonable cause" as set forth in section

6651(a)(1) has been defined as the exercise of ordinary business

care and prudence.   See sec. 301.6651-1(c)(1), Proced. & Admin.

Regs.   "Willful neglect" means a "conscious, intentional failure

or reckless indifference."   See United States v. Boyle, 469 U.S.

241, 245 (1985).   The question of whether a failure to file a

timely return is due to reasonable cause and not willful neglect

is one of fact, on which petitioners bear the burden of proof.

See Rule 142(a); Commissioner v. Walker, 326 F.2d 261, 264 (9th

Cir. 1964), affg. in part and revg. in part on another ground 37

T.C. 962 (1962); BJR Corp. v. Commissioner, 67 T.C. 111, 131

(1976).
                                - 10 -


     Petitioner testified that he thought he was entitled to a

tax refund, and that taxpayers who are entitled to a refund are

not required to request an extension if they file after the due

date.     Petitioner's testimony included the statement "I don't

know where I came up with that idea".

     Petitioners' erroneous belief that no taxes are due does not

constitute reasonable cause for the failure to timely file their

income tax return.     See Krieger v. Commissioner, T.C. Memo. 1993-

347, affd. without published opinion 64 F.3d 657 (4th Cir. 1995);

Adams v. Commissioner, T.C. Memo. 1982-223, affd. without

published opinion 732 F.2d 159 (7th Cir. 1984).      Under these

circumstances, we conclude that petitioners' failure to timely

file their income tax return for 1991 was not due to reasonable

cause.     Accordingly, we hold that the addition to tax pursuant to

section 6651(a) is properly imposed.

Issue 3. Accuracy-Related Penalty

        Respondent determined that petitioners are liable for an

accuracy-related penalty pursuant to section 6662(a) for either

negligence or disregard of rules or regulations or the

substantial understatement of income tax.      Section 6662 provides

for the imposition of a penalty equal to 20 percent of the

portion of an underpayment which is attributable to negligence or

disregard of rules or regulations.       See sec. 6662(a) and (b)(1).

For purposes of this section, the term "negligence" includes any
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failure to make a reasonable attempt to comply with the

provisions of the internal revenue laws, to exercise ordinary and

reasonable care in the preparation of a tax return, and to keep

adequate books and records or to substantiate items properly.

See sec. 1.6662-3(b)(1), Income Tax Regs.   The term "disregard"

includes any careless, reckless, or intentional disregard of

rules or regulations.   See sec. 6662(c).

     The burden is on the taxpayer to prove the Commissioner's

imposition of the penalty is in error.   See Betson v.

Commissioner, 802 F.2d 365, 372 (9th Cir. 1986), affg. in part

and revg. in part T.C. Memo. 1984-264; LaVerne v. Commissioner,

94 T.C. 637, 652 (1990), affd. without published opinion 956 F.2d

274 (9th Cir. 1992); Luman v. Commissioner, 79 T.C. 846, 860-861

(1982); Bixby v. Commissioner, 58 T.C. 757, 791 (1972).   Except

for petitioner's testimony that he thought the insurance proceeds

were not taxable because they were compensation for the casualty

loss, petitioners did not address this issue at trial.

     Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment if it

is shown that there was a reasonable cause for the taxpayer's

position with respect to that portion and that the taxpayer acted

in good faith with respect to that portion.   See sec. 6664(c)(1).

     The determination of whether a taxpayer acted with

reasonable cause and good faith within the meaning of section
                               - 12 -


6664(c)(1) is made on a case-by-case basis, taking into account

all pertinent facts and circumstances.    See sec. 1.6664-4(b)(1),

Income Tax Regs.    The most important factor is the extent of the

taxpayer's efforts to assess the taxpayer's proper tax liability.

See id.

       In this case, petitioners were negligent and disregarded

rules or regulations.    Petitioners received $58,475 from the

insurance company for their loss of the bus.    The acquisition

cost of the bus plus the cost of petitioners' listed items total

no more than $40,359.    Furthermore, petitioners claimed $18,517

of depreciation deductions, which decreased their basis in the

bus.

       Although the amount that petitioners received from the

insurance company for the converted bus substantially exceeded

their basis, even without considering the depreciation charges,

petitioners never reported any portion of the insurance proceeds

as income.    In addition, although petitioner testified that he

had no knowledge of tax law, petitioners apparently did not seek

the advice of anyone who could have informed them of their proper

tax liability.

       It is evident from the record that petitioners did not make

a reasonable attempt to comply with the internal revenue laws or

to exercise ordinary and reasonable care in the preparation of

their tax return.    Finally, we do not find that there was
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reasonable cause for petitioners' reporting position or that they

acted in good faith.   Respondent is sustained on this issue.6

     To reflect the foregoing,

                                           Decision will be entered

                                       under Rule 155.




     6
      Because we have found that petitioners are liable for the
accuracy-related penalty for negligence or disregard of rules or
regulations, we need not decide the issue of whether petitioners
are liable for the penalty for the substantial understatement of
income tax. See sec. 1.6662-2(c), Income Tax Regs.
