                        T.C. Memo. 1997-353



                      UNITED STATES TAX COURT



       RANDALL L. KIRST and MARY M. KIRST, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22189-95.                       Filed July 31, 1997.



     Curt R. Craton, for petitioners.

     Willis B. Douglass, for respondent.



                        MEMORANDUM OPINION


     WRIGHT, Judge:   Respondent determined a deficiency of

$25,561 in petitioners' Federal income tax for taxable year 1990.

Respondent further determined that petitioners are liable for the
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accuracy-related penalty under section 6662(a)1 in the amount of

$5,112.       After concessions, the issues for decision are:

       (1) Whether petitioners may defer recognition of gain

realized from the sale of petitioner husband's former principal

residence under section 1034(a).       We hold that they may not.

       (2) Whether petitioners are liable for the accuracy-related

penalty under section 6662(a).       We hold that they are.

       This case was submitted fully stipulated pursuant to Rule

122.       The stipulation of facts and attached exhibits are

incorporated herein.       Petitioners resided in Newport Beach,

California, at the time the petition was filed in this case.

       Petitioners were married on September 4, 1989.     Prior to

their marriage, petitioner-husband's (Mr. Kirst) principal

residence was located at 16421 Superior Street, Sepulveda,

California (the Sepulveda property), and petitioner-wife's (Mrs.

Kirst) principal residence was located at 17 Toulon Street,

Newport Beach, California (the Newport Beach property).         Neither

petitioner owned an interest in the other's principal residence

prior to their marriage.       After the couple were married, Mr.

Kirst changed his principal residence and began residing with

Mrs. Kirst at the Newport Beach property.



       1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect during the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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     Mrs. Kirst purchased the Newport Beach property in 1981 by

assuming the former owner's existing mortgage (the Newport Beach

mortgage).   In April 1990, the principal balance remaining on

that mortgage was $225,566.36.

     On April 27, 1990, Mr. Kirst sold the Sepulveda property for

$235,000 (the Sepulveda proceeds).       He realized a gain of $81,968

on this sale.   Sometime thereafter, Mr. Kirst transferred

$120,000 of the Sepulveda proceeds to petitioners' joint bank

account (the joint account).   Mrs. Kirst withdrew at least

$20,000 from this account for personal and business reasons.

She also withdrew $40,000 from the joint account in order to pay

a personal debt.

     Prior to petitioners' marriage, Mr. Kirst maintained a

checking account at a local bank.    This account became the

couple's joint checking account (the couple's joint checking

account) after their marriage.    Since May 1990, petitioners paid

the mortgage on the Newport Beach property with checks drawn

against the couple's joint checking account.

     Using Form 2119, petitioners deferred recognition of the

gain realized from the sale of the Sepulveda property.      They

attached this form to their timely filed 1990 return and

indicated thereon that Mr. Kirst had not purchased a replacement

property but that he intended to do so within the applicable

replacement period.
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     Mr. Kirst did not have record title to the Newport Beach

property at anytime prior to the submission of this case.

However, on January 23, 1997, petitioners executed a written

agreement entitled "Agreement Regarding Residential Property"

(occasionally the agreement).    The agreement purports to

memorialize an oral agreement allegedly made on September 4,

1989, in which Mrs. Kirst agreed to transmute an interest in the

Newport Beach property to Mr. Kirst in exchange for certain

consideration.   The preamble to this agreement indicates that

petitioners intended for it to be effective as of April 27, 1990.

 Issue 1.   Principal Property, Section 1034.

     As a general rule, gain realized from the sale or other

disposition of property must be recognized.     Sec. 1001(c).

Section 1034 provides an exception to this general rule and

allows a taxpayer to defer recognition of all or part of any gain

realized on the sale of a principal residence if other property

is purchased and used by the taxpayer as a new principal

residence within the period beginning 2 years before the date of

the sale and ending 2 years after that date (the replacement

period).    Under section 1034(a), gain is recognized only to the

extent that the adjusted sales price of the old property exceeds

the cost of purchasing the new property.

     Petitioners argue that Mr. Kirst purchased an interest in

the Newport Beach property, and that the amount of consideration
                                - 5 -

that he paid for that interest exceeded the adjusted sales price

of the Sepulveda property.

       Respondent maintains that Mr. Kirst did not purchase a new

principal residence within the meaning of section 1034.      In

advancing this argument, respondent argues that petitioners are

not entitled to nonrecognition treatment because Mr. Kirst did

not obtain record title to the Newport Beach property during the

replacement period.    We agree with respondent.

       Section 1034 is strictly construed.   See Boesel v.

Commissioner, 65 T.C. 378, 386 (1975); see also Lokan v.

Commissioner, T.C. Memo. 1979-380; Bazzell v. Commissioner, T.C.

Memo. 1967-101.    If a taxpayer is to receive nonrecognition

treatment under section 1034, it is essential that he or she

maintain continuity of title.    Marcello v. Commissioner, 380 F.2d

499, 502 (5th Cir. 1967), affg. on this issue and remanding on

other issues T.C. Memo. 1964-299; Boesel v. Commissioner, supra;

see also De Ocampo v. Commissioner, T.C. Memo. 1997-161; Allied

Marine Sys., Inc. v. Commissioner, T.C. Memo. 1997-101; Edmondson

v. Commissioner, T.C. Memo. 1996-393; Snowa v. Commissioner, T.C.

Memo. 1995-336; May v. Commissioner, T.C. Memo. 1974-54; sec.

1.1034-1(b)(9), Income Tax Regs.    This requirement operates to

prevent taxpayers from enjoying the benefits of tax deferral

while placing themselves in a position as nontitleholders to

escape future recognition.    See Boesel v. Commissioner, supra at

388.
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     Petitioners concede that Mr. Kirst did not obtain record

title to the Newport Beach property during the replacement

period.    They contend, however, that obtaining record title was

not necessary because Mrs. Kirst effectively transmuted an

interest in the Newport Beach property to Mr. Kirst, and that

such transmutation satisfies section 1034's continuity of title

requirement.2   Specifically, petitioners contend that, in

exchange for consideration consisting of a portion of Sepulveda

proceeds and the assumption of the Newport Beach mortgage, Mrs.

Kirst orally agreed to transmute an interest in the Newport Beach

property to Mr. Kirst.   This agreement, according to petitioners,

occurred on September 4, 1989, and was executed on April 27,

1990.    The purported agreement was reduced to writing on January

23, 1997.    Petitioners maintain that, while their oral agreement

was not reduced to writing during the replacement period, the

effect of their written agreement relates back to the date on

which they entered their oral agreement, a date which petitioners

maintain occurred during the replacement period.

     We are unpersuaded by petitioners' argument that the effect

of their written transmutation agreement, which was executed

roughly 5 years after the close of the replacement period,

     2
      California is a community property State, and property
owned by a person before marriage remains the separate property
of that person after marriage. Cal. Civ. Code secs. 5107, 5108,
(West 1983). However, a married person's separate property may
be transmuted into community property if the parties execute a
written transmutation agreement. Cal. Civ. Code sec. 5110.710.
                                - 7 -

relates back to the date of the purported oral agreement.3   The

authority upon which petitioners rely does not espouse their

argument.   See Marriage of Garrity, 181 Cal. App. 3d. 675 (Ct.

App. 1986).   Suffice it to say that the Federal tax law cannot be

circumvented in the manner advocated by petitioners.4

     Mr. Kirst failed to obtain record title to the Newport Beach

property during the replacement period.   This alone prevents

petitioners from deferring the gain realized from the sale of the

Sepulveda property.    As explained above, continuity of title is

essential if a taxpayer is to receive nonrecognition treatment

under section 1034.    Marcello v. Commissioner, supra; Boesel v.

Commissioner, supra.




     3
      It is interesting to note that petitioners' argument is
inconsistent with the evidence of record. That is, petitioners
maintain that, in exchange for certain consideration, Mrs. Kirst
orally agreed in September 1989 to transmute an interest in the
Newport Beach property to Mr. Kirst. According to petitioners,
that "exchange" occurred on April 27, 1990. However, when
petitioners completed Form 2119, which was attached to their
timely filed return for 1990 and was presumably prepared in 1991,
they indicated that Mr. Kirst had yet to purchase a replacement
principal residence. Petitioners fail to explain why the Form
2119 indicates that Mr. Kirst had yet to purchase a replacement
principal residence, while petitioners now argue that the
exchange or transmutation involved in their agreement occurred in
April 1990.
     4
      We do not consider the effect of a written transmutation
agreement that is executed during the replacement period.
                                   - 8 -

     Accordingly, we hold that petitioners are required to

recognize the gain realized from the sale of the Sepulveda

property.5

Issue 2.     Section 6662.

     Respondent determined that petitioners are liable for the

accuracy-related penalty pursuant to section 6662(a).         Section

6662 imposes a penalty equal to 20 percent of the portion of an

underpayment of tax that is attributable to any substantial

understatement of tax.       Secs. 6662(a) and (b)(2).   An

understatement of tax is substantial when it exceeds the greater

of 10 percent of the tax required to be shown on the return or

$5,000.    Sec. 6662(d)(1)(A).     The amount of an understatement

will be reduced if a taxpayer has substantial authority for the

way an item was treated, or if the facts that affect the item's

tax treatment are adequately disclosed on the return and there is

a reasonable basis for the tax treatment of such item.         Sec.

6662(d)(2)(B).     Moreover, the accuracy-related penalty does not

apply to any portion of an underpayment if there was reasonable

cause for such portion and the taxpayer acted in good faith.

Sec. 6664(c)(1).     A taxpayer has the burden of proving that

respondent's determination is in error.        Rule 142(a).




     5
      We have considered each of petitioners' allegations with
respect to this issue and, to the extent not discussed herein,
find them to be irrelevant or without merit.
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     Petitioners fail to address this issue in meaningful detail.

They limit their argument to the contention that there is no

underlying deficiency.   Accordingly, under the facts and

circumstances of this case, we conclude that petitioners have not

carried their burden of refuting respondent's determination with

respect to this issue.   Respondent's determination is sustained.6

     To reflect the foregoing,

                                              Decision will be

                                         entered under Rule 155.




     6
      Respondent also argues that petitioners were negligent, but
because we hold petitioners liable for the accuracy-related
penalty due to their substantial understatement of income tax, we
do not address the negligence issue.
