                        T.C. Memo. 2004-200



                      UNITED STATES TAX COURT



JOHN WELLER WOOD, JR., AND MAGDALENA FRANCES WOOD, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 5259-99, 15992-99.        Filed August 31, 2004.


     John Weller Wood, Jr., and Magdalena Frances Wood, pro sese.

     Lorianne D. Masano, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax and accuracy-related penalties as

follows:
                                 - 2 -

                                     Accuracy-related penalty
          Year      Deficiency             Sec. 6662(a)

          1994       $23,663                 $4,732
          1995         3,102                    620
          1996         7,515                  1,503

     After concessions by John Weller Wood (petitioner),1 the

issues to be decided in these cases are:

     1.   Whether respondent violated the automatic stay under

section 362 of the Bankruptcy Code2 by auditing petitioner’s

Forms 1040, U.S. Individual Income Tax Return, and issuing

notices of deficiency for 1994, 1995, and 1996;

     2.   whether petitioner’s capital gain in 1994 on the sale of

a house in Warren, New Jersey, was less than the $90,888

determined by respondent;




     1
      Petitioner concedes that:

     1. For 1994, the amount allowable as an itemized deduction
for real estate taxes is $12,835 as determined by respondent,
rather than $24,389 as claimed on Schedule A, Itemized
Deductions, of the Form 1040, U.S. Individual Income Tax Return;

     2. he is not entitled to deduct losses of $3,431 for 1994
and $809 for 1995 from IDN Distributorship or $1,578 for 1995
from Home Business Services;

     3. for 1996, the amount allowable as a loss from the sale
of a Buick LeSabre is $201 as determined by respondent, rather
than $19,233 as reported on Form 4797, Sales of Business
Property; and

     4. the statute of limitations does not bar assessment of
tax for 1994.
     2
      Bankruptcy Code references are to 11 U.S.C. (2000).
                                 - 3 -

     3.    whether petitioner understated the net profits from his

consulting business by $24,016 in 1994, $7,037 in 1995, and

$13,094 in 1996;

     4. (a)     whether petitioner is a real estate dealer, and, if

so, whether he is entitled to deduct business losses of $121,966

reported in 1994, $72,546 reported in 1995, and $345,223 reported

in 1996, or alternatively

          (b)   if petitioner is not a real estate dealer, then

whether he is entitled to (i) deductions on Schedule A, Itemized

Deductions, greater than $25,665 in 1994, $45,066 in 1995, and

$8,545 in 1996, as allowed by respondent, and (ii) deductions for

rental expenses on Schedule E, Supplemental Income and Loss,

greater than $13,977, as allowed by respondent for 1994;

     5.    whether petitioner is entitled to deduct net operating

loss carryovers of $18,520 in 1994 and $36,389 in 1996;

     6.    whether petitioner is liable for self-employment tax of

$5,902 for 1994, $3,102 for 1995, and $3,626 for 1996;3 and

     7.    whether petitioner is liable for the accuracy-related

penalty under section 6662(a)4    for each of the years at issue.




     3
      The parties agree that in computing petitioner’s Federal
income tax liability for each year petitioner may deduct one-half
of the self-employment tax.
     4
      Unless otherwise noted, section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 4 -

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are found

accordingly.     The stipulation of facts, the supplemental

stipulation of facts, and the exhibits submitted therewith are

incorporated herein by this reference.

     Petitioner and his wife, Magdalena Frances Wood5 (Mrs.

Wood), resided in Orlando, Florida, when the petitions in these

cases were filed.

         Petitioner graduated from West Point in 1960 and served in

the military until 1977.     In 1967 while he was in Florida

attending the Air Ground Operations School at Eglin Air Force

Base, petitioner and other officers became shareholders of

Miracle Strip Parkway Realty, Inc. (MSPR, Inc.), a corporation

organized for the purpose of buying land to be divided into lots.

Approximately 20 persons invested in MSPR, Inc.     At some time

before the years at issue, MSPR, Inc., converted to a limited

partnership and thereafter was known as Miracle Strip Parkway

Realty, Ltd. (MSPR, Ltd.).     Petitioner was a limited partner of

MSPR, Ltd.     Over the years, MSPR, Ltd., purchased and sold




     5
      Magdalena Frances Wood did not appear at the trial in these
cases and did not execute the stipulation of facts or the
supplemental stipulation of facts. Respondent filed a motion to
dismiss the cases with respect to Mrs. Wood for failure to
properly prosecute. The Court will grant respondent’s motion and
will dismiss these cases as to her. See Rule 123(b).
                                 - 5 -

undeveloped land to individuals, real estate companies, and

developers.

     In 1974, petitioner and Mrs. Wood purchased a house in

Annandale, Virginia (the Virginia house), for $57,000.    They

resided in the Virginia house until petitioner retired from the

military in 1977.

     In 1976, petitioner and Mrs. Wood purchased undeveloped land

in Florida.   The land remained undeveloped through the years at

issue.

     When petitioner retired from the military in 1977, he and

Mrs. Wood moved to New Jersey.    They sold the Virginia house for

$70,000 (incurring closing costs of $3,000 on the sale) and

purchased a house in Warren, New Jersey (the New Jersey house),

for $87,900 (incurring closing costs of $1,214.25).   Petitioner

and Mrs. Wood did not report the gain from the sale of the

Virginia house on their 1977 Federal income tax return.    While

living in the New Jersey house, they made capital improvements

costing $153,435.

     In 1977, petitioner and Mrs. Wood purchased a 1-week

timeshare unit in Brookdale, Pennsylvania (the Brookdale

timeshare), for $7,900.

     After petitioner moved to New Jersey, he was employed first

by Lockheed Electronics and then by ITT Avionics.   In 1981,
                               - 6 -

petitioner started a consulting business.    He also began a home

improvement business, operating under the name “J&M Enterprises”.

Petitioner’s mother owned an apartment in Shrewsbury, New Jersey.

Over the years, petitioner repaired, cleaned, managed, and found

tenants for that apartment.6   Petitioner spent approximately 1

week each year maintaining and managing the apartment.

     In 1982, petitioner filed a business name certificate with

the State of New Jersey, certifying that he was conducting a

business under the name “The Logistics Technology Group.”     The

nature of the business was described as defense electronics

consulting services, real estate dealer activities, and home

improvement services.   Petitioner opened a bank account titled

“Logistics Technology Group” (the LTG account).

     In 1986, petitioner and Mrs. Wood purchased a house in

Hilton Head, South Carolina (the South Carolina house), and, in

1987, they purchased a 1-week timeshare unit in Gulfstream,

Florida (the Gulfstream timeshare), for $7,900.

     In 1988, petitioner and Mrs. Wood purchased land in Boca

Raton, Florida, and, in 1989, they hired a builder to construct a

home on that property (the Florida house).   To help finance the

construction of the Florida house, petitioner and Mrs. Wood sold

the South Carolina house in 1989.



     6
      Petitioner began these activities in 1972 and continued
them through 1996.
                                - 7 -

     In 1989 and 1990, petitioner generally paid the installments

on the New Jersey house mortgage, as well as the taxes and

related fees associated with the undeveloped land in Florida, the

Brookdale timeshare, and the Gulfstream timeshare, from the LTG

account.

     Petitioner advertised the New Jersey house for sale and

found a buyer.   However, the buyer under the contract of sale

defaulted, and the sale did not go through.   (Petitioner was

relying on the proceeds from the sale of the New Jersey house to

repay loans for constructing the Florida house.)   After the buyer

defaulted, petitioner obtained money from his brother ($105,000)

and Mrs. Wood’s mother ($100,000) to assist with the cost of

constructing the Florida house.   Petitioner paid an additional

$155,000 of the cost and obtained a loan for the balance.

     Petitioner and Mrs. Wood moved into the Florida house in

August 1990 and listed the New Jersey house for sale with a real

estate agent.    The real estate agent rented the New Jersey house

for petitioner on a month-to-month basis from 1992 until it sold

in 1994.   A lease, dated March 15, 1993, specified that the New

Jersey house would remain on the market for sale and could be

shown to prospective buyers by appointment.   The lease also

provided that, if a contract of sale was accepted, the tenant

would be given 90 days’ notice to vacate the property.
                                - 8 -

     In 1994, petitioner and Mrs. Wood entered into a contract to

sell the undeveloped land in Florida, but the buyer failed to

perform under the contract.

     On April 29, 1994, petitioner and Mrs. Wood filed for

bankruptcy under chapter 11 of the Bankruptcy Code (chapter 11)

in the U.S. Bankruptcy Court for the Southern District of Florida

(the bankruptcy court).   On May 9, 1994, petitioner and Mrs. Wood

sold the New Jersey house for $334,000.   They incurred $20,300 of

expenses related to the sale.   Allowable depreciation for the 3-

year period the house was rented totaled $9,737.

     On September 13, 1994, the Internal Revenue Service (IRS)

filed with the bankruptcy court a proof of claim, claiming an

unsecured nonpriority claim of $2,200 and an unsecured priority

claim of $20,389.54.

     On January 18, 1995, petitioner and Mrs. Wood filed with the

bankruptcy court their chapter 11 plan of reorganization.

Pursuant to the plan, the bankruptcy court retained jurisdiction

of the case until all payments and distributions called for under

the plan had been made.   The plan noted that the Florida house

had been listed with a licensed realtor for sale for $994,900.

     By order dated February 6, 1995, the bankruptcy court

confirmed the plan of reorganization.   The order confirming the

plan proclaimed:

     that, except as provided in the Plan, the individual
     Debtors are discharged from any debt that arose before
                                   - 9 -

     the date of confirmation of the Plan, except any debts
     excepted from discharge under § 523 of the Bankruptcy
     Code, and except if the Debtors would be denied a
     discharge under § 727(a) of a chapter 7 case; * * *

     On May 18, 1995, the bankruptcy court issued its final

decree and closed the bankruptcy case.

     Petitioner and Mrs. Wood resided in the Florida house until

January 1996, when the mortgage was foreclosed.        They continued

to own the undeveloped land in Florida, the Brookdale timeshare,

and the Gulfstream timeshare throughout 1996.

     On their 1994, 1995, and 1996 Forms 1040, U.S. Individual

Income Tax Return, petitioner and Mrs. Wood reported the

following:

                                             1994       1995        1996
Income
 Wages, salaries, tips, etc.                    --         --       $1,442
 Taxable interest                              $408        $86         908
 Business income or (loss)--Schedule C     (107,644)   (58,440)   (334,232)
 Capital gain or (loss)--Schedule D          76,771        --          --
 Other gains or (losses)--Form 4797             -0-        --      (20,581)
 Pensions & annuities--taxable amount        21,372     21,965      22,544
 Other income                                   --         --      (36,389)
  Total income                               (9,093)   (36,389)   (366,308)
Schedule A
 Medical & dental                            1,365        --          --
 Taxes
  Real estate taxes                         24,389     11,610         --
  Personal property taxes                       35        --          --
 Home mortgage interest                     42,614     23,476         --
  Total itemized deductions                 68,403     35,086         --
Itemized deductions/Standard deduction      68,403     35,086       6,700
Taxable income                                 -0-        -0-         -0-
                               - 10 -

     The capital gain reported in 1994 was gain on the sale of

the New Jersey house.

     The business income reported each year was attributable to

three activities that were reported on separate Schedules C,

Profit or Loss From Business--one for Mr. Wood’s consulting

business (the consulting business Schedule C), one for his

property management/real estate activity (the property management

Schedule C), and one for a distributorship (the distributorship

Schedule C).   The Schedules C reported aggregate net operating

losses each year as follows:
                                    - 11 -

                                               1994        1995        1996
Consulting business Schedule C
 Income                                       75,657      53,804      60,072
 Expenses                                    (51,879)    (27,527)    (42,829)
 Expense for business use of home             (6,025)    (11,362)     (4,674)
 Net profit                                   17,753      14,915      12,569
Property management Schedule C
 Income1                                         -0-         -0-    (336,981)
 Expenses
  Depreciation                                  3,536     27,525        --
  Insurance                                       148       --          --
  Mortgage interest                           106,322     33,487        --
  Other interest                                 --        1,357       8,242
  Legal                                           283        500        --
  Office expense                                  236       --          --
  Repairs and maintenance                       7,196       --          --
  Taxes and licenses                            3,659      9,677        --
  Travel                                          586       --          --
   Total                                      121,966     72,546       8,242
 Net profit (loss)                           (121,966)   (72,546)   (345,223)
Distributorship Schedule C
 Income                                         (776)        -0-         -0-
 Expenses                                     (2,655)       (809)     (1,578)
 Net profit (loss)                            (3,431)       (809)     (1,578)

    1
      For 1994 and 1995, petitioner reported no inventory at the beginning
and close of each year with respect to the property management and real
estate dealership business. For 1996, he reported opening inventory of
$355,966 and closing inventory of $18,985 for which he reported cost of goods
sold of $336,981. Petitioner did not attach an explanation as to why the
1996 beginning year inventory was different from the 1995 closing inventory.


     In December 1997, the IRS began an examination of

petitioner’s 1994-96 returns.        On December 21, 1998, respondent

issued petitioner and Mrs. Wood a notice of deficiency for 1994.

On July 19, 1999, respondent issued them a notice of deficiency

for 1995-96.    In the notices of deficiency, respondent (1)

increased the capital gain on the sale of the New Jersey house by

$14,117 ($90,888 rather than the $76,771 reported on petitioner’s
                             - 12 -

1994 return), (2) increased petitioner’s profits from his

consulting business by $24,016 for 1994, $7,037 for 1995, and

$13,094 for 1996, consisting of omitted gross receipts and

disallowed claimed business expenses, (3) disallowed net losses

(for expenses attributable to the New Jersey house, the Florida

house, the undeveloped land in Florida, and the timeshares and a

loss on the sale of the Florida house) totaling $121,966 in 1994,

$72,546 in 1995, and $345,223 in 1996 claimed by petitioner and

Mrs. Wood on the property management Schedules C, (4) disallowed

losses of $3,431 for 1994, $809 for 1995, and $1,578 for 1995

claimed on the distributorship Schedules C, (5) allowed

petitioner deductions on Schedule E for expenses relating to the

rental of the New Jersey house before its sale that had been

claimed on the property management Schedules C, (6) made

adjustments to Schedule A itemized deductions, (7) disallowed

$19,032 of the $19,233 loss from the sale of a Buick LeSabre

petitioner claimed on Form 4797 of the 1996 return, (8)

determined that petitioner was liable for self-employment taxes

on the net profit from his consulting business and allowed

petitioner a deduction for half of those taxes, (9) allowed

petitioner a net operating loss carryover of $18,520 to 1994, and

(10) disallowed the net operating loss carryover of $36,389

petitioner claimed on the 1996 return.
                               - 13 -

                               OPINION

I.   Violation of Automatic Bankruptcy Stay

     This Court has limited jurisdiction, and we may exercise

jurisdiction only to the extent authorized by Congress.       Naftel

v. Commissioner, 85 T.C. 527, 529 (1985).     Our jurisdiction to

redetermine a deficiency depends upon the issuance of a valid

notice of deficiency and a timely filed petition.    Rule 13(a),

(c); Monge v. Commissioner, 93 T.C. 22, 27 (1989); Normac, Inc.

v. Commissioner, 90 T.C. 142, 147 (1988).

     Section 6212(a) expressly authorizes the Commissioner, after

determining a deficiency, to send a notice of deficiency to the

taxpayer by certified or registered mail.     The taxpayer, in turn,

generally has 90 days from the date the notice of deficiency is

mailed to file a petition in this Court for a redetermination of

the deficiency.   Sec. 6213(a).

     An exception to the normal 90-day filing period arises where

the taxpayer has filed a petition for relief under the Bankruptcy

Code.   Sec. 6213(f).   The filing of a bankruptcy petition

operates as an automatic stay which precludes the commencement or

continuation of proceedings in this Court.    11 U.S.C. sec.

362(a)(8); Kieu v. Commissioner, 105 T.C. 387, 391 (1995);

Allison v. Commissioner, 97 T.C. 544, 545 (1991).

     Petitioner contends that respondent violated the automatic

stay in his chapter 11 bankruptcy proceeding under section 362 of
                                - 14 -

the Bankruptcy Code by conducting a tax audit and issuing the

notices of deficiency.

     Section 362(a) of the Bankruptcy Code provides in pertinent

part:

     (a) Except as provided in subsection (b) of this
     section, a petition filed under section 301, 302, or
     303 of this title, * * * operates as a stay, applicable
     to all entities, of–

                  *    *    *    *    *    *    *

        (4) any act to create, perfect, or enforce any lien
        against property of the estate;

        (5) any act to create, perfect, or enforce against
        property of the debtor any lien to the extent that such
        lien secures a claim that arose before the commencement
        of the case under this title;

        (6) any act to collect, assess, or recover a claim
        against the debtor that arose before the commencement
        of the case under this title;

                  *    *    *    *    *    *    *

        (8) the commencement or continuation of a proceeding
        before the United States Tax Court concerning the
        debtor. [11 U.S.C. sec. 362(a).]

        A chapter 11 filing, however, does not operate as a stay of

either an audit by a governmental unit to determine tax liability

or the issuance to the debtor by a governmental unit of a notice

of tax deficiency.     11 U.S.C. sec. 362(b)(9)(A) and (B).    Thus,

during the stay, the IRS may conduct an audit and issue a notice

of deficiency to the debtor.

        If the IRS issues a notice of deficiency to a taxpayer who

has filed a bankruptcy petition, the normal 90-day period for
                              - 15 -

filing a timely petition with this Court is suspended for the

period during which the taxpayer is prohibited by reason of the

automatic stay from filing a petition in this Court and for 60

days thereafter.   Sec. 6213(f); Olson v. Commissioner, 86 T.C.

1314, 1318-1319 (1986).

     Unless relief from the automatic stay is granted by order of

the bankruptcy court, the automatic stay generally remains in

effect until the earliest of the closing of the case, dismissal

of the case, or the grant or denial of a discharge.7   11 U.S.C.

sec. 362(c)(2); Guerra v. Commissioner, 110 T.C. 271, 275 (1998);

Allison v. Commissioner, supra at 545; Smith v. Commissioner, 96

T.C. 10, 14 (1991); Neilson v. Commissioner, 94 T.C. 1, 8 (1990).

     Petitioner filed for bankruptcy on April 29, 1994.   The

bankruptcy court confirmed the plan of reorganization by order



     7
      The period that the automatic stay remains in effect is
prescribed in 11 U.S.C. sec. 362(c) as follows:

     (c) Except as provided in subsections (d), (e), and (f)
     of this section--

     (1) the stay of an act against property of the estate
     under subsection (a) of this section continues until
     such property is no longer property of the estate; and

     (2) the stay of any other act under subsection (a) of
     this section continues until the earliest of--
     (A) the time the case is closed;
     (B) the time the case is dismissed; or
     (C) if the case is a case under chapter 7 of this title
     concerning an individual or a case under chapter 9, 11,
     12, or 13 of this title, the time a discharge is
     granted or denied.
                                - 16 -

dated February 6, 1995, and closed the case on May 18, 1995.     The

order confirming the plan specifically discharged petitioner and

Mrs. Wood.    Therefore, the automatic stay of Bankruptcy Code

section 362 was lifted no later than May 18, 1995, when the order

closing the case was entered.

     Respondent issued to petitioner and Mrs. Wood a notice of

deficiency for 1994 on December 21, 1998, and a notice of

deficiency for 1995 and 1996 on July 19, 1999.    Thus, the notices

of deficiency were issued, and the petitions in these cases were

filed, well after the automatic stay in petitioner and Mrs.

Wood’s bankruptcy case was lifted.

     Petitioner contends, and asks us to rule, that respondent’s

claims against him were discharged in bankruptcy.    We do not have

authority in these cases to decide whether respondent’s claims

against petitioner have been discharged because in a deficiency

proceeding our subject matter jurisdiction is generally limited

to the redetermination of the correct amount of a deficiency

determined by the Commissioner and is unrelated to the collection

of the tax.    Swanson v. Commissioner, 65 T.C. 1180, 1184 (1976).

An action brought for redetermination of a deficiency “has

nothing to do with collection of the tax nor any similarity to an

action for collection of a debt”.    Id.   Thus, in deficiency

proceedings commenced in this Court under section 6213, such as

these cases, while we have jurisdiction to redetermine the
                                - 17 -

Federal income tax deficiencies, we do not have jurisdiction to

determine whether a bankruptcy court has discharged a taxpayer

from an unpaid tax liability.    Neilson v. Commissioner, supra at

9; Graham v. Commissioner, 75 T.C. 389, 399 (1980); Bilski v.

Commissioner, T.C. Memo. 1994-55; McAlister v. Commissioner, T.C.

Memo. 1993-166.8

II.   Capital Gain in 1994 on the Sale of New Jersey House

      Respondent determined that petitioner’s corrected capital

gain on the sale of the New Jersey house was not $76,771 (as

reported on petitioner’s 1994) return but rather $90,888,

computed as follows:




      8
      In contrast to a deficiency proceeding, a lien proceeding
commenced in this Court under sec. 6330(d)(1) “is closely related
to and has everything to do with collection of a taxpayer’s
unpaid liability for a taxable year.” Washington v.
Commissioner, 120 T.C. 114, 120 (2003). Thus, this Court has
jurisdiction in a lien or levy proceeding commenced under sec.
6330(d)(1) to determine whether a bankruptcy court has discharged
the taxpayer from unpaid tax liabilities. Swanson v.
Commissioner, 121 T.C. 111 (2003); Washington v. Commissioner,
supra.
                                - 18 -

     Sale price                 $334,000
     Closing costs               (20,300)
       Amount realized                                  $313,700
     Purchase price               87,900
     Closing costs                 1,214
     Improvements                153,435
       Cost basis                           $242,549
     Depreciation allowed
       1992                        3,455
       1993                        3,455
       1994                        2,827
        Total                                 (9,737)
     Deferred gain from
      sale of Virginia house
       Sale price                 70,000
       Cost                      (57,000)
       Closing costs              (3,000)
       Deferred gain                         (10,000)
     Adjusted basis                                     (222,812)
     Gain on sale                                         90,888

     Respondent increased petitioner’s cost basis in the New

Jersey house by $153,435 for improvements petitioner made to the

house.    Respondent included in the improvements to the New Jersey

house $20,000 petitioner established he incurred in 1984 for

modifications to the kitchen.    Petitioner asserts that he spent

$22,500 for modifications to the kitchen of the New Jersey house.

     Respondent’s determinations are presumed to be correct and

petitioner bears the burden of proof on all issues in these

cases.9   See Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,



     9
      Sec. 7491, which is effective for court proceedings arising
in connection with examinations commencing after July 22, 1998,
shifts the burden of proof to the Commissioner in certain
circumstances and places on the Commissioner the burden of
production with respect to penalties and additions to tax. Sec.
7491 is inapplicable in these cases because the examination of
petitioner and Mrs. Wood’s returns commenced in December 1997.
                               - 19 -

115 (1933).   Petitioner has not established that he paid more for

kitchen remodeling than the $20,000 respondent allowed.       He

provided two documents from Frank and Sal Fricano for material

and labor for “tiling kitchen & foyer”.10       Both documents provide

for tiling an area of 305 square feet.     The documents could be

estimates rather than invoices, and they do not establish that

the work was completed or that the stated amounts were paid.

     Petitioner asserts that he spent several thousand dollars to

add fireplaces to the New Jersey house.        He did not provide any

checks or receipts to substantiate the cost of the fireplaces.

     We find that petitioner has not established that the capital

improvements he and Mrs. Wood made to the New Jersey house

totaled more than $153,435.    We sustain respondent’s

determination on this issue.

III. Net Profits From Petitioner’s Consulting Business

     For the years at issue, petitioner reported the following on

the consulting business Schedules C:

                                        1994         1995          1996

 Income                             $75,657        $53,804     $60,072
 Expenses                           (51,879)       (27,527)    (42,829)
 Expense for business use of         (6,025)       (11,362)     (4,674)
 Net profit                          17,753         14,915      12,569




     10
      One is clearly dated “June 5 - 84”. The second document
is also dated June 5 but it appears the “84” has been changed to
“85”.
                                - 20 -

     Respondent determined that petitioner’s profits from his

consulting business should be increased by $24,016 for 1994,

$7,037 for 1995, and $13,094 for 1996, consisting of omitted

gross receipts and disallowed claimed business expenses.

     In addition to compensation for his consulting services,

petitioner received reimbursement from his clients for expenses.

The reimbursements were not included in the compensation reported

on Forms 1099 issued by the clients but were deducted by

petitioner on the consulting business Schedules C.   Petitioner

did not keep accurate records of his reimbursed expenses.   The

invoices he submitted to the clients did not match deposits made

into his bank accounts.   During the audit, petitioner identified

certain deposits as amounts he received from clients for services

and reimbursed expenses (the consulting business deposits).

     In computing the gross receipts from petitioner’s consulting

business, respondent used the specific items method; i.e., the

consulting business deposits.    The consulting business deposits

totaled $83,966 in 1994, $56,066 in 1995, and $63,651 in 1996.

At trial petitioner offered no evidence to establish that the

deposits were not amounts paid to him by his clients or were

nontaxable amounts.   We find that petitioner’s gross receipts

from the consulting business were as determined by respondent;

namely $83,966 in 1994, $56,066 in 1995, and $63,651 in 1996.
                               - 21 -

      The parties stipulated that petitioner’s total business

expenses allowable on the consulting business Schedules C were

$42,197 for 1994, $34,114 for 1995, and $37,988 for 1996, as

respondent determined in the notices of deficiency.

      We thus hold that petitioner had additional profits from his

consulting business of $24,016 for 1994, $7,037 for 1995, and

$13,094 for 1996, computed as follows:

                                         1994       1995      1996

 Gross receipts                         $83,966    $56,066   $63,651
 Expenses
 Net profit                              41,769     21,952    25,663
 Less net profit reported on return     (17,753)
 Additional profits                      24,016      7,037    13,094

IV.   Business Losses as Real Estate Dealers

      For the years at issue, petitioner and Mrs. Wood claimed

deductions on the property management Schedules C for expenses

(that resulted in net losses) related to their ownership of real

property, including the New Jersey house, the Florida house, the

undeveloped land in Florida, the Brookdale timeshare, and the

Gulfstream timeshare, and petitioner’s management of the

apartment owned by his mother.   In addition, in 1996, they

claimed a business loss on the sale of the Florida house.

      Respondent disallowed the net losses petitioner claimed on

the property management Schedules C ($121,966 in 1994, $72,546 in

1995, and $345,223 in 1996) because petitioner did not establish,

alternatively, (1) that he and Mrs. Wood were in the property
                              - 22 -

management business during the years at issue, (2) that the

activities were entered into for profit within the meaning of

section 183, or (3) that any amount was for an ordinary and

necessary business expense or was expended for the purpose

designated.

     Respondent, however, treated the New Jersey house as

property held for the production of income and, pursuant to

section 212,11 allowed petitioner deductions on Schedule E for

claimed expenses relating to the rental of the New Jersey house

before its sale.   Respondent also allowed deductions on Schedule

A for State and local property taxes for all other properties,

pursuant to section 164, and for interest paid on the Florida

house mortgage, pursuant to section 163(h).

     Petitioner contends that he and Mrs. Wood were real estate

dealers and thus the expenses and loss incurred in that business

are deductible under sections 162 and 165.    On the other hand,

respondent asserts that the expenses and loss on the foreclosure

of the Florida house are nondeductible personal expenses and

loss.




     11
      An individual is entitled to deduct all the ordinary and
necessary expenses paid or incurred during the taxable year “for
the management, conservation, or maintenance of property held for
the production of income”. Sec. 212(2).
                                - 23 -

     A.    Expenses

     Taxpayers generally may deduct expenses that are ordinary

and necessary in carrying on a trade or business.    Sec. 162(a).

Also, taxpayers generally may deduct expenses that are ordinary

and necessary for (1) the production or collection of income, or

(2) the management, conservation, or maintenance of property held

for the production of income.    Sec. 212(1) and (2).   Further,

while business expenses and expenses related to income-producing

property are currently deductible, a taxpayer is not entitled to

deduct a capital expenditure; i.e., an amount paid for new

property or for permanent improvements or betterments made to

increase the value of any property or estate.12    Sec. 263(a)(1).

Instead, a depreciation deduction may be allowed if the property

is used in a trade or business or held for the production of

income.   Sec. 167; see INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 83-84 (1992).     Personal, living, and family expenses, on the

other hand, may not be deducted unless the Internal Revenue Code

expressly provides otherwise; e.g., State and local real property

taxes are deductible pursuant to section 164(a)(1).     Sec. 262(a).

The statutory prohibitions of sections 262 and 263 regarding

deductibility of personal and capital expenses take precedence

over the allowance provisions of sections 162 and 212.


     12
      Generally, the cost of acquisition of property having a
useful life substantially beyond the taxable year is a capital
expenditure. Sec. 1.263(a)-2(a), Income Tax Regs.
                               - 24 -

Commissioner v. Idaho Power Co., 418 U.S. 1, 17 (1974); Sharon v.

Commissioner, 66 T.C. 515, 523 (1976), affd. 591 F.2d 1273 (9th

Cir. 1978).

     To be deductible under section 162(a), an item must (1) be

paid or incurred during the taxable year, (2) be for carrying on

any trade or business, (3) be an expense (rather than a capital

expenditure), (4) be a necessary expense, and (5) be an ordinary

expense.    Commissioner v. Lincoln Sav. & Loan Association, 403

U.S. 345, 352 (1971).   Here, we are primarily concerned with the

second requirement; i.e., whether petitioner and Mrs. Wood

incurred the disallowed expenses while carrying on a trade or

business.

     Petitioner contends that he and Mrs. Wood were in the trade

or business of dealing in real estate.   He asserts that their

intent and commitment to be real estate dealers is evidenced by

(1) petitioner’s promoter activities with MSPR, Inc., (2)

petitioner’s and Mrs. Wood’s obtaining real estate licenses,

taking real estate education courses, and being employed by a New

Jersey real estate development company, (3) petitioner’s

registering the business name “Logistics Technology Group” in New

Jersey, establishing bank accounts in that business name, and

paying the expenses of their seven properties from that account,

and (4) petitioner’s advertising the New Jersey house, the

Florida house, and the undeveloped Florida land.
                               - 25 -

     To be engaged in a trade or business the taxpayer must have

a good faith expectation of profit although that expectation need

not be reasonable.    Burger v. Commissioner, 809 F.2d 355, 358

(7th Cir. 1987), affg. T.C. Memo. 1985-523; Golanty v.

Commissioner, 72 T.C. 411, 425-426 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981).    However, as

stated by the Supreme Court in Commissioner v. Groetzinger, 480

U.S. 23, 35 (1987):

     not every income-producing and profit-making endeavor
     constitutes a trade or business. * * * to be engaged in
     a trade or business, the taxpayer must be involved in
     the activity with continuity and regularity and * * *
     the taxpayer’s primary purpose for engaging in the
     activity must be for income or profit. * * *

Although an individual who is engaged in the business of selling

real estate to customers may be characterized as a real estate

dealer, an individual who holds real estate for investment or

speculation, and receives rentals therefrom, is not a real estate

dealer.   Sec. 1.1402(a)-4(a), Income Tax Regs.

     Petitioner asserts that he and Mrs. Wood were real estate

dealers and that the properties constituted inventory held for

sale to customers.    Whether property is held by a taxpayer for

sale to customers in the ordinary course of the taxpayer’s

business or for another purpose is a question of fact, and each

property must be considered individually.    Gartrell v. United

States, 619 F.2d 1150, 1153 (6th Cir. 1980); Cottle v.

Commissioner, 89 T.C. 467, 486-487 (1987).
                                - 26 -

     The taxpayer’s primary purpose for holding the property must

be determined by reference to his purpose “at some point before

he decided to make the sale”.    Suburban Realty Co. v. United

States, 615 F.2d 171, 182 (5th Cir. 1980).   Earlier events may be

considered in deciding what the taxpayer’s primary purpose was at

the time of sale.    The ownership and maintenance of the property

must relate primarily to a business, rather than a social or

personal, purpose.    Intl. Artists, Ltd. v. Commissioner, 55 T.C.

94, 104 (1970); Chapman v. Commissioner, 48 T.C. 358, 366 (1967).

     Over the years, courts have considered a variety of factors

in determining the taxpayer’s primary purpose for holding

property, including (1) the taxpayer’s purpose in acquiring the

property and the duration of his ownership, (2) the purpose for

which the property was subsequently held; (3) the taxpayer’s

everyday business and the relationship of realty income to total

income, (4) the frequency, continuity, and substantiality of

sales of property, (5) the extent of developing and improving the

property to increase sales, (6) the extent to which the taxpayer

used advertising, promotion, or other activities to increase

sales, (7) the use of a business office for the sale of

property, (8) the character and degree of supervision or control

the taxpayer exercised over any representative selling the

property, and (9) the time and effort the taxpayer habitually

devoted to the sales.    United States v. Winthrop, 417 F.2d 905,
                              - 27 -

910 (5th Cir. 1969); Cottle v. Commissioner, supra at 487;

Raymond v. Commissioner, T.C. Memo. 2001-96; Neal T. Baker

Enters., Inc. v. Commissioner, T.C. Memo. 1998-302; Nadeau v.

Commissioner, T.C. Memo. 1996-427; Tollis v. Commissioner, T.C.

Memo. 1993-63, affd. without published opinion 46 F.3d 1132 (6th

Cir. 1995).   Although these factors may aid the finder of fact in

determining, on the entire record, the taxpayer’s primary purpose

for holding property, they have no independent significance and

individual comment on each factor is not necessary or required.

Cottle v. Commissioner, supra at 487-489; see also Suburban

Realty Co. v. United States, supra at 177-179; Hay v.

Commissioner, T.C. Memo. 1992-409.

      Petitioner and Mrs. Wood did not purchase and hold the

Virginia house, the New Jersey house, or the Florida house for

sale to customers in the ordinary course of a trade or business.

Petitioner and Mrs. Wood purchased the Virginia house in 1974.

They resided in that house until 1977 when they moved to New

Jersey after petitioner retired from the military.   Petitioner

and Mrs. Wood sold the Virginia house and purchased a new

residence, the New Jersey house.   They lived in the New Jersey

house until 1990 when they moved into their next residence, the

newly constructed Florida house.   After the contract for sale of

the New Jersey house fell through, they rented that house on a

month-to-month basis until it was sold.   To satisfy their
                              - 28 -

mortgage obligation, they borrowed money from relatives and

placed the Florida house on the market.

     The timeshares and the South Carolina house were personal

vacation properties.   They were not listed for sale until funds

were needed to pay for the Florida house.   These vacation

properties were not purchased or held for sale to customers in

the ordinary course of business.

     Moreover, petitioner’s ownership of the undeveloped land in

Florida does not establish that petitioner and Mrs. Wood were

dealers in real estate.   Petitioner and Mrs. Wood purchased the

undeveloped land in 1976.   In 1994, petitioner and Mrs. Wood

entered into a contract to sell that land, but the buyer failed

to perform under the contract.   The land remained undeveloped,

and petitioner continued to own it through 1996.   There is no

evidence that petitioner offered the land for sale before 1994 or

that he ever attempted to develop the land.   We conclude that

petitioner purchased the land as an investment and not as

property held for sale to customers in the ordinary course of

business.

     Finally, petitioner’s investment in MSPR, Ltd., does not

establish that he was a dealer in real estate.   Petitioner’s

partnership interest in MSPR, Ltd., was not real property held

for sale to customers in the ordinary course of petitioner’s

business.   It is settled law that a partnership is an
                               - 29 -

independently recognizable entity apart from its partners, and

that business conducted by a partnership is considered apart from

any business activity conducted by its partners on their own

behalves.    See, e.g., Madison Gas & Elec. Co. v. Commissioner,

633 F.2d 512, 517 (7th Cir. 1980) (expenses were characterized as

“pre-operational costs” of the partnership even though the

general partner was already in the same business), affg. 72 T.C.

521 (1979); Brannen v. Commissioner, 78 T.C. 471, 505 (1982)

(“the partnership is an independently recognizable entity apart

from its partners for the purposes of the calculation of its

taxable income under section 703”), affd. 722 F.2d 695 (11th Cir.

1984); see also Polakof v. Commissioner, 820 F.2d 321, 323 (9th

Cir. 1987) (in characterizing partnership income “it is the

dominant economic motive of the partnership, not that of the

individual investors, that is determinative”), affg. T.C. Memo.

1985-197; Tallal v. Commissioner, 778 F.2d 275, 276 (5th Cir.

1985) (“When the taxpayer is a member of a partnership, we have

interpreted 26 U.S.C. § 702(b) to require that business purpose

must be assessed at the partnership level.”), affg. T.C. Memo.

1984-486.    Moreover, petitioner was a limited partner of MSPR,

Ltd.    He did not actively participate in the conduct of the

partnership business.

       The frequency of the taxpayer’s sales “is highly probative

in the real estate context because the presence of frequent sales
                               - 30 -

ordinarily belies the contention that the property is being held

‘for investment’ [or for personal purposes] rather than ‘for

sale.’”   Major Realty Corp. & Subs. v. Commissioner, 749 F.2d

1483, 1488 (11th Cir. 1985), affg. in part and revg. in part T.C.

Memo. 1981-361.

     Petitioner and Mrs. Wood did not make frequent sales of

property.    Over the 20-year period that included 1977 through

1996, petitioner and Mrs. Wood sold four properties that they

owned--the Virginia house in 1977, the North Carolina property in

1989, the New Jersey house in 1994, and the Florida house in

1996.

     The infrequency of sales is highly probative that the

properties were held for personal or investment reasons rather

than for sale.    We conclude that the residences, the vacation

properties, the undeveloped land in Florida, and the partnership

interest in MSPR, Ltd., were not properties purchased or held for

sale to customers.    We find that petitioner and Mrs. Wood were

not real estate dealers and hold, therefore, that the disallowed

amounts are not business expenses deductible under section 162.

     B.     Loss on Sale of Florida House

     Petitioner claimed an ordinary loss on the foreclosure of

the Florida house in 1996.    Section 165(a) allows a deduction for

any loss sustained during the taxable year that is not

compensated for by insurance or otherwise.    However, in the case
                               - 31 -

of an individual, section 165(c) limits the deduction to (1)

losses incurred in a trade or business, (2) losses incurred in

any transaction entered into for profit, even though not

connected with a trade or business, and (3) losses of property

not connected with a trade or business or with a transaction

entered into for profit, if such losses arise from fire, storm,

shipwreck, or other casualty, subject to limitations set forth in

section 165(h).

     Petitioner asserts that the Florida house was held primarily

for sale to customers in the ordinary course of either (1) his

and Mrs. Wood’s trade or business as a real estate dealers or (2)

their family partnership’s business of constructing the house for

immediate sale.   We have found that petitioner and Mrs. Wood were

not real estate dealers.   Further, we do not think that the

arrangement petitioner had with his brother and Mrs. Wood’s

mother constituted a partnership that carried on a business.

     There is no evidence in the record that a partnership was

created.   Neither petitioner’s brother nor Mrs. Wood’s mother

testified at the trial in these cases.   The records from the

bankruptcy proceeding lead us to believe that the funds advanced

by petitioner’s brother and Mrs. Wood’s mother were debts of

petitioner and of Mrs. Wood.

     Furthermore, the activities of constructing, owning, and

selling the Florida house were not carried on as a trade or
                              - 32 -

business.   Petitioner and Mrs. Wood retained ownership of the

Florida house.   They resided in the house.   They never paid any

rent to any partnership for their use of the house.    And they

claimed the Florida house as their residence in their bankruptcy

case.   Considering all the facts and circumstances, we find that

the Florida house was not property related to, or used in, any

trade or business.

     Finally, we note that generally even though people who buy

property for their own residential purposes are interested in

making a potentially profitable purchase, the purchase or

construction of a personal residence is not considered a

transaction entered into for profit.   The primary motive of

acquiring a family residence brings the purchase within the ambit

of section 262, which provides that “no deduction shall be

allowed for personal, living, or family expenses.”    The

regulations under section 165 provide:   “A loss sustained on the

sale of residential property purchased or constructed by the

taxpayer for use as his personal residence and so used by him up

to the time of the sale is not deductible under section 165(a).”

Sec. 1.165-9(a), Income Tax Regs.   The regulations also provide

that in order to be allowed a loss on the sale of property which

at an earlier time was used as a personal residence, a taxpayer

must show that his purpose for owning the residence changed and
                               - 33 -

that the new purpose was for the production of income.    Sec.

1.165-9(b)(1), Income Tax Regs.

       Petitioner and Mrs. Wood purchased the Florida lot with the

intent to build their personal residence on it.    Petitioner and

Mrs. Wood used the Florida house as their personal residence

until it was sold in 1996.    The property was never rented or

otherwise changed to income-producing property.    See, e.g.,

Newcombe v. Commissioner, 54 T.C. 1298, 1301-1302 (1970); Newbre

v. Commissioner, T.C. Memo. 1971-165.

       In sum, we hold that petitioner is not entitled to deduct

any loss on the foreclosure of the Florida house.    We have

considered all of petitioner’s arguments regarding the disallowed

expenses and loss claimed on the property management Schedules C,

and to the extent not specifically addressed, we find them

unpersuasive.

V.     Schedule A Itemized Deductions

       For 1994, respondent made the following adjustments to the

itemized deductions petitioner claimed on the 1994 return:

1994 Itemized Deductions       Per Return    Per Exam    Adjustment

     Medical & dental             $1,365        -0-       $1,365
     Taxes                        24,424     $12,456      11,968
     Home interest                42,614       6,632      35,982
     Contributions                  -0-          304        (304)
     Miscellaneous                  -0-        6,488      (6,488)
     AGI limitation                  –-         (215)       (215)
      Total                       68,403      25,665      42,738
                              - 34 -

     For 1995, respondent made the following adjustments to the

itemized deductions petitioner claimed on the 1995 return:

1995 Itemized Deductions      Per Return    Per Exam   Adjustment

  Taxes                        $11,610      $11,865       ($255)
  Home mortgage interest        23,476       32,871      (9,395)
  Contributions                   -0-           330        (330)
   Total                        35,086       45,066      (9,980)

     For 1996, respondent determined that the standard deduction

was less than petitioner’s itemized deductions and made the

following adjustments for itemized deductions:

1996 Itemized Deductions      Per Return    Per Exam   Adjustment

  Standard deduction            $6,700           -0-     $6,700
  Itemized deductions
   Taxes                          -0-          $303        (303)
   Home mortgage interest         -0-         8,242      (8,242)
    Total                        6,700        8,545      (1,845)

     Aside from petitioner’s claim that the taxes13 and mortgage

interest were trade or business expenses deductible on Schedules

C for his and Mrs. Wood’s business as dealers in real estate,

petitioner does not challenge respondent’s adjustments for

itemized deductions.   We have found that petitioner and Mrs. Wood

are not dealers in real estate, and, therefore, we sustain

respondent on this issue.




     13
      Respondent allowed petitioner to deduct on the consulting
business Schedule C 10 percent of the taxes as a home office
expense of Mr. Wood’s consulting business.
                               - 35 -

VI.   Schedule E Rental Expenses for 1994.

      Petitioner documented taxes of $2,526 on the New Jersey

house, which respondent allowed as a rental expense deduction on

Schedule E.    Respondent determined that $13,997 of expenses for

depreciation, repairs, and other expenses disallowed for 1994 as

deductions on property management Schedule C were deductible in

1994 on Schedule E as expenses related to the rental of the New

Jersey house.   Aside from his claim that these items were trade

or business expenses deductible on Schedules C for the business

dealing in real estate, petitioner does not challenge these

adjustments.    We have found that petitioner and Mrs. Wood are not

dealers in real estate, and, therefore, we sustain respondent on

this issue.

VII. Self-Employment Tax and Net Operating Loss Carryovers

      Respondent determined that petitioner was liable for self-

employment tax of $5,902 in 1994, $3,102 in 1995, and $3,626 in

1996 on the net profit from his consulting business and allowed

petitioner a deduction for half of those taxes ($2,951 in 1994,

$1,551 in 1995, and $1,813 in 1996).

      Respondent also allowed petitioner a net operating loss

carryover of $18,520 to 1994 from the examination of earlier

years but, on the basis of the adjustments made to 1995,

disallowed the net operating loss carryover of $36,389 petitioner

claimed on the 1996 return.
                                - 36 -

     Petitioner has not addressed these issues and is deemed to

have conceded them.     Therefore, we sustain respondent on these

issues.

VIII.        Accuracy-Related Penalty Under Section 6662(a)

        Respondent determined that petitioner is liable for the

accuracy-related penalty under section 6662(a).       As pertinent

here, section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to negligence or disregard of

rules or regulations.     Sec. 6662(b)(1).   Negligence includes any

failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code, including any failure to

keep adequate books and records or to substantiate items

properly.     Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

        The penalty under section 6662(a) does not apply to any

portion of an underpayment of tax if it is shown that there was

reasonable cause for the taxpayer’s position and that the

taxpayer acted in good faith with respect to that portion.       Sec.

6664(c)(1).     The determination of whether a taxpayer acted with

reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances.     Sec. 1.6664-4(b)(1), Income Tax Regs.    The most

important factor is the extent of the taxpayer’s effort to assess

his/her proper tax liability for the year.      Id.   The good faith

reliance on the advice of an independent, competent professional
                               - 37 -

as to the tax treatment of an item may meet this requirement.

Sec. 1.6664-4(b), Income Tax Regs.

     Petitioner has made no showing that he made a reasonable

attempt to comply with the tax rules and regulations with regard

to those deductions he took for the years at issue which have

been disallowed.    Hence, with respect to those deductions,

petitioner has failed to show that he was not negligent.

Moreover, petitioner has not shown that he acted in good faith

with respect to, or that there was reasonable cause for, the

position he took.    Further, petitioner does not claim that he

relied on a tax professional as to the tax treatment of the

expenses and losses at issue, including those related to his

personal residences.    Petitioner simply asserts that the

accuracy-related penalty does not apply because he properly

claimed the deductions under section 162(a).    We have found to

the contrary.

     Under these circumstances, we are compelled to hold that

petitioner is liable for the accuracy-related penalty for the

years at issue.
                        - 38 -

To reflect the foregoing,


                                 Decisions will be entered for

                            respondent as to petitioner John

                            Weller Wood, Jr., and orders of

                            dismissal and decision will be

                            entered as to petitioner Magdalena

                            Frances Wood.
