                        T.C. Memo. 2002-31



                       UNITED STATES TAX COURT



    STEVEN K. STODDARD AND ELLEN M. STODDARD, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1527-99.             Filed January 30, 2002.



     Ellen M. Stoddard, pro se.

     Sandra Veliz, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following defi-

ciencies in, and accuracy-related penalties under section

6662(a)1 on, petitioners’ Federal income tax (tax):


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years at
issue. Unless otherwise indicated, all Rule references are to
                                                   (continued...)
                                - 2 -

         Year            Deficiency      Accuracy-Related Penalty
         1995              $95,369                $17,272.40
         1996               65,748                  8,194.60
         1997               13,943                  2,788.60

     The issues remaining for decision2 are:

     (1)    Are petitioners entitled to deduct a claimed casualty

loss for 1997?    We hold that they are not.

     (2)    Did petitioners understate the amount of long-term

capital gain that they realized for 1995 on the sale of certain

property?    We hold that they did.

     (3)    Are petitioners entitled to deduct for each of the

years 1996 and 1997 certain claimed rental expenses with respect

to their residence?    We hold that they are not.

     (4)    Are petitioners entitled to deduct for 1996 mortgage

interest in excess of the amount conceded by respondent?    We hold

that they are not.

     (5)    Are petitioners liable for each of the years at issue

for the accuracy-related penalty under section 6662(a)?    We hold

that they are.

                          FINDINGS OF FACT

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


     1
      (...continued)
the Tax Court Rules of Practice and Procedure.
     2
      Computational or correlative issues also remain, resolution
of which flows automatically from the concessions of respondent
and our resolution of the determinations in the notice of defi-
ciency (notice) that we address herein.
                               - 3 -

     At the time the petition was filed, petitioners resided in

Anacortes, Washington (Anacortes).

Claimed Casualty Loss

     The Quissett

     During 1984, petitioners acquired a sailboat named the

“Quissett” (Quissett), a 45-foot Peterson schooner made of wood

that was built in 1933.   At a time not disclosed by the record,

petitioners began to use the Quissett for charter sailing.

Petitioners advertised the Quissett for charter sailing during

1997.

     Petitioners maintained a checking account in the name

“Quissett Sailing Charters” (Quissett checking account) through-

out the period from at least August 1993 until at least June

1997.   Petitioners continued to draw on that account through at

least the middle of 1997.

     At all times that petitioners owned the Quissett, it re-

quired regular repairs and maintenance.   At a time not disclosed

by the record, petitioners renovated the Quissett.

     Certain Loans Secured by the Quissett

     On June 17, 1992, petitioners applied for a loan of

$74,367.17 (1992 loan) from Seattle Postal Employees Credit Union

(Credit Union) by completing and signing a document entitled

“LOANLINER® ADVANCE REQUEST VOUCHER AND SECURITY AGREEMENT” (loan

application).   The purpose of that loan as stated in that loan
                               - 4 -

application was, inter alia, boat maintenance.   The 1992 loan

application indicated, inter alia, that the Quissett was to

secure3 the 1992 loan and that the value of the Quissett was

$110,000.   Petitioners’ loan balance with Credit Union before

they received the 1992 loan was $8,132.83, and their loan balance

with Credit Union after they received that loan was $82,500.

     On June 16, 1993, petitioners applied for a loan of $20,000

(1993 loan) from Credit Union by completing and signing a loan

application (1993 loan application).   The purpose of that loan as

stated in that loan application was “REMODEL CABIN” and “BOAT

MAINT”.   The 1993 loan application indicated, inter alia, that

the Quissett was to secure4 the 1993 loan and that the value of

the Quissett was $170,000.   Petitioners’ loan balance with Credit

Union before they received the 1993 loan was $76,074.11, and

their loan balance with Credit Union after they received that

loan was $96,074.11.

     On May 24, 1994, petitioners applied for a loan of $15,000

(1994 loan) from Credit Union by completing and signing a loan


     3
      The terms of the security agreement that petitioners en-
tered into by signing the 1992 loan application were on the
reverse side of that document. The record does not contain a
copy of the reverse side of the 1992 loan application and the
terms of that security agreement.
     4
      The terms of the security agreement that petitioners en-
tered into by signing the 1993 loan application were on the
reverse side of that document. The record does not contain a
copy of the reverse side of the 1993 loan application and the
terms of that security agreement.
                               - 5 -

application (1994 loan application).   The purpose of that loan as

stated in that loan application was boat repair.   The 1994 loan

application indicated, inter alia, that the Quissett was to

secure5 the 1994 loan and that the value of the Quissett was

$170,000.   Petitioners’ loan balance with Credit Union before

they received the 1994 loan was $89,195.63, and their loan

balance with Credit Union after they received that loan was

$104,195.63.

     Foreclosure With Respect to Credit
     Union Loan Secured by the Quissett

     On November 12, 1996, petitioners filed a petition for

bankruptcy (bankruptcy petition) under Chapter 7 of title 11 of

the United States Code with the United States Bankruptcy Court

for the Western District of Washington (bankruptcy court).

Petitioners’ bankruptcy petition included a document entitled

“SUMMARY OF SCHEDULES”, to which was attached, inter alia,

“SCHEDULE B-–PERSONAL PROPERTY” (bankruptcy Schedule B) and

“SCHEDULE D--CREDITORS HOLDING SECURED CLAIMS” (bankruptcy

Schedule D).

     In bankruptcy Schedule B, petitioners listed the Quissett

among their personal property and claimed that it had a fair

market value of $84,000.


     5
      The terms of the security agreement that petitioners en-
tered into by signing the 1994 loan application were on the
reverse side of that document. The record does not contain a
copy of the reverse side of the 1994 loan application and the
terms of that security agreement.
                                 - 6 -

     In bankruptcy Schedule D, petitioners listed Credit Union

among their secured creditors.

     On December 16, 1996, Credit Union filed a claim against

petitioners’ bankruptcy estate with respect to a loan of

$84,192.13 that was secured by the Quissett.

     On January 8, 1997, the trustee of petitioners’ bankruptcy

estate (trustee) filed a document entitled “TRUSTEE’S REPORT OF

NO DISTRIBUTION” (trustee’s report) with the bankruptcy court.

In that report, the trustee stated, inter alia, that, except for

exempt property, no property had been received and no money had

been paid on account of petitioners’ estate and that there was no

property available for distribution from the estate.

     On February 21, 1997, the bankruptcy court granted petition-

ers a discharge.

     In May 1997, Credit Union foreclosed on a loan to petition-

ers that was secured by the Quissett and sold that boat for

$22,000.

     Credit Union issued Form 1099-C, Cancellation of Debt (Form

1099-C), to Mr. Stoddard for 1997.       Form 1099-C indicated that

the amount of debt canceled was $64,116.40.

Long-Term Capital Gain From the Sale of Certain Property

     During August 1990, petitioners purchased a condominium unit

(condo) for $165,000.   During 1993, 1994, and part of 1995,

petitioners rented that condo.    On July 20, 1995, they sold it
                                - 7 -

for $211,000.

Claimed Rental Expenses

     At all relevant times, petitioners owned certain real

property located at 5005 Doon Way (Doon Way residence) in

Anacortes.   During the years at issue, the Doon Way residence was

petitioners’ primary residence.

     At certain times during 1996, petitioners rented the Doon

Way residence to various individuals.    The respective periods for

those rentals generally were short, lasting no more than two or

three days, except during June, when petitioners rented the Doon

Way residence for the entire month.

     During 1997, petitioners placed a classified advertisement

with Skagit Valley Publishing, in which the Doon Way residence

was offered for rent.    Petitioners did not rent the Doon Way

residence during 1997.

Certain Amounts Expended by Petitioners

     On the dates shown below, petitioners paid the following

amounts to the payees indicated by issuing checks drawn on a

checking account in the name “Steven or Ellen Stoddard

(Quissett)”:
                              - 8 -

    Date of Check              Payee         Amount of Payment
        9/14/90              Spa Shop           $3,736.44
        2/13/921          Edensaw Woods            783.69
       3/20/92            Edensaw Woods          1,443.66
        6/2/92            Edensaw Woods            909.89
       6/29/92            Edensaw Woods            314.13
       7/24/92            Edensaw Woods             83.10
       8/24/92            Edensaw Woods          2,919.22
      10/28/92           Brian Callahan            927.00
       11/10/92          Brian Callahan          1,084.50
       11/20/92          Brian Callahan          1,405.60
       12/18/92           Edensaw Woods          1,000.00
        1/20/93           Edensaw Woods          1,000.00
        2/13/93           Edensaw Woods          1,000.00
        6/14/93            Peter Jones           1,050.00
     1
      The handwritten notation “Quissett Charters” appeared at
the bottom of the check dated 2/13/92.

     On the dates shown below, petitioners paid the following

amounts to the payees indicated by issuing checks drawn on the

Quissett checking account:

 Date of Check              Payee            Amount of Payment
     8/3/93            Edensaw Woods               $62.66
     1/2/97                   GTE                  146.06
     1/2/97          City of Anacortes              62.79
     1/2/97          Airtouch Cellular              21.00
     1/7/97              State Farm                374.68
    1/15/97                   GTE                  174.02
    1/15/97                  AT&T                   21.16
    1/29/97              Skagit Co.                 21.37
    1/31/97             Finn’s Photo                26.07
     2/3/97                 Costco                  72.10
     2/6/97                  Sears                  37.71
     2/6/97             Ace Hardware                25.85
     2/7/97          City of Anacortes              65.26
     2/7/97              Puget Power               611.61
                              - 9 -

    2/19/97                  Sebos                   17.19
    2/19/97           WA State Ferries               61.50
     3/3/97      Washington State Ferries            49.20
    3/17/97                Allstate                  77.03
    3/17/97             Frontier Ford                27.97
    3/20/97                   GTE                   344.65
    3/20/97          City of Anacortes              127.28
     4/1/97      Washington State Ferries            49.20
     4/6/97              Puget Power                480.76
     4/6/97                Allstate                  73.55
     4/6/97               Doug Owens                 50.00
    4/14/97        Skyline Contract Post             16.40
                            Office
    4/16/97           Boelter & Assoc.              560.00
    4/30/97            WA. ST. Ferries               49.20
    4/30/97                 D.O.L.                  491.35
     5/7/97                 Costco                  129.01
    5/17/97             Seattle Times                26.05
    5/18/97                Allstate                  77.03
    5/22/97          City of Anacortes              122.63
    5/25/97          Arcadia Financial              553.17
    5/28/97                   GTE                   268.09
    5/29/97         Frontier Industries             251.68
     6/2/97            Frontier Lumber               51.57
     6/9/97            Frontier Lumber               14.05
    6/10/97      Washington State Ferries            58.75
    6/16/97      Washington State Ferries            49.20
    6/16/97                Allstate                  77.03
    6/17/97          Puget Sound Energy             211.74

Petitioners’ Tax Returns

     Petitioners filed jointly Form 1040, U.S. Individual Income

Tax Return (Form 1040), for 1995 (1995 joint return), 1996 (1996

joint return), and 1997 (1997 joint return).   Mr. Stoddard and

Ms. Stoddard signed their 1995 joint return on April 10, 1996,

and April 12, 1996, respectively.   Petitioners signed their 1996
                                - 10 -

and 1997 joint returns on May 14, 1997, and February 8, 1998,

respectively.

     The 1995 joint return included Schedule A, Itemized Deduc-

tions (Schedule A).   The 1995 Schedule A claimed deductions of

$6,177 for taxes, $38,138 for mortgage interest, and $490 for

gifts to charity.

     The 1995 joint return also included Schedule D, Capital

Gains and Losses (Schedule D).    In Schedule D, petitioners

reported a long-term capital gain of $25,204, which petitioners

included as income on line 13 of their 1995 joint return.      In

part II of Schedule D, Long-Term Capital Gains and Losses–-Assets

Held More Than One Year, petitioners reported, inter alia, that

(1) the condo was sold on July 20, 1995, (2) the sales price of

that condo was $211,000, and (3) the cost or other basis of the

condo was $185,796.

     The 1995 joint return also included Schedule E, Supplemental

Income and Loss (Schedule E).    The 1995 Schedule E, inter alia,

claimed a depreciation deduction of $5,491 with respect to the

condo.

     The 1996 joint return included Schedule A.   The 1996 Sched-

ule A claimed deductions of $6,834.14 for taxes, $21,846.03 for

mortgage interest, and $500 for gifts to charity.

     The 1996 joint return also included Schedule E.   With

respect to the Doon Way residence, the 1996 Schedule E reported
                              - 11 -

rental income of $4,385.20 and claimed rental expense deductions

of $29,382.66, which included $8,806.68 for claimed depreciation,

and a 1996 Schedule E loss of $24,997.46.

     The 1997 joint return included Schedule A.   In the 1997

Schedule A, petitioners claimed, inter alia, a casualty loss

deduction of $138,256 with respect to the Quissett.    As required,

petitioners filed Form 4684, Casualties and Thefts (Form 4684),

with the 1997 joint return.   In section A of Form 4684, Personal

Use Property, petitioners indicated (1) that the “Cost or other

basis” of the Quissett was $144,990, (2) that they had no “Insur-

ance or other reimbursement” with respect to the Quissett,

(3) that they had no gain from casualty or theft, (4) that the

fair market value before the casualty or theft of the Quissett

was $175,000, (5) that the fair market value of the Quissett

after the casualty or theft was $22,000, and (6) that the amount

of the casualty loss with respect to the Quissett, after applying

certain limitations, was $138,256.

     The 1997 joint return also included Schedule E.   With

respect to the Doon Way residence, the 1997 Schedule E reported

no rents received and claimed rental expense deductions of

$17,438, consisting of $391 for claimed advertising, $834 for

claimed cleaning and maintenance, $375 for claimed insurance,

$1,200 for claimed utilities, and $14,638 for claimed deprecia-

tion, and a 1997 Schedule E loss of $17,438.
                               - 12 -

     The 1997 joint return did not report the $64,116.40 of

canceled debt that was shown on Form 1099-C that Credit Union

issued to Mr. Stoddard for 1997.

Petitioners’ Amended Tax Returns

     Petitioners filed jointly Form 1040X, Amended U.S. Individ-

ual Income Tax Return (Form 1040X), for 1995 (1995 amended joint

return), 1996 (1996 amended joint return), and 1997 (1997 amended

joint return).    Petitioners signed their 1995, 1996, and 1997

amended joint returns on March 13, 1998.

     In their 1995 amended joint return, petitioners claimed

Schedule A deductions of $132,617, an increase of $87,812 in the

deductions that petitioners claimed in Schedule A of their 1995

joint return.    In Form 1040X for 1995, part II, Explanation of

Changes to Income, Deductions, and Credits, petitioners indicated

that the change in the amount of the Schedule A deductions

claimed resulted from a “Net operating loss carryback from 1997”.

     In their 1996 amended joint return, petitioners claimed

Schedule A deductions of $59,225, an increase of $30,045 in the

deductions that petitioners claimed in Schedule A of their 1996

joint return.    In Form 1040X for 1996, part II, Explanation of

Changes to Income, Deductions, and Credits, petitioners indicated

that the change in the amount of the Schedule A deductions

claimed resulted from a “Net operating loss carryback from 1997

casualties & theft loss”.
                              - 13 -

     In their 1997 amended joint return, petitioners claimed an

amended casualty loss deduction of $168,266 with respect to the

Quissett, an increase of $30,010 in the casualty loss deduction

that petitioners claimed in Schedule A of their 1997 joint

return.   As required, petitioners filed Form 4684, Casualties and

Thefts (amended Form 4684), with the Form 1040X for 1997.    In

section A of the amended Form 4684 for 1997, Personal Use Prop-

erty, petitioners indicated (1) that the “Cost or other basis” of

the Quissett was $186,492, (2) that they had no “Insurance or

other reimbursement” with respect to the Quissett, (3) that they

had no gain from casualty or theft, (4) that the fair market

value before the casualty or theft of the Quissett was $175,000,

(5) that the fair market value of the Quissett after the casualty

or theft was $0, and (6) that the amount of the casualty loss

with respect to the Quissett, after applying certain limitations,

was $168,266.

Notice of Deficiency

     In the notice issued to petitioners for the years at issue,

respondent determined, inter alia, to disallow a casualty loss

deduction of $138,256 that petitioners claimed in their 1997

joint return with respect to the Quissett.   Respondent further

determined to disallow the net operating loss (NOL) carryback

deductions of $87,812 and $30,045 that petitioners claimed in

their respective amended returns for 1995 and 1996.   Respondent
                               - 14 -

made those determinations because petitioners did not establish

their entitlement to a casualty loss deduction for 1997.

     Respondent also determined in the notice that petitioners

realized a long-term capital gain of $211,000 for 1995 from the

sale of the condo and that they understated the amount of such

gain in their 1995 joint return by $185,796.    In determining that

petitioners realized $211,000 from the sale of the condo, respon-

dent determined that petitioners’ adjusted basis in the condo at

the time of its sale was zero.

     Respondent further determined in the notice to disallow

rental expense deductions of $29,383 and $17,438 claimed in

Schedules E of the 1996 and 1997 joint returns, respectively.

Respondent made those determinations because petitioners did not

establish that the deductions claimed were for amounts (1) that

petitioners expended or (2) that petitioners expended for the

purpose(s) claimed.

     Respondent also determined in the notice to disallow a

mortgage interest deduction of $21,846.03 in Schedule A of the

1996 joint return.    Respondent made that determination because

petitioners did not establish that the deduction claimed was for

an amount (1) that petitioners expended or (2) that petitioners

expended for the purpose claimed.

     Respondent further determined in the notice that petitioners

are liable for each of the years at issue for the accuracy-
                              - 15 -

related penalty under section 6662(a) because of (1) negligence

or disregard of rules or regulations or (2) a substantial under-

statement of income tax.

                              OPINION

     Petitioners6 have the burden of showing error in respon-

dent’s determinations in the notice that remain at issue.7   See

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

respect to the deductions claimed by petitioners, deductions are

strictly a matter of legislative grace, and petitioners bear the

burden of proving that they are entitled to any deductions

claimed.   See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992).



     6
      Although Mr. Stoddard did not appear at trial, Ms. Stoddard
informed the Court that Mr. Stoddard had authorized her to speak
for both of them at trial, and the Court allowed her to do so.
Ms. Stoddard filed briefs in this case; Mr. Stoddard did not.
However, our findings and conclusions herein shall apply to both
Ms. Stoddard and Mr. Stoddard.
     7
      With respect to court proceedings arising in connection
with examinations commencing after July 22, 1998, under sec.
7491(a) the burden of proof shifts to respondent in specified
circumstances. Internal Revenue Service Restructuring and Reform
Act of 1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727. The
record in this case does not establish the date on which the
examination of each of petitioners’ taxable years at issue began,
and neither party contends that sec. 7491(a) applies here.

     With respect to court proceedings arising in connection with
examinations commencing after July 22, 1998, under sec. 7491(c)
respondent bears the burden of production with respect to any
individual’s liability for any penalty or addition to tax. Id.
As noted above, the record in this case does not establish the
date on which the examination of each of petitioners’ taxable
years at issue began. Moreover, neither party contends that sec.
7491(c) applies here.
                               - 16 -

Claimed Casualty Loss Deduction

     Respondent determined to disallow a casualty loss deduction

of $138,256 that petitioners claimed in their 1997 joint return

with respect to the Quissett.8    Petitioners contend that on

January 3, 1997, a storm caused damage to the Quissett and that

therefore they are entitled to a casualty loss deduction for

1997.    Respondent contends, inter alia, that petitioners have

failed to establish that the alleged storm occurred and that the

Quissett sustained the alleged damage during that alleged storm.

     Section 165(a) allows a deduction for any loss sustained

during the taxable year and not compensated for by insurance or

otherwise.    A loss is treated as sustained during the taxable

year in which the loss occurs, as evidenced by closed and com-

pleted transactions and as fixed by identifiable events occurring

in such taxable year.    Sec. 1.165-1(d)(1), Income Tax Regs.

     As pertinent here, section 165(c)(3) limits the deduction

allowed by section 165(a) in the case of an individual to a loss

that arises from fire, storm, shipwreck, or other casualty, or




     8
      Respondent further determined to disallow the NOL carryback
deductions that petitioners claimed in their 1995 amended joint
return and their 1996 amended joint return of $87,812 and
$30,045, respectively. Resolution of respondent’s determinations
to disallow petitioners’ claimed NOL carryback deductions for
1995 and 1996 will flow automatically from our findings and
resolution of respondent’s determination to disallow petitioners’
casualty loss deduction claimed for 1997.
                                  - 17 -

from theft.9

       Petitioners attempted to satisfy their burden of proof with

respect to the casualty loss deduction claimed for 1997 through

Ms. Stoddard’s testimony and 14 photographs of the Quissett that

are part of the instant record.       With respect to Ms. Stoddard’s

testimony, we found that testimony to be general, conclusory,

and/or uncorroborated in certain material respects.       We shall not

rely on her testimony to sustain petitioners’ burden of proof

with respect to the casualty loss deduction claimed for 1997.

       With respect to the photographs of the Quissett on which

petitioners rely, Ms. Stoddard testified that 12 of the 14

photographs show the Quissett during and after repairs and/or

“restoration work” that petitioners undertook before the alleged

storm and that 2 of the 14 photographs show the Quissett after

the alleged storm caused the damage that petitioners are claim-

ing.       The back side of each of 4 of the 12 photographs that Ms.

Stoddard testified show the Quissett before the alleged storm

contain handwritten notations indicating that each of those

photographs was taken sometime during 1993 and 1994 (i.e., before

the alleged storm).       The remaining eight photographs that Ms.

Stoddard testified show the Quissett before the alleged casualty

do not contain any indication as to when they were taken.       The


       9
      Petitioners do not contend that the alleged damage with
respect to the Quissett was a loss incurred in a trade or busi-
ness or in any transaction entered into for profit. See sec.
165(c)(1) and (2).
                              - 18 -

back side of each of the two photographs that Ms. Stoddard

testified show the Quissett after the alleged storm contain

handwritten notations indicating that each of those photographs

was taken in July 1994, which was around 2-1/2 years before the

alleged storm that petitioners claim occurred on January 3, 1997.

Petitioners introduced no reliable evidence to establish that

those two photographs show storm damage, as opposed to, for

example, the “restoration work” that petitioners undertook with

respect to the Quissett.   On the record before us, we find that

petitioners have failed to establish that any of the 14 photo-

graphs in question shows damage to the Quissett that was caused

by a storm that occurred on January 3, 1997.   On that record, we

further find that petitioners have failed to carry their burden

of proving that the Quissett sustained any damage during a storm

on that date.10

     Based upon our examination of the entire record before us,

we find that petitioners have failed to carry their burden of



     10
      In light of our findings that petitioners have not shown
that the Quissett sustained damage as a result of a storm that
occurred on Jan. 3, 1997, we shall not address respondent’s
contention that at the time of the alleged storm the Quissett was
the property of petitioners’ bankruptcy estate, and not petition-
ers’ property.

     Assuming arguendo that petitioners had established that the
Quissett sustained damage as a result of a storm that occurred on
Jan. 3, 1997, on the instant record, we find that petitioners
have failed to establish the amount of any deduction to which
they would be entitled under sec. 165(a). See sec. 165(b), (h);
sec. 1.165-7(b)(1), (4), Income Tax Regs.
                              - 19 -

proving that they are entitled to the casualty loss deduction

that they are claiming for 1997.11

Long-Term Capital Gain From the Sale of the Condo

     Respondent determined in the notice that petitioners real-

ized for 1995 a long-term capital gain of $211,000 from the sale

of the condo and that they understated the amount of such gain in

their 1995 joint return by $185,796.   Respondent concedes that

that determination in the notice was wrong in that respondent no

longer maintains that, in calculating the amount of such gain,

petitioners’ basis in the condo at the time of its sale was zero.

It is respondent’s position that petitioners’ adjusted basis in

the condo was $148,527 when they sold it for $211,000, that they

realized $62,473 of long-term capital gain from that sale, and

that they understated the amount of such gain in their 1995 joint

return by $37,269.

     The parties stipulated that petitioners’ cost basis in the

condo at the time of its sale was $165,000 and that they sold the

condo in 1995 for $211,000.   The only dispute between the parties

with respect to the sale of the condo is the amount of petition-

ers’ adjusted basis for determining the amount of long-term

capital gain that they realized and must recognize for 1995 from

that sale.



     11
      In light of our finding that petitioners have not estab-
lished their entitlement to a casualty loss deduction for 1997,
we find that petitioners have failed to establish that they are
entitled to the claimed NOL deductions for 1995 and 1996. See
supra note 8.
                              - 20 -

     As we understand petitioners’ position, they contend that

they expended $20,796 on improvements to the condo and that the

cost of those improvements, when added to their cost basis in the

condo of $165,000, results in their having an adjusted basis in

the condo of $185,796, which is the amount of petitioners’ basis

that they reported in Schedule D of their 1995 joint return.12

The parties stipulated that petitioners’ adjusted basis in the

condo must reflect a reduction of at least $5,491 for the depre-

ciation that petitioners claimed in Schedule E of their 1995

joint return.   Consequently, according to petitioners, their

adjusted basis in the condo at the time of its sale was $180,305

(i.e., basis of $185,796 reported in Schedule D of petitioners’

1995 joint return reduced by depreciation of $5,491 for 1995 that

the parties stipulated should reduce petitioners’ basis).   It is

respondent’s position that at the time of the sale of the condo

in 1995 petitioners’ adjusted basis in the condo was $148,527.

In support of that position, respondent contends (1) that peti-

tioners have failed to establish that they made the improvements

to the condo that they are claiming and (2) that petitioners’

adjusted basis in the condo should be calculated by reducing



     12
      Ms. Stoddard did not specify at trial or on brief the
exact amount that petitioners are claiming they incurred for
improvements to the condo. The checks on which petitioners rely
to support their position with respect to the claimed improve-
ments to the condo total $13,983.45. However, we assume that the
amount of such claimed improvements is equal to the excess (i.e.,
$20,796) of the adjusted basis of $185,796 that petitioners
claimed in Schedule D of their 1995 joint return over their cost
basis in the condo of $165,000 to which the parties stipulated.
                              - 21 -

their cost basis of $165,000 by the depreciation deductions

allowed or allowable, whichever is greater, for each of the years

1993, 1994, and 1995 during which petitioners rented the condo.

     We turn first to petitioners’ position regarding the im-

provements that they claim they made to the condo.    In support of

that position, petitioners rely on Ms. Stoddard’s testimony,

certain checks payable to Edensaw Woods, Peter Jones, Brian

Callahan, and Spa Shops and on the 1993 loan application.

     Ms. Stoddard testified that the checks payable to Edensaw

Woods represented disbursements for “lumber and specialty wood

that we had put into the condominium in the form of ceiling

timbers and a bookcase around the fireplace.”    However, the

following handwritten notation appears on one of those checks:

“Quissett Charters”.   Ms. Stoddard testified that the checks

payable to Peter Jones and Brian Callahan represented disburse-

ments “for wages paid to them to build this bookcase and sur-

rounding hearth–-or it’s not a hearth, around the fireplace.”    It

is not clear from Ms. Stoddard’s testimony or from the checks on

which petitioners rely what she meant when she testified that the

wood purchased from Edensaw Woods was “put into the condominium

in the form of ceiling timbers”.   Nor is it clear from Ms.

Stoddard’s testimony or from the checks on which petitioners rely

that the bookcase which was built around the fireplace in the

condo constitutes an improvement to the condo.    Assuming arguendo

that we were able to find on the instant record that the results

of the work in the condo about which Ms. Stoddard testified
                              - 22 -

constitute improvements to the condo, on that record, we are not

persuaded that petitioners did not deduct as rental expenses for

years prior to the years at issue the cost of such improvements.

     As for the copy of the check payable to Spa Shops on which

petitioners rely, Ms. Stoddard did not testify about that copy.

The sheet of paper on which the copy of the check appears con-

tains the following handwritten notation:    “Basis For P.T.

Condo”.   We are not satisfied from that notation or from any

other part of the record before us that the check payable to Spa

Shops represented a disbursement for an improvement to the condo.

     As for the 1993 loan application on which petitioners rely,

Ms. Stoddard did not testify about that copy.    The sheet of paper

on which the copy of the 1993 loan application appears contains

the following handwritten notation:    “Condo & Boat Basis”.   We

are not satisfied from that notation or from any other part of

the record before us that petitioners used all or a portion of

the 1993 loan proceeds that they received as a result of the 1993

loan application in order to make improvements to the condo.

     On the record before us, we find that petitioners have

failed to carry their burden of establishing that they paid for

improvements to the condo that should be added to their cost

basis in the condo.

     We turn next to respondent’s contention that, pursuant to

sections 1011(a) and 1016(a)(2), petitioners’ adjusted basis in

the condo must reflect reductions made for the depreciation

allowed or allowable, whichever is greater, under section 167(a)
                              - 23 -

for each year during which petitioners held the condo for rental

(i.e., for 1993, 1994, and 1995).   The parties stipulated that

during 1993 and 1994 petitioners rented the condo, and we have

found that they rented the condo for part of 1995.    As noted

above, the parties stipulated that petitioners’ adjusted basis in

the condo must reflect at least a reduction of $5,491 for the

depreciation that petitioners claimed in Schedule E of their 1995

joint return.   Respondent contends that petitioners’ adjusted

basis in the condo should also reflect reductions for deprecia-

tion of $5,491 for each of the years 1993 and 1994.

     We agree with respondent that section 1016(a)(2) requires a

decrease in petitioners’ basis in the condo, determined under

section 1012 (i.e., the cost), for depreciation allowed or

allowable, whichever is greater, under section 167(a).    See secs.

1011(a), 1012, 1016(a)(2); see also Reithmeyer v. Commissioner,

26 T.C. 804, 815 (1956).   On the record before us, we find that

petitioners have failed to carry their burden of proving that

they are not entitled for each of the years 1993 and 1994 to

depreciation of at least $5,491 with respect to the condo.13     On

     13
      It is not clear from the record whether the depreciation
of $5,491 for 1995, which the parties stipulated must be taken
into account as a reduction in calculating petitioners’ adjusted
basis in the condo, was computed for a full year or for a period
that began on Jan. 1, 1995, and ended on July 20, 1995, when
petitioners sold the condo. The parties stipulated that peti-
tioners’ adjusted basis in the condo must reflect at least a
reduction for the depreciation of $5,491 that petitioners claimed
in the Schedule E of their 1995 return, and petitioners sold the
condo on July 20, 1995. We believe that the depreciation for
1995 of $5,491, which the parties stipulated must be reflected as
                                                   (continued...)
                              - 24 -

that record, we further find that petitioners have failed to show

that their cost basis of $165,000 in the condo should not be

reduced by depreciation of $5,491 for each of the years 1993,

1994, and 1995.   On the instant record, we find that petitioners

have failed to show that their adjusted basis in the condo at the

time of its sale was greater than $148,527 (i.e., petitioners’

cost basis of $165,000 reduced by depreciation of $5,491 for each

of the years 1993, 1994, and 1995).

     Based upon our examination of the entire record before us,

we find that petitioners have failed to show that they did not

realize a long-term capital gain of $62,473 on the sale of the

condo (i.e., sales price of $211,000 minus petitioners’ adjusted

basis in the condo of $148,527).   On that record, we further find

that petitioners have failed to show that they did not understate

their long-term capital gain for 1995 on the sale of the condo by

$37,269 (i.e., petitioners’ long-term capital gain of $62,473

reduced by the long-term capital gain of $25,204 that petitioners

reported in Schedule D of their 1995 joint return).




     13
      (...continued)
a reduction in calculating petitioners’ adjusted basis in the
condo, was computed for the period that began on Jan. 1, 1995,
and ended on July 20, 1995, when petitioners sold the condo. If
our belief is correct, respondent’s position that depreciation of
only $5,491 for each of the years 1993 and 1994 during which
petitioners rented the condo must also be reflected as a reduc-
tion in calculating petitioners’ adjusted basis in the condo
would be advantageous to petitioners.
                              - 25 -

Claimed Rental Expense Deductions

     In Schedules E of their 1996 and 1997 joint returns, peti-

tioners claimed rental expense deductions of $29,382.66 and

$17,438, respectively, with respect to the Doon Way residence.

Respondent determined to disallow those claimed deductions.

     We turn first to the rental expense deductions that peti-

tioners claimed in Schedule E of their 1996 joint return.    It is

respondent’s position that petitioners are not entitled to the

rental expense deductions claimed for 1996 because they have

failed to establish (1) that the expenses in question were

incurred or, if incurred, that those expenses were incurred with

respect to the Doon Way residence and (2) that those rental

expense deductions are not disallowed by section 280A.   Petition-

ers introduced no evidence supporting their entitlement to those

deductions.   On the instant record, we find that petitioners have

failed to carry their burden of proving that they are entitled to

deduct the rental expenses claimed in Schedule E of their 1996

joint return.

     We turn next to the rental expense deductions that petition-

ers claimed in Schedule E of their 1997 joint return.    On brief,

respondent concedes that petitioners incurred certain rental

expenses with respect to the Doon Way residence.14   However,


     14
      At trial, petitioners introduced into the record certain
checks to establish that during 1997 they paid certain expenses
for advertising, cleaning and maintenance, utilities, and insur-
ance. Those checks, when totaled for each such category of
expense, exceed the total amount of expenses that petitioners
                                                   (continued...)
                               - 26 -

respondent contends that petitioners are not entitled to the

claimed rental expense deductions for 1997 because petitioners

have failed to establish that those deductions are not disallowed

by section 280A.

     Section 280A(a) provides:

     SEC. 280A.    DISALLOWANCE OF CERTAIN EXPENSES IN
                   CONNECTION WITH BUSINESS USE OF HOME,
                   RENTAL OF VACATION HOMES, ETC.

          (a) General Rule.--Except as otherwise provided in
     this section, in the case of a taxpayer who is an
     individual * * *, no deduction otherwise allowable
     under this chapter shall be allowed with respect to the
     use of a dwelling unit which is used by the taxpayer
     during the taxable year as a residence.

     Section 280A(b) provides:

          (b) Exception for Interest, Taxes, Casualty
     Losses, Etc.–-Subsection (a) shall not apply to any
     deduction allowable to the taxpayer without regard to
     its connection with his trade or business (or with his
     income-producing activity).

     A “dwelling unit” is defined to include a house, apartment,

condominium, or similar property.    Sec. 280A(f)(1)(A).   On the

record before us, we find that the Doon Way residence constitutes

a dwelling unit within the meaning of section 280A.

     14
      (...continued)
claimed as a deduction for each such category in Schedule E of
their 1997 joint return. Although petitioners did not claim
rental expense deductions in their 1997 joint return for legal
fees, supplies, and automobile and travel, petitioners introduced
into the record at trial certain checks in an attempt to estab-
lish that during 1997 they incurred certain expenses for each
such category of expense. It is not clear whether respondent is
conceding the total amount of rental expenses that petitioners
claimed in Schedule E of their 1997 joint return or some other
amount. In any event, in light of our findings below, we need
not decide the exact amount of rental expenses that respondent
concedes petitioners paid during 1997.
                                - 27 -

     In determining whether a dwelling unit is a residence within

the meaning of section 280A(a), section 280A(d)(1) provides in

pertinent part:

     a taxpayer uses a dwelling unit during the taxable year
     as a residence if he uses such unit (or portion
     thereof) for personal purposes for a number of days
     which exceeds the greater of--

          (A) 14 days, or

          (B) 10 percent of the number of days during such
     year for which such unit is rented at a fair rental.

     We have found that petitioners did not rent the Doon Way

residence during 1997.   The Doon Way residence constituted a

“residence” within the meaning of section 280A(d)(1) only if

petitioners’ use of the Doon Way residence for personal purposes

exceeded 14 days during 1997.    See sec. 280A(d)(1).

     At trial, Ms. Stoddard testified that the Doon Way residence

was petitioners’ primary residence during 1997.15   On the instant

record, we find that petitioners have failed to carry their

burden of proving that their personal use of the Doon Way resi-

dence did not exceed 14 days during 1997.   On that record, we

find that the Doon Way residence qualifies within the meaning of

section 280A(d)(1) as petitioners’ “residence” during 1997.



     15
      At trial, Ms. Stoddard also testified that “we were stay-
ing on the boat [Quissett] right after the casualty loss [to the
Quissett]. We had it in the boatyard. We were–-we were being
stalked, and we basically moved out of the house and put it up
for rent.” On the record before us, we find that petitioners
have failed to establish (1) that they did not live in the Doon
Way residence after the Quissett was seized and sold in May 1997
and (2) that during 1997 they owned property in addition to the
Doon Way residence in which they resided.
                              - 28 -

Accordingly, for 1997 petitioners are subject to the limitations

provided in section 280A.

     Section 280A(c)(3) provides:

          (3) Rental use.–-Subsection (a) shall not apply to
     any item which is attributable to the rental of the
     dwelling unit or portion thereof (determinated after
     the application of subsection (e)).

     Section 280A(e) provides:

          (1) In general.–-In any case where a taxpayer who
     is an individual * * * uses a dwelling unit for per-
     sonal purposes on any day during the taxable year
     (whether or not he is treated under this section as
     using such unit as a residence), the amount deductible
     under this chapter with respect to expenses attribut-
     able to the rental of the unit (or portion thereof) for
     the taxable year shall not exceed an amount which bears
     the same relationship to such expenses as the number of
     days during each year that the unit (or portion
     thereof) is rented at a fair rental bears to the total
     number of days during such year that the unit (or
     portion thereof) is used.

          (2) Exception for deductions otherwise allowable.
     -–This subsection shall not apply with respect to
     deductions which would be allowable under this chapter
     for the taxable year whether or not such unit (or
     portion thereof) was rented.

     On the instant record, we find that the numerator of the

fraction under the limitation imposed by section 280A(e)(1) is

zero.   That is because the numerator of that fraction consists of

the number of days during 1997 that the Doon Way residence was

rented, and we have found that petitioners did not rent the Doon

Way residence during that year.     On the record before us, we find

that petitioners have failed to carry their burden of proving

that the expenses that they claimed for 1997 with respect to the
                               - 29 -

Doon Way residence are not disallowed by section 280A.16

     Based upon our examination of the entire record before us,

we find that petitioners have failed to carry their burden of

proving that they are entitled to deduct the respective rental

expenses claimed for 1996 and 1997.

Claimed Mortgage Interest Deduction

     Respondent determined in the notice to disallow the mortgage

interest deduction of $21,846.03 that petitioners claimed in

their 1996 joint return with respect to the Doon Way residence.

On brief, respondent concedes that petitioners have established

that they are entitled for 1996 to a mortgage interest deduction

of $17,392.   It is petitioners’ position that they are entitled

to deduct the entire $21,846.03 of mortgage interest that they

claimed in their 1996 joint return.

     Petitioners attempted to satisfy their burden of proof with

respect to the mortgage interest deduction at issue through Ms.

Stoddard’s testimony.17   We found her testimony to be general,


     16
      In their 1997 Schedule E, petitioners claimed rental
expense deductions for advertising, cleaning and maintenance,
insurance, utilities, and depreciation. At trial, petitioners
introduced into the record certain other checks in an attempt to
establish that they also paid, but did not deduct in their 1997
Schedule E, rental expenses for legal fees, supplies, and automo-
bile and travel. See supra note 14. On the record before us, we
find that petitioners have failed to establish that any of the
expenses claimed as a deduction for 1997 would be allowable as a
deduction whether or not the Doon Way residence was rented. See
sec. 280A(b), (e)(2).
     17
      Petitioners did not make part of the instant record Form
1098, Mortgage Interest Statement, for 1996 with respect to the
                                                   (continued...)
                                - 30 -

conclusory, and/or uncorroborated in certain material respects,

and we shall not rely on it.     On the record before us, we find

that petitioners have failed to carry their burden of showing

that during 1996 they paid $4,454.03 of mortgage interest in

addition to the $17,392 conceded by respondent.

     Based upon our examination of the entire record before us,

we find that petitioners have failed to carry their burden of

proving that they are entitled to a mortgage interest deduction

in excess of the $17,392 conceded by respondent.

Accuracy-Related Penalty

     Respondent determined that petitioners are liable for each

of the years at issue for the accuracy-related penalty under

section 6662(a) because of:     (1) Negligence under section

6662(b)(1) or (2) a substantial understatement of income tax

under section 6662(b)(2).

     Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment of tax resulting from, inter alia,

negligence or disregard of rules or regulations, sec. 6662(b)(1),

or a substantial understatement of income tax, sec. 6662(b)(2).

For purposes of section 6662(a), the term “negligence” includes

any failure to make a reasonable attempt to comply with the Code,

and the term “disregard” includes any careless, reckless, or

intentional disregard.     Sec. 6662(c).   Negligence has also been

defined as a lack of care or failure to do what a reasonable


     17
      (...continued)
Doon Way residence.
                                - 31 -

person would do under the circumstances.     Leuhsler v. Commis-

sioner, 963 F.2d 907, 910 (6th Cir. 1992), affg. T.C. Memo. 1991-

179; Antonides v. Commissioner, 91 T.C. 686, 699 (1988), affd.

893 F.2d 656 (4th Cir. 1990).    An understatement is equal to the

excess of the amount of tax required to be shown in the tax

return over the amount of tax shown in the tax return, sec.

6662(d)(2)(A), and is substantial in the case of an individual if

it exceeds the greater of 10 percent of the tax required to be

shown or $5,000, sec. 6662(d)(1)(A).

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.     Sec. 6664(c)(1).

     The only evidence that petitioners introduced in support of

their position that they were not negligent was Ms. Stoddard’s

testimony.   We found her testimony to be general, conclusory,

and/or uncorroborated in certain material respects, and we shall

not rely on it to establish petitioners’ position that respondent

erred in determining to impose the accuracy-related penalty under

section 6662(a) for each of the years at issue.     On the record

before us, we find that petitioners have failed to show that they

were not negligent and did not disregard rules or regulations

within the meaning of section 6662(b)(1), or otherwise did what a

reasonable person would do, with respect to any portion of the
                              - 32 -

underpayment for any of the years at issue.18   On that record, we

further find that petitioners have failed to show that they acted

with reasonable cause and in good faith with respect to any

portion of the underpayment for any of the years at issue.    See

sec. 6664(c).

     We have considered all of the contentions and arguments of

petitioners that are not discussed herein, and we find them to be

without merit and/or irrelevant.

     To reflect the foregoing and the concessions of respondent,


                                        Decision will be entered

                                   under Rule 155.




     18
      In the notice, respondent determined that petitioners are
liable for each of the years at issue for the accuracy-related
penalty under sec. 6662(a) on the alternative ground that there
was a substantial understatement of income tax under sec.
6662(b)(2). We have found that petitioners are liable for each
of the years at issue for the accuracy-related penalty because of
negligence or disregard of rules or regulations under sec.
6662(b)(1). In light of that finding, we shall not address
whether petitioners are liable for each of the years at issue for
the accuracy-related penalty because of a substantial understate-
ment of income tax under sec. 6662(b)(2).
