                          T.C. Memo. 1997-438



                        UNITED STATES TAX COURT



                   RICHARD A. PETTIT, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 17758-96.                Filed September 25, 1997.



        Frank W. Louis, for petitioner.

        Meryl Silver, for respondent.



                          MEMORANDUM OPINION


        DINAN, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

        1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable year in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 2 -

     Respondent determined a deficiency in petitioner's Federal

income tax for 1990 in the amount of $7,169.

     After concessions by petitioner,2 the issue for decision is

whether petitioner's claimed loss is properly characterized as an

ordinary loss or a capital loss.

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

The stipulations of fact and attached exhibits are incorporated

herein by this reference.   Petitioner resided in Niantic,

Connecticut, on the date the petition was filed in this case.

     Petitioner has been an airline pilot for American Airlines

since October 1985.   During and preceding the taxable year in

issue, he bid his flight schedule on a reserve basis which

required him to be "on call" 20 days per month but guaranteed him

10 days off per month.   Reserve pilots are required to be

available to fly on short notice in the event of a pilot

scheduling problem.   As long as he remained in his home locality

and carried a beeper or cellular phone by which he could be

contacted, petitioner was free to use his "on call" time as he

wished.   Petitioner's actual flight time averaged 4 to 6 days per

month.




     2
          Petitioner concedes that he is not entitled to
dependency exemption deductions for his two daughters, Christy
and Jenna, for 1990. Petitioner also concedes that he received
and failed to report interest income in the amount of $13 during
1990.
                                - 3 -

       With such a substantial amount of free time, petitioner

obtained a Connecticut home improvement contractor's license and

started a construction business in 1987.    The business provided

him with financial security in the event his piloting career was

not successful.    He specialized in carpentry work on home

improvements such as remodelings, additions, and decks.

       Petitioner believed that there was higher income potential

in constructing new homes than remodeling existing ones.      In

March 1989, he acquired an unimproved lot in East Lyme,

Connecticut (East Lyme property) for the purpose of building a

single family home.    The East Lyme property was petitioner's

first new home construction project.    Petitioner wanted to

establish a reputation for himself as a new home builder and

anticipated that the East Lyme property would serve as his

"calling card".    He believed people would see the quality of his

work and hire him to build other new homes.

       Petitioner obtained a second mortgage on his personal

residence to finance the 10-percent downpayment on the unimproved

lot.    The balance of the funds for the construction project was

obtained in a commercial construction loan from Mechanic's

Savings Bank in Hartford, Connecticut.    The bank took a security

interest in the East Lyme property as collateral for the loan.

       There was a significant amount of risk for petitioner in

building a home without a predetermined buyer, but he believed

that he would make a modest profit on the East Lyme property and
                               - 4 -

attract more customers for his business.    He enlisted a real

estate agent in April 1989 to promote its sale.

     The construction project proceeded smoothly.    As the general

contractor, petitioner constructed the majority of the two-story

house himself, including framing, roofing, siding, and installing

the windows, cabinets, and doors.    He obtained assistance from

his father and other individuals for certain work such as

erecting the frame of the house, insulating the house, and

constructing the fireplace, chimney, and staircases.    In

addition, the plumbing and electrical wiring were required by law

to be performed by licensed subcontractors.

     In February 1990, petitioner and his wife separated.     The

problems that resulted had a serious negative impact on his

construction business.   For a period of time immediately

following the separation, petitioner's wife took possession of

his truck with all of his tools.    Shortly thereafter, she placed

a lien on the East Lyme property to protect her interests in the

event it was sold by petitioner.    The additional legal issues

connected with the lien discouraged potential buyers.    In

addition, the real estate market took a significant downturn in

the early 1990's.   Under these circumstances, petitioner was

unable to secure a buyer for the East Lyme property.

     Petitioner could not make the construction loan payments as

a result of financial difficulties caused by his separation.      He

deeded the East Lyme property to Mechanics Savings Bank in lieu
                               - 5 -

of foreclosure on October 5, 1990.     The bank sold the property on

October 31, 1990.

     Petitioner thereafter abandoned his construction business.

He began flying on a full-time schedule and has since been

promoted from co-pilot to international co-pilot to captain.

     Petitioner claimed a Schedule C business loss resulting from

his construction activity in the amount of $25,621 on his 1990

return.   In the statutory notice of deficiency, respondent

recharacterized petitioner's claimed ordinary loss as a long-term

capital loss.   In so determining, respondent limited petitioner's

1990 loss deduction to $1,500, but allowed the excess loss in the

amount of $24,121 as a long-term capital loss carryover.3

     Respondent's determinations in the statutory notice of

deficiency are presumed to be correct, and petitioner bears the

burden of proving otherwise.   Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

     Section 165(a) provides that there shall be allowed as a

deduction any loss sustained during the taxable year and not

compensated for by insurance or otherwise.     Losses from the sales

or exchanges of capital assets are allowed only to the extent

allowed in sections 1211 and 1212.     Sec. 165(f).



     3
          In allowing the loss, we find that respondent has
conceded that the amount of the claimed loss is correct. We
therefore only address the issue of the characterization of the
claimed loss.
                               - 6 -

     In the case of a taxpayer other than a corporation, section

1211(b) allows losses from the sales or exchanges of capital

assets only to the extent of the gains from such sales or

exchanges, plus (if such losses exceed such gains) the lower of

(1) $3,000 ($1,500 in the case of a married individual filing a

separate return), or (2) the excess of such losses over such

gains.   Any net capital loss in excess of the amount allowed by

section 1211(b) for the taxable year must be carried over to the

succeeding taxable year.   Secs. 1212(b), 1222(10).

     A capital asset is generally defined as property held by the

taxpayer, whether or not connected with his trade or business.

Sec. 1221.   However, section 1221(1) provides in part that

property held by the taxpayer primarily for sale to customers in

the ordinary course of his trade or business does not constitute

a capital asset.   The purpose of the section 1221(1) exclusion is

to "differentiate between gain derived from the everyday

operations of a business and gain derived from assets that have

appreciated in value over a substantial period of time."      McManus

v. Commissioner, 65 T.C. 197, 212 (1975), affd. 583 F.2d 443 (9th

Cir. 1978) (citing Malat v. Riddell, 383 U.S. 569, 572 (1966)).

     Petitioner's position is that the East Lyme property was

held primarily for sale to customers in the ordinary course of

his construction business and therefore does not constitute a

capital asset under section 1221(1).   He argues that he is
                                 - 7 -

entitled to deduct the full amount of his loss under section

165(a).

     Respondent's position is that petitioner's loss is limited

by section 165(f) because the East Lyme property was held by

petitioner as a capital asset.     Respondent argues that the East

Lyme property does not fall within the section 1221(1) exception

for property held primarily for sale to customers in the ordinary

course of a trade or business because petitioner was not in the

business of buying and selling real estate.

     The question of whether property is held primarily for sale

to customers in the ordinary course of the taxpayer's trade or

business is a question of fact that depends on the circumstances

of each case.   McManus v. Commissioner, supra at 211.    After

fully considering the record in this case, we find that

petitioner did not hold the East Lyme property as a capital

asset.

     The East Lyme property construction project and its

subsequent disposition arose within the context of petitioner's

existing construction business.4    See S & H , Inc. v.

Commissioner, 78 T.C. 234, 243 (1982).     Respondent attempts to

isolate petitioner's activity with respect to the East Lyme

     4
          The fact that petitioner simultaneously worked as an
airline pilot does not preclude a finding that he was engaged in
the construction business, since a taxpayer may be engaged in
more than one business. S & H , Inc. v. Commissioner, 78 T.C.
234, 243 (1982); Curphey v. Commissioner, 73 T.C. 766, 775
(1980).
                               - 8 -

property from his previous construction activity, and respondent

tests for the existence of a trade or business using a number of

factors relevant to real estate dealers.   See United States v.

Winthrop, 417 F.2d 905, 910 (5th Cir. 1969).   We find that the

controlling factor in this case is the extent to which petitioner

developed the East Lyme property.

     Petitioner did not purchase the East Lyme property with the

intent of holding it as an investment.   Rather, his intent was to

increase its value by personally constructing a house on it and

selling it for a profit.   In this case, the fact that he hired a

real estate agent to help him sell the property emphasizes the

point that the profit which he sought flowed from his

construction work, not his ability to buy and sell real estate.

     The facts of this case are comparable to those in Heebner v.

Commissioner, 280 F.2d 228, 233 (3d Cir. 1960), affg. 32 T.C.

1162 (1959), in which the Court of Appeals for the Third Circuit

found that--

     the sale of real estate here was but one aspect of the
     entire transaction. There is absolutely no reason for
     treating the profit from the building transaction here
     any differently because one small aspect of it involved
     a sale of land. The land under this factual pattern
     was merely another commodity, such as lumber, steel and
     bricks, which went into the finished product * * *

     In Heebner, the taxpayer husband, an architect and builder,

engaged in package building5 to get his "foot in the door as a

     5
          A package builder not only undertakes the construction
of a building but also arranges for the design, location, and
                               - 9 -

builder."   The Court of Appeals for the Third Circuit affirmed

the Tax Court's holding that he was not entitled to capital gain

treatment on the disposition of the property because his profit

resulted from the operation of a business.   Id. at 234.

     Likewise, the general nature of the East Lyme project was

not significantly different from petitioner's previous home

improvement projects.   His business was building and selling home

improvements, which in this case involved an entire home.    The

fact that the disposition included a plot of land does not

convert the entire finished product into a capital asset.

     Moreover, assuming arguendo that petitioner's previous

construction work constituted a separate business because he had

never previously constructed a new home, it is clear from the

facts in this case that petitioner's extensive participation in

the development of the East Lyme property constitutes a business

activity in and of itself.6   His subsequent abandonment of the

construction business and decision to become a full-time airline

pilot is understandable given the personal and financial problems

he experienced during 1990.   These events do not serve to




financing of the building so the purchaser is delivered a
completed project, i.e., a package.
     6
          We have previously held that a taxpayer may treat the
gain or loss from one venture or sale as ordinary income or loss
derived from a trade or business. Morley v. Commissioner, 87
T.C. 1206 (1986).
                                - 10 -

diminish petitioner's business objective that existed prior to

his separation from his former wife.

     We hold that petitioner's loss with respect to the East Lyme

property constitutes an ordinary loss incurred within the scope

of his construction business.

     To reflect the foregoing,



                                          Decision will be entered

                                     under Rule 155.
