                        T.C. Memo. 1998-82



                      UNITED STATES TAX COURT



     TERRY DUANE BEALL AND JOYCE ENGEL BEALL, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18922-94.                Filed February 25, 1998.



     Paul Martin Shimoff, for petitioners.

     Jonathan H. Moss, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     WRIGHT, Judge:   Respondent determined an income tax

deficiency for petitioners' 1989 taxable year in the amount of

$140,882.   Respondent also determined an accuracy-related penalty

for negligence under section 6662(a)1 in the amount of $28,182.

     1
         All section references are to the Internal Revenue Code
                                                    (continued...)
                                - 2 -


The issues for decision are (1) whether petitioners are entitled

to roll over the gain on the sale of their residence under

section 1034, and (2) whether petitioners are liable for the

accuracy-related penalty for negligence.

                          FINDINGS OF FACT

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

The stipulation of facts and attached exhibits are incorporated

herein by this reference.    Petitioners resided in Coronado,

California, when the petition was filed.

Background

     Petitioners Terry Duane Beall (Terry) and Joyce Engel Beall

(Joyce) are husband and wife.    They were married in 1954.   In

1959, petitioners moved to Riverside, California.    They had two

children:    Marc, born in November 1955, and Julie, born in July

1957.    Both children attended high school in Riverside.   As of

1980, neither child lived at home with petitioners.

Business

     Since 1955, Terry has worked in the insurance business.

From 1959 to 1964, he worked at Beall, Hughes & Associates, in

Riverside, which specialized in selling life insurance to




     1
      (...continued)
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                - 3 -


military personnel.   After 1964, he continued to work in the

insurance industry for various insurance companies.

     In 1971, Terry purchased an office building on Alessandro

Boulevard (Alessandro office) in Riverside.    This office building

was not sold until November 22, 1991.    From this office he

primarily sold insurance to members of the Non-Commissioned

Officers Association (NCOA).    NCOA was affiliated with Academy

Life Insurance, Inc. (Academy).    Terry, as an independent agent,

became a managing general agent on behalf of Academy in 1971.

In this position he sold life insurance to military personnel in

17 Western States.

     In 1972, Terry, as the sole shareholder, organized the New

Dawn Corp.   Later, the articles of incorporation were amended,

changing the name to Terry Beall, Inc. (Corporation).    The

Corporation's primary business purpose was to sell life insurance

to military personnel.    Petitioners were the Corporation's only

employees during 1987 and 1988.    Joyce was the Corporation's

secretary.   Her services included entertainment activities, such

as picking up people at airports, helping plan dinners, etc.

     During the 1970's, the Corporation's business began to

expand throughout California.    As its presence grew in the San

Diego area, the Corporation purchased properties known as 30 The

Point and 20 The Point.   The business also expanded outside
                                - 4 -


California to such places as Idaho and Hawaii and eventually

expanded on an international level.

     On December 31, 1986, Terry entered into an agreement with

Academy for the sale of his clients' names, records, and

accounts, including the managing general agent's agreements.       At

the same time, he entered into a 5-year employment contract with

Academy, commencing on January 1, 1987, to be Academy's executive

vice president--marketing and the chairman of the board of

Academy Services, Inc.   During Terry's employment term, Academy

could not require him to relocate.      In light of Academy's

business interests around the world, Terry's job focused on

clients in and outside California.      As a result, he traveled

outside California regularly.

     On August 1, 1988, the Corporation was liquidated, and Terry

made a section 333 election.    Before the Corporation was

liquidated, petitioners held a meeting with their tax attorney

and accountant.

Mary Street

     In 1973, petitioners purchased property at 2320 Mary Street

(Mary Street) in Riverside, California from Joyce's parents.

Mary Street had been Joyce's family home.      Petitioners moved into

Mary Street, and they raised their children there from 1973 until

1980.
                               - 5 -


     Mary Street was located on approximately 3.4 acres.   It had

a 2,700-square-foot residence consisting of three bedrooms and a

separate residence for the caretaker and his spouse.    It also had

a citrus grove with approximately 350 citrus trees.    Petitioners

maintained a citrus grove business on the property.

     For the years 1973 through 1988, petitioners received a

homeowners' exemption on Mary Street.

     On March 29, 1993, petitioners sold Mary Street.   Before to

that date, petitioners purchased another residence at 6199

Hawarden Drive in Riverside.   Before the sale of Mary Street,

petitioners never rented out the property.

30 The Point

     The Corporation owned a one-half interest in 30 The Point,

Coronado, California (30 The Point), with petitioners holding the

other one-half interest.   The Corporation used 30 The Point for

business purposes, such as office space, as a place to entertain

clients, and as an alternative to hotel rooms for the

Corporations's employees while they were in the San Diego area.

In February 1985, the Corporation sold its interest in 30 The

Point.

20 The Point

     On April 28, 1983, the Corporation purchased a residence

located at 20 The Point, Coronado, California (20 The Point).

The Corporation purchased 20 The Point fully furnished.
                               - 6 -


     20 The Point was a 3,200-square-foot home, with four

bedrooms and two master bedroom suites, on the Coronado Cays

waterfront with a 40-foot dock.   As with 30 The Point, 20 The

Point was used by the Corporation as a business asset.     The

Corporation took depreciation deductions on the property for the

period April 27, 1983, to July 31, 1988.      20 The Point was used

as an office for the Corporation.    Additionally, it was used as

an alternative to hotel rooms for the Corporation's employees and

agents, and as a place to entertain clients.     From its own dock,

the Corporation took clients out on the bay.

     When the Corporation was liquidated in August of 1988,

petitioners received 20 The Point.     The deed conveying 20 The

Point to them was dated August 31, 1988, and recorded on

September 23, 1988.

     Petitioners continued to have an office at 20 The Point

after the liquidation.

     On September 28, 1988, petitioners listed 20 The Point for

sale.   On December 30, 1988, petitioners entered into a Real

Estate Purchase Contract and Receipt for Deposit for the sale of

20 The Point.   On March 9, 1989, the sale of 20 The Point was

closed.

     For the years 1988 and 1989, petitioners did not apply for a

homeowners' exemption on 20 The Point.     Petitioners never
                                - 7 -


reported 20 The Point as their mailing address to the California

Department of Motor Vehicles.

15 Sandpiper

     15 Sandpiper Strand (15 Sandpiper) is located in Coronado,

across the channel from 30 The Point and 20 The Point.     15

Sandpiper is a 4,000-square-foot waterfront house with four

bedrooms, three and a half baths, and a 100-foot dock.

     After admiring the residence, Terry approached the owner of

15 Sandpiper about the property, requesting that he be notified

if the property became available for sale.    On September 26,

1988, petitioners became aware of the availability of 15

Sandpiper.   At that time, Terry was in Washington, D.C., and he

flew back to California immediately and on September 27

negotiated the purchase of 15 Sandpiper.    The next day

petitioners listed 20 The Point for sale.    On October 3, 1988,

petitioners executed a Real Estate Purchase Contract and Receipt

for Deposit with respect to the purchase of 15 Sandpiper.       On

this document petitioners listed Mary Street as their address.

Because of a prior tax sale in 1988 and difficulties in obtaining

title insurance, an agreement was entered on November 18, 1988,

so that full defeasible title of 15 Sandpiper could be conveyed

to petitioners as trustees of the Beall Family Trust.      The escrow

on 15 Sandpiper closed on November 21, 1988.    The purchase price
                                 - 8 -


for 15 Sandpiper was $950,000, and the home was purchased fully

furnished for an additional $250,000.

     On November 29, 1988, petitioners changed their voter

registrations from Riverside County to San Diego County, listing

15 Sandpiper Strand as their new address.       Upon the expiration of

his driver's license on January 26, 1989, Terry changed the

address of his residence to reflect 15 Sandpiper.

     On March 1, 1989, petitioners hired a moving company to move

their furnishings from 20 The Point to 15 Sandpiper.

     In 1989, petitioners received a homeowners' exemption for 15

Sandpiper.

3 Green Turtle

     Petitioners purchased a vacant lot located at 3 Green Turtle

Road, Coronado, California (3 Green Turtle) on December 1, 1988.

3 Green Turtle is a residential lot located in Coronado Cays,

within the same neighborhood as 20 The Point and 15 Sandpiper.

Terry believed the lot to be "superior" because it was located on

a main channel, with a "bigger dock space," and an "unobstructed

view of Coronado Bridge."

1989 Federal Income Tax Return

     On their 1989 Federal income tax return, petitioners

reported the sale of 20 The Point.       They executed a Form 2119,

Sale of Your Home, with respect to 20 The Point.       They attached

this form to their return, thereby claiming the right to defer
                               - 9 -


under section 1034 a gain of $341,710 realized on the sale of 20

The Point based on the rollover to 15 Sandpiper.   Later, the

correct amount of deferred gain on the sale of 20 The Point was

determined to be $503,250.

     Petitioners' 1989 Federal income tax return was prepared by

Robert McKenzie, who had been their accountant for more than 30

years.   He maintains his office in San Bernardino, California.

McKenzie had also been the Corporation's accountant since its

incorporation in 1972.

     Before the Corporation's liquidation, petitioners met with

McKenzie in June 1988 to discuss it.   Petitioners also met with

McKenzie to discuss their 1989 tax return.

Activities

     Between 1980 and 1989, petitioners were members of either

Palm Baptist Church or Magnolia Avenue Baptist Church, located in

Riverside.   Petitioners also attended various churches from San

Diego to Palm Springs, such as Skyline Wesleyan Church in San

Diego.

     Petitioners were members of Coronado Cays Yacht Club,

located in Coronado, California, and Shrimers Pictoria Country

Club, located in Riverside, California.

     Petitioners continued to maintain bank accounts at Inland

National Bank in Riverside during 1988, 1989, and 1990.   Also,

petitioners continued to receive mail at Mary Street after the
                               - 10 -


acquisition of 20 The Point.   Petitioners' 1988 Forms W-2 were

mailed to petitioners at Mary Street.    Petitioners' 1989 and 1990

Forms W-2 were mailed to the Alessandro office.

     In 1988, Marc and Julie both lived in Riverside.   At this

time, Terry's mother lived in San Bernardino, California.

                               OPINION

Issue 1. Whether Petitioners Must Recognize Gain From the Sale of
20 The Point

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

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

Section 1034, which provides an exception to this general rule,

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

realized on the sale of a principal residence (old residence) if

other property is purchased and used by the taxpayer as a new

principal residence (new residence) within the period beginning 2

years before the date of the sale and ending 2 years after that

date (the replacement period).    Under section 1034(a), gain is

recognized only to the extent that the "adjusted sales price", as

defined in section 1034(b), of the old property exceeds the cost

of purchasing the new property.

     The primary issue is whether petitioners' realized gain on

the sale of 20 The Point is entitled to the nonrecognition

treatment of section 1034.   Respondent determined that section

1034(a) is inapplicable because 20 The Point was a business asset

and was not used by petitioners as their principal residence.
                              - 11 -


Petitioners contend that they are entitled to roll over the

$503,250 gain under section 1034.   Petitioners bear the burden of

showing their entitlement to the nonrecognition benefits of

section 1034 by proving that they have satisfied all of the

section's requirements.   Rule 142(a); Welch v. Helvering, 290

U.S. 111 (1933); Durando v. United States, 70 F.3d 548, 550 (9th

Cir. 1995); see Boesel v. Commissioner, 65 T.C. 378, 386 (1975);

see also Lokan v. Commissioner, T.C. Memo. 1979-380.

     Petitioners sold 20 The Point, which they describe as their

old residence, on March 9, 1989, realizing a gain of $503,250,

purchased 15 Sandpiper, the new residence, on November 21, 1988,

and then moved into 15 Sandpiper on March 1, 1989.   This meets

the replacement period of 2 years mandated in section 1034.

Thus, we must decide the narrow question whether 20 The Point was

petitioners' principal residence from August 31, 1988 (date of

acquisition of legal title), until March 9, 1989 (date of sale),

and, if so, whether 15 Sandpiper was then used by petitioners as

their principal residence.

     The phrase "principal residence" is not defined by the Code;

however, section 1.1034-1(c)(3)(i), Income Tax Regs., provides

that the determination of whether a property is used by a

taxpayer as his principal residence "depends upon all the facts

and circumstances in each case, including the good faith of the

taxpayer."   In Stolk v. Commissioner, 40 T.C. 345, 353, 355,
                                - 12 -


(1963), affd. 326 F.2d 760 (2d Cir. 1964), this Court stated that

     The elements of residence are the fact of abode and the
     intention of remaining, and the concept of residence is
     made up of a combination of acts and intention.
     Neither bodily presence alone nor intention alone will
     suffice to create a residence. * * *

          *       *   *     *    *    *    *

          The phrase "used by the taxpayer as his principal
     residence" means habitual use of the old residence as
     the principal residence. [Emphasis added.]

The term "principal residence" means one's chief or main place of

residence.    Id. at 351.   In general, the property sold must be

the principal residence at the time it is sold.     Thomas v.

Commissioner, 92 T.C. 206, 243 (1989); Aagaard v. Commissioner,

56 T.C. 191, 202-203 (1971).

     Moreover, where part of the old residence sold was used as

the taxpayer's principal residence and part was used for business

purposes,2 only the portion of the gain allocable to the

residential use is entitled to section 1034(a) nonrecognition.

Richards v. Commissioner, T.C. Memo. 1993-422; Beckwith v.

Commissioner, T.C. Memo. 1964-254; Grace v. Commissioner, T.C.

Memo. 1961-252.


     2
        Respondent argues that 20 The Point was a business asset
and that petitioners never abandoned their business use at 20 The
Point. Therefore, respondent contends that 20 The Point
continued to be used as a business asset, and not as petitioners'
principal residence. Because, as discussed later, we determine
that 20 The Point was not petitioners' principal residence, we do
not need to make an allocation of business and personal use at 20
The Point.
                                - 13 -


     Intention of Remaining

     Petitioners expressed their intention regarding 20 The

Point.    In June 1988, they told McKenzie of their intention to

"live at 20 The Point more or less indefinitely."       At trial,

Terry stated that on the day of the Corporation's liquidation,

petitioners' intention was to live at 20 The Point for the

future.    Petitioners preferred to be in the San Diego area as

opposed to the Riverside area.     The San Diego area's climate was

smog free and cooler than the Riverside area's climate, which was

smoggy and hot.

     Respondent argues that petitioners always intended to

purchase 15 Sandpiper, even before their acquisition of 20 The

Point on August 31, 1988.     We disagree.    We find that on August

31, 1988, the date of acquisition of 20 The Point, through the

Corporation's liquidation, petitioners intended to remain in

Coronado at 20 The Point.     This intent changed when 15 Sandpiper

became available on September 26, 1988.       At that time,

petitioners began to negotiate for the purchase of 15 Sandpiper,

listed 20 The Point for sale, and eventually on November 21,

1988, purchased 15 Sandpiper.

     Respondent also argues that petitioners never intended to

make 20 The Point or 15 Sandpiper their principal residence

because they purchased 3 Green Turtle.       We disagree.   Respondent

relies on a letter by McKenzie, which states that Terry "decided
                             - 14 -


he would like to build a house on the lot for his own residence",

and for that reason it was suggested that title be changed from

Terry's Retirement Trust to his living trust.    This letter

provides us with McKenzie's view of petitioners' intentions and

with an explanation for the change in title.    We note that

petitioners purchased 3 Green Turtle, which was a vacant lot, 3

months after acquiring 20 The Point, and after the acquisition of

15 Sandpiper.

     Considering the facts and circumstances, during the relevant

period, we find that petitioners had the intent of remaining at

20 The Point from August 31, 1988, the date of acquisition, until

November 21, 1988, when their purchase of 15 Sandpiper was

completed.

     Fact of Abode

     Generally, for property to be "used by the taxpayer as his

principal residence" within the meaning of section 1034(a), a

taxpayer must physically occupy and live in the dwelling.

Houlette v. Commissioner, 48 T.C. 350, 354 (1967); Stolk v.

Commissioner, supra at 353-356.   It has long been recognized that

moving furniture into a house or spending weekends in a house

does not make that house a taxpayer's principal residence.     King

v. Commissioner, 72 T.C. 349, 355 (1979).   A taxpayer must live

in a house on a regular day-to-day basis in order for the house

to be his "principal residence" within the meaning of section
                                - 15 -


1034.    United States v. Sheahan, 323 F.2d 383 (5th Cir. 1963);

Stolk v. Commissioner, supra at 353; Bayley v. Commissioner, 35

T.C. 288, 297 (1960).

     Petitioners acquired 20 The Point on August 31, 1988, and

sold it on March 9, 1989.    During that period, they spent time at

both Mary Street and 20 The Point.       The distance between

Riverside and Coronado is just over 100 miles, and the round-trip

drive time is approximately 4 hours.

     Petitioners' case rests primarily upon Terry's testimony.

We are not required to accept his testimony as gospel, even

though it is not controverted.    We may take into account whether

it is questionable.     Kean v. Commissioner, 51 T.C. 337, 343-344

(1968), affd. in part and revd. in part 469 F.2d 1183, 1188 (9th

Cir. 1972); Simon v. Commissioner, T.C. Memo. 1981-198.          At

trial, Terry stated that petitioners believed that 20 The Point

became their principal residence as of August 1, 1988.          According

to Terry, between August 31, 1988, and March 1, 1989, he spent

the majority of his time in California at 20 The Point.         However,

as with most of Terry's testimony on direct examination, leading

questions were prevalent,3 resulting in a credibility issue.

     3
        During the direct examination of Terry, the Court
expressed the following concerns:

            while leading questions are not always objectionable, I
            can tell you that I give much more credence to the
            witness' testimony than the attorney's, and when
                                                     (continued...)
                              - 16 -


While we have given careful consideration to his testimony, we

find it questionable; petitioners did not offer other witnesses

to attest to their physical occupancy of 20 The Point.

     In weighing the reasonableness of Terry's response that a

majority of petitioners' time during the period was spent at 20

The Point, we have considered the following "acts and

intentions".

     Mary Street:   Mary Street, which was Joyce's family home,

was purchased by petitioners in 1973.    Petitioners raised their

children there from 1973 to 1980.

     Petitioners continued to own their Mary Street property

until 1993, 4 years after 20 The Point was sold.    Before to its

sale, Mary Street was never rented out.    Petitioners contend that

they had attempted to sell Mary Street since 1985, and that it

took 8 years to sell the property.     However, Terry testified that

he could not remember the date when the property was listed, and


     3
      (...continued)
          attorneys state a series of facts and say, is that
          right, yes, or no, I have to assume that there's some
          reason they're doing it that way and it's not always to
          your benefit that I make those assumptions. So I would
          like to hear the witness.

Later during the direct examination of Terry, the Court stated
the following to petitioners' attorney:

          You have a habit of leading the witness, and that's not
          a good habit. * * * I want the witness' testimony, not
          yours. He's the one that took the oath.
                               - 17 -


petitioners presented no information to corroborate the listing

of the property during 1985 or in any year thereafter.

     Petitioners' presence at Mary Street was necessary in part

because of its maintenance requirements.    In addition to the

caretakers, petitioners undertook many of the tasks involved in

maintaining the property, such as oiling the citrus groves for

weeds and maintaining the fields.   While the citrus groves may

have been a burden on petitioners, they continued to spend time

at the property.

     Family Connections:    Petitioners’ children, Marc and Julie,

and their grandchildren lived in Riverside in 1988.

Additionally, at least one parent lived in neighboring San

Bernardino during 1988.

     Business Location:    While Terry's work primarily started in

Riverside in the 1950's, he had an increasing presence in the San

Diego area in the 1970's and 1980's.    Petitioners contend that

the location of 20 The Point in the San Diego area was important

to their business and that the Corporation's business needs at

the Alessandro office diminished.

     In light of the following, we do not think that Terry's

business leads to the conclusion that petitioners spent the

majority of their time at 20 The Point.    While the Corporation

(which was liquidated in August 1988) used 30 The Point and 20

The Point as an office and place for entertaining, it never
                              - 18 -


acquired any San Diego office space other than 20 The Point in

1986, 1987, and 1988.   Instead, at all times, Terry continued to

maintain the Alessandro office in Riverside.   As with Mary

Street, petitioners suggested that they tried to sell the

Alessandro office, but it was difficult to sell.    However, they

presented no documentary evidence to corroborate this statement.

     As of January 1, 1987, Terry became an employee of Academy,

and with the Corporation's liquidation in August 1988 Terry was

no longer self-employed.   In regard to his employment with

Academy, Terry's job expanded outside California, requiring

extensive travel.   During a substantial portion of the period at

issue, and in particular from August 31 to September 23, Terry

was traveling regularly outside California on business.    When

Terry traveled, Joyce stayed at Mary Street or remained at 20 The

Point.

     Furnishings:   We know that, at a minimum, petitioners lived

at Mary Street for 15 years (1973-88).   Yet there is no record of

moving any belongings from Riverside to Coronado.   In response to

this observation, petitioners point to the fact that the

Corporation purchased 20 The Point fully furnished, and upon

liquidation petitioners received the furnishings.   Therefore,

according to petitioners, there was no need to hire a moving van

to move belongings from Mary Street to 20 The Point.   However,

this explanation is questionable considering the fact that
                                - 19 -


petitioners hired a moving van for the move from 20 The Point to

15 Sandpiper when they purchased 15 Sandpiper furnished at a cost

of $250,000.

     Bills and Patterns of Usage:     In response to respondent's

discovery requests, petitioners produced limited documents: (a)

water bill from 20 The Point for the period May 2, 1983 to

March 9, 1989; (b) phone bill for 20 The Point for the period

January 2 to February 2, 1989; and (c) Terry's business American

Express Card bill for 1988 and 1989.     Terry testified that these

documents were the only ones that he could locate.    He could not

find relevant documents for the complete period at issue for any

of the three properties:    20 The Point, Mary Street, and 15

Sandpiper.     From the submitted documents, we cannot make any type

of comparison.

     Respondent requests that we draw a negative inference from

petitioners' failure to produce all the documents requested.

Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158,

(1946), affd. 162 F.2d 513 (10th Cir. 1947).    In response,

petitioners state that "petitioners are not obligated and cannot

be expected to retain all of their personal records for such a

long time period."    We note that the lack of bills contributes to

the lack of concrete evidence regarding petitioners’ occupancy of

20 The Point.
                               - 20 -


     Address Used for Mail:    We consider how petitioners reported

their address on tax forms.    Friedman v. Commissioner, T.C. Memo.

1982-178.    Petitioners’ 1988 Forms W-2 went to Mary Street, and

their 1989 and 1990 Forms W-2 were mailed to the Alessandro

office.    For 1988 and 1989, their Forms 1099 went to Mary Street.

     While some documents4 listed 20 The Point as petitioner's

address, numerous documents dated after August 31, 1988, listed

Mary Street as petitioners' address.    These included petitioners'

investment statements from Paine Webber, Prudential Securities,

and PGF Securities.   In reaching petitioners, the administrator

for petitioner's pension plan and petitioners' accountant

McKenzie used the Mary Street address.   Further, on agreements

regarding 15 Sandpiper, petitioners listed Mary Street as their

address.

     At trial, Terry testified that he "felt more secure about

having their mail delivered at [the] 2320 Mary Street property

than at 20 The Point."   According to petitioners, the caretaker

at Mary Street would receive the mail daily and place it in the

garage.    Then, periodically, petitioners would pick up the mail.

Further, on brief, petitioners state that they "did not want to

burden themselves with having to change all of their records to


     4
        20 The Point was listed as petitioners' address on a
letter to Security Pacific National Bank, a San Diego Country
Club Membership Application, a Fire Insurance Exchange
Declaration, and Pacific Bell statements.
                                - 21 -


reflect a new mailing address when it was not necessary."

However, petitioners' explanation seems questionable considering

that the documents delivered often required immediate notice and

that delivery at Mary Street required petitioners to pick up the

mail personally more than 100 miles from 20 The Point.

     Location of Banks:     Petitioners continued to maintain their

bank accounts at Inland National Bank in Riverside in 1988, 1989,

and 1990.   At trial, Terry testified that the bank's location was

of no consequence because his presence was not required.     As with

most of Terry's examination, the above responses were obtained by

Terry's merely responding "yes" or "no" to leading questions.

     Churches:   Between 1980 and 1989, petitioners were members

of either Palm Baptist Church or Magnolia Avenue Baptist Church,

located in Riverside.     But petitioners also attended various

churches from San Diego to Palm Springs, such as Skyline Wesleyan

Church in San Diego.    This indicates petitioners' presence in

both Riverside and Coronado.

     Country Club Memberships:     Petitioners' membership in the

Coronado Country Club as resident members was initiated for

business reasons to establish connections in the San Diego area.

This was consistent with the business at 20 The Point

(entertaining clients, etc.).     At the same time, petitioners were

also members of the Shrimers Pictoria Country Club in Riverside.

This indicates petitioners' presence in both Riverside and

Coronado.
                               - 22 -


     Homeowners' Exemption, Voter Registrations, and Driver's

Licenses:    Respondent points out the following facts.    First, no

homeowners' exemption was filed regarding 20 The Point.      Second,

petitioners’ voter registration renewals, dated November 29,

1989, did not reflect 20 The Point as their address.      Instead,

the renewals changed petitioners' address from Mary Street to 15

Sandpiper.    Third, petitioners did not report 20 The Point to the

California Department of Motor Vehicles.

     In regard to the homeowners' exemption, petitioners acquired

20 The Point on August 31, 1988, but at that time, they already

had filed and obtained a homeowners' exemption for 1988 on Mary

Street.   Under California law, the eligibility for homeowners'

exemption is determined as of the "lien date", which is March 1

of each year.    Cal. Rev. & Tax. Code sec. 2192 (1987).

Affidavits    for a homeowners' exemption are required to be filed

after the claimant becomes eligible but no later than April 15.

Cal. Rev. & Tax. Code sec. 255(b)(1987).    By the following year

(1989), petitioners had sold 20 The Point (March 9, 1988) and

acquired 15 Sandpiper (November 21, 1988).    As a result,

petitioners received a homeowners' exemption for 1989 on 15

Sandpiper, having owned the property as of the lien date.      See

Cal. Rev. & Tax. Code sec. 253.5 (1987).    Therefore, the fact

that petitioners did not apply for a homeowners' exemption on 20

The Point is of little significance, given that their actions
                               - 23 -


were consistent with California's homeowners' exemption

procedures.

     In regard to the driver's license and the voter

registrations, petitioners acquired 20 The Point on August 31,

1988, and within 3 months they had purchased 15 Sandpiper.

Because of the short time involved, we do not consider it

significant that 20 The Point was not listed on either

petitioners’ driver's licenses or voter registrations.

     Conclusion

     After considering the record as a whole, and on balance, we

find that 20 The Point was not petitioners' principal residence

during the relevant period.    In our judgment, their principal

residence was Mary Street.    Therefore, we sustain respondent's

determination that section 1034 is inapplicable and hold that

petitioners must recognize the gain on the sale of 20 The Point

in 1989.

Issue 2. Accuracy-Related Penalty

     Respondent determined an accuracy-related penalty pursuant

to section 6662(a) for petitioners' 1989 tax year.     Section 6662

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

underpayment of tax that is attributable to "negligence or

disregard of rules or regulations."     Sec. 6662(a) and (b)(1).

The term "negligence" includes "any failure to make a reasonable

attempt to comply with the provisions of this title," and the

term "disregard" includes "any careless, reckless, or intentional
                                - 24 -


disregard."   Sec. 6662(b).   A taxpayer has the burden of proving

that the Commissioner's determination of an addition to tax is in

error.   Luman v. Commissioner, 79 T.C. 846, 860-861 (1982).

     The accuracy-related penalty of section 6662 does not apply

to any portion of an underpayment if there was reasonable cause

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

6664(c)(1).    The most important factor is the extent of the

taxpayer's efforts to assess his proper tax liability for the

year.    Sec. 1.6664-4(b)(1), Income Tax Regs.   Such a

determination is made by taking into account all facts and

circumstances, including the experience, knowledge, and education

of the taxpayer.    Id.   Reliance by the taxpayer on the advice of

a qualified adviser will constitute reasonable cause and good

faith if, under all of the facts and circumstances, such reliance

was reasonable and the taxpayer acted in good faith.      Id.

     On their 1989 Federal income tax return, petitioners

reported no gain from the sale on 20 The Point, rolling over a

gain of $341,710.    Later, petitioners agreed to the revenue

agent's recalculation of gain to be $503,250.

     Petitioners assert that they believed they were entitled to

the benefits of section 1034; yet they presented little evidence

to support their belief.    Petitioners argue that their actions in

establishing 20 The Point as their principal residence and making

the subsequent sale were in "ignorance" of the existence of the

Internal Revenue Code provisions.
                              - 25 -


     In view of petitioners' lack of formal training in tax or

accounting, they argue that they relied on McKenzie for advice in

the preparation of their tax returns to assure compliance with

rules and regulations.   In June 1988, before the Corporation's

liquidation, petitioners met with their tax attorney and

McKenzie, who is a certified public accountant.   At that time,

petitioners told McKenzie of their intention to "live at 20 The

Point more or less indefinitely."   Terry notified McKenzie that

they sold 20 The Point after the sale occurred, and he notified

McKenzie after the agreement to purchase 15 Sandpiper was signed.

This was consistent with petitioners' habit of informing McKenzie

after an event occurred.

     In preparing petitioners' tax return, McKenzie testified

that in reaching his opinion that section 1034 applied, he relied

upon Terry for a determination of which residence he should

reflect as their personal residence.   More specifically, he

relied on Terry's statement in June 1988 that petitioners were

going to live at 20 The Point more or less indefinitely.

Further, petitioners did not inform McKenzie, and he was unaware,

of petitioners’ use of 20 The Point, of the addresses used by

them on their tax forms, and of other circumstances bearing on

whether and when 20 The Point was their principal residence.

Under the facts and circumstances, we conclude that petitioners

have failed to prove that their reliance on McKenzie was

reasonable and that they acted in good faith.
                              - 26 -


     We also note that petitioners were careless by not retaining

sufficient records to establish 20 The Point as their principal

residence.   On the basis of the record as a whole, we also

conclude that petitioners have not carried their burden of

proving that they acted with reasonable cause.     Therefore, we

hold that they are liable for the accuracy-related penalty for

negligence under section 6662(a).

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
