                          T.C. Memo. 1997-164



                     UNITED STATES TAX COURT



     JOSE M. VIDAURRE AND ANA MARIA VIDAURRE, Petitioners v.
         COMMISSIONER OF THE INTERNAL REVENUE, Respondent



     Docket No. 881-95.                         Filed April 1, 1997.



     Jose M. Vidaurre and Ana Maria Vidaurre, pro sese.

     Ladd C. Brown, Jr., for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     PARR, Judge:   Respondent determined deficiencies in,

additions to, and penalties on petitioners' 1990 and 1991 Federal

income tax as follows:

                                    Additions to Tax and Penalties
     Year      Deficiency           Sec. 6651(a)(1)   Sec. 6662(a)
     1990      $132,949                  $33,238          $26,590
     1991      $154,293                  $38,574           30,859
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     All section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure, unless otherwise

indicated.   All dollar amounts are rounded to the nearest dollar,

unless otherwise indicated.   After concessions,1 three issues

remain regarding petitioners' tax liability for 1990: (1) Whether

petitioners failed to report gain from the sale of property, (2)

whether petitioners are subject to an addition to tax under

section 6651(a)(1) for failure to timely file, and (3) whether

petitioners are subject to an accuracy-related penalty under

section 6662(a).   We hold for respondent on all three issues.

                         FINDINGS OF FACT

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

The stipulated facts and accompanying exhibits are incorporated


1
   For 1990, respondent concedes that petitioners did not receive
income of $376,733, and that petitioners are not subject to a
self-employment tax of $7,849. Respondent further concedes that
petitioners incurred expenses of $12,395 attributable to the sale
of their Fort Lauderdale property, and that their basis in such
property is increased by $575.
   For 1990, petitioners concede they are not entitled to deduct
compensation expense of $4,800, employment tax of $659, or one-
half of the self-employment tax of $3,134.
   For 1991, respondent concedes that petitioners did not receive
income of $502,142, that petitioners are entitled to a deduction
for personal exemptions of $4,300, and that they are not subject
to a self-employment tax of $10,247. Respondent further concedes
that there is no deficiency in income tax due from petitioners
for 1991, and that petitioners are not subject to the addition to
tax under sec. 6651(a)(1), nor a penalty under sec. 6662(a) for
that year.
   For 1991, petitioners concede they are not entitled to deduct
compensation expense of $9,200, employment tax of $1,298, or one-
half of the self-employment tax of $3,968, and that no
overpayment is due them for that year.
                               - 3 -


into our findings by this reference.    At the time the petition in

this case was filed, petitioners resided in Miami, Florida.

Petitioners are married and filed a joint return for the years at

issue.

     Petitioners purchased a parcel of land at 14321 S.W. 47th

Court, Fort Lauderdale, Florida (the land), on July 20, 1983, for

$50,000.   Petitioners began building a house on the land in 1987.

Lacking sufficient funds to continue construction beyond the

completed foundation, petitioners sold the land on March 21,

1990, for $142,500.2   Petitioners are over 55 years of age and

did not live on the Fort Lauderdale land at any time.    The

parties stipulated that petitioners incurred selling expenses of

$12,395; therefore, the amount realized on the sale was $130,105

($142,500 less $12,395 = $130,105).    Respondent concedes that

$575 should be added to the property's basis, increasing

petitioners' adjusted basis in the property to $50,575 ($50,000

plus $575 = 50,575).   Thus, the gain on the sale of the land was

$79,530 ($130,105 less $50,575).



2
   Petitioners claim that they spent between $25,000 and $30,000
to build a foundation on the land. Petitioners also claim they
expended $3,000 for clearing the land and $2,000 in the
construction of a fence. Ordinarily, the cost of such
improvements would be added to the basis of the land. See sec.
1.1016-2(a), Income Tax Regs. However, taxpayers have the burden
of proving the cost of such improvements. Rule 142(a); INDOPCO,
Inc. v. Commissioner, 503 U.S. 79 (1992); Welch v. Helvering, 290
U.S. 111 (1933). While petitioners presented two invoices
totaling $575, they failed to substantiate by receipts, invoices,
canceled checks, or otherwise, that they made any expenditures in
addition to the $575.
                               - 4 -


     Petitioners did not report any gain from the sale of the

land on their 1990 joint Federal income tax return.   Petitioners'

1990 return was prepared by their accountant, Ms. Georgina M.

Alcover, and filed on November 21, 1991, 7 months after the April

15 deadline.

     In making the decision to exclude the gain from the sale of

the land on their 1990 Federal Income tax return, petitioners

relied upon a paragraph of a brochure prepared by Century 21,

which stated that a person over the age of 55 could "keep all of

the proceeds on the sale of his or her property" to use during

retirement.3   The article, which was entitled "Tax Advantages

for Homeowners", dealt entirely with the sale of homes used as

primary residences.

                              OPINION

     Respondent determined that petitioners are required to

recognize gain on the sale of the Fort Lauderdale property under

the general rule of section 1001(c).    Petitioners assert that the

gain is not taxable because of either the deferral provisions

under section 1034(a) or the one-time exclusion of section

121(a).   The Commissioner's determinations in a notice of

deficiency generally are presumed correct, and the taxpayer bears

the burden of proving that those determinations are erroneous.




3
   Century 21 is a realty corporation. Its February 1990 issue
of The Prospector News contained an article entitled "Tax
Advantages for Homeowners".
                               - 5 -


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

Feldman v. Commissioner, 20 F.3d 1128, 1132 (11th Cir. 1994).

Issue 1. Whether Petitioners Failed To Report Gain From the Sale
of Property

      Under section 1001(c), a taxpayer must generally recognize

all gain or loss realized upon the sale or exchange of property.

      An exception to section 1001(c) is section 1034(a),4 which

allows a taxpayer to defer a gain when proceeds of a property

sale are rolled over into a new principal residence.   However,

section 1034(a) further provides that the property sold must be

the taxpayer's principal residence.    Petitioners' Fort Lauderdale

property contained only a foundation and never served as

petitioners' principal residence.

      Section 121 permits taxpayers over the age of 55 to exclude

from gross income gain from the sale of property (not to exceed

$125,000) which has been their principal residence for 3 of the 5

years prior to sale.   Sec. 121(a) and (b).   While petitioners are




4
    Sec. 1034(a) provides, in pertinent part, as follows:

           (a) Nonrecognition of Gain.--If property (in this
      section called "old residence") used by the taxpayer as his
      principal residence is sold by him and, within a period
      beginning 2 years before the date of such sale and ending 2
      years after such date, property (in this section called "new
      residence") is purchased and used by the taxpayer as his
      principal residence, gain (if any) from such sale shall be
      recognized only to the extent that the taxpayer's adjusted
      sales price (as defined in subsection (b)) of the old
      residence exceeds the taxpayer's cost of purchasing the new
      residence.
                                 - 6 -


over the age of 55, the property was not their principal

residence; petitioners are thus ineligible for the section 121



exclusion5 and must recognize their gain.

Issue 2.    Addition to Tax Under Section 6651(a)(1)

      Respondent determined that petitioners are liable for an

addition to tax under section 6651(a)(1).     Section 6651(a)(1)

provides for an addition to tax for failure to timely file.

However, the addition is not applicable if "it is shown that such

failure is due to reasonable cause and not due to willful

neglect."    Sec. 6651(a)(1).   Petitioners have the burden of

proving such failure was due to reasonable cause.      Rule 142(a);

United States v. Boyle, 469 U.S. 241, 245 (1985).      The amount of

the addition is 5 percent for each month or fraction of a month

for which the return is delinquent, not to exceed 25 percent in

the aggregate.    Sec. 6651(a)(1).   Calendar year individual

taxpayers must file their Federal income tax return by April 15,



5
    Sec. 121(a) provides, in pertinent part, as follows:

      (a) General Rule--At the election of the taxpayer, gross
      income does not include gain from the sale or exchange of
      property if--

           (1) the taxpayer has attained the age of 55 before the
      date of such sale or exchange, and

           (2) during the 5-year period ending on the date of the
      sale or exchange, such property has been owned and used by
      the taxpayer as his principal residence for periods
      aggregating 3 years or more.
                               - 7 -


following the close of the calendar year.    Sec. 6072(a).

Petitioners did not file their 1990 tax return until November 21,

1991.   They offered no explanation for their lateness.    We

therefore hold that petitioners' failure to timely file was not

due to reasonable cause.   Thus, petitioners are liable for the

addition to tax under section 6651(a)(1).

Issue 3.   Accuracy-Related Penalty, Section 6662(a)

     Respondent determined that petitioners are subject to an

accuracy-related penalty under section 6662(a) for a substantial

understatement of tax.   Sec. 6662(b)(2).   The deficiency here

determined is a substantial understatement.    See sec.

6662(d)(1).6

     Section 6664(c)(1), however, provides that the penalty under

section 6662(a) shall not apply to any portion of an underpayment

if it is shown that there was reasonable cause for the taxpayers'

position with respect to that portion and that the taxpayers

acted in good faith with respect to that portion.    The

determination of whether petitioners acted with reasonable cause

and in good faith depends upon the pertinent facts and

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

important factor is the extent of the taxpayers' efforts to

assess their proper tax liability for the year.     Id.



6
   Respondent states on brief that petitioners were also
negligent. However, because we find petitioners liable for the
accuracy-related penalty due to their substantial understatement
of income tax, we need not address the negligence issue.
                               - 8 -


     Petitioners reported no gain from the sale on their Fort

Lauderdale property on their 1990 return.     They assert that they

believed they were entitled to the benefits of sections 121 and

1034.   However, petitioners' sole basis for believing their gain

was nontaxable was a single paragraph contained in a homeowners'

brochure.   Their reliance upon the single paragraph was

unreasonable.   They disregarded the rest of the article, which

discussed the qualifications for obtaining nonrecognition

treatment of gain on home sales.   Petitioners clearly took the

paragraph out of context and presented no further evidence to

justify their belief.

     Based on the record as a whole, we conclude that petitioners

have not carried their burden of proving that they acted with

reasonable cause.   We hold that petitioners are liable for the

accuracy-related penalty under section 6662(a).

     To reflect the foregoing and respondent's concessions,



                                       Decision will be entered

                               under Rule 155.
