                          T.C. Memo. 1995-477



                        UNITED STATES TAX COURT


              JULIUS AND HANAN DIBSY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16466-93.                  Filed October 4, 1995.



     Julius Dibsy, pro se.

     Roy Wulf, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GERBER, Judge:     Respondent determined a deficiency in

petitioners' 1989 Federal income tax of $34,079 and additions to

tax under sections 66541 and 6662(a) in the amounts of $191 and

$6,816, respectively.    The issues for our consideration are:   (1)


     1
       All section references are to the Internal Revenue Code in
effect for the taxable year under consideration, and all Rule
references are to this Court's Rules of Practice and Procedure,
unless otherwise indicated.
                                - 2 -

Whether petitioners are entitled to defer, as a like-kind

exchange, the income realized on the sale of their liquor store;

(2) whether petitioners are liable for the addition to tax for

failure to make estimated income tax payments; and (3) whether

petitioners are liable for the addition to tax for substantial

understatement of income tax.

                         FINDINGS OF FACT

     Petitioners, at all pertinent times, were married, and they

resided in Westminster, California, at the time their petition in

this case was filed.   Julius and Hanan Dibsy (petitioners) have

been in the business of owning and operating liquor stores.     On

January 17, 1986, petitioners purchased a liquor store in

Huntington Beach, California, from William D. Hanshaw (Hanshaw).

Petitioners changed the name of the store from "Hoovs Hut Liquor

#4" to "Sunshine Liquor".   Petitioners paid $210,000 for the

noninventory assets of Sunshine Liquor.

     During 1988, petitioners entered into discussions with

Hanshaw about obtaining a store with a larger volume of sales.

Petitioners learned that Hanshaw might sell "Bayshore Liquor", a

liquor store located in Seal Beach, California.   Consequently,

petitioners immediately listed Sunshine Liquor for sale.    On or

about March 23, 1988, they entered into an agreement to sell the

noninventory assets of Sunshine Liquor to Sathit and Supin

Sathavoran.   On March 31, 1988, petitioners agreed to purchase

Bayshore Liquor from Hanshaw, and they gave him $10,000 in
                                - 3 -

"earnest money".   On or about August 16, 1988, the Sathavorans

notified petitioners that they would not purchase Sunshine

Liquor.

     Petitioners requested that Hanshaw release them from the

purchase of Bayshore Liquor.    Hanshaw refused to return the

$10,000 "earnest money" and also refused to purchase Sunshine

Liquor from petitioners.    However, Hanshaw allowed petitioners to

defer payment of a portion of the purchase price for Bayshore

Liquor by petitioners' issuing a note to Hanshaw in the amount of

$150,000 plus interest, which was secured by the assets of

Sunshine Liquor.

     On October 5, 1988, petitioners purchased Bayshore Liquor

from Hanshaw for $434,593.82.    Petitioners financed the purchase

as follows:

     Seller                          $50,861.94
     Demand note                      75,000.00
     Note to Hanshaw1                150,000.00
     Credits through escrow            1,863.81
     Check                           156,868.07
           Total                     434,593.82
     1
      The note was due in 1 year, or upon the earlier sale of
Sunshine Liquor.

     On March 31, 1989, petitioners sold Sunshine Liquor to Mr.

and Mrs. Nam Kyun and Sun Cha Shin for $286,423.63.    This price

was allocated as follows:

     Inventory                      $39,827.71
     Other store assets             242,500.00
     Lease deposit adjustment         3,800.00
     Other                              295.92
           Total                    286,423.63
                                - 4 -


     Petitioners then disbursed the funds from the sale as

 follows:

     Payment of note to W. Hanshaw             $46,641.16
     Interest on above note to Hanshaw1            108.83
     Payment of note to W. Hanshaw             158,850.00
     Interest on above note to Hanshaw             900.15
     Note to petitioners from purchasers        43,150.00
     Inventory service                             249.14
     Escrow and closing costs                    1,639.55
     Creditors' claims paid                      8,843.38
     State Board of Equalization                19,483.57
     Payoffs of preexisting loans                6,557.85
          Total                                286,423.63
     1
      We assume that "W. Hanshaw" and "Hanshaw" are both one and
the same person discussed elsewhere.

     In connection with Sunshine Liquor, petitioners claimed a

total of $100,547 as depreciation and amortization expenses

during 1986, 1987, and 1988.   Their basis in the noninventory of

Sunshine Liquor was $109,453 on March 31, 1989.   The selling

price of these assets was $242,500.

     From October 5, 1988, until March 31, 1989, petitioners

operated both Sunshine Liquor and Bayshore Liquor, and they were

entitled to any profits earned by either store.   The parties

agree that if section 1031 does not apply to the disposition of

Sunshine Liquor, then petitioners must recognize a long-term

capital gain of $133,047 on the transaction.

                               OPINION

     Respondent concluded that the purchase of one liquor store

and subsequent sale of another by petitioners were two separate

taxable events.   Accordingly, respondent determined that
                                - 5 -

petitioners should have reported a long-term capital gain from

the sale of Sunshine Liquor.    Petitioners agree that, in form, a

separate sale and purchase occurred.    They contend, however,

that, in substance and when considered together, the transactions

resulted in a section 1031 like-kind exchange.    Petitioners'

failure to include the capital gain as income is justified if

section 1031 is applicable.

     Section 1001(c) generally requires that the entire amount of

gain or loss on the sale or exchange of property shall be

recognized.    Section 1031(a)(1), however, provides for the

nonrecognition of such gain or loss when "property held for

productive use in a trade or business or for investment * * * is

exchanged solely for property of like kind which is to be held

either for productive use in a trade or business or for

investment."

     The parties disagree on whether petitioner "exchanged"

Sunshine Liquor for Bayshore Liquor.2   Petitioners bear the

burden of establishing that respondent's determination is

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

(1933).

     Essentially, section 1031 assumes that new property received

in an exchange is "'substantially a continuation of the old


     2
       For reasons that will become clear, we find it unnecessary
to address whether Bayshore Liquor and Sunshine Liquor were
property of like kind within the meaning of sec. 1031.
                               - 6 -

investment'".   Commissioner v. P.G. Lake, Inc., 356 U.S. 260, 268

(1958) (quoting section 39.112(a)-1), Income Tax Regs.

(promulgated under the Internal Revenue Code of 1939), and

analyzing a tax-free exchange under section 112(b)(1) of the 1939

Code, a predecessor of section 1031).   In an exchange of like-

kind property, "the taxpayer's economic situation after the

exchange is fundamentally the same as it was before the

transaction occurred."   Koch v. Commissioner, 71 T.C. 54, 63

(1978).   The U.S. Court of Appeals for the Fourth Circuit in

Coastal Terminals, Inc. v. United States, 320 F.2d 333, 337 (4th

Cir. 1963), stated:

          The purpose of Section 1031(a), as shown by its
     legislative history, is to defer recognition of gain or
     loss when a direct exchange of property between the
     taxpayer and another party takes place; a sale for cash
     does not qualify as a nontaxable exchange even though
     the cash is immediately reinvested in like property.

See also Magneson v. Commissioner, 753 F.2d 1490, 1494 (9th Cir.

1985), affg. 81 T.C. 767 (1983);3 Starker v. United States, 602

F.2d 1341, 1352 (9th Cir. 1979).   In Barker v. Commissioner, 74

T.C. 555, 561 (1980), this Court noted:

          The "exchange" requirement poses an analytical
     problem because it runs headlong into the familiar tax

     3
       The case law, the regulations and the legislative history
are thus all in agreement that the basic reason for
nonrecognition of gain or loss on transfers of property under
sec. 1031 is that the taxpayer's economic situation after the
transfer is fundamentally the same as it was before the transfer:
his money is still tied up in investment in the same kind of
property. Magneson v. Commissioner, 753 F.2d 1490, 1494 (9th
Cir. 1985); affg. 81 T.C. 767 (1983).
                               - 7 -

     law maxim that the substance of a transaction controls
     over form. In a sense, the substance of a transaction
     in which the taxpayer sells property and immediately
     reinvests the proceeds in like-kind property is not
     much different from the substance of a transaction in
     which two parcels are exchanged without cash. Bell
     Lines, Inc. v. United States, 480 F.2d 710, 711 (4th
     Cir. 1973). Yet, if the exchange requirement is to
     have any significance at all, the perhaps formalistic
     difference between the two types of transactions must,
     at least on occasion, engender different results.
     Accord, Starker v. United States, 602 F.2d, 1341, 1352
     (9th Cir. 1979).

     Courts have afforded some latitude in structuring exchange

transactions.   See, e.g., Magneson v. Commissioner, supra (change

in mechanism of ownership which does not significantly affect

amount of control or nature of underlying investment does not

preclude a tax-free exchange); Starker v. United States, supra at

1354-1355 (the transfers need not occur simultaneously);4

Alderson v. Commissioner, 317 F.2d 790, 793 (9th Cir. 1963),

revg. 38 T.C. 215 (1962) (parties can amend previously executed

sales agreement to provide for an exchange); Barker v.

Commissioner, supra at 562 (a party can hold transitory ownership

solely for the purpose of effectuating an exchange); Biggs v.

Commissioner, 69 T.C. 905, 913-914 (1978); affd. 632 F.2d 1171

(5th Cir. 1980) (multiple parties can be involved in an exchange

with parties not owning any property at the time of entering into


     4
       In 1984, sec. 1031 was amended by the enactment of sec.
1031(a)(3) to permit nonsimultaneous exchanges under certain
limited circumstances. This provision is more restrictive in
that regard than the decision in Starker v. United States, 602
F.2d 1341, 1352 (9th Cir. 1979).
                              - 8 -

an agreement to exchange); 124 Front Street, Inc. v.

Commissioner, 65 T.C. 6, 17-18 (1975) (taxpayer can advance money

toward purchase price of property to be exchanged); Coupe v.

Commissioner, 52 T.C. 394, 405, 409 (1969) (the taxpayer can

locate and negotiate for the property to be acquired); J.H. Baird

Publishing Co. v. Commissioner, 39 T.C. 608, 615 (1962) (the

taxpayer can oversee improvements on the land to be acquired);

Mercantile Trust Co. v. Commissioner, 32 B.T.A. 82, 87 (1935)

(alternative sales possibilities are ignored where conditions for

an exchange are manifest and an exchange actually occurs).

Provided the final result is an exchange of property for other

property of a like kind, the transaction may qualify under

section 1031.5

     However, courts have discerned boundaries in the

interpretation and application of section 1031.   In Barker v.

Commissioner, 74 T.C. at 563-564, we recognized that

     at some point the confluence of some sufficient number
     of deviations will bring about a taxable result.
     Whether the cause be economic and business reality or
     poor tax planning, prior cases make clear that
     taxpayers who stray too far run the risk of having
     their transactions characterized as a sale and
     reinvestment.

     Other courts have acknowledged that transactions that take

the form of a cash sale and reinvestment cannot, in substance,

constitute an exchange for purposes of section 1031, even though

     5
       Biggs v. Commissioner, 69 T.C. 905, 914 (1978); affd. 632
F.2d 1171 (5th Cir. 1980).
                                - 9 -

the end result is the same as a reciprocal exchange of

properties.    Bell Lines, Inc. v. United States, 480 F.2d 710, 714

(4th Cir. 1973); Carlton v. United States, 385 F.2d 238, 241 (5th

Cir. 1967).    Thus, our inquiry here focuses on whether

petitioner's disposition of Sunshine Liquor was a sale, as argued

by respondent, or an exchange, as argued by petitioner.

     In Bezdjian v. Commissioner, 845 F.2d 217 (9th Cir. 1988),

affg. T.C. Memo 1987-140, the taxpayers received an oil company's

offer to sell a gas station that the taxpayers operated under a

lease.   The oil company refused to accept a rental property owned

by the taxpayers in exchange and, instead, insisted on a cash

transaction.   The taxpayers consented and bought the gas station

with the proceeds of a loan that was secured by a deed of trust

on their residence and the rental property.    About 3 weeks after

the gas station was conveyed to the taxpayers, they sold the

rental property to a third party who assumed a mortgage and paid

the remainder of the price in cash.     The taxpayers treated these

transactions as a like-kind exchange governed by section 1031 on

their 1978 tax return.

     The U.S. Court of Appeals for the Ninth Circuit explained

that there was no "exchange" under the meaning of section 1031.

The court found that the taxpayers failed to understand that the

parties involved must make an exchange of property or an interest

in property for other property of a like kind in order for the

transaction to qualify for nonrecognition.    The court also found
                                - 10 -

no proof that either party evidenced an intention to make an

exchange.    "The fact that the * * * [taxpayers] intended the

 * * * [new] parcel to replace the * * * [old] property in their

holdings does not render their transactions an exchange."     Id. at

218.

       Petitioners' factual circumstances are indistinguishable

from Bezdjian v. Commissioner, supra.     In both cases, there was a

desire to purchase property and a need to dispose of like-kind

property to finance the acquisition.     In both cases, there was an

inability to find a buyer for the original property and a

purchase of the new property before the original property could

be sold.    In both instances, there was a borrowing against the

original property to finance the purchase of the new property,

and neither set of taxpayers received cash in hand from the sale

of the original property.

       The facts here support respondent's position that

petitioners possessed indicia of ownership of both Bayshore

Liquor and Sunshine Liquor.    If petitioners had been unable to

sell Sunshine Liquor, they would still have been liable to

Hanshaw on the note they gave him to finance their purchase of

Bayshore.    Likewise, petitioners were legally entitled to keep

Sunshine Liquor in any event.    Petitioners were liable to Hanshaw

for the outstanding debt, but they were not otherwise bound to

sell Sunshine Liquor.    Furthermore, petitioners simultaneously

operated Sunshine Liquor and Bayshore Liquor from October 5,
                               - 11 -

1988, until March 31, 1989, when they finally sold Sunshine

Liquor.   They kept the profits and losses from both businesses.

These circumstances do not reflect or otherwise show the

existence of a tax-free exchange under section 1031.

     The purchase of Bayshore Liquor and the subsequent sale of

Sunshine Liquor were not structured as a section 1031 exchange.

The escrow documents do not refer to a section 1031 exchange.

There is no indication that this transaction was intended to be a

section 1031 exchange.   Additionally, it does not appear that the

ultimate purchasers of Sunshine Liquor were aware that a section

1031 exchange was intended.    There is no evidence that

petitioners relied on section 1031 until they filed their 1989

Federal income tax return.

     Petitioners apparently argue that Hanshaw was the de facto

owner of Sunshine Liquor at the time of the sale because part of

the proceeds from petitioners' sale of Sunshine Liquor were

utilized to pay off the debt incurred and owed to Hanshaw.    In

other words, petitioners appear to contend that they had

previously accomplished a section 1031 exchange with Hanshaw and

were merely his "agents" in the sale of Sunshine Liquor.   This

gloss on Hanshaw's role is not confirmed by the record.    Hanshaw

refused to purchase Sunshine Liquor from petitioners when the

Sathavorans reneged on the agreement to purchase the store.

Hanshaw did not have any rights other than those granted to him

by petitioners' note.    Hanshaw was only a creditor of
                               - 12 -

petitioners.   Petitioners retained title and equity in Sunshine

Liquor until they sold it.

     Petitioners' argument implies that an intent on their part

to undertake an exchange should be sufficient to bring the

transactions within the ambit of section 1031.    We cannot agree.

Although intent can be relevant in determining what events

transpired, it is not sufficient to cause these transactions to

fall within section 1031.    Garcia v. Commissioner, 80 T.C. 491,

498 (1983); Biggs v. Commissioner, 69 T.C. 905, 915 (1978).

Rather these transactions constitute a purchase and subsequent

sale.

     We hold that the transactions here are properly

characterized as a purchase followed by a sale.    Accordingly,

there was no exchange within the meaning of section 1031.

     Section 6654 provides an addition to tax for the failure to

pay estimated income tax.    This addition to tax is mandatory

unless petitioners demonstrate that they come within one of the

computational exceptions of section 6654(e).     The addition to tax

is imposed regardless of reasonable cause or extenuating

circumstances.   Dodge v. Commissioner, 96 T.C. 172, 183 (1991),

affd. in part and revd. in part 981 F.2d 350 (8th Cir. 1992);

Grosshandler v. Commissioner, 75 T.C. 1, 20-21 (1980).

Furthermore, they have not demonstrated that they come within any

exception or that they had reasonable cause or extenuating

circumstances.   Petitioners failed to make any estimated tax
                                 - 13 -

payments in 1989.    Therefore, respondent's determination is

sustained.

       We next consider whether petitioners are liable for the

addition to tax for substantially understating their income tax.

Sec. 6662(b)(2).    A substantial understatement is one that

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

or $5,000.    Sec. 6662(d)(1).   Any understatement is reduced by an

item that is adequately disclosed or for which there was

substantial authority for its tax treatment.

       Petitioners' failure to report the gain from the sale of

Sunshine Liquor resulted in a $34,079 understatement of income

tax.    This amount is in excess of $5,000, and exceeds 10 percent

of the amount of tax required to be shown on the return.

       Next, we must decide if petitioners adequately disclosed

their position or had substantal authority.    Section

6662(d)(2)(B)(ii) defines a disclosed item as one regarding

which "the relevant facts affecting the item's tax treatment are

adequately disclosed in the return or in a statement attached to

the return".    The statute does not set forth what constitutes

adequate disclosure of relevant facts.     Schirmer v. Commissioner,

89 T.C. 277, 285 (1987).    Under generally applicable regulatory

authority, however, respondent may prescribe the form of such

disclosure.    H. Conf. Rept. 97-760 (1982), 1982-2 C.B. 600, 650;

Schirmer v. Commissioner, supra at 285.
                              - 14 -

     Even where a taxpayer fails to comply with the methods set

forth by the regulations, this Court has indicated that a

taxpayer may also satisfy the requirements of adequate disclosure

for purposes of section 6662 if he provides sufficient facts on

the face of his return that enable respondent to identify the

potential controversy involved.   Schirmer v. Commissioner, supra

at 286.   We hold that petitioners have satisfied the adequate

disclosure requirement.

     Petitioners properly completed their 1989 Federal income tax

return identifying the property in question, the amount of gain

involved, and the facts affecting the tax treatment.

Furthermore, on the face of petitioners' return there are only

two items reported: (1) Business income generated by a liquor

store as reported on Schedule C, and, (2) a transaction involving

the same liquor store which produced zero capital gain as

reported on Schedule D.   It appears likely that the items

reported generated respondent's audit.   The information reported

was sufficient to apprise respondent of and enable respondent to

identify the potential controversy involved here, that is,

whether petitioners actually engaged in a tax-free exchange.     We

hold that petitioners have adequately disclosed the relevant

facts relating to the questioned transaction.

     We hold that petitioners are not liable for the addition to

tax under section 6662(a).

     To reflect the foregoing,
- 15 -

     Decision will be entered for

respondent as to the deficiency

and addition to tax under sec.

6654, and for petitioners as to the

addition to tax under sec. 6662(a).
