                         T.C. Memo. 1999-132



                       UNITED STATES TAX COURT



       CHARLES A. BUDA AND ANNETTE H. BUDA, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16309-96.              Filed April 21, 1999.



     Robert S. Marquis, for petitioners.

     Kirk S. Chaberski, for respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:    By notice dated July 17, 1996, respondent

determined a $1,181,285 deficiency in petitioners' 1988 Federal

income tax.    The issues for decision are as follows:

     1.   What was the nature and value of the leasehold interest

that Mr. Buda received on liquidation of his wholly owned S

corporation?    We hold that Mr. Buda received the right to use,
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and receive all income from, the underlying realty and that the

fair market value was $5,200,000.

     2.   Did Mr. Buda, pursuant to section 333, make a valid

election to defer the recognition of gain on the liquidation?       We

hold that he did not.

     3.   Were petitioners entitled to deduct an abandonment loss?

We hold that they were not.

     All section references are to the Internal Revenue Code in

effect for the year in issue.

                         FINDINGS OF FACT

      Petitioners, husband and wife, resided in Pigeon Forge,

Tennessee, at the time they filed their petition.      In 1969, C.A.

and Bessie King leased approximately 11 acres of land to Mr.

Buda, and Mr. Buda assigned the lease to B & M Development Co. (B

& M), a corporation he owned with two other shareholders.      In

1978, B & M extended the duration of the lease from 1978 to 2028.

The lease and the assignment were recorded in Sevier County,

Tennessee.

     In 1977, B & M subleased approximately 5 acres of the Kings'

property (5 Acre) to Mountain Ocean Corporation. (MOC), an S

corporation that, at the time of the sublease, was owned by Mr.

Buda and three other shareholders.      The sublease, which was

recorded, grants MOC a leasehold interest in 5 Acre through 2028.

After entering into the sublease, MOC constructed a wave pool

facility on the property.   In 1984, Mr. Buda acquired 100 percent

of MOC's stock.   During that year, MOC, in response to a dramatic
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increase in insurance costs, permanently closed the wave pool

facility and attempted to sell the wave pool equipment.    When

these attempts were unsuccessful, MOC dismantled the equipment

and moved it to another location where it remained in storage

through 1988.

     In 1984, Mr. Buda began converting 5 Acre into Z Buda

Outlets, a retail outlet mall.    MOC and Mr. Buda borrowed

$1,461,000 from Citizens National Bank (the bank).    Proceeds of

the loan were used to fund construction work on 5 Acre.    As

collateral for the loan, MOC assigned the bank the leasehold

interest in, and right to all rental income from, 5 Acre.     As

additional collateral, Mr. Buda assigned interests in two other

parcels of realty that he held in his individual capacity.

     The shops in the mall were leased to various businesses.

Mr. Buda signed, either in his individual capacity or as

president of MOC, the leases and related amendments and

assignments.    All cash transactions relating to the operation of

the mall were processed through a bank account under the name "Z

Buda Factory Outlets".   The mall's income and expenses were

reported on petitioners' records and tax returns.    The expenses

reported by petitioners for 1985, 1986, 1987, and 1988 included

$30,000 in rent payments, which were reported as income on MOC's

records and tax returns.

     On December 30, 1988, MOC was liquidated.    Its leasehold

interest in 5 Acre and all other corporate assets were

distributed to Mr. Buda.   On his 1988 return, Mr. Buda reported
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the liquidating distribution (i.e., $393,071 of property

received, a $495,401 stock basis, and a resulting capital loss of

$102,330).   On its 1988 return, MOC reported an $82,189

abandonment loss relating to the wave pool equipment.     Mr. Buda,

MOC's sole shareholder, reported this loss on his 1988 return.

                                OPINION

I.   Nature and Value of the Leasehold Interest

     The amount realized on liquidation of MOC is in dispute.

More specifically, the parties disagree about the nature and

value of the leasehold interest in 5 Acre that Mr. Buda received.

Respondent contends that the leasehold interest in 5 Acre

included the right to use, and receive all income from, the

property.    Petitioners contend that MOC subleased 5 Acre to Mr.

Buda for $30,000 per year and that, on liquidation, Mr. Buda

received the right to the $30,000 annual payments.     The nature of

the leasehold interest received by Mr. Buda, therefore, turns on

whether MOC subleased 5 Acre.

     Petitioners assert that MOC entered into an oral sublease

with its sole shareholder, Mr. Buda.      Mr. Buda and Daniel Cooper,

Mr. Buda's accountant, testified.    Their testimony relating to

the terms of the oral sublease was vague and contradictory.

Moreover, neither witness could offer the Court any explanation

why this sublease was not in writing, while all other agreements

relating to 5 Acre were in writing (i.e., Mr. Buda's lease with

the Kings, his assignment of that lease to B & M, and B & M's

sublease to MOC).   Furthermore, the record controverts
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petitioners' contention.   For example, the bank required MOC to

pledge its leasehold interest in, and right to all rents from, 5

Acre, and MOC consented to assignments of leases.   In short,

petitioners' contention is meritless.

     Petitioners emphasize that the records relating to the

operation of the mall were consistent with the alleged oral

sublease (i.e., maintaining a separate checking account for the

activity, reporting the activity on Mr. Buda's income tax

returns, and recording the $30,000 rent payments on Mr. Buda's

and MOC's books).   While these records may be consistent with a

sublease, they are not convincing evidence of a sublease.     See

Electric & Neon, Inc. v. Commissioner, 56 T.C. 1324, 1339 (1971)

(stating that we closely scrutinize transactions between

shareholders and their closely held corporations because such

transactions are easily manipulated), affd. without published

opinion 496 F.2d 876 (5th Cir. 1974).   We conclude that MOC did

not sublease 5 Acre to Mr. Buda and that, upon liquidation of

MOC, Mr. Buda received the right to use, and receive all income

from, 5 Acre.

     Respondent determined that, on the date of liquidation, the

fair market value of the leasehold interest in 5 Acre was

$5,200,000.   Respondent's assumptions were reasonable, and his

analysis was thorough.   Petitioners' contention that the fair

market value should be lower (i.e., $4,850,000) was unpersuasive.

Accordingly, we sustain respondent's determination relating to

the gain realized on liquidation of MOC.
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II.   Section 333 Election

      Respondent contends that petitioners did not make an

election under section 333 and, thus, are not eligible to defer

the gain relating to MOC's liquidation.      Petitioners contend that

they made a valid election under section 333 and, thus, may defer

the gain.

      Congress, in 1986, repealed section 333 but provided a

transition rule that allowed certain shareholders to elect to

defer gain realized from a liquidating distribution received

before January 1, 1989.      See Tax Reform Act of 1986, Pub. L. 99-

514, secs. 631(e)(3), 633(d), 100 Stat. 2085, 2273, 2278-2279, as

amended by Technical and Miscellaneous Revenue Act of 1988, Pub.

L. 100-647, sec. 1006(g), 102 Stat. 3342, 3407.      The election was

required to be in writing and filed by the shareholder on Form

964, Election of Shareholder Under Section 333 Liquidation,

within 30 days after the adoption date of the liquidation plan.

See sec. 333(d); sec. 1.333-3, Income Tax Regs.

      The parties agree that the Internal Revenue Service did not

receive Form 964.    At trial, Mr. Cooper delineated in great

detail the circumstances under which he allegedly mailed Form

964, yet during the course of the 4-year audit he inexplicably

failed to mention any of this to the Internal Revenue Service

representatives.    Mr. Buda's testimony relating to this issue

(i.e., that he signed "some forms" on a "Sunday afternoon") was

similarly unpersuasive.      We conclude that petitioners did not
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make a section 333 election.   Accordingly, petitioners must

recognize the gain relating to MOC's liquidation.



III. Abandonment Loss

     Respondent disallowed petitioners' 1988 abandonment loss

because petitioners failed to establish that MOC abandoned the

wave pool equipment in that year.    Section 165(a) permits a

deduction for any loss sustained during the taxable year that is

not compensated for by insurance or otherwise.       To be entitled to

an abandonment loss, petitioners must prove an intent to abandon,

coupled with an act of abandonment.       See Massey-Ferguson, Inc. v.

Commissioner, 59 T.C. 220, 225 (1972).       The loss is allowed for

the year in which the act of abandonment takes place.       See sec.

1.165-1(d)(1), Income Tax Regs.

     MOC may have abandoned the wave pool equipment in 1984

(i.e., the year MOC dismantled, moved, and attempted to sell the

equipment) but did not abandon the equipment in 1988--the year

the loss was reported.    Accordingly, petitioners are not entitled

to an abandonment loss.

     All other contentions are irrelevant or moot.

     To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
