                        T.C. Memo. 1997-203



                      UNITED STATES TAX COURT



               JAMES E. ZURCHER, JR., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5797-96.                          Filed May 5, 1997.



     Sebastian D'Amico, for petitioner.

     Karen Nicholson Sommers, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   James E. Zurcher, Jr., petitioned the Court to

redetermine respondent's determination of a $24,142 deficiency in

his 1992 Federal income tax and a $4,828 penalty under section

6662(a).   We must decide the following issues:
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     1.   Whether petitioner's loss on his sale of real estate was

capital or ordinary.   We hold it was capital.

     2.   Whether petitioner is liable for the accuracy-related

penalty determined by respondent under section 6662(a).1    We hold

he is not.

                           FINDINGS OF FACT

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

The stipulated facts and the exhibits submitted therewith are

incorporated herein by this reference.    Petitioner resided in

Carlsbad, California, when he petitioned the Court.

     In 1989, petitioner received a written proposal from

Robert L. Grant, Sr. (Mr. Grant), a "hands on" building

contractor licensed by the State of California, memorializing

their understanding concerning Mr. Grant's proposed purchase of a

1-acre lot of land and his development of a single-family

residence thereon.   Mr. Grant and petitioner understood that

Mr. Grant needed petitioner's funds to purchase the lot and to

construct the residence.    Mr. Grant and petitioner understood

that Mr. Grant would pay petitioner "for the use of his funds,

Interest at the current rate (Generally Prime+ 2 %) and a 50%

share of the profit at the sale and close of escrow of the




     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year in issue, and Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 3 -

project."    Mr. Grant and petitioner understood that petitioner's

"interest [would] be secured by Joint Title to all projects."

     Petitioner and Mr. Grant jointly purchased a vacant lot on

Gracey Lane in Fallbrook, California, on or about September 22,

1989, and by the end of 1990 Mr. Grant had built a single-family

residence on it (we collectively refer to the lot and the

residence as the Property).    Petitioner and Mr. Grant did not

enter into a formal partnership agreement with respect to the

purchase of the lot or the building of the residence.    Petitioner

financed the residence's construction, and Mr. Grant was the

builder.    Mr. Grant supervised the construction and hiring of

crews and subcontractors who participated in the development of

the Property.

     After Mr. Grant had built the residence on the lot, the

Property was offered for sale at approximately $389,000.    The

Property did not sell as expected, and Mr. Grant realized that he

could not pay petitioner the agreed rate of return on his

investment.    In January 1991, Mr. Grant quitclaimed his interest

in the Property to petitioner to allow him to attempt to recover

his promised return.    In 1992, petitioner sold the Property for

$279,000.    With the exception of this sale and the sale of his

personal residence, petitioner was not involved in any other real

estate sales activity from 1990 through 1994.

     Petitioner never maintained a business office with respect

to his participation in the Property, and he did not have a
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business license in his name.   Petitioner did not have a business

name, and he did not have a business telephone.    Petitioner did

not belong to any trade association, and he did not have any

employees.   Petitioner did not advertise the Property for sale;

all advertising was done by a real estate agent with whom

petitioner listed the Property for sale.

     Petitioner filed a 1992 Form 1040, U.S. Individual Income

Tax Return, using the filing status of "Single".   The return was

prepared by petitioner's long-time tax preparer, a certified

public accountant (C.P.A.), and it listed petitioner's occupation

as "investments".   Petitioner's 1992 gross income was $186,003,

exclusive of a $3,000 capital loss and a $71,504 loss that he

reported on the sale of the Property.   Most of petitioner's gross

income was from interest, dividends, and petitioner's involvement

in numerous partnerships.

     Petitioner reported the $71,504 loss on his 1992 Schedule C,

Profit or Loss From Business (Sole Proprietorship), as an

ordinary loss: $71,304 of this amount was due to the loss on the

sale of the Property and $200 was attributable to "Legal and

professional fees".   The Schedule C stated that petitioner was a

"developer", that he had operated his business for 5 months

during 1992, and that his business was not in operation at the

end of 1992.   Petitioner and his C.P.A. discussed petitioner's

financial data before the C.P.A. prepared petitioner's return,

and they discussed the facts behind petitioner's involvement in
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the Property.   Petitioner supplied the C.P.A. with all relevant

information to prepare petitioner's return, and petitioner relied

on the C.P.A. to report the sale of the Property correctly.     The

C.P.A. advised petitioner that he was entitled to claim an

ordinary loss on his sale of the Property.

     Petitioner's 1992 Schedule C was the first Schedule C that

petitioner had filed with respect to the Property.     On his 1990

income tax return, petitioner deducted the Property's real estate

taxes on Schedule A, Itemized Deductions.

     The notice of deficiency states that petitioner's $71,504

loss was a long-term capital loss.

                              OPINION

     We must decide whether the Property was a capital asset in

petitioner's hands.   A "capital asset" includes all property held

by a taxpayer, with certain exceptions.     The parties focus on one

of these exceptions, namely, "property held by the taxpayer

primarily for sale to customers in the ordinary course of his

trade or business".   Sec. 1221(1).    If the Property is within

this exception, petitioner's $71,504 loss is deductible in full.

See sec. 165(a), (c)(1).   If the Property is not within this

exception, petitioner's recognizable loss for 1992 with respect

to the Property (and other capital assets) is allowable only to

the extent of any gains from the sale or exchange of capital

assets plus (if the capital loss exceeds gains) the lesser of
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$3,000 a year or the excess of loss over the gains.    Sec. 1211(b).

     Whether the Property is a capital asset or was instead held

primarily for sale in the ordinary course of petitioner's

business is a factual determination.   Kelley v. Commissioner,

281 F.2d 527 (9th Cir. 1960), affg. T.C. Memo. 1959-63;

Daugherty v. Commissioner, 78 T.C. 623, 628 (1982).    Courts have

developed the following nonexclusive factors to assist in this

determination:   (1) The nature of the taxpayer's business;

(2) the taxpayer's purpose in acquiring and holding the property;

(3) subdivision, platting, and other improvements tending to make

the property more marketable; (4) the frequency, number, and

continuity of sales; (5) the extent to which the taxpayer engaged

in the sales activity; (6) the length of time the property was

held; (7) the substantiality of income derived from the sales,

and what percentage the income was of the taxpayer's total

income; (8) the extent of advertising and other promotional

activities; and (9) whether the property was listed directly or

through brokers.   Parkside, Inc. v. Commissioner, 571 F.2d 1092,

1096 (9th Cir. 1977), revg. on other grounds T.C. Memo. 1975-014;

Estate of Segel v. Commissioner, 370 F.2d 107, 108 (2d Cir.

1966), affg. T.C. Memo. 1965-221; Howell v. Commissioner, 57 T.C.

546, 554 (1972).

     Although the above-described factors assist in our

determination, we must consider all of the facts and

circumstances; no individual factor or set of factors is
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controlling.   Buono v. Commissioner, 74 T.C. 187, 199 (1980).

The purpose of this analysis is to determine whether, within the

meaning of section 1221(1), petitioner conducted a trade or

business and whether petitioner held the Property primarily for

sale to customers in the ordinary course of this trade or

business.   Cappuccilli v. Commissioner, T.C. Memo. 1980-347,

affd. 668 F.2d 138 (2d Cir. 1981).     Petitioner bears the burden

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

(1933).

     Following our review of the record, and after our

consideration of all the relevant facts, we conclude that

petitioner held the Property as a capital asset.    We find that

petitioner was merely an investor in the Property, rather than a

developer of it.   He provided an infusion of capital for

Mr. Grant's development of the Property, and petitioner did not

actively participate in the Property's development.    Although

petitioner sold the Property himself, this was a one-time event

in which petitioner took a relatively passive role by retaining a

real estate agent to sell it for him.    Moreover, petitioner sold

the Property himself only because Mr. Grant, after completing

construction of a residence on the Property, relinquished his

interest to petitioner in satisfaction of the money Mr. Grant

owed to petitioner.   Petitioner made no meaningful improvements

to the Property, did not personally advertise the Property for

sale, and sold it at a loss.   Petitioner's activity regarding the
                               - 8 -

property was not regular or continuous.     Petitioner claimed an

itemized deduction for the Property's real estate taxes on his

1990 Schedule A, rather than a business expense on Schedule C.

     Petitioner's claim to an ordinary loss is rooted in his

assertion that he was Mr. Grant's active partner in the

Property's development.   Petitioner asks the Court to find as a

fact that he and Mr. Grant entered into an oral partnership

agreement in or around June 1989 to develop the Property for

profit, and that petitioner was actively involved in this

partnership.   We decline to do so.    The fact of the matter is

that petitioner simply has not proven that he was more than a

financier of Mr. Grant's development of the Property.     The record

indicates that petitioner's actions were consistent with those of

an investor, rather than a person who was involved in a working

partnership.   Petitioner was involved with the Property only

because he had the money, and Mr. Grant did not.     But for his

investment of capital, through the form of a loan, we find that

petitioner had no meaningful participation in the Property's

development.   Although petitioner testified at trial, in a

somewhat general and vague manner, that he spent time and money

preparing the Property for sale (e.g., by installing carpeting,

drapery, flooring, and doing landscaping), his testimony fails to

persuade us that the Property was not a capital asset in hands.

We hold for respondent on this issue.
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     Respondent also determined that petitioner was liable for a

penalty under section 6662(a) because he substantially

understated his Federal income tax.    See sec. 6662(b)(2).   As

relevant herein, section 6662(a) imposes an accuracy-related

penalty equal to 20 percent of an underpayment that is due to a

substantial understatement of income tax.    An individual

substantially understates his or her income tax when the reported

tax is understated by the greater of 10 percent of the tax

required to be shown on the return or $5,000.    Sec.

6662(d)(1)(A).   Tax is not understated to the extent that the

treatment of the item related thereto is based on substantial

authority or is adequately disclosed in the return or in a

statement attached to the return.   Sec. 6662(d)(2)(B).

     Section 6662's accuracy-related penalty does not apply to

any portion of an underpayment to the extent that an individual

has reasonable cause for that portion and he or she acts in good

faith with respect thereto.   Sec. 6664(c)(1).   Such a

determination is made by taking into account all facts and

circumstances, including the experience and knowledge of the

taxpayer and his or her reliance on a professional tax adviser.

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

     We hold that petitioner is not liable for the penalty in

dispute.   Petitioner relied reasonably on his C.P.A. to report

correctly the subject sale.   Petitioner met with the C.P.A.

beforehand to discuss the facts surrounding the sale, and the
                              - 10 -

C.P.A. concluded that petitioner was entitled to ordinary loss

treatment.   Under the facts herein, we find that petitioner acted

in good faith and with reasonable cause in reporting the

transaction in the manner that he did.

     We have reached our holdings herein after considering each

party's arguments.   To the extent that we have not discussed an

argument, we have found it to be irrelevant or without merit.

     To reflect the foregoing,

                                         Decision will be entered

                                    for respondent for the

                                    deficiency and for petitioner

                                    for the accuracy-related

                                    penalty.
