                        T.C. Memo. 1998-219



                      UNITED STATES TAX COURT



                CLIFFORD F. ASHER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6570-95.               Filed June 23, 1998.



     Jon R. Vaught, for petitioner.

     Elaine Sierra, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WRIGHT, Judge:   Respondent determined deficiencies of

$21,670 and $23,054 in petitioner's income tax and accuracy-

related penalties under section 6662(a) of $4,334 and $4,611, for

the taxable years 1990 and 1991, respectively.
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     Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years in issue.     Rule

references are to the Tax Court Rules of Practice and Procedure.

     The issues to be decided are:

     (1) Whether petitioner is required under section 1034 to

defer recognition of gain he realized on the sale of a residence

in 1990.

     (2) Whether petitioner received a constructive dividend from

Golden Gate Litho in 1991.

     (3) Whether petitioner is liable for the accuracy-related

penalty under section 6662(a) for 1990 and 1991.

                        FINDINGS OF FACT

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.     Petitioner resided in

Oakland, California, when the petition was filed in this case.

     In 1980, petitioner formed Golden Gate Litho, a California

corporation (the corporation).    The corporation is in the

lithography and commercial printing business.     During 1991,

petitioner owned 76 percent of the corporation's stock and his

son, Donald Asher, owned 24 percent.     During 1992, petitioner

owned 71 percent of the corporation's stock and his son owned 29

percent.
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     The corporation's principal place of business is located in

a building on Golf Links Road in Oakland, California (the office

building).   Petitioner owns the office building and leases it to

the corporation.    During all relevant periods, petitioner was a

full-time, year-round employee of the corporation, and his place

of work was in the office building.

      On November 13, 1985, petitioner purchased a residence

located on Forest Avenue in Castro Valley, California (the Castro

Valley house) for $120,666.   Petitioner occupied the Castro

Valley house on that date and lived there until August 27, 1988.

On December 31, 1986, petitioner sold a residence that had been

his principal residence (former residence) prior to the purchase

of the Castro Valley house.

     On his 1986 Federal income tax return, petitioner reported

the sale of the former residence on a Form 2119, Sale or Exchange

of Principal Residence.   On the Form 2119, petitioner reported

that he realized gain in the amount of $59,959, based on the

$132,356 selling price of the former residence with an adjusted

basis of $72,397.   Petitioner reported taxable gain of $11,690

(the difference between the $132,356 selling price of the former

residence and the $120,666 cost of the Castro Valley house) and

deferred gain of $48,269 (the difference in the $59,959 gain

realized and the $11,690 taxable gain).    Petitioner reported that
                                - 4 -


his adjusted basis in the Castro Valley house was $72,397 (the

$120,666 cost less the $48,269 deferred gain).

     On August 27, 1988, petitioner purchased a condominium

located in Incline Village, Nevada, for $149,793.1   At that time,

petitioner moved all of his furniture and personal belongings

into the condominium.

     On the same day that petitioner purchased the condominium,

he leased the Castro Valley house to Robert Whitlock and Patricia

Lofton-Whitlock (the Whitlocks).    Under the agreement petitioner

leased the house to the Whitlocks for a 1-year term commencing

September 1, 1988, subject to automatic month-to-month renewal,

and granted the Whitlocks the option to purchase the house.    When

the Whitlocks did not exercise their option to purchase the house

by the end of the 1-year term, petitioner listed the house for

sale.    On April 27, 1990, petitioner sold the Castro Valley house

for $169,000, incurring selling expenses of $10,756, and, thus,

realizing $158,244 on the sale of the house.

     Petitioner reported the sale of the Castro Valley house as

the sale of his principal residence on a Form 2119 attached to

his 1990 return.    On the Form 2119 petitioner reported an $85,847

gain on the sale ($158,244 amount realized less $72,397 basis of

home sold).    He reported that the cost of the new home was

     1
      The $149,793 purchase price includes the $149,000 contract
sales price of the condominium plus $793 of capitalized closing
costs paid by petitioner.
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$149,793 and that his taxable gain on the sale of the Castro

Valley house was $8,451 ($158,244 adjusted sales price of the

Castro Valley house less the $149,793 cost of the condominium).

     In the notice of deficiency dated February 3, 1995,

respondent determined that petitioner realized a capital gain of

$77,396 that must be recognized in 1990 on the sale of his Castro

Valley house.

     The condominium in Incline Village, Nevada, is approximately

200 miles from the corporate office building in Oakland,

California.   It took petitioner approximately 4 hours to drive

from the condominium to the office building.     From the time

petitioner acquired the condominium until July 19932, he resided

in the condominium on weekends and during vacation periods.

During the work week, he stayed in the vicinity of his place of

work (the San Francisco Bay area).     When petitioner was in the

San Francisco Bay area he usually stayed with his mother or

friends who live in the area, but occasionally he stayed in a

hotel.

     Petitioner has received his personal mail at the office

building since he acquired the building in 1980.     Although

petitioner was not registered to vote during 1988 through 1991,

he had a California driver's license, filed income tax returns


     2
      In July 1993 petitioner sold the condominium and purchased
a house in Incline Village.
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with the State of California, and used the corporate business

address on his Federal income tax returns.

     During 1991, the corporation needed more office space3 and

constructed a loft area in the office building.     The cost of

constructing the loft was $75,096.     The loft area consists of

approximately 1,200 square feet and includes offices, a storage

area, a lounge area with a kitchen (285 square feet), and a

bathroom with a shower (45 square feet).     Another bathroom is

located in the back of the office building.     The new bathroom was

constructed so that petitioner and clients would not have to walk

through the manufacturing area to the other bathroom.     Petitioner

uses the lounge area to meet with clients.     The kitchen has a

sink and microwave but is not equipped with a stove or pots and

pans.

     After work Donald Asher likes to work out before going home.

He requested the shower be installed so that he could shower

before going home after working out.    Donald Asher lived in the

loft for a few weeks following a domestic dispute with his wife

until he could find an apartment.    He slept on a mattress on the

floor in the storage room.   Petitioner does not use the shower

and has never lived in the loft.




     3
      Donald Asher had become the production manager and took
over petitioner's office space.
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     On his Federal income tax return for 1990, petitioner

reported income from two sole proprietorships (Sungate Travel and

Sungate Tours located on Alcosta Boulevard in San Ramon,

California), in addition to his wages from the corporation.    He

reported gross receipts of $1,649,088 from Sungate Travel and

$115,982 from Sungate Tours.   On his 1991 return, he reported

gross receipts of $1,090,975 from Sungate Travel and he reported

the sale of Sungate Tours.

     During 1993 and 1994, an agent of the Internal Revenue

Service conducted an audit of the corporation's returns for the

taxable years ending May 31, 1991 and 1992, and petitioner's

individual returns for taxable years 1990 and 1991.   Petitioner's

accountant was present at all meetings with petitioner and the

agent.   The agent reviewed documents such as invoices and

contracts supporting the corporation's depreciation schedule of

items related to the construction and furnishings of the loft.

The documents showed the purchase of a leather sofa and chair,

kitchen cabinets, fixtures for the bathroom, and blinds.

     During the course of the audit, the agent visited the office

building twice, once in July 1993 and again in July 1994.    While

walking down the hallway in the loft during the second visit, the

agent noticed a mattress with box spring and a cabinet in one of

the rooms.
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     The agent concluded that petitioner lived in the office

building because petitioner used the office address on his income

tax returns and received most of his mail at the office building

and because of the 4-hour drive from the condominium to the

office building, the presence of the cabinet and mattress with

box spring in a room in the loft during July 1994, and the

presence of the kitchen and shower in the loft.

     Consistent with the revenue agent's conclusion and

adjustment to petitioner's income, respondent determined in the

notice of deficiency that petitioner received a constructive

dividend as a result of the construction of the loft in 1991.

                                OPINION

1.   Whether the Gain Petitioner Realized on the Sale of the
     Castro Valley House Is Taxable in the Year of the Sale

     Generally, sections 1001 and 61 require a taxpayer to

recognize gain realized on the sale of property in the year of

the sale.    Section 1034, however, requires a taxpayer to defer

recognition of gain realized on the sale of the taxpayer's

principal residence in certain circumstances.    If the taxpayer

purchases and uses a new principal residence within the 4-year

replacement period, the taxpayer will recognize gain only to the

extent that the taxpayer's adjusted sales price of the old

residence exceeds the taxpayer's cost of purchasing the new

residence.    Sec. 1034(a).   Thus, if the cost of the new residence

equals or exceeds the adjusted sales price of the old residence,
                                 - 9 -


the entire gain will be deferred.    If the cost of the new

residence is less than the adjusted sales price of the old

residence, gain will be recognized to the extent of the

difference.   Sec. 1034-1(a), Income Tax Regs.   The deferral of

the gain is accomplished by reducing the basis of the new

residence by the amount of gain not recognized on the sale of the

old residence.   Sec. 1034(e).

     The 4-year replacement period begins 2 years before the date

of the sale of the old residence and ends 2 years after such

date.   Sec. 1034(a).   If, however, during the 4-year replacement

period, the taxpayer purchases more than one residence that is

used by him as his principal residence at some time within 2

years after the date of the sale of the old residence, only the

last of such residences is treated as the new residence.      Sec.

1034(c)(4).

     Petitioner contends that the Castro Valley house was his old

principal residence and the condominium was his new principal

residence.    Petitioner concludes, that since he purchased and

used the condominium as his new principal residence within 2-

years prior to the sale of the Castro Valley house, he is

required by section 1034(a) to defer recognition of the gain on

the sale of the house.

     Respondent argues that section 1034(a) does not apply

because (1) the Castro Valley house was not petitioner's
                              - 10 -


principal residence on the date of the sale because he rented the

property prior to its sale and (2) the condominium was not

petitioner's new principal residence because he lived most of the

time in the Oakland area, either at his place of work or at the

home of his mother or friends.

     Both parties, however, fail to recognize the consequence of

applying section 1034(c)(4) to the sale of petitioner's former

residence on December 31, 1986.   Petitioner purchased and

occupied the Castro Valley house on November 13, 1985, and he

purchased and occupied the condominium on August 27, 1988.    If

the condominium was used by petitioner as his principal

residence, then the Castro Valley house and the condominium were

both purchased and used by petitioner as his principal residence

during the 4-year replacement period and were both used by

petitioner during the 2-year period after the sale of the former

residence.   Since the condominium would be the last principal

residence to be used by petitioner during the 2-year period after

the date of the sale of the former residence, the condominium

would constitute the new residence with respect to the sale of

the former residence.   Sec. 1034(c)(4).

     Where a taxpayer purchases and sells a number of principal

residences during the statutory period following a section 1034

nonrecognition sale, that statute ignores all of the transactions

except for the last purchase occurring within the period.    See
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Aagaard v. Commissioner, 56 T.C. 191, 204 (1971); Kerns v.

Commissioner, T.C. Memo. 1984-22.   Thus, if the condominium

became petitioner's primary residence on August 27, 1988, under

section 1034(c)(4), the Castro Valley house would have ceased to

be petitioner's primary residence and would not have been his

primary residence when it was sold on April 27, 1990.

     If the condominium was petitioner's principal residence,

section 1034(a) would not apply to the gain on the sale of the

Castro Valley house by virtue of section 1034(c)(4).    Nor would

section 1034(a) apply to such gain if the condominium was not

petitioner's primary residence, because in that event petitioner

did not purchase and use a new principal residence within the 4-

year replacement period required by section 1034(a).    Therefore,

in either event, petitioner must recognize the gain realized on

the sale of the Castro Valley house in the year of the sale.

     The amount of gain petitioner realized on the sale of the

Castro Valley house, however, depends upon whether the Castro

Valley house or the condominium became petitioner's new principal

residence with respect to the sale of petitioner's former

residence.   If the Castro Valley house was not petitioner's new

principal residence for purposes of the deferral of gain on the

sale of petitioner's former residence, petitioner's adjusted

basis in the Castro Valley house was not reduced by the amount of

the deferred gain.   Therefore, we must determine whether the
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condominium was petitioner's primary residence as of August 27,

1988.

     The determinations of whether property (1) is used by a

taxpayer as his residence and (2) is used as his principal

residence depends upon all the facts and circumstances.    Sec.

1.1034-1(c)(3), Income Tax Regs.     For purposes of section 1034,

property is "used" by taxpayer as his residence if the taxpayer

physically occupies or lives in that property.     United States v.

Sheahan, 323 F.2d 383, 386 (5th Cir. 1963); Bayley v.

Commissioner, 35 T.C. 288, 295 (1960).     An individual may have

more than one residence.     Howard v. Commissioner, 16 T.C. 157

(1951), affd. 202 F.2d 28 (9th Cir. 1953).    A residence is a

taxpayer's "principal residence" if it is his "chief or main"

place of residence, considering all relevant facts, including the

amount of time the taxpayer spends at one residence as opposed to

another.     Stolk v. Commissioner, 40 T.C. 345, 351, 356 (1963),

affd. per curiam 326 F.2d 760 (2d Cir. 1964).

        A residence as distinguished from a domicile does not mean

one's permanent place of abode.     In Stolk v. Commissioner, supra

at 355, we stated: "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."     Residence is something less than domicile.
                              - 13 -


Friedman v. Commissioner, 37 T.C. 539, 552 (1961).     "An

individual may have a domicile in one place and a residence in

another, and may also have more than one residence."     Id.

Residence does not mean one's permanent place of abode, where he

intends to live all his days or for an indefinite or unlimited

time; nor does it mean one's residence for a temporary purpose,

with the intention of returning to his former residence when that

purpose has been accomplished.   Houlette v. Commissioner, 48 T.C.

350, 356 (1967); Stolk v. Commissioner, supra at 353.

     When petitioner was in the San Francisco Bay area during the

work week, he stayed with his mother or friends or in a hotel.

Sleeping at his mother's or friends' homes is not enough to make

those locations petitioner's abode, nor did he intend to remain

there.   His mother or friends could at any time change the locks

or otherwise exclude petitioner from the premises.   Lacking any

actual dominion over the property, petitioner was merely a guest

at sufferance, and neither his mother's home nor his friends'

homes constitute petitioner's actual place of abode.    Generally,

property is not "used by the taxpayer as his principal residence"

within the meaning of section 1034(a), unless the taxpayer

physically occupies and lives in the property.   Perry v.

Commissioner, 91 F.3d 82, 85 (9th Cir. 1996), affg. T.C. Memo.

1994-247; Houlette v. Commissioner, supra; Stolk v. Commissioner,

supra.
                              - 14 -


     Petitioner kept all of his possessions in the condominium

and spent most weekends and holidays at the condominium.    Unlike

the taxpayers in Friedman v. Commissioner, supra, and Stolk v.

Commissioner, supra, petitioner did not own or occupy any other

dwelling in the San Francisco Bay Area on a regular basis or for

periods greater than the time he spent at the condominium.    The

phrase "used by the taxpayer as his principal residence" means

habitual use of the residence.   In Perry v. Commissioner, supra

at 85, the U.S. Court of Appeals for the Ninth Circuit stated:

     While literal definitions of "home" are elusive, here
     it is enough * * * that a residence is "one's actual
     home, in the sense of having no other home, whether
     [one] intends to reside there permanently or for a
     definite or indefinite length of time." Dwyer v.
     Matson, 163 F.2d 299, 302 (10th Cir. 1947).[Alteration
     made by the Court of Appeals for the Ninth Circuit.]

     The condominium was petitioner's actual home; he had no

other home.   We find that for purposes of section 1034(a) the

condominium was petitioner's primary residence as of August 27,

1988.

     Since the condominium is the last residence used by

petitioner during the 2-year period after the date of the sale of

the former residence, the condominium constitutes the new

residence with respect to the sale of the former residence.    Sec.

1034(c)(4).   Since the Castro Valley house was not petitioner's

new principal residence for purposes of the deferral of gain on

the sale of petitioner's former residence, petitioner's adjusted
                              - 15 -


basis in the Castro Valley house was not reduced by the amount of

the deferred gain.   Therefore, for purposes of computing the gain

on the sale of the house, petitioner's basis in the house is its

$120,666 cost.   Petitioner realized $158,244 on the sale of the

house, and his gain is $37,578 ($158,244 less $120,666).      Since

petitioner reported $8,451 of taxable gain on the sale of the

house, he must include the additional gain of $29,127 in income

for 1990.

2.   Whether Petitioner Received a Constructive Dividend as a
     Result of the Construction of the Loft

     Section 61(a) includes in a taxpayer's gross income

dividends received by the taxpayer.    Section 316(a) defines a

dividend as any distribution of property by a corporation to its

shareholders out of earning and profits.    A taxpayer can be

charged with disguised or constructive dividend income even

though the corporation has not observed the formalities of

dividend declaration, has not made a pro rata distribution to the

entire class of stockholders, and did not record the distribution

as a dividend for bookkeeping purposes and even though neither

the corporation nor the shareholder intended a dividend.      See

Crosby v. United States, 496 F.2d 1384 (5th Cir. 1974); United

States v. Smith, 418 F.2d 589, 593 (5th Cir. 1969); Paramount-

Richards Theatres, Inc. v. Commissioner, 153 F.2d 602 (5th Cir.

1946), affg. a Memorandum Opinion of this Court.    Where a

corporation has incurred costs to construct, maintain, or
                                - 16 -


otherwise improve real property owned by a shareholder, such

costs may constitute constructive dividends to be recognized by

the shareholder as dividend income if the shareholder receives a

benefit attributable to such costs without the expectation of

repayment.    Magnon v. Commissioner, 73 T.C. 980, 994 (1980);

Estate of Clarke v. Commissioner, 54 T.C. 1149, 1161 (1970);

Benes v. Commissioner, 42 T.C. 358, 379 (1964), affd. without

published opinion 355 F.2d 929 (6th Cir. 1966).

     "Not every corporate expenditure incidentally conferring

economic benefit on a shareholder is a constructive dividend."

Crosby v. United States, supra at 1388.    An indirect or

incidental benefit to the shareholder should not by itself be

treated as a distribution to him.     Kuper v. Commissioner, 61 T.C.

624 (1974), affd. in part and revd. in part 533 F.2d l52 (5th

Cir. 1976).    The crucial test of the existence of a constructive

dividend is whether the expenditure was primarily for the benefit

of the shareholder.    Loftin & Woodard, Inc. v. United States, 577

F.2d 1206, 1215 (5th Cir. 1978); Sammons v. Commissioner, 472

F.2d 449 (5th Cir. 1972), affg. in part and remanding T.C. Memo

1971-145; Magnon v. Commissioner, supra at 994.    Whether a

corporate payment was made primarily for the shareholder's

benefit rather than for the corporation's benefit is a question

of fact.     Loftin & Woodard, Inc. v. United States, supra.
                              - 17 -


     Respondent contends that the loft was used by petitioner as

a residence and, therefore, the corporation's payment for the

construction of the loft constitutes a constructive dividend to

petitioner.   Respondent contends that petitioner lived in the

office building because of (1) the use of the office address on

petitioner's income tax returns and receipt of mail at the office

building; (2) the presence of the cabinet and mattress with box

spring in a room in the loft during July 1994; (3) the 4-hour

drive from the condominium to the office building; and (4) the

presence of the kitchen and shower in the loft.4

     Petitioner used the office address on his returns and

received his mail at the office even when he lived in the Castro

Valley house.   Furthermore, it is not unusual for a business to

have a kitchen or bathroom with a shower.   When petitioner was in

the San Francisco Bay area he stayed with friends or his mother.

     We found petitioner to be credible and his testimony to be

candid and forthright.   Additionally, petitioner's accountant

     4
      The agent testified that petitioner said he lived in
Incline Village but also on several occasions said he "lived in
the business since 1988". Respondent contends that petitioner's
statement was an admission that petitioner resided in the loft.
Assuming without finding that petitioner made such a statement,
we think that the statement is ambiguous. During the years in
issue, not only did petitioner work full time as an employee of
the corporation, he also was the sole proprietor of two other
businesses (Sungate Travel and Sungate Tours) that were located
at another location and generated over $1 million in gross
receipts each year. Under the circumstances, we do not think
that "lived in the business" would necessarily mean that
petitioner was residing in the loft.
                              - 18 -


corroborated much of petitioner's testimony.   We find that

petitioner did not reside in the loft.

     The loft was constructed in order to provide more office

space after Donald Archer became the production manager and to

provide an appropriate place for petitioner to meet with the

corporation's customers.   Petitioner did not use the loft as a

residence.   The loft was constructed and used for valid corporate

business purposes.   Therefore, we hold that petitioner did not

receive a constructive dividend in 1991 as a result of the

corporation's construction of the loft.

3.   Whether Petitioner Is Liable for the Accuracy-related
     Penalty Under Section 6662(a) for 1990 and 1991.

     Respondent determined that petitioner is liable for the

accuracy-related penalty under section 6662(a) for 1990 and 1991.

Taxpayers are liable for a penalty equal to 20 percent of the

part of the underpayment to which section 6662 applies.   Sec.

6662(a).

     With respect to the 1990 taxable year, petitioner failed to

report part of the gain on the sale of the Castro Valley house.

He introduced no evidence disputing the accuracy-related penalty

and failed to argue during trial or on brief as to why the

penalty should not be applied to the understatement for that

year.   Accordingly, we sustain respondent's determination that

petitioner is liable for the section 6662(a) accuracy-related

penalty for 1990.
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     For the 1991 taxable year, we have held that petitioner did

not receive a constructive dividend.    Therefore, petitioner is

not liable for the section 6662(a) accuracy-related penalty for

1991.

     To reflect the foregoing,

                                     Decision will be entered under

                                 Rule 155.
