                       T.C. Memo. 1997-161



                     UNITED STATES TAX COURT



    JAMES P. DE OCAMPO AND MARLA L. DE OCAMPO, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11624-94.                    Filed April 1, 1997.



     A. Nathan Zeliff, for petitioners.1

     Patricia Anne Golembiewski, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge: Respondent determined a $38,819 deficiency for

1989 and a $7,764 accuracy-related penalty under section 6662(a).

     The issues for decision are:    (1) Whether petitioners may

     1
          Mr. Zeliff represented petitioners at the trial of this
case and filed posttrial briefs on their behalf. Thereafter, he
filed a motion to withdraw as counsel for petitioners which was
granted on Oct. 7, 1996.
                                        -2-

defer recognition of gain from the sale of their former principal

residence under section 1034(a) when title to their new residence

was acquired by the parents of petitioner James De Ocampo, and (2)

whether petitioners are liable for an accuracy-related penalty

under section 6662(a).

       All section references are to the Internal Revenue Code for

the year under consideration.           All Rule references are to the Tax

Court Rules of Practice and Procedure.

                                FINDINGS OF FACT

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

stipulation of facts and the attached exhibits are incorporated

herein by this reference.

       Petitioners,      husband      and     wife,     resided    in     Livermore,

California, at the time they filed their petition.                      They filed a

joint    Federal    income      tax    return     for    1989,    the    year   under

consideration.      The return shows Mr. De Ocampo's occupation as a

lithographer,      and   Mrs.    De   Ocampo    as      self-employed,     having   a

printing business.         Their total combined income for 1989 was

$26,780.

       On October 14, 1989, petitioners signed a deposit-receipt and

purchase contract for the purchase of their current residence at

1007    Montclair     Court     in    Livermore      (Montclair    property)     for

$300,000.    At the time, petitioners resided at 5017 Curtis Street

in Freemont, California (Curtis property). After they signed the

contract, petitioners encountered credit and financial problems in
                                    -3-

obtaining a mortgage. Petitioners' real estate agent suggested Mr.

De    Ocampo's   mother,   Rosita   De   Ocampo,   and   father,   the   late

Felicismo De Ocampo, purchase the Montclair property because they

had a better credit rating than petitioners and could obtain a

mortgage on more favorable terms.

       On December 2, 1989, Mr. De Ocampo's parents signed a deposit-

receipt and purchase contract for the purchase of the Montclair

property for $300,000.      The contract provided that Mr. De Ocampo's

parents were purchasing the property for their own account, and

that the contract was subject to the termination of the agreement

signed by seller and petitioners on October 14, 1989.

       Mr. De Ocampo's parents obtained a loan from Home Savings of

America (Home Savings) to finance the purchase of the Montclair

property. Petitioners and Mr. De Ocampo's parents agreed that

petitioners would live in the Montclair property and pay all

mortgage, insurance, property tax, and utility bills for the

residence. However, there was no written agreement to that effect,

and none of the documentation involving Home Savings, the seller,

or any other party indicated that Mr. De Ocampo's parents purchased

the    Montclair   property    on   behalf   of    petitioners,    or    that

petitioners were the owners of the property.

       Loan statements and property tax bills were mailed to Mr. De

Ocampo's parents.    When a bill arrived in the mail, Mr. De Ocampo's

mother would telephone petitioners, and they would stop at the

residence of Mr. De Ocampo's parents to obtain the bill.                 When
                                       -4-

petitioners were late with payments of insurance premiums and

property taxes on the Montclair property, Home Savings added the

delinquent amounts to the balance of the mortgage held by Mr. De

Ocampo's parents. Delinquency notices were mailed to the residence

of Mr. De Ocampo's parents.

      Petitioners claimed home mortgage interest deductions on their

tax   return   for   the   Montclair    property   from   the    time   it   was

purchased by Mr. De Ocampo's parents.

      Petitioners sold the Curtis property to Mr. De Ocampo's

parents on December 28, 1989, for $215,000.                Mr. De Ocampo's

parents purchased the Curtis property so that another son, Richard,

could live there. Mr. De Ocampo's parents obtained the mortgage on

the Curtis property, and Richard made the mortgage payments.

      Petitioners received $91,301.52 from the escrow agent on

December 28, 1989, with respect to the sale of the Curtis property.

Petitioners used a portion of the sale proceeds to purchase an

$80,000 cashier's check that was used as a deposit with respect to

the purchase of the Montclair property.              The purchase of the

Montclair property closed on December 29, 1989.

      On January 14, 1992, Mr. De Ocampo's parents transferred title

to the Montclair property to petitioners.          A notation on the deed

shows that the transfer was treated as a gift.            On July 28, 1992,

petitioners    transferred    a   one-half   interest     in    the   Montclair

property back to Mr. De Ocampo's parents because petitioners were

told by a friend that the transfer to them from Mr. De Ocampo's
                                     -5-

parents would cause the entire mortgage to become due. Petitioners

did not consult with an attorney with regard to any of the

aforementioned transactions.         On November 5, 1993, Home Savings

informed petitioners that it had changed the name on the loan from

Mr. De Ocampo's parents to petitioners.

     Petitioners informed their tax return preparer that they did

not hold title to the Montclair property.             On Form 2119 (Sale of

Your Home) attached to their 1989 return, petitioners reported the

sale of the Curtis property; the selling price was shown to be

$215,000, and expenses of sale as $477.          Petitioners' basis in the

property was shown as $65,736. Petitioners deferred recognition of

the gain ($148,787) pursuant to section 1034.

                                    OPINION

Issue 1.     Sale of Residence

     Section 1034(a) permits deferral of gain on the sale of a

taxpayer's principal residence (old residence) if other property is

purchased and used by the taxpayer as a new principal residence

within a period beginning 2 years before the date of the sale and

ending 2 years after such date.            Gain is recognized only to the

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

principal residence       exceeds   the       cost   of   purchasing   the   new

residence.      Id.

     Petitioners contend that they purchased the Montclair property

using Mr. De Ocampo's parents as agents, thus satisfying the

requirement of section 1034 that the taxpayer purchased a new
                                         -6-

principal residence within 2 years of the sale of the former

residence.        Respondent argues that the Montclair property was

purchased    by    Mr.   De    Ocampo's    parents,     not    petitioners,    and

therefore section 1034 is not applicable.



       Section 1034 has been strictly construed.               See, e.g., Boesel

v. Commissioner, 65 T.C. 378, 390 (1975); Lokan v. Commissioner,

T.C. Memo. 1979-380; Bazzell v. Commissioner, T.C. Memo. 1967-101.

Maintaining       continuity    of      title   is   the      key   to   receiving

nonrecognition treatment under section 1034.                   Starker v. United

States, 602 F.2d 1341, 1351 (9th Cir. 1979); Allied Marine Sys.,

Inc. v. Commissioner, T.C. Memo. 1997-101; see also Edmondson v.

Commissioner, T.C. Memo. 1996-393.              In Marcello v. Commissioner,

380 F.2d 499 (5th Cir. 1967), affg. on this issue T.C. Memo. 1964-

299,   the   taxpayers,       husband     and   wife,   sold    their    principal

residence and moved into a new principal residence, legal title to

which was acquired by the husband's mother.                    In an unrecorded

affidavit, the mother stated that she held title to the residence

for convenience only, that the residence was purchased by and for

her son, who paid the purchase price, and that she would convey the

property to him whenever required to do so, for no consideration.

The mother held the mortgage on the property, but her son made the

payments.     The Court of Appeals for the Fifth Circuit agreed with

this Court that the taxpayers did not qualify under section 1034

for deferral of gain realized from the sale of their former
                                  -7-

residence.    The Court of Appeals stated:

     Congress intended to enable homeowners to use the sales
     proceeds from a sale of the old residence for buying
     their own home. The purpose of Section 1034 was not to
     permit a taxpayer to re-invest the proceeds from the sale
     of his home in the home of another person without
     recognizing for federal income tax purposes the gain
     realized by the sale.      The clear statutory language
     requires that a new residence be purchased and used by
     the taxpayer. That the residence must be owned by the
     taxpayer is made evident by the exception in subsection
     (g) of Section 1034 permitting either the husband or the
     wife to hold the residence in his or her name. If a
     third party owns the residence, the purchase requirements
     are not met.

Id. at 502 (fn. refs. omitted).

     In May v. Commissioner, T.C. Memo. 1974-54, the taxpayer

received proceeds from the disposition of her principal residence

pursuant to a divorce settlement.         She gave a portion of the

proceeds to her daughter, who used the money as a downpayment on

three houses, and the taxpayer spent some of the proceeds on

improvements to her daughter's houses.        The taxpayer advanced the

money to her daughter so that the taxpayer's ex-husband would not

know the taxpayer's whereabouts or what property was acquired with

the funds.    She also did not want the property to become part of

her estate.    The taxpayer claimed that the gain from the sale of

her interest in her former residence should be deferred under

section 1034 to the extent the proceeds were used to acquire

additional    residential   property    and   make   improvements.   We

disagreed and held that the taxpayer was not entitled to deferral

of gain because the property was purchased by her daughter, who
                                     -8-

took the deed in her name and signed the escrow instructions, the

note for the balance of the purchase price, and a deed of trust

securing the note.

      In Boesel v. Commissioner, supra, the taxpayers sought to add

to   the   purchase   price   of   their   new   principal   residence   the

discounted present value of future ground lease payments                 for

purposes of computing their cost of purchasing a new residence for

the nonrecognition provisions of section 1034.          In that case, the

taxpayer-husband was transferred by his employer from New York to

California.    As a result of the transfer, the taxpayers purchased

a home on land subject to a long-term lease.         In computing the cost

of the new residence, the taxpayers included the capitalized value

of their future payments under the land lease.          We therein stated

that section 1034 permits nonrecognition of gain "only to the

extent that a taxpayer continues to hold title in fee simple to

property which is occupied as his principal residence".            We held

that the taxpayers were not entitled to include as part of the

purchase price of their new residence the cost of the particular

leasehold interest involved in that case.         Id. at 386.   We further

stated:

           Embodied   within   the   statutory   language   and
      authorities * * * requiring continuity of record title as
      a precondition to nonrecognition of gain under section
      1034 is a desire to prevent taxpayers from enjoying the
      benefits of tax deferral (current nonrecognition) while
      placing themselves in a position (as nontitleholders) to
      escape future recognition altogether. Section 1034 was
      created to assist those taxpayers compelled to sell their
      old residences, due to family expansion or shifts in
                                             -9-

      places of employment, who desire to reinvest equal or
      greater funds in new residences, as legal owners of
      record. * * *

Id. at 388.

      Here, Mr. De Ocampo's parents purchased the Montclair property

and   obtained      a    loan       to    finance    the   purchase.        They      (not

petitioners) were the legal owners of record, irrespective of

petitioners' payment of any acquisition or maintenance costs and

use of the property.            Petitioners have failed to establish that

Mr. De Ocampo's parents were acting as petitioners' agents in

purchasing    the       Montclair        property.     Mr.      De    Ocampo's   parents

acquired the Montclair property in their own names and for their

own account, as they represented in the purchase contract.                            They

obtained the mortgage using their personal credit, not that of a

disclosed or undisclosed principal.                   Although we believe Mr. De

Ocampo's parents'         purchase of the property was done as a favor to

petitioners, the fact remains that it was the parents who made the

purchase.

      The transfer of the Montclair property from Mr. De Ocampo's

parents to petitioners occurred on January 14, 1992. This was more

than 2 years after the sale of petitioners' Curtis property in late

December 1989; accordingly,                 we need not decide whether such a

transfer    constitutes         a    "purchase"      within     the    meaning   of   the

statute.

      Petitioners        did    not       establish    that     they    satisfied      the

requirements     of      section         1034.     While   we   are     sympathetic    to
                                        -10-

petitioners' plight, having legal title to the Montclair property

in the names of Mr. De Ocampo's parents could permit the sale of

the property to a third party, and perhaps allow petitioners to

avoid payment of tax on the gain from the sale of the Curtis

property.

     To     summarize,      petitioners        did   not    meet   the     purchase

requirement of section 1034.            See Marcello v. Commissioner, 380

F.2d at 502 n.7. Accordingly, we hold that petitioners are required

to recognize gain from the sale of their Curtis property in 1989.

Issue 2.    Accuracy-Related Penalty

     Respondent determined an accuracy-related penalty pursuant to

section 6662(a) for petitioners' 1989 tax year.                        Section 6662

imposes a penalty equal to 20 percent of the portion of an

underpayment    of    tax   that   is    attributable       to   any    substantial

understatement of tax. Sec. 6662(a) and (b)(2). An understatement

of tax is substantial when it exceeds the greater of 10 percent of

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

6662(d)(1)(A).       The amount of an understatement will be reduced if

a taxpayer has substantial authority for the way an item was

treated, or if the facts that affect the item's tax treatment are

adequately    disclosed     in   the    return.      Sec.    6662(d)(2)(B).       A

taxpayer has the burden of proving that respondent's determination

of an addition to tax is in error.             Luman v. Commissioner, 79 T.C.

846, 860-861 (1982).

     The accuracy-related penalty does not apply to any portion of
                                      -11-

an underpayment if there was reasonable cause for such portion and

the taxpayer acted in good faith.                  Sec. 6664(c)(1).             Such a

determination    is   made    by   taking    into       account    all       facts   and

circumstances, including the experience, knowledge, and education

of the taxpayer and reliance on a professional tax adviser.                          Sec.

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

     With regard to the instant case, petitioners' real estate

agent suggested that Mr. De Ocampo's parents purchase the Montclair

property and obtain a mortgage because petitioners had credit

problems. Petitioners informed their tax return preparer that they

did not hold title to the Montclair property.                   They relied on the

preparer   to   properly     report   the    transaction,         and    indeed      the

transaction was reported on Form 2119.             Petitioners made mortgage,

insurance, and tax payments on the Montclair property, as though

they were the owners.      Under the facts and circumstances presented

herein, we believe that petitioners acted in good faith and with

reasonable cause in reporting the transaction.                   We therefore hold

that petitioners are not liable for the accuracy-related penalty.

     To reflect the foregoing,



                                                    Decision will be entered

                                             for    respondent          as     to     the

                                             deficiency, and for petitioners

                                             as    to     the     accuracy-related

                                             penalty under section 6662(a).
