                        T.C. Memo. 1997-319



                      UNITED STATES TAX COURT



          JAMES B. AND JOAN E. MURTAUGH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5181-95.              Filed July 9, 1997.


     Hedy Pollak Forspan and Mei Chen, for petitioners.

     Drita Tonuzi, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GALE, Judge:   Respondent determined the following

deficiencies in, and additions to, petitioners' Federal income

taxes.
                                 - 2 -

Petitioner James B. Murtaugh:

                      Addition to Tax        Addition to Tax
Year     Deficiency   Sec. 6651(a)           Sec. 6654
1987     $24,520      $4,748                 $361
1988      20,939       3,124                  738
1990      20,349       3,925                  998
1991       6,737       1,460                  331
1992       4,554       1,105                  192


Petitioner Joan E. Murtaugh:

                       Addition to Tax        Addition to Tax
Year     Deficiency    Sec. 6651(a)           Sec. 6654
1987     $2,075        $100                   $0
1988      1,901          29                    0
1992      3,098         168                    0


       Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

         The parties agree that petitioners are entitled to joint

filing status.     Petitioners filed all of their joint tax returns

for the years in issue between May 1995 and March 1996, after the

notices of deficiency in this case were issued.     Petitioners

submitted three returns for tax year 1990.    Petitioners' tax

returns reported the following information:
                                  - 3 -



Year     Return Date    Tax            Withholding   Overpayment
1987     5/11/95        $5,515         $7,208        $1,693
1988     5/13/95         5,366         10,328          4,952
1990     1/15/96         5,564          6,919          1,355
1990     2/26/96         6,709          6,919            210
1990     3/15/96         5,942          6,919            977
1991     5/15/95         2,321          3,039            718
1992     5/16/95           0            2,563          2,563



The parties agree that if respondent prevails on the issues as

stated below, the revised deficiencies and additions to tax will

be as follows:

                                        Addition to      Addition
         Statutory     Deficiency/      Tax              to Tax
Year     Deficiency    (Overpayment)    Sec. 6651(a)     Sec. 6654
1987     $ 5,515       ($1,693)         $   0            $ 0
1988       5,366        (4,952)             0
1990      12,328         5,409            1,352           305
1991       2,321          (718)             0              0
1992       4,114         1,551              388            55


Petitioners concede that the overpayments are barred by section

6511(b)(2)(B).

       We must decide the following issues:

       (1) Whether petitioners are required to include, as ordinary

income, the entire distribution of $25,313.22 received by James
                                - 4 -

Murtaugh from the Union Camp Corporation retirement plan for the

taxable year 1990.   We hold that petitioners are required to

include the entire distribution as ordinary income.

     (2) Whether petitioners are entitled to an ordinary, rather

than a capital, loss in the amount of $59,700 from the

foreclosure in 1992 of petitioners' two timeshare units in a

resort lodging facility.    We hold that petitioners are entitled

to an ordinary loss.

     (3) Whether petitioners are liable for additions to tax for

failure to file and for failure to pay estimated tax.    We hold

that petitioners are liable for additions to tax to the extent

provided in the opinion.

                           FINDINGS OF FACT

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

incorporate by this reference the stipulation of facts and

attached exhibits.   At the time of filing the petition,

petitioners resided in Tuckahoe, New York.

Issue 1.   Distribution Under a Qualified Plan

     In 1990, petitioner James Murtaugh (petitioner) received a

distribution from his qualified pension plan at Union Camp

Corporation.   The gross distribution from the pension plan was in

the amount of $25,313.22, composed of an actual distribution of

$16,203.29, and an amount of $9,109.93 that offset an outstanding

loan principal.   Petitioner received the gross distribution

because he ceased employment with Union Camp and his
                               - 5 -

participation in the plan was terminated.   At some point prior to

the gross distribution petitioner had taken out a loan or loans

from his pension plan account to pay for the education of

petitioners' three children and to make improvements to

petitioners' residence, resulting in the outstanding loan balance

of $9,109.93 at the time of the gross distribution.

     A statement of petitioner's pension plan account as of April

30, 1990, the effective date of petitioner's termination from the

plan, indicated that there was an attached check in the amount of

$16,203.29, and that the outstanding loan balance of $9,109.93

would be included in the gross distribution for purposes of

determining taxable income.   On the Form 1099R issued to

petitioner, the plan administrator reported the gross

distribution as a taxable distribution of $25,313.12, indicating

that this amount included a defaulted loan of $9,109.93.    The

Form 1099R indicated that no amount of the gross distribution was

eligible for a capital gains election.

     All of petitioners' tax returns for the years in issue were

submitted to the Internal Revenue Service after the notices of

deficiency in this case were issued.   Petitioners did not pay any

tax for the 1990 taxable year except withholding tax.   With

respect to the 1990 taxable year, petitioners filed a tax return

and two amended returns during the first 3 months of 1996.     There

are inconsistencies within each return, and inconsistencies

between the returns.   Petitioners' first tax return for 1990
                               - 6 -

(original return) was submitted in January 1996.    On the original

return, petitioners attempted to elect 5-year averaging and

capital gains treatment.   On the original return, petitioners

reported a gross distribution of $25,313, indicating that $9,202

was the taxable amount and $3,324 was capital gain.    Petitioners

submitted an amended return for 1990 (first amended return) in

February 1996, on which petitioners did not elect 5-year

averaging or capital gains treatment.    On the first amended

return, petitioners reported a gross distribution of $25,313,

indicating that $9,202 was the taxable amount.    Petitioners

submitted another amended return for 1990 (second amended return)

in March 1996, on which petitioners attempted to elect 5-year

averaging and capital gains treatment.    On the second amended

return, petitioners reported a gross distribution of $16,203,

indicating that $12,706 was the taxable amount and $3,437 was

capital gain.1

Issue 2.   Capital or Ordinary Loss

     On January 24, 1988, petitioners purchased a 25-percent

timeshare interest in each of two condominium units (the

timeshares) in B'Mae's Resort in Gilford, New Hampshire, a ski

and lake resort area.   The timeshares were purchased for a total

of $89,700.   During tax years 1988 and 1989, petitioners had



     1
       We note that $12,706 plus $3,437 equals $16,143, not
$16,203.
                                - 7 -

rental income from the timeshares of $3,480 and $3,579.36,

respectively.

     Prior to the purchase of the timeshares, petitioner had some

previous experience with owning rental property.   Petitioner had

purchased a condominium on Cape Cod, Massachusetts, in 1985, and

sold it in 1988 at a profit of around $20,000 to $25,000.

Petitioner rented the Cape Cod property to one individual as a

residence.    Petitioner decided that he could do better by renting

a property at $110-$150 per night, similar to a hotel or motel.

Petitioner looked at properties in Orlando, Florida, and Myrtle

Beach, South Carolina, and other places along the east coast.

Petitioner's investigation revealed that southern locations were

patronized heavily in the winter and lightly in the summer.

Petitioner saw advantages with B'Mae's Resort.   The resort was

located on a resort lake, was close to snow skiing facilities,

and was also a suitable venue for viewing fall foliage.    Thus,

petitioner expected it would be well patronized for several

months out of the year.   In addition, the timeshare interests

offered for sale by B'Mae's were suites, and petitioner thought

that suites, compared with single rooms, would be an advantage to

families.    When B'Mae's decided to add a new wing of condominiums

and offered quarter (13-week) timeshare interests in the

properties, petitioner decided to purchase the timeshares.

Petitioner felt that the timeshares had a good potential for
                                - 8 -

generating cash-flow over and above expenses.    Petitioner used

profits from the sale of the Cape Cod property to purchase the

timeshares.

     B'Mae's was a resort hotel with approximately 24-30 total

units, half of which were single rooms and half of which were

suites.    B'Mae's owned and rented out the single rooms itself,

and offered the suites for sale as condominiums or timeshares.

Petitioner had an agreement with B'Mae's whereby B'Mae's would

manage the rental of the timeshares, including promotional

advertising, rental contracts, housekeeping, replenishment of

inventory, and guest registration, for a fee of 40 percent of

rents paid.    This was the standard agreement that B'Mae's had

offered to other condominium owners for renting the suites.

B'Mae's exclusively handled the rental of the timeshares.

Petitioner did make people aware that he had the timeshares for

rent, but no actual rentals occurred based on those efforts.

     Petitioner visited the timeshares approximately once a year

from 1988 to 1992.    He stayed at one of the timeshares during his

visits, usually for 2 nights and usually in the off-season.    He

did not use the pool or the lake when he visited the timeshares,

although he would eat dinner and Sunday brunch at the resort

facility.    He once brought his daughter along and once brought

his son.    Petitioners did not take any depreciation on the

timeshares.    In preparing to buy the timeshares from B'Mae's,
                                - 9 -

petitioner did not prepare an economic projection or cash flow

analysis, but he considered the number of days of rental and

costs involved.

       After 2 years, when it was clear that the rentals were not

generating a positive cash flow, petitioner spoke with B'Mae's

about why there were not more rentals.     However, petitioner did

not put much effort into trying to rent the timeshares on his

own.    For instance, he did not advertise.   He made only one minor

suggestion about improving the rentals.     Petitioner only

occasionally communicated with B'Mae's.     For instance, B'Mae's

contacted petitioner about using one of the timeshares during a

telephone strike in New Hampshire.      He did not maintain books and

records for the timeshares other than the records he got from

B'Mae's.    He did not maintain a separate bank account for the

timeshares.    However, petitioner was engaged in a consulting

activity separate from his job, and he maintained books and

records and a separate account for the consulting activity.      The

primary source of petitioners' income during the years in issue

was their wages.

       B'Mae's had given petitioner some information, in the form

of brochures, suggesting that petitioner did not need to be

actively involved in the renting of the property for it to

generate cash flow.    Petitioner understood that B'Mae's would

take care of all day-to-day aspects of renting the timeshares.
                              - 10 -

     During tax year 1992, the Bank of New Hampshire foreclosed

on the timeshares.   Petitioners received $15,000 in proceeds for

each unit, resulting in a loss totaling $59,700.

                              OPINION

     Petitioners have the burden of proof for all of the issues

discussed below.   Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933).

Issue 1.   Distribution Under a Qualified Plan

     Petitioners argue that the $9,109.93 amount of the

outstanding loan proceeds was not income to them when the gross

distribution was received.2   We disagree.   Petitioner received a

gross distribution of $25,313.22 from his pension plan account,

and this amount was reduced, or offset,3 by the amount of the

outstanding loan balance of $9,109.93.   Petitioner received a

check for only $16,203.29 because of the outstanding loan.




     2
       For convenience, we occasionally refer to the loan or
loans as a loan. We do not make a finding that this case
involved one loan rather than multiple loans. As discussed
infra, there is very little evidence about the loan or loans in
question.
     3
       A proposed regulation issued by respondent uses the term
"plan loan offset" to refer to the amount of an outstanding loan
that is deducted from the account balance upon distribution.
Sec. 1.72(p)-1, Q&A-13, Proposed Income Tax Regs., 60 Fed Reg.
66233, 66237 (Dec. 21, 1995). Proposed regulations carry no more
weight than a position advanced by respondent on brief. F.W.
Woolworth Co. v. Commissioner, 54 T.C. 1233, 1265-1266 (1970).
Our use of the word "offset" does not indicate any reliance on
the proposed regulation.
                               - 11 -

Therefore, he in effect repaid the loan out of his pension plan

account.

     If the loan proceeds were taxed when first received by

petitioner, taxing them at the time of the gross distribution

would lead to double taxation of the same funds, a result

generally to be avoided.    See Campbell v. Commissioner, 108 T.C.

54, 67-68 (1997).    However, petitioners are required to show that

the loan proceeds were taxed when first received in order to

avoid taxation at the time they were offset against the gross

distribution, and they have not done so.    Petitioners make no

allegation or argument that the loan proceeds were taxed when

first received, and the available evidence suggests otherwise.

First of all, petitioner received a statement from the plan with

respect to the gross distribution that indicated that the

$9,109.93 loan proceeds would be included in the gross

distribution for purposes of taxable income.    Thus, the plan

administrators believed, and so advised petitioner, that the loan

proceeds were includable in income.

     Moreover, it appears that the loan to petitioner was not

income when received because it was a loan of $10,000 or less.

In general a loan from a qualified plan to a plan participant is

treated as a distribution from the plan under section 72(p)(1),

and therefore included in income under section 72.    See sec.

402(a).    However, section 72(p)(2)(A) provides an exception to

the general rule for certain loans, and petitioner's loan appears
                                - 12 -

to have satisfied the basic requirements of the exception.

Petitioners have presented no evidence of the terms of the loan

in question.    Although we need not, and do not, make a finding to

this effect, we think it probable that the loan to petitioner

qualified for the exception.     If the $9,109.93 loan fell under

the exception of section 72(p)(2), it would not have been a

distribution when received, but rather would have simply been a

loan, not taxable to the borrower.       Commissioner v. Indianapolis

Power & Light Co., 493 U.S. 203, 207 (1990).      In any event,

petitioners have presented no evidence to show that the loan was

in fact includable in income when received.      The mere fact that

the loan proceeds were offset against the balance of petitioner's

account before the gross distribution, so that petitioner

received only $16,203.29, does not prevent the $9,109.93 from

being income to petitioner.

     Petitioners argue that section 72(e)(4)(A) provides the

relief they seek.     However, section 72(e)(4)(A) does not apply in

this case.     Section 72(e)(4)(A) applies if an individual

"receives * * * any amount as a loan" under an annuity contract.

Thus, if section 72(e)(4)(A) were to have any application on the

facts of this case, it would have been when petitioners received

the proceeds of the loan in question, not when the gross

distribution was made.     Moreover, section 72(e)(4)(A) merely

designates loans under annuity contracts as amounts "not received

as an annuity".     Petitioners incorrectly conclude that any amount
                             - 13 -

not received as an annuity is not includable in income.    See sec.

72(e)(2)(B).

     With respect to the actual distribution of $16,203.29, which

petitioners agree must be included in income in some form,

petitioners attempted to elect 5-year averaging and capital gains

treatment in the second amended return for tax year 1990.4

Respondent argues that petitioners do not qualify for either 5-

year averaging or capital gains treatment because the elections

were untimely, and that petitioners have failed to prove that

they qualify for capital gains treatment in any event.

     Section 402(e) permits a taxpayer to elect 5-year averaging.

With 5-year averaging, the tax is imposed in the year of

distribution, but the amount of the tax is equal to the tax on

1/5 of the distribution multiplied by 5, giving the taxpayer the

advantage of lower tax rates on the smaller amount of income.5

Under section 11.402(e)(4)(B)-1(c)(1), Temporary Income Tax

Regs., 40 Fed. Reg. 1016 (Jan. 6, 1975), an election for 5-year

averaging must be made within the time for filing a claim for

     4
       The second amended return is the only return that can be
read consistently with petitioners' position on brief.
     5
       Sec. 402(e) permits 5-year averaging. Prior to the Tax
Reform Act of 1986 (TRA 1986), Pub. L. 99-514, 100 Stat. 2085,
sec. 402(e) of the Code as then in effect permitted 10-year
averaging. TRA 1986 prospectively eliminated 10-year averaging,
but grandfathered the existing availability of 10-year averaging
for persons who attained age 50 before Jan. 1, 1986. See TRA
1986, sec. 1122(h)(5), 100 Stat. 2471-2472. Respondent concedes
on brief that petitioner had reached age 50 before Jan. 1, 1986.
Nevertheless, petitioner sought to use 5-year averaging.
                              - 14 -

refund under section 6511.   See also section 1.402(e)-3(c)(1),

Proposed Income Tax Regs., 40 Fed. Reg. 18810 (Apr. 30, 1975).6

In this case, petitioners have stipulated that their claims for

refund for tax years 1987, 1988, and 1991 were barred by section

6511(b)(2)(B).   Petitioners made no such stipulation with respect

to tax year 1990.7   For tax year 1990, petitioners did not file a

return until on or around January 15, 1996, and had not paid any

tax by that date, except withholding tax.   Pursuant to section

6513(b)(1), petitioners are deemed to have paid the withholding

tax on April 15, 1991.   Because petitioners did not file a return

before receiving the notice of deficiency, the time period in

which they must claim any refund is 2 years from the time the tax

was paid.   See Commissioner v. Lundy, 516 U.S. ___, ___, 116

S.Ct. 647, 652 (1996).   Thus, when they filed their original

return for tax year 1990 they were barred from claiming a refund.

Consequently, under section 11.402(e)(4)(B)-1(c)(1), Temporary


     6
       Respondent relies on the proposed regulations in her
brief. As already noted, proposed regulations carry no more
weight than a position advanced by respondent on brief. F.W.
Woolworth Co. v. Commissioner, supra. However, the temporary
regulations, not cited by respondent, are identical, in all
respects relevant for this case, to the proposed regulations.
See Hall v. Commissioner, T.C. Memo. 1991-133. In general
temporary regulations remain in effect until replaced by final
regulations or withdrawn. Id. The temporary regulations in this
case have been neither replaced nor withdrawn, so we rely on
them.
     7
       Of course, petitioners did not allege that there was an
overpayment with respect to tax year 1990, so there was no
apparent need for such a stipulation.
                               - 15 -

Income Tax Regs., 40 Fed. Reg. 1016 (Jan. 6, 1975), petitioners

are barred from electing 5-year averaging.8

     Petitioners have also not demonstrated that they are

eligible for capital gains treatment.    They have presented no

evidence or argument attempting to establish that they are

entitled to capital gains treatment.    Prior to 1986, section

402(a)(2) of the Code as then in effect permitted capital gains

treatment for the portion of certain lump sum distributions from

pension plans that was attributable to plan participation before

1974.    The Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514, 100

Stat. 2085, prospectively eliminated capital gains treatment for

lump sum distributions.    However, taxpayers who attained age 50

before January 1, 1986, could elect to have the pre-TRA 1986 law

apply.    See TRA 1986, sec. 1122(h)(3)(A), (C), 100 Stat. 2470-

2471.    Respondent concedes on brief that petitioner had reached

age 50 before January 1, 1986.    Thus, petitioner meets the

threshold requirement of the transitional relief.    However,

petitioner must still satisfy the requirements of the pre-TRA

1986 law in order to get capital gains treatment.    Under the pre-

TRA 1986 law, capital gains treatment was available only if the

taxpayer was an active participant in the plan prior to January

     8
       The same would be true if petitioners had attempted to
elect 10-year averaging. Even if petitioners met the age
requirement for the transitional relief provided in TRA 1986,
sec. 1122(h)(5), 100 Stat. 2471-2472, application of that
provision would still require a valid election under sec.
402(e)(4)(B).
                               - 16 -

1, 1974.    See sec. 402(a)(2) of the pre-TRA 1986 Code.

Petitioners have presented no evidence to show that petitioner

was a participant in the plan before January 1, 1974.      Therefore

petitioners have failed to prove that they are eligible for

capital gains treatment.    On the other hand, there is evidence in

the record supporting their ineligibility.    The Form 1099R that

petitioner received with respect to the gross distribution states

that no part of the gross distribution is eligible for capital

gains treatment.    We hold that petitioners are not eligible for

capital gains treatment with respect to any part of the gross

distribution.    Accordingly, petitioners must include the entire

$25,313.22 distribution as ordinary income during tax year 1990.

Issue 2.    Capital or Ordinary Loss

     There is no question in this case that the foreclosure of

the timeshares was a sale or exchange under which loss was

realized, and hence recognized.    Sec. 1001(a) through (c);

Helvering v. Hammell, 311 U.S. 504 (1941).    The only question is

the character of that loss.    Section 1221(2) provides that

certain property used in a trade or business is not a capital

asset.9    The parties agree that this issue turns on whether the

     9
       The type of property to which sec. 1221(2) applies is
property of a character which is subject to the allowance for
depreciation, or real property, used in the taxpayer's trade or
business. There is no evidence in this case concerning the
precise property interest that petitioners had in the timeshares.
For instance, there is no evidence establishing that the
timeshares were undivided partial fee interests, and therefore
                                                   (continued...)
                              - 17 -

timeshares were used in a trade or business.   If so, petitioners

are entitled to an ordinary loss; if not, petitioners must take a

capital loss.

     The Supreme Court has stated that

     to be engaged in a trade or business, the taxpayer must
     be involved in the activity with continuity and
     regularity and that the taxpayer's primary purpose for
     engaging in the activity must be for income or profit.
     * * * [Commissioner v. Groetzinger, 480 U.S. 23, 35
     (1987).]

On brief, respondent does not dispute that petitioner intended to

make a profit as his primary purpose for acquiring the

timeshares; respondent chooses instead to focus on other factors

relating to the question of whether petitioner was engaged in a

trade or business.   We find that petitioner's primary purpose for

purchasing the timeshares was profit.    He chose B'Mae's not based

on his personal preferences for a vacation spot but on what he

thought would be a viable location for turning a profit.   He

thought about the costs and potential rental income.   He visited

the property only sparingly, and usually in the off-season.     His

purpose for visiting the property was to check up on it, not to

     9
      (...continued)
real property. See, e.g., Ames v. Commissioner, T.C. Memo. 1990-
87, affd. without published opinion 937 F.2d 616 (10th Cir.
1991), affd. sub nom. Lukens v. Commissioner, 945 F.2d 92 (5th
Cir. 1991), affd. without published opinion sub nom. Chesser v.
Commissioner, 952 F.2d 411 (11th Cir. 1992), affd. sub nom.
Hildebrand v. Commissioner, 967 F.2d 350 (9th Cir. 1992).
Nonetheless, respondent does not dispute that the timeshares are
included within the type of property to which sec. 1221(2)
applies if such property is used in the taxpayer's trade or
business.
                                - 18 -

take a vacation.   It is true that petitioners had other jobs and

that they lost rather than made money on the timeshares, but we

are persuaded that the primary purpose for purchasing the

timeshares was to make a profit.

     Merely because petitioner sought to make a profit does not

mean that he was engaged in a trade or business.     To be engaged

in a trade or business, there must be continuity and regularity

to the activity.   Commissioner v. Groetzinger, supra; see Flint

v. Stone Tracy Co., 220 U.S. 107, 171 (1911).     Respondent

stresses that this case is appealable to the Court of Appeals for

the Second Circuit and that we must, therefore, follow the law of

the Second Circuit.     In this regard, respondent relies most

heavily on Grier v. United States, 218 F.2d 603 (2d Cir. 1955),

affg. per curiam 120 F.Supp. 395 (D. Conn. 1954).        Petitioner

relies on three Tax Court cases and one Second Circuit case,

Gilford v. Commissioner, 201 F.2d 735, 736 (2d Cir. 1953), affg.

a Memorandum Opinion of this Court, and attempts to distinguish

Grier from this case.

     In Gilford, the taxpayer inherited fractional interests in

several buildings in the 700 block of Third Avenue in New York

City.   Two sisters of the taxpayer and another person acquired

similar interests in the same manner as the taxpayer.       The

taxpayer and the other owners hired a real estate firm to manage

all the properties as a unit and to account to each owner for his

or her share of income.     The Court of Appeals held:
                                - 19 -

          Although it does not appear that the * * *
     [taxpayer] did anything herself in connection with the
     management of these * * * buildings, an appreciable
     amount of time and work was necessarily required on the
     part of the managing agent. And if such management was
     a "trade or business," the * * * [taxpayer] was so
     engaged although she acted only through an agent.
     [Gilford v. Commissioner, 201 F.2d 735, 736 (2d Cir.
     1953).]

     The principle of Gilford was more recently reaffirmed by

this Court in Whyte v. Commissioner, T.C. Memo. 1986-486 n.22

("It is well settled that where an agent is acting on behalf of

an owner in managing a business, the owner is still considered to

be engaged in a trade or business."      (Emphasis added.)), affd.

852 F.2d 306 (7th Cir. 1988).    We look to whether someone acting

as an agent on behalf of petitioner to manage the timeshares was

engaged in activities sufficient to rise to the level of a trade

or business.   We find that B'Mae's was engaged in a trade or

business with respect to renting the timeshares.      To use the

language of the Court of Appeals, "an appreciable amount of time

and work was necessarily required on the part of" B'Mae's.

Gilford v. Commissioner, supra at 736.      B'Mae's was in the

business of operating a resort hotel, and this included renting

its own single-room units.   However, B'Mae's also managed the

rental of the suite units, including timeshares, owned by others.

B'Mae's took care of rental contracts, promotional advertising,

housekeeping, replenishment of inventory, and guest registration.

In short, B'Mae's' function with respect to the timeshares and to
                              - 20 -

other suites was similar to its function with respect to its own

rooms.

     We believe the record in this case, although sparse,

establishes that B'Mae's was acting as petitioner's agent when it

undertook the various activities incident to renting out the

timeshares.   Petitioner's uncontroverted testimony was that

B'Mae's undertook the advertising, guest registration,

housekeeping, and inventory replenishment in exchange for a fee

equal to 40 percent of the proceeds of any rentals.    Documents in

evidence substantiate this fee arrangement.

     Respondent argues that B'Mae's was a competitor of

petitioners with respect to rentals at the resort.    It is true

that B'Mae's rented its own units as well as the timeshares of

petitioners and units of other owners.    However, B'Mae's could

retain 40 percent of rent receipts on any rental of petitioners'

timeshares, and B'Mae's had none of the risks of ownership.    This

was the standard arrangement that B'Mae's had offered to other

owners.   We think B'Mae's proposed and accepted a 40-percent fee

because it was advantageous to B'Mae's, despite the fact that

B'Mae's was also renting its own units.   B'Mae's initially made

money on the sale of suites to petitioners and the other owners,

and the only way B'Mae's could continue to make money on the

suites was to be paid for managing the rentals.   Thus, B'Mae's

had significant incentive to rent the timeshares.    In addition,
                              - 21 -

B'Mae's was a good choice to manage the property.    B'Mae's,

unlike an independent manager, could spread the costs of

advertisement among other suite owners and B'Mae's itself.

Moreover, B'Mae's, unlike an independent manager, might receive

unsolicited telephone calls about the availability of suites in

the B'Mae's Resort.   Finally, B'Mae's, unlike an independent

manager, had access to and familiarity with the property for

purposes of repairs and maintenance of the timeshares.    We do not

believe that the conflict of interest suggested by respondent

affects our finding that B'Mae's was petitioner's agent.

     On the other hand, the cases on which respondent relies,

Grier and Balsamo v. Commissioner, T.C. Memo. 1987-477, are

distinguishable from this case.   In Grier, the taxpayer, a

securities adviser and salesman, inherited a house that had

previously been rented to a single tenant for a period of years,

and the taxpayer continued this arrangement until he sold the

house approximately 12 years later.    During the taxpayer's

ownership, he or his agent performed the necessary maintenance on

the house.   The District Court held that the house was not

property used in a trade or business.    In distinguishing Gilford,

the District Court stated that the most important issue was "the

extent of the regular and continuous activity of management

involved" in the "multiple rental" in that case, which was not

present in Grier itself, which involved a one-family house.

Grier v. United States, 120 F.Supp. 395, 398 (D. Conn. 1954),
                                 - 22 -

affd. 218 F.2d 603 (2d Cir. 1955).        The District Court pointed

out that the activities with respect to renting the house were

minimal, even though rental continued over a long period of time.

Moreover, activity to rent or re-rent the house was not needed,

and there were no employees regularly engaged for maintenance or

repair.   Id.

     In Balsamo, the issue was the proper characterization of the

property in question, a single-family residence, that the

taxpayer's husband had purchased before they were married.         When

the taxpayer and her husband had married, she signed a prenuptial

agreement.      Her husband died 5 months after the wedding.      Shortly

after his death, the estate rented the property in question to a

third party.      Subsequently, the taxpayer sued to challenge the

prenuptial agreement, and in satisfaction of this suit, she

received the property in question.        Within 3 months after

receiving the property in question, the taxpayer sold it to the

third party who had been renting it.

     The Tax Court relied on Grier v. United States, supra, to

hold that the taxpayer was not in a trade or business with

respect to the property in question.        The taxpayer was a

securities salesperson and secretary, and had little involvement

with real estate.      She owned the property in question for a very

short period of time.      Her activities with respect to the

property as a rental property were almost nonexistent; even when

the tenant pointed out a few problems, she did not attempt to
                               - 23 -

remedy them.   Essentially, the taxpayer treated the property not

as a rental property but as an investment property to be sold in

a short period of time.

     In both Grier v. United States, supra, and Balsamo v.

Commissioner, supra, neither the taxpayers themselves nor their

agents had been sufficiently active with respect to the real

property involved to be engaged in a trade or business.      In

Gilford v. Commissioner, supra, the agents were actively involved

in managing commercial real property, to a sufficient degree to

be engaged in a trade or business.      In the present case, the

transient rentals of petitioners' property likewise entailed

sufficient activities to constitute a trade or business, and

while these activities were conducted by B'Mae's, they are

attributable to petitioners for purposes of determining whether

petitioners were engaged in a trade or business.      Petitioner

bought the timeshares after investigating various options and

personally checked up on them in the years that followed.

     We conclude that petitioners were engaged in a trade or

business with respect to the timeshares and are entitled to

ordinary loss treatment upon their disposition.

Issue 3.   Additions to Tax

     The parties have stipulated that if respondent prevails on

the issues discussed above, then petitioners are liable for

additions to tax as follows:   Under section 6651(a), $1,352 for

1990 and $388 for 1992; and, under section 6654, $305 for 1990
                                - 24 -

and $55 for 1992.   Thus, respondent has conceded that petitioners

are not liable for additions to tax in excess of the amounts in

the stipulation.    Further, for 1990 and 1992 petitioners have

conceded that with respect to the additions under section

6651(a), their failure to file tax returns was not due to

reasonable cause; and, with respect to the additions under

section 6654, they do not qualify for any exceptions to the

additions in section 6654(e).    The only remaining matters with

respect to additions to tax are computational, which can be

addressed in the Rule 155 computation.

     To reflect the foregoing,


                                         Decision will be entered

                                   under Rule 155.
