                  T.C. Summary Opinion 2001-48



                     UNITED STATES TAX COURT



                 THEODORE B. BARE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No.   3271-98S.                 Filed April 4, 2001.


     Bradley S. Shannon, Amanda Skiles, and Jesse Smith, for

petitioner.

     Shirley M. Francis, for respondent.




     DEAN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    Unless otherwise

indicated, subsequent section references are to the Internal

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

references are to the Tax Court of Practice and Procedure.    The
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decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.

     Respondent determined deficiencies of $378, $896, and $9,570

in petitioner’s Federal income taxes for taxable years 1993,

1994, and 1995, respectively.   In addition, respondent determined

accuracy-related penalties under section 6662(a) of $76 and

$1,914 for taxable years 1993 and 1995, respectively.

     The issues remaining for decision are:   (1) Whether

petitioner must recognize gain from the sale of his personal

residence in taxable year 1993, and (2) whether petitioner is

liable for accuracy-related penalties under section 6662(a) for

taxable years 1993 and 1995.1

                            Background

     The stipulation of facts and the accompanying exhibits are

incorporated herein by reference.   Petitioner resided in Tigard,

Oregon, at the time his petition was filed in this case.

     Petitioner has been a certified public accountant for 25

years.   In March 1989, petitioner and his wife, Sandra K. Bare

(now deceased), purchased a residential property located at 1461

N.E. Burns Street, West Linn, Oregon (the Burns Street property),

for $80,100.



     1
        The parties reached agreement on the amount of gain to be
recognized on the sale of petitioner’s business property, and
respondent concedes the sec. 6662(a) accuracy-related penalty for
taxable year 1995 insofar as it relates to that issue.
                               - 3 -

     The Burns Street property was petitioner’s personal

residence from March 1989 to December 10, 1993.   On December 10,

1993, petitioner sold the Burns Street property for an adjusted

sales price of $127,920.   Petitioner realized $9,123 of gain on

the sale of the Burns Street property.

     From January 1994 through September 1995, petitioner lived

on his boat docked at a marina in Portland, Oregon.   In late

September 1995, petitioner and a friend sailed petitioner’s boat

to Astoria, Oregon, and docked it there.

     In August 1995, Uprite Homes, Inc. (Uprite Homes),

petitioner’s wholly owned S corporation, completed construction

of a residential property located in Washington County in

Sherwood, Oregon (the Bowmen Lane property).   Petitioner began to

sleep at the Bowmen Lane property in October of 1995.   The Bowmen

Lane property was unfurnished, and petitioner did not keep his

personal belongings in the house.   He slept at the Bowmen Lane

property in a sleeping bag that he stored in his camper during

the day.   He also showered at the Bowmen Lane property but stored

his toiletries in his camper afterwards.   He did not cook meals

at the house although he did eat in the house some meals

purchased from fast food restaurants.    Petitioner did not receive

mail at the Bowmen Lane property.

     Between October 1 and December 6, 1995, the utilities and

insurance for the Bowmen Lane property were in the name of Uprite
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Homes, and Uprite Homes paid all utilities, insurance, and

property taxes for the Bowmen Lane property.   Petitioner paid no

rent for his use of the property.

     On October 9, 1995, petitioner made an offer to purchase a

house in Portland, Oregon (the Portland house), and his offer was

accepted.   Petitioner expected to close on the Portland house

before December 10, 1995.

     On November 30, 1995, Uprite Homes received an offer on the

Bowmen Lane property from William A. Weber, Jr., and Nicole L.

Weber (the Webers), for $160,500.   The offer was accepted

contingent upon the Webers’ ability to secure a loan.

     On or about November 30, 1995, petitioner learned the seller

of the Portland house could not close on the sale of the house by

December 10, 1995.   On December 6, 1995, Uprite Homes executed a

quitclaim deed to transfer the Bowmen Lane property to petitioner

for the stated consideration of $130,000.   In its general ledger,

Uprite Homes recorded the transfer by reducing the corporation’s

recorded debt to petitioner from $113,004 to zero and by

recording a debt from petitioner to Uprite Homes of $16,996.     The

December 6, 1995, deed from Uprite Homes to petitioner was not

filed in the records of Washington County, Oregon.

     The Uprite Homes 1995 general ledger reflects, through an

increase in petitioner’s recorded debt to the corporation, that

in December 1995, petitioner assumed liability for $678 for
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property tax, interest, and insurance for the Bowmen Lane

property for the period between December 6 and December 26, 1995.

During this period, all insurance and utilities for the Bowmen

Lane property remained in the name of Uprite Homes, and Uprite

Homes continued to pay all utilities for the property.

     On December 26, 1995, petitioner executed a quitclaim deed

to transfer the Bowmen Lane property to Uprite Homes for the

stated consideration of $130,000.    Uprite Homes recorded the

December 26, 1995, transaction with petitioner in its general

ledger by reversing petitioner’s sales transaction and recorded

debt to the corporation and by recording a $112,326 debt from the

corporation to petitioner.   The December 26, 1995, deed from

petitioner to Uprite Homes was not filed in the records of

Washington County, Oregon.

     During the 20-day period that petitioner purports to have

owned the Bowmen Lane property, he continued to store his

personal belongings in his camper.     He did not do his laundry in

the house and used none of its kitchen appliances.    He had no

telephone service, garbage pickup, newspaper delivery, or

television.   He knew none of his neighbors.

     On December 26, 1995, Uprite Homes executed a statutory

warranty deed to transfer title to the Bowmen Lane property to

the Webers for the previously agreed consideration of $160,500.

The Webers believed that no one had occupied the Bowmen Lane
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property before they moved in.    On December 27, 1995, the

statutory warranty deed from Uprite Homes to the Webers was

recorded in Washington County, and the closing on the Bowmen Lane

property occurred.

     Petitioner went to Southern Oregon on December 26, 1995, to

stay with his parents.   On January 5, 1996, the closing occurred

on petitioner’s purchase of the Portland house.

                            Discussion

     Under sections 1001 and 61, taxpayers generally must

recognize in the year of sale all gain or loss realized upon the

sale or exchange of property.    Section 1034, however, provides an

exception which allows taxpayers to defer recognition of gain

when sale proceeds are reinvested in a new principal residence.2

Section 1034(a) specifies that gain must be reinvested in

property "purchased and used by the taxpayer as his principal

residence" in order for nonrecognition treatment to be available.

     Respondent determined that petitioner must report gain from

the sale of his personal residence in 1993 because a qualifying

replacement residence was not purchased and used within 2 years

as required by section 1034.     The 2-year deadline for petitioner

to reinvest in a new residence and thereby qualify for gain



     2
        Although sec. 1034 was repealed by sec. 312(b) of the
Taxpayer Relief Act of 1997, Pub. L. 105-34, 111 Stat. 839, and
the rollover provision was replaced by an expanded and revised
sec. 121, sec. 1034 was in effect for the year at issue herein.
                                - 7 -

deferral was December 10, 1995.   Respondent’s determination

resulted in a reduction of petitioner’s capital losses in 1993,

1994, and 1995.   Petitioner contends that he purchased the Bowmen

Lane property and used it as his principal residence within the

required timeframe.

     We first consider whether petitioner purchased the Bowmen

Lane property.    The facts and circumstances of petitioner’s case

reveal that the transaction between him and his wholly owned S

corporation was not a bona fide sale.    See Scherr v.

Commissioner, T.C. Memo. 1993-87.

     The "incidence of taxation depends upon the substance of a

transaction" rather than its mere form.    Commissioner v. Court

Holding Co., 324 U.S. 331, 334 (1945).    A transaction lacking

economic substance may be disregarded for tax purposes.    See

Knetsch v. United States, 364 U.S. 361, 365-366 (1960); Braddock

Land Co. v. Commissioner, 75 T.C. 324 (1980).    In the context of

a sale transaction, the inquiry is whether the parties have in

fact done what they purport to do in the form of their agreement.

See Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221,

1237 (1981).

     The term "sale" is given its ordinary meaning for Federal

income tax purposes and is generally defined as a transfer of

property for money or a promise to pay money.    See Commissioner

v. Brown, 380 U.S. 563, 570-571 (1965).    The determination of
                               - 8 -

whether a particular transaction constitutes a sale turns on

whether the benefits and burdens of ownership have passed from

seller to buyer.   See Grodt & McKay Realty, Inc. v. Commissioner,

supra.   This inquiry is factual and is determined from the

intention of the parties, as evidenced by the written agreements

read in light of the attendant facts and circumstances.    See

Haggard v. Commissioner, 24 T.C. 1124, 1129 (1955), affd. 241

F.2d 288 (9th Cir. 1956).

     Various factors to consider in making a determination as to

whether a sale has occurred have been summarized as follows:

(1) Whether legal title passes; (2) how the parties treat the

transaction; (3) whether equity was acquired in the property;

(4) whether the contract creates a present obligation on the

seller to execute and deliver a deed and a present obligation on

the purchaser to make payments; (5) whether the right of

possession is vested in the purchaser; (6) which party pays the

property taxes; (7) which party bears the risk of loss or damage

to the property; and (8) which party receives the profits from

the operation and sale of the property.   See Grodt & McKay

Realty, Inc. v. Commissioner, supra at 1237-1238.   An additional

factor to be weighed is the presence or absence of arm's-length

dealing.   See Falsetti v. Commissioner, 85 T.C. 332, 348 (1985)

(citing Estate of Franklin v. Commissioner, 64 T.C. 752 (1975),

affd. 544 F.2d 1045 (9th Cir. 1976)).
                                - 9 -

     Upon consideration of these factors in light of the totality

of the facts and circumstances surrounding the transaction, we

conclude that the conveyance of the Bowmen Lane property was

without substance and had no effect for tax purposes.

     Petitioner’s purported purchase of the Bowmen Lane property

did not occur until after Uprite Homes had accepted the Webers’

offer to purchase the property, no money was exchanged, and the

deed was never recorded.    Petitioner’s purported purchase and

sale price of $130,000 is almost 20 percent less than the

$160,500 Uprite Homes agreed upon and received from the Webers.

The insurance and utilities for the property remained in the name

of Uprite Homes, and petitioner never moved any of his personal

belongings into the home.    Uprite Homes continued to pay the

utilities, and the $698 petitioner “paid” the corporation for

property tax, interest, and insurance on the Bowmen Lane property

was merely a recorded entry in Uprite Homes’ general ledger.

     As the purported purchaser and as sole shareholder of the

purported seller, petitioner was on both sides of the

transaction.   The facts surrounding the transaction indicate the

parties did not deal at arm’s length.    The “sale” was fabricated

solely to facilitate petitioner’s attempt to defer gain on the

sale of the Burns Street property.

     Furthermore, the record reflects that petitioner did not use

the Bowmen Lane property as his principal residence as required
                                - 10 -

by section 1034.    Whether or not property is used by a taxpayer

as his residence depends upon all the facts and circumstances in

each case, including the good faith of the taxpayer.     See sec.

1.1034-1(c)(3)(i), Income Tax Regs.      "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."      Stolk v. Commissioner, 40

T.C. 345, 353 (1963), affd. 326 F.2d 760 (2d Cir. 1964); see also

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

Memo. 1994-247.

     Petitioner never had any intention of making the Bowmen Lane

property his residence.     His limited use of the property is not

sufficient to create a residence.     Accordingly, petitioner does

not qualify for the nonrecognition provisions of section 1034.

     Finally, we address the accuracy-related penalties imposed

pursuant to section 6662(a).     Section 6662(a) and (b)(1) imposes

a penalty of 20 percent of the portion of an underpayment of tax

that is attributable to negligence or disregard of rules or

regulations.     “Negligence” includes any failure to make a

reasonable attempt to comply with the statute, and “disregard”

includes any careless, reckless, or intentional disregard.     Sec.

6662(c).     We have further defined negligence as the failure to

exercise the due care that a reasonable and ordinarily prudent
                              - 11 -

person would employ under the same circumstances.   See Neely v.

Commissioner, 85 T.C. 934, 947 (1985).   A taxpayer is not liable

for the penalty if he shows that there was reasonable cause for

the underpayment and that he acted in good faith.   See sec.

6664(c)(1).

     Petitioner bears the burden of proving that the accuracy-

related penalties are inapplicable.3   See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933); Bixby v. Commissioner, 58

T.C. 757, 791-792 (1972).

     Petitioner is a certified public accountant.   His purported

purchase and resale of the Bowmen Lane property clearly were

undertaken solely with the intent to meet the nonrecognition

provisions of section 1034.   Petitioner knew or should have known

that a transaction devoid of any substance does not meet the

requirements of section 1034 and the regulations promulgated

thereunder.

     Accordingly, we hold that petitioner is liable for

accuracy-related penalties pursuant to section 6662(a) for 1993

and 1995 with respect to the understatements of tax attributable




     3
        Sec. 7491(c), applicable to court proceedings arising in
connection with examinations commencing after July 22, 1998,
requires the Secretary to carry the burden of production with
respect to penalties. See Internal Revenue Service Restructuring
& Reform Act of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 685,
726. The notice of deficiency at issue herein, however, was
dated December 12, 1997.
                             - 12 -

to his failure to recognize gain from the sale of his residence

and the corresponding adjustments to his capital losses.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                        Decision will be entered

                                   under Rule 155.
