T.C. Memo. 1996-177

UNITED STATES TAX COURT

ANDREW WESLEY FRANK & JOY MARY FRANK, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

 Docket No. 1164-94. Filed April 11, 1996.

Andrew Wesley Frank and Joy Mary Frank, pro se.

Kathryn K. Vetter, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent determined deficiencies in

petitioners' Federal income tax of $51,944 for 1991 and $12,672

for 1992 and accuracy-related penalties of $10,389 for 1991 and

$2,534 for 1992.

After concessions, the issues for decision are:
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1. Whether petitioners are exempt from Federal income tax. 

We hold that they are not.

2. Whether petitioners may deduct advertising expenses for

selling living trusts in 1991. We hold that they may not.

3. Whether petitioners may deduct expenses for selling

living trusts and food supplements and renting their Nebraska

Street property in 1991. We hold that they may deduct expenses

to the extent stated below.

4. Whether petitioners may deduct or capitalize for 1991

various expenses related to their Springs Road and Mesa Verde

rental property. We hold that petitioners may not deduct or

capitalize some of their expenses, may deduct other expenses, and

must capitalize the remaining expenses.

5. Whether petitioners may deduct points that they paid

in connection with certain loans in 1992. We hold that they may

not.

6. Whether petitioners' losses from their airplane leasing

activity are passive losses under section 469. We hold that they

are.

 7. Whether petitioners are liable for the accuracy-related

penalty under section 6662(a) for 1991 and 1992. We hold that

they are not.

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.
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FINDINGS OF FACT

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

Petitioners

Petitioners are married and lived in Vallejo, California,

when they filed their petition.

Petitioner Andrew Wesley Frank (Mr. Frank) has a bachelor of

science degree in mechanical engineering and worked as a nuclear

engineer at the Mare Island Naval Shipyard during the years in

issue (1991 and 1992). Petitioner Joy Mary Frank was a homemaker

and beauty consultant during the years in issue. Earl W. Frank

is Mr. Frank's brother.

On their 1991 and 1992 tax returns, petitioners reported

income and expenses from selling living trusts and food

supplements, renting residential property, and leasing an

airplane. 

B. Advertising Expenses for Living Trusts

Petitioners began to sell living trusts in 1990. For

purposes of the living trust activity, Mr. Frank advertised that

he was a financial consultant for tax and estate planning

purposes. Petitioners had printed at a date not specified in the

record about 200 brochures which promoted the trusts. Mr. Frank

distributed the brochures at work, church, and at other places to

solicit business. Mr. Frank met with about 10 people per month

who were interested in establishing a trust.
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C. Automobile Expenses

Mr. Frank drove his car an unspecified number of times to

meet with persons interested in establishing a living trust. 

Petitioners reported that the trust activity lost $509.95 in 1991

and $48.56 in 1992.

Petitioners marketed and distributed a food supplement drink

and other dietary products. Some customers came to petitioners'

home to buy the products. Petitioners sometimes traveled to sell

the products. Petitioners used their car to meet with several

people in 1991 to discuss buying food supplement products. 

Petitioners deducted $349.03 in 1991 for automobile expenses

related to the food supplement business.

During the years in issue, petitioners owned residential

rental property at 501 Nebraska Street (Nebraska Street

property). Petitioners deducted $237.27 in automobile expenses

for the Nebraska Street property.

Petitioners drove about 514 miles for the living trusts and

food supplements activities and the Nebraska Street property from

January to April 1991. Petitioners maintained an automobile log

in 1991, but lost the log for May to December 1991.

D. Rental Property Expenses

1. Springs Road Rental Property

Petitioners bought rental property at 400 Springs Road

(Springs Road property) around August 18, 1992. Petitioners
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deducted $2,818.54 for closing costs related to the Springs Road

property on their 1992 return.

2. Mesa Verde Rental Property

Petitioners bought a one-third interest in rental property

at 316 Mesa Verde Street (Mesa Verde property) in June 1991. It

was rented when petitioners and the other co-owners (the owners)

bought it. The owners evicted the tenants. The owners then

installed a new gas range, dishwasher, furnace, heater, front

door, windows, screens, smoke detectors, a toilet, and garage

door. They painted the inside and outside of the house, did some

work not specified in the record relating to termites, landscaped

the grounds, and refinished the floors. They repaired the

sheetrock and tile in the bathroom and had general carpentry work

done. The owners hired KJB Construction to repair the kitchen

cabinets and counters. The owners did some of the work

themselves. They kept track of how many hours each worked and

paid each other $10 an hour. Mr. Frank worked 207 hours from

July 10, 1991, to September 5, 1991.

The owners prepared the following schedule of expenses for

the Mesa Verde property:

Item of Expense Amount

Services $4,122.75

Legal & professional 2,949.32

Supplies 4,227.90

Repairs general 172.95

Repairs carpentry 782.59

Repairs electrical & plumbing 246.01

Repairs painting 2,172.00

 14,673.52
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Petitioners deducted some of the following expenses related

to the Mesa Verde property on their 1991 return:

Item of Expense Amount Deducted by Petitioners

Legal & professional $991.49

Repairs 1,124.52

Supplies 1,409.30

Services 1,374.25

 4,899.56

The owners capitalized and designated a 7-year useful life

for the following items:

Item of Expense Amount Capitalized

Spiteri Bros. refinish $1,835.00

Garage door 795.06

Stove 534.86

Heater 260.00

 3,424.92

Petitioners deducted depreciation of $3,424.92 on their 1991

return.

3. Nebraska Street Rental Property

Petitioners deducted $345.70 for expenses for the Nebraska

Street property on their 1991 return. These expenses included

insurance, recording fees, plumbing expenses, inspection fees,

and receipts from various hardware stores.

E. Points

Petitioners lived at 121 Whitecliff Drive in 1992. 

Petitioners paid points in 1992 to refinance this home. 

Petitioners paid points in 1992 for an equity line of credit

based on their equity in the Whitecliff Drive property.

Petitioners bought property at 106 Luann Court for about

$165,000 in the last few months of 1992. Petitioners paid
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$16,500 in cash and obtained a $148,500 mortgage. Petitioners

paid points on that loan. Petitioners deducted $4,457.50 on

their 1992 Schedule A for the points petitioner paid relating to

both houses.

Petitioners had receipts for these three transactions but

lost them. Petitioners did not contact the banks that arranged

the financing to get copies of these documents. 

F. Airplane Leasing

Petitioners bought an airplane for $7,700 on January 22,

1991. Mr. Frank did not know how to fly when they bought the

airplane. He learned how to fly 2 or 3 years later.

Petitioners bought the airplane with the intent of making

a profit. Petitioners leased it to General Aviation Pilots

Association (GAPA) from January 22, 1991, to July 15, 1991, and

to Slant Alpha Inc., Flight Training (SAFT) from July 1991 to

the end of 1991. GAPA and SAFT rented the airplane to people

learning how to fly. GAPA and SAFT paid for fuel, oil,

maintenance, inspection fees, insurance, and parts. GAPA and

SAFT sent statements to petitioners showing the airplane's income

and expenses. GAPA or SAFT paid petitioner the profit if the

airplane's income exceeded its expenses. If the airplane's

expenses exceeded its income, petitioners paid the difference to

GAPA or SAFT.

Mr. Frank, with a mechanic, changed the airplane's oil,

removed screws from the inspection plates, and tied down and
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washed the airplane. The record does not indicate how often

Mr. Frank did those things. Petitioner spoke with flight

schools (not otherwise identified in the record) to find the

best rate for leasing, maintaining, and insuring the airplane.

Petitioner reported a $2,773.52 loss for the airplane in

1991 and a $3,672.39 loss in 1992. 

OPINION

A. Whether Petitioners Are Exempt From Federal Income Tax

Petitioners contend that they are not subject to Federal

income tax because Mr. Frank is a "common laborer" and has an

"occupation of common right". Petitioners also contend that they

revoked their tax returns for the years at issue and that, as a

result, they have no contract with respondent; that they are not

taxpayers; and that we lack jurisdiction because they moved to

withdraw their petition, which we denied. We disagree.

We have jurisdiction over this case because respondent

properly issued notices of deficiencies to petitioners for the

years in issue and petitioners timely filed a petition with this

Court. Secs. 6212(a) and 6213(a); Stamos v. Commissioner, 95

T.C. 624, 626 (1990), affd. without published opinion 956 F.2d

1168 (9th Cir. 1992).

Wages are income and a tax on wages is constitutional. 

Coleman v. Commissioner, 791 F.2d 68, 70 (7th Cir. 1986); Crain

v. Commissioner, 737 F.2d 1417, 1417-1418 (5th Cir. 1984). 

Mr. Frank received wages for his work as a nuclear engineer at a
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naval shipyard. Petitioners assert nothing more than tax

protester rhetoric, which this and other courts have universally

rejected, to support their position that they are not subject to

Federal income tax. See In re Becraft, 885 F.2d 547, 549 (9th

Cir. 1989) (Federal tax laws apply to resident U.S. citizens);

Edwards v. Commissioner, 680 F.2d 1268 (9th Cir. 1982); United

States v. Romero, 640 F.2d 1014, 1016 (9th Cir. 1981)

(compensation for labor or services is subject to income tax);

McCoy v. Commissioner, 76 T.C. 1027, 1029-1030 (1981), affd. 696

F.2d 1234 (9th Cir. 1983); Jackson v. Commissioner, T.C. Memo.

1991-498, affd. without published opinion 990 F.2d 1258 (9th Cir.

1993). Petitioners are clearly not exempt from Federal income

tax or from the imposition of additions to tax.

B. Whether Petitioners May Deduct More Expenses Than

Respondent Allowed

Taxpayers may deduct ordinary and necessary expenses paid or

incurred during the taxable year to carry on a trade or business. 

Sec. 162(a). A taxpayer must keep records that are sufficient

to substantiate the amounts the taxpayer deducted on his or her

return. Sec. 1.6001-1(a), Income Tax Regs.

1. Whether Advertising Expenses for the Living Trusts

Are Deductible

Petitioners deducted $156.97 on their 1991 return for

brochures they used to advertise living trusts.

Mr. Frank testified that the brochures cost $156.97, but

did not remember in what year the brochures were printed. 
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Petitioners started the living trust activity in 1990. It is at

least as likely that they bought and paid for the brochures in

1990 as in 1991. Petitioners used the cash basis of accounting,

and a deduction is only allowed in the taxable year in which the

expense was paid. Sec. 461(a). Petitioners have not shown that

they paid for the brochures in 1991 and thus may not deduct the

$156.97 on their 1991 tax return.

2. Whether Petitioners May Deduct Automobile Expenses

To deduct automobile expenses, a taxpayer must show the

amount, date and business purpose of each expense, the amount of

miles traveled, and total automobile use for the taxable period. 

Sec. 280F(e); sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50

Fed. Reg. 46016 (Nov. 6, 1985). The taxpayer must have adequate

records or other evidence to corroborate his or her statements. 

Sec. 1.274-5(c)(1), Income Tax Regs. A taxpayer must maintain an

account book, diary, statement of expense, or similar record and

documentary evidence which, in combination and establish each

element of an expense. Sec. 1.274-5(c)(2)(i), Income Tax Regs. 

If a taxpayer does not have adequate records, the taxpayer must

establish each element of the expense by his or her own

statement, written or oral, and by other corroborative evidence

sufficient to establish each element. Sec. 1.274-5(c)(3)(i),

(ii), Income Tax Regs.

Petitioners deducted automobile expenses for 1991 for three

activities as follows:
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Activity Miles Amount

Living trusts 1,096 $301.43

Food supplement 1,269 349.03

Nebraska Street 863 237.27

3,228 887.73

Respondent concedes that petitioners may deduct $141.35 of

this amount based upon the 514 miles petitioners' log shows they

traveled from January to April 1991 for all three activities. 

This amount reflects all of the miles petitioners recorded in

their log from January to April 1991. Petitioners contend that

they may deduct additional amounts for their living trust

activity, food supplement business, and the Nebraska Street

property. As discussed next, petitioners may deduct some amounts

and may not deduct others.

a. The Living Trust Business

Petitioners lost their log for May to December 1991. 

Petitioners contend that they may challenge respondent's

determination by secondary proof where records are unavoidably

lost. Citing Andrew Crispo Gallery, Inc. v. Commissioner, 16

F.3d 1336 (2d Cir. 1994), affg. in part and vacating and

remanding in part T.C. Memo. 1992-106.

In Andrew Crispo Gallery, Inc., the taxpayer, an art

gallery, was the subject of a Federal tax fraud investigation. 

Id. at 1339. In 1984, the Department of Justice subpoenaed the

taxpayer's records. Id. In 1986, the gallery asked the

Government to return the records. Id. The Department of Justice

returned some records in 1987 and 1988, but they were in
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disarray. Id. The Department of Justice lost many other

records. Id. The U.S. Court of Appeals for the Second Circuit

held that the gallery's inability to produce the books and

records which the Government seized and did not return was not a

sufficient reason to reject the gallery's claim of loss. Id. at

1342. Andrew Crispo is distinguishable from the present case

because the Government did not lose petitioners' records;

petitioners lost the records.

Petitioners introduced a bridge toll receipt, a supermarket

receipt, a notary receipt, six handwritten notes, and 10

questionnaires to show that they used their car for the living

trust activity from May to December 1991. All the receipts

petitioners introduced had "LT" marked on them. The six

handwritten notes listed names, numbers, addresses, and some

directions. One of the notes and the supermarket receipt were

dated June 15, 1991. Of the 10 questionnaires, 4 sought members

for a financial support group sponsored by petitioners. Those

four questionnaires indicated that petitioners called the person

on May 6, 1991. The other six asked the individual responding

if he or she understood a presentation about the living trusts. 

Those six were dated June 15, 1991.

Petitioners listed, on one of their exhibits, what they

claim are income and expenses of the trust activity. Petitioners

listed six expenses. There were entries dated March 11, April 1,

and June 27, 1991, and three dated June 15, 1991. The six
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1 Petitioners' mileage deduction was computed by applying

the standard mileage rate to 28.3 miles.

expenses include $1 for bridge tolls, $5 for a notary fee, $5.24

for paper plates, $14 for babysitting, and $7.781 for 2 mileage

expenses. Mr. Frank testified that he spent these amounts in

connection with the living trust activity. Petitioners have not

shown that the babysitting expense was an ordinary and necessary

business expense. See sec. 162. We hold that petitioners may

deduct all of the above stated items, except the babysitting

expense.

Petitioners introduced a form dated December 19, 1991, which

showed that Mr. Frank drove 640 miles to Oregon to discuss estate

planning issues with his brother, Earl W. Frank. Petitioners

have not shown that the primary purpose of the trip was business

related and may not take a deduction for the 640 miles.

Petitioners' evidence shows that they conducted the living

trust activity before May 1991, but does not show that they

conducted the activity to the same extent during and after May

1991. Petitioners reported $125 in gross income from the living

trust activity on their 1991 tax return. Most of petitioners'

receipts show expenses incurred before May 1991, some of which

respondent conceded. Petitioners have not shown that they may

deduct mileage expenses for the living trust activity from May to

December 1991 in excess of amounts previously allowed and

discussed above.
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b. The Food Supplement Business

Petitioners lost the log which listed their automobile use

for the food supplement business from May to December 1991. In

lieu of a mileage log, petitioners introduced numerous receipts

to support their claim that they participated in that business

from May to December 1991.

Petitioners offered a summary of income and expenses of

their food supplement business. The list was marked with the

letters "KM". It listed 17 expenses, such as $7 in bridge tolls,

$6.52 for postage, $10.81 for failure to collect taxes on sales

made, and 50 cents for parking. Mr. Frank testified that he

spent these amounts for his food supplement business. We hold

that petitioners may deduct $24.83 for these expenses.

c. The Nebraska Street Property

Petitioners offered no evidence relating to automobile

expenses for the Nebraska Street property. They have not met

their burden of proof for this expense. Rule 142(a).

3. Whether Petitioners May Deduct Expenses Related to

 Their Purchase of the Springs Road Property

Amounts paid in connection with the acquisition of property

are capital expenditures if they increase the value or

substantially prolong the useful life of the property. Sec.

1.263(a)-1(b), Income Tax Regs. Amounts paid or incurred for

repairs and maintenance are not capital expenditures. 
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Petitioners deducted $2,818.54 on their 1992 return for

costs associated with their purchase of the Springs Road

property. They deducted the following as closing costs:

 Item Amount of Expense

Settlement charges $2,746.54

Credit report 97.00

Lawyer fee 80.00

Mailing fees 4.58

Notary fees 10.00

Recording fees 30.00

Roofing permit fee 72.00

Fee to obtain a loan 300.00

 broker's license 

 3,340.12

Petitioners contend that they may deduct those amounts and

an additional $521.58. We disagree.

Petitioners introduced part of a HUD-1 Form which was not

dated and which did not indicate the property to which it

referred except for "400 Springs" written on it. Petitioners

introduced two receipts for certified mail. The recipient of the

mail was Scott Barry (not otherwise identified in the record). 

The receipt does not show what was mailed. Petitioners did not

show that they had a business purpose relating to the certified

mail items.

Petitioners paid $300 to the State of California, Department

of Corporations for a loan broker license. The words "400

Springs" is written on the receipt. The receipt is dated

February 21, 1992. Petitioners bought the Springs Road property

in August 1992. We are not convinced that the fee to obtain the
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loan broker's license was incurred as part of petitioners'

purchase of the Springs Road property.

Petitioners introduced credit report receipts dated June 21,

1991, and September 20, 1992. The words "400 Springs" were

written on the receipts. Petitioners presented one receipt

for a rental application dated July 27, 1992. The words "400

Springs" was written on it. We find that the expense for the

September 20, 1992, report was incurred for a business purpose

because it is dated near the time that petitioners bought the

Springs Road property. Petitioners may deduct the second credit

report and rental application expenses.

Petitioners offered three receipts, dated August 25, 1992,

totaling $30, from the Solano County Assessor/Recorder's office. 

The receipts were for recording fees. We conclude that

petitioners may capitalize these expenses because they were

incurred on or near the date that petitioners bought the Springs

Road property. See Thompson v. Commissioner, 9 B.T.A. 1342, 1345

(1928) (recording fees are capital expenses). 

4. Whether Petitioners May Deduct or Must Capitalize

Expenses Relating to the Mesa Verde Property

Amounts paid to permanently improve property are capital

expenses. Sec. 263(a). Capital expenses are amounts paid to

increase the value or substantially prolong the useful life of

property. Sec. 1.263(a)-1(b), Income Tax Regs. Courts have

distinguished between a capital expense and a deductible business

expense as follows:
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A repair is an expenditure for the purpose of keeping

the property in an ordinarily efficient operating

condition. It does not add to the value of the

property, nor does it appreciably prolong its life. It

merely keeps the property in an operating condition

over its probable useful life for the uses for which it

was acquired. Expenditures for that purpose are

distinguishable from those for replacements,

alterations, improvements or additions which prolong

the life of the property, increase its value, or make

it adaptable to a different use. The one is a

maintenance charge, while the others are additions to

capital investment which should not be applied against

current earnings. * * * 

Illinois Merchants Trust Co. v. Commissioner, 4 B.T.A. 103, 106

(1926).

Whether an expense is deductible or must be capitalized

is a question of fact. See Plainfield-Union Water Co. v.

Commissioner, 39 T.C. 333, 338 (1962) (the test is whether an

expense materially enhances the value of property or appreciably

prolongs the life of the property). Amounts paid as part of a

general plan of capital improvement may be capitalized even

though the payment would be deductible as an ordinary and

necessary business expense if incurred separately. See Moss v.

Commissioner, 831 F.2d 833, 839-842 (9th Cir. 1987) (discussing

the rehabilitation doctrine), revg. T.C. Memo. 1986-128.

Petitioners contend that they may deduct expenses for legal

and professional fees, repairs, supplies, and services for the

Mesa Verde property.

In Kaonis v. Commissioner, T.C. Memo. 1978-184, affd.

without published opinion 639 F.2d 788 (9th Cir. 1981), we

distinguished between expenses that add to the value of the
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property and those which restore the property to its previous

condition. Id. We held that expenses for a patio, fence,

gate, floor, tile, window treatments, paneling, light fixtures,

bathroom fixtures and wash basins, tile, and a stove added to

the value or prolonged the life of the property and were properly

capitalized. Id. We found that the taxpayer's expenses for

painting and cleaning restored the property to its previous

condition and were deductible. Id. Here, the installation of

the gas range, dishwasher, furnace, heater, garage door, toilet,

sheetrock and tile in the bathroom, windows and screens, kitchen

cabinet and counters, general carpentry work, termite work and

floor refinishing added to the value of the home and must be

capitalized. See id. The expenses of painting the inside and

outside of the property restored the property to its previous

condition and are deductible. Id. 

5. Whether Petitioners May Deduct Expenses Relating to

the Nebraska Street Property

Petitioners contend that they may deduct their expenses for

the Nebraska Street property.

Petitioner introduced two receipts from Truck Insurance

Exchange for $135.70 and $135. Both show the same policy and

agent number, and are dated February 15, 1992. Neither receipt

indicates the property to which it relates. Petitioners have not

shown that they incurred these expenses for a business purpose.

Another receipt was from the Solano County Recorders Office

dated March 14, 1991, for a recording fee for a property not
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identified. The receipt has "501" written on it. While the

record does not show when petitioners bought the Nebraska Street

property, petitioners reported income from it on their 1990 tax

return. Petitioners have not explained how a 1991 recording fee

relates to property they owned at least since 1990.

Petitioners introduced a receipt from Solano Superior Court

for copies and forms dated August 20, 1991. They did not show

what copies were made or whether they were made for a business

purpose.

Petitioners introduced a receipt for a $20 plumbing expense

dated September 26, 1991, a receipt for $75 paid to Sullivan

Industries, Inc., for an inspection fee for the Nebraska Street

property dated April 29, 1991, and about 23 receipts from stores

including Yardbirds, Orchard Supply Hardware, Newcomb & Son,

Inc., Homeclub, Payless Drug, Dan's Ace Hardware, Standard Brands

Paint & Home Decorating Center, and the Solano County Recorder's

Office. Mr. Frank testified that these expenses were for general

maintenance of the Nebraska Street property. We hold that

petitioners may deduct these expenses.

C. Points

A taxpayer may generally deduct interest paid or accrued on

indebtedness. Sec. 163(a). Interest is compensation for the use

or forbearance of money. Deputy v. Du Pont, 308 U.S. 488, 498
- 20 -

(1940). Payments for a lender's services in connection with a

loan are generally capital expenditures and must be amortized

over the life of the loan. Goodwin v. Commissioner, 75 T.C. 424,

440-441 (1980), affd. without published opinion 691 F.2d 490 (3d

Cir. 1982).

Points are amounts paid by a borrower for loan processing. 

Cao v. Commissioner, T.C. Memo. 1994-60, affd. without published

opinion ___ F.3d. ___ (9th Cir., Feb. 29, 1996). Fees paid for

loan processing can be for the use or forbearance of money or for

a lender's services. Id. Points paid for the use or forbearance

of money are deductible as prepaid interest. Id.

A cash basis taxpayer must generally amortize prepaid

interest over the life of the loan. Sec. 461(g)(1). However,

points are immediately deductible if they are paid for

indebtedness incurred in connection with the purchase or

improvement of the taxpayer's principal residence and the loan

is secured by the home. Sec. 461(g)(2). 

Petitioners deducted $4,457.50 for points on their 1992

return. Mr. Frank testified that this amount includes $1,980

from refinancing their Whitecliff Drive residence, $250 from a

line of equity on Whitecliff Drive, and $2,227.50 from buying

their new residence at Luann Court. Petitioners lost the records

for all three transactions. They did not contact the bank to get

the relevant documents or otherwise try to reconstruct the
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records. Petitioners introduced an example of a loan from Home

Savings of America apparently for the Springs Road property to

support their claim.

Petitioners' principal place of residence early in 1992 was

the Whitecliff Drive home. Mr. Frank testified that petitioners

intended the Luann Court property to become their residence when

they bought it late in 1992, and that it did become their

residence. However, petitioners' 1992 tax return, dated

March 20, 1993, stated that petitioners' address was Whitecliff

Drive. Petitioners have not introduced any evidence to explain

this inconsistency. On brief, petitioners assert that they

moved into the Luann Court residence in October 1992, that they

immediately rented out the Whitecliff Drive property, that in

February 1993, the tenants of Whitecliff Drive gave notice

that they were moving out, that petitioners moved back to the

Whitecliff Drive property in mid-1993, and that petitioners

have lived at Whitecliff Drive and rented out the Luann Court

house ever since. Petitioners' statements in the brief are not

supported by the record. We cannot base our findings of fact

on assertions made in the brief that are not supported by the

record. See United States v. Genser, 582 F.2d 292, 311 (3d Cir.

1978) (statements made by counsel in their briefs are not

evidence).
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We hold that petitioners may not deduct any amount for

points because they have not shown whether or when the Luann

Court residence became their principal place of residence or that

the loans were secured by their principal place of residence, or

proven the amount of points they paid. See sec. 461(g)(2); Rule

142(a).

D. Whether Petitioners' Airplane Leasing Activity Is

a Passive Activity

Individuals generally may not deduct losses from a passive

activity. Sec. 469(a). A passive activity is any activity

involving a trade or business in which the taxpayer does not

materially participate. Sec. 469(c)(1). Rental activities are

per se passive. Sec. 469(c)(2), (4); sec. 1.469-1T(e)(1),

Temporary Income Tax Regs., 53 Fed. Reg. 5702 (Feb. 25, 1988). 

Rental activity is any activity in which payments are principally

for the use of tangible property. Sec. 469(j)(8). An activity

is a rental activity for a taxable year if:

 (A) During such taxable year, tangible property

held in connection with the activity is used by

customers or held for use by customers; and

 (B) The gross income attributable to the conduct

of the activity during such taxable year represents

(or, in the case of an activity in which property is

held for use by customers, the expected gross income

from the conduct of the activity will represent)

amounts paid or to be paid principally for the use

of such tangible property (without regard to whether

the use of the property by customers is pursuant to

a lease or pursuant to a service contract or other

arrangement that is not denominated a lease).
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Sec. 1.469-1T(e)(3)(i)(A), (B), Temporary Income Tax Regs., 53

Fed. Reg. 5702 (Feb. 25, 1988).

Petitioners leased the plane to GAPA and SAFT. GAPA and

SAFT rented the plane to customers who were learning to fly. 

The airplane was held by GAPA and SAFT for use by customers. 

The amounts to be paid to petitioners by GAPA and SAFT were for

the use of the airplane. Services were not the dominant element

of the relationship. This is a rental activity for purposes of

section 469. Rental activity is passive whether or not the

taxpayer materially participates in it. Sec. 469(c)(4). 

Petitioners may not use the $25,000 offset under section 469(i)

because it applies only to rental real estate activities. We

hold that losses from petitioner's airplane leasing activity are

passive losses.

E. Whether Petitioners Are Liable for Accuracy-Related

Penalties

Taxpayers are liable for the accuracy-related penalty on any

part of an underpayment which is due to negligence. Sec.

6662(b)(1) and (c). Negligence is the lack of due care or the

failure to do what a prudent person would do under the

circumstances. Sec. 6662(c); Norgaard v. Commissioner, 939 F.2d

874, 880 (9th Cir. 1991), affg. in part and reversing in part

T.C. Memo. 1989-390; Zmuda v. Commissioner, 731 F.2d 1417, 1422

(9th Cir. 1984), affg. 79 T.C. 714 (1982). Negligence includes
- 24 -

any failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code. Sec. 6662(c). 

Petitioners must prove that they were not negligent. Allen v.

Commissioner, 925 F.2d 348, 353 (9th Cir. 1991), affg. in part

and revg. in part 92 T.C. 1 (1989); Betson v. Commissioner, 802

F.2d 365, 372 (9th Cir. 1986), affg. T.C. Memo. 1984-264.

Petitioners contend that they were not negligent because

they prepared their tax returns in good faith and to the best of

their ability. Respondent argues that petitioners are negligent

because they lost many of their records and did not take

reasonable steps to reconstruct them. See Lewis v. Commissioner,

T.C. Memo. 1983-741. In Lewis, we concluded not only that the

taxpayer lost records of travel and entertainment expenses, but

also that some of the records may never have existed. We also

pointed out that the taxpayer in Lewis deducted some automobile

expenses which he said at trial related to personal use of his

car. We conclude that this case is distinguishable from Lewis

and that petitioners have shown that they were not negligent in

the preparation of their 1990 and 1991 tax returns.

To reflect the foregoing and concessions,

Decision will be entered

under Rule 155.