James E. Copley and Cynthia R. Copley - Page 16

          from Brenda Summers, a friend of the family.  He presented no               
          loan documents or credible proof of repayment.  Accordingly,                
          petitioners have failed to prove that respondent's determination            
          regarding the gain realized is incorrect.                                   
               In the alternative, petitioner argues that the gain realized           
          on the sale of the California property should not be recognized             
          in 1989 pursuant to section 1034.  Respondent contends that                 
          petitioners are not entitled to deferral because the California             
          property was rented out beginning in 1985, which was more than 3            
          years prior to the date on which the property was sold.                     
               Generally, sections 1001 and 61 require a taxpayer to                  
          recognize in the year of the sale gain realized on the sale of              
          property.  Section 1034, however, allows a taxpayer, in certain             
          circumstances, to defer recognition of gain realized on the sale            
          of the taxpayer's principal residence.  Under section 1034, if              
          the taxpayer purchases a new principal residence within the                 
          replacement period, the taxpayer will recognize gain on the sale            
          only to the extent that the taxpayer's adjusted sale price of the           
          old residence exceeds the taxpayer's cost of purchasing the new             
          residence.  Sec. 1034(a).                                                   
               As noted above, petitioner presented a statement at trial              
          which explains the process he used to arrive at the gain realized           
          on the California property.  In particular, he calculated a total           
          of $35,320 in depreciation as follows:                                      

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