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capitalized this part of the interest payment. Because
petitioners acquired Crow Canyon on December 18, 1986, and the
first payment covered the period ending on February 1, 1987, the
interest capitalization rules for both 1986 and 1987 apply.
Under section 266, section 263A(f), and section 189
(repealed for years after December 31, 1986), mortgage interest
on improved real property is only capitalized during a period of
construction or further improvement. Sec. 189(e)(2)(A) (repealed
for years after December 31, 1986); sec. 1.266-1(b)(ii), Income
Tax Regs.; sec. 1.263A-8(d)(3), Income Tax Regs. Petitioners
failed to prove that Crow Canyon underwent a period of
improvement. As already explained, petitioners substantiated
only $1,763.31 of repairs on Crow Canyon. Because we do not
believe there was a period of improvement petitioners are not
entitled to increase their basis by the amount of interest paid.
5. Additions to Tax and Penalties
Respondent determined additions to tax for negligence under
section 6653(a)(1) for 1988 and an accuracy-related penalty under
section 6662 for 1989. Section 6662(a) imposes a 20-percent
accuracy-related penalty to any portion of an underpayment of tax
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