James D. Schlicher - Page 15

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          such use was insufficient to constitute residential use as                  
          required by section 1034(a).                                                
               We find that respondent's reliance on Grace is misplaced.              
          In Grace we concluded that a taxpayer's storing business tools in           
          the basement of his home was insignificant business use, so that            
          no allocation was required for purposes of section 1034 and the             
          regulation thereunder.  However, it does not follow that                    
          petitioner's use of the upper, steeply hilled portion of his                
          property was so insignificant as to establish that it was not               
          used by him as his residence.  Moreover, we do not believe that             
          petitioner's use of this area was insignificant.                            
               Petitioner and his girlfriend, Patsy Lyons, have used the              
          upper, steeply hilled portion of the Clayton property for                   
          horseback riding, hiking, walking, and simply to enjoy the                  
          unobstructed view of the countryside and Mount Diablo.  During              
          the springtime petitioner's personal horses graze up there.                 
          When petitioner originally built his principal residence on the             
          Clayton property, he was considering building it in the upper               
          wooded area.  However, he chose not to do so, because he would              
          not have been able to clear the area and build a house within the           
          2-year period of section 1034.                                              
               Based on the entire record, we find that petitioner's use of           
          the upper, steeply hilled area was significant, and sufficient to           
          constitute residential use.  Cf. Grace v. Commissioner, supra.              
               Petitioner asserts that he used only 7-� acres of the                  

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