-8-
an act contrary to their argument that the road is a part of the
real property that surrounds it.
The regulations require that petitioners identify each
separate piece of property damaged and isolate the basis in that
asset. Petitioners have failed to identify what portion, if any,
of the original purchase price should be allocated to the road
that existed on the property at the time of purchase. In
addition, we note that petitioners have not alleged or shown that
any amounts spent by Mr. Cziraki in personally constructing
dirt/gravel extensions of the road were capitalized or added to
petitioners' basis in the property. Petitioners are not entitled
to apply their entire cost basis in the two properties to the
road damage because of the limitation of section 1.165-7(b)(1),
Income Tax Regs., and petitioners' zero basis in the personally
constructed road. Accordingly, petitioners’ casualty loss is
limited to $6,844, their cost basis in the 1984 road extension
less allowable depreciation.
The next issue for our consideration is whether petitioners
are liable for an accuracy-related penalty pursuant to section
6662(a). Section 6662(a) imposes an accuracy-related penalty of
20 percent on any portion of an underpayment of tax that is
attributable to items set forth in section 6222(b). Respondent
contends that petitioners were negligent with respect to their
understatement of tax under section 6662(b)(1).
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