Miguel Espinoza and Mariaclariza Montoya - Page 8




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          reduced by the greater of the amount of depreciation that is                
          allowed or allowable in a tax year.                                         
               The expenditures that petitioners made in 1985 to acquire              
          and improve the bus would have been recovered completely in 1989.           
          See sec. 168(b)(1), I.R.C. 1954 (as amended).  Although it may              
          seem a harsh result as petitioners did not claim the full amount            
          of depreciation allowable, these costs provide petitioners no               
          basis in 1990.  The expenditures that petitioners made in 1986 to           
          improve the bus would have been recovered completely in 1990;               
          however, as the bus was destroyed in that year, no deduction is             
          allowed.  See sec. 168(d)(2)(B), I.R.C. 1954 (as amended).                  
          Accordingly, we find that petitioners had an adjusted basis in              
          the bus at the time of the involuntary conversion that is equal             
          to the percentage of the costs incurred during 1986 allowable for           
          recovery in 1990.  That basis and the consequent amount of gain             
          that petitioners must recognize can be determined by the parties            
          in their Rule 155 calculations.                                             
          Issue 2.  Addition to Tax for Failure To Timely File                        
               Respondent determined that petitioners are liable for the              
          addition to tax pursuant to section 6651(a)(1) for 1991.  Section           
          6651(a)(1) imposes an addition to tax for failure to file a                 
          return on the date prescribed (determined with regard to any                
          extension of time for filing), unless the taxpayer can establish            
          that such a failure is due to reasonable cause and not due to               





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