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depreciation for the period after conversion: (1) the fair market
value (FMV), or (2) the adjusted cost basis, e.g., cost basis
plus improvements. Heiner v. Tindle, supra at 587; Adams v.
Commissioner, T.C. Memo. 1995-142; Higgins v. Commissioner, T.C.
Memo. 1995-139; Frahm v. Commissioner, T.C. Memo. 1974-138; secs.
1.165-9(b)(2), 1.1011-1, Income Tax Regs. Although the Internal
Revenue Code does not define the term “fair market value” for
purposes of section 165, the universally accepted definition of
this term has been the willing buyer-willing seller test under
which FMV is the price at which the property would change hands
between a willing buyer and a willing seller, neither being under
any compulsion to buy or to sell and both having reasonable
knowledge of relevant facts. United States v. Cartwright, 411
U.S. 546, 551 (1973); Kolom v. Commissioner, 644 F.2d 1282, 1288
(9th Cir. 1981), affg. 71 T.C. 235 (1978); Gresham v.
Commissioner, 79 T.C. 322, 326 (1982), affd. 752 F.2d 518 (10th
Cir. 1985).
Our first inquiry is whether petitioners converted the
Stewart property from personal use to an income-producing use.
Whether a former residence used for personal purposes has been
converted in the hands of the same taxpayer to property held for
the production of income is a question of fact to be resolved
with reference to the surrounding facts and circumstances.
Newcombe v. Commissioner, 54 T.C. 1298, 1300-1301 (1970). We are
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