T.C. Memo. 2014-254
UNITED STATES TAX COURT
ROSE A. WODACK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8009-12. Filed December 17, 2014.
Rose A. Wodack, pro se.
Richard Charles Grosenick and Mark J. Miller, for respondent.
MEMORANDUM OPINION
PARIS, Judge: Respondent determined a deficiency in Federal income tax
of $2,609 for petitioner’s 2008 taxable year. The only issue before the Court is
-2-
[*2] whether petitioner is entitled to the first-time homebuyer credit under section
36(a).1 The Court holds that petitioner is not entitled to the credit.
Background
The parties submitted this case fully stipulated, without trial, pursuant to
Rule 122. The parties’ stipulations of facts are hereby incorporated by reference
and are found accordingly. At the time of the filing of the petition, petitioner
resided in Wisconsin.
On August 3, 1993, petitioner entered into a seller-financed land contract
for a tract of land and a residence (property or property at issue) with Howard
Schlise. Petitioner and Mr. Schlise are not related. The land contract states:
“Vendor sells and agrees to convey to Purchaser, upon the prompt and full
performance of this contract by Purchaser, the following property, together with
the rents, profits, fixtures and other appurtenant interests”, and then describes the
property at issue.
Pursuant to the land contract, petitioner agreed to pay Mr. Schlise $27,500
for the property. The land contract specified that petitioner was to pay $1,000
upon execution of the contract and make monthly payments of $222.39 over a
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986 as amended and in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
-3-
[*3] five-year term. Interest accrued at the rate of 9%. The land contract called
for full payment of the outstanding balance by September 1, 1998, but stated that
“[t]he purchaser may request an extension of land contract for an additional five
years provided the purchaser has given 30 days written notice of such intention to
extend and provided the interest is recalculated at 3 points above prime rate as
quoted in the Wall Street Journal, and the principal is amortized over 20 years.”
Under the contract, petitioner was required to pay Mr. Schlise annual
property taxes, special assessments, and fire and other required insurance
premiums. Mr. Schlise was to hold these amounts in escrow and apply the
payments to the obligations when they became due.2 Petitioner agreed to keep the
improvements on the property insured in an amount at least equal to the balance
owed under the contract. Petitioner further agreed not to commit waste, to keep
the property in “good tenantable condition and repair”, to keep the property from
superior liens, and to comply with all laws affecting the property. In return,
petitioner had the right to take possession of the property at the time of the closing
and could improve the property without permission.
2
Another paragraph of the contract contemplates that petitioner will pay
property taxes, assessments, and insurance premiums directly and deliver receipts
showing such payment to Mr. Schlise upon demand.
-4-
[*4] The land contract also vested Mr. Schlise with certain rights and
obligations. Upon petitioner’s paying the principal and interest in full, Mr. Schlise
had the obligation to “execute and deliver to Purchaser, a Warranty Deed, in fee
simple, of the Property, free and clear of all liens and encumbrances” with certain
exceptions not relevant here. Mr. Schlise also had the right, which terminated five
years from closing, to repurchase the property at the original purchase price if
petitioner put the property up for sale. He also had certain rights upon petitioner’s
default, including: the right of strict foreclosure, the right to sue for specific
performance by full payment through judicial sale, the right to sue at law for the
entire unpaid purchase price, the right to initiate a quiet title action, and the right
to have petitioner ejected from the property and to have a receiver appointed to
collect rents. Moreover, Mr. Schlise could demand full payment of the remaining
balance if petitioner transferred any interest in the property without his
permission.
Petitioner resided at the property at issue, made timely monthly payments,
and renewed the land contract for two additional five-year terms without issue.
Mr. Schlise passed away on August 20, 2006. Mr. Schlise’s interest in the
property at issue passed to the Schlise Family Trust. When the contract’s third
five-year period was coming to an end in 2008, petitioner requested that the
-5-
[*5] Schlise Family Trust renew the contract for another five years or until such
time as she could procure a “conventional mortgage”.
Mr. Schlise’s son’s attorney chose not to renew the contract for another five
years.3 Petitioner therefore decided to pay in full the balance owing upon
expiration of the contract. The contract expired in August 2008. Petitioner
contacted Attorney Philip Johnson to request the payoff figure.4 On October 31,
2008, Mr. Johnson wrote a letter stating that the payoff figure on November 20,
2008, was $19,768.31. On November 18, 2008, petitioner obtained a loan through
a promissory note with Riverside Finance, Inc., for $25,006.29. Riverside Finance
paid $19,758.47 by check to the “Schlise Trust” out of these proceeds.5 The
Schlise Family Trust transferred the deed to petitioner in November 2008.6
On her Federal income tax return for taxable year 2008, petitioner claimed a
first-time homebuyer credit of $2,609 pursuant to section 36(a). After an
3
It is unclear whether the attorney was acting as the trustee of the Schlise
Family Trust or as Mr. Schlise’s son’s representative.
4
It is unclear whether Philip Johnson was the same attorney who chose not
to extend the contract.
5
This figure equals the $19,768.31 that Mr. Johnson provided petitioner as a
payoff figure for November 20, 2008, adjusted downward for two days’ per diem
of $4.92 each as calculated by Mr. Johnson.
6
The deed is not part of the record.
-6-
[*6] examination, respondent sent petitioner a notice of deficiency on December
28, 2011, disallowing the credit. On March 28, 2012, petitioner filed a timely
petition in this Court for redetermination.
Discussion
The Commissioner’s determination of a deficiency is generally presumed
correct, and the taxpayer bears the burden of proving it incorrect. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions and
credits are matters of legislative grace, and the taxpayer bears the burden of
proving entitlement to any deductions or credits claimed. See INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
U.S. 435, 440 (1934).
Pursuant to section 36(a), a first-time homebuyer of a principal residence is
entitled to a credit of 10% of the purchase price, not to exceed $7,500. The
taxpayer must have purchased the residence on or after April 9, 2008, and before
July 1, 2009.7 Sec. 36(h). The term “first-time homebuyer” is defined in section
36(c)(1) to mean “any individual if such individual * * * had no present ownership
7
The credit was later extended to apply to purchases made on or after April
9, 2008, and before May 1, 2010. See sec. 36(h)(1) (as amended by the Worker,
Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, sec.
11, 123 Stat. at 2989).
-7-
[*7] interest in a principal residence during the 3-year period ending on the date of
the purchase of the principal residence to which this section applies.” As pertinent
here, the term “purchase” is defined in section 36(c)(3) to mean “any acquisition”.
The only issue is whether petitioner purchased the property at issue on or
after April 9, 2008, and before July 1, 2009. Petitioner contends that she
purchased the property in November 2008 when she paid the Schlise Family Trust
the remaining balance under the land contract and received the deed to the
property. Respondent asserts that petitioner purchased the property within the
meaning of section 36(a) on August 3, 1993, because (1) under Wisconsin law,
petitioner had equitable title to the property upon execution of the land contract,
and (2) petitioner had possession of the property and enjoyed the benefits and
burdens of ownership beginning in 1993.
In determining when a purchase occurred for purposes of the first-time
homebuyer credit, the Court has looked to when the benefits and burdens of
ownership have shifted. See Woods v. Commissioner, 137 T.C. 159, 162 (2011);
see also Baird v. Commissioner, 68 T.C. 115, 124 (1977) (analyzing when the
transfer of property occurred for purposes of real estate depreciation and mortgage
interest deductions). Generally, a transfer is complete upon the earlier of the
transfer of title or the shift of the benefits and burdens of ownership. Woods v.
-8-
[*8] Commissioner, 137 T.C. at 162; Deyoe v. Commissioner, 66 T.C. 904, 910
(1976) (citing Dettmers v. Commissioner, 430 F.2d 1019, 1023 (6th Cir. 1970),
aff’g Estate of Johnston v. Commissioner, 51 T.C. 290 (1968)).
State law determines a taxpayer’s property rights. See United States v. Nat’l
Bank of Commerce, 472 U.S. 713, 722 (1985); Patel v. Commissioner, 138 T.C.
395, 404 (2012); Woods v. Commissioner, 137 T.C. at 162. Federal tax
consequences are decided under Federal law. Patel v. Commissioner, 138 T.C. at
404; Woods v. Commissioner, 137 T.C. at 162. Accordingly, the Court looks to
Wisconsin law to determine what rights petitioner had in the property at issue.
The Court considers the substance of the property rights under State law, including
the benefits and burdens of such rights, and not merely the labels that the State
gives to these rights or the conclusions it draws from them. United States v. Craft,
535 U.S. 274, 279 (2002); Patel v. Commissioner, 138 T.C. at 404.
Among the factors which this and other courts have cited as indicative of
the benefits and burdens of ownership are: a right to possession; an obligation to
pay taxes, assessments, and charges against the property; a responsibility for
insuring the property; a duty to maintain the property; a right to improve the
property without the seller’s consent; a bearing of the risk of loss; and a right to
obtain legal title at any time by paying the balance of the full purchase price. See
-9-
[*9] Keith v. Commissioner, 115 T.C. 605, 611-612 (2000); Goldberg v.
Commissioner, T.C. Memo. 1997-74, aff’d without published opinion, 246 F.3d
674 (9th Cir. 2000); see also Major Realty Corp. & Subs. v. Commissioner, 749
F.2d 1483, 1487 (11th Cir. 1985), aff’g in part, rev’g in part T.C. Memo. 1981-
361; Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221, 1237-1238
(1981); Musgrave v. Commissioner, T.C. Memo. 2000-285; Berger v.
Commissioner, T.C. Memo. 1996-76; Spyglass Partners v. Commissioner, T.C.
Memo. 1995-452. When a buyer, by virtue of these incidents, would be
considered to have obtained equitable ownership under State law, a sale will
generally be deemed completed for Federal tax purposes. Keith v. Commissioner,
115 T.C. at 612.
Under Wisconsin law, the doctrine of “equitable conversion” governs sales
of property. City of Milwaukee v. Greenberg, 471 N.W.2d 33, 36 (Wis. 1991);
Kallenbach v. Lake Publ’ns, Inc., 142 N.W.2d 212 (1966). As stated by the
Wisconsin Supreme Court:
A land contract vendor holds legal title as security for the
unpaid balance of the contract, while the land contract vendee holds
equitable title. Holding equitable title in effect gives the land contract
vendee “full rights” of ownership * * *. The land contract vendee has
liabilities generally attributed to ownership, such as payment of taxes,
and is also generally liable as the owner to third parties injured on the
property.
- 10 -
[*10] Steiner v. Wis. Am. Mut. Ins. Co., 697 N.W.2d 452, 457 (Wis. 2005) (fn.
refs. omitted). Although the vendor’s interest in the land is not identical to that of
a mortgagee’s, the vendor under a land contract holds bare legal title as security
for the unpaid balance. Greenberg, 471 N.W.2d at 36, 39.
The Court holds that under Wisconsin law petitioner became the equitable
owner of the property at issue as of August 3, 1993, the effective date of the land
contract. Petitioner obtained the benefits and burdens of ownership at that time.
She had the right of possession and made the property her principal residence. As
required by the contract, petitioner paid the real property taxes, assessments, and
insurance. She also had an obligation to maintain the property and could improve
the property without permission. Under Wisconsin law, petitioner bore the risk of
loss. See Steiner, 697 N.W.2d at 457-458. She also had the right to obtain legal
title by paying the remaining balance under the contract. And though petitioner
had to seek Mr. Schlise’s permission to transfer any interest in the property, the
Court does not find this inconsistent with Mr. Schlise’s rights as a creditor. See
id. at 457. (“Holding equitable title in effect gives the land contract vendee ‘full
rights’ of ownership, including the ability to ‘sell, lease or encumber the real estate
subject to the rights of the Vendor unless the contract provides to the contrary.’”
- 11 -
[*11] (quoting Martin J. Greenberg & Henry R. Pinekenstein, Wisconsin Land
Contracts 2 (1986))).
The decision not to renew the contract did not affect petitioner’s status as
owner of the property, as her rights and obligations under State law did not change
at that time. Moreover, there is no indication that the benefits and burdens of
ownership shifted briefly to the Schlise Family Trust upon expiration of the
contract in August 2008 until petitioner obtained full legal title in November
2008.8 Petitioner continued to reside at the property and presumably was still
liable for taxes, insurance premiums, and the like.
Accordingly, the Court finds that for purposes of section 36 petitioner
“purchased” the real property in question on August 3, 1993, and thus not on or
after April 9, 2008, and before July 1, 2009, as required by section 36(h). On that
record, the Court holds that petitioner is not entitled to the first-time homebuyer
credit under section 36(a) for her taxable year 2008.
8
Even if petitioner briefly lost her status as the property’s equitable owner
between the expiration of the third contract renewal and her procurement of legal
title to the property, she still would not qualify for the credit as she would not be
considered a “first-time homebuyer” under those circumstances. See sec. 36(c)(1)
(“The term ‘first-time homebuyer’ means any individual if such individual (and if
married, such individual’s spouse) had no present ownership interest in a principal
residence during the 3-year period ending on the date of the purchase of the
principal residence to which this section applies.”).
- 12 -
[*12] To reflect the foregoing,
Decision will be entered
for respondent.