T.C. Memo. 1995-535
UNITED STATES TAX COURT
HENRY ALLEN WATERS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8798-93. Filed November 13, 1995.
Henry Allen Waters, pro se.
Lori M. Mersereau, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: Respondent, by notice of deficiency,
determined that petitioner is liable for a deficiency in his 1989
Federal income tax and an addition to tax in the amounts of
$38,405 and $7,681, respectively. The issues for decision are:
(1) Whether the gain realized by petitioner from the sale of his
principal residence qualifies for nonrecognition treatment under
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section 1034(a);1 (2) whether petitioner is entitled to an
interest deduction in excess of that allowed by respondent; and
(3) whether petitioner is liable for the accuracy-related penalty
under section 6662(a) for a substantial understatement of his tax
liability.
FINDINGS OF FACT2
Petitioner resided in Fairfield, California, at the time his
petition was filed.
During 1989, petitioner decided to sell his principal
residence in Richmond, California, with the intention of
purchasing a new home in the area. In April 1989, prior to
selling his Richmond home, petitioner engaged the services of a
real estate agent to assist him in finding and purchasing a new
home. Shortly thereafter, petitioner located a home he wanted to
purchase and applied to a mortgage financing company for a loan.
Petitioner's loan application was denied, however, because he had
filed for bankruptcy in 1988 and his obligations in that regard
had not yet been resolved. At the time petitioner applied for
the loan, he was making payments of approximately $580 per month
pursuant to a debt repayment plan established in accordance with
his bankruptcy case.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2
The parties have stipulated facts and exhibits which are
incorporated by this reference.
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Petitioner continued his search for a new home and, in July
1989, attempted to purchase another house. Once again,
petitioner's application for a loan was denied due to his recent
bankruptcy filing and his outstanding obligations under the debt
repayment plan.
Meanwhile, petitioner found a buyer for his Richmond home,
and he agreed to sell the house for $125,000. The grant deed
effectuating the transfer was signed by petitioner on July 24,
1989, and the transaction went to settlement on August 1, 1989,
at which time the deed was filed with the recorder's office in
Contra Costa County. Total proceeds to petitioner were reduced
by (among other settlement charges) closing costs of $2,000 and
prorated property taxes of $80.44. Settlement charges to the
purchaser were $5,735.36, including a loan origination fee of
$2,368.75. Petitioner, presumably believing that he would be
eligible for nonrecognition treatment under section 1034(a), did
not report as taxable income on his 1989 return any gain from the
sale of his old residence.
During 1989, up to the date he sold the property, petitioner
paid $7,532.08 in mortgage interest on his Richmond home.
Nevertheless, on his 1989 Schedule A--Itemized Deductions,
petitioner reported a home mortgage interest deduction of
$11,582, which amount presumably includes the $7,532.08 noted
above and a portion of the closing costs and other charges
reported on the settlement statement relating to the transfer of
the Richmond property.
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After selling his Richmond home, petitioner continued his
search for a new home and completed his obligations under the
debt repayment plan with a lump-sum payment in April 1990, at
which time petitioner's bankruptcy case was closed.
Petitioner's next attempt to obtain a loan for the purchase of a
new home occurred in May 1991, but he was again unsuccessful,
presumably due to his recent bankruptcy.
During the ensuing 2 months, petitioner finally located and
succeeded in obtaining financing for the purchase of a home in
Fairfield, California. Petitioner testified that he made a
deposit on his new home in July 1991, and that he received a key
and moved into the house prior to August 1, 1991. The grant
deed, however, was not signed by the sellers until August 2,
1991, and the settlement date for the transfer was August 7,
1991. Petitioner paid $137,500, excluding settlement charges,
for the house.
OPINION
The first issue for decision is whether the gain realized by
petitioner in 1989 from the sale of his old residence qualifies
for nonrecognition treatment under section 1034(a). Section 1034
allows a taxpayer to defer the recognition of gain realized from
the sale of his principal residence, provided he meets the
requirements of the statute. It provides, in relevant part, that
when property used by a taxpayer as his principal residence is
sold by him and, within the period beginning 2 years before the
date of such sale and ending 2 years after such date, property is
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purchased by the taxpayer and used as his principal residence,
gain shall be recognized only to the extent that the adjusted
sale price of the old residence exceeds the cost of purchasing
the new residence.
Respondent argues that, for purposes of determining the
applicability of section 1034, the sale of petitioner's former
residence in Richmond and the purchase of his new residence in
Fairfield occurred on the respective settlement dates of the
transfers, August 1, 1989, and August 7, 1991. Thus, respondent
argues that petitioner's new home was not purchased within 2
years of the sale of his old residence and that he is therefore
not eligible for nonrecognition treatment under section 1034(a).
Petitioner contends that he made a deposit on the Fairfield
property and moved into the home prior to August 1, 1991, and
further, that he made several attempts to purchase a new home
prior to that date but that he was unable to obtain financing due
to his bankruptcy filing.
We note at the outset that the purchase of a new residence
within the period fixed by statute is a strict requirement for
obtaining the benefits of section 1034, and that we are without
authority to weigh the merits of the events precipitating delay
to determine whether the time limits may be waived or extended.
Elam v. Commissioner, 477 F.2d 1333, 1335 (6th Cir. 1973), affg.
per curiam 58 T.C. 238 (1972); Bayley v. Commissioner, 35 T.C.
288, 297 (1960). Petitioner's circumstances, including the
bankruptcy, his inability to obtain financing, and his missing
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the statutory deadline by a few days, are unfortunate and elicit
sympathy. Courts, however, have consistently held that the time
limits of section 1034 are uniformly applicable and leave no room
for interpretation or tempering because of hard or unfortunate
circumstances, even where the taxpayer was prevented from
acquiring the new residence on time due to circumstances beyond
his control. See Shaw v. Commissioner, 69 T.C. 1034, 1038
(1978), and cases cited therein.3 "Extensions of § 1034(a)'s
time limitations are available only when a specific statutory
provision so provides." Moore v. Townsend, 577 F.2d 424, 428 n.7
(7th Cir. 1978). Thus, petitioner's eligibility for
nonrecognition treatment depends solely on a determination of the
dates when the sale of his old residence and the purchase of his
new residence occurred, and we cannot consider any delay in
purchasing a new home caused by petitioner's personal bankruptcy.
The question of when a sale is complete for Federal tax
purposes is essentially one of fact to be decided based on a
consideration of all the facts and circumstances with no single
factor controlling the outcome. Derr v. Commissioner, 77 T.C.
708, 723-724 (1981); Baird v. Commissioner, 68 T.C. 115, 124
(1977). A sale of real property is generally complete upon the
earlier of the transfer of legal title or the practical
assumption of the benefits and burdens of ownership by the
3
See also Chavez v. Commissioner, T.C. Memo. 1983-199;
Henry v. Commissioner, T.C. Memo. 1982-469; Bazzell v.
Commissioner, T.C. Memo. 1967-101.
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purchaser. Dettmers v. Commissioner, 430 F.2d 1019, 1023 (6th
Cir. 1970), affg. 51 T.C. 290 (1968); Derr v. Commissioner, supra
at 724; Baird v. Commissioner, supra at 124.
In California, a grant deed evidencing the transfer of title
takes effect upon delivery by the grantor, or, if placed in
escrow, upon performance of the prescribed conditions and
delivery by the depositary. Cal. Civ. Code secs. 1054, 1057
(West 1982); Blumenthal v. Liebman, 240 P.2d 699, 703 (Cal. Dist.
Ct. App. 1952). In the present case, we agree with respondent
that the relevant property transfers occurred on August 1, 1989,
and August 7, 1991, the respective settlement dates of the
transfers. Although petitioner contends that he made a deposit
on his new residence and moved into the home in July 1991, he has
not otherwise shown that he assumed the burdens/risks of
ownership prior to the passage of title on August 7, 1991.4 From
these facts, we are compelled to conclude that petitioner failed
to meet the statutory requirements of section 1034.
While we sympathize with petitioner's plight--he undoubtedly
intended and diligently attempted to purchase a new residence
within the 2-year period required for the nonrecognition of gain
from the sale of his old residence--we are powerless to move a
line Congress has drawn. We hold that petitioner has failed to
4
Petitioner has not shown, for example, that he was
responsible for and/or paid property taxes on his new home, or
that he maintained insurance on the property, for any period
prior to the date of settlement.
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show that he is qualified for nonrecognition under section
1034(a).
In the notice of deficiency, respondent determined that
petitioner's gain on the sale of his old residence was equal to
the full sales price of the property; no reduction was taken for
petitioner's adjusted basis in the property, although such a
reduction is provided for in section 1001. The Court brought
this matter to the attention of the parties, and they filed a
supplemental stipulation of facts agreeing that the $125,000
selling price included in petitioner's income should be reduced
by $10,780 of costs and expenses in connection with the sale.5
Accordingly, petitioner realized $114,220, rather than $125,000
as the net proceeds of sale. In addition, the parties stipulated
that petitioner's adjusted basis in the property sold was
$77,806.25. Accordingly, petitioner realized income of
$36,413.75 from the sale of the Richmond realty. The parties
should reflect these differences from the notice of deficiency in
their Rule 155 computation.
Next, we consider the home mortgage interest deduction of
$11,582 reported by petitioner on his 1989 return. Petitioner
claims that this amount includes $7,532.08 in mortgage interest
paid, and several amounts reported on the settlement statement
petitioner received when he sold the Richmond property,
5
Petitioner claimed $2,000 of closing costs as part of an
interest deduction on his return. Respondent disallowed this
amount as part of a disallowance of a large amount of interest
claimed.
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including: Closing costs ($2,000), prorated property taxes
($80.44), and loan origination fees paid by the purchaser
($2,368.75).6 While petitioner erred in reporting these amounts
collectively as mortgage interest on his 1989 Schedule A, he is
nevertheless entitled to the following deductions: (1) Mortgage
interest--$7,532.08, and (2) property taxes--$80.44. The $2,000
closing costs were reflected above as a selling expense in
calculating petitioner's gain from the sale of the Richmond
property. Petitioner is not entitled to deduct the loan
origination fees because they were not paid by him.
Finally, respondent determined an addition to petitioner's
tax for 1989 under section 6662(a) in the amount of $7,681.
Section 6662 imposes an accuracy-related penalty on a substantial
understatement of income tax. The section provides that if there
is a substantial understatement of income tax, there shall be
added to the tax an amount equal to 20 percent of the amount of
any underpayment attributable to such understatement. The
taxpayer bears the burden of proving that the Commissioner's
determination as to the addition to tax under section 6662(a) is
erroneous. Rule 142(a).
An understatement is substantial if it exceeds the greater
of 10 percent of the tax required to be shown on the return or
$5,000. Sec. 6662(d)(1)(A). An understatement is the difference
6
The amounts petitioner claims make up the mortgage
interest deduction total $11,981.27, or $399.27 more than the
deduction reported on petitioner's return. Petitioner did not
offer an explanation for this discrepancy.
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between the amount required to be shown on the return and the
amount actually shown on the return. Sec. 6662(d)(2)(A). The
understatement is reduced, however, to the extent it is (1) based
on substantial authority or (2) adequately disclosed in the
return or a statement attached to the return. Sec.
6662(d)(2)(B)(i) and (ii). Neither exception is present here.
Therefore, if the recomputed deficiency under Rule 155 satisfies
the statutory percentage or amount, petitioner will be liable for
the addition to tax under section 6662(a).
To reflect the foregoing,
Decision will be entered
under Rule 155.