T.C. Summary Opinion 2001-48
UNITED STATES TAX COURT
THEODORE B. BARE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3271-98S. Filed April 4, 2001.
Bradley S. Shannon, Amanda Skiles, and Jesse Smith, for
petitioner.
Shirley M. Francis, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the years in issue, and all Rule
references are to the Tax Court of Practice and Procedure. The
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decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority.
Respondent determined deficiencies of $378, $896, and $9,570
in petitioner’s Federal income taxes for taxable years 1993,
1994, and 1995, respectively. In addition, respondent determined
accuracy-related penalties under section 6662(a) of $76 and
$1,914 for taxable years 1993 and 1995, respectively.
The issues remaining for decision are: (1) Whether
petitioner must recognize gain from the sale of his personal
residence in taxable year 1993, and (2) whether petitioner is
liable for accuracy-related penalties under section 6662(a) for
taxable years 1993 and 1995.1
Background
The stipulation of facts and the accompanying exhibits are
incorporated herein by reference. Petitioner resided in Tigard,
Oregon, at the time his petition was filed in this case.
Petitioner has been a certified public accountant for 25
years. In March 1989, petitioner and his wife, Sandra K. Bare
(now deceased), purchased a residential property located at 1461
N.E. Burns Street, West Linn, Oregon (the Burns Street property),
for $80,100.
1
The parties reached agreement on the amount of gain to be
recognized on the sale of petitioner’s business property, and
respondent concedes the sec. 6662(a) accuracy-related penalty for
taxable year 1995 insofar as it relates to that issue.
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The Burns Street property was petitioner’s personal
residence from March 1989 to December 10, 1993. On December 10,
1993, petitioner sold the Burns Street property for an adjusted
sales price of $127,920. Petitioner realized $9,123 of gain on
the sale of the Burns Street property.
From January 1994 through September 1995, petitioner lived
on his boat docked at a marina in Portland, Oregon. In late
September 1995, petitioner and a friend sailed petitioner’s boat
to Astoria, Oregon, and docked it there.
In August 1995, Uprite Homes, Inc. (Uprite Homes),
petitioner’s wholly owned S corporation, completed construction
of a residential property located in Washington County in
Sherwood, Oregon (the Bowmen Lane property). Petitioner began to
sleep at the Bowmen Lane property in October of 1995. The Bowmen
Lane property was unfurnished, and petitioner did not keep his
personal belongings in the house. He slept at the Bowmen Lane
property in a sleeping bag that he stored in his camper during
the day. He also showered at the Bowmen Lane property but stored
his toiletries in his camper afterwards. He did not cook meals
at the house although he did eat in the house some meals
purchased from fast food restaurants. Petitioner did not receive
mail at the Bowmen Lane property.
Between October 1 and December 6, 1995, the utilities and
insurance for the Bowmen Lane property were in the name of Uprite
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Homes, and Uprite Homes paid all utilities, insurance, and
property taxes for the Bowmen Lane property. Petitioner paid no
rent for his use of the property.
On October 9, 1995, petitioner made an offer to purchase a
house in Portland, Oregon (the Portland house), and his offer was
accepted. Petitioner expected to close on the Portland house
before December 10, 1995.
On November 30, 1995, Uprite Homes received an offer on the
Bowmen Lane property from William A. Weber, Jr., and Nicole L.
Weber (the Webers), for $160,500. The offer was accepted
contingent upon the Webers’ ability to secure a loan.
On or about November 30, 1995, petitioner learned the seller
of the Portland house could not close on the sale of the house by
December 10, 1995. On December 6, 1995, Uprite Homes executed a
quitclaim deed to transfer the Bowmen Lane property to petitioner
for the stated consideration of $130,000. In its general ledger,
Uprite Homes recorded the transfer by reducing the corporation’s
recorded debt to petitioner from $113,004 to zero and by
recording a debt from petitioner to Uprite Homes of $16,996. The
December 6, 1995, deed from Uprite Homes to petitioner was not
filed in the records of Washington County, Oregon.
The Uprite Homes 1995 general ledger reflects, through an
increase in petitioner’s recorded debt to the corporation, that
in December 1995, petitioner assumed liability for $678 for
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property tax, interest, and insurance for the Bowmen Lane
property for the period between December 6 and December 26, 1995.
During this period, all insurance and utilities for the Bowmen
Lane property remained in the name of Uprite Homes, and Uprite
Homes continued to pay all utilities for the property.
On December 26, 1995, petitioner executed a quitclaim deed
to transfer the Bowmen Lane property to Uprite Homes for the
stated consideration of $130,000. Uprite Homes recorded the
December 26, 1995, transaction with petitioner in its general
ledger by reversing petitioner’s sales transaction and recorded
debt to the corporation and by recording a $112,326 debt from the
corporation to petitioner. The December 26, 1995, deed from
petitioner to Uprite Homes was not filed in the records of
Washington County, Oregon.
During the 20-day period that petitioner purports to have
owned the Bowmen Lane property, he continued to store his
personal belongings in his camper. He did not do his laundry in
the house and used none of its kitchen appliances. He had no
telephone service, garbage pickup, newspaper delivery, or
television. He knew none of his neighbors.
On December 26, 1995, Uprite Homes executed a statutory
warranty deed to transfer title to the Bowmen Lane property to
the Webers for the previously agreed consideration of $160,500.
The Webers believed that no one had occupied the Bowmen Lane
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property before they moved in. On December 27, 1995, the
statutory warranty deed from Uprite Homes to the Webers was
recorded in Washington County, and the closing on the Bowmen Lane
property occurred.
Petitioner went to Southern Oregon on December 26, 1995, to
stay with his parents. On January 5, 1996, the closing occurred
on petitioner’s purchase of the Portland house.
Discussion
Under sections 1001 and 61, taxpayers generally must
recognize in the year of sale all gain or loss realized upon the
sale or exchange of property. Section 1034, however, provides an
exception which allows taxpayers to defer recognition of gain
when sale proceeds are reinvested in a new principal residence.2
Section 1034(a) specifies that gain must be reinvested in
property "purchased and used by the taxpayer as his principal
residence" in order for nonrecognition treatment to be available.
Respondent determined that petitioner must report gain from
the sale of his personal residence in 1993 because a qualifying
replacement residence was not purchased and used within 2 years
as required by section 1034. The 2-year deadline for petitioner
to reinvest in a new residence and thereby qualify for gain
2
Although sec. 1034 was repealed by sec. 312(b) of the
Taxpayer Relief Act of 1997, Pub. L. 105-34, 111 Stat. 839, and
the rollover provision was replaced by an expanded and revised
sec. 121, sec. 1034 was in effect for the year at issue herein.
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deferral was December 10, 1995. Respondent’s determination
resulted in a reduction of petitioner’s capital losses in 1993,
1994, and 1995. Petitioner contends that he purchased the Bowmen
Lane property and used it as his principal residence within the
required timeframe.
We first consider whether petitioner purchased the Bowmen
Lane property. The facts and circumstances of petitioner’s case
reveal that the transaction between him and his wholly owned S
corporation was not a bona fide sale. See Scherr v.
Commissioner, T.C. Memo. 1993-87.
The "incidence of taxation depends upon the substance of a
transaction" rather than its mere form. Commissioner v. Court
Holding Co., 324 U.S. 331, 334 (1945). A transaction lacking
economic substance may be disregarded for tax purposes. See
Knetsch v. United States, 364 U.S. 361, 365-366 (1960); Braddock
Land Co. v. Commissioner, 75 T.C. 324 (1980). In the context of
a sale transaction, the inquiry is whether the parties have in
fact done what they purport to do in the form of their agreement.
See Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221,
1237 (1981).
The term "sale" is given its ordinary meaning for Federal
income tax purposes and is generally defined as a transfer of
property for money or a promise to pay money. See Commissioner
v. Brown, 380 U.S. 563, 570-571 (1965). The determination of
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whether a particular transaction constitutes a sale turns on
whether the benefits and burdens of ownership have passed from
seller to buyer. See Grodt & McKay Realty, Inc. v. Commissioner,
supra. This inquiry is factual and is determined from the
intention of the parties, as evidenced by the written agreements
read in light of the attendant facts and circumstances. See
Haggard v. Commissioner, 24 T.C. 1124, 1129 (1955), affd. 241
F.2d 288 (9th Cir. 1956).
Various factors to consider in making a determination as to
whether a sale has occurred have been summarized as follows:
(1) Whether legal title passes; (2) how the parties treat the
transaction; (3) whether equity was acquired in the property;
(4) whether the contract creates a present obligation on the
seller to execute and deliver a deed and a present obligation on
the purchaser to make payments; (5) whether the right of
possession is vested in the purchaser; (6) which party pays the
property taxes; (7) which party bears the risk of loss or damage
to the property; and (8) which party receives the profits from
the operation and sale of the property. See Grodt & McKay
Realty, Inc. v. Commissioner, supra at 1237-1238. An additional
factor to be weighed is the presence or absence of arm's-length
dealing. See Falsetti v. Commissioner, 85 T.C. 332, 348 (1985)
(citing Estate of Franklin v. Commissioner, 64 T.C. 752 (1975),
affd. 544 F.2d 1045 (9th Cir. 1976)).
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Upon consideration of these factors in light of the totality
of the facts and circumstances surrounding the transaction, we
conclude that the conveyance of the Bowmen Lane property was
without substance and had no effect for tax purposes.
Petitioner’s purported purchase of the Bowmen Lane property
did not occur until after Uprite Homes had accepted the Webers’
offer to purchase the property, no money was exchanged, and the
deed was never recorded. Petitioner’s purported purchase and
sale price of $130,000 is almost 20 percent less than the
$160,500 Uprite Homes agreed upon and received from the Webers.
The insurance and utilities for the property remained in the name
of Uprite Homes, and petitioner never moved any of his personal
belongings into the home. Uprite Homes continued to pay the
utilities, and the $698 petitioner “paid” the corporation for
property tax, interest, and insurance on the Bowmen Lane property
was merely a recorded entry in Uprite Homes’ general ledger.
As the purported purchaser and as sole shareholder of the
purported seller, petitioner was on both sides of the
transaction. The facts surrounding the transaction indicate the
parties did not deal at arm’s length. The “sale” was fabricated
solely to facilitate petitioner’s attempt to defer gain on the
sale of the Burns Street property.
Furthermore, the record reflects that petitioner did not use
the Bowmen Lane property as his principal residence as required
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by section 1034. Whether or not property is used by a taxpayer
as his residence depends upon all the facts and circumstances in
each case, including the good faith of the taxpayer. See sec.
1.1034-1(c)(3)(i), Income Tax Regs. "The elements of residence
are the fact of abode and the intention of remaining, and the
concept of residence is made up of a combination of acts and
intention. Neither bodily presence alone nor intention alone
will suffice to create a residence." Stolk v. Commissioner, 40
T.C. 345, 353 (1963), affd. 326 F.2d 760 (2d Cir. 1964); see also
Perry v. Commissioner, 91 F.3d 82, 85 (9th Cir. 1996), affg. T.C.
Memo. 1994-247.
Petitioner never had any intention of making the Bowmen Lane
property his residence. His limited use of the property is not
sufficient to create a residence. Accordingly, petitioner does
not qualify for the nonrecognition provisions of section 1034.
Finally, we address the accuracy-related penalties imposed
pursuant to section 6662(a). Section 6662(a) and (b)(1) imposes
a penalty of 20 percent of the portion of an underpayment of tax
that is attributable to negligence or disregard of rules or
regulations. “Negligence” includes any failure to make a
reasonable attempt to comply with the statute, and “disregard”
includes any careless, reckless, or intentional disregard. Sec.
6662(c). We have further defined negligence as the failure to
exercise the due care that a reasonable and ordinarily prudent
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person would employ under the same circumstances. See Neely v.
Commissioner, 85 T.C. 934, 947 (1985). A taxpayer is not liable
for the penalty if he shows that there was reasonable cause for
the underpayment and that he acted in good faith. See sec.
6664(c)(1).
Petitioner bears the burden of proving that the accuracy-
related penalties are inapplicable.3 See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933); Bixby v. Commissioner, 58
T.C. 757, 791-792 (1972).
Petitioner is a certified public accountant. His purported
purchase and resale of the Bowmen Lane property clearly were
undertaken solely with the intent to meet the nonrecognition
provisions of section 1034. Petitioner knew or should have known
that a transaction devoid of any substance does not meet the
requirements of section 1034 and the regulations promulgated
thereunder.
Accordingly, we hold that petitioner is liable for
accuracy-related penalties pursuant to section 6662(a) for 1993
and 1995 with respect to the understatements of tax attributable
3
Sec. 7491(c), applicable to court proceedings arising in
connection with examinations commencing after July 22, 1998,
requires the Secretary to carry the burden of production with
respect to penalties. See Internal Revenue Service Restructuring
& Reform Act of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 685,
726. The notice of deficiency at issue herein, however, was
dated December 12, 1997.
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to his failure to recognize gain from the sale of his residence
and the corresponding adjustments to his capital losses.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.