T.C. Summary Opinion 2010-38
UNITED STATES TAX COURT
JASON AND MISTY DEWEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13650-08S. Filed March 31, 2010.
Jason and Misty Dewey, pro sese.
Alicia E. Elliott, for respondent.
RUWE, Judge: This case was heard pursuant to the provisions
of section 74631 of the Internal Revenue Code in effect when the
petition was filed. Pursuant to section 7463(b), the decision to
be entered is not reviewable by any other court, and this opinion
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.
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shall not be treated as precedent for any other case. Respondent
determined a $1,492 deficiency in petitioners’ 2005 Federal
income tax. After a concession by respondent,2 the only issue
remaining is whether petitioners are entitled to a sales tax
deduction in connection with the purchase of a new home.
Background
Some of the facts have been stipulated. The stipulation of
facts and the attached exhibits are incorporated herein by this
reference. At the time the petition was filed, petitioners
resided in Arizona.
In March 2005 petitioners purchased a new home from KB Home
Sales (KB Homes) for $231,301. The final settlement statement
prepared by First American Title Insurance Co. reflects a
contract sale price of $231,301 and detailed settlement charges
of $8,711.46 but does not separately state any sales tax paid.
Moreover, the record is devoid of any indication of what taxes,
if any, KB Homes paid.
In April 2005 the combined rate of the transaction privilege
tax for retail sales or prime contracting for the State of
Arizona, Maricopa County, and the City of Mesa was 7.8 percent.
Furthermore, prime contractors are allowed a flat 35-percent
deduction from gross receipts in computing the transaction
2
Respondent concedes that petitioners are entitled to an
additional $1,030 deduction for taxes paid for 2005.
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privilege tax owed to the State of Arizona, Maricopa County, and
the City of Mesa.
Petitioners, under the direction of their tax return
preparer, determined the portion of their claimed sales tax
deduction for the purchase of their new home using a formula
based on estimates for the cost of land, labor, materials, and
the sales tax rate. Petitioners’ estimates are as follows:
New Home Purchase Amount
Cost of land $46,260
Labor (at 35 percent) 61,639
Materials (at 65 percent) 114,473
Sales tax (at 7.8 percent) 8,929
Total 231,301
On Schedule A, Itemized Deductions, of their 2005 Federal
income tax return, petitioners claimed a $14,665 taxes paid
deduction, which consisted of $12,527 for State and local general
sales taxes, $1,483 for real estate taxes, and $655 for personal
property taxes.
In the notice of deficiency respondent disallowed $9,959 of
petitioners’ claimed $14,665 taxes paid deduction. As previously
noted, the parties stipulate that respondent has conceded an
additional $1,030 deduction for taxes paid. Thus, respondent has
allowed a $5,736 taxes paid deduction as follows: $655 for
personal property taxes; $1,483 for real estate taxes; and $3,598
for State and local general sales taxes. The remaining $8,929
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represents the amount petitioners claimed as sales tax paid on
the purchase of their new home.
The parties stipulate that for tax year 2005, petitioners
paid State income taxes of $3,630. However, on their 2005
Federal income tax return petitioners claimed the general sales
tax deduction in lieu of the State income tax deduction. The
parties agree that if respondent prevails and the general sales
tax deduction on the single-family home is not allowed, then
petitioners are entitled to a $3,630 deduction for State income
taxes, which would entitle petitioners to total itemized
deductions of $27,673.
Discussion
Deductions are strictly a matter of legislative grace, and
the taxpayer bears the burden of proving entitlement to the
deductions claimed. Rule 142(a); 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 7491(a), the burden of
proof as to factual issues may shift to the Commissioner where a
taxpayer has introduced credible evidence relevant to
ascertaining his tax liability. Rule 142(a)(2). Petitioners
have neither claimed nor shown eligibility for a shift in the
burden of proof. Consequently, the burden of proof remains with
petitioners.
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Section 164(a)(3) allows a deduction for State and local
income taxes paid or accrued during the taxable year. However,
section 164(b)(5)(A) provides that a taxpayer may elect to deduct
State and local general sales taxes in lieu of State and local
income taxes.3 “The term ‘general sales tax’ means a tax imposed
at one rate with respect to the sale at retail of a broad range
of classes of items.” Sec. 164(b)(5)(B).
Section 1.164-3(e)(1), Income Tax Regs., defines the term
“sales tax” as “a tax imposed upon persons engaged in selling
tangible personal property, or upon the consumers of such
property, * * * which is a stated sum per unit of property sold
or which is measured by the gross sales price or the gross
receipts from the sale.” To qualify as a general sales tax, a
tax must meet two tests: (1) The tax must be a tax in respect of
sales at retail, and (2) the tax must be general–-that is, it
must be imposed at one rate in respect of the retail sales of a
broad range of classes of items. Sec. 1.164-3(f), Income Tax
Regs.
In support of petitioners’ claimed sales tax deduction,
petitioner Jason Dewey (Mr. Dewey) alleges that KB Homes
completed an Arizona Form 5000, Arizona Department of Revenue
3
The election to deduct State and local sales taxes in lieu
of State and local income taxes is applicable for taxable years
beginning after Dec. 31, 2003, and before Jan. 1, 2010. Sec.
164(b)(5)(I).
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Transaction Privilege Tax Exemption Certificate, thereby allowing
KB Homes to purchase construction materials without paying any
sales tax. Mr. Dewey theorizes that if KB Homes did not have to
pay sales tax on the construction materials when purchased but
rather paid a transaction privilege tax when the home was sold to
petitioners and “Since the builder never ventured any of their
own capital to pay the tax”, then petitioners effectively paid
the sales tax on the construction materials and “should be deemed
a buyer at retail of this property in question.” Respondent
asserts, however, that the transaction privilege tax in issue was
imposed with respect to the sale of real property and, therefore,
does not qualify as “general sales tax” within the meaning of
section 164(b)(5)(B).4 We agree with respondent.
The State of Arizona, Maricopa County, and the City of Mesa
impose a tax on the privilege of doing business within their
respective jurisdictions. These so-called transaction privilege
taxes are based on the volume of business transacted, which is
generally measured by gross proceeds of sales or gross income as
4
Respondent also asserts that because the transaction
privilege tax for the State of Arizona, Maricopa County, and the
City of Mesa allow for a flat 35-percent deduction for land and
labor, the rates applied to contractors are not applied on
generally the same base as other businesses subject to the tax.
Thus, respondent argues that the taxes are not imposed at one
rate in respect of a broad range of classes of items. See sec.
164(b)(5)(B). Respondent further asserts that even if the taxes
qualify as “general sales taxes”, they are not imposed upon
petitioners because they were not separately stated. See sec.
164(b)(5)(G).
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the case may be. See Ariz. Rev. Stat. Ann. secs. 42-5061 and 42-
5075 (2006) (retail or prime contracting classifications,
respectively).
To qualify as a retail sale under the State of Arizona,
Maricopa County, and the City of Mesa taxing provisions, the sale
must consist of the transfer of tangible personal property at
retail. See id. secs. 42-5001(12), 42-5061(A); Mesa City Code
sec. 5-10-100 (2009). In Duhame v. State Tax Commn., 179 P.2d
252, 259 (Ariz. 1947), the Arizona Supreme Court concluded that a
sale of a new home, such as the transaction between KB Homes and
petitioners, is not a sale of tangible personal property and,
consequently, is not a retail sale. In this respect, the Arizona
Supreme Court stated:
When a contractor fabricates his materials for the
contractee, and the completed structure is erected on
the owner’s land, it is as much real property as the
land itself. The constituent elements of tangible
personal property have been destroyed by their
incorporation into the completed structure. And such a
contractor, therefore, is not making a sale of tangible
personalty to his contractee.
Id. Thus, a contractor, when fabricating personalty into realty,
“neither sells, resells, sells at retail, nor can he be
considered a retailer.” Id. Consequently, KB Homes did not
engage in selling tangible personal property at retail when it
sold a new home to petitioners.
Under the State and local taxing authorities, contractor’s
sales are not retail sales. Therefore, these taxes do not
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qualify as “general sales taxes” within the meaning of section
164(b)(5). See Karpinski v. Commissioner, T.C. Memo. 1983-50;
see also Beimfohr v. Commissioner, T.C. Memo. 1986-57 (applying
the holding in Karpinski under similar facts).5 Accordingly, we
sustain respondent’s determination and hold that petitioners are
not entitled to the $8,929 deduction they claimed as State and
local sales taxes paid for the purchase of their new home in
2005.6
To reflect the foregoing, and in the light of the parties’
agreement to allow a State income tax deduction,
Decision will be entered
under Rule 155.
5
This Court has held on several occasions that a home buyer
may not deduct retail sales taxes a contractor pays on the
purchase of materials that went into the construction of the
home. See Wise v. Commissioner, 78 T.C. 270 (1982); Petty v.
Commissioner, 77 T.C. 482 (1981); Armentrout v. Commissioner, 43
T.C. 16 (1964); Porter v. Commissioner, T.C. Memo. 1978-391. In
each of these cases the tax was imposed in respect to sales of
tangible personal property at retail that preceded the sales
transaction involving the home buyer. And in each case the home
buyer was disallowed the deduction on the grounds that under
State law the contractor was the “ultimate consumer” of the
materials that went into construction of the home; i.e., there
was no retail sale of the materials when the home buyer paid the
contractor.
6
On account of our holding, we need not address
respondent’s other contentions. See supra note 4.