*11 Decision will be entered for the petitioners.
Petitioner, a specialist in foreign economics, was employed in 1948 and prior thereto by the Federal Government and lived with his family in a home which he owned in Bethesda, Maryland. In that year he accepted a temporary position with the Federal Government in Europe. For the primary purpose of providing care and maintenance of his house he leased it for 1 year and later from month to month. In 1951 petitioner and his family returned to this country and he was offered and accepted another position with the Federal Government in Washington, D. C. His attempt to regain immediate occupancy of his home failed because of Federal Rent Control Regulations. He thereupon purchased a new home and in order to obtain the necessary funds he sold his old home subject to the lease. The purchaser of the old home obtained possession thereof 6 months later. Held, petitioner entitled to benefits of section 112 (n), I. R. C. 1939.
*515 Respondent determined a deficiency in the income tax liability of petitioners for the year 1951 in the amount of $ 1,314.52. That part of the deficiency is here in issue which results from respondent's determination that the gain realized by petitioners on the sale of real estate in that year did not meet the requirements of section 112 (n) of the Internal Revenue Code of 1939, relating to the nonrecognition of gain from the sale or exchange of a residence, but was taxable as a gain from the sale of a capital asset subject to the limitations of section 117 of the 1939 Code.
FINDINGS OF FACT.
A partial stipulation of facts was filed by the parties at the time of the trial of this case. We find those facts to be as stipulated.
The petitioners are husband and wife who filed their joint income tax return for the year 1951 with the collector of internal revenue for the district of Maryland.
Petitioners*13 were married in 1941. The house at 4412 Maple Avenue, Bethesda, Maryland (hereinafter sometimes referred to as the house), was built for the petitioners in 1941. The house was occupied as a residence by the petitioners from the date of its completion in June 1941 until June 1943.
In that month Ralph was assigned to United States Naval Reserve duty outside the Bethesda, Maryland, area. The house was rented during the remainder of 1943 and a part of 1944. In October 1944 *516 Mildred and petitioners' children reoccupied the house as a residence, and upon Ralph's return from overseas duty in the Armed Forces he also resumed his occupancy thereof.
Petitioners continued to reside in the house at 4412 Maple Avenue until February 1948. During this period Ralph was employed by the United States Department of Commerce as a specialist in foreign economics. The State Department desired to obtain Ralph's services, and in February 1948 he was appointed to the Foreign Service Reserve of the State Department. Section 522 of the Foreign Service Act, 22 U. S. C. sec. 922 (1946 ed.), under which petitioner was appointed, provided that the Secretary might*14 appoint qualified persons as reserve officers for nonconsecutive periods of not more than 4 years each. Petitioner accepted an appointment as a coal adviser to the United States Delegation to the Economic Commission for Europe and was assigned to a post in Geneva, Switzerland. He accepted this appointment with the understanding that it was temporary, that it would not be for longer than 4 years, and that it could be for a shorter period but not for less than 1 year.
When petitioners arrived in Switzerland in 1948 they lived in a hotel for a few months, and then rented an apartment in Geneva. In 1950 Ralph's official duties required him to live in Paris, France, and in September of that year he moved his family (which had been increased by the birth of a son in July 1950) to that city where he rented a row house, which they occupied until he and his family returned to this country in June 1951.
When Ralph decided in 1948 to accept the temporary Foreign Service position with the State Department, petitioners made arrangements to rent their home on Maple Avenue in Bethesda. They were more interested in obtaining a responsible tenant who would "keep the house up" and maintain it in*15 good condition than in obtaining a large rental income therefrom. Accordingly, they rented the house for $ 100 a month although they were advised by their real estate agent that they could reasonably be expected to obtain $ 125 a month as rental for the house.
The first lease between petitioners and their tenant was for 1 year since petitioners knew they would be gone at least that long. Subsequent leases were from month to month. These short leases were made so that the petitioners could reoccupy their Maple Avenue residence just as soon as they returned to the Washington area. Ralph intended at all times while away from his residence to return to it as soon as his employment made it possible. He declined several offers to buy his residence.
In June 1951 Ralph and his family returned to the United States on home leave. It was customary to receive home leave every 2 years, *517 but Ralph had not been able to take any leave until this time. They traveled to Minneapolis to visit Ralph's parents and while there, in July, Ralph received a call offering him a position with the Economic Cooperation Administration in Washington, D. C. A week or so later Ralph returned to Washington*16 and accepted the new job.
Petitioners immediately endeavored to reoccupy their residence in Bethesda. The tenants at this time had a month-to-month lease. However, they had three children and the wife of the tenant was pregnant. Ralph instructed his rental agent to notify the tenants to vacate the Maple Avenue residence. Petitioners were told that "with the condition of the tenants -- that is, the circumstances that they were in with three children and the woman being pregnant, the tight housing situation, the existence of the rent control laws under which they could claim certain rights with respect to eviction, we [petitioners] could not rely to any degree of certainty on being able to repossess the property, and our need was immediate."
During the time petitioners were negotiating for repossession of their house on Maple Avenue, they lived for a month in the house of friends who were on vacation and later in the home of Mildred's parents.
When it became apparent to petitioners that they could not obtain repossession of their house without indeterminate delays, they decided to buy another residence on Charlcote Road in Bethesda. This they did on October 10, 1951. In order *17 to obtain the funds needed to buy this house, they sold the Maple Avenue house on October 9, 1951, subject to the existing tenancy. The purchasers of the Maple Avenue house were not able to obtain possession of it until 6 months after its purchase. The cost of petitioners' new residence exceeded the selling price of the old residence.
During the years 1948, 1949, 1950, and 1951 petitioners claimed and were allowed the following income tax deductions:
| Depreciation | Repairs | Other expenses 1 | |
| 1948 | $ 280 | ||
| 1949 | 320 | $ 176.70 | $ 125.75 |
| 1950 | 320 | 400.00 | 81.29 |
| 1951 | 320 | 36.82 | 192.05 |
The above-mentioned deductions were attributable to the rental of the house at 4412 Maple Avenue and totaled the sum of $ 2,251.61 1 during the 3 1/2 years the house was rented.
*518 OPINION.
The facts in the instant case are not in dispute. The question presented is whether under*18 these facts petitioner may have the benefits provided by section 112 (n) of the Internal Revenue Code of 1939. This subsection and pertinent provisions of respondent's regulations are set out in the margin hereof. 2
*19 It is apparent that the general purpose of this statute was to provide relief to individual taxpayers who felt it necessary or advisable to *519 sell their homes and used the proceeds to purchase new or substitute homes. If all the proceeds of such a sale were used in the purchase of the new home, the transaction was to be considered in effect as a nontaxable exchange of the old home for the new.
In the instant case the respondent has determined that the petitioner is not entitled to the relief afforded by section 112 (n) because at the time he sold his old home and purchased the new home he was not residing in his old home but was leasing it to tenants and using it as income-producing real estate.
Petitioner points out that he built the house for use as a home, that he lived there with his family for many years, that he and his family left it only because of his temporary assignment to work abroad, that he at all times intended to return to the house and make it his home, that his primary purpose in leasing the house while he was abroad was to provide for its care and maintenance, that the negligible profit he derived from the rentals was a secondary consideration, and that*20 he attempted to regain possession of the house for use as a home upon his return to this country, but because this was immediately impossible on account of Rent Control Regulations imposed by the Federal Government he was compelled to purchase another home at a time when his old home was occupied by tenants.
We have no doubt but that the situation presented by the instant case is of the general type which Congress considered entitled to the relief provided for by section 112 (n). The narrow question is whether petitioner is precluded from such relief by reason of the words "used * * * as his principal residence" appearing in the statute.
That Congress did not intend that the relief afforded by this statute should be confined solely to cases where the old home is actually lived in by the taxpayer as a home at the time of sale is indicated by that part of the committee reports which reads as follows:
Whether or not property is used by the taxpayer as his residence, and whether or not property is used by the taxpayer as his principal residence (in the case of a taxpayer using more than one place of residence), depends upon all of the facts and circumstances in each individual case, *21 including the bona fides of the taxpayer. The term "residence" is used in contradistinction to property used in trade or business and property held for the production of income. Nevertheless, the mere fact that the taxpayer temporarily rents out either the old or the new residence may not, in the light of all of the facts and circumstances in the case, prevent the gain from being not recognized. For example, if the taxpayer purchases his new residence before he sells his old residence, the fact that he rents out the new residence during the period before he vacates the old residence will not prevent the application of this subsection. [H. Rept. No. 586, 82d Cong., 1st Sess. (1951), p. 109; S. Rept. No. 781 (Supp.), 82d Cong., 1st Sess. (1951), p. 32.]
This is recognized by respondent in his regulations quoted above.
In our opinion "all of the facts and circumstances" in the instant case, "including the bona fides of the taxpayer," indicate to our satisfaction *520 that the property sold by the taxpayer was used by him as a residence "in contradistinction to property used in trade or business and property held for the production of income" in spite of the fact that "the taxpayer*22 temporarily [rented] out * * * the old * * * residence."
Our decision, limited strictly to the facts here present, is in favor of petitioner upon the issue before us.
Decision will be entered for the petitioners.
Footnotes
1. This figure does not include interest or taxes.↩
1. This figure does not include repair and other expense deductions for the year 1948.↩
2. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(n) Gain From Sale or Exchange of Residence. --
(1) Nonrecognition of gain. -- If property (hereinafter in this subsection called "old residence") used by the taxpayer as his principal residence is sold by him and, within a period beginning one year prior to the date of such sale and ending one year after such date, property (hereinafter in this subsection called "new residence") is purchased and used by the taxpayer as his principal residence, gain (if any) from such sale shall be recognized only to the extent that the taxpayer's selling price of the old residence exceeds the taxpayer's cost of purchasing the new residence.
Regulations 111. (As amended by T. D. 5991, 1953-1 C. B. 146, 154.)
Sec. 29.112 (n)-1. Gain from sale or exchange of residence. -- (a) In general. -- Gain from a sale after December 31, 1950, of property used by the taxpayer as his principal residence (referred to hereinafter as the "old residence") will not be recognized if the taxpayer within a period beginning one year prior to the date of such sale and ending one year after such date purchases property and uses it as his principal residence (referred to hereinafter as the "new residence") except to the extent that the taxpayer's selling price of the old residence exceeds the taxpayer's cost of purchasing the new residence. In the case of a new residence the construction of which was commenced by the taxpayer at any time prior to the expiration of one year after the date of the sale of the old residence, the one year after the sale of the old residence referred to in the preceding sentence shall be considered as including a period of 18 months beginning with the date of the sale of the old residence. Such nonrecognition of gain is mandatory. This section applies only with respect to gains; losses from sales of property used by the taxpayer as his principal residence are recognized or not recognized without regard to this section.
(b) Rules for application of section. -- (1) Property used by the taxpayer as his principal residence. -- Whether or not property is used by the taxpayer as his residence, and whether or not property is used by the taxpayer as his principal residence (in the case of a taxpayer using more than one property as a residence), depends upon all of the facts and circumstances in each individual case, including the bona fides of the taxpayer. The mere fact that property is, or has been, rented is not determinative that such property is not used by the taxpayer as his principal residence. For example, if the taxpayer purchases his new residence before he sells his old residence, the fact that he temporarily rents out the new residence during the period before he vacates the old residence may not, in the light of all the facts and circumstances in the case, prevent the new residence from being considered as property used by the taxpayer as his principal residence. Property used by the taxpayer as his principal residence may include a houseboat, a house trailer, or stock held by a tenant-stockholder in a cooperative apartment corporation (as those terms are defined in section 23 (z) (2)), if the apartment which the taxpayer is entitled to occupy as such stockholder is used by him as his principal residence. Property used by the taxpayer as his principal residence does not include personal property such as a piece of furniture, a radio, etc., which, in accordance with the applicable local law is not a fixture.
Where part of a property is used by the taxpayer as his principal residence and part is used for other purposes, an allocation must be made to determine the application of this section. If the old residence is used only partially for residential purposes, only that part of the gain allocable to the residential portion may be not recognized under this section and only an amount allocable to the selling price of such portion need be reinvested in the new residence in order to have the gain allocable to such portion not recognized under this section. If the new residence is used only partially for residential purposes, only so much of its cost as is allocable to the residential portion may be counted as the cost of purchasing the new residence.↩