Decision will be entered for respondent.
Ps owned and used a house as a principal residence for 2 years. Ps wanted to enlarge and remodel the house but were advised by an architect that more stringent building and permit restrictions had been enacted since the house was built. In 1999, rather than remodel the house, Ps voluntarily demolished it and constructed a new house on the property. Ps never occupied the new house, and in 2000 they sold it for $ 1,100,000. Ps realized capital gain of $ 591,406 on the sale of the new house. On their untimely 2000 Federal income tax return Ps did not report any of the gain from the sale of the new house. Ps subsequently agreed that $ 91,406 of the gain was taxable, but they claimed that $ 500,000 of the gain was excludable from income under
135 T.C. 1">*2 MARVEL,
After concessions, 2 the issues for decision are: (1) Whether petitioners may exclude from gross income $ 500,000 of capital gain from the sale in 2000 of property on Summit Road 2010 U.S. Tax Ct. LEXIS 18">*20 in Santa Barbara, California (Summit Road property), under
The parties submitted this case fully stipulated pursuant to
On December 14, 1984, petitioner David A. Gates (Mr. Gates) purchased the Summit Road property for $ 150,000. The Summit Road property included an 880-square-foot two-story building with a studio on the second level and living quarters on the first level (original house). 3
On August 12, 1989, Mr. Gates married petitioner Christine A. Gates. Petitioners resided in the original house for a period of at least 2 years from August 1996 to August 1998.
In 1996 petitioners decided to enlarge and remodel the original house, 2010 U.S. Tax Ct. LEXIS 18">*21 and they hired an architect. The architect advised petitioners that more stringent building and permit restrictions had been enacted since the original house was built. 4
Subsequently, petitioners demolished the original house and constructed a new three-bedroom house (new house) on 135 T.C. 1">*3 the Summit Road property. 5The new house complied with the building and permit requirements existing in 1999. During 1999 petitioners had outstanding mortgage loans, but the record does not disclose the identity of the property or properties that secured the mortgage loans or the dates, amounts, or purposes of the loans. 62010 U.S. Tax Ct. LEXIS 18">*22
Petitioners never resided in the new house. 7 On April 7, 2000, petitioners sold the new house for $ 1,100,000. The sale resulted in a $ 591,406 gain to petitioners.
On April 15, 2001, petitioners applied for an automatic extension of time for filing their 2000 Form 1040, U.S. Individual Income Tax Return (2000 return). However, petitioners failed to file their 2000 return by the August 15, 2001, due date. On September 17, 2001, petitioners filed their 2000 return. 8
On their 2000 return, petitioners did not report as income any of the $ 591,406 capital gain generated from the sale of the Summit Road property. Petitioners subsequently agreed that $ 2010 U.S. Tax Ct. LEXIS 18">*23 91,406 of the gain should have been included in their gross income for 2000, but they asserted that the remaining gain of $ 500,000 was excludable from their income under
Petitioners timely petitioned this Court seeking a redetermination of the deficiency and addition to tax. Petitioners 135 T.C. 1">*4 assert that respondent erred in determining that they were not entitled to exclude $ 500,000 of the gain under
Ordinarily, the Commissioner's 2010 U.S. Tax Ct. LEXIS 18">*24 determination is entitled to a presumption of correctness,
Petitioners do not dispute that they received proceeds from the sale of the Summit Road property or that the sale resulted in gain that is taxable to them unless some part of the gain is excluded under
Gross income means all income from whatever source derived, unless excluded by law. See
The issue presented arises from the fact that
Respondent contends that petitioners did not sell property they had owned and used as their principal residence for the required statutory period because they never occupied the new house as their principal residence before they sold it. Respondent's argument interprets the term "property" to mean, or at least include, a dwelling that was owned and occupied by the taxpayer as his "principal residence" for at least 2 of the 2010 U.S. Tax Ct. LEXIS 18">*27 5 years immediately preceding the sale. Respondent urges this Court to conclude that a qualifying sale under
Predictably, petitioners disagree. Petitioners argue that any analysis of
Because
The American Heritage Dictionary of the English Language 1405 (4th ed. 2000) defines "property" as "Something owned; a possession", "A piece of real estate", and "The right of ownership; title." Merriam-Webster's Collegiate Dictionary 935 (10th ed. 1997) defines "property" as "a quality or trait belonging and esp. peculiar to an individual or thing" and "something owned or possessed;
The American Heritage Dictionary of the English Language 1395 (4th ed. 2000) defines "principal" in its first definition as "First, highest, or foremost in importance, rank, worth, or degree; chief." Similar definitions appear in other dictionaries. See, e.g., Merriam-Webster's 2010 U.S. Tax Ct. LEXIS 18">*30 Collegiate Dictionary 926 (10th ed. 1997); Black's Law Dictionary 1312 (9th ed. 2009).
The American Heritage Dictionary of the English Language 1483 (4th ed. 2000) defines "residence" as "The place in which one lives; a dwelling" and "The act or a period of residing in a place." Merriam-Webster's Collegiate Dictionary 996 (10th ed. 1997) defines "residence" as "1 a: the act or fact of dwelling in a place for some time b: the act or fact of living or regularly staying at or in some place for the discharge of a duty or the enjoyment of a benefit" and "3 a: building used as a home: DWELLING [synonym]". See also Black's Law Dictionary 1423 (9th ed. 2009). When the dictionary definitions of "principal" and "residence" are combined, we conclude that "principal residence" may have two possible meanings. It can either mean the chief or primary
Because there is more than one possible meaning for both the term "property" and the term "principal residence", we cannot conclude that the meaning of
Until 1951 any gain realized on the sale of a principal residence was taxed as capital gain. S. Rept. 781, 82d Cong., 1st Sess. (1951),
In 1964 Congress enacted
In the Taxpayer Relief Act of 1997 (TRA 1997),
The legislative history of Calculating capital gain from the sale 2010 U.S. Tax Ct. LEXIS 18">*36 of a principal residence is among the most complex tasks faced by a typical taxpayer. Many taxpayers buy and sell a number of * * * * Present law also may discourage some older taxpayers from selling their * * * [H. Rept. 105-148, at 347 (1997),
The conclusion that we reach from an examination of the legislative history surrounding the enactment of
Our conclusion regarding the meaning that Congress attaches to the terms "property" and "principal residence" in
In
Former
Although we recognize that petitioners would have satisfied the requirements under
If a taxpayer assigns error to the Commissioner's determination that the taxpayer is liable for the addition to tax, the Commissioner has the burden, under
Petitioners admit that they did not file a timely Federal income tax return for 2000. This is sufficient to satisfy respondent's burden of producing evidence that the
135 T.C. 1">*15 We have considered all the other arguments made by the parties, and to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
Reviewed by the Court.
COLVIN, COHEN, GALE, THORNTON, WHERRY, GUSTAFSON, PARIS, and MORRISON,
COHEN,
The dissent argues that the holding of the majority is inconsistent with the remedial purpose of
The focal point of the
The fully stipulated facts reveal that the dwelling petitioners sold was not used as their principal residence 2010 U.S. Tax Ct. LEXIS 18">*49 for the required 2-year period. Petitioners demolished their former principal residence and built a new, much larger house that they never occupied. The facts are decisive and support the holding of the majority.
The dissent maintains that, because petitioners owned and used their former principal residence (old house, now demolished, and old land) for the required 2-year period, the property 135 T.C. 1">*16 that they sold (new house and old land) qualifies for the exclusion. The dissent argues that this result is consistent with Congress' intention to liberalize the exclusion rules in 1997 when it amended
The majority's holding is consistent with caselaw that has developed under the predecessor provisions of
If petitioners had sold their old home instead of demolishing it, they would have qualified for the Hypothetical applications that come to mind and those advanced at oral argument illustrate the difficulty of interpreting the statute in a single opinion that would apply to all possible fact situations. We therefore focus upon the case before us and allow other facts to await their legal resolution on another day.
We have often stated that we "must decide the case in the light of what was done, not what might have been done."
GALE, THORNTON, MARVEL, WHERRY, GUSTAFSON, and PARIS,
HALPERN,
The gain 2010 U.S. Tax Ct. LEXIS 18">*54 exclusion rule of
While the majority is correct that the Supreme Court has said that exclusions from income are to be narrowly construed,
With that latter rule of construction in mind, consider a taxpayer whose longtime home is demolished by a natural disaster (a hurricane). The taxpayer lacks insurance. Nevertheless, she rebuilds on the same land (perhaps a bit further from the ocean) and lives in the rebuilt house for 18 months, and then she sells the house and land at a gain. Although the taxpayer satisfies the property use condition, I assume that, nevertheless, under the majority's analysis, she gets no exclusion because she fails the temporal condition; i.e., she has not lived in the rebuilt house for 2 or more of the last 5 years. 12010 U.S. Tax Ct. LEXIS 18">*57 I assume further that, if her house had been only damaged (and not demolished), and she repaired it, she would get an exclusion. That seems like an untenable distinction to me. 2
The majority's interpretation of the property use condition naturally suggests that there is some recognizable difference between remodeling a house and demolishing and rebuilding the house. I assume the majority does not mean to suggest that any remodeling of a home (1) terminates the use of that home as the taxpayer's principal residence and (2) resets the temporal clock to zero time elapsed. If not, then is there some level of remodeling that does (1) terminate the use of the home as the taxpayer's principal residence and (2) set the temporal clock to zero? 2010 U.S. Tax Ct. LEXIS 18">*58 What about a taxpayer who, wanting a bigger house, demolishes the old house (but not the foundation) and constructs a larger (taller) house using the old foundation? Is that remodeling or rebuilding? What about keeping part of the foundation, and expanding horizontally? If that is remodeling, then there may be an easy way for the Court to reach a similar result in the case before us. The parties have stipulated an exhibit, a blueprint, that shows footprints of both the old and the new house. I have examined the exhibit, and the footprints overlap. Might we not conclude that part of the foundation of the old house was incorporated into the new, thus making the case a remodeling case and not a rebuilding case?
The majority's report will undoubtedly raise the kind of remodeling versus rebuilding questions that I have raised. I think that the better course would be to avoid provoking those questions.
Cases, see, e.g.,
I would treat the demolition and reconstruction of petitioners' house no differently from a renovation. As a second best solution (if I had adequate information), I would treat the original house as being sold for zero dollars upon its demolition and apply
WELLS, 2010 U.S. Tax Ct. LEXIS 18">*60 GOEKE, KROUPA, and HOLMES,
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. Petitioners concede that the destruction of the original house does not qualify as an involuntary conversion under
3. The previous owner of the house had converted the first level from a two-car garage to living quarters in 1972.↩
4. The record does not establish whether the new building and permit restrictions prevented petitioners from remodeling and expanding the original house.↩
5. The footprint of the new house has a very different shape from that of the original house, and it appears to be two to three times larger than the footprint of the original house. Only about one-half of the land area of the original house overlaps with the land area covered by the new house, and no part of the original foundation perimeter corresponds to the foundation perimeter of the new house.↩
6. Although petitioners suggest in their posttrial brief that the loans were related to the demolition of the old house and the construction of the new house, there is no credible evidence in the record that permits us to make any finding about the nature and use of the loans.
7. During the demolition and construction period, petitioners resided at a location that does not appear in the record. The record does not contain any information regarding whether or when petitioners purchased and moved into a new principal residence.↩
8. Petitioners' 2000 return was postmarked on Sept. 5, 2001.↩
9. In the notice of deficiency respondent determined a $ 500,000 adjustment because petitioners had conceded a $ 91,406 capital gain adjustment.↩
10. Petitioners do not contend that
11. Black's Law Dictionary 441 (9th ed. 2009) defines "curtilage" as "The land or yard adjoining a house, usu. within an enclosure."
12. As enacted in 1951, former (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.
13. The taxpayer had to reduce the basis in the new residence by the amount of gain excluded under former
14. In 1954 (a) Nonrecognition of Gain.--If property (in this section called "old residence") used by the taxpayer as his principal residence is sold by him after December 31, 1953, and, within a period beginning 1 year before the date of such sale and ending 1 year after such date, property (in this section 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 adjusted sales price * * * of the old residence exceeds the taxpayer's cost of purchasing the new residence.↩
15. In 1964 (a) General Rule.--At the election of the taxpayer, gross income does not include gain from the sale or exchange of property if-- (1) the taxpayer has attained the age of 65 before the date of such sale or exchange, and (2) during the 8-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as his principal residence for periods aggregating 5 years or more.
16. We have found only one case where the taxpayers were permitted to exclude gain on a sale of land that did not occur simultaneously with the sale of the taxpayers' principal residence. See
Courts have distinguished
Regulations under amended
17.
18. Petitioners do not contend or provide any authority for the proposition that we should allocate the gain between gain on the land and gain on the residence, or offer any evidence to support such an allocation.
1. Under the facts assumed, the destruction of the original house does not result in the conversion of the house into similar property or into money. See
2. It is no answer to that criticism to say, as Judge Cohen↩ does, that it is not the Court's job to anticipate and decide cases that are not yet before it. We are a national court that treats its own cases as precedent until we overrule ourselves by action of the Court Conference. This case (and my arguments) have been before the Court Conference. We should recognize, as no doubt the Commissioner and taxpayers will, the weight that the analysis in this case will carry in similar situations under principles of stare decisis.
