Daily Development for
Thursday, October 29, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

Note that there are two Sec. 121 cases reported here:

FEDERAL INCOME TAX; GAIN; SALE OR EXCHANGE OF PRINCIPAL RESIDENCE: Residence may qualify as "principal residence" for purposes of nonrecognition treatment in a sale under IRC Sec. 121 even though taxpayer did not physically occupy the residence for five years before the sale.

Gummer v. U.S., 981 U.S.T.C. ¶ 50,401 (U.S. Ct. Cl. 4/30/98).

Because of a precipitous decline in the California real estate market, taxpayer was unable to sell her house for the $690,000 listing price, and successively lowered her price over the next four years until she finally was able to sell it for $420,000. But this took over four years.

The taxpayer lived in the house for seven months while attempting to sell it, and then moved to a rental apartment in another state. In the ensuing years preceding the sale, taxpayer kept a substantial portion of her furniture in the house to maintain a "lived in appearance" and allowed her adult grandchildren to live in the house for one and one half years. She herself, however, lived elsewhere, as noted. The statute required that to qualify for nonrecognition treatment the taxpayer must use property as a principal residence for three of the five years preceding the sale.

In what appears to be an important test case, the IRS addressed a large number of arguments to support its conclusion that the court should not apply the same "facts and circumstances" test in dealing with Section 121 that it had earlier adopted in connection with the interpretation of the "exchange of principle residence" section, IRC Section 1034. The court here successively batted away each of the Service's arguments and ultimately concluded that the same "facts and circumstances" test would apply. Under that test, the courts had earlier ruled that for purposes of IRC Sec. 1034 a residence would be treated as "used for residential purposes" even if the taxpayer had vacated it if market factors prevented the disposition of the property for a substantial period of time. Although taxpayer appeared to have mustered facts to support such a claim here, the court remanded for further development of the record to be certain that the taxpayer's claim was sound.

Comment: Note that under rewritten IRC Sec. 121 the deferral of gain is available in larger amounts and the required use as a principal residence has been reduced to two of the five years preceding the sale, rather than three, but the principles of this case would still appear to apply.

FEDERAL INCOME TAX; GAIN; SALE OF PRINCIPAL RESIDENCE; USE AND OWNERSHIP TESTS: Married taxpayers were not entitled to § 121exclusion of gain on the sale of a principal residence where they lived in the residence for more than three years but owned the residence for less than the requisite three year period.

Blanton v. Commissioner, T.C. Memo. 1998211.

Before the closing of the purchase, taxpayers took possession of the property, assuming some of the burdens and benefits of ownership. However, they did not assume the risk of loss with respect to the house, the responsibility to insure the property, and the obligation to pay property taxes. Thus, they did not assume enough of the burdens and benefits of ownership to be deemed the owners of the property prior to passage of the title.

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