Joseph Melville Woods, Jr. v. Commissioner

JOSEPH MELVILLE WOODS, JR., PETITIONER v. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT
Docket No. 27484–09. Filed October 27, 2011.
P entered into a contract for deed to purchase a house in
2008, took possession of the house in 2008, and claimed the
first-time homebuyer tax credit pursuant to I.R.C. sec. 36 on
his 2008 Federal income tax return. The house required ren-
ovations before being ready for occupancy. Petitioner intended
to use the first-time homebuyer tax credit to pay for the nec-
essary renovations. In February 2009 petitioner received
$7,500 for the first-time homebuyer tax credit and began ren-
ovations. In August 2009 R issued P a statutory notice of defi-
ciency denying P’s claimed first-time homebuyer tax credit for
2008. Upon receiving notice that R was denying the credit, P
suspended renovations of the house. R argues that P is not
entitled to the first-time homebuyer tax credit for two rea-
sons. First, R argues that P took possession of the house
under a contract for deed and therefore has not ‘‘purchased’’
the house pursuant to I.R.C. sec. 36. Next, R argues that even
if P satisfies the ‘‘purchase’’ requirement of I.R.C. sec. 36, the
house was not P’s ‘‘principal residence’’ in 2008 as that term
159
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160 137 UNITED STATES TAX COURT REPORTS (159)
is used in I.R.C. sec. 36. P argues that he intended to occupy
the house as his full-time home as soon as the renovations
were complete. Held: Pursuant to Texas property law, the con-
tract for deed granted P equitable title to the house, and P
therefore has ‘‘purchased’’ the house under I.R.C. sec. 36.
Held, further, I.R.C. sec. 36 requires a prospective analysis,
asking whether a taxpayer will occupy a house as a principal
residence. Held, further, P has established that he intends to
occupy the house as his principal residence as soon as the nec-
essary renovations are complete, and he is therefore entitled
to the first-time homebuyer tax credit for 2008.
Joseph Melville Woods, Jr., pro se.
Christopher M. Menczer, for respondent.
HAINES, Judge: Respondent determined a deficiency in
petitioner’s 2008 Federal income tax of $7,500. The sole issue
for decision is whether petitioner is entitled to the first-time
homebuyer tax credit (FTHBC) for 2008 pursuant to section
36. 1
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, together with the attached exhibits,
is incorporated herein by this reference. At the time peti-
tioner filed his petition, he resided in Texas.
Petitioner works in Rice, Texas, and has been working
there since 1999. Throughout most of that time, petitioner
lived in Dallas, which is approximately 50 miles from Rice.
Because of the distance and the commuting cost, petitioner
began looking for a permanent place to live in Rice. In 2008
petitioner found a house for sale in Rice (the Rice house).
Petitioner also learned through an advertisement that he
might be eligible for the FTHBC. Petitioner confirmed the
possibility of the FTHBC through his own research on the
Internal Revenue Service (IRS) Web site and discussions with
his tax preparer.
On December 18, 2008, petitioner entered into an agree-
ment for deed to purchase (contract for deed) the Rice house
from Capital T Properties (Capital T) for $75,000 and took
possession of the house. Petitioner paid Capital T an initial
downpayment of $2,000 and agreed to pay the balance of the
1 Unless otherwise indicated, all section references are to the Internal Revenue Code, as
amended for the year at issue.
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(159) WOODS v. COMMISSIONER 161
purchase price together with 7 percent interest over 184
months. Although petitioner took possession of the Rice
house under the contract for deed, legal title does not
transfer from Capital T to petitioner until petitioner has paid
the final monthly installment. Petitioner is required to pay
all property taxes attributable to the Rice house for all
periods after December 18, 2008.
The Rice house required renovations before being ready for
occupancy. Petitioner planned to use the FTHBC to fund the
necessary renovations and could not afford the renovations
without the credit. In January 2009 petitioner claimed the
FTHBC on his 2008 Federal income tax return. In February
2009 petitioner received $7,500 for the FTHBC. 2 As a result,
in March 2009 renovations on the Rice house began.
During the period of renovation, petitioner lived in a rental
house in Dallas until a fire left it uninhabitable. He has
since lived with his daughter in Dallas. On August 20, 2009,
the IRS sent petitioner a notice of deficiency disallowing the
FTHBC. As a result, petitioner suspended renovations of the
Rice house. On November 18, 2009, the Court filed peti-
tioner’s timely petition challenging respondent’s determina-
tion with respect to the FTHBC.
OPINION
I. FTHBC
Section 36(a) provides a refundable tax credit to a first-
time homebuyer of a principal residence in the United
States. In 2008 the amount of the credit was 10 percent of
the purchase price of the residence, with a limitation of
$7,500. Sec. 36(b)(1)(A). Section 36(c)(1) defines a first-time
homebuyer as any individual (and if married, the individual’s
spouse) having no present ownership interest in a principal
residence during the 3-year period ending on the date of the
purchase of the principal residence. Section 36(c)(2) provides
that the term ‘‘principal residence’’ has the same meaning as
used in section 121.
Respondent contends that petitioner fails to qualify for the
FTHBC for two reasons. First, respondent argues that peti-
2 Although referred to as a ‘‘credit’’, for the tax year in question (i.e., 2008) the FTHBC is es-
sentially a governmental, non-interest-bearing loan inasmuch as the recipient taxpayer repays
the credit by an increase in the income tax rate over a 15-year period. Sec. 36(f)(1).
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162 137 UNITED STATES TAX COURT REPORTS (159)
tioner took possession of the Rice house under contract for
deed and has not acquired legal or equitable title of the prop-
erty. Next, respondent argues that even if petitioner satisfies
the ‘‘purchase’’ requirement of section 36, the Rice house was
not petitioner’s ‘‘principal residence’’ in 2008.
II. Whether for Federal Tax Purposes Petitioner ‘‘Purchased’’
the Rice House
We first address the issue of whether petitioner ‘‘pur-
chased’’ the Rice house in 2008. 3 To decide when a transfer
is complete for tax purposes, we examine all the surrounding
facts and circumstances, no single one of which is controlling.
Baird v. Commissioner, 68 T.C. 115, 124 (1977). The focus of
our inquiry, however, is on when the benefits and burdens of
ownership have shifted. Id. Generally, a transfer is complete
upon the earlier of the transfer of title or the shift of the
benefits and burdens of ownership. Deyoe v. Commissioner,
66 T.C. 904, 910 (1976) (citing Dettmers v. Commissioner, 430
F.2d 1019, 1023 (6th Cir. 1970), affg. Estate of Johnston v.
Commissioner, 51 T.C. 290 (1968)).
In a Federal tax controversy, State law controls the deter-
mination of the taxpayer’s interest in the property, and the
tax consequences are then determined under Federal law.
United States v. Natl. Bank of Commerce, 472 U.S. 713, 722
(1985) (and cases cited and quoted therein). Accordingly, to
determine the property rights transferred to petitioner from
Capital T pursuant to the contract for deed, we must look to
Texas property law.
We reviewed a similar transaction under Texas property
law in Musgrave v. Commissioner, T.C. Memo. 2000–285. In
Musgrave, the taxpayers signed a contract for deed to sell a
property to a church in a bargain sale and claimed a chari-
table contribution deduction for the difference between the
fair market value and the sale price of the property. The tax-
payers agreed to sell and the church agreed to purchase the
property for $152,500, to be paid in monthly installments of
$1,400. Under the contract for deed, the taxpayers retained
legal title to the property, but the church had full rights of
3 Sec. 36(c) provides that the term ‘‘purchase’’ means any acquisition, but only if: (1) The prop-
erty is not acquired from a related person; or (2) the basis of the property in the hands of the
acquiring person is not determined in whole or in part by the basis of the property in the hands
of the seller, or under sec. 1014(a). Neither of these limitations is applicable in this case.
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(159) WOODS v. COMMISSIONER 163
possession and was required to pay any applicable property
taxes on the property and the taxpayers were required to
convey legal title to the church when the final monthly
installment was paid. The issue before us was whether equi-
table title (i.e., the benefits and burdens of ownership)
passed from the taxpayers to the church in the year the par-
ties entered into the contract for deed.
In finding for the taxpayers, we relied on the holding by
the Supreme Court of Texas in Criswell v. European Cross-
roads Shopping Ctr., Ltd., 792 S.W.2d 945, 949 (Tex. 1990),
which described the substance of a contract for deed as
effecting a ‘‘change of ownership wherein [the] purchaser
becomes [the] equitable owner of the property while all that
remains in [the] seller is bare legal title, more in the nature
of security to guarantee payment than anything else’’. As in
Musgrave v. Commissioner, supra, we see no reason to treat
the contract for deed between petitioner and Capital T dif-
ferently. The contract for deed is a financing arrangement
between Capital T, as the seller, and petitioner, as the buyer.
Although legal title remains with Capital T, equitable title
passed to petitioner in 2008 upon signing of the contract for
deed. Petitioner paid Capital T an initial downpayment of
$2,000 and took possession of the Rice house. Petitioner is
required to pay all property taxes after December 18, 2008.
Finally, nothing in the contract for deed removes petitioner’s
obligation to make his monthly payments to Capital T for
any reason. Therefore, we find that petitioner acquired equi-
table title and therefore ‘‘purchased’’ the Rice house in 2008
for purposes of section 36.
III. Whether the Rice House Was Petitioner’s ‘‘Principal Resi-
dence’’ in 2008
Next, respondent argues that the Rice house does not sat-
isfy the ‘‘principal residence’’ requirement of section 36. Sec-
tion 36(c)(2) provides that the term ‘‘principal residence’’ has
the same meaning for purposes of section 36 as in section
121. Section 121 generally provides that gross income does
not include gain from the sale or exchange of property if,
during the 5-year period ending on the date of sale or
exchange, such property has been owned and used by the
taxpayer as the taxpayer’s ‘‘principal residence’’ for periods
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164 137 UNITED STATES TAX COURT REPORTS (159)
aggregating 2 years or more. Consequently, section 121
requires a retrospective analysis, asking whether a taxpayer
has occupied a primary residence for 2 of the previous 5
years.
Section 36 is fundamentally different from section 121.
Section 36(a) provides that
In the case of an individual who is a first-time homebuyer of a principal
residence in the United States during a taxable year, there shall be
allowed as a credit against the tax imposed by this subtitle for such tax-
able year an amount equal to 10 percent of the purchase price of the resi-
dence. [Emphasis added.]
Pursuant to section 36, a taxpayer who purchases a home
during a taxable year may be entitled to the FTHBC for that
same year. There is no occupancy requirement to establish a
‘‘principal residence’’. In contrast to section 121, section 36
requires a prospective analysis. Therefore, for purposes of
section 36, ‘‘principal residence’’ means the primary dwelling
or house that a taxpayer will occupy as his principal resi-
dence.
The appropriateness of this prospective analysis is further
supported by section 36(f), which requires a taxpayer to
recapture the FTHBC if the principal residence for which the
taxpayer claimed the credit is disposed of or ceases to be the
taxpayer’s principal residence within the recapture period. 4
Through section 36(f), Congress created a retrospective anal-
ysis similar to section 121 that protects against taxpayers
who qualify for the FTHBC but fail to maintain the home as
a principal residence pursuant to section 36. This safety net
provision ensures that the fisc is protected where a taxpayer
fails to satisfy the statutory requirements throughout the
recapture period.
Respondent argues that because petitioner never occupied
the Rice house it is not his ‘‘principal residence’’ and he is
not entitled to the FTHBC. Petitioner argues that he is enti-
tled to the FTHBC because he intended to occupy the Rice
house as his principal residence as soon as renovations were
completed. He further argues that he intended to use the
FTHBC to pay for the renovations and that he was forced to
4 Sec. 36(f)(7) defines the term ‘‘recapture period’’ as the 15 taxable years beginning with the
second taxable year following the taxable year in which the purchase of the principal residence
for which the FTHBC was allowed was made.
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(159) WOODS v. COMMISSIONER 165
suspend work on the Rice house when he learned that the
FTHBC had been disallowed. Petitioner therefore argues that
he was not given the opportunity to establish the Rice house
as his principal residence.
We agree with petitioner. Section 36 requires a prospective
analysis of whether petitioner purchased the Rice house to
occupy it as his principal residence. 5 Petitioner purchased
the Rice house because it was close to his work. He intends
to occupy the home as his principal residence when renova-
tions are completed. We may accept a taxpayer’s unverified
testimony where we find it to be credible and persuasive.
Teymourian v. Commissioner, T.C. Memo. 2005–232. We find
petitioner to be honest and his testimony to be both credible
and persuasive. There is no evidence that petitioner intended
to use the Rice house for any purpose other than as his prin-
cipal residence. Therefore, we hold that petitioner is entitled
to the FTHBC of $7,500 for 2008 pursuant to section 36.
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we
conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered for petitioner.
f
5 The prospective analysis adopted for a taxpayer that ‘‘purchases’’ and ‘‘renovates’’ a home
is different from the approach mandated in the case of a taxpayer that ‘‘constructs’’ a new home.
Sec. 36(c)(3)(B) provides that a ‘‘residence which is constructed by the taxpayer shall be treated
as purchased by the taxpayer on the date the taxpayer first occupies such residence.’’ Sec.
36(c)(3)(B) requires that the taxpayer occupy a newly constructed home before qualifying for the
FTHBC. We anticipate that the distinction between a taxpayer who ‘‘purchases’’ and ‘‘renovates’’
a home and a taxpayer who ‘‘constructs’’ a new home may give rise to future questions. It is
not this Court’s job to anticipate and decide cases that are not yet before it. Gates v. Commis-
sioner, 135 T.C. 1, 17 (2010).
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