DocketNumber: Tax Ct. Dkt. No. 14941-97
Citation Numbers: 1998 T.C. Memo. 322, 76 T.C.M. 402, 1998 Tax Ct. Memo LEXIS 324
Judges: JACOBS
Filed Date: 9/10/1998
Status: Non-Precedential
Modified Date: 4/18/2021
Decision will be entered for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, JUDGE: Respondent determined a $12,952 deficiency in petitioners' 1993 Federal income tax and a
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.
FINDINGS OF FACT
Some of the *325 facts have been stipulated, and the stipulation of facts is incorporated in our findings by this reference. Petitioners resided in Ely, Minnesota, at the time they filed their petition.
BACKGROUND
Douglass H. Bartley (petitioner) received a bachelor of arts degree in business administration from the University of Arizona in 1970 and a juris doctor degree from the University of Arizona Law School in 1973. Petitioner had a private law practice in Milwaukee, Wisconsin, until 1980; at that time, he moved to Washington, D.C., and began working at Washington Gaslight Co. In approximately 1983, he returned to his private practice in Milwaukee.
In April 1987, the Governor of Wisconsin appointed petitioner a commissioner (the equivalent of a State tax court judge) to the Wisconsin Tax Appeals Commission (the commission). This was a part-time position. (As a part-time commissioner, petitioner was permitted to maintain his private law practice.) Petitioner received $50,000 in yearly compensation as a commissioner. In 1992, he was appointed to a full-time position on the commission to fill the remainder of an unexpired term (March 31, 1993) of a commissioner who had resigned. (By accepting the *326 full-time position, petitioner was required to abandon his private law practice.) Petitioner was not reappointed at the end of the interim term, and he thereafter returned to private practice, spending a substantial amount of his practice on Federal and State tax law issues.
SALE OF RESIDENCE
On September 28, 1987, petitioners purchased a house in Mequon, Wisconsin (the Mequon residence), for $155,000. In late 1987, they built an addition to the Mequon residence (which was completed in January 1988) costing $48,606, so that petitioner's mother could live with them. She paid rent to petitioners.
Petitioners used 83 percent of the Mequon residence for personal purposes and 17 percent for rental purposes.
In 1991, petitioners spent $9,475 on further improvements to the Mequon residence. Between 1988 and 1992, petitioners claimed depreciation of $4,913 on the rental portion of the Mequon residence.
As a consequence of petitioner's departure from the commission, petitioners could no longer afford the monthly mortgage payments; thus petitioners sold their Mequon residence for $270,000 on June 15, 1993.
The parties stipulated that the adjusted basis of the Mequon residence on the date *327 of sale was $213,582, and that the selling expenses totaled $21,191 (of which $17,588 was allocated as personal expenses and $3,603 as rental expenses). 2 Thus, the gain on the sale of petitioners' Mequon residence was $40,140. (The amount of gain is not in dispute.)
In June 1993, petitioners purchased land in Ely, Minnesota, and built a cabin thereon (the Ely residence), costing $66,588. They began living there in October 1993. On February 1, 1994, petitioners sold the Ely residence for $66,588. Subsequently, they moved into a rental apartment.
FEDERAL INCOME TAX RETURN
Petitioners neither reported any capital gain on the sale of their Mequon residence on their 1993 Federal income tax return nor attached thereto a Form 2119, Sale of Your Home.
During 1996, petitioners were audited by one of respondent's agents. The auditor requested information from petitioners with respect to the sale of their Mequon residence. On September 16, 1996, petitioners provided Form 2119 and Form 4797, Sales of Business Property, to *328 the Internal Revenue Service auditor assigned to their case. However, petitioners did not execute either form.
NOTICE OF DEFICIENCY
In the notice of deficiency, respondent determined that the capital gain petitioners received from the sale of their Mequon residence was includable in their 1993 income. Respondent calculated petitioners' capital gain in the following manner:
Personal | Business | ||
Total | 83% | 17% | |
Sale price | $ 270,000 | $ 224,100 | $ 45,900 |
Add: Depreciation allowed | 4,913 | --- | 4,913 |
Less: Adjusted basis in | |||
property | (213,582) | (177,273) | (36,309) |
Selling expenses | (21,191) | (17,588) | (3,603) |
Capital gain on sale of | |||
property | 40,140 | 29,239 | + 10,901 |
OPINION
ISSUE 1. GAIN FROM SALE OF HOME
The first issue is whether petitioners must include as income the capital gain realized from the sale of their Mequon residence in 1993. Respondent maintains that because petitioners failed to satisfy the requirements of
a.
Generally,
Petitioners bear the burden of showing their entitlement to the nonrecognition of income benefits of
Although petitioners purchased the Ely residence within 2 years of selling the Mequon residence, the adjusted sale price of the Mequon residence ($248,809) exceeded the cost of the Ely residence by $182,221, which in turn exceeded the $40,140 gain realized on the sale. Thus, because petitioners did not meet the requirements of
b. CONSTITUTIONAL ARGUMENTS
Petitioners contest the constitutionality of any statutory provisions or Internal Revenue Service (IRS) actions (or inactions) which result in capital gain from the sale of their Mequon residence, arguing as follows: (1) The capital gain respondent determined is a violation of their equal protection and due process rights because
First, we do not agree that taxing the capital gain realized on the sale of petitioners' Mequon residence is a violation of petitioners' equal protection rights. The
Under equal protection analysis, a classification in a Federal statute is subject to strict scrutiny only if it interferes with the exercise of a fundamental right or operates to the peculiar disadvantage of a suspect class. Regan v. Taxation with
Where a tax statute results in differing treatment of different classes of persons, the statute generally is not in violation of the
In the case before us, no denial of the equal protection or due process provisions of the Constitution has occurred.
this bill amends the present provisions relating to a gain on the sale of a taxpayer's principal residence so as to eliminate a hardship under existing law which provides that when a personal residence is sold at a gain the difference between its adjusted basis and the sale price is taxed as a capital gain. The hardship is accentuated when the transactions are necessitated by such facts as an increase in the size of the family or a change in the place of the taxpayer's employment. In these situations the transaction partakes of the nature of an involuntary conversion. * * *
See
Over the years, the governing Code provision has changed slightly. See H. Rept. 1337, 83d Cong., 2d Sess. A268-A269 (1954). The rules under
It is clear from the legislative history that Congress viewed the deferral of capital gains tax as a means to alleviate hardships for growing families purchasing a new home and for taxpayers changing employment and thus needing to purchase a new residence. Because a rational basis exists for the gain deferral under
In repealing
To postpone the entire capital gain from the sale of a principal residence, the purchase price of a new home must be greater than the sales price of the old home. This provision of present law encourages some taxpayers to purchase larger and more expensive houses than they otherwise would *340 in order to avoid tax liability, particularly those who move from areas where housing costs are high to lower-cost areas. This promotes an inefficient use of taxpayer's financial resources.
H. Rept. 105-148, at 761-762 (1997). Thus, in 1997, Congress repealed
We now turn to petitioners' age discrimination argument. Section 121, 6 a companion to
In
In sum, we hold that no denial of the equal protection or due process provisions of the Constitution has occurred herein.
Petitioners maintain that to tax the gain from the sale of their Mequon residence because they could not afford to purchase another house of equal or greater value constitutes "blatant discrimination on the basis of wealth." Petitioners' economic hardship situation does not alleviate their obligation to report the gain on the sale of their Mequon residence, as required by
In addition, petitioners argue that taxpayers are unfairly treated when the value of their home increases because of inflation. They contend that
The $40,140 of alleged gain is fictitious, for the IRS gain computation assumes that the taxpayers' 1987 purchase dollars are equivalent to 1993 sale dollars. If equivalent dollars are used to compute gain here, the $40,140 "gain" becomes a loss of $8,397. An income tax may not be imposed on a loss without violating
Other taxpayers have raised the argument of inflation as grounds for failing to report income. We have consistently rejected this argument. See
Finally, petitioners argue that because
Although petitioners, nominal gain may or may not equal their real gain in an economic sense, neither the Constitution nor tax laws "embody perfect economic theory". See
d. CONCLUSION
On the basis of the foregoing analysis, we hold that the gain realized from the sale of petitioners' Mequon residence is taxable in 1993. Moreover, respondent's computation of gain is sustained.
ISSUE 2.
The second issue is whether petitioners are liable for the
Petitioners argue that the portion of the negligence penalty attributable to the gain on the residence is "unjustified *350 because the gain is not taxable in the first place and because petitioners were not negligent in any event in that they did report the sale transaction and its details in a timely fashion." We disagree.
Petitioner was a well-educated attorney who spent a substantial part of his career in tax law. He is a former Wisconsin Tax Appeals commissioner. It is evident that he was familiar with Federal and State tax law. Although petitioner was fully aware of petitioners' duty to report the capital gain on the Mequon residence, petitioners failed to file Form 2119 with their 1993 income tax return. 11 The taxpayer must file Form 2119 to notify the IRS of the sale for the tax year in which the old residence is sold, whether or not gain is realized.
Petitioners failed to satisfy the requirements of
Accordingly, we sustain respondent's determinations with respect to the
To reflect the foregoing and petitioners, concessions,
Decision will be entered for respondent.
1. On May 5, 1998, respondent filed a motion to impose a sec. 6673 penalty. On July 10, 1998, respondent filed a motion to withdraw the May 5 motion. On July 14, 1998, we granted respondent's motion to withdraw the motion to impose a sec. 6673 penalty.↩
2. At closing, after subtracting the unpaid balances of three mortgages totaling $192,251 and the selling expenses, petitioners received $50,533 of the proceeds.↩
3.
References hereinafter to
4. In their petition, petitioners state as follows:
a. Taxing "gain" on the sale of our residence has no rational basis and violates the Equal Protection component of the
(1) The tax invidiously discriminates in favor of wealthy homeowners and against those less fortunate. The wealthier homeowner, who trades up to a more expensive house, has no taxable gain. In contrast, the less affluent homeowner, who can't afford a more expensive house or must move into rental quarters, gets taxed merely because he can't come up with enough to buy anything or because he can't afford to buy a house of equivalent or greater price.
(2) The tax also invidiously discriminates on the basis of age. Those who are 55 or older get an exclusion that no one else qualifies for.
b. Taxing the "gain" violates the
c. The house "gain" taxing scheme violates the Equal Protection component of the
5. The wide scope of powers of the legislature under the
It is inherent in the exercise of the power to tax that a state be free to select the subjects of taxation and to grant exemptions. Neither due process nor equal protection imposes upon a state any rigid rule of equality of taxation. This Court has repeatedly held that inequalities which result from a singling out of one particular class for taxation or exemption, infringe no constitutional limitation.
Like considerations govern exemptions from the operation of a tax imposed on the members of a class. A legislature is not bound to tax every member of a class or none. It may make distinctions of degree having a rational basis, and when subjected to judicial scrutiny they must be presumed to rest on that basis if there is any conceivable state of facts which would support it. Citations omitted. ↩
6. The one-time exclusion for gain on the sale of residences applied to homes sold before May 7, 1997. Sec. 121 was amended by sec. 312(a) and (d)(1), Taxpayer Relief Act of 1997, 111 Stat. 836, 839.↩
7. Sec. 121 differed from
8. In adopting this one-time exclusion provision, Congress' intent was as follows:
The Congress believed that the taxes imposed upon an individual with respect to gain that he or she realizes on the sale or exchange of his or her principal residence, in many instances, may be unduly high, especially in view of recent inflation levels and the increasing cost of housing. The Congress believed that, in most situations, the nonrecognition provisions of present law operate adequately to allow individuals to move from one residence to another without recognition of gain or payment of tax. However, where an individual has owned his or her principal residence for a number of years and sells it either to purchase a smaller, less expensive dwelling, or to move into rental quarters, any tax due on the gain realized may be too high. While the provisions of prior law relating to the exclusion of gain by taxpayers who attained the age of 65 may ameliorate this situation somewhat, the Congress believed that the prior dollar limits and age restriction were unrealistic in view of increasing housing costs and decreasing retirement ages. In addition, the Congress believed that the holding period of a principal residence which is involuntarily converted should be tacked to that of a replacement residence for purposes of meeting the use and occupancy requirements needed to qualify for the exclusion upon a sale of the replacement residence.
Staff of Joint Comm. on Taxation, General Explanation of the Revenue Act of 1978, at 255-256 (J. Comm. Print 1979). ↩
9. In fact, there were a number of other sections in the Internal Revenue Code that provided for differing tax treatment depending upon the taxpayer's age. For instance, a taxpayer who attained age 25 before the close of the computation year and was not a full-time student during the 4 taxable years commencing upon attaining the age of 21 and ending with the computation year would be eligible for income averaging. Former sec. 1303(c)(2)(A) (Tax Reform Act of 1986, Pub. L. 99-514, sec. 141(a), 100 Stat. 2117, repealed sec. 1303, applicable to tax years beginning after Dec. 31, 1986); see
In addition, if a taxpayer fails to roll over distributed retirement funds within 60 days, and the distribution is made before the date the taxpayer attains the age of 59-1/2, and none of the other exceptions in sec. 72(t)(2) applies, the tax on the distribution is increased by an amount equal to 10 percent of the portion includable in gross income. Sec. 72(t).
10. We note that when Congress desires to take inflation into account, it does so by statute. See, e.g., secs. 1(f), 151.↩
11. Generally, cash basis taxpayers must include all items of income in the gross income for the taxable year in which actually or constructively received. Sec. 451(a);
12. Petitioners argue that they filed a 1994 Form 2688, Application for Additional Extension of Time To File U.S. Individual Income Tax Return, which notified the IRS of the sale of the Mequon residence. At most, Form 2688 notified respondent that petitioners sold a residence in 1994, which would have been their Ely residence.
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Regan v. Taxation With Representation of Washington , 103 S. Ct. 1997 ( 1983 )