DocketNumber: Tax Ct. Dkt. No. 10861-97
Citation Numbers: 1998 T.C. Memo. 421, 76 T.C.M. 926, 1998 Tax Ct. Memo LEXIS 418
Judges: THORNTON
Filed Date: 11/24/1998
Status: Non-Precedential
Modified Date: 4/18/2021
Decision will be entered for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, JUDGE: Respondent determined a deficiency of $ 55,814 in petitioners' 1993 Federal income tax and a $ 11,163 accuracy-related penalty under
The issues for decision are: (1) Whether petitioners are required to include in income capital gain from the sale of investment property; (2) whether certain interest payments and taxes that petitioners reported as Schedule E deductions from rental real estate income should be redesignated as Schedule A itemized deductions; and (3) whether petitioners are liable for an accuracy- related penalty pursuant to
FINDINGS OF FACT
The parties have stipulated some of the facts, which are so found. The stipulation of facts is incorporated herein by this reference. At the time the petition was filed, petitioners were husband and wife whose 1998 Tax Ct. Memo LEXIS 418">*419 primary residence was in Carmel, California.
On July 12, 1976, petitioners purchased a house in Pacific Grove, California, for $ 48,351. They resided in this house for approximately 4 years before converting it into rental property.
On April 7, 1992, petitioners purchased a 5-acre lot in Big Sur, California, for $ 160,316. Their purchase offer contained no contingencies. Borrowing against a personal line of credit, petitioners paid the seller of the property, Marcia D'Esopo, $ 35,316 as a cash downpayment and assumed a note for the balance of the purchase price. In July 1992, petitioners began work to construct a house on the Big Sur property. The house was completed in August 1994, and petitioners commenced using it as a rental property.
In the meantime, on March 16, 1993, petitioners sold the Pacific Grove property to Allen and Marla Elvin (the Elvins) for $ 228,668. The Elvins entered into an agreement with petitioners whereby, upon the closing of a Chicago Title Company escrow account, the money consideration for the Pacific Grove property would be deposited into an account that petitioners opened at Provident Central Credit Union for this purpose. After the sales proceeds were deposited, 1998 Tax Ct. Memo LEXIS 418">*420 petitioners directed Provident Central Credit Union to make payments by cashier's check to contractors hired to make improvements on the Big Sur property. In addition, petitioners directed Provident Central Credit Union to reimburse petitioner husband for the downpayment on the Big Sur property and for expenses incurred to improve it. Statements from the Provident Central Credit Union account were sent directly to petitioners' home address. Petitioners had sole authority to withdraw funds and make payments from the account.
Petitioners did not report any gain on the sale of the Pacific Grove property on their joint 1993 Federal income tax return, nor did their return include a Form 8824, Like-Kind Exchanges.
In the notice of deficiency, respondent determined that petitioners failed to meet the requirements for a
OPINION
Generally, a taxpayer must recognize the entire amount 1998 Tax Ct. Memo LEXIS 418">*421 of gain or loss on the sale or exchange of property.
(1) In general. -- No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.
The purpose of
An exchange ordinarily requires a "reciprocal transfer of property, as distinguished from a transfer of property for a money consideration only".
Petitioners purchased the Big Sur property from Marcia D'Esopo with a cash downpayment and assumed a note for the balance of the purchase price. Almost a year later, they sold the Pacific Grove property to the Elvins and received cash. Although petitioners may have intended to effect a
In a case with facts that are not favorably distinguishable for petitioners, the court to which an appeal of this case would lie reached a similar conclusion. In
Petitioners contend that they never would have sold the Pacific Grove property except for their need to generate funds to improve the Big Sur property, and that hence the two transactions were interdependent. We question the premises and disagree with the conclusion. While petitioners may have viewed the sale of the Pacific Grove property as a source of revenue to finance construction on the Big Sur property, a year prior to the sale of the Pacific Grove property they were able to borrow against their personal line of credit to make a cash downpayment on the Big Sur property. Moreover, they began construction on the Big Sur property 9 months prior to the Pacific Grove sale. In any event, neither the petitioners' financial motivation for selling the Pacific Grove property nor their application of the sales proceeds operates to transform the independent purchase 1998 Tax Ct. Memo LEXIS 418">*425 and sale transactions into an exchange. See
Likewise, it is of no material significance that the Elvins agreed that the money consideration for their purchase of the Pacific Grove property should be deposited into petitioners' Provident Central Credit Union account. Indeed, it is difficult to imagine what difference it could have made to the Elvins. Petitioners had unfettered and unrestrained control over the money in the Provident Central Credit Union account, which was in their names. Although the funds were used to finance improvements at the Big Sur property and to reimburse petitioner husband for the cash downpayment on the Big Sur property, petitioner husband conceded at trial that payment could have been made out of the account for any purpose. These circumstances strongly support the conclusion that the Pacific Grove sale was an independent transfer of property for money consideration rather than part of an exchange. See
At most, the circumstances relating to petitioners' establishment 1998 Tax Ct. Memo LEXIS 418">*426 and use of the Provident Central Credit Union account evidence their belated intent to avail themselves of
At trial and on brief, petitioners cite
Accordingly, we sustain respondent's determination that petitioners have failed to meet the requirements for a
INTEREST EXPENSES AND TAXES
On Schedule E of their 1993 joint Federal income tax return, in computing a claimed loss from rental real estate, petitioners claimed expenses and taxes relating to several rental properties, including the Big Sur property. Respondent determined that since construction of the Big Sur rental property was not completed and rental did not commence until 1994, petitioners had no ongoing business in 1993 1998 Tax Ct. Memo LEXIS 418">*428 with regard to this property. Accordingly, respondent reallocated from Schedule E to Schedule A, as itemized deductions, the interest and taxes attributable to the Big Sur property.
Petitioners bear the burden of proving that respondent's determinations are erroneous.
ACCURACY-RELATED PENALTY
Any understatement is reduced to the extent that it is attributable to an item that was adequately disclosed and has a reasonable basis, or for which there was substantial authority for its tax treatment.
The remaining question is whether there was substantial authority for the tax treatment petitioners claimed. Substantial authority exists when the weight of authority supporting the treatment of an item is substantial as compared to the weight of authority for the contrary treatment.
Petitioners' position is not supported by any well- reasoned construction of the relevant statutory provisions. There is no substantial authority for their position that the purchase of the Big Sur property and the subsequent sale of their Pacific Grove property constituted an exchange. The cases petitioners have cited on brief are readily distinguishable and to the extent they are pertinent, undermine their position. Similarly, there is no substantial authority for petitioners' treatment of the reallocated items.
Accordingly, we sustain respondent's imposition of the accuracy-related penalty.
To reflect the foregoing,
Decision will be entered for respondent.
1. Subsequent to the decision in
Bell Lines, Inc. v. United States , 480 F.2d 710 ( 1973 )
Coastal Terminals, Inc. v. United States , 320 F.2d 333 ( 1963 )
T. J. Starker v. United States , 602 F.2d 1341 ( 1979 )
Garbis S. Bezdjian and Maida M. Bezdjian v. Commissioner of ... , 845 F.2d 217 ( 1988 )
John M. Rogers and John M. Rogers, of the Estate of Gladys ... , 377 F.2d 534 ( 1967 )
June Pinson Carlton and Charles T. Carlton, as ... , 385 F.2d 238 ( 1967 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Koch v. Commissioner , 71 T.C. 54 ( 1978 )