Lead Opinion
OPINION
Respondent determined a deficiency in petitioners’ Federal income tax of $112,553 and an addition to tax under section 6651(a)(1)
After concessions,
Background
The parties submitted this case fully stipulated pursuant to Rule 122. We incorporate the stipulation of facts into our findings by this reference. Petitioners resided in California when the petition was filed.
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).
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, 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.
Subsequently, petitioners demolished the original house and constructed a new three-bedroom house (new house) on the Summit Road property.
Petitioners never resided in the new house.
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.
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 $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 section 121. On September 9, 2005, respondent mailed petitioners a notice of deficiency for 2000 that increased petitioners’ income by $500,000
Petitioners timely petitioned this Court seeking a redeter-mination of the deficiency and addition to tax. Petitioners assert that respondent erred in determining that they were not entitled to exclude $500,000 of the gain under section 121. Petitioners also argue that because they are not liable for a deficiency, respondent erred in determining that they were liable for the section 6651(a)(1) addition to tax.
Discussion
I. Burden of Proof
Ordinarily, the Commissioner’s determination is entitled to a presumption of correctness, Rapp v. Commissioner,
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 section 121(a). Accordingly, we hold that respondent’s determination is entitled to the presumption of correctness and that petitioners have the burden of proof. We note, however, that this case is fully stipulated and that there is no disputed issue of fact that might be affected by our assignment of the burden of proof.
II. Sale of the Summit Road Property
Gross income means all income from whatever source derived, unless excluded by law. See sec. 61(a); sec. 1.61 — 1(a), Income Tax Regs. Generally, gain realized on the sale of property is included in a taxpayer’s income. Sec. 61(a)(3). Section 121(a), however, allows a taxpayer to exclude from income gain on the sale or exchange of property if the taxpayer has owned and used such property as his or her principal residence for at least 2 of the 5 years immediately preceding the sale. Section 121(a) specifically provides:
SEC. 121(a). Exclusion. — Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. [Emphasis added.]
The maximum exclusion is $500,000 for a husband and wife who file a joint return for the year of the sale or exchange. Sec. 121(b)(2). A married couple may claim the $500,000 • exclusion on the sale or exchange of property they owned and used as their principal residence if either spouse meets the ownership requirement, both spouses meet the use requirement, and neither spouse claimed an exclusion under section 121(a) during the 2-year period before the sale or exchange. Sec. 121(b)(2)(A).
The issue presented arises from the fact that section 121(a) does not define two critical terms — “property” and “principal residence”. Section 121(a) simply provides that gross income does not include gain from the sale or exchange of property if “such property” has been owned and used by the taxpayer “as the taxpayer’s principal residence” for the required statutory period.
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 5 years immediately preceding the sale. Respondent urges this Court to conclude that a qualifying sale under section 121(a) is one that includes the sale of a dwelling used by the taxpayer as his principal residence. Because petitioners never resided in the new house before its sale in 2000, respondent maintains that the new house was never petitioners’ principal residence.
Predictably, petitioners disagree. Petitioners argue that any analysis of section 121(a) must recognize that the exclusion thereunder applies to the gain on the sale of property that was used as the taxpayer’s principal residence. Petitioners’ argument focuses on two facts — petitioners used the original house as their principal residence for the period required by section 121(a) and they sold the land on which the original house had been situated. Petitioners contend that the term “property” includes not only the dwelling but also the land on which the dwelling is situated. Petitioners seem to argue that the requirements of section 121(a) are satisfied if a taxpayer lived in any dwelling on the property for the required 2-year period even if that dwelling is not the dwelling that is sold. Petitioners contend that because they used the original house and the land on which it was situated as their principal residence for the required term, the Summit Road property qualifies as their principal residence and $500,000 of the gain generated by the sale of the property is excluded under section 121.
Because section 121 does not define the terms “property” and “principal residence”, we must apply accepted principles of statutory construction to ascertain Congress’ intent. It is a well-established rule of construction that if a statute does not define a term, the term is given its ordinary meaning. See Perrin v. United States,
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; specif: a piece of real estate”. Black’s Law Dictionary 1335-1336 (9th ed. 2009) defines “property” as “The right to possess, use, and enjoy a determinate thing (either a tract of land or a chattel)” and “Any external thing over which the rights of possession, use, and enjoyment are exercised”.
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 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 place where a person lives or the chief or primary dwelling in which a person resides. Likewise, the term “property” as used in section 121(a) can refer more broadly to a parcel of real estate, or it can refer to the dwelling (and related curtilage)
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 section 121(a) is clear and unambiguous. Section 121(a) is not explicit as to whether Congress intended section 121 to apply to a sale of property when the property sold does not include the dwelling that the taxpayer used as a principal residence for the period that section 121(a) requires. Because section 121(a) is ambiguous, we may examine the legislative history of section 121 and its predecessor provisions to ascertain Congress’ intent regarding the proper tax treatment of principal residence sales.
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), 1951-
In 1964 Congress enacted section 121 (former section 121) as part of the Revenue Act of 1964, Pub. L. 88-272, sec. 206, 78 Stat. 38, to provide older taxpayers tax relief on the sale of their principal residences.
In the Taxpayer Relief Act of 1997 (tra 1997), Pub. L. 105-34, sec. 312(a) and (b), 111 Stat. 836, 839, Congress again amended former section 121 and repealed former section 1034. Section 121 as amended by TRA 1997 (section 121) provides that a taxpayer generally may exclude up to $250,000 of gain realized on the sale or exchange of a principal residence occurring after May 6, 1997, each time the taxpayer sells or exchanges a principal residence and meets the eligibility requirements under section 121. Section 121 applies to petitioners’ sale of the Summit Road property.
The legislative history of section 121 supports a conclusion that Congress intended the terms “property” and “principal residence” to mean a house or other dwelling unit in which the taxpayer actually resided. In explaining the 1997 amendment to section 121, the House Committee on the Budget used the terms “home” and “house” and their derivations interchangeably with the term “principal residence”:
Calculating capital gain from the sale of a principal residence is among the most complex tasks faced by a typical taxpayer. Many taxpayers buy and sell a number of homes over the course of a lifetime, and are generally not certain of how much housing appreciation they can expect. Thus, even though most homeowners never pay any income tax on the capital gain on their principal residences, as a result of the rollover provisions and the $125,000 one-time exclusion, detailed records of transactions and expenditures on home improvements must be kept, in most cases, for many decades. To claim the exclusion, many taxpayers must determine the basis of each home they have owned, and appropriately adjust the basis of their current home to reflect any untaxed gains from previous housing transactions. This determination may involve augmenting the original cost basis of each home by expenditures on improvements. In addition to the record-keeping burden this creates, taxpayers face the difficult task of drawing a distinction between improvements that add to basis, and repairs that do not. The failure to account accurately for all improvements leads to errors in the calculation of capital gains, and hence to an under- or overpayment of the capital gains on principal residences. By excluding from taxation capital gains on principal residences below a relatively high threshold, few taxpayers would have to refer to records in determining income tax consequences of transactions related to their house.
* * * * * * *
Present law also may discourage some older taxpayers from selling their homes. Taxpayers who would realize a capital gain in excess of $125,000 if they sold their home and taxpayers who have already used the exclusion may choose to stay in their homes even though the home no longer suits their needs. * * *
[H. Rept. 105-148, at 347 (1997), 1997-4 C.B. (Vol. 1) 319, 669; emphasis added.]
The legislative history demonstrates that Congress intended the term “principal residence” to mean the primary dwelling or house that a taxpayer occupied as his principal residence. Nothing in the legislative history indicates that Congress intended section 121 to exclude gain on the sale of property that does not include a house or other structure used by the taxpayer as his principal place of abode. Although a principal residence may include land surrounding the dwelling, the legislative history supports a conclusion that Congress intended the section 121 exclusion to apply only if the dwelling the taxpayer sells was actually used as his principal residence for the period required by section 121(a).
The conclusion that we reach from an examination of the legislative history surrounding the enactment of section 121 is bolstered by and is consistent with regulations promulgated under the predecessor provisions of section 121. Section 1.121-3(a), Income Tax Regs., under former section 121, provided that the term “principal residence” has the same meaning as in section 1034 and the regulations thereunder. Section 1.1034-1(c)(3)(i), Income Tax Regs., under former section 1034 (section 1034 regulations), provided that whether property was used by the taxpayer as his principal residence depended on all the facts and circumstances in each case, including the good faith of the taxpayer. The section 1034 regulations further provided that property used by the taxpayer as his principal residence may include a houseboat, a house trailer, or stock held by a tenant-stockholder in a cooperative housing corporation, if the dwelling which the taxpayer is entitled to occupy as such stockholder is used by him as his principal residence. The focal point of the section 1034 regulations was the dwelling unit a taxpayer uses as his principal residence. The section 1034 regulations reinforce our conclusion that to obtain the benefits of former section 1034, a taxpayer who sells a dwelling must have actually used it as his principal residence.
Our conclusion regarding the meaning that Congress attaches to the terms “property” and “principal residence” in section 121(a) is also consistent with caselaw interpreting former section 1034, as in effect before its repeal. This Court held that in order to qualify under former section 1034, a taxpayer had to sell a dwelling that he used as his principal residence.
In O’Barr v. Commissioner,
Former section 1034 required that a taxpayer sell “property * * * used by the taxpayer as his principal residence” in order to qualify for deferral. In 1997, when Congress amended section 121 and repealed section 1034, tra 1997 sec. 312(a) and (b), Congress continued to use the wording of former section 1034 to describe the type of property that qualified for exclusion treatment under section 121(a) if sold — “property * * * used by the taxpayer as the taxpayer’s principal residence”. Congress did not give any indication in the legislative history of section 121 that it intended that wording to have a meaning for the purpose of section 121 different from the meaning it had been accorded under former section 1034; nor did Congress state that it disagreed with the interpretation of that wording in cases that had interpreted former section 1034. We infer from the consistent use of the phrase “property * * * used by the taxpayer as his principal residence” in former section 1034 and in section 121 as amended by Congress in 1997 that Congress intended the comparable wording in the two sections to be interpreted comparably.
Although we recognize that petitioners would have satisfied the requirements under section 121 had they sold or exchanged the original house instead of tearing it down, we must apply the statute as written by Congress. Rules of statutory construction require that we narrowly construe exclusions from income. Commissioner v. Schleier,
III. Addition to Tax Under Section 6651(a)(1)
Section 6651(a)(1) authorizes the imposition of an addition to tax for failure to file a timely return, unless it is shown that such a failure is due to reasonable cause and not due to willful neglect. United States v. Boyle,
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 section 7491(c), of producing evidence to show that the section 6651(a) addition to tax applies. See Swain v. Commissioner,
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 section 6651(a)(1) addition to tax applies. Petitioners did not introduce any evidence to prove that they had reasonable cause for their failure to file their 2000 return timely. Consequently, we sustain respondent’s determination.
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,
Decision will be entered for respondent.
Reviewed by the Court.
Notes
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.
Petitioners concede that the destruction of the original house does not qualify as an involuntary conversion under sec. 1033. Petitioners further concede a $12,010 operating loss adjustment.
The previous owner of the house had converted the first level from a two-car garage to living quarters in 1972.
The record does not establish whether the new building and permit restrictions prevented petitioners from remodeling and expanding the original house.
Petitioners do not contend that sec. 7491(a) shifts the burden of proof to respondent, and petitioners have not established that the requirements of sec. 7491(a) have been met. Moreover, because there are no factual issues in dispute, sec. 7491(a) does not apply.
Black's Law Dictionary 441 (9th ed. 2009) defines “curtilage” as “The land or yard adjoining a house, usu. within an enclosure ”
As enacted in 1951, former sec. 112(n)(l) provided as follows:
SEC. 112(n). Gain From Sale or Exchange of Residence.—
(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.
The taxpayer had to reduce the basis in the new residence by the amount of gain excluded under former sec. 112(n)(l). S. Rept. 781, 82d Cong., 1st Sess. (1951), 1951 —
In 1954 sec. 1034(a) read as follows:
SEC. 1034. SALE OR EXCHANGE OF RESIDENCE
(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.
In 1964 sec. 121 read as follows:
SEC. 121. GAIN FROM SALE OR EXCHANGE OF RESIDENCE OF INDIVIDUAL WHO HAS ATTAINED AGE 65.
(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.
Courts have distinguished Bogley on the grounds that in Bogley the sale of the 10 acres was not a sale of land alone as the dwelling was also sold albeit in a transaction separate from the sale of the 10 acres. See Hughes v. Commissioner,
Regulations under amended sec. 121, as currently in effect, provide that if a taxpayer meets certain requirements, gain from the sale of land alone may qualify for the sec. 121 exclusion. Sec. 1.121 — 1(b)(3), Income Tax Regs. However, to qualify under this provision of the regulations, the taxpayer must still sell a “dwelling unit” that meets the requirements under sec. 121 within 2 years before or after the sale of the land. Sec. 1.121-1(b)(3)(i)(C), Income Tax Regs. The regulations under amended sec. 121 are effective for sales on or after Dec. 24, 2002. Sec. 1.121-1(f), Income Tax Regs.
Sec. 121(c) provides that a taxpayer who fails to meet the ownership or use requirements under sec. 121(a) because of “a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances” is entitled to a prorated exclusion under sec. 121(a). The prorated exclusion is based on the period of a taxpayer’s ownership and use of the principal residence. See sec. 121(c)(1). Because petitioners never used the new house as their principal residence, they would not qualify for proration in any event. Even if they did, however, petitioners did not introduce any credible evidence to support their claim to a prorated exclusion. Petitioners argue that the unsustainable debt they incurred in constructing the new house is an unforeseen circumstance that justifies an exclusion under sec. 121(a). However, petitioners did not introduce any credible evidence regarding the debt they allegedly incurred or that the debt was “unsustainable”, or that unsustainable debt qualified as “unforeseen circumstances” within the meaning of sec. 121(c).
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.
Concurrence Opinion
concurring: I agree with the majority and write to explain my disagreement with the dissent.
The dissent argues that the holding of the majority is inconsistent with the remedial purpose of section 121. This Court’s assigned task in the first instance, however, is to apply section 121 as written to the facts of this case. Section 121 requires that we examine the sale or exchange of property and provides that if the property sold was owned and used by the taxpayer as the taxpayer’s principal residence for at least 2 of the 5 years preceding the sale or exchange, the taxpayer qualifies for the exclusion under section 121(a).
The focal point of the section 121 analysis is the property sold or exchanged. In this case the property sold consisted of land that petitioners had used for the required period (old land) and a new dwelling in which petitioners had never resided (new house). After concluding that the term “principal residence” means the dwelling (and associated land) in which a taxpayer resided as his or her primary home, the majority examined the facts to see whether what petitioners sold qualified as a principal residence within the meaning of section 121(a).
The fully stipulated facts reveal that the dwelling petitioners sold was not used as their principal residence 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 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 section 121. However, the dissent ignores the fact that the term “principal residence” has been consistently used by Congress since 1951, and there is no evidence in the legislative history of the Taxpayer Relief Act of 1997 (tra 1997), Pub. L. 105-34, sec. 312(a) and (b), 111 Stat. 836, 839, which amended section 121 and repealed section 1034, to indicate that Congress intended to change the meaning of the term “principal residence” sub silentio when it amended section 121. Although section 121 as amended by the TRA 1997 blended the approaches of former section 121 and former section 1034 to provide a simpler and more uniform treatment of gain generated by the sale of a principal residence, Congress did not change the definition of principal residence, a term it has used consistently since 1951 when section 112(n), the predecessor provision to former section 1034, was first enacted.
The majority’s holding is consistent with caselaw that has developed under the predecessor provisions of section 121, most particularly former section 1034. The cases examine the dwelling to decide whether the property sold was used as the taxpayer’s principal residence. If a taxpayer sold a dwelling that the taxpayer used as a principal residence, the taxpayer qualified for the deferral provided by former section 1034 if the other requirements of section 1034 (such as the timely purchase of a qualifying replacement property) were met. If a taxpayer sold some part of the underlying land but not the dwelling that the taxpayer used as a principal residence, the taxpayer could not defer the recognition of gain on the sale because the taxpayer did not sell his or her principal residence. See, e.g., Hughes v. Commissioner,
If petitioners had sold their old home instead of demolishing it, they would have qualified for the section 121 exclusion. That is not what they did. They demolished the old home, constructed a new and larger dwelling, and then sold the new dwelling without occupying it for the required 2-year period. The dissent objects to the result and argues that the majority’s analysis in this case will distort the result in other cases in which the taxpayer should qualify for the section 121 exclusion. The response to this argument is straightforward — it is not this Court’s job to anticipate and decide cases that are not yet before it. As the Supreme Court cautioned in Dewsnup v. Timm,
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.” Paula Constr. Co. v. Commissioner,
Dissenting Opinion
dissenting: There is adequate ground for the majority’s conclusion that, to qualify for the section 121 exclusion, the taxpayer must sell not only the land on which her principal residence is located but also the principal residence itself. Nevertheless, I think that there is also adequate ground for concluding that petitioners’ sale of the new house qualified for that exclusion.
Interpretation Contrary to the Remedial Intent of Section 121(a)
The gain exclusion rule of section 121(a) applies if three conditions are met: (1) There must be a sale or exchange (without distinction, sale); (2) the sale must be of “property * * * owned and used by the taxpayer as the taxpayer’s principal residence” (the property use condition), and (3) the property use condition must be satisfied for 2 out of the 5 years ending on the date of sale of the property (the temporal condition). The majority focuses on the second condition (the property use condition) and interprets the condition as being satisfied only if the property sold constitutes, at least in part, “a house or other structure used by the taxpayer as his principal place of abode.” Majority op. p. 10. The majority does not rely on the text of the statute for that interpretation (which text it concludes is ambiguous) but looks to a report of the Committee on Ways and Means, House of Representatives (included as part of H. Rept. 105-148, at 285 (1997), 1997-4 C.B. (Vol. 1) 319, 607, a report of the Committee on the Budget, House of Representatives, accompanying H.R. 2014, 105th Cong., 1st Sess. (1997), which was enacted as the Taxpayer Relief Act of 1997, Pub. L. 105-34, 111 Stat. 788), explaining the committee’s reasons for recommending an amendment to section 121. The committee’s reasons are principally the difficulties a homeowner faces in keeping track of his basis in his home. The committee report language the majority quotes neither addresses the language of the proposed amendment nor purports to exhaust the situations giving rise to the need for the amendment. It provides insufficient grounds to conclude “that Congress intended the section 121 exclusion to apply only if the dwelling the taxpayer sells was actually used as his principal residence for the period required by section 121(a).” Majority op. p. 10 (emphasis added).
While the majority is correct that the Supreme Court has said that exclusions from income are to be narrowly construed, Commissioner v. Schleier,
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.
Difficult Interpretative Questions
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? 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.
Disposition of House Followed by Sale of Land
Cases, see, e.g., Bogley v. Commissioner,
Conclusion
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 section 121 to a subsequent sale of the land (and new house).
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 sec. 1033(a). Therefore, the rebuilt house is not property acquired after an involuntary conversion, and there would be no tacking of the use and period of occupancy of the original house onto the rebuilt house for purposes of sec. 121. See sec. 121(d)(5)(C).
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.