Stephen Bolaris and Valerie H. Bolaris v. Commissioner of Internal Revenue

SKOPIL, Before REINHARDT, and HALL, Circuit Judges.

CYNTHIA HALL, HOLCOMB Circuit Judge:

I. FACTS. The taxpayers, Stephen and Valerie H. (the “Bolarises”), Bolaris purchased a home Jose, California, San in April 1975 for $44,000 and used it as their resi- dence until October they when moved into a new they home had constructed at a $107,040. cost of They attempted sell their old home continuously July until August it was sold in $70,- 1978 for

In beginning, the Bolarises tried un- successfully days for 90 to sell their old point home. At they rented the home (to on a month-to-month basis “lessen the carrying burden of the property”) at a fair rental value in length an arm’s transaction. eight After months the Bolarises asked the tenant to leave in the hopes of improving saleability of the house. To that end repainted cleaned and the home. About six weeks after original tenant left, and after the house improved, Bolarises received their buy first offer to the old which the accepted. Bolarises purchasers Because the having were diffi- culty obtaining financing, the Bolarises agreed buyers to rent the old home to the financing. buyers until obtained month, rented the home for about one bought finally August it on 1978 for $70,000. joint filed income tax re- deficiencies of in 1977 and $486 $408

The Bolarises $29,021 in- reporting salaries turns $33,- in 1977 salaries

terest of $281 pro se petition The Bolarises filed a addi- interest $286 simplified proce- the Tax Court under from their old home tion, rent they received dure small tax cases. $2,717 $1,271 in 1978. From in 1977 7456(d)(3), day 7463. On the of trial the depreciation deducted of this income asserting filed an amended IRS answer an $1,120 in rental 1978 and in 1977 and $3,339 $373 deficiency raising increased of and $3,607 $1,365 in in 1977 and expenses of for the first time the of issue whether the depreciation disallowed the The IRS 1978. recogni- Bolarises were entitled to deferred (except interest and real expense and rental gain tion of the from the sale of their old $2,915 in in taxes of $486 estate home under I.R.C. section 1034.2 The IRS given statutory in 1978).1 the The reason if contended that the Bolarises were enti- disallowing depreciation the and gain notice tled to deferred on the sale of their old was that the rental of the expenses rental home under were not entitled not entered into as trade or depreciation expenses home “was or rental on the production of income.” or for the business old home under 167 and 212.3 As far as §§ disallowances, along determine, disal- These with a we have been able to this is an impression. Court, and California State issue of first lowed IRA deduction deduction, decision,4 permitted resulted in in a reviewed deferred Disability Insurance (B) qualified paid and real estate taxes as item- which are Interest or before the 30th day after ized under 163 and 164 of the the date of the sale of the old §§ residence; Revenue Code of 26 U.S.C. Internal (further 163 and 164 references to the Inter- §§ (C) "I.R.C.”) which are— cited nal Revenue Code of 1954 (i) comput- not allowable as deductions in the old residence was held for whether or not 63(a) (de- ing taxable income under section production of income. income), fining taxable (ii) computing not taken into account in During years question tax in section 1034 realized amount from the sale of the old provided part: in residence. (a) Nonrecognition gain of Section 1034 has since been amended to allow (in property If dence") this section called "old resi- non-recognition gain if the new residence is by taxpayer principal used as his purchased years within two before or after the and, by period residence is sold him within a date of sale of the old residence. Pub.L. No. beginning 18 months before the date of such 97-34, I, 112(b)(4), 122(a), (b), Title 95 Stat. date, ending sale and 18 months after such 195, 197. (in this section called resi- “new provides part: 3. Section 167 in dence") purchased by taxpayer and used residence, (a) (if gain any) General as his rule.—There shall be allowed as a from depreciation recognized only deduction a reasonable allow- such salé shall be to the ex- obsolescence)— (as ance for ... taxpayer's adjusted price tent that sales (1) used in the trade or busi- (b)) defined in subsection of the old residence ness, or taxpayer’s purchasing exceeds the cost of (2) new residence. income. (b) Adjusted price sales defined (1) general provides part: section, Section in purposes “adjusted For of this sales individual, In the case of an there shall be realized, price” means the amount reduced ordinary as a deduction all the allowed aggregate for work necessary expenses paid during or incurred performed on the old residence in order to year— the taxable sale. assist its (1) of in- or collection (2) Limitations come; (1) provided paragraph The reduction conservation, management, expenses— applies pro- maintenance of (A) during 90-day performed for work duction of income ... period ending day on the on which the to sell the old residence is entered contract into; Special before a Trial 4. This case was tried opinion; opinion Judge who wrote an gain from the sale of the out recognition of the rents either the old or the new resi- not, Bolarises’ claimed may denied the dence but of all the under depreciation case, facts and pre- circumstances 212, accepting the sections 167 and vent the recognized. not theory and rental IRS’s example, For if the taxpayer purchases expenses, and deferred his new residence before he sells his old mutually exclusive as a matter of residence, were the fact that he rents out the appealed pro se to this law. The Bolarises during period new residence before Circuit. he vacates the old pre- residence will not application vent the of this subsection. II. DELAYED R.Rep. Cong., H. No. 82d 1st Sess. RECOGNITION OP GAIN. reprinted Cong. in 1951 U.S.Code & Ad. The first issue is whether the Bolarises News Clapham See also delayed recognition are entitled to home under section on the sale of their old We affirm permit- the Tax Court’s decision stated, Tax the 1034. As the Court IRS ting recognition deferred gain of from the seriously challenge applicabil- “does not sale of the Bolarises’ old home. question, ity of section 1034 to the sale III. DEDUCTIONS FOR PROPERTY stating that ‘the best view of the facts of HELD THE FOR PRODUCTION qualify this case is that for [the Bolarises] OF INCOME. 1034 treatment. section [Section 1034] never con- available because question A more difficult by [the Bolarises] is raised ” personal verted the house from use.’ Bo- Tax Court’s denial of and oth- 840, laris v. 81 T.C. 844 expense er rental deductions. Section 167 (1983). The Tax Court held that the Bolar- permits depreciation “prop- deductions for prior ises rental of their old residence to its erty production held for of income.” preclude applicability sale did not of 167(a)(2). permits I. 212 R.C. Section de- 1034, IRS, citing Clapham v. 63 for ductions insurance and miscellaneous (1975). Bolaris, T.C. 505 81 T.C. at 845-47. expenses. (per- maintenance See id. 212 mitting “ordinary for deductions and neces- findings The Tax regarding Court’s sary expenses” relating manage- to “the whether Bolarises were entitled to non ment, conservation, or maintenance of gain of on the sale of their old property production held for the of in- subject home are clearly to a erroneous come”). standard of review. See Crocker v. Com missioner, (6th Cir.1978). 571 F.2d 338 Nonrecognition A. Effect of of Gain. agree by We for the reasons stated the Tax accepted argu the IRS’s Court Court that the rental of the Bolarises’ qualifies ment that residence which for a prior home preclude to its sale does not nonrecognition of under section 1034 nonrecognition of realized the sale law, cannot, as matter of also be held for a Bolaris, of the old home. See T.C. at production income under sections of history 844-47. The of section Bolaris, 167 or 212. at 848-49. T.C. supports nonrecognition of legal question We this in review de novo by stating: this case volving statutory interpretation. Dum The term “residence” is used in contra- deang 739 F.2d property distinction to used in trade or (9th Cir.1984). property pro- business held for the Nevertheless, argument

duction of income. The isolates the sen- IRS’s taxpayer temporarily mere fact legislative history tence in the of section Court, majority concurring, judges judges reviewed the full Tax a dissent- with two and four judges participating of those in the review ing. opinion Special adopting Judge, Trial quoted above that term apparently ‘resi- The IRS has “[t]he now come prop- dence’ is used contradistinction to to the conclusion permitting both rent erty trade used in or business and expense al deductions and nonrecognition production of income.” H.R. gain provides of an improper “windfall” However, Rep. supra. No. this sen- taxpayers. Our response is three-fold. tence must read context with the First, all not rentals of former residences legislative history and in remainder of qualify expense will for rental deductions. background historical of sec- example, For a rental for less than fair In 1942 Congress tions likely market value will most not as qualify statutory predecessors enacted the to sec- held for tions and 212 which for the first time income. See Jasionowski v. Commission permitted involv- er, ac (“voluntary ing property held for the ceptance rent substantially at an amount Bittker, 1 B. income. Federal See Taxa- below fair market is a value clear indica Income, Gifts, tion Estates and 20.-Ml profit-motive). Second, tion” of a lack 1.2 following year & 23.2.1 any the extent “windfall” exists it is limit Tax held Court which has period years, ed to a of two the time within been as a abandoned residence and which which the old residence must be sold to diligently has been listed rent or sale qualify nonrecognition gain. See qualifies produc- 1034(a). Third, Congress if had tion purposes obtaining of income for prevent intended to to taxpay “windfall” deductions. See Robinson ers, easily provi it could have included a Commissioner, (1943). v. T.C. stating application sion that of section 1034 though This was true even the property in precluded deductions under Robinson was never rented. Id. at Congress sections 167 and 212. did not provision draft such a we refuse to Section in 1034 was enacted 1951. Con- imply reject one. We therefore the IRS’s gress presumably was aware Robin- argument qualifies that a which residence son decision at the time section 1034 was nonrecognition cannot also above, As enacted. noted production held of income. If the history begins by stating of section 1034 “ rule, IRS wants such a it should ask Con ‘residence’ is used contradistinc- gress it. to enact tion production to ... H.R.Rep. income.” No. supra. However, despite Congress’ presumed Expense B. to Entitlement Rental Deduc- awareness that an abandoned residence tions. which qualify was rented could as property remaining issue is whether income, held legis- for the the Bolarises are entitled to the claimed history lative further states An this case. individual “[nevertheless, the mere fact that the tax- entitled to deductions under sections 167 payer temporarily either rents out the old [engaged] and 212 if “the individual in the not, or the may new residence of all activity predominant purpose with the case, facts circumstances in the making intention profit.” a Allen v. prevent being recog- not Commissioner, (1979). T.C. See added). (emphasis Thus, nized.” Id. we proving The burden of a read the legislative history section 1034 Allen, profit petitioner. motive is on the stating as former residence could profit 72 T.C. at 34. The of a existence qualify nonrecognition even if question subject a factual motive is temporarily residence rented and Jackson v. clearly erroneous review. Com qualified produc- also for the held missioner, (9th interpretation 708 F.2d tion of income. This Cir. has questioned 1983). never until this lawsuit. been recently (P-H) Court set forth 1178,095, a T.C.M. (1978)(“If at 78-442

non-exhaustive list of five factors to be taxpayers’] primary profit, motive was [the determining considered in whether an indi they would certainly have tried to maxim- vidual has converted his residence prop profit ize that by renting at the highest erty of income. possible price.”). Commissioner, v. See Grant 84 T.C. 809 Second, the permanently Bolarises aban (1985). factors, The five adopt, which we doned the old home they when moved to are as follows: their new residence. Even if the Bolarises (1) length of time the house was had wanted to return to the old occupied by the individual as his resi- would have been legally unentitled to do so placing dence before it on the market for because the home was rented almost con sale; (2) preman- whether the individual tinually from the time vacated the ently abandoned all personal further [sic] home until it was sold. Langford See house; (3) use of the the character of the (P-H) 1181, 532, T.C.M. (recreational otherwise); (4) at 81-2061 rent; offers to offers to sell. Third, the old home offered no elements Id. 825. See also Newcombe v. Commis- personal recreation. As stated in the sioner, (1970).5 No Regulations, Income Tax profit “a motiva- one factor is determinative and all of the tion may be indicated activity where an facts and particular circumstances of a lacks any appeal other profit.” than case 1.183-2(a), must be considered. See § 1.183-2(b)(9), (26 Regs. Income Tax C.F. (26 Regs. C.F.R.). Income Tax R.). Allen, 36; See 72 T.C. at Langford, Several strongly support factors (P-H) 50 T.C.M. at 81-2061.7 possessed conclusion that the Bolarises We view the ancillary Bolarises’ desire to requisite profit-motive upon based their sell the old home insignificant as an factor First, rental of the old home.6 this case determining profit-motive. their See Bo- involves both offers to rent and offers to laris, (Wilbur, J., 81 T.C. at dissenting) sell. More importantly, the Bolarises actu cases). (citing supported Our conclusion is ally rented their old home at fair market Sherlock v. rental. As the 31 T.C.M. Tax Court’s majority opin (CCH) Sherlock, recognized, ion 383 In “renting taxpay- the residence at its fair market ers value would abandoned their old residence in normally suggest No- taxpayer that the requisite profit had the vember 1964 and offered it for sale for the objective.” Bolaris, 81 ninety days. T.C. at 849. first Id. at See 385. When no Commissioner, also Eisenstein v. buy 47 offers to were received the old resi- 2(b) residence, 5. Section Regula- of ordinarily the Income Tax abandonment as a will be 1.183— (26 C.F.R.) separate tions contains a list of nine strong taxpayer holding evidence that a is not factors determining to be considered in whether postconversion appreciation for activity engaged an profit. is in for As the Tax Newcombe, value.” 54 T.C. at 1302. We there- noted, however, Court has the factors listed in reject they fore the Bolarises’ contention that 1.183-2(b) section “are more relevant to farm- holding postconversion were the old home for ing and property.” hobbies than to rental See appreciation. Commissioner, Smith v. 50 T.C.M. No. 1985 (CCH) 42,444 (1985); Jasionowski, T.C.M.Dec. factor, remaining length 7. We find the Grant 1.183-2(b) 66 T.C. at 321 n. 6. The section occupied of time the house was as a residence provide general guidance factors but are not as sale, placing before it on the market for to be helpful in this case as those set forth in Grant. unhelpful occupied in this case. The Bolarises principal the old home as their residence from they 6. The Bolarises also contend that intended August length to October 1977. This profit appreciation make a to from the on the occupancy adequately is too short to indicate during old home the time it was rented. personal expenses subsequently "the nature of However, immediately upon leaving the old holding postoc- incurred while placed the Bolarises the home on the cupancy long adequately sale” but is too to hoping possible. to market sell it as soon as expenses non-personal. indicate that such are placing "The on the market for Newcombe, sale, 54 T.C. at 1300. shortly immediate at or after the time its REINHARDT, Judge, for rent or sale until it concurring offered Circuit dence was dissenting: finally sold November sought be price rental was found to reason- agree IWhile that the Bolarises are enti- actually home was rent- able but the never recognition tled to deferred permitted ed. at Id. Court the sale of their home under I.R.C. § expense rental deductions under sections agree I cannot are also entitled to though taxpayers 167 and 212 even take deductions under I.R.C. §§ court period during intended to sell home. The stat- 212 for the which were attempting completely property. is to sell that ed that understandable Under “[i]t deferred petitioners poten- desired this to turn only allowed if the sold is the eater expense tial into [the residence] 1034; taxpayer’s “principal residence.” § during income-producing an asset [the] Treas.Reg. 1.1034-l(c)(3). theOn other [prior waiting period Id. at 385. sale].” hand, under sections 167 and deduc- argues that the The IRS Bolarises could can tions be taken for profit to make a because not have intended expenses only maintenance if the property payments they were received is “held for the of income.” mortgage payments. less their Sus- than phrases mutually The two are exclusive as unexplained probative tained losses are respective are the forms tax treatment. they present profit a lack of motive but recognized have long Courts the differ one non-determinative factor ence between a pro residence and income Jasionowski, 319; considered. 66 T.C. at ducing property. It has been well-estab (P-H) Langford, 50 T.C.M. at 81-2060. We law years lished for over believe that other factors discussed are not allowable under sections 167 and outweigh the existence of short-term above 212 for respect incurred with to a experienced by losses the Bolarises. taxpayer’s residence, whether Brady Commissioner, In denying Bolarises’ rental not. v. 1983 T.C.M. (P-H) 1183,163, deductions, upon the Tax mem. F.2d 1445 Court relied aff'd - (3d Cir.), -, denied, cert. U.S. theory IRS’s new that a which residence (1984); 83 L.Ed.2d 509 Mere S.Ct. qualifies nonrecognition cannot (1975); v. dith 65 T.C. 34 also be held of income. Robinson T.C. 305 of the factors discussed above indi- (1943); 1.167(a)-2, Treas.Reg. 1.212- cating possessed that the req- Bolarises 1(h). motive, profit uisite we conclude that the clearly Tax Court erred denying the de- would It seem that words of the ductions claimed under interpretations sections 167 and statute well as the compel courts the conclusion that if the “principal a in sale of residence” results a 1034, deferral of under section then IV. CONCLUSION. taking is barred the seller from permitting Court’s decision de- sections 212 expenses under ferred the sale of respect property. incurred with to that the Bolarises’ home is AFFIRMED. clarity statutory the language Given and denying depreciation The decision and rent- consistency judicial interpretation, the al deductions is turn, REVERSED AND would there seem to no reason to be REMANDED for does, majority legislative redetermination the as the to his- tory.2 deficiencies. Commissioner, 223, may

1. A deduction also be the taken if 2. See Focht v. 68 T.C. 244 business,” (Hall, J., said, is used in "trade a or but as the dissenting): "It has been parties agree, provision inapplicable that truth, is grain judges more with than a that in here. Court, event, accepted by the Tax legislative history expressly is either any In plain unambiguous.3 It states: and impliedly, on a number of “[t]he occasions. in term ‘residence’ is used contradistinction See, Commissioner, e.g., Trisko v. 29 T.C. property held for of in- to ... 515, (1957); Commissioner, Stolk v. Cong., 1st H.R.Rep. No. 82d come.” (1963), T.C. mem. 326 aff'd 109, reprinted in 1951 U.S.Code Sess. (2d Cir.1964); F.2d 760 Daves v. Commis Thus, Cong. & Ad.News sioner, (1970); Barry history what have legislative confirms we (P-H) 1171,-1 1971 T.C.M. “property “residence” and already noted: 79;4 Rogers v. production of income” are mu- held for the (P-H) 1182,718. T.C.M. tually exclusive terms. Moreover, holding a that the Bolarises history also that legislative The states cannot take deductions under sections 167 taxpayer rents out his old the fact that the and 212 does not mean that are not not, may of all the facts and house any entitled to deductions at all for ex- circumstances, inconsistent with a find- be penses relating to their home. Under sec- ing taxpayer’s the old house is still the that 163, 164, 183(b)(1) tions the Bolarises Treas.Reg. 1.1034- residence. Id. See § to, did, were entitled 1(c)(3). deduct full the majority The seizes on the state- temporary renting out of mortgage ment that the interest and real estate taxes deprive it of its character as home does not they paid. addition, that In taxpayer’s residence. On 183(b)(2) authorizes the deduction of the benign proposition and basis of this rather depreciation and maintenance explanation, further any particular without extent that the income from the rental majority leaps to the conclusion that a of the house exceeds the amount at taxpayer’s home can once be both a mortgage pay- interest and real estate tax produc- residence and only ments. It is because the Bolarises’ fact, as has dem- tion of income. been rental income was less than the amount of above, legislative history pro- onstrated payments those cannot deduct at support precisely compelling vides portion least some of the maintenance and opposite Contrary conclusion. to the ma- depreciation expenses they incurred.6 assertion, that “resi- proposition jority’s judgment Because I that the believe property” producing “income dence” should affirmed in its the Tax Court it are antithetical terms is not novel: has entirety, respectfully I dissent. advanced the Commissioner and been days Barry appli- both stated that was not § tax cases these tend to consult the statute history only ambiguous.” taxpayers' when if the old house was held for cable production of income. (H.L.) per Gray Mil- v. Father Lord Cf. Bluff says mean what it dew: "If Parliament does not Robinson, majority heavily 5. The relies su- Herbert, (Quoted say in A.P. it must so.” However, reaching pra, its conclusion. Rob- (1935)). Employment Law: The Tax Uncommon merely taxpayer holds that if the has actu- inson residence, appears Barry ally While it that in Trisko and abandoned his can taxpayers were allowed to take certain deduc- then become advantage Thus, as well as take tions provides support income. it no for the taxpayer case that a can neither held majority’s conclusion. It follows therefore that take deductions under 212 when theory validity majority's is no there First, applicable. case did the is also neither Congress Robinson at the time the existence of taking challenge the of the de- Commissioner Congress in- enacted 1034 demonstrates ductions; challenged he the avail- rather to receive the benefit of tended homeowners us, ability case before simultaneously. §§ both course, challenging both. the Commissioner Second, Barry the court ex- in both Trisko explanation of the somewhat com- 6. For a fuller taxpayers’ plicitly held that old house ¡Cor- 183(b), Judge workings plicated see of income. The not held for opinion in in the Tax Court’s ner's concurrence Bolarises, however, entitled to deduc- will be case, 81 T.C. at 850-52. this if their old house tions under for the of income. Trisko was held

Case Details

Case Name: Stephen Bolaris and Valerie H. Bolaris v. Commissioner of Internal Revenue

Court Name: Court of Appeals for the Ninth Circuit

Date Published: Nov 22, 1985

Citation: 776 F.2d 1428

Docket Number: 84-7188, 84-7382

Court Abbreviation: 9th Cir.