SCOTUS Reports

Tag: Section 121

  • Debough v. Commissioner, 142 T.C. 297 (2014): Interaction of Sections 1038 and 121 of the Internal Revenue Code

    Debough v. Commissioner, 142 T. C. 297 (2014)

    In Debough v. Commissioner, the U. S. Tax Court ruled that a taxpayer who reacquired his principal residence after a defaulted installment sale must recognize previously excluded gain under Section 121 upon reacquisition, as mandated by Section 1038 of the Internal Revenue Code. Marvin E. Debough sold his home in 2006, excluding $500,000 of gain, but had to repossess it in 2009 after the buyers defaulted. The court clarified that without resale within one year, as stipulated in Section 1038(e), the general rule of Section 1038(b) applies, requiring recognition of gain received before reacquisition. This decision underscores the interaction between these sections and their impact on homeowners facing similar circumstances.

    Parties

    Marvin E. Debough, the petitioner, sought a redetermination of a deficiency in federal income tax assessed by the respondent, the Commissioner of Internal Revenue. Throughout the litigation, Debough was represented by Matthew L. Fling, while the Commissioner was represented by John Schmittdiel and Randall L. Eager.

    Facts

    In 1966, Marvin E. Debough purchased his primary residence and surrounding land for $25,000. On July 11, 2006, he sold this property to Stonehawk Corp. and Catherine Constantine Properties, Inc. (collectively, the buyers) under a contract for deed, with a total purchase price of $1,400,000. The sale included a down payment of $250,000, with the remaining $1,150,000 to be paid over time with interest at 5% per annum. Debough reported an adjusted basis of $742,204 in the property, which included half of the original cost, capital improvements, a stepped-up basis from his deceased spouse, and sale expenses. However, the parties later stipulated a basis of $779,704. Debough and his deceased spouse excluded $500,000 of gain from their 2006 tax return under Section 121 and reported the remaining gain on an installment basis. Debough received payments totaling $505,000 before the buyers defaulted in 2009. After serving a notice of cancellation, Debough reacquired the property on or about July 29, 2009, incurring $3,723 in repossession costs. He reported $97,153 in long-term capital gains for 2009 but later amended his return to exclude this amount. The Commissioner assessed a deficiency, determining Debough should recognize $448,080 in long-term capital gains for 2009, including the previously excluded $500,000.

    Procedural History

    The Commissioner issued a notice of deficiency to Debough on June 18, 2012, asserting a deficiency of $58,893 in federal income tax for the 2009 taxable year. Debough timely filed a petition with the United States Tax Court seeking redetermination of the deficiency. The parties stipulated facts under Tax Court Rule 122. The Tax Court, with Judge Negah presiding, considered the case and ruled in favor of the Commissioner, ordering that a decision be entered for the respondent.

    Issue(s)

    Whether a taxpayer who reacquires his principal residence after an installment sale where gain was previously excluded under Section 121 must recognize that previously excluded gain upon reacquisition under Section 1038?

    Rule(s) of Law

    Section 1038 of the Internal Revenue Code provides that no gain or loss results from the reacquisition of real property sold on an installment basis and later reacquired in satisfaction of the debt secured by the property, except to the extent of money and other property received before reacquisition. Section 1038(b) mandates recognition of gain to the extent that the amount of money and the fair market value of other property received before reacquisition exceeds the gain on the sale reported as income before reacquisition. Section 1038(e) provides an exception for reacquisition of a principal residence, allowing nonrecognition of gain if the property is resold within one year of reacquisition. Section 121 permits taxpayers to exclude up to $500,000 of gain from the sale of a principal residence if certain conditions are met.

    Holding

    The Tax Court held that Marvin E. Debough was required to recognize long-term capital gain upon the reacquisition of his property under Section 1038, including the $500,000 previously excluded under Section 121, because he did not resell the property within one year of reacquisition as required by Section 1038(e).

    Reasoning

    The court reasoned that Section 1038 applies to the reacquisition of real property sold on an installment basis and later reacquired in satisfaction of the debt secured by the property. The court noted that Congress intended for Section 1038 to prevent recognition of gain or loss based on fluctuations in the fair market value of the property upon reacquisition, but not to the extent of cash or other property received by the seller before reacquisition. The court interpreted the specific exception in Section 1038(e) for principal residences as evidence that Congress intended for the general rule of Section 1038(b) to apply in cases like Debough’s, where the property was not resold within one year of reacquisition. The court rejected Debough’s argument that the absence of a specific provision mandating the recognition of previously excluded Section 121 gain meant that Section 1038 did not apply to recapture such gain. Instead, the court found that the mandatory language of Section 1038(b) required recognition of gain to the extent of money received before reacquisition, which in Debough’s case included the $505,000 received before the buyers defaulted. The court also noted that this interpretation was consistent with the basic principles of federal income tax law, which include any accession to wealth in gross income unless specifically excluded by statute.

    Disposition

    The Tax Court entered a decision for the respondent, the Commissioner of Internal Revenue, affirming the deficiency in federal income tax for the 2009 taxable year.

    Significance/Impact

    The decision in Debough v. Commissioner has significant implications for taxpayers who sell their principal residences on an installment basis and later reacquire them due to buyer default. It clarifies that the exclusion of gain under Section 121 is not permanent if the property is reacquired and not resold within one year, as provided by Section 1038(e). This ruling emphasizes the importance of understanding the interplay between Sections 1038 and 121 and may affect the financial planning of homeowners considering installment sales of their residences. The case also reinforces the principle that statutory exclusions and deductions must be explicitly provided by Congress and cannot be inferred from silence in the tax code.

  • Marvin E. DeBough v. Commissioner of Internal Revenue, 142 T.C. No. 17 (2014): Interplay of Sections 121 and 1038 in Taxation of Reacquired Property

    Marvin E. DeBough v. Commissioner of Internal Revenue, 142 T. C. No. 17 (U. S. Tax Court 2014)

    In DeBough v. Commissioner, the U. S. Tax Court ruled that a taxpayer must recognize previously excluded gain under Section 121 when reacquiring a principal residence under Section 1038. Marvin DeBough sold his home on an installment basis, excluding $500,000 of gain under Section 121. After the buyers defaulted, DeBough reacquired the property. The court held that, absent a resale within one year as provided by Section 1038(e), previously excluded Section 121 gain must be recognized under the general rules of Section 1038. This decision clarifies the interaction between these tax provisions and impacts how taxpayers must account for gains from reacquired properties.

    Parties

    Marvin E. DeBough, Petitioner, versus Commissioner of Internal Revenue, Respondent. At the trial level, DeBough was represented by Matthew L. Fling, while the Commissioner was represented by John Schmittdiel and Randall L. Eager.

    Facts

    Marvin E. DeBough purchased his personal residence and 80 acres of mixed-use land in 1966 for $25,000. On July 11, 2006, he sold the property to Stonehawk Corp. and Catherine Constantine Properties, Inc. (the buyers) for $1,400,000 under a contract for deed. DeBough received $250,000 at the time of sale and an additional $250,000 in 2007, and $5,000 in 2008. He excluded $500,000 of gain from the sale under Section 121 of the Internal Revenue Code. In 2009, the buyers defaulted on the contract, and DeBough reacquired the property on July 29, 2009. DeBough reported $97,153 in long-term capital gains for 2009 but later amended his return to remove this gain. The Commissioner determined that DeBough should recognize $448,080 in long-term capital gains for 2009, including the previously excluded $500,000 under Section 121.

    Procedural History

    The Commissioner issued a notice of deficiency dated June 18, 2012, determining that DeBough was required to recognize $443,644 in long-term capital gains for the 2009 tax year. This amount was later recalculated to $448,080 to account for an omitted payment. DeBough timely filed a petition with the U. S. Tax Court seeking redetermination of the deficiency. The Tax Court, with Judge Nega presiding, upheld the Commissioner’s determination, requiring DeBough to recognize the previously excluded gain under Section 121 upon reacquisition of the property.

    Issue(s)

    Whether a taxpayer must recognize long-term capital gain previously excluded under Section 121 upon reacquisition of a principal residence under Section 1038 when the property is not resold within one year of reacquisition?

    Rule(s) of Law

    Section 1038 of the Internal Revenue Code provides that no gain or loss results from the reacquisition of real property sold on an installment basis if the seller reacquires the property in satisfaction of the debt secured by it. However, under Section 1038(b), gain must be recognized to the extent that money or other property received before reacquisition exceeds the gain reported as income prior to reacquisition. Section 1038(e) provides an exception for principal residences reacquired and resold within one year, treating the resale as part of the original sale transaction and allowing the Section 121 exclusion to apply.

    Holding

    The Tax Court held that DeBough was required to recognize long-term capital gain on the reacquisition of his principal residence under Section 1038, including the $500,000 gain previously excluded under Section 121, because he did not resell the property within one year of reacquisition as required by Section 1038(e).

    Reasoning

    The court’s reasoning focused on the interplay between Sections 1038 and 121. It noted that Section 1038(e) explicitly addresses the reacquisition of principal residences but limits its relief to situations where the property is resold within one year. The absence of any broader exception in Section 1038 led the court to conclude that the general rule of Section 1038(b) applies, requiring recognition of gain to the extent of money received before reacquisition, including gain previously excluded under Section 121. The court rejected DeBough’s argument that the absence of specific language mandating recapture of Section 121 gain meant that such gain should not be recaptured, citing the statutory canon of construction expressio unius est exclusio alterius. Additionally, the court emphasized that the tax treatment should reflect the economic reality of DeBough’s situation, as he had received $505,000 in cash before reacquiring the property. The decision aligns with fundamental federal income tax principles that gross income includes any accession to wealth clearly realized and over which the taxpayer has dominion.

    Disposition

    The Tax Court entered a decision for the Commissioner, requiring DeBough to recognize $448,080 in long-term capital gains for the 2009 tax year.

    Significance/Impact

    The DeBough decision clarifies the interaction between Sections 1038 and 121 of the Internal Revenue Code, establishing that gain previously excluded under Section 121 must be recognized upon reacquisition of a principal residence under Section 1038 if the property is not resold within one year. This ruling has significant implications for taxpayers engaging in installment sales of their principal residences, as it affects the tax consequences of reacquiring such properties upon buyer default. The decision underscores the importance of considering the specific statutory exceptions and general rules when planning and reporting tax transactions involving reacquired properties.

  • Robarts v. Commissioner, 103 T.C. 72 (1994): Finality of Tax Elections and the Inability to Revoke After Statutory Period

    Robarts v. Commissioner, 103 T. C. 72 (1994)

    A taxpayer’s election under section 121 to exclude gain from the sale of a residence is irrevocable after the statutory period for revocation has expired.

    Summary

    Mary Robarts sold her home in 1979 and elected to exclude the gain under section 121, unaware that this would preclude a similar exclusion in 1988 when she sold her subsequent residence. The Tax Court held that her 1979 election was valid and could not be revoked after the statutory three-year period had passed, despite her argument that section 1034 should have been used instead. The decision underscores the finality of tax elections and the strict adherence to statutory deadlines for revocation, emphasizing the importance of careful tax planning and the potential consequences of relying solely on tax preparers.

    Facts

    Mary K. Robarts sold her residence at 3208 Chapin Avenue, Tampa, Florida, in 1979 for $36,000, realizing a gain of $7,320. 77. Prior to this sale, she had purchased a new residence at 5219 Crescent Drive, Tampa, Florida, in 1978 for $48,500, which included a single-family house and a duplex. On her 1979 tax return, prepared by her CPA, she elected to exclude the gain from the sale of the Chapin property under section 121, which allows a one-time exclusion of up to $125,000 of gain from the sale of a principal residence for individuals aged 55 or older. In 1988, she sold the Crescent property for $165,000, realizing a gain of $112,363, and attempted to exclude this gain under section 121 as well. The Commissioner disallowed the 1988 exclusion, citing the prior election in 1979.

    Procedural History

    Robarts filed a petition with the U. S. Tax Court challenging the Commissioner’s disallowance of her 1988 section 121 election. Both parties filed cross-motions for summary judgment. The Tax Court granted the Commissioner’s motion and denied Robarts’ motion, upholding the disallowance of the 1988 exclusion.

    Issue(s)

    1. Whether Robarts’ 1979 election to exclude gain under section 121 was valid despite the availability of section 1034.
    2. Whether Robarts could revoke her 1979 section 121 election after the statutory period for revocation had expired.

    Holding

    1. Yes, because the election was valid under the statute and regulations, and section 1034’s mandatory deferral did not preclude the section 121 election.
    2. No, because the statutory period for revoking the 1979 election had expired, and the court lacked authority to permit a late revocation.

    Court’s Reasoning

    The court analyzed that section 121 allowed for the exclusion of gain from the sale of a principal residence, and Robarts’ 1979 election was valid under this section. The court clarified that section 1034, which mandates the deferral of gain, did not preclude the use of section 121. The court also noted that section 121(c) provided a three-year period from the filing of the return to revoke the election, which had expired by the time Robarts attempted to revoke it in 1988. The court rejected Robarts’ argument that it could correct the 1979 return under section 6214(b), as this section did not empower the court to allow the revocation of an election outside the statutory period. The court emphasized the irrevocability of tax elections once the statutory period for revocation has passed, highlighting the importance of timely and informed decision-making in tax matters. The court also addressed Robarts’ reliance on her tax preparer, stating that such reliance did not excuse her from meeting statutory deadlines.

    Practical Implications

    This decision underscores the importance of understanding and carefully considering tax elections, as they can have significant long-term implications. Taxpayers must be aware of the statutory deadlines for revoking elections and cannot rely solely on tax preparers without understanding the choices made on their behalf. The ruling also affects how tax practitioners advise clients on the use of sections 121 and 1034, emphasizing the need for thorough analysis of the client’s current and potential future circumstances. For subsequent cases, this decision reinforces the finality of tax elections and the strict adherence to statutory deadlines, potentially impacting how courts view requests for relief from untimely revocations of elections.