Baertschi v. Comm'r of Internal Revenue, Docket No. 2186-66.

• Decision Date: 29 December 1967
• Docket Number: Docket No. 2186-66.
• Citation: 49 T.C. 289
• Parties: E. F. BAERTSCHI AND ALMA M. BAERTSCHI, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

49 T.C. 289

E. F. BAERTSCHI AND ALMA M. BAERTSCHI, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2186-66.

Tax Court of the United States.

Filed December 29, 1967.

James F. Kennedy, Jr., for the petitioners.

Robert T. Hollohan, for the respondent.

Held, on the facts disclosed by the record, that petitioners had commenced construction of a new residence prior to the expiration of 1 year after the date of sale of the old residence and had used the newly constructed residence as their principal residence within 18 months of said sale date and that, therefore, they are entitled to utilize the nonrecognition provisions of sec. 1034, I.R.C. 1954, with respect to the sale of their old residence.

FAY, Judge:

Respondent determined deficiencies in petitioners' Federal income taxes for the calendar years 1962 and 1963 in the amounts of $4,736.68 and $13,046.88, respectively.

The sole issue for determination is whether petitioners are entitled to utilize the nonrecognition provisions of section 1034 of the Internal Revenue Code of 1954 with respect to the sale of their old residence.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.

E. F. Baertschi and Alma B. Baertschi, husband and wife, had their legal residence in Toledo, Ohio, at the time the petition herein was filed. They filed joint Federal income tax returns for the years 1962 and 1963 with the district director of internal revenue at Cleveland, Ohio.

On October 15, 1962, petitioners entered into an agreement which was captioned as a ‘Land Contract’ with Irving Stollman (hereinafter referred to as Stollman) and Herman Ross (hereinafter referred to as Ross), two real estate promoters who were contemplating the construction of a shopping center. The agreement provided, in pertinent part, as follows:

FIRST. The said parties of the second part, for themselves and their heirs, assigns, executors and administrators, promise, covenant and agree to purchase from the parties of the first part,¹ the following described property, * * * (the property described will hereinafter be referred to as the old residence) and to pay therefor to the said parties of the first part their heirs, and assigns, at such place as may be designated by said parties of the first part the sum of One Hundred Ninety Two Thousand Dollars ($192,000.00), ² in the manner following, to-wit: Eleven Thousand Dollars ($11,000.00) cash, the receipt whereof is hereby acknowledged, and Forty Six Thousand Dollars ($46,000.00), on or before the 30th day of November, A.D. 1962, and One Hundred Thirty-Five Thousand Dollars ($135,000.00) on or before the 31st day of May, A.D. 1963, said balance of $135,000.00 shall bear interest from the date hereof at the rate of six per cent per annum.

SECOND. In consideration of the above and the fulfillment of all and singular the covenants contained in this agreement to be performed and kept, and upon the fulfillment of each and every one of them by the said parties of the second part, in the manner and at the time herein specified, the said parties of the first part agree to sell and convey the above described premises by good and sufficient deed of general warranty unto the said parties of the second part, their heirs and assigns, and free and clear from all encumbrances, whatsoever except as stated herein and existing easements and restrictions of record, ordinances and zoning. Said parties of the first part further agree to give immediate possession of said premises to the parties of the second part, except that said parties of the first part shall have the right to remain in occupancy of and living at their residence on said premises until December 15, 1962 without interference from parties of the second part and the building located on said premises shall not be razed or removed at any time prior to December 15, 1962 without written consent of parties of the first part, and excavations, footings and the like shall not be commenced by parties of the second part until the payment of the $46,000.00 as required aforesaid has been made.

THIRD. It is understood and agreed by the parties hereto that the said parties of the second part shall pay all taxes and assessments on said described real estate, which may be assessed or become payable on same from and after this date and shall not fail to discharge the same before the accruing of any penalty incurred by delay in the payment thereof, and shall keep said premises fully insured in favor of the said parties of the first part, their heirs or assigns in companies to be approved by the parties of the first part. If the parties of the second part shall fail to make payments of said taxes, assessments or insurance premiums within twenty (20) days after said payment falls due, the same may be paid by the parties of the first part, and thereupon be charged against and become immediately due from the parties of the second part, and any amount paid by the parties of the second part may be applied or reapplied in satisfaction of the claim of the parties of the first part against the parties of the second part for taxes, assessments, or insurance premiums paid by the parties of the first part. All payments to be made by the parties of the second part to the parties of the first part if not paid when due shall bear interest at the rate of eight per cent per annum, payable semi-annually.

FOURTH. If the parties of the second part, their heirs, executors, administrators or assigns, shall fail to make any of the payments pursuant to this agreement, either of principal or interest, or in payment of taxes or insurance premiums, and be so in default for 20 days after registered mail notice of said default has been given by parties of the second part as hereinafter provided or in any other manner break the conditions of this contract, then and in that event, parties of the first part are hereby given an option either to declare the entire balance of the purchase price due and payable, and enforce their vendor's lien for payment thereof, or to rescind this contract to sell and convey said property, and take possession thereof; and in event of the exercise of the option to rescind this contract, any and all payments theretofore made by parties of the second part, and all improvements made on said premises shall be taken and retained by parties of the first part as and for liquidated damages for the non-performance of this contract, and parties of the first part, their heirs, executors, administrators or assigns, shall be entitled to the possession of the premises aforesaid, and of all the improvements thereon, and parties of the second part covenant and agree that they and all persons holding under them shall and will surrender possession thereof, with the improvements, to parties of the first part, their heirs, executors, administrators or assigns. Failure or delay to exercise said option at the time of any default shall not be, or operate as, a waiver of the right to exercise such option at any time thereafter. * * * The remedy of recourse of said parties of the first part for the non-performance of any obligation of the parties of the second part hereunder shall be limited solely to the moneys paid hereunder, and to the herein described property, and said parties of the second part shall not be liable for any deficiency arising from the sale of said property in any way, capacity or manner whatsoever, nor shall said parties of the first part have the right to, nor seek, a deficiency or other money judgment against said parties of the second part.³

AND IT IS FURTHER AGREED, that no sale, transfer, assignment or pledge of this contract shall be in any manner binding upon the said parties of the first part, unless the parties of the first part first consent in writing hereon to such sale, transfer, assignment or pledge.

On October 15, 1962, upon the signing of the agreement, petitioners received the sum of $11,000 from Stollman and Ross. The payment due on November 30, 1962, was not timely received. On December 12, 1962, petitioners' attorney gave written notice of default to Stollman and Ross. On December 14, 1962, petitioners received the overdue payment in the amount of $46,000, plus interest.

Also in December 1962, petitioners vacated their old residence, after which they lived temporarily in a house located on Bancroft Street, Toledo, Ohio, while looking for a satisfactory permanent residence.

On May 31, 1963, petitioners timely received the final payment of $135,000, plus interest as specified in the agreement and at that time they executed and delivered the required deed to Stollman and Ross. At the date of this final payment, the old residence was still intact.

On November 20, 1963, petitioners purchased a lot on Farmington Road, Toledo, Ohio, and later, on December 9, 1963, commenced construction of a new residence. The construction was completed at a total cost of $103,860.72 and on September 16, 1964, petitioners took up residence therein.

On their joint Federal income tax returns for the years 1962 and 1963, petitioners reported the sale of their residence as being subject to the nonrecognition provisions of section 1034.

Respondent, in his statutory notice of deficiency, determined that the transaction did not qualify for the relief provisions of section 1034 and that, therefore, the entire gain on the sale was taxable to the petitioners in 1962 and 1963.

OPINION

The issue for determination is whether petitioners are entitled to utilize the nonrecognition provisions of section 1034, with respect to the sale of their old residence. Section 1034 provides, in part, 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 ...