Young v. Commissioner
| Decision Date | 09 May 1985 |
| Docket Number | Docket No. 1173-83. |
| Citation | 49 TCM (CCH) 1439,1985 TC Memo 221 |
| Parties | Robert G. Young v. Commissioner. |
| Court | U.S. Tax Court |
Allen J. Gordon, 1553 S. Military Hwy., Chesapeake, Va., for the petitioner. Scott Anderson, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's 1978 Federal income tax and an addition to tax under section 6653(a)1 in the amounts of $19,291.00 and $964.55, respectively. The issues2 for decision are:
(1) The amount of gain petitioner realized on the sale or exchange of real property, which depends on petitioner's adjusted basis in the property at the time of the transaction;
(2) Whether petitioner must recognize such gain in 1978 or can defer recognition of the gain in this transaction as a like-kind exchange under section 1031; and
(3) Whether petitioner is liable for the addition to tax under section 6653(a).
Some of the facts have been stipulated and are so found. The first and second stipulations of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioner resided in Virginia Beach, Virginia, at the time he filed his petition in this case. Petitioner timely3 filed his 1978 Federal individual income tax return (Form 1040) with the Internal Revenue Service Center in Memphis, Tennessee. His filing status was that of a married person filing a separate return.
Petitioner is a native of Floyd County, Virginia, which is located in the rural Blue Ridge Mountain region of Virginia. Petitioner's formal education included the sixth grade; he entered but did not complete the seventh grade. Sometime before 1953, petitioner moved from Floyd County to Virginia Beach, Virginia. In Virginia Beach petitioner worked as a carpenter, building houses primarily.
Sometime during the first half of 1953, petitioner decided to buy some land in Floyd County in case he wanted to move back there some day. Petitioner told an acquaintance in Floyd County, Dock Dickerson (Dickerson), that if he could find some property there that petitioner could buy, he would give Dickerson part of it "for his trouble." Soon thereafter, Dickerson reported to petitioner that he had located a parcel of real estate that petitioner might be interested in. As soon as he could, petitioner traveled to Floyd County, inspected the property, and discussed with the owner the purchase of the land.
Petitioner bought this property, consisting of approximately 164.5 acres in the Court House Magisterial District of Floyd County, Virginia (the Virginia property). He acquired the property by a deed dated June 19, 1953, from Edd S. Rakes and Catherine M. Rakes (the Rakes) to petitioner and his wife, Jean D. Young, as tenants by the entirety.4 Petitioner paid the Rakes $10,000 cash and a promissory note in the amount of $14,900. The note was co-signed by Dickerson, but it was not otherwise secured or recorded as a lien against the property. Only the $10,000 cash payment was recited in the deed as the consideration therefor.
Petitioner also owned a house located in an area known as Elizabeth River Shores, which is now within the city limits of Virginia Beach, Virginia. Sometime after petitioner purchased the land in Floyd County, he sold the Virginia Beach house and used the proceeds from that sale to pay in full the $14,900 note he had given to the Rakes. Dickerson did not pay any portion of the note.
Shortly after paying off the note petitioner transferred to Dickerson 44.1 acres5 of the Virginia property as a finder's fee or broker's commission for locating it. Petitioner received no additional consideration from Dickerson for this parcel.
Sometime during 1963 petitioner sold approximately 15 acres of the Virginia property to the Floyd County School Board for $5,400.6 Shortly thereafter petitioner made a number of capital improvements to the remainder of the Virginia property. These improvements included leveling off a portion of the property as well as putting in an access road, drainage ditches, and drainage pipes. Petitioner paid the contractor who did the work $6,900, consisting of the $5,400 petitioner received from the Floyd County School Board plus an additional $1,500 of petitioner's separate funds.
Sometime during 1978 petitioner had an accident with a chain saw that injured his foot and precluded him from continuing to work as a carpenter. After his convalescence from this accident, petitioner decided to try to support himself by cutting and selling firewood. The Virginia property was heavily wooded with timber suitable for firewood. However, petitioner did not think he could profitably exploit that timber because the property was too far away, some 300 miles from Virginia Beach, his best potential market. Petitioner decided to trade the Virginia property for similar real estate located closer to Virginia Beach so that he could profitably sell firewood from such timberland.
Shortly after reaching this conclusion, petitioner found a parcel of suitable land in Currituck County, North Carolina (the North Carolina property). Currituck County is just across the North Carolina State line, approximately eight miles from petitioner's residence. Petitioner called the owners of the North Carolina property, James H. Ferebee, Sr., and James H. Ferebee, Jr. (the Ferebees), to inquire if the land was for sale. The Ferebees referred petitioner to Mary Louise Chappell (Chappell), the real estate agent who was handling the sale of their land. Petitioner contacted Chappell during the summer of 1978 and asked her if she thought the Ferebees would be interested in trading the North Carolina property for his Virginia property. After discussing petitioner's proposal with the Ferebees, Chappell told petitioner that they would not trade properties because the Virginia property was too far away and they were interested in selling land, not buying land.
Sometime before September 7, 1978, petitioner again spoke with Chappell about a possible trade of his Virginia property for the Ferebees' North Carolina property. Chappell repeated their refusal to trade. After further negotiations during that conversation, petitioner agreed to offer to purchase the North Carolina property for $100,000. At that time petitioner signed an offer to purchase and contract (the offer to purchase and contract), reflecting the offer and gave Chappell a $5,000 earnest money deposit.7 Pursuant to the offer to purchase and contract, petitioner's $5,000 earnest money deposit was to be credited against the $100,000 purchase price. The balance was to be paid at the closing, $80,000 by cash and $15,000 by a secured promissory note payable June 1, 1979. However, petitioner made it clear to Chappell, and she agreed, that petitioner's offer was conditioned on his selling his Virginia property and using the proceeds of the sale to make the purchase. In response to petitioner's inquiry during the negotiations, Chappell told petitioner that it was her understanding that his sale of the Virginia property and immediate use of the proceeds to buy the North Carolina property would be tax free because, as she saw it, petitioner was essentially exchanging timberland in Virginia for timberland in North Carolina.
Pursuant to a contract (the sales contract) dated September 7, 1978, petitioner agreed to sell his Virginia property8 to the Turmans, husband and wife, for $90,000, and received an earnest money deposit in the amount of $5,000. On October 10, 1978, the sale9 was closed and petitioner received a check for the net settlement proceeds in the amount of $84,242.63 (the sale proceeds). At the closing, petitioner asked the closing attorney, Warren G. Lineberry (Lineberry), what the tax consequences of his sale of the Virginia property and reinvestment of the sale proceeds in the North Carolina property would be. Lineberry responded that the transactions should be tax free.
On October 26, 1978, the Ferebees accepted petitioner's offer to purchase the North Carolina property for $100,000. The purchase was consummated on November 27, 1978. At the closing petitioner delivered the check for the sale proceeds received for the Virginia property to Chappell as part of the payment required by the offer to purchase and contract.10 In response to petitioner's inquiry, the closing attorney, a Mr. Brumsey, told petitioner that his real estate transactions would be tax free. From the outset petitioner intended that his sale of the Virginia property followed by his purchase of the North Carolina property qualify for tax-free treatment and he would not have entered into those transactions if he had known they did not.
During 1978, petitioner and his counsel, Allen J. Gordon (Gordon), were partners in a partnership that owned a six-unit apartment building. Despite their partnership, petitioner was in contact with Gordon infrequently during 1978. Petitioner did not seek Gordon's advice about the tax consequences of petitioner's 1978 real estate transactions until after he had met with respondent's agent regarding the deficiency herein.
On his 1978 return petitioner reported only a loss from the partnership with Gordon in the amount of $710.42. The return contained no information regarding petitioner's 1978 real estate transactions.
In his statutory notice of deficiency dated October 28, 1982, respondent determined that petitioner realized and should have recognized a capital gain on the sale of the Virginia property in the amount of $79,712, determined as follows:
Amount realized .................. $90,000
Less
cost basis ............. $10,000
selling expenses ....... 288
________
10,288
_______
Capital gain ..................... $79,712
Respondent also determined that petitioner was liable for the negligence addition provided...
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