Gates v. Commissioner

135 T .C . No . 1

UNITED STATES TAX COURT

DAVID A . . GATES AND CHRISTINE A . GATES, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 19350-05 . Filed July 1, 2010 .

Ps owned and used a . house as a principal residence for 2 years . Pb wanted to .enlarge and remodel the house but were advised by an architect that more stringent building and permit restrictions had been enacted since the house was built . In 1999, rather than remodel the house, Ps voluntarily demolished it and constructed a new house on the property . Ps never occupied the new house, and in 2000 they sold it for $1,100,000 . Ps realized capital gain of $591,406 on the sale of the new house . On their untimely 2000 Federal income tax return Ps did not report any of the gain from . the sale of . the new house . Ps subsequently agreed that $91,406 of ..the .gain was taxable, but they claimed that $500,000 of the gain was excludable from income under sec . 121(a), I .R .C . In a notice of deficiency, R determined that Ps are not entitled to the $500,000 exclusion under sec . 121(a), I .R .C ., and that Ps are liable for a deficiency in income tax and an addition to tax under sec . . 6651(a)(1), I .R .C ., for 2000 .

SERVED JUG-12010

Held: Ps may not exclude from their income, under sec . 121(a), I .R .C ., the gain . on the sale of the new house because the new house was never used as Ps' principal residence .

Held , further , Ps are liable for the addition to tax under sec . 6651(a)(1), I .R .C ., for failure to timely file their 2000 Federal income tax return .

George J . Tomlinson ; Jr . , for petitioners .

Kris H . An and Jonathan H .,Sloat , for respondent .

OPINIO N

MARVtL, Judge :

Respondent determined a def.iciencyi n petitioners' Federal income tax of $112,553 and an additiont o tax under. section 6651 (a) (1) 1 of $11, 211 for 200 .0 . Petitioners filed a timely petition contesting respondent's determination .

After concessions,2 the„ issues, for decision are : (1 ) Whether petitioners may exclude from gross income $500,00 0 capital gain from the sale .in 2000, of property on Summit Road in Santa Barbara, California .(Summit Road property), under section 'Unless otherwise indicated, all section reference's 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 .

2Petitioners concede that .the destruction of the original house does not qualify as an involuntary conversion under sec . 103 .3 . Petitioners further concede a $12,010 operating loss adjustment .

121(a) ; and (2) whether petitioners are liable for the section 3 - 6651(a)(1) addition to tax .

Background The parties submitted this case fully stipulated pursuant t o 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 . ' 'The previous owner of the house had converted the first level from a two-car garage to living quarters in 1972 .

'The record does nbt establish whether the new building and permit restrictions prevented petitioners from remodeling and expanding the original house .

4- - Subsequently,' petitioners demolished the original house:and constructed a new three-bedroom house (new house) on'the .Summit Road property .5 The new house complied with . the building and permit requirements existing in 1999 . 'During 1999,petitioners had outstanding mortgage loans, but the record does not disclose the "identity of the property or properties that secured the :loans .,6 . 4 mortgage loans or the dates, amounts, or purposes of the Petitioners never resided, in the new house, .7 -On°April 2000, petitioners sold . the new house for $1,100',000 . 'The . sale, resulted in a $591, 406 . gain -to petitioners . ; 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, petitioner s failed . to file their . 2000 return by'the ' August 15,,'2001, du e SThe footprint of the new house has a very different shape from that of the original house, and it appears to be two to three'times larger than the footprint of the original house . Only about one-half of the land area of the original house overlaps with the land area covered by the new house,, and no part of the original foundation perimeter corresponds to the . foundation perimeter_of .the new house .

.

6Although petitioners suggest in their posttrialpbrief that the loans were related to the demolition of the old house andthe : construction of the new house, there is no credible evidence in the record that permits us .to make any finding about the"'natur& and use of the loans .

'During the . demolition and construction period, petitioners resided at a location that . does not appear in .the ;record . The record does not contain any information regarding whether or when petitioners purchased and moved intoanew principal .residence . ., .

date . On September 17, 2001, petitioners filed their 2000 5 - 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 .

September 9, 2005, respondent mailed petitioners a notice of deficiency for 2000 that increased petitioners' income b y $500,000.9 and explained that petitioners had failed to establish that any of the gain on the sale of the Summit Road property was excludable under section 121 . Respondent also determined a n addition to tax under section 6651(a)(1) for petitioners' failure to timely file their 2000 return .

Petitioners timely petitioned this Court seeking a redetermination 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 fo r 8Petitioners' 2000 return was postmarked on Sept . 5, 2001 .

9In the notice of deficiency respondent determined a $500,000 adjustment because petitioners had conceded a $91,406 capital gain adjustment .

a deficiency, respondent erred in determining-that-they wer e liable for the section 6651(a)(1) addition to tax .

6_ - I Burden of Proo f Discussion " ordinarily-,",the Commissioner's'determination is'entitledto a presumption of correctness, Rapp v . Commissioner , 774 F .2d 932, ' 935 (9th Cir .-1985), and the burden of proving error in th e determination generally rests with the-taxpayer, Rule 142(a)' .

.

Petitioners argue .that because respondent's determination in ..the , notice of deficiency is arbitrary, excessive , and withou t foundation, respondent's determination-is not entitled tolany, .

presumption of correctness and that respondent-bears .the burden- f proof .10l Petitioners also contend that respondent has faile d to meet his burden of producing evidence in support-of hi s determination that petitioners have unreported income .

Petitioners do .not dispute that -..they received proceeds - from the sale of the'Summit Road property or, that . the sale-resulte d gain that is taxable to them- unless some .part of the gain i s excluded under section 121(a) . Accordingly, we hold that respondent's determination-is entitled to the presumption,o f correctness .and that . petitioners have the burden of proof .

10Petitioners .do not contend that sec . . 7491(a) shifts the burden of proof to respondent, and petitioners have no t established that the requirements of .sec . 74"91(a) have beenmet . Moreover, . because there areno factual issues in-dispute, sec . 7491(a) does not apply .

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' Propert y 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 i s 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 use d 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 . 12 .1(b)(2)(A) .

, .The issues presented arises from the fact ; that section 121 ;(a) does not define-two critical-terms--"property" and "principa l residence" . Section 121(a ) simply provides that,grossT income does not include gain from the sale orexchange-of property if .

"such property" has beenowned .and .used by the ;taxpayer "as the .,, taxpayer's principal residence" for the required statutory, period . .

,Respondent contends that petitionersdid not sell property.

they had owned and used as,,their principal residence .-for the required statutory period because they never occupied the, new ,house astheir principal residence before theysold 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 residencel";forµat least 2 of the 5 years immediately-preceding the, sale . Respondent urges this Court to conclude that aqualifying sale under section 121(a) is one that includes the sale of a dwelling .used by the taxpayer a s 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 wa s used as the taxpayer's principal residence . Petitioners' 9 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 th e .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 , 444 U .S . 37, 42 (1979) ; Nw . Forest Res .

Council v . Glickman , 82 F .3d 825, 833 (9th .Cir . 1996) ; Keene v .

Commissioner , 121 T .C . 8, 14 (2003) . It is also well established that a court may look to sources such as dictionaries for assistance in determining the ordinary meaning of a term . See Muscarello v . United States ,a524 U .S . 125,127-132 (1998) We look to - the, legislative history to ascertain Congress' intent, .if-, the . statute is ambiguous . See Burlington N . R .R .(cid:127)v . Okla . Tax Commn . , 481 U .S . 454,461- (1987) . Exclusions-from income must be construed narrowly, and-taxpayers must-bring themselves withi n the clear scope of the exclusion .

See,-, .Commissioner v . Schleier , 5115 U . S . 323, 328 : . ( .1'995) ; Dobra .v . Commissioner , 111 T .C . 339, 349 n .1 .6 (1998)-(citing-Graves v . Commissioner , .89 T .C~.

.49, 51 (1987) , supplementing 88 (cid:127)T .C . 28 ., (1987) ) 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 o f ownership ; title ." . Merriam-Webster.'s Collegiate Dictionary 935 (10th ed . 1997) defines ""property.",,as "a quality or traits 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 area exercised"3 .

The American Heritage, Dictionary of the English Language 1395 (4th ed . 200,0) .defines "principal" in its first definition,, as "First, ; highest, or foremost 'in .impqrtanqe, rank, ,worth, or .

- 1 1 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 : they 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)" used as a taxpayer's principal residence .

Because there is more than one possible meaning for both the term "property" and the term "principal residence", we canno t "Black's Law Dictionary 441 (9th ed . 2009) defines "curtilage" as "The land or yard adjoining a house, usu . within an enclosure ."

- 1 2 conclude that the meaning-of section " 12 1 (a ) is clear and`' unambiguous .- Section 121(a ) is notexplicit as towhe .the r Congress intended section 121-to'apply to'a saleofproperty .whe n the property sold does, not include the : dwelling- that -the-taxpayer used as a principal. residence for the period that section - 121,(a ) requires ., equi'res ., ' 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,-82dLCong. . ;', ist Sess . (1951), 1951-2 C .B . 458 ; 482, . In 1951 Congress .

recognized that many taxpayers faced-hardship as a result of . tax a, on gain realized on the sale of their principal residences- especially where a` taxpayer was`?compelled . to sell his :principal residence and move to ,a new onebecause-of a change i n circumstances such as an increase in! .family size or relocation for employment--and granted -relief by enacting section 112(n)(1-)_- (former section .112(n)(1)) . Revenue Act .of 1951," ch . 521, sec :

318, 65 Stat . 1494 ; S . Rept . 781, supra , :1951-2 C .B . at _482 . - ," - 1 3 Former section 112(n)(1)12 provided that . no gain on the sale of a principal residence was recognized if a taxpayer purchased a new residence for a price at least equal to the selling price of the old residence within the period specified therein . Unlike section 121(a), which excludes gain from the sale . . of . property used as a principal residence, former section 112(n)( .1) provided for a deferral of gain from the sale of .a principal residence .13 In the Internal Revenue Code of 1954, ch . 736 ., 68A Stat . 306 , "As-enacted in 1951, former sec . 112(n)(1) 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 S .

by the amount of gain excluded under former sec . 112(n)(1) . Rept. . 781, 82d Cong ., 1st Sess . (1951), 1951-2 C .B . 458, 483 .

former -section 112 (n) (1) was recodified as section 1034 (former section 1034)- .-14 ' " In 1°964 ° Congress enacted section 121 .(former section 121) ` a s part of the Revenue Act, of 1964 ; Pub . L .. .88 272, sec . 206', 7.8' . ; Stat . .38,"^to provide older+ ;taxpayers tax relief on the sale o f their principal, residences .15 Former section 121 wa s subsequently amended, see Technical and,Miscellaneous-Revenue .Act ` In 1954 sec . 1034(a) read as follows :

SEC . 1034 . SALE OR .EXCHANGE OF RESIDENC E

(a) Nonrecognition of Gain .--If property (in this section called "old residence") used by the taxpayer as hiss 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 taxpaye'r's adjusted sales price * * * of .the old residence exceeds the taxpayer's cost of purchasing the new residence .

15In 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-- F (1) the taxpayer-,has attained-the age of 65 before-the date of such saleor 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 4 as .,. his ; . principal residence for periods aggregating 5 years : or more .

15 - of 1988, Pub . L . 100-647, sec . 6011(a), 102 Stat . 3691 ; Economic Recovery Tax Act of 1981, Pub . L . 97-34, sec . 123(a),,95 Stat .

197 ; Revenue Act of 1978, Pub . L . 95-600, sec . 404(a)°;92 Stat .

2869 ; Tax Reform Act,of 1976, Pub . L . 94-455, sec . 1404(a), 90 Stat . 1733, and as amended, permitted an individual, on a .one- time basis, to elect to exclude from gross income-up to-$125,000 of gain from the sale or exchange of a principal residence if the taxpayer (1) had attained age 55 before the sale and (2) .had, owned the property and used it as a principal residence for 3 or more of the 5 years immediately preceding the sale .

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 Roa d 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 anumber 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 th e 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 ma y 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 i s used by him as his principal residence . The focal point of the section 1034 regulations was the dwelling unit a taxpayer uses a s his principal residence . The section 1034 regulations reinforc e our conclusion that to obtain the benefits of former section 1034, a taxpayer who sells a dwelling must have actually used i t as his principal residence .

Our conclusion regarding the meaning that Congress . attache s .to the terms "property" and "principal residence" in sectio n 121(a) is also consistent with caselaw interpreting former section 1034, as in effect before its repeal . This Court hel d that in order to qualify under former section 1034, a taxpaye r had to sell a dwelling that he used as his principal residence .16 d 16We have found only one case where the taxpayers were .

permitted to exclude gain on a sale of land that did not occur simultaneously with the sale-of the taxpayers' principal residence . See Bogley v .Commissioner , 263 F .2d 74 .6 (4th Cir . 1959), revg . 30 T .C . 452-(1958) . In Bogley v . Commissioner ,-. supra at 747, the taxpayers attempted to sell the entire 13-acre parcel . on which their principal residence was situated, but they . were able to sell only the dwelling and 3 acres surrounding the dwelling . Less than 1 year later, the taxpayers-sold the, remaining 10 acres . Circuit concluded that the character of the .10 :acres-neve r changed and held that the sale of the 10 acres qualified as a (continued .

The Court of Appeals for the Fourt h . .,) , Id .

19 - In Hughes v, Commissioner , 54 T .C . 1049, 1050 (1970), affd . per, curiam 450 F .2d(cid:127)980 (4th Cir . 1971), the . taxpayers agreed'to exchange premises A, on which the : dwelling that served as thei r principal residence was situated, for cash and'the right to occupy premises B as their new principal residence . Before the exchange, the taxpayers moved the dwelling from premises A to premises C and began using the dwelling on premises C as income- producing property .

Id . at 1053 . Relying on former section 1034, the taxpayers-excluded gain realized on the exchange of premises A .(without the dwelling) for premises B and cash .

Id .

16( .

. .continued) sale of the taxpayers' principal residence .

Id . at 748 .

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 , 54 T .C . 1049, 1055 (1970), affd . per curiam 450 F .2d 980 (4th Cir . 1971) ; O'Barr v . Commissioner , 44 T .C . 501, 503 (1965) . This Court has stated that Bogley does not support the position that a sale of land alone without a sale of the dwelling qualifies for the sec . 1034 exclusion . See Hughes v . Commissioner , supra at 1054-1056 . Bogley is distinguishable from this case because petitioners did not sell the . original house and the land in separate but related transactions as the taxpayers did in Bogley .

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 .

- 2 0 at 1053 .F',They.argued that premises A without the dwelling was-as- much a part, of their principal residence as the dwelling and, that the land should be treated .as,, their, old . residence for . purposes of, section 1034 . , Id . at 1054 .(cid:127) This Court disagreed with th e taxpayers, and held that they were not entitled to the exclusion' because the dwelling that was used as their principal_residence .

was never sold or disposed of as, required by former :section 103 4 In O'Barr v . Commissioner , 44 T .C . 501 (1965), the taxpayer s sold.a portion of a tract of land on which their principal residence was situated . However, the portion of land sold di d not include the residence .

Id . "Relying on former-section 1034, the taxpayers excluded gain from the sale of the land .

Id . `a t 502 . The taxpayers argued_that,the controlling fact was how the, land had been used before the sale and not"whether'the_lan d included-a dwelling when it was sold . According to the taxpaye r used as their-principal residence,and that .use entitled them t o claim the benefit of former section 1034 .

Id .

In its analysi s of :former section 1034, this Court stated that "The only logical interpretation of section 1034 is that it willonly apply in situations where a taxpayer has disposed of his old`dwelling . .

Id . at 503 . Because the taxpayers did not dispose of thei r dwelling, the Court concluded .that former section 1034"was 21 - inapplicable .

Id .

Other cases have followed Hughes -and' O'Barr .

.

See, e .g .,- Boesel v . Commissioner , 65 T .C . 378, .390 (1975 ) (essential-element of a residence is the dwelling, not the land- on which it is situated) ; Hale v Commissioner , T .C . Memo . 1982 527 ("The sale of a taxpayer's residence requires the sale of a structure which is used as a principal-place of abode, and we have held that-the sale of land without the structure does not constitute a'sale of a residence-within,the meaning of section 1034 .") .

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 tha t it disagreed-with the interpretation of that wording in case s 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,l2l :had~they sold or'exchariged ..the= original .,house instead oftearing 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 , 515 U .S . at 328 . Under section 121(a ) and=its legislative history, .-we cannot conclude-on the facts of ° this case that petitioners sold their principal residence . " 17Sed 121(c), provides . that a . taxpayer who fails . to meet ' the _.¢ .

The prorated exclusion is 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 ) based on the period of a taxpayer ' s ownership and use of the principal residence . - See sec-121(c)(1) . never used the new house as their principal residence , they -- would ,not qualify for proration in any event . Even if .they did, r ., 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 ) . 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 ofk sec . 121(c) .

However, petitioners did not introduce any 'Because- petitioners 23 - Accordingly, we hold that petitioners may not exclude from .income under section 121(a) the gain realized on the sale of the Summit Road property .18 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 , 469 U .S . 241, 245 (1985) ; United States v . Nordbrock , 3 .8 F .3d 440, 444 (9th Cir .

1994) ; . Harris v . Commissioner , T .C . Memo . 19,98-332 . A failure to file a timely Federal income tax return is due to reasonable cause if the taxpayer exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time . See sec . 301 .6651-1(c)(1), Proced . & Admin .

Regs . Willful neglect means a conscious, intentional failure to file or reckless indifference toward filing . See United States v . Boyle , supra at 245 .

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 t o "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 .

tax applies .. See Swain v : Commissioner , 118'T .C . 358, 364-36 5 (2002) Higbee_v . Commissioner , 116 T .C . . 438, 446 (2001 ) meet his burden of production, the Commissioner must come forward .with sufficient evidence to show'that it is appropriate to impose the .; relevant penalty. or addition to tax .

Higbee . v . .Commissioner , supra at 446 .,`However, the Commissioner,is-not required to introduce evidence regarding reasonable cause, substantia l authority ., or similar defenses .

Id .

.`Petitioners' admit .that they- did not file a timely Federal , income tax return for 200 .0 . This 'is sufficient 'to satisfy , respondent"s burden of producing evidence that the sectio n 6651 (a)'(1), addition .to tax applies . Petitioners .did note, introduce any evidence . td .proverthat .they had reasonable' caus e for their failure to' ' file -their,2000 return timely, .

Consequently, ve,sustain respondent ' s determination .

.

We,have considered al1' .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, Reviewed by the Court .

for respondent .

COLVIN, COHEN, GALE,,,THORNTON, WHERRY, GUSTAFSON ,,, PARIS, ;,

MORRISON, ..JJ ., agree with this . majority opinion .

- 2 5 COHEN,=4 J . ,, concurring : I agree " with the majority . and -write .

to explain my disagreement with the dissent . "(cid:127) Theta dissent argues 'that the holding of the 4maj ority i s inconsistent with . the, remedial' purpose of . section-121 . This .

Court' s assigned task in the first instance however is toy appl y section 1211'as` written to -the : facts of this case . . Section' . 12 1 requires that we (cid:127)exam .ne `the sale or exchange of property-and .

provides that if' the property sold' was -owned and` used by,-the ., ' princ ipal ' residence :for at least 2 of , . taxpayer as the taxpayer's the 5 'year`s'Rpreceding the sale or 'exchange , the taxpaye r qualifies 'for the exclusion ; under section, 121 ( ) :; . - -The focal'point: of the section 121 analysis is ? the pproperty sold ``or _`e'xchariged . "''In this case the property sold consisted .of, land that pettioners had used °-for the -yrequired period ' (`old land) ,and a new .'dwelli'ng in which petitioners had never resided (ne w house) =After -concliiding that the term,__ "principal residence" .:

means the,rdwellifi T (and associated land)'Iin whichra taxpayer resided'as his-`or her primary home,-,the ,majority examined the facts to see wheaher -what petitioners sold- qualified :as a, : - .

principal residence within the meaning of section 121(a) .° ° The fully stipulated facts reveallthatthe dwelling petitioners (cid:127) 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 - 2 6 never., occupied . ,The facts are-decisive,and support the holding ; of the majority . The dissent . maintains . that, . because petitioners owned an d used their : former principal residence .-,(old house, : now demolished , and,old land) for-the required 2-year period, the property tha t 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 tha t the term "principal residence" .has been consistently, used b y Congress since 1951,2 and there .is no evidence inthe legislativ e history of the Taxpayer Relief .Act of 1997 (TRA l997) ,~, Pub . L .

105-34, sec .. 312(a) and (b), , 111 . Stat . 83&,-839, which amende d section :121 and repealed s .ection .1034, to,indicate that Congres s intendedf'to,change the meaning, of the term "principal residence" .

sub silentio when it amended section(cid:127)121 . . Although section 121 as amended by'the TRA 1997,blended the approaches of former ` section 121 and-former section 1034 to provide asimpler and mor e uniform treatment of gain,generated_by the sale of a principa l residence, :Congress did not-change the definition-of principa l residence, a ;term it has used consistently,since .,1951 when .

section 112 .(n)., .the predecessor : provision to former section 1034, ..- 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 aprincipal 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 , 54 T .C . 1049 ( 1970 ), affd . percuriam 450 F .2d 980 (4th Cir . 1971) ; O'Barr v . Commissioner , 44 T .C . 501 (1965) .

If a taxpayer sold his or her principal residence with part but not all of the underlying land and then sold the rest of the land close to the time of the sale of the principal residence, at least one court has held that the sales must be integrated in deciding whether the gain on the sale of land could be deferred .

Bogley v . Commissioner , 263 F .2d 746 ( 4th Cir . 1959 ), revg . 3 0 T .C . 452 ( 1958 ) . Although the Court of Appeals ultimately decided in Bogley that deferral was appropriate, the deferral was 28 - predicated on the fact that the taxpayer had also'sold the principal' residence in a related sale .

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 ol d home, . . constructed a new and larger-dwelling, and then sold th e 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 i which the-taxpayer should qualify for the section 121 exclusion .

The response to this argument is<straightforward--it is not thi s Court's job to anticipate and decide cases .that are not,ye t before it . As the Supreme Court cautioned in Dewsnup v . Timm , 502 U .S .-A¹⁰, 416-417 (1992) Hypothetical applications that come-to mind and thos e advanced at oral argument illustrate the difficulty o f interpreting the statute in a single opinion that woul d apply to :all possible fact situations . We therefor e 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, 58 T .C . 1055 1060 (1972), affd .

per curiam without published opinion 474 F .2d 1345 (5th Cir . .1973)"(cid:127)' see also Rogers v . Commissioner , 44 T .C . 126, 136 (1965) ("Ou r decision must be governed by what was actually done, rather,Ftha n by what might have been done ."), affd . per curiam 377 F .2d 534 (9th Cir . 1967) . The , majority . properly limits its analysis to the facts of this case, which were fully stipulated, and to the issues raised by the parties . Petitioners did not argue for a partial exclusion of gain attributable to the . sale of the land, nor did petitioners introduce any evidence that . would have .permitted the Court to .allocate gain between the new house and the land . Petitioners argued only that . they were entitled to the full exclusion under .section 121 . As the majority holds, the property sold, .i .e ., the dwelling and related land, must have actually been used as petitioners' principal residence for the required 2-year period . Because the new house petitioners sold was never used as their principal residence, the section 121 exclusion does not apply here . We may reach a different conclusion in cases involving different facts if and when the opportunity arises, but we should not distort the result in this case by anticipating those cases .

GALE, THORNTON, MARVEL, WHERRY, GUSTAFSON, and PARIS, JJ ., agree with this concurring opinion .

30 - HALPERN, J ., dissenting': There'is adequate ground=for the ` majority's conclusion that, to qualify for the section 12 1 exclusion ; the taxpayer must sell not only the .landon 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 newt house .. qualifie d for that exclusion .

Interpretation Contrary to the Remedial Intent ofSection 121(a ) The gain exclusion rule of section 121(a) applies if three°}_ .

conditions are me t : (1) There must be a sale or exchange (without distinction, sale) ; (~2) the safe must be of "property,*, .- * owned and used by the taxpayer as the .taxpayer's principa l 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 us e 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 . 17 . The majority does not rely on th e text of . the statute for that interpretation (which text i t 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, 31 - 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 ar e 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 . 17 (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 , 515 U .S . 323, 328 (1995) (mor e precisely, the Court said : -the default rule of statutory interpretation .[is] that exclusions from income must be narrowl y construed'" (quoting United States v . Burke , 504 U .S . 229, 24 8 (1992) (Souter, J ., .concurring in judgment))), the Supreme Court has also said that, if the meaning of a tax provision liberalizing the law from motives of public policy is doubtful, then it should not be narrowly construed, Helvering v . Bliss , 293 U .S . 144, 150-151 (1934) .

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 sell s the house and'land at ,a gain . Although the taxpayer satisfie s the property use condition, I assume : that,, nevertheless, unde r 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 .1 : I assume further that ., if her house had been only .damaged-(and not demolished), and she repaired it, she would get an exclusion . That seems like an .

untenable distinction to Me . 2 1Under 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 . 1633'(a) . Therefore the rebuilt house is not property acquired after an involuntary- conversion, and there would `be no tacking of th°e use and period . of occupancy of the original house onto the rebuilt house fo r purposes of sec . 121 . See" sec . 121(d) (5)` (C ) 21t 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 b y 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 unde r principles of stare decisis .

Difficult Interpretative Question s - 33 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 - 3 4 ,questions .

Disposition of-House Followed by-'Sale .of Lan d Cases, see ;' e .g . ., Bogley v ., Commi .ssioner , .263 F .2d 746 (4th Cir . 1959) , revg . 30 T .C . 452' (1958), 'suggest that, and the regulations, sec .` 1 .121-1(b)(3 ) Income- Tax`Regs .', confirm that,' if-the principal residence consists of both .land .and' improvements, both a prior sale,of'the improvements and part of the land and a subsequent sale of the remaining land 'can qualify, .

.

under section 121(a)' . Although petitioners are perhaps at a disadvantage for not'arguing it, it does not,seem to,me_to be an ; .

impossible stretch'to view the demolition°ofethe original house, .

as a sale for zero dollars followed by' a later .,sale of the land .

There would, then be a ground to apply,section 121(a) to the .

subsequent sale of the land . The demolition/disposition of the .,, .

original house would give,rise to a nondeductible lossi, with the, basis in-the house going to theland . See ,sec . 28,0(B)ry . „Any-gain attributable to the original house and land would be realized on the sale,of the land (and-new house) . That approach requires the allocation of the proceeds between the new house and the land, which : apparently petitioners did .not think,to-address .

Conclusion T 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) .

WELLS, GOEKE, KROUPA, and HOLMES, JJ ., agree with this dissent .