Sale of Principle Residence; Tax Exempt Status

Gummer v United States, 40 Fed Cl 812 (Fed Cl 1998).

Facts: Taxpayer owned and resided in a home for 22 years prior to listing her home for sale and relocating to a rented apartment. The taxpayer's former home eventually sold approximately four years after it had been listed. The taxpayer claimed that she was over 55 years of age at the time of the sale and was eligible to exclude the recognition of a portion of the gain from the sale of her residence under Internal Revenue Code § 121, which provides in relevant part:

At the election of the taxpayer, gross income does not include gain from the sale or exchange of property if - (1) the taxpayer has attained the age of 55 before the date of such sale or exchange, and (2) during the five-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as his principal residence for periods aggregating three years or more.

The Internal Revenue Service denied the taxpayer's claim for an exclusion under § 121, stating that the taxpayer did not occupy the residence for three out of the five years prior to the date of its sale. The taxpayer argued that the "use" requirement of § 121 is tied to the definition of "principal residence," and whether or not the owner physically occupied the property becomes only part of the analysis. The parties cross-moved for judgment on the pleadings.

Holding: Motion and cross-motion denied. Whether the property was used as the taxpayer's "principal residence" for the requisite three out of five years pursuant to IRC § 121 does not depend solely on physical occupancy and instead will be determined under a "facts and circumstances" analysis. This analysis will include the taxpayer's good faith, surrounding whether the property was "used" as the taxpayer's "principal residence." Depending upon the situation, an individual who does not physically occupy the residence for the requisite period may have extenuating circumstances that prevent physical presence but do not deny the characterization of "use" of the property as a "principal residence" for the requisite time. The government would be entitled to a judgment on the pleadings only if actual physical occupancy of the residence for three out of the five years preceding the sale was required under § 121. As a result of the adoption of the "facts and circumstances" test, the government's motion was denied. Further, the facts were not developed sufficiently for the court to determine whether the "facts and circumstances" surrounding the taxpayer's absence from the property would enable her to claim the benefits of § 121. Thus, the taxpayer's motion was denied.

EDITOR'S NOTE: The court is applying section 121 from the 1994 Internal Revenue Code because the taxpayer's claim for a tax refund arose from her 1994 tax return. In 1997, section 121 was entirely rewritten. Section 121 now allows a limited exclusion (which can be claimed as frequently as every two years) of a home sale gain from gross income if the taxpayer satisfies certain requirements for duration of use and ownership. See 26 USCA § 121 (1998).

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