Tax Court in Brief | Webert v. Commissioner | Sale of Principal Residence

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Tax Court in Brief | Webert v. Commissioner | Sale of Principal Residence

The Tax Court in Brief – April 4th- April 8th, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of April 4th, 2022, through April 8th, 2022

Webert v. Comm’r, T.C. Memo. 2022-32 | April 7, 2022 | Gustafson, J. | Dkt. No. 15981-17

Opinion

Short Summary:  The Weberts married in 2004. Ms. Webert purchased a house on Mercer Island in 2005. That same year, Ms. Webert also was diagnosed with cancer, the treatments for which led to a prolonged period of financial precarity.

The Weberts resided in the Mercer Island house until 2009. Thereafter, Ms. Webert rented out the Mercer Island house, and the couple resided in Mr. Webert’s house in Sammamish, Washington. Ms. Webert sold the Mercer Island house in 2015.

The Weberts filed joint federal income tax returns for tax years 2010 through 2015. During those years, the Weberts reported income from the lease of the Mercer Island house on Schedule E, “Supplemental Income and Loss.” The Weberts reported that they used the Mercer Island home for personal purposes for 14 days in 2010 and zero days in 2011 through 2015. The depreciation schedules that the Weberts attached to their returns for those years mirrored the number of fair rental days reported for the property on their Schedule E. On their 2015 return, the Weberts reported the sale of the Mercer Island house but excluded the gain from gross income.

The Internal Revenue Service (“IRS”) assessed federal income tax for the Webert’s 2015 tax year in connection with the gain on the sale of the Mercer Island house. The Weberts filed a petition with the Tax Court. On motion for summary judgment, the IRS argued that there was no genuine dispute of material fact regarding whether the Weberts could exclude the gain realized from the sale of the Mercer Island house from gross income.

Key Issues

  • Is there a genuine dispute of material fact that the Weberts did not use the Mercer Island house as their principal residence for at least two of the five years immediately the sale of the house?
  • Is there a genuine dispute of material fact that Ms. Webert’s health problems were not the primary reason for the sale of the Mercer Island home?

Primary Holdings

  • No, there is no genuine dispute of material fact that the Weberts did not use the Mercer Island house as their principal residence for at least two of the five years immediately preceding the sale of the house.
  • Yes, there may be a genuine dispute of fact that Ms. Webert’s health problems were the primary reason for the sale of the Mercer Island home. However, it is not clear if this dispute of fact is material.

Key Points of Law

  • The Tax Court may grant summary judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Tax Court Rule 121(b); Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
  • A partial summary judgment is appropriate when only some issues in a case may be decided as a matter of law. Rule 121(b); Turner Broad. Sys., Inc. & Subs. v. Comm’r, 111 T.C. 315, 323–24 (1998).
  • The party moving for a motion for summary judgment bears the burden of showing that there is no genuine dispute of material fact. Dahlstrom v. Comm’r, 85 T.C. 812, 821 (1985). The Tax Court will make factual inferences in the light most favorable to the nonmoving party. However, the party opposing summary judgment has the duty to set forth specific facts that show that there is a genuine dispute for trial.  Tax Court Rule 121(d).
  • Gross income means all income from whatever source derived. I.R.C. § 61(a); Treas. Reg. § 1.61-1(a).
  • Gain realized from the sale of property generally is included in a taxpayer’s gross income. I.R.C. § 61(a)(3).
  • However, gain on the sale of property owned and used by a taxpayer as their principal residence for at least two of the five years immediately preceding the sale is excluded from gross income. R.C. § 121(a).
  • Gain from the sale or exchange of a principal residence for the primary reason of a change of place of employment, health, or unforeseen circumstances also is excluded from gross income. SeeR.C. § 121(c)(2)(B); Treas. Reg. § 1.121-3(b). The amount of the exclusion is determined by multiplying the maximum amount of the exclusion ($250,000 for single returns and $500,000 for joint returns) by the amount of time that the taxpayer has used the property as their principal residence during the preceding five years divided by two years. Treas. Reg. § 1.121-3(g)(1).

Insights: This case highlights the importance of being consistent in how things are reported to the IRS. Taxpayers should take a wholistic view of their return submission and not succumb to the temptation of treating each individual item (here, the rental of the Mercer Island home and the claimed e