T.C. Memo. 2011-122

UNITED STATES TAX COURT

WILFREDO EMILIO RODRIGUEZ, A MINOR, STEVEN W. CONNER, GUARDIAN,

Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12864-10. Filed June 2, 2011.

C is guardian of the property of P, a minor who is

mentally and physically handicapped. C arranged for

P’s parents to transfer title of their home to C in his

individual capacity. C used P’s funds to satisfy the

mortgage on the home. C in his individual capacity

then transferred title of the home to himself as P’s

guardian. C prepared P’s tax return and claimed the

$8,000 first-time homebuyer credit.

Held: P is not entitled to the first-time

homebuyer credit because he purchased the home from

related persons (his parents). See I.R.C. sec.

36(c)(5). Economic substance and step transaction

doctrines applied.

Steven W. Conner (guardian), for petitioner.

Lynn M. Barrett, for respondent.
- 2 -

MEMORANDUM FINDINGS OF FACT AND OPINION

ARMEN, Special Trial Judge: Respondent determined a

deficiency in petitioner’s 2008 Federal income tax of $8,000 and

an addition to tax of $29.70 under section 6651(a)(1) for failure

to timely file a tax return.1 After a concession by respondent,2

the issue for decision is whether petitioner is entitled to the

$8,000 first-time homebuyer credit (FTHBC) under section 36 for

2008.

FINDINGS OF FACT

Some of the facts have been stipulated, and they are so

found. We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits. At the time the petition was

filed, Wilfredo Emilio Rodriguez (Emilio) resided in Florida.

Emilio was born in April 2001 to Wilfredo and Soledad

Rodriguez (Mr. and Mrs. Rodriguez). Emilio suffered trauma at

birth and as a result is mentally and physically handicapped.

In June 2001 Mr. and Mrs. Rodriguez purchased a home in

Middleburg, Florida (the home), and financed it with a mortgage

of $108,785. Emilio and Mr. and Mrs. Rodriguez have resided

continuously in the home since June 2001.

1 Unless otherwise indicated, all section references are to

the Internal Revenue Code of 1986, as amended.

2 Respondent concedes the addition to tax under sec.

6651(a)(1) for failure to timely file a tax return.
- 3 -

In 2004 Emilio received net proceeds of $463,907.10 in

settlement for the injuries he sustained at birth.

On November 16, 2004, Steven W. Conner (Mr. Conner) was

appointed guardian of the property of Emilio (guardian) by the

Circuit Court, Fourth Judicial Circuit, in and for Clay County,

Florida, Probate Division (the probate court). Mr. Conner was

appointed guardian because Mr. and Mrs. Rodriguez are of “humble

means” and are not financially sophisticated. Although no

training is required to become a guardian, Mr. Conner is familiar

with Florida State guardianship provisions. Mr. Conner is

presently guardian of the property of one other individual and

was the guardian of the property of approximately three other

individuals.

Mr. Conner holds both bachelor’s and master’s degrees in

accounting. Mr. Conner has been a certified public accountant

(C.P.A.) for approximately 25 years and is a member of the

Florida Institute of C.P.A.s. Mr. Conner owns a C.P.A. practice

and has approximately 12 employees. Mr. Conner’s areas of

concentration include Internal Revenue Service defense and tax

planning. Mr. Conner spends 60 percent of his time “representing

[and] defending businesses and individuals that the IRS has

decided to audit for one reason or another.”

Although Mr. Conner professes not to be financially savvy,

he believes he is capable of making wise investments. Mr.
- 4 -

Conner’s ultimate goal when investing is “to make money.” Mr.

Conner presently owns, and has previously owned, various

investment properties ranging from small commercial properties to

multiacreage residential properties.

On March 29, 2005, the probate court issued an order

authorizing a monthly allowance of $200 to Mr. and Mrs. Rodriguez

from Emilio’s funds. On July 26, 2006, the probate court issued

an order authorizing an increase in the monthly allowance from

Emilio’s funds to $300 for the payment of medical and other bills

for Emilio. At all relevant times Mr. and Mrs. Rodriguez

continued to receive the allowance of $300 from Emilio’s funds.

In early 2009 Mr. Conner learned that Mr. and Mrs. Rodriguez

were experiencing financial difficulty and had missed several

mortgage payments. At some point before February 17, 2009, Mr.

Conner petitioned the probate court for an order authorizing a

loan of $103,000 from Emilio’s funds to Mr. and Mrs. Rodriguez to

satisfy the mortgage. On February 17, 2009, the probate court

issued an order authorizing the loan.3

At trial Mr. Conner testified that on three separate

occasions after February 17, 2009, he contacted the holder of the

mortgage on the home and informed the company that Emilio

intended to lend Mr. and Mrs. Rodriguez the funds necessary to

3 The order authorizing the loan indicates that the loan

would be for a term of 30 years at a rate of 6 percent interest,

with a promissory note to balloon in 20 years.
- 5 -

satisfy the mortgage, thereby extinguishing the holder’s interest

in the mortgage. Mr. Conner testified further that the mortgage

holder was “not willing to accept * * * payment” from Emilio.

Emilio and his parents never entered into the loan

arrangement as contemplated by the February 17, 2009 order of the

probate court.

Also on February 17, 2009, section 36 was amended to allow

to first-time homebuyers a refundable $8,000 tax credit that

generally is not subject to recapture. At some point thereafter,

but before the following events, Mr. Conner researched section 36

as amended.

Sometime on or before May 4, 2009, Mr. Conner contacted the

mortgage holder to ascertain the current balance of the mortgage

on the home. On May 4, 2009, the mortgage holder issued a

statement to Mr. Conner indicating that the “total payoff” was

$106,621.46. The statement also states that “In an effort to

expedite and more efficiently process your payoff request * * *

Write the loan number and borrower’s name or property address on

the check”. The statement does not identify or otherwise specify

from whom the check must originate.

On May 6, 2009, Mr. Conner transferred $106,621.46 from

Emilio’s bank account to the escrow account of Mr. Conner’s

C.P.A. firm.
- 6 -

On May 11, 2009, Mr. and Mrs. Rodriguez executed a warranty

deed transferring the home to Mr. Conner in his individual

capacity. The warranty deed was prepared by Mr. Conner. 

Although Mr. and Mrs. Rodriguez signed over the title of the home

to Mr. Conner, they did not receive anything of monetary value

from Mr. Conner in exchange.

On May 14, 2009, a cashier’s check was purchased by Mr.

Conner’s C.P.A. firm for $106,621.46 and sent to the mortgage

holder in satisfaction of Mr. and Mrs. Rodriguez’s mortgage on

the home.

Mr. Conner testified at trial that he purchased the home as

an investment. However, before taking title to the home Mr.

Conner did not have the home inspected, nor did he obtain an

independent appraisal of the fair market value of the home. Mr.

Conner stated at trial that he did not know the fair market value

of the home at the time of the transfer.4

Mr. and Mrs. Rodriguez never paid rent to Mr. Conner. Mr.

Conner testified at trial that he was not concerned about the

risk involved in the transaction because even “If I didn’t

collect rent for a year, it wasn’t going to make a whole lot of

difference in my economic gain as a property holder”.

4 We note that the record includes a property record card

from the Clay County Property Appraiser indicating that the “just

value” of the home on Feb. 19, 2009, was $154,534. But the

Property Record Card is dated Oct. 12, 2009, well after the

events described herein.
- 7 -

On May 18, 2009, just 7 days after Mr. and Mrs. Rodriguez

transferred title of the home to Mr. Conner, Mr. Conner executed

a warranty deed in his individual capacity transferring the home

to himself as guardian. The warranty deed was prepared by Mr.

Conner. That same day Mr. Conner in his individual capacity as

seller and Mr. Conner as guardian and buyer executed a purchase

and sale agreement listing a purchase price for the home of

$106,621.46.

On May 18, 2009, the mortgage holder executed a release of

mortgage because the mortgage had been fully paid.

Both the May 11, 2009 warranty deed and the May 18, 2009

warranty deed were recorded simultaneously on July 14, 2009.

On May 28, 2009, following the transfers of the home on May

11 and 18, Mr. Conner prepared and signed Emilio’s 2008 Federal

income tax return. On that return, Mr. Conner claimed an $8,000

FTHBC under section 36 relating to Emilio’s purchase of the home.5

5 The genesis of the events described above that culminated

in the claiming of the sec. 36 credit on Emilio’s return is

revealed in a letter dated Mar. 23, 2009, sent by Mr. Conner to

Mrs. Rodriguez, which letter reads in part as follows:

This letter is written to summarize our conversation

regarding the purchase of your home by me.

I will purchase the home for the payoff amount from 

* * * [the mortgage holder]. The payoff amount is

approximately $106,000. You said that you were

satisfied to make this transaction because you and Mr.

Rodriguez have been unable to make the mortgage

payments. You will receive no funds from the purchase. 

(continued...)
- 8 -

In the notice of deficiency respondent determined, inter

alia, that Emilio was not eligible for the FTHBC.

OPINION

Generally, section 36(a) and (b) allows a credit of up to

$8,000 to a first-time homebuyer of a principal residence in the

United States.6 Pursuant to section 36(g) the FTHBC for the

purchase of a principal residence in 2009 may be claimed on either

the taxpayer’s 2008 or 2009 Federal income tax return.

However, under section 36(c)(3) the FTHBC is not available to

a taxpayer who purchases a home from a related person. Under

section 36(c)(5) related persons include direct ancestors such as

parents. Sec. 267(b)(1), (c)(4).

5(...continued)

After this purchase, I will own the house that you

presently live in.

Because of the difficulty of negotiating the close with

* * * [the mortgage holder], it may take some time to

actually close the loan. Your evidence of the sale

will be the release of lien/mortgage from * * * [the

mortgage holder] and signing of the warranty deed

transferring title to me.

After the sale to me is complete, we will discuss

whether it makes sense for you to rent the house from

me or me to sell the house to Emilio.

6 The requirement under sec. 36(b)(4) that the taxpayer

attain 18 years of age before the date of the purchase to qualify

for the FTHBC is effective for purchases after Nov. 6, 2009. 

Worker, Homeownership, and Business Assistance Act of 2009, Pub.

L. 111-92, sec. 12(a)(1), 123 Stat. 2991.
- 9 -

Mr. Conner contends that he as guardian purchased the home

from himself in his individual capacity, such that Emilio is

eligible for the FTHBC.

Respondent contends that the purchase of the home by Mr.

Conner in his individual capacity from Mr. and Mrs. Rodriguez

lacks economic substance and that as a result of the application

of the step transaction doctrine, Emilio effectively purchased the

home from his parents, Mr. and Mrs. Rodriguez. Therefore, in

respondent’s view, Emilio is not eligible for the FTHBC because he

purchased the home from related persons as defined in section

36(c)(5). We agree with respondent.

“Federal tax law is concerned with the economic substance of

the transaction under scrutiny and not the form by which it is

masked.” United States v. Heller, 866 F.2d 1336, 1341 (11th Cir.

1989); see also Commissioner v. Court Holding Co., 324 U.S. 331,

334 (1945) (“The incidence of taxation depends upon the substance

of a transaction. * * * To permit the true nature of a

transaction to be disguised by mere formalisms, which exist solely

to alter tax liabilities, would seriously impair the effective

administration of the tax policies of Congress.”); Gregory v.

Helvering, 293 U.S. 465, 470 (1935) (finding the economic

substance of a transaction to be controlling, and stating: “To

hold otherwise would be to exalt artifice above reality and to

deprive the statutory provision in question of all serious
- 10 -

purpose.”). See generally Kirchman v. Commissioner, 862 F.2d

1486, 1490-1494 (11th Cir. 1989), affg. Glass v. Commissioner, 87

T.C. 1087 (1986). “When the form of the transaction has not, in

fact, altered any cognizable economic relationships, we will look

through that form and apply the tax law according to the substance

of the transaction.” Zmuda v. Commissioner, 79 T.C. 714, 720

(1982), affd. 731 F.2d 1417 (9th Cir. 1984). The legitimacy of a

transaction under State law has no bearing on the economic

substance analysis. Id. Conversely, if the substance of a

transaction accords with its form, then the form will be upheld

and given effect for Federal tax purposes. See Blueberry Land Co.

v. Commissioner, 361 F.2d 93, 100-101 (5th Cir. 1966), affg. 42

T.C. 1137 (1964).

In Commissioner v. Court Holding Co., supra at 334, the

Supreme Court explained the step transaction doctrine, stating

The tax consequences which arise from * * * a sale of

property are not finally to be determined solely by the

means employed to transfer legal title. Rather, the

transaction must be viewed as a whole, and each step,

from the commencement of negotiations to the

consummation of the sale, is relevant. A sale by one

person cannot be transformed for tax purposes into a

sale by another by using the latter as a conduit through

which to pass title. * * * 

The economic substance and step transaction doctrines require

“a searching analysis of the facts to see whether the true

substance of the transaction is different from its form or whether

the form reflects what actually happened.” Harris v.
- 11 -

Commissioner, 61 T.C. 770, 783 (1974). The issue of whether any

of those doctrines should be applied involves an intensely factual

inquiry. See Gordon v. Commissioner, 85 T.C. 309, 327 (1985); see

also Bowen v. Commissioner, 78 T.C. 55, 79 (1982), affd. 706 F.2d

1087 (11th Cir. 1983).

Mr. Conner contends that Emilio did not purchase the home

directly from his parents because the mortgage holder would not

accept payment directly from Emilio. However, it is well

established that the Court is “not required to accept the selfserving testimony of petitioner * * * as gospel.” Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986). In Diaz v. Commissioner, 58

T.C. 560, 564 (1972), we observed that the process of distilling

truth from the testimony of witnesses, whose demeanor we observe

and whose credibility we evaluate, is the daily grist of judicial

life.

Mr. Conner did not introduce any documents regarding the

alleged refusal of the mortgage holder to accept payment from

Emilio, nor did Mr. Conner call as a witness a representative of

the mortgage holder to corroborate his testimony. In this regard

it is also well established that a party’s failure to call a

critical witness may give rise to a presumption that, if called,

such witness’ testimony would not have been favorable to the

party. Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.

1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).
- 12 -

Mr. Conner researched section 36 before the purchase and sale

of the home and concluded that he was not a related person vis-avis Emilio under section 36(c)(5). Mr. Conner must also have

concluded that a purchase by Emilio directly from Mr. and Mrs.

Rodriguez would make Emilio ineligible for the FTHBC because Mr.

and Mrs. Rodriguez were related persons under section 36(c)(5).

For Federal income tax purposes the term “sale” is given its

ordinary meaning and “is generally defined as a transfer of

property for money or a promise to pay money.” Grodt & McKay

Realty, Inc. v. Commissioner, 77 T.C. 1221, 1237 (1981) (citing

Commissioner v. Brown, 380 U.S. 563, 570-571 (1965)). Mr. and

Mrs. Rodriguez, however, did not receive any money from Mr. Conner

for the purported sale of their home. Mr. Conner would have us

believe that Mr. and Mrs. Rodriguez transferred title for no money

and without knowing whether they were going to be renting the home

from Mr. Conner or whether title would be transferred to Emilio. 

But, in fact, Mr. Conner transferred the exact payoff amount from

Emilio’s bank account into the C.P.A. firm’s escrow account before

both the transfer of title from Mr. and Mrs. Rodriguez to Mr.

Conner and the purchase of the cashier’s check by Mr. Conner. As

previously stated: “A sale by one person cannot be transformed

for tax purposes into a sale by another by using the latter as a

conduit through which to pass title.” Commissioner v. Court

Holding Co., 324 U.S. at 334.
- 13 -

Mr. Conner orchestrated the purchase and sale of the home to

make it appear as if Emilio purchased the home from Mr. Conner in

his individual capacity. However, the record demonstrates that

Mr. Conner was a mere “conduit through which to pass title” from

Mr. and Mrs. Rodriguez to Emilio. Thus, we disregard the

intermediate transfer of title from Mr. and Mrs. Rodriguez to Mr.

Conner in his individual capacity and instead compress the

transaction into a single event, which was a purchase by Emilio

from Mr. and Mrs. Rodriguez, his parents. In other words, Mr.

Conner structured the form of the transaction in an attempt to

qualify Emilio for the FTHBC, but the true substance of the

transaction was a purchase from related persons as described in

section 36(c)(5).

Because Emilio purchased the home from related persons, he is

not entitled to the FTHBC under section 36.

Conclusion

Finally, in reaching the conclusion described herein, we have

considered all arguments made by Emilio, and, to the extent not
- 14 -

mentioned above, we find them to be moot, irrelevant, or without

merit.

To give effect to the foregoing,

Decision will be entered

for respondent as to the

deficiency and for petitioner

as to the addition to tax.