t c memo united_states tax_court stephen m gaggero petitioner v commissioner of internal revenue respondent docket no filed date david blake chatfield for petitioner john d faucher for respondent memorandum findings_of_fact and opinion holmes judge stephen gaggero is a self-made man and a successful real- estate developer who in the ‘90s bought and moved into a rundown beach house in malibu that became a splendid mansion the house was his primary residence while he upgraded it and he was still living there when it was sold for at least three times its initial value but before he began the upgrades he signed a deal with blanchard construction company bcc bcc was in the real-estate development business and the essential part of the deal was that bcc would get an equal share in any increase in the property’s value between the time the deal was signed and the time the property was sold to a third party although gaggero would pay most of the costs of the project renovations bcc would provide the development services and get its half-interest in the increase if it completed its work bcc completed its work in date and the house was sold a few weeks later the commissioner’s problem is that bcc is wholly owned by gaggero he disputes gaggero’s tale of a conveyance to bcc and contends that the property remained entirely in gaggero’s hands to him gaggero’s deal with bcc is just a scheme to avoid recognizing capital_gain findings_of_fact stephen gaggero grew up with the name stephen blanchard and only changed it when he was reunited with his natural father he did not have a carefree boyhood and dropped out of school in the tenth grade he earned his living first as a handyman in greater los angeles until a movie studio hired him as a carpenter he was good at what he did and movie people began hiring him-- first to work on their homes and then to build them he saved his money bought land and became a developer he continues to develop and manage real_estate today bcc was the corporation that gaggero formed in to carry on his business and he was its sole owner and president at least between and in its heyday bcc had as many a sec_40 people working for it in the early ’90s that number was in the teens bcc even had its own in-house counsel and accountants in addition to a construction superintendent laborers decorators and designers this case’s origins go back to when gaggero bought two adjoining parcels of land on the beach side of the pacific coast highway in malibu california it was during one of southern california’s periodic real-estate busts and gaggero thought he saw a great potential gain if the next boom sounded soon enough only one of those two parcels is at issue in this case but even in that relatively depressed market it was still worth about dollar_figure million but gaggero saw potential value far greater than the rundown house that then sat on the land he also looked for a way to finance the improvements that he wanted to make and wanted to save on any final tax bills should his vision prove true so before closing he consulted with his accountant james walters on how to structure the purchase and development of the property he had worked with walters for several years he trusted walters regarded walters as entirely competent walters was a cpa and usually took his advice acting at walters’ suggestion but certainly contributing to the script with his own experience gaggero as individual signed a land_contract purchase and sale agreement and a development contract sale agreement with bcc according to this sale agreement bcc would develop the property in exchange for an interest equal to half the increase in its value less the costs of sale the sale agreement specified the property’s value as dollar_figure million and said that bcc would not receive its interest unless and until it finished its work or the property was sold gaggero then moved into the house and made it his primary residence while bcc performed the development work bcc redesigned rebuilt and expanded the house and grounds-- adding amenities such as a small golf course stadium tennis court new pool and secret pathway that wound from the home through the woods to a private beach-- and gaggero personally paid approximately dollar_figure million for the cost of these improvements bcc was responsible for the design planning permits and day-to-day management of the project it hired both subcontractors and independent contractors to perform the work gaggero paid many of the project costs--eg the materials supplies and outside labor needed to complete the renovations--either continued the project took years but led to a boffo beachfront beauty of a home that attracted international attention bcc finished its work in date and the property was sold for dollar_figure million in date to monticello properties s a a luxembourg corporation founded by a successful flemish biochemist to close the deal gaggero executed a grant deed a sales agreement and a bill of sale--all of which he signed as an individual with no mention of bcc gaggero reported dollar_figure million from the sale on form_2119 sale of your home as part of his individual tax_return but he didn't recognize any capital_gain bcc also reported continued directly or by reimbursing bcc gaggero didn’t pay bcc in cash for its development services--bcc’s payment was the part-ownership interest it would obtain upon completion of its services gaggero purchased a replacement house for dollar_figure million within two years and deferred his gain under then- sec_1034 before its repeal sec_1034 provided that a taxpayer could completely defer recognition of gain on the sale of his principal_residence if within two years before or two years after the sale he purchased a new residence and used it as his principal_residence and the adjusted_sales_price of the old residence did not exceed the cost of the new residence see sec_1034 and b before the taxpayer_relief_act_of_1997 tra pub_l_no sec_312 sec_111 stat pincite if the adjusted_sales_price of the old residence was greater than the cost of the new residence the taxpayer would recognize gain on the sale of the old residence only to the extent the adjusted_sales_price exceeded the cost of the new residence id as we will discuss later what exactly the adjusted_sales_price of the old residence was is at issue here congress repealed sec_1034 in and amended sec_121 at the same time to allow all taxpayers to exclude from income up to dollar_figure dollar_figure for taxpayers filing joint returns of gain from the sale of a principal continued over dollar_figure million of ordinary_income but no capital_gain on its corporate return for that year the commissioner began an audit of gaggero's returns for several years but in the end focused on this old deal determining a deficiency on two theories under the first the commissioner determined that gaggero should have reported the full dollar_figure million sales_price on his individual return this argument is based on the premise that gaggero never in fact sold any part of the property to bcc at least not in any way that the code would recognize as a sale he argues that bcc's interest was only that of a lienholder little different from that which any contractor who works on a house could get to ensure payment for his work if he's right gaggero should have reported the entire dollar_figure million sales_price himself that dollar_figure million sales_price was dollar_figure million greater than what gaggero paid to purchase his new home thus according to the commissioner gaggero continued residence see tra sec_312 and b stat pincite unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue gaggero says that dollar_figure million of bcc’s ordinary_income resulted from the proceeds it received from the monticello sale we think it more_likely_than_not that he’s telling the truth since his testimony was corroborated by walters and a statement that is consistent with the gross_sales figure on two pages of bcc’s corporate tax_return that made it into the record should recognize dollar_figure million of gain on the malibu property the difference between the adjusted_sales_price of the malibu property and the cost of his new residence gaggero argues the commissioner is wrong to think that bcc’s interest was just a sort of mechanic’s lien he contends that bcc acted as a developer and consistent with the norms of that industry charged not for the value of its services but for the increase in the property’s value that its work created according to gaggero this means there was a true sale to bcc when bcc finished its work in date even if gaggero wins on the first issue however it doesn’t necessarily mean that he is home free the commissioner also argues that if gaggero actually sold a portion of his house to bcc he needed to report two transactions on his return the sale to bcc for dollar_figure million in date and the sale to monticello for dollar_figure million in date gaggero however didn’t report that first sale on his return under this alternative theory the commissioner didn’t the commissioner calculated gaggero’s adjusted_basis in the malibu property to be dollar_figure7 million which resulted in a dollar_figure3 million realized gain on the sale after applying sec_1034 the commissioner acknowledged gaggero would need to recognize only dollar_figure million of that gain the difference between the dollar_figure3 million and dollar_figure million would reduce gaggero’s basis in his new residence see sec_1034 allocate to gaggero any basis for the sale to bcc and thus asserts gaggero should’ve reported a dollar_figure million capital_gain on that first sale although gaggero now concedes that it might have been technically proper to report the two transactions on the return he has two problems with the commissioner’s determination first he argues that the fact that he didn’t report the two transactions separately was harmless because the two taxpayers gaggero and bcc together did report the full dollar_figure million sales_price the dollar_figure million reported by bcc on its return and the dollar_figure million on gaggero’s second if there was a sale to bcc in date the commissioner should have account ed for his increase in basis if the commissioner wins on his second theory we then need to assess the interplay of sec_1034 and those two sales if sec_1034 doesn’t save gaggero from a deficiency for we then need to determine whether he is liable for an accuracy-related_penalty under sec_6662 because we decide this case on a preponderance_of_the_evidence we need not decide whether the burden_of_proof shifts to the commissioner under sec_7491 opinion i did gaggero sell an interest to bcc in date we start by looking at gaggero’s evidence that he sold an interest in the house to bcc the most important evidence is two documents dated date--the sale agreement and bcc’s company resolution signed by gaggero twice--once as the individual selling the house and another as the president of bcc the sale agreement states that bcc will provide expertise supervision labor permanent and temporary facilities support staff insurance preliminary and final feasibility studies budgets break downs schedules to obtain all entitlements and permits to completely design develop remodel construct landscape decorate and manage the property in exchange for a fee-simple ownership_interest of the house’s value less dollar_figure million bcc’s interest would vest upon completion of its work on the property or the property’s sale to a third party whichever came first the company resolution authorized gaggero as president of bcc to execute all agreements as necessary regarding the development of the property this all looks pretty good for gaggero’s theory but the commissioner tells us to focus instead on the documents that gaggero gave to monticello and the state of california in which list gaggero as sole owner and don’t mention bcc as owner of any interest in the property these documents include a grant deed sales agreement bill of sale owner’s declaration and form 1099s issued by chicago title company to monticello each of these reports only gaggero as the property’s owner they even refer to him as a single man as his separate_property an individual as seller and an individual who hereby sells the commissioner argues that gaggero cannot disavow the form of his sale to monticello and that gaggero’s signature on the monticello sale agreements is strong evidence that whatever bcc got was not true co-ownership he also contends that gaggero consciously decided to deny the existence of bcc in the monticello sale documents and to structure bcc’s interest as a lien not a fee and he is of course able to point out a great many cases where a taxpayer gets stuck with the tax consequences of his chosen form of transaction which documents prevail form does not always tell us whether a deal is a sale or something else under the code we look for the objective economic realities of a transaction in order to determine whether there was a sale for tax purposes 435_us_561 79_tc_570 things get more complicated though because we have to look at state law to figure out if a taxpayer or other party has an ownership_interest in property 472_us_713 the pithy way of saying this is that state law defines property rights but federal_law defines their tax consequences when deciding whether a deal is a sale we ask whether the benefits and burdens of property ownership have passed or in a case like this become shared this is a question of fact determined by examining the written agreements and all the relevant facts and circumstances see 108_tc_507 90_tc_116 77_tc_1221 we consider the following whether legal_title passed the manner in which the parties treated the transaction whether the buyer acquired an equity_interest in the property whether the buyer has any control_over the property and if so the extent of such control whether the buyer bore the risk of loss or damage to the property whether the buyer received any benefit from the operation or sale of the property whether the contract obligated the seller to execute and deliver a deed and the buyer to make payments and whether the buyer had a right to possess the property or an obligation to pay property taxes see grodt mckay realty t c pincite we look at each a did legal_title pass the commissioner emphasizes that title didn’t pass to bcc and that even if it did bcc must still hold it because title never passed from bcc to monticello according to the recorded deed we do find that gaggero didn’t reveal his agency relationship with bcc to monticello and even if gaggero acted as bcc’s agent he cannot sign the documents to transfer an interest in real_estate under california law without subscribing the name of the principal see cal civ code sec west gaggero argues in reply that according to the sale agreement title was to be passed automatically in a self-executing process once bcc completed its development work gaggero commenced negotiations with monticello in late multifactor tests can be hard to handle see 560_f3d_620 7th cir posner j multifactor tests with no weight assigned to any factor are bad enough from the standpoint of providing an objective basis for a judicial decision rev’g 130_tc_54 but we aren’t juggling these factors we’re using them as possible light sources to shine on the question of whether the deal we’re looking at is enough like the paradigm of a cash-for-property deal to transfer ownership to be reasonably considered a sale for tax law before bcc finished its work which remember was a condition for bcc’s receiving its interest in the house it completed that work in early date and bcc passed a corporate resolution on date to allow gaggero to act as its agent in the sale to monticello those negotiations involved many lawyers and realtors became long and tedious and the parties were not certain until the very end that the deal would close gaggero’s presentation of the deed to monticello without mentioning bcc was therefore reasonable but even if gaggero’s failure to mention bcc’s interest to monticello is reasonable might it still make a difference one way of answering this key question is to imagine what might happen if bcc had not been under gaggero’s control--would california law recognize its interest as that of a titleholder or only a mere lienholder california real-estate law considers substance over form bachenheimer v palm springs mgmt corp p 2d cal dist ct app although the instrument is called a lease and the payments are called rent the transaction is a sale if fee title will eventually pass to the buyer-occupant moss v williams p 2d cal dist ct app according to california law there are situations where legal_title or deed will not reflect the parties’ intent in a transaction for example under land-sales contracts which are similar to the case before us the seller holds legal_title as security for the unpaid purchase_price see eg alhambra redevelopment agency v transamerica fin servs cal rptr cal ct app under land-sales contracts the seller only possesses legal_title to the property and is considered to be nothing more than a trustee holding the land in trust for the purchaser as security for the payment of the purchase_price until a conveyance of the legal_title to the vendee is finally made citation and internal quotation marks omitted if a third party owned bcc and wished to compel the documentation of the transfer of title it could have brought an action for declaratory relief or specific performance under the sale agreement at that time the ninth circuit has held that the fact that certain documents contained different terminology is immaterial where the intent of the parties was plain the purpose of the contracts was clear and the tax consequences are therefore well settled see 241_f2d_288 9th cir aff’g 24_tc_1124 and the supreme court has long established that formal written documents are not rigidly binding in the field of tax law 308_us_252 even if passage of title is required by california law we have held that a transaction is a sale under federal tax law once there’s been a transfer of the benefits and burdens of ownership--we do not wait for the technical requirements for the passage of title under state law to be satisfied see amdahl corp t c pincite 74_tc_1513 48_tc_694 aff’d 426_f2d_1391 9th cir we therefore conclude that this factor is not decisively against gaggero’s characterization of his deal with bcc as a sale but doesn’t much count in his favor either title alone just doesn’t illuminate much about bcc’s and gaggero’s respective rights under the terms of their deal b how did the parties treat the transaction the commissioner argues that gaggero’s hiding bcc’s ownership_interest from monticello and failing to include bcc in the sale paperwork amounts to gaggero’s implicit denial that anything was transferred to bcc and he concludes from this that bcc had no property right in the parcel but as we’ve already described other documents reflect a different understanding between the parties gaggero argues that these documents some of them dating back to properly record the continuous understanding between the parties that if bcc developed the property it would share in the gain if the property were to be sold we think gaggero has the better of this argument we do find that he concealed bcc from monticello but only because he wanted the deal to get done and not because he was implicitly denying that bcc co-owned the property the negotiations that led to the sale were long and delicate but the closing was quick gaggero and monticello signed the sale agreement on date and escrow was over less than a week later the parties disputed commissions throughout the deal and gaggero ended up indemnifying monticello for some of the sale’s commissions we specifically find gaggero credible when he testified that he feared the introduction of bcc as a part-owner would have jeopardized the sale once monticello signed its deed however gaggero did ensure that both bcc and himself as an individual were considered sellers in the escrow closing-agreement and tax-related documents the commissioner would have us rely on a statement by gaggero’s lawyer in the deal--jennifer kilpatrick--that she erroneously assumed the dollar_figure million payment to bcc was a loan repayment because bcc was the beneficiary of a deed_of_trust recorded on the property in date to secure payment of dollar_figure million on the contrary we find that gaggero recorded the deed_of_trust on the property in favor of bcc to protect bcc’s interests in a number of gaggero’s properties we also find that gaggero’s retention of a different lawyer to represent bcc and bcc’s own reconveyance of the deed_of_trust once it received dollar_figure million from escrow are persuasive evidence that the parties intended to follow the terms of the sale agreement that required gaggero to transfer part ownership to bcc we likewise find that gaggero’s retention of separate legal representation for himself and bcc strongly indicates that he was looking for an arm’s-length transaction where each party’s own interest was represented therefore we weigh this factor in favor of gaggero c did bcc acquire equity in the property the commissioner argues that bcc’s shared investment risk was not a real- property interest he also reminds us that gaggero’s adviser conceded as much during trial we agree that bcc--just by signing the contract back in 1991--did not acquire any significant equity but once it started work things quickly changed one who contracts to purchase real_property acquires an equity therein immediately on the signing of the contract to purchase and taking possession according to the commissioner gaggero committed a material misrepre- sentation of fact for the purpose of avoiding the transfer tax--a misdemeanor under los angeles cal county code sec_4 --by not recording a deed showing a transfer from gaggero of part ownership to bcc and then later omitting bcc from the deed to monticello although the commissioner is correct that the parties didn’t record gaggero’s transfer of part ownership to bcc we don’t believe gaggero was hiding bcc’s interest for the purpose of avoiding the transfer_tax payment of transfer_taxes usually happens with recording see los angeles cal county code sec_4 and gaggero credibly testified that the parties didn’t record bcc’s interest because it happened so close to the time of the monticello deal we therefore find that the parties’ failure to record a deed and to pay the transfer_tax on the transfer of part ownership to bcc aren’t persuasive evidence of this factor this equity increases with every payment no comparison of the value of the realty and the amount of rental paid at any given time has any validity 226_f2d_798 9th cir we think this case is a lot like an installment_sale because bcc was pouring money and effort into the house for years after like a buyer under an installment-sale contract bcc gradually increased the value of its conditional interest until it completed the work which is when it became fully entitled to an equity right we need not try to figure out if and precisely when its conditional interest became an equity_interest but do find that by date--when it fulfilled the condition that it finish work--it did acquire equity in the property d did bcc control the property one of the indicators that an asset has been sold is that control_over that asset shifts to another party 281_us_376 the commissioner argues that this factor weighs against gaggero because he kept complete control_over the house until he sold it the commissioner therefore views the sale agreement as first a construction_contract and bcc as merely a contractor gaggero says the commissioner held at all times the full right power and authority to sell and transfer the property as he saw fit the commissioner stresses that gaggero made the house his personal_residence and the sale agreement made him responsible for all costs and income associated with it the commissioner also argues that the parties ensured gaggero’s control_over the house would survive any loss of his control_over bcc in the section of the sales agreement that bars bcc from making any decisions about the property without gaggero’s consent we don’t lay too much stress on this however because the sale agreement also ended gaggero’s veto power once bcc finished the development work and received ownership in the house it also lasted only while gaggero was still bcc’s president the latter part of sec_3_6 of the sale agreement specifically notes that if gaggero did not have more than ownership in bcc or ceased to be its president then all decisions should be mutually agreed upon in writing between bcc and gaggero and all contracts concerning the property should be signed by both bcc and gaggero that section also states all agreements and documents concerning the house had to be signed by both bcc and gaggero after bcc’s interest vested we find it especially telling that this agreement was devised six years before the monticello sale and it is strong evidence that gaggero was not certain he would remain in control of bcc and so took pains--as he said in testimony that we find credible--to make sure the agreement was at arm’s length we therefore weigh this factor in favor of gaggero’s argument that he sold part ownership of the property to bcc upon vesting e did bcc bear the risk of loss or damage to the property the answer to this question is that both gaggero and bcc assumed some risk according to sec_3_4 of the sale agreement gaggero was responsible for insuring against loss and bcc had to insure its work on the house and against any harm that its work might cause third parties bcc had had twelve years of experience in the malibu custom-home market and the resources to develop the property to create its highest and best value for sale developing property on california’s coast is not for the risk-averse and features potential exposure to litigation with local governments and the california coastal commission see malibu may be especially difficult for property owners yearning to improve their land see eg william s banowsky the malibu miracle discussing general sentiment of malibu residents regarding construction of pepperdine university’s campus id pincite since the days of silent movies malibu meant serenity privacy no more cars on the highway and no more construction on the hills id pincite malibu is probably the most sophisticated place left on the planet without any public sewage disposal system and that’s no accident a century of vigilance guaranteed it malibuites were among america’s earliest environmentalists fifty years before ecologists became ubiquitous malibuites were national no-growth leaders the 1950s popularized handwritten pacific coast highway signs proclaim ed small is beautiful less is more not in my backyard no sewer here in for the very first time malibuites will be connected to a sewer as a result of state coercion despite the stink raised by the locals see memorandum of understanding between city of malibu continued eg reddell v cal coastal comm’n cal rptr 3d ct app charles a pratt constr co v cal coastal comm’n cal rptr 3d ct app lt-wr llc v cal coastal comm’n cal rptr 3d ct app california also imposes liability on developers more generally see harry d miller marvin b starr california real_estate sec_29 3d ed and gaggero was concerned about liability risk both while bcc developed the property and after the sale to monticello he wanted to insulate himself from that risk as an individual and bcc was already an entity that he used in other development projects and which as an established real-estate development_corporation could insure against liability claims at a lower cost this division of risk between bcc and gaggero is entirely consistent with the behavior of other co-owners of property and at the very least is not a factor to weigh against gaggero continued regional water quality control board los angeles region state water resources control board regarding phased implementation of basin plan amendment prohibiting on-site wastewater disposal systems in the malibu civic center area available at http www malibucity org download index cfm fuseaction download cid last visited date f did bcc receive any benefit from the property’s operation or sale this is the single most important factor in this determination as we’ve already found bcc fulfilled its obligations under the sale agreement and so earned millions of dollars in income on paper when its property interest in the malibu property vested in date it was then able to receive dollar_figure million in cash proceeds from that interest when the property was sold to monticello its earnings were moreover contingent on the market’s fluctuations not the costs it incurred in developing the property--a key distinction between equity and merely being a lienholder see eg 220_f2d_240 9th cir t he essential difference between a creditor and a stockholder is that the latter intends to make an investment and take the risks of the venture while the former seeks a definite obligation payable in any event citation and internal quotation marks omitted but the commissioner nevertheless argues that bcc did not share the benefits of ownership during the development years and contends that this is an indication that it had only a lien and not an equity_interest the commissioner is partly right sec_3_4 of the sale agreement for example states that gaggero was entitled to any income generated by the property such as movie location income or event income bcc also had no right to charge rent for the property because gaggero had the right to maintain his personal_residence on the property and it was gaggero alone who was entitled to all the income-tax benefits relating to the property gaggero even agreed with the commissioner on this front and explained that since he occupied the property as his residence he paid the expenses and enjoyed the benefits we think however that we need to swing the light this factor shines away from the development phase and over to bcc’s rights once it finished its work the commissioner argues that even after bcc’s right in the property vested it had only an interest in the proceeds from the sale of the house and that under suhr v commissioner tcmemo_2001_28 wl at an interest in those proceeds is not an ownership_interest in the real_property the problem is that suhr was about whether a taxpayer had an ownership_interest in his former wife’s house simply by virtue of his divorce decree which gave him one-half of the proceeds from the sale of the house this case does not involve a marital interest in proceeds the other problem with the commissioner’s argument is that the sale agreement provided that bcc’s ownership_interest would vest when it completed its services and there was very little time between that date and the sale to monticello the commissioner is right that the sale agreement gave gaggero the operating income from the property but on the facts of this case--where the property wasn’t a mall or office building but only a private residence--we find that bcc’s variable return on proceeds from a sale to a third-party is more salient than its lack of a right to share in foreseeably tiny operating income this factor weighs especially heavy in gaggero’s favor g did gaggero have an obligation to deliver a deed in return for payments the commissioner argues that gaggero had no obligation to deliver a deed to bcc the sale agreement does define deed as a grant deed conveying title to the property from gaggero to bcc and does say that either party may record a deed against the property upon completion of bcc’s services or the sale of the property but we read this part of the sale agreement as making the recording of the deed not gaggero’s obligation to execute one optional with either party section of the sale agreement specifically provides that i n addition to any documents expressly referred to in this agreement to be executed by any or all parties all parties agree to execute any and all documents which might be required to implement the provisions of this agreement the commissioner also argues that bcc had no obligation to make payments on the debts gaggero incurred to improve the property but whether bcc made payments on debts incurred before its part-ownership interest vested is irrelevant to this factor which asks whether bcc made payments in return for its part-ownership interest the sale agreement specified that bcc’s purchase_price was its services which bcc did provide in exchange for its interest this factor also weighs in gaggero’s favor h did bcc have a vested right of possession the commissioner notes that bcc had no right to rent the house and did not have any right to even possess the house this is not terribly important in a case like this one because gaggero is not arguing that he sold the property to bcc--he’s arguing that he sold part-ownership to bcc if he was arguing that he sold the entire property to bcc and still got to live there rent-free with the right to rent to another that would certainly be a factor that counted against calling the deal a sale but that he was conveying an immediate right to bcc to work on the property and a promise to give it an interest when the work was done looks entirely consistent with his own characterization of the deal as an executory sale of a partial interest if the commissioner’s argument is to be believed bcc’s interest in the property was nothing more than a lien because its only real value was the expectancy of payment on a sale to a third party the commissioner is again partly right he is right that what the parties called fee ownership during the development period was a mere contractual right during development the sale agreement gave bcc no right to occupy or to collect rent from the property but the situation all changed when bcc finished its work at that moment bcc could transfer take possession or partition the property and there is nothing in the sale agreement that could keep it from doing so we therefore find that--after vesting--bcc could have done as it liked with its share of the property the commissioner also views the fact that bcc relinquished authority over the property to gaggero as an indicator that bcc didn’t have true ownership we disagree bcc resolved on date once its ownership_interest had vested that it would grant gaggero power to act on its behalf to sell the property nevertheless if a person other than gaggero owned bcc the sale agreement allowed bcc to transfer dispose or even exercise its right to partition the house under california law see cal civ proc code sec_872 b west see also am med int’l inc v feller cal rptr ct app although a right to partition is not by itself sufficient proof of ownership schwartz v shapiro cal rptr ct app we think it undermines the commissioner’s characterization of bcc as a mere lienholder this is also a factor weighing in gaggero’s favor i which party pays the property taxes the sale agreement states in sec_3_4 that gaggero is responsible for all costs associated with the property including the obligation to pay property taxes while bcc was developing the property and gaggero admitted that he himself paid property taxes gaggero argues however that property taxes are not that relevant in this case we agree there was so little time between bcc’s completion of its work and the sale to monticello that neither bcc nor gaggero had to pay property taxes during that timeframe j conclusion we find that bcc was a co-owner of the property before the sale to monticello on completion of its development work bcc had a share of the benefits and burdens in the property and received part-ownership in the property we accept gaggero’s explanation that disclosure of bcc’s interest to monticello would have jeopardized the sale of the property but note that both gaggero and bcc filed separate real-estate reporting solicitation forms to the escrow agent showing that there were multiple transferors both gaggero and bcc were paid directly from the escrow for their respective ownership interests and the dollar_figure million sale proceeds was allocated according to the sale agreement--dollar_figure million to gaggero and dollar_figure million to bcc ii the sale to bcc followed by the sale to monticello after concluding that gaggero sold a partial interest in the property to bcc when its interest vested in date we now turn to the question of what if any capital_gains gaggero should have recognized from the transactions at issue here as we noted earlier the fact that gaggero sold a partial interest in the property to bcc doesn’t necessarily mean the commissioner loses the commissioner has an alternative theory that gaggero’s sale of a partial ownership should trigger recognition of capital_gain bcc we have found completed the development services it had contracted to perform in date and its ownership_interest vested at that time the commissioner insists that if gaggero truly believed he had sold something to bcc he needed to report that sale on his tax_return gaggero even said that walters his tax preparer told him--as they were preparing for trial--that he should’ve told gaggero to report a capital_gain both from the disposition to bcc and then again when the property was sold to monticello gaggero argues however that this was a harmless mistake because both gaggero and bcc picked up the full capital_gain in the same year at the same time--gaggero reported dollar_figure million and bcc reported dollar_figure million and if no income was left unreported disaggregating the large capital_gain on the sale to monticello into two smaller ones would have no practical consequence on gaggero’s tax bill a closer look however reveals that gaggero did indeed leave a slab of gain unreported on his return even if bcc reported dollar_figure million of income in connection with the monticello sale what’s still missing is any reporting of the transfer from gaggero to bcc gaggero seems to want the benefits of characterizing the date vesting as a sale to bcc so he could report only a dollar_figure million sales_price from the monticello transaction without the although bcc’s tax_return is not before us we think that the dollar_figure million that gaggero argues that bcc reported as income from its interest in the malibu property was realized when its interest vested on date and not when the property was sold to monticello the following month indeed bcc reported only ordinary income--and no capital gain--on its tax_return that year reporting the dollar_figure million as ordinary_income when its interest vested would be in accord with sec_1_61-2 income_tax regs which says the fair_market_value of property acquired in exchange for services must be included as ordinary_income by the party rendering the services see also 84_tc_1192 that value would then become bcc’s basis in the property see 37_tc_1099 estate of rogers v commissioner tcmemo_1970_192 wl aff’d 445_f2d_1020 2d cir assuming that bcc’s services were valued at dollar_figure million as of date we’ll get to that dispute momentarily when bcc received its partial interest in exchange for its services it acquired a basis of dollar_figure million in that partial interest when bcc sold its partial interest to monticello on date and received dollar_figure million in proceeds it would not have had to report any capital_gain since its amount_realized and adjusted_basis both would have been dollar_figure million corresponding burden of the gain that might arise from the bcc sale in short gaggero should have reported that sale we now must determine his gain from that sale to do that we must calculate both gaggero’s amount_realized and his adjusted_basis in the interest sold first we tackle the amount_realized we start with the code gain realized from the sale_or_other_disposition of property is taxed under sec_61 the amount of gain realized is the excess of the amount_realized over the adjusted_basis sec_1001 sec_1001 also tells us that the amount that gaggero realized in disposing of a part-ownership of the house is the sum of the cash and the value of any property received the problem here is that bcc didn’t give gaggero cash or property in exchange for its interest it gave its services in exchange for one-half of the increase in market_value of the property which its work created or at least contributed to this should be equal to what bcc received a party transferring property in exchange for services realizes gain to the extent the fair_market_value of the property transferred exceeds his adjusted_basis in the property see 370_us_65 transferring appreciated_property to pay compensation is a taxable disposition of property for its fair_market_value 37_tc_932 aff’d 328_f2d_428 5th cir the commissioner argues that if bcc made dollar_figure million worth of improvements to the malibu property since that was the amount bcc received from the monticello sale then gaggero conveyed an interest in the malibu property worth dollar_figure million to bcc in exchange for its services therefore the commissioner argues gaggero’s amount_realized should equal dollar_figure million with respect to that conveyance gaggero argues that the fair_market_value of the property when he transferred the part-ownership to bcc has to be determined by an appraisal of the property at the time bcc’s interest vested according to gaggero any post-valuation date event would not be considered probative of the fair_market_value of the property transferred earlier the trouble is that we have an appraisal of dollar_figure million dated date almost a year before the work was finished and an appraisal from date about a month after bcc finished its work and less than a month before the monticello sale that valued the sum of the two malibu lots that gaggero owned at dollar_figure million we don’t have an appraisal of only the parcel at issue here as of date the day bcc’s interest vested gaggero and walters however estimated the value of that parcel as of that date to be dollar_figure which they calculated by taking of the date appraisal of the combined values of both parcels dollar_figure million which were both sold to monticello at about the same time for a total of dollar_figure milliondollar_figure based on a dollar_figure million valuation to obtain the amount_realized on the transfer to bcc gaggero and walters put forth--on the assumption that we find that there was a sale to bcc--the following calculations first subtract dollar_figure million that was reserved to gaggero pursuant to the sale agreement which reduces the amount to dollar_figure million then multiply the dollar_figure million by the interest that bcc was to receive according to the sale agreementdollar_figure thus say gaggero and walters if there was a sale to bcc gaggero’s amount_realized from that sale should be dollar_figure million we find that the commissioner has the better position here we acknowledge that the fair_market_value of the malibu property on date when bcc’s interest vested wouldn’t necessarily equal the dollar_figure million the other malibu lot sold for dollar_figure million therefore the sale proceeds from the malibu property at issue here dollar_figure million represent approximately 66-percent of total sale proceeds of dollar_figure million specifically the sale agreement provided that u pon the sale or transfer of the property buyer’s fifty percent interest shall be calculated on the gross value of the entire property less real_estate brokers commissions legal fees or other costs of sale agreed to between the parties and less the sum of dollar_figure sales_price agreed upon for that property on date which resulted in the dollar_figure million sales_price allocation to bcc at closing on date dollar_figure we do however find that the amount allocated to bcc from the monticello sale in date is highly probative of the fair_market_value of bcc’s interest less than two months earlier see 366_f3d_608 8th cir s ubsequent events that shed light on what a willing buyer would have paid on the date in question are admissible such as evidence of actual sales prices received for property after the date in question so long as the sale occurred within a reasonable_time and no intervening events drastically changed the value of the property citation and internal quotation marks omitted aff’g tcmemo_2002_ wl estate of noble v commissioner tcmemo_2005_2 wl at an event occurring after a valuation_date even if unforeseeable as of the valuation_date may be probative of the earlier according to gaggero bcc’s dollar_figure million allocation from the monticello closing resulted from the following calculations gross_sales price of dollar_figure million minus dollar_figure that gaggero estimated were the costs of the sale he approximated dollar_figure in commissions and dollar_figure in other closing costs which he allocated all to himself since he said he personally indemnified monticello against those costs minus dollar_figure million-- the first money out according to gaggero--pursuant to the sale agreement this leaves dollar_figure million and under the sale agreement gaggero and bcc should divide that amount the dollar_figure in estimated sales costs we find definitely affected the amount bcc received which we do find equaled dollar_figure million they were not substantiated however see infra p at note valuation to the extent that it is relevant to establishing the amount that a hypothetical willing buyer would have paid a hypothetical willing seller as of the valuation_date this is especially true here where the subsequent event--the monticello sale--was reasonably foreseeable as of the valuation_date monticello had made an offer to gaggero before the time that bcc’s interest vested indeed we give the actual sales_price allocated to bcc considerably more weight than the date appraisal which undervalued the properties by approximately dollar_figure million that gaggero and walters rely on to calculate their estimate of the amount gaggero realized without any credible_evidence to the contrary we therefore find that the value of bcc’s interest on date was equal to the dollar_figure million sales_price that bcc received around date accordingly we find that gaggero’s amount_realized from the conveyance to bcc on date was dollar_figure million after determining amount_realized we now have to figure out gaggero’s adjusted_basis in that partial interest at the time of the sale before we can calculate his realized gain real property’s basis is usually its cost sec_1012 sec_1 a income_tax regs the parties don’t dispute that gaggero’s basis in the property before entering into the agreement with bcc was dollar_figure but a taxpayer increases his adjusted_basis by the cost of improvements that he made sec_1016 sec_1_1016-2 income_tax regs the parties stipulated that by the time the property was sold to monticello gaggero’s basis had increased to dollar_figure we need to allocate a portion of that basis to calculate gaggero’s realized gain on the interest he transferred to bcc see sec_1001 sec_1_61-6 income_tax regs 88_tc_1532 hall v commissioner tcmemo_1993_198 wl at not surprisingly the parties have significantly different views on the proper allocation_of_basis to gaggero for the bcc sale the commissioner takes a hard-line approach he argues that gaggero’s adjusted_basis in the interest transferred to bcc should be zero because gaggero didn’t adequately substantiate his payment for the improvements in contrast gaggero argues that--should we determine that he should’ve separately reported the transfer of the bcc interest--we should equitably allocate his dollar_figure adjusted_basis gaggero and walters we agree with the parties that the fair_market_value of bcc’s services to improve the property--which the commissioner under his alternative theory acknowledges would be dollar_figure million--should not be added to gaggero’s adjusted_basis see hall v commissioner tcmemo_1993_198 wl at determining that--after taxpayers sold a carpenter a interest in a property in exchange for services the carpenter had rendered-- there was no legal support for adding the fair_market_value of the carpenter’s services to the taxpayers’ basis in the property contend that we should first divide dollar_figure million the proposed amount_realized by dollar_figure million the proposed valuation of the property as of date which results in a ratio of approximately from there gaggero and walters assert that we should multiply that ratio by the adjusted_basis of dollar_figure7 million which amounts to dollar_figure that number they say should be gaggero’s adjusted_basis we agree with gaggero to the extent he argues that he should be allocated some basis for the sale to bcc we also agree that the starting point should be the dollar_figure7 million adjusted_basis we disagree however with the other_amounts he uses for his calculation what fraction of the dollar_figure7 million should gaggero have allocated to the bcc sale since we allocated dollar_figure million of the eventual dollar_figure million monticello sales_price to gaggero’s amount_realized for the bcc sale we will use that same percentage to allocate to gaggero’s adjusted_basis the dollar_figure million amount i sec_31 of dollar_figure million we then multiply by dollar_figure7 million equaling dollar_figure--which we find is gaggero’s adjusted_basis in the bcc sale having already found gaggero’s amount_realized to be dollar_figure million that leaves him with a realized gain on his disposition to bcc of dollar_figure so that leaves us with the start of a table sale date amount_realized adjusted_basis realized gain subject_to sec_1034 sale gaggero to bcc sale gaggero to monticello dollar_figure dollar_figure dollar_figure we still need to attach a few more legs to it before we apply the polish of the nonrecognition provisions of sec_1034 we turn to the date sale to monticello we know the sales_price monticello paid it was dollar_figure million dollar_figure million of which was allocated to bcc that leaves gaggero with an amount_realized of dollar_figure milliondollar_figure having already determined how much of gaggero’s of the dollar_figure million gaggero testified--when discussing the calculation of the dollar_figure million allocation to bcc from the monticello sale--that he estimated there were dollar_figure of costs in connection with that sale dollar_figure in commissions and dollar_figure in other closing costs a taxpayer may of course reduce his amount_realized by costs and expenses of the property’s disposition see eg sec_1_263_a_-2 income_tax regs 224_f2d_547 9th cir aff’g 20_tc_332 see also sec_1 b i income_tax regs gaggero doesn’t argue however that any such costs should lower his amount_realized indeed on his form_2119 gaggero reported dollar_figure million as the sales_price but didn’t report any amount in the line titled expense of sale therefore--in this instance--we take him at his word and don’t reduce the dollar_figure million by any closing costs we think it possible but need not decide that the number was gaggero’s estimate of what it would take to settle a foreseeable dispute over commissions with a real-estate broker who was hovering near the deal gaggero testified that a lawsuit about this commission spanned many many continued adjusted_basis to allocate to the bcc sale it’s a bit easier to calculate that number for the monticello sale since there’s no evidence of any increases to the basis between the time of the bcc sale and the monticello sale using the adjusted_basis amount of dollar_figure7 million at the time of the bcc sale and subtracting the dollar_figure basis allocated to that sale leaves gaggero with an adjusted_basis of dollar_figure a dollar_figure million amount_realized results in a gain to gaggero of dollar_figure so now we have gaggero’s total realized gain from both sales sale date amount_realized adjusted_basis realized gain subject_to sec_1034 sale gaggero to bcc sale gaggero to monticello total dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number continued years and walters testified that a settlement wasn’t reached until long after a cash-basis taxpayer in this position of uncertainty is allowed a deduction as a capital_loss in the later year when he actually pays it out see 21_tc_422 iii application of sec_1034 to the sales now knowing what gaggero’s realized gain is from those two transactions we move on to determine how much of that gain should be recognized a realized gain is recognized unless one of the code’s nonrecognition provisions applies sec_1001 499_us_554 specifically we need to address the not-so-straightforward question of whether we look to one or both of the sales transactions in determining how much realized gain qualifies for nonrecognition under sec_1034 to address that question we start with the language of the statute and its background before its repeal midway through sec_1034 said if property in this section called old residence used by the taxpayer as his principal_residence is sold by him and within a period beginning years before the date of such sale and ending years 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 taxpayer’s adjusted_sales_price of the old residence exceeds the taxpayer’s cost of purchasing the new residence sec_1034 before the taxpayer_relief_act_of_1997 tra pub_l_no sec_312 sec_111 stat pincite emphasis added thus assuming a the repeal of sec_1034 applied to sales and exchanges made after date with special rules for sales on or before date tra sec_312 d stat pincite since both parties agree that no sale occurred after date sec_1034 applies taxpayer bought a new principal_residence within the statutory timeframe sec_1034 provides that a taxpayer should completely defer recognition of gain on the sale of his principal_residence if the adjusted_sales_price of that old residence did not exceed the cost of purchasing the new residence see sec_1034 sec_1 a income_tax regs see also bartley v commissioner tcmemo_1998_322 wl at noting that sec_1034 is mandatory so that a taxpayer can’t elect to have gain recognized where sec_1034 is applicable if the adjusted_sales_price of the old residence exceeded the cost of the new residence however the taxpayer would recognize gain on the sale of the old residence --but only to the extent the adjusted_sales_price of the old residence exceeded the cost of the new residence see sec_1034 and b sec_1 a income_tax regs now for a brief bit of history on that statute congress amended sec_112 the predecessor to sec_1034 through the revenue act of pub_l_no the code defines the term adjusted_sales_price as the amount_realized on the sale of an old residence reduced by certain nondeductible expenses related to fixing up the residence in preparation for sale that aren’t already taken into account in computing the amount_realized sec_1034 since gaggero hasn’t argued that any of these additional expenses exist there’s no difference between amount_realized and adjusted_sales_price in this case sec_318 sec_65 stat at dollar_figure see also 63_tc_505 congress enacted the nonrecognition provisions in that section because it was aware that the disposition of one residence and the acquisition of another one were often prompted by a change in the size of a taxpayer’s family a change in the taxpayer’s place of employment or other circumstances beyond the taxpayer’s control see s rept no pincite u s c c a n although congress was primarily concerned with addressing relief from those situations it also recognized that it would be administratively burdensome to confine the section’s application to those circumstances and thus extended relief to all residential sales that met the requirements see id while both parties agree that sec_1034 applies here they disagree about how to apply it although neither party specifically says as much the dispute arises from what the term old residence means under sec_1034 by the manner on which he reported the monticello sale on his return gaggero took the only significant change between the nonrecognition rules in and was the extension of the period for acquisition or construction of a new residence from one year to eighteen months by the tax reduction act of pub_l_no sec a stat pincite and then to two years by the economic_recovery_tax_act_of_1981 pub_l_no sec_122 stat pincite see bartley v commissioner tcmemo_1998_322 wl at the position that his old residence for purposes of applying sec_1034 was only the partial interest in the property he retained after the sale to bcc in date dollar_figure million under that logic gaggero believed that his entire claimed realized gain claimed amount_realized dollar_figure million less claimed basis dollar_figure7 million qualified for nonrecognition under sec_1034 because his new residence which the irs has acknowledged cost dollar_figure million exceeded the adjusted_sales_price of what he claimed was his old residence on the other hand under his first theory arguing no sale to bcc the commissioner asserts that the adjusted_sales_price of the old residence for purposes of sec_1034 was dollar_figure million under that calculation since the adjusted_sales_price of gaggero’s old residence exceeded the cost of his new residence by dollar_figure million the commissioner says that gaggero should recognize a dollar_figure million gain alternatively--even assuming there were a sale to bcc and then a sale to monticello--the commissioner says that we should adopt gaggero’s view that the transactions were simultaneous event s which the commissioner says gets him to the same place as his primary position he argues that we should view the dollar_figure million sale to bcc and the dollar_figure million sale to monticello as simultaneous sales --where both sales prices would be included for determining nonrecognition under sec_1034 the commissioner contends in other words that allowing gaggero to use his sale to bcc as a means to lower his receipts from the sale to monticello does not fall within the intended scope of section and would only encourage a taxpayer to strip away part of his interest in his residence in order to fully take advantage of its provisions who has the better position on what should be the adjusted_sales_price of the old residence we first look to the regulations since the statute doesn’t define the term old residence under the regulations an old residence is defined as property used by the taxpayer as his principal_residence which is the subject of a sale by him after date sec_1 b income_tax regs the use of the phrase a sale doesn’t definitively answer the question of whether an old residence could be disposed of via multiple sales but it also doesn’t foreclose the possibility although we’ve found very little authority to help us answer this question we agree with the commissioner that both the bcc and monticello sales prices should be considered in determining the amount of gain that qualifies for nonrecognition under sec_1034 we don’t hold this because the sales were simultaneous but because both sales--although not simultaneous--were of gaggero’s old residence congress enacted sec_1034 and its predecessor sec_112 to lift the tax burden that a taxpayer faced when he decided to move from a less expensive home to a more expensive one that just isn’t the case here gaggero moved from a home that was sold for dollar_figure million to a home that cost him dollar_figure million although we’re not suggesting that either gaggero or walters engaged in any funny business in structuring the sales transaction to reap the benefits of sec_1034 we don’t believe congress intended for a taxpayer to have the ability to manipulate the sales_price of his old residence by selling it in different pieces thereby allowing him to take advantage of sec_1034’s nonrecognition provisions there is one tiny bit of authority out there that supports our interpretation of the term old residence in 263_f2d_746 4th cir rev’g 30_tc_452 taxpayers acquired thirteen acres of land in constructed a residence on that land and lived in that residence until date when they moved to a new residence several miles away id pincite before date they sold the old home and three of the thirteen acres id pincite the following year the taxpayers sold the other ten acres in two separate transactions id the nonrecognition provisions of sec_112 added by the revenue act of however applied only to residences that were sold after date see id since the taxpayers sold the house and the three acres in date before sec_112 became effective they reported and paid capital_gain tax on the difference between the sales_price and their cost_basis id however when the taxpayers sold the remaining ten acres in after the enactment of sec_112 they didn’t report the proceeds of those sales because they claimed that those ten acres were part of their old residence within the meaning of sec_112 id although we had concluded that those ten acres weren’t a part of the taxpayers’ old residence bogley t c pincite and thus held they couldn’t avail themselves of sec_112’s nonrecognition provisions the fourth circuit reversed it couldn’t agree with such a narrow reading of the statute determining the statute did not require the character of the ten acres of unimproved land to be determined in vacuo ignoring what had gone before bogley f 2d pincite instead the fourth circuit deemed that t he thirteen acres intact were undoubtedly the taxpayers’ ‘old residence ’ id pincite it went on to explain that t here is no limitation in the statute even by implication that the old residence property must be sold in its entirety id as the character of the ten acres never changed it was in reality part of the taxpayers’ ‘old residence ’ id and since the taxpayers sold the ten acres we note that the question in bogley centered on what was the old residence but also acknowledge that the fourth circuit didn’t specifically address whether the adjusted_sales_price actually called the selling_price under sec_112 of the taxpayer’s old residence should have included the amount_realized continued within the statutory timeframe the court concluded that they were entitled to the benefit of sec_112’s nonrecognition provisions id although a revenue_ruling doesn’t bind us see 133_tc_202 aff’d 679_f3d_1109 9th cir one such ruling touching on a bogley-like situation is also helpful here in revrul_76_541 1976_2_cb_246 a taxpayer owned a principal_residence on a ten-acre plot he then sold off pieces of that property at various times he first sold the house and three of the ten acres immediately surrounding the house together later that year he sold two of the other seven acres to another purchaser the taxpayer began construction of a new residence on the remaining five-acre portion before the sale of the two-acre plot but didn’t move into it until afterward he realized a gain from each of the sales transactions but combined the gain from the sale of the old residence and three acres of land the first sale with the gain from the sale of the two-acre parcel the continued from the sale for purposes of determining what part of the gain qualified for nonrecognition in other words the bogley court only determined that the latter two sales were entitled to the benefit of the nonrecognition provisions of sec_112 it didn’t explicitly say how much of the gain from those two sales qualified for nonrecognition under that section second sale and treated the combined gain as gain from the sale of the old residence under section dollar_figure relying on bogley the irs ruled that the taxpayer’s sale of the house and three-acre portion before his sale of the two of the remaining seven acres did not alter the character of the two acres the irs determined that the two-acre parcel remained part of the taxpayer’s old residence for purposes of sec_1034 and ruled that the nonrecognition provisions of sec_1034 applied not only to the gain realized from the sale of the three-acre parcel containing the taxpayer’s principal_residence but also to the gain realized from the subsequent sale of the two-acre parceldollar_figure we now turn back to the facts here the first thing to note is that the facts in bogley and revrul_76_541 featured subsequent sales only of acreage without a structure and not a subsequent sale of a partial interest in the structure itself this is actually helpful in finding a solution to the present puzzle because bogley since the cost of the taxpayer’s new residence exceeded the total adjusted_sales_price of all of the property sales combined the taxpayer reported that recognition of the combined gain from those sales should be deferred under sec_1034 although this ruling like bogley didn’t specifically say that the adjusted_sales_price of the old residence should have included the amount_realized from all of the sales combined for purposes of determining what portion of the realized gains qualified for nonrecognition under sec_1034 by ruling in the taxpayer’s favor it implicitly endorsed that notion led to a t c opinion and though it was reversed on appeal the appeal was to a different circuit than the one this case would presumably go to as a reviewed opinion bogley remains good law in our court unless a case is to be appealed to the fourth circuit this case is not see 54_tc_742 aff’d 445_f2d_985 10th cir that means that we have to follow the rule we ourselves laid down in bogley and not what the fourth circuit ruled except that our holding in bogley was that unimproved land upon which the taxpayers did not reside was not their old residence see t c pincite that holding isn’t applicable to the facts of gaggero’s case here we have two partial sales of an actual structure in which gaggero resided our holding in bogley is distinguishable and we do distinguish it to fit these facts we also recognize that the taxpayers in bogley and revrul_76_541 arguing for a subsequent sale to be characterized as part of the old residence sought the opposite result that gaggero does here arguing that a prior sale should not be characterized as part of the old residence nonetheless we find the underlying principle from bogley and rev_rul 76-541--that the nonrecognition provisions of sec_1034 and its predecessor can apply to more than one sale if a primary residence is sold in parts--persuasive in the situation we are presented with in this case the fact that gaggero sold a partial interest in his primary residence to bcc before selling the rest of his interest in monticello approximately six weeks later didn’t alter the character of the preceding interest sold to bcc we therefore conclude that the entire malibu property--including the interest gaggero sold to bcc--was undoubtedly gaggero’s old residence for sec_1034 purposes as both sales of the property were sold within two years of gaggero purchasing his new residence bogley f 2d pincite to conclude otherwise would be an impermissible narrow reading of the statute id pincite sec_1034 doesn’t require the character of the partial interest sold to bcc to be determined in vacuo ignoring what took place six weeks later and in the same taxable_year id pincite since neither the character of the partial interest gaggero sold to bcc nor the character of the remainder of that interest he sold to monticello ever changed we believe they were both in reality part of gaggero’s old residence id therefore since both transfers were of gaggero’s old residence we conclude that for purposes of the nonrecognition provisions of sec_1034 both the sale to bcc and the sale to monticello dollar_figure million should be included to calculate the adjusted_sales_price of that old residence we do not believe that concluding that there were two separate sales for the purposes of determining realized gain precludes us from also concluding that continued our table is finished sale date amount_realized adjusted_basis realized gain subject_to sec_1034 sale gaggero to bcc sale gaggero to monticello total dollar_figure dollar_figure dollar_figure big_number big_number big_number yes yes big_number big_number big_number all that’s left is one more bit of math gaggero’s adjusted_sales_price in his old residence dollar_figure million exceeded the cost of his new residence dollar_figure million gaggero should have recognized a gain in of the difference equal to dollar_figure million iv penalties the commissioner imposed penalties under sec_6662 based on a substantial_understatement of tax because gaggero’s 1997’s tax_return reported no tax due and the determined deficiency totaled more than dollar_figure continued sales_price from both of those sales are part of gaggero’s old residence for purposes of applying the provisions of sec_1034 the former issue is one of realization of gain the latter asks how much of that realized gain should be recognized penalties under sec_6662 are subject_to the defense of reasonable good- faith reliance on professional advice sec_6664 see also sec_1_6664-4 income_tax regs 116_tc_438 whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances see sec_1_6664-4 income_tax regs generally a taxpayer must show that the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment see 115_tc_43 aff’d 299_f3d_221 3d cir see also 98_tc_294 gaggero argues that he reasonably relied in good_faith on walters all the way from the structuring of the sale agreement with bcc through the reporting of the sale to monticello on his tax_return we find by an abundance of evidence that gaggero did rely on walters we also find that walters would appear to someone of gaggero’s experience and education--and actually was from any objective viewpoint--a thoroughly qualified professional adviser walters has been a cpa since and has been with the firm of kellogg andelson since k a is ranked 18th among accounting firms in southern california has been in business since and has approximately employees both k a and walters had experience with real-property transfers when k a drafted the sale agreement and development contract k a and walters had extensive experience with these type of owner-developer real-estate transactions--they have put them together drafted the necessary agreements and prepared the tax returns on which these deals are reported many of k a’s other clients are real-estate developers and owners gaggero had been a client of k a since and k a has done all of gaggero’s and bcc’s tax work since that then we also find that gaggero provided walters and k a with all the information they needed or asked for and that he actually followed their advice but the commissioner argues that even if gaggero proved reliance he didn’t show that his reliance was in good_faith see 108_tc_147 mere shifting of responsibility to the tax preparer does not relieve a taxpayer from liability for the accuracy-related_penalty citing 57_tc_781 we acknowledge that gaggero’s practical knowledge is unusual compared to his education though he never graduated from high school his experience and skills have given him a keen understanding of the world for example during trial he didn’t hesitate to question his attorney’s advice suggested cross-examination questions and showed a deep understanding of the concept of tax basis in forming his own opinion on the irs’s approach on reporting the capital_gain this worldly understanding according to the commissioner made him consciously aware that the tax consequences of the transaction were too good to be true sec_1 b income_tax regs see also sec_1_6664-4 income_tax regs generally the most important factor under the facts_and_circumstances_test in determining reasonable good-faith reliance is the extent of taxpayer’s effort to assess the taxpayer’s proper tax_liability the commissioner even argues that gaggero may have carefully planned to file the erroneous return intending to claim ignorance if caught we disagree our impression of gaggero during the trial was of an honest craftsman who followed professional advice of his long-term consultants a man who had to fight the irs and then learn the case well enough to be familiar with the terms of the somewhat obscure issues that it raised the commissioner insists however that gaggero’s behavior before and after filing the return precludes any finding he was acting in good_faith he argues that gaggero created two sets of documents for the sale to monticello--one for the parties to the sale and one for the irs he pointedly argues that gaggero’s contradictory descriptions of the house’s ownership during the closing with monticello do not correspond with an honest belief that he had actually transferred an interest in his property to bcc before the sale to monticello the commissioner also argues that gaggero hid the sale to bcc from monticello his own real-estate attorney and the local_tax collector he argues that gaggero’s signature on the purchase agreement with monticello certified he had not executed any other sales contract for the sale of the property effectively denying the existence of the sale agreement and even contradicting it and he points out that gaggero stated twice in the owner’s declaration that no other persons asserted ownership in the property and delivered that declaration to chicago title insurance_company the deed to monticello and the estimated settlement statement do not mention the terms of the sale agreement and gaggero explained that his full ownership of bcc made only the essence of his declaration true-- there is nobody out there that i’m aware of that’s going to make a run at this property other than that which i represent this the commissioner contends amounts to gaggero’s admission that he prepared two mutually exclusive versions of the same transaction which indicates lack of good_faith well the problem here for the commissioner is that we’re not looking at gaggero’s good_faith in the transaction as a whole--where he had to deal with a hard-nosed third party in monticello and what seems to have been a very contentious relationship with a real-estate broker who wanted by turns to profit from the deal or torpedo it we’re looking instead at whether he reasonably relied in good_faith on the advice of his professional tax adviser and with both walters specifically and k a more generally gaggero made sure he was honest and completely forthcoming and that he followed their advice gaggero consulted with k a about the allocation of the sale price between bcc and himself k a and in particular walters were expert tax advisers and competent in the tax matters at issue in this case it was k a who advised gaggero how to report the transaction and to roll over the sale proceeds into another personal_residence so that the gains from the sale would qualify for deferral under sec_1034 the fact that the transaction began six years before its reporting reinforces our belief it had true and genuine economic_substance and we attribute the partial inaccuracy of the reporting as due solely to gaggero’s tax preparer we agree with the commissioner on the amount of the gain that gaggero must recognize but do not sustain the penalty so decision will be entered under rule


internal_revenue_service number release date index number -------------------------- ---------------------------------------- ---------------------------- ----------------------------------- -------------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-132814-06 date november -------------------------- --------------------------------------- ---------------------------------------------- ---------------------------------------------- legend x -------------------------------------------------- y -------------------------------------------------- z -------------------------------------------------- trust state dear -------------- this responds to a letter dated date submitted on behalf of x y and z by their authorized representatives requesting entity classification rulings under sec_7701 and sec_7704 of the internal_revenue_code the information submitted states that x is a life_insurance_company licensed in states and the district of columbia to provide various life_insurance products annuities mutual funds and other investment products y a wholly owned subsidiary of x is a life_insurance and annuity company that provides a variety of life_insurance products annuities and other investment products to individuals and businesses in all states and the district of columbia -------------------- plr-132814-06 trust is an open-end management investment_company organized under the laws of state the beneficial interests in trust’s property consist of transferable shares shares in multiple segregated portfolios of assets including portfolio z each with separate investments the portfolios support x’s and y’s variable_contracts shares of the portfolios may only be purchased by domestic life_insurance_companies either directly or through separate_accounts of such companies x has nine separate_accounts and y has four separate_accounts premiums received by x and y are allocated to their respective separate_accounts collectively the accounts of x and y own all of the shares of the portfolios and have the right to purchase additional shares or have shares redeemed at any time contract holders may specify in which separate_account the premium is to be invested the benefits x and y pay to the contract holder are determined by reference to the investment return associated with and the market_value of the relevant portfolio supporting the variable_contract however the benefits under the variable_contracts can vary significantly from the value of the shares in the portfolios especially where a contract holder dies before his or her life expectancy the contract holder is typically entitled to a minimum payment regardless of the portfolio’s performance typically a variable_contract cannot be redeemed within a specified period without a penalty nor sold at face value furthermore the shares in the portfolios are owned by the insurance_company issuing the variable_contract for federal_income_tax purposes the contract holder only has claims against the insurance_company issuing the variable_contract and not against the income gains losses or distributions of the portfolios each portfolio is currently a regulated_investment_company ric within the meaning of sec_851 z proposes to elect to be treated as a partnership z requests a ruling that it will be classified as a partnership and not a publicly_traded_partnership x and y make the following representations trust is a business_trust that has never held itself out to be a state law corporation each portfolio is currently a separate ric as defined in sec_851 z will have at least two members x and y investing through their separate_accounts and will elect to be treated as a partnership for federal tax purposes if shares are sold to other insurance_companies the shares will not be held by more than domestic life_insurance_companies if shares are sold to other insurance_companies the shares will only be issued to separate_accounts of domestic life_insurance_companies x and y are and will be treated as the owners of the shares in the portfolios for federal_income_tax purposes the assets of the separate_accounts will be adequately diversified within the meaning of sec_817 and sec_1_817-5 of the income_tax regulations allocations of taxable_income gain loss deductions and credits of the portfolios will be made in accordance with sec_704 and c and except as required by sec_704 plr-132814-06 each holder of a share will be allocated its share of each portfolio’s income or loss which will be composed of a proportionate share of each item of the portfolio’s income or loss public access to z is only available through the purchase of a variable_contract the shares are not and will not be traded on an established_securities_market the shares are not and will not be regularly quoted by any person such as a broker or dealer making a market in the shares no person regularly makes available and will not make available to the public including customers or subscribers bid or offer quotes with respect to the shares or stands ready or will stand ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others no holder of shares has or will have a readily available regular and ongoing opportunity to sell or exchange the shares through a public means of obtaining or providing information of offers to buy sell or exchange shares there is no plan or intention for the redemption of shares by z to be combined with the issuance of shares in z to a new partner partnership ruling sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes sec_301_7701-3 provides that unless it elects otherwise a domestic eligible_entity is classified as a partnership if it has two or more members x and y represent that z will have at least two members and will elect pursuant to sec_301_7701-3 to be classified as a partnership provided z ha sec_2 or more members and makes the entity classification election to be classified as a partnership z will be properly classified as a partnership for federal tax purposes publicly_traded_partnership ruling sec_7704 provides that except as provided in sec_7704 a publicly_traded_partnership will be treated as a corporation sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in such partnership are traded on an established_securities_market and interests in such partnership are readily_tradable on a secondary market or the substantial equivalent thereof sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 an interest in a partnership includes a any interest in the capital or profits of the partnership including the right to partnership_distributions and b any financial plr-132814-06 instrument or contract the value of which is determined in whole or in part by reference to the partnership including the amount of partnership_distributions the value of partnership assets or the results of partnership operations sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 a transfer of an interest in a partnership means a transfer in any form including a redemption by the partnership or the entering into of a financial_instrument or contract described in sec_1_7704-1 sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 interests in a partnership that are not traded on an established_securities_market within the meaning of sec_7704 and sec_1_7704-1 are readily_tradable on a secondary market or the substantial equivalent thereof if taking into account all of the facts and circumstances the partners are readily able to buy sell or exchange their partnership interests in a manner that is comparable economically to trading on an established_securities_market sec_1_7704-1 provides that for purposes of sec_1_7704-1 interests in a partnership are readily_tradable on a secondary market or the substantial equivalent thereof if i interests in the partnership are regularly quoted by any person such as a broker or dealer making a market in the interests ii any person regularly makes available to the public including customers or subscribers bid or offer quotes with respect to interests in the partnership and stands ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others iii the holder of an interest in the partnership has a readily available regular and ongoing opportunity to sell or exchange the interest through a public means of obtaining or providing information of offers to buy sell or exchange interests in the partnership or iv prospective buyers and sellers otherwise have the opportunity to buy sell or exchange interests in the partnership in a time frame and with the regularity and continuity that is comparable to that described in the other provisions of sec_1_7704-1 sec_1_7704-1 provides that for purposes of sec_7704 and sec_1_7704-1 interests in a partnership are not traded on an established_securities_market within the meaning of sec_1_7704-1 and are not readily_tradable on a secondary market or the substantial equivalent thereof within the meaning of sec_1_7704-1 even if interests in the partnership are traded or readily_tradable in a manner described in sec_1_7704-1 or c unless the partnership participates in the establishment of the market or the inclusion of its interests thereon or the partnership recognizes any transfers made on the market by i redeeming the transferor partner in the case of a redemption or repurchase by the partnership or ii admitting the transferee as a partner or otherwise recognizing any rights of the transferee such as a right of the transferee to receive partnership_distributions directly or indirectly or to acquire an interest in the capital or profits of the partnership plr-132814-06 the shares sold by x to the segregated_asset accounts of other insurance_companies are interests in the capital or profits of the portfolios therefore the shares are partnership interests for purposes of sec_7704 see sec_1_7704-1 the sale of shares to the segregated_asset accounts of other insurance_companies does not fall within the definition of trading on an established_securities_market as defined in sec_7704 and sec_1_7704-1 additionally shares may only be sold to the segregated_asset accounts of other insurance_companies and i are not regularly quoted by any person such as a broker or dealer making a market in the interests ii no person regularly makes available to the public including customers or subscribers bid or offer quotes with respect to the shares and stands ready to effect buy or sell transactions at the quoted prices for itself or on behalf of others iii the unit holder does not have a readily available regular and ongoing opportunity to sell or exchange the interest through a public means of obtaining or providing information of offers to buy sell or exchange interests in the partnership or iv prospective buyers and sellers do not otherwise have the opportunity to buy sell or exchange shares in a time frame and with the regularity and continuity that is comparable to that described in the other provisions of sec_1_7704-1 the shares are not traded on an established_securities_market and the shares are not readily_tradable on a secondary market or substantial equivalent thereof therefore based solely on the information submitted and the representations made we conclude that after z elects to be classified as a partnership z will not be a publicly_traded_partnership except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-132814-06 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to z’s authorized representatives sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c o f f i c e o f c h i e f c o u n se l date number release date conex-116533-12 uil the honorable benjamin l cardin united_states senator tower suite south charles street baltimore md attention --------------------- dear senator cardin i am responding to your inquiry dated date on behalf of your constituent -------------------- ------------ wrote about taxing social_security_benefits of married individuals in particular he asked about the difference between the tax treatment of benefits of married taxpayers and single taxpayers prior to social_security_benefits were not subject_to income_tax the income_tax treatment of social_security_benefits is governed by sec_86 of the internal_revenue_code the code the legislative_history of sec_86 of the code says the congress believed the prior policy of excluding all social_security_benefits from a recipient's gross_income was inappropriate the congress reasoned that social_security_benefits are similar to benefits received under other retirement systems which the law taxes if they exceed a worker's after-tax contributions consequently taxing a portion of social_security_benefits improves tax equity by treating more equally all forms of retirement and other income designed to replace lost wages for example unemployment_compensation and sick_pay see s rep no 98th cong 1st sess 1983_2_cb_326 under sec_86 of the code the taxable_portion of social_security_benefits depends on the benefit amount the amount of other income and the filing_status in the conex-116533-12 congress taxed up to percent of social_security_benefits for taxpayers whose modified_adjusted_gross_income plu sec_50 percent of social_security_benefits exceeded dollar_figure for an individual or dollar_figure for a married couple filing a joint tax_return first tier threshold the threshold_amount is zero for calculating the taxability of social_security_benefits in the case of a married individual filing separately and living with his or her spouse during any part of the year sec_86 the congress introduced the two tier_system in sometimes referred to as a graduated system for the calculation of taxable social_security_benefits by adding subsection c to sec_86 the omnibus_budget_reconciliation_act_of_1993 taxed up to percent of social_security_benefits for taxpayers whose modified_adjusted_gross_income plu sec_50 percent of social_security_benefits exceeded dollar_figure for an individual or dollar_figure for a married couple filing a joint tax_return second tier threshold sec_86 of the code does not include any basis or method for adjusting the threshold amounts accordingly the threshold amounts are statutory and the congress would need to enact legislation to change them an individual can choose to have income_tax withheld from his or her social_security_benefits for more information ------------can refer to the enclosed form w-4v voluntary withholding request if an individual chooses not to have income_tax withheld from the benefits he or she may have to make estimated_tax payments during the year ------------ can find a detailed explanation of the taxation of social_security_benefits in the enclosed publication social_security and equivalent railroad retirement benefits the publication contains worksheets for calculating the taxable_portion of social_security_benefits i hope this information is helpful if you need further information please contact me at -- -------------------- or -------------------------------- of my staff at --------------------- sincerely victoria a judson division counsel associate chief_counsel tax exempt government entities enclosures


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date cc psi b06 conex-127880-11 number release date uil 30d the honorable mark r warner united_states senate washington dc dear senator warner thank you for your letter dated date on behalf of your constituent ------------------------- -------------------wrote about potential abuse of the sec_30d tax_credit when multiple parties claim the credit for the same vehicle he suggested a possible way to prevent such abuse the energy improvement and extension act of provided a credit for new qualified plug-in electric drive motor vehicles under sec_30d of the internal_revenue_code the american_recovery_and_reinvestment_act_of_2009 the act amended sec_30d for vehicles acquired after date section a of the act the amendment changed sec_30d to narrow the scope of eligible vehicles and reduce the maximum amount of the credit available for a vehicle to its present level of dollar_figure the initial user of the vehicle who must acquire the vehicle for use or lease and not for resale is the only individual who qualifies for the credit sec_30d of the code -------------------suggested that we amend form_8936 on which taxpayers claim the sec_30d credit to require a claimant to list the vehicle identification_number vin as a means of preventing multiple individuals from claiming the credit for the same vehicle we appreciate ---------------------suggestions on this issue the current draft of the form_8936 does require that a claimant list the vin of a vehicle to claim the credit i hope this information is helpful in responding to ------------------ please contact me at ------- ------------- if i can assist you further sincerely charles b ramsey chief branch passthroughs special industries


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl br1-plr-141323-02 date date ty legend a date b country c year date d dear this is in response to your letter dated date requesting a ruling that a’s loss of lawful permanent resident status expatriation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born on date b in country c a obtained a green card in year a is a citizen and permanent resident of country c where he now lives on date d a relinquished his green card a will be subject_to country c tax in the same manner as plr-141323-02 other country c residents on the date of a's expatriation his net_worth exceeded the applicable_amount set forth in sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual's average income_tax_liability or the individual's net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary's determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual's expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because he is a citizen and resident fully subject_to tax in country c the country in which he was born a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission plr-141323-02 accordingly based solely on the facts submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have had as one of his principal purposes for expatriating the avoidance of u s taxes however because the information submitted does not clearly establish the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the code no opinion is expressed as to whether a's expatriation had for one of its principal purposes the avoidance of such taxes except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a's u s tax_liability for the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a's u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file in this office a copy of this letter will be sent to a sincerely _______ elizabeth u karzon branch chief cc intl br1