                    T.C. Summary Opinion 2010-38



                        UNITED STATES TAX COURT



              JASON AND MISTY DEWEY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13650-08S.              Filed March 31, 2010.



     Jason and Misty Dewey, pro sese.

     Alicia E. Elliott, for respondent.



     RUWE, Judge:     This case was heard pursuant to the provisions

of section 74631 of the Internal Revenue Code in effect when the

petition was filed.    Pursuant to section 7463(b), the decision to

be entered is not reviewable by any other court, and this opinion



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 2 -

shall not be treated as precedent for any other case.    Respondent

determined a $1,492 deficiency in petitioners’ 2005 Federal

income tax.    After a concession by respondent,2 the only issue

remaining is whether petitioners are entitled to a sales tax

deduction in connection with the purchase of a new home.

                             Background

     Some of the facts have been stipulated.    The stipulation of

facts and the attached exhibits are incorporated herein by this

reference.    At the time the petition was filed, petitioners

resided in Arizona.

     In March 2005 petitioners purchased a new home from KB Home

Sales (KB Homes) for $231,301.    The final settlement statement

prepared by First American Title Insurance Co. reflects a

contract sale price of $231,301 and detailed settlement charges

of $8,711.46 but does not separately state any sales tax paid.

Moreover, the record is devoid of any indication of what taxes,

if any, KB Homes paid.

     In April 2005 the combined rate of the transaction privilege

tax for retail sales or prime contracting for the State of

Arizona, Maricopa County, and the City of Mesa was 7.8 percent.

Furthermore, prime contractors are allowed a flat 35-percent

deduction from gross receipts in computing the transaction



     2
       Respondent concedes that petitioners are entitled to an
additional $1,030 deduction for taxes paid for 2005.
                                 - 3 -

privilege tax owed to the State of Arizona, Maricopa County, and

the City of Mesa.

     Petitioners, under the direction of their tax return

preparer, determined the portion of their claimed sales tax

deduction for the purchase of their new home using a formula

based on estimates for the cost of land, labor, materials, and

the sales tax rate.    Petitioners’ estimates are as follows:

                  New Home Purchase           Amount

           Cost of land                     $46,260
           Labor (at 35 percent)             61,639
           Materials (at 65 percent)        114,473
           Sales tax (at 7.8 percent)         8,929
             Total                          231,301

     On Schedule A, Itemized Deductions, of their 2005 Federal

income tax return, petitioners claimed a $14,665 taxes paid

deduction, which consisted of $12,527 for State and local general

sales taxes, $1,483 for real estate taxes, and $655 for personal

property taxes.

     In the notice of deficiency respondent disallowed $9,959 of

petitioners’ claimed $14,665 taxes paid deduction.      As previously

noted, the parties stipulate that respondent has conceded an

additional $1,030 deduction for taxes paid.    Thus, respondent has

allowed a $5,736 taxes paid deduction as follows:      $655 for

personal property taxes; $1,483 for real estate taxes; and $3,598

for State and local general sales taxes.    The remaining $8,929
                                 - 4 -

represents the amount petitioners claimed as sales tax paid on

the purchase of their new home.

     The parties stipulate that for tax year 2005, petitioners

paid State income taxes of $3,630.       However, on their 2005

Federal income tax return petitioners claimed the general sales

tax deduction in lieu of the State income tax deduction.       The

parties agree that if respondent prevails and the general sales

tax deduction on the single-family home is not allowed, then

petitioners are entitled to a $3,630 deduction for State income

taxes, which would entitle petitioners to total itemized

deductions of $27,673.

                              Discussion

     Deductions are strictly a matter of legislative grace, and

the taxpayer bears the burden of proving entitlement to the

deductions claimed.     Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934).    Pursuant to section 7491(a), the burden of

proof as to factual issues may shift to the Commissioner where a

taxpayer has introduced credible evidence relevant to

ascertaining his tax liability.    Rule 142(a)(2).     Petitioners

have neither claimed nor shown eligibility for a shift in the

burden of proof.   Consequently, the burden of proof remains with

petitioners.
                               - 5 -

     Section 164(a)(3) allows a deduction for State and local

income taxes paid or accrued during the taxable year.   However,

section 164(b)(5)(A) provides that a taxpayer may elect to deduct

State and local general sales taxes in lieu of State and local

income taxes.3   “The term ‘general sales tax’ means a tax imposed

at one rate with respect to the sale at retail of a broad range

of classes of items.”   Sec. 164(b)(5)(B).

     Section 1.164-3(e)(1), Income Tax Regs., defines the term

“sales tax” as “a tax imposed upon persons engaged in selling

tangible personal property, or upon the consumers of such

property, * * * which is a stated sum per unit of property sold

or which is measured by the gross sales price or the gross

receipts from the sale.”   To qualify as a general sales tax, a

tax must meet two tests:   (1) The tax must be a tax in respect of

sales at retail, and (2) the tax must be general–-that is, it

must be imposed at one rate in respect of the retail sales of a

broad range of classes of items.   Sec. 1.164-3(f), Income Tax

Regs.

     In support of petitioners’ claimed sales tax deduction,

petitioner Jason Dewey (Mr. Dewey) alleges that KB Homes

completed an Arizona Form 5000, Arizona Department of Revenue



     3
       The election to deduct State and local sales taxes in lieu
of State and local income taxes is applicable for taxable years
beginning after Dec. 31, 2003, and before Jan. 1, 2010. Sec.
164(b)(5)(I).
                               - 6 -

Transaction Privilege Tax Exemption Certificate, thereby allowing

KB Homes to purchase construction materials without paying any

sales tax.   Mr. Dewey theorizes that if KB Homes did not have to

pay sales tax on the construction materials when purchased but

rather paid a transaction privilege tax when the home was sold to

petitioners and “Since the builder never ventured any of their

own capital to pay the tax”, then petitioners effectively paid

the sales tax on the construction materials and “should be deemed

a buyer at retail of this property in question.”     Respondent

asserts, however, that the transaction privilege tax in issue was

imposed with respect to the sale of real property and, therefore,

does not qualify as “general sales tax” within the meaning of

section 164(b)(5)(B).4   We agree with respondent.

     The State of Arizona, Maricopa County, and the City of Mesa

impose a tax on the privilege of doing business within their

respective jurisdictions.   These so-called transaction privilege

taxes are based on the volume of business transacted, which is

generally measured by gross proceeds of sales or gross income as


     4
       Respondent also asserts that because the transaction
privilege tax for the State of Arizona, Maricopa County, and the
City of Mesa allow for a flat 35-percent deduction for land and
labor, the rates applied to contractors are not applied on
generally the same base as other businesses subject to the tax.
Thus, respondent argues that the taxes are not imposed at one
rate in respect of a broad range of classes of items. See sec.
164(b)(5)(B). Respondent further asserts that even if the taxes
qualify as “general sales taxes”, they are not imposed upon
petitioners because they were not separately stated. See sec.
164(b)(5)(G).
                                 - 7 -

the case may be.   See Ariz. Rev. Stat. Ann. secs. 42-5061 and 42-

5075 (2006) (retail or prime contracting classifications,

respectively).

      To qualify as a retail sale under the State of Arizona,

Maricopa County, and the City of Mesa taxing provisions, the sale

must consist of the transfer of tangible personal property at

retail.   See id. secs. 42-5001(12), 42-5061(A); Mesa City Code

sec. 5-10-100 (2009).   In Duhame v. State Tax Commn., 179 P.2d

252, 259 (Ariz. 1947), the Arizona Supreme Court concluded that a

sale of a new home, such as the transaction between KB Homes and

petitioners, is not a sale of tangible personal property and,

consequently, is not a retail sale.      In this respect, the Arizona

Supreme Court stated:

           When a contractor fabricates his materials for the
      contractee, and the completed structure is erected on
      the owner’s land, it is as much real property as the
      land itself. The constituent elements of tangible
      personal property have been destroyed by their
      incorporation into the completed structure. And such a
      contractor, therefore, is not making a sale of tangible
      personalty to his contractee.

Id.   Thus, a contractor, when fabricating personalty into realty,

“neither sells, resells, sells at retail, nor can he be

considered a retailer.”   Id.    Consequently, KB Homes did not

engage in selling tangible personal property at retail when it

sold a new home to petitioners.

      Under the State and local taxing authorities, contractor’s

sales are not retail sales.     Therefore, these taxes do not
                               - 8 -

qualify as “general sales taxes” within the meaning of section

164(b)(5).   See Karpinski v. Commissioner, T.C. Memo. 1983-50;

see also Beimfohr v. Commissioner, T.C. Memo. 1986-57 (applying

the holding in Karpinski under similar facts).5     Accordingly, we

sustain respondent’s determination and hold that petitioners are

not entitled to the $8,929 deduction they claimed as State and

local sales taxes paid for the purchase of their new home in

2005.6

     To reflect the foregoing, and in the light of the parties’

agreement to allow a State income tax deduction,


                                            Decision will be entered

                                       under Rule 155.




     5
       This Court has held on several occasions that a home buyer
may not deduct retail sales taxes a contractor pays on the
purchase of materials that went into the construction of the
home. See Wise v. Commissioner, 78 T.C. 270 (1982); Petty v.
Commissioner, 77 T.C. 482 (1981); Armentrout v. Commissioner, 43
T.C. 16 (1964); Porter v. Commissioner, T.C. Memo. 1978-391. In
each of these cases the tax was imposed in respect to sales of
tangible personal property at retail that preceded the sales
transaction involving the home buyer. And in each case the home
buyer was disallowed the deduction on the grounds that under
State law the contractor was the “ultimate consumer” of the
materials that went into construction of the home; i.e., there
was no retail sale of the materials when the home buyer paid the
contractor.
     6
       On account of our holding, we need not address
respondent’s other contentions. See supra note 4.
