                              T.C. Memo. 2014-254



                        UNITED STATES TAX COURT



                    ROSE A. WODACK, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 8009-12.                          Filed December 17, 2014.



      Rose A. Wodack, pro se.

      Richard Charles Grosenick and Mark J. Miller, for respondent.



                           MEMORANDUM OPINION


      PARIS, Judge: Respondent determined a deficiency in Federal income tax

of $2,609 for petitioner’s 2008 taxable year. The only issue before the Court is
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[*2] whether petitioner is entitled to the first-time homebuyer credit under section

36(a).1 The Court holds that petitioner is not entitled to the credit.

                                     Background

      The parties submitted this case fully stipulated, without trial, pursuant to

Rule 122. The parties’ stipulations of facts are hereby incorporated by reference

and are found accordingly. At the time of the filing of the petition, petitioner

resided in Wisconsin.

      On August 3, 1993, petitioner entered into a seller-financed land contract

for a tract of land and a residence (property or property at issue) with Howard

Schlise. Petitioner and Mr. Schlise are not related. The land contract states:

“Vendor sells and agrees to convey to Purchaser, upon the prompt and full

performance of this contract by Purchaser, the following property, together with

the rents, profits, fixtures and other appurtenant interests”, and then describes the

property at issue.

      Pursuant to the land contract, petitioner agreed to pay Mr. Schlise $27,500

for the property. The land contract specified that petitioner was to pay $1,000

upon execution of the contract and make monthly payments of $222.39 over a

      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986 as amended and in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                         -3-

[*3] five-year term. Interest accrued at the rate of 9%. The land contract called

for full payment of the outstanding balance by September 1, 1998, but stated that

“[t]he purchaser may request an extension of land contract for an additional five

years provided the purchaser has given 30 days written notice of such intention to

extend and provided the interest is recalculated at 3 points above prime rate as

quoted in the Wall Street Journal, and the principal is amortized over 20 years.”

      Under the contract, petitioner was required to pay Mr. Schlise annual

property taxes, special assessments, and fire and other required insurance

premiums. Mr. Schlise was to hold these amounts in escrow and apply the

payments to the obligations when they became due.2 Petitioner agreed to keep the

improvements on the property insured in an amount at least equal to the balance

owed under the contract. Petitioner further agreed not to commit waste, to keep

the property in “good tenantable condition and repair”, to keep the property from

superior liens, and to comply with all laws affecting the property. In return,

petitioner had the right to take possession of the property at the time of the closing

and could improve the property without permission.




      2
       Another paragraph of the contract contemplates that petitioner will pay
property taxes, assessments, and insurance premiums directly and deliver receipts
showing such payment to Mr. Schlise upon demand.
                                          -4-

[*4] The land contract also vested Mr. Schlise with certain rights and

obligations. Upon petitioner’s paying the principal and interest in full, Mr. Schlise

had the obligation to “execute and deliver to Purchaser, a Warranty Deed, in fee

simple, of the Property, free and clear of all liens and encumbrances” with certain

exceptions not relevant here. Mr. Schlise also had the right, which terminated five

years from closing, to repurchase the property at the original purchase price if

petitioner put the property up for sale. He also had certain rights upon petitioner’s

default, including: the right of strict foreclosure, the right to sue for specific

performance by full payment through judicial sale, the right to sue at law for the

entire unpaid purchase price, the right to initiate a quiet title action, and the right

to have petitioner ejected from the property and to have a receiver appointed to

collect rents. Moreover, Mr. Schlise could demand full payment of the remaining

balance if petitioner transferred any interest in the property without his

permission.

      Petitioner resided at the property at issue, made timely monthly payments,

and renewed the land contract for two additional five-year terms without issue.

Mr. Schlise passed away on August 20, 2006. Mr. Schlise’s interest in the

property at issue passed to the Schlise Family Trust. When the contract’s third

five-year period was coming to an end in 2008, petitioner requested that the
                                           -5-

[*5] Schlise Family Trust renew the contract for another five years or until such

time as she could procure a “conventional mortgage”.

      Mr. Schlise’s son’s attorney chose not to renew the contract for another five

years.3 Petitioner therefore decided to pay in full the balance owing upon

expiration of the contract. The contract expired in August 2008. Petitioner

contacted Attorney Philip Johnson to request the payoff figure.4 On October 31,

2008, Mr. Johnson wrote a letter stating that the payoff figure on November 20,

2008, was $19,768.31. On November 18, 2008, petitioner obtained a loan through

a promissory note with Riverside Finance, Inc., for $25,006.29. Riverside Finance

paid $19,758.47 by check to the “Schlise Trust” out of these proceeds.5 The

Schlise Family Trust transferred the deed to petitioner in November 2008.6

      On her Federal income tax return for taxable year 2008, petitioner claimed a

first-time homebuyer credit of $2,609 pursuant to section 36(a). After an


      3
      It is unclear whether the attorney was acting as the trustee of the Schlise
Family Trust or as Mr. Schlise’s son’s representative.
      4
       It is unclear whether Philip Johnson was the same attorney who chose not
to extend the contract.
      5
       This figure equals the $19,768.31 that Mr. Johnson provided petitioner as a
payoff figure for November 20, 2008, adjusted downward for two days’ per diem
of $4.92 each as calculated by Mr. Johnson.
      6
          The deed is not part of the record.
                                        -6-

[*6] examination, respondent sent petitioner a notice of deficiency on December

28, 2011, disallowing the credit. On March 28, 2012, petitioner filed a timely

petition in this Court for redetermination.

                                     Discussion

      The Commissioner’s determination of a deficiency is generally presumed

correct, and the taxpayer bears the burden of proving it incorrect. See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions and

credits are matters of legislative grace, and the taxpayer bears the burden of

proving entitlement to any deductions or credits claimed. See 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 36(a), a first-time homebuyer of a principal residence is

entitled to a credit of 10% of the purchase price, not to exceed $7,500. The

taxpayer must have purchased the residence on or after April 9, 2008, and before

July 1, 2009.7 Sec. 36(h). The term “first-time homebuyer” is defined in section

36(c)(1) to mean “any individual if such individual * * * had no present ownership


      7
       The credit was later extended to apply to purchases made on or after April
9, 2008, and before May 1, 2010. See sec. 36(h)(1) (as amended by the Worker,
Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, sec.
11, 123 Stat. at 2989).
                                        -7-

[*7] interest in a principal residence during the 3-year period ending on the date of

the purchase of the principal residence to which this section applies.” As pertinent

here, the term “purchase” is defined in section 36(c)(3) to mean “any acquisition”.

      The only issue is whether petitioner purchased the property at issue on or

after April 9, 2008, and before July 1, 2009. Petitioner contends that she

purchased the property in November 2008 when she paid the Schlise Family Trust

the remaining balance under the land contract and received the deed to the

property. Respondent asserts that petitioner purchased the property within the

meaning of section 36(a) on August 3, 1993, because (1) under Wisconsin law,

petitioner had equitable title to the property upon execution of the land contract,

and (2) petitioner had possession of the property and enjoyed the benefits and

burdens of ownership beginning in 1993.

      In determining when a purchase occurred for purposes of the first-time

homebuyer credit, the Court has looked to when the benefits and burdens of

ownership have shifted. See Woods v. Commissioner, 137 T.C. 159, 162 (2011);

see also Baird v. Commissioner, 68 T.C. 115, 124 (1977) (analyzing when the

transfer of property occurred for purposes of real estate depreciation and mortgage

interest deductions). Generally, a transfer is complete upon the earlier of the

transfer of title or the shift of the benefits and burdens of ownership. Woods v.
                                         -8-

[*8] Commissioner, 137 T.C. at 162; Deyoe v. Commissioner, 66 T.C. 904, 910

(1976) (citing Dettmers v. Commissioner, 430 F.2d 1019, 1023 (6th Cir. 1970),

aff’g Estate of Johnston v. Commissioner, 51 T.C. 290 (1968)).

      State law determines a taxpayer’s property rights. See United States v. Nat’l

Bank of Commerce, 472 U.S. 713, 722 (1985); Patel v. Commissioner, 138 T.C.

395, 404 (2012); Woods v. Commissioner, 137 T.C. at 162. Federal tax

consequences are decided under Federal law. Patel v. Commissioner, 138 T.C. at

404; Woods v. Commissioner, 137 T.C. at 162. Accordingly, the Court looks to

Wisconsin law to determine what rights petitioner had in the property at issue.

The Court considers the substance of the property rights under State law, including

the benefits and burdens of such rights, and not merely the labels that the State

gives to these rights or the conclusions it draws from them. United States v. Craft,

535 U.S. 274, 279 (2002); Patel v. Commissioner, 138 T.C. at 404.

      Among the factors which this and other courts have cited as indicative of

the benefits and burdens of ownership are: a right to possession; an obligation to

pay taxes, assessments, and charges against the property; a responsibility for

insuring the property; a duty to maintain the property; a right to improve the

property without the seller’s consent; a bearing of the risk of loss; and a right to

obtain legal title at any time by paying the balance of the full purchase price. See
                                        -9-

[*9] Keith v. Commissioner, 115 T.C. 605, 611-612 (2000); Goldberg v.

Commissioner, T.C. Memo. 1997-74, aff’d without published opinion, 246 F.3d

674 (9th Cir. 2000); see also Major Realty Corp. & Subs. v. Commissioner, 749

F.2d 1483, 1487 (11th Cir. 1985), aff’g in part, rev’g in part T.C. Memo. 1981-

361; Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221, 1237-1238

(1981); Musgrave v. Commissioner, T.C. Memo. 2000-285; Berger v.

Commissioner, T.C. Memo. 1996-76; Spyglass Partners v. Commissioner, T.C.

Memo. 1995-452. When a buyer, by virtue of these incidents, would be

considered to have obtained equitable ownership under State law, a sale will

generally be deemed completed for Federal tax purposes. Keith v. Commissioner,

115 T.C. at 612.

      Under Wisconsin law, the doctrine of “equitable conversion” governs sales

of property. City of Milwaukee v. Greenberg, 471 N.W.2d 33, 36 (Wis. 1991);

Kallenbach v. Lake Publ’ns, Inc., 142 N.W.2d 212 (1966). As stated by the

Wisconsin Supreme Court:

              A land contract vendor holds legal title as security for the
      unpaid balance of the contract, while the land contract vendee holds
      equitable title. Holding equitable title in effect gives the land contract
      vendee “full rights” of ownership * * *. The land contract vendee has
      liabilities generally attributed to ownership, such as payment of taxes,
      and is also generally liable as the owner to third parties injured on the
      property.
                                        - 10 -

[*10] Steiner v. Wis. Am. Mut. Ins. Co., 697 N.W.2d 452, 457 (Wis. 2005) (fn.

refs. omitted). Although the vendor’s interest in the land is not identical to that of

a mortgagee’s, the vendor under a land contract holds bare legal title as security

for the unpaid balance. Greenberg, 471 N.W.2d at 36, 39.

      The Court holds that under Wisconsin law petitioner became the equitable

owner of the property at issue as of August 3, 1993, the effective date of the land

contract. Petitioner obtained the benefits and burdens of ownership at that time.

She had the right of possession and made the property her principal residence. As

required by the contract, petitioner paid the real property taxes, assessments, and

insurance. She also had an obligation to maintain the property and could improve

the property without permission. Under Wisconsin law, petitioner bore the risk of

loss. See Steiner, 697 N.W.2d at 457-458. She also had the right to obtain legal

title by paying the remaining balance under the contract. And though petitioner

had to seek Mr. Schlise’s permission to transfer any interest in the property, the

Court does not find this inconsistent with Mr. Schlise’s rights as a creditor. See

id. at 457. (“Holding equitable title in effect gives the land contract vendee ‘full

rights’ of ownership, including the ability to ‘sell, lease or encumber the real estate

subject to the rights of the Vendor unless the contract provides to the contrary.’”
                                        - 11 -

[*11] (quoting Martin J. Greenberg & Henry R. Pinekenstein, Wisconsin Land

Contracts 2 (1986))).

      The decision not to renew the contract did not affect petitioner’s status as

owner of the property, as her rights and obligations under State law did not change

at that time. Moreover, there is no indication that the benefits and burdens of

ownership shifted briefly to the Schlise Family Trust upon expiration of the

contract in August 2008 until petitioner obtained full legal title in November

2008.8 Petitioner continued to reside at the property and presumably was still

liable for taxes, insurance premiums, and the like.

      Accordingly, the Court finds that for purposes of section 36 petitioner

“purchased” the real property in question on August 3, 1993, and thus not on or

after April 9, 2008, and before July 1, 2009, as required by section 36(h). On that

record, the Court holds that petitioner is not entitled to the first-time homebuyer

credit under section 36(a) for her taxable year 2008.


      8
         Even if petitioner briefly lost her status as the property’s equitable owner
between the expiration of the third contract renewal and her procurement of legal
title to the property, she still would not qualify for the credit as she would not be
considered a “first-time homebuyer” under those circumstances. See sec. 36(c)(1)
(“The term ‘first-time homebuyer’ means any individual if such individual (and if
married, such individual’s spouse) had no present ownership interest in a principal
residence during the 3-year period ending on the date of the purchase of the
principal residence to which this section applies.”).
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[*12] To reflect the foregoing,


                                                 Decision will be entered

                                           for respondent.
