                        T.C. Memo. 2002-230



                      UNITED STATES TAX COURT



         ROWLAND G. AND VALERIE J. PILARIA, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7788-01.              Filed September 16, 2002.



     John W. Ambrecht and Gregory Arnold, for petitioners.

     Elaine T. Fuller, for respondent.



                        MEMORANDUM OPINION


     PANUTHOS, Chief Special Trial Judge:     This matter is before

the Court on petitioners’ motion for partial summary judgment

pursuant to Rule 121(a).1   Petitioners contend that there is no


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

dispute as to a material fact and that they are entitled to

partial summary judgment as a matter of law.   In particular,

petitioners contend that the general 3-year period of limitations

under section 6501(a) bars the assessment of any deficiency

attributable to respondent’s determination that the property that

petitioners sold in 1995 was not their “principal residence”.

Respondent objects to petitioners’ motion on the ground that the

assessment of the deficiency, which is attributable in its

entirety to gain that petitioners realized on the sale of their

purported principal residence, is subject to the period of

limitations set forth in section 1034(j)–-a period that

respondent contends remained open on the date the notice of

deficiency was issued to petitioners.

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    Summary judgment may be

granted with respect to all or any part of the legal issues in

controversy “if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that a decision may be

rendered as a matter of law.”   Rule 121(a) and (b); Sundstrand

Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965

(7th Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988);
                               - 3 -

Naftel v. Commissioner, 85 T.C. 527, 529 (1985).    The moving

party bears the burden of proving that there is no genuine issue

of material fact, and factual inferences will be read in a manner

most favorable to the party opposing summary judgment.    Dahlstrom

v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.

Commissioner, 79 T.C. 340, 344 (1982).

     We are satisfied that there is no genuine issue as to any

material fact and that a decision may be rendered as a matter of

law with regard to the period of limitations that is applicable

in this case.   As explained in detail below, we shall deny

petitioners’ motion for partial summary judgment.

Background

     On August 26, 1996, petitioners filed a joint Form 1040,

U.S. Individual Income Tax Return, for 1995.   Petitioners’ 1995

tax return included a Form 2119, Sale of Your Home.2   Petitioners

reported in part I of the Form 2119 that they:   (1) Sold their

“main home” in Solvang, California (the Solvang property), on

August 4, 1995; (2) realized a gain of $511,587 on the sale of

the Solvang property; and (3) had not purchased or built a new

main home.   Part I, line 9 of the Form 2119 asked in pertinent

part: “If you haven’t replaced your home, do you plan to do so


     2
        The Form 2119 consisted of three distinct parts:
Part I-–Gain on Sale; Part II-–One-Time Exclusion of Gain for
People Age 55 or Older; and Part III–-Adjusted Sales Price,
Taxable Gain, and Adjusted Basis of New Home.
                               - 4 -

within the replacement period?”    Petitioners checked the box on

line 9 labeled “Yes”.   The Form 2119 further stated: “If line 9

is ‘Yes,’ stop here, attach this form to your return, and see

Additional Filing Requirements.”   Petitioners did not make any

additional entries on the remainder of the Form 2119.

     On May 26, 1998, petitioners filed with respondent a second

Form 2119.   In part I of the Form 2119 petitioners reported that

they:   (1) Sold the Solvang property on August 4, 1995; (2)

realized a gain of $508,285 on the sale; and (3) purchased a new

main home on July 18, 1997, at a cost of $480,536.   Petitioners

completed part II of the Form 2119 electing the one-time

exclusion of $125,000 of gain on the sale of a principal

residence for people age 55 or older under section 121.

Petitioners also completed part III of the Form 2119 deferring

recognition of the remaining $383,285 of gain (i.e., $508,285

minus $125,000) under section 1034.

     On March 20, 2001, respondent issued to petitioners a notice

of deficiency for 1995.   In the notice, respondent determined

that petitioners were liable for a tax deficiency of $148,415, an

accuracy-related penalty under section 6662(a) of $29,683, and an

addition to tax under section 6651(a)(1) of $7,200.75.    In

particular, respondent determined that the gain that petitioners

realized upon the sale of the Solvang property was required to be
                                   - 5 -

included in their gross income and subject to tax for 1995.3

Respondent concluded that petitioners were not eligible for the

tax benefits of section 121 or section 1034 because the Solvang

property was not their principal residence at the time it was

sold.

       Petitioners filed with the Court a joint petition for

redetermination.       The petition included the allegation that

respondent’s determination that the Solvang property was not

petitioners’ principal residence at the time it was sold is

barred by the general 3-year period of limitations under section

6501(a).       Respondent filed an answer to the petition including

the allegation that the deficiency, which is attributable to

respondent’s determination that the gain that petitioners

realized on the sale of the Solvang property was includable in

their gross income for 1995, is subject to the period of

limitations prescribed in section 1034(j).

       As indicated, petitioners filed a motion for partial summary

judgment, to which respondent filed an objection.       The matter was

called for hearing at the Court’s motions session in Washington,

D.C.       Counsel for respondent appeared at the hearing and offered


       3
        Respondent determined that petitioners were required to
report a gain of $428,087 on the sale of the Solvang property as
follows: Sale price ($530,000) minus expenses of sale ($18,413)
minus adjusted basis ($83,500). As a consequence of the increase
in petitioners’ adjusted gross income, petitioners were subject
to related adjustments attributable to the phase-out of personal
exemptions and itemized deductions.
                                 - 6 -

argument in opposition to petitioners’ motion.   Although no

appearance was made by or on behalf of petitioners at the

hearing, petitioners filed a reply to respondent’s objection

which they offered to the Court as a statement in lieu of

appearance.    See Rule 50(c).

     Following the hearing, the parties filed a stipulation,

petitioners filed a memorandum, respondent filed a supplemental

objection to petitioners’ motion, and petitioners filed a

response to respondent’s supplemental objection.

Discussion

     A.   Tax Benefits Related to Sales/Exchanges of a Principal
          Residence

     Beginning with the enactment of section 112(n) under the

Revenue Act of 1951, ch. 521, sec. 318, 65 Stat. 452, 494,

Congress has taken steps to diminish the impact of the Federal

income tax on gain arising from the sale or exchange of a

taxpayer’s principal residence.    Section 112(n) (a predecessor to

section 1034)4 provided that a taxpayer would not have to

recognize a portion of the gain realized upon the sale or

exchange of his principal residence if, within a specified

period, the taxpayer purchased a new principal residence at a

cost equal to or exceeding the selling price of the old

residence.    Section 112(n) did not provide an outright exclusion


     4
        Sec. 112(n) was recodified as sec. 1034 under the
Internal Revenue Code of 1954, ch. 736, 68A Stat. 306.
                               - 7 -

of the gain realized upon the sale or exchange of a taxpayer’s

principal residence but rather acted as a means for tax deferral.

In particular, a taxpayer seeking to defer recognition of gain

under section 112(n) was required to reduce his basis in the new

residence by an amount equal to the gain not recognized on the

sale or exchange of the old residence.

     Several years after the enactment of section 112(n),

Congress passed legislation designed to provide an additional tax

benefit to older taxpayers selling or exchanging a principal

residence.   Recognizing that older taxpayers “may desire to

purchase a less expensive home or move to an apartment or to a

rental property” and that such taxpayers might “require some or

all of the funds obtained from the sale of the old residence to

meet * * * living expenses”, S. Rept. 830, 88th Cong., 2d Sess.

51 (1964), 1964-1 C.B. (Part 2) 505, 555, Congress enacted

section 121 under the Revenue Act of 1964, Pub. L. 88-272, sec.

206, 78 Stat. 19, 38, allowing older taxpayers to exclude from

gross income a portion of the gain realized on the sale or

exchange of a principal residence.

     B.   Section 1034

     Section 1034, Rollover Of Gain On Sale Of Principal

Residence, provides in pertinent part:

          SEC. 1034(a). Nonrecognition of Gain.-–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 2 years before the date of
                              - 8 -

     such sale and ending 2 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
     (as defined in subsection (b)) of the old residence
     exceeds the taxpayer’s cost of purchasing the new
     residence.

In sum, gain realized upon the sale of a taxpayer’s principal

residence is subject to deferral under section 1034(a) if the

taxpayer acquires a new principal residence (at a cost equal to

or exceeding the sale price of the old residence) within the 2-

year period preceding or following the sale of the old residence.

     Section 1034(j) provides an extended period for the

assessment of a deficiency attributable to any gain realized on

the sale or exchange of a taxpayer’s principal residence.   In

contrast to section 6501(a), which provides that the period of

limitations on assessment generally expires 3 years after a tax

return is filed, section 1034(j) provides:

          SEC. 1034(j). Statute of Limitations.–-If the
     taxpayer during a taxable year sells at a gain property
     used by him as his principal residence, then--

               (1) the statutory period for the
          assessment of any deficiency attributable to
          any part of such gain shall not expire before
          the expiration of 3 years from the date the
          Secretary is notified by the taxpayer (in
          such manner as the Secretary may by
          regulations prescribe) of–-

                     (A) the taxpayer’s cost of
               purchasing the new residence which
               the taxpayer claims results in
               nonrecognition of any part of such
               gain,
                                - 9 -

                      (B) the taxpayer’s intention
                 not to purchase a new residence
                 within the period specified in
                 subsection (a), or

                      (C) a failure to make such
                 purchase within such period; and

                 (2) such deficiency may be assessed
            before the expiration of such 3-year period
            notwithstanding the provisions of any other
            law or rule of law which would otherwise
            prevent such assessment.

Thus, the statutory period for the assessment of any deficiency

attributable to any part of the gain realized on the sale or

exchange of a taxpayer’s principal residence will not expire

until 3 years after the Commissioner is notified of:      (1) The

taxpayer’s purchase of a new residence; (2) the taxpayer’s

intention not to purchase a new residence within the period

specified in section 1034(a); or (3) the taxpayer’s failure to

purchase a new residence within the period specified in section

1034(a).

     Section 1034(l) provides a cross-reference to the one-time

exclusion of gain under section 121.

     C.    Section 121

     Section 121, One-Time Exclusion Of Gain From Sale Of

Principal Residence By Individual Who Has Attained Age 55,

provides in pertinent part:

          SEC. 121(a). General Rule.–-At the election of the
     taxpayer, gross income does not include gain from the
     sale or exchange of property if--
                               - 10 -

                 (1) the taxpayer has attained the age of
            55 before the date of such sale or exchange,
            and

                 (2) during the 5-year period ending on
            the date of the sale or exchange, such
            property has been owned and used by the
            taxpayer as his principal residence for
            periods aggregating 3 years or more.

Section 121(b)(1) limits the amount of the exclusion to $125,000

or $62,500 in the case of a separate return by a married

taxpayer.

     Section 121(c) describes the process for making an election

under the provision in pertinent part as follows:

          SEC. 121(c). Election.–-An election under
     subsection (a) may be made or revoked at any time
     before the expiration of the period for making a claim
     for credit or refund of the tax imposed by this chapter
     for the taxable year in which the sale or exchange
     occurred, and shall be made or revoked in such manner
     as the Secretary shall by regulations prescribe. * *
     *[5]

     Unlike section 1034, section 121 does not contain a separate

provision for the period of limitations on assessment.      We



     5
        In conjunction with sec. 121(c), we observe that sec.
6511(a) provides in pertinent part:

          SEC. 6511(a). Period of Limitation on Filing
     Claim.–-Claim for credit or refund of an overpayment of
     any tax imposed by this title in respect of which tax
     the taxpayer is required to file a return shall be
     filed by the taxpayer within 3 years from the time the
     return was filed or 2 years from the time the tax was
     paid, whichever of such periods expires the later, or
     if no return was filed by the taxpayer, within 2 years
     from the time the tax was paid. * * *
                                 - 11 -

further observe that there is no direct reference to section 121

in section 6501.   However, paragraph (4) of section 6504, titled

“Cross References”, provides:     “For limitation period in case

of–- * * * (4) Gain upon sale or exchange of principal residence,

see section 1034(j).”

     D.   Current Law

     As an epilogue to the preceding discussion, section 121 was

amended, and section 1034 was repealed, under the Taxpayer Relief

Act of 1997 (TRA), Pub. L. 105-34, sec. 312(a) and (b), 111 Stat.

836, 839, generally effective with respect to sales and exchanges

after May 6, 1997.      TRA section 312(a) and (b) provides that all

taxpayers may elect to exclude from gross income up to $250,000

of gain ($500,000 for joint filers) realized on the sale or

exchange of a principal residence.

     E.   The Parties’ Positions

     Petitioners do not dispute that the period of limitations

under section 1034(j) would apply to a determination that the new

residence that they purchased in 1997 does not qualify as their

principal residence within the meaning of section 1034.     However,

petitioners assert that the general 3-year period of limitations

under section 6501(a) bars respondent from determining that the

old residence (the Solvang property) was not their principal

residence under section 121 or section 1034.     Petitioners contend

that the general 3-year period of limitations expired in this
                               - 12 -

case inasmuch as petitioners reported the sale of the Solvang

property on the Form 2119 attached to their 1995 Federal income

tax return which was filed more than 3 years before the issuance

of the notice of deficiency.   Respondent counters that: (1)

Section 1034(j) prescribes the period for the assessment of the

deficiency–-a deficiency which is attributable to gain realized

by petitioners upon the sale of property that they characterized

as their principal residence; and (2) that period remained open

as of the date that the notice of deficiency was mailed to

petitioners.

     F.   Analysis

     The deficiency in this case is attributable in its entirety

to respondent’s determination that petitioners’ gross income for

1995 included the gain that petitioners realized upon the sale of

what they characterized as their principal residence.   Consistent

with the plain language of section 1034(j) and section 6504(4),

we hold that the period of limitations set forth in section

1034(j) governs the assessment of the deficiency in this case.

Because we conclude that the period of limitations remained open

at the time the notice of deficiency was issued to petitioners,

we shall deny petitioners’ motion for partial summary judgment.

     A portion of the gain from a sale or exchange of property

qualifies for exclusion from gross income under section 121 if

the property was owned and used by the taxpayer as his principal
                              - 13 -

residence for periods aggregating 3 years or more of the 5-year

period ending on the date of the sale or exchange and if the

taxpayer attained the age of 55 before the date of the

transaction.   Gain from a sale or exchange of property is subject

to deferral under section 1034 if the property was used by the

taxpayer as his principal residence and the taxpayer acquires a

new principal residence within the 2-year period preceding or

following the sale of the old residence.

     Just as section 1034(a) grants the taxpayer an extended

period to complete a section 1034 transaction with the

acquisition or construction of a new residence, section 1034(j)

in turn grants the Commissioner an extended period of time within

which to assess any deficiency attributable to gain from the sale

or exchange property that the taxpayer has characterized as his

principal residence.

     Contrary to petitioners’ position, the statutory scheme does

not suggest that Congress intended bifurcated examinations of

section 1034 transactions.   In other words, rather than require

the Commissioner to conduct one examination to determine whether

the property sold was the taxpayer’s principal residence and a

second examination to determine whether the property purchased

qualifies as a new principal residence, section 1034(j) permits

the Commissioner to examine all aspects of the transaction at

once.   In this regard, section 1034(j)(1) plainly provides that
                              - 14 -

the period of limitations set forth therein applies to “the

assessment of any deficiency attributable to any part of such

gain”.

     Consistent with section 1034(j)(1), subsection (j)(2)

provides that the period of limitations shall apply

“notwithstanding the provisions of any other law or rule of law

which would otherwise prevent such assessment.”    As we see it, if

(as petitioners maintain) Congress intended for the general

3-year period of limitations under section 6501(a) to apply to

assessments attributable to the Commissioner’s determination that

a property sold by a taxpayer was not his principal residence,

Congress would have qualified the language of section 1034(j) so

that it did not preempt the more general rules of section

6501(a).   In the absence of such qualifying language, our holding

that the period of limitations under section 1034(j) governs the

assessment of the deficiency in this case conforms with the basic

principle of statutory construction that a specific statute

controls over a general provision.     See, e.g., Bulova Watch Co.

v. United States, 365 U.S. 753, 758 (1961).

     Our holding also comports with the legislative history of

section 1034.   H. Rept. 586, 82d Cong., 1st Sess. 108-114 (1951),

1951-2 C.B. 357, 406, 435-439, contains a section titled

“Detailed Discussion Of The Technical Provisions Of The Bill”,
                              - 15 -

which includes the following explanation regarding former section

112(n):

          Whether or not property is used by the taxpayer as
     his residence, and whether or not property is used by
     the taxpayer as his principal residence (in the case of
     a taxpayer using more than one place of residence),
     depends upon all of the facts and circumstances in each
     individual case, including the bona fides of the
     taxpayer. The term “residence” is used in
     contradistinction to property used in trade or business
     and property held for the production of income.
     Nevertheless, the mere fact that the taxpayer
     temporarily rents out either the old or the new
     residence may not, in the light of all the facts and
     circumstances in the case, prevent the gain from being
     not recognized. * * *

          Where part of a property is used by the taxpayer
     as his principal residence and part is used for
     business purposes or in the production of income * * *
     allocation must be made to determine the extent to
     which the new subsection applies. If the old residence
     is used only partially for residential purposes, a
     proper allocation of the gain and of the selling price
     is necessary; only that part of the gain allocable to
     the residential portion may be not recognized under the
     new subsection and only so much of the selling price as
     is allocable to such part of the property need be
     reinvested in the new residence.

              *     *     *     *      *    *     *

          Whenever a taxpayer sells property used as his
     principal residence at a gain the statutory period
     prescribed in section 275 [a predecessor to section
     6501] of the Code for the assessment of any deficiency
     attributable to any part of such gain will not expire
     prior to the expiration of 3 years from the date the
     Secretary is notified by the taxpayer, in accordance
     with such regulations as the Secretary may prescribe,
     of the cost of purchasing the new residence which the
     taxpayer claims results in the nonrecognition of any
     part of such gain, or of the taxpayer’s intention not
     to, or failure to, purchase a new residence within the
     period when such a purchase will result in the
     nonrecognition of any part of such gain. Such a
                              - 16 -

     deficiency may be assessed prior to the expiration of
     such 3-year period notwithstanding the provisions of
     any other law or rule of law which might otherwise bar
     such assessment.

S. Rept. 781, 82d Cong., 1st Sess. (1951), 1951-2 C.B. 458, 566-

570 does not differ in any material respect from the House report

quoted above.

     Significantly, the legislative history quoted above does not

distinguish between the period of limitations applicable to the

Commissioner’s determinations pertaining to the status of a

taxpayer’s old residence and the period of limitations applicable

to the Commissioner’s determinations pertaining to status of the

taxpayer’s new residence.   That factor, considered in conjunction

with the statement in the legislative history excepting such

transactions from the general 3-year period of limitations, leads

us to conclude that Congress intended that the question of the

status of the taxpayer’s old residence would be subject to the

period of limitations prescribed in section 1034(j).

     Our holding that the period of limitations set forth in

section 1034(j) is controlling in this matter is equally

applicable to respondent’s determination to disallow petitioners’

election to exclude $125,000 of the gain realized on the sale of

the Solvang property from gross income under section 121.

Although there is no provision for a period of limitations in

section 121, nor a specific reference to section 121 within the

general 3-year period of limitations under section 6501, section
                                - 17 -

6504(4) provides that the period of limitations for gain upon the

sale or exchange of a taxpayer’s principal residence is to be

found under section 1034(j).

     Reading section 1034(j) as a whole, we understand that the

provision integrates the period of limitations for taxpayers who

elect the tax benefits of section 121 and section 1034, either

singly or in combination.   In particular, when a taxpayer

notifies the Commissioner that he has sold his principal

residence, and he does not intend to purchase a new principal

residence within the statutory replacement period, section

1034(j)(1)(B) provides that the period of limitations on

assessment will expire 3 years from the date that notice is

filed.   Consistent with this provision, Form 2119 is arranged so

that the taxpayer may immediately elect to exclude up to $125,000

of gain from gross income under section 121, as appropriate.     On

the other hand, if a taxpayer notifies the Commissioner that he

has sold his principal residence and he intends to purchase a new

principal residence within the statutory replacement period,

section 1034(j)(1)(A) and (C) provides that the period of

limitations on assessment will expire 3 years from the date the

taxpayer notifies the Commissioner:      (1) Of the purchase price of

the taxpayer’s new principal residence or (2) the taxpayer’s

failure to purchase a new principal residence within the

statutory replacement period.    Consistent with these provisions,
                                - 18 -

Form 2119 is arranged so that such taxpayers are not required to

include any portion of the gain realized on the transaction in

their gross income, and they may postpone making an election

under section 121.6    However, such taxpayers are directed to

comply with additional filing requirements; i.e., to file a

second Form 2119.     A taxpayer that files a second Form 2119

reporting the purchase of a new principal residence within the

statutory replacement period is permitted to make the election to

exclude up to $125,000 of gain under section 121 and/or to defer

recognition of gain under section 1034, as appropriate.7

     Petitioners in the instant case reported on their original

Form 2119, filed August 26, 1996, that they realized gain on the

sale of the Solvang property and that they intended to purchase a

new principal residence within the statutory replacement period.

As a result, petitioners were not required to (and did not)

include any of the gain in their gross income for 1995, nor did

they make an election to exclude any portion of the gain from



     6
        Form 2119 allows taxpayers who may be eligible for the
tax benefits of sec. 121 and sec. 1034 in tandem the advantage of
delaying their election to use the one-time exclusion of gain
under sec. 121 until they have purchased a new principal
residence and are able to determine whether they qualify to defer
recognition of some or all of the gain under sec. 1034.
     7
        When a taxpayer qualifies for the tax benefits of both
sec. 121 and sec. 1034, in effect the first $125,000 of gain is
excluded under sec. 121, with the balance (to the extent invested
in a replacement residence) subject to deferral under sec. 1034.
See sec. 121(d)(7).
                             - 19 -

gross income under section 121.   However, on their second Form

2119, filed May 26, 1998, petitioners reported the purchase price

of their new principal residence and notified respondent of their

election to exclude $125,000 of gain under section 121 and to

defer recognition of the balance of the gain under section 1034.

     Under the circumstances, the filing of petitioners’ second

Form 2119 on May 26, 1998, satisfied the notice requirement under

section 1034(j)(1)(A) and initiated the running of the 3-year

period of limitations on assessment with regard to both

petitioners’ election to exclude $125,000 of gain from their

gross income under section 121 and their claim to defer

recognition of the balance of the gain under section 1034(a).

See sec. 1.1034-1(i)(2), Income Tax Regs.   It follows that the

3-year period of limitations remained open on March 20, 2001--the

date the notice of deficiency in this case was issued to

petitioners.

     Consistent with the foregoing, we shall deny petitioners’

motion for partial summary judgment.   To reflect the foregoing,



                                    An order will be issued

                              denying petitioners’ motion for

                              partial summary judgment.
