                                       JOSEPH MELVILLE WOODS, JR., PETITIONER v. COMMISSIONER
                                                 OF INTERNAL REVENUE, RESPONDENT

                                                        Docket No. 27484–09.                   Filed October 27, 2011.

                                                   P entered into a contract for deed to purchase a house in
                                                2008, took possession of the house in 2008, and claimed the
                                                first-time homebuyer tax credit pursuant to I.R.C. sec. 36 on
                                                his 2008 Federal income tax return. The house required ren-
                                                ovations before being ready for occupancy. Petitioner intended
                                                to use the first-time homebuyer tax credit to pay for the nec-
                                                essary renovations. In February 2009 petitioner received
                                                $7,500 for the first-time homebuyer tax credit and began ren-
                                                ovations. In August 2009 R issued P a statutory notice of defi-
                                                ciency denying P’s claimed first-time homebuyer tax credit for
                                                2008. Upon receiving notice that R was denying the credit, P
                                                suspended renovations of the house. R argues that P is not
                                                entitled to the first-time homebuyer tax credit for two rea-
                                                sons. First, R argues that P took possession of the house
                                                under a contract for deed and therefore has not ‘‘purchased’’
                                                the house pursuant to I.R.C. sec. 36. Next, R argues that even
                                                if P satisfies the ‘‘purchase’’ requirement of I.R.C. sec. 36, the
                                                house was not P’s ‘‘principal residence’’ in 2008 as that term

                                                                                                                                     159




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                                                is used in I.R.C. sec. 36. P argues that he intended to occupy
                                                the house as his full-time home as soon as the renovations
                                                were complete. Held: Pursuant to Texas property law, the con-
                                                tract for deed granted P equitable title to the house, and P
                                                therefore has ‘‘purchased’’ the house under I.R.C. sec. 36.
                                                Held, further, I.R.C. sec. 36 requires a prospective analysis,
                                                asking whether a taxpayer will occupy a house as a principal
                                                residence. Held, further, P has established that he intends to
                                                occupy the house as his principal residence as soon as the nec-
                                                essary renovations are complete, and he is therefore entitled
                                                to the first-time homebuyer tax credit for 2008.

                                           Joseph Melville Woods, Jr., pro se.
                                           Christopher M. Menczer, for respondent.
                                        HAINES, Judge: Respondent determined a deficiency in
                                      petitioner’s 2008 Federal income tax of $7,500. The sole issue
                                      for decision is whether petitioner is entitled to the first-time
                                      homebuyer tax credit (FTHBC) for 2008 pursuant to section
                                      36. 1
                                                                          FINDINGS OF FACT

                                         Some of the facts have been stipulated and are so found.
                                      The stipulation of facts, together with the attached exhibits,
                                      is incorporated herein by this reference. At the time peti-
                                      tioner filed his petition, he resided in Texas.
                                         Petitioner works in Rice, Texas, and has been working
                                      there since 1999. Throughout most of that time, petitioner
                                      lived in Dallas, which is approximately 50 miles from Rice.
                                      Because of the distance and the commuting cost, petitioner
                                      began looking for a permanent place to live in Rice. In 2008
                                      petitioner found a house for sale in Rice (the Rice house).
                                      Petitioner also learned through an advertisement that he
                                      might be eligible for the FTHBC. Petitioner confirmed the
                                      possibility of the FTHBC through his own research on the
                                      Internal Revenue Service (IRS) Web site and discussions with
                                      his tax preparer.
                                         On December 18, 2008, petitioner entered into an agree-
                                      ment for deed to purchase (contract for deed) the Rice house
                                      from Capital T Properties (Capital T) for $75,000 and took
                                      possession of the house. Petitioner paid Capital T an initial
                                      downpayment of $2,000 and agreed to pay the balance of the
                                       1 Unless otherwise indicated, all section references are to the Internal Revenue Code, as

                                      amended for the year at issue.




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                                      (159)                          WOODS v. COMMISSIONER                                           161


                                      purchase price together with 7 percent interest over 184
                                      months. Although petitioner took possession of the Rice
                                      house under the contract for deed, legal title does not
                                      transfer from Capital T to petitioner until petitioner has paid
                                      the final monthly installment. Petitioner is required to pay
                                      all property taxes attributable to the Rice house for all
                                      periods after December 18, 2008.
                                         The Rice house required renovations before being ready for
                                      occupancy. Petitioner planned to use the FTHBC to fund the
                                      necessary renovations and could not afford the renovations
                                      without the credit. In January 2009 petitioner claimed the
                                      FTHBC on his 2008 Federal income tax return. In February
                                      2009 petitioner received $7,500 for the FTHBC. 2 As a result,
                                      in March 2009 renovations on the Rice house began.
                                         During the period of renovation, petitioner lived in a rental
                                      house in Dallas until a fire left it uninhabitable. He has
                                      since lived with his daughter in Dallas. On August 20, 2009,
                                      the IRS sent petitioner a notice of deficiency disallowing the
                                      FTHBC. As a result, petitioner suspended renovations of the
                                      Rice house. On November 18, 2009, the Court filed peti-
                                      tioner’s timely petition challenging respondent’s determina-
                                      tion with respect to the FTHBC.

                                                                                  OPINION

                                      I. FTHBC
                                        Section 36(a) provides a refundable tax credit to a first-
                                      time homebuyer of a principal residence in the United
                                      States. In 2008 the amount of the credit was 10 percent of
                                      the purchase price of the residence, with a limitation of
                                      $7,500. Sec. 36(b)(1)(A). Section 36(c)(1) defines a first-time
                                      homebuyer as any individual (and if married, the individual’s
                                      spouse) having no present ownership interest in a principal
                                      residence during the 3-year period ending on the date of the
                                      purchase of the principal residence. Section 36(c)(2) provides
                                      that the term ‘‘principal residence’’ has the same meaning as
                                      used in section 121.
                                        Respondent contends that petitioner fails to qualify for the
                                      FTHBC for two reasons. First, respondent argues that peti-

                                        2 Although referred to as a ‘‘credit’’, for the tax year in question (i.e., 2008) the FTHBC is es-

                                      sentially a governmental, non-interest-bearing loan inasmuch as the recipient taxpayer repays
                                      the credit by an increase in the income tax rate over a 15-year period. Sec. 36(f)(1).




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                                      tioner took possession of the Rice house under contract for
                                      deed and has not acquired legal or equitable title of the prop-
                                      erty. Next, respondent argues that even if petitioner satisfies
                                      the ‘‘purchase’’ requirement of section 36, the Rice house was
                                      not petitioner’s ‘‘principal residence’’ in 2008.
                                      II. Whether for Federal Tax Purposes Petitioner ‘‘Purchased’’
                                          the Rice House
                                         We first address the issue of whether petitioner ‘‘pur-
                                      chased’’ the Rice house in 2008. 3 To decide when a transfer
                                      is complete for tax purposes, we examine all the surrounding
                                      facts and circumstances, no single one of which is controlling.
                                      Baird v. Commissioner, 68 T.C. 115, 124 (1977). The focus of
                                      our inquiry, however, is on when the benefits and burdens of
                                      ownership have shifted. Id. Generally, a transfer is complete
                                      upon the earlier of the transfer of title or the shift of the
                                      benefits and burdens of ownership. Deyoe v. Commissioner,
                                      66 T.C. 904, 910 (1976) (citing Dettmers v. Commissioner, 430
                                      F.2d 1019, 1023 (6th Cir. 1970), affg. Estate of Johnston v.
                                      Commissioner, 51 T.C. 290 (1968)).
                                         In a Federal tax controversy, State law controls the deter-
                                      mination of the taxpayer’s interest in the property, and the
                                      tax consequences are then determined under Federal law.
                                      United States v. Natl. Bank of Commerce, 472 U.S. 713, 722
                                      (1985) (and cases cited and quoted therein). Accordingly, to
                                      determine the property rights transferred to petitioner from
                                      Capital T pursuant to the contract for deed, we must look to
                                      Texas property law.
                                         We reviewed a similar transaction under Texas property
                                      law in Musgrave v. Commissioner, T.C. Memo. 2000–285. In
                                      Musgrave, the taxpayers signed a contract for deed to sell a
                                      property to a church in a bargain sale and claimed a chari-
                                      table contribution deduction for the difference between the
                                      fair market value and the sale price of the property. The tax-
                                      payers agreed to sell and the church agreed to purchase the
                                      property for $152,500, to be paid in monthly installments of
                                      $1,400. Under the contract for deed, the taxpayers retained
                                      legal title to the property, but the church had full rights of
                                         3 Sec. 36(c) provides that the term ‘‘purchase’’ means any acquisition, but only if: (1) The prop-

                                      erty is not acquired from a related person; or (2) the basis of the property in the hands of the
                                      acquiring person is not determined in whole or in part by the basis of the property in the hands
                                      of the seller, or under sec. 1014(a). Neither of these limitations is applicable in this case.




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                                      (159)                          WOODS v. COMMISSIONER                                          163


                                      possession and was required to pay any applicable property
                                      taxes on the property and the taxpayers were required to
                                      convey legal title to the church when the final monthly
                                      installment was paid. The issue before us was whether equi-
                                      table title (i.e., the benefits and burdens of ownership)
                                      passed from the taxpayers to the church in the year the par-
                                      ties entered into the contract for deed.
                                         In finding for the taxpayers, we relied on the holding by
                                      the Supreme Court of Texas in Criswell v. European Cross-
                                      roads Shopping Ctr., Ltd., 792 S.W.2d 945, 949 (Tex. 1990),
                                      which described the substance of a contract for deed as
                                      effecting a ‘‘change of ownership wherein [the] purchaser
                                      becomes [the] equitable owner of the property while all that
                                      remains in [the] seller is bare legal title, more in the nature
                                      of security to guarantee payment than anything else’’. As in
                                      Musgrave v. Commissioner, supra, we see no reason to treat
                                      the contract for deed between petitioner and Capital T dif-
                                      ferently. The contract for deed is a financing arrangement
                                      between Capital T, as the seller, and petitioner, as the buyer.
                                      Although legal title remains with Capital T, equitable title
                                      passed to petitioner in 2008 upon signing of the contract for
                                      deed. Petitioner paid Capital T an initial downpayment of
                                      $2,000 and took possession of the Rice house. Petitioner is
                                      required to pay all property taxes after December 18, 2008.
                                      Finally, nothing in the contract for deed removes petitioner’s
                                      obligation to make his monthly payments to Capital T for
                                      any reason. Therefore, we find that petitioner acquired equi-
                                      table title and therefore ‘‘purchased’’ the Rice house in 2008
                                      for purposes of section 36.
                                      III. Whether the Rice House Was Petitioner’s ‘‘Principal Resi-
                                           dence’’ in 2008
                                         Next, respondent argues that the Rice house does not sat-
                                      isfy the ‘‘principal residence’’ requirement of section 36. Sec-
                                      tion 36(c)(2) provides that the term ‘‘principal residence’’ has
                                      the same meaning for purposes of section 36 as in section
                                      121. Section 121 generally provides that gross income does
                                      not include gain from the sale or exchange of property if,
                                      during the 5-year period ending on the date of sale or
                                      exchange, such property has been owned and used by the
                                      taxpayer as the taxpayer’s ‘‘principal residence’’ for periods




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                                      aggregating 2 years or more. Consequently, section 121
                                      requires a retrospective analysis, asking whether a taxpayer
                                      has occupied a primary residence for 2 of the previous 5
                                      years.
                                        Section 36 is fundamentally different from section 121.
                                      Section 36(a) provides that
                                      In the case of an individual who is a first-time homebuyer of a principal
                                      residence in the United States during a taxable year, there shall be
                                      allowed as a credit against the tax imposed by this subtitle for such tax-
                                      able year an amount equal to 10 percent of the purchase price of the resi-
                                      dence. [Emphasis added.]

                                      Pursuant to section 36, a taxpayer who purchases a home
                                      during a taxable year may be entitled to the FTHBC for that
                                      same year. There is no occupancy requirement to establish a
                                      ‘‘principal residence’’. In contrast to section 121, section 36
                                      requires a prospective analysis. Therefore, for purposes of
                                      section 36, ‘‘principal residence’’ means the primary dwelling
                                      or house that a taxpayer will occupy as his principal resi-
                                      dence.
                                         The appropriateness of this prospective analysis is further
                                      supported by section 36(f), which requires a taxpayer to
                                      recapture the FTHBC if the principal residence for which the
                                      taxpayer claimed the credit is disposed of or ceases to be the
                                      taxpayer’s principal residence within the recapture period. 4
                                      Through section 36(f), Congress created a retrospective anal-
                                      ysis similar to section 121 that protects against taxpayers
                                      who qualify for the FTHBC but fail to maintain the home as
                                      a principal residence pursuant to section 36. This safety net
                                      provision ensures that the fisc is protected where a taxpayer
                                      fails to satisfy the statutory requirements throughout the
                                      recapture period.
                                         Respondent argues that because petitioner never occupied
                                      the Rice house it is not his ‘‘principal residence’’ and he is
                                      not entitled to the FTHBC. Petitioner argues that he is enti-
                                      tled to the FTHBC because he intended to occupy the Rice
                                      house as his principal residence as soon as renovations were
                                      completed. He further argues that he intended to use the
                                      FTHBC to pay for the renovations and that he was forced to

                                        4 Sec. 36(f)(7) defines the term ‘‘recapture period’’ as the 15 taxable years beginning with the

                                      second taxable year following the taxable year in which the purchase of the principal residence
                                      for which the FTHBC was allowed was made.




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                                      suspend work on the Rice house when he learned that the
                                      FTHBC had been disallowed. Petitioner therefore argues that
                                      he was not given the opportunity to establish the Rice house
                                      as his principal residence.
                                         We agree with petitioner. Section 36 requires a prospective
                                      analysis of whether petitioner purchased the Rice house to
                                      occupy it as his principal residence. 5 Petitioner purchased
                                      the Rice house because it was close to his work. He intends
                                      to occupy the home as his principal residence when renova-
                                      tions are completed. We may accept a taxpayer’s unverified
                                      testimony where we find it to be credible and persuasive.
                                      Teymourian v. Commissioner, T.C. Memo. 2005–232. We find
                                      petitioner to be honest and his testimony to be both credible
                                      and persuasive. There is no evidence that petitioner intended
                                      to use the Rice house for any purpose other than as his prin-
                                      cipal residence. Therefore, we hold that petitioner is entitled
                                      to the FTHBC of $7,500 for 2008 pursuant to section 36.
                                         In reaching our holdings herein, we have considered all
                                      arguments made, and, to the extent not mentioned above, we
                                      conclude they are moot, irrelevant, or without merit.
                                         To reflect the foregoing,
                                                                               Decision will be entered for petitioner.

                                                                               f




                                         5 The prospective analysis adopted for a taxpayer that ‘‘purchases’’ and ‘‘renovates’’ a home

                                      is different from the approach mandated in the case of a taxpayer that ‘‘constructs’’ a new home.
                                      Sec. 36(c)(3)(B) provides that a ‘‘residence which is constructed by the taxpayer shall be treated
                                      as purchased by the taxpayer on the date the taxpayer first occupies such residence.’’ Sec.
                                      36(c)(3)(B) requires that the taxpayer occupy a newly constructed home before qualifying for the
                                      FTHBC. We anticipate that the distinction between a taxpayer who ‘‘purchases’’ and ‘‘renovates’’
                                      a home and a taxpayer who ‘‘constructs’’ a new home may give rise to future questions. It is
                                      not this Court’s job to anticipate and decide cases that are not yet before it. Gates v. Commis-
                                      sioner, 135 T.C. 1, 17 (2010).




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