                        T.C. Memo. 1998-211



                      UNITED STATES TAX COURT



    PAUL L. BLANTON AND CYNTHIA D. BLUE-BLANTON, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22687-96.               Filed June 16, 1998.



     Maris Baltins, for petitioners.

     Gregory M. Hahn, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a deficiency in

petitioners' 1992 Federal income tax of $27,898 and an addition

to tax of $6,974 under section 6651(a)(1) for failure to file

timely.

     After concessions, the issues for decision are:
                                 -2-

       1.   Whether petitioners may exclude $125,000 of the gain

from the sale of their principal residence in 1992 under section

121.    We hold that they may not.

       2.   Whether petitioners are liable for the addition to tax

under section 6651(a)(1) for failure to file timely their 1992

income tax return.    We hold that they are.

       Unless otherwise indicated, section references are to the

Internal Revenue Code.    Rule references are to the Tax Court

Rules of Practice and Procedure.

                          FINDINGS OF FACT

A.     Petitioners

       Petitioners lived in Spokane, Washington, when they filed

the petition in this case.

       Petitioner Paul L. Blanton (Mr. Blanton) was born on March

4, 1930, and was 62 years old on October 30, 1992.    In 1989,

petitioners had one son, Terrence, who was 2 years old.

       Mr. Blanton taught at the University of Idaho in Moscow,

Idaho, from 1957 until he retired in 1990.     In 1989, he was the

dean of the College of Arts and Architecture.    He stepped down as

dean in September 1989.    He commuted from Spokane, Washington, to

teach one course at the University from September 1989 to

sometime in 1990.

       In 1989 and 1990, Mrs. Blanton was an associate professor of

interior planning and design in the Department of Architecture at

the University of Idaho in Moscow.
                                  -3-

     Petitioners lived at 605 Moore Street in Moscow until August

1989.     Around January 1, 1989, petitioners rented an office at

106 E. Third in Moscow (E. Third property).     Petitioners

occasionally spent the night at the E. Third property.

B.   Petitioners' Purchase and Sale of the Spokane Property

     1.      Purchase Agreement

     On March 20, 1989, petitioners signed a residential real

estate purchase and sale agreement (purchase agreement) to buy a

residence at 529 W. 22d, Spokane, Washington (W. 22d property)

for $180,000 from Michael W. Hagan (Hagan).     Petitioners paid

Hagan a $5,000 deposit for the W. 22d property.

     The purchase agreement stated that petitioners could take

possession of the W. 22d property at closing, which the agreement

defined as the date on which all documents are recorded and the

sale proceeds are available to the seller.

     The purchase agreement stated that closing would occur by

June 19, 1989.     On June 17, 1989, petitioners paid Hagan a second

$5,000 deposit to extend their purchase agreement for 60 days

because Hagan could not convey legal title (for reasons discussed

below at paragraph B-3) to the W. 22d property by June 19.

     The purchase agreement stated that it was contingent on

Hagan's conveying clear title to the W. 22d property to

petitioners, and that if Hagan could not do so, the agreement

would be void and Hagan would return petitioners' deposit.
                                 -4-

     The purchase agreement stated that Hagan had never lived in

the house and that he made no warranties as to the condition of

the house or whether it was habitable, or in compliance with code

or laws.

     2.     Petitioners' Move to Spokane

     Petitioners rented moving equipment from U-Haul several

times in July 1989 to move some of their furniture and personal

belongings to the W. 22d property.     Petitioners sold their home

in Moscow on August 4, 1989, for $150,000.    Around that time,

petitioners and their son moved from Moscow to the W. 22d

property.    Petitioners took possession of the W. 22d property by

early August 1989.    Petitioners did not have a residence in

Moscow after August 4, 1989.

     The W. 22d property needed a lot of work when petitioners

moved into it.    Petitioners were responsible for maintaining the

W. 22d property after they moved in.    They made various repairs

to the property in July and August 1989.

     3.     Title Dispute Over the Spokane Property

     Shortly after signing the purchase agreement, petitioners

learned that Hagan could not deliver clear title by the closing

date (June 19, 1989) because a third party, Riner E. Deglow

(Deglow), claimed that his chapter 7 bankruptcy estate possessed

an interest in the W. 22d property.

     On November 30, 1989, petitioners, Hagan, and Deglow's

chapter 7 trustee in the bankruptcy proceeding, Joseph A.
                                 -5-

Esposito (Esposito), filed with the Bankruptcy Court for the

Eastern District of Washington a motion to authorize the trustee

to sell the W. 22d property (motion to sell).    On December 15,

1989, Deglow objected to the motion to sell.

     On December 22, 1989, the bankruptcy court decided that the

W. 22d property was the property of Deglow's bankruptcy estate

and ordered that the trustee and Hagan sell the residence to

petitioners for $180,000.    Petitioners spent $10,000 in legal

fees to resolve the title dispute over the W. 22d property.

     4.   Passage of Title to the W. 22d property

     On January 25 and 26, 1990, Hagan, and Esposito as trustee

for Deglow's bankruptcy estate, conveyed title to the W. 22d

property to petitioners by quitclaim deed.    Petitioners financed

$144,000 of the purchase price through Mountain West Savings Bank

(Mountain West).    Mountain West disbursed the $144,000 loan on

January 30, 1990.

     On January 31, 1990, escrow closed on the W. 22d property.

Petitioners obtained legal title to the W. 22d property on

January 31, 1990.    At settlement, Hagan applied petitioners'

$10,000 deposit to the purchase price.

     Petitioners made the first mortgage payment on the W. 22d

property on March 1, 1990.    Petitioners did not pay rent or other

compensation to Hagan to live in the W. 22d property from when

the purchase agreement was executed on March 20, 1989, until

escrow closed on January 31, 1990.
                                  -6-

     5.      Taxes on the W. 22d Property

     Hagan paid the delinquent county taxes on the W. 22d

property for 1987, 1988, and 1989.      Petitioners paid the county

taxes on the W. 22d property for January 1990 at settlement.

     6.      Petitioners' Improvements to and Sale of the W. 22d
             Property

     In 1989, Mr. Blanton spent a substantial amount of time

creating architectural drawings for the renovation of the W. 22d

property.     Petitioners did not begin to make substantial

renovations until 1990.     Petitioners kept detailed records of

their improvements to the W. 22d property in 1990, 1991, and

1992.     Petitioners spent $42,225.46 in 1990, $63,838.02 in 1991,

and $9,730.49 in 1992 to renovate the W. 22d property.

Petitioners included the amounts they paid in 1990, 1991, and

1992 to renovate the W. 22d property in their cost basis in the

Spokane property.     Petitioners did not include any amounts they

paid in 1989 in their cost basis in the Spokane property.

     Petitioners lived in the W. 22d property until they sold it

on October 30, 1992, for $485,000.      They incurred selling

expenses of $38,825.     Their cost basis in the W. 22d property was

$302,302.     They realized gain of $143,873 on its sale, calculated

as follows:

     Sale   price of W. 22d property             $485,000
     Less   adjusted cost of W. 22d property      302,302
     Less   expenses of sale                       38,825
     Gain   on sale of W. 22d property            143,873
                                  -7-

     On December 15, 1992, petitioners bought a new residence at

3620 Jefferson Drive, Spokane, Washington (Jefferson property),

for $361,678.

C.   Petitioners' Credit Applications

     On June 2, 1989, petitioners submitted a residential loan

application.    On the line marked "present address" petitioners

typed: "106 E. 3rd Suite 1".    On the line for "No. Years" at

their present address they typed "6 mth".

     On February 13, 1990, petitioners submitted a loan

application to Rainier Bank.    On it, petitioners listed the W.

22d property as their home address, and wrote "1990" in the box

marked "YRS & MOS THERE".

     Petitioners submitted a credit application dated March 15,

1991, to Security Pacific Bank.    On it, they listed as their

residence address the W. 22d property, and wrote "1 year" in the

box marked "YRS & MOS THERE".

D.   Petitioners' 1992 Income Tax Return

     Friends of petitioners recommended an accountant in Spokane,

Joseph Schmitz (Schmitz), to them.      Schmitz told petitioners that

he had obtained extensions to file their 1992 return.

Petitioners' 1992 return was due October 15, 1993.

     Schmitz prepared petitioners' 1992 income tax return.

Petitioners filed it on July 25, 1994.     Schmitz attached Form

2119, Sale of Your Home, to petitioners' 1992 return.     On the

Form 2119, Schmitz checked a box to indicate that petitioners had
                                   -8-

not owned and used the W. 22d property as their principal

residence for at least 3 years.

                                 OPINION

A.     Whether Petitioners Had Owned and Used the W. 22d Property
       for 3 Years

       The issue for decision is whether $125,000 of the gain

petitioners realized in 1992 from the sale of their W. 22d

property is excludable under section 121.     Generally, a taxpayer

must recognize gain on the sale of a personal residence.

However, during the year in issue, taxpayers 55 and older could

exclude from gross income up to $125,000 of gain from the sale of

property which they had owned and used as their principal

residence for 3 or more of the 5 years immediately before the

sale.    Sec. 121(a) and (b).1   The term "principal residence" in

section 121 has the same meaning as in section 1034 and the

regulations thereunder.    Sec. 1.121-3(a), Income Tax Regs.

       The parties dispute whether petitioners had owned and used

the W. 22d property for 3 years when they sold it in 1992.

1
     Sec. 121(a) provides as follows:

            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--

                 (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.
                                  -9-

Petitioners bear the burden of proving that they meet the

requirements of section 121.   Rule 142(a).

B.   Use of the W. 22d property

     Generally, whether property is used as a principal residence

depends on the facts and circumstances.   Sec. 1.1034-1(c)(3)(i),

Income Tax Regs.   Petitioners submitted loan applications in 1990

and 1991 in which they stated how long they had lived at the W.

22d property.   The information on both forms is ambiguous, but it

tends to suggest they first occupied it in 1990.    Despite this,

there is more persuasive evidence that petitioners moved into the

W. 22d property by early August 1989 and lived there until they

sold it on October 30, 1992.   Therefore, we find that petitioners

used the W. 22d property for more than 3 years.    However, as

discussed next, to qualify for the exclusion under section 121,

petitioners must also have owned the W. 22d property for more

than 3 years.

C.   Ownership of the W. 22d Property

     When a sale is complete for Federal tax purposes depends on

all the facts and circumstances; no single factor controls.      Derr

v. Commissioner, 77 T.C. 708, 724 (1981); Baird v. Commissioner,

68 T.C. 115, 124 (1977).   A sale of real property is generally

complete upon the earlier of the transfer of legal title or the

assumption of the benefits and burdens of ownership by the buyer.

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

affg. 51 T.C. 290 (1968); Derr v. Commissioner, supra; Baird v.

Commissioner, supra.
                                 -10-

        1.   When the Benefits and Burdens of Ownership Passed
             to the Blantons

     Petitioners argue that they acquired the benefits and

burdens of ownership of the W. 22d property around August 1989.

To decide their claim, we consider whether they:    (a) Had the

right to possess the property and to enjoy the use, rents, and

profits thereof; (b) had the duty to maintain the property; (c)

were responsible for insuring the property; (d) bore the risk of

loss of the property; (e) were obligated to pay taxes,

assessments, and charges against the property; (f) had the right

to improve the property without the seller's consent; and (g) had

the right to obtain legal title at any time by paying the balance

of the purchase price.     Derr v. Commissioner, supra at 724-725;

Ryan v. Commissioner, T.C. Memo. 1995-579.

     The purchase agreement did not state that it shifted any of

the benefits and burdens of ownership to petitioners.

Nevertheless, petitioners argue that they had the right to

possess the W. 22d property, they bore the burden of maintaining

the property, and they had the right to obtain legal title at

anytime by paying the balance of the purchase price.

             a.   Whether Petitioners Had a Right To Possess the
                  Residence and Enjoy the Use, Rents, and Profits
                  Thereof

     Petitioners moved into the W. 22d property by August 4,

1989.    Petitioners apparently had the right to possess and use

the W. 22d property before closing because Hagan gave them
                               -11-

permission to do so.2   However, petitioners did not claim that

they had the right to rent the W. 22d property to anyone else.

          b.    Whether Petitioners Had a Duty To Maintain the
                Residence

     Mr. Blanton testified that petitioners understood that they

were responsible for the W. 22d property once they moved into it

in July 1989.   In the purchase agreement, Hagan made no

warranties as to the condition of the house or whether it was

habitable or in compliance with code or laws.    We infer from this

that Hagan did not have a duty to maintain the residence after

petitioners signed the purchase agreement, and that petitioners

had the duty to maintain the residence after they took possession

of it.

          c.    Whether Petitioners Were Responsible for Insuring
                the Property

     The record contains no evidence that petitioners provided or

were responsible for providing insurance on the W. 22d property

before escrow closed on January 31, 1990.   Petitioners do not

contend that they were responsible for insuring the W. 22d

property before that date.

          d.    Whether Petitioners Bore the Risk of Loss

     Petitioners do not contend that they bore the risk of loss

for the W. 22d property before title passed.    Under Washington

State law, the right to possess does not necessarily include the



     2
       We note, however, that it is not clear whether Hagan,
whose own title was clouded by Deglow's ownership claim, had
authority to vest petitioners with possession.
                                -12-

risk of loss.    Voorde Poorte v. Evans, 832 P.2d 105 (Wash. Ct.

App. 1992) (contention that the risk of loss follows possession

has a certain equitable appeal but is against the weight of

authority).

            e.   Whether Petitioners Were Obligated To Pay Taxes,
                 Assessments, and Charges

     Hagan, not petitioners, paid the property taxes on the W.

22d property before settlement.    Petitioners do not contend that

they were obligated to pay taxes, assessments, and charges for

the W. 22d property.

            f.   Whether Petitioners Had the Right To Improve the
                 Property Without the Seller's Consent

        The agreement is silent as to whether petitioners had the

right to improve the W. 22d property without Hagan's consent. Mr.

Blanton testified that petitioners had the right to and did

improve the property in 1989.    We accept Mr. Blanton's testimony

on this point.    However, petitioners spent far less to improve

the house in 1989 than in 1990 and later.    It appears that they

made urgent repairs needed to inhabit the house but delayed

anything more until 1990.    On this record, it is unclear whether

petitioners had an unlimited right to improve the W. 22d property

in 1989.

            g.   Whether Petitioners Had the Right To Obtain Legal
                 Title Any Time by Paying the Balance of the
                 Purchase Price

     Petitioners did not have the right to obtain legal title to

the Spokane property at any time before settlement on January 31,

1990.    Hagan could not pass clear title until the Bankruptcy
                                -13-

Court resolved Deglow's claim to title.      Since this occurred in

late December 1989, title could not pass before then.

            h.   Conclusion

       In summary, petitioners had:    (a) The right to possess and

use the W. 22d property, but not the right to rent it to others;

(b) the duty to maintain the property; and (c) a limited right to

improve the property without Hagan's consent.     Petitioners did

not:    (a) Bear the risk of loss of the property; (b) have the

obligation to pay taxes on the property; (c) have the

responsibility to insure the property against fire or other

hazards; or (d) have the right to obtain legal title at any time

by paying the balance of the purchase price.     We conclude that

petitioners did not have enough of the benefits and burdens of

ownership of the W. 22d property to be treated as owning it for

purposes of section 121 before title passed.

       2.   Title Passage to the Blantons

       Title to the W. 22d property passed to the Blantons on

January 31, 1990, less than 3 years before they sold it on

October 30, 1992.    Passage of title is perhaps the most important

indicator of the date of sale of property.      Commissioner v.

Baertschi, 412 F.2d 494, 498 (6th Cir. 1969), revg. and remanding

49 T.C. 289 (1967).

       Petitioners contend that the date of the passage of title is

less important here than in the usual case because passage of

title was delayed by a title dispute.     In light of our conclusion

that petitioners did not have the benefits and burdens of
                               -14-

ownership before title passed, they would not prevail here even

if we gave little weight to the date of title passage.

     Petitioners rely on Merrill v. Commissioner, 40 T.C. 66, 74

(1963), affd. per curiam 336 F.2d 771 (9th Cir. 1964), for the

proposition that intent to transfer title is particularly

important if transfer of title is delayed by circumstances beyond

the control of the buyer and seller.   In Merrill v. Commissioner,

supra, we held that a sale was completed even though title to the

property could not pass until several months later, a title

insurance policy had not been issued, and the balance of the

purchase price was to be paid at a future date.     Id. at 74-77.

     Petitioners' reliance on Merrill is misplaced.    We stated in

Merrill that the intent of the parties as to when the benefits

and burdens of ownership of the property are to be transferred

will control where passage of title is delayed to secure payment

of the purchase price or for an escrow arrangement.     Id. at 74.

The buyer in Merrill had assumed almost all the benefits and

burdens of ownership.   However, we are not convinced that the

parties to the transaction at issue intended the benefits and

burdens to pass to petitioners before title passed, and as

discussed above, petitioners did not have the benefits and

burdens of ownership before title passed to them.



     3.   Petitioners' 1992 Tax Return

     Petitioners checked the box on their 1992 income tax return

indicating that they had not owned and used the Spokane property
                                 -15-

for 3 years.   Petitioners contend that Schmitz erroneously

checked that box.   Petitioners did not call Schmitz to explain

why he checked the box indicating that petitioners had not owned

and used the W. 22d property for 3 years.     Petitioners did not

explain why they did not immediately correct the return when they

noticed what Schmitz had done.    Although this is not compelling

evidence in isolation, it adds some weight to the other evidence

that petitioners had not owned and used the Spokane property for

3 years when they sold it in 1992.      See Bank of the West v.

Commissioner, 93 T.C. 462, 468 (1989); Kenyatta Corp. v.

Commissioner, 86 T.C. 171, 182 (1986), affd. per order 812 F.2d

577 (9th Cir. 1987); McShain v. Commissioner, 71 T.C. 998, 1010

(1979).

     4.   Conclusion

     Income tax provisions which exempt taxpayers under given

circumstances from paying taxes or permit them to postpone taxes

are strictly construed.   Commissioner v. Baertschi, supra at 498-

499 (the taxpayer/sellers were not entitled to section 1034

deferral).   We conclude that petitioners did not meet the

statutory requirement that they own and use the Spokane property

for 3 years.

     A taxpayer seeking to exclude gain on the sale of property

must own and use that property as his or her principal residence

for 3 years or more.   Sec. 121(a)(2).    Petitioners used the W.

22d property for more than 3 years.     However, they did not bear

enough of the benefits and burdens of ownership before title
                                 -16-

passed on January 31, 1990, for us to find that their ownership

preceded that date.   Thus, petitioners do not qualify under

section 121(a)(2).

B.   Whether Petitioners Are Liable for the Addition to Tax Under
     Section 6651(a)(1) for Failure To File Timely

     Section 6651(a)(1) imposes an addition to tax of up to 25

percent for failure to file timely Federal income tax returns

unless the taxpayer shows that such failure was due to reasonable

cause and not willful neglect.    United States v. Boyle, 469 U.S.

241, 245 (1985).   To prove "reasonable cause", a taxpayer must

show that he exercised ordinary business care and prudence and

was nevertheless unable to file the return within the prescribed

time.   Crocker v. Commissioner, 92 T.C. 899, 913 (1989); sec.

301.6651-1(c)(1), Proced. & Admin. Regs.

     Petitioners' 1992 return was due October 15, 1993.

Petitioners filed their 1992 return on July 25, 1994.

     Petitioners argue that they had reasonable cause to file

their 1992 return late because they thought that Schmitz had

requested an extension of time to file.    A failure to file is due

to reasonable cause if the taxpayers exercised ordinary business

care, but could not, nevertheless, file their return by the

deadline prescribed by law.   United States v. Boyle, supra at

246; Bank of the West v. Commissioner, supra at 471.

     Mr. Blanton testified that Schmitz told him that requests

for extensions had been filed.    Two extensions were filed

regarding petitioners' 1992 return which extended the due date to
                                 -17-

October 15, 1993.   Mr. Blanton did not testify that Schmitz told

them they had an additional extension of time to file their 1992

return beyond the October 15, 1993, due date, call Schmitz to

testify, or provide any correspondence from Schmitz corroborating

his testimony.

     Petitioners did not have reasonable cause for filing their

1992 return more than 9 months after their extensions expired.

Thus, they are liable for the addition to tax under section

6651(a)(1).

     To reflect the foregoing,


                                             Decision will be entered

                                        for respondent.
