                    T.C. Summary Opinion 2010-39



                        UNITED STATES TAX COURT



             CARL D. AND CAROL NASO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18830-08S.               Filed March 31, 2010.



     Carl D. and Carol Naso, pro sese.

     Alicia E. Elliott, for respondent.



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

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

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

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



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

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

determined a $4,570 deficiency in petitioners’ 2005 Federal

income tax.    The only issue2 is whether petitioners are entitled

to a State and local sales tax deduction in connection with the

purchase of a new home in 2005.

                             Background

     Some of the facts have been stipulated.    The stipulation of

facts and the attached exhibits are incorporated herein by this

reference.    At the time the petition was filed, petitioners

resided in Arizona.

     On November 17, 2004, petitioners entered into a purchase

contract for new home (purchase contract) with Deerefield Homes

to build a home on unimproved vacant land for a purchase price of

$524,900.    On August 4, 2005, petitioners and Deerefield Homes

attached an addendum to the purchase contract which provided that

Deerefield Homes agreed to credit petitioners $9,117 for the

following items:    $8,000 for lights and appliances; $742 for

travertine scratch removal; $175 for garage cabinets; and $200

for laundry room sink and tape.    In the addendum petitioners also

agreed to $26,915.90 in extra expenses as follows:    $3,500 for


     2
       Although the notice of deficiency indicates that
respondent denied petitioners’ claimed deductions for State sales
tax and personal property tax, in the petition and at trial
petitioners have failed to dispute respondent’s denial of the
claimed personal property tax deduction. Accordingly, we treat
petitioners’ failure to contest the denial of the claimed
personal property tax deduction as a concession.
                               - 3 -

extra dirt; $500 for a garage sink; $2,000 for cabinets; $1,200

for pavers; $1,200 for stone; $5,551 for travertine; $344 for

listel; $6,500 for rear wall and stairs; $1,500 for garage floor;

$400 for paint; $1,774 for travertine seal; and $2,446.90 for a

10-percent tax.   Thus, the final contract sale price, as

reflected on the U.S. Department of Housing and Urban Development

settlement statement, increased to $542,698.90.

     In April 2005 the combined rate of the transaction privilege

tax for retail sales or prime contracting for the State of

Arizona, Maricopa County, and the Town of Fountain Hills was 8.9

percent.   Furthermore, prime contractors are allowed a flat 35-

percent deduction from gross receipts in computing the

transaction privilege tax owed to the State of Arizona, Maricopa

County, and the Town of Fountain Hills.

     Using an algebraic formula, petitioners’ return preparer

computed the State and local sales tax deduction regarding the

purchase of the new home as $23,742.   By letter dated January 25,

2009, “Deerefield Homes Limited” confirmed to petitioners that on

August 31, 2005, it had remitted a transaction privilege tax of

$20,606.51 to the Arizona Department of Revenue.

     On Schedule A, Itemized Deductions, of their 2005 Federal

income tax return, petitioners claimed a $27,097 deduction for

taxes paid.   Of the $27,097 of taxes that they allege to have

paid, petitioners claimed that $25,012 was attributable to
                               - 4 -

general sales taxes, $1,854 was attributable to real estate

taxes, and $231 was attributable to personal property taxes.    A

portion, $1,270, of the $25,012 of general sales taxes claimed as

a deduction was calculated using the 2005 sales tax tables.     The

remaining $23,742 of claimed sales taxes is in dispute and

represents the amount petitioners claim as State and local sales

taxes paid in connection with the purchase of their new home.

     In the notice of deficiency respondent disallowed $23,973 of

petitioners’ claimed $27,097 taxes paid deduction.    Respondent’s

determination was a result of the disallowance of the $23,742 of

State and local sales taxes and $231 of personal property taxes.3

     The parties stipulate that for tax year 2005 petitioners

paid State income taxes of $2,983.     However, petitioners claimed

the general sales tax deduction in lieu of the State income tax

deduction on their 2005 Federal income tax return.    The parties

agree that if respondent prevails and the general sales tax

deduction is not allowed, then petitioners are entitled to a

$2,983 deduction for State income taxes.

                            Discussion

     Deductions are strictly a matter of legislative grace, and

the taxpayer bears the burden of proving entitlement to the

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


     3
       Although the parties stipulate that $231 of personal
property taxes are in dispute, petitioners are deemed to have
conceded this issue. See supra note 2.
                               - 5 -

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

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

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

taxpayer has introduced credible evidence relevant to

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

have neither claimed nor shown eligibility for a shift in the

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

petitioners.

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

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

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

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

income taxes.4   “The term ‘general sales tax’ means a tax imposed

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

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

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

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

tangible personal property, or upon the consumers of such

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

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

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



     4
       The election to deduct State and local sales taxes in lieu
of State and local income taxes is applicable for taxable years
beginning after Dec. 31, 2003, and before Jan. 1, 2010. Sec.
164(b)(5)(I).
                               - 6 -

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

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

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

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

Regs.

     In support of petitioners’ claimed sales tax deduction,

petitioner Carl Naso (Mr. Naso) alleges that Deerefield Homes

completed an Arizona Form 5000, Arizona Department of Revenue–-

Transaction Privilege Tax Exemption Certificate, thereby allowing

Deerefield Homes to purchase construction materials without

paying sales tax at the time the materials were purchased.    Mr.

Naso testified:

          Our position is since the builder was allowed to
     postpone the determination of the amount of tax as well
     as the obligation to pay the tax until we purchased the
     property from him, * * *, and since the builder never
     ventured any of his own capital to pay the tax but,
     rather, used the money that we provided him as part of
     the purchase agreement, we should be deemed the retail
     buyer of the property and, as such, it is our position
     that the builder merely remitted the tax to the State
     on our behalf and, therefore, the tax became a valid
     deduction against our 2005 personal income.

Respondent asserts, however, that the transaction privilege tax

in issue does not qualify as a general sales tax under section

164 because contractor’s sales are not sales at retail in the

State of Arizona.5   We agree with respondent.


     5
       Respondent also asserts that any taxes paid for the
purchase of petitioners’ new home were imposed upon the
                                                   (continued...)
                               - 7 -

     The State of Arizona, Maricopa County, and the Town of

Fountain Hills impose a tax on the privilege of doing business

within their respective jurisdictions.   These so-called

transaction privilege taxes are based on the volume of business

transacted, which is generally measured by gross proceeds of

sales or gross income, as the case may be.   See Ariz. Rev. Stat.

Ann. secs. 42-5061, 42-5075 (2006) (classifying transactions as,

inter alia, either retail or prime contracting, respectively).

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

Maricopa County, and the Town of Fountain Hills taxing

provisions, the sale must consist of the transfer of tangible

personal property at retail.   See id. secs. 42-5001(12), 42-

5061(A); see also Fountain Hills Tax Code sec. 8A-100 (2008).     In

Duhame v. State Tax Commn., 179 P.2d 252, 259 (Ariz. 1947), the

Arizona Supreme Court concluded that a sale of a new home, such

as the transaction between Deerefield Homes and petitioners, is

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

not a retail sale.   In this respect, the Arizona Supreme Court

stated:

          When a contractor fabricates his materials for the
     contractee, and the completed structure is erected on
     the owner’s land, it is as much real property as the
     land itself. The constituent elements of tangible
     personal property have been destroyed by their


     5
      (...continued)
contractor (Deerefield Homes) rather than petitioners and that
the contractor is solely liable for the tax payment.
                                 - 8 -

      incorporation into the completed structure. And such a
      contractor, therefore, is not making a sale of tangible
      personalty to his contractee.

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

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

considered a retailer.”   Id.    Consequently, Deerefield Homes did

not engage in selling tangible personal property at retail when

it sold a new home to petitioners.

      Under the State and local taxing authorities, contractor’s

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

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

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

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

the holding in Karpinski under similar facts).6    Accordingly, we

sustain respondent’s determination and hold that petitioners are




      6
       Other instances in which this Court has held that a home
buyer may not deduct retail sales taxes paid by the contractor on
the purchase of materials that went into the construction of the
home include: Wise v. Commissioner, 78 T.C. 270 (1982), Petty v.
Commissioner, 77 T.C. 482 (1981), Armentrout v. Commissioner, 43
T.C. 16 (1964), and Porter v. Commissioner, T.C. Memo. 1978-391.
In each of these cases the tax was imposed in respect to sales of
tangible personal property at retail that preceded the sales
transaction involving the home buyer. And in each case the home
buyer was disallowed the deduction on the grounds that under
State law the contractor was the “ultimate consumer” of the
materials that went into construction of the home; i.e., there
was no retail sale of the materials when the home buyer paid the
contractor.
                              - 9 -

not entitled to the $23,742 deduction they claimed as State and

local sales taxes paid for the purchase of a new home in 2005.7

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

agreement to allow a State income tax deduction,


                                           Decision will be entered

                                      under Rule 155.




     7
       On account of our holding, we need not address
respondent’s other contention. See supra note 5.
