                       T.C. Memo. 1996-132



                     UNITED STATES TAX COURT



       MARTIN FELDMAN AND LYNNE Z. GOLD-BIKIN, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27086-93.               Filed March 18, 1996.



     Barry H. Frank, for petitioners.

     Joellyn R. Cattell, for respondent.


                       MEMORANDUM OPINION

     HAMBLEN, Chief Judge:    Respondent determined a deficiency in

petitioners' Federal income tax for the taxable year 1988 in the

amount of $31,700 and an addition to tax under section 6653(a)(1)

in the amount of $1,585.    Unless otherwise indicated, section

references are to the Internal Revenue Code in effect for the
                                   - 2 -

1988 taxable year, and Rule references are to the Tax Court Rules

of Practice and Procedure.

       References to petitioner husband are to Martin Feldman, and

references to petitioner wife are to Lynne Z. Gold-Bikin.       After

concessions,1 the sole issue for decision is whether petitioners

are entitled to defer any of the gain realized by petitioner

husband on the sale of his former residence.

                                Background

       This case was submitted fully stipulated pursuant to Rule

122.       The stipulation of facts and the attached exhibits are

incorporated by this reference, and the facts contained therein

are found accordingly.       Petitioners resided in King of Prussia,

Pennsylvania, at the time the petition was filed in this case.

       Petitioners timely filed a joint Federal income tax return

for the year 1988 with the Philadelphia service center using the

cash receipts and disbursements method of accounting.

       Petitioners were married on June 28, 1987.     At the time of

their marriage, petitioner husband owned a house in Wyndmoor,

Pennsylvania (the Wyndmoor property), and petitioner wife owned a

house in King of Prussia, Pennsylvania (the King of Prussia

property).       On August 16, 1988, petitioner husband sold the

Wyndmoor property for an adjusted sale price of $340,798.70

(contract sale price of $365,500 less $24,702.30 for settlement

       1
      Petitioners concede that the negligence penalty is
applicable to any deficiency determined in this case.
                               - 3 -

charges to seller).   Petitioner husband's adjusted basis in the

Wyndmoor property was $234,289 (rounded).   Accordingly,

petitioner husband realized $106,509 gain on the sale of the

Wyndmoor property (the adjusted sale price of $340,798 less the

adjusted basis of $234,289)

     On February 21, 1989, petitioner wife transferred the

ownership of her King of Prussia property to herself and her

husband for consideration of $1.   The outstanding principal

balance on the mortgage on the King of Prussia property on

February 21, 1989, was $140,806.   Thereafter, petitioners started

a major renovation project on the King of Prussia property.

     On July 24, 1989, petitioners executed an agreement (the

private agreement) between themselves that provided, in pertinent

part, as follows:

     1. Wife owns a property at 307 Hughes Road, King of
     Prussia, Pennsylvania, on which there is a $155,000[2]
     mortgage due and owing to GMAC.

     2. Wife intends to transfer ownership of one-half of
     the said property to Husband in exchange for Husband's
     assumption of one-half of the mortgage balance on which
     he agrees he will be jointly and severally liable.

     3. Husband intends to sell his residency in Wyndmoor
     and the parties agree that all of the proceeds of the
     said sale will be utilized to do major improvements to
     what will be the marital residence at 307 Hughes Road.




     2
      The parties have stipulated that the correct outstanding
balance of the mortgage on the King of Prussia property was
$140,806.
                                - 4 -

Neither the mortgage nor the promissory note held by the lending

institution was changed to reflect petitioner husband's joint

liability for the mortgage on the King of Prussia property.

     Renovations and restorations were made to the King of

Prussia property in the total amount of $229,472 within the 2-

year replacement period permitted by section 1034(a) before and

after the date of the sale of the Wyndmoor property.    The

renovation and restoration payments for the King of Prussia

property qualify as payments made for the partial reconstruction

of a replacement residence.    All renovation and restoration

payments for the King of Prussia property were paid from a joint

checking account in the names of petitioners, or from a checking

account in the name of petitioner wife.    A substantial portion of

the renovations and restorations of the King of Prussia property

was made before petitioners had executed the written agreement

between themselves on July 24, 1989.

                              Discussion

     Under the general rule of section 1001(c),3 taxpayers are

ordinarily required to recognize their entire gain on the sale of

property.   Secs. 61, 1001.   However, section 1034, captioned

     3
      SEC. 1001.   DETERMINATION OF AMOUNT OF AND RECOGNITION OF
                   GAIN OR LOSS.

          (c) Recognition of Gain or Loss.--Except as
     otherwise provided in this subtitle [subtitle A,
     relating to income taxes], the entire amount of the
     gain or loss, determined under this section, on the
     sale or exchange of property shall be recognized.
                                 - 5 -

"ROLLOVER OF GAIN ON SALE OF PRINCIPAL RESIDENCE", requires

taxpayers, in certain circumstances, to defer recognition of gain

realized on the sale of their principal residence.     Under section

1034, if a taxpayer sells a principal residence (old residence)

and, within a period beginning 2 years before the date of such

sale and ending 2 years after such sale, purchases a new

principal residence (new residence), then the taxpayer recognizes

gain realized on the sale only to the extent that the adjusted

sale price4 of the old residence exceeds the cost of purchasing

the new residence.    Sec. 1034(a) and (b).   Thus, by applying all

of the sale proceeds (net of selling costs) from the old

residence towards the purchase of a new residence, a taxpayer

defers recognition on all of the gain realized on the sale of the

taxpayer’s old residence.    Sec. 1.1034-1(a), Income Tax Regs.      If

less than all of the sale proceeds are so applied, the taxpayer

recognizes gain to the extent of the difference between the net

proceeds and the cost of the new residence, limited, however, to

the gain realized on the sale.     Id.   The provisions of section

1034 are mandatory.    Sec. 1.1034-1, Income Tax Regs.

     In order to qualify for the rollover treatment provided for

in section 1034, a taxpayer must purchase a new principal

residence within the replacement period.      Whether a residence is


     4
      The adjusted sale price is the amount realized (selling
price minus selling expenses) reduced by expenses of fixing up
the residence preparatory to sale. Sec. 1034(b).
                                - 6 -

used by a taxpayer as his principal residence depends on all the

facts and circumstances of each case.     Roth v. Commissioner, T.C.

Memo. 1977-17; sec. 1.1034-1(c)(3)(i), Income Tax Regs.     The

taxpayer's cost of purchasing the new residence means the total

of all amounts which are attributable to the acquisition,

construction, reconstruction, and improvements constituting

capital expenditures made during the replacement period.        Shaw v.

Commissioner, 69 T.C. 1034 (1978); sec. 1.1034-1(b)(7), (9),

Income Tax Regs.    Section 1.1034-1(c)(4)(i), Income Tax Regs.,

further provides:

     The taxpayer's cost of purchasing the new residence
     includes not only cash but also any indebtedness to
     which the property purchased is subject at the time of
     purchase whether or not assumed by the taxpayer
     (including purchase-money mortgages, etc.) and the face
     amount of any liabilities of the taxpayer which are
     part of the consideration for the purchase.
     Commissions and other purchasing expenses paid or
     incurred by the taxpayer on the purchase of the new
     residence are to be included in determining such cost.

     The parties do not dispute the existence of the sale of

petitioner husband’s old residence, the date of the sale, the

selling price, the gain realized on the sale, or the adjusted

sale price of the old residence.    The parties also agree that

$229,472 was expended for construction and reconstruction on the

King of Prussia residence, and that the King of Prussia property

was subject to a $140,806 mortgage.     The parties disagree,

however, on the allocation of these amounts between petitioner

husband and petitioner wife.
                               - 7 -

     Respondent determined that petitioner husband's cost of

purchasing his interest in the King of Prussia residence was

$185,139, comprising one-half of the total amount expended for

construction and reconstruction ($229,472) and one-half of the

indebtedness ($140,806) that the King of Prussia property was

subject to at the time of purchase.    This determination would

deny petitioners the nonrecognition treatment afforded by section

1034.   Respondent's determination is presumed correct, and

petitioners bear the burden of proving otherwise.     Welch v.

Helvering, 290 U.S. 111 (1933).

     Petitioner husband contends that he is entitled to receive

credit for section 1034 purposes for all of the amounts expended

for construction and reconstruction of the King of Prussia

property and that he is entitled to include the entire

outstanding balance of the mortgage in his cost of purchasing the

King of Prussia property.   Under his computation, petitioner

husband now seeks to defer his gain realized on the sale of the

Wyndmoor property in its entirety.

     Maintaining continuity of title is a key to receiving

nonrecognition treatment under section 1034.    See Starker v.

United States, 602 F.2d 1341, 1351 (9th Cir. 1979).    The general

rule requires that on the disposition of a taxpayer's old

residence, the ownership of the new residence must be in that

taxpayer's name in order to obtain nonrecognition of gain under

section 1034.   Marcello v. Commissioner, 380 F.2d 499, 502 (5th
                               - 8 -

Cir. 1967), affg. T.C. Memo. 1964-299 (gain recognized where

title to new residence was placed in the name of the taxpayer's

mother); Snowa v. Commissioner, T.C. Memo. 1995-336 (gain

recognized where divorced taxpayer purchased new residence where

title to new residence was jointly placed in the names of

taxpayer and her new spouse and the taxpayer’s cost of purchasing

her interest in the new residence exceeded the adjusted sale

price for her interest in old residence); May v. Commissioner,

T.C. Memo. 1974-54 (gain recognized where title to new residence

was placed in the name of the taxpayer's daughter).   Generally,

if there is a shift in title from the taxpayer to someone other

than the taxpayer, then the nonrecognition provided for in

section 1034 is denied.   Marcello v. Commissioner, supra.

     Accordingly, unintended recognition of gain may arise when a

married taxpayer’s contribution to the purchase price of a new

residence is less than his or her share of the sale price

received from the old residence, and title to the new residence

is held in a different way than it was held in the old residence.

Cf. Murphy v. Commissioner, 103 T.C. 111 (1994).   Recognizing

that difficulties may arise when married taxpayers buy and sell

property, section 1034(g) provides a limited exception to the

general ownership and purchase requirements as between spouses.

Where both the old residence and the new residence are used by

the taxpayer and the taxpayer's same spouse as their principal

residence, they can file a special consent election under section
                                - 9 -

1034(g) to be treated as a single taxpayer for purposes of

determining the old residence's adjusted sale price, the new

residence's cost, the gain rolled over, and the new residence's

basis.   Sec. 1034(g); sec. 1.1034-1(f), Income Tax Regs.    A

section 1034(g) special election cannot be made in this case

because both spouses did not reside in the husband’s former

residence.

     In February 1989, petitioner wife transferred title in the

King of Prussia property, which was owned solely by her, to

herself and her husband, for consideration of $1.   The deed that

transferred ownership in the King of Prussia property did not

specify whether the tenancy that was created was a joint tenancy

or a tenancy by the entirety.   Under Pennsylvania law, when

married persons take title to a piece of property in the name of

husband and wife, a presumption arises that such title vested in

them by entirety, and because there is nothing in this record

contradicting that presumption, we find that such conveyance

created a tenancy by the entirety in the new residence.     See

Commissioner v. Estate of Bosch, 387 U.S. 456 (1967); In re

Meyer’s Estate (No. 1), 232 Pa. 89, 81 A. 145 (1911).     The

transfer of petitioner wife's interest in her residence to

petitioner husband constituted a nontaxable gift under section

1041.5   Pursuant to section 1041, the basis of the transferee

     5
      SEC. 1041.   TRANSFERS OF PROPERTY BETWEEN SPOUSES OR
                                                    (continued...)
                                - 10 -

spouse in the property shall be the adjusted basis of the

transferor in the portion transferred.

     Petitioner husband contends that because the King of Prussia

property is held in a tenancy by the entirety, for purpose of

section 1034, he is treated as an owner of the entire interest in

the King of Prussia property.    Accordingly, petitioner husband

asserts that he is entitled to include all the amounts expended

for construction and reconstruction of the King of Prussia

property.

     In Pennsylvania, a tenancy by the entirety is an estate per

tout et non per my (by the whole and not by the half).     Sterrett

v. Sterrett, 401 Pa. 583, 585, 166 A.2d 1, 2 (1960).    The

distinctive characteristic of a tenancy by the entirety is that

it is deemed to be owned by a single entity, the marital

community.   While a tenancy by the entirety resembles a common

     5
      (...continued)
                  INCIDENT TO DIVORCE.

          (a) General Rule.--No gain or loss shall be
     recognized on a transfer of property from an individual
     to (or in trust for the benefit of)--
               (1) a spouse, or
               (2) a former spouse, but only if the transfer is
           incident to the divorce
          (b) Transfer Treated as Gift; Transferee Has
     Transferor's Basis.--In the case of any transfer of
     property described in subsection (a)--
               (1) for purposes of this subtitle, the
     property shall be treated as acquired by
     the transferee by gift, and
               (2) the basis of the transferee in the
     property shall be the adjusted basis of
     the transferor.
                                - 11 -

law joint tenancy in that each spouse owns the whole and,

therefore, is entitled to enjoyment of the entirety and to

survivorship rights, it differs in that neither person has an

individual portion which can be alienated or separated, or which

can be reached by the creditors of either spouse.      See Meyer's

Estate (No. 1), supra at 92, 81 A. at 146.      Each spouse is seized

of the whole of the property rather than any divisible part of

the property.

     Even though each spouse may have a right to possession of

the entire property, the Supreme Court of Pennsylvania has held

that this right cannot be exercised at the expense of the other

spouse.    Lindenfelser v. Lindenfelser, 396 Pa. 530, 153 A.2d 901

(1959).    Each party to a tenancy by the entirety is entitled to

equal use, enjoyment, and possession of the property so held,

and, if necessary, this right may be enforced by injunctive

order.    Id.   In Pennsylvania, one spouse may maintain an action

in equity against the other to enforce his or her rights in a

tenancy by the entirety, where one spouse wrongfully excludes the

other from any form of possession.       Mower v. Mower, 387 Pa. 325,

328, 80 A.2d 856, 858 (1957); Brobst v. Brobst, 384 Pa. 530, 532,

121 A.2d 178, 180 (1956).    Consequently, we conclude that under

Pennsylvania law the interest of petitioner wife in the King of

Prussia property is equal to that of petitioner husband and

cannot be ignored.
                              - 12 -

     The mere fact that the King of Prussia property is held as

tenants by the entirety does not determine the amount of the

$229,472 in construction and reconstruction that is included in

petitioner husband’s cost of purchasing the King of Prussia

property.   For Federal tax law purposes, the phrase “taxpayer’s

cost of purchasing the new residence” includes contributions of

both the taxpayer and the taxpayer’s spouse to determine

nonrecognition of gain under section 1034, if the taxpayer falls

under the provisions of section 1034(g) and section 1.1034-1(f),

Income Tax Regs.   Petitioner husband fails to satisfy those

provisions yet seeks their benefit.

     Petitioners contend that the private agreement executed

approximately 11 months after petitioner husband has sold the

Wyndmoor property and 5 months after he had acquired a 50-percent

ownership interest in the King of Prussia property allows him to

include all of the reconstruction expenses in his cost of

purchasing the King of Prussia property.   Under the terms of this

agreement petitioner husband was to use the proceeds from the

sale of the Wyndmoor property to do major renovations on the King

of Prussia property.   This private agreement cannot rewrite

history and fails to change the Federal tax consequences of

transactions which took place months before it was executed.    Nor

does the agreement (or any other evidence of record) establish

that petitioner husband in fact paid more than half the cost of

the renovations.
                               - 13 -

     Petitioner husband further relies upon Kellogg v.

Commissioner, T.C. Memo. 1986-549, to support his argument that

he is entitled to include the entire cost of reconstruction in

his cost of purchasing the King of Prussia property.     However,

the facts in the Kellogg case are definitely distinguishable from

the facts of this case.   In Kellogg, the taxpayer sold his

residence in 1979 and moved into his new wife's separate

residence.   Shortly thereafter, the wife quitclaimed her interest

in the residence to the taxpayer and herself, as joint tenants

with rights of survivorship.   The wife made this transfer in

consideration of improvements already paid for by the taxpayer,

which were made before the house was jointly owned.     The

taxpayer’s cost of the acquisition was held to include all of the

reconstruction costs, in addition to one-half of the indebtedness

to which the property was subject.      In Kellogg, we did not

address the issue of renovations and restorations made to jointly

owned property.

     In the instant case, the King of Prussia property was

jointly owned when the improvements were made to the property.

There is no evidence in the record that petitioner husband

actually paid for more than half the cost of any of the capital

improvements made to the new residence.     All the renovation and

restoration payments for the King of Prussia property were made

from a joint checking account in the names of petitioners, or

from a checking account in the name of petitioner wife.
                              - 14 -

Moreover, there is no evidence in the record that petitioner wife

transferred her interest in her residence to herself and her

husband in consideration of improvements to be made to the

residence.   Petitioners have failed to show that petitioner

husband actually paid for more than half the improvements to the

King of Prussia property, and it is stipulated that none was paid

for from an account solely in the name of petitioner husband.

     Petitioner husband contends that section 1034 does not

require the proceeds from the old residence to be invested in the

new residence.   Petitioner husband contends that there is no

provision in section 1034 or the regulations requiring that costs

attributable to a new residence be split between husband and

wife.   However section 1034 requires that a taxpayer who wishes

to defer recognition on all of the gain realized on the sale of

an old residence must purchase a new residence for an amount

greater than or equal to the adjusted sales price of the old

residence.   Petitioner husband has not proved that he provided

more than half of the cash paid in the reconstruction of the King

of Prussia property.   Accordingly, respondent’s determination on

this point is sustained.   As we have found that petitioner

husband did not prove that he provided more than half of the

amounts that were expended for construction and reconstruction

for the King of Prussia property, we need not address
                                - 15 -

respondent’s contention that section 1041 applies to this

transaction.6

     Petitioner husband relies on section 1.1034-1(c)(4), Income

Tax Regs., for his assertion that he is entitled to include the

entire outstanding mortgage balance on the new residence in the

calculation of his acquisition cost.     Section 1.1034-1(c)(4),

Income Tax Regs., provides that the taxpayer's cost of purchasing

the new residence includes not only cash but also any

indebtedness to which the property purchased is subject at the

time of purchase whether or not assumed by the taxpayer and the

face amount of any liabilities of the taxpayer which are part of

the consideration for the purchase.      Petitioner husband maintains

that he is entitled to include the entire outstanding mortgage on

the property in his cost of purchasing the replacement residence

despite the fact that he owns the King of Prussia property with

his spouse.     Petitioner husband entered into a private agreement

in July of 1989 in which he agreed to assume one-half of the

mortgage indebtedness of the King of Prussia property.     This

agreement states that the transfer of one-half of the property to

petitioner husband was in exchange for his assumption of one-half

of the mortgage indebtedness.    We hold that petitioner husband’s


     6
      Respondent contends that when the    provisions for deferral
of recognition of gain on the sale of a    residence under section
1034 overlap the provision of sec. 1041    for married spouses, the
provisions of sec. 1041 apply (a matter    on which we express no
opinion).
                               - 16 -

cost of purchasing the King of Prussia property includes only

one-half of the outstanding mortgage balance in addition to one-

half the reconstruction costs.    See, e.g., Snowa v. Commissioner,

T.C. Memo. 1995-336; Kellogg v. Commissioner, supra.

     For purposes of section 1034, petitioner husband's cost of

purchasing the King of Prussia property is one-half of the

amounts expended for reconstruction and renovation of this

property, plus one-half of the outstanding mortgage balance.

These amounts ($114,736 + $70,403) total $185,139.    Accordingly,

because the adjusted sale price of the old residence exceeds his

purchase price in the new residence by more than the gain

realized ($340,798 less $185,139 equals $155,659, which is more

than $106,509), petitioners must recognize all of the gain

realized on the sale of petitioner husband's old residence.

Petitioners have conceded that the addition to tax under section

6653(a)(1) for negligence is applicable to any deficiency

determined in this case.

     Based on the foregoing,

                                      Decision will be entered

                                 for respondent.
