Attorney-at-Law

UNHEALTHY EXCLUSION

In Uncategorized on 04/07/2022 at 16:15

There’s no doubt Steven W. Webert and Catherine S. Webert, T. C. Memo. 2022-32, filed 4/7/22, only lived in their dream house for one year, then rented it, and didn’t sell it for another ten (count ’em, ten) years. Their MFJ 1040s for the subject years all told the same story.

But what the 1040s didn’t tell was Catherine’s battle with cancer, and the astronomical medical bills that her treatment generated. When the home equity line of credit failed to cover, they tried to sell, but the Black ’08 was upon them. The upshot is a $237K deficiency, but part of that is the $194K capital gain on the sale.

Catherine concedes IRS’ summary J motion to disallow the Section 121 principal residence exclusion, but Steve doesn’t. They divorced the year after sale, and Catherine wants innocent spousery.

Judge David Gustafson will always try to find a way when he hears a truly sad tale.

IRS gets summary J that Steve and Catherine fail to meet the two-out-of-five-years-preceding-sale use and occupancy tests of Section 121. Steve’s vague claim otherwise is torpedoed by the 1040s and Schedule E rental info they filed.

But what about Reg. Section 1.121(b)(3) sale-by-reason-of-health outs?

“During the period at issue, it is clear that the Weberts suffered many unfortunate and prolonged difficulties. They are not mentioned in the Commissioner’s motion…; they are alluded to in Mr. Webert’s response…; and in Ms. Webert’s response, those problems and their effects are described in some detail in an attachment … to her Form 8857, “Request for Innocent Spouse Relief”, which was signed under penalty of perjury. It seems clear that Ms. Webert ’s health was both a cause of the need to move from the Mercer Island house and a precipitating cause for the financial circumstances that contributed to that need. However, in his response to the Commissioner’s motion for summary judgment, Mr. Webert did not anticipate the Commissioner’s arguments (for which we do not blame him), and he therefore did not argue that any of these difficulties fall under the safe harbors enumerated under Treasury Regulation § 1.121-3(b) nor that they were the ‘primary reason’ for the sale of the Mercer Island house in 2015. If we draw all reasonable inferences in Mr. Webert’s favor (as Rule 121 requires), it appears that the health problems may have been the primary reason for the attempts to sell which began in 2009 and did not succeed until 2015.  Consequently, we find a genuine dispute on that factual issue, and we assume that health reasons were the primary reason for the sale. We cannot grant partial summary judgment to the Commissioner on the section 121 exclusion issue if, in order to do so, we must assume otherwise.” T. C. Memo. 2022-32, at pp. 11-12.

The issue is whether Catherine’s health was a “material fact” in the sale.

Of course, even if health was a “material fact” in the sale, all that results is a partial exclusion, and if there was no personal occupancy in any of the five years preceding sale, there is no exclusion.

Clear? Thought not.

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