Appeal from a Decision of the United States Tax Court. Tax Ct. No. 12756-92.
Before: Cynthia Holcomb Hall, Diarmuid F. O'Scannlain and Andrew J. Kleinfeld, Circuit Judges. Opinion by Judge Hall.
We are asked to consider the application of I.R.C. section 1034 to property relinquished in a divorce settlement. The tax court determined that a man who vacated his marital home, permanently and with no intention ever to return, pursuant to a divorce settlement, could not defer recognition of his share of the gain from the sale of that property. We have jurisdiction under 26 U.S.C. § 7482, and affirm.
Petitioner Curtis B. Perry lived with his former wife for five years in their Irvine, California house. The marriage faltered and Curtis Perry moved out of the house on June 15, 1984. He continued to pay the mortgage and other household expenses, but would never again reside at the Irvine address. In August or September 1984, he moved into the house of the current Mrs. Perry in La Mirada, California. He lived there without interruption until 1989.
Curtis Perry and his former wife divorced in December 1985. Their divorce settlement gave the former Mrs. Perry and a minor daughter exclusive use of the Irvine house until December 1987, and provided that they would share equally the burden of taxes and insurance. The house was to be sold as soon as reasonably possible after December 1987, when Curtis Perry and his former wife would split the proceeds of sale between them in equal parts.
In April 1987, Curtis married his current wife, Laura L. Perry, who is also a petitioner in this matter.
In December 1987 the Irvine house was listed for sale. It sold in March 1988 for $213,000. As stipulated in the divorce settlement, Curtis and the former Mrs. Perry each recovered one half the proceeds of sale.
Curtis and the current Mrs. Perry filed jointly for 1988. On their return, they reported a $106,500 receipt from the sale of the Irvine house. They subtracted $6,342 in sales expenses and $50,000 in basis. This left $50,158 in profit, but they reported no taxable gain. Instead, the Perrys sought to take advantage of the nonrecognition treatment afforded in I.R.C. section 1034.*fn1 This provision allows a taxpayer to postpone (or "rollover") the recognition of gain from the sale of his principal residence if he purchases a new residence within a prescribed time period. See 26 C.F.R. § 1.1034-1(a) (1988) (describing operation of § 1034).
Later in 1989, the current Mrs. Perry sold the house in which she and Curtis had been living together.*fn2 In August 1989, the couple bought a new house in Simi Valley for $400,032 and it immediately became their principal residence.
This case arose when the IRS refused to allow section 1034 treatment for the sale of the Irvine house. It determined that the $50,158 gain was taxable in 1988, because the Irvine property had by then ceased to be Curtis Perry's principal residence. The Commissioner also imposed a negligence penalty pursuant to I.R.C. section 6653(a); this statutory provision permits the imposition of a penalty when any part of an underpayment is due to the taxpayer's negligence. On petition for review, the tax court upheld the Commissioner's determination. The Perrys timely appealed to this court.
The sole question on appeal is whether Curtis Perry was entitled to call the Irvine property his "principal residence" for the purposes of section 1034, after he turned the house over to his former wife pursuant to their divorce settlement. Neither the statute nor the accompanying regulations settle the matter. Instead, we are directed to examine "all the facts and circumstances" of ...