ShareA federal court has considered a taxpayers' challenge to the Internal Revenue Service's ("IRS") disallowance of a claimed refund because the taxpayers had failed to establish that home in question was their primary residence for two of the five years they owned the home, as required by the federal tax code.
James M. and Jean M. Guinan ("Taxpayers") purchased a home in Wisconsin in March 1993 and sold it in September 1998. During this same five-year period, the Taxpayers also owned homes in Arizona and Georgia. The Taxpayers spent the following amount time at each of the residences during the five year period: Wisconsin- 847 days; Georgia- 563 days; and Arizona- 375 days. They used the Wisconsin home mainly in the summer, and the other two homes served as their winter residence (they sold the Georgia home and purchased the Arizona home in 1996).
The Taxpayers sought a refund from taxes paid in 1998 arising from the sale of their Wisconsin home. The Taxpayers based their argument on section 121(a) of the federal tax code, which states that "[g]ross income shall not include gain from the sale...of property if, during the five year period ending on the date of sale..., such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more" for a gain on the sale of up to $500,000 for a married couple or $250,000 for an individual. The Taxpayers claimed that the Wisconsin home had served as their principal residence and therefore the income from the sale was not part of their gross income. The IRS denied the Taxpayers' refund claims, and the Taxpayers filed a lawsuit challenging the IRS's determination. Both parties filed motions with the court seeking judgment in their favor.
The United States District Court, District of Arizona, ruled in favor of the IRS. The burden of proof was on the Taxpayers. The question before the court was whether the Taxpayers had met their burden of establishing that the Wisconsin home had served as their principal residence during two of the five years that they owned the home. An IRS regulation sets forth the criteria that the IRS uses to make this determination, with the first step determining the residence that the taxpayer used for a majority of the years in question and then looking at six other factors: taxpayer's place of employment; principal residence of taxpayer's family members; address listed on taxpayer's official government documents (such as on tax returns and driver's licenses); mailing address used for bills and correspondence; location of taxpayer's banks; and location of religious organizations and recreational clubs to which the taxpayer belongs.
Looking at the IRS criteria, the court found that the Taxpayers had used the Wisconsin home more than their other two homes. However, the court also found that the evidence showed that the Taxpayers had used the other homes in combination more than the Wisconsin home and had used the Wisconsin home for the majority of a year in only one of the five years in question, spending the majority of their time during the other years in Georgia or Arizona. Most of the other factors listed in the IRS regulations were neutral as the Taxpayers had bank accounts in both places, had no family members in any of the states in question, and had social engagements in both locations. However, the court did find that the Taxpayers had Georgia/Arizona driver's licenses and filed state tax returns in both of those states and not in Wisconsin, and so both of these findings favored the IRS's refund denial. Looking at all of the factors in question, the court found that the Taxpayers had not demonstrated to the court that they were entitled to a tax refund, as the evidence supported the IRS's rejection of the refund request. Thus, the court ordered judgment to be entered in favor of the IRS.
Guinan v. United States of America, No. CV 02--0261-PHX-PGR (D. Ariz. May 22, 2003). [Note: This opinion is not yet published in an official reporter and therefore should not be cited as authority. Please consult counsel before relying on this opinion.]
TO COMPLY WITH CERTAIN U.S. TREASURY REGULATIONS, WE INFORM YOU THAT, UNLESS EXPRESSLY STATED OTHERWISE, ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THE TEXT OF THIS COMMUNICATION, IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER THE INTERNAL REVENUE CODE.