In Zampella, (CA-3 04/04/2014) 113 AFTR 2d ¶ 2014-708, the Court of Appeals for the Third Circuit, affirming the Tax Court, has held that a residence was acquired by a beneficiary from an estate and not purchased by the beneficiary from his brother. Accordingly, the residence did not qualify for the first-time homebuyer credit under the provision’s related party rules. Note that the opinion is limited – – it is not binding as it has been deemed “Not Precedenital.”
Background. Code Sec. 36 generally allowed up to an $8,000 credit against an individual’s Federal income tax if he qualified as a first-time homebuyer who “purchased” a principal residence in the U.S. after Apr. 9, 2008, and before Dec. 1, 2009. Code Sec. 36(g) provided that the FTHBC for the “purchase” of a principal residence after Dec. 31, 2008, and before Dec. 1, 2009, could be claimed on either the taxpayer’s 2008 or 2009 Federal income tax return.
Code Sec. 36(c)(3)(A)(i) defined a “purchase” for purposes of the FTHBC as “any acquisition, but only if …the property is not acquired from a person related to the person acquiring such property.” Siblings were excluded from the definition of related persons for FTHBC purposes. However, under Code Sec. 36(c)(5) and Code Sec. 267(b)(13), related persons generally included an executor of an estate and a beneficiary of the estate.
Facts. The taxpayer was Edward R. Zampella. His mother, Maria Lee Zampella, died and her will left her entire estate equally to him and his brother, who were named as coexecutors. The estate included a residence in Middletown, New Jersey which was worth $430,000 on the date of Marie’s death.
By deed dated July 30, 2009 (Deed), the two brothers, as “Grantors” in their representative capacities as coexecutors of their mother’s estate, transferred title of the residence to Edward as “Grantee” for the sum of $215,000.
In a HUD-1, Settlement Statement, which was prepared for the closing of the transfer and also dated July 30, 2009 (HUD-1), the brothers as coexecutors and beneficiaries of the estate were listed as the “Seller” and Edward was listed as the “Borrower.” The HUD-1 indicates that $215,000 was transferred from the “Borrower” and provided to the “Seller.” The $215,000 settlement proceeds related to the transfer were deposited into a trust account. A check for $215,000 was subsequently issued to Edward’s brother from the trust account.
Edward timely filed a 2008 Federal income tax return. He attached to that return a Form 5405, First-Time Homebuyer Credit, on which he claimed an $8,000 first-time homebuyer credit (FTHBC) related to his acquisition of the residence. IRS determined that he wasn’t entitled to the FTHBC.
The dispute wound up in Tax Court where IRS contended that Edward did not “purchase” the residence within the meaning of Code Sec. 36 because he, a beneficiary of the estate, acquired the residence from a “related person,” i.e., an executor of the estate. Thus, IRS concluded that Edward wasn’t entitled to the FTHBC with respect to the residence.
Edward did not dispute that he was a beneficiary of his mother’s estate or that he and his brother were coexecutors of their mother’s estate. But he argued that he acquired a one-half interest in the residence from the estate and the remaining one-half interest from his brother. According to Edward, the interest purchased from his brother should qualify for the FTHBC.
The Tax Court observed that the deed indicated that Edward and his brother, in their representative capacities as coexecutors of their mother’s estate, transferred title of the residence to Edward. Furthermore, the brothers as “Coexecutors and beneficiaries of the Estate of Maria Lee Zampella,” were listed as the “Seller” on the HUD-1. Moreover, Edward and his brother both signed the HUD-1 as “Seller,” and Edward signed as “Borrower.” The Tax Court said that this evidence showed that Edward acquired the residence from a related person, i.e., an executor of the estate. The notion that he acquired a one-half interest from his brother ignored his brother’s role as coexecutor. Accordingly, the Court sustained IRS’s determination.
Failed taxpayer argument on appeal. Before the Third Circuit, Edward argued that the Tax Court erred by not applying New Jersey law to this transaction. Relying on New Jersey case law governing wills, Edward argued that upon his mother’s death, actual ownership of one-half interest in the property passed to him and one-half interest passed to his brother. Thus, he claimed that the estate couldn’t have sold the property to him, because his brother already owned the half-interest Edward later purchased from him. However, as IRS pointed out, the case law cited by Edward relates to a vesting of an interest in property, not ownership. Consequently, the Third Circuit said it did not view the New Jersey case law as standing for the proposition that title passed to Edward and his brother immediately upon the death of their mother.
Rather, the Third Circuit concluded that the Tax Court correctly determined that Edward acquired the property from the executors of his mother’s estate. Edward was listed, along with his brother, in his representative capacity as a co-executor, as “Grantor” on the Deed and “Seller” on the HUD-1 Settlement Statement. In addition, Edward was listed individually as “Grantee” on the Deed and “Borrower” on the HUD-1 Settlement Statement.
Edward also urged the Court to look to the substance of the transaction, not its form. The Third Circuit said that, aside from the fact that Edward paid one-half the value of the property, rather than the entire value, the substance of the transaction was that Edward acquired the property from the estate. The Deed was executed with both executors as Grantor and the money was exchanged in accordance with the HUD-1 Settlement Statement listing Arthur Zapolski as “Settlement Agent.” The Third Circuit saw no basis for disturbing the findings of the Tax Court.
Bottom line. Edward did not qualify as a first-time homebuyer because the documentation substantiated the Tax Court’s findings that he acquired the property from his mother’s estate. Accordingly, Edward did not purchase the property within the meaning of Code Sec. 36(c) and thus, couldn’t claim the FTHBC.