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Rose A. Wodack, TC Memo 2014-254TC Memo 2014-254

The Tax Court has denied a Code Sec. 36 first-time homebuyer tax credit to an individual who claimed to have purchased a home under a Wisconsin land contract in 2008 (a year during which qualifying purchases were eligible for the credit) when she made final payment under the contract’s terms and received a deed to the property. The Court determined that she purchased the property in ’93 (when no credit was allowable) when she executed the contract.

Facts. On Aug. 3, ’93, the taxpayer, Rose A. Wodack, entered into a seller-financed land contract for a tract of land and a residence (property) with Howard Schlise, an unrelated person. The contract stated that the seller would transfer the property to the purchaser upon full performance of the contract by her. The purchase price was $27,500. It was payable with a $1,000 downpayment and monthly payments of $222.39 over a 5-year term. Interest accrued at the rate of 9%. The contract called for full payment of the outstanding balance by Sept. 1, ’98, but allowed the purchaser to renew the contract for additional 5-year terms if she took certain actions and agreed to specified conditions.

Under the contract, Wodack had to pay Schlise annual property taxes, special assessments, and fire and other required insurance premiums. He was to hold these amounts in escrow and apply them to the obligations when they became due. She agreed to keep the improvements on the property insured in an amount at least equal to the balance owed under the contract. She further agreed not to commit waste, to keep the property in good repair, to keep it from superior liens, and to comply with all laws affecting it. In return, Wodack had the right to take possession of the property at the time of the closing and could improve the property without permission.

The contract also vested Schlise with certain rights and obligations. Upon Wodack’s paying the principal and interest in full, he had the obligation to execute and deliver a Warranty Deed, in fee simple, of the Property, free and clear of all liens and encumbrances to her. He also had the right, which terminated five years from closing, to repurchase the property at the original purchase price if she put the property up for sale. He also had certain rights upon her default. In addition, he could demand full payment of the remaining balance if Wodack transferred any interest in the property without his permission.

Wodack resided at the property at issue, made timely monthly payments, and renewed the land contract for two additional 5-year terms without issue. Schlise passed away on Aug. 20, 2006. His interest in the property passed to the Schlise Family Trust.

When the contract’s third 5-year period was coming to an end in 2008, Wodack requested that the Schlise Family Trust renew the contract for another five years or until such time as she could procure a conventional mortgage.

Schlise’s son’s attorney chose not to renew the contract for another five years. Wodack therefore decided to pay in full the balance owing upon expiration of the contract. The contract expired in August 2008. Wodack contacted Attorney Philip Johnson to request the payoff figure. On Oct. 31, 2008, he wrote a letter stating that the payoff figure on Nov. 20, 2008, was $19,768.

On Nov. 18, 2008, Wodack obtained a loan through a promissory note with Riverside Finance, Inc., for $25,006. Riverside Finance paid $19,758 (the payoff figure as slightly adjusted downward) by check to the Schlise Trust out of these proceeds. The Schlise Family Trust transferred the deed to Wodack in November 2008.

On her 2008 income tax return, Wodack claimed a first-time homebuyer credit of $2,609. After an examination, IRS sent her a notice of deficiency on Dec. 28, 2011, disallowing the credit. On Mar. 28, 2012, she filed a timely petition in the Tax Court for redetermination.

Background. For qualifying purchases of principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, eligible first-time homebuyers could claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). (Code Sec. 36) (The credit was subsequently modified and extended.)

The credit phased out for individual taxpayers with modified adjusted gross income (MAGI) between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase. (Code Sec. 36(b)(2))

A taxpayer was considered a first-time homebuyer if he (and his spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applied. (Code Sec. 36(c)(1))

Taxpayer denied credit. The Tax Court said that the only issue with respect to the allowance of the credit was whether Wodack purchased the property in 2008. She argued that she purchased it in November 2008 when she paid the Schlise Family Trust the remaining balance under the land contract and received the deed to the property. IRS asserted that she purchased the property on Aug. 3, ’93, because (1) under Wisconsin law, she had equitable title to the property upon execution of the land contract, and (2) she had possession of the property and enjoyed the benefits and burdens of ownership beginning in ’93.

The Tax Court said that generally, a transfer is complete for Code Sec. 36 purposes upon the earlier of the transfer of title or the shift of the benefits and burdens of ownership. Accordingly, the Tax Court looked to Wisconsin law to determine what rights Wodack had in the property.

Under Wisconsin law, a land contract vendor holds legal title as security for the unpaid balance of the contract, while the land contract vendee holds equitable title. Holding equitable title in effect gives the land contract vendee full rights of ownership. Accordingly, the Tax Court held that under Wisconsin law Wodack became the equitable owner of the property as of Aug. 3, ’93, the effective date of the land contract. She obtained the benefits and burdens of ownership at that time. She had the right of possession and made the property her principal residence. As required by the contract, she paid the real property taxes, assessments, and insurance. She also had an obligation to maintain the property and could improve the property without permission. Under Wisconsin law, she bore the risk of loss. She also had the right to obtain legal title by paying the remaining balance under the contract.

The decision not to renew the contract did not affect Wodack’s status as owner of the property, as her rights and obligations under State law did not change at that time. Moreover, there was no indication that the benefits and burdens of ownership shifted briefly to the Schlise Family Trust upon expiration of the contract in August 2008 until she obtained full legal title in November 2008. She continued to reside at the property and presumably was still liable for taxes, insurance premiums, and the like.

Accordingly, the Tax Court found that for Code Sec. 36 purposes Wodack purchased the property on Aug. 3, ’93, and thus not after Apr. 8, 2008 and before July 1, 2009, as required by Code Sec. 36(h). She therefore was not entitled to the first-time homebuyer credit.

References: For the first-time homebuyer credit, see FTC 2d/FIN ¶ A-4271 ; United States Tax Reporter ¶ 364 ; TaxDesk ¶ 568,851 ; TG ¶ 1470 .