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T.C. Memo. 1998-322

UNITED STATES TAX COURT

DOUGLASS H. AND SUZANNE M. BARTLEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No.

14941-97.

Filed September 10, 1998.

Douglass H. and Suzanne M. Bartley, pro sese.
Frederic J. Fernandez and Mark J. Miller, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge:
petitioners'

1993

Respondent determined a $12,952 deficiency in
Federal

accuracy-related penalty.

income

tax

and

a

section

6662(a)

Following concessions by petitioners,

the issues for decision are (1) whether petitioners must include as
income the gain realized from the sale of their residence in 1993,

- 2 and (2) if that gain is includable in petitioners' 1993 income,
then whether petitioners' failure to report it subjects petitioners
to liability for the section 6662(a) accuracy-related penalty.1
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulation of
facts

is

incorporated

in

our

findings

by

this

reference.

Petitioners resided in Ely, Minnesota, at the time they filed their
petition.
Background
Douglass H. Bartley (petitioner) received a bachelor of arts
degree in business administration from the University of Arizona in
1970 and a juris doctor degree from the University of Arizona Law
School

in

practice

in

he

moved

to

Washington, D.C., and began working at Washington Gaslight Co.

In

approximately

in

Milwaukee,

1973.

Petitioner

Wisconsin,

1983,

until

he

had

a

private

1980;

at

that

returned

to

his

law

time,

private

practice

Milwaukee.

1

On May 5, 1998, respondent filed a motion to impose a
sec. 6673 penalty. On July 10, 1998, respondent filed a motion
to withdraw the May 5 motion. On July 14, 1998, we granted
respondent's motion to withdraw the motion to impose a sec. 6673
penalty.

- 3 In April 1987, the Governor of Wisconsin appointed petitioner
a commissioner (the equivalent of a State tax court judge) to the
Wisconsin Tax Appeals Commission (the commission).
part-time position.
permitted

to

This was a

(As a part-time commissioner, petitioner was

maintain

his

private

law

practice.)

Petitioner

received $50,000 in yearly compensation as a commissioner.

In

1992, he was appointed to a full-time position on the commission to
fill the remainder of an unexpired term (March 31, 1993) of a
commissioner

who

had

resigned.

(By

accepting

the

full-time

position, petitioner was required to abandon his private law
practice.)

Petitioner was not reappointed at the end of the

interim term, and he thereafter returned to private practice,
spending a substantial amount of his practice on Federal and State
tax law issues.
Sale of Residence
On September 28, 1987, petitioners purchased a house in
Mequon, Wisconsin (the Mequon residence), for $155,000.

In late

1987, they built an addition to the Mequon residence (which was
completed in January 1988) costing $48,606, so that petitioner's
mother could live with them.

She paid rent to petitioners.

Petitioners used 83 percent of the Mequon residence for
personal purposes and 17 percent for rental purposes.
In 1991, petitioners spent $9,475 on further improvements to
the Mequon residence.

Between 1988 and 1992, petitioners claimed

- 4 depreciation

of

$4,913

on

the

rental

portion

consequence

of

petitioner's

of

the

Mequon

residence.
As

a

departure

from

the

commission, petitioners could no longer afford the monthly mortgage
payments; thus petitioners sold their Mequon residence for $270,000
on June 15, 1993.
The parties stipulated that the adjusted basis of the Mequon
residence on the date of sale was $213,582, and that the selling
expenses

totaled

$21,191

(of

which

$17,588

was

personal expenses and $3,603 as rental expenses).2

allocated

as

Thus, the gain

on the sale of petitioners' Mequon residence was $40,140. (The
amount of gain is not in dispute.)
In June 1993, petitioners purchased land in Ely, Minnesota,
and built a cabin thereon (the Ely residence), costing $66,588.
They began living there in October 1993.

On February 1, 1994,

petitioners sold the Ely residence for $66,588. Subsequently, they
moved into a rental apartment.
Federal Income Tax Return
Petitioners neither reported any capital gain on the sale of
their Mequon residence on their 1993 Federal income tax return nor
attached thereto a Form 2119, Sale of Your Home.

2

At closing, after subtracting the unpaid balances of
three mortgages totaling $192,251 and the selling expenses,
petitioners received $50,533 of the proceeds.

- 5 During 1996, petitioners were audited by one of respondent's
agents.

The auditor requested information from petitioners with

respect to the sale of their Mequon residence.

On September 16,

1996, petitioners provided Form 2119 and Form 4797, Sales of
Business Property, to the Internal Revenue Service auditor assigned
to their case. However, petitioners did not execute either form.
Notice of Deficiency
In the notice of deficiency, respondent determined that the
capital gain petitioners received from the sale of their Mequon
residence

was

includable

in

their

1993

income.

Respondent

calculated petitioners' capital gain in the following manner:

Sale price

Total

Personal
83%

Business
17%

$270,000

$224,100

$45,900

Add: Depreciation allowed

4,913

---

4,913

Less: Adjusted basis in
property

(213,582)

(177,273)

(36,309)

Selling expenses

(21,191)

(17,588)

(3,603)

Capital gain on sale of property

40,140

=

29,239

+

10,901

OPINION
Issue 1.

Gain From Sale of Home

The first issue is whether petitioners must include as income
the capital gain realized from the sale of their Mequon residence
in 1993.

Respondent maintains that because petitioners failed to

satisfy the requirements of section 1034, they should have reported

- 6 the

capital

gain.

Petitioners,

on

the

other

hand,

advance

constitutional and equitable arguments as to why the capital gain
is not includable in income.
a.

Section 1034

Generally,

sections

1001

and

61

require

a

taxpayer

to

recognize in the year of the sale gain realized on the sale of
property.

Section 1034,3 which provides an exception to this

general rule, allows a taxpayer, in certain circumstances, to defer
recognition of all gain realized on the sale of the taxpayer's
principal residence (referred to as the old residence) if (1) other
property (referred to as the new residence) is purchased and used
by the taxpayer as a new principal residence within the period
beginning 2 years before the date of the sale and ending 2 years
after the date, and (2) the

3

adjusted sale price of the old

Sec. 1034 was repealed by sec. 312(b) of the Taxpayer
Relief Act of 1997, Pub. L. 105-34, 111 Stat. 839, generally
effective for sales and exchanges of principal residences after
May 6, 1997. (The repeal of sec. 1034 was part of the capital
gains relief provided to individual taxpayers by the Taxpayer
Relief Act of 1997.) The sec. 1034 rollover provision was
replaced by an expanded and revised sec. 121, which generally
provides for the nonrecognition of up to $500,000 of gain
realized from the sale of a principal residence by married
taxpayers filing a joint return, and up to $250,000 of gain
realized by all other individual taxpayers, if during the 5-year
period ending on the date of the sale or exchange, the property
has been owned and used by the taxpayer as the taxpayer's
principal residence for a period aggregating 2 or more years.
This exclusion is not predicated on the reinvestment of gain in a
new home.
References hereinafter to sec. 1034 are to that provision as
in effect during the year in issue, 1993.

- 7 residence is less than the cost of the new residence.

Sec.

1034(a), (c). Section 1034(b)(1) defines "adjusted sales price" as
the amount realized on the sale of the old residence (selling price
minus selling expenses) reduced by expenses of fixing up the
residence in preparation for sale.

Thus, if the cost of the new

residence equals or exceeds the adjusted sale price of the old
residence, the entire gain on the sale of the old residence must be
deferred. (We note that section 1034 is mandatory, so that a
taxpayer cannot elect to have gain recognized where the section is
applicable.

Sec. 1.1034-1(a), Income Tax Regs.)

If the cost of

the new residence is less than the adjusted sale price of the old
residence, gain must be recognized to the extent the adjusted sale
price of the old residence exceeds the cost of the new residence,
but not greater than the amount realized on the sale.
1(a), Income Tax Regs.

Sec. 1.1034-

The deferral of gain is accomplished by

reducing the basis of the new residence by the amount of gain not
recognized on the sale of the old residence (i.e., the unrecognized
gain is rolled over into a lower basis for the new residence).
Sec. 1034(e).

Finally, pursuant to section 1.1034-1(i)(1), Income

Tax Regs., any gain recognized from the sale of the old residence
is includable in gross income for the taxable year in which the
gain was realized.

(Section 1034 does not apply to losses; losses

are recognized or not recognized without regard to the provisions
of section 1034.)

- 8 Petitioners bear the burden of showing their entitlement to
the nonrecognition of income benefits of section 1034 by proving
that they have satisfied all of the section's requirements.
142(a); Welch v. Helvering, 290 U.S. 111 (1933).

Rule

Income tax

provisions which exempt taxpayers under given circumstances from
paying

taxes

construed.

or

permit

them

to

postpone

taxes

are

narrowly

Commissioner v. Schleier, 515 U.S. 323, 328 (1995);

Commissioner v. Baertschi, 412 F.2d 494, 499 (6th Cir. 1969), revg.
and remanding 49 T.C. 289 (1967).

In fact, this Court has

indicated that section 1034 must be strictly construed. See, e.g.,
Boesel

v.

Commissioner,

65

T.C.

378,

390

(1975);

Lokan

v.

Commissioner, T.C. Memo. 1979-380.
Although petitioners purchased the Ely residence within 2
years of selling the Mequon residence, the adjusted sale price of
the Mequon residence ($248,809) exceeded the cost of the Ely
residence by $182,221, which in turn exceeded the $40,140 gain
realized on the sale.

Thus, because petitioners did not meet the

requirements of section 1034, they must include the $40,140 gain
realized in their 1993 income.
b.

Constitutional Arguments

Petitioners contest the constitutionality of any statutory
provisions or Internal Revenue Service (IRS) actions (or inactions)
which

result

in

capital

gain

residence, arguing as follows:

from

the

sale

of

their

Mequon

(1) The capital gain respondent

- 9 determined is a violation of their equal protection and due process
rights

because

section

1034

favors

wealthy

taxpayers

and

discriminates on the basis of age; (2) the gain from the sale of
their Mequon residence is "fictitious", resulting solely from
inflation, and because there was no "real gain", there is no income
subject to taxation; and (3) because the IRS does not recognize
either nominal or real losses on the sale of a residence, gain from
the sale of a residence cannot be taxed.4
4

Not surprisingly,

In their petition, petitioners state as follows:
a. Taxing "gain" on the sale of our
residence has no rational basis and violates
the Equal Protection component of the 5th
Amendment Due Process Clause because:
(1) The tax invidiously
discriminates in favor of wealthy
homeowners and against those less
fortunate. The wealthier
homeowner, who trades up to a more
expensive house, has no taxable
gain. In contrast, the less
affluent homeowner, who can't
afford a more expensive house or
must move into rental quarters,
gets taxed merely because he can't
come up with enough to buy anything
or because he can't afford to buy a
house of equivalent or greater
price.
(2) The tax also invidiously
discriminates on the basis of age.
Those who are 55 or older get an
exclusion that no one else
qualifies for.
b.

Taxing the "gain" violates the Due
(continued...)

- 10 respondent disagrees with each of petitioners' arguments. We agree
with respondent.
First, we do not agree that taxing the capital gain realized
on the sale of petitioners' Mequon residence is a violation of
petitioners' equal protection rights.

The Fifth Amendment to the

Constitution protects against the deprivation of life, liberty, or
property without due process of law.

The Due Process Clause of the

Fifth Amendment provides protection against Federal discriminatory
action "so unjustified as to be violative of due process".

Shapiro

v. Thompson, 394 U.S. 618, 642 (1969); Bolling v. Sharpe, 347 U.S.
497-499 (1954); Ward v. Commissioner, 608 F.2d 599 (5th Cir. 1979),
affg. per curiam T.C. Memo. 1979-39.

Further, the Due Process

Clause of the 5th Amendment has been held to incorporate the Equal

4

(...continued)
Process Clause of the 5th Amendment, because
it transforms a real loss into a fictitious
gain and creates phantom income or distorts
income beyond any reasonable proportions.
IRS wrongfully fails to recognize the
phenomenon of inflation, as explained more
fully below.
c. The house "gain" taxing scheme
violates the Equal Protection component of
the 5th Amendment for an additional reason,
namely because IRS refuses to recognize
either nominal or real losses on the sale of
a residence, even though it readily taxes
nominal gains. That results in disparate
treatment as between homeowners who cannot
deduct losses and businesses which can
because businesses can deduct those losses.

- 11 Protection Clause of the 14th Amendment.
U.S.

361,

364-365

n.4

(1974);

Ward

Johnson v. Robison, 415
v.

Commissioner,

supra;

Stevenson v. Commissioner, T.C. Memo. 1981-127.
Under equal protection analysis, a classification in a Federal
statute is subject to strict scrutiny only if it interferes with
the exercise of a fundamental right or operates to the peculiar
disadvantage

of

a

suspect

class.

Regan

v.

Taxation

with

Representation, 461 U.S. 540, 547 (1983); Massachusetts Bd. of
Retirement v. Murgia, 427 U.S. 307, 312 (1976); San Antonio Indep.
Sch.

Dist.

v.

Rodriguez,

is

present

circumstance

411

U.S.

1,

here.

Wealth

16-17

(1973).

discrimination

Neither

alone

is

insufficient to require strict scrutiny; such review of wealth
classifications has been applied only where the discrimination
affects an important individual interest.

See, e.g., San Antonio

Indep. Sch. Dist. v. Rodriguez, supra at 24, 29; Harper v. Virginia
State Bd. of Elections, 383 U.S. 663 (1966).
Where

a

tax

statute

results

in

differing

treatment

of

different classes of persons, the statute generally is not in
violation of the Fifth Amendment because of the different treatment
if it has a rational basis. Regan v. Taxation with Representation,
supra; United States v. Maryland Savings-Share Ins. Corp., 400 U.S.
4 (1970).

Furthermore, it is especially difficult to demonstrate

that no rational basis exists for a classification in a revenue
measure for which the presumption that an act of Congress is

- 12 constitutional is particularly strong.

Black v. Commissioner, 69

T.C. 505, 507-508 (1977); Nammack v. Commissioner, 56 T.C. 1379,
1383 (1971), affd. per curiam 459 F.2d 1045 (2d Cir. 1972).
Legislatures

have

particularly

broad

latitude

in

creating

classifications and distinctions in tax statutes.5
In the case before us, no denial of the equal protection or
due process provisions of the Constitution has occurred.

Section

1034 has a rational basis as enacted by Congress in the Revenue Act
of 1951, ch. 521, 65 Stat. 452.

Congress enacted section 112(n),

the predecessor to section 1034, as an amendment to the 1939
5

The wide scope of powers of the legislature under the
14th Amendment in the matter of classification was discussed at
length by the Supreme Court in Carmichael v. Southern Coal & Coke
Co., 301 U.S. 495, 509-510 (1937):
It is inherent in the exercise of the power
to tax that a state be free to select the
subjects of taxation and to grant exemptions.
Neither due process nor equal protection
imposes upon a state any rigid rule of
equality of taxation. This Court has
repeatedly held that inequalities which
result from a singling out of one particular
class for taxation or exemption, infringe no
constitutional limitation.
Like considerations govern exemptions
from the operation of a tax imposed on the
members of a class. A legislature is not
bound to tax every member of a class or none.
It may make distinctions of degree having a
rational basis, and when subjected to
judicial scrutiny they must be presumed to
rest on that basis if there is any
conceivable state of facts which would
support it. [Citations omitted.]

- 13 Internal Revenue Code, recognizing that the disposition of one
residence and the acquisition of another were often necessitated by
a change in the size of the taxpayer's family, a change in the
taxpayer's place of employment, or other circumstances beyond the
taxpayer's control.

As the Ways and Means Committee report, H.

Rept. 586, 82d Cong., 1st Sess. (1951), 1951-2 C.B. 357, 377-378,
explained:
H.
Gain From Sale Or Exchange Of The
Taxpayer's Residence.
this bill amends the present provisions
relating to a gain on the sale of a taxpayer's
principal residence so as to eliminate a
hardship under existing law which provides that
when a personal residence is sold at a gain the
difference between its adjusted basis and the
sale price is taxed as a capital gain.
The
hardship is accentuated when the transactions
are necessitated by such facts as an increase
in the size of the family or a change in the
place of the taxpayer's employment. In these
situations the transaction partakes of the
nature of an involuntary conversion. * * *
See Clapham v. Commissioner, 63 T.C. 505, 511 (1975); see also S.
Rept. 781, 82d Cong., 1st Sess. (1951), 1951-2 C.B. 458, 482-484,
566-570; Staff of Joint Comm. on Taxation, Summary of Provisions of
the Revenue Act of 1951, at 389-310 (J. Comm. Print 1951), 1951-2
C.B. 287, 309-310.
Over the years, the governing Code provision has changed
slightly. See H. Rept. 1337, 83d Cong., 2d Sess. A268-A269 (1954).
The

rules

under

section

1034

during

the

year

in

issue

are

substantially similar to those Congress adopted in 1951. The major

- 14 change to section 1034 (other than its repeal) has been the
extension of the period for acquisition or construction of a new
residence from 1 year to 18 months by the Tax Reduction Act of
1975, Pub. L. 94-12, sec. 207(a), 89 Stat. 32, and then to 2 years
by the Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec.
122(b), 95 Stat. 197.
It is clear from the legislative history that Congress viewed
the deferral of capital gains tax as a means to alleviate hardships
for growing families purchasing a new home and for taxpayers
changing employment and thus needing to purchase a new residence.
Because a rational basis exists for the gain deferral under section
1034,

this

provision

is

constitutional

and

does

not

violate

petitioners' equal protection rights.
In repealing section 1034 in the Taxpayer Relief Act of 1997,
sec.

312(b),

it

appears

that

Congress

addressed

petitioners'

concern that the "poor" were penalized through section 1034:
To postpone the entire capital gain from
the sale of a principal residence, the
purchase price of a new home must be greater
than the sales price of the old home. This
provision of present law encourages some
taxpayers
to
purchase
larger
and
more
expensive houses than they otherwise would in
order to avoid tax liability, particularly
those who move from areas where housing costs
are high to lower-cost areas. This promotes
an inefficient use of taxpayer's financial
resources.
H. Rept. 105-148, at 761-762 (1997).

Thus, in 1997, Congress

repealed section 1034 and revised section 121 because, among other

- 15 things, section 1034 was generally more useful when trading up a
residence.

As the excerpt above illustrates, presumably Congress

realized that section 1034 favored wealthy taxpayers.

However,

this does not equate to a constitutional violation.

See, e.g.,

Black v. Commissioner, supra.
We now turn to petitioners' age discrimination argument.
Section 121,6 a companion to section 1034,7 permitted taxpayers 55
and older to exclude from gross income up to $125,000 of gain from
the sale of property which they had owned and used as their
principal residence for 3 or more of the 5 years immediately before
the sale. The purpose of the section 121 exclusion rule was to
enable an older taxpayer to sell his home without being required to
pay tax on the realized appreciation or invest all the proceeds
from the old residence in a new residence. Congress concluded that
although section 1034 generally provided adequately for the younger
taxpayer who changed residences, it did not provide adequate tax
benefits for the taxpayer whose family had grown up and who no
6

The one-time exclusion for gain on the sale of
residences applied to homes sold before May 7, 1997. Sec. 121
was amended by sec. 312(a) and (d)(1), Taxpayer Relief Act of
1997, 111 Stat. 836, 839.
7

Sec. 121 differed from sec. 1034 as follows: (1) Under
sec. 121, a $125,000 ceiling existed on the amount of gain
excludable ($62,500 in the case of a separate return by a married
individual); (2) sec. 121 permanently excluded the gain from
income instead of only postponing recognition and could be used
only once in a lifetime; (3) sec. 121 was available only to
taxpayers over 55 years old; and (4) the sec. 121 exclusion was
elective and did not require the purchase of a new residence.

- 16 longer needed the family homestead.8

See, e.g., H. Rept. 749, 88th

Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 125, 169-171, 284288; S. Rept. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part

8

In adopting this one-time exclusion provision,
Congress' intent was as follows:
The Congress believed that the taxes
imposed upon an individual with respect to
gain that he or she realizes on the sale or
exchange of his or her principal residence,
in many instances, may be unduly high,
especially in view of recent inflation
levels and the increasing cost of housing.
The Congress believed that, in most
situations, the nonrecognition provisions of
present law operate adequately to allow
individuals to move from one residence to
another without recognition of gain or
payment of tax. However, where an
individual has owned his or her principal
residence for a number of years and sells it
either to purchase a smaller, less expensive
dwelling, or to move into rental quarters,
any tax due on the gain realized may be too
high. While the provisions of prior law
relating to the exclusion of gain by
taxpayers who attained the age of 65 may
ameliorate this situation somewhat, the
Congress believed that the prior dollar
limits and age restriction were unrealistic
in view of increasing housing costs and
decreasing retirement ages. In addition,
the Congress believed that the holding
period of a principal residence which is
involuntarily converted should be tacked to
that of a replacement residence for purposes
of meeting the use and occupancy
requirements needed to qualify for the
exclusion upon a sale of the replacement
residence.
Staff of Joint Comm. on Taxation, General Explanation of the
Revenue Act of 1978, at 255-256 (J. Comm. Print 1979).

- 17 2) 505, 555-557.

Congress believed that a rollover under section

1034 may not be feasible because the older taxpayer often wants to
purchase a less expensive home or move to a rented residence at
another location and may also need the proceeds from the sale of
the old residence to meet living expenses in the retirement years.
In Woolf v. Commissioner, T.C. Memo. 1981-286, we held that a
rational basis existed for allowing the section 121 exclusion, and
thus the exclusion did not result in any constitutional violations.
We reasoned that in the case of certain older individuals, Congress
made a reasonable attempt to provide for those individuals who,
because of their age and particular situation in life, may wish to
change

residences.

We

stated:

"We,

accordingly,

find

no

constitutional violation resulting from the fact that * * * [the
taxpayers'] tax consequences may have been different from those of
other individuals who sold their personal residences".9
9

Id.

"'No

In fact, there were a number of other sections in the
Internal Revenue Code that provided for differing tax treatment
depending upon the taxpayer's age. For instance, a taxpayer who
attained age 25 before the close of the computation year and was
not a full-time student during the 4 taxable years commencing
upon attaining the age of 21 and ending with the computation year
would be eligible for income averaging. Former sec.
1303(c)(2)(A) (Tax Reform Act of 1986, Pub. L. 99-514, sec.
141(a), 100 Stat. 2117, repealed sec. 1303, applicable to tax
years beginning after Dec. 31, 1986); see Baldwin v.
Commissioner, 84 T.C. 859, 869 (1985).
In addition, if a taxpayer fails to roll over distributed
retirement funds within 60 days, and the distribution is made
before the date the taxpayer attains the age of 59-1/2, and none
of the other exceptions in sec. 72(t)(2) applies, the tax on the
distribution is increased by an amount equal to 10 percent of the
(continued...)

- 18 scheme of taxation, whether the tax is imposed on property, income,
or purchases of goods and services, has yet been devised which is
free of all discriminatory impact.'" Druker v. Commissioner, 77
T.C. 867, 872 (1981) (quoting San Antonio Indep. Sch. Dist. v.
Rodriguez, 411 U.S. at 42), affd. in part on this issue and revd.
in part on another issue 697 F.2d 46 (2d Cir. 1982).
In sum, we hold that no denial of the equal protection or due
process provisions of the Constitution has occurred herein.
c.

Equitable Arguments

Petitioners maintain that to tax the gain from the sale of
their Mequon residence because they could not afford to purchase
another house of equal or greater value constitutes "blatant
discrimination on the basis of wealth."

Petitioners' economic

hardship situation does not alleviate their obligation to report
the gain on the sale of their Mequon residence, as required by
section 1034.

To petitioners this result may appear inequitable.

Petitioners essentially are requesting the Court to ignore the
plain language of the statute and rewrite the statute to achieve
what

they

regard

as

an

equitable

result.

See

Hildebrand

v.

Commissioner, 683 F.2d 57, 58-59 (3d Cir. 1982), affg. T.C. Memo.
1980-532.

This we cannot do.

of the statute.

We cannot alter the plain reading

Petitioner has not cited any authority for us to

9

(...continued)
portion includable in gross income.

Sec. 72(t).

- 19 provide

the

relief

he

requests.

"The

proper

place

for

a

consideration of petitioner's complaint is the Halls of Congress,
not here [Tax Court]."

Hays Corp. v. Commissioner, 40 T.C. 436,

443 (1963), affd. 331 F.2d 422 (7th Cir. 1964).
In addition, petitioners argue that taxpayers are unfairly
treated

when

inflation.

the

value

of

their

home

increases

because

of

They contend that

The $40,140 of alleged gain is fictitious, for
the IRS gain computation assumes that the
taxpayers'
1987
purchase
dollars
are
equivalent
to
1993
sale
dollars.
If
equivalent dollars are used to compute gain
here, the $40,140 "gain" becomes a loss of
$8,397. An income tax may not be imposed on a
loss without violating IRC § 61 and the Due
Process Clause of the Fifth Amendment.
Other taxpayers have raised the argument of inflation as
grounds for

failing

to

report

income.

We

have

consistently

rejected this argument.

See Hellermann v. Commissioner, 77 T.C.

1361

v.

(1981);

Milkowski

Commissioner,

T.C.

Downing v. Commissioner, T.C. Memo. 1983-97.

Memo.

1981-225;

The taxpayers in

Hellermann made arguments similar to those advanced by petitioners:
That gain from the sale of their buildings was due to inflation;
that their gain was nominal; and that the portion of their nominal
gain that was due to inflation does not constitute taxable income.
77 T.C. at 1362-1363. The taxpayers therein also used the Consumer
Price Index to illustrate the effects of inflation and what was
alleged to be their nominal gain.

Id. at 1362.

Responding to that

- 20 argument, we therein stated "that we have several times denied
taxpayers deductions for losses due to inflation, on grounds that
the tax law is not written to account for inflation."
1363.10

Id. at

We further determined that nominal gain is taxable because

of (1) the doctrine "that Congress has the power and authority to
establish the dollar as a unit of legal value with respect to the
determination of taxable income, independent of any value the
dollar might also have as a commodity" (citations omitted), and (2)
the doctrine of common interpretation, which defines income on the
basis of the understanding of a lay person, not an economist.
at 1364, 1366.

Id.

We held in the Commissioner's favor, concluding

that (1) the taxpayers' use of the Consumer Price Index (including
any other method measuring inflation) to calculate taxable income
is irrelevant, and (2) nominal gain is taxable income.

Id. at

1363-1364; see also Sibla v. Commissioner, 68 T.C. 422, 430-431
(1977) (holding

that

the

taxpayer

was

neither

entitled

to

a

deduction nor any other adjustment to his gross income because of
the fact that the value of a dollar may have declined in relation
to silver or gold), affd. 611 F.2d 1260 (9th Cir. 1980); Gajewski
v. Commissioner, 67 T.C. 181, 194-195 (1976) (holding that the
value of the dollar is "irrelevant for purposes of computing * * *
[a taxpayer's] taxable income", and "for purposes of the tax law,

10

We note that when Congress desires to take inflation
into account, it does so by statute. See, e.g., secs. 1(f), 151.

- 21 a dollar is what Congress says it is, without regard to intrinsic
value or lack thereof"), affd. without published opinion 578 F.2d
1383 (8th Cir. 1978); Notter v. Commissioner, T.C. Memo. 1982-96.
Accordingly, we dismiss petitioners' argument with regard to the
effect of inflation.
Finally, petitioners argue that because section 1034 does not
apply to losses, there is "disparate treatment" between homeowners
and businesses.

We recognize that because a residence is, by

definition, for personal use, a loss incurred on its sale is not
deductible.

See secs. 165, 262.

However, a loss is recognizable

on the sale of a home if it was converted to rental property prior
to its sale.

See sec. 165(c).

Although petitioners' nominal gain may or may not equal their
real gain in an economic sense, neither the Constitution nor tax
laws "embody perfect economic theory".

See Weiss v. Wiener, 279

U.S. 333, 335 (1929).
d.

Conclusion

On the basis of the foregoing analysis, we hold that the gain
realized from the sale of petitioners' Mequon residence is taxable
in 1993.

Moreover, respondent's computation of gain is sustained.

Issue 2.

Section 6662(a) Accuracy-Related Penalty

The second issue is whether petitioners are liable for the
section 6662(a) accuracy-related penalty for negligence.
6662

imposes

an

accuracy-related

penalty

for

Section

negligence

and

- 22 intentional disregard of rules and regulations.

Negligence is

defined as

the

"`lack

to

do

reasonable

and

ordinarily

do

under

circumstances.'"

of

due

care

prudent

or

failure

person

would

what

a

the

See Neely v. Commissioner, 85 T.C. 934, 947

(1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th
Cir. 1967), affg. in part and remanding per curiam 43 T.C. 168
(1964)).
Petitioners argue that the portion of the negligence penalty
attributable to the gain on the residence is "unjustified because
the gain is not taxable in the first place and because petitioners
were not negligent in any event in that they did report the sale
transaction and its details in a timely fashion."
Petitioner

was

a

well-educated

attorney

substantial part of his career in tax law.
Wisconsin Tax Appeals commissioner.

We disagree.
who

spent

a

He is a former

It is evident that he was

familiar with Federal and State tax law.

Although petitioner was

fully aware of petitioners' duty to report the capital gain on the
Mequon residence, petitioners failed to file Form 2119 with their
1993 income tax return.11

The taxpayer must file Form 2119 to

notify the IRS of the sale for the tax year in which the old
residence is sold, whether or not gain is realized.

11

Sec. 1.1034-

Generally, cash basis taxpayers must include all items
of income in the gross income for the taxable year in which
actually or constructively received. Sec. 451(a); sec. 1.4511(a), Income Tax Regs.

- 23 1(i), Income Tax Regs.

Furthermore, petitioners provided Forms

2119 and 4797 on September 16, 1996, only after being requested to
do so by the IRS auditor; but they failed to execute the forms.12
Petitioners failed to satisfy the requirements of section
1034.

Petitioner, as a tax attorney and former Wisconsin Tax

Appeals commissioner, knew, or at least should have known, of the
section

1034

requirements;

he

chose

not

to

follow

them.

Petitioners failed to demonstrate that they were not negligent.
See, e.g., Milkowski v. Commissioner, T.C. Memo. 1983-406; Notter
v. Commissioner, T.C. Memo. 1982-96.

Indeed, the record indicates

that they were.
Accordingly,

we

sustain

respondent's

determinations

with

respect to the section 6662(a) accuracy-related penalty.
To reflect the foregoing and petitioners' concessions,

Decision will be entered
for respondent.

12

Petitioners argue that they filed a 1994 Form 2688,
Application for Additional Extension of Time To File U.S.
Individual Income Tax Return, which notified the IRS of the sale
of the Mequon residence. At most, Form 2688 notified respondent
that petitioners sold a residence in 1994, which would have been
their Ely residence.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A0e7d001475b1a0d5. Public record. Not legal advice.