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DeBough v. Shulman

United States Court of Appeals, Eighth Circuit

August 28, 2015

Marvin E. DeBough, Appellant
v.
Douglas Shulman, Commissioner of Internal Revenue, Appellee

Submitted June 9, 2015

The United States Tax Court.

For Marvin E. DeBough, Appellant: Matthew Leo Fling, Matthew L. Fling, Edina, MN.

For Douglas Shulman, Commissioner of Internal Revenue, Appellee: Jonathan S. Cohen, Ivan Clay Dale, Gilbert Steven Rothenberg, Senior Attorney, John Schumann, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; William Wilkins, Internal Revenue Service, Washington, DC.

Before LOKEN, BYE, and KELLY, Circuit Judges.

OPINION

Page 1211

KELLY, Circuit Judge.

In 1966, Marvin DeBough purchased a residence and surrounding 80 acres of mixed-use land in Delano, Minnesota (the property) for $25,000. On July 11, 2006, DeBough agreed to sell the property for $1.4 million to Stonehawk Corporation and Catherine Constantine Properties, Inc. (the buyers) pursuant to an installment contract. The buyers' indebtedness was secured by the property.

Because the property was his principal residence, DeBough excluded $500,000 of gain from income on his 2006 tax return pursuant to 26 U.S.C. § 121 (the principal-residence exclusion). This left taxable income of $157,796 on the sale of the property. DeBough reported this income as installment sale income, beginning in 2006. DeBough received a total of $505,000 from the buyers and reported a total of $56,920 as taxable installment sale income for tax years 2006, 2007, and 2008.

In 2009, the buyers defaulted and DeBough reacquired the property, incurring $3,723 in costs related to the reacquisition. DeBough kept the $505,000 he had previously received from the buyers as liquidated damages. On his 2009 tax return, DeBough treated this event as a reacquisition of property in full satisfaction of indebtedness under 26 U.S.C. § 1038.[1] In calculating his realized gain on the reacquisition, DeBough again applied the $500,000 principal-residence exclusion. DeBough reported $97,153 as long-term capital gains related to the reacquisition of the property for tax year 2009. DeBough did not resell the property.

In 2012, the Commissioner sent DeBough a notice of deficiency with respect to his 2009 tax return. The Commissioner determined DeBough had underreported $448,080 in long-term capital gain for tax year 2009 by applying the principal-residence exclusion in his calculation of gain. DeBough filed a petition with the Tax Court, seeking a redetermination of the deficiency for tax year 2009. The Tax Court[2] agreed with the Commissioner, finding DeBough was not entitled to the principal-residence exclusion because he had not resold the property within one year. DeBough timely appealed. We affirm.[3]

I. Discussion

DeBough asserts that the Tax Court erred by not allowing him to claim the $500,000 principal-residence exclusion when he reacquired the property in 2009. In support of reversal, he contends that the Tax Court's interpretation of ยง 1038 is contrary to the intent of Congress and produces ...


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