PLR 200004022: Homeowners count the period a partnership held title toward residence ownership

Plain-English summary

Homeowners asked whether they owned their residence for purposes of the § 121(a) home sale exclusion while a partnership held title. They directly held 2% of the partnership, and a trust they represented they owned under the grantor trust rules held the other 98%. The IRS ruled that they would be treated as owning the residence during the partnership's title period, reasoning that the home served no partnership business purpose and produced no partnership income. The ruling addresses the ownership requirement only. The IRS gave no opinion on whether the homeowners actually owned the trust under the grantor trust rules, used the home as their principal residence, or met any other condition for excluding gain.

Ruling snapshot

• Question: Does the period when the partnership held title count as the homeowners' ownership of the residence under § 121(a)?
• Outcome: Approved: that period counts toward ownership, on the represented facts.
• Key authorities: IRC §§ 121(a), 671 through 677; Rev. Rul. 66-159; Rev. Rul. 85-45.

Full text (IRS public release)

Internal Revenue Service                       Department of the Treasury

Index Numbers:       121.01-02                 Washington, DC 20224



Number: 200004022                              Person to Contact:
Release Date: 1/28/2000
                                               Telephone Number:


                                                 CC:DOM:IT&A:1 / PLR-111497-99
                                               Date:
                                                10-28-99




Re:      Letter Ruling Request Regarding Excluding Gain from the Sale of a Residence


LEGEND:

Taxpayers


Residence


Trust

Partnership

Year 1

Date 1

Date 2


Dear                          :

This responds to your letter dated June 11, 1999, and your supplemental letter dated
September 27, 1999, requesting a ruling on whether Taxpayers will be considered the
owners of Residence for purposes of section 121(a) of the Internal Revenue Code
during the period of time that the residence was owned by Partnership.


                                        FACTS


Taxpayers lived in Residence since before Year 1 to Date 1. Taxpayers intend to sell
Residence.

In Year 1, Taxpayers transferred title in Residence to Partnership. The transfer
occurred in two steps. Taxpayers first deeded 98% of Residence to Trust, then
Taxpayers and Trust deeded Residence to Partnership. Trust is a grantor trust formed
by Taxpayers, and Taxpayers have represented that they are treated as the owners of
Trust under the grantor trust rules under sections 671 through 677 of the Code.
Taxpayers each own a 1% interest in Partnership as general partners. Trust owns the
remaining 98% interest of Partnership as a limited partner. Taxpayers also transferred
several small rental properties to Partnership in Year 1. On Date 2, Partnership
distributed title to Residence to its partners (Taxpayers and Trust) in accordance with
their partnership interests.

                           SECTION 121 REQUIREMENTS

Section 121(a) of the Code provides that a taxpayer’s gross income will not include gain
from the sale or exchange of property if, during the 5-year period ending on the date of
the sale or exchange, such property has been owned and used by the taxpayer as the
taxpayer’s principal residence for periods aggregating two years or more.

Section 121(b)(1) of the Code provides that the amount of gain excluded from gross
income under section 121(a) with respect to any sale or exchange will not exceed
$250,000.

Section 121(b)(2)(A) of the Code provides that in the case of a husband and wife who
make a joint return for the taxable year of the sale or exchange of property, the
exclusion amount in section 121(b)(1) is increased to $500,000 if-- (1) either spouse
meets the ownership requirements of section 121(a) with respect to such property, (2)
both spouses meet the use requirements of section 121(a) with respect to such
property, and (3) neither spouse is ineligible for the benefits of section 121(a) with
respect to such property by reason of section 121(b)(3).

Section 121(b)(3) of the Code provides the general rule that section 121(a) will not
apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the
date of such sale or exchange, there was any other sale or exchange by the taxpayer to
which subsection 121(a) applied.

Rev. Rul. 66-159, 1966-1 C.B. 162, considers whether the gain realized from the sale of
trust property used by the grantor as the grantor’s principal residence qualifies for the
deferment and rollover of gain into a replacement residence under section 1034 of the
Code. The ruling holds that because the grantor is treated as the owner of the entire
trust under sections 676 and 671 of the Code, the sale by the trust will be treated for
federal income tax purposes as if made by the grantor.

Rev. Rul. 85-45, 1985-1 C.B. 183, considers whether gain realized from the sale of trust
property used by a beneficiary of a trust as the beneficiary’s residence qualifies for the
one-time exclusion of gain from the sale of a residence under section 121 of the Code.
The ruling holds that because the beneficiary is treated as the owner of the entire trust
under sections 678 and 671 of the Code, the sale by the trust will be treated for federal
income tax purposes as if made by the beneficiary

        OWNERSHIP OF TRUST PROPERTY FOR INCOME TAX PURPOSES

Section 671 of the Code provides the general rule that when the grantor or another
person is treated as the owner of any portion of a trust, there will be included in
computing the taxable income and credits of the grantor or other person those items of
income, deductions, and credits against tax of the trust which are attributable to that
portion of the trust to the extent that such items would be taken into account in
computing taxable income or credits against the tax of an individual.

Sections 673 through 677 of the Code specify the circumstances under which the
grantor is treated as the owner of any portion of a trust.

Taxpayers have represented that they are treated as the owners of Trust under the
grantor trust rules under sections 671 through 677.

   OWNERSHIP OF PARTNERSHIP PROPERTY FOR SECTION 121 PURPOSES

In order for a federal tax law partnership to exist, the parties must, in good faith and
with a business purpose, intend to join together in the present conduct of an enterprise
and share in the profits or losses of the enterprise. This determination requires
weighing all of the facts and circumstances of a particular case. Culbertson v.
Commissioner, 337 U.S. 733 (1949). Because the existence of a partnership is based
on federal tax principles, an arrangement that constitutes a partnership under state law
may not be a partnership under federal tax law. Commissioner v. Tower, 327 U.S. 280
(1946). In the present case, Residence was not used in the conduct of an enterprise.
Partnership held title to Residence, but Residence did not yield any income to
Partnership or Taxpayers, and Residence served no business purpose of Partnership
or Taxpayers. Furthermore, Taxpayers (individually or as the grantors of Trust) owned
100% of Residence during the period that Partnership held title to Residence, and have
taken no business deductions (such as depreciation deductions) with respect to
Residence.



Based on the facts as represented and the relevant law as set forth above, we rule that
for purposes of section 121(a) Taxpayers will be treated as the owners of Residence
throughout the period that Partnership held title to Residence.

Except as specifically ruled upon above, no opinion is expressed or implied regarding
the income tax consequences of Partnership, Trust, any transaction, or any item
discussed or referenced in this letter. In addition, no opinion is expressed or implied as
to whether Taxpayers are treated as the owners of Trust under the grantor trust rules of
sections 671 through 677 of the Code or whether Taxpayers have used Residence as
their principal residence.

This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.
The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.


                                             Sincerely,


                                             /c/ David B. Auclair
                                             DAVID B. AUCLAIR
                                             Senior Technician Reviewer
                                             Office of Assistant Chief Counsel
                                                 (Income Tax and Accounting)


Enclosures (2):
      Copy of this letter
      Copy of section 6110 purposes