Estate Beneficiary Doesn't Qualify for First-Time Homebuyer Credit.
(Parker Tax Publishing April 30, 2014)

Where a taxpayer acquired his mother's home as a result of being a beneficiary of her estate, he did not qualify as a first-time homebuyer and was not entitled to the first-time homebuyer credit because the home was acquired from a related person. Zampella v. Comm'r, 2014 PTC 175 (3d Cir. 4/4/14).

Marie Lee Zampella died in 2008 and left her entire estate to her two sons, Edward and Arthur, to be divided equally. She appointed Edward and Arthur as co-executors and beneficiaries of her estate. Her estate included a home, which Edward wanted to own. The estate had the home appraised at $430,000, and Edward deposited $215,000 into a trust account of his brother, Arthur Zapolski, identified as the "Settlement Agent." Subsequently, the trust issued a check for $215,000 to Arthur, and a deed for the home was issued to Edward. The deed listed the grantor as "Edward R. Zampella and Arthur F. Zampella individually and as Co-Executors of the Estate of Maria Lee Zampella," and listed the grantee as "Edward R. Zampella." Additionally, a HUD-1 Settlement Statement was executed and identified the seller as Edward and Arthur as co-executors and beneficiaries of the estate. Edward claimed a first-time homebuyer credit (FTHBC) of $8,000 on his 2008 federal income tax return. After the IRS denied the FTHBC, Edward appealed to the Tax Court, which sided with the IRS. Edward then appealed to the Third Circuit.

Code Sec. 36 allows a tax credit of up to $8,000 to qualified first-time homebuyers who purchased a principal residence after April 8, 2008, and before May 1, 2010. For purposes of the FTHBC, no credit is allowed for the purchase of a home from a related person. Siblings are excluded from the definition of "related person" for FTHBC purposes. However, generally, related persons include an executor and a beneficiary of an estate.

Before the Third Circuit, Edward argued that he acquired the property from his brother, who was not a related person. The IRS contended that Edward acquired his home from the executors of the estate and, thus, it was acquired from a related person and did not qualify for the FTHBC.

The Third Circuit affirmed the Tax Court decision and held that Edward was not entitled to the FTHBC. The court concluded that, based on the transfer documents, Edward acquired the property from the executors of his mother's estate. The court noted that the deed listed Edward and Arthur as the grantors in their representative capacities as co-executors. The brothers, the court observed, were also identified in the HUD-1 Settlement Statement under "Seller" as co-executors, and both signed as the seller. In rejecting Edward's argument that under state (New Jersey) law, upon his mother's death, actual ownership of one-half interest in the property passed to him and one-half interest passed to Arthur, the court noted that the state law relates to the vesting of an interest in property and not to ownership.

The court also rejected Edward's argument that the substance of the transaction, not the form, should control the transaction. According to the court, although Edward paid one-half the value of the property rather than the full value, the substance of the transaction was that he acquired the property from the estate.

For a discussion of the first-time homebuyer credit, see Parker Tax ¶102,701. (Staff Editor Parker Tax Publishing)

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