Tax Court Holds Against IRS on First-Time Homebuyer Credit Issue

On November 5, 2012, the Tax Court ruled on case involving the first-time homebuyer credit overruling the Internal Revenue Service (IRS) that had consistently held that both spouses had to qualify individually for the credit. The Court noted Congress enacted the long-time homebuyer provision to expand qualification for the credit and disagreed with the IRS that the plain language of the statute required that both spouses had to meet the same criteria.

Previously, in Information Letter 2010-0117, the IRS determined that if one member of a newly married couple had never owned a residence during the three years prior to the purchase of a new residence (thus being a "first time homebuyer") while the other member had owned and occupied the same residence for three of the prior five years (thus being a "long-time home owner"), no credit was available under Internal Revenue Code (IRC) Section 36. The IRS subsequently issued several Information Letters affirming this position.

Under IRC 36(c)(1), an individual is a first-time homebuyer "if such individual (and if married, such individual's spouse) had no present ownership interest in a principal residence during the 3-year period" ending on the date of purchase of the principal residence. Further, IRC ยง36(c)(6) states that an individual is a long-time resident if the "individual (and, if married, such individual's spouse) . . . has owned and used the same residence as such individual's principal residence for any 5-consecutive-year period during the 8-year period" ending on the date of purchase of the principal residence."

Under the statute, according to the IRS, both spouses had to be either first-time homebuyers or long-term residents. If one spouse was a first-time homebuyer and the other spouse was a long-time resident they did not qualify, both spouses had to be one or the other.

In Packard v. Commissioner, 139 T.C. No. 15 (2012), the Tax Court ruled that the intent of IRC Section 36(c)(6) was to provide an exception to the first-time homebuyer, and thus, the fact that the husband didn't qualify as a long-time resident didn't matter . The taxpayers were entitled to the $6,500 credit that they claimed. The Court held that Congress intended that no couple could get the credit unless each qualified. Congress, however, did not require that each spouse qualify under the same provision.

When Congress amended section 36(c) to add an exception to the definition of first-time homebuyer that would include longtime residents of the same principal residence, it presumably also sought to restrict the first-time homebuyer credit to only those married couples where both spouses qualify as first-time homebuyers, and it therefore borrowed the same parenthetical phrase from section 36(c)(1). However, we cannot believe that Congress intended to restrict the first-time homebuyer credit to only those married couples where both spouses qualify under the same paragraph of section 36(c).

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