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record, however, only supports petitioners' argument that Fairway
was used as their principal residence prior to the critical date,
but the improvements were not begun within that same time frame.
Petitioners' attempt to concoct a scenario to be able to
defer gain based on the renovations caused their testimony, and
that of five people they called as witnesses, to be incongruous
and out of sync with the circumstantial evidence offered by
respondent. Based on the record before us, the only logical
explanation for the incongruity is one where petitioners
established the Fairway residence as their principal residence
and then relied on the townhouse to get them through the heavy
renovation construction that was commenced after the June 21,
1990 deadline.
Respondent cites several cases where the taxpayer only
partially complied with the use requirement of section 1034. For
example, in Bayley v. Commissioner, 35 T.C. 288 (1960), moving a
few pieces of furniture was insufficient to satisfy the used as
principal residence requirement. In Henry v. Commissioner, T.C.
Memo. 1982-469, even circumstances beyond the taxpayer's control
that kept them from moving into the new residence did not
mitigate or obviate the use requirement. Here, petitioners used
Fairway as their principal residence and took the necessary legal
and physical steps to make Fairway their permanent residence.
The precarious aspect of petitioners’ situation is their
ownership of two residences, presenting the question as to which
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