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Thus, in general, courts have made clear that lack of actual
occupancy will thwart the attempts of even the most well-
intentioned taxpayer to utilize the deferment rules of section
1034.
Application to Construction and Improvements
More specifically, this focus on actual use does not shift
when examination turns to what courts and legislatures have had
to say concerning construction and improvements. As indicated
above, section 1034 explicitly provides that capital expenditures
for construction, reconstruction, and improvements may be
included in the statutory cost of purchase. However, to relieve
petitioners from the requirement that the separate structure be
put to some residential use within the prescribed time period
would be not only inconsistent with the history of the section,
but also illogical.
As early as 1961, in interpreting the predecessor of section
1034 (section 112(n) of the 1939 Code), the U.S. Court of Appeals
for the Ninth Circuit concluded that “Congress intended to permit
the taxpayer to obtain the benefit, taxwise, only of so much of
the cost of construction of, or improvements to [emphasis added],
a new house as the taxpayer had constructed and used within the
eighteen month period herein applicable.” Kern v. Granquist, 291
F.2d 29, 33 (9th Cir. 1961). Since the 1939 Code provision, like
section 1034(c)(2), used the language “construction * * * and
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