T.C. Memo. 1996-15
UNITED STATES TAX COURT
DOUGLAS RITTER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22351-93. Filed January 22, 1996.
Douglas Ritter, pro se.
Kevin M. Murphy, for respondent.
MEMORANDUM OPINION
PAJAK, Special Trial Judge: This case was heard pursuant to
section 7443A(b)(3) of the Code and Rules 180, 181, and 182.
Unless otherwise indicated, all section numbers refer to the
Internal Revenue Code for the taxable year in issue, and all Rule
numbers refer to the Tax Court Rules of Practice and Procedure.
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Respondent determined a deficiency in petitioner's 1991
Federal income tax in the amount of $3,845, and an addition to
tax under section 6651(a)(1) in the amount of $961. The Court
must decide: (1) The amount of rental income petitioner received
from the Broome County, New York, Department of Social Services
for the year 1991; (2) whether petitioner is entitled to any
deductions for rental expenses incurred; (3) whether petitioner
is entitled to three additional dependency exemptions; and
(4) whether petitioner is liable for an addition to tax under
section 6651(a)(1) for failure to timely file a tax return.
Some of the facts in the case have been stipulated and are
so found. Petitioner resided in Lisle, New York, at the time he
filed his petition.
For clarity and convenience, the findings of fact and
opinion have been combined.
In 1991, petitioner owned the following real property in
Broome County, New York:
41 Charlotte Street, Binghamton, New York
18 Pleasant Avenue, Binghamton, New York
RD 2, Box 133 and 134, Conklin, New York
In 1991, petitioner owned the following real property with
his wife, Carole Ritter, as tenants by the entireties:
53 Mary Street, Binghamton, New York
99-101 Robinson Street, Binghamton, New York
Langdon Grove, Kirkwood, New York
Church Road, Lisle, New York
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Petitioner also owned and operated a pest control business
that served a 50-mile area in and around Broome County.
Petitioner operated this pest control business from his home and
an office located at the 99-101 Robinson Street, Binghamton,
property. Petitioner reported no income or expense from this
business. In the absence of any proof of income or of expense,
we leave this matter where the parties left it.
The Broome County Department of Social Services (Social
Services) reported on a Form 1099-MISC that it paid $26,618.70 to
petitioner in 1991. This amount represented rental payments for
clients of Social Services who occupied apartments in
petitioner's properties. According to documents from Social
Services, petitioner received payments in 1991 from Social
Services with respect to the following properties:
53 Mary Street, Binghamton, New York
99-101 Robinson Street, Binghamton, New York
18 Pleasant Avenue, Binghamton, New York
RD 2, Box 133 and Box 134, Conklin, New York
The Form 1099-MISC from Social Services was issued in
petitioner's name only. Neither petitioner, nor his wife,
reported this income on a 1991 tax return. Petitioner conceded
that he failed to file Federal income tax returns since 1984.
Respondent determined petitioner's tax liability based on
the $26,618.70 reported on the Form 1099-MISC from Social
Services, as well as on $5 of unreported interest income from
Marine Midland Bank. Respondent computed the deficiency with the
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filing status of "married, filing separate", and allowed
petitioner one personal exemption, as well as the standard
deduction.
Rental Income
Petitioner argues that a portion of the rental income he
received from Social Services was for properties he owned jointly
with his wife and therefore half the payments are not his income.
Under New York law, if property is held by a husband and
wife as tenants by the entireties, then each is entitled to one-
half of the rents and profits from such property. Kraus v.
Huelsman, 52 Misc.2d 807, 276 N.Y.S.2d 976 (Sup. Ct. 1967), affd.
287 N.Y.S.2d 365 (App. Div. 1968); Hiles v. Fisher, 39 N.E. 337
(N.Y. 1895); Colabella v. Commissioner, T.C. Memo. 1958-136.
Where, under State law, each property is owned by husband and
wife as tenants by the entireties, one-half of the resulting
income is taxable to each. Greene v. Commissioner, 7 T.C. 142,
152 (1946); Colabella v. Commissioner, supra.
We have found that petitioner and Mrs. Ritter owned 53 Mary
Street and 99-101 Robinson Street properties as tenants by the
entireties. Under New York law, petitioner and Mrs. Ritter were
entitled to share equally the rental income. It is thus
immaterial for tax purposes that petitioner received the rent in
his name only. Greene v. Commissioner, supra.
Accordingly, we hold that $4,105 and $3,838, which
represents half the rental income from the 53 Mary Street and 99-
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101 Robinson Street properties, respectively, is includable in
petitioner's income for 1991. We further hold that the remaining
rental income of $10,732.70 reported on the Form 1099-MISC, as
well as the $5 of interest income, is includable in petitioner's
income for 1991. In short, petitioner failed to report
$18,680.70 of income for 1991.
Rental Expenses
Petitioner contends he has incurred rental expenses with
respect to the properties that he should be able to deduct
against the income he received. Petitioner submitted the
following list at trial:
53 Mary St.
utilities $2293.55
taxes $3341.58
99-101 Robinson St.
utilities $2617.28
taxes $3713.20
18 Pleasant Ave.
taxes $1067.34
RD2-Conklin prop.
taxes $576.17
trash removal $644.16
41 Charlotte St.
taxes $1494.73
Church Road
taxes $429.17
Langdon Grove
taxes $1294.16
trash removal $1043.95
Taxpayers do not have an inherent right to take tax
deductions. Deductions are a matter of legislative grace, and
taxpayers must establish their right to take them. Deputy v. du
Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v.
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Helvering, 292 U.S. 435, 440 (1934). Taxpayers also have the
burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87
(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).
Petitioner's rental expenses are deductible under sections
162 or 212 only if his use of the properties constituted an
activity engaged in for profit. Sec. 183(a). The test to
determine whether an activity is engaged in for profit is whether
the individual engaged in the activity with the "actual and
honest objective of making a profit." Dreicer v. Commissioner,
78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205
(D.C. Cir. 1983). The taxpayer's expectation of earning a profit
need not be reasonable, but the taxpayer must establish that the
activities were continued with a bona fide profit objective.
Dreicer v. Commissioner, supra; Hager v. Commissioner, 76 T.C.
759, 784 (1981); sec. 1.183-2(a), Income Tax Regs. Whether the
taxpayer had such an objective must be determined by reference to
all the surrounding facts and circumstances, and greater weight
is given to such facts than to the taxpayer's statement of
intent. Dreicer v. Commissioner, supra. The regulations set
forth various factors to consider. Sec. 1.183-2(b), Income Tax
Regs.
Petitioner substantiated $3,218.06 of real estate taxes paid
in 1991 for the Church Road, Charlotte Street, and Langdon Grove
properties. Petitioner has produced no records or history of
income for the Church Road, Charlotte Street, and Langdon Grove
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properties. Consequently, at trial we sustained respondent's
disallowance of the related expenses as deductions under section
162 or 212 due to a failure by petitioner to prove that he was
engaged in an activity for profit with respect to these
properties. Sec. 183.
Even so, the real estate taxes petitioner paid on these
properties could be deductible under section 164 and allowable
under section 183(b)(2). Brannen v. Commissioner, 78 T.C. 471,
499-500 (1982), affd. 722 F.2d 695 (11th Cir. 1984). Section
164, however, is an itemized deduction. See sec. 63(d); sec.
62(a). Section 63 and the regulations thereunder do not
authorize the election to itemize deductions unless a return is
filed. Sec. 63(e)(1). Because petitioner failed to file a
return for the year in issue, he did not make the required
election. Consequently, petitioner is not entitled to any
itemized deductions for the year. Andreas v. Commissioner, T.C.
Memo. 1993-551. Thus, petitioner may not deduct under section
164 any real estate taxes he may have paid in 1991 for the Church
Road, Charlotte Street, and Langdon Grove properties.
After consideration of the record, we conclude that
petitioner's use of the following properties constituted an
activity engaged in for profit:
53 Mary Street, Binghamton, New York
99-101 Robinson Street, Binghamton, New York
18 Pleasant Avenue, Binghamton, New York
RD 2, Box 133 and Box 134, Conklin, New York
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Based upon substantiation submitted by petitioner at trial, we
have determined the expenses paid with respect to these
properties to be as follows:
53 Mary Street: $4,318.87
99-101 Robinson Street: $5,178.72
18 Pleasant Avenue: $712.11
RD 2, Box 133 and Box 134: $576.17
As outlined above, these substantiated expenses consist of
utilities, trash removal, and real property taxes paid during
1991. Because petitioner jointly owned both the 53 Mary Street
and 99-101 Robinson Street properties with Mrs. Ritter, he is
only entitled to deduct half of the utility and trash removal
expenses for those properties. White v. Commissioner, 18 T.C.
385 (1952). Although the payment of real property taxes by a co-
owner has been treated differently than the payment of other
expenses, the threshold requirement for allowing a co-owner to
deduct 100 percent of the property taxes paid is that the co-
owner must have paid the taxes with his separate funds. Higgins
v. Commissioner, 16 T.C. 140 (1951); Powell v. Commissioner, T.C.
Memo. 1967-32.
In this case, we find that Mrs. Ritter made the half of the
property tax payments with her own money; i.e., the rents
petitioner collected on her behalf. Thus, petitioner only paid
one-half of the property taxes on the jointly owned rental
properties. Accordingly, we find that petitioner is entitled to
deduct one-half of the expenses paid for the 53 Mary Street and
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99-101 Robinson Street properties, and all of the expenses paid
for the 18 Pleasant Avenue and RD 2, Box 133 and Box 134
properties, for a total of $6,037.08 in rental expenses for the
1991 taxable year.
Additional Dependency Exemptions
Petitioner claims he is entitled to dependency exemptions
for his wife and two of his children who lived at home in 1991.
The burden of proving error in the Commissioner's determination
is on the taxpayer. Rule 142(a); Welch v. Helvering, 290 U.S.
111 (1933).
Section 151(b) provides that a taxpayer who does not file a
joint return may claim a dependency exemption for a spouse if the
spouse has no gross income and is not the dependent of another
taxpayer for the year in question. Section 151(c) allows an
exemption for each of a taxpayer's dependents, as defined in
section 152, who is a child of the taxpayer under age 19 or, if a
student, under age 24. A taxpayer's child who receives over one-
half of the child's support from the taxpayer is a dependent.
Sec. 152(a)(1). The fact that a taxpayer failed to file a tax
return does not preclude him from claiming the dependency
exemptions. Yoder v. Commissioner, T.C. Memo. 1990-116.
In the instant case, Carole Ritter jointly owned the 53 Mary
Street property and the 99-101 Robinson Street property with
petitioner. She earned gross income in the form of rents
received from Social Services for those properties. Accordingly,
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petitioner is not entitled to claim Mrs. Ritter as an exemption
for the 1991 taxable year.
Mrs. Ritter testified that in 1991 two of their children
lived at home. The oldest child attended high school. We find
that petitioner has met his burden of proof and is entitled to
exemptions for his two children for the 1991 taxable year.
Section 6651(a)(1) Addition to Tax
Petitioner, though he earned at least $18,680.70 in 1991,
did not file a Federal income tax return for 1991. Section
6651(a)(1) imposes an addition to tax for failure to file a
Federal income tax return by its due date, determined with regard
to any extension of time for filing previously granted, unless
such failure was due to reasonable cause and not willful neglect.
Fischer v. Commissioner, 50 T.C. 164, 177 (1968). Petitioner
bears the burden of showing reasonable cause. Fischer v.
Commissioner, supra. Petitioner presented no credible evidence
as to why he failed to file a Federal income tax return for the
year in issue. Accordingly, respondent's determination with
respect to the addition to tax under section 6651(a)(1) is
sustained.
At trial, we strongly advised petitioner to file the
required income tax returns. We again warn petitioner that his
tax protester arguments, which we struck from his petition at a
motions' session hearing, are meritless. Rowlee v. Commissioner,
80 T.C. 1111 (1983). If petitioner persists in making such
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arguments in the future, he should be aware that he may be
subject to a penalty of up to $25,000 under section 6673.
Decision will be entered
under Rule 155.