T.C. Memo. 1998-125
UNITED STATES TAX COURT
LESLIE A. AND BETSY M. ROY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7423-96. Filed March 31, 1998.
Walter A. Hefner, Jr., for petitioners.
Sandra Veliz, for respondent.
MEMORANDUM OPINION
DEAN, Special Trial Judge: This case was heard pursuant to
section 7443A(b)(3) and Rules 180, 181, and 182.1 Respondent
determined deficiencies in petitioners' Federal income taxes for
the years 1992 and 1993 in the amounts of $3,600 and $3,901,
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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respectively. The issues for decision are: (1) Whether
petitioners are entitled to rental expense deductions for a
personal residence; and (2) whether petitioners are entitled to
exclude payments by their employer for use of their personal
residence.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by reference. Petitioners resided in Moxee,
Washington, at the time they filed their petition.
Background
When Leslie Roy (petitioner) was in high school, he began
working on his family's farm, Roy Farms, Inc. (Roy Farms or the
farm). Roy Farms is a large farm, owning more than 5,000 acres
of land and harvesting crops such as apples, hops, sweet
cherries, and alfalfa. The farm also maintains approximately
1,000 head of cattle.
Roy Farms is an S corporation, of which petitioner holds a
minority interest. In 1992, he held 8.15 percent of Roy Farms'
shares and in 1993, he held 10.39 percent. The remainder is held
by petitioner's three brothers and his parents. Lester Roy,
petitioner's father, is the president of Roy Farms.
Petitioner has worked steadily on the farm since high
school, taking only a temporary break to earn his college degree
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in economics. For the taxable years at issue, petitioner worked
as one of several farm managers.
In his capacity as manager, petitioner is required to live
on or in close proximity to the farm. He has personnel to manage
on a daily basis. Each morning, petitioner awakens to laborers
waiting outside his house in hopes of getting work for the day.
Petitioner is responsible for hiring and firing these laborers,
as needed, on the land he oversees.
Petitioner also must be available at various times of the
day and night as part of his management of the land. The hops
season runs for 11 months out of the year, with a 6-month cycle
of around the clock irrigation. The laborers work 24 hours a day
in August to harvest the 1,300-acre crop. The apple orchard
requires 24-hour attention from April through October, and the
cattle require 24-hour attention during calving season. During
irrigation season, the managers must watch for broken pipes, and
during frost season, managers are on call for frost alarms which
require immediate response. Farming equipment must be closely
monitored to avoid vandalism and to ensure the security of the
machinery. For this reason, petitioner sometimes stores farming
vehicles and other equipment on his property.
In addition to tractors and trucks, petitioner also provides
storage space for ladders and packing boxes that are used
throughout the season. On the 5-acre parcel of land surrounding
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his home, petitioner uses 1/4 acre to store the empty apple bins
used in harvesting the 600-acre apple orchard. During picking
season, the apples are also kept on the property where they are
eventually loaded and hauled away. During pruning season, cars
and trucks use his long driveway to park, and tractors ride up
and down the road, creating dust and causing wear and tear on the
road.
Petitioner's land is contiguous to the farming property
owned by Roy Farms. Prior to 1989, petitioner and his family
lived in farm-owned housing for 15 years. In 1989, petitioner
and his wife purchased a 5-acre parcel of land abutting the
property and built their own home. All the expense incurred in
purchasing and running the home are paid by the petitioners.
Petitioners pay the mortgage and insurance on the property, as
well as real estate taxes. Although there is no signed contract,
Roy Farms agreed to pay petitioner $1,000 each month to
compensate petitioner for the wear and tear on his roads, for use
of various facilities in his home, and for storage of the farming
equipment and materials on his property.
In his 1992 Federal income tax return, petitioners reported
$12,000 on the Schedule E as rental income, and deducted $12,000
in business expenses and depreciation for the farm's use of his
house. In 1993, petitioner reported the $12,000 as rental
income, but then excluded the entire amount as de minimis income
under section 280A(g)(2).
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Respondent disallowed deduction of any expenses or
depreciation on the grounds that section 280A(c)(6) denies
deduction when an employee rents a residence to his employer for
business purposes, and respondent disallowed exclusion under
section 280A(g)(2), arguing that the $12,000 was not de minimis
rental income. Rather, respondent argues that petitioners rented
their residence to Roy Farms for $1,000 a month, who subsequently
leased it back to petitioners rent free as farm housing.2
Because this alleged leasing agreement provided for rental of
petitioner's home for more than 15 days during the taxable year,
the exclusion for de minimis use of their property, respondent
argues, does not apply.
Petitioner contends that even if respondent's position were
true, section 280A(g)(2) works to exclude the $1,000 payments
from Roy Farms as rental income because the payments are
significantly below the fair rental value of the residence, and
thus the petitioners have not actually rented out their dwelling
unit but have maintained exclusive personal use of the house as a
residence for the entire taxable years at issue.
Discussion
Generally, a taxpayer may not deduct expenses incurred from
the rental use of a personal residence or any portion thereof.
2
We decline to address the application of sec. 119 to
petitioners, as this issue was not raised by either party
anywhere in the record.
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Sec. 280A(a). If the taxpayer rents out his dwelling unit,
deductions are allowed only to the extent the gross income
derived from renting the property exceeds certain expenses. Sec.
280A(c)(3), (c)(5).
Petitioners received $12,000 in taxable years 1992 and 1993
from Roy Farms for the use of certain areas of their house and
surrounding property. They do not dispute receiving this income,
but they contest respondent's disallowance of any exclusions or
deductions to offset this income.
The arrangement petitioners have with Roy Farms, respondent
argues, is one that falls squarely within the disqualifying
language of section 280A(c)(6). Section 280A(c)(6) provides that
no deduction shall be allowed for "any item which is attributable
to the rental of the dwelling unit (or any portion thereof) by
the taxpayer to his employer during any period in which the
taxpayer uses the dwelling unit (or portion) in performing
services as an employee of the employer."
We agree with respondent that deduction by petitioners of
any rental expenses that may be otherwise allowable by section
280A(c)(3) is disallowed by reason of section 280A(c)(6). The
meaning of the statutory language is clear. There shall be no
deduction for expenses attributable to the rental use of a
personal residence by an employee when the property is rented to
the employee's employer. The parties stipulated that petitioner
is employed by Roy Farms, and that he received $1,000 per month
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from Roy Farms during 1992 and 1993 to cover their business use
of the petitioners' property. Petitioners have offered no
evidence or argument which leads us to conclude that section
280A(c)(6) should be ignored, or is inapplicable to petitioners'
situation in light of these undisputed facts.
In the alternative, petitioners have argued that the $12,000
they received annually as rental income should be excluded from
their gross income pursuant to section 280A(g). Section 280A(g)
provides:
(g) Special Rule for Certain Rental Use.--
Notwithstanding any other provision of this section or
section 183, if a dwelling unit is used during the
taxable year by the taxpayer as a residence and such
dwelling unit is actually rented for less than 15 days
during the taxable year, then--
(1) no deduction otherwise allowable under
this chapter because of the rental use of such
dwelling unit shall be allowed, and
(2) the income derived from such use for the
taxable year shall not be included in the gross
income of such taxpayer under section 61.
Petitioners have the burden of proving their entitlement to
the exclusion found in section 280A(g). Rule 142(a); Welch v.
Helvering, 290 U.S. 111 (1933).
In essence, petitioners argue that the $12,000 received from
Roy Farms in both 1992 and 1993 is properly excludable under
section 280A(g)(2) because their home was not "actually rented"
during the taxable year. It was not actually rented, according
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to petitioners, because the value of what they received is not
the fair rental value of the dwelling unit.
We note that for purposes of allocating allowable deductions
under section 280A(c), the taxpayer may deduct only those
expenses attributable to the number of days the dwelling unit is
rented at a fair rental value. Sec. 280A(e). However, section
280A(g) contains no requirement that the dwelling unit be rented
at fair rental value for it to be actually rented for purposes of
this subsection, nor can we find any case purporting to impose
such a requirement. Hence, we do not find the lack of a fair
rental value dispositive of whether section 280A(g) works in the
petitioners' favor.3 Examining the language of section 280A(g),
we find that there are other requirements which preclude the
petitioners from benefiting from this provision.
Section 280A(g) requires that the taxpayer's "dwelling unit"
be actually rented for less than 15 days out of the taxable year.
Dwelling unit is defined in section 280A(f)(1)(A) as a "house,
apartment, condominium, mobile home, boat, or similar property,
and all structures or other property appurtenant to such dwelling
unit." (Emphasis added.)
3
In any event, petitioners presented no evidence with
respect to the fair rental value of the portion of the dwelling
unit that was rented to Roy Farms. Even if petitioners' argument
had merit, they would not prevail because they failed to meet
their burden of proof with respect to this fact.
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Petitioners' dwelling unit, as defined in section
280A(f)(1), includes all areas of the home plus the surrounding
property. For $1,000 each month, petitioner agreed to let Roy
Farms store apple bins, apples, and farming equipment on his
property. He allowed the trucks to drive up and down the roadway
leading up to his house, and permitted use of his telephone,
bathroom facilities, and other miscellaneous areas of his home as
needed for the convenience of those working on the farm. Even if
the petitioners maintained certain areas of the house for their
exclusive use, they are still considered to have rented out their
dwelling unit for purposes of section 280A(g) because they rented
out property appurtenant to their dwelling unit. The $1,000
monthly payments represent income from the rental of their
dwelling unit for the entire year, which takes them out of
section 280A(g) because the de minimis provision only seeks to
exclude income from the rental of a dwelling unit for less than
15 days during the taxable year.
Contrary to respondent's assertion, there is economic
substance to this transaction, but it simply does not afford
petitioners favorable tax treatment. The intent of the parties
was to provide the petitioners with compensation for limited
business use of their property. Based on the record, that use
was confined to storage equipment and crops on certain areas of
his property, use of his roads, and the occasional use of his
telephone and bathroom facilities. When rented for the entire
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year, this is sufficient rental of a dwelling unit to preclude
exclusion of income and prohibit deductions under section
280A(g).
For this reason, we find that petitioners have not met their
burden of proof with respect to their claimed deductions and
exclusions.
To reflect the foregoing,
Decision will be entered
for respondent.