T.C. Memo. 2003-342
UNITED STATES TAX COURT
PAUL S. AND SHARON E. TALCHIK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12419-02. Filed December 16, 2003.
Paul S. and Sharon E. Talchik, pro se.
Leonard T. Provenzale, for respondent.
MEMORANDUM OPINION
COUVILLION, Special Trial Judge: Respondent determined a
deficiency of $13,974 in petitioners' Federal income tax for
1999.1
1
Unless otherwise indicated, all section references
hereafter are to the Internal Revenue Code in effect for the year
at issue. All Rule references are to the Tax Court Rules of
Practice and Procedure. The petition was filed pursuant to sec.
7463. At trial, pursuant to Rule 171(c), petitioners moved,
(continued...)
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The sole issue for decision is whether petitioners are
entitled to an itemized deduction for the year 1999 for
investment interest under section 163(d)(1) in an amount greater
than the amount allowed by respondent in the notice of
deficiency.
Some of the facts were stipulated, and those facts, with the
annexed exhibits, are so found and are incorporated herein by
reference. Petitioners' legal residence at the time the petition
was filed was Ft. Lauderdale, Florida.
Petitioners filed a joint Federal income tax return for
1999. That return included a Schedule A, Itemized Deductions, on
which they claimed a deduction of $47,780 for investment interest
relating to numerous capital gain transactions reflected on
Schedule D, Capital Gains and Losses, of their return. In the
notice of deficiency, respondent determined that petitioners were
entitled to a $225 deduction for investment interest and
disallowed $47,555 of the $47,780 claimed on the return. No
other adjustments were made to petitioners' return.
1
(...continued)
without objection from respondent, to remove the case from
consideration under sec. 7463. The Court granted petitioners'
motion, and respondent thereafter filed an answer of general
denial. The deficiency in the notice of deficiency is $13,974.
No concessions have been made by respondent; however, in a
posttrial brief, respondent stated the deficiency to be $13,215
with no concessions or explanation for the $756 discrepancy. The
Court assumes the $13,215 recited in respondent's brief is in
error, and the deficiency at issue is $13,974.
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On Schedule D of their 1999 return, petitioners reported
$47,555 in short-term capital gains. That amount was offset,
however, by a short-term capital loss carryover from 1998 of
$74,836, leaving a $27,281 net short-term capital loss carryover
to future years.
Petitioners also reported long-term capital gains of $29,535
during 1999 that were also totally offset by a long-term capital
loss carryover from 1998 of $99,122. This left petitioners with
a $69,587 long-term capital loss carryover to future years.
Petitioners reported dividend and interest income of $225 on
their 1999 return. Additionally, petitioners reported on a
Schedule E, Supplemental Income and Loss, net income of $17,569,
of which $17,428 came from the rental of a commercial building at
Ft. Lauderdale, Florida, and $141 from an apartment partnership.
Respondent determined that $47,555 of the investment
interest deduction claimed by petitioners was not deductible as
investment interest under section 163(d). The $225 amount that
was allowed by respondent represented the equivalent interest and
dividend income reported by petitioners that respondent agreed
represented investment income and, thus, entitled petitioners to
an itemized deduction for investment interest equal to the
investment income they reported. Sec. 163(d)(5)(A)(i), (d)(4),
(d)(1). Respondent has not questioned petitioners' payment of
the $47,780 in interest; consequently, there is no substantiation
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issue with respect to the $47,555 at issue.2 Respondent's basis
for disallowance of the $47,555 interest deduction is that
petitioners had no investment income in excess of the dividend
and interest income of $225 since their short-term and long-term
capital gains for 1999 were totally offset by capital loss
carryovers from 1998.
Section 163(d)(1) limits a noncorporate taxpayer's deduction
for investment interest to "the net investment income of the
taxpayer for the taxable year". Section 163(d)(4)(A) defines
"net investment income" as the excess of investment income over
investment expenses. Investment income includes interest,
dividends, annuities, or royalties not derived in the ordinary
course of a trade or business. Secs. 163(d)(5)(A)(i), 469(e)(1).
Respondent, therefore, correctly characterized petitioners'
interest and dividend income as investment income and allowed
petitioners an investment interest expense deduction equal to
that amount, $225. Investment income also includes "net gain
attributable to the disposition of property held for investment".
Sec. 163(d)(4)(B)(ii)(I). Although petitioners realized capital
gains during 1999, which they reported on Schedule D of their
return, petitioners also sustained capital losses in prior years,
2
Since the sole issue is based on a question of law, the
Court decides this case without regard to the burden of proof.
Sec. 7491(a).
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and those losses carried over to 1999. Under section
1212(b)(1)(A) and (B), net short-term and net long-term capital
losses realized in one year are treated, respectively, as short-
term or long-term capital losses in the succeeding tax year.
Thus, the net short-term and net long-term carryover losses from
petitioners' 1998 tax year constituted short-term and long-term
capital losses on petitioners' 1999 return. These carryover
losses totally offset the capital gains petitioners realized
during 1999. Therefore, under section 163(d)(4)(B), petitioners,
during 1999, did not realize any income that would be considered
net income attributable to the disposition of property held for
investment. Respondent, therefore, correctly disallowed
petitioners' investment interest deduction to the extent the
deduction exceeded their net investment income. Under section
163(d)(2), any investment interest that is disallowed as a
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deduction is carried forward and deductible in succeeding taxable
years to the extent of net investment income in those years.3
Decision will be entered
for respondent.
3
On their income tax return for 1999, petitioners also
reported Schedule E income of $17,569 from two sources, the
rental of a commercial building and an apartment partnership.
Although petitioners, in their petition and at trial, did not
allege or claim the $17,569 to be net investment income, the
Court, nevertheless, after trial, ordered the parties to address
this income item since, under sec. 163(d)(4)(B), "investment
income", in part, includes gross income from "property held for
investment", subject, however, to limitations under sec.
163(d)(5)(A)(ii). Based on the reports filed by the parties, the
Court is not satisfied that the $17,569 in income is outside the
realm of the limitations of sec. 163(d)(5)(A)(ii).