T.C. Summary Opinion 2004-81
UNITED STATES TAX COURT
SHARON M. RIVERA AND RICHARD C. RIVERA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4731-03S. Filed June 23, 2004.
Sharon M. and Richard C. Rivera, pro sese.
Charlotte Mitchell, for respondent.
DEAN, Special Trial Judge: This case was heard under the
provisions of section 7463 of the Internal Revenue Code as in
effect at the time the petition was filed. Unless otherwise
indicated, all other section references are to the Internal
Revenue Code in effect for the years at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
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Respondent determined deficiencies in petitioners' Federal
income taxes of $4,018 for 1999 and $4,130 for 2000. The Court
must decide whether petitioners are entitled to deduct losses on
Schedule E, Supplemental Income and Loss, for either year.
Respondent's adjustments to petitioners' itemized deductions are
computational and will be determined by the Court's resolution of
the Schedule E loss issue.
The stipulated facts and exhibits received into evidence are
incorporated herein by reference. At the time the petition in
this case was filed, petitioners resided in Newark, California.
Background
During the years here involved, petitioner Richard C. Rivera
was employed as an electrician, and petitioner Sharon M. Rivera
was employed as a "personnel technician".
Around 1989 or 1990, petitioners purchased improved real
property in Truckee, California, for about $80,000. As of the
date of trial it was worth between $160,000 and $170,000. In the
early 1990s, after a year or so of ownership, petitioners rented
their property through a vacation property management company
under short-term leases for the winter or for ski season. This
caused a lot of wear and tear on the property, and they had "so
much trouble" from the renters. Petitioners received numerous
complaints there were "extra people living at the property", and
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petitioners had trouble getting some of the renters out of their
property.
Starting around 1994, after the short-term lessees were
removed, petitioners began entering into longer term leases with
multiple occupants without using the vacation property management
companies. But even the longer term renters caused a lot of
"trouble", including leaving mattresses outdoors in the carport,
and building a skate ramp in the back of the property in
contravention of the homeowners' association rules. Petitioners
eventually decided that they were "only going to rent to people
that we knew, or were acquaintances, or people we worked with."
During 1999 and 2000, petitioners relied on word of mouth
advertising at work to obtain renters. Petitioners' books and
records for their rental activity consisted of calendars, logs of
their mileage driven, retained utility and insurance bills, and
bills for association dues. During 1999, petitioners rented the
property in Truckee for 25-1/2 days and stayed there themselves
for 8 days. During 2000, petitioners rented the property for 23
days and stayed there for 8 days. Petitioners reported rents
received of $1,400 for 1999 and $1,500 for 2000, and Schedule E
losses of $19,322 for 1999 and $19,336 for 2000.
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Discussion
Because petitioners did not comply with the requirements of
section 7491(a), section 7491 is inapplicable here.
Tax Year 1999
Section 280A, Disallowance of Certain Expenses in Connection
With Business Use of Home, Rental of Vacation Homes, etc., limits
otherwise allowable deductions by individuals with respect to a
dwelling unit that is used by the taxpayer during the year as a
"residence". The provision does not apply to deductions for
amounts allowable without regard to the taxpayer's income
producing activity, such as interest and taxes. Sec. 280A(b).
A taxpayer uses a dwelling as a "residence" if his personal
use exceeds the greater of 14 days or 10 percent of the days it
is rented at fair rental value during the year. Sec. 280A(d)(1).
Petitioners used the Tahoe property themselves for 8 days during
1999. They rented the property for 25-1/2 days for total gross
rentals of $1,400, or an average of $54.90 per day. The parties
stipulated evidence indicating that the minimum daily fair rental
value of the property was $65 per day. Every day that a dwelling
unit is rented at less than fair rental value is deemed used by
the taxpayer for "personal purposes". Sec. 280A(d)(2)(C).
Petitioners' personal use of the property in 1999 was 33-1/2
days. Sec. 280A(d)(2)(A), (C).
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Because petitioners' gross income was less than their
deductions for mortgage interest and taxes, petitioners must
carryover their other deductions to the following tax year, and
they are only deductible up to the amount of income generated by
the property. Sec. 280A(c)(5).1
Tax Year 2000
During 2000, petitioners used their property for 8 days and
rented it for 23 days for gross rentals of $1,500, or an average
of $65.21 per day. Because petitioners rented the property for
fair rental value during the year, their personal use did not
exceed the greater of 14 days or 10 percent of the days it was
rented at fair rental value during the year. Sec. 280A(d)(1).
Petitioners’ deductions are not limited under section 280A(a) for
2000 because their property was not used as a "residence" during
the year. Sec. 280A(a), (d)(1). Section 280A is not, however,
the only obstacle between petitioners and their claimed
deductions.
Section 183(a) generally provides that if an activity
engaged in by an individual is not entered into for profit, no
deduction attributable to the activity shall be allowed, except
as otherwise provided in section 183(b). An "activity not
engaged in for profit" means any activity other than one for
1
Because sec. 280A(a) applies, sec. 183 does not. Sec.
280A(f)(3).
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which deductions are allowable under section 162 or under
paragraph (1) or (2) of section 212. Sec. 183(c).
Deductions are allowed under section 162 for the ordinary
and necessary expenses of carrying on an activity that
constitutes the taxpayer's trade or business. Deductions are
allowed under section 212(1) and (2) for expenses paid or
incurred in connection with an activity engaged in for the
production or collection of income, or for the management,
conservation, or maintenance of property held for the production
of income. With respect to either section, however, the taxpayer
must demonstrate a profit objective for the activity in order to
deduct associated expenses. See Jasionowski v. Commissioner, 66
T.C. 312, 320-322 (1976); sec. 1.183-2(a), Income Tax Regs. The
profit standards applicable to section 212 are the same as those
used in section 162. See Agro Science Co. v. Commissioner, 934
F.2d 573, 576 (5th Cir. 1991), affg. T.C. Memo. 1989-687;
Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir. 1990),
affg. 91 T.C. 686 (1988); Allen v. Commissioner, 72 T.C. 28, 33
(1979); Rand v. Commissioner, 34 T.C. 1146, 1149 (1960).
Whether the required profit objective exists is to be
determined on the basis of all the facts and circumstances of
each case. See Hirsch v. Commissioner, 315 F.2d 731, 737 (9th
Cir. 1963), affg. T.C. Memo. 1961-256; Golanty v. Commissioner,
72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d
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170 (9th Cir. 1981); sec. 1.183-2(a), Income Tax Regs. While a
reasonable expectation of profit is not required, the taxpayer's
objective of making a profit must be bona fide. See Elliott v.
Commissioner, 84 T.C. 227, 236 (1985), affd. without published
opinion 782 F.2d 1027 (3d Cir. 1986). In making this factual
determination, the Court gives greater weight to objective
factors than to a taxpayer's mere statement of intent. See
Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d 724 (9th Cir.
1986), affg. Lahr v. Commissioner, T.C. Memo. 1984-472; Dreicer
v. Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion
702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.
Section 1.183-2(b), Income Tax Regs., sets forth nine
nonexclusive factors that should be considered in determining
whether a taxpayer is engaged in a venture with a profit
objective. They include: (1) The manner in which the taxpayer
carried on the activity; (2) the expertise of the taxpayer or his
advisers; (3) the time and effort expended by the taxpayer in
carrying on the activity; (4) the expectation that the assets
used in the activity may appreciate in value; (5) the success of
the taxpayer in carrying on other similar or dissimilar
activities; (6) the taxpayer's history of income or loss with
respect to the activity; (7) the amount of occasional profits
that are earned; (8) the financial status of the taxpayer; and
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(9) whether elements of personal pleasure or recreation are
involved.
No single factor is controlling, and the Court does not
reach its decision by merely counting the factors that support
each party's position. See Dunn v. Commissioner, 70 T.C. 715,
720 (1978), affd. 615 F.2d 578 (2d Cir. 1980); sec. 1.183-2(b),
Income Tax Regs. Rather, the relevant facts and circumstances of
the case are determinative. See Golanty v. Commissioner, supra
at 426.
After considering all the factors, the Court disagrees, in
part, with respondent's position that petitioners did not have an
actual and honest objective of making a profit from their Truckee
real estate.
Petitioner, Sharon Rivera, testified that the property was
rented at a small profit during the first few years of ownership.
After a series of destructive tenants, however, petitioners
became reluctant to rent the property to the general public. For
the years before the Court, petitioners did not maintain
businesslike books and records of rental activity, and there was
not much time spent in carrying on the activity. Furthermore, it
appears from the record that the property was rented for less
than its fair rental value for the days it was rented, only to
family and friends, in 1999. The Court agrees with respondent
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that petitioners had abandoned holding the property for profit
from rentals during the years at issue.
The term "profit", however, encompasses the appreciation in
the value of the assets used in the activity. Sec. 1.183-
2(b)(4), Income Tax Regs. The term "income" as it is used in
section 212 "is not confined to recurring income" but may also
apply to gains from the disposition of property. Sec. 1.212-
1(b), Income Tax Regs. The term "income" means not merely income
of the taxable year but includes income the taxpayer "may realize
in subsequent taxable years". Id.
When the returns at issue were filed, petitioners had held
their property in Truckee, located near the Lake Tahoe ski and
vacation area, for 9 or 10 years. Petitioners' personal use of
the property in 2000 was de minimis. The Court also credits the
testimony of petitioner, Sharon Rivera, that she and her husband
purchased the property with the expectation that it would
increase in value and that it had, in fact, substantially
increased in value while they owned it.
The Court finds that petitioners held the property in
Truckee primarily for investment purposes and are therefore
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entitled to deduct expenses under section 212(2).2 See Mitchell
v. Commissioner, 47 T.C. 120, 128 (1966); Thomason v.
Commissioner, T.C. Memo. 1997-480; sec. 1.212-1(b), Income Tax
Regs.
The Court concludes from the record that petitioners'
activities with respect to the property for 2000 were of two
separate types, a rental activity and an investment activity.
"If the taxpayer engages in two or more separate activities,
deductions and income from each separate activity are not
aggregated either in determining whether a particular activity is
engaged in for profit or in applying section 183." Sec. 1.183-
1(d)(1), Income Tax Regs.
Because petitioners' property was used for more than one
activity, one of which was not for profit, petitioners must
allocate deductions relating to the property on a reasonable
basis. Sec. 1.183-1(d)(2), Income Tax Regs. Because
petitioners' mortgage interest and real estate taxes are
specifically allowable as deductions under sections 163 and
164(a) without regard to the use of the property for profit, no
allocation between the activities is necessary. Sec. 1.183-
1(d)(3), Income Tax Regs.
2
The deductions would appear to give petitioners a passive
activity loss. See sec. 469(c)(1), (6)(B). Petitioners,
however, are treated as "materially participating" in the
investment activity under test two of sec. 1.469-5T(a),
Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988).
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Amounts for homeowners' dues, insurance, repairs, and
depreciation are amounts allocable to both of petitioners'
activities. Since petitioners rented or personally used the
property for about 1 month each year and held the property for
investment the rest of the year, 11/12 of the above amounts are
allocable to petitioners' investment activity. All other
amounts, including auto and travel (to clean after rentals),
cleaning and maintenance, supplies, utilities, "amortization",
and amounts for furnishings, are allocable solely to petitioners'
not-for-profit rental and personal activity.
Section 183(b)(1) permits a deduction for expenses that are
otherwise deductible without regard to whether the activity is
engaged in for profit, such as mortgage interest and personal
property taxes. Section 183(b)(2) permits a deduction for
expenses that would be deductible only if the activity were
engaged in for profit, but only to the extent that the gross
income derived from the activity exceeds the deductions allowed
by section 183(b)(1). Because petitioners' gross income derived
from the rental activity does not exceed the section 183(b)(1)
expenses, section 183(b)(2) does not permit a deduction for
expenses that would be deductible only if the rental activity
were engaged in for profit. Items that are allocable to
petitioners' personal use are also not deductible. Sec. 262.
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The Court sustains respondent's determination to the extent
that petitioners may not deduct expenses allocable to their
rental and personal use of the Truckee property.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be
entered under Rule 155.