T.C. Summary Opinion 2004-125
UNITED STATES TAX COURT
ROBERT P. SWEET AND DAWNIELLE K. LAWSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 331-03S. Filed September 9, 2004.
Robert P. Sweet and Dawnielle K. Lawson, pro sese.
Ronald T. Jordan, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the year at issue. 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 for the year 2000 a deficiency in
petitioners' Federal income tax of $5,437 and an accuracy-related
penalty of $1,087.
The Court considers petitioners to have conceded
respondent's determination disallowing itemized deductions of
$540 because petitioners provided neither argument nor evidence
on the issue at trial. Bradley v. Commissioner, 100 T.C. 367,
370 (1993); Sundstrand Corp. v. Commissioner, 96 T.C. 226, 344
(1991); Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988).
Petitioners concede that respondent correctly determined
that $1,283 of respondent's $17,986 adjustment in the statutory
notice of deficiency is a passive activity loss. The issues
remaining for decision are whether for 2000 petitioners: (1) Are
entitled to deduct a loss of $16,703 on Schedule E, Supplemental
Income and Loss; and (2) whether petitioners are liable for the
accuracy-related penalty under section 6662.
Some of the facts have been stipulated and are so found.
The stipulation of facts and exhibits received in evidence are
incorporated herein by reference. At the time the petition was
filed, petitioners resided in Noblesville, Indiana.
Background
Robert P. Sweet (petitioner) was employed during the year as
a real estate loan officer, and his wife, Dawnielle K. Lawson,
was not employed outside of the home.
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In July of 1997, petitioner purchased his first condominium
unit at The Summit condominium resort (Summit) in Panama City,
Florida. In December of 1998, he purchased a second unit at the
same location. Petitioner's two units, 518 and 519, adjoin.
Petitioner installed doors that allowed inside access from one
unit to the other. Each unit contains 912 square feet of living
space and sleeps 6 people. The average rental period for both
units was more than 7 but less than 30 days.
The Summit owners association handled the maintenance and
upkeep of the building exterior and common areas, including
swimming pools, hot tubs, exercise equipment and sauna areas,
tennis courts, beaches and beach chair rentals, restaurants,
parking, and collecting and removing trash.
A separate entity, Advisors Realty (Advisors), operated an
on site rental agency that rented units to the public and
provided ancillary services for owners under an agreement
providing for a 30-percent commission. Advisors provided
accounting services, advertising and promotion, cleaning
equipment and supplies, an inspection prior to return of the
damage deposits, and an annual inspection and inventory.
Advisors also received in 2000 a separate cleaning charge of
$40.751 after each owner's or owner's guest's use of a unit. The
1
Evidence in the record indicates that this charge was later
increased to $65.
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cleaning charge paid for Advisors' housekeeping or "maid service"
following rental departures, which in petitioner's case would
have included cleaning and linen exchange. Petitioner provided
the maid and linen service at no "extra" charge to customers.
Each owner, however, was free to book his own guests or allow
Advisors to do it for commission. Petitioner periodically
allowed Advisors to book guests for his units and paid the
standard commission.
Petitioner sought to minimize the involvement of Advisors,
and avoid their commission, by executing his own marketing
activity and customer bookings. In 2000, petitioner put together
and maintained a Web page that advertised units 518 and 519. He
created the Web site by entering contact information and
information about the amenities offered by his condominium into a
"template" on a preexisting site called A1 Vacations.
Petitioners received gross rental income of $29,467 during 2000,
of which $11,137 was received through bookings from Advisors.
Petitioners required their guests to call them before
contacting the front desk with problems and concerns as a way to
avoid high fees charged by the owners association for routine
maintenance items like changing light bulbs. Petitioners also
led guests that they booked through a detailed telephone check-in
procedure. Petitioners maintained a storage area onsite
containing certain replacement items.
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Petitioner, from time to time, went to visit his units to
perform repairs and maintenance accompanied, occasionally, by his
wife. It was a 785 mile trip each way. When petitioner traveled
to the condominium for repairs and maintenance, he and his wife
stayed in one of the units. One of those trips was to attend the
owners meeting in September. Petitioner attends owners meetings
from time to time to "protect my investment".
Petitioner performed other activities related to the
condominium units. He replied to e-mails, answered the phone to
talk to people about the units, updated his online availability
calendar, tested and improved his Web site, paid bills, and
handled various banking and oversight matters.
On petitioners' Federal income tax return for 2000, on
Schedule E, petitioners claimed a loss of $17,986 of which
$16,703 is attributable to units 518 and 519.
Discussion
The Court decides this case on the preponderance of the
evidence, regardless of the allocation of the burden of proof.
Section 7491(a) is therefore inoperative.
Section 469
Passive Activity Loss Exemption
If a taxpayer is an individual, the "passive activity loss"
for the taxable year shall not be allowed. Section 469(a). The
term "passive activity loss" means the amount by which "the
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aggregate losses from all passive activities" exceeds "the
aggregate income from all passive activities" for the taxable
year. Sec. 469(d)(1). Except for taxpayers entitled to
treatment under section 469(c)(7), "Special rules for taxpayers
in real property business", the term "passive activity" includes
any rental activity. Sec. 469(c)(2). Rental activity is any
activity "where payments are principally for the use of tangible
property." Sec. 469(j)(8). Petitioners do not claim that the
special rules of section 469(c)(7) apply to their return for
2000.
Section 469(i), with respect to rental real estate
activities in which an individual actively participates, provides
that the section 469(a) disallowance will not apply to a maximum
of $25,000 of passive activity losses. An annual maximum of one
$25,000 offset is allowed for all of a taxpayer's rental
activities. Sec. 469(i)(2), (5). This nonapplication or
"exemption" begins to phase out where the taxpayer's adjusted
gross income (AGI) exceeds certain levels. Sec. 469(i)(3). The
phaseout in petitioners' case is 50 percent of the amount by
which their AGI (computed without regard to passive activity
losses) exceeds $100,000. See sec. 469(i)(3)(A), (E)(iv).
Computed as required, petitioners' adjusted gross income is
$152,700, and the exemption is completely phased out.
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Exception for Significant Personal Services
The parties agree that petitioners are entitled to claim the
disputed $16,703 loss from their condominium units at the Summit
as nonpassive on their Federal income tax return for 2000 only
if: (1) Petitioners' condominium activity is described in
section 1.469-1T(e)(3)(ii), Temporary Income Tax Regs., 53 Fed.
Reg. 5702 (Feb. 25, 1988); and (2) petitioners meet one of the
material participation tests of section 1.469-5T(a), Temporary
Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988).
Section 1.469-1T(e)(3)(ii)(B), Temporary Income Tax Regs.,
supra (B exception) provides that an activity generating payment
for the use of tangible personal property is not rental activity
(and therefore not per se passive) if the average period of
customer use is 30 days or less and "significant personal
services" are provided by or on behalf of the owner of the
property in connection with making it available for customer use.
Petitioners contend that they fall within the B exception.
Certain services are "excluded services" and are not
considered in determining whether significant personal services
are performed. Section 1.469-1T(e)(3)(iv), Temporary Income Tax
Regs., supra. Services necessary to permit the lawful use of the
property, and certain construction and repair services are
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"excluded services". Section 1.469-1T(e)(3)(iv)(B), Temporary
Income Tax Regs., supra. Also described as excluded services
are:
Services * * * similar to those commonly provided in
connection with long-term rentals of high-grade
commercial or residential real property (e.g., cleaning
and maintenance of common areas, routine repairs, trash
collection, elevator service, and security at entrances
or perimeters).
For purposes of the B exception, "personal services" means
only services performed by individuals. Section 1.469-
1T(e)(3)(iv), Temporary Income Tax Regs., 53 Fed. Reg. 5702 (Feb.
25, 1988). In determining whether personal services are
"significant", all relevant facts and circumstances, for example
the frequency, type, and value of the services, are taken into
account. Id.
At trial, petitioner adduced both oral and documentary
evidence of what he considers to have been the significant
personal services provided by or on behalf of petitioners in
making the property available for customer use. During the
examination of petitioners' joint return, petitioner provided a
"Summary Tax Year 2000 Fact & Circumstances Condo #518 & #519"
document purporting to show "personal services" requiring 1,016
hours to perform. Petitioner, however, prepared for and
presented at trial a second document showing the performance of
686 hours of personal services (summary for trial).
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It is apparent from petitioner's testimony, and the two
versions of the summary for 2000, that at best the summaries
represent estimates of the time devoted to the performance of
services associated with the condominium units. The Court will,
however, for purposes of discussion, accept as accurate the
summary for trial.
The Court views petitioners' summary for trial as describing
five categories of activity: (1) Responding to telephone and
Internet inquiries, and preparing and changing the Internet Web
site; (2) booking guests, confirming reservations, and arranging
for keys and parking passes; (3) travel by petitioners to and
from the property; (4) repair and cleaning of the property; and
(5) banking and bookkeeping.
Among excluded services are services similar to those
provided in connection with long-term rentals of high-grade
commercial or residential real property. Section 1.469-
1T(e)(3)(iv)(B), Temporary Income Tax Regs., 53 Fed. Reg. 5702
(Feb. 25, 1988). Petitioners allege that 150 hours were spent
responding to telephone and Internet inquiries to discuss the
amenities of the units, their availability, and their
desirability. An additional 64 hours are alleged to have been
spent preparing and changing the Web site at A1 Vacations, which
contained similar information. These activities can be fairly
described as marketing. Similar services are provided in
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connection with long-term rentals of high-grade commercial or
residential real property. Regardless of the hours spent, such
services are excluded services. Id.
Petitioner, or petitioner's agents, engaged in booking
guests, confirming reservations and security deposits, and
arranging for keys and parking passes, activities allegedly
requiring 45 hours. The services may have been performed more
frequently than at typical high-grade commercial or residential
real properties. Petitioners have, however, provided little
evidence as to whether the provided personal services were
significant, especially in terms of their value and the
relationship of that value to the amount charged for use of the
properties.
Some of the reservation services were provided by Advisors
for a 30-percent commission. But the same commission also paid
for accounting services, advertising and promotion, cleaning
equipment and supplies, an inspection prior to return of the
damage deposit, and an annual inspection and inventory. Some of
the services are excluded services. The Court is unable to
determine how to allocate the commission to the various services
provided. Petitioner provided no evidence of the value of the
reservation services that he performed. The Court concludes that
the reservation type services were not significant personal
services. The travel by petitioners, a 1,570 mile round-trip
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between their home and the condominium units, to attend meetings
and to perform "maintenance" is said to have consumed 219 hours.
The Court recognizes that travel in some circumstances can be a
personal service performed in connection with making property
available for customer use. Commuting, however, is an inherently
personal activity and as such does not constitute a "personal
service" to customers. See Fausner v. Commissioner, 413 U.S.
838, 839 (1973) ("We cannot read section 262 of the Internal
Revenue Code as excluding such expense from 'personal'
expenses"); Commissioner v. Flowers, 326 U.S. 465 (1946); sec.
1.262-1(b)(5), Income Tax Regs. (taxpayer's choice to live at a
distance from his place of business is personal).
Petitioners claim involvement in 96 hours' worth of
"comprehensive seasonal" repairs and maintenance of the property.
Petitioners performed the services three times together and
Dawnielle assisted him on two or three of the trips.2 The
services may have been performed more frequently than at typical
high-grade commercial or residential real properties.
Petitioners, however, failed to provide any evidence of the value
of the services they provided. They did provide evidence that
they paid maid and linen service costs of $2,364, a figure
2
Petitioner testified that his wife was with him on three of
the trips. Petitioners' C.P.A. represented to Appeals Division
in a letter dated September 12, 2003, that she made two trips to
their properties.
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representing about 8 percent of gross rentals.
In Example (4) of section 1.469-1T(e)(3)(viii), Temporary
Income Tax Regs., 53 Fed. Reg. 5703 (Feb. 25, 1988), the taxpayer
is engaged in the activity of owning and operating a residential
apartment hotel where rentals are for more than 7 but less than
30 days. The taxpayer provides daily maid and linen service at
no additional charge. Because the value of the maid and linen
service is less than 10 percent of the amount charged to tenants,
they are not significant personal services. The Court concludes
that petitioners' cleaning and repair services, including maid
and linen services, are not significant personal services.
Petitioner testified that they attended owners association
meetings to protect their investment. They also received and
deposited funds from customers, paid bills, and prepared income
and expense summaries "for tax return preparation". Petitioners
argue that these activities should be considered as personal
services under the B exception.
The B exception addresses cases where significant personal
services are provided by or on behalf of the owner of the
property in connection with making it available for customer use.
Petitioners press their argument by broadly interpreting the "in
connection with" language of the exception. They fail, however,
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to place enough emphasis on the "making the property available
for use by customers" language qualifying "in connection with."
Legislative history of section 469 suggests that "section
1372(e)(5) (as in effect prior to the Subchapter S Revision Act
of 1982) is relevant" in determining whether significant services
are performed in connection with furnishing property. S. Rept.
99-313 at 741 n.32 (1986). The regulations provided that,
generally, only services provided to the occupant "primarily for
his convenience" are to be considered significant services.
Stover v. Commissioner, 781 F.2d 137, 139 (8th Cir. 1986), affg.
T.C. Memo. 1984-551; Bramlette Bldg. Corp. v. Commissioner, 52
T.C. 200, 203-204 (1969), affd. 424 F.2d 751 (5th Cir. 1970).
Petitioners' attendance at owners association meetings and their
banking activities have more to do with the ownership of property
than with making the properties available to customers. The
activities are not significant personal services.
Petitioners have also alleged that they incurred higher than
normal owners association charges, dues, and assessments for
additional amenities such as beach chair rentals, bars, a game
room and a parking lot. Nearly all the services listed are of a
type commonly rendered by luxury apartment complexes, especially
on the Florida Coast. See Crouch v. United States, 692 F.2d 97,
101 (10th Cir. 1982).
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The Court finds from the entire record that petitioners'
condominium activity is not described in section 1.469-
1T(e)(3)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 5702 (Feb.
25, 1988). Petitioners' condominium activity during 2000 was a
rental activity, a passive activity, and respondent's denial of
the deduction of passive activity losses is sustained.
Accordingly, the Court sustains respondent's determination
that there is a deficiency in petitioners' income tax for the
year.
Accuracy-Related Penalty
Respondent determined that petitioners are liable for the
section 6662(a) accuracy-related penalty. Taxpayers are liable
for an accuracy-related penalty in the amount of 20 percent of
the portion of an underpayment of tax attributable to any
substantial understatement of income tax. Sec. 6662(a) and
(b)(2). A "substantial understatement" is an understatement for
the taxable year exceeding the greater of 10 percent of the
proper tax or $5,000. Sec. 6662(d)(1)(A). No penalty will be
imposed with respect to any portion of any underpayment if it is
shown that there was a reasonable cause for such portion and that
the taxpayer acted in good faith with respect to such portion.
Sec. 6664(c). This determination is based on all the facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
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Section 7491(c) imposes on respondent the burden of
producing evidence to show that the section 6662(a) penalty is
appropriate, but respondent need not produce evidence regarding
reasonable cause. Higbee v. Commissioner, 116 T.C. 438, 446-447
(2001). The Court has sustained respondent's determination of
the deficiency. Petitioners' understatement of tax exceeds the
greater of 10 percent of the proper tax or $5,000. The Court
finds that respondent has satisfied the burden of production with
respect to the accuracy-related penalty under section 6662(a).
Petitioners presented no evidence indicating reasonable
cause for the understated income. Accordingly, the imposition of
the accuracy-related penalties is sustained.
The Court has considered all of the other arguments made by
the parties, and to the extent that the arguments have not been
specifically discussed above, they have been found to be moot or
without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing.
Decision will be
entered for respondent.