T.C. Summary Opinion 2008-142
UNITED STATES TAX COURT
BERNIE RILEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12531-07S. Filed November 12, 2008.
Bernie Riley, pro se.
Kimberly W. Chowning, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency of $1,268 in petitioner’s
Federal income tax for the taxable year 2004. The 2004
deficiency stemmed from the disallowance of rental expenses in
excess of rental income for a vacation property owned by
petitioner.
Respondent also determined a deficiency of $6,678 in
petitioner’s Federal income tax for the taxable year 2005. The
2005 deficiency stemmed from a disallowance of rental expenses in
excess of rental income from the same vacation property, as well
as the disallowance of rental expenses in excess of rental income
for the property that petitioner uses as her primary residence.
Additionally, respondent determined that for 2005 petitioner was
liable for both an accuracy-related penalty of $1,335.60 under
section 6662(a) and an addition to tax of $973.65 for failure to
timely file under section 6651(a)(1).
After concessions by respondent,2 the three issues remaining
for decision are:
2
Respondent conceded prior to trial that certain
calculations in the 2005 notice of deficiency were erroneous, and
that the deficiency in petitioner’s Federal income tax for 2005
should be $4,450. See sec. 469. Accordingly, respondent
conceded the sec. 6662(a) penalty and revised the sec. 6651(a)
addition to tax to $639.45. See secs. 6662(d)(1)(A)(ii),
6651(a)(1), (b)(1).
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(1) Whether petitioner is entitled to deduct rental
expenses claimed in excess of her rental income from the vacation
property for either taxable year. We hold that she is not;
(2) whether petitioner is entitled to deduct rental
expenses claimed in excess of rental income she received from
renting a portion of her personal residence in 2005. We hold
that she is not;
(3) whether petitioner is liable for an addition to tax for
failure to timely file her 2005 Federal income tax return. We
hold that she is not.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulations of
facts.
At the time the petition was filed, petitioner was a
resident of Illinois.
During the taxable years at issue, petitioner owned
undeveloped property in Lee County, Illinois (the Woodhaven Lakes
property). The Woodhaven Lakes property had been in petitioner’s
family for a long time. Located in Sublette, Illinois (about 2
hours outside Chicago), the property is part of an area which
Wikipedia describes as being a “privately owned camping resort”.
See http://en.wikipedia.org/wiki/Woodhaven_Lakes. Petitioner’s
testimony supports this description.
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Petitioner and her family would drive to the Woodhaven Lakes
property to fish and get away from the city in the summer. When
petitioner took her grandchildren, they would stay the whole
summer. Petitioner went to the Woodhaven Lakes property with her
grandchildren in 2004 and 2005.
The Woodhaven Lakes property actually comprised two
contiguous lots. However, the two lots were treated as a single
piece of property, and, when petitioner’s family sold the
Woodhaven Lakes property in 2007, the two lots were sold
together. On one side of the property stood a converted camper
trailer; the other side was completely unimproved.
When petitioner and her grandchildren went for the summer,
they stayed on the unimproved side of the land in a “pop-up
trailer”. A handyman lived in the camper trailer. He acted as a
caretaker for the property and the camper trailer itself;3 he
also performed maintenance work for petitioner and other
residents of the area. In exchange for these services,
petitioner charged the handyman below-market rent.
Petitioner properly reported the rent she received ($500 in
2004 and $1,500 in 2005) on her tax returns. Because of the
expense of owning and maintaining the property, petitioner
3
Raccoons caused a considerable amount of damage when the
camper trailer was left uninhabited.
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claimed losses in both 2004 and 2005 stemming from the Woodhaven
Lakes property.
In addition to the Woodhaven Lakes property, petitioner owns
a home in Chicago (the Chicago property). The Chicago property
was her primary residence, and she lived there with some of her
grandchildren. Petitioner rents the finished basement of her
home to her son and daughter-in-law. The basement apartment has
a full bath, a family room, a dining room, a kitchen, and a
bedroom. It also has its own entrance to the outside.
Petitioner reported the $5,896 of rental income she received
from her son and daughter-in-law on her 2005 Federal income tax
return. She filed her 2005 return on June 26, 2006. Petitioner
did not request an extension of time to file her return for 2005.
On April 19, 2007, respondent mailed to petitioner a notice
of deficiency for the 2004 and 2005 tax years. In the notice of
deficiency, respondent adjusted petitioner’s deductions related
to rental expenses for the Woodhaven Lakes property for both
years because petitioner used the property as a “residence”. For
2004, respondent allowed $500 of the $692 claimed real estate tax
deduction; the remaining $192 was allowable as an itemized
deduction. For 2005, respondent allowed the $138 claimed real
estate tax deduction and the $934 claimed mortgage interest
deduction. Respondent also allowed $428 of the $555 claimed for
rental insurance premiums in 2005. Respondent disallowed
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petitioner’s deductions for all other expenses related to the
Woodhaven Lakes property for 2004 and 2005 as they exceeded the
amounts of rental income received in those years.
Respondent also adjusted petitioner’s rental expense
deductions for the basement apartment in her home for 2005
because she used the Chicago property in its entirety for
“personal use”. Respondent allowed deductions for one-half of
the mortgage interest expense and one-half of the real estate
taxes as rental expenses; the other half of each of those
expenses was allowed as an itemized deduction, and the remainder
of the claimed expenses were disallowed to the extent that they
exceeded the rental income received for that property in 2005.
Respondent also determined an addition to tax under section
6651(a) for the late filing of petitioner’s 2005 Federal income
tax return.
Discussion
I. Burden of Proof
Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving those
determinations wrong. Rule 142(a); INDOPCO, Inc. v Commissioner,
503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115
(1933). Under section 7491(a)(1), the burden of proof may shift
from the taxpayer to the Commissioner if the taxpayer produces
credible evidence with respect to any factual issue relevant to
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ascertaining the taxpayer’s tax liability. In this case there is
no such shift because petitioner neither alleged that section
7491 was applicable nor established that she fully complied with
the requirements of section 7491(a)(2). The burden of proof
remains on petitioner.
II. The Woodhaven Lakes Property
The issue here is whether petitioner is entitled to
additional deductions for expenses she incurred maintaining the
Woodhaven Lakes property.
Section 212(2) allows a deduction for all the ordinary and
necessary expenses paid or incurred during the taxable year for
the management, conservation, or maintenance of property held for
the production of income. No deduction is permitted for
personal, living, or family expenses. Sec. 262(a).
Section 280A limits otherwise allowable deductions by
individuals with respect to a “dwelling unit” that is used by the
taxpayer during the year as a “residence”. Sec. 280A(a).
Deductions related to the rental of a dwelling unit are exempt
from the section 280A(a) limitation, provided that the property
is not used as a residence. Sec. 280A(c); see also sec. 280A(e).
A taxpayer uses a dwelling unit as a “residence” if his or her
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). Section 280A(c)(5) then limits the deduction of
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expenses related to the property to the excess of gross income
from the property over deductions allocable to the rental use
that are deductible regardless of the rental use, such as
interest and taxes. See sec. 280A(b).
Although petitioner did not charge the handyman market-rate
cash rent, we are unable to ascertain from the facts of this case
whether the rent she did charge was fair rental value given the
services he provided to petitioner in maintaining and caring for
her property and the camper trailer. What we can decide,
however, is that petitioner used the Woodhaven Lakes property
itself for more than 14 days in each of the years at issue.
Petitioner and her grandchildren spent the bulk of the
summer in both years at the Woodhaven Lakes property, and
although they did not use the mobile home, their extended stays
in a pop-up camper on the property in 2004 and 2005 were
sufficient to turn petitioner’s use of the property into
residence-like treatment.
Accordingly, petitioner’s deductions relating to the
Woodhaven Lakes property for each of the years in issue are
limited by section 280A. As respondent has already allowed
petitioner the maximum deduction for each year, we hold for
respondent on this issue.
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III. The Chicago Property
Much like with the Woodhaven Lakes property, the issue here
is whether petitioner is entitled to deductions for rental
expenses beyond those already permitted by respondent with regard
to her home in Chicago. In other words, did petitioner rent out
a designated portion of her home for fair rental value or was the
entire property–-including the basement apartment in which her
son and daughter-in-law lived-–her residence for tax purposes
such that section 280A would limit petitioner’s expense
deductions with regard to that property?
According to the Internal Revenue Code, each 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); see sec. 280A(d)(2)(A). Further, if a member of
the taxpayer’s family uses the dwelling unit as a principal
residence, a personal purpose is attributed to the taxpayer
unless the property is leased for a fair rental. See secs.
280A(d)(2)(A), (3)(A), 267(c)(4). As noted earlier, no deduction
is permitted for personal, living, or family expenses. Sec.
262(a).
Unfortunately, petitioner did not introduce any evidence
regarding fair market rents for 2005 in her neighborhood to
permit a comparison with the amount of rent she received from her
son and daughter-in-law. In the absence of such evidence, we
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have no way to find that the amount petitioner’s son and his wife
paid for use of the apartment was at a fair value rate, and we
are unable to hold for petitioner on this issue.
In the absence of further information and given petitioner’s
testimony, it appears that the rent paid to petitioner reflected
the incremental costs and expenses attributable to additional
people living in the house; it was not reflective of a fair
rental value paid with an eye toward either profit or housing
cost recoupment.
Because respondent has already permitted petitioner a
deduction for those expenses that would be deductible without
regard to rental activity, we hold for respondent on this issue.
IV. The Addition to Tax
Section 6651(a)(1) imposes an addition to tax for failure to
file a return by its due date. The addition equals 5 percent for
each month or fraction thereof that the return is late, not to
exceed 25 percent. Id. Respondent bears the burden of
production with respect to the addition to tax. See sec.
7491(c); see also, e.g., Swain v. Commissioner, 118 T.C. 358, 363
(2002); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Respondent has met his burden.
If the taxpayer is able to prove that the failure to timely
file was not the result of “willful neglect” and was “due to
reasonable cause”, the addition to tax will not be imposed.
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United States v. Boyle, 469 U.S. 241, 245 (1985); see sec.
301.6651-1(c), Proced. & Admin. Regs.; sec. 1.6161-1(b), Income
Tax Regs.
Petitioner, a senior citizen, has had severe health
problems, including suffering the lingering effects of a stroke.
She is also a caregiver to her five grandchildren as one son is
deployed in Iraq and the other suffers from spina bifida.
Petitioner’s failure to timely file was not the result of willful
neglect and was due to reasonable cause. Accordingly, we hold
that petitioner is not liable for the addition to tax under
section 6651(a)(1) for 2005.
V. Conclusion
To reflect our disposition of the disputed issues, as well
as respondent’s concessions,
Decision will be entered
for petitioner as to the
addition to tax under section
6651(a)(1) for 2005 and as to
the accuracy-related penalty
under section 6662(a) for
2005, and decision will be
entered for respondent as to
the deficiency for 2004 and as
to the reduced deficiency for
2005.