T.C. Memo. 2010-85
UNITED STATES TAX COURT
CHARLES M. AKERS, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16391-08. April 21, 2010.
R determined a deficiency in P’s 2004 Federal
income tax. After P’s concessions, the issues for
decision are: (1) Whether P is entitled to deduct
Schedule E expenses relating to real property in
California; and (2) whether the real property in
California was a residence of P during 2004 for
purposes of sec. 280A, I.R.C.
Held: P is not entitled to deduct Schedule E
expenses relating to the real property in California.
Held: The real property in California was a residence
of P during 2004 for purposes of sec. 280A, I.R.C. P is
liable for the income tax deficiency.
- 2 -
Charles M. Akers, Jr., pro se.
Jeffery D. Rice, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case is before the Court on a petition
for redetermination of an alleged income tax deficiency that
respondent determined for petitioner’s 2004 tax year. After
concessions by petitioner,1 the issues for decision are: (1)
Whether petitioner is entitled to a deduction for expenses
claimed on Schedule E, Supplemental Income and Loss, for 2004
relating to petitioner’s real property in California; (2) if
petitioner is not entitled to deduct Schedule E expenses for the
2004 tax year, whether the real property in California is a
residence of petitioner for 2004 for purposes of section 280A.2
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts and accompanying exhibits are hereby incorporated by
1
Petitioner conceded that he received $673 of unreported
income in 2004. This amount included income from compensation
and the sale of stocks and bonds. There was also an unreported
withholding tax credit of $104 which respondent conceded.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the tax year at issue. The Rule reference is to the Tax Court
Rules of Practice and Procedure.
- 3 -
reference into our findings. At the time he filed his petition,
petitioner resided in California.
During the 2004 tax year petitioner was the sole owner of a
three-bedroom home in California (the cabin). On his 2004
Federal income tax return, petitioner claimed $20,258 of Schedule
E expenses relating to the rental of the cabin. All of these
claimed expenses were disallowed by respondent.
Petitioner contracted with Alpine Resort Rentals (Alpine), a
property management company, to rent the cabin for the 2004 tax
year. Per the rental agreement, Alpine had an exclusive right to
rent the cabin during 2004. For its services, petitioner paid
Alpine a 35 percent commission of all rental income received.
Among other things, Alpine was responsible for arranging
housekeeping and linens for rental customers; petitioner was
responsible for maintaining the property in a safe and aesthetic
condition, paying all utilities, having the property “deep
cleaned” twice a year, and providing linens.
The cabin was rented 3 times during the 2004 tax year, for a
total rental period of 12 days and 9 nights. The parties have
agreed that the average rental period of customer use for the
cabin for 2004 tax year was 3 days.
Petitioner visited the cabin eight times during 2004, for a
total of approximately 27 days and 19 nights. Each time
- 4 -
petitioner visited the cabin during 2004, he was accompanied by
family members.
On April 14, 2008, respondent issued a notice of deficiency
disallowing the previously noted $20,258 of petitioner’s claimed
Schedule E expenses. Petitioner filed a timely petition with
this Court. A trial was held on January 18, 2009, in Los
Angeles, California.3
OPINION
I. Burden of Proof
The Commissioner’s determination of a taxpayer’s liability
is generally presumed correct, and the taxpayer bears the burden
of proving that the determination is improper. See Rule 142(a);
3
It is appropriate at this juncture to dispose of a
procedural matter pending before this Court. In the stipulation
of facts and the supplemental stipulation of facts, respondent
objected to the admissibility of petitioner’s Exhibits 9-P
through 22-P on grounds of relevancy and materiality. We took
respondent’s objections under advisement. Upon due consideration
we find that Exhibits 9-P through 11-P and 14-P through 22-P have
a tendency to make the existence of facts that are of consequence
to the determination of this case more or less likely than
without them. See Fed. R. Evid. 401 and 402. Therefore,
respondent’s objections to the admissibility of petitioner’s
Exhibits 9-P through 11-P and 14-P through 22-P are overruled and
these exhibits are received into evidence.
With regard to Exhibit 12-P, a copy of the letter petitioner
wrote to his Congressman regarding his case, and Exhibit 13-P, a
copy of the letter petitioner received from the director of
constituent services for Representative Edward R. Royce in
response to petitioner’s letter, we find that these exhibits are
not relevant to the case at hand and not admissible into
evidence. Therefore, respondent’s objections to the
admissibility of petitioner’s Exhibits 12-P and 13-P are
sustained and these exhibits are not received into evidence.
- 5 -
Welch v. Helvering, 290 U.S. 111, 115 (1933). However, pursuant
to section 7491(a), the burden of proof on factual issues that
affect the taxpayer’s tax liability may be shifted to the
Commissioner where the “taxpayer introduces credible evidence
with respect to * * * such issue.” Petitioner has not
established that he meets the requirements under section
7491(a)(1) and (2) for such a shift. Consequently, the burden of
proof remains on him. Moreover, deductions are a matter of
legislative grace, and petitioner bears the burden of proving
that he is entitled to any of the deductions claimed. See
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
II. Section 469 Schedule E Expenses Relating to Rental of Cabin
Section 469(a)(1) and (d)(1) generally prohibits a taxpayer
from claiming deductions attributable to “passive activities” in
an amount which exceeds the income generated by that taxpayer’s
“passive activities”. Madler v. Commissioner, T.C. Memo. 1998-
112; Scheiner v. Commissioner, T.C. Memo. 1996-554; Mordkin v.
Commissioner, T.C. Memo. 1996-187. Section 469(c)(1) and (2)
provides that the term “passive activity” includes: (1) Any
activity which involves the conduct of a trade or business and in
which the taxpayer does not materially participate, and (2)
except for taxpayers engaged in the real property business, any
rental activity without regard to whether or not the taxpayer
materially participates in the activity.
- 6 -
For purposes of section 469, the term “rental activity” is
defined in section 469(j)(8) as any activity where payments are
principally for the use of tangible property. See also sec.
1.469-1T(e)(3)(i), Temporary Income Tax Regs., 53 Fed. Reg. 5702
(Feb. 25, 1988). An activity involving the use of tangible
property, however, is not considered a rental activity for a
taxable year if for such taxable year the average period of
customer use for such property is 7 days or less. Sec.
1.469-1T(e)(3)(i) and (ii)(A), Temporary Income Tax Regs., supra.
Therefore, owners of rental real estate are not considered to be
engaged in a rental activity if the average period of customer
use is 7 days or less. Madler v. Commissioner, supra.
Section 469(i)(1) and (2) allows the taxpayer to offset from
nonpassive income up to $25,000 of certain passive activity
losses,4 as long as the activity is considered a “rental
activity”.
The parties have stipulated that the average period of
customer use for the cabin during 2004 was 3 days. Consequently,
petitioner’s rental activity of the cabin during the 2004 tax
year is not a “rental activity” as defined in section 469(j)(8)
and the regulations thereunder and thus he is not allowed the
4
The deduction is phased out for income levels above
$100,000. Sec. 469(i)(3).
- 7 -
$25,000 offset for losses against nonpassive income. See sec.
1.469-1T(e)(3)(i) and (ii)(A), Temporary Income Tax Regs., supra.
Additionally, since the rental of the cabin does not fall
within the definition of “rental activity” under section 469,
Passive Activity Losses and Credits Limited, it is not a per se
passive activity under section 469(c)(2). Therefore, if
petitioner can show that he “materially [participated]” in the
rental of the cabin, the activity would not be considered passive
and he could claim his losses against nonpassive income. Sec.
469(c)(1)(B).
Material participation is defined as involvement in the
operations of an activity on a regular, continuous, and
substantial basis. Sec. 469(h)(1). A taxpayer can establish
material participation by satisfying any one of the seven tests
provided in the regulations. Sec. 1.469-5T(a), Temporary Income
Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25, 1988); see also
Mordkin v. Commissioner, supra. We consider that for purposes of
the case before us, the pertinent tests, as stated in section
1.469-5T(a)(2) and (3), Temporary Income Tax Regs., supra, are as
follows:
(2) The individual’s participation in the activity for
the taxable year constitutes substantially all of the
participation in such activity of all individuals (including
individuals who are not owners of interests in the activity)
for such year; [or]
(3) The individual participates in the activity for
more than 100 hours during the taxable year, and such
- 8 -
individual’s participation in the activity for the taxable
year is not less than the participation in the activity of
any other individual (including individuals who are not
owners of interests in the activity) for such year;
To satisfy one of these tests, petitioner must establish
that either (1) no other individual’s participation exceeded
petitioner’s participation during 2004 or (2) that petitioner
participated in the activity for more than 100 hours in 2004.
With regard to the second requirement, petitioner has set forth
little evidence to establish that he was involved in the rental
of the cabin for more than 100 hours in the 2004 tax year. He
has alleged that he took eight maintenance trips to the cabin
during 2004, but in no way has he quantified for the Court the
amount of his active participation time. In order to establish
that he did spend more than 100 hours engaged in the rental of
the cabin, the Court would expect petitioner to provide evidence
corroborating his claim that his trips to the cabin were indeed
for the purpose of maintenance, e.g., in the form of time logs,
oral testimony, and/or receipts.
Nor has petitioner established that no other individual’s
participation exceeded his participation in the activity or that
his participation constituted substantially all the participation
in the activity. Alpine was responsible for advertising,
showing, and renting the property, and after each tenant, a
cleaning service cleaned the property. Further, petitioner has
conceded that his daughter assisted in the management and
- 9 -
maintenance of the cabin and that he contracted with
professionals to provide repair services during 2004. While we
do not know how much time these services took, they involve a
substantial amount of time.
It is petitioner’s burden to show that he satisfies the
requirements of section 1.469-5T(a), Temporary Income Tax Regs.,
supra, and he has failed to meet that burden. On the basis of
the foregoing, we find that petitioner did not materially
participate in this activity. Accordingly, petitioner is not
allowed to deduct Schedule E expenses relating to the cabin on
his 2004 tax return.
III. Section 280A Personal Use of a Residence
Section 280A(a) limits otherwise allowable deductions by
individuals with respect to a “dwelling unit” that is used by the
taxpayer during the year as a “residence”. 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).
If found to be a “residence”, section 280A(c)(5) limits the
deduction of 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).
- 10 -
However, if a dwelling unit is used during the taxable year
by the taxpayer as a residence and such dwelling unit is rented
for less than 15 days during the taxable year, then no deduction
allocable to the rental use of such dwelling unit is allowed, and
the income derived from such use for the taxable year is not
included in the gross income of the taxpayer under section 61.
Sec. 280A(g).
Contrary to petitioner’s contention in his brief, a taxpayer
is deemed to “have used a dwelling unit for personal purposes for
a day if, for any part of such day, the unit is used” for
personal purposes by the taxpayer or by any member of the
taxpayer’s family. Sec. 280A(d)(2). However, a dwelling unit is
generally not used by a taxpayer for personal purposes on any day
it is principally used to perform repair or maintenance work on
the unit. Id.
Petitioner has conceded that he made eight trips to the
cabin in 2004, for a minimum stay of 27 days, and that members of
his family accompanied him on each trip. He alleges that these
trips were not for personal use, but with regard to the upkeep
and maintenance of the cabin. Specifically, petitioner claims in
his brief that: “The only purpose for the owner to travel to the
cabin is for maintenance, inspection and oversight, purchasing
supplies, such as (plumbing, antifreeze, smoke alarm batteries,
- 11 -
light bulbs) management and scheduling specialized work or
repair.”
Petitioner has presented no evidence to substantiate his
contention. He has not provided to the Court any receipts, work
reports, time logs, or testimony to support his claim that the
motive of his trips and his activity at the cabin was in fact for
upkeep. Although cautioned at trial that his opening statement
was not evidence that the Court could rely on to make findings of
fact, petitioner chose not to testify at the trial, relying
entirely on the stipulation of facts and the stipulated exhibits
to provide all of the evidence in his case. Hence, petitioner
has failed to meet his burden of proving that personal use of the
cabin did not exceed the greater of 14 days. Consequently, the
cabin is considered a residence for purposes of section 280A.
The parties have stipulated that the cabin was rented for
less than 15 days during 2004. Therefore, no income from the
rental of the cabin is included in petitioner’s 2004 tax return
and he is not allowed to deduct any expenses related to the
rental of the cabin. Petitioner is still allowed to deduct the
mortgage interest and taxes attributable to the cabin on Schedule
A, Itemized Deductions, of his 2004 tax return, subject to the
limitations provided in section 68. See sec. 280A(b).
- 12 -
The Court has considered all of petitioner’s contentions,
arguments, requests, and statements. To the extent not discussed
herein, we conclude that they are meritless, moot, or irrelevant.
To reflect the foregoing,
Decision will be entered
for respondent.