Epstein v. Commissioner
Opinion
*33 On their 1988 tax return, Ps, a husband and wife, claimed various Schedule C deductions with respect to a venture carried on by petitioner wife. Ps also claimed Schedule E losses with respect to two rental properties they owned: a condominium and a vacation house. They also claimed Schedule E losses incurred in their dealings with an entity known as Friedmann Financial Company #2 (Friedmann). R disallowed all of Ps' reported Schedule C deductions and Schedule E loss deductions.
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*33 On their 1988 tax return, Ps, a husband and wife, claimed various Schedule C deductions with respect to a venture carried on by petitioner wife. Ps also claimed Schedule E losses with respect to two rental properties they owned: a condominium and a vacation house. They also claimed Schedule E losses incurred in their dealings with an entity known as Friedmann Financial Company #2 (Friedmann). R disallowed all of Ps' reported Schedule C deductions and Schedule E loss deductions.
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MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN,
| Additions to Tax | ||||
| Sec. | Sec. | Sec. | ||
| Year | Deficiency | 6651(a)(1) | 6653(a)(1) | 6661 |
| 1988 | $ 38,564 | $ 6,215.50 | $ 2,085.15 | $ 9,641 |
Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The pleadings in this case consist of the petition and an answer thereto. The petition assigns no error to respondent's determination save that petitioners' tax return*35 was never audited. The answer admits of that charge but explains that admission by stating that petitioners failed to submit records or keep appointments scheduled with respondent's agents. 1 Nevertheless, a wide variety of issues have been addressed by stipulation, raised at trial, and argued on brief. Those issues that we deem to have been tried by the implied consent of respondent (Rule 41(b)(1)) are: 2 (1) Whether petitioners' Schedule C activity was engaged in for profit within the meaning of
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of facts filed by the parties and attached exhibits are incorporated herein by this reference.
Petitioners are husband and wife, who, for the year in issue, made a *37 joint return of income, computed on the basis of a calendar year. For that year, they reported gross income of approximately $ 169,000. At the time the petition in the instant case was filed, petitioners resided in Framingham, Massachusetts.
During 1988, petitioner Caren Epstein (Caren) carried on an undertaking listed on petitioners' tax return as Caren's Sales. Caren belonged to a wide variety of health, sports, and tennis clubs near her home. There she would meet women whose husbands were in business. She would propose to those women business services that she could perform for their husbands. Those services included planning parties, sending out invitations, printing various materials, making hotel reservations for out-of-town trade show participants, entertaining the wives and girlfriends of the out-of-town participants, furnishing small gifts such as watches and handbags, and providing the material for, and assembly of, trade show displays.
In furtherance of her undertaking, Caren spent a great deal of time entertaining. She would treat to lunch or dinner women friends or acquaintances whose husbands might potentially*38 engage her services. Moreover, she would invite such friends to her house, where she would entertain them in a boutique-type room that was part of her den. There she would display samples and make presentations regarding her services.
Although Caren had experience in purchasing items at flea markets for subsequent resale, she had never operated a formal business prior to initiating Caren's Sales. She prepared no financial projections before commencing Caren's Sales. She did not maintain separate books and records for the undertaking. She maintained no separate bank account for the undertaking. She devoted approximately 5 to 10 hours a week to the undertaking in 1988. She discontinued Caren's Sales at the end of 1988 because "it was a lot of work" and because she was losing money.
On their 1988 tax return, in connection with Caren's Sales, petitioners reported $ 3,900 of gross income and claimed $ 71,761 of deductions, for a net loss of $ 67,861.
Among the deductions claimed, petitioners claimed the expense of more than 50 meals. Four of those meals were with Caren's mother, Betty Paul; four were with Caren's cousin, Sue Habelow; and two were with Caren's nephew, Mitchell*39 Burman. Petitioners also deducted the expense ($ 3,900) of a birthday party thrown for Caren's father-in-law at the LaFayette Hotel. More than 75 percent of the guests attending that party were related to petitioners.
During 1988, petitioners paid $ 20,824 of mortgage interest and $ 1,281 of real estate taxes with respect to their principal residence.
In 1985, petitioners purchased residential property (a condominium) in Ashland, Massachusetts (the Ashland property). The purchase price of the Ashland property was $ 123,900. Petitioners' daughter Lauren moved into the Ashland property when petitioners purchased it in 1985. She resided there while she was in college in the area and subsequent thereto. The Ashland property is shown as Lauren's address on the town of Ashland's voter registration records for 1987, 1988, and 1989. Lauren moved to Florida in October 1988. She resided at the Ashland property for at least 2 months in 1988. In 1988, after the completion of improvements, the condominium consisted of three bedrooms, two bathrooms, a kitchen, den, living room, and two-car garage.
Mitchell Burman (Mitchell) is a nephew of petitioners. Mitchell*40 was a tenant of petitioners at the Ashland property during 1987 and 1988. His monthly rental obligation was $ 583.33 a month. Petitioners paid the gas, electricity, water, and sewer charges incurred with respect to the Ashland property. They also paid the telephone bill for the phone at that property for the first 3 months of 1988. The rent charged Mitchell for use of the Ashland property during 1988 was less than a fair rental.
On their 1988 tax return, petitioners reported $ 5,900 of rental income from the Ashland property. With respect to that property, they claimed deductible expenditures including $ 9,927 for mortgage interest and $ 1,894 for real estate taxes. Petitioners claimed a total loss from rental of the property of $ 23,729 but, on account of the passive activity loss limitations, deducted only $ 14,012 of that total.
In 1986, petitioners also purchased a newly built house in Ludlow, Vermont (the Ludlow property). The purchase price of the Ludlow property was $ 183,000. The Ludlow property has four bedrooms, three bathrooms, and is located within 100 feet of a lake. It is also near the Okemo Vue Ski area and Stratton Mountain, which*41 attracted major tennis tournaments during the summer months. Petitioners are skiers and tennis enthusiasts.
During January and February 1988, petitioners rented the Ludlow property to Alvin Levy (Levy) for a rent of $ 4,050. Petitioners did not rent the property at any other time during 1988.
Since the property was a 2-1/2 hour drive from their principal residence in Framingham, Massachusetts, petitioners typically would stay over for one or two nights whenever they visited the Ludlow property. Petitioners generally frequented the Ludlow property on weekends only, since they did not wish to miss work. During 1988, petitioners undertook no less than 12 trips to the property, during each of which they claim to have cleaned the vacation house or displayed it to prospective renters.
In August 1988, Caren accompanied a group of women from her tennis club to the Ludlow property where they stayed for a week. As part of the trip, Caren and the women attended a national tennis tournament held annually at nearby Stratton Mountain.
Petitioners kept no records regarding the identity of the potential renters who were entertained at the Ludlow property during 1988. Similarly, petitioners*42 maintained no logs or journals with respect to the total number of trips, recreational and otherwise, they made to the property during the year. Telephone records indicate that phone calls were made from the Ludlow property on 22 different weekends from March 1 through November 23, 1988. Telephone calls were made from the property on over 100 different days during that same period.
Petitioners reported $ 4,050 of gross income from the Ludlow property for 1988. With respect to that property, they claimed deductible expenditures including $ 11,813 for mortgage interest and $ 2,053 for real estate taxes. Petitioners claimed a total loss from rental of the property of $ 34,392 but, on account of the passive activity loss limitations, deducted only $ 20,309 of that total.
Petitioners used the Ludlow property for personal purposes on no less than 100 days during 1988. It was rented for a fair rental for 60 days in 1988.
OPINION
I. Caren's Sales
Respondent disallowed petitioners' Schedule C deductions in the amount of $ 71,761 claimed with respect to Caren's Sales for 1988. Respondent's basis for that disallowance was that (1) petitioners had failed to substantiate those*43 deductions and (2) Caren's Sales was not an activity engaged in for profit within the meaning of
An activity is engaged in for profit if the taxpayer has an actual and honest objective of making a profit.
The regulations promulgated under
Caren's Sales, as described by Caren, in her testimony, was an eclectic venture that began with Caren carrying with her items such as handbags and watches that she had purchased at flea markets. Caren displayed those items to potential customers, mainly women from her health and tennis clubs, hoping for sales. In 1988, however, Caren made no such sales. Instead, mainly through those same women, she tried to*46 sell to their husbands business services that she could perform (such as making hotel reservations). Although petitioners reported $ 3,900 of fees from such business in 1988, petitioners have not given us any particulars as to who paid that money or why it was paid. In connection with earning that income in 1988, petitioners claimed expenses of $ 71,761. Caren testified that she discontinued Caren's Sales at the end of 1988 because she was losing money.
The following factors are indicative to us that Caren's Sales was an activity not engaged in for profit. Prior to commencing Caren's Sales, Caren had no experience with running a business in general or with providing services to businesses in particular. During 1988, Caren worked only part time (between 5 and 10 hours a week) on Caren's Sales. Caren developed no strategic plan or business projections with respect to Caren's Sales. Caren failed to segregate her personal funds from those generated by the undertaking. Caren maintained no separate books or records with respect to the undertaking. A substantial portion of Caren's "business development" activities consisted of entertaining friends and relatives, which, we have *47 no doubt, were activities giving Caren and her friends and relatives substantial pleasure. Finally, petitioners were in a position to receive substantial tax benefits from their Schedule C losses as a result of their income from other sources (approximately $ 169,000).
We think that Caren's Sales, in large part, represented an attempt on the part of petitioners to deduct as business expenses expenditures that, in fact, were personal in nature. Petitioners have not convinced us that Caren's undertaking required her to do anything other than to maintain an active social life. A substantial portion of her time in connection with the undertaking appears to have been spent dining with or entertaining her friends and relatives or attending her various health and tennis clubs. While there is no requirement that profit-oriented work be onerous and unpleasant, the evidence presented by petitioners does not indicate activity motivated by a profit objective. On the contrary, the evidence shows that Caren simply carried on her active social life, kept cursory records in connection therewith, and claimed deductions that offset a substantial portion of her and her husband's combined income. *48 On the record before us, we are unconvinced that Caren's Sales was an activity engaged in for profit within the meaning of
*49 II.
*50 a.
In 1988, petitioners owned a three bedroom residence in Ashland, Massachusetts (the Ashland property). During that year, petitioners received rent with respect to the Ashland property from their nephew, Mitchell. Mitchell's monthly rent obligation was $ 583.33 ($ 7,000 annualized). 6*51 Petitioners reported a net loss attributable to the Ashland property of $ 23,729, which, after taking account of the passive loss limitations, gave rise to a loss deduction of $ 14,012. Respondent contends that all of the loss claimed by petitioners with respect to the Ashland property is disallowed by
We are not persuaded that $ 583.33 a month represented a fair rental for the Ashland property. Mitchell was the nephew of petitioners and, thus, to some degree, the natural object of their bounty. It would not be unnatural for them to charge him less than a fair rental. Petitioner Jerald Epstein (Jerald) testified that Mitchell was a tenant for all of 1988 and was the only tenant with a lease. Mitchell was also a tenant during 1987. Jerald testified that Mitchell was to pay a monthly rental of $ 583.33. He also testified that Mitchell paid rent on a timely basis during 1988. On their 1988 return, however, petitioner reported only $ 5,900 of rent from the Ashland property. Among other things, such amount is consistent with petitioners receiving only $ 491.66 a month from Mitchell. Petitioners have not argued that $ 491.66 a month is fair market rental for the Ashland property.
Petitioner's daughter, Lauren, *52 lived at the Ashland property for at least 2 months during 1988, and may have lived there for a longer period. 8 Petitioners paid the phone bill for the first 3 months of 1988. We think that that is an indication of Lauren's presence in the condominium for such period. Indeed, we assume that petitioners paid the phone bill because the phone was in either their name (for Lauren's use) or Lauren's and remained so for the full period that Lauren resided there (from 1985 until some time in 1988). We are suspicious that Mitchell was a tenant with rights to only
The foregoing analysis*53 involves conjectures. Together with the reasons set forth in the next paragraph, however, we believe that we have sufficient reason to conclude that petitioners have not carried their burden of proving that Mitchell paid a fair rental.
The only evidence in the record to support petitioners' contention that the rent was indeed set at a fair value is Jerald's testimony. Indeed, that testimony is only to the effect that, to establish a fair rental, Jerald: "just looked in the newspaper and I talked to a couple of people who were handling real estate in that area and I asked them, [to] just try to get a feel for what other apartments in the area were going for." In and of itself, we do not find that testimony persuasive. Of course, Jerald might, nevertheless, have set a fair rental. Although corroborative data undoubtedly could have been obtained from a variety of sources, petitioners come forward with no evidence whatsoever to establish a fair rental for the condominium in 1988. We have long adhered to the rule that the failure of a party to introduce evidence within his possession and which, if true, would be favorable to him, gives rise to the presumption that, if produced, such*54 evidence would be unfavorable.
Accordingly, pursuant to the terms of
*55 b.
In 1988, petitioners also owned a four bedroom house in Ludlow, Vermont (the Ludlow property). Although they rented out the Ludlow property for the first 2 months of 1988, the property went unrented for the remainder of the year. Petitioners challenge respondent's disallowance under
Petitioners admit that they traveled to the vacation house on approximately 12 different weekends in 1988. They insist, however, that such trips were made solely to clean the vacation house and to advertise the property to potential renters. In his testimony, petitioner Jerald explained, in part, the frequency of those trips by saying: "Well, the place was constantly getting dusty."
Simply put, we do not believe Jerald that the primary purpose of those trips was to clean or advertise the property. The nature of the property is clear -- it was*56 a vacation home. It was close to facilities for the seasonal activities of skiing and tennis. Petitioners participated in both sports. Whatever other reasons petitioners may have had for spending $ 183,000 to purchase the Ludlow property, we simply do not believe that those reasons excluded using it as a vacation home. Moreover, we believe that they did so in 1988.
In August 1988, Caren made a week-long trip to the Ludlow property with several women from her tennis club. A significant part of their time during the trip was devoted to attending a national tennis tournament held annually at nearby Stratton Mountain. Petitioners attempt to explain away that excursion as being actuated purely by business motives. As with Jerald's testimony, we disbelieve Caren. We do not believe that her trip was motivated purely (or even significantly) by business motives.
Petitioners have not convinced us that the trips described should be treated as anything but principally for personal purposes. If petitioners wish to deduct their expenses under
Telephone records placed into evidence by respondent indicate that phone calls were made from the Ludlow property on 22 different weekends from March 1 through November 23, 1988. 10 Such records also show that telephone calls were made from the vacation house on over 100 different days during that period. The plain inference to be drawn from such telephone activity is that petitioners were present at their vacation house for more time than they admit.
Not surprisingly, at trial, Jerald professed a lack of knowledge regarding the problematic telephone activity. Petitioners' only explanation of the calls is that some friends as well as some local business persons, such as an alarm company and an oil *58 company, possessed keys to the house. They opine that such persons might have made unauthorized telephone calls or might have used the phone to notify the Epsteins or other contact persons on account of unforeseen occurrences. We find significant the circumstance that petitioners received and paid the phone bills generated at the vacation house during 1988 without remarking the telephone activity regarding which they now profess such surprise. Petitioners' explanation, in our view, is wholly unsatisfactory to account for the suggestive telephone activity, particularly on the weekends during which the vacation house allegedly was unoccupied.
We are not persuaded by petitioners that the vacation house was used solely for business purposes in 1988. Moreover, we are convinced that the house was put to personal use for 100 days during that year, and we have so found. Thus, contrary to petitioners' protestations, the vacation house meets the definition of a residence set forth in
*60 III.
Respondent also disallowed losses of $ 11,878 claimed by petitioners with respect to their dealings with an entity known as Friedmann Financial Company #2 (Friedmann). Petitioners contend that during 1988 Friedmann was a partnership within the meaning of section 6231(a)(1) and that, therefore, the statute of limitations under section 6229, operating at the partnership level, bars respondent from making any adjustment with respect to the claimed losses. The bar of the statute of limitations is an affirmative defense, and the party raising it must carry the burden of proof with respect thereto. Rules 39, 142(a).
Section 6229 contains special provisions establishing a separate statute of limitations for adjustment of certain items arising from entities that are partnerships within the meaning of section 6231(a)(1). On brief, petitioners assert that Friedmann was a partnership within the meaning of section 6231(a)(1) and that it timely filed a return for its 1988 taxable year. 13 Nevertheless, petitioners present us with no evidence beyond their simple assertions of those facts. We are provided with no details as to the organization *61 and structure of Friedmann or any corroboration that a return was, indeed, filed. Petitioners have failed to carry their burden of proof that Friedmann is a partnership, that Friedmann filed a return for 1988, or that Friedmann is a partnership within the meaning of section 6231(a)(1). Accordingly, petitioners have failed to meet their burden of proof that the adjustment made with respect to Friedmann is barred by the statute of limitations on assessments. Respondent's adjustment in that respect is upheld.
IV. Additions to Tax
a.
In relevant part,
b.
Respondent determined a
As we explained in
Here, we have found that petitioners failed to keep separate and adequate books and records with respect to their Schedule C activity. Moreover, petitioners' attempts to dress up personal expenditures (i.e., Caren's health club memberships and lunches with her mother) as business expenses, represent, at best, a lack of due care on the part of petitioners. Accordingly, we sustain respondent's addition to tax for negligence with respect to petitioners' 1988 taxable year.
c.
Respondent also determined that petitioners are*64 subject to a
Respondent's deficiency determination, which we have substantially upheld, exceeds 10 percent of petitioner's corrected liability, and, unless that liability can be reduced by (i) the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment, or (ii) any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed*65 in the return or in a statement attached to the return.
Petitioners do not contend that adequate disclosure was made within the meaning of
Where substantial authority is concerned, petitioners have not come forward with any valid authority in support of their claimed deductions. Petitioners do contend that they relied upon the advice of their accountant. Such advice, however, does not constitute substantial authority within the meaning of
Footnotes
1. Although respondent did not audit the tax return for the year in issue in the sense petitioners have in mind, it is apparent from the notice of deficiency received by petitioners that respondent did examine their return for 1988 and determine a deficiency based thereon. This case does not raise any issue of jurisdiction based on a respondent's failure to make a determination of deficiency within the meaning of
Scar v. Commissioner , 814 F.2d 1363 (9th Cir. 1987)87 T.C. 855↩ (1983) .2. The parties also appear to have agreed to a variety of issues, which we do not address in our opinion.↩
3. On brief, respondent sets forth various alternative arguments including: (1) That petitioners failed to substantiate meals, entertainment, automobile, and home office expenses, (2) that Caren's home office was not her principal place of business, and (3) that other claimed business expenditures were not ordinary and necessary within the meaning of sec. 162. Petitioners contest those allegations. Since our holding for respondent with respect to
sec. 183↩ disposes of all issues concerning Caren's Sales, we do not address those alternative arguments.4. We have found that petitioners paid $ 20,824 of mortgage interest (qualified residence interest, see sec. 163(h)(3)) with respect to their Framingham home. They claimed $ 15,224 on Schedule A of their 1988 return. The remainder, $ 5,600, is allocable to petitioners' Schedule C activity, and is therefore allowable under
sec. 183(b)(1) . That amount exceeds the gross income generated by Caren's Sales ($ 3,900). Accordingly, all other deductions claimed by petitioners with respect to their Schedule C activity are disallowed bysec. 183(b)(2) . Since neither party has asked us to address the interaction ofsec. 183 withsec. 280A , we will not do so. Seesec. 280A(f)(3) ;Antonides v. Commissioner , 91 T.C. 686, 697↩ (1988)5.
Section 280A :(a) General Rule. -- Except as otherwise provided in this section, in the case of * * * an individual * * * no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.
(b) Exception For Interest, Taxes, Casualty Losses, Etc. -- Subsection (a) shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity).
* * *
(3) Rental Use. -- Subsection (a) shall not apply to any item which is attributable to the rental of the dwelling unit or portion thereof (determined after the application of subsection (e)).
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(5) Limitation On Deductions. -- * * * where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of --
(A) the gross income derived from such use for the taxable year, over
(B) the sum of --
(i) the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used, and
(ii) the deductions allocable to the trade or business (or rental activity) in which such use occurs (but which are not allocable to such use) for such taxable year.
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(d) Use As Residence. --
(1) In General. -- * * * a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of --
(A) 14 days, or
(B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.
* * * a unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes.
(2) Personal Use Of Unit. -- For purposes of this section, the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used --
(A) for personal purposes by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4)) of the taxpayer or such other person;
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(C) by an individual * * * unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental.
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(e) Expenses Attributable to Rental. --
(1) In General. -- In any case where a taxpayer * * * uses a dwelling unit for personal purposes on any day during the taxable year (whether or not he is treated under this section as using such unit as a residence), the amount deductible under this chapter with respect to expenses attributable to the rental of the unit (or portion thereof) for the taxable year shall not exceed an amount which bears the same relationship to such expenses as the number of days during each year that the unit (or portion thereof) is rented at a fair rental bears to the total number of days during such year that the unit (or portion thereof) is used.
(2) Exception For Deductions Otherwise Allowable. -- This subsection shall not apply with respect to deductions which would be allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was rented.
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(3) Coordination With
Section 183 . -- If subsection (a) applies with respect to any dwelling unit (or portion thereof) for the taxable year --(A)
section 183 (relating to activities not engaged in for profit) shall not apply to such unit (or portion thereof) for such year, but(B) such year shall be taken into account as a taxable year for purposes of applying subsection (d) of
section 183↩ (relating to 5-year presumption).6. Noting the approximately $ 1,000 disparity between the $ 7,000 of annualized rent petitioners claimed was paid by Mitchell and the $ 5,900 reported as rent on petitioners' 1988 return, respondent, on brief, contends that petitioners underreported their income by approximately $ 1,000 in 1988. Nevertheless, such unreported income was neither determined by respondent in her notice of deficiency nor reflected in her pleadings. Rule 41(a). Moreover, we do not deem that the issue has been tried by either express or implied consent of the parties. See Rule 41(b)(1). Accordingly, we do not consider that item at issue and will not further discuss it.↩
7. Respondent has conceded the deductibility of petitioners' deductions in connection with the Ashland property in the amount of rental ($ 5,900) reported with regard to that property.↩
8. There is no evidence that convinces us that Lauren paid rent to reside at the Ashland property or that the Ashland property was her personal residence. Those facts, alone, subject petitioners to
sec. 280A(c)(5)↩ .9. Here, petitioners are not entitled by
sec. 280A(e)(2)↩ to deduct the mortgage interest claimed with respect to the Ashland property as qualified residence interest since, as discussed in n.10, we deem the Ludlow property, and not the Ashland property, to represent petitioners' second qualified residence within the meaning of sec. 163(h)(4)(A)(i)(II).10. The telephone records in evidence extend only through November 23, 1988.↩
11. On brief, petitioners initially attempt to frame their argument in the context of
sec. 183 .Sec. 280A(f)(3) , however, makes clear that wheresec. 280A applies, as it does here,sec. 183↩ becomes inapplicable.12. Since the mortgage interest paid with respect to the Ludlow property ($ 11,813) exceeds the amount of mortgage interest paid with respect to the Ashland property for 1988 ($ 9,927), we deem the Ludlow property to represent petitioners' second qualified residence within the meaning of sec. 163(h)(4)(A)(i)(II).
In total, petitioners are entitled to deductions of $ 15,642.89: $ 13,866 of qualified residence interest and taxes and $ 1,776.89 of depreciation. Respondent, however, only has allowed petitioners a deduction in the amount of gross income generated by the Ludlow property ($ 4,050). Thus, petitioners are entitled to an additional deduction of $ 11,592.89. That adjustment is based on the following analysis.
Sec. 280A(c)(5) restricts deductions allocable to the Ludlow property to the amount of gross income generated by the property for the year ($ 4,050). The portion of qualified residence interest and taxes allocable to the rental activity is $ 2,273.11 (60 days of rental use/366 days = 16.393%. 16.3934% x $ 13,866 = $ 2.273.11)Bolton v. Commissioner , 77 T.C. 104, 111 (1981)694 F.2d 556 (9th Cir. 1982) . After subtracting the portion of deductions allocable to qualified residence interest and taxes from gross income generated by the property ($ 4,050 - $ 2,273.11), there remains $ 1,776.89 of deductions allowed bysec. 280A(c)(5) . Although the parties do not indicate with precision the amount of depreciation allowable with respect to the Ludlow property during the year in issue, the allocable portion of that amount clearly exceeds the remaining $ 1,776.89 ceiling imposed bysec. 280A(c)(5) . Accordingly, that lingering $ 1,776.89 is attributable to depreciation. We note that the remaining amount of mortgage interest and taxes disallowed bysec. 280A(c)(5) is allowed bysec. 280A(b) since such amount is independently deductible elsewhere in the Code.In sum, petitioners are entitled to deductions as follows: (1) Qualified residence interest and taxes of $ 2,273.11 under
sec. 280A(c)(5) ,(2) depreciation of $ 1,776.89 undersec. 280A(c)(5) , and(3) remaining qualified residence interest and taxes of $ 11,592.89 undersec. 280A(b) . (Total = $ 15,642.89) Respondent, however, has allowed petitioners a deduction only to the extent of thesec. 280A(c)(5)↩ limitation ($ 4,050). Accordingly, we adjust respondent's determination to allow petitioners a deduction for the remaining $ 11,592.89 ($ 15,642.89 - $ 4,050).13. In their opening brief, petitioners claim "The partnership return was filed in 1988." In their reply brief, by contrast, they state "This partnership tax return was filed in 1989 and was filed again in March of 1990."↩
1994 T.C. Memo. 34 (Epstein v. Commissioner) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.