DocketNumber: Docket No. 29798-07
Citation Numbers: 2010 T.C. Memo. 126, 99 T.C.M. 1526, 2010 Tax Ct. Memo LEXIS 163
Judges: WELLS
Filed Date: 6/10/2010
Status: Non-Precedential
Modified Date: 11/20/2020
Decision will be entered under
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS,
FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated. The stipulations of fact are incorporated in this opinion by reference and are found accordingly.
At the time the petition was filed, petitioner resided in Miami, Florida.
During the years in issue petitioner managed rental properties he owned and, for part of 2003, was employed as an airline pilot for United Airlines. Petitioner was furloughed by United Airlines beginning in November 2003 *165 and did not work for the airline during 2004.
During the years in issue petitioner owned rental properties in Miami Beach, Florida (Miami Beach property), Edmond, Oklahoma (Edmond property), Ventura, California (Ventura property), and Culver City, California (Culver City property).
The Miami Beach property is a 13-unit apartment building. Petitioner lives in one of the units, a one-bedroom apartment, and maintains part of the space as his office for his rental activities (personal residence). Petitioner claimed deductions for the expenses attributable to all 13 apartments on Schedule E of his Federal income tax returns for tax years 2003 and 2004. The claimed deductions included real property taxes, mortgage interest, and depreciation. 4*166 Petitioner actively and materially manages the Miami Beach property.
The Edmond property is a condominium. Petitioner reported net income, after expenses, from the Edmond property of $ 1,658 and $ 2,048 for his 2003 and 2004 tax years, respectively.
The Ventura property is a condominium. Petitioner claimed losses from the Ventura property of $ 1,954 and $ 5,856 for his 2003 and 2004 tax years, respectively. 5 Petitioner sold the Ventura property during 2004 and claimed a long-term capital gain on the sale on his 2004 tax return. Respondent allowed $ 1,954 of the loss for the 2003 tax year. Respondent disallowed $ 5,856 of the loss for the 2004 tax year as a rental real estate loss but allowed it as an offset against the capital gain recognized from the sale of the Ventura property.
The Culver City property is a condominium. *167 Petitioner claimed losses from the Culver City property of $ 10,006 and $ 9,511 on his 2003 and 2004 tax returns, respectively. Respondent allowed the $ 10,006 of the loss for the 2003 tax year and disallowed $ 7,463 of the loss claimed during the 2004 tax year.
Petitioner's leases with tenants for the Culver City and Ventura properties included a clause requiring the tenants to be responsible for routine maintenance. Petitioner collected the rent from the California properties and visited the California properties periodically during the years in issue.
Petitioner concedes that he did not file an election pursuant to
Petitioner traveled to California and Colombia, South America, to investigate the potential acquisition of new rental properties. On his 2004 tax return petitioner claimed travel expense for those trips as unreimbursed employee expenses of $ 5,481, all of which respondent disallowed.
By letter dated December 6, 2007, respondent sent petitioner a notice of deficiency. Petitioner timely filed a petition in this Court for redetermination of the *168 deficiencies.
OPINION
Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer has the burden of proving it incorrect.
We first address the issue of whether the expenses attributable to petitioner's personal residence, a one-bedroom apartment, are deductible as rental expenses. Petitioner contends that the mortgage interest, real estate taxes, and depreciation expense attributable to his personal residence are deductible because he manages his rental properties from his personal residence. Respondent contends that the depreciation expenses on petitioner's personal residence are personal and, therefore, are not deductible. 7
Deductions are a matter of legislative grace, and taxpayers bear the burden of proving that *169 they have met all requirements necessary to be entitled to the claimed deductions.
Generally, no deduction is allowed with respect to the personal residence of a taxpayer. Exclusive use of a portion of a taxpayer's dwelling unit means that the taxpayer must use a specific part of a dwelling unit solely for the purpose of carrying on his trade or business. The use of a portion of a dwelling unit for both personal purposes and for the carrying on of a trade or business does not meet the exclusive use test. Thus, for example, a taxpayer who uses a den in his *170 dwelling unit to write legal briefs, prepare tax returns, or engage in similar activities as well for personal purposes, will be denied a deduction for the expenses paid or incurred in connection with the use of the residence which are allocable to these activities. * * *
The record shows that petitioner's personal residence was used on a regular basis as the principal place of business for managing his rental properties. Petitioner used his personal residence as his office and stored tools there, and tenants paid their rent there. However, petitioner presented no evidence that any specific area of his personal residence, a one-bedroom apartment, was used exclusively for business purposes. Consequently, petitioner fails the exclusive use test regarding any specific portion of his personal residence. Therefore, we hold that
As to the issue of whether petitioner has substantiated $ 509 of the $ 26,393 in real property taxes claimed on his tax return for the 2003 tax year, petitioner bears the burden of proving that respondent's determination is incorrect. See
We next address whether the losses related to the Culver City property for tax year 2004 are subject to passive activity limitations pursuant to
Taxpayers are allowed *172 deductions for certain business and investment expenses under
Under (i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable *173 year are performed in real property trades or businesses in which the taxpayer materially participates, and (ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.
Respondent concedes that petitioner meets the requirements of
Petitioner contends that his consolidation of his rental activities on Schedule E is sufficient to treat his interests *174 in rental properties as a single real estate activity for purposes of the material participation test. Respondent contends that petitioner's rental properties should be evaluated separately because petitioner failed to file an election pursuant to
To make an election, a taxpayer must clearly notify the Commissioner of the taxpayer's intent to do so. See
We have held that aggregating losses from Schedule E on line 17 of Form 1040, U.S. Individual Income Tax Return, is insufficient notice to the Commissioner that the taxpayer intended to elect to treat all his rental properties as a single activity under
Petitioner failed to file an election to treat all of his rental properties as a single real estate activity. See
Material participation is defined as involvement in the operations of the activity that is regular, continuous, and substantial.
As to the Culver City property, petitioner fails to meet the tests for material participation. Petitioner presented no evidence on the number of hours that he spent managing the Culver City property; he only stated that he made several trips and was actively involved. Consequently, petitioner fails the 500-hour test (1), as well as tests (3) and (4), which require petitioner to show that he worked for a minimum of 100 hours on the Culver City property, as required by
As to petitioner's expenses with respect to the Ventura property for tax year 2004, respondent contends that the losses are passive and should be allocated against petitioner's capital gain from the sale of the Ventura property.
As stated above, a taxpayer may not deduct passive activity losses in excess of passive activity income; however, excess losses may be carried forward to subsequent years to offset subsequent *179 passive activity income.
As we held above, petitioner is a real estate professional who did not file an election to treat his rental properties as a single real estate activity. Petitioner's evidence that he was actively involved in the Ventura property is the same as that provided for the Culver City property. We find petitioner's evidence unpersuasive and conclude that the Ventura property is a passive activity. However, petitioner completely disposed of the Ventura property in a taxable transaction during his 2004 tax year. Gain from the disposition of property used in a passive activity is treated as passive income.
Finally, we address the $ 5,481 petitioner claimed on his return for his 2004 tax year in unreimbursed employee expenses which respondent disallowed. 10*181 Petitioner contends that the amounts he claimed are fully deductible as they relate to business expenses incurred while searching for new rental properties. Respondent contends that the disallowed amounts are nondeductible because they were not properly substantiated. In the alternative, respondent contends that the disallowed expenses relate to new properties and, therefore, must be capitalized.
Generally, a taxpayer is permitted to deduct the ordinary and necessary expenses that he or she pays or incurs during the tax year in carrying on a trade or business.
When a taxpayer establishes that he or she paid or incurred a deductible expense but does not establish the amount of the deduction to which he or she may be entitled, we may in certain circumstances estimate the amount allowable.
Certain categories of expenses must also satisfy the strict substantiation requirements of
To substantiate a deduction pursuant to
Petitioner reported travel expenses that he incurred while investigating the possibility of acquiring new rental properties. To be deductible, the travel expenses must be ordinary and necessary expenses incurred in carrying on a trade or business.
Additionally, for foreign travel,
Petitioner owns rental properties in Miami Beach, Florida; Edmond, Oklahoma; Ventura, California; and Culver City, California. Petitioner claimed a deduction for travel expenses that relate to the investigation of new rental properties in California*184 and Colombia, South America. Petitioner's claimed expenses included car rental fees, airfare, hotel charges, and a "per diem" for each travel day.
The record is unclear regarding the length of petitioner's stay in Colombia, South America. 11 However, neither at trial nor in the notice of deficiency did respondent raise any issues as to whether petitioner was in South America for more than a week. See
In addition to petitioner's *185 receipts, he also testified at trial, making a blanket statement that all of his expenses were business expenses. However, petitioner failed to offer any specific testimony regarding his trip to Colombia, South America. We, therefore, do not accept his uncorroborated testimony regarding the nature of that trip. Additionally, one of petitioner's receipts was for the purchase of clothing. On the basis of the record, we hold that petitioner has failed to prove that his trip to Colombia, South America, was for business purposes. See
Petitioner *186 also claimed expenses for traveling to the Los Angeles and San Francisco areas to investigate new rental real estate investments. Respondent contends that petitioner must capitalize those expenses pursuant to
Petitioner testified, and we conclude, that his travel expenses were for the investigation of new rental properties. Such expenses are directly related to the acquisition of a capital asset; namely, a new rental property. Accordingly, the investigatory expenses must be capitalized. Petitioner, however, never purchased any new rental properties. The fact that a taxpayer does not make an investment does not change the nature of the expenditure; the expense nevertheless must be capitalized.
The Court has considered all other arguments made by the parties and, to the extent we have not addressed them herein, we consider them moot, irrelevant, or without merit.
To reflect the foregoing and respondent's concessions,
1. Respondent has conceded the issue of whether petitioner failed to include in gross income $ 6,136 of rental income he received during his 2004 tax year.
2. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code, as amended, for the years in issue. Amounts are rounded to the nearest dollar.↩
3. Respondent also contends that the miscellaneous itemized deduction petitioner claimed on his 2003 tax return should be reduced by $ 334 and that the personal exemption he claimed on his 2004 tax return should be reduced by $ 434. Those matters are computational and will be resolved in accordance with our holdings pursuant to a
4. Petitioner claimed deductions on Schedule E attached to his return for tax year 2003 for the Miami Beach property of $ 4,436 for mortgage interest, $ 2,500 for real property taxes, and $ 3,623 for depreciation. Petitioner claimed deductions on Schedule E attached to his return for tax year 2004 for the Miami Beach property of $ 4,228 for mortgage interest, $ 2,122 for real property taxes, and $ 3,502 for depreciation.
5. Respondent determined that the 2003 and 2004 losses from the Ventura property were losses from a passive activity. For the 2003 tax year respondent allowed the 2003 loss for the full amount. For the 2004 tax year respondent offset the 2004 loss against the gain recognized from the sale of the Ventura property. See
6. Petitioner does not contend that
7. Respondent concedes that petitioner may deduct mortgage interest and real property taxes associated with his personal residence on Schedule A, Itemized Deductions, for each of petitioner's 2003 and 2004 tax years.↩
8. Culver City, California, is in Los Angeles County, California.↩
9. In the notice of deficiency, respondent applied the losses generated by the Ventura property to the sale proceeds of the Ventura property.↩
10. Petitioner claimed the excess unreimbursed employee and other miscellaneous expense deductions on Schedule A attached to his return. The deductible amount equals the sum of allowable unreimbursed employee expenses and other miscellaneous expenses, less 2 percent of the taxpayer's adjusted gross income.
11. Petitioner submitted an electronic ticket for airfare for his trips, including his trip to Colombia, South America. The electronic ticket lists the dates Aug. 16 and Aug. 24. However, it is unclear from the electronic ticket where petitioner traveled and whether any additional trips were made during that time. Petitioner's hotel receipt lists the dates of the trip to Colombia, South America, as Aug. 19 to Aug. 24. Petitioner's other receipts that relate to Colombia, South America, do not evidence any purchases before Aug. 22 or after Aug. 24. Petitioner did not specifically testify regarding how long he was in Colombia, South America.↩
12. If we were to assume that petitioner's expenses that relate to the investigation of rental properties in South America were business expenses, petitioner would have to capitalize those expenses because they were directly related to the acquisition of a capital asset; namely, a new rental property. See
Knight-Ridder Newspapers, Inc. v. United States , 743 F.2d 781 ( 1984 )
Ellis Banking Corporation v. Commissioner of Internal ... , 688 F.2d 1376 ( 1982 )
W. Horace Williams, Sr., and Viola Bloch Williams v. United ... , 245 F.2d 559 ( 1957 )
William F. Sanford v. Commissioner of Internal Revenue , 412 F.2d 201 ( 1969 )
John H. Young and Carolyn J. Young v. Commissioner of ... , 783 F.2d 1201 ( 1986 )
Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Commissioner v. Tellier , 86 S. Ct. 1118 ( 1966 )
Indopco, Inc. v. Commissioner , 112 S. Ct. 1039 ( 1992 )
Lychuk v. Comm'r , 116 T.C. 374 ( 2001 )
Radio Station WBIR, Inc. v. Commissioner , 31 T.C. 803 ( 1959 )
Sanford v. Commissioner , 50 T.C. 823 ( 1968 )