DocketNumber： Docket No. 20086-91
Judges： CHIECHI
Filed Date： 12/27/1993
Status： Non-Precedential
Modified Date： 11/20/2020
*639 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI,
| Additions to Tax | |||
| Year | Deficiency | Section 6653(a)(1)(A) Section 6653(a)(1)(B) | |
| 1986 | $ 20,309 | $ 1,039 | * |
| 1987 | 11,123 | 574 | * |
| * 50 percent of the interest due on the portion of the | |||
| underpayment attributable to negligence. Respondent determined | |||
| that $ 1,872 and $ 1,717 of the underpayments for the years 1986 | |||
| and 1987, respectively, were attributable to negligence. | |||
The sole issue for decision is whether claimed rental losses for the tax years 1986 and 1987 are disallowed under
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. Petitioners, Mehdi Razavi (Razavi) and Alexandra L. Razavi, husband and wife, resided in Pepper Pike, Ohio, when they filed the petition. Petitioners filed joint Federal income tax returns for the years 1986 and 1987.
On December 13, 1985, Razavi entered into a contract with South Seas Plantation Development Company (SSPD) to purchase a $ 355,000 resort condominium unit, unit number 1661 (Unit 1661 or Unit), located at Land's End Village, South Seas Plantation Resort (SSPR), Captiva Island, Florida. An addendum to this contract was executed by Razavi on December 13, 1985, and by a representative of SSPD on January 7, 1986. Unit 1661, a 1,537-square foot villa unit located on a golf course, consists of a living room, a dining room, a kitchen, a screened porch, an open deck, two bedrooms, and two bathrooms.
SSPR is a 330-acre resort community located at the northern end of Captiva Island, an island which, along with Sanibel Island, is part of a 15-mile chain of barrier islands on the southwest coast of Florida. Captiva and Sanibel *641 Islands are bounded on the south and west by the Gulf of Mexico, on the east by the San Carlos Bay and Pine Island Sound, and on the north by Red Fish Pass. Accommodations at SSPR include villas, cottages, and homes, each with views of either the beach and gulf, the bay, Red Fish Pass, a golf course, the tennis center, or numerous pools.
Unit 1661 was under construction and not available for use during the period December 13, 1985, through February 12, 1986. As of February 13, 1986, Unit 1661 was complete. Consequently, for 1986, a nonleap year, Unit 1661 was available for use for 322 days.
On March 21, 1986, SSPD executed a warranty deed to Razavi conveying Unit 1661, which was stamped as recorded by the Lee County Recorder on March 31, 1986. Therefore, beginning as of March 21, 1986, Unit 1661 was available for use for 286 days during 1986.
On February 17, 1986, Razavi and South Seas Plantation Company (SSP) executed a guaranteed lease *642 Razavi's fully furnished and equipped Unit as a resort rental accommodation unit and to rent it to persons who would occupy it (patrons). Rates charged by SSP for the use of the Unit included "rack" rates, special rates, and package rates. Special rates and package rates often were less than the highest seasonal rates charged by SSP for units in SSPR.
Razavi was under no obligation to enter into the guaranteed lease agreement. As a result of his executing the agreement, the personal use of the Unit by him and his family was restricted. The lease, however, did permit petitioners to use Unit 1661 for four weeks during the year at a nominal rental rate of $ 10 per day and for additional days during the year at 80 percent of the full published rental rate charged by SSP.
The guaranteed lease agreement required SSP to pay to Razavi, *643 in monthly installments of $ 1,750 each, total annual rent of $ 21,000 (basic lease payment). Although SSP agreed to perform certain management, maintenance, and rental promotional services for Razavi, the guaranteed lease agreement did not require Razavi to pay SSP a fixed fee that was denominated as a management or similar fee to compensate it for those services. However, SSP was allowed to retain any rents it received from patrons to whom it rented Unit 1661 that exceeded $ 21,000 and that were below $ 52,501. Any rents that exceeded $ 52,500 were to be divided by Razavi and SSP on a 40 percent/60 percent basis. *644 As an alternative to the guaranteed lease program, SSP offered a second lease arrangement to unit owners in SSPR under which a unit owner agreed to make his or her unit available for rent and SSP agreed to offer it for rent. As was the case under the guaranteed lease agreement, SSP agreed to occupy and use any such unit as a resort rental accommodation unit and to rent it to patrons. As was also the case under the guaranteed lease agreement, unit owners were not obligated to enter into the alternative lease arrangement. The alternative agreement provided that SSP was to receive a fee for the services it provided thereunder, including renting and managing an owner's unit. That fee approximated 50 percent of the total rent SSP collected from patrons for the unit's rental. In implementing the alternative lease agreement, SSP did not guarantee a specific rental occupancy rate. Owners enrolling in this program agreed not to enroll their units in any other rental service program.
In 1986, SSP received gross rental receipts of $ 29,558.98 from the rental of Unit 1661 to patrons. Since the Unit was under construction and not available for occupancy until February 13, 1986, SSP's *645 1986 basic lease payment to Razavi was made for an 11-month period, February through December, and amounted to $ 19,250 (11/12ths of the annual rent of $ 21,000). No additional annual rent was due Razavi for 1986.
In 1987, SSP received gross rental receipts of $ 48,327.64 from the rental of Unit 1661 to patrons. SSP paid Razavi $ 21,000 as the 1987 basic lease payment. No additional annual rent was due Razavi for 1987.
During 1986, Razavi and members of his family used Unit 1661 for 36 days. Nine of those days were attributable to the period occurring after February 13, 1986, and before March 21, 1986. During the period commencing February 13, 1986, when Unit 1661 first became available for use, through the end of that year, SSP rented Unit 1661 to patrons other than petitioners and guests of petitioners for 149 days or 46.27 percent of the days on which the Unit was available for use (149 days/322 days). (Hereinafter, the patrons other than petitioners and guests of petitioners who rented Unit 1661 from SSP will be referred to as renters.) Rates charged by SSP for the Unit during 1986 ranged from a low of $ 65 per night to a high of $ 320 per night.
During 1987, Razavi and*646 members of his family used Unit 1661 for 27 days. During 1987, SSP rented Unit 1661 to renters for 200 days or 54.79 percent of the days on which the Unit was available for use (200 days/365 days). Rates charged by SSP for the Unit during 1987 ranged from a low of $ 107 per night to a high of $ 375 per night.
Petitioners' expert witness, John S. Ross, Jr. (Ross), determined that the "fair market rent" payable to the owners of Unit 1661 during 1986 and 1987 was $ 21,000. In his report, Ross used the term "fair market rent" interchangeably with the term "market rent". We therefore assume that he intended the terms to have identical meanings.
Ross defined the term "market rent" in his report to mean the most probable rent which a property should return to the owner in a competitive and open market, the renter and owner, each acting prudently, knowledgeably and assuming the rental amount is not affected by undue stimulus. the rental income that a property would most probably command on the open market as indicated by current rentals being paid for comparable space (as of *647 the effective date of the appraisal).
In determining the fair market rent of Unit 1661 payable to petitioners during 1986 and 1987, Ross examined (1) the gross rents generated in 1986 and 1987 by 16 units located within SSPR that he considered to be comparable to Unit 1661 and that operated under SSP's alternative lease agreement pursuant to which receipts collected by SSP from the rental of the units to patrons were divided evenly between SSP and the unit owners, and (2) the annual rents generated in 1986 or 1987 (and, in some instances, in both years) by eight units that he considered to be comparable to the Unit, one of which was located in SSPR and seven of which were located*648 outside of SSPR but within the Captiva and Sanibel Islands resort area.
Ross utilized certain valuation techniques in determining the fair market rent of Unit 1661 during the years at issue. These techniques assumed that the annual rents generated by units that he considered to be comparable to Unit 1661 already reflected the rates of occupancy and vacancy in the resort area in question. During the years at issue, the annual occupancy rate of units that Ross considered to be comparable to Unit 1661 ranged from 39 percent to 49 percent. This occupancy rate reflected occupancy by patrons, other than the owners of those comparable units or guests of those owners, who in fact occupied those comparable units during the years 1986 and 1987 under various rental arrangements. The comparable units relied upon by Ross in determining the fair market rent of Unit 1661 thus had a vacancy rate during the years at issue that ranged between 51 percent and 61 percent.
OPINION
A unit is treated as used for personal purposes on any 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 of the taxpayer or such other person; (B) by any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit; or (C) by any individual, unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is a fair rental.
The parties agree that if the personal use ceiling of
Because petitioners used Unit 1661 for more than 14 days during 1986, they will be below the personal use ceiling of
On brief, petitioners point out that they did not acquire title to Unit 1661 until March 21, 1986, the date on which SSP executed the warranty deed for that Unit. Petitioners argue that we must therefore determine whether they*651 exceeded the personal use limitation for 1986 by examining the period commencing on March 21, 1986, and by counting as fair rental days all the days during 1986, including and following that date, on which the Unit was under lease to SSP. Thus, petitioners would have us compare the 27 days of their personal use of Unit 1661 after March 20, 1986, to the total 286 days remaining in 1986 after that date on which Unit 1661 was leased to SSP.
Because (1) the contract for the sale of Unit 1661 and the addendum to this contract were signed by both Razavi and a representative of SSPD on or before January 7, 1986, (2) petitioners received from SSP $ 19,250 during 1986 representing the basic lease payment by SSP covering the 11-month period from February through December of that year, and (3) petitioners occupied the Unit on February 14, 15, and 16, 1986, respondent suggests that petitioners had the "benefits and burdens of ownership" with respect to the Unit as of February 13, 1986, the day on which the Unit was first available for use. Respondent argues that the number of days of petitioners' personal use of Unit 1661 should therefore be determined beginning with February 13, 1986. During*652 the period starting February 13, 1986, through the end of that year, petitioners personally used Unit 1661 for 36 days. Under respondent's analysis, we would determine whether petitioners exceeded the personal use ceiling of
Applying the flush language of
*654 Petitioners would also have exceeded the personal use ceiling if we were to compare, as respondent argues, the 36 days of their personal use of Unit 1661 commencing February 13, 1986, the day on which the Unit was first available for use during that year, to 149 days, the number of days during that year on which respondent contends petitioners leased the Unit at a fair rental within the meaning of
Since the days of personal use of Unit 1661 by petitioners during 1987 (i.e., 27 days) exceed 14 days, in order to avoid the limitation of
*656 In resolving this question, we note that both the United States Court of Appeals for the Seventh Circuit and this Court have previously addressed the fair rental days standard in
In the
The taxpayers in both the
In rejecting the taxpayer's argument in the
In rejecting a similar argument of the taxpayers in the
As emphasized in
*662 Respondent contends that, for purposes of applying the fair rental days standard of
Although we do not necessarily agree with respondent's latter contention that the opinion of petitioners' expert as to the fair market rent of Unit 1661 for 1987*663 is unreliable, her first argument has merit. Assuming arguendo that we were to accept Ross' opinion of the fair market rent of that Unit for 1987, *664 to the Unit and that operated under SSP's alternative lease agreement pursuant to which receipts collected by SSP from the rental of the units to patrons were divided evenly between SSP and the unit owners, and (2) the annual rents generated in 1986 or 1987 (and, in some instances, in both years) by eight units that he considered to be comparable to the Unit, one of which was located in SSPR and seven of which were located outside of SSPR but within the Captive and Sanibel Islands resort area. After making certain adjustments to those rent amounts to reflect (1) SSP's receipt of a portion of the gross rents and differences in location and view for the 16 comparable units operated under SSP's alternative lease arrangement and (2) the payment of management fees and differences in physical characteristics and location for the remaining eight units he chose, Ross determined that the owners of units that he considered to be comparable to Unit 1661 could have expected to receive income ranging from $ 20,300 to $ 22,000 during 1987. He thus concluded that the fair market rent of Unit 1661 for 1987 was $ 21,000.
The valuation techniques Ross employed assumed that the annual rents generated*665 by units that he considered to be comparable to Unit 1661 already reflected the rates of occupancy and vacancy existing in that resort area. The vacancy rate for the comparable units he chose was in the range of 51 percent to 61 percent. Conversely, the occupancy rate for those units ranged between 39 percent and 49 percent. *666 Ross' opinion that the fair market rent of Unit 1661 for 1987 was $ 21,000 was thus premised on the assumption that the Unit would be vacant for approximately 51 percent to 61 percent of that year (i.e., for approximately 186 days to approximately 223 days). Therefore, on the instant record, we cannot accept petitioners' argument that, when SSP leased Unit 1661 for $ 21,000 during 1987, that Unit was rented to SSP for 365 days at a fair rental within the meaning of
To reflect the foregoing and the concessions of the parties,
1. All section references are to the Internal Revenue Code in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Our use herein of the words "lease", "leasing", or similar terms is for convenience only and does not necessarily reflect our view of the nature of the agreement between Razavi and SSP.↩
3. This is the same basis on which Razavi and SSP were to share rents received by SSP that equaled at least $ 52,500.↩
4. Consequently, we need not decide whether the starting date in 1986 for counting days of petitioners' personal use of Unit 1661 and days on which the Unit was rented at a fair rental within the meaning of
5. On brief, respondent noted that petitioners' personal use of Unit 1661 during 1986 would also have exceeded 10 percent of the number of days for which the Unit could have been treated as rented at a fair rental if we were to compare the 36 days of their personal use commencing February 13, 1986 (the day on which the Unit was first available for use in 1986) to either (1) the 286 days remaining in that year for which the Unit could have been treated as rented to SSP (322 days remaining in that year commencing on February 13, 1986, minus 36 days of personal use), or (2) 329 days (365 days in 1986 minus 36 days of personal use).↩
6. As noted above,
7. The taxpayers in
8. The rental pool arrangement and issues we faced in
9. Petitioners argue that the calculation for 1987 of the personal use ceiling of
10. Additional annual rent was payable under that lease if gross receipts from SSP's rental of the Unit exceeded $ 52,500. No such additional rent was in fact paid by SSP to petitioners during 1987. They received only the $ 21,000 basic lease payment for that year. Because petitioners were not obligated to pay SSP a fee denominated as a management or similar fee, we surmise that the difference between $ 52,500 and $ 21,000 represented amounts that SSP would retain from the rental of Unit 1661 to cover its costs (including management costs) and to generate a profit.↩
11. The Court has no reason based on the record here not to accept Ross' opinion of the market rent, as he defines that term, of Unit 1661 for 1987.↩
12. During 1986 and 1987, the annual occupancy rate of SSPR units that Ross considered to be comparable to Unit 1661 ranged from 39 percent to 49 percent. These comparable units thus had a vacancy rate during the years at issue that ranged between 51 percent and 61 percent. Ross testified that he chose comparable units both within SSPR and outside SSPR in determining the fair market rent of Unit 1661 for 1987. A review of his report indicates that he made no adjustments to the rents generated by those units in order to reflect differences in rates of vacancy. Neither petitioners nor respondent has presented any evidence that would cause us to conclude that the vacancy rate for comparable units in SSPR was different from the vacancy rate for comparable units in the entire 15-mile resort area in which Unit 1661 was located. Thus, on the basis of the instant record, we conclude that the vacancy rate for all the comparable units selected by Ross ranged from 51 percent to 61 percent and that the occupancy rate for those units ranged from 39 percent to 49 percent.↩
13. It is noteworthy that if petitioners had leased Unit 1661 to SSP under the alternative lease arrangement, pursuant to which rents generated by the rental by SSP of the Unit to patrons would have been divided evenly between SSP and petitioners, petitioners would have received during 1987 $ 24,163.82, or one-half of the total rents of $ 48,327.64 that SSP in fact collected from having actually rented the Unit to renters for 200 days during that year. We assume that SSP's portion of this $ 48,327.64 would have been used by it to cover its costs and to generate a profit. Thus, under the alternative lease arrangement, petitioners would have received more rental income from the lease of Unit 1661 to renters for 200 days during 1987 than they in fact received from SSP for allegedly leasing the Unit to SSP for that entire year.↩
14. The record does establish that during 1987 SSP leased Unit 1661 to renters for 200 days. We assume the rent paid to SSP by these renters represented a fair rental within the meaning of