                  T.C. Summary Opinion 2004-81



                     UNITED STATES TAX COURT



     SHARON M. RIVERA AND RICHARD C. RIVERA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4731-03S.            Filed June 23, 2004.


     Sharon M. and Richard C. Rivera, pro sese.

     Charlotte Mitchell, for respondent.



     DEAN, Special Trial Judge:   This case was heard under the

provisions of section 7463 of the Internal Revenue Code as in

effect at the time the petition was filed.   Unless otherwise

indicated, all other section references are to the Internal

Revenue Code in effect for the years at issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.
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     Respondent determined deficiencies in petitioners' Federal

income taxes of $4,018 for 1999 and $4,130 for 2000.    The Court

must decide whether petitioners are entitled to deduct losses on

Schedule E, Supplemental Income and Loss, for either year.

Respondent's adjustments to petitioners' itemized deductions are

computational and will be determined by the Court's resolution of

the Schedule E loss issue.

     The stipulated facts and exhibits received into evidence are

incorporated herein by reference.   At the time the petition in

this case was filed, petitioners resided in Newark, California.

                             Background

     During the years here involved, petitioner Richard C. Rivera

was employed as an electrician, and petitioner Sharon M. Rivera

was employed as a "personnel technician".

     Around 1989 or 1990, petitioners purchased improved real

property in Truckee, California, for about $80,000.    As of the

date of trial it was worth between $160,000 and $170,000.    In the

early 1990s, after a year or so of ownership, petitioners rented

their property through a vacation property management company

under short-term leases for the winter or for ski season.    This

caused a lot of wear and tear on the property, and they had "so

much trouble" from the renters.   Petitioners received numerous

complaints there were "extra people living at the property", and
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petitioners had trouble getting some of the renters out of their

property.

     Starting around 1994, after the short-term lessees were

removed, petitioners began entering into longer term leases with

multiple occupants without using the vacation property management

companies.    But even the longer term renters caused a lot of

"trouble", including leaving mattresses outdoors in the carport,

and building a skate ramp in the back of the property in

contravention of the homeowners' association rules.    Petitioners

eventually decided that they were "only going to rent to people

that we knew, or were acquaintances, or people we worked with."

     During 1999 and 2000, petitioners relied on word of mouth

advertising at work to obtain renters.    Petitioners' books and

records for their rental activity consisted of calendars, logs of

their mileage driven, retained utility and insurance bills, and

bills for association dues.    During 1999, petitioners rented the

property in Truckee for 25-1/2 days and stayed there themselves

for 8 days.    During 2000, petitioners rented the property for 23

days and stayed there for 8 days.    Petitioners reported rents

received of $1,400 for 1999 and $1,500 for 2000, and Schedule E

losses of $19,322 for 1999 and $19,336 for 2000.
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                             Discussion

     Because petitioners did not comply with the requirements of

section 7491(a), section 7491 is inapplicable here.

Tax Year 1999

     Section 280A, Disallowance of Certain Expenses in Connection

With Business Use of Home, Rental of Vacation Homes, etc., limits

otherwise allowable deductions by individuals with respect to a

dwelling unit that is used by the taxpayer during the year as a

"residence".    The provision does not apply to deductions for

amounts allowable without regard to the taxpayer's income

producing activity, such as interest and taxes.     Sec. 280A(b).

     A taxpayer uses a dwelling as a "residence" if his 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).

Petitioners used the Tahoe property themselves for 8 days during

1999.   They rented the property for 25-1/2 days for total gross

rentals of $1,400, or an average of $54.90 per day.     The parties

stipulated evidence indicating that the minimum daily fair rental

value of the property was $65 per day.     Every 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).

Petitioners' personal use of the property in 1999 was 33-1/2

days.   Sec. 280A(d)(2)(A), (C).
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     Because petitioners' gross income was less than their

deductions for mortgage interest and taxes, petitioners must

carryover their other deductions to the following tax year, and

they are only deductible up to the amount of income generated by

the property.   Sec. 280A(c)(5).1

Tax Year 2000

     During 2000, petitioners used their property for 8 days and

rented it for 23 days for gross rentals of $1,500, or an average

of $65.21 per day.   Because petitioners rented the property for

fair rental value during the year, their personal use did not

exceed the greater of 14 days or 10 percent of the days it was

rented at fair rental value during the year.   Sec. 280A(d)(1).

Petitioners’ deductions are not limited under section 280A(a) for

2000 because their property was not used as a "residence" during

the year.   Sec. 280A(a), (d)(1).   Section 280A is not, however,

the only obstacle between petitioners and their claimed

deductions.

     Section 183(a) generally provides that if an activity

engaged in by an individual is not entered into for profit, no

deduction attributable to the activity shall be allowed, except

as otherwise provided in section 183(b).   An "activity not

engaged in for profit" means any activity other than one for


     1
      Because sec. 280A(a) applies, sec. 183 does not.    Sec.
280A(f)(3).
                               - 6 -

which deductions are allowable under section 162 or under

paragraph (1) or (2) of section 212.   Sec. 183(c).

     Deductions are allowed under section 162 for the ordinary

and necessary expenses of carrying on an activity that

constitutes the taxpayer's trade or business.   Deductions are

allowed under section 212(1) and (2) for expenses paid or

incurred in connection with an activity engaged in for the

production or collection of income, or for the management,

conservation, or maintenance of property held for the production

of income.   With respect to either section, however, the taxpayer

must demonstrate a profit objective for the activity in order to

deduct associated expenses.   See Jasionowski v. Commissioner, 66

T.C. 312, 320-322 (1976); sec. 1.183-2(a), Income Tax Regs.   The

profit standards applicable to section 212 are the same as those

used in section 162.   See Agro Science Co. v. Commissioner, 934

F.2d 573, 576 (5th Cir. 1991), affg. T.C. Memo. 1989-687;

Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir. 1990),

affg. 91 T.C. 686 (1988); Allen v. Commissioner, 72 T.C. 28, 33

(1979); Rand v. Commissioner, 34 T.C. 1146, 1149 (1960).

     Whether the required profit objective exists is to be

determined on the basis of all the facts and circumstances of

each case.   See Hirsch v. Commissioner, 315 F.2d 731, 737 (9th

Cir. 1963), affg. T.C. Memo. 1961-256; Golanty v. Commissioner,

72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d
                                - 7 -

170 (9th Cir. 1981); sec. 1.183-2(a), Income Tax Regs.     While a

reasonable expectation of profit is not required, the taxpayer's

objective of making a profit must be bona fide.    See Elliott v.

Commissioner, 84 T.C. 227, 236 (1985), affd. without published

opinion 782 F.2d 1027 (3d Cir. 1986).   In making this factual

determination, the Court gives greater weight to objective

factors than to a taxpayer's mere statement of intent.    See

Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d 724 (9th Cir.

1986), affg. Lahr v. Commissioner, T.C. Memo. 1984-472; Dreicer

v. Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion

702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.

     Section 1.183-2(b), Income Tax Regs., sets forth nine

nonexclusive factors that should be considered in determining

whether a taxpayer is engaged in a venture with a profit

objective.   They include:   (1) The manner in which the taxpayer

carried on the activity; (2) the expertise of the taxpayer or his

advisers; (3) the time and effort expended by the taxpayer in

carrying on the activity; (4) the expectation that the assets

used in the activity may appreciate in value; (5) the success of

the taxpayer in carrying on other similar or dissimilar

activities; (6) the taxpayer's history of income or loss with

respect to the activity; (7) the amount of occasional profits

that are earned; (8) the financial status of the taxpayer; and
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(9) whether elements of personal pleasure or recreation are

involved.

     No single factor is controlling, and the Court does not

reach its decision by merely counting the factors that support

each party's position.   See Dunn v. Commissioner, 70 T.C. 715,

720 (1978), affd. 615 F.2d 578 (2d Cir. 1980); sec. 1.183-2(b),

Income Tax Regs.   Rather, the relevant facts and circumstances of

the case are determinative.    See Golanty v. Commissioner, supra

at 426.

     After considering all the factors, the Court disagrees, in

part, with respondent's position that petitioners did not have an

actual and honest objective of making a profit from their Truckee

real estate.

      Petitioner, Sharon Rivera, testified that the property was

rented at a small profit during the first few years of ownership.

After a series of destructive tenants, however, petitioners

became reluctant to rent the property to the general public.    For

the years before the Court, petitioners did not maintain

businesslike books and records of rental activity, and there was

not much time spent in carrying on the activity.   Furthermore, it

appears from the record that the property was rented for less

than its fair rental value for the days it was rented, only to

family and friends, in 1999.   The Court agrees with respondent
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that petitioners had abandoned holding the property for profit

from rentals during the years at issue.

     The term "profit", however, encompasses the appreciation in

the value of the assets used in the activity.     Sec. 1.183-

2(b)(4), Income Tax Regs.   The term "income" as it is used in

section 212 "is not confined to recurring income" but may also

apply to gains from the disposition of property.     Sec. 1.212-

1(b), Income Tax Regs.   The term "income" means not merely income

of the taxable year but includes income the taxpayer "may realize

in subsequent taxable years".   Id.

     When the returns at issue were filed, petitioners had held

their property in Truckee, located near the Lake Tahoe ski and

vacation area, for 9 or 10 years.     Petitioners' personal use of

the property in 2000 was de minimis.    The Court also credits the

testimony of petitioner, Sharon Rivera, that she and her husband

purchased the property with the expectation that it would

increase in value and that it had, in fact, substantially

increased in value while they owned it.

     The Court finds that petitioners held the property in

Truckee primarily for investment purposes and are therefore
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entitled to deduct expenses under section 212(2).2   See Mitchell

v. Commissioner, 47 T.C. 120, 128 (1966); Thomason v.

Commissioner, T.C. Memo. 1997-480; sec. 1.212-1(b), Income Tax

Regs.

     The Court concludes from the record that petitioners'

activities with respect to the property for 2000 were of two

separate types, a rental activity and an investment activity.

"If the taxpayer engages in two or more separate activities,

deductions and income from each separate activity are not

aggregated either in determining whether a particular activity is

engaged in for profit or in applying section 183."    Sec. 1.183-

1(d)(1), Income Tax Regs.

     Because petitioners' property was used for more than one

activity, one of which was not for profit, petitioners must

allocate deductions relating to the property on a reasonable

basis.   Sec. 1.183-1(d)(2), Income Tax Regs.   Because

petitioners' mortgage interest and real estate taxes are

specifically allowable as deductions under sections 163 and

164(a) without regard to the use of the property for profit, no

allocation between the activities is necessary.    Sec. 1.183-

1(d)(3), Income Tax Regs.

     2

     The deductions would appear to give petitioners a passive
activity loss. See sec. 469(c)(1), (6)(B). Petitioners,
however, are treated as "materially participating" in the
investment activity under test two of sec. 1.469-5T(a),
Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988).
                              - 11 -

     Amounts for homeowners' dues, insurance, repairs, and

depreciation are amounts allocable to both of petitioners'

activities.   Since petitioners rented or personally used the

property for about 1 month each year and held the property for

investment the rest of the year, 11/12 of the above amounts are

allocable to petitioners' investment activity.   All other

amounts, including auto and travel (to clean after rentals),

cleaning and maintenance, supplies, utilities, "amortization",

and amounts for furnishings, are allocable solely to petitioners'

not-for-profit rental and personal activity.

     Section 183(b)(1) permits a deduction for expenses that are

otherwise deductible without regard to whether the activity is

engaged in for profit, such as mortgage interest and personal

property taxes.   Section 183(b)(2) permits a deduction for

expenses that would be deductible only if the activity were

engaged in for profit, but only to the extent that the gross

income derived from the activity exceeds the deductions allowed

by section 183(b)(1).   Because petitioners' gross income derived

from the rental activity does not exceed the section 183(b)(1)

expenses, section 183(b)(2) does not permit a deduction for

expenses that would be deductible only if the rental activity

were engaged in for profit.   Items that are allocable to

petitioners' personal use are also not deductible.   Sec. 262.
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     The Court sustains respondent's determination to the extent

that petitioners may not deduct expenses allocable to their

rental and personal use of the Truckee property.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                             Decision will be

                                        entered under Rule 155.
