                        T.C. Memo. 1996-15



                     UNITED STATES TAX COURT



                  DOUGLAS RITTER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22351-93.            Filed January 22, 1996.




     Douglas Ritter, pro se.

     Kevin M. Murphy, for respondent.



                       MEMORANDUM OPINION

     PAJAK, Special Trial Judge:   This case was heard pursuant to

section 7443A(b)(3) of the Code and Rules 180, 181, and 182.

Unless otherwise indicated, all section numbers refer to the

Internal Revenue Code for the taxable year in issue, and all Rule

numbers refer to the Tax Court Rules of Practice and Procedure.
                               - 2 -

     Respondent determined a deficiency in petitioner's 1991

Federal income tax in the amount of $3,845, and an addition to

tax under section 6651(a)(1) in the amount of $961.   The Court

must decide:   (1) The amount of rental income petitioner received

from the Broome County, New York, Department of Social Services

for the year 1991; (2) whether petitioner is entitled to any

deductions for rental expenses incurred; (3) whether petitioner

is entitled to three additional dependency exemptions; and

(4) whether petitioner is liable for an addition to tax under

section 6651(a)(1) for failure to timely file a tax return.

     Some of the facts in the case have been stipulated and are

so found.   Petitioner resided in Lisle, New York, at the time he

filed his petition.

     For clarity and convenience, the findings of fact and

opinion have been combined.

     In 1991, petitioner owned the following real property in

Broome County, New York:

     41 Charlotte Street, Binghamton, New York
     18 Pleasant Avenue, Binghamton, New York
     RD 2, Box 133 and 134, Conklin, New York

     In 1991, petitioner owned the following real property with

his wife, Carole Ritter, as tenants by the entireties:

     53 Mary Street, Binghamton, New York
     99-101 Robinson Street, Binghamton, New York
     Langdon Grove, Kirkwood, New York
     Church Road, Lisle, New York
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     Petitioner also owned and operated a pest control business

that served a 50-mile area in and around Broome County.

Petitioner operated this pest control business from his home and

an office located at the 99-101 Robinson Street, Binghamton,

property.   Petitioner reported no income or expense from this

business.   In the absence of any proof of income or of expense,

we leave this matter where the parties left it.

     The Broome County Department of Social Services (Social

Services) reported on a Form 1099-MISC that it paid $26,618.70 to

petitioner in 1991.    This amount represented rental payments for

clients of Social Services who occupied apartments in

petitioner's properties.    According to documents from Social

Services, petitioner received payments in 1991 from Social

Services with respect to the following properties:

     53 Mary Street, Binghamton, New York
     99-101 Robinson Street, Binghamton, New York
     18 Pleasant Avenue, Binghamton, New York
     RD 2, Box 133 and Box 134, Conklin, New York

     The Form 1099-MISC from Social Services was issued in

petitioner's name only.    Neither petitioner, nor his wife,

reported this income on a 1991 tax return.    Petitioner conceded

that he failed to file Federal income tax returns since 1984.

     Respondent determined petitioner's tax liability based on

the $26,618.70 reported on the Form 1099-MISC from Social

Services, as well as on $5 of unreported interest income from

Marine Midland Bank.   Respondent computed the deficiency with the
                               - 4 -

filing status of "married, filing separate", and allowed

petitioner one personal exemption, as well as the standard

deduction.

Rental Income

     Petitioner argues that a portion of the rental income he

received from Social Services was for properties he owned jointly

with his wife and therefore half the payments are not his income.

     Under New York law, if property is held by a husband and

wife as tenants by the entireties, then each is entitled to one-

half of the rents and profits from such property.    Kraus v.

Huelsman, 52 Misc.2d 807, 276 N.Y.S.2d 976 (Sup. Ct. 1967), affd.

287 N.Y.S.2d 365 (App. Div. 1968); Hiles v. Fisher, 39 N.E. 337

(N.Y. 1895); Colabella v. Commissioner, T.C. Memo. 1958-136.

Where, under State law, each property is owned by husband and

wife as tenants by the entireties, one-half of the resulting

income is taxable to each.   Greene v. Commissioner, 7 T.C. 142,

152 (1946); Colabella v. Commissioner, supra.

     We have found that petitioner and Mrs. Ritter owned 53 Mary

Street and 99-101 Robinson Street properties as tenants by the

entireties.   Under New York law, petitioner and Mrs. Ritter were

entitled to share equally the rental income.    It is thus

immaterial for tax purposes that petitioner received the rent in

his name only.   Greene v. Commissioner, supra.

     Accordingly, we hold that $4,105 and $3,838, which

represents half the rental income from the 53 Mary Street and 99-
                                 - 5 -

101 Robinson Street properties, respectively, is includable in

petitioner's income for 1991.    We further hold that the remaining

rental income of $10,732.70 reported on the Form 1099-MISC, as

well as the $5 of interest income, is includable in petitioner's

income for 1991.   In short, petitioner failed to report

$18,680.70 of income for 1991.

Rental Expenses

     Petitioner contends he has incurred rental expenses with

respect to the properties that he should be able to deduct

against the income he received.    Petitioner submitted the

following list at trial:

     53 Mary St.
          utilities        $2293.55
          taxes            $3341.58
     99-101 Robinson St.
          utilities        $2617.28
          taxes            $3713.20
     18 Pleasant Ave.
          taxes            $1067.34
     RD2-Conklin prop.
          taxes             $576.17
          trash removal     $644.16
     41 Charlotte St.
          taxes            $1494.73
     Church Road
          taxes             $429.17
     Langdon Grove
          taxes            $1294.16
          trash removal    $1043.95

     Taxpayers do not have an inherent right to take tax

deductions.   Deductions are a matter of legislative grace, and

taxpayers must establish their right to take them.    Deputy v. du

Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v.
                               - 6 -

Helvering, 292 U.S. 435, 440 (1934).    Taxpayers also have the

burden of substantiation.   Hradesky v. Commissioner, 65 T.C. 87

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

     Petitioner's rental expenses are deductible under sections

162 or 212 only if his use of the properties constituted an

activity engaged in for profit.   Sec. 183(a).   The test to

determine whether an activity is engaged in for profit is whether

the individual engaged in the activity with the "actual and

honest objective of making a profit."     Dreicer v. Commissioner,

78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205

(D.C. Cir. 1983).   The taxpayer's expectation of earning a profit

need not be reasonable, but the taxpayer must establish that the

activities were continued with a bona fide profit objective.

Dreicer v. Commissioner, supra; Hager v. Commissioner, 76 T.C.

759, 784 (1981); sec. 1.183-2(a), Income Tax Regs.    Whether the

taxpayer had such an objective must be determined by reference to

all the surrounding facts and circumstances, and greater weight

is given to such facts than to the taxpayer's statement of

intent.   Dreicer v. Commissioner, supra.    The regulations set

forth various factors to consider.     Sec. 1.183-2(b), Income Tax

Regs.

     Petitioner substantiated $3,218.06 of real estate taxes paid

in 1991 for the Church Road, Charlotte Street, and Langdon Grove

properties.   Petitioner has produced no records or history of

income for the Church Road, Charlotte Street, and Langdon Grove
                                - 7 -

properties.   Consequently, at trial we sustained respondent's

disallowance of the related expenses as deductions under section

162 or 212 due to a failure by petitioner to prove that he was

engaged in an activity for profit with respect to these

properties.   Sec. 183.

     Even so, the real estate taxes petitioner paid on these

properties could be deductible under section 164 and allowable

under section 183(b)(2).    Brannen v. Commissioner, 78 T.C. 471,

499-500 (1982), affd. 722 F.2d 695 (11th Cir. 1984).      Section

164, however, is an itemized deduction.      See sec. 63(d); sec.

62(a).   Section 63 and the regulations thereunder do not

authorize the election to itemize deductions unless a return is

filed.   Sec. 63(e)(1).   Because petitioner failed to file a

return for the year in issue, he did not make the required

election.   Consequently, petitioner is not entitled to any

itemized deductions for the year.       Andreas v. Commissioner, T.C.

Memo. 1993-551.   Thus, petitioner may not deduct under section

164 any real estate taxes he may have paid in 1991 for the Church

Road, Charlotte Street, and Langdon Grove properties.

     After consideration of the record, we conclude that

petitioner's use of the following properties constituted an

activity engaged in for profit:

     53 Mary Street, Binghamton, New York
     99-101 Robinson Street, Binghamton, New York
     18 Pleasant Avenue, Binghamton, New York
     RD 2, Box 133 and Box 134, Conklin, New York
                                 - 8 -

Based upon substantiation submitted by petitioner at trial, we

have determined the expenses paid with respect to these

properties to be as follows:

     53 Mary Street:                     $4,318.87
     99-101 Robinson Street:             $5,178.72
     18 Pleasant Avenue:                   $712.11
     RD 2, Box 133 and Box 134:            $576.17

     As outlined above, these substantiated expenses consist of

utilities, trash removal, and real property taxes paid during

1991.   Because petitioner jointly owned both the 53 Mary Street

and 99-101 Robinson Street properties with Mrs. Ritter, he is

only entitled to deduct half of the utility and trash removal

expenses for those properties.     White v. Commissioner, 18 T.C.

385 (1952).   Although the payment of real property taxes by a co-

owner has been treated differently than the payment of other

expenses, the threshold requirement for allowing a co-owner to

deduct 100 percent of the property taxes paid is that the co-

owner must have paid the taxes with his separate funds.      Higgins

v. Commissioner, 16 T.C. 140 (1951); Powell v. Commissioner, T.C.

Memo. 1967-32.

     In this case, we find that Mrs. Ritter made the half of the

property tax payments with her own money; i.e., the rents

petitioner collected on her behalf.      Thus, petitioner only paid

one-half of the property taxes on the jointly owned rental

properties.   Accordingly, we find that petitioner is entitled to

deduct one-half of the expenses paid for the 53 Mary Street and
                               - 9 -

99-101 Robinson Street properties, and all of the expenses paid

for the 18 Pleasant Avenue and RD 2, Box 133 and Box 134

properties, for a total of $6,037.08 in rental expenses for the

1991 taxable year.

Additional Dependency Exemptions

     Petitioner claims he is entitled to dependency exemptions

for his wife and two of his children who lived at home in 1991.

The burden of proving error in the Commissioner's determination

is on the taxpayer.   Rule 142(a); Welch v. Helvering, 290 U.S.

111 (1933).

     Section 151(b) provides that a taxpayer who does not file a

joint return may claim a dependency exemption for a spouse if the

spouse has no gross income and is not the dependent of another

taxpayer for the year in question.     Section 151(c) allows an

exemption for each of a taxpayer's dependents, as defined in

section 152, who is a child of the taxpayer under age 19 or, if a

student, under age 24.   A taxpayer's child who receives over one-

half of the child's support from the taxpayer is a dependent.

Sec. 152(a)(1).   The fact that a taxpayer failed to file a tax

return does not preclude him from claiming the dependency

exemptions.   Yoder v. Commissioner, T.C. Memo. 1990-116.

     In the instant case, Carole Ritter jointly owned the 53 Mary

Street property and the 99-101 Robinson Street property with

petitioner.   She earned gross income in the form of rents

received from Social Services for those properties.     Accordingly,
                               - 10 -

petitioner is not entitled to claim Mrs. Ritter as an exemption

for the 1991 taxable year.

     Mrs. Ritter testified that in 1991 two of their children

lived at home.   The oldest child attended high school.   We find

that petitioner has met his burden of proof and is entitled to

exemptions for his two children for the 1991 taxable year.

Section 6651(a)(1) Addition to Tax

     Petitioner, though he earned at least $18,680.70 in 1991,

did not file a Federal income tax return for 1991.   Section

6651(a)(1) imposes an addition to tax for failure to file a

Federal income tax return by its due date, determined with regard

to any extension of time for filing previously granted, unless

such failure was due to reasonable cause and not willful neglect.

Fischer v. Commissioner, 50 T.C. 164, 177 (1968).    Petitioner

bears the burden of showing reasonable cause.   Fischer v.

Commissioner, supra.   Petitioner presented no credible evidence

as to why he failed to file a Federal income tax return for the

year in issue.   Accordingly, respondent's determination with

respect to the addition to tax under section 6651(a)(1) is

sustained.

     At trial, we strongly advised petitioner to file the

required income tax returns.   We again warn petitioner that his

tax protester arguments, which we struck from his petition at a

motions' session hearing, are meritless.   Rowlee v. Commissioner,

80 T.C. 1111 (1983).   If petitioner persists in making such
                             - 11 -

arguments in the future, he should be aware that he may be

subject to a penalty of up to $25,000 under section 6673.



                                        Decision will be entered

                                   under Rule 155.
