                       T.C. Memo. 2002-143



                     UNITED STATES TAX COURT



                PHILIP A. SAUNDERS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21534-97.               Filed June 10, 2002.


     Philip A. Saunders, pro se.

     Anita A. Gill, for respondent.


                       MEMORANDUM OPINION


     CARLUZZO, Special Trial Judge:   Respondent determined

deficiencies of $5,250 and $2,520, and section 66621 penalties of

$1,050 and $504, with respect to petitioner’s 1993 and 1994

Federal income taxes, respectively.



     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 2 -

     For each year in issue, the issues for decision are:    (1)

Whether petitioner is entitled to various deductions claimed on a

Schedule E, Supplemental Income and Loss; (2) whether petitioner

is entitled to an itemized deduction for medical expenses; and

(3) whether any underpayment of tax required to be shown on

petitioner’s income tax return is due to negligence.

Background

     Some of the facts have been stipulated and are so found.

During all relevant times, petitioner was married to Elizabeth A.

Saunders.    For each year in issue, petitioner filed his timely

Federal income tax return as a married individual, filing

separately.    At the time the petition was filed, petitioner

resided in Evendale, Ohio.

     During the years in issue, petitioner, an attorney licensed

in Massachusetts, was employed as a consultant for Arthur

Andersen LLP; his spouse was employed as a school teacher.

     In 1978, petitioner and his spouse purchased a house in

Pepper Pike, Ohio (the Pepper Pike residence).    Pepper Pike is a

suburb of Cleveland, Ohio, where petitioner was employed at the

time.   From 1978 until at least December 1990, the exclusive use

of the Pepper Pike residence was as a residence for petitioner,

his spouse, and, until each moved out, their three children.
                               - 3 -

     In April 1990, petitioner accepted employment in Cincinnati,

Ohio, and, at least during the work week, lived in a rented

apartment in the Cincinnati area.   Because petitioner’s spouse

was then employed in the Cleveland area, she did not immediately

move to Cincinnati with petitioner.    Soon thereafter, however,

she was offered employment in the Cincinnati area.    In December

1990 or January 1991, she moved from the Pepper Pike residence,

and petitioner moved from his apartment into a rented house in

the Cincinnati area.   On May 15, 1992, they purchased a new

residence in Evendale, Ohio, a suburb of Cincinnati.    The parties

stipulated that petitioner and his spouse abandoned the Pepper

Pike residence as their residence when petitioner’s spouse moved

to the Cincinnati area.

     The Pepper Pike residence was listed for sale for several

months during 1991, but no offers were received.    A real estate

agent suggested that they offer it for rent.    In September 1991

the Pepper Pike residence was rented for a 6-month term, which

term was extended for an additional 6 months.    The rent charged

and presumably received during the rental period was $1,850 per

month.   The Pepper Pike residence remained vacant from October

1992 until it was sold in April 1994.    As best as can be

determined from the record, the Pepper Pike residence was sold to

the first person or persons who made an offer to buy it.

     For the years during which the Pepper Pike residence was
                                - 4 -

rented (portions of 1991 and 1992) petitioner filed Federal

income tax returns as a married individual filing a separate

return.   With each return petitioner included a Schedule A,

Itemized Deductions, on which he claimed deductions for home

mortgage interest and real estate taxes attributable to the

Pepper Pike residence.    Apparently, neither he nor his spouse

reported any rental income attributable to the Pepper Pike

residence during those years.

     Petitioner’s Federal income tax return for each year in

issue, as well as the Federal income return of his spouse for

each of those years, was prepared by petitioner.    Included with

petitioner’s return for each year is a Schedule E, Supplemental

Income and Loss, on which the following items attributable to the

Pepper Pike residence are reported:

                                        1993        1994

Income:                                 - 0 -       - 0 -

Expenses:

     Advertising                     $249.06       $83.03
     Auto and travel                     420          140
     Cleaning and maintenance       2,852.77       950.92
     Insurance                           446          149
     Mortgage interest paid
       to banks                    17,383.71     5,794.23
     Other interest                   161.52        53.84
     Repairs                          737.59       245.86
     Taxes                          3,074.46     1,024.82
     Utilities                      1,830.23       610.08
     Depreciation                   4,357.70     1,452.57

            Total expenses         31,513.04    10,504.35
                              - 5 -

On each Schedule E, petitioner characterized the Pepper Pike

residence as property “held for sale”.    On line 23 of each

Schedule E, petitioner claimed the total expenses listed above,

respectively, as a “Deductible rental real estate loss”.

(Emphasis added.)

     For each year, petitioner computed the adjusted gross income

reported on his return as follows:

                                          1993          1994

Wages from Arthur Andersen            $90,283.09    $74,620.35
State income tax refund                    80.10      1,877.75
Rental real estate                    (31,513.04)   (10,504.35)
Unemployment compensation                  ---        4,320.00

     Adjusted gross income             58,850.15     70,313.75

     The sale of the Pepper Pike residence is not reported on

petitioner’s 1994 return; it is reported on the 1994 return of

petitioner’s spouse as the sale of a principal residence subject

to section 1034.

     For each year in issue, petitioner computed his taxable

income taking into account his election to itemize deductions.

In this regard, his Federal income tax return for each of those

years includes a Schedule A, Itemized Deductions.    Among other

items, on the Schedules A, petitioner claimed medical expense

deductions computed as follows:
                                 - 6 -

                                            1993           1994

Medical and dental expenses              $9,903.06     $10,075.89
7.5% of Adjusted gross income             4,413.76       5,273.53

     Medical expense deduction            5,489.30       4,802.36

     Included in the deduction for each year are expenses for

medical services, drugs, prescriptions, etc. for petitioner, his

spouse, and other members of his family, paid for by checks drawn

on a joint checking account maintained by petitioner and his

spouse.   Most of the expenses relate to petitioner’s spouse and

were paid for by checks written by her.       Petitioner and his

spouse were covered under separate employment-based medical

insurance plans.   The medical expense deductions also include

petitioner’s costs for his insurance coverage, that is $1,008 and

$875.68 for the years 1993 and 1994, respectively.       The 1994

medical expense deduction also includes Medicare taxes totaling

$1,707 that were withheld from petitioner’s and his spouse’s

wages.

     Under her medical insurance plan, petitioner’s spouse

received insurance reimbursements of $3,824.20 and $3,772.20 for

1993 and 1994, respectively, with respect to medical expenses

incurred by her.   These reimbursements are not taken into account

in the medical expense deduction claimed by petitioner for either

year.

     In the notice of deficiency for each year in issue,

respondent:   (1) Disallowed the “Deductible rental real estate
                                 - 7 -

loss” claimed on the Schedule E because the Pepper Pike residence

had not been “converted from personal use to use as an income-

producing property”; (2) disallowed the medical expense

deduction; and (3) determined that the underpayment of tax

required to be shown on petitioner’s return is due to negligence

and imposed a section 6662 accuracy-related penalty.     Other

adjustments made in the notice of deficiency are not in dispute.

Discussion

1.   “Rental real estate loss” Claimed on Schedule E

     Normally, no deduction is allowed for the expenses incurred

in maintaining a personal residence.     Sec. 262(a); sec. 1.262-

1(b)(3), Income Tax Regs.    Similarly, any loss incurred in the

sale of a personal residence is generally considered personal in

nature and cannot be deducted.    Sec. 1.262-1(b)(4), Income Tax

Regs.   However, an individual is entitled to deduct all the

ordinary and necessary expenses paid or incurred during the

taxable year “for the management, conservation, or maintenance of

property held for the production of income”.     Sec. 212(2).

     According to petitioner, by holding the Pepper Pike

residence for rent and temporarily renting it for a portion of

1991 and 1992, the property was converted from property used for

personal purposes to “property held for the production of income”

during the years in issue.    Respondent disagrees, and so do we.
                                - 8 -

     Whether a former residence used for personal purposes has

been converted in the hands of the same taxpayer to property held

for the production of income is a question of fact to be resolved

with reference to the surrounding facts and circumstances.

Newcombe v. Commissioner, 54 T.C. 1298 (1970).    Five factors have

been identified by this Court and other Federal Courts in

deciding previous cases involving similar questions; those

factors include: (1) The length of time the house was occupied by

the individual as his residence before placing it on the market

for sale; (2) whether the individual permanently abandoned all

further use of the house; (3) the character of the property

(recreational or otherwise); (4) offers to rent; and (5) offers

to sell.    Grant v. Commissioner, 84 T.C. 809, 825 (1985), affd.

without published opinion 800 F.2d 260 (4th Cir. 1986); see also

Bolaris v. Commissioner, 776 F.2d 1428, 1433 (9th Cir. 1985),

affg. in part and revg. in part on another ground 81 T.C. 840

(1983); Newcombe v. Commissioner, supra at 1300-1301.     No one

factor is determinative; rather, all the facts and circumstances

must be considered.    Grant v. Commissioner, supra at 825;

Newcombe v. Commissioner, supra at 1300-1301.

     Petitioner and his spouse purchased the Pepper Pike

residence in 1978 to be used as their family residence.    They did

not originally acquire it for investment or income producing

purposes.   Following its purchase, petitioner and his spouse
                                 - 9 -

lived in the Pepper Pike residence for many years, raised their

family in it, and moved from it, only because of employment

considerations.   At the time they moved from it, their intention

was to sell the property as they were relocating out of the area.

Their initial attempts to sell the property were frustrated,

according to petitioner’s testimony, by circumstances beyond

petitioner’s control; i.e., real estate market conditions at the

time.   They received no offers to purchase the Pepper Pike

residence while it was on the market for several months during

1991.   Their decision to rent the property was not made with the

primary intention to profit from the rental, see Jasionowski v.

Commissioner, 66 T.C. 312, 319 (1976), but to alleviate the

financial burden of owning the Pepper Pike residence while at the

same time living and working elsewhere.   Apparently, petitioner

and his spouse sold the property at the first opportunity to do

so.

      To allow the Schedule E deductions as claimed in this case,

we would have to ignore most of the relevant “facts and

circumstances” and fashion a rule that allows for the conversion

of personal use property to “property held for the production of

income” merely because the property was rented for a temporary

period.   We have declined to do so in past cases and likewise

decline to do so in this case.    See, e.g., Murphy v.

Commissioner, T.C. Memo. 1993-292 (holding that the temporary
                             - 10 -

lease on petitioners’ former residence was ancillary to

petitioners’ efforts to sell the property as a result of

petitioners’ relocating to another area); Hudson v. Commissioner,

T.C. Memo. 1981-175 (holding that a rental property was no longer

considered as held out for rent in 1976 where taxpayer’s last

tenant moved out in September 1974).

     Considering all of the facts and circumstances, we find that

the Pepper Pike residence was not converted to “property held for

the production of income” merely because it was rented on a

temporary basis during years prior to 1993 and 1994.   See Grant

v. Commissioner, supra at 825-826 (rejecting taxpayer’s argument

that he was entitled to expenses under section 212 where he did

not claim the expenses until after his former residence was no

longer being rented and was only being held for sale).

Consequently, petitioner is not entitled to the deductions

claimed on the Schedule E for each of those years, and

respondent’s determinations in this regard are sustained.2



     2
       On each Schedule E, petitioner reports a “Deductible
rental real estate loss”, a concept that contemplates the
limitations on passive activity losses provided in sec. 469.
Except for a glancing reference in respondent’s trial memorandum,
neither party addressed the application of that section to the
deductions here in dispute. Even if the Pepper Pike residence
was considered “property held for the production of income”
because it was rented or held for rent, then it appears that any
loss attributable to that rental activity, a passive activity for
purposes of sec. 469, would be denied because petitioner did not
file a joint return with his spouse for either year. Sec.
469(i)(5)(B).
                               - 11 -

2.     Medical Expense Deductions

       Section 213(a) allows “as a deduction the expenses paid

during the taxable year, not compensated for by insurance or

otherwise, for medical care of the taxpayer, his spouse, or a

dependent * * *, to the extent that such expenses exceed 7.5

percent of adjusted gross income.”

       Petitioner now concedes that the medical expense deductions

claimed on his returns are overstated to the extent that the

insurance reimbursements received on account of his spouse’s

medical insurance plan have not been taken into account.    See,

e.g., Marlett v. Commissioner, T.C. Memo. 1976-105.

       Petitioner’s concession on this point, in and of itself,

eliminates petitioner’s entitlement to a medical expense

deduction for 1993.    Respondent’s determination that he is not

entitled to a medical expense deduction for that year is

therefore sustained.

       As to 1994, we find that petitioner’s medical expense

deduction for that year is also overstated to the extent that it

includes amounts withheld for Medicare from his and his spouse’s

wages.    Medicare taxes do not qualify for deduction under section

213.    Sec. 1.213-1(e)(4)(i)(a)(3), Income Tax Regs.   Taking into

account the increase to petitioner’s 1994 adjusted gross income

resulting from our holding regarding the Schedule E deductions,

petitioner’s concession with respect to the medical insurance
                               - 12 -

reimbursements, and our finding with respect to Medicare taxes,

petitioner is not entitled to a medical expense deduction for

1994.    Respondent’s determination to this end is likewise

sustained.3

3.   Negligence Penalty

     Section 6662(a) imposes an accuracy-related penalty of 20

percent on any portion of an underpayment of tax that is

attributable to negligence or disregard of rules or regulations.

Section 6662(c) defines “negligence” to include any failure to

make a reasonable attempt to comply with the Internal Revenue

Code, and defines “disregard” to include any careless, reckless,

or intentional disregard of rules or regulations.    The negligence

penalty does not apply to any portion of an underpayment if it is

shown that there was reasonable cause for such portion and the

taxpayer acted in good faith with respect thereto.    Sec.

6664(c)(1).

     Petitioner prepared his Federal income tax return for each

year in issue.    In determining whether imposition of the

negligence penalty is appropriate for those years, we take into

account petitioner’s background as an attorney and a consultant



     3
       Because its resolution would have no tax effect, we do not
address the dispute between the parties as to whether certain
expenses incurred by petitioner’s spouse for participation in a
weight loss program qualify for deduction under sec. 213. See
Rev. Rul. 2002-19, 2002-16 I.R.B. 778.
                                - 13 -

for Arthur Andersen LLP.     Tippen v. Commissioner, 104 T.C. 518,

534 (1995) (holding attorneys to a higher standard regarding the

negligence penalty).   Even if we were to ignore his professional

background, however, we would have little difficulty in

sustaining respondent’s imposition of the negligence penalty with

respect to the portion of the deficiency for each year

attributable to the overstated medical expense deduction claimed

on petitioner’s return.

     Section 213 expressly provides, among other requirements,

that a deduction is allowable for medical expenses “not

compensated for by insurance”.    Many of the medical expenses of

petitioner’s spouse that were included in the medical expense

deduction claimed by petitioner for each year were, in fact,

compensated for by insurance.    Petitioner now acknowledges his

mistake in not taking the medical insurance reimbursements into

account, but explains that he was unaware that his spouse

received those reimbursements.    He further explains that the

system that medical insurance companies use to pay and notify

recipients of benefits is confusing and difficult to follow.

     Neither explanation protects petitioner from the imposition

of the negligence penalty.    Petitioner obviously was aware that

his spouse was covered by an employment-based medical insurance

plan.   Common knowledge suggests that many of the medical

expenses of his spouse included in petitioner’s medical expense
                              - 14 -

deductions might have been subject to reimbursement.   Before

petitioner included his spouse’s medical expenses in his medical

expenses deduction for each year he should have, if, in fact he

did not, asked her about any reimbursements she might have

received.

     Petitioner’s claim that the notification of benefits and

reimbursement process is confusing does not explain petitioner’s

failure to account for all of the reimbursements.   Respondent’s

imposition of the negligence penalty on the portion of the

deficiency for each year attributable to petitioner’s overstated

medical expense deduction is sustained.4

     We do not, however, sustain respondent’s imposition of the

penalty on that portion of each deficiency attributable to the

Schedule E deductions.   As noted above, allowance of those

deductions is determined by the application of a facts and

circumstances test.   Taking into account the relevant factors

previously discussed, reasonable minds could differ as to any

conclusion reached.




     4
       We also note that all but four of the checks from
petitioner’s and his spouse’s joint checking account that were
presented at trial were signed by petitioner’s spouse and related
to her personal medical expenses. Petitioner presented no
evidence that these expenses were personally paid by him, and not
his spouse. With this in mind and taking into account the fact
that petitioner and his spouse filed separate returns for each
year in issue, we consider it questionable that petitioner
deducted all of the medical expenses paid by checks drawn from
the joint checking account. See Higgins v. Commissioner, 16 T.C.
140, 142-144 (1951).
                          - 15 -

Based on the foregoing,

                                     Decision will be

                               entered under Rule 155.
