T.C . M e m o. 2020-147

UNITED STATES TAX C OUR T

R AM R ATAN SHAR

M A AND SHAKUNTALA SHAR M A, Pe titione rs v. C OM M ISSIONER OF INTER NAL REVENUE, R e sponde nt

Doc ke t No. 19466-17. File d Oc tobe r 29, 2020.

R am R ata n Sha rm a and Sha kunta l a Sharm a , pro se se . M ay e r Y. Silbe r, Eliz a

b e th A. C arlson, a

nd Sta nisla w B a la z ia , for
re sponde nt.

M EM OR

ANDUM FINDINGS OF FAC T AND OPINION GALE, Judge : R e sponde nt de te rm ine d a de fic ie nc y

in pe t itione rs’ 2014 Fe de ra l inc om e t a x of $5,230 a nd a se c tion 6662(a

) 1 a c c ura c y -re late d pe na lty of

1 Unle ss othe rwise indic at e d, a ll se c tion re fe re nc e s a re to the Inte rna l R e ve nue C ode of 1986, a s a m e nde d, a

nd a ll R ule re fe re nc e s a

re to the Tax C ourt (c ontinue d...)- 2 -

[*2] $1,046. Re sponde nt now c onc e de s tha t pe titione rs a

re not lia ble for the
se c t ion 6662(a) pe na l ty , a n d the only issue re m a ining for de c ision is wha t portion of pe titione rs’ loss de duc tion from re nta l re a l e sta

te a c tivitie s c la im e d on Sc he dule E, Supple m e n t a l Inc om e and Loss, is disa llowe d unde r the se c tion 469(a)
and (i) limita

t ions on the

de duc tibility

of pa ssive a c tivity

losse s. FINDINGS OF FAC T Som e of the fa c ts ha

ve be e n de e m e d stipula

te d a nd a re so found. The stipula tion of fa c ts a

nd its e xhibits a

re inc orporate d he re in by this re fe re nc e . Pe titione rs re side d in Illinois whe n the y file d the i r pe tition. Pe titione rs file d

a joint Fe de ra l inc om e tax re turn for the ir 2014 ta xa ble y e ar. On the ba sis of ite m s of inc om e and loss reporte d on the ir re turn, pe titione rs re porte d the ir a djuste d

gross inc om e (AGI) a s $122,948. Tha t figure inc lude d the following inc om e ite m s, a m ong othe rs: ta

xa ble individual re tire m e nt a c c ount (IR A) distributions of $5,579; ta xa ble pe nsion a

nd a nnuity distributions of $103,443; a

nd tota l Soc ia l Se c urity

be ne fits of $13,828, the

taxa ble portion of whic h pe titione rs re porte d a s $11,754. At tria l, howe ve r, the pa

rtie s stipula

te d tha t pe titione rs a c tua lly

re c e i ve d tota l Soc ia l Se c urity be n e fits of only

$13,328.

1 (...c ontinue d) R ule s of Pra c tic e a

nd Proc e dure . All dolla

r am ounts ha

ve be e n rounde d to the ne are st dolla

r.- 3 -

[*3] Additionally , in c a lc ulating the ir 2014 AGI pe t itione rs did not c la i m any de duc tion for c ontributing m o ne y to a n IR A or othe r re t ire m e nt pla

n. The y did, howe v e r, de duc t a

loss of $26,877 from

re nta l re a l e sta

t e a c tivitie s de ta ile d on Sc he dule E, whic h t

he y atta c he d to the ir re turn. Se pa ra te from the i r re turn, pe titione rs a lso submitte d to re sponde nt a Form 8582, Pa ssive Ac tivity

Loss Lim ita tions, on which the y

re porte d tha

t the y we re pe rm itte d to c la im the full
am ount of the ir $26,877 Sc h e dule E loss for 2014. R e sponde nt subse que ntly issue d a notic e of de fic ie nc y

to pe titione rs in whic h he disa llowe d $20,913 of the ir c la im e d $26,877 Sc h e d ule E loss de duc tion,
re sulting in a

de fic ie nc y

in ta x of $5,230. Re sponde nt a l so de te rm ine d the
now-c onc e de d a c c ura c y -re late d pe n a lty of $1,046 a g a inst pe titione rs unde r se c tion 6662(a ). Pe titione rs tim e ly file d a pe tition for re d e te rm ination. OPINION Ge ne ra lly , the C om

m issione r’ s de t e rm i nation of a de fic ie nc y

is pre sum e d
c orre c t, a nd the taxpa

y e r ha s the burde n of proving it inc orre c t. 2 R ule 142(a ); W e lc h v. He lve ring, 290 U.S. 111, 115 (1933). De duc tions a re a m atte r of le gisla tive gra c e , and the burde n of showing entitle m e n t to a c la im e d de duc tion is on the taxpa

y e r. INDOPC O, Inc . v. C om m issione r, 503 U.S. 79, 84 (1992).

2 Pe titione rs ha

ve not c l a im e d or shown e ntitle m e nt to a ny shift in the

burde n of proof pursua

nt to se c . 7491(a ).- 4 -

[*4] Ta xpa

y e rs m ay c la im de duc tions for c e rta in busine ss a nd inve stm e n t
e xpe nse s unde r se c tions 162 a nd 212. Howe ve r, any

de duc tion for a “ pa s sive
a c tivity loss” for a

taxa ble y e ar is disa llowe d , a

nd the disa llowe d loss is c arrie d forward to the ne xt ta

xa ble y e ar. Se e se c . 469(a ) and (b). A pa ssive a c tivity loss is the a m ount by whic h the a ggre g ate losse s from a ll pa ssive a c tivitie s for the taxa ble y e ar e xc e e d the a ggre gate inc o m e from a ll pa ssive a c tivitie s for suc h y e ar. Se c . 469(d)(1). A “pa ssive a c tivity ” is a ny a c tivity whic h involve s the c onduc t of a ny tra de or busine ss in whic h the taxpa y e r doe s not m at e ria lly

pa rtic ipate . Se c . 469(c )(1). R e nta l a c t ivitie s a

re ge ne ra lly

tre ate d a s pe r se pa ssive a c tivitie s re g ardle ss of whe the r the taxpa

y e r m at e ria lly

pa rtic ipate s . Se c . 469(c )(2), (4). The re are , howe v e r, two signific an t e xc e ptions to this ge ne ra l rule . First, it doe s not a pply to
re nta l a c tivitie s of taxpa

y e rs e nga ge d in c e rta in re a l prope rty tra d e s or busine sse s; suc h a c tivitie s a

re inste a d subje c t to them ate ria l pa rtic ipation re quire m e nts of
se c t ion 469(c )(1). Se e se c . 469(c )(7). Se c ond, se c t ion 469(i) provide s an e xe m ption pe rm i tting individua ls who a c tive ly

pa rtic ipate in re nta l re a l e sta te
a c tivitie s to de duc t

up to $25,000 in a

nnua l losse s from

suc h re n ta l a c tivitie s. Se c . 469(i)(1) a

nd (2).- 5 -

[*5] The $25,000 m a xim um e xe m ption is subje c t

to a pha se out tha

t re duc e s the
e xe m ption by 50% of the am ount by

whic h a taxpa y e r’ s “ m odifie d a djuste d gross inc o m e ” (M AGI) for the taxa ble y e ar e xc e e ds $100,000. Se e se c . 469(i)(3)(A), (F). 3 C onse que ntly , if a taxpa y e r’ s M AGI is $150,000 or m ore , the se c tion 469(i)
e xe m ption is fully pha se d out. Spouse s who ha ve file d a joint re turn a

re tre ate d a s
a single taxpa

y e r for purpose s of the M A GI c a lc ulat ion, a nd both spouse s’ inc om e the re fore m

ust be take n into a c c ount in c a lc ulating the ir M AGI. Oppe rwa ll v. C om m issione r, 105 F.3d 666, 1997 W L 8473, a t *1 (9th C ir. 1997) (unpublishe d ta ble de c i sion); se c . 1.469-1T(j)(1), Te m pora ry Inc om e Tax R e g s ., 53 Fe d . R e g. 5711 (Fe b. 25, 1988). Pe titione rs do not c onte nd, nor doe s the re c ord sugge st, tha t the y qua lify to de duc t the ir Sc he dule E loss under the se c tion 469(c )(7) e x c e p tion for ta xpa y e rs e nga ge d in a re a l prope rty tra d e or busine ss. The y

ne ve rthe le ss a

rgue , e vide ntly
re ly ing on these c tion 469(i) e xe m ption, tha t re s ponde n t wa s inc orre c t to disa llow
any portion of the i r c la im e d $26,877 loss de duc tion. 4 While re s ponde n t c onc e de s

3 The c a lc ulation of M AGI is disc usse d infra pp. 6-7.
4 Pe titione rs c ha lle nge re sponde nt’ s de fic i e nc y de te rm ination only on the ground tha

t he inc orre c tly

c a lc ulate d the ir M AGI, indic ating tha t the y be lie ve the ir loss de duc tion is a llowa

ble unde r se c . 469(i). Of c ourse , se c . 469(i)(2) would lim it the a llowa

ble portion of pe titione rs’ loss for they e ar at issueto $25,000 e ve n if the i r M AGI wa s be ne at

h the pha se out thre shold. W e thus unde rsta nd pe titione rs’ (c ontinue d...)- 6 -

[*6] tha t pe titione rs a

re e ntitle d to de duc t a

portion of tha

t loss unde r se c tion 469(i), he c onte nds tha

t the a llowa

ble portion is lim

ite d to $5,964 on the

ba sis of the i r se c tion 469(i) MAGI for 2014. B y re sponde nt’ s c a lc ulat ion, pe t itione rs’ M AGI is $138,072. Tha t figure
e xc e e ds $100,000 by

$38,072, a

nd 50% of $38,072 is $19,036. The re fore , unde r the s e c tion 469(i) pha se o ut, the m a x im um pa ssive a c tivity

loss pe titione rs c o uld de duc t on the ba sis of re s ponde nt’ s M AGI c a lc ulation would be $25,000 minus $19,036, or $5,964. The

re m a ining $20,913 of pe titione rs’ c la im e d Sc he dule E loss de duc tion would be

disa llowe d for 2014 a s re sponde nt de te rm ine d in the notic e of de fic ie n c y . R e sponde nt a

rgue s tha t his M AGI c a l c ulation is supporte d by se c t ion 469(i)(3)(F), whic h provide s tha t for purpose s of the se c tion 469(i) e xe m ption,

“ a d juste d gross inc om e sha ll be de te rm ine d without re ga

rd to” the following item s: (1) the taxa

ble portion of Soc ia l Se c urity be ne fits tha

t would beinc l ude d in gross inc o m e unde r se c tion 86; (2) the e x c lusion from

gross inc om e of am ounts re c e ive d upon re de e m ing U.S. sa

v ings bonds in the c irc um sta nc e s de sc ribe d in se c t ion 135; (3) the e xc lusion from gross inc om e of a d o ption a ssista nc e pa ym e nts in the

4 (...c ontinue d) argum e nt to be tha

t, for 2014, se c . 469(i) a llows the m to de duc t $25,000 of the ir c la im e d Sc h e dule E loss.- 7 -

[*7] c irc um sta

n c e s de sc ribe d

in se c t ion 137; (4) the

se c tion 199 de duc tion for inc o m e attributa

b le to dom e stic produc tion a c tivitie s; (5) the se c tion 219 de duc tion for qua l ifie d c ontributions to a re tire m e nt pla

n ; (6) the se c tion 221 de duc t ion for
e duc ation loa

n inte re s t pa

y m e nts; (7) these c tion 222 de d uc tion for qua l ifie d tuition
e xpe nse s ; a

nd (8) a ny pa ssive a c tivity

loss (inc luding a

ny pa ssive a c tivity

loss
a llowa ble unde r the se c tion 469(c )(7) e x c e ption for ta xpa y e rs e n g a ge d in a

re a l
e sta te tra d e or busine ss). In re sponde nt’ s vie w this list of m o dific ations re quire s only two a djustm e nts to the AGI re p orte d on pe t itione rs’ re t urn in orde r to a

rrive at the ir se c tion 469(i) M AGI. First, he sa

y s tha t pe t itione rs’ AGI, whic h

the y re porte d a s $122,948, m

ust be re duc e d by

the $11,753 tha

t pe titione rs re porte d a s the taxa ble portion of the ir Soc ia l Se c urity

be ne fits for the y e ar at issue . Se c ond, he sa y s tha t pe titione rs’ AGI
m ust be inc re a se d by the $26,877 pa ssive re nta l re a l e sta te loss tha t the y re porte d on Sc he dule E. C o nse que ntly , a c c ording to re s ponde nt, the c orre c t c a l c ulation of pe titione rs’ M AGI is: $122,948 – $11,754 + $26,877 =

$138,071. Pe titione rs ta

ke no issue with e ithe r of the a djustm e nts inc lude d in
re sponde nt’ s M AGI c a lc ulation. Howe v e r, pe titione rs c o nte nd tha t the $138,071 figure tha t re sponde nt c a lc ulate d m ust be furthe r re duc e d by

$5,579 of IR

A- 8 -

[*8] distributions a

n d $100,625 of distributions from pe nsions a

n d a nnuitie s 5 tha

t pe titione rs re c e ive d for 2014. The se a dditiona l a djustm e nts would re sult in a M AGI of $31,867, a

nd the se c tion 469(i) pha s e out would no longe r a pply
. In support of the ir c a lc ulation pe titione rs c ite the instruc tions for Form 8582. 6 The instruc tions dire c t taxpa y e rs to c a l c ulate the i r M AGI in the sam e
m anne r a s the ir AGI but without ta king into a c c ount (a

m o ng othe r ite m s )

“ [d] e duc tible c ontributions to tra ditiona l individual re tire m e nt a c c ounts (IR A s) a n d
se c t ion 501(c )(18) pe nsion pla ns” . 2014 Instruc tions for Form 8582, a t 10. W e c annot a g re e with pe titione rs’ argum e nt tha t the Form

8582 instruc tions dire c t taxpa

y e rs to e xc lude IR

A a nd pe nsion inc om e from

the se c tion 469(i) MAGI

5 On the ir re turn pe titione rs re porte d $103,443 of distributions from pe nsions and a nnuitie s. Pe titione rs do not e xpla in why the figure the y

use in the ir c a lc ulat ion is le ss tha

n the am ount re porte d on the i r re turn, but the diffe re nc e is im m ate ria l. Subtra c ting e ithe r am o unt would suffic ie n tly re duc e pe titione rs’ M AGI tha

t the y would not be

subje c t to thepha s e out. 6 Pe titione rs a

tta c he d to the ir pre tria l m e m orandum a c opy of the re le v ant portion of theForm

8582 instruc tions issue d for the 2016 ta x a ble y e ar. W e will take judic ia l notic e of the c onte nts of theForm 8582 instruc tions issue d

for 2016, a s we ll a s those issue d for 2014, whic h is they e ar at issue . Se e , e .g., R e c klitis v. C om m issione r, 91 T.C
. 874, 911 (1988) (ta king judic ia l notic e of 1974 a nd 1975 Form s W -4E, Exe m

ption From

W ithholding, a

nd re l ate d instruc tions); W a dsworth v. C om m issione r, T.C . M e m o. 2007-46, 2007 W L 610069, a

t *10 (“ T his C ourt routine ly ta ke s judic ia l notic e of the c onte nts of theC o m m issione r’ s offic ia l public ations[.] ” ). The re le va n t portion of the

2014 instruc tions is identic a l to the c orre sponding portion of the 2016 instruc t ions tha

t form s the ba sis of pe titione rs’ argum e nt.- 9 -

[*9] c a lc ulation. Theinstruc tions a ddre ss only situa tions in which a

taxpa y e r ha s c ontribute d to a

re tire m e nt pla

n during thetaxa

b l e y e ar. Pe titione rs did not report on the ir re turn, a

nd do not c o nte nd tha

t the y m a de , a ny pa ym e nt to a

n IR Aor othe r re tire m e nt pla

n in 2014. Inste a d, the y

re porte d tha t the y re c e ive d distributions from an IR A a nd othe r re tire m e nt pla

ns during tha

t y e ar. The portion of the Form 8582 instruc tions on which pe titione rs re ly doe s not in a

ny wa y sugge st tha

t m one y re c e ive d from

a re tire m e nt pla

n during thetaxa

ble y e ar should besubtra c te d whe n c a lc ulat ing M AGI. Inde e d, the re le va

nt portion of the

instruc tions c orre sponds to se c tion 469(i)(3)(F)(iii), whic h provide s tha t a taxpa y e r’ s M A GI is c a lc ulate d without
re ga rd to “ the am ount[] a llowa ble a s a de duc tion unde r se c tion[] * * * 219”
. Se c tion 219 allows ta

xpa y e rs to de duc t the ir “ qua lifie d re tire m e nt c ontributions” for a t a xa ble y e a r, inc luding “ any

am ount pa id in c a sh for the taxa ble y e ar by

or on be ha lf of a

n individual to a

n individual re tire m e nt pla n for suc h individual’ s be ne fit” a nd “ any am ount c ontribute d on be h a lf of a n individual to a

pla n de sc ribe d in se c tion 501(c )(18).” Se c . 219(a ), (e ). The am ount a llowa ble a s a de duc tion unde r se c tion 219 is subtra c te d from gross inc om e whe n c a lc ulating AGI. Se c . 62(a )(7). Sinc e se c tion 469(i)(3)(F)(iii) dire c ts tha t M AGI for purpose s of se c tion 469(i) m

u st be c a lc ulate d without re ga rd to a ny othe rwise a llowa

ble- 10 -

[*10] se c tion 219 de duc tion, thee ffe c t of tha t provision would be to inc re a se , not de c re a se , pe titione rs’ M AGI if the y ha d m a de any

re tire m e n t c ontributions for 2014. B ut he re , a s we have note d, pe titione rs did not c ontributeany m one y to a
re tire m e nt pla

n for 2014, a

nd se c tion 469(i)(3)(F)(iii) there fore doe s not a ffe c t the
c a lc ulat ion of the i r M AGI. Ac c ordingly , re sponde nt’ s M AGI c a lc ulation c o rre c tly inc lude d the full
am ount of theIR

A a nd othe r re tire m e nt distributions tha t pe titione rs re c e ive d for 2014. B e c a

use re sponde nt c onc e de s tha t pe titione rs a

re not lia ble for the se c tion 6662(a ) pe na l t

y de te rm ine d in the notic e of de fic ie nc y , the only m atte r still to be
a ddre s se d is the e ffe c t of the pa rtie s’ stipula

tion a t tria l tha t pe t itione rs ove rre porte d the tota l am o unt of Soc ia l Se c urity be ne fits the y

re c e ive d for 2014. W e e xpe c t tha

t the pa rtie s will a c c ount for the$13,328 tha t the y a gre e pe titione rs
a c tua lly re c e ive d, a

nd the portion the re of tha t is ta xa b le unde r se c t ion 86, in the ir R ule 155 c om

puta tions. To re fle c t

the fore going,

De c ision will be

e nte re d unde r R u le 155.