T.C. Memo. 1996-146

UNITED STATES TAX COURT

LLOYD PATTERSON, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1254-94. Filed March 25, 1996.

Lloyd Patterson, pro se.

Patricia Riegger, for respondent.

MEMORANDUM OPINION

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

section 7443A(b)(3) and Rules 180, 181 and 182. All section

numbers refer to the Internal Revenue Code in effect for the

taxable year in issue. All rule numbers refer to the Tax Court

Rules of Practice and Procedure.
Respondent determined a deficiency in petitioner's Federal

income tax for the year 1991 in the amount of $4,377, and an

addition to tax under section 6651(a) in the amount of $339.

After concessions, the Court must decide: (1) Whether

petitioner is entitled to any deductions with respect to his

purported rental activity; (2) whether petitioner is entitled to

deduct any amount for charitable contributions; and (3) whether

petitioner is subject to limitations under section 219(g) on the

deduction of an Individual Retirement Account contribution.

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

Petitioner resided in Brooklyn, New York, when his petition was

filed. For convenience and clarity, the findings of fact and

opinion are combined.

Petitioner failed to file timely his 1991 Federal Income Tax

return. After the issuance of the notice of deficiency,

petitioner submitted an executed Form 1040 for the taxable year

1991 to the Brookhaven Service Center on February 8, 1994. His

filing status was married filing separate.

Petitioner reported $26,000 of wage income and $2,517 of

interest income on his return. He claimed Schedule A deductions

for taxes and charitable contributions. He also claimed a

Schedule E loss in the amount of $4,795 relating to a purported

rental property.

Petitioner testified that he bought an apartment house in

Brooklyn, New York, in July 1991. Respondent agreed that
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petitioner owned this building. Petitioner described the

building as rundown, but occupied by a few persons. When he

bought the building, the previous owner and tenants had been at

loggerheads with regard to services in the building. Water was

leaking from one bedroom to the other, and the floors of the

bathrooms and kitchens were bad. Petitioner claimed he worked on

the property to make it habitable. As indicated below,

petitioner did not rent the apartments. Some of the tenants from

the prior ownership continued to occupy the building but did not

pay rent to petitioner. We conclude that the apartment building

was not habitable, except perhaps for a few squatters.

In 1991, petitioner never collected rent from the squatters

because, he claimed, he would get involved with the "landlord and

tenants court". Petitioner never rented any apartments to any

legitimate tenants in 1991 because, he said, of the same fears. 

Petitioner explained these fears as follows: "I would be sued by

the tenants because I couldn't stop the water that was escaping

and going down on the other [apartments]". When neighbors

inquired as prospective tenants about an apartment, petitioner

said: "I've already got enough trouble with the [squatters who]

threaten to sue me and the position is that the water repairs are

being done, it will make it difficult for you, if you want to

rent it in that way give me in writing that you will not sue me

I'll be happy to rent to you." No one was willing to do so. 

Petitioner never collected any rent with respect to the apartment
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building during 1991 and for several years thereafter. We find

that petitioner never made any serious attempt to rent the

apartments.

Respondent contends that petitioner had not yet begun his

trade or business in 1991. Respondent argues that petitioner's

expenses, other than those conceded by respondent, are start-up

expenses paid in connection with a trade or business, and may be

deductible under section 195 if and when he begins to operate his

apartment building as a business.

Petitioner's rental expenses are deductible under sections

162 or 212 only if his use of the property 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
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forth various factors to consider. Sec. 1.183-2(b), Income Tax

Regs.

On this record, we must conclude that petitioner did not

engage in his apartment house activity in 1991 for profit within

the meaning of sections 162, 212, or 183.

We turn to section 183(b) which provides in pertinent part

that in the case of an activity which is not for profit, the

deductions allowable are those allowable "without regard to

whether or not such activity is engaged in for profit." 

Respondent has agreed that petitioner substantiated $1,849 of

mortgage interest paid in 1991, and that this amount is

deductible under section 163 without regard to whether the

activity is engaged in for profit and is to be added to his

itemized deductions. Sec. 183(b). Except for this amount,

respondent is sustained on this issue.

Respondent also disallowed $1,180 claimed as New York City

mortgage recording tax and transfer tax on petitioner's Schedule

A. These taxes related to the purchase of the apartment house. 

We have concluded that the apartment house is not an activity

engaged in for profit. These expenses are not currently

deductible. Sec. 183(b).

Respondent also disallowed a claimed charitable deduction 

of $1,534. At trial, respondent maintained that petitioner had

not substantiated any charitable contributions. Petitioner

claimed he had a "little notebook" in which he recorded
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contributions. Yet, he never put any such document in evidence. 

Petitioner testified that: "I get invited to various churches to

hear the preacher or the speaker so I go there, I put money in

the collection plate * * *. It could be a $50 bill. It could be

$25 or $30." We are not required to accept petitioner's selfserving statements as gospel. Tokarski v. Commissioner, 87 T.C.

74, 77 (1986).

Nevertheless, we believe petitioner went to churches and

made contributions to those churches. Where the Court is

satisfied that the taxpayer is entitled to some deduction but

where the records are inadequate to establish the amount of the

deduction, the Court may make an approximation of the amount of

the deduction. Cohan v. Commissioner, 39 F.2d 540 (2d Cir.

1930). In such cases we are cautioned to bear heavily against

the taxpayer "whose inexactitude is of his own making." Cohan v.

Commissioner, supra at 544. We find that petitioner is entitled

to deduct $120 as a charitable contribution.

Respondent has conceded that petitioner made a $2,000

contribution to an Individual Retirement Account (IRA). 

Respondent contends that this IRA contribution is subject to the

limitation set forth in section 219(g)(3).

In general, a taxpayer is entitled to deduct the amount he

contributes to an IRA, although the deduction allowable for any

taxable year may not exceed the lesser of an amount equal to the
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compensation includable in the taxpayer's gross income or $2,000. 

Sec. 219(b)(1).

The maximum amount that may be deducted is further limited

where the taxpayer or the spouse of a taxpayer is an "active

participant" in certain retirement plans. Sec. 219(g)(1). 

Section 219(g)(5) defines "active participant" as an individual

(A) who is an active participant in--

 (i) a plan described in section 401(a)

which includes a trust exempt from tax under

section 501(a),

 (ii) an annuity plan described in section

403(a),

 (iii) a plan established for its

employees by the United States, by a State or

political subdivision thereof, or by an

agency or instrumentality of any of the

foregoing,

 (iv) an annuity contract described in

section 403(b), or

 (v) a simplified employee pension (within

the meaning of section 408(k)), or

 (B) who makes deductible contributions to a trust

described in section 501(c)(18).

The determination of whether an individual is an active

participant shall be made without regard to whether or

not such individual's rights under a plan, trust, or

contract are nonforfeitable. An eligible deferred

compensation plan (within the meaning of section

457(b)) shall not be treated as a plan described in

subparagraph (A)(iii).

There is no evidence and not even a suggestion in the record

that petitioner was an "active participant" for purposes of the

section 219(g) limitation. Yet, respondent contends that
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petitioner's deduction is subject to section 219(g). Respondent

is wrong. Petitioner is entitled to deduct his $2,000 IRA

contribution in full.

Petitioner, though he had income of at least $28,517 in

1991, did not timely file a Federal income tax return for 1991. 

There was no extension requested by petitioner nor granted by the

Internal Revenue Service. Petitioner's 1991 return was due on

April 15, 1992. After the notice of deficiency was issued,

petitioner submitted a signed Form 1040 for 1991 on February 8,

1994.

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 timely file a Federal income tax return for the year in

issue. Respondent acknowledges that petitioner is entitled to a

withholding credit of $3,201. Thus, we find that petitioner is

liable for an addition to tax under section 6651(a)(1) of 25

percent of the amount required to be shown on the return as tax

reduced by the $3,201 credit.
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Petitioner raised a claim for litigation costs in his

petition. This was improper. Rules 34, 231.

Decision will be entered

under Rule 155.