T.C. Mem o. 2 01 5- 18 1

UNITED STAT ES TAX COURT

CHARLES OKONKW O AND CECILIA OKONK W O, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 23 49 6- 13
. Fi le d S ep te m be r 14 , 20 15
.
Ch arl es Oko nkwo an d C eci li a Oko nkwo, p ro ses e. Mi ch ael W . Tan, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION FOLEY, Jud ge : Aft er co nc es si on s, the is su es forde ci si on are wh ethe r pe ti ti on ers m ay

de du ctcert ai n e xp en se s an d wh ethe r th ey are l iabl e fo r se ct io n 66 62 (a) a ccu racy-rela te d p en al ti es . 1
Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al 1 Rev enue Co de rel at in g t o the y ears inis su e, an d a ll Ru le refe ren ces are t o the Tax (co nt in ue d...)- 2 -

[* 2] FINDINGS OF FACT Dur in g 2 00 8, 2 00 9, an d 2 01 0 (years inis su e) Ch arl es Oko nkwo was a card io lo gi stan d h is wife , Ceci li a, worke d i n h is m ed ic al pra ct ic e. Thei r pr in ci pa l
res id en ce (B el Air re si de nc e) was inth e Bel Air n ei gh bo rh oo d o f Los Ang el es , Cal ifo rn ia . Peti ti on ers , in19 92 , pu rch as eda va can t l otinW oo dl an d Hi ll s, Cal ifo rn ia ; i n 1 99 7, co ns tru ct eda si ng le -fam il y ho us e o n the lo t; an d, thr ou gh 20 01 , att em

pt edto sel l i t. The y

ceas edth ei r sa le s ef

fo rts in20 02 an d thr ou gh 20 06 ren te d the W oo dl an d Hi ll s h ou se for$6 ,00 0 p er m on th to anun rel at ed te na nt . From 20 07 th ro ug h M arch20 10 , pet it io ne rs ’ daug ht er re si de d i n the W oo dl an d Hi ll s h ou se an d p ai d re ntof $ 2,0 00 pe r m on th . Duri ng th is ti m e, pe ti ti on ers res um edth ei r sa le s ef fo rts an d ro ut in el y

cle an edth e Wood landHil ls ho us e. Harry Stir it z, Jr ., a cert ifi edpubl ic acco un tant(C.P.A.) wit h re al est at e in ve st m en t ex pe rie nc e, pr ep aredpe ti ti on ers ’ returns us in g e st im at es of c ert ai n de du ct io ns th atMr. Ok on kwo co nv ey eddu rin g the ir c on ve rs at io ns . Peti ti on ers ti m el y fil edFo rm s 1 04 0, U.S. In di vi du al Inc om e Tax Return, re la ti ng to th e y ears inis su e. On Sc he du le A, Item iz edDedu ct io ns , of the ir 2 00 8 F orm 10 40 , th ey (...co nt inue d) 1 Co urt Ru le s o f Prac ti ce an d P ro cedur e.- 3 -

[* 3] rep orte d $ 10 0,9 15 of m ortg ag e in te res t re la ti ng to th e Bel Air re si de nc e. On Sch edul e E, Sup pl em en ta l In co m e an d Lo ss , pet it io ne rs in di cat edth atth e W oo dl an d Hi ll s h ou se was re nt al real est at e an d re po rte d re ntof $ 24 ,00 0, t ot al
ex pe ns es (i.e ., m ortg ag e in te res t, t ax es , in su ran ce, an d d ep reci at io n) of $ 15 8,3 60 , an d ane t l os s o f $1 34 ,36 0. OnFo rm 85 82 , Pas si ve Acti vi ty L os s Li m it at io ns , th ey ch arac te riz edth ei r 20 08 Sch edul e E ne t l os s as pa ss iv e. Befo re h e p rep ared th ei r 20 09 an d 2 01 0 re turn s, M r. Sti rit z n ot ic ed , andask edpe ti ti on ers ab ou t, the si gn ifi can t d ecre as e in th ei r ren ta l i nc om e rel at in g t o the W oo dl an d Hi ll s h ou se . Inres po ns e, pe ti ti on ers in fo rm edhi m th atth e d ecre as e was att rib ut ab le to th e pr ev io us ten an t’s m ov in g o utof, andth ei r daug ht er’s m ov in g i nt o, the ho us e. On Sch edul es C, Pro fitor Lo ss Fro m Bu si ne ss , of the ir 2 00 9 and20 10 Fo rm s 1 04 0,
res pe ct iv el y , pet it io ne rs rep orte d g ro ss rece ip ts of $ 24 ,00 0 and$6 ,00 0, t ot al
ex pe ns es of $ 10 8,6 00 an d $ 11 3,8 20 , andne t l os se s o f $8 4,6 00 an d $ 10 7,8 20 an d in di cat edth atth ey

were i n the co ns tru ct io n b us in es s. Dur in g re sp on de nt ’s exa m in at io n, an d p ur su an t t o M r. Sti rit z’ adv ic e, pe ti ti on ers fil eda 20 08 Fo rm 10 40 X, Am en de d U.S. In di vi du al Inc om e Tax Return, o n wh ic h the y

rep orte d, o n S ch edul e C, th e in co m e an d e xp en se s re la ti ng to th e Wood landHil ls ho us e an d c la im eda refu ndof $ 8,7 89 . Thes e it em s h ad pr ev io us ly beenrep orte d o n p et it io ne rs ’ Sch edul e E. On Ju ly 8, 20 13 , res po nd en t- 4 -

[* 4] is su edpe ti ti on ers a no ti ce o f de fic ie nc y rel at in g t o 2 00 8 i n wh ic h re sp on de nt di sa ll owe d the refundcla im , di sa ll owe d $ 19 ,21 1 o f th e m ortg ag e in te res t de du ct io n re la ti ng to th e Bel Air re si de nc e, an d d et erm in edth atpe ti ti on ers owed in co m e ta x o f $4 ,29 5 andwere l iabl e fo r a s ect io n 6 66 2( a) ac cu racy-rela te d pe na lty . Res po nd en t, o n J ul y 8, 2 01 3, i ss ue d ano ti ce o f de fic ie nc y rel at in g t o 20 09 an d 2 01 0 i n wh ic h re sp on de ntdi sa ll owe d p et it io ne rs ’ Sch edul e C d educ ti on s (i.e ., m ortg ag e in te res t, t ax es , rep ai rs , andin su ran ce) a ndad jus te d c ert ai n i te m iz ed de du ct io ns (i.e ., m ortg ag e in te res t re lati ng to th e Bel Air re si de nc e, ta xe s, an d ret ire m en t co nt rib ut io ns ). Res po nd en t fu rth er d et erm in edth atpe ti ti on ers he ldth e W oo dl an d Hi ll s h ou se for th e p ro du ct io n o f in co m e; th atth e lo ss es rep orte d, pu rs ua ntto sec ti on 46 9, wer e p as si ve ; tha t p et it io ne rs owedin co m e ta x o f $1 8,4 25
an d $ 32 ,25 6, re la ti ng to 20 09 an d 2 01 0, re sp ect iv el y ; an d tha t p et it io ne rs were li ab le forsec ti on 66 62 (a) a ccu racy-rela te d p en al ti es . On Oct ob er 1 7, 2 01 3, p et it io ne rs , whi le res id in g i n C al ifo rn ia , fil eda pe ti ti on with the Co urt. OnApri l 1 5, 2 01 5, the Co urt fi le d re sp on de nt ’s firs t am en dm en t t o ans wer i n wh ic h re sp on de ntco nt en de d tha t the de du ct io ns at i ss ue are l im it ed , pu rs uantto sec ti on28 0A, t o the am ou nt s o f pe ti ti on ers ’ ren ta l i nc om e.- 5 -

[* 5] OPINION Inge ne ral , a tax pa y er m ay no t cl ai m

de du ct io ns th atwou ldothe rwis e b e al lo wab le (e.g ., pu rs ua ntto sec ti on 21 2) rel at in g t o the us e o f a dwell in g u ni t as a res id en ce. See sec . 28 0A( a). A dwel li ng un itis us edas ares id en ce i f th e ta xp ay er, o r a fam il y

m em be r, us es itforpe rs on al purp os es form or e th anth e gr eat er o f 14 day s a year o r 10 % of t he nu m be r of day s i t i s re nt edat f

ai r ren ta l th aty ear. Se e se c. 28 0A( d) (1 ) an d (2 )(A). Res po nd en t co nt en ds th atpe ti ti on ers ’ de du ct io ns rel at in g t o the W oo dl an d Hi ll s h ou se are l im it edbe cau se th ei r daug ht er res id edth ere. See s ec. 2 80 A(a), (c) (5 ). Pet it io ne rs , ho wev er, co nt en d tha t the y

2
are r eal est at e d ev el op ers an d re nt edth e Wood landHil ls ho us e to th ei r daug ht er be cau se th ei r ho m eo wne rs po li cy requi redth atth e h ou se be oc cupi ed . Peti ti on ers , iness en ce, co nt en d tha t s ect io n 2 80 A is in ap pl ic ab le
. Pet it io ne rs ’ daug ht er’s u se of t he W oo dl an d Hi ll s h ou se was p ers on al an d i s at tri bu te d t o p et it io ne rs . See s ecs . 26 7( c)(4 ), 28 0A( d) (1 ) an d (2 )(A). Bec au se th ei r daug ht er d idno t p ay fai r ren ta l, the y

do no t qua li fy

foranex cep ti on to th is

Res po nd en t as se rte d thi s co nt en ti on inhi s fi rs t am en dm en t t o ans wer an d 2 acco rd in gl y

ha s the bu rd enof p ro of

. See Ru le 14 2( a). Res po nd en t h as , ho wev er, m ethi s b ur de n.- 6 -

[* 6] rul e. See s ec. 2 80 A(d )(2 )(C) . Accor di ng ly, de du ct io ns rel at in g t o the W oo dl an d Hi ll s h ou se are l im it edto th e ex te ntof r en ta l i nc om e. See s ec. 3 28 0A( c)(5 ). Res po nd en t d et erm in edan d e st ab li sh edth atpe ti ti on ers are l iabl e fo r a se ct io n 6 66 2( a) an d (b )(1 ) acc ur acy-rela te d p en al ty for n eg li ge nc e rel at in g t o 20 08
. Pet it io ne rs di d n otm ak e a rea so nabl e atte m ptto co m pl y with the law o r 4
m ai nt ai n a de qu at e b oo ks an d re co rd s re la ti ng to th ei r 20 08 return. Se e se c. 66 62 (c); sec . 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. In de ed , Mr. Oko nkwo an d M r. St iri tz bo th read il y

ackno wled ge d tha t the cla im edm ortg ag e in te res t d educ ti on rel at in g t o the Bel Air re si de nc e (i .e., th e o nl y it em ad jus te d) was b as edon Mr. Oko nkwo’s es ti m at e. Acco rd in gl y , we su st ai n re sp on de nt ’s det erm in at io n. Se e se c. 66 64 (c)( 1) ; Hi gb ee v . Comm is si on er, 1 16 T.C. 43 8, 4 48 -4 49 (20 01 ). Pet it io ne rs ’ un de rs ta te m en ts of i nc om e ta x re la ti ng to 20 09 an d 2 01 0
ex ceed edbo th10 % of t he tax requi redto be sh own on th e returns an d $ 5,0 00 , and th us , were s ub st an ti al un de rs ta te m en ts . See s ec. 6 66 2( d) (1 )(A). Pet it io ne rs were Deduc ti on s d is al lo wedpu rs ua ntto sec . 28 0A( c)(5 ) m ay be carr ie d fo rward 3 to th e su ccee di ng tax ab le y ear. We nee d n otde te rm in e whe th er p et it io ne rs ’ lo ss es were p as si ve purs ua ntto sec . 46 9. Se e se c. 46 9( j)(10 ). Res po nd en t b ears , andha s m et , hi s b ur de n o f pr oduc ti on rel at in g t o the 4 20 08 sec . 66 62 (a) and(b) (1 ) acc ur acy-rela te d p en al ty. See s ec. 7 49 1( c); Hig be e v . Co m m is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ).- 7 -

[* 7] als o n eg li ge ntrel at in g t o the ir 2 00 9 and20 10 un de rp aym en ts to th e ex te nt at tri bu tabl e to it em iz edde du ct io ns , all of wh ic h wer e b as edon Mr. Ok on kwo ’s
erro ne ou s es ti m at es . See s ec. 6 66 2( c); sec . 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. 5 Pet it io ne rs , ho wev er, rea so nabl y rel ie d o n M r. Sti rit z’ adv ic e reg ard in g wh ethe r th ei r 20 09 an d 2 01 0 d educ ti on s re la ti ng to th e Wood landHil ls ho us e were l im it ed by sect io n 2 80 A. Mr. Sti rit z, a C.P.A. with re al est at e in ve st m en t ex pe rie nc e, was aware th atdu rin g 2 00 9 and20 10 pe ti ti on ers ’ daug ht er re si de d i n the W oo dl an d Hil ls ho us e an d d idno t p ay pe ti ti on ers fai r ren ta l. Pet it io ne rs , ingo odfai th , rel ie d
on hi s ju dg m en t tha t ex pe ns es rel at in g t o the ho us e were f ul ly deduc ti bl e. Acco rd in gl y , th ey

are n otli ab le forsec ti on 66 62 (a) a ccu racy-rela te d p en al ti es rel at in g t o the po rti on s o f th e und erp aym en ts att rib ut ab le to res po nd en t’s s ect io n 28 0A d et erm in at io ns . See s ec. 6 66 4( c)(1 ); Ne on at ol og y Ass oc s., P.A. v. Co m m is si on er, 1 15 T.C. 43 , 99 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2) ; s ec. 1.6 66 4- 4( c), In co m e Tax Reg s. Pet it io ne rs are, h owe ve r, li ab le forsec ti on 66 62 (a) a ccu racy-rela te d p en al ti es rel at in g t o the po rti on s o f th e und erp aym en ts at tri bu tabl e to erro ne ou sl y cla im edit em iz edde du ct io ns . See s ec. 6 66 2( c); sec . 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. Res po nd en t h as m ethi s b ur de n o f pr oduc ti on , andpe ti ti on ers be ar the 5 bu rd enof p ro vi ng a de fen se to th e p en al ti es . See s ec. 7 49 1( c); Hig be e v . Co m m is si on er, 1 16 T.C. at 4 46 -4 47
.- 8 -

[* 8] Co nt en ti on s we h av e n otad dr es se d are i rrel ev an t, m oo t, o r m eri tl es s. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red
un de r Ru le 15 5.