TAX COURT OPINION

Case: Sonya Chavez
Docket Number: 21895-10
Judge: Kroupa
Opinion Type: bench
Filed: 10/24/2011
Pages: 8

UNITED STATES TAX COURT WASHINGTON, D.C. 20217 SONYA CHAVEZ, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Re spondent . ) ) ) ) ) ) ) ) Docket No. 21895-10 O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith the pages of the to petitioner and to respondent a copy of transcript of Diane L. Kroupa at Los Angeles, California on October 6, 2011, containing her oral findings of fact and opinion. the above case before Judge the proceedings of In accordance with the oral findings of fact and opinion, decision will be entered for respondent as to the deficiency and for petitioner as to the penalty. (Signed) Diane L. Kroupa Judge Dated: Washington, D.C. October 24, 2011 SERVED Oct 25 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 BENCH OPINION BY JUDGE DIANE L. KROUPA OCTOBER 6, 2011 CHAVEZ V. COMMISSIONER DOCKET NO.: 21895-10 THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. . This bench opinion is made pursuant to the authority granted in section 7459(b) and Rule 152. All section references are to the Internal Revenue Code as amended and in effect for 2006, and all Rule references are to the Tax Court Rules of Practice and Procedure. Chester A. Swart appeared on behalf of petitioner, and Priscilla A. Parrett appeared on. behalf of respondent. FINDINGS OF FACT Some of the facts have been stipulated and are so found. We incorporate the stipulation of facts and the accompanying exhibits by this reference. Petitioner resided in California at the time she filed the petition. Petitioner owned a cabin in Big Bear Lake, Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 California, which is within two hours of petitioner's personal residence, in 2006. Petitioner maintained a Cabin Rental Agreement with a local real estate company. The real estate company was responsible for managing rental of the cabin. The real estate company's responsibilities included, among other things, securing renters and having the cabin cleaned after each rental. The real estate company rented the cabin twice for a total3of five days during 2006. Petitioner prepared a noncontemporaneous log of her visits to the cabin for 2006. The log reflects that petitioner spent at least 20 days at the cabin during 2006, including the Thanksgiving holiday. Petitioner alleges and the log reflects that she spent time during some of her days at the cabin doing repair and maintenance. She claims to have spent 21 hours doing repair and maintenance work during her five-day Thanksgiving holiday at the cabin. Petitioner timely filed a tax return for 2006 claiming $21,375 of losses on Schedule E with respect to the cabin rental activities. Respondent disallowed the losses. Respondent allowed petitioner to claim the accrued mortgage interest and property tax paid with respect to the cabin as itemized deductions on Schedule A. Respondent determined a Heritage Reporting Corporation (202) 628-4888 $2,025 deficiency for 2006 in petitioner's Federal income taxes and a $405 accuracy-related penalty under section 6662(a). Petitioner timely filed a petition with this 5 Court. OPINION. We are asked to decide whether petitioner is entitled to deduct losses with respect to the cabin rental activities for 2006. We must also decide whether petitioner is liable for an accuracy-related penalty for 2006. We begin with the burden of proof. The Commissioner's determinations in a deficiency notice are presumed correct, and taxpayers bear the burden of proving otherwise. Rule 142(a); Welch v. Helverìng, 290 U.S. 111, 115 (1933). 2-9H+-90 Deductions are generally a matter of legislative grace and taxpayers bear the burden.of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 - 18 proving entitlement to claimed deductions. New 19 20 21 22 23 24 25 Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d.821 (5* Cir.. 1976). Substantiation means that a taxpayer shall keep such permanent records or books of account as are sufficient to establish the amount of deductions Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 claimed on the return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. The Court need not accept a taxpayer's self-serving testimony when the taxpayer fails to present other probative evidence. Beam v. Commissioner, T.C. Memo. 1990-304 (citing Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)) Cyghierg %47 2d I I blo Nb CÃr (%2)f ^ We now address whether petitioner is , iNi p entitled to deduct the Schedule E expenses claimed with respect to the cabin rental activities. A taxpayer is not entitled to.deduct expenses attributable to rental use of a dwelling unit if the taxpayer uses the dwelling unit as a residence and rents it out less than 15 days.during the taxable year. Sec. 280A(g). A taxpayer uses a dwelling unit as a "residence" if his or her personal use exceeds the greater of 14 days or 10 percent of the days it is rented at fair rental value during the taxable year. Sec. 280A(d) (1). A taxpayer is deemed to use a dwelling unit for personal purposes for a day if, for any part of that day, the unit is used for personal purposes by the taxpayer or a member of the taxpayer's family. Sec 280A(d) (2). A taxpayer is not treated as using a unit for personal purposes if the primary purpose of the use is to perform repairs or maintenance. Sec. 1.280A-1(e) (6), Proposed Income Tax Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 Regs. The cabin was rented a total of five days during 2006. Accordingly, expenses attributable to the cabin rental are not deductible if petitioner's personal use of the cabin exceeded 14 days during 2006. See Sec. 280(g). Petitioner's log reflects that she spent at least 20 days at the cabin during 2006, including five days during the Thanksgiving holiday. Petitioner alleges and the log reflects that petitioner performed repair and maintenance during some of her days at the cabin. We do not find petitioner's log credible because it is noncontemporaneous and the times recorded for the repair and maintenance projects are excessive. The record also reflects that petitioner used the cabin for personal reasons on other days in 2006 that were not included on her log. Petitioner has failed to satisfy her burden of proving that her primary purpose for any of the days she spent at the cabin in 2006 was to perform repair or maintenance. Consequently, we find that the cabin was used by petitioner as a residence for 2006. We therefore sustain respondent's disallowance of the Schedule E losses. Because we hold for respondent on this Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 issue, we need not address respondent's alternative argument that the claimed losses are disallowed under passive loss rules of section 469. We next address whether petitioner is liable for the accuracy-related penalty under section 6662. Section 6662(a) imposes a penalty equal to 20 percent of any underpayment of tax that is due to either negligence or disregard of rules or regulations or a substantial understatement of income tax. See sec. 6662(a), (b) (1), and (2). The accuracy-related penalty under section 6662(a) does not apply to any portion of an underpayment, however, if it is shown that there was reasonable cause for the taxpayer's position and that the taxpayer acted in good faith with respect to that portion. Sec. 6664 (c) (1); sec.1.6664-4(b), Income Tax Regs. The determination of whether a taxpayer acted with reasonable cause and good faith is made on a case-by-case basis, taking into account all the pertinent facts and circumstances, including the taxpayer's efforts to assess his or her proper tax liability and the knowledge and experience of the taxpayer. Sec. 1.6664-4 (b) (1), Income Tax Regs. The Commissioner bears the burden of production under section 7491(c) and the taxpayer bears the burden of proof with Heritage Reporting Corporation (202) 628-4888 9 respect to reasonable cause. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Respondent has not demonstrated that petitioner's understatement was substantial, and a mere allegation is not enough to satisfy his burden of production. Respondent has also argued that petitioner acted negligently. We disagree. The conditions for rental expense deductions can be very complex. Given the facts and circumstances of this case, we find that petitioner acted with reasonable cause and in good faith. Accordingly, we hold that petitioner is not liable for the accuracy-related penalty under section 6662. To reflect the foregoing, decision will be entered for respondent to the deficiency and for petitioner as to the penalty. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 . T.HIS CONCLUDES THE COUR.T'S· ORAL FINDINGS OF 18 19 20 21 22 23 24 25 FACT AND OPINION IN THIS CASE. (Whereupon, at 11:29 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // // Heritage Reporting Corporation (202) 628-4888