Opinion ID: 711076
Heading Depth: 1
Heading Rank: 1

Heading: R.C. Sec. 280A(d)(1) provides:

Text: 17 (d) Use as Residence---- 18 (1) In general----For purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of---- 19 (A) 14 days, or 20 (B) 10 percent of the number of days during such year for which such unit is rented at a fair rental. 21 For purposes of subparagraph (B), a unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes. 22 (2) Personal use of unit----For purposes of this section, the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used---- 23 (A) for personal purposes by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4)) of the taxpayer or such other person. 24 The term fair rental of I.R.C. Sec. 280A(d)(1) is not further defined in the tax code, regulations, legislative history or case law. However, that term is also used in a later amendment to the tax code, I.R.C. Sec. 280A(d)(3). The staff of the Joint Committee on Taxation prepared a report explaining the fair rental standard. That report states: 25 The Congress intends that fair rental be determined by taking into account such factors as: 26 (1) comparable rentals in the area. 27 Staff of the Joint Committee on Taxation, 97th Cong., 1st Sess., Summary of H.R. 5159: The Black Lung Benefits Revenue Act of 1981 12 (Comm. Print 1981). 28 The term fair rental, like the term fair market value, reflects the amount at which property would change hands between a willing lessee and a willing lessor, neither being under any compulsion to enter into the transaction and both having reasonable knowledge of the relevant facts. The court must ask whether the taxpayer could have gone into the open market and found a significantly better financial arrangement than the $21,000 annual rental paid by SSP. In evaluating this issue, the court must accept the uncontested term of the lease as thirty months, adjusted to an annual figure because of the annual tax obligation. It is likely that a daily or weekly rental would be at a higher rate than the proportionate share for the annual rate negotiated by the taxpayers. But nothing in the I.R.C. or the regulations requires a taxpayer to enter into short-term rentals; indeed, such an arrangement might have significant disadvantages and additional expenses for the taxpayer, and require him to assume a risk and responsibility he may not be prepared to accept. Here, the Appellants accepted a guaranteed annual rental which was lower than a gross daily rental for the unit, but without the expenses and risk that such an arrangement required. Given the expert's uncontradicted testimony that comparable units generated $19,919 to $24,976 a year for their owners, the $21,000 received by this taxpayer is well within the range of fair rental for comparable units in the area. 29 The tax court, relying in part on Fine v. United States, 647 F.2d 763 (7th Cir.1981) and Byers v. Commissioner, 82 T.C. 919, 1984 WL 15582 (1984), rejected the taxpayers' claim based on the occupancy rate represented by the rentals of comparable units, or the days SSP re-rented the unit to third parties. Byers and Fine, however, are distinguishable. In Byers and Fine, the taxpayers were participating in pooling agreements that guaranteed some payment when the units were not rented, but a greater payment when the units were rented. In this case Appellants received from SSP a fixed rent regardless of whether the unit was ever rented to any third parties. Only when SSP would receive rental income in excess of $52,500, an event which has never occurred, could Appellants receive any bonus income. Thus, unlike Byers and Fine, where the taxpayers retained some of the downside risk of loss, here Appellants shifted all of the risks to the lessee, SSP. Regardless of whether SSP sub-leased the unit to any third parties, Appellants were entitled to payment. 30 In addition, the taxpayers' claim was rejected in Byers because the distributive share represented the average profit that the partnership derived from the rental of all of the units of a particular class. It did not reflect the fair rental value of any specific unit or the projected annual rent that a given unit would generate. Byers, 82 T.C. at 927. In the instant case, SSP had an individual rental agreement with the taxpayer, based on the amount of income SSP believed it could generate from the specific unit. Therefore, the rate of occupancy of Appellants condominium is irrelevant.