Jasionowski v. Comm'r of Internal Revenue
| Decision Date | 19 May 1976 |
| Docket Number | Docket No. 3057-74. |
| Citation | 66 T.C. 312 |
| Parties | EDWARD JASIONOWSKI AND JANE JASIONOWSKI, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In accordance with Rule 91, Tax Court Rules of Practice and Procedure, petitioners and respondent stipulated that petitioners had received a certain amount of rent under a lease with a third party and had reported such amount as rental income during each of the years at issue. At trial, petitioner's (husband's) testimony, and other evidence, indicated that during these years petitioners had received additional rental payments from the lessee. Held, where facts presented at trial are clearly contrary to those stipulated to by the parties, we have discretion not to be bound by the stipulation. William Ernest Seatree, 25 B.T.A. 396 (1932), followed. Held, further: Petitioners did not lease the house with a bona fide expectation and anticipation of making a profit. Accordingly, loss deductions taken for the years at issue are disallowed. Statutory scheme of Code sec. 183 examined. Leonard Bailin, for the petitioners.
Carolyn J. Chabora, for the respondent.
Respondent has determined deficiencies in petitioners' income tax of $3,489.12 for 1969 and $6,784.03 for 1970. In an amended answer, respondent also claims that petitioners understated their gross rental income in 1969 and 1970 in the respective amounts of $201.92 and $161.74. Concessions having been made, the issues remaining for our decision are as follows:
(1) Whether, and to what extent, petitioners understated their gross rental income for taxable years 1969 and 1970;
(2) Whether expenses incurred by petitioners during 1969 and 1970 in connection with the rental of a house to a third person are deductible under section 161 et seq;1
(3) If so, in depreciating the house during 1969 and 1970, (a) whether petitioners used the correct basis for the house, and (b) whether they are limited to the straight line method of depreciation.
Some of the facts have been stipulated and are so found.
Edward and Jane Jasionowski (hereinafter petitioners) filed joint Federal income tax returns for taxable years 1969 and 1970 with the District Director in Newark, N.J. Petitioners resided in Sayreville, N.J., at the time the petition herein was filed.
The issues in the instant case relate to a lease agreement entered into in 1968 between petitioners and Anna E. Schmitt (Schmitt).
During 1969 and 1970, petitioner Edward Jasionowski (Jasionowski) was a medical doctor specializing in obstetrics and was a stockholder and physician employee of Sayreville Medical Group, P.A. Schmitt had known Jasionowski since 1947 when Jasionowski began practicing medicine in Sayreville. Both Schmitt and her mother and father (who died in 1952 and 1954, respectively) were patients of Jasionowski. Schmitt thought very highly of Jasionowski as both a doctor and a friend, and their families were acquainted with each other over the years.
In November 1965, at which time Schmitt was approximately 55 years of age, she had a heart attack and was thereafter unable to work. In December 1965, she drew up a will in which she left her house located at 37 Quaid Street in Sayreville to Jasionowski. She included this provision in her will because she no longer had any family and because she wanted to repay Jasionowski for the kindness he had shown to her mother and father.
In 1966 Schmitt broke her hip and by 1968, because of her high medical bills, she determined that she could no longer continue to make the mortgage payments on her house. In order to avoid foreclosure, she told Jasionowski that she would like to give him her house. He said he would consider her offer and, about 1 week later, he told her he would accept the house and suggested that he would lease the house to her at a minimal rent so she could continue to live there. Accordingly, on June 14, 1968, Schmitt deeded the house to petitioners.
Schmitt had purchased the land upon which the house is situated for $2,054.50 in September 1959, and in February 1961, she had the house constructed at a cost of $15,060.78. Schmitt obtained a $10,000 mortgage on the house in February 1961. On June 14, 1968, the date she deeded the house to petitioners, the balance of the mortgage amounted to $7,713.85, and the fair market value of the house was at least $24,000.
Also on June 14, 1968, petitioners and Schmitt entered into a lease agreement covering a period of 7 years beginning June 14, 1968. Pertinent terms of this lease were:
SAID Tenant shall pay as rental for said premises all taxes, ordinary as well as extraordinary, of every kind, that may be levied upon or assessed against said premises, or any part hereof, during the term of this lease, and all gas, light and heat, and water rents, and during said term, keep said premises insured against loss or damage by fire in an amount not less than $20,000.00, and pay the premiums for such insurance; it also being the intent hereof that the Tenant shall bear all expenses connected with the maintenance and painting of said premises except for the painting and maintenance to be performed during the year 1968. Capital improvements shall be the responsibility of the Landlord.
UPON expiration of the term of this Lease, the Landlord and Tenant shall renegotiate a new lease at terms agreeable to both. Said Lease shall provide for a net annual rent of 5% on the value of the premises at that time after payment of taxes, utilities and insurance.
NON PAYMENT of rental shall not be a default until same has exceeded four months.
Schmitt lived in the house for the full 7 years of the lease, and still lived there at the time of the trial of this case (3 months after expiration of the lease).
During the years at issue, petitioners reported as income on their returns rental payments received from Schmitt as follows:
+-------------------------------------------------------+
¦ ¦ ¦ ¦Total rent ¦Gross rental ¦
+----+-------+-----------+------------+-----------------¦
¦ ¦Taxes ¦Insurance ¦received ¦income returned ¦
+----+-------+-----------+------------+-----------------¦
¦ ¦ ¦ ¦ ¦ ¦
+----+-------+-----------+------------+-----------------¦
¦1969¦$408.58¦$202 ¦$610.58 ¦$408.66 ¦
+----+-------+-----------+------------+-----------------¦
¦1970¦467.58 ¦202 ¦669.58 ¦507.84 ¦
+-------------------------------------------------------+
On their respective 1969 and 1970 returns, petitioners claimed the following expenses attributable to the house and land as rental expense deductions:
Because he determined that petitioners' rental of the house to Schmitt did not constitute a trade or business, respondent disallowed the following claimed rental expense deductions:
On their 1968, 1969, and 1970 returns, petitioners used the double-declining method of depreciation in calculating the depreciation on the house for those years. Although petitioners now concede that such method was improper, respondent has never disallowed the $853.60 depreciation deduction taken on their 1968 return.
On several occasions when he visited Schmitt, Jasionowski noticed that she nearly slipped on her rug. Because he was concerned for her safety, he purchased a new carpet for the house in 1969 for $700. In both 1969 and 1970 he claimed a $70 depreciation deduction for the carpet.
In both 1969 and 1970, petitioners were also the lessors of an office building located in Sayreville. In 1969 and 1970 they earned net income of $2,745.52 and $2,607.81, respectively, from the rental of this property. On their 1969 and 1970 returns, petitioners reported adjusted gross income of $48,583.75 and $66,605.20, respectively.
Since acquiring the house in 1968 from Schmitt, petitioners have never made any attempt to sell the property. Although petitioners have never attempted to ascertain the amount of rent they could command on the open market, Jasionowski was of the opinion that in 1968 a fair market rental would have been between $1,500 and $1,800 per year.
OPINIONThe first issue we must decide is whether petitioners understated their gross rental income in 1969 and 1970.
On their returns for 1969 and 1970, petitioners reported gross rental income of $408.66 and $507.84, respectively. In accordance with Rule 91, Tax Court Rules of Practice and Procedure, the parties made the following stipulation of fact:
During the taxable years 1969 and 1970 Anna E. Schmitt paid a total of $408.66 and $507.84, respectively to the petitioners as rent which was included as rental income on the petitioners respective 1969 and 1970 federal income tax returns.
At trial, petitioners called Schmitt as a witness and, during cross-examination by respondent's counsel, Schmitt testified that during each of the years at issue she paid the amount of the insurance premiums and taxes directly to petitioners as rent. Under cross-examination, Jasionowski also testified that he and his wife received the amount of these two items from Schmitt as rental...
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