Allen v. Comm'r of Internal Revenue
| Decision Date | 02 April 1979 |
| Docket Number | Docket No. 5435-76. |
| Citation | 72 T.C. 28 |
| Parties | TRUETT E. ALLEN and BARBARA ALLEN, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ps owned a Vermont lodge which they rented to others. Over a number of years, they incurred substantial losses in the operation of such lodge, but they never used it for personal purposes. Held, based on all the facts and circumstances of this case, the operation of the lodge was an activity engaged in for profit under sec. 183, I.R.C. 1954. F. L. Dougan and Vincent J. Boyd, for the petitioners.
Joan Ronder Domike, for the respondent.
The Commissioner determined deficiencies in the petitioners' Federal income taxes of $1,376 for 1971 and $3,209 for 1972. The petitioners have conceded certain issues. The only issue left for decision is whether the petitioners operated their lodge as an “activity * * * not engaged in for profit” within the meaning of section 183(a), I.R.C. 1954.1
Some of the facts have been stipulated, and those facts are so found.
The petitioners, Truett E. Allen and Barbara Allen, husband and wife, maintained their legal residence in New York, N. Y., at the time they filed their petition in this case. They filed their Federal income tax returns for 1971 and 1972 with the office of the Internal Revenue Service, Andover, Mass.
In the early 1960's, Mr. Allen was a regular skier in the Londonderry, Vt., area. During this period, the primary skiing facility in the area was at Bromley Mountain. However, the area was experiencing rapid growth as a ski resort with the development of skiing facilities at Magic Mountain and Stratton Mountain.
Because of the development of the skiing facilities and because of the apparent boom in downhill and cross-country skiing, Mr. Allen believed that there was a demand for overnight lodging during the winter ski season and that a lodge which provided such accommodations would be available investment opportunity. In addition to the winter ski season (which extended from December 1 through April 15), a lodge could be rented as a summer vacation home during the summer season (which lasted from July 4 through Labor Day weekend) and as a fall vacation home during the autumn “leaf” season. Because of insects and the mud caused by melting snow, Mr. Allen was aware that he would not be able to rent the lodge from April 15 to July 4.
In January 1964, Mr. Allen purchased the land on which he intended to build a lodge. After investigating various possibilities, he decided to construct the lodge himself, using a pre-cut packaged house. He applied for a mortgage, and in such application, he estimated that his annual gross income from the lodge would be $1,500, that his annual expenses excluding depreciation would be $200, and that his net income excluding depreciation would be $1,300 annually. He also estimated his annual real estate taxes at $200. On April 15, 1965, his mortgage loan application was approved. The principal amount of the loan which was $14,400, was to bear interest at 5 1/2 percent and the mortgage was to be repaid commencing October 1, 1965, in monthly installments of $99.07 over a term of 20 years.
In a 35-day period during the summer of 1965, Mr. Allen completed most of the construction of the lodge. It was built on 1.5 acres of land, and it had 5 bedrooms, 3 bathrooms, and could accommodate 12 overnight guests. Mr. Allen obtained a fire and liability insurance policy on the property, and in such policy, he was permitted to use the lodge “for not exceeding 5 rooms for lodging and dining room capacity for not exceeding 10 boarders.”
By December 1965, the lodge was ready to be rented and was available for rent from that time to the time of trial in January 1978. The following is a summary of the revenue, expenses, and Schedule C losses generated by the lodge:
+---------------------------------------------------------------------------+
¦ ¦ ¦Real ¦ ¦ ¦ ¦ ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦ ¦ ¦estate ¦ ¦ ¦Other ¦Schedule C ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦Year ¦Revenue ¦tax ¦Interest ¦Depreciation ¦expense ¦loss ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1965 ¦$400 ¦$20 ¦$336 ¦$2,458 ¦$3,312 ¦$5,726 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1966 ¦1,408 ¦359 ¦880 ¦4,191 ¦4,182 ¦8,204 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1967 ¦2,007 ¦350 ¦924 ¦3,787 ¦3,191 ¦6,245 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1968 ¦2,782 ¦433 ¦789 ¦2,971 ¦3,919 ¦5,330 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1969 ¦5,225 ¦461 ¦798 ¦2,753 ¦4,721 ¦3,508 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1970 ¦4,125 ¦512 ¦797 ¦2,570 ¦3,450 ¦3,204 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1971 ¦4,350 ¦554 ¦736 ¦2,612 ¦3,659 ¦3,211 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1972 ¦1,381 ¦642 ¦701 ¦2,359 ¦4,231 ¦6,552 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1973 ¦2,250 ¦611 ¦665 ¦1,983 ¦2,901 ¦3,910 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦19741 ¦3,635 ¦1 ¦1 ¦1 ¦1 ¦1 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1975 ¦4,175 ¦648 ¦742 ¦1,515 ¦3,880 ¦2,610 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦1976 ¦3,075 ¦650 ¦545 ¦1,396 ¦4,055 ¦3,571 ¦
+-------+---------+--------+----------+--------------+---------+------------¦
¦Total ¦34,813 ¦5,240 ¦7,913 ¦28,595 ¦41,501 ¦52,071 ¦
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In the 1965-66 ski season, the lodge was rented to family groups. In the 1966-67, 1967-68, and 1968-69 ski seasons, the lodge was a licensed inn offering food and lodging to transients. The inn was operated primarily on a weekend basis, and Mr. Allen managed the inn and cooked and served all meals. In time, Mr. Allen concluded that the lodge could not be operated profitably as an inn on a weekend basis. Accordingly, for the 1969-70, 1970-71, 1971 -72 ski seasons, the lodge was available for full-season rental. Under this arrangement, a tenant leased the premises from Mr. Allen for the entire ski season for an agreed rent. In addition, the tenant assumed the costs of operating the lodge, such as expenses for fuel oil, electricity, snow removal, and telephones, for the term of the lease. Though this rental arrangement proved more successful than the weekend operation, the petitioners continued to lose some money on the operation of their lodge; there was a significant reduction in the demand for the petitioners' lodge because there was very little snow in that area during those years and because many other lodges were constructed in the area during those years.
In response to the declining demand for full-season rentals, Mr. Allen offered short-term leases during the 1972-73 and 1973-74 ski seasons. However, because of the weather, competitors, and the gasoline shortage in 1973 and 1974, Mr. Allen's rental revenue decreased dramatically. Most of the people who skied in the Londonderry, Vt., area came from New York City, Boston, and Hartford; but dwindling gasoline supplies and the concomitant lines at gasoline stations discouraged all but the most devoted skiers from traveling to Vermont.
Since 1965, the lodge has also been offered on a weekly or multi-weekly basis as a summer or fall vacation home. During the 8-week summer seasons from 1965 through 1976, Mr. Allen managed to rent the lodge a minimum of 2 weeks and a maximum of 5 weeks each year. It was difficult to secure summer rentals except for the last 2 weeks in August. Also it was very difficult to obtain fall rentals because generally people were only interested in short term or overnight accommodations were provided by the local motels.
Since 1965, the petitioners have taken extensive measures to rent the lodge. They advertised it for winter and summer rentals in the New York Times, Saturday Review, Vermont Real Estate, and Time, Inc. The lodge was also listed with real estate brokers and agents in the area for the purpose of securing rentals.
For the most part, repairs, maintenance, and cleaning were performed by Mr. Allen. However, on those occasions when he was unavailable, Mr. Allen hired two neighbors to perform such services. The petitioners have never used the lodge for personal purposes. They remained in the lodge overnight only when they were there for business purposes, i. e., cleaning, repairing, or preparing it for use by a tenant. On occasion, the petitioners vacationed or skied in the Londonderry, Vt., area; however, they rented a room from their neighbor on an annual basis for those occasions. In addition, although the petitioners reside in New York City, they also own a home on Long Island where they spend weekends throughout the year. They do not offer such home for rent.
At the time of trial, the lodge had a fair market value of...
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