Barranti v. Commissioner of Internal Revenue, 120398 FEDTAX, 789-97

Docket Nº:789-97
Opinion Judge:PARR, Judge
Attorney:Woodford G. Rowland, for petitioners. Daniel J. Parent, for respondent.
Case Date:December 03, 1998
Court:United States Tax Court

T.C. Memo. 1998-427




No. 789-97

United States Tax Court

December 3, 1998

Woodford G. Rowland, for petitioners.

Daniel J. Parent, for respondent.


PARR, Judge

Respondent determined a deficiency in, and an accuracy-related penalty on, petitioners' Federal income tax as follows:



Accuracy-Related Penalty Sec. 6662(a)




All section references are to the Internal Revenue Code in effect for the taxable year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. All dollar amounts are rounded to the nearest dollar, unless otherwise indicated. References to petitioner are to Stephanya M. Barranti.

After concessions,1 the issues for decision are: (1) Whether petitioners are entitled to deduct the $5,852 loss sustained in renting the property to petitioner's brother and the loss realized on the sale of petitioner's residential property. We hold they are not. (2) Whether petitioners are liable for an accuracy-related penalty pursuant to section 6662(a). We hold they are.

Some of the facts have been stipulated and are so found. The stipulated facts and the accompanying exhibits are incorporated herein by this reference. At the time the petition in this case was filed, petitioners resided in Alamo, California.


On February 21, 1991, petitioner acquired by gift a joint tenancy in her grandmother's house located in San Mateo, California. Less than 3 weeks later, the grandmother died, and petitioner became the sole owner of the property.

At the time of the grandmother's death, the property was in a state of disrepair. For instance, mildew had grown on the interior walls around the windows; the awning over the patio had fallen down; the garage door did not open; the yard required landscaping; and the fence surrounding the property required mending. Furthermore, the house was located in a neighborhood that was not safe at night.

After several months spent considering whether to sell or to rent the property, petitioner decided that she would repair the house and offer it for rent. However, petitioner did not know the amount of the rent to charge for the property.

As a starting point in determining how much rent to charge, petitioner sought to determine the fair market value of her property. To determine the property's value, petitioner had several real estate agents come to the property and provide her with estimates. A Century 21 real estate agent performed a thorough market analysis of the property on June 6, 1991. The agent estimated the fair market value of the property was between $219,500 and $275,000, and that it would sell quickly at $229,000. To determine how much to charge for rent, petitioner researched a trade magazine and several newspapers which listed comparable properties for rent, and determined that the fair market rental amount was between $700 and $750 per month.

To prepare the property for habitation, petitioner first cleared the house of the decedent's personal property and then began making repairs. Although petitioner was not an experienced home repair person, she wanted to do as much of the repair work herself as possible to minimize its expense. Accordingly, petitioner called various contractors to come to the property to explain what needed to be done and to submit a bid for the work. After receiving the advice, petitioner thanked the contractors for their time, purchased the required materials, and did the work herself. For instance, petitioner scraped the mildew from the interior walls, recaulked the windows and sealed the ground under the house to prevent moisture from entering and reviving the fungus, and sanded and refinished the hardwood floors.

Because petitioner worked on the property only during weekends, the repairs took several months. During this time, petitioner's awareness of the character of the neighborhood and the risks of renting to someone who might prove to be an irresponsible tenant increased. In December 1991, petitioner began negotiating with her brother, Ronny Murray (Murray), to rent the house to him in exchange for $500 per month plus utilities, and his agreement to help petitioner finish the repair work and maintain the property.

Murray helped petitioner repaint the interior of the house and agreed to repair the bathroom plumbing, repair the patio awning to the extent possible and remove the irreparable part, repaint an outside storage shed, replant a flower border, restore a rock garden, and mend the fence. Murray performed the repair work; in May 1992, he moved into the house with his girlfriend and their child.

In December 1992, Murray's girlfriend and child decided to move to Stockton, California, and Murray informed petitioner that he intended to follow them. At that time, petitioner decided to sell her property, rather than offer it for rent to some unknown persons.

In January 1993, petitioner agreed with a real estate sales agent to list the property for sale at approximately $230,000; however, the house did not sell at that price and the relationship between petitioner and the agent deteriorated. On March 9, 1993, petitioner relisted the property with Cornish & Carey, a real estate broker, at a sales price of $219,000. In listing the property with Cornish & Carey, petitioner signed a contract authorizing it to be the exclusive broker for her property. The property was sold in July 1993 for $180,000.

On their 1992 Federal income tax return, petitioners reported total income of $219,388 without reporting any income or expenses from the rental activity. On their 1993 return, petitioners reported total income of $284,470, before deducting a loss of $5,852 from the rental of petitioner's property and an ordinary loss of $73,501 on its sale.


Respondent disallowed the rental loss, because petitioners did not provide any evidence that the property actually was rented during the year at issue or substantiate the expenses. Respondent determined that petitioners are not entitled to claim a loss on the sale of petitioner's property, because they have not proved that it was used in a trade or business or held for the production of income. Petitioners assert that petitioner's property was used as rental property, that petitioner was actively engaged from May 1992 through June 1993 in the trade or business of renting the property, and that they suffered a loss on its rental during 1993. Respondent's determinations are presumed correct, and petitioners bear the burden of proving that respondent's determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Issue 1. Whether Petitioners May Deduct the Losses

Rental Loss

Whether petitioners are entitled to deduct the $5,280 rental loss turns on whether petitioner's property was used by petitioner as a...

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