Carkhuff v. CIR
| Decision Date | 07 May 1970 |
| Docket Number | No. 19788.,19788. |
| Parties | John R. CARKHUFF et ux., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Harlan Pomeroy, Cleveland, Ohio, Oakley V. Andrews, George Downing, Baker, Hostetler & Patterson, Cleveland, Ohio, on the brief, for appellants.
John A. Townsend, Department of Justice, Washington, D. C., Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Elmer J. Kelsey, Nick G. Kolokathis, Attys., Department of Justice, Washington, D. C., on the brief, for appellee.
Before PHILLIPS, Chief Judge, and McCREE and BROOKS, Circuit Judges.
This is an appeal by the taxpayers from a decision of the Tax Court upholding the Commissioner's disallowance of certain deductions and the assessment of deficiencies for the years 1962-64. The memorandum opinion of the Tax Court is T.C. Memo 1969-66.
The facts are not in dispute but the tax conclusions to be drawn from them are contested earnestly. The taxpayers, John R. and Rosemary W. Carkhuff, are husband and wife, residing in Akron, Ohio. They filed joint tax returns for the tax years in question. In the latter part of 1956 taxpayers purchased residential property on Sea Island, Georgia, fronting on the Atlantic Ocean. The residence contained four bedrooms, each with bath, a two-storied living room, a dining room, pantry, kitchen, bar, storage closet, sun deck and terrace, servants' quarters consisting of two additional bedrooms with bath, and a three-car garage. The fair market value of the property, excluding furnishings, as of April 1968, was approximately $200,000 of which approximately $125,000 would be allocable to the land. The original cost of the property was $140,000. In computing depreciation the taxpayers allocated to the house $79,153.87 of the purchase price.
The Island is operated as a privately owned resort and attracts a substantial number of people annually. The resort period extends principally through ten months, from February through November. The peak rental period for the Cloister Hotel, the only hotel facility on the Island, extends from the latter part of April through early June and the month of September. During these months the hotel generally is booked to capacity and other guests are accommodated in nearby rental cottages.
The rental department of the Sea Island Company, which owns the hotel, maintains a listing of all the cottages on the Island which are available for rent at various periods of time. Of the some 200 cottages on the island approximately one-half are listed for rent during some part of the year. Soon after they purchased it, the taxpayers listed their cottage with the rental department as available for rent during eight months of the year. The rental department is the exclusive rental agent for the taxpayers' cottage. Although the taxpayers could rent their property personally, to do so was impractical because of certain restrictions that would be placed on the tenants under direct rental. By renting through the rental department a tenant has full use of other recreational facilities owned by the Sea Island Company.
Advertising of Sea Island is placed by the Sea Island Company in various news media, including several national magazines. The company also uses direct mail advertising. The advertisements list the services and facilities available and mention the availability of rental cottages. Specific cottages are not mentioned, nor is the cottage of taxpayers advertised individually by the company. Specific information is furnished as to taxpayers' cottage, which was identified as Cottage 83, only when a prospective tenant makes inquiry as to a cottage of a general description, e. g., "a four bedroom cottage on the waterfront." The peak rental period for the cottages covers the months of March and April and from mid-June through August. The taxpayers reserved the cottage for their personal use for the four months of February, March, April and October.
The monthly rental charge for the taxpayers' cottage has been $1,300. This charge has remained consistent during all the eight months that the cottage is available for rent. It is based upon the fair rental value of the property and is in keeping with comparable rates for similar properties on Sea Island. The rate was reviewed periodically. The rental agreement provided that the cottage would not be occupied unexpectedly by the owners, or friends, until the owner had contacted the Rental Department to determine that it had not been rented previously for conflicting periods.
The cottage was outfitted with proper facilities which would make it suitable for rental occupancy. It was furnished and otherwise equipped for use by tenants. In 1962 the house was refurbished, after a survey was made which had been prompted by a complaint from a tenant during the summer of that year. Following an inventory of recommended repairs and improvements the house was upgraded accordingly.
The taxpayers' cottage was not air conditioned, although the trend had been for the newer cottages to have built-in air conditioning. This cottage was not adaptable to air conditioning without the expenditure of substantial sums of money. It was determined that it would be impossible to install window air conditioning because of the casement windows, and that central air conditioning would be expensive and impractical because of high ceilings. The taxpayers had the casement windows on the oceanside of the living room removed and replaced by sliding glass windows to provide additional ventilation. Because of its lack of air conditioning the cottage was beginning to face more severe competition from the newer air conditioned homes, although the rental of cottages generally showed an increase.
On their income tax returns for the years 1962-64 taxpayers reported receipts from rental of their cottage, claimed deductions for expenses and depreciation in the amounts set forth below, which resulted in the claimed losses:
Receipts Depreciation Expense Rental
Year Reported Deduction Claimed Deduction Claimed Loss
1962 $3,600.00 $4,106.49 $3,406.11 $3,912.60
1963 2,400.00 4,188.21 3,299.84 5,088.05
1964 0 4,292.12 3,203.68 7,495.80
The deduction for expenses did not include real estate taxes, which were separately claimed in the amounts of $1,428 for 1962 and 1963 and of $1,367.07 for 1964.
The Commissioner in his notice of deficiency disallowed the taxpayers' claimed rental losses as set forth above, with the explanation that the taxpayers had "not established that the property was acquired or is operated with the reasonable expectation or purpose of realizing a profit, and because the property was acquired and is used primarily for personal reasons." This disallowance created deficiencies of $3,130.07, $318.64 and $5,719.25 for the years 1962-64, respectively.
The Tax Court upheld the Commissioner's deficiency assessments.
The issue raised by the taxpayers on this appeal is whether the taxpayers are entitled to the expense and depreciation deductions under the applicable parts of §§ 162, 167 and 212 of the Internal Revenue Code of 1954. The statutes involved provide as follows:
Resolution of this case requires a determination of whether the Sea Island property was the taxpayers' "trade or business" or whether that property was "held for the production of income."
The Tax Court upheld the Commissioner on the grounds that the taxpayers had not established that they acquired their Sea Island property with the intent to make a profit, and that it had not been converted thereafter to a profit motivated activity.
This Court will overturn the Tax Court's findings of...
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