Gorkes v. Commissioner of Internal Revenue
| Decision Date | 31 October 2003 |
| Docket Number | No. 15415-02S.,15415-02S. |
| Parties | RICHARD GORKES, JR. AND SUSAN GORKES, Petitioners <U>v</U>. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time that the petition was filed.1 The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority.
Respondent determined deficiencies in petitioners' Federal income taxes for the taxable years 1999, 2000, and 2001 in the amounts of $3,961, $6,583, and $9,715 respectively.2
After concessions by the parties, the sole issue for decision is whether petitioners are entitled to investment interest expense deductions for the taxable years 1999, 2000, and 2001 in excess of the amounts allowed by respondent. We hold that they are not.
Some of the facts have been stipulated, and they are so found. Petitioners resided in Lilburn, Georgia, at the time that their petition was filed with the Court.
Petitioners timely filed their Form 1040, U.S. Individual Income Tax Return, for the taxable year 1999. Petitioners attached to their return Schedule A, Itemized Deductions, and claimed an investment interest expense deduction of $31,215. Petitioners calculated this amount on an attached Form 4952, Investment Interest Expense Deduction, as shown below:
Part I. Total Investment Interest Expense
Line 1. Investment interest expense
paid or accrued in 1999 $63,807
Line 2. Disallowed investment interest
expense from 1998 Form 4952, line 7 ___
_______
Line 3. Total investment interest expense 63,807
=======
Part II. Net Investment Income
Line 4a. Gross income from property held for
investment (excluding any net gain from the
disposition of property held for investment) 31,215
Line 4b. Net gain from the disposition
of property held for investment $ ___
Line 4c. Net capital gain from the
disposition of property held for ___
investment
______
Line 4d. Subtract line 4c from line 4b ___
Line 4e. Enter all or part of the amount
on line 4c that you elect to include
in investment income ___
_______
Line 4f. Investment Income
Add lines 4a, 4d, and 4e. 31,215
Line 5. Investment expenses ___
_______
Line 6. Net investment income
Subtract line 5 from line 4f. 31,215
=======
Part III. Investment Interest Expense Deduction
Line 7. Disallowed investment interest
expense to be carried forward to 2000
Subtract line 6 from line 3. 32,592
_______
Line 8. Investment interest expense deduction.
Enter the smaller of line 3 or 6. 31,215
________
Petitioners timely filed their Form 1040 for the taxable year 2000. Petitioners attached to their return Schedule A and claimed an investment interest expense deduction of $43,271. Petitioners calculated this amount on an attached Form 4952 as shown below:
Part I. Total Investment Interest Expense
Line 1. Investment interest expense
paid or accrued in 2000 $92,036
Line 2. Disallowed investment interest
expense from 1998 Form 4952, line 7 1-
_______
Line 3. Total investment interest expense 92,036
=======
Part II. Net Investment Income
Line 4a. Gross income from property held for
investment (excluding any net gain from the
disposition of property held for investment) 43,271
Line 4b. Net gain from the disposition
of property held for investment $ ___
Line 4c. Net capital gain from the
disposition of property held for
investment ___
______
Line 4d. Subtract line 4c from line 4b ___
Line 4e. Enter all or part of the amount
on line 4c that you elect to include
in investment income ___
_______
Line 4f. Investment Income.
Add lines 4a, 4d, and 4e. 43,271
Line 5. Investment expenses ___
_______
Line 6. Net investment income.
Subtract line 5 from line 4f. 43,271
========
Part III. Investment Interest Expense Deduction
Line 7. Disallowed investment interest
expense to be carried forward to 2001.
Subtract line 6 from line 3. 48,765
_______
Line 8. Investment interest expense deduction.
Enter the smaller of line 3 or 6. 43,271
________
Petitioners timely filed their Form 1040 for the taxable year 2001. Petitioners attached to their return Schedule A and claimed an investment interest expense deduction of $42,039. Petitioners calculated this amount on an attached Form 4952 as shown below:
Part I. Total Investment Interest Expense
Line 1. Investment interest expense
paid or accrued in 2001 $2,779
Line 2. Disallowed investment interest
expense from 2000 Form 4952, line 7 48,765
_______
Line 3. Total investment interest expense 51,544
=======
Part II. Net Investment Income
Line 4a. Gross income from property held for
investment (excluding any net gain from the
disposition of property held for investment) 42,039
Line 4b. Net gain from the disposition
of property held for investment $ ___
Line 4c. Net capital gain from the
disposition of property held for
investment ___
______
Line 4d. Subtract line 4c from line 4b ___
Line 4e. Enter the amount from line 4c
that you elect to include in investment income ___
_______
Line 4f. Investment Income.
Add lines 4a, 4d, and 4e. 42,039
Line 5. Investment expenses ___
_______
Line 6. Net investment income.
Subtract line 5 from line 4f. 42,039
=======
Part III. Investment Interest Expense Deduction
Line 7. Disallowed investment interest
expense to be carried forward to 2002.
Subtract line 6 from line 3.
Line 8. Investment interest expense deduction. 9,505
______
Enter the smaller of line 3 or 6. 42,039
______
Petitioners attached a Schedule D, Capital Gains and Losses, to their tax return for each taxable year at issue. Petitioners reported total net capital losses for each taxable year as follows:
1999 2000 2001
Net short-term capital gain or (loss)1 ($27,672) ($1,781,652) ($2,109,359)
Net long-term capital gain or (loss)2 (9,825) (2,609) (107,733)
________ ____________ ____________
Total net capital loss3 (37,497) (1,784,261) (2,217,092)
In the notice of deficiency, respondent disallowed a portion of petitioners' investment interest expense deductions for 1999, 2000, and 2001 in the amounts of $26,076, $38,784, and $49,483, respectively.3 Respondent contends that petitioners' "gross income from property held for investment" for 1999, 2000, and 2001 was $5,139, $4,487, and $453, respectively.4 Respondent also argues that because petitioners had a total net capital loss in each of the taxable years at issue, petitioners had zero "net gain from the disposition of property held for investment" for purposes of determining their "net investment income" for each taxable year.5
Petitioners contend that for purposes of determining the "net investment income" for each taxable year, "net gain from the disposition of property held for investment" includes only their items of capital gain.6 Specifically, petitioners argue that their capital losses and capital loss carryovers are not included in the calculation of "net gain from the disposition of property held for investment".
The parties do not dispute petitioners' entitlement to an investment interest expense deduction under section 163(a), but the parties do dispute the calculation of that deduction. The main issue of contention between the parties is whether the term "investment income", as...
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