Kaonis v. Commissioner, Docket No. 172-76.
| Decision Date | 17 May 1978 |
| Docket Number | Docket No. 172-76. |
| Citation | 37 TCM (CCH) 792,1978 TC Memo 184 |
| Parties | George Kaonis v. Commissioner. |
| Court | U.S. Tax Court |
George Kaonis, pro se, 5655 Lone Star Drive, San Diego, Calif. Timothy L. Nelson, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $1,825.84 in petitioner's Federal income tax for 1972. The issues for decision are:
(1) Whether certain residential property owned by petitioner was community property at any time during 1972;
(2) whether petitioner received rent from that property totaling $330 in 1972;
(3) whether all or any part of expenditures made by petitioner in 1972 for refurbishing the residential property were currently deductible by him for that year;
(4) the proper basis of petitioner's residential property for the purpose of depreciation and whether he is entitled to a depreciation deduction for the full year 1972;
(5) whether petitioner may deduct his adjusted basis in one component of his residential property as loss on its retirement; and
(6) the proper amount, if any, of petitioner's deductions for education expenses, work clothing, tools, charitable contributions and casualty loss.
Some of the facts have been stipulated and are found accordingly.
Petitioner filed an individual Federal income tax return for calendar year 1972. At the time of filing his petition in this case, he resided in San Diego, California.
Prior to 1966, petitioner married Rita Kaonis. They separated in April 1969, and on June 19, 1969, Rita Kaonis filed for divorce in the Superior Court of the State of California, for the County of San Diego. A Final judgment of Dissolution of Marriage was entered in the case on June 2, 1972. Subsequent to the separation, petitioner met Mary Ruth Morgan. They were married in August 1973.
In 1966, during his first marriage, petitioner and Rita Kaonis purchased a house in San Diego, for use as their personal residence. They paid $1 as downpayment, and assumed a mortgage of $21,900. They lived at this house together until April 1969 when Rita Kaonis moved out. Petitioner continued to reside there until August 1970 when he was transferred to the San Francisco area by his employer. Petitioner rented the house from September 1970 to March 1, 1972. The rent was $165 per month.
In 1967, the master bedroom of the house was enlarged. In 1971, the backyard was excavated for construction of a patio and an apartment. The cost of these improvements was approximately $1,730.
The house and certain other marital property were the subject of a property settlement executed by petitioner and Rita Kaonis in connection with their final judgment of divorce. The pertinent parts of this settlement are set forth below:
The quitclaim deed to petitioner's San Diego residence, required by paragraph 6 of the settlement, was executed on May 24, 1972, by Rita Kaonis in favor of "GEORGE KAONIS as his sole and separate property."
The furniture mentioned in the settlement was left in petitioner's San Diego residence after his separation from Rita Kaonis. It was used by petitioner until he moved to San Francisco in September 1970. Thereafter, it was stored in the garage of the San Diego house until the fall of 1971, when it was removed by Rita Kaonis.
After the tenant moved out of petitioner's San Diego house on March 1, 1972, petitioner decided that substantial refurbishing and additions were appropriate. Numerous expenditures were made during 1972 in connection with the renovation. Various appliances and fixtures were repaired or replaced. Walls were painted. Paneling and cabinets were replaced or refinished. Tile was installed, and curtains were purchased. Petitioner had a patio, gate and fence constructed.1
Upon regaining possession of the property in 1972, petitioner discovered that the water softener which had been acquired in 1968 at a cost of $270 had become clogged with sand and was beyond repair. It was removed in 1972 but was not replaced until 1973. It has never been discarded. Also in 1972, a number of articles were stolen from petitioner's garage.2
During 1972, petitioner made approximately 26 trips from his place of employment in San Francisco to San Diego. On these trips he stayed at the apartment of his fiancee Mary Ruth Morgan. On all of these trips he visited his house to examine the work performed and on some occasions to work on it himself.
In 1972, petitioner gave to Goodwill Industries a television set, two couches and a chair which had a total fair market value of $120. He also purchased 15 professional books and catalogues at a cost of $185.88, some of which were directly related to his employment, numerous tools and pieces of equipment related to his employment which cost $172, and certain clothing, including a hard hat which cost $12 that he used in his employment. Except for the hard hat, the clothing was of the type usable in petitioner's personal activities and most of it was so used.
On his tax return for 1972, petitioner did not report any receipt of rental income. He deducted $880 as depreciation on his San Diego house, calculated by applying the straight line method to a stated basis of $17,600 for the building and by using a useful life of 20 years. He had allocated $9,000 to the land and noted Petitioner also deducted $4,400 as repairs and vandalism loss, and $1,586 as cost of overseeing, both with respect to the San Diego house. Finally, petitioner deducted $200 as charitable contributions, $250 for small tools and supplies, $100 for special clothing, and $2103 as education expense.
In his notice of deficiency to petitioner, respondent disallowed the deductions for expenses of $4,400 and $1,586 and for depreciation of $880 relating to the San Diego house, because petitioner failed to show that these "resulted from a transaction entered into for profit or were incurred in a trade or business" and because the expenditures were unsubstantiated and, if made, were capital in nature. Respondent also disallowed the deductions for charitable contributions and employee business expenses because of lack of substantiation and because the clothing included therein was not of a type for which deduction is allowed. By amendment to his answer respondent has further asserted that petitioner received $330 of rental income in 1972.
OpinionWe first address the issue of ownership of petitioner's San Diego house. Both parties recognize that the house, acquired during petitioner's first marriage, was originally held as community property. However, petitioner claims that the house was owned by him as his separate property after 1969 and was not community property at any time during 1972. Respondent asserts that the house remained community property until Rita Kaonis executed a quitclaim deed of the property to petitioner on May 24, 1972.
Petitioner's argument is based on an oral agreement with his first wife made at the time of their separation in 1969. Under California law, a husband and wife can transmute community property to separate property by oral agreement, and petitioner claims to have done so here. See Woods v. Security First National Bank, 46 Cal. 2d 697, 701, 299 P. 2d 657, 659 (1956). However, on this record, we find that the agreement reached in 1969 provided only for the future division of the marital property and was not intended by the parties to effect a transmutation of the property prior to their divorce.
Under the 1969 oral agreement between petitioner and his first wife, petitioner was to keep the house and Rita Kaonis was to take the household furnishings. Furthermore, Rita Kaonis was to receive in cash one-half of the couple's equity in the house determined at the time of final divorce. The record shows that petitioner retained the household furnishings for as long as he lived in the house. Having no use for them after he moved to San Francisco, petitioner stored them in the garage until they were removed by Rita Kaonis in 1971. Although Rita Kaonis permanently vacated the house in April 1969, her interest did not terminate at that time. Since the amount she was to receive as a property settlement was to be determined by the fair market value of the house at the time of the divorce, she bore her full share of appreciation or depreciation until that date. Furthermore, there is no evidence that any other burdens or benefits of...
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