Littlejohn v. Comm'r
| Decision Date | 09 April 2020 |
| Docket Number | T.C. Memo 2020-42,Docket No. 8457-16. |
| Parties | CHARLES P. LITTLEJOHN AND MAXINE M. LITTLEJOHN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
John D. Faucher, for petitioners.
Kris H. An, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
By notice of deficiency, respondent determined deficiencies in petitioners' Federal income tax and section 6662(a) accuracy-related penalties as follows:1
| Year |
| Deficiency |
| Penalty |
| sec. 6662(a) |
| 2010 |
| $48,536 |
| $9,707 |
| 2011 |
| 47,335 |
| 9,467 |
| 2012 |
| 38,476 |
| 7,695 |
| 2013 |
| 182,478 |
| 36,495 |
After concessions, the issues for decision are: (1) whether petitioners are entitled to certain rental real estate deductions for the tax years at issue; (2) whether they are entitled to theft loss deductions for their tax years 2010 and 2013; and (3) whether they are liable for the section 6662(a) accuracy-related penalty for each tax year at issue.
The parties have stipulated some facts, which we incorporate herein by this reference. Petitioners, husband and wife, resided in California when they filed their petition. Charles P. Littlejohn has a law degree and previously taught law at the Southern California Institute of Law in Santa Barbara.
During the tax years at issue, Maxine M. Littlejohn owned two rental properties in Lompoc, California. One of the properties, located on L Street (L Street property), was a triplex. The other, located on Oak Hill Drive (Oak Hill property), was a single-family home that Mrs. Littlejohn's son had purchased in 1996 for $234,500. In 2005 he put Mrs. Littlejohn on the deed as a partial owner, and in 2010 he quitclaimed his entire interest in the Oak Hill property to her.
Mr. Littlejohn managed these rental properties. His responsibilities included making minor repairs, gardening, coordinating with service persons, and collecting rent.
Before Mrs. Littlejohn acquired the property, John Stanier and Kimberly Stanier (Staniers), through the John and Kimberly Stanier Family Trust (Stanier Family Trust), owned a 4,862-square-foot house on 85.5 acres off Prefumo Canyon Road in San Luis Obispo, California (Prefumo property). This four-story house in the style of a French chateau has six bathrooms, a pool, a spa, a wine cellar, a slate roof, and extensive landscaping. The house is built into a hillside, and the roof of the detached four-car garage, which is tiled with travertine marble, is level with the backyard and serves as a sundeck.
In October 2004, in connection with the Staniers' refinancing of the Prefumo property, their bank obtained an appraisal which valued the Prefumo property at $3,600,000.
On January 3, 2006, the Staniers hired Linda Wilson, a licensed realtor in San Luis Obispo, to sell the Prefumo property. Before selling the Prefumo property the Staniers paid a contractor, Phillip King, $1,800 to repair a drain on the garage roof/sundeck.
After seeing an advertisement for the Prefumo property and after visiting it in late February 2006, petitioners decided that Mrs. Littlejohn would buy it as her separate property. Mrs. Littlejohn hired as her realtor Ms. Wilson, who also represented the Staniers. On or about March 30, 2006, Mrs. Littlejohn signed a residential purchase agreement and joint escrow instruction offering to purchase the Prefumo property "as is" for $2,500,000. Mr. Littlejohn was not a party to the sale.
On April 6, 2006, the well pump was tested on the property. The pump test report, which both Mrs. Littlejohn and the Staniers initialed, indicated a consistent flow of five gallons per minute.
On April 20, 2006, Mrs. Littlejohn signed the real estate transfer disclosure statement prepared by the Staniers and Ms. Wilson. This document, in response to the question: "Are you (Seller) aware of any significant defects/malfunctions in any of the following?", indicated that the "garage ceiling has small leak in severe weather (rain)", that the driveway was cracked, and that some windows had defective seals. Ms. Wilson's agent's disclosure statement, which was also part of the real estate transfer disclosure statement, noted, among other things, that there were many fogged windows, worn and stained carpet, stains in the living room ceiling, a crack in the marble near the library entry, and a small crack at the bottom of the pool; it also noted that "garage leak is being repaired during inspection." As part of her disclosure statement Ms. Wilson recommended a professional home inspection.
On April 26, 2006, petitioners hired Andrew Wallace to inspect the Prefumo property. His inspection report listed the "Decks/Balcony" as "marginal", noting that "[d]rainage appears incomplete at 2nd floor walking deck." The report listed the "Roof" as "defective", noting that "[w]ater leaks through garage ceiling; apparently due to failed seal at patio deck drain above." The report listed the "Crawl Space" as "marginal", noting that In describing the condition of one of the bedrooms, the report listed the "Ceilings" as "marginal", noting The report listed the windows as "marginal", noting that
On April 27, 2006, petitioners hired McElwain Real Estate to appraise the Prefumo property. The appraisal report valued the Prefumo property at $2,600,000 and described the house as being of "[v]ery good quality construction in good condition".
On May 2, 2006, Mrs. Littlejohn reviewed and signed a seller property questionnaire completed by the Staniers. In response to the question "ARE YOU (SELLER) AWARE OF . . . Defects in any of the following, (including past defects that have been repaired) * * * roof * * * drainage * * * ceilings floors or appliances", the box for "Yes" was checked, with the notation that In response to the question "ARE YOU (SELLER) AWARE OF . . . Water intrusion into any part of any physical structure on the Property; leaks from or in any * * * roof; standing water, drainage", the box for "Yes" was checked, with the notation that there is "slow drainage in storm conditions at the rear patio area" and that it " usually takes a day to drain".
On or about June 1, 2006, the Staniers and Mrs. Littlejohn closed the escrow for the Prefumo property. The Staniers then rented the house back from petitioners for four to five weeks before petitioners began moving their belongings into the house.
Shortly after moving into the Prefumo property, petitioners had problems with the well-water system: there was sand in the water line, the water supply was insufficient to irrigate the property's landscaping, and tests indicated that there was arsenic in the water.
On November 27, 2006, in conjunction with applying for an increased line of credit, petitioners hired a second appraiser to value the Prefumo property. This appraiser valued the property at $2,900,000.
In December 2007 the ceiling of the Prefumo property garage collapsed. On December 28, 2007, petitioners reported this damage to their insurance company. By letter dated April 3, 2008, the insurance company advised petitioners that the damage was not covered by their insurance policy because the damage resulted from "faulty or negligent construction of the deck and one of the drains on the deck, wear and tear, and rusting or deterioration of the flashing surrounding the deck, all of which allowed water to intrude into the interior of the garage." The insurance company noted that "[t]he center drain on the [sun]deck had been replaced and was installed in a faulty manner and ha[d] probably been leaking since it was installed."
At some point Mr. Littlejohn came to believe that the slate roof was improperly attached to the house and that the Staniers had tried to cover up this and a number of other defects. He also came to believe that the water pipes had broken on several occasions before Mrs. Littlejohn had acquired the Prefumo property and that the Staniers had tried to cover up the resulting water damage.
On January 23, 2008, petitioners filed a complaint with the California Contractors State License Board against Mr. King (whom the Staniers had hired to repair the garage-roof/sundeck drain); they also made a claim against his contractor bonding company. On December 22, 2008, the bonding company settled with petitioners for $7,500.
On or about August 5, 2009, Mrs. Littlejohn filed a complaint in the Superior Court of the State of California, County of San Luis Obispo (California superior court), against the Staniers individually and as trustees of the Stanier Family Trust; Ms. Wilson; Ms. Wilson's realty company, Wilson & Co.; and Mr. King. In her complaint Mrs. Littlejohn sought more than $2 million each from Ms. Wilson and the Staniers. Mrs. Littlejohn also sought $150,000 from Mr. King with respect to the garage damage.
Mr. King did not respond to the lawsuit. On September 22, 2010, after a default hearing, the California superior court awarded Mrs. Littlejohn $150,000 as a default judgment against Mr. King.2 The judgment states that Mr. King "was a willing member of a conspiracy [with the Staniers, the Stanier Family Trust, and Ms. Wilson and her real estate company] to defraud a future buyer of the * * * [Prefumo property] by engaging in a fraud involving an omission and/or cover-up of material defects of the garage and travertine deck".
On October 18, 2013, Mrs. Littlejohn settled...
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