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Petitioners reported the rents received and expenses from
the Lake Arrowhead property on Schedule E of their 1996 and 1997
joint income tax return as follows:
1996 1997
Rents received $9,855 $9,935
Less: Expenses 18,861 16,361
Income/(Loss) (9,006) (6,426)
Notice of Deficiency
The notice of deficiency dated December 14, 1999, informed
petitioners that the deficiency amounts determined by the
Commissioner were based on the following adjustments to income:
(1) “Rental Loss” of $38,722 and $40,527 disallowed in 1996 and
1997, respectively; (2) “Exemptions” reduced by $1,122 and $1,696
for 1996 and 1997, respectively; and (3) “Itemized Deductions”
reduced by $1,936 and $2,027 for 1996 and 1997, respectively.
OPINION
The parties have stipulated that petitioner was a real
estate professional pursuant to section 469(c)(7) in 1996 and
that petitioners are entitled to deduct $29,716 in rental losses
in 1996 with respect to the Indian Wells properties and Elderwood
properties.
Whether the remaining rental losses claimed by petitioners
in 1996 and 1997 constitute passive activity losses under section
469 depends on: (1) Whether petitioner was a real estate
professional under section 469(c)(7) during 1997 and (2) whether
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