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Schedules C, Profit or Loss From Business, petitioners reported a
net loss of $17,641 from the operation of the Maui condo, and a net
loss of $16,336 from the operation of the Molokai condo. On both
Schedules C, petitioners indicated that they materially
participated in their rental activities.2
3. Notice of Deficiency
In the notice of deficiency, respondent disallowed
petitioners' losses from the operation of their Hawaiian
condominiums. In the parties' stipulation agreement, respondent
concedes that the expenses incurred were ordinary and necessary
trade or business expenses. Respondent also conceded at trial that
substantiation is not being challenged. The passive activity loss
rules under section 469(a) constitute respondent's sole basis for
disallowing petitioners' losses from their Hawaiian condominiums.
OPINION
Issue 1. Passive Activity Losses
Pursuant to section 469(a) a passive activity loss is
generally not allowed as a deduction for the year sustained. A
passive activity loss is defined as the excess of the aggregate
2 Petitioners filed a third Schedule C, Profit or Loss
From Business, reporting a net loss of $11,714 from Mrs.
Pohoski's home health care nursing business. Petitioners also
filed a Schedule E, Supplemental Income and Loss, showing a net
loss of $24,546 from the rental of their condominiums in
Camarillo, California.
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Last modified: May 25, 2011