Joseph A. Morcos and Joann M. Morcos - Page 7

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          the carriage house.  Respondent also allowed petitioners to                 
          capitalize for depreciation the $70,000 they spent for                      
          renovations to the carriage house.                                          
               As an additional argument to support the adjustments,                  
          respondent argued at trial that the deductions attributable to              
          petitioner’s rental of the third floor units are limited to their           
          gross rental income from the units minus certain deductions.                
               The first issue considered is whether section 280A(c)(5)               
          limits petitioners’ deductions for the rental of the third floor            
          units.  Section 280A(a) provides the general rule that no                   
          deduction is allowable “with respect to the use of a dwelling               
          unit which is used by the taxpayer during the taxable year as a             
          residence.”  The term “dwelling unit includes a house, apartment,           
          condominium, mobile home, boat, or similar property, and all                
          structures or other property appurtenant to such dwelling unit.”            
          Sec. 280A(f)(1)(A).  The term “dwelling unit” does not include              
          that portion of a unit which is used exclusively as a hotel,                
          motel, inn, or similar establishment.  Sec. 280A(f)(1)(B).                  
               Section 280A(c) lists exceptions to the general rule of                
          section 280A(a).  The only exception relevant herein is that                
          provided by section 280A(c)(3) which states that “Subsection (a)            
          shall not apply to any item which is attributable to the rental             
          of the dwelling unit or portion thereof (determined after the               

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