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Respondent determined deficiencies and penalties in
petitioners’ 1999 and 2000 Federal income taxes as follows:
Penalty
Year Deficiency Sec. 6662(a)
1999 $4,886 $977.20
2000 5,642 1,128.40
The issues for decision are: (1) Whether the passive activity
rules of section 469 preclude petitioners from deducting the full
amounts of losses from their rental real estate activities for
the 1999 and 2000 taxable years, and (2) whether petitioners are
liable for accuracy-related penalties for the 1999 and 2000
taxable years pursuant to section 6662(a).
Background
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time their
petition was filed, petitioners resided in Abingdon, Maryland.
During the years in issue, petitioners were employees of
Ashley, Inc., which is located in Havre de Grace, Maryland.
Petitioner Camilla Thomas-Firsow worked full time as an employee,
whereas petitioner Alexander Firsow (petitioner) worked 32 hours
per week. In addition to being an employee of Ashley, Inc.,
petitioner also operated a horse racing business.
Also during the years in issue, petitioners owned two rental
properties. One was located at 309 Rowland Drive, Port Deposit,
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