Edward C. and Susan R. Hanna - Page 3

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               Respondent determined a $26,693 deficiency in petitioners’             
          2000 Federal income tax and a $5,338.60 penalty pursuant to                 
          section 6662(a).  The issues for decision are:  (1) Whether the             
          passive activity rules of section 469 preclude petitioners from             
          deducting losses from their rental real estate activities in the            
          taxable year 2000, and (2) whether petitioners are liable under             
          section 6662(a) for an accuracy-related penalty.                            
               Some of the facts have been stipulated, and they are so                
          found.  The stipulation of facts, supplemental stipulation of               
          facts, and attached exhibits, as well as additional exhibits                
          admitted during trial, are incorporated herein by this reference.           
          Petitioners Susan Hanna (Mrs. Hanna) and Edward Hanna (Mr. Hanna)           
          are married and resided in Sanibel, Florida, when they filed                
          their petition.  For convenience, we combine our findings and               
          discussion herein.                                                          
               Sanibel is a popular vacation spot located on an island off            
          the west coast of Florida.  In 1999, petitioners purchased two              
          houses in Sanibel and began renting them to vacationers.  In                
          2000, petitioners rented the first house for a total of 20 weeks            
          and the second house for a total of 19 weeks.  Petitioners also             
          purchased a third house in Sanibel in May 2000, which they                  
          immediately leased back to the sellers for the remainder of that            
          year.  For convenience, we refer to the management and operation            
          of the three properties as the “rental activities”.                         
               Petitioners did not live in Sanibel in 2000.  Instead, they            

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