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The brothers are equal partners in Lee Brothers Investments,
a partnership that owned three rental properties--one single-
family home and a five-unit apartment building in southern
California, and another small apartment building in Hawaii.
Outside this partnership, Kai Lee owns three other rental
properties (two single-family homes and a three-unit apartment
building); and Ulysses owns one other rental property, a four-
unit apartment building. These properties produced losses,
largely from depreciation, which the Lees reported on their
returns.
The Commissioner disallowed the losses, and added accuracy-
related penalties to the resulting deficiencies, for both years
and both brothers. The Lees filed timely petitions, and the
cases were consolidated and tried together in Los Angeles.
OPINION
A. Passive Activity Losses
The focus of the trial was on whether the challenged losses
were deductible. The Code allows taxpayers to deduct most
business and investment expenses under sections 162 and 212;1
however, section 469 limits these deductions when they arise from
“passive” activities. Section 469(c)(2) defines passive
1 Unless otherwise indicated, section references are to the
Internal Revenue Code as in effect for the years at issue, and
the Rule reference is to the Tax Court Rules of Practice and
Procedure.
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Last modified: May 25, 2011