Bolaris v. Commissioner

Wilbur, J., dissenting: The only issue really before the Court is whether or not petitioner is entitled to deduct expenses incurred for the production of income under section 212. In relevant part, section 212 allows the deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year for the management, conservation, or maintenance of property held for the production of income.” That a business venture is temporary or of an indefinite duration has never been grounds for denying the deduction of expenses incurred, any more than it is grounds for excluding the income generated.

It is not unusual for an employee to be transferred to a temporary or indefinite duty site for 1 or 2 years. If he rents his personal residence for a fair market value during his absence, it remains his personal residence in the colloquial sense. Nevertheless, the expenses associated with renting the property are deductible during the temporary or indefinite period the property is rented or "held for the production of income.” Similarly, a couple may move from a large home to a smaller rental unit upon retirement. If due to high interest rates and/or a poor real estate market, they must rent their former residence for a couple of years in conjunction with efforts to sell, the expenses associated with that rental are deductible. And a couple in precisely the same circumstances except that they buy rather than rent after moving is entitled to the same treatment.

In considering the applicability of section 212, a principled distinction cannot be made between these three cases. In conditioning the applicability of section 212 on the inapplicability of section 1034 (making the two sections mutually exclusive) the majority is in error. Congress did not intend to indirectly amend section 212 when it enacted section 1034 in 1951, and never even hinted that temporary rentals of property qualifying for section 1034 treatment would be treated differently or carved out from other temporary rentals for purposes of section 212. Indeed, Congress specifically stated that either the old or new residence could be temporarily rented consistent with section 1034. H. Rept. 586, 82d Cong., 1st Sess. 109 (1951), 1951- 2 C.B. 357 , 377; S. Rept. 781 (Part 2), 82d Cong., 1st Sess. 32 (1951), 1951- 2 C.B. 458 , 483. A 2-year rental for a fair market value of a new dwelling that has never been used as a personal residence by a taxpayer would clearly entitle petitioner to deductions associated with the production of the rental income, and I believe Congress intended both the old and new residence to be treated symmetrically.

Even more to the point, until today, the law has been well settled that when the property is leased under the varying circumstances outlined above at its fair market rental value in an arm’s-length transaction, it is property held for the production of income as described in sections 212 and 167 and their predecessors. See Briley v. United States, 298 F.2d 161 (6th Cir. 1962); Horrmann v. Commissioner, 17 T.C. 903 (1951); Robinson v. Commissioner, 2 T.C. 305 (1943); see also sec. 1.212-l(h), Income Tax Regs, ("ordinary and necessary expenses paid or incurred in connection with the management, conservation, or maintenance of property held by the taxpayer as rental property are deductible even though such property was formerly held by the taxpayer for use as a home”). Indeed, residential property has been considered to have been held for the production of income even when the owner has been unsuccessful in his efforts to rent the property. Briley v. United States, supra; Horrmann v. Commissioner, supra; Robinson v. Commissioner, supra.

The majority recognizes that renting one’s former residence "at its fair market value would normally suggest that the taxpayer had the requisite profit objective.” Yet the Court finds that since the rental activity was ancillary to sales efforts, it was not undertaken with the primary intention of making a profit, and cites Jasionowski v. Commissioner, 66 T.C. 312 (1976). At issue in Jasionowski was the distinction between the desire to profit through the receipt of rental income and the desire "to help a long-time friend who had become infirm and destitute.” Jasionowski v. Commissioner, supra at 322. In helping a friend, petitioners rented at far less than half their own estimate of the fair market rental value. We concluded:

This voluntary acceptance of rent at an amount substantially below fair market value is a clear indication to us that petitioners’ primary and dominant motivation was to help a long-time friend who had become infirm and destitute. Such a motive, while no doubt laudatory, should not be confused with an intention to make a profit. * * * [ 66 T.C. at 322 .]

We have an entirely different case before us. Indeed, the parties stipulated that the property herein was rented for its fair market value and it is hard to see how anyone could reasonably demand or expect more. Under these circumstances, petitioners’ ancillary desire to sell at the earliest practical' time is not an important factor. See, e.g., Johnson v. Commissioner, 19 T.C. 93, 98 (1952) ("Depreciation is properly allowable where property is merely held for the production of income even though in the taxable year it has produced no income and is held for sale.”); Horrmann v. Commissioner, supra at 907-908 ("when efforts are made to rent the property * * * , the property is then being held for the production of income and this may be so even though * * * the property is at the same time offered for sale”)- I see no reason why the case at bar does not fall within this established principal of law.

The taxpayers in the case at bar incurred expenses for hardware, plumbing, and lawn supplies, as well as other miscellaneous repairs, to maintain their home for tenants who paid fair market value rent. It is most extraordinary that the Court applies section 183 to the facts before us. Respondent admits that section 183 "is not customarily applied to the rental of real property when a fair rental is charged.” Respondent’s brief at 17. Nevertheless in arguing for the application of section 183, respondent cites legislative history showing Congress’ intent to allow deductions for expenses such as depreciation, insurance, or maintenance, to the extent that income is derived from a non-profit-related activity, and thereby implies that section 183 provides the relief necessary to fairly tax petitioners’ net income. On the contrary, however, section 183 affords no relief to petitioners here. Petitioners’ income from the property consisted of $1,271 in 1977, and $2,717 in 1978. Interest and tax expenditures totaled $1,757.55 in 1977, and $5,632 in 1978. These expenses, deductible regardless of whether the house was rented for profit, exceed the income derived from the property, and thus preclude the deduction of repairs under section 183. To tax petitioners’ income without deducting the expenses incurred to maintain property rented in an arm’s-length transaction at its fair market value is a complete misapplication of section 183. I respectfully dissent.

Goffe, Chabot, and Hamblen, JJ., agree with this dissent.