Tax Courtroom In Temporary | Sezonov v. Commisioner | Facet Gigs And Passive Actions – Tax Authorities

26 April 2022

Freeman Law

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Tax Litigation: The Week of April 18th, 2022, through

April 22nd, 2022

Sezonov. Comm’r, TC Memo. 

2022-40| April 20, 2022 | Marvel, J. | Dkt. No.

26650-17

Opinion

Short Summary: The Sezonovs

(“Petitioners”) had their primary residence in Ohio

during 2013 and 2014. Mr. Sezonov was the only member of a

single-member LLC. Petitioners owned two properties that they

rented out through the LLC during those years (the “Rental

Properties”). Petitioners performed various activities with

regard to the Rental Properties, including communicating with

prospective renters and preparing the properties for new

renters.

Petitioners kept records of the hours they worked on the Rental

Properties for these years:

 Mrs. SezonovMr. Sezonov
2013201420132014
Hours476:2080:20405:3026:40

Petitioners jointly filed their 2013 and 2014 Forms 1040, U.S.

Federal Income Tax Returns, reporting the income, expenses, and

losses associated with the Rental Properties on Schedule E,

Supplemental Income and Loss. The IRS issued a statutory notice of

deficiency disallowing the loss deduction that Petitioners claimed

on their Schedules E for 2013 and 2014.

Key Issues

  • Were Petitioners’ activities with respect to the Rental

    Properties during 2013 and 2014 passive activities?

Primary Holdings

  • Yes, Petitioners’ activities with respect to the Rental

    Properties during 2013 and 2014 were passive activities. Therefore,

    the losses from those activities were not deductible. The evidence

    that Petitioners presented did not show that either spouse

    performed more than 750 hours of services in real property trades

    or businesses during either of those years.

Key Points of Law

  • A deficiency determination generally is presumed correct, with

    the taxpayer bearing the burden of proving that the determination

    is in error. Tax Court Rule 142(a); Welch v.

    Helvering, 290 U.S. 111, 115 (1933).
  • Deductions are a matter of legislative grace, and the taxpayer

    bears the burden of proving they are entitled to any claimed

    deduction. INDOPCO, Inc. v. Comm’r, 503 U.S. 79,

    84 (1992).
  • Taxpayers must maintain records to adequately substantiate the

    nature, amount, and purpose of a claimed deduction. R.C. §

    6001; Higbee v. Comm’r, 116 T.C. 438, 440

    (2001)
  • Taxpayers may deduct ordinary and necessary expenses paid or

    incurred in the ordinary course of business. R.C. § 162.
  • However, individual taxpayers are not allowed to deduct

    “passive activity losses.” I.R.C. § 469(a)(1), (b).A

    “passive activity loss” is the excess of the aggregate

    losses from all of a taxpayer’s passive activities for a

    taxable year over the aggregate income from all of that

    taxpayer’s passive activities during that taxable year. §

    469(d).
  • A “passive activity” is any trade or business in

    which a taxpayer does not materially participate or any rental

    activity (regardless of whether the taxpayer materially

    participates in the rental activity). I.R.C. § 469(c)(1),

    (2).
  • While most rental activity is passive, there is an exception

    for rental activities of a taxpayer engaged in a real property

    trade or business. See I.R.C. § 469(c)(2), (7).
  • If a taxpayer is engaged in a real property trade or business,

    the material participation requirements apply. I.R.C. §

    469(c)(7)(A)(i).
  • A taxpayer is engaged in a real property trade or business

    during a given taxable year if half of the personal services in

    trades or businesses that the taxpayer performs in the taxable year

    are performed in real property trades or business in which the

    taxpayer materially

    participates and the taxpayer

    performs more than 750 hours of services in real property trades or

    businesses in which the taxpayer materially participates. I.R.C.

    § 469(c)(7)(B). When taxpayers file joint returns, the two

    requirements are satisfied only if either spouse satisfies both

    requirements.

Insights:  This case is another

illustration of the (frustrating) principle that deductions can be

hard to come by-taxpayers need to be able to prove them up in order

to get them.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.

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