Garrison v. Comm'r
100 T.C.M. 481
| Tax Ct. | 2010Background
- Petitioners Wendell V. and Sharon T. Garrison filed delinquent joint Federal income tax returns for 1998-2000 on March 22, 2002.
- Respondent issued a notice of deficiency on June 8, 2007 and later amended it, recharacterizing income from real estate transactions.
- Petitioners regularly purchased and sold real estate within short periods; many properties were foreclosures.
- Respondent classified gains from real estate as ordinary income from a trade or business, not as royalty income or capital gains.
- The Court granted respondent’s motion to amend the answer and later evaluated increased deficiencies and additions to tax based on unreported real estate income.
- Trial occurred December 7-9, 2009, with concessions and adjustments discussed in posttrial briefs and by the Court during findings of fact.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Capital gain or ordinary income from real estate sales | Garrison: gains are capital gains | respondent: gains from real estate held for sale in ordinary course; ordinary income | Gains treated as ordinary income (trade/business) |
| Self-employment tax on real estate activities | Garrison: self-employment tax not properly computed | real estate activity constitutes a trade or business generating net earnings | Petitioners liable for self-employment tax on real estate income |
| Deductibility of costs associated with real estate transactions | Garrison: claimed repair/expense deductions should be allowed | lacking receipts; cannot substantiate additional repairs/expenses | No additional deductions allowed beyond amounts supported by evidence |
| Income tax on dividend and interest from investments | Garrison: unclear/incorrect treatment of dividends or interest | respondent’s determinations sustained for dividends and 1998 interest | Dividend and 1998 interest determinations sustained; no contrary evidence presented |
| Failure to timely file addition to tax under §6651(a)(1) | Garrison: no reasonable cause shown for late filing | taxpayers failed to file timely; burden on petitioners | Petitioners liable for §6651(a)(1) additions for 1998-2000 due to neglect; no reasonable cause found |
Key Cases Cited
- Malat v. Riddell, 383 U.S. 569 (U.S. 1966) (definition of 'primarily' held for sale/holdings for investment)
- Biedenharn Realty Co. v. United States, 526 F.2d 409 (5th Cir. 1976) (factors for holding property for sale vs. investment)
- Suburban Realty Co. v. United States, 615 F.2d 171 (5th Cir. 1980) (frequency of sales as probative of business vs investment)
- United States v. Winthrop, 417 F.2d 905 (5th Cir. 1969) (inventory-like considerations in real estate sales)
- Pritchett v. Commissioner, 63 T.C. 149 (1974) (factors for characterizing property as inventory or investment)