Individual Income Taxes
The case, analyzed in the scope of this paper, manly relates to the property issues and taxation of the individual income. Briefly, this case may be represented in the following manner – the wife and husband have purchased the property - Pebble Beach for $460,000, which was purchased for cash (applying $136,000 of Wilshires sale proceeds and gaining the loan for the rest of the sum).
Afterwards, the husband has purchased the Meadowbrook for $280,000. In the same way, the cash payment was issued (47,066 of Wilshires sale and loan - for the rest of the sum). Both properties were initially considered to be for the rent.The major concern of this case is the fact that several rental properties were owned by the taxpayers. The losses of $109,919 and $31,857 in the timeframe of 2003-2004 were claimed by them and thus, the couple has applied for the federal income tax returns. Even while taking into account the fact that the wife has served as the rental properties’ primary caretaker, she has failed in terms of keeping the contemporary logs of the time , which was spent by her for the process of managing and maintaining the properties.At the same time, the “activity” logs were created by her after examination of their tax returns for 2003-2004 has been conducted by the IRS.
For instance, as for 2003, 799 hours were claimed to be spent for rental properties managing, while for 2004 - 716 hours.The deficiencies in the returns of taxpayers for the timeframe 2003-2004 were determined by the IRS. In accordance with the supportive arguments, made by the IRS, the payers of the taxes could not postpone the recognition of gain, which has been realized on the sale of Wilshire for the tax years 2003(1); losses from the rental properties, owned by the taxpayers, may be considered as the passive activity losses for the period of tax years 2003 - 2004, which, in turn, could not be deducted (2). Additional emphasis should be put on the fact that it was determined by the IRS that the taxpayers were responsible for the accuracy related penalty, which corresponds to the section 6662 for the following tax years: 2003 and 2004. The claims, made by the IRS, are supported by the following legislation: Section 1031(a) exchange.
It is claimed in the scope of this section, that no loss or gain is recognized on the exchange or sale of property, which was held for productive use (for instance, for the business or trade purposes as well as for investment in the case if the property is exchanged merely for property of a similar type, which is furthermore planned to be held either for business or productive use in the scope of the trade operations or for investment. As this case has reached the court, it was claimed that these taxpayers have lacked the necessary intent for holding the Pebble Beach for productive use or investment in a business or trade at the time of …