Tax Case 3
Individual Paper
2/22/2014

Attn: Dr. Ott

Executive Summary:
In this case, my group members represented the side of the taxpayer. One of the main issues in this case is whether or not Rex and Agnes Harrell should be able to make deductions in excess of rental income on their beach house. This deduction depends on if the 14-day personal use provision was exceeded. If the 14-day provision was exceeded than income should be limited to rental income as the ISR decided in this case. However, we have determined that the Harrell’s have not violated the 14-day provision and should therefore be allowed deductions for rental expenses exceeding rental income.

Facts:
• The Harrell’s purchased a beach house to use occasionally
If personal use exceeds this amount then the vacation home is considered a residence and limits the deduction to rental income. However, we found that the Harrell’s did not exceed the second limitation and should also be able to deduct the amount deductible under the first limitation that exceeds rental income.
As shown above, Section 183(a) can also be related to this case and states that no deduction should be allowed if the activity is defined as not engaged in for profit. Reg. Sec. 1.183-2 helps better define not engaged in for profit by listing the factors that should be taken into account when determining whether an activity is engaged in for profit. The first factor is that the taxpayer contains complete and accurate records and carries on activity in a businesslike manor. The Harrell’s meet this factor by well documenting their activities in their log. A second factor to consider is the expertise of the taxpayer of the specific activity being performed which comes from extensive study. Rex represents this factor by previously taking advanced courses in woodwork at a local college. A third factor to consider is the time and effort expended by the taxpayer in carrying on the activity. Rex and his wife spent significant time on their beach house making maintenance repairs considering they both has somewhat demanding jobs at home. Overall, we believe the couple meets the definition of being engaged an activities