6th Circuit allows rental losses under sec. 280A.

• Author: Barton, Peter C.

The Sixth Circuit, in Razavi, 74 F3d 125 (1996), rev'" TC Memo 1993-624, ruled that taxpayers who leased their condominium to a company that subleased it to third parties for 200 days could deduct their rental losses from the condominium even though they had personally used it for 27 days. The Tax Court had disallowed the losses, ruling that the Razavis' personal use had exceeded the limits of Sec. 280A(d). The Court of Appeals' opinion is the first in which a court ruled that the days a rental unit is unoccupied can be counted as days in which the unit is rented at fair value in determining if a taxpayer can deduct rental losses.

Sec. 280A(c) (5) disallows the deduction of rental losses if a taxpayer uses a dwelling unit during the tax year as a residence. Sec. 280A(d) specifies that a dwelling unit is used as a residence if the use of the unit by the taxpayer or his family for personal purposes exceeds the greater of 14 days or "10 percent of the number of days during such year for which such unit is rented at a fair rental."

In 1985, Mehdi and Alexandra Razavi purchased a condominium for $355,000 in South Seas Plantation (SSP) in Florida. SSP offered to lease the condominium from the Razavis under two optional lease plans. Under the first, SSP would pay them $21,000 annual rent plus 40% of the annual gross rents in excess of $52,500; the $21,000 was guaranteed even if SSP did not rent the condominium to any third parties. Under the second, SSP would rent out the condominium and pay the Razavis 50% of the gross rents collected with no guaranteed paymeet. Under both plans, the Razavis could use the condominium for a maximum of four weeks per year for $10 per day.

The Razavis chose the first plan. They signed a 30-month lease in February 1986. In 1986, SSP rented the Razavis' condominium to third parties for 149 days and received $29,559; SSP paid the Razavis $19,250 (11/12 of $21,000). In 1987, SSP rented the condominium to third parties for 200 days and received $48,328; SSP paid the Razavis $21,000. The Razavis used their condominium for 36 days in 1986 and 27 days in 1987.

The Razavis deducted rental losses from the condominium in 1986 and 1987. The IRS disallowed the losses, determining deficiencies of $20,309 in 1986 and $11,123 in 1987. The Service argued that the language of Sec. 280A(d) required the Razavis to count only the number of days SSP subleased the condominium to third parties as days when it was rented at "fair rental"...