Eugene Holmes, Margaret Holmes, As Voluntary Administrator For Eugene Holmes (Deceased), and Mark Holmes v. United States, 85 F.3d 956, 2d Cir. (1996)
Eugene Holmes, Margaret Holmes, As Voluntary Administrator For Eugene Holmes (Deceased), and Mark Holmes v. United States, 85 F.3d 956, 2d Cir. (1996)
Eugene Holmes, Margaret Holmes, As Voluntary Administrator For Eugene Holmes (Deceased), and Mark Holmes v. United States, 85 F.3d 956, 2d Cir. (1996)
3d 956
78 A.F.T.R.2d 96-5077, 64 USLW 2792,
96-1 USTC P 50,299,
34 Fed.R.Serv.3d 924
In the summer of 1984, Mark Holmes and his parents, Eugene and Margaret
Holmes, entered into a partnership ("the partnership") to purchase from the
Corporation the shares necessary to get the right to occupy apartment 5M. Mark
Holmes took a one-half interest in the partnership, and each of his parents took
a one-quarter interest in it. In November 1994, the partnership simultaneously
1) bought 773 shares of the Corporation for $60,000, financed entirely by a
loan from Long Island Savings Bank; 2) mortgaged the shares to Long Island
Savings; 3) executed a proprietary lease with the Corporation for apartment
5M; and 4) executed a lease with Mark Holmes under which he would continue
to live in apartment 5M and pay, as rent to the Partnership, $550 per month for
the year ending October 1985, and $600 per month for the year ending October
1986.
In 1985, the income received by the Partnership (the rent paid by Mark
Holmes) was not sufficient to meet its expenses (the maintenance fees and
mortgage interest). The partnership, therefore, sustained a loss, and each partner
claimed a proportionate share. Accordingly, in his tax return for the 1985 tax
year, Mark Holmes deducted half of the partnership's losses, $10,136. This sum
included his share of qualified mortgage interest and property taxes on the
apartment (deductions that are not contested here), and one half of the
The IRS audited Mark Holmes and his parents and determined: 1) that the rent
Mark Holmes paid was not at a fair market rate; 2) that the partnership's rental
activity was not "for profit;" and 3) that, under all the circumstances, Internal
Revenue Code 280A barred the Holmeses from taking the deductions they
sought. A deficiency was assessed against them.
The Holmeses paid the taxes and interest on October 9, 1988, and filed a timely
administrative claim for a refund with the IRS. Mark Holmes sought a refund
of $5,358.40, plus statutory interest. In October 1994, the IRS partially
refunded $772 in erroneously assessed tax, plus $687.50 in interest, but
otherwise denied his claim.2 His parents received similar treatment.
The Holmes family then brought suit in district court seeking a further refund.
The case was tried to a jury, which returned a verdict in favor of Mark and his
parents. In answer to special interrogatories, the jury found that the
partnership's rental activity was for profit and it further found that the
partnership had charged a fair rent.
The Government filed a motion for judgment as a matter of law, or, in the
alternative, for a new trial. The district court denied the motion. It concluded
that there was ample evidence from which the jury could reasonably have
found that the partnership was engaged in for-profit activity. The district court
also found that the jury's verdict that a fair rent had been charged was fully
supported by the evidence. Holmes v. United States, 868 F.Supp. 42, 44
(W.D.N.Y.1994). It held, finally, that, regardless of fair rent and for-profit
activity, "Section 280A does not apply to the ownership of shares of a
cooperative corporation." Id.
The court noted that the section limits loss deductions deriving from the rental
of the taxpayer's personal "dwelling unit," and that 280A(f)(1)(A) defines a
"dwelling unit" as including "a house, apartment, condominium, mobile home,
boat, or similar property, and all structures or other property appurtenant to such
dwelling unit." "It would be illogical," the court stated, "to conclude that shares
in or of a cooperative corporation, even though they correlate to the use of a
particular apartment, were 'similar property' under the above definition." Id. at
44-45.
10
In the face of the jury verdict, the Government sought to turn defeat into
victory by arguing that even if a fair rent had been charged by a "for profit"
The government, in this appeal, does not challenge the jury verdict and contests
only a) whether Section 280A applies to the ownership of cooperative shares,
and b) whether the government had preserved various claims arising under
Section 280A that it asserts are valid despite the jury's findings. The fair rental
and profit motive issues are, therefore, not before us. The government,
moreover, has abandoned its claims against the parents, and attacks the
judgment below only to the extent that it awards a refund to Mark Holmes
("taxpayer").
Discussion
I.
12
13
Among these limits are those imposed by 280A. This section states that "
[e]xcept as otherwise provided ... no deduction otherwise allowable under this
chapter shall be allowed with respect to the use of a dwelling unit which is used
by a taxpayer during the taxable year as a residence." The Code, as we have
earlier noted, defines "dwelling unit" as "a house, apartment, condominium,
mobile home, boat, or similar property, and all structures or other property
appurtenant to such dwelling unit." I.R.C. 280A(f)(1)(A).
14
In general, a taxpayer uses a dwelling unit as a residence when she uses the unit
"for personal purposes" for the greater of 14 days or 10 percent of the number
of days the unit is rented at the fair market price during the taxable year. I.R.C.
16
But the "fair rental" exception is itself subject to a restriction: If the tenant "has
an interest in the dwelling unit," the exception applies "only if such rental is
pursuant to a shared equity financing arrangement." I.R.C. 280A(d)(3)(B)(i).
A "shared equity financing arrangement" is an agreement under which two or
more persons acquire "qualified ownership interests" in a dwelling unit, and the
person holding one or more of the interests is both entitled to occupy the unit
and required to pay rent to one or other persons holding "qualified ownership
interests" in the dwelling unit. I.R.C. 280A(d)(3)(C). A "qualified ownership
interest" is further defined in 280A(d)(3)(D) as "an undivided interest for
more than 50 years in the entire dwelling unit and appurtenant land being
acquired in the transaction to which the shared equity financing agreement
relates."
17
II.
18
The first question in this case is whether the district court erred by construing
Section 280A as not restricting deductions of expenses incurred from the
ownership of cooperative shares. If the court was correct, the taxpayer wins
regardless of whether the rent was fair, or whether any of the other arguments
made by the government apply. The issue was raised by the district court when
it denied the government's motion for judgment notwithstanding the verdict,
and so we review the court's decision de novo. Fiataruolo v. United States, 8
F.3d 930, 938 (2d Cir.1993).
19
20
21
22
The taxpayer argues, and the district court found, however, that at one time coops were treated differently from other forms of real property. The taxpayer is
correct that in early cases, some courts denied deductions to tenants who were
stockholders in co-ops when deductions were sought for the proportionate share
of the interest and real estate taxes paid by the corporations. See, e.g., Wood v.
Rasquin, 21 F.Supp. 211, 213 (E.D.N.Y.1937), aff'd without op., 97 F.2d 1023
(2d Cir.1938); Holden v. Commissioner, 27 B.T.A. 530, 538, 1933 WL 188
(1933). It was in response to these cases that Congress enacted Section 216,
which explicitly permits tenant-stockholders to deduct their share of these
expenses. Relying on these cases, the district court reached the conclusion that,
as a general matter, the Code treats co-ops differently from apartments and
other real property, and that the two are treated in the same way only when
there is an explicit statement in the Code. Holmes, 868 F.Supp. at 45-46. The
court then noted that no such explicit language exists in 280A, and therefore
ruled for the taxpayer.
23
But, in fact, the court below overlooked the crucial factual posture of these
early cases. These were all cases in which taxpayers sought deductions for
expenses related to co-ops, even though no specific Code provision expressly
authorized such deductions. The cases were therefore subject to the general
presumption that vagueness in the Code must be read against deductions.3
Wood and its progeny simply interpreted the statutory provisions in accordance
with this presumption. They certainly did not hold that co-ops were
fundamentally different from other forms of property. And Congress quickly
made clear, by enacting 216 and by granting co-op owners the same
deductions as other holders of real property, that the underlying similarity was
in fact present and justified.
24
III.
25
Having decided that 280A applies to co-op shares, we must now determine
whether the deduction limitations of 280A apply in this particular instance.
The government litigated this case by making its argument in two steps. First, it
contended that 280A applies to co-ops. Second, it argued that the taxpayer
was not protected by the fair rental exception to 280A because a fair market
rent was not charged for apartment 5M.4 On the second issue, the jury
determined that a fair market rent was charged. And the government has
declined to appeal that determination. Accordingly, the government is left in
the position of arguing that, despite the fact that a fair market rent was charged,
the taxpayer's co-op arrangement is, nevertheless, subject to the deduction
limits imposed by 280A.
26
27
Federal Rule of Civil Procedure 50(a) specifies the procedures for making a
motion for "judgment as a matter of law." The motion is made during the trial,
and after "a party has been fully heard on an issue and there is no legally
sufficient evidentiary basis for a reasonable jury to find for that party on that
issue." Fed.R.Civ.P. 50(a)(1). A Rule 50(a) motion "shall specify the judgment
sought and the law and the facts on which the moving party is entitled to the
judgment." Fed.R.Civ.P. 50(a)(2). It must be made "before the submission of
the case to the jury," id., and, if rejected, may be renewed after the jury verdict.
28
Rule 50(b) governs the procedure for renewing such a motion for judgment as a
matter of law. A Rule 50(b) motion can be made after the jury verdict, but only
if a Rule 50(a) motion was made prior to the close of the evidence. Together,
Rules 50(a) and (b) "limit the grounds for judgment n.o.v. to those specifically
raised in the prior motion for a directed verdict." Lambert v. Genesee Hosp., 10
F.3d 46, 54 (2d Cir.1993) (quoting Samuels v. Air Transp. Local 504, 992 F.2d
12, 14 (2d Cir.1993)), cert. denied, --- U.S. ----, 114 S.Ct. 1612, 128 L.Ed.2d
339 (1994). See also Fed.R.Civ.P. 50(b), Notes of Advisory Committee to 1991
Amendment ("A post-trial motion for judgment can be granted only on grounds
advanced in the pre-verdict motion.").
29
The government's Rule 50(a) motion was made at the close of the Holmeses's
case. In its oral motion, the government identified two grounds on which it was
entitled to judgment as a matter of law. First, it argued that the partnership was
not engaged in an activity "for profit" because it did not charge Mark Holmes
"fair rent," and therefore that the partners were not entitled to deductions for
costs associated with that activity. Tr., Aug. 24, 1993, at 110-18. Second, the
government contended that, even if the partnership charged fair rent, the
partnership could deduct rental-related expenses under 280A only to the
extent of the income derived from the rental activity. It stated, with singular
inelegance, that:
31 second issue is 280A, and that is the section where if it's a dwelling unit used as
The
a residence for personal purposes at a below market rental, which this was in our
opinion, there are limitations on what the person can do, and he can only offset the
income from that activity with his deductions and any excess is not an allowable
loss, whether fair market or not. So, even if Mr. Holmes paid fair rental or fair
market rental, Mr. Holmes or his family can only get an offset equal to the income
derived from that activity and any excess would not be allowed as a loss.
32
Tr., Aug. 24, 1993, at 118. The government's motion was denied.
33
At the close of all the evidence, the government renewed its motion:
34 this time, the United States would like to renew its Rule 50 motion based upon all
At
of the grounds as we cited and the testimony recently elicited.
35
36
During the charging conference, the government specified that because Mark
Holmes used the apartment for personal purposes, 280A(c)(5) limited the
partnership's deductions to the gross income from the apartment, regardless of
whether fair rent was charged. Tr., Aug. 24, 1993, at 228. At the same time, the
government mentioned, in general terms, proposed Treasury regulations, id. at
231-32, but it did not explain their applicability.
37
In this appeal, the government makes essentially two arguments. First, it claims
37
In this appeal, the government makes essentially two arguments. First, it claims
that the taxpayer had an "interest" in the unit under 280A(d)(3)(A) because he
was a member of the partnership that held the shares in the cooperative
corporation, and that, therefore, he could not deduct losses unless he could
prove that rental of the unit was pursuant to a "shared equity financing
agreement." Second, it argues that the taxpayer's use of the dwelling unit for
personal purposes places him within the ambit of 280A(c)(5), regardless of
whether a fair rent was charged.
38
The government clearly did not preserve its argument that, under 280A(d)(3),
the taxpayer cannot deduct losses unless he can show that the rental was
pursuant to a "shared equity financing agreement." This issue was not
mentioned in the government's Rule 50(a) motion. Nor did the government say
anything, at that time, about the taxpayer's interest in the partnership that
"owned" the dwelling unit. We therefore have no occasion to rule on this
280A(d)(3) claim. See Cruz v. Local Union No. 3, 34 F.3d 1148, 1155 (2d
Cir.1994) ("[I]f an issue is not raised in a previous motion for a directed verdict,
a Rule 50(b) motion should not be granted unless it is 'required to prevent
manifest injustice.' ") (citation omitted). The district court correctly held that
this argument was not preserved, see Holmes, 868 F.Supp. at 46 & n. 10, and
we affirm its holding.
39
40
The issue is not only a close one, it is one that the district court did not address
specifically. It may, moreover, depend on the context in which the government
made the Rule 50(a) motion, and on what the taxpayer could reasonably
understand from that context.
41
42
due to inadequate preservation) and since we lack adequate input from the
parties and the district court.6 Accordingly, we remand the case to the district
court for consideration of whatever further arguments it deems appropriate to
decide: a) whether the 280(A)(c)(5) issue was preserved, and b) the
significance of 280(A)(c)(5) to this case if the question was in fact
preserved.7 Conclusion
43
We reverse the district court's decision that 280A of the Internal Revenue
Code does not apply to deductible losses from the ownership of cooperative
shares. We affirm the district court's conclusion that the government is
precluded from arguing that, even though a fair rent was charged, 280A(d)(3)
(A) makes 280A applicable in this case. And we remand to the district court
for a determination of whether the government preserved its claim that
280A(c)(5) limits the taxpayer's deductions irrespective of fair rent, as well as
the merits of that contention if it was, in fact, properly preserved.
The Honorable Arthur D. Spatt, District Judge, United States District Court for
the Eastern District of New York, sitting by designation
See Leyser, The Ownership of Flats--A Comparative Study, 7 INT'L & COMP.
L.Q. 31, 33-37 (1958); Scamell, Legal Aspects of Flat Schemes, 14 CURRENT
LEGAL PROBS. 161-62 (1961); CURTIS J. BERGER, LAND OWNERSHIP
AND USE 170 (1968); Curtis J. Berger, Condominium: Shelter on a Statutory
Foundation, 63 COLUM. L. REV . 987 (1963)
The record on appeal contains no explanation of why the IRS provided this
partial refund
In its written Pretrial Statement, the Government described the two issues of
law as: 1) whether Mark Holmes was paying fair market rent, and 2) whether
the activity was engaged in for profit. Pretrial Statement of the United States of
America at 4. There was no mention of any other theory of tax liability in its
statement
See Samuels, 992 F.2d at 15 ("The moving party must set forth a statement of
The government has also asked us to remand this case so that the district court
may decide whether the taxpayer should be subject to negligence penalties.
This we will not do. The government may, or may not, ultimately win on the
280A(c)(5) argument. But the taxpayer's actions, and the arguments he has
made in this case, in no way suggest negligence. Negligence under 6653 of
the Code is the lack of due care or the failure to do what a reasonable and
prudent person would do under similar circumstances. Allen v. Commissioner,
925 F.2d 348, 353 (9th Cir.1991). It is obvious to us, as it should have been to
the government, that the taxpayer in this case did not act negligently. One may
disagree, as we did, with the taxpayer on whether or not 280A applies to
cooperative stock, but the government's bald claim that the taxpayer did not
exercise due care in making his argument is little short of reprehensible. And its
persistence in asserting the negligence claim even after it lost below is mind
boggling. Both bespeak of bullying tactics employed against someone who did
no more than exercise his right to question the government's chosen reading of
the tax laws. We therefore not only reject the claim of negligence in this case,
but caution the government against making like claims in similar situations
where the law is, at best, unclear