Benjamin A. And Louise H. Van Etten v. Commissioner of Internal Revenue

Benjamin and Louise Van Etten appeal a Tax Court judgment which sustained the Commissioner in disallowing a corporate loss that the taxpayers claimed for 1972 under the “pass-through” provisions of Sub-chapter S. We affirm.

Benjamin Van Etten owns Highland Corporation, a land development company. In 1970, Highland acquired and thereafter rented a house to one Jack Garn. A printed real estate sales contract entitled “Earnest Money Receipt and Agreement” was altered to read “Rent & Earnest Money Receipt and Agreement with Option to Purchase.” The agreement provided:

The agreement was extended through 1974. Garn never exercised the option to purchase and the agreement terminated.

In 1972, Highland sustained a deductible loss of approximately $23,000. It also took depreciation on the rental house. Van Et-ten deducted this amount on his 1972 personal income tax return, as allowed by the “pass-through” provisions of Subchapter S. The Commissioner determined, however, that the entire 1972 income under the agreement with Garn constituted rent. That rent, combined with other passive income received in 1972, exceeded 20 percent of Highland’s total gross receipts and terminated Highland’s…