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Meinhardt v. Commissioner of Internal Revenue

United States Court of Appeals, Eighth Circuit

September 10, 2014

Donald B. and Arvila Meinhardt, Appellants
v.
Commissioner of Internal Revenue, Appellee

Submitted June 11, 2014.

Appeal from The United States Tax Court.

For Donald B. Meinhardt, Appellant: Steven E. Uhr, Attorney, Eden Prairie, MN.

For Commissioner of Internal Revenue, Appellee: Richard Farber, Curtis Clarence Pett, Gilbert Steven Rothenberg, Deputy Assistant Attorney General, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; William Wilkins, Internal Revenue Service, Washington, DC.

Before LOKEN, BEAM, and GRUENDER, Circuit Judges.

OPINION

Page 918

LOKEN, Circuit Judge.

In 1976, architect Donald Meinhardt and his wife Arvilla purchased 140 acres of farmland in rural Minnesota consisting of three contiguous parcels of tillable land and pasture land and an eighty-year-old farmhouse in need of substantial repair and renovation. In the years following, the Meinhardts at times farmed the tillable and pasture land themselves but regularly rented the farmland to neighboring farmers for cash rent. On their income tax returns for 2005, 2006, and 2007, the Meinhardts deducted, as ordinary and necessary business expenses, substantial expenses that related solely to the farmhouse and surrounding outbuildings, in addition to their ordinary and necessary expenses related to the leased farmland. The Commissioner of Internal Revenue issued notices of deficiency that explained in relevant part, " Since the farm land is the only part of the property that is leased and income derived, you cannot deduct the expenses of owning the home on the farm."

The Meinhardts petitioned the United States Tax Court, challenging the deficiencies. After the parties resolved other issues and a short trial on the farmhouse expenses issue, the Tax Court denied the petition, disallowing $42,694 in claimed deductions because the Meinhardts failed to prove that the farmhouse expenses " were tied to a real estate property rental business" for purposes of 26 U.S.C. (" IRC" ) § 162, or related to " property held for the production of income" within the meaning of IRC § 212. Meinhardt v. Comm'r, T.C. Memo 2013-85, 105 T.C.M. (CCH) 1530 (2013).[1] Reviewing the Tax Court's resolution of these fact-intensive issues for clear error, we affirm. See Keating v. Comm'r, 544 F.3d 900, 903 (8th Cir. 2008) (standard of review).

I.

The parties stipulated that all reported farm-related income was cash rent paid by

Page 919

neighboring farmers who leased the pasture and crop lands during the tax years in question. The Meinhardts reported " Land Farm Rental" losses of $19,214 in 2005, $15,811 in 2006, and $7,649 in 2007. The Commissioner disallowed expenses of $20,523 in 2005, $14,336 in 2006, and $7,835 in 2007 because they related solely to the farmhouse. The dollar amounts are not at issue; the question on appeal is whether farmhouse-related expense deductions should have been disallowed.

Donald Meinhardt, the sole trial witness, testified that he received a substantial bonus from his architectural firm in 1975 and decided to apply the bonus toward purchase of the farm because " [i]t looked like a good investment." The Meinhardts purchased the three contiguous 140-acre parcels together for $75,000. They have never attempted to sell the land or the house; they estimate the entire farm is now worth $375,000. Donald did not estimate the value of the farmhouse alone, but he did testify that it would be possible to sell the farmhouse separately from the land, by parceling off about ten acres with the ...


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