Tom Bradford comes to you with a tax notice he received. The notice is based on a property that Tom exchanged for Jules Easterman’s property. Tom used the property in question as a vacation home in Cape Code Massachusetts and rented it out to vacationers when he did not use it personally. Jules used his property in Tampa Florida as a vacation home but mostly rented it out to vacationers as well. They decided to go into a like-kind exchange under IRC Section 1031 so that the gains on the sales of their properties would not be recognized for income tax purposes until such time that they sold to someone else who did not want to take part in a further like-kind exchange.
Tom originally treated the Tampa property as a vacation home, but a few months after this exchange in the tax year 2019 he lived on the property for about 5 weeks when he was scouting for a new job in Florida. As soon as he was hired at his new job in Florida, he looked for a permanent place to live and went back to treating that property as a vacation home and also renting it out to vacationers in the area.
The IRS learns of his use during the 5 weeks he was using it while looking for a job in Florida, and wants to disallow the sale as a like-kind exchange in 2019, the year in which he both exchanged the property and lived there while searching for a job.
Tom tells you that all other aspects of the exchange was done by the rules (i.e. property was identified in 45 days and exchanged in 180 days). He tells you also that he used to also spend about 4-5 weeks using his vacation home on the Cape and did not think anything of it to live that same amount of time at the Tampa property as well.
Tom responds to the notice, but the IRS does not agree with his response and goes into a full examination, resulting in them sending Tom adjustments to his 2019 tax return. You believe that Tom has an argument that if he treated the property as a vacation home for the rest of the year (when Tom was not there that year the property was rented out or on the list as a rental property in the area) he should not be penalized for using it to stay there temporarily, since an owner of rental property is allowed a personal use allocation without being penalized under IRC section 280A.
Draft a protest letter in responses to the above scenario, being sure to make your case with both relevant Code and Regulation sections. (You only have to write up from the tax period involved to the end of the penalties of perjury statement when following the structure of the Sample Protest Letter in your book.)
Grading Rubric:
Properly addressing the law(s) at issue 25 points
Making a strong argument by using appropriate authority 30 points
Citing all sources properly 25 points
Following the correct format for an IRS protest letter 20 points