# PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.T.C. Summ ary Opi ni on 20 13 -1 08

UNITED STAT ES TAX COURT

JOSE C. BALLESTEROS AND LINDA S. BALLE STEROS, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 27 88 0- 11 S. Fil edDecem be r 23 , 20 13 .
Jo se C. Bal le st ero s an d Li nd a S. Bal le st ero s, p ro ses e. Kim -Kh an h Th i Ng uyen, fo r res po nd en t.

SUMM ARY OPINION COHEN, Ju dg e: Thi s ca se was h eardpu rs ua ntto th e p ro vi si on s o f se ct io n 74 63 of t he Int ern al Rev enue Co de ineffec t wh enth e p et it io n was fil ed . Purs ua nt to sec ti on 74 63 (b ), th e d eci si on to be en te redis no t re vi ewab le by any othe r co urt, an d thi s o pi ni on sh al l n otbe tre at edas p rece de ntforan y othe r cas e.- 2 -

Res po nd en t d et erm in edde fic ie nc ie s an d s ect io n 6 66 2( a) p en al ti es as fo ll ows : Pen al ty

Year Defi ci en cy se c. 66 62 (a) 20 08 $1 6,1 87 $3 ,23 7.4 0 20 09 15 ,74 9 3,1 49 .80 20 10 12 ,66 6 2,5 33 .20 Afte r co nc es si on s, the is su es forde ci si on are wh ethe r se ct io n 4 69 pre cl ud es pe ti ti on ers ’ de du ct io ns forren ta l l os se s cl ai m edan d wh ethe r pe ti ti on ers are l iabl e fo r th e p en al ti es . Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the In te rn al Rev enue Co de ineffe ctforth e y ears inis su e, an d a ll Ru le refe ren ces are to th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. Bac kg ro un d Pet it io ne rs res id edinCal ifo rn iawhen th ey fil edth ei r pe ti ti on . Duri ng th e y ears inis su e, Lin daS. Bal le st ero s (p et it io ne r) was a fu ll -ti m e nur se for th e Co un ty of Los Ang el es , reg ul arl y work in g i n 1 2- ho ursh ift s thr ee d ay s a we ek . Her b as e sa lary

was b etween$9 0,0 00 an d $ 10 0,0 00 pe r y ear. Be cau se sh e worke d subs tant ia l o ve rti m e h ou rs , sh e earne d wag es of a t l eas t $ 14 3,4 54 in20 08 , $1 34 ,09 6 i n 2 00 9, an d $ 13 9,9 12 in20 10 . Jo se C. Bal le st ero s was a fu ll -ti m e em pl oyee of MAG Aero sp ace I ndus tri es .- 3 -

Pet it io ne rs own edtwo ren ta l p ro pe rti es inFlo rid a an d o ne inGeor gi a. They al so own edanin ve st m en t p ro pe rty in Ge or gi a. Tena nt s fo r pe ti ti on ers ’ ren ta l pr op ert ie s wer e u su al ly obt ai ne d b y tra ve l ag en ci es or r eal ty com pa ni es . Tenan ts us ua ll y m ad e n eed edrep ai rs by the m se lv es an d wer e rei m bu rs edby pet it io ne rs . A fri en d o f pe ti ti on er was ask edto ch eckon th e p ro pe rti es inFlo rid a fro m ti m e to ti m e. On the ir t ax returns for20 07 th ro ug h 2 01 0, p et it io ne rs ele ct edto gro up th ei r ren ta l p ro pe rti es as asi ng le ren ta l re al est at e act iv ity , rep res en ti ng th atth ey were real est at e p ro fes si on al s. Th ey de du ct edren ta l l os se s fo r eac h year in is su e. Pet it io ne rs pre paredlo gs of t he ho ur s al le ge dl y sp en t o n the ir r eal est at e act iv ity , reco rd in g tha t p et it io ne r sp en t 2 ,19 9 h ou rs in20 08 , 3,0 25 ho ur s i n 2 00 9, an d 2 ,24 8 h ou rs in20 10 , andJo se C. Bal le st ero s s pe nt90 1 h ou rs in20 08 , 1,0 05 ho ur s i n 2 00 9, an d 8 51 ho ur s i n 2 01 0 o n the ir r en ta l ac ti vi ty. Bec au se pe ti ti on ers li ve d i n C al ifo rn iaan d the pro pe rti es were i n F lo rid a an d Geo rg ia , m os t o f th e h ou rs reco rd edinth e lo gs were fo r te le ph on e cal ls , writ in g c he ck s an d d el iv eri ng th e ch eck s t o the po stoff ic e, an d o th er adm in is tra ti ve tas ks . Peti ti on ers reco rd eda recu rri ng ti m e, us ua ll y two ho ur s, t o m ak e a p ho ne cal l o r to pa y bi ll s an d g o t o the po stoff ic e, so m et im es ch arg in g the sa m e h ou rs to each of t he ir p ro pe rti es . App oi nt m en ts were re gu larly reco rd edas- 4 -

la st in g fo urho ur s. Oft eneach pe ti ti on er re co rd edth e sa m e h ours forth e sa m e ta sk s. Ma ny of th e h ours reco rd edon th e lo gs rel at edto th ei r in ve st m en t p ro pe rty in Geor gi a. Pet it io ne rs in cl ud edho ur s re la te d t o s oc ia l ev en ts du rin g wh ic h the y recrui te d fr ie nd s t o jo ininth ei r in ve st m en t p lans forth e p ro pe rty. O ve ral l, the ho ur s re co rd edinth e lo gs were i m pr ob ab le an d n otcred ib le invi ew of th e de sc rib edact iv it ie s an d p et it io ne rs ’ fu ll -ti m e em pl oym en t. Pet it io ne rs ’ ren ta l l os se s wer e d is al lo wedinth e st atut ory no ti ce o f de fic ie nc y . Reco m

pu te d d efi ci en ci es tak in g i nt o a cco un t the set tl edis su es ex ceed th e g reat er o f 10 % of t he tax sh own onth ei r returns or $ 5,0 00 foreach y ear. Dis cu ss io n Tax pa y ers are al lo wedde du ct io ns forcert ai n b us in es s an d i nv es tm en t ex pe ns es un de r se ct io ns 16 2 and21 2. Se ct io n 4 69 (a), h owe ve r, ge ne ral ly di sa ll ows an y

pa ss iv e act iv ity

lo ss . A pas si ve act iv ity

lo ss is de fin edas t he ex ces s of th e ag gr eg at e lo ss es fro m all pa ss iv e act iv it ie s fo r th e ta xabl e y ear o ve r th e ag gr eg at e in co m e fro m

all pa ss iv e act iv it ie s fo r th aty ear. Se c. 46 9( d) (1 ). A pa ss iv e act iv ity

is an y tra de or b us in es s i n wh ic h the tax pa y er d oe s n otm at eri al ly pa rti ci pa te . Sec. 4 69 (c)( 1) . For t he pu rp os es of s ect io n 4 69 an d t o the ex te nt pr ov id edinreg ul at io ns , a tra de or b us in es s i nc lu de s an y act iv ity with re sp ectto whi chex pe ns es are al lo wab le as ade du ct io n u nd er s ect io n 2 12 . Sec.- 5 -

46 9( c)(6 )(B) . Ren ta l ac ti vi ty is g en eral ly treat edas ape r se pa ss iv e act iv ity reg ard le ss of wh ethe r th e ta xp ay er m at eri al ly part ic ip at es . Sec. 4 69 (c)( 2) , (4) . Mat eri al pa rti ci pa ti on is de fin edas i nv ol ve m en t i n the op erat io ns of t he act iv ity th atis reg ul ar, co nt inuo us , andsubs tant ia l. Sec . 46 9( h) (1 ). An ex cep ti on to th e ru le th ata ren ta l ac ti vi ty is p er s e p as si ve is fou ndin se ct io n 4 69 (c)( 7) , whi chpro vi de s tha t the ren ta l ac ti vi ti es of c ert ai n t ax pay ers in real pro pe rty trad es or b us in es se s ar e n otpe r se pa ss iv e act iv it ie s u nd er s ect io n 46 9( c)(2 ), bu t ar e tr eat edas atra de or b us in es s s ub ject t o the m at eri al pa rti ci pa ti on requi rem en ts of s ect io n 4 69 (c)( 1) . See s ec. 1 .46 9- 9( e)(1 ), In co m e Tax Reg s. A ta xp ay er m ay

qu al ify as a re al est at e p ro fes si on al if: (1) m or e th anon e-h al f of th e pe rs on al servi ces pe rfo rm edintra de s o r bu si ne ss es by the tax pa y er dur in g the ta xabl e y ear a re p erfo rm edinreal pro pe rty trad es or b us in es se s i n wh ic h the ta xp ay er m at eri al ly part ic ip at es an d (2 ) th e ta xp ay er p erfo rm s m or e th an75 0 h ou rs of servi ces du rin g the tax ab le y ear i n re al pro pe rty trad es or b us in es se s i n wh ic h th e ta xp ay er m at eri al ly part ic ip at es . Sec. 4 69 (c)( 7) (B)( i) and(ii ). In t he cas e o f a joi nttax return, ei th er s po us e m us t s at is fy

bo th requi rem en ts . Sec. 4 69 (c)( 7) (B). Thu s, i f ei th er s po us e qua li fie s as a real est at e p ro fes si on al , th e ren ta l ac ti vi ti es of th e rea l es ta te pro fes si on al are n otpe r se pa ss iv e und er s ect io n 4 69 (c)( 2) .- 6 -

Altho ug h p et it io ne rs ha ve ass ert edth ateach of t he m was areal est at e pr of es si on al , on ly pet it io ne r ap pe aredan d t es ti fie d a t tria l. Sh e in si st edth atwhat was reco rd edinhe r lo gs rep res en te d wh atsh e d iddu rin g the y ears inis su e. At the Co urt’s d ire ct io n, re sp on de ntfil eda m em or an du m bri ef ad dr es si ng th e rel iabi li ty of pe ti ti on er’s t es ti m on y

an d the lo gs sh e p res en te d. Pe ti ti on ers di d n otfil e a res po ns iv e b rie f. They pres en te d n o e vi de nc e o r arg um en t wi th res pe ctto th e act iv it ie s o f Jo se C. Bal le st ero s o th er than the un co rro bo rat edlo gs . W e n eedno t ac cep t p et it io ne r’s te st im on y an d m ay an d d o re ject i t b ecau se of th e m an y in di ci a o f un rel iabi li ty. See Fl ei sc he r v. C omm is si on er, 4 03 F.2d40 3, 40 6 (2 d C ir. 1 96 8) , aff’g T.C. Mem o. 1 96 7- 85 ; To ka rs ki v. Co m m is si on er, 8 7 T.C. 74 , 77 (19 86 ). Pet it io ne r’s lo gs are u nr el iabl e b ecau se th e h ou rs sh e rec or de d fo r sp eci fic tas ks , su chas t el ep ho ne cal ls an d wri ti ng an d m ai li ng ch eck s, were im pr ob ab le inth atth ey

were ex ces si ve , app aren tl y dupl ic at iv e (ch arg in g the same ho ur s t o e ach ren ta l p ro pe rty), andalwa y s the same. The to ta l h ou rs reco rd edare un real is ti c in vi ew of

pe ti ti on ers ’ fu ll -ti m e em pl oym en t. Onco ns id erat io n o f th e en ti re re co rd , we do no t ac cep t p et it io ne rs ’ cl ai m s as to th e h ours de vo te d t o the ren ta l ac ti vi ty. Bec au se we are n otpe rs ua de d tha t p et it io ne r sp en t m or e ti m e o n h er re nt al act iv ity du rin g the y ears inis su e th ansh e sp en t wo rk in g a s a n ur se , sh e h as no t- 7 -

es tabl is he d tha t s he is a real est at e p ro fes si on al . W e al so can no t re ly on the lo gs to pr ov e th ateit he r pe ti ti on er s pe ntm or e th an75 0 h ou rs on th ei r ren ta l ac ti vi ty. Thu s, we n eedno t an al yze wh ethe r th ey m at eri al ly part ic ip at edinm an ag em en t o f th e ren ta l p ro pe rti es . Peti ti on ers ’ ren ta l ac ti vi ty, th eref or e, is pe r se pa ss iv e, an d th ey m ay no t o ffs etth e lo ss es ag ai ns t the ir o th er i nc om e. Res po nd en t al so co nt en ds th atpe ti ti on ers ’ ren ta l l os se s wer e n ot subs tant ia te d. Pe ti ti on ers di d n otpro du ce t o re sp on de ntor p res en t attri al ev id en ce o f actua l ex pe ns es in cu rredinrel at io n t o the ir r en ta l p ro pe rti es . Becau se we ho ldth atpe ti ti on ers are n oten ti tl edto de du ctth e lo ss es , we nee d n otad dr es s th e subs tant ia ti on is su e. Sect io n 6 66 2( a) Pe na lty Sect io n 6 66 2( a) an d (b )(2 ) im po se s a 2 0% a ccu racy-rela te d p en al ty on any un de rp aym en t o f Fed eral in co m e ta x wh ic h i s at tri bu tabl e to a subs tant ia l un de rs ta te m en t o f in co m e ta x. Anun de rs ta te m en t o f in co m e ta x i s s ub st an ti al if i t ex ceed s the gre at er o f 10 % of t he tax requi redto be sh own on th e return o r $5 ,00 0. Se c. 66 62 (d )(1 )(A). Und er s ect io n 7 49 1( c), the Co m m is si on er b ears th e b ur de n o f pr oduc ti on with re ga rdto pe na lt ie s an d m us t co m e fo rwardwith s uf fic ie ntev id en ce in di cat in g tha t i t i s ap pr op ria te to im po se pe na lt ie s. Hig be e v . Commis si on er, 1 16- 8 -

T.C. 43 8, 4 46 -4 47 (20 01 ). If th e und ers ta te m en t o f in co m e ta x fo r th e y ear i n is su e, aft er re co m

pu ta ti on to refl ectth e st ip ul at io n o f se tt le d i ss ue s, i s s ub st an ti al , res po nd en t h as sat is fie d the bu rd enof p ro du ci ng ev id en ce tha t the pe na lty is ap pr op ria te . Res po nd en t h as reco m pu te d the de fic ie nc ie s t ak in g i nt o a cco un t the se tt le d i ss ue s, an d the un de rs ta te m en ts are s ti ll inex ces s o f 10 % of t he tax requi redto be sh own on pe ti ti on ers ’ returns , whi chis gre at er than $ 5,0 00 foreach y ear. Thus res po nd en t’s b ur de n o f go in g fo rwardha s b eensat is fie d. Onc e th e Co m

m is si on er h as m etth e b ur de n o f pr oduc ti on , th e ta xp ay er m us t co m e fo rwardwith p ers ua si ve ev id en ce tha t the pe na lty is in ap pr op ria te be cau se he or s he act edwith re as on ab le cau se an d i n g oo d fa ith. Se c. 66 64 (c)( 1) ; Hig be e v . Comm is si on er, 1 16 T.C. at 4 48 -4 49 . The d eci si on as t o wh ethe r a ta xp ay er ac te d wi threas on ab le cau se an d i n g oo d fa ith i s m ad e o n acas e-b y -cas e ba si s, t ak in g i nt o a cco un t al l o f th e p ert in en t fa ct s an d c irc um st an ces . See s ec. 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. W e co nc lu de th atth e ex ag ge rat edlo gs ne ga te th e g oo d fa ith o f pe ti ti on ers in cla im in g re nt al lo ss es ag ai ns t the ir e arn edin co m e. Pet it io ne r te st ifi edth atsh e co nf irmed he r st atus as areal est at e p ro fes si on al with h er t ax pre pa rer b y co m pl et in g ach eck li stof que st io ns as t o qua li fic at io ns forth atst atus . Becau se sh e kne w whatwas re qu ire d, s he is ch arg eab le with kno wled ge th atsh e d idno t- 9 -

sa ti sf y th os e requi rem en ts . The p rep arerdi d n ottes ti fy . Thu s we h av e n o ev id en ce as to th e co m

pe te nc e an d e xp ert is e o f th e p rep arer , anditap pe ars th atth e pr ep arerrel ie d s ol el y

on pe ti ti on ers ’ rep res en ta ti on s as to th ei r act iv it ie s re la ti ng to th e ren ta l p ro pe rti es . If th e rep res en ta ti on s t o the tax pre pa rer wer e th e sa m e as th e co nt en ti on s i n thi s C ou rt, the pre pa rer was no t p ro vi de d wi th accu rat e in fo rm at io n. Un de r th os e ci rcu m st an ces , pet it io ne rs were n oten ti tl edto rel y on th e p rep arer . See Neo na to lo gy Asso cs ., P.A. v. Co m m is si on er, 1 15 T.C. 43 , 99 (2 00 0) , aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2) . They are l iabl e fo r th e se ct io n 6 66 2( a) pe na lty for subs tant ia l u nd ers ta te m en ts of i nc om e ta x fo r eac h year. W e h av e co ns id eredth e o th er ar gu m en ts of t he pa rti es , andth ey are n ot m at eri al to ou r co nc lu si on s. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red un de r Ru le 15 5.