T.C. Sum m ary Opi ni on 20 15 -2 7

UNITED STAT ES TAX COURT

RICHARD S. LEYHAND EL LEN P. O’ NEILL, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 29 90 8- 13 S. Fi le d Ap ril 13 , 20 15 .
Ri ch ardS. Leyh a ndEll enP. O’ Neil l, p ro ses e. Bro ok e S. Laurie , forres po nd en t.

SUMM ARY OPINION GERBER, Jud ge : Th is cas e was he ardpu 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 . 1

Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o 1 th e In te rn al Rev enue Co de ineffe ctforth e y ear i n i ss ue , andall Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d P ro cedur e.- 2 -

Purs ua ntto 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 ot he r co urt, an d thi s o pi ni on sh al l n otbe tre at edas p rece de ntforan y ot he r cas e. Res po nd en t d et erm in eda $1 2,0 11 in co m e ta x d efi ci en cy an d a$2 ,40 4.2 0 s ect io n 66 62 (a) p en al ty for p et it io ne rs ’ 20 10 tax ab le y ear. Th e is su es forour co ns id erat io n a re: (1) whet he r pe ti ti on er Ell enP. O’ Neil l p erfo rm edm or e th an 75 0 h ou rs of s erv ic es inhe r ren ta l re al est at e act iv ity so as t o b e en ti tl edto de du ct lo ss es fro m

no n- pa ss iv e-ac ti vi ty inc om e wit hi n t he m ean in g o f se ct io n 4 69 , and (2 ) whe th er p et it io ne rs are l iabl e fo r th e acc ur acy-rela te d p en al ty und er s ect io n 66 62 (a). Bac kg ro un d Pet it io ne rs res id edinth e v ic in ity of Au st in , Texa s, atth e ti m e th ei r pe ti ti on was fil ed . Elle n P . O’ Neil l (p et it io ne r) wo rk edreg ul arl y inth e ren ta l re al est at e act iv ity . Mr. Leyh a ls o wo rk edful l t im e b utwas n oten ga ge d i n t he ren ta l re al es ta te act iv ity . The real est at e act iv ity

in vo lv edpe ti ti on ers ’ own ers hi p o f 12 ren ta l pr op ert ie s. Pet it io ne r was res po ns ib le for th e o pe rat io n o f th e ren ta l re al est at e act iv ity an d h adbe enso en ga ge d fo r a num be r of y ears . Elev enof t he pro pe rti es were s in gl e fam il y

res id en ces , andon e was a co nd om in iu m un it . Peti ti on er pe rfo rm edso m e o f th e rep ai rs an d m os t o f th e m ai nt en an ce o n t he pro pe rti es . For- 3 -

ex am pl e, if a te na ntcal le d abo uta pl um bi ng or app li an ce p ro bl em , pet it io ne r wou ldpe rs on al ly reso lv e th e p ro bl em . Add it io na ll y , sh e h an dl edth e ren ta l act iv ity , in cl ud in g a dv ert is in g fo r, in te rv ie win g, an d v et ti ng of p ot en ti al ten an ts . Sh e d idall of the pape rwo rk , bo okke ep in g, an d re se arch forpo te nt ia l p ro pe rti es to pu rch as e. Duri ng 20 10 pe ti ti on er p erfo rm edex te ns iv e res earc h re gard in g po te nt ia l Fl or id a ren ta l p ro pe rti es foracqui si ti on . Pet it io ne rs res id edon a ran chinDrip pi ng Sp rin gs , Texa s, tha t was ap pr ox im at el y

26 to 30 m il es fro m

th e ren ta l p ro pe rti es , dep en di ng on th e ro ut e ta ke n. Th e 1 2 re nt al pro pe rti es were i n Au st in , Texa s, the dri ve to whi chto ok ap pr ox im at el y

42 to 55 m in ut es , aga in de pe nd in g o n t he rou te tak enan d the tra ffi c co nd it io ns . Pet it io ne r reg ul arl y

dro ve to th e Aus ti n a rea t o re so lv e p ro bl em s, p erfo rm m ai nt en an ce, an d a dm in is te r an d o pe rat e th e ren ta l p ro pe rti es . Peti ti on er m ai nt ai ne d aco nt em

po ran eo us lo g d et ai li ng th e type o f ren ta l p ro pe rty acti vi ty th atsh e en ga ge d i n e ach da y . Res po nd en t h adau di te d p et it io ne r’s returns for y ears be fo re 2 01 0, an d p et it io ne r ha d b eco m e aware of t he requi rem en ts for de du ct in g l os se s fr om

a ren ta l re al est at e act iv ity fro m no n- pa ss iv e in co m e. In pa rti cu lar, sh e kne w th atsh e h adto “ m at eri al ly” part ic ip at e inth e b us in es s b y sp en di ng 75 0 h ou rs or m or e in vo lv edinth e act iv ity du rin g t he tax ab le y ear.- 4 -

Whe n i t ca m e ti m e to ha ve th e 2 01 0 i nc om e ta x re tu rnpre pared , pet it io ne rs ’ return p rep arerfro m

earl ie r y ears was n otav ai labl e an d p et it io ne r sp en t t im e se arch in g fo r a certi fie d p ub li c acc ou nt an t (C .P.A.) to pre pa re p et it io ne rs ’ 20 10 return. Pe ti ti on ers pro vi de d the ir i nf orm at io n, i nc lu di ng in fo rm at io n re ga rd in g the ren ta l re al est at e act iv ity , to th e C.P.A., an d t he y de du ct eda $6 9,5 31 lo ss fro m th e ren ta l re al est at e act iv ity

on th ei r return t o re du ce the ir n on -p as si ve -act iv ity in co m e. Res po nd en t ex am in edth e 2 01 0 re tu rn , andpe ti ti on ers off eredpe ti ti on er’s lo g i n s up po rt o f th ei r po si ti on th atth ey were en ti tl edto de du ctth e rea l es ta te lo ss es fro m

th ei r no n- pa ss iv e-ac ti vi ty inc om e. Altho ug h t he lo g d et ai le d t he da te s, types of a ct iv ity , andnu m be r of ho ur s tha t p et it io ne r sp en t i n the act iv ity , th e nu m be r of ho ur s s pe nttrave li ng fro m pe ti ti on ers ’ res id en ce t o the ren ta l p ro pe rti es ha d n otbe enin cl ud ed . The o rig in al lo g t ha t the y pre se nt edto res po nd en t dur in g th e au di t ac co un te d fo r 63 2.5 ho ur s s pe ntinth e rea l es ta te act iv ity . Pet it io ne r rev is edan d re subm it te d t he lo g t o re fle ctth e h ou rs sp en t tra ve li ng to th e p ro pe rti es , bu t re sp on de ntrefu se d t o a ccep t the ad di ti on al ho ur s. W itho utth e tr av el ti m e, th e h ou rs inth e lo g t ot al edles s tha n t he th res ho ldof 7 50 ho ur s. In cl ud in g the tra ve l t im e, pe ti ti on er’s h ou rs to ta le d 8 46 , exc eed in g t he 75 0- ho urth res ho ldby alm os t 1 00 ho ur s.- 5 -

Pet it io ne r’s m etho do lo gy in re vi si ng th e lo g was to de te rm in e whe th er the act iv ity foran y day refl ect edinth e lo g t oo k p la ce i n Au st in or n ear h er re si de nc e in Drip pi ng Sp rin gs . For e ach oc cas io n wh ere t he act iv ity oc curredinAus ti n, s he co m pu te d a45 -m in ut e tr ip or 1 -1 /2 ho ur s ro un d t rip forth atda y . For e xa m pl e, on a p art ic ul ar d ay

th atrefl ect edon ly 1-1 /2 ho ur s i nv ol ve d i n t he act iv ity inAus ti n, pe ti ti on er ad de d 1 -1 /2 ho ur s fo r th e tr av el to Aus ti n fr om he r ho m e in Drip pi ng Sp rin gs , fora to ta l o f th ree h ou rs en ga ge d i n t he act iv ity forth atda y . Dis cu ss io n The pri m ary is su e is th e n arro w andpu rel y factua l que st io n o f whe th er pe ti ti on er s pe nt75 0 h ou rs or m or e as a real est at e p ro fes si on al in vo lv edinhe r ren ta l re al est at e act iv ity . Res po nd en t co nc ed es th atpe ti ti on er m eet s al l o th er requi rem en ts to be en ti tl edto de du ctlo ss es fro m a ren ta l re al est at e act iv ity fro m no n- pa ss iv e in co m e. Gen eral ly, se ct io n 4 69 di sa ll ows a de du ct io n a ttrib ut ab le to a “pa ss iv e act iv ity lo ss ” th atis us edto reduc e n on -p as si ve -act iv ity in co m e fo r an y

tax ab le y ear. Se c. 46 9( a), (d )(1 ). A “pa ss iv e act iv ity ” is a bu si ne ss inwhi chth e ta xp ay er do es no t “ m at eri al ly part ic ip at e.” Sec . 46 9( c)(1 ). Mat eri al pa rti ci pa ti on inan act iv ity is reg ul ar, co nt in uo us , andsubs tant ia l i nv ol ve m en t. Sec . 46 9( h) (1 ).- 6 -

Fo r pu rp os es of d et erm in in g wh ethe r a t ax pa y er i s a r eal est at e p ro fes si on al , a ta xp ay er’s m at eri al pa rti ci pa ti on is de te rm in edsep arat el y with re sp ectto each ren ta l p ro pe rty un le ss th e ta xp ay er m ak es anele ct io n t o t reatall in te res ts inren ta l real est at e as a si ng le ren ta l re al est at e act iv ity . Sec. 4 69 (c)( 7) (A); sec . 1.4 69
- 9( e)(1 ), In co m e Tax Reg s. Pet it io ne rs m ad e anele ct io n t o t reatth ei r ren ta l pr op ert ie s as a si ng le act iv ity . Accor di ng to sec ti on 1.4 69 -9 (g )(1 ), In co m e Tax Reg s., thi s el ect io n i s b in di ng forth e ta xabl e y ear i n i ss ue . Ren ta l ac ti vi ty, ho wev er, i s g en eral ly treat edas p as si ve pe r se reg ard le ss of whe th er the re i s m at eri al pa rti ci pa ti on . Sec. 4 69 (c)( 2) , (4) . Peti ti on er, h owe ve r, se ek s t o qua li fy

un de r se ct io n 4 69 (c)( 7) (B), wh ic h p ro vi de s tha t a r eal est at e pr of es si on al m ay

en ga ge ina no np as si ve real est at e b us in es s i f he or s he m eet s cert ai n re qu ire m en ts . In p art ic ul ar, the tax pa y er’s ren ta l ac ti vi ty w il l n otbe pe r se pa ss iv e if he or s he m eet s two re qu ire m en ts . Firs t, m or e th anon e-h al f of th e pe rs on al servi ces pe rfo rm edby the tax pa y er i n t rad es or b us in es se s ar e p erfo rm ed in th e rea l p ro pe rty trad es or b us in es se s i n wh ic h the tax pa y er m at eri al ly pa rti ci pa te s. Sec on d, the tax pay er p erfo rm s m or e th an75 0 h ours of s erv ic es du rin g the tax y ear i n the real pro pe rty trad es or b us in es se s i n wh ic h t he tax pa y er m at eri al ly part ic ip at es . Sec. 4 69 (c)( 7) (B)( i) a nd(ii ); S ha w v. Co m m is si on er, T.C. Mem o. 2 00 2- 35 ; Ba il ey

v. Co m m is si on er, T.C. Mem o. 2 00 1- 29 6.- 7 -

Res po nd en t ag rees th atpe ti ti on er m at eri al ly part ic ip at edan d s pe ntm or e th anon e-h al f of

he r ti m e inth e ren ta l re al est at e act iv ity bu t d oe s n otag ree t ha t pe ti ti on er p erfo rm ed75 0 h ou rs of s erv ic es inth e act iv ity . Res po nd en t co nt en ds th atpe ti ti on er d idno t m eetth e 7 50 -h ou r te stbe cau se th e h ou rs rep orte d i n t he or ig in al lo g p res en te d t o re sp on de ntfel l s ho rt o f th e 7 50 -h ou r requi rem en t. Res po nd en t fu rth er co nt en ds th atpe ti ti on er’s rev is edlo g was in su ffi ci en t t o rem edy th e p erce iv edsh ortfa ll inth e o rig in al lo g. The pe rti ne ntrequi rem en ts are s etforth insec ti on 1.4 69 -5 T(f)(4 ), Tem po rary Inco m e Tax Reg s., 5 3 F ed . Reg . 57 27 (Feb . 25 , 19 88 ), as fol lo ws: The ex te ntof a n i nd iv idua l’s p art ic ip at io n i n a n a ct iv ity m ay be es tabl is he d b y

any reas on ab le m ean s. Co nt em po ran eo us da il y

ti m e rep orts , lo gs , or s im il ar d oc um en ts are n otrequi redif the ex te ntof su chpa rti ci pa ti on m ay

be est ab li sh edby oth er re as on ab le m ean s. Rea so nabl e m ean s fo r pu rp os es of t hi s p arag rap h m ay in cl ud e b utare no t l im it edto th e id en ti fic at io n o f se rv ic es pe rfo rm edov er a p eri odof ti m e an d the ap pr ox im at e num be r of ho ur s s pe ntpe rfo rm in g s uc h se rv ic es du rin g s uc h p eri od , bas edon ap po in tm en t b oo ks , cal en da rs , orna rrat iv e su m

m ari es . The foc al po in t o f th e co nt ro ve rs y , th eref or e, is whet he r pe ti ti on er’s rev is ed lo g i s s uf fic ie ntto sh ow tha t s he sp en t atlea st75 0 h ou rs inth e act iv ity . W e h ol d th atitis . The reco rdrefl ect s tha t p et it io ne r ke pta co nt em po ran eo us lo g a nd accu rat el y

reco rd edhe r ren ta l re al est at e act iv ity for each da y sh e en ga ge d i n the- 8 -

act iv ity . The t ot al ho ur s o rig in al ly recor de d o n t he lo g, h owe ve r, di d n otacco un t fo r pe ti ti on er’s trav el ti m e fro m he r Drip pi ng Sp rin gs ho m e to Aus ti n. Acco rd in gl y , pet it io ne r id en ti fie d t ho se da y s tha t s he was i n Au st in an d i nv ol ve d in th e act iv ity

an d a dd ed1-1 /2 ho ur s fo r tr av el to an d fr om he r ho m e in Drip pi ng Sp rin gs . W ith tho se ad di ti on al ho ur s, p et it io ne r wou ldha ve m etth e th res ho ld ho urrequi rem en t o f th e reg ul at io n. Res po nd en t, h owe ve r, co nt en ds th atth e ti m es on th e o rig in al lo g wer e in cl us iv e o f al l o f pe ti ti on er’s act iv ity tra ve l. Pet it io ne r te st ifi edan d h adcle ar an d cri sp reca ll of t he act iv ity refl ect edon th e lo g a ndwas e as il y ab le to id en ti fy

th os e oc cas io ns when th e act iv ity oc cu rredinAus ti n. Re sp on de nt ’s cou ns el cro ss ex am in edpe ti ti on er b utwas abl e to sh ow o nl y a few m in ordi sc rep an ci es th at pe ti ti on er ad m it te d wer e in erro r. Alt og ethe r, pe ti ti on er h as sh own th atsh e sp en t m or e th an75 0 h ours en ga ge d i n t he ren ta l re al est at e act iv ity du rin g 2 01 0. Res po nd en t re li es ona se rie s o f Mem or an du m Opi ni on s o f th is Co urt wh ere th ere was in ad equa te reco rdke ep in g a ndin su ffi ci en t ev id en ce t o s up po rt t he th res ho ldho urrequi rem en t. Inth os e cas es , th e Co urt re co gn iz edth atth e reco rdke ep in g re qu ire m en ts of t he reg ul at io ns are s om ewh atam bi gu ou s co nc ern in g the reco rd s t o b e m ai nt ai ne d b y tax pa y ers bu t tha t the reg ul at io ns do no t al lo w a po st ev en t “ba ll parkgu es st im at e”. See Bai le y v. Co m m is si on er, T.C.- 9 -

Mem o. 2 00 1- 29 6; Sp eer v . Comm is si on er, T.C. Mem o. 1 99 6- 32 3; Gos ho rnv. Co m m is si on er, T.C. Mem o. 1 99 3- 57 8. Tho se cas es di d n otin vo lv e a d et ai le d c on te m po ran eo us lo g s uc h a s the on e pe ti ti on er m ai nt ai ne d. Pe ti ti on er p ro vi de d d ay -b y -d ay ex pl an at io ns of the sp eci fic ren ta l re al est at e act iv ity

inhe r lo g. Fu rth er, fro m th e lo g i t was eas y

to id en ti fy da y s wh enth e act iv ity

to okpl ace i n Au st in . Fin al ly, pe ti ti on er h as sh own th atth e tra ve l t im e was no t i nc lu de d i n the ori gi na l l og . Peti ti on er’s l og an d h er re vi se d lo g s ho win g the tra ve l t im e are well withi n t he gu id el in es of s ect io n 1 .46 9- 5T(f )(4 ), Tem po rary Inco m e Tax Reg s., s up ra. Acco rd in gl y , pet it io ne rs are en ti tl edto ap pl y th e lo ss es fro m

th e rea l es ta te act iv ity ag ai ns t the ir n on -p as si ve -act iv ity in co m e, an d t he y

ha ve sh own th at res po nd en t’s d et erm in at io n i s i n e rro r. Becaus e we h ol d t ha t p et it io ne rs are en ti tl edto th e d is al lo wedlo ss de du ct io n, the re i s n o u nd erp aym en t o f in co m e ta x an d the accu racy-rela te d p en al ty of se ct io n 6 66 2( a) i s, the refo re, n otap pl ic ab le . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor pe ti ti on ers .