T.C. Sum m ary Opi ni on 20 13 -4 3

UNITED STAT ES TAX COURT

PETER H. HOFINGA A

ND MARGARET M. W ONG, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 21 70 4- 09 S. Fil edJu ne 3, 2 01 3.

Sh an no n Gal la gh er, fo r pe ti ti on ers . Seb as ti anVoth, fo r res po nd en t.

SUMM ARY OPINION CARLUZZO, Spec ia l Tri al Ju dg e: Thi s ca se was h eardpu rs ua ntto th e pr ov is io ns of s ect io n 7 46 3 o f th e In te rn al Rev enue Co de ineffe ctwhen th e-2
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pe ti ti on was fi le d. Pur su an t t o s ect io n 7 46 3( b) , th e d eci si onto be en te redis no t 1
rev ie wab 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 nt fo r an y othe r cas e. Ina no ti ce o f de fic ie nc y

date d Au gu st21 , 20 09 , res po nd en t d et erm in ed de fic ie nc ie s o f $2 3,7 06 an d $ 27 ,65 3 i n p et it io ne rs ’ 20 06 an d 2 00 7 F ed eral in co m e ta x, re sp ect iv el y . The i ss ue forde ci si on for each y ear i s wh ethe r pe ti ti on ers are en ti tl edto a de du ct io n fo r a ren ta l re al est at e lo ss . The res ol ut io n o f th e is su e de pe nd s upo n wh ethe r Pet er H. Hof in ga(pe ti ti on er) i s a t ax pay er d es cri be d i n se ct io n 4 69 (c)( 7) for

eit he r y ear i n i ss ue .

Bac kg ro un d So m e o f th e fac ts ha ve be enst ip ul at edan d are s o fo un d. Atth e ti m e th e pe ti ti on was fi le d, p et it io ne rs res id edinCal ifo rn ia
. Ove r th e y ears aft er the y

m arri edin19 82 , pet it io ne rs pu rch as ed , andas ne ces sa ry ren ov at edan d re m od el ed , res id en ti al real est at e p ro pe rti es th atth ey he ld fo r ren t. As o f th e cl os e o f 20 06 , pet it io ne rs own edeig htren ta l p ro pe rti es ; as of th e cl os e o f 20 07 , pet it io ne rs own edni ne ren ta l p ro pe rti es (co ll ect iv el y , ren ta l pr op ert ie s) . Becau se of a n e le ct io n the y m ad e fo r Fed eral in co m e ta x p ur po se s, Unl es s o th erwi se in di cat ed , sec ti on refe ren ces are t o the Int ern al Rev enue 1 Co de of 1 98 6, as am en de d, i n e ffec t fo r th e y ear i n i ss ue . Rul e ref eren ces are t o th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e.-3
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pe ti ti on ers ’ in te res ts inth e ren ta l p ro pe rti es are treat edas o ne act iv ity . See s ec. 46 9( c)(7 )(A). Befo re re ti rin g i n 1 99 3 p et it io ne r was em pl oyed as a so ccerco ach an d pr of es so r of ph y si cal educ at io n b y

th e Uni ve rs ity

of C al ifo rn iaIrv in e (UCI) . He
was no t em

pl oyed i n any capa ci ty dur in g e ithe r y ear i n i ss ue . At al l t im es rel ev an t, Ma rg aretM. W on g (M rs . W on g) was a ls o e m pl oyed b y UCI. As b etweenth e two of t he m , pet it io ne r was m or e res po ns ib le forth e m an ag em en t o f th e ren ta l p ro pe rti es . For the m os t p arthe di d s o fr om hi s de n/ of fic e in pe ti ti on ers ’ res id en ce. Ro ut in el y an d re gu larly he rev ie wedan d p ai d
va rio us bi ll s, co ns id eredan d m ad e arr an ge m en ts forrep ai rs , arran ge d fo r th e pu rch as e o f supp li es , rev ie wedren ta l ap pl ic at io ns , fro m ti m e to ti m e in sp ect eda ren ta l p ro pe rty for v ari ou s re as on s, an d s up erv is edan d/ orm ad e th e arr an ge m en ts fo r ren ov at in g andrem od el in g aren ta l p ro pe rty whenne ces sa ry . Neithe r pe ti ti on er, h owe ve r, ke ptan y so rt o f co nt em

po ran eo us lo g o r rec or d tha t s ho ws the
am ountof t im e ei th er s pe nt , or s pe ci fic servi ces eit he r pr ov id ed , with re sp ectto
an y sp eci fic ren ta l p ro pe rty onany sp eci fic da te . Pet it io ne rs als o e m

pl oyed p ro pe rty m an ag ers forso m e o f th e ren ta l pr op ert ie s. Ro ut in el y , th e p ro pe rty m an ag ers were re sp on si bl e fo r co ll ect in g re nt , res po nd in g t o i nqui rie s o r co m pl ai nt s fr om

ten an ts , andm ak in g/ supe rv is in g-4
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rep ai rs , th e co st s o f whi chdi d n otex ceeda de si gn at edam ountsetby pet it io ne rs . Inad di ti on to th e fee s p ai d t o the pro pe rty m an ag ers , a rev ie w of p et it io ne rs ’ Fed eral in co m e ta x re tu rn s fo r th e y ears inis su e sh ows de du ct io ns forex pe ns es at tri bu tabl e to th e ren ta l p ro pe rti es forcle an in g, m ai nt en an ce, g ard en in g, p es t co nt ro l, p lu m

be rs , ele ctric ians , andco m m is si on s. On the ir 2 00 6 and20 07 Fed eral in co m e ta x re tu rn s, p et it io ne rs de du ct ed lo ss es of $ 11 1,0 42 an d $ 14 1,1 33 , res pe ct iv el y , attrib ut ab le to th e ren ta l p ro pe rti es (ren ta l p ro pe rty los se s) . If th e ren ta l p ro pe rty los se s ar e n ottak enin to acco un t, th enpe ti ti on ers ’ ad

jus te d g ro ss in co m e as rep orte d o n e ach of t ho se returns wou ld
ex ceed$1 50 ,00 0. The ren ta l p ro pe rty los se s ar e d is al lo wedinth e n ot ic e o f de fic ie nc y . Acco rd in g t o re sp on de nt ’s exp lana ti on , “ [r]ent al act iv it ie s o f an y ki nd , reg ard le ss of m at eri al parti ci pa ti on , are co ns id eredpa ss iv e act iv it ie s u nl es s the requi rem en ts of sec ti on 46 9( c)(7 ) of

th e In te rn al Rev enue Co de are m etintax y ears be gi nn in g aft er Dece m

be r 31 , 19 93 ”. Acco rd in g t o re sp on de nt , th os e “ requi rem en ts ”, whi ch wil l b e m or e fu ll y

di sc us se d b el ow, h av e n otbe en“ m et ”. Oth er ad jus tm en ts m ad e inth e n ot ic e o f de fic ie nc y are co m pu ta ti on al an d wi ll no t b e d is cu ss ed
.-5
- Dis cu ss io n The ex pl an at io n fo r th e d is al lo wan ces of t he ren ta l p ro pe rty los se s p ro vi de d inth e n ot ic e o f de fic ie nc y in cl ud es term s o f art , su chas “ m at eri al parti ci pa ti on ”
an d “pa ss iv e act iv it ie s” , whi chare u se d andde fin edinsec ti on 46 9 andit s co rres po nd in g re gu la ti on s. Inanart ic le publ is he d i n the Octo be r 24 , 20 11 , edi ti on of Tax No te s, Pr of

es so r Geo rg e S. Ja ck so n s tate s tha t s ect io n 4 69 co nt ai ns “ al m os t 4,5 00 word s” (we d idno t co un t) a nd“ ex em pl ifi es why fed eral tax law i s in co m pr eh en si bl e fo r m os t ci ti zen s.” Geo rg e S. Ja ck so n, “ Pas si ve Acti vi ty Lim it at io ns : Ti m e fo r a New Par ad ig m ? ”, 13 3 Tax Not es 44 7, 4 59 (20 11 ). Des cri bi ng sec ti on 46 9 a s “ in co m pr eh en si bl e” i s p ro babl y

anov ers tate m en t; th at se ct io n, h owe ve r, is hard ly unc om pl ic at ed
. The d is pu te be twee n the parti es in

2 th is cas e, ho wev er, al lo ws u s t o a vo ida di sc us si on of m an y of t he co m

pl ex it ie s o f
se ct io n 4 69 , anda su m

m ari zat io n o f th e rel ev an t p ro vi si on s o f th atsec ti onis
su ffi ci en t.

Sec. 4 69 was e na ct edas p artof t he Tax R efo rm Act o f 19 86 , Pub . L. No. 2 99 -5 14 , sec . 50 1, 1 00 Sta t. at22 33 , to pre ve ntaffe ct edtax pa y ers fro m us in g de du ct io ns fro m

a pa ss iv e act iv ity

to sh el te r wag es or o th er ac ti ve in co m e. See ge ne ral ly Staff o f J. Co m m . onTaxa ti on , Gene ral Exp lana ti on of t he Tax R efo rm Act o f 19 86 , at 2 09 -2 15 (J. Co m m . Prin t 1 98 7)
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Inge ne ral an d a s re le va nthe re, anin di vi du al is no t en ti tl edto a de du ct io n fo r a p as si ve act iv ity

lo ss in curreddu rin g the tax ab le y ear. Se e se c. 46 9( a). A pa ss iv e act iv ity

is an y act iv ity whi chin vo lv es th e co nduc t o f an y tra de or b us in es s inwhi chth e ta xp ay er d oe s n otm at eri al ly part ic ip at e. See s ec. 4 69 (c)( 1)
.

“ Mat eri al parti ci pa ti on ” is de fin edge ne ral ly in the st atut e an d m or e sp eci fic al ly in th e reg ul at io ns . See s ec. 4 69 (h ); s ec. 1 .46 9- 5T, Tem po rary Inco m e Tax Reg s., 5 3 Fed . Reg . 57 25 (Feb . 25 , 19 88 ). Inge ne ral , a ren ta l ac ti vi ty is treat edas apa ss iv e act iv ity reg ard le ss of whe th er the tax pa y er m at eri al ly part ic ip at es . See s ec. 4 69 (c)( 2) , (4) . There are two ex cep ti on s t o thi s g en eral rul e, eac h s ub ject t o avarie ty of li mit at io ns an d
co nd it io ns if the tax pa y er’s ren ta l ac ti vi ty is a re al est at e ren ta l ac ti vi ty. One o f th os e ex cep ti on s, wh ic h a ll ows a li m it edde du ct io n i f a t ax pa y er ac ti ve ly pa rti ci pa te s i n the ren ta l re al est at e act iv ity , is no t re le va nthe re b ecau se pe ti ti on ers ’ ad

jus te d g ro ss in co m e, as th atterm is de fin edinsec ti on 46 9( i)( 3) (F),
ex ceed s $ 15 0,0 00 foreach y ear i n i ss ue . See s ec. 4 69 (i) (2 ) an d (3 )(A). The rel ev an t ex cep ti onis fou ndinsec ti on 46 9( c)(7 ). If a t ax pa y er i s de sc rib edinth atsec ti on (so m et im es th attax pa y er i s re ferr edto as a“ real est at e pr of es si on al ”), the n s ect io n 4 69 (c)( 2) do es no t ap pl y an d the tax pa y er’s ren ta l re al
es ta te act iv ity , if co nduc te d a s a t rad e o r bu si ne ss or f orth e p ro du ct io n o f in co m e,-7
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is no t treat edas apa ss iv e act iv ity if the tax pa y er m at eri al ly part ic ip at es inth e act iv ity . Sec. 4 69 (c)( 1) ; Fo wlerv. Co m m is si on er, T.C. Mem o. 2 00 2- 22 3; sec . 1.4 69 -9 (e), In co m e Tax Reg s. W e n eedno t g etin to th e co m pl ic at edde fin it io n o f th e te rm “ m at eri al pa rti ci pa ti on ” se t fo rth insec ti on 46 9( h) an d i ts co rres po nd in g re gu la ti on s. Keep in g tha t d efi ni ti on inm in d, an d b ecau se pe ti ti on ers ele ct edto tre atth e ren ta l pr op ert ie s as a si ng le act iv ity , we are s at is fie d tha t the y m at eri al ly part ic ip at edin th e ren ta l p ro pe rty acti vi ty dur in g e ach y ear i n i ss ue , andres po nd en t d oe s n ot se em to su gg es t o th erwi se . Ins te ad , th e d is ag reem en t b etweenth e p art ie s fo cu se s on whet he r pe ti ti on er i s a t axpa y er d es cri be d i n s ect io n 4 69 (c)( 7)
. Acco rd in g t o 3 pe ti ti on ers , he i s; acco rd in g t o re sp on de nt , he i s n ot . Sect io n 4 69 (c)( 7) co nt ai ns two tes ts th ata ta xp ay er m us t s at is fy

to be de sc rib edinth atsec ti on . One re qu ire s tha t the tax pa y er p erfo rm m or e th an75 0 ho ur s o f se rv ic es 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 whi chth e ta xp ay er m at eri al ly part ic ip at es . See s ec. 4 69 (c)( 7) (B)( ii ). The o th er requi res th at“ m or e th anon e-h al f of th e p ers 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 s uc h t ax ab le y ear are p erfo rm edinreal pro pe rty tra de s o r bu si ne ss es inwhi chth e ta xp ay er m at eri al ly part ic ip at es ”. See s ec. Mrs . W on g d oe s n otcla im to be a ta xp ay er s o d es cri be d. 3-8
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46 9( c)(7 )(B) (i) . Becau se pe ti ti on er was no t o th erwi se em pl oyed dur in g e ithe r y ear inis su e, we ne edturnou r at te nt io n o nl y to th e fi rs t t es t (t he 75 0- ho urtes t). Id eal ly, a ta xp ay er wh o c la im s t o b e d es cri be d i n s ect io n 4 69 (c)( 7) wou ld
m ai nt ai n aco nt em

po ran eo us lo g o r reco rdsh owi ng with p art ic ul ari ty the am ou nt of ti m e d ev ot edto th e ren ta l re al est at e act iv ity onanev en t-b y -ev en t b as is . See
se c. 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 ). Ide al ly, th e lo g wo ul d b e d et ai le d e no ug h t o a ll ow fo r so m eo ne who
rev ie weditto m ak e anin fo rm edjud gm en t as to th e acc ur acy of th e in fo rm at io n rep orte d. Th e cre at io n andav ai labi li ty of a d et ai le d l og is im po rta nt , esp eci al ly if th atrev ie win g “ so m eo ne ” is anInt ern al Rev enue Serv ic e em pl oyee co ns id eri ng th e lo g i n c on ne ct io n wi th anex am in at io n o f th e ta xp ay er’s return o n wh ic h re nt al real est at e lo ss es are d educ te d. Ap pa ren tl y , pet it io ne rs were n otaware o f th e im po rta nc e o f ke ep in g s uc h alo g and , as n ot ed , nei th er k ep t a l og du rin g e ithe r y ear i n i ss ue . Rec og ni zi ng th atm an y

tax pa y ers m ig htno t b e aware of t he im po rta nc e o f ke ep in g aco nt em

po ran eo us lo g o f ti m e d ev ot edto th e ta xp ay er’s ren ta l re al est at e act iv ity , th e Co m

mis si on er’s reg ul at io ns pro vi de a se co nd -b es t al te rn at iv e. Sect io n 1 .46 9- 5T(f

)(4 ), Tem po rary Inco m e Tax Reg s., s up ra, p ro vi de s:-9
- (4 ) Met ho ds of p ro of

. The ex te ntof a n i nd iv idua l’s pa rti ci pa ti on inanact iv ity m ay be est ab li sh edby 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 do cu m en ts are n otrequi redif the ex te ntof s uc h p art ic ip at io n m ay be es tabl is he d b y

othe r rea so nabl e m ean s. Re as on ab le 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 n otli m 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 t im 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 s erv ic es du rin g su chpe rio d, b as edonap po in tm en t b oo ks , cal en dars , or n arrati ve su m m ari es . Altho ug h p et it io ne rs di d n otm ai nt ai n c on te m po ran eo us lo gs of t he ti m e de vo te d t o the ir r en ta l re al est at e act iv ity , th ey tri edto est ab li sh pe ti ti on er’s pa rti ci pa ti on by oth er re as on ab le m ean s (e .g., n on co nt em po ran eo us lo gs ba se d o n pe ti ti on ers ’ reco rd s) inco m pl ianc e with s ect io n 1 .46 9- 5T(f )(4 ), Tem po rary In co m e Tax Reg s., s up ra. Dur in g the ex am in at io n o f th e y ears he re i n d is pu te , and inres po ns e to a reque stby the ex am in in g a ge nt , Mrs . W on g p rep aredsev eral set s of lo gs sh owi ng est im at es of t im e sp en t o n v ari ou s ev en ts . Accor di ng to Mrs . W on g, s he us edcal en da rs , ban k s ta te m en ts , cred itcardreco rd s, p ro pe rty tri p fi le s, bi ll s, re cei pt s, an d o th er re co rd s t o c on st ru ctth e lo gs . Accor di ng to pe ti ti on ers , th es e lo gs est ab li sh th atpe ti ti on er h as sat is fie d the 75 0- ho urtes t. Acco rd in g t o res po nd en t, the y

do no t. Fo r th e fo ll owi ng reas on s, we ag ree wi th res po nd en t. The est im at es of t im e sh ownforso m e en tri es onth e fi rs t s etof l og s M rs . W on g p rep aredin cl ud e a co m bi na ti onof t im e sp en t b y bo th pe ti ti on ers . For-1 0-

pu rp os es of t he 75 0- ho urtes t, h owe ve r, on ly the ho ur s p et it io ne r sp en t ar e ta ke n in to acco un t. See sec . 46 9( c)(7 )(B) . Havi ng ha d thi s p ro bl em po in te d o utto he r du rin g the ex am in at io n, s he pre pa reda se co ndsetof l og s u si ng a ge ne ral iz ed al lo cat io n o f ti m e sp en t b y each of t he m . For t he m os t p art , sh e supp orte d the al lo cat io n o f ti m e o n the ba si s o f th e am ou ntof t im e p et it io ne r sp en t i n h is de n/ of fic e atth ei r res id en ce. The l og s co nt ai n g en eral iz eden tri es su chas: 4 Hours Hour s Addre ss Week of (Petitioner) ( Mrs. Wong) D escription All properties 2/6/2006 8 -- - Pay ment of bills, filing of bills, paper work, monthly

statement revie ws, cross- chec king, ke epingin touch with proper ty manag ement companies All properties 2/13/2007 9 1 Pay ment of bills, filing of bills, paper work, monthly

statement revie ws, cross- chec king, ke epingin touch with proper ty manag ement companies

Pet it io ne r’s he al thpre ve nt edhi s ap pe aran ce attri al . The tria l was 4 co nt in ue d twice to all ow fo r th e p os si bi li ty that h is he al th wou ldim pr ov e so th at he co ul d b e cal le d a s a wi tn es s. Bu t p et it io ne r’s he al th di d n otim pr ov e an d, as it tu rn edou t, o nl y

Mrs . W on g t es ti fie d o n p et it io ne rs ’ be ha lf wh enth e m at te r was tri ed . Her tes ti m on y

as t o wh athe was d oi ng whi le inhi s d en/o ffi ce an d o utof h er pr es en ce m ig htve ry

well ha ve be enob

jecti on ab le un de r Fed . R. Evi d. 6 02 an d 80 2, s ee s ec. 7 45 3, b utforpe ti ti on ers ’ se c. 74 63 ele ct io n. Be cau se th is cas e is subjec t t o tha t el ect io n, “ ev id en ce d eem edby the Co urt t o h av e p ro ba ti ve va lu e sh al l b e admis si bl e.” See Ru le 17 4( b) . Prob at iv e v al ue , ho wev er, d oe s n ot ne ces sa ril y

equa te to pe rs ua si ve effe ct .-1 1-

All properties 1/1/2007 9 1 Pay ment of bills, filing of bills, paper work, monthly

statement revie ws, cross- chec king, ke epingin touch with proper ty manag ement companies All properties 1/8/2007 7 1 Pay ment of bills, filing of bills, paper work, monthly

statement revie ws, cross- chec king, ke epingin touch with proper ty manag ement companies On the othe r ha nd , so m e o f th e en tri es inth e lo gs refe ren ce s pe ci fic pr op ert ie s an d p ro vi de a di st in ctde sc rip ti on , su chas: Hours Hour s Addre ss Week of (Petitioner) ( Mrs. Wong) D escription RPT-25 Park City

1/2/2006 4 --- Discuss winter renta ls, hot tub repa ir, roof r epair Miraflore s 4/3/2006 3 --- Walk-through inspection, assess patio cover , painting ne eds 82401 Odlum 4/23/2007 6 --- Work with handy man to identify repa irs, window cove ring s, installation Altho ug h we e xp ectpe ti ti on ers , inth ei r ro le of l an dl or ds , exp en de d si gn ifi can t t im e dur in g e ach y ear i n i ss ue pro vi di ng servi ces inco nn ect io n wi th th e ren ta l p ro pe rti es , we are u nabl e, fro m whatha s b eensubm it te d, t o qua nt ify the to ta l t im e th atpe ti ti on er s pe ntdo in g s o, an d we c anno t i gn or e th e d educ ti on s at tri bu tabl e to othe rs ’ pr ov id in g m an ag em en t an d m ai nt en an ce s erv ic es in
co nn ect io n wi th th e ren ta l p ro pe rti es . Sim pl y pu t, the lo gs do no t al lo w fora-1 2-

rev ie w of a ct iv ity

rel at edto th e ren ta l p ro pe rti es onanev en t-b y -ev en t b as is to th e ex te ntne ces sary

to est ab li sh th atth e 7 50 -h ou r te stha s b eensat is fie d. 5 Pet it io ne rs ha ve fai le d t o e st ab li sh th atpe ti ti on er s at is fie d the 75 0- ho urtes t fo r ei th er y ear i n i ss ue ; co ns eque nt ly, pe ti ti on er i s n ota ta xp ay er d es cri be d i n se ct io n 4 69 (c)( 7) for

eit he r of th os e y ears . Thatbe in g s o, p et it io ne rs ’ ren ta l re al
es ta te act iv ity

is tre at edas apa ss iv e act iv ity forbo th of t ho se y ears . It fo ll ows th atres po nd en t’s d is al lo wan ces of t he ren ta l p ro pe rty los se s at tri bu tabl e to th at act iv ity are s us ta in ed
. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red fo r res po nd en t.

Giv in g p et it io ne rs th e b en efi t o f th e d oubt , andke ep in g i n m in d the 5 in firm it ie s o f ti m e lo gs pre paredaft er the fact , see Mo ss v. Co m m is si on er, 1 35 T.C. 36 5, 3 69 (20 10 ) (we are no t re qu ire d t o a ccep t a p os te ve nt“ba ll pa rk gu es st im at e”); Bai le y

v. Co m m is si on er, T.C. Mem o. 2 00 1- 29 6 (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”), t o the ex te ntth atth e lo gs refe ren ce sp eci fic pro pe rti es or e ve nt s, atbe stth ey sh ow tha t p et it io ne r sp en t 3 79 .5 h ou rs du rin g 2 00 6 and52 6 h ou rs durin g 2 00 7 p erfo rm in g s erv ic es inco nn ect io n wi th th e ren ta l p ro pe rti es .