# 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 14 -1 03

UNITED STAT ES TAX COURT

HOWARD C. CANTOR AND PATRICIA M. ALLEN, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 20 85 8- 11 S. Fi le d No ve m be r 6, 2 01 4.

Darre n M ari e Lars en , forpe ti ti on ers . St ev enRo th , forres po nd en t.

SUMM ARY OPINION CARLUZZO, Spec ia l Tri al Ju dg e: Thi s ca se was h eardpu rs uantto 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 -

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 J un e 2 2, 2 01 1 (n ot ic e), res po nd en t de te rm in edde fic ie nc ie s o f $2 ,15 6 and$1 0,2 78 inpe ti ti on ers ’ 20 07 an d 2 00 8 Fed eral in co m e ta x, re sp ect iv el y , andim po se d a$9 87 .75 sec ti on 66 51 (a)( 1) ad di ti on to tax for20 08 . After c on ces si on s, the is su e fo r de ci si on is whet he r pe ti ti on ers are en ti tl edto de du ct io ns forlo ss es fro m th ei r ren ta l re al est at e act iv ity fo r ei th er y ear i n i ss ue . The res ol ut io n o f th e is su e d ep en ds up on whet he r Howard C. Can to r (p et it io ne r) i s a t ax pay er t o wh om sec ti on 46 9( c)(7 )(B) ap pl ie s fo r ei th er of th os e y ears . 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 . At al l t im es rel ev an t, p et it io ne r was th e o wne r of ABS Gla ss , a so le pr op rie to rs hi p o rg an iz edby him in19 91 . At fir st , ABS Glas s was inth e b us in es s of pro vi di ng au to m ob il e p art s. Lat er, the bu si ne ss foc us edonau to m ob il e 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 rel ev an t p eri od . 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 -

win ds hi el d re pa irs an d re pl acements . Starti ng inor aro un d 1 99 5, i n a dd it io n t o i ts au to gl as s b us in es s, ABS Glas s o ffer edservi ces m or e sp eci fic al ly des cri be d b el ow inco nn ect io n wi th res id en ti al bu il di ng s. 2 On M ay 4, 2 00 1, the State of C al ifo rn iais su eda “ C1 7- Glaz in g” co ntract or ’s li cen se to ABS Gla ss . The l ic en se rem ai ne d i n e ffec t fo r th e y ears inis su e. Acco rd in g t o the Cal . Cod e Reg s. t it . 16 , sec . 83 2.1 7 (2 00 6) : “ [A] glaz in g co ntract or

sel ect s, cu ts , ass em

bl es an d/ orin st al ls all m ak es an d k in ds of g la ss , gl as s wo rk , mirr or edgl as s, an d g la ss subs ti tu te m at eri al s fo r gl azi ng ; ex ecu te s the fab ric at io n andgl azi ng of f ram es , pan el s, s as he s an d d oo rs ; an d/ orin st al ls th es e it em s i n any struc tu re.” Dur in g the y ears inis su e an d thr ou gh ABS Gla ss , pet it io ne r pr ov id ed gl azi ng servi ces in vo lv in g: (1) rep ai rs an d/ orin st al lati onof aut om ob il e win ds hi el ds an d wi nd ows an d (2 ) rep ai rs an d/ orin st al la ti on of g la ss an d g la ss pr oduc ts inbu il di ng s. As de sc rib edby pet it io ne r, atso m e p oi ntdu rin g i ts hi st ory ABS Gla ss was d iv id edin to two work in g d iv is io ns : (1 ) an“ au to m ot iv e” d iv is io n an d (2 ) a “res id en ti al ” d iv is io n. Durin g the y ears inis su e th e b us in es s p rem is es of ABS Gla ss , a 1,5 00 -s qu are- fo otfaci li ty in Sant a Bar bara, Cal ifo rn ia , was d iv id ed Fo ll owi ng pe ti ti on er’s l ead , we us e th e te rm “ res id en ti al ” fo r co nv en ie nc e. 2 The reco rdsu gg es ts th atth e act iv it ie s re la te d t o “ res id en ti al ” p ro pe rti es m ig ht rel at e to co m

m erci al pro pe rti es as we ll .-4 -

in to at l eas t thr ee s ect io ns --o ne de di cat edto ge ne ral off ic e/m an ag em en t func ti on s, on e d ed ic at edto th e au to m ot iv e d iv is io n, an d o ne de di cat edto th e res id en ti al di vi si on . Dur in g the y ears inis su e p et it io ne r worke d app ro xi m at el y 45 to 50 ho ur s pe r weekat ABS Glas s. His rol e th ere was m uc h a s i s ex pe ct edfro m

a so le pr op rie to r. He m an ag edan d a ct iv el y parti ci pa te d i n a ll asp ect s o f th e b us in es s. He di d wh at ev er n eed edto be do ne inord er t o e ns ur e th e su cces s o f th e b us in es s, in cl ud in g, as de sc rib edby pet it io ne r, cl ean in g the bu si ne ss pre m is es when ne ces sary . Peti ti on er was m or e act iv el y in vo lv edwith the res id en ti al di vi si on of ABS Gla ss th anhe was wi th th e au to m ot iv e d iv is io n. The res id en ti al di vi si on off eredvario us servi ces , in cl ud in g the rep ai r an d in st al la ti onof g la ss for : (1 ) sh owe r an d b athtub en cl os ur es ; (2 ) win do ws; (3) sh el vi ng ; (4 ) tabl e to ps ; (5 ) m irr or s; an d (6 ) cab in et s. Inco nn ect io n wi th th es e act iv it ie s, p et it io ne r: (1 ) rec ei ve d c al ls fro m cu st om ers an d p ot en ti al cu st om ers ; (2 ) ge ne rat edjob -co stest im at es aft er o n- si te vi si ts ; (3 ) ne go ti at edco ntract s; (3) or de redm at eri al s an d s up pl ie s; (4) fab ric at edgl as s p ro du ct s, s uc h a s t ab le to ps an d m irr or s; (5) in st al le d g la ss pro du ct s s uc h a s wi nd ows , do or s, m irr or s an d sh owe r an d b athtub en cl os ur es ; (6 ) bi ll edcu st om ers ; an d i f ne ces sary ; (7 ) act edas bi ll co ll ect orwith re sp ectto ou ts tand in g d eb ts fro m cu st om ers .-5 -

Pet it io ne r di d n otm ai nt ai n any form of c on te m

po ran eo us lo g i n wh ic h h e reco rd edth e ti m e sp en t i n c on ne ct io n wi th eithe r th e au to m ot iv e d iv is io n o r th e res id en ti al di vi si on of AB S Gla ss . He ob vi ou sl y sp en t m or e th an75 0 h ou rs pe r y ear dur in g e ach y ear i n i ss ue pro vi di ng servi ces inco nn ect io n wi thth e res id en ti al di vi si onof AB S g la ss , bu t the reco rddo es no t al lo w foranall oc at io n o f ti m e sp en t on th e v ari ou s ac ti vi ti es li st edinth e p rece di ng parag rap h. Als o dur in g 2 00 7 and20 08 pe ti ti on ers own edfou r ren ta l p ro pe rti es , two as th e m em be rs of Al canDeve lo pm en t LLC (Al can ), an d two i n the ir i nd iv idua l cap aci ti es (co ll ect iv el y , pet it io ne rs ’ ren ta l re al est at e act iv ity ). Pet it io ne rs ’ 20 07 an d 2 00 8 jo in t Fe de ral in co m e ta x re tu rn s wer e p rep ared by a cert ifi edpubl ic acco un tant . As rel ev an t, ea chreturn i nc lu de s a S ch edul e C, Pro fitor Lo ss Fro m

Bu si ne ss , rel at in g t o ABS Glas s, an d aSch edul e E, Supp le m en ta l In co m e an d Lo ss , sh owi ng ren ta l re al est at e in co m e an d e xp en se de du ct io ns attrib ut ab le to th e fo urren ta l p ro pe rti es . The Sch edul es C fo r ABS Gl as s i nc lu de d wi thth e 2 00 7 and20 08 returns sh ow $ 69 4,5 04 an d $ 70 1,1 27 of g ro ss rece ip ts , res pe ct iv el y . Peti ti on ers en te red th e North Am eri canIndus try Clas si fic at io n S y st em (NAICS) c od e “ 81 11 20 ” in bo x B onth e 2 00 7 and20 08 Sch edul es C. Acco rd in g t o the NAICS, a s tand ard-6 -

us edby Feder al st at is ti cal ag en ci es incla ss ifyin g b us in es se s, the co de en te redon th e Sch edul es C rel at es to “ Aut om ot iv e Bo dy, Pain t, In te rio r, an d Gl as s R ep ai r”. The 20 07 Sch edul e E rep orte d ato ta l re nt al real est at e lo ss of $ 16 ,02 0; th e 20 08 Sch edul e E rep orte d t ot al ren ta l re al est at e in co m e o f $6 ,22 3. Alca n’s Fo rm s 1 06 5, U.S. Return o f Part ne rs hi p In co m e, fo r 20 07 an d 2 00 8 sh ow n etren ta l re al est at e lo ss es of $ 43 ,50 3 and$4 7,2 83 , res pe ct iv el y . The Sch edul es K-1, Partn er’s Sh are o f In co m e, Deduc ti on s, Cr ed it s, et c., att ach edto th e Fo rm s 1 06 5, al lo cat e th e lo ss es to pe ti ti on ers . The ren ta l re al est at e lo ss es rep orte d o n the 20 07 Sch edul e E an d the 20 07 an d 2 00 8 S ch edul es K-1 are t ak enin to acco un t i n the ad jus te d g ro ss in co m e rep orte d o n p et it io ne rs ’ 20 07 an d 2 00 8 re tu rn s. Th e d educ ti on s at tri bu tabl e to th es e lo ss es are d is al lo wedinth e n ot ic e. Oth er ad jus tm en ts m ad e in th e n ot ic e ha ve be enres ol ve d b y

th e p art ie s an d wi ll no t b e d is cu ss ed .

Dis cu ss io n As we h av e o bs erv edinco un tl es s o pi ni on s, d educ ti on s ar e a m atte r of le gi sl at iv e g race , andth e ta xp ay er b ears th e b ur de n o f pr oo f to est ab li sh en ti tl em en t t o any clai m edde du ct io n. Rul e 1 42 (a); INDOPCO, In c. v. 3
Pet it io ne rs do no t cl ai m

th atth e p ro vi si on s o f se c. 74 91 (a) are ap pl ic ab le , 3 an d we p ro ceedas tho ug h the y are n ot .-7 -

Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ); Ne w Col on ia l Ic e Co . v. Co m m is si on er, 29 2 U.S. 4 35 , 44 0 (1 93 4) . This bu rd enrequi res th e ta xp ay er t o s ub st an ti at e de du ct io ns cla im edby keep in g andpro du ci ng ad equa te reco rd s tha t en ab le th e Co m m is si on er t o d et erm in e th e ta xp ay er’s co rrec t t axli ab il ity . Sec. 6 00 1; Hrad es ky v. Co m

m is si on er, 6 5 T.C. 8 7, 8 9- 90 (19 75 ), aff’d p er cu ria m , 54 0 F .2d 82 1 (5 thCir . 19 76 ); M en eg uz zo v. Co m m is si on er, 4 3 T.C. 8 24 , 83 1- 83 2 (1 96 5) . A tax pay er cl ai min g ade du ct io n o n aFed eral in co m e ta x re turnm us t d em on strat e th atth e d educ ti on is all owabl e p ur su an t t o s om e st atut ory pro vi si on an d m

us t furth er s ub st an ti at e th atth e ex pe ns e to whi chth e d educ ti on rel at es ha s b eenpa id orin curred . See s ec. 6 00 1; Hrad es ky v. Co m mis si on er, 6 5 T.C. at89 -9 0; sec . 1.6 00 1- 1( a), In co m e TaxReg s. Acco rd in g t o re sp on de nt , th e ren ta l re al est at e lo ss in curredforeachy ear i s de du ct ib le on ly as al lo wab le un de r se ct io n 4 69 --a p oi ntpe ti ti on ers do no t d is pu te . Inge ne ral , th atsec ti on pre cl ud es a ta xp ay er fro m curren tl y de du ct in g alo ss fro m

a

“pa ss iv e act iv ity ”, a te rm th atis de fin edto in cl ud e an y ren ta l ac ti vi ty regar dl es s o f th e ta xp ay er’s l ev el of p art ic ip at io n. Se c. 46 9( a), (c) (1 ), (2 ), (4 ). The re i s an ex cep ti on to th is ge ne ral rul e fo r anin di vi du al de sc rib edin se ct io n 4 69 (c)( 7) an d s om et im es refe rredto as a“ real est at e p ro fes si on al ”. Und er se ct io n 4 69 (c)( 7) (B) atax pay er i s a r eal est at e p ro fes si on al fora ta xabl e y ear i f:-8 -

(1 ) 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 pay er dur in g s uc h t ax ab le y ear are p erfo rm edinreal pro pe rty trad es or bu si ne ss es inwhi chth e ta xp ay er m at eri al ly part ic ip at es an d (2 ) su chtax pay er pe rfo rm s m or e th an75 0 h ou rs of s erv ic es du rin g the tax ab le y ear i n re al 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 . 4 A real pro pe rty trad e o r bu si ne ss m ean s an y real pro pe rty dev el op m en t, red ev el op m en t, co ns tru ct io n, re co ns tru ct io n, ac qu is it io n, co nv ers io n, re nt al , op erat io n, m an ag em en t, l eas in g, o r br ok erag e tr ad e o r bu si ne ss . Sec. 46 9( c)(7 )(C) . The d et erm in at io n o f whe th er a t ax pay er’s act iv it ie s co ns ti tu te a real pro pe rty trad e o r bu si ne ss “ is ba se d o n a ll of the rel ev an t fa ct s an d ci rcu m st an ces .” Sec. 1 .46 9- 9( d) (1 ), In co m e Tax Reg s. Inth e cas e o f a joi nt return, the for eg oi ng requi rem en ts forqu al ifi cat io n a s a r eal est at e p ro fes si on al are sa ti sf ie d i f, an d o nl y

if, ei th er s po us e se parat el y sat is fie s the requi rem en ts . Sec. 46 9( c)(7 )(B) . If 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) . The di sa gr eem en t b etweenth e p art ie s fo cu se s o n wh ethe r pe ti ti on er i s a r eal est at e Res po nd en t co nc ed es th atpe ti ti on ers m at eri al ly part ic ip at edinth ei r ren ta l 4 real est at e act iv ity

withi n the m ean in g o f se c. 1.4 69 -5 T(a)(2 ), Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4 (No v. 6 , 19 85 ), fo r bo thy ears inis su e.-9 -

pr of es si on al , th atis , whethe r he is a ta xp ay er t o wh om sec ti on 46 9( c)(7 )(B) ap pl ie s. Acco rd in g t o p et it io ne rs , he i s; acco rd in g t o re sp on de nt , he i s n ot .

5 W e fi rs t co ns id er wh ethe r ABS Gl as s, o r an y of the servi ces itpro vi de d, co ns ti tu te d areal pro pe rty trad e o r bu si ne ss as c on te m pl at edby sect io n 46 9( c)(7 )(C) . Obv io us ly, th e se rv ic es pe rfo rm edby pet it io ne r inco nn ect io n wi th th e au to m ot iv e d iv is io n o f ABS Gl as s ar e n otservi ces pe ti ti on er p erfo rm edina real pro pe rty trad e o r bu si ne ss . Accor di ng to pe ti ti on ers , th e se rv ic es pe ti ti on ers pr ov id edinco nn ect io n wi th th e res id en ti al di vi si on of AB S Gla ss are

“ co ns tru ct io n” or “ reco ns tru ct io n” act iv it ie s tha t qua li fy th e res id en ti al di vi si on of ABS Gla ss as areal pro pe rty trad e o r bu si ne ss un de r se ct io n 4 69 (c)( 7) (C) fo r bo th y ears inis su e. As p et it io ne rs vi ew th e m atte r, th e ti m e p et it io ne r sp en t p erfo rm in g se rv ic es inco nn ect io n wi th th e res id en ti al di vi si on of AB S Gla ss qu al ifi es hi m as a rea l es ta te pro fes si on al as d es cri be d i n s ect io n 4 69 (c)( 7) (B). Pet it io ne rs ’ po si ti onass um es th atall of the servi ces pe ti ti on er p erfo rm edforth e res id en ti al di vi si onof AB S Gla ss co ns ti tu te “ co ns tru ct io n” or “ reco ns tru ct io n” act iv it ie s, b ut we are n otso su re tha t the y do . The word s “ co ns tru ct io n” an d “ reco ns tru ct io n” are n otde fin edinsec ti on 46 9, the reg ul at io ns pro m ul ga te d the reu nd er, cas el aw ad dr es si ng th atsec ti on , or Mrs . All endo es no t cl ai m to be a ta xp ay er s o d es cri be d. 5-1 0-

th e st atut e’s le gi sl at iv e h is to ry . Con se qu en tl y , th e wor ds are co ns tru edco ns is te nt with the ir o rd in ary an d c omm on m ean in gs . Texac o In c. & Subs . v. Co m m is si on er, 10 1 T.C. 5 71 , 57 5 (1 99 3) , aff’d, 9 8 F .3d82 5 (5 th Cir . 19 96 ); s ee Co m m is si on er v . Bro wn, 3 80 U.S. 56 3, 5 70 -5 71 (19 65 ); C ran e v . Commis si on er, 3 31 U.S. 1, 6 -7 (1 94 7) ; Ro m e I, Ltd . v. Co m mis si on er, 9 6 T.C. 6 97 , 70 4 (1 99 1) ; Un io n P ac. Co rp . v. Co m m is si on er, 9 1 T.C. 3 2, 3 8- 40 (19 88 ); F irs t Sav. & LoanAss ’n v. Co m m is si on er, 4 0 T.C. 4 74 , 48 2 (1 96 3) . W eb st er’s II New Ri ve rs id e Uni ve rs ity Dict io nary

30 3 (1 98 4) de fin es th e te rm “ co ns tru ct io n” as “ [t]he actor p ro ces s o f co ns tru ct in g” an d d efi ne s the term

“ co ns tru ct in g” as “ [t]o p utto ge th er b y ass em bl in g p art s” . W eb st er’s II New Ri ve rs id e Uni ve rs ity

Dict io nary

98 3 d efi ne s the term

“ reco ns tru ct io n” as “ [t]he act orres ul t o f rec on stru ct in g” an d d efi ne s the term “ reco ns tru ct in g” as “ [t]o c on stru ct ag ai n.” Nothi ng inth e d ic ti on ary de fin it io ns li m it s the term s t o re al pro pe rty co ns tru ct io n o r rec on stru ct io n, b utth e st atut e ex pr es sl y im po se s s uc h ali mit at io n. Keep in g tha t l im it at io n i n m in d, we as su m e witho utfin di ng th atin st al li ng or ig in al or r ep la cem en t wi nd ows inne wly bu il t o r ex is ti ng bu il di ng s co ns ti tu te s

“ co ns tru ct io n” or “ reco ns tru ct io n” withi n the m ean in g o f se ct io n 4 69 (c)( 7) . On th e o th er h an d, we fi ndth atcu tt in g andin st al li ng mirr or s an d t ab le to ps , cut ti ng-1 1-

an d i ns ta ll in g s ho wer an d b ath g la ss en cl os ur es , andrep la ci ng win do w pan es do no t. Sect io n 4 69 (c)( 7) (B) re qu ire s tha t we co m pare the ti m e p et it io ne r sp en t i n real pro pe rty trad es or b us in es se s ag ai ns t the ti m e h e sp en t i n o th er trad es or bu si ne ss es du rin g e ach y ear i n i ss ue . Peti ti on er ex pl ai ne d the servi ces he pro vi de d as th e so le pro pr ie to r of

ABS Gla ss inge ne ral iz edterm s, an d h is expl an at io n sh ows th athe pe rfo rm edservi ces inreal pro pe rty trad es or b us in es se s as well as othe r types of trad es or b us in es se s. He d idno t k eep a co nt em po ran eo us lo g sh owi ng ho w m

uc h o f hi s t im e was sp en t i n any part ic ul ar ac ti vi ty, an d we c an no t othe rwis e m ak e th atde te rm in at io n fr om hi s t es ti m on y

or any of th e o th er ev id en ce adm it te d i n thi s ca se . Bec au se pe ti ti on er p ro vi de d s erv ic es inbo th real pro pe rty trad es or bu si ne ss es an d o th er trad es or b us in es se s dur in g the y ears inis su e, an d b ecau se th e ev id en ce d oe s n otall ow fo r a fi nd in g tha t h e sp en t m or e ti m e in th e rea l pr op erty tra de s o r bu si ne ss es th anhe di d i n the othe r tr ad es or b us in es se s dur in g ei th er y ear i n i ss ue , he i s n otanin di vi du al de sc rib edinsec ti on 46 9( c)(7 ) fo r ei th er of th os e y ears . It fo ll ows th atth e rea l es ta te lo ss de du ct io ns he re i n d is pu te are subjec t t o the li m it at io ns im po se d i n s ect io n 4 69 . Res po nd en t’s d et erm in at io ns in th atreg ardare s us ta in ed .-1 2-

To re fle ctth e fo reg oi ng an d the parti es ’ co nc es si on s, Deci si on wil l b e en te red un de r Ru le 15 5.