T.C. M em o . 2 0 1 8 -1 4 8

UNITED STATES TAX COURT

ROBERTA BIRDSONG AND W ILLIAM H. BIRDSONG, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 2 8 63 -1 6
. Fi l edSep t em b er 1 0 , 2 0 1 8
.
Ro b ert a Bi rd s o ng an d W i l l i am H. Bi rd s o ng , p ro s es e. Bri an A. Pfei fer an dCh ri s t i an e C. San i co l a, fo r res p on d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION VASQUEZ, Ju d ge: Res p o n d en td et erm i n eda d efi ci en cy o f $ 4 4 ,2 9 5 an dan accu racy -rel at edp en al ty

o f $ 8 ,8 5 9 u n d er s ect i o n6 6 6 2 (a) wi th res p ectt o p et i t i o n ers ’ 2 0 14 Fed eral i n co m e t ax . 1

1 Al l s ect i o nreferen ces are t o th e In t ern al Rev en u e Co d e i neffect fo r th e (co n ti n u ed ...)- 2
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[* 2 ] Th e i s s u es fo r d eci si o nare wh et h er: (1 ) p et i t i o n ers ’ ren t al real es t at e l o s s i s
s ub jectt o t h e p as s i v e act i v i ty l o s s l i m i t at i o n s o f s ect i o n4 6 9 an d(2 ) p et it i o n ers are l i ab l e fo r an accu racy -rel at edp en al ty u n d er s ect i o n 6 6 62 (a). FINDINGS OF FACT So m e o f th e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o no f fact s an dth e acco m

p an y i n g ex h i b i t s are i nco rp o rat ed h erei nb y th i s referen ce. At th e t i m e t h ey

fi l edth ei r p et i t io n , p et i t i o n ers res i d edi n Cal i fo rn i a. Du ri n g 2 0 1 4 p et i t i o n ers o wn edtw o ren t al real es t at e p ro p ert i es . Bo th p ro p ert i es were i nOak l an d , Cal i fo rn i a. Th ey co n s i s t edo f fo u r an d fi v e ren t al
u n i t s , res p ect i v el y . Pet i t i o ner h u s b an d wo rk s fu l l t i m e as an em erg en cy p h y s i ci an . Wh il e p et i t i o n er wi fe i s n o tfo rm al l y em p l o y ed , s h e d i v i d es h er t i m e b et ween cari n g fo r th ei r ch i l dren an dm an ag i ng th ei r ren t al p ro p ert i es . In2 0 1 4 p et i t i o n er wi fe was th e s o l e p art y

act i v el y i n v o lv edi nth e d ay -t o -d ay m an ag em en to f th ei r ren tal p ro p ert i es . Th es e t as k s i ncl u d ed , i n t er al i a, cl ean in g co m m o nareas , co ll ect i n g co i n s fro m

was hi ng m ach i n es , p erfo rm in g rep ai rs atth e p ro p ert i es , co m m u n icat in g wi th t en an t s, co l l ect i n g an dd ep o s it i n g ren t , m ai nt ai ni n g i n s u ran ce

1 (...co n t in u ed ) t ax y ear i ni s s u e, an dal l Ru l e referen ces are t o t h e Tax Co urtRu l es o f Pract i ce an d Pro cedure.- 3
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[* 3 ] p o l i ci es , p u rch as i n g m at eri al s fo r the p ro p ert i es as n eed ed , p ay in g b il l s , an d k eep in g b o o k s an dreco rd s fo r t ax acco u n t i n g p u rp os es . Sh e o ccas i o n al ly h i reda co n tract or (s u ch as a h an dym an o r p l u m ber) t o p erfo rm

t as k s s h e co u l d n o t
co m p l et e h ers el f. W

h en s h e h i reda co n tract o r, p et i t i o n er wi fe s p en t co ns i d erab l e t i m e res earch i n g an dco n t act in g co n tract ors , o b t ai n in g p ri ce q u ot es , an d
s up erv i s i n g rep ai rs . Pet i t io n er wi fe’ s p ro p ert y m an ag em en t du t i es al s o i n cl u d ed i n s p ect i ng u n i t s , p rep ari n g (p ai n t i n g an ds uperv i s i n g co n tract o rs ) u n i t s fo r ren t al , ad v ert i s in g v acat edu n i t s , s creen i n g p ot en t i al t en an ts , s ho wi n g th e uni t s , an d p ro ces s i n g ren tal ap p l i cat io n s . Pet i t i o ner wi fe p ro ducedtwo s pread sh eet s d et ai l i n g h er ren tal m an ag em en t act i vi t i es . Th e fi rs ts p read s h eetrefl ect s th atp et i ti o n er wi fe l o g g ed8 4 4.7 5 h o u rs
m an ag i n g th e ren tal p ro p ert i es i n2 0 1 4 ; th e s eco n ds p read sh eets h o ws a t o t al o f 1 ,1 36 .2 5 h o urs . Th e s eco n d s p read s h eeti n cl u d es p rev io u s ly o m it t edt as k s s u ch as i n v es t o r h o u rs an ddri v i n g ti m e b et ween th e ren t al p ro pert i es an d t h e h ard ware s t ore an do th er l o cat io n s p ert i n en tt o th e m an ag em en to f th e u n it s . Pet i t i o n ers
u s ed pet i t i o n er wi fe’ s cal en d ar an drecei p t s t o reco n s tru ctth e t i m e en tri es o nb o th
s p read s h eet s fo r th e fi rs th al f o f 2 01 4 . Fo r th e s eco n d h al f o f 2 0 1 4, the t im e en tri es co m e fro m

a co n t em p o ran eo u s l o g p et i t i o n er wi fe m ai nt ai n edo nh er p h on e o nwh i ch s he en t eredth e d at e, l o cat i o n , t i m e, an dd es cri p t i o n o f each t as ks h e- 4
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[* 4 ] p erfo rm ed . Pet i t io ner wi fe s up p l i edrecei pt s an di nv o i ces th ats ub s t an t i at e th e h o urs s h e l og g ed
. Pet i t i o ners h i redan acco u n t an t , Do ug l as Yo u n g o f th e An d ers o n C.P.A. Gro up , t o p rep are p et i t i o n ers ’ t ax retu rn fo r 2 0 1 4 , am o n g o th er y ears . Pet i t i o n ers rep o rt eda l o s s fo r th ei r ren tal real es t at e act i v i t i es o n Sch edul e E, Sup p l em en t al In co m e an d Lo s s , as th o u g h p et i t i o n er wi fe qu al i fi edas a “ real es t at e p ro fes s i on al .” Pu rs u an tt o s ect i o n4 6 9 (c)(7 )(A), p et i ti o n ers el ect edt o treatal l o f th ei r ren tal real es t at e i n t eres ts as a s i n g l e act i v it y fo r Fed eral i n co m e t ax p u rp o s es i n2 0 1 4. OnSep t em

b er 1 2 , 2 0 1 6 , res p on d en t i s s u edp et i ti o n ers a n o ti ce o f d efi ci en cy fo r 2 0 1 4 d is al l o w i n g th ei r Sch edu l e E ren t al real es t at e l o ss i nex ces s o f th e s ect i on 4 6 9 p as s i v e act i v i ty l o s s l i m i t at i o n . Res p o n d en tal so d et erm i n ed an accu racy -rel at edp en al ty

u n d er s ect i o n6 6 62 (a). Pet i t i o n ers t im el y fi l eda p et i t io n wi th th i s Co u rtfo r red et erm i n at i o n .- 5
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[* 5 ] OPINION I. Bu rd en o f Pro o f Th e Co m m is s i o n er’ s d et erm i n at i o n s i nth e n o t i ce o f d efi ci en cy are g en eral l y p res u m edco rrect , an dt ax p ay ers b ear t h e b u rd en o f p ro vi n g th em i n co rrect . 2 See Ru l e 1 4 2 (a); W el chv . Hel veri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 93 3 ). Tax p ay ers al s o b ear th e b u rd en o f p ro v i n g t h atth ey h av e m etal l req u i rem en t s t o b e en t i t l edt o an y d educt i o n s cl ai m ed . See Ru le 1 4 2 (a); INDOPCO, In c. v . Co m m i s s io n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ). II. Sect io n4 6 9 Pas si v e Act i v i ty Lo s s Li m i t at i o n Tax p ay ers are al l o w edd edu ct i o n s fo r cert ai nb u s i nes s an d i nv es t m en t
ex p en s es p u rs uan tt o s ect i o n s 1 6 2 an d2 1 2; h o w ev er, s ect i o n4 6 9 g en eral l y d i s al lo ws an y

p as si v e act iv it y

l o s s fo r th e t ax y ear. Sec. 4 6 9 (a). A p as s iv e act i vi ty i s an y trad e o r b u s i n es s i nwh i ch th e t ax p ay er d o es n otm at eri al l y p art i ci p at e. 3 Sec. 4 6 9(c)(1 ). A p as s iv e act iv i ty l os s i s d efi n edas th e ex ces s o f th e

2 Sec. 7 4 9 1 (a) p ro v i des th ati f, i nan y co u rtp ro ceed i ng , a t ax p ay er i n tro du ces cred i b le ev id en ce wi th res p ectt o an y factu al i s s ue rel ev an tt o as cert ai n i n g th e l i ab i l i ty

fo r t ax an dm eet s o th er p rereq u i si t es , th e b u rd en o f p ro o f s h i ft s t o th e Co m

m is s i o n er as t o th atfactu al i s s ue. See Hi g b ee v . Co m m is si o n er, 1 1 6 T.C. 4 3 8 , 4 4 0 -4 41 (2 0 0 1). Th i s cas e i s d eci d ed o nth e p rep o n d eran ce o f th e ev i d en ce an di s n o taffect edb y th e b urd en o f p ro o f o r s ec. 7 4 91 (a). 3 M at eri al p art i ci pat i o ni s d efi n edas th e reg u l ar, co n t i n u o us , an d (co n ti n u ed ...)- 6
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[* 6 ] ag g reg at e l os s es fro m al l p as s i v e act i v i t i es fo r th e y ear o v er th e ag g reg at e i n co m e fro m

al l p as s iv e act i v i t i es fo r s u chy ear. Sec. 4 6 9 (d )(1 ). A ren t al act i v i ty i s g en eral l y

treat edas a p er s e p as s i v e act i v it y reg ard l es s o f wh et h er t h e t ax p ay er
m at eri al l y

p art i ci p at es . 4 Sec. 4 6 9 (c)(2 ). Pu rs uan tt o s ect i o n 4 6 9 (c)(7 ), th e ren t al act i v i t i es o f a t ax p ay er wh o i s i nth e real p ro p ert y

b us i nes s (real es tat e p ro fes s i o n al ) are n o tp er s e p as s i v e act i v i t i es b u t are t reat edas a trad e o r b u s i n es s s ub jectt o th e m at eri al p art i ci p at i o n req u i rem en t s o f s ect i o n4 6 9(c)(1 ). Sec. 1 .4 6 9 -9 (e)(1 ), In co m e Tax Reg s . A t ax pay er qual i fi es as a real es t at e p ro fes s i o n al an d i s n oten g ag edi n a p as s i v e act i v it y u nd er s ect i o n 4 6 9 (c)(2 ) i f: (i ) m o re t h an o n e-h al f o f th e p ers o n al s erv i ces p erfo rm edi n trad es o r b u s in es s es b y

th e t ax p ay er du ri ng s u ch t ax ab l e y ear are p erfo rm edi n real p ro p erty trad es o r b us i n es s es i nwh i ch the t ax p ay er m at eri al ly

p art i ci p at es , an d (i i ) s uch t ax p ay er p erfo rm s m o re t h an 7 5 0 h o u rs o f s erv i ces du ri ng th e t ax ab le y ear i nreal p ro pert y trad es o r b u s i n es s es i nwh i ch th e t ax p ay er m at eri al l y

p art i ci p at es . Sec. 4 6 9(c)(7 )(B).

3 (...co n t in u ed ) s ub s t an t i al i n v o lv em en t i nth e o p erat i o ns o f th e act i v i ty . Sec. 4 6 9 (h )(1 ).

4 A ren t al act iv it y

i s “ an y act i v it y wh ere p aym en ts are p ri n ci p al ly fo r th e u s e o f t an g i b le p ro p ert y ”. Sec. 4 6 9 (j)(8 ).- 7
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[* 7 ] A real p ro p ert y trad e o r b u s i n es s i s d efi n edi ns ect i o n4 6 9 (c)(7 )(C) as “ an y real p ro p ert y

d ev el o p m en t , red ev el o p m en t , co n s tru ct i o n , reco ns tru ct i o n, acq u is i t io n , co n vers i o n, ren t al , o p erat i o n, m an ag em en t , l eas i n g , o r b ro k erag e t rad e o r b u si n es s .” In the cas e o f a jo i n tretu rn , th e fo reg o i n g requ i rem en t s fo r qu al i fi cat i o nas a real es t at e p ro fes s i o n al are s at i s fi ed i f, an do n l y i f, ei th er s p o u s e s ep arat el y

s at i s fi es th e req u i rem en t s . Sec. 4 6 9(c)(7 )(B). Al l o f a t ax pay er’ s real
es t at e act i v i ti es are t ak en i n t o acco u n t t o d et erm i n e wh et h er t h e 7 5 0 -h o u r req u i rem en ti s s at i s fi ed . See Hai l s t o ckv . Co m m is s i o n er, T.C. M em o . 2 0 1 6-1 4 6;
s ec. 1 .4 6 9-5 (f)(1 ), In co m e Tax Reg s . Sect io n1 .4 6 9 -5 T(f)(4 ), Tem p o raryIn co m e Tax Reg s., 5 3 Fed . Reg
. 5 7 2 7 (Feb . 2 5, 1 9 8 8 ), s et s fo rt h th e req u i rem en ts t o es tab l i s h th e t ax p ay er’ s h o u rs o f p art i ci p at i o nas fo l l o ws : Th e ex t en to f an i nd i v i du al ’ s p art i ci p at i o ni nan act i vi ty m ay b e es t ab l i sh edb y an y

reas o n ab l e m ean s. Co n t em p o ran eo u s d ai l y

t i m e rep o rt s , l o g s , o r s i m i l ar d o cu m en t s are n o trequ i red i f th e ex t en to f s u ch p art i ci p at io nm ay

b e es t ab l i s hedb y

o ther reas o n ab l e m ean s . Reas o n ab l e m ean s fo r p u rp os es o f th is p arag rap h m ay i n cl u d e b u tare n o tl i m i t edt o th e i d en t i fi cat i o no f s erv ices p erfo rm edo ver a p eri o d o f t i m e an dth e ap p ro x i m at e n u m ber o f h o u rs s p en tp erfo rm i n g s u ch s erv ices du ri n g s u ch p eri o d , b as edo n ap po i nt m en tb o o k s , cal en d ars , o r n arrat i ve s u m

m ari es .- 8
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[* 8 ] W e h av e h el dth atth e reg u l at io n s d o n o tal lo w a p o s tev en t“b al lp ark g u es st i m at e”. Bai l ey v . Co m m i s s i o n er, T.C. M em o . 2 0 0 1-2 9 6 ; Go s ho rn v . Co m m i s s i o n er, T.C. M em o . 1 9 9 3 -5 7 8
. Res p o n d en tco n ced edth atp et i t i o n er wi fe s at i s fi es th e fi rs tp ro n g o f th e real
es t at e p ro fes s i o n al t es tu n d er s ect i o n 4 6 9 (c)(7 )(B)(i ) b ecau s e s h e was n o t
o th erwi s e em

p l o y edi n2 0 1 4
. Th erefo re, t h e o n l y m at t er b efo re t h i s Co u rtwi th
res p ectt o t h e s ect i o n 4 6 9 p as s iv e act i v it y l o s s l im i t at i o n i s wh et h er p et i t i o n er wi fe h as s at i s fi edth e 7 50 -h o u r req u i rem en tu n der s ect io n4 69 (c)(7 )(B)(i i ). Res p o n d en t arg u es th atp et i t i o n er wi fe’ s l o g s d o n o tes t ab li sh th ats h e s at i s fi edth e 7 5 0 -h o u r req u i rem en tb ecau s e th ey were n o tco n t em

p o ran eo u s an d co n t ai nedi n accu raci es . W e d i s ag ree. Pet i t i o ners t es ti fi edcred i b l y an di nd et ai l ab o u t p et i t io n er wi fe’ s act i v e an d
ex t en s i v e m an ag em en to f thei r ren t al p ro p ert i es . 5 Fu rt h erm o re, p et i t i o ners p res en t edd et ai l eds p read sh eet s th atrefl ect edp et i t i o n er wi fe’ s ren tal m an ag em en t act i vi t i es ex ceed edth e 7 5 0 -h o ur req u i rem en t. W e fi n dp et i t i o n ers ’ n arrat iv e s u m m ary an d t h oro ug h t i m e l o g s co n v in ci n g b ecau s e p et i t i o n ers o wn ednu m ero u s

5 W e fi n dp et i t i o n ers t o b e h o n es t , fo rth ri g h t , an dcred i b l e. See Di az v . Co m m i s s i o n er, 5 8 T.C. 5 60 , 5 6 4 (1 9 7 2 ) (o b serv i ng th at th e p ro ces s o f d i s ti l l i n g tru th fro m

th e t es t i m o n y

o f wi tn es ses , wh o s e d em ean o r we o b s erv e an dwh o s e cred i b i l i ty

we ev al u at e, i s th e “ d ai l y g ri s to f ju d i ci al l i fe”).- 9
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[* 9 ] ren t al u n it s thatp et i t i o n er wi fe o p erat edal o n e. See Hai l s to ckv . Co m m i s s i o n er, at* 2 1 (h o l d i n g th atth e t ax p ay er’ s cred i b le t es t i m o n y reg ard i n g t i m e s p en to p erat i n g m

u l t i p l e p ro p ert i es al on e s at i s fi edth e s ect i o n4 6 9(c)(2 ) req u i rem en t s ). 6 Pet i t i o n ers ’ tes t i m o n y i s fu rt h er b u t tres s edb y p et i t i o n er wi fe’ s th o ro u g h t i m e-k eep i n g as wel l as th e recei pt s an di nv o i ces p et i ti o n er wi fe p ro ducedt o co rro b o rat e h er t i m e l o g s . Onth e b as is o f p et i t i o ners ’ t es t i m o n y an dth e reco rdas a wh o le, we
co n cl u d e th atp et i t i on er wi fe, p u rs u an tt o s ect i o n 4 6 9 (c), m at eri al l y p art i ci p at ed
an d i s a real es t at e p ro fes si o n al . Acco rd i n g l y , p et it i o n ers ’ l o s s at tri b u t ab l e t o th ei r ren t al real es t at e i s n o t l i m i t ed b y th e p as s i v e act iv i ty

l os s ru l es o f s ect i o n 4 6 9
. III. Accu racy -Rel at edPen al ty Res p o n d en td et erm i n edth at p et i t i o n ers are l i ab l e fo r an accu racy -rel at ed p en al ty o f $ 8 ,8 5 9 u n d er s ect io n 6 6 6 2 (a). Pu rs u an tt o s ect i o n 6 6 6 2 (a) an d(b )(1 )
an d (2 ), a t ax p ay er m ay

b e l i ab l e fo r a p en al ty

o f 2 0 % o f th e p o rt i on o f an

6 Al th o u g h we cau t i o np et i t io n er wi fe t o co n s tru ctm o re s tri ct l y co n tem p o ran eo u s t i m e l og s fo r h er fu tu re en d eav o rs , we fi n d h er cred i b l e t es t i m o ny an d t i m e l o g s t o b e a “ reas o n ab l e m ean s” o f p ro o f. See s ec. 1 .4 6 9
- 5 T(f)(4 ), Tem

p o rary In co m e Tax Reg s ., 5 3 Fed . Reg . 5 7 2 7 (Feb . 2 5 , 1 9 8 8 ).- 1 0 -

[* 1 0 ] u n d erp aym en to f t ax du e t o : (1 ) n eg l i g en ce o r d is reg ardo f ru l es o r reg u l at i o n s o r (2 ) a s ubs t an t i al u n d ers t at em en to f i n co m e t ax . 7 Becau s e we h o l dfo r p et i t i o ners as t o th e s ect i o n4 6 9 p as si ve act i vi ty l o s s l i m i tat i on , p et it i on ers h av e n o u n d erp aym en tan dh en ce n o accu racy -rel at ed p en al ty . 8 In reach i n g o u r h o ld in g s h erei n, we h av e co n s id eredal l arg u m en t s m ad e,
an d , t o th e ex t en tn o t m en t io nedab o v e, we co n cl u d e t h ey are m oo t , i rrel ev an t , o r wi th o u tm eri t . To refl ectthe fo reg o i n g , Anap p ro p ri at e o rd er wi ll b e i s s u ed , an dd eci s i o n wi ll b e en t eredfo r p et i t i o n ers .

7 “ Un d ers t at em en t ” m ean s th e ex ces s o f th e am o u n t o f th e t ax requi redt o b e s h own o nth e retu rn o ver t h e am o u n to f th e t ax i m p o s ed wh i ch i s s h o wno nthe retu rn , redu cedb y

an y reb at e. Sec. 6 66 2 (d )(2 )(A). A “ s ub s t an t ial u n d ers t at em en t ” o f i n co m e t ax i s d efi n edas an u n d ers tat em en to f t ax th atex ceed s th e g reat er o f 1 0 % o f th e t ax requ i redt o b e s h o wno nth e t ax retu rn o r $ 5 , 0 0 0
. Sec. 6 6 62 (d )(1 )(A).

8 Aft er t ri al res p o n d en tfi l eda m o t i o n t o reo pen th e reco rdt o i n tro du ce ev i d en ce o f co m

p li an ce wi th the wri t t en s up erv i s o ry ap p ro v al requ i rem en tu n d er s ec. 6 7 51 (b ). Becau s e we h o l dfo r p et it i o n ers o n th e d efi ci en cy , we wi l l d en y res p o n d en t’ s m o t i o n as m o o t .