United States Tax Court

T.C. Summary Opinion 2024-20

JAMES MICHAEL WARREN,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 25429-21S. Filed October 3, 2024.

—————

James Michael Warren, pro se.

Gretchen W. Altenburger, Inga C. Plucinski-Holbrook, and Jonathan D. 

Walker, for respondent.

SUMMARY OPINION

LANDY, Judge: This case was heard pursuant to the provisions 

of section 74631 of the Internal Revenue Code in effect when the Petition 

was filed. Pursuant to section 7463(b), the decision to be entered is not 

reviewable by any other court, and this Opinion shall not be treated as 

precedent for any other case.

In a Notice of Deficiency (Notice) dated April 13, 2021, the 

Internal Revenue Service disallowed losses from petitioner James 

Michael Warren’s rental real estate activity and determined a deficiency 

and a section 6662(a) accuracy-related penalty for tax year 2017. The 

issues for decision are whether Mr. Warren (1) may deduct passive

1 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the 

Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and 

Rule references are to the Tax Court Rules of Practice and Procedure. We round all 

monetary amounts to the nearest dollar and numbers to the nearest whole number.

Served 10/03/24
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losses as a real estate professional pursuant to section 469 and (2) is

liable for a section 6662(a) accuracy-related penalty. We resolve these

issues in the Commissioner’s favor.

Background

Mr. Warren organized Warren Assisted Living, LLC, in 2015 to 

open an assisted living facility to provide professional caregiver services.

To that end, Mr. Warren purchased a single-family home (group home) 

in 2016 near his residence in Gilbert, Arizona. Mr. Warren began 

repairing the group home shortly after purchase and later decided to 

completely revise the layout to add more bedrooms and bathrooms to the 

existing footprint. During 2017, the year in issue, Mr. Warren was 

employed by Lockheed Martin Corp. (Lockheed) where he worked 1,913 

hours as an engineer. As the work continued at the group home, Mr.

Warren attended caregiver and business management courses. He also 

rented habitable rooms at the group home and received $6,000 of rental 

income. Mr. Warren provided no testimony or other evidence that the 

tenants received caregiver services or assisted in the renovations while 

residing at the group home.

On a timely filed 2017 Form 1040, U.S. Individual Income Tax 

Return, Mr. Warren reported an adjusted gross income (AGI) of 

$199,974 consisting of wages of $86,305; pension and annuity income of 

$155,402; no rents received on his Schedule E, Supplemental Income 

and Loss; and a net loss for rental real estate expenses incurred of 

$41,733. The Commissioner determined that Mr. Warren was not 

entitled to the loss deduction claimed, failed to report the rental income

received,2 and was not eligible for the active participation exception 

provided in section 469(i). The Commissioner issued Mr. Warren the

Notice proposing a deficiency of $15,392 and a section 6662(a) accuracyrelated penalty of $3,078. The penalty received timely managerial 

approval. On July 19, 2021, Mr. Warren, while residing in Arizona, 

timely petitioned this Court disputing the Notice.

Mr. Warren did not keep contemporaneous logs of his time spent

renovating the group home. In preparation for trial, Mr. Warren 

created—and presented—two time logs. The first log maintained that 

Mr. Warren worked 1,421 hours at the group home; it was created one 

2 At trial, Mr. Warren admitted to receiving $6,000 of rental income. He did

not assert that any amount of this income was nontaxable or subject to offsets. We find

that Mr. Warren received $6,000 of rental income, and we deem this issue conceded.
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week before trial. The second log maintained that Mr. Warren worked 

1,628 hours at the group home; it was created the night before trial.

Mr. Warren testified that the second log contained corrected 

information derived from emails and other records he maintained. Some 

of the hours listed on Mr. Warren’s logs are supported by reference to 

emails, work permits, and invoices, but most remained unsupported 

beyond Mr. Warren’s testimony.

Discussion

Section 469 generally disallows any passive activity losses for the 

taxable year. A passive activity is any trade or business in which the 

taxpayer does not materially participate. § 469(c)(1). Rental activity is 

treated as per se passive regardless of whether the taxpayer materially 

participates. § 469(c)(2). The term “rental activity” means any activity 

where payments are principally for the use of tangible property.

§ 469(j)(8).

There are exceptions to the general rule for rental activities for

(1) certain taxpayers (real estate professionals) in real property trades 

or businesses under section 469(c)(7) or (2) passive activity losses up to 

$25,000 under section 469(i).3 Moss v. Commissioner, 135 T.C. 365, 368 

(2010). A taxpayer qualifies as a real estate professional in a given tax 

year and is not engaged in a passive activity under section 469(c)(2) if

(i) more than one-half of the personal services 

performed in trades or businesses by the taxpayer during 

such taxable year are performed in real property trades or 

businesses in which the taxpayer materially participates, 

and

(ii) such taxpayer performs more than 750 hours of 

services during the taxable year in real property trades or 

businesses in which the taxpayer materially participates.

§ 469(c)(7)(B).

3 The Treasury regulations provide six exceptions to the definition of “rental 

activity” that, if met, would recharacterize an activity in which the taxpayer materially 

participates from passive to nonpassive. See Temp. Treas. Reg. § 1.469-1T(e)(3)(ii). 

Rental of property incidental to providing extraordinary personal services (for 

example, a patient staying in a hospital’s boarding facility to receive medical 

treatment) is one such exception. Temp. Treas. Reg. § 1.469-1T(e)(3)(ii)(C), (v). On the 

record before us, there is insufficient evidence to determine whether Mr. Warren meets 

this exception.
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A trade or business includes a taxpayer’s status as an employee. 

Putoma Corp. v. Commissioner, 66 T.C. 652, 673 (1976), aff’d, 601 F.2d 

734 (5th Cir. 1979).

The Commissioner’s determinations in a Notice of Deficiency are 

generally presumed correct, and the taxpayer bears the burden of 

proving that he is entitled to any deduction claimed. See Rule 142(a); 

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. 

Helvering, 290 U.S. 111, 115 (1933). A taxpayer must maintain 

sufficient records to substantiate the deduction claimed. § 6001; Treas. 

Reg. § 1.6001-1(a). The taxpayer may substantiate that he met the

section 469(c)(7) hour requirement by any reasonable means. Temp. 

Treas. Reg. § 1.469-5T(f)(4). While contemporaneous records are not 

required, we have routinely held that a postevent “ballpark 

guesstimate” is not sufficient. Moss, 135 T.C. at 369.

Mr. Warren does not qualify as a real estate professional under 

section 469(c)(7)(B) because he worked fewer hours at the group home 

than he did at Lockheed. Mr. Warren’s employee status at Lockheed was 

personal service in a trade or business. Mr. Warren worked 1,913 hours 

at Lockheed, and his job duties did not involve real property activities.

To meet the first requirement of the section 469(c)(7)(B) test,

Mr. Warren needed to spend more than 1,900 hours working at the 

group home. Even if we accepted Mr. Warren’s second log as accurate, 

the total time spent on the group home totaled only 1,628 hours. Thus, 

Mr. Warren does not satisfy the section 469(c)(7)(B) test to qualify as a 

real estate professional. See § 469(c)(7)(B)(i); see also Moss, 135 T.C. 

at 370–71 (concluding that the section 469(c)(7) test is conjunctive, and 

the analysis may end when a taxpayer fails to satisfy one of its 

requirements).

Section 469(i) allows a taxpayer who “actively participated” in 

rental real estate activities during any taxable year to deduct up to 

$25,000 of the passive activity losses attributable to those activities in 

that year. § 469(i)(1) and (2). This deduction begins to phase out when a 

taxpayer’s AGI exceeds $100,000 and phases out entirely when AGI 

reaches $150,000. See § 469(i)(3). Mr. Warren is ineligible for the 

exception under section 469(i) because his AGI exceeded $150,000. We 

sustain the Commissioner’s determination that Mr. Warren is not 

entitled to deduct any loss on Schedule E of his 2017 return.

Lastly, the Commissioner determined that Mr. Warren is liable 

for a section 6662(a) accuracy-related penalty. Section 6662 imposes a 
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20% penalty on any portion of an underpayment of tax required to be 

shown on a return attributable to any substantial understatement of 

income tax. § 6662(a), (b)(2). An understatement is substantial if it 

exceeds the greater of 10% of the tax required to be shown on the return 

or $5,000. § 6662(d)(1)(A). Mr. Warren’s underpayment exceeds both 

amounts. The Commissioner obtained timely approval to impose the 

penalty, see § 6751(b)(1), and Mr. Warren did not present any evidence 

that his underpayment was due to reasonable cause, see § 6664(c)(1);

Treas. Reg. § 1.6664-4(b)(1). Accordingly, we determine that Mr. Warren

is liable for the section 6662(a) accuracy-related penalty.

We have considered all the arguments that the parties have 

made, and to the extent they are not addressed herein, we find the 

arguments to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered for respondent.