T.C. Mem o. 2 01 4- 13 8

UNITED STAT ES TAX COURT

DOUGLAS D. SCHUMANN, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 14 60 8- 12
. Fi le d J ul y 14 , 20 14
. Ty le r B. Korn, fo r pe ti ti on er. Jo el D. McMaha n, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION KERRIGAN, Ju dg e: Res po nd en t d et erm in edde fic ie nc ie s an d ape na lty with re sp ectto pe ti ti on er’s Fed eral in co m e ta x re tu rn s as fol lo ws:- 2 - [* 2] Year Defi ci en cy Pen al ty se c. 66 62 (a) 20 08 $1 9,7 30
--- 20 09 71 8,7 25 $1 43 ,74 5 1 The de fic ie nc y

am ou ntfor

20 09 is th e am ou ntinth e n ot ic e o f de fic ie nc y . 1 Res po nd en t fi le d afir stam en dm en t t o a ns wer wh ic h a ss ert s ad di ti on al Sch edul e E in co m e o f $2 ,96 4,4 12 ($1 ,48 2,2 06 in crea se to pe ti ti on er’s 2 00 9 n onpa ss iv e in co m e an d an e rro ne ou s o ffs etof $ 1,4 82 ,20 6) . A Rul e 1 55 co m pu ta ti on wil l b e requi redto de te rm in e th e co rrec t d efi ci en cy am ou ntfor20 09
. Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al Rev enue Co de (Co de ) in effe ctforth e ta x years 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. W e ro un d a ll m on et ary am ount s t o the ne ares t d ol lar. The is su es forco ns id erat io n a re (1 ) whe th er p et it io ne r qu al ifi es as areal
es ta te pro fes si on al who m at eri al ly part ic ip at edina real est at e tr ad e o r bu si ne ss for ei th er t ax y ear 2 00 8 o r 20 09 ; (2 ) whe th er the ren ta l i nc om e p et it io ne r rec ei ve d fo r us e o f hi s p ro pe rti es inMai ne an d C on ne ct ic utis no np as si ve in co m e und er the
se lf- ren ta l ru le s o f se ct io n 4 69 ; (3 ) whe th er p et it io ne r’s ren ta l re al est at e lo ss es for 20 09 are l im it edby sect io n 2 80 A; an d (4 ) whe th er p et it io ne r is li ab le forth e accu racy-rela te d p en al ty und er s ect io n 6 66 2( a) fo r ta x year 20 09
.- 3 -

[* 3] FINDINGS OF FACT So m e o f th e fac ts are s ti pu la te d a ndare s o fo un d. Pe ti ti on er re si de d i n Fl or id a whe n h e fi le d the pe ti ti on . Peti ti on er g radua te d fr om co ll eg e wit h ade gr ee in m ech an ic al en gi ne eri ng . Pet it io ne r’s Bu si ne ss es Pet it io ne r ha s i nc or

po rat edfou r co m

pa ni es : P-Q C on tro ls , Inc . (P-Q Co nt ro ls ), P-Q Co nt ro ls Mai ne , Inc . (P-Q Co nt ro ls Mai ne ), N R S Ass oc ia te s, In c. (N R S Ass oc iate s) , andExec -J et , Inc ., d.b .a. DDS Pro pr ie tary , Inc . (Exec -J et ). P-Q Co nt ro ls is anS co rp or at io n wi th a pr in ci pa l p la ce o f bu si ne ss in Co nn ect ic ut . P-Q Co nt ro ls m anuf actur es ele ctro ni c co nt ro ls forco ns tru ct io n a nd
m ob il e equi pm en t. In20 08 an d 2 00 9 p et it io ne r was th e p res id en t an d m ajor ity sh areh ol de r of

P-Q Co nt ro ls . In 2 00 8 p et it io ne r was on e o f fo urdi rect or s o f P-Q Co nt ro ls an d h is th ree a du ltch il dr enwere the rem ai ni ng di rect or s. In20 09 pe ti ti on er was th e so le di rect orof P -Q Co nt ro ls
. P-Q Co nt ro ls Mai ne is anS co rp or at io n wi th a pr in ci pa l p la ce o f bu si ne ss in Mai ne . P-Q Co nt ro ls Mai ne pro vi de s m anuf actur in g s erv ic es to P-Q Co nt ro ls
. Pet it io ne r was th e p res id en t, m ajor ity sh areh ol de r, an d s ol e d ire ct or of P -Q Co nt ro ls Mai ne in20 08 an d 2 00 9.- 4 -

[* 4] N R S Ass oc iate s i s a F lo rid a co rp or at io n. N R S As so ci at es li cen se d te ch no lo gy to P -Q Co nt ro ls du rin g 2 00 8. N R S As so ci at es di d n otha ve an y op erat io ns in20 09 . Peti ti on er was th e so le sh areh ol de r of N R S Ass oc ia te s i n 20 08 an d 2 00 9. Exe c-J etis anS co rp or at io n. Du rin g 2 00 8 a nd20 09 pe ti ti on er was a li cen se d p il ot , andin20 09 he own edanair craf t. Pet it io ne r or ig in al ly form ed Exe c-J etto ho ldown ers hi p o f hi s ai rcra ft. Du rin g 2 00 8 a nd20 09 Exec -J etha d n o em pl oyees. Ex ec-J etdo es no t o wn an in te res t i n P -Q Co nt ro ls . In 2 00 9 P -Q Co nt ro ls pa idpe ti ti on er ap pr ox im at el y $2 .3 m il li on on be ha lf o f Exe c-J et . Pet it io ne r’s Real Est at e Hol di ng s Dur in g 2 00 8 a nd20 09 pe ti ti on er o wne d two co m m erci al ren ta l p ro pe rti es , on e in Co nn ect ic ut(Co nn ect ic utpro pe rty) andon e in Mai ne (Mai ne pro pe rty). In 20 08 an d 2 00 9 p et it io ne r ren te d the Co nn ect ic utpro pe rty to P -Q Co nt ro ls an d the Mai ne pro pe rty to P -Q Co nt ro ls Mai ne . In20 08 an d 2 00 9 p et it io ne r al so own edanair pl an e h an ga r in Flo rid a. Dur in g 2 00 8 a nd20 09 pe ti ti on er o wne d 1 2 re si de nt ia l p ro pe rti es inFlo rid a: Gor do n # 1, Go rd on #2 , Cut la ss #1 , Gin#1 , Cut la ss #2 , Kin gs Town , Gin#2 , Treas ur e, Fo rt C ha rle s, Gree n Do lp hi n # 1, Gre enDol ph in #2 , andGreenDol ph in #3 (co ll ect iv el y , Flo rid a p ro pe rti es ). All 12 res id en ti al pro pe rti es are wi th in a m il e- 5 -

[* 5] of pe ti ti on er’s h om e in Flo rid a. Pet it io ne r pu rch as edsi x o f th e p ro pe rti es in 20 08 an d two o f th e p ro pe rti es in20 09 . Peti ti on er d idno t re ntou t an y of t he pr op ert ie s i n 2 00 8, an d h e was ab le to ren t o uton ly the GreenDol ph in #3 pro pe rty in 20 09 . Peti ti on er d idno t s el l an y of t he pro pe rti es du rin g 2 00 8 a nd20 09
. Pet it io ne r pe rm it te d h is fri en ds to us e th e p ro pe rti es oc cas io na ll y whi le th ey

were on va cat io n. Pet it io ne r own s two ap art m en ts on a cru is e sh ip kn own as t he W or ld . The W or ldis a pr iv at el y

own edlu xu ry

y ach t tha t trav el s ar ou ndth e wor ld . He pu rch as edth e fi rs t ap art m en t i n 2 00 6 andth e se co ndap art m en t i n 2 00 9. He u se d
on e o f hi s two ap artm en ts as h is res id en ce wh il e ab oa rdth e World . Peti ti on er sp en t atlea st92 da y s i n 2 00 8 a nd16 2 d ay s i n 2 00 9 abo ardth e World . Peti ti on er de du ct edth e an nu al m ai nt en an ce co st s as so ci at edwith the se ap art m en ts on Sch edul es E, Sup pl em en ta l In co m e an d Lo ss , of h is in co m e ta x re tu rn s. Pet it io ne r rep orte d n o re nt al in co m e fro m th es e ap art m en ts on hi s 2 00 8 o r 20 09 in co m e ta x return.Pet it io ne r di d n otke ep a co nt em po ran eo us lo g d et ai li ng hi s re al est at e act iv it ie s dur in g 2 00 8 o r 20 09
.- 6 -

[* 6] Thi rd -Party A ss is tanc e With th e Fl or id a Pro pe rti es Dur in g 2 00 8 a nd20 09 pe ti ti on er h ire d anu m be r of in di vi du al s an d
co m pa ni es to ass is t h im

with the m ai nt en an ce o f hi s Fl or id a p ro pe rti es . Pet it io ne r hi redth e Fo rres t Co . Real ty of Nap le s, In c. (Fo rres t Co .), Down in g & Fry e, Pru de nt ia l Re al ty, an d AAdvi so rs Real ty to m ark etth e Fl or id a pr op ert ie s. Th e Fo rres t Co . pl acedsi gn s o n s om e o f pe ti ti on er’s p ro pe rti es an d he lp edhi m

att em ptto lea se hi s p ro pe rti es . Pet it io ne r em

pl oyed Th om as Frei an d M ic ha el Nich ol s t o m an ag e th e ren ov at io n a ndrep ai r of

th e Fl or id a p ro pe rti es . Mr. Frei work edforpe ti ti on er fro m Aug us t 2 00 8 t o F eb ru ary 20 09 . He rep ai redan d p ai nt edpe ti ti on er’s pr op ert ie s, s ol ic it edco nt ract or s fo r work e st im at es , hi redco nt ract or s t o p erfo rm work, an d p ai d c on tra ct or s fo r th ei r se rv ic es . Mr. Nich ol s re pl acedMr. Fre i i n Feb ru ary 20 09 an d a ss um edsi mil ar dut ie s an d re sp on si bi li ti es . Mr. Nich ol s rece iv eda week ly sala ry . Pet it io ne r al so hi redlan ds cap ers , in te rio r de co rat or s, p es t co ntro l
co m pa ni es , airco nd it io ni ng co m pa ni es , andala rm

co m pa ni es to pe rfo rm

workon th e Fl or id a p ro pe rti es .- 7 -

[* 7] Pet it io ne r’s Tax R eturns Pet it io ne r fi le d aFo rm

10 40 , U.S. Ind iv idua l In co m e Tax Return, fo r ta x y ear 2 00 8. He re po rte d $ 5,3 75 ,00 0 o f wag es fro m P-Q Co nt ro ls an d $ 10 ,00 0 o f wag es fro m

P-Q Co nt ro ls Mai ne . Peti ti on er al so rep orte d $ 10 3,5 83 in
m an ag em en t fe es fro m

a subc on tra ct in g b us in es s o n aSch edul e C, Pro fitor Lo ss Fro m Bu si ne ss . Peti ti on er at ta ch eda Sch edul e E to hi s 2 00 8 F orm 10 40 . On h is Sch edul e E pe ti ti on er re po rte d $ 21 ,64 3 a nd$7 29 ,95 9 o f no np as si ve in co m e fro m P-Q Co nt ro ls Mai ne an d P -Q Co nt ro ls , res pe ct iv el y . He als o re po rte d $ 62 9,9 94 of
ren ta l i nc om e fro m

P-Q Co nt ro ls forth e Co nn ect ic utpro pe rty and$7 5,0 00 of
ren ta l i nc om e fro m

P-Q Co nt ro ls Mai ne for

th e Ma in e p ro pe rty. Peti ti on er al so rep orte d $ 65 2,5 76 of r oyalt ie s fr om N R S Ass oc ia te s. A cert ifi edpubl ic
acco un tantpre pa redpe ti ti on er’s 2 00 8 t ax return. Pet it io ne r subm it te d aFo rm 10 40 X, Am en de d U.S. In di vi du al Inc om e Tax Return, fo r ta x year 20 08 . On th e am en de d re tu rnpe ti ti on er re po rte d the same wag es an d b us in es s i nc om e b utm ad e ch an ge s t o h is Sch edul e E. Peti ti on er ad de d ei gh t o f th e Fl or id a p ro pe rti es (Cu tl as s # 2, Gre enDol ph in #1 , Fort Ch arl es , Gin #2 , Gin#1 , Kin gs Town , Treas ur e, an d C ut la ss #1 ) an d h is ap art m en t ab oa rdth e W or ldto hi s Sc he du le E. Peti ti on er re po rte d z ero ren ta l i nc om e wit h re sp ectto th e ei gh t Fl or id a p ro pe rti es an d h is ap art m en t ab oa rdth e World , bu t h e rep orte d- 8 -

[* 8] ex pe ns es with re sp ectto th os e p ro pe rti es . Peti ti on er re po rte d $ 84 3,7 70 of
ex pe ns es forth e Fl or id a p ro pe rti es , whi chin cl ud edin su ran ce, m ortg ag e in te res t, ta xe s, u ti li ti es , m an ag em en t fe es , gro un d c are, p es t co nt ro l, p oo l ca re, an d de pr eci at io n. Pe ti ti on er’s rep orte d e xp en se s fo r hi s ap art m en t ab oa rdth e World in cl ud ed$2 39 ,32 8 o f m ai nt en an ce fe es an d $ 1,9 25 ,00 0 o f de pr eci at io n. Pe ti ti on er al so att ach eda do cu m en t en ti tl ed“ Ren ta l Re al Est at e Pro fes si on al Elec ti on ”, in whi chhe st at edth athe was a“ qu al ifi edreal est at e p ro fes si on al un de r Co de Sec. 46 9( c)(7 )” an d wi sh edto “ el ectun de r Co de Sec. 4 69 (c)( 7) (A) to tre atall in te res ts in real est at e as a si ng le ren ta l re al est at e act iv ity ”. His am en de d 2 00 8 t ax return was pre pa redby a tax return p rep arerdi ffer en t fr om th e o ne who ha d p rep aredhi s or ig in al return. Pet it io ne r fi le d aFo rm

10 40 fortax y ear 2 00 9. Pe ti ti on er re po rte d $ 85 6,9 89 of wage s fr om

P-Q Co ntro ls an d $ 10 ,00 0 o f wag es fro m P-Q Co nt ro ls Mai ne . Pet it io ne r al so rep orte d $ 26 0,0 00 inm an ag em en t fe es fro m Exec -J eton a Sch edul e C. Pet it io ne r atta ch eda Sch edul e E to hi s 2 00 9 F orm 10 40 . On h is Sch edul e E pe ti ti on er re po rte d $ 37 1,5 25 an d $ 2,2 72 ,76 8 o f no np as si ve in co m e fro m P-Q Co nt ro ls Mai ne an d Ex ec-J et , res pe ct iv el y , and$6 59 ,22 3 o f no np as si ve lo ss fro m P-Q Co nt ro ls . He als o re po rte d $ 1,2 00 ,00 0 o f ren ta l i nc om e fro m P-Q- 9 -

[* 9] Co nt ro ls forth e Co nn ect ic utpro pe rty and$3 00 ,00 0 o f ren ta l i nc om e fro m P-Q Co nt ro ls Mai ne for

th e Ma in e p ro pe rty. Pet it io ne r li st edall 12 of h is res id en ti al pro pe rti es inFlo rid a, hi s ap art m en ts ab oa rdth e World , andhi s ai rp lane ha ng ar o n h is Sch edul e E. Peti ti on er re po rte d
on ly $31 ,00 0 o f ren ta l i nc om e fro m th e GreenDol ph in #3 pro pe rty and$3 ,60 0 o f
ren ta l i nc om e fro m

hi s ai rp lane ha ng ar. Pet it io ne r rep orte d $ 2,8 36 ,86 0 o f
ex pe ns es forth e Fl or id a p ro pe rti es , whi chin cl ud edcle an in g a ndm ai nt en an ce, co m m is si on s, l eg al fees , in su ran ce, m ortg ag e in te res t, re pa irs , supp li es , ut il it ie s, gr ou ndcare , pes t co nt ro l, p oo l ca re, s ecu rity , perm it s, i ns pe ct io ns , and de pr eci at io n. Pe ti ti on er’s rep orte d e xp en se s fo r hi s ap art m en ts ab oa rdth e World in cl ud ed$3 54 of l eg al fees , $4 00 ,75 5 o f m ai nt en an ce fe es , and$3 15 ,00 0 o f de pr eci at io n. Pe ti ti on er al so att ach eda do cu m en t en ti tl ed“ Ren ta l Re al Est at e Pro fes si on al Elec ti on ” whi chis id en ti cal to th e o ne he att ach edto hi s amend ed 20 08 tax return. Hi s 2 00 9 t ax return was pre pa redby the tax return p rep arerwho ha d p rep aredhi s amend ed20 08 tax return. Not ic e o f Defi ci en cy On M arch 15 , 20 12 , res po nd en t i ss ue d p et it io ne r a n ot ic e o f de fic ie nc y . For ta x year 20 08 res po nd en t d et erm in edth atpe ti ti on er was no t en ti tl edto th e ref un d th athe cla im edon hi s amend ed20 08 tax return b ecau se he di d n otqu al ify as a- 10 -

[* 10 ] real est at e p ro fes si on al
. For tax y ear 2 00 9 re sp on de ntdi sa ll owe d a 1 de du ct io n fo r $1 ,86 9,0 95 of r ep orte d re nt al real est at e lo ss es be cau se of s ect io n 46 9 p as si ve lo ss li m it at io ns . Res po nd en t al so de te rm in edth atpe ti ti on er i s l iabl e fo r anaccu racy-rela te d p en al ty und er s ect io n 6 66 2( a) fo r ta x year 20 09
. Pl ead in gs On J un e 8 , 20 12 , pet it io ne r fi le d t im el y th e p et it io n. On Jul y

24 , 20 12 , 2
res po nd en t fi le d a n a ns wer. On J ul y 31 , 20 13 , res po nd en t fi le d a n a m en de d
an swe r whi chass ert s tha t p et it io ne r im pr op erl y rep orte d the ren ta l p aym en ts th at he rece iv edfro m

P-Q Co nt ro ls an d P -Q Co ntro ls Mai ne inbo th20 08 an d 2 00 9 a s pa ss iv e ren ta l i nc om e. Res po nd en t as se rts th atth e ren ta l i nc om e is no np as si ve in co m e und er the sel f-re nt al rul es of s ect io n 4 69 an d tha t p et it io ne r can no t o ffs et th is in co m e wit h h is pa ss iv e lo ss es . On Oct ob er 2 2, 2 01 3, re sp on de ntfil eda se co ndam en de d a ns wer. Inth e se co ndam en de d a ns wer res po nd en t as se rts th atpe ti ti on er’s ren ta l re al est at e lo ss es for20 09 are l im it edby sect io n 2 80 A. Res po nd en t d idno t ac cep t p et it io ne r’s am en de d 2 00 8 t ax return a ndba se d 1 hi s ad jus tm en ts onpe ti ti on er’s 2 00 8 F orm 10 40
. The pe ti ti on st at es on ly tha t p et it io ne r di sa gr ees with re sp on de nt ’s 2 “ de te rm in at io n tha t h e d oe s n otm eetth e requi rem en ts to be a real est at e pr of es si on al .” The p et it io n d oe s n otsp eci fy whet he r pe ti ti on er’s d is ag reem en t pe rta in s t o b ot h 2 00 8 a nd20 09
.- 11 -

[* 11 ] OPINION The Co m m is si on er’s d et erm in at io ns ina no ti ce o f de fic ie nc y are g en eral ly pr es um edco rrec t, an d the tax pa y er b ears th e b ur de n o f pr ov in g tho se de te rm in at io ns erro ne ou s. Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (1 93 3) . The t ax pa y er l ik ewis e b ears th e b ur de n o f pr ov in g h is or h er en ti tl em en t to de du ct io ns all owe d b y th e Co de an d o f subs tant ia ti ng th e am ou nt s o f cl ai m ed de du ct io ns . INDOPCO, Inc . v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ); s ec. 1.6 00 1- 1( a), In co m e Tax Reg s. Pet it io ne r be ars th e b ur de n o f pr ov in g tha t h e is
en ti tl edto de du ctth e p as si ve act iv ity lo ss es th athe rep orte d fo r 20 08 an d 2 00 9. Pet it io ne r do es no t co nt en d, an d the ev id en ce d oe s n otest ab li sh , th atth e b ur de n o f pr oo f sh ift s t o re sp on de ntun de r se ct io n 7 49 1( a) as to an y is su e o f fac t. The Co m m is si on er b ears th e b ur de n o f pr oo f fo r an y ne w m at te rs or in crea se s i n d efi ci en cy

ass ert edinth e an swe r. Ru le 14 2( a); Turn er v . Co m m is si on er, 6 8 T.C. 4 8, 5 0 (1 97 7) . Res po nd en t d idno t ra is e th e se ct io n 2 80 A li mit at io n u nt il th e se co ndam en dm en t t o ans wer. Res po nd en t d idno t ra is e th e se lf- ren ta l ru le s o f se ct io n 4 69 un ti l the fir stam en dm en t t o a ns wer. The refo re, res po nd en t b ears th e b ur de n o f pr oo f fo r bo th is su es . Howev er, we d eci de th es e is su es by the pre po nd eran ce o f th e ev id en ce ra th er tha n b y refe ren ce t o the pl acement o f th e b ur de n o f pr oo f.- 12 -

[* 12 ] I. Sect io n 4 69 Tax pa y ers are al lo wedde du ct io ns forcert ai n b us in es s an d i nv es tm en t ex pe ns es un de r se ct io ns 16 2 and21 2. Ho wev er, i f th e ta xp ay er i s an in di vi du al , se ct io n 4 69 ge ne ral ly dis al lo ws an y pa ss iv e act iv ity

lo ss forth e ta xabl e y ear a nd tre at s i t as a de du ct io n o r cre di t fo r th e n ex t t ax ab le y ear. Se c. 46 9( a) an d (b ). A pa ss iv e act iv ity

lo ss is de fin edas t he ex ces s o f th e ag gr eg at e lo ss es fro m all pa ss iv e act iv it ie s fo r th e ta xabl e y ear o ve r th e ag gr eg at e in co m e fro m all pa ss iv e act iv it ie s fo r th aty ear. Se c. 46 9( d) (1 ). A pas si ve act iv ity is any tra de or b us in es s in whi chth e ta xp ay er d oe s n otm at eri al ly part ic ip at e. Sec. 4 69 (c)( 1) . A tax pa y er is tre at edas m at eri al ly part ic ip at in g i n a n a ct iv ity on ly if hi s o r he r in vo lv em en t i n th e o pe rat io ns of the act iv ity is reg ul ar, co nt in uo us , andsubs tant ia l. Sec
. 46 9( h) (1 ). Ren ta l ac ti vi ty is g en eral ly treat edas ape r se pa ss iv e act iv ity reg ard le ss of wh ethe r th e ta xp ay er m at eri al ly part ic ip at es . Sec. 4 69 (c)( 2)
. A. Rea l Es ta te Pro fes si on al Sect io n 4 69 (c)( 7) pro vi de s an ex cep ti on to th e ru le th ata ren ta l ac ti vi ty is pe r se pa ss iv e. The re nt al act iv it ie s o f a t ax pay er i n areal pro pe rty trad e o r bu si ne ss (a rea l es ta te pro fes si on al ) are n otsubjec t t o the pe r se rul e o f se ct io n 46 9( c)(2 ). Sec. 4 69 (c)( 7) (A); see Kos on env. Co m m is si on er, T.C. Mem o. 2 00 0- 10 7, s li p o p. at9; sec . 1.4 69 -9 (b )(6 ), (c)( 1) , Inc om e Tax Reg s. Ra th er, the ren ta l- 13 -

[* 13 ] act iv it ie s o f a rea l es ta te pro fes si on al are s ub ject t o the m at eri al pa rti ci pa ti on requi rem en ts of s ect io n 4 69 (c)( 1) . See s ec. 1 .46 9- 9( e)(1 ), In co m e Tax Reg s. A ta xp ay er qua li fie s as a real est at e p ro fes si on al if: (1) m or e th anon e-h al f of th e pe rs on al servi ces pe rfo rm edintra de s an d b us in es se s b y th e ta xp ay er dur in g the ta xabl e y ear a re p erfo rm edinreal pro pe rty trad es or b us in es se s i n wh ic h the ta xp ay er m at eri al ly part ic ip at es , and(2) th e ta xp ay er p erfo rm s 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 . Sec. 4 69 (c)( 7) (B)( i) a nd(ii ).

1. Elec ti on Fo r th e p ur

po se s o f de te rm in in g wh ethe r a t ax pa y er i s a r eal est at e pr of es si on al , a tax pa y er’s m at eri al pa rti ci pa ti on is co ns id eredsep arat el y with
res pe ctto each ren ta l p ro pe rty, unl es s the tax pa y er m ak es anele ct io n t o treatall in te res ts inren ta l re al est at e as a si ng le ren ta l re al est at e act iv ity . Sec. 46 9( c)(7 )(A); sec . 1.4 69 -9 (e)( 1) , Inc om e Tax Reg s. A ta xp ay er m ak es th e el ect io n by “ fil in g ast at em en t wi th th e ta xp ay er’s o rig in al in co m e ta x re tu rnfor th e ta xabl e y ear.” Sec. 1 .46 9- 9( g) (3 ), In co m e Tax Reg s. Th e st at em en t m us t co nt ai n a de cl arat io n tha t the tax pa y er i s a qua li fy in g t ax pa y er fo r th e ta xabl e y ear a ndis
m ak in g the ele ct io n p ur su an t t o s ect io n 4 69 (c)( 7) (A). Id
.- 14 -

[* 14 ] a. 20 08 Pet it io ne r di d n otfil e a s ta te m en t wi th hi s o rig in al 20 08 tax return e le ct in g to tre atall of h is in te res ts inren ta l re al est at e as a si ng le ren ta l re al est at e act iv ity . Altho ug h p et it io ne r di d i nc lu de a st at em en t m ak in g the ele ct io n wi thhi s amend ed 20 08 tax return, the ele ct io n i s i ne ffec ti ve be cau se th e st at em en t m us t ac co m

pa ny th e o rig in al return. Se e Sh ie khv. Co m m is si on er, T.C. Mem o. 2 01 0- 12 6, s li p o p. at11 ; Tras k v . Comm is si on er, T.C. Mem o. 2 01 0- 78 , sl ip op . at 1 1- 12 ; s ee al so sec . 1.4 69 -9 (g )(3 ), In co m e Tax Reg s. Th e n ot ic e o f de fic ie nc y is ba se d upo n the
or ig in al return. Acco rd in gl y , fortax y ear 2 00 8 we wi ll tre ateach of p et it io ne r’s pr op ert ie s s ep arat el y

inord er t o d et erm in e whe th er h e m at eri al ly part ic ip at edin th e p art ic ul ar re nt al act iv ity .

b. 20 09 Pet it io ne r fi le d ast at em en t wi th hi s 2 00 9 t ax return e le ct in g t o treatall of hi s i nt eres ts inren ta l re al est at e as a si ng le ren ta l re al est at e act iv ity . The st at em en t s ta te d tha t p et it io ne r was a “ qu al ifi edreal est at e p ro fes si on al un de r Co de Sec. 4 69 (c)( 7) ” an d wi sh edto “ el ectun de r Co de Sec. 4 69 (c)( 7) (A) to tre at al l i nt eres ts inreal est at e as a si ng le ren ta l re al est at e act iv ity .” Fo r ta x year 20 09 we wil l treatpe ti ti on er’s p ro pe rti es as asi ng le ren ta l re al est at e act iv ity .- 15 -

[* 15 ] 2. Mat eri al Part ic ip at io n Tes ts A tax pa y er i s co ns id eredto ha ve m at eri al ly part ic ip at edinanact iv ity if o ne of th e se ve n t es ts li st edinth e reg ul at io ns is sat is fie d. Se c. 1.4 69 -5 T(a), Tem po rary Inco m e Tax Reg s., 5 3 F ed . Reg . 57 25 -5 72 6 (F eb . 25 , 19 88 ). Fou r te st s, s etforthinpa rag rap h (a )(1 ), (2 ), (3 ), an d (7 ), are m os t re le va nthe re:

(1 ) The in di vi du al pa rti ci pa te s i n the act iv ity form or e th an50 0 ho ur s dur in g s uc h year; (2 ) The in di vi du al ’s parti ci pa ti on inth e act iv ity forth e ta xabl e y ear c on st itut es subs tant ia ll y all of the parti ci pa ti on insu chact iv ity of all in di vi du al s (i nc lu di ng in di vi du al s wh o a re n otown ers of in te res ts inth e act iv ity ) fo r su chy ear; (3 ) The in di vi du al pa rti ci pa te s i n the act iv ity form or e th an10 0 ho ur s dur in g the tax ab le y ear, an d s uc h i nd iv idua l’s p art ic ip at io n i n th e act iv ity

forth e ta xabl e y ear i s n otles s tha n the pa rti ci pa ti on inth e act iv ity of any oth er i nd iv idua l (i nc lu di ng in di vi du al s wh o a re n ot own ers of i nt eres ts inth e act iv ity) fo r su chy ear; * * * * * * * (7 ) Bas edonall of t he fact s an d c irc um st an ces * * *, the in di vi du al pa rti ci pa te s i n the act iv ity on a reg ul ar, co nt in uo us , and subs tant ia l b as is du rin g s uc h year. A tax pa y er m ay

est ab li sh ho ur s o f pa rti ci pa ti on by any reas on ab le m ean s. Sec. 1 .46 9- 5T(f

)(4 ), Tem po rary Inco m e Tax Reg s., 5 3 F ed . Reg . 57 27 (Feb . 25 , 19 88 ). Co nt em

po ran eo us da il y

rep orts are n otrequi redif the tax pa y er ca n es tabl is h p art ic ip at io n b y othe r rea so nabl e m ean s. Id . Reas on ab le m ean s i nc lu de s- 16 -

[* 16 ] “ ap po in tm en t b oo ks , cal en da rs , or n arra ti ve su m m ari es ” th atid en ti fy

th e se rv ic es pe rfo rm edan d “ th e 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 ”. Id . W e h av e n ot edpre vi ou sl y th atwe are n otrequi redto acce pta po st ev en t “ba ll pa rk

gu es st im at e” o r th e unv eri fie d, u nd oc um en te d t es ti m on y of ta xp ay ers . See, e.g ., Mos s v . Comm is si on er, 1 35 T.C. 36 5, 3 69 (20 10 ); Lu m v. Co m m is si on er, T.C. Mem o. 2 01 2- 10 3; Est at e o f St an ge landv. Co m m is si on er, T.C. Mem o. 2 01 0- 18 5. Pet it io ne r te st ifi edth athe sp en t o ve r 1,0 00 ho ur s i n b ot h 2 00 8 and20 09 do in g v ari ou s t as ks co nn ect edwith h is pro pe rti es . He furt he r te st ifi edth athe
worke d fi ve to si x h ours pe r day , si x d ay s a we ek when he was i n F lo rid a an d
worke d re m ot el y

(ex ch an ge d m es sa ge s wi th Mr. Nic ho ls ) two ho ur s p er d ay when ab oa rdth e World . Mr. Nich ol s t es ti fie d tha t h e wit ne ss edpe ti ti on er wo rk in g o n th e p ro pe rti es ap pr ox im at el y th ree t o fo urho ur s p er d ay , th ree t o fo urda y s p er weekwhen pe ti ti on er was into wn an d tha t h e ex ch an ge d e m ai ls with p et it io ne r. Howev er, p et it io ne r di d n otpro du ce an y of the em ai ls th athe ex ch an ge d wi th Mr. Nich ol s. We decl in e to acce ptpe ti ti on er’s an d M r. Nich ol s’ tes ti m on y witho ut ad equa te do cum en tary

supp ort. Pet it io ne r di d n otke ep a co nt em po ran eo us lo g o r anap po in tm en t ca le nd ar tra ck in g h is real est at e act iv it ie s, b uthe pre pa reda na rrat iv e su m m ary of hi s- 17 -

[* 17 ] act iv it ie s. Th e su m m ary, ho wev er, p ro vi de s a b ro adde sc rip ti on of t he work pe rfo rm edat e ach pro pe rty rath er tha n ade ta il edde sc rip ti on of the workth at pe ti ti on er p erfo rm edpe rs on al ly. The s umm ary do es no t d iff eren ti at e b etween ho ur s tha t p et it io ne r worke d i n 2 00 8 a ndho ur s tha t h e worke d i n 2 00 9. Th e su m m ary al so see m s t o i nc lu de ho ur s wo rk edin20 10
. Pet it io ne r co nt en ds th atth e n arra ti ve su m m ary is ba se d o n the do cu m en ts th athe in tro du cedin to ev id en ce. Pet it io ne r in tro du ceda do cu m en t l ab el ed“ da il y lo g” foreach tax y ear t ha t p ro vi de s the nu m be r of ho ur s tha t h e worke d dur in g each da y in20 08 an d 2 00 9. Th es e d oc um en ts were p rep areddu rin g e xa min at io n. The “ da il y

lo g” co nt ai ns co nt rad ic ti on s. Fo r in st an ce, p et it io ne r in di cat es inth e lo g tha t o n c ert ai n d at es (Nov em be r 4 a ndNov em

be r 23 , 20 08 ; J anua ry

28 to Feb ru ary 3, 2 00 9; an d J un e 8 , Octo be r 13 to 14 , andNov em be r 30 to Decem

be r 3, 20 09 ) he was i n F lo rid a in sp ect in g h is pro pe rti es , bu t attri al he tes ti fie d tha t h e was ab oa rdth e Worldonth os e d at es . In the lo g p et it io ne r in di cat es th atMr. Fre i
carr ie d o utda il y

in sp ect io ns an d p art ic ip at edina da il y tel eco m m un ic at io ns m eet in g wi th pe ti ti on er i n J un e 2 00 8 a ndMarc h a ndApri l 2 00 9. Mr . Frei , ho wev er, t es ti fie d tha t h e worke d fo r pe ti ti on er fro m Aug us t 2 00 8 t o F eb ru ary 20 09 . W e b el ie ve th atth e m etho ds th atpe ti ti on er u se d t o app ro xi m at e th e ti m e th athe sp en t p erfo rm in g s erv ic es du rin g 2 00 8 and20 09 are n otreas on ab le withi n- 18 -

[* 18 ] th e m ean in g o f se ct io n 1 .46 9- 5T(f )(4 ), Tem po rary Inco m e Tax Reg s., s up ra. Pet it io ne r’s es ti m at es are u nc orro bo rat edan d d o n otrel iabl y refl ectth e h ou rs th at he sp en t o n h is ren ta l re al est at e act iv it ie s. See Bai le y v. Co m m is si on er, T.C. Mem o. 2 00 1- 29 6, s li p o p. at13
. Pet it io ne r al so in tro du cedba nkreco rd s, co pi es of c he ck s, an d re cei pt s. The se ba nkst at em en ts , che ck s, an d re cei pt s p ro vi de no in fo rm at io n re gard in g h ow m an y ho ur s p et it io ne r sp en t wo rk in g o n agi ve n d ay on hi s p ro pe rti es . Furth erm or e, pe ti ti on er ad m it te d a t tria l tha t h e d idno t p ers on al ly m ak e al l o f th e pu rch as es rep res en te d b y th e rec ei pt s an d d idno t p ers on al ly writ e al l o f th e ch eck s. Pet it io ne r te st ifi edth athe ga ve hi s cr ed itcardto Mr. Nic ho ls so Mr. Nich ol s co ul d m ak e m os t o f th e p ur ch as es fro m Hom e Dep ot . Pet it io ne r te st ifi edth atDebo rah Hou se m an , an e m pl oyee of P-Q Co nt ro ls , ret ai ne d p os se ss io n o f hi s P- Q Con tro ls ch eckbo okan d asi gn atur e st am p wi th hi s na m e. He tes ti fie d tha t M s. Ho us em anpa idm any bi ll s o n h is be ha lf. M r. Frei te st ifi edth athe typic al ly recei ve d c he ck s fr om Ms . Hou se m anto pay

ex pe ns es rel at in g t o p et it io ne r’s pr op ert ie s. Mr . Nich ol s t es ti fie d tha t h e o fte n p ai d
ex pe ns es rel at in g t o p et it io ne r’s real est at e p ro pe rti es ou t o f po ck et . He furthe r te st ifi edth athe sen t an in vo ic e fo r th e ex pe ns es to Ms . Hou se m anan d tha t M s.- 19 -

[* 19 ] Hou se m anwou ldsen d h im a ch eckwith p et it io ne r’s si gn atur e ad de d b y st am p t o re im bu rs e h im for th e ex pe ns es . To the ex te ntth atpe ti ti on er b as edhi s n arra ti ve su m m ary on th e b an k
reco rd s, co pi es of c he ck s, an d re cei pt s, the na rrat iv e su m m ary wou ldbe a po st ev en t “ba ll pa rk

gu es st im at e”, an d we a re n otbo un d t o a ccep t h is su m m ary as pr oo f th athe m at eri al ly part ic ip at edinhi s re nt al act iv it ie s. Pet it io ne r do es no t s at is fy th e fi rs t m at eri al pa rti ci pa ti on tes t fo r ta x year 20 08 be cau se he di d n otpro ve th athe sp en t m or e th an50 0 h ours work in g o n a ny of hi s p ro pe rti es in20 08 . He li ke wis e d idno t s at is fy th e fi rs t m at eri al pa rti ci pa ti on tes t fo r ta x year 20 09 be cau se he di d n otpro ve th athe sp en t m or e th an50 0 h ou rs work in g o n a ll of h is pro pe rti es co m bi ne d i n 2 00 9. We fin d tha t pe ti ti on er d idno t m eethi s b ur de n o f sh owi ng th athe parti ci pa te d i n any of h is
ren ta l ac ti vi ti es form or e th an50 0 h ou rs foreit he r 20 08 or 2 00 9. Pet it io ne r do es no t s at is fy th e se co ndm at eri al pa rti ci pa ti on tes t b ecau se va rio us em

pl oyees andin de pe nd en t co nt ract or s wo rk edon each of h is pro pe rti es fo r un kn own am ou nt s o f ti m e. W itho utqu an ti fic at io n o f th e work p erfo rm edby th es e th irdpa rti es , we can no t d et erm in e whe th er p et it io ne r’s pa rti ci pa ti on co ns ti tu te s “ subs tant ia ll y all of t he pa rti ci pa ti on ” wit h re sp ectto an y pa rti cu lar pr op erty . See Sh ie kh v. Co m m is si on er, s li p o p. at14 (st at in g tha t the tax pay er d id- 20 -

[* 20 ] no t s at is fy

“ subs tant ia ll y

all ” te stwher e te na nt s wer e “ res po ns ib le forth e m ai nt en an ce o f th atpro pe rty”). Pet it io ne r do es no t s at is fy th e th irdm at eri al parti ci pa ti on tes t b ecau se he di d
no t s ho w th athi s p art ic ip at io n i n e ach ren ta l ac ti vi ty w as no t l es s than the pa rti ci pa ti on of a ny oth er i nd iv idua l. On ce ag ai n, p et it io ne r di d n otpro vi de us with a ny qu an ti fic at io n o f th e work p erfo rm edby the m an y th irdpa rti es th at worke d o n h is pro pe rti es . The ev id en ce s ug ge st s tha t M r. Frei an d M r. Nich ol s worke d m or e h ou rs th anpe ti ti on er. Mr. Fr ei tes ti fie d tha t h e typi cal ly w orke d a s a pr op erty m an ag er fo r 40 ho ur s p er weekon pe ti ti on er’s p ro pe rti es in20 08 . Mr. Nich ol s t es ti fie d tha t h e typi cal ly w orke d 4 0, 5 0, o r ev en55 ho ur s p er weekon pe ti ti on er’s p ro pe rti es in20 09 . Mr. Nich ol s t es ti fie d tha t h e wit ne ss edpe ti ti on er worki ng on th e p ro pe rti es ap pr ox im at el y th ree t o fo ur

ho ur s p er d ay , th ree t o fo ur da y s p er weekwhenpe ti ti on er was into wn an d tha t h e ex ch an ge d e m ai ls with pe ti ti on er. If we were to acce ptMr. Nic ho ls ’ te st im on y , pet it io ne r wou ldha ve worke d a t m os t 1 6 h ours pe r weekon hi s p ro pe rti es . Evenif we a ss um e th at pe ti ti on er wo rk ed6 h ou rs pe r da y , si x d ay s p er weekwhen he was i n F lo rid a as he
co nt en ds , hi s 3 6 h ou rs pe r weekwou ldbe fewer tha n M r. Frei ’s ho ur s i n 2 00 8 a nd Mr. Ni ch ol s’ ho ur s i n 2 00 9.- 21 -

[* 21 ] Fin al ly, we can no t co nc lu de th atpe ti ti on er p art ic ip at edinhi s re nt al act iv it ie s “ on a reg ul ar, co nt inuo us , andsubs tant ia l b as is ”. See s ec. 1 .46 9- 5T(a )(7 ), Tem

po rary Inco m e Tax Reg s., s up ra. Pet it io ne r sp en t t im e o n h is ren ta l act iv it ie s, b utwe can no t o ve rem ph as iz e th e im

po rtanc e o f ke ep in g tho ro ug h,
co nt em po ran eo us ti m e rec or ds rathe r th anm ak in g e st im at es aft er the fact . In ad di ti on , pet it io ne r’s us e o f se ve ral ren ta l ag en ci es to he lp fin d p ro sp ect iv e te na nt s, s ho w hi s p ro pe rti es , andm ark ethi s p ro pe rti es su gg es ts th athe di d n ot
m at eri al ly part ic ip at e in th e ren ta l o f hi s p ro pe rti es . See Ba il ey v. Co m m is si on er, sl ip op . at 1 9- 20 ; Barn is ki s v . Comm is si on er, T.C. Mem o. 1 99 9- 25 8; Ch ap in v. Co m m is si on er, T.C. Mem o. 1 99 6- 56
. W e co nc lu de th atpe ti ti on er h as no t m ethi s b ur de n o f pr ov in g tha t h e m at eri al ly part ic ip at edinan y real est at e act iv ity

du rin g 2 00 8 a nd20 09 . Sin ce pe ti ti on er d idno t m at eri al ly part ic ip at e in an y real est at e act iv ity

du rin g 2 00 8 a nd 20 09 , he d oe s n otsat is fy

eithe r requi rem en t o f se ct io n 4 69 (c)( 7) (B). Pet it io ne r do es no t qua li fy

as areal est at e p ro fes si on al foreithe r 20 08 or 2 00 9. Pe ti ti on er’s lo ss de du ct io ns with re sp ectto th e Fl or id a p ro pe rti es are d is al lo wedfortax y ears 20 08 an d 2 00 9 p ur su an t t o s ect io n 4 69
.- 22 -

[* 22 ] B. Sel f-Re nt al Ru le s Res po nd en t co nt en ds th atpe ti ti on er’s n etren ta l i nc om e fro m th e Co nn ect ic utpro pe rty andth e Ma in e p ro pe rty is n onpa ss iv e in co m e und er the sel fren ta l ru le s o f se ct io n 1 .46 9- 2( f)(6 ), In co m e Tax Reg s. In co m e fro m ren ta l act iv ity is ge ne ral ly treat edas p er s e p as si ve in co m e. See s ec. 4 69 (c)( 2) . Und er th e se lf- ren ta l ru le s n etren ta l i nc om e is recl as si fie d a s n onpa ss iv e in co m e if th e ta xp ay er re cei ve s the ren ta l i nc om e fo r us e o f anit em of h is or h er p ro pe rty in a bu si ne ss inwhi chhe or s he m at eri al ly part ic ip at es . Sec. 1 .46 9- 2( f)(6 ), In co m e Tax Reg s.; see als o Ver ih a v . Comm is si on er, 1 39 T.C. 45 , 48 -4 9 (2 01 2) . Ren ta l in co m e th atis recl as si fie d a s n onpa ss iv e can no t b e o ffs etby pas si ve lo ss es . See Carl os v. Co m

m is si on er, 1 23 T.C. 27 5 (2 00 4)
. Pet it io ne r own edth e Co nn ect ic utpro pe rty andth e Ma in e p ro pe rty. In 20 08
an d 2 00 9 h e ren te d the Co nn ect ic utpro pe rty andth e Ma in e p ro pe rty to P -Q Co nt ro ls an d P -Q Co nt ro ls Mai ne forus e in th ei r res pe ct iv e b us in es se s. He rep orte d n etren ta l i nc om e fro m bo th pro pe rti es for

20 08 an d 2 00 9. Th e se lf- ren ta l
ru le s ap pl y

to th is ne t re nt al in co m e if pe ti ti on er m at eri al ly part ic ip at edinth e bu si ne ss es of P -Q Co nt ro ls an d P -Q Co nt ro ls Mai ne du rin g 2 00 8 a nd20 09
. Mat eri al pa rti ci pa ti on ina bu si ne ss is tes te d i n the same way as m at eri al pa rti ci pa ti on ina ren ta l ac ti vi ty. Sec. 1 .46 9- 5T(a ), Tem po rary Inco m e Tax Reg s.,- 23 -

[* 23 ] supr a. W e fo cu s o n wh ethe r, on th e b as is of a ll th e fac ts an d c irc um st an ces , pe ti ti on er p art ic ip at edinth e b us in es se s o f P-Q Co ntro ls an d P -Q Co nt ro ls Mai ne on a reg ul ar, co nt in uo us , andsubs tant ia l b as is du rin g 2 00 8 a nd20 09 . See s ec. 1.4 69 -5 T(a)(7 ), Tem

po rary Inco m e Tax Reg s., s up ra. Pet it io ne r’s ta x re po rti ng su gg es ts th athe was an a ct iv e p art ic ip an t i n b ot h bu si ne ss es in20 08 an d 2 00 9. Fo r 20 08 pe ti ti on er re po rte d $ 5,3 75 ,00 0 o f wag es fro m P-Q Co ntro ls an d $ 10 ,00 0 o f wag es fro m P-Q Co ntro ls Mai ne . On h is Sch edul e E he rep orte d $ 21 ,64 3 and$7 29 ,95 9 o f no np as si ve in co m e fro m P-Q Co nt ro ls Mai ne an d P -Q Co nt ro ls , res pe ct iv el y . For 2 00 9 p et it io ne r rep orte d $8 56 ,98 9 o f wag es fro m

P-Q Co nt ro ls an d $ 10 ,00 0 o f wag es fro m P-Q Co nt ro ls Mai ne . On h is Sch edul e E he rep orte d $ 37 1,5 25 of n onpa ss iv e in co m e fro m P-Q Co nt ro ls Mai ne an d $ 65 9,2 23 of n onpa ss iv e lo ss fro m P-Q Co nt ro ls
. Pet it io ne r te st ifi edth athi s i nc om e ta x re po rti ng forbo th y ears was “ ta x pr ov is io ni ng ” an d tha t h e d idno t ac ti ve ly pro vi de servi ces to eit he r co m pa ny in
ex ch an ge forth e wag es an d p aym en ts rep orte d o n h is tax returns . Howev er, pe ti ti on er t es ti fie d tha t h e rev ie wedth e m on th ly financ ia l s ta te m en ts of h is
co m pa ni es with B artGuthr ie . He furt he r te st ifi edth athe wou ldco m m un ic at e wit h Mr. Gu th rie week ly or bi week ly abo uthi s co m pa ni es . Peti ti on er ac kn owl ed ge d th athe was the m ajor ity

sh areh ol de r, pr es id en t, an d adi rect orof b ot h P -Q Co nt ro ls- 24 -

[* 24 ] an d P -Q Co nt ro ls Mai ne du rin g the y ears inis su e, an d h e te st ifi edth athe
was fin an ci al ly resp on si bl e fo r hi s co m pa ni es . On J un e 1 , 20 11 , pet it io ne r’s th ree a du ltch il dr en , all m in or ity sh areh ol de rs of P-Q Co nt ro ls , comm en ceda sh areh ol de r’s de riv at iv e la wsu itag ai ns t p et it io ne r in th e U.S. Dis tri ctCo urt fo r th e Dis tri ctof C on ne ct ic ut . Am on g o th er thi ng s, pe ti ti on er’s ch il dr enall eg edth atpe ti ti on er d idm in im al workforP-Q Co nt ro ls du rin g 2 00 8. Pe ti ti on er d en ie d tha t h e d idm in im al workforP-Q Co nt ro ls du rin g 20 08 . On Apr il 23 , 20 12 , pet it io ne r was de po se d i n c on ne ct io n wi th th e sh areh ol de r’s de riv at iv e la wsu it . Peti ti on er adm itte d tha t h e was res po ns ib le for
en surin g tha t P- Q Con tro ls ha d e no ug h re so ur ces to in ve stcap it al inne w pro jects
. Pet it io ne r al so adm it te d tha t h e was in vo lv edact iv el y insal es cal ls du rin g 2 00 8
an d 2 00 9. Pe ti ti on er al so st at edth atas o f th e d at e o f th e d ep os it io n, h e was st il l with P -Q Co nt ro ls “ crea ti ng an d i nv en ti ng ” an d c on ti nu edto be “ a p art ic ip an t i n th e o ve ral l s tra te gy andgro wth of t he bu si ne ss .” W e co nc lu de th atpe ti ti on er p art ic ip at edinth e b us in es se s o f P-Q Co ntro ls
an d P -Q Co nt ro ls Mai ne on a reg ul ar, co nt in uo us , andsubs tant ia l b as is . As a
co ns eque nc e, pe ti ti on er’s n etren ta l i nc om e is no np as si ve an d c anno t b e o ffs etby
an y pa ss iv e act iv ity

lo ss es th athe in cu rredwith re sp ectto an y othe r pr op ert ie s. See Di ric o v . Comm is si on er, 1 39 T.C. 39 6, 4 04 (20 12 ).- 25 -

[* 25 ] II. Sect io n 2 80 A Res po nd en t co nt en ds th atth e d educ ti on s tha t p et it io ne r cl ai m edfortax y ear 20 09 with re sp ectto hi s ap art m en ts ab oa rdth e Worldare l im it edby sect io n 2 80 A. Sect io n 2 80 A(a) p ro vi de s tha t “ no de du ct io n o th erwi se all owabl e und er thi s ch ap te r sh al l b e al lo wedwith re sp ectto th e u se of adwel li ng un itwhi chis us edby th e ta xp ay er dur in g the tax ab le y ear a s a r es id en ce.” Se e al so Lang le y v. Co m mis si on er, T.C. Mem o. 2 01 3- 22 , at * 5. A dwell in g u ni t i s a r es id en ce i f th e ta xp ay er u se s the dwel li ng forpe rs on al purp os es fora nu m be r of da y s equa l t o the gr eat er o f 14 da y s o r 10 % of t he nu m be r of day s dur in g the y ear f

or whi chth e uni t is ren te d a t a f

ai r ren ta l v al ue . Sec. 2 80 A(d )(1 ); s ee al so Lang le y v. Co m m is si on er, at*5 . Pers on al pu rp os es in cl ud e p ers on al us e b y th e ta xp ay er an d p ers on al us e b y an y othe r in di vi du al un le ss th atin di vi du al is ren ti ng th e dwell in g fo r fai r ren ta l
va lu e. Sec. 2 80 A(d )(2 ). Pet it io ne r own s two ap art m en ts ab oa rdth e World . He us edon e o f hi s two ap artm en ts as h is res id en ce wh il e ab oa rdth e World . He sp en t atlea st16 2 d ay s i n 20 09 ab oardth e World . Peti ti on er t es ti fie d tha t h e o ffer edhi s s eco ndap art m en t ab oardth e Worldas ali ve au ct io n i te m to he lp rai se m on ey

forch ari ti es . He furth er t es ti fie d tha t h is do na ti on s l edto au ct io n b id de rs ’ us in g h is sec on d ap artm en t ab oa rdth e Worldfor15 to 26 week s. Pet it io ne r di d n otpro vi de an y- 26 -

[* 26 ] ev id en ce tha t ei th er ap art m en t was ren te d at fa ir r en ta l v al ue in20 09
. Bec au se bo th of p et it io ne r’s ap art m en ts were u se d fo r pe rs on al pu rp os es forat l eas t 14 da y s i n 2 00 9, b oth apartments are treat edas r es id en ces for20 09 . W e fi ndth at th e d educ ti on s tha t p et it io ne r cl ai m edfor20 09 with re sp ectto hi s ap art m en ts ab oardth e Worldare l im it edby sect io n 2 80 A. III. Accu racy-Rel at edPen al ty Res po nd en t co nt en ds th atpe ti ti on er i s l iabl e fo r anaccu racy-rela te d p en al ty un de r se ct io n 6 66 2( a) fo r ta x year 20 09 . Sect io n 6 66 2( a) p ro vi de s a p en al ty for an
un de rp aym en t at tri bu tabl e to ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns withi n th e m ean in g o f se ct io n 6 66 2( b) (1 ). The Co m m is si on er b ears th e b ur de n o f pr oduc ti on reg ard in g the tax pa y er’s li ab il ity foran y pe na lty . Sec. 7 49 1( c); see als o Hi gb ee v . Comm is si on er, 1 16 T.C. 43 8, 4 46 -4 47 (20 01 ). Once th e Co m m is si on er h as m etth is bu rd en , th e ta xp ay er m us t p ro vi de pe rs ua si ve ev id en ce tha t the Co m m is si on er’s d et erm in at io n was in co rrec t. See Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. at 4 47
. Neg li ge nc e in cl ud es an y

fai lu re t o m ak e a rea so nabl e at te m ptto co m pl y with th e p ro vi si on s o f th e in te rn al rev enue laws , to ex erci se du e car e, orto do whata reas on ab le an d p ru de ntpe rs onwou lddo un de r th e ci rcu m st an ces . Sec. 6 66 2( c); Neel y v. Co m m is si on er, 8 5 T.C. 9 34 , 94 7 (1 98 5) ; s ec. 1 .66 62 -3 (b )(1 ), In co m e Tax- 27 -

[* 27 ] Reg s. Neg li ge nc e al so in cl ud es an y fai lu re b y

a ta xp ay er t o k eep ad equa te bo ok s an d re co rd s o r to subs tant ia te it em s p ro pe rly. Sec. 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. Re sp on de ntha s d em on st rat edth atpe ti ti on er fa il edto ke ep accurat e reco rd s wi th res pe ctto hi s p art ic ip at io n i n h is ren ta l ac ti vi ti es , th e p art ic ip at io n o f th irdpa rti es inhi s re nt al act iv it ie s, an d h is pa rti ci pa ti on inth e b us in es se s o f hi s co m pa ni es . Res po nd en t h as sh ownth atpe ti ti on er ac te d n eg li ge nt ly w ith re sp ectto 20 09
. The accu racy-rela te d p en al ty doe s n otap pl y with re sp ectto an y

po rti on of a n un de rp aym en t fo r whi chitis sh own th atth e ta xp ay er h adreas on ab le cau se an d act edingo odfai th . Sec. 6 66 4( c)(1 ). Forpu rp os es of s ect io n 6 66 4( c) a t ax pa y er m ay be ab le to est ab li shreas on ab le cau se an d g oo d fa ith b y sh owi ng rel ianc e o n pr of es si on al advi ce. Sec . 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. To est ab li sh go od fai th an d re as on ab le cau se th ro ug h re li an ce o n p ro fes si on al advi ce, the tax pa y er m us t s ho w th at(1) th e advi se r was a co m pe te ntpro fes si on al who ha d s uf fic ie nt ex pe rti se to jus ti fy

rel ianc e; (2) th e ta xp ay er p ro vi de d n eces sa ry an d a ccu rat e in fo rm at io n t o the advi se r; and(3) th e ta xp ay er ac tu al ly reli edingo odfai thon th e advi se r’s jud gm en t. Neo na to lo gy Asso cs ., P.A. v. Co m m is si on er, 1 15 T.C. 43 , 99 (2 00 0) , aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2)
.- 28 -

[* 28 ] Pet it io ne r’s or ig in al 20 08 tax return was pre pa redby a certi fie d p ub li c acco un tant . He tes ti fie d tha t af te r hi s 2 00 8 t ax return was fil ed , he d eci de d t o h av e a se co ndtax return p rep arerreas se ss th e ta x re tu rnbe cau se he ha d c on cern s ab ou t th e ta x re tu rn . He tes ti fie d tha t the sec on d p rep arerin fo rm edhi m th atth e o rig in al ta x re tu rnha d m an y

om is si on s. Pet it io ne r hi redth e se co ndtax pre pa rer t o draftan am en de d 2 00 8 t ax return. Aft er re vi ewin g the am en de d re tu rn , pet it io ne r de ci de d to fil e th e am en de d 2 00 8 t ax return. Th is pre pa rer a ls o p rep aredpe ti ti on er’s 2 00 9 ta x re tu rn . Pet it io ne r di d n otcal l ei th er o f hi s t ax return p rep arer s t o t es ti fy
. Pet it io ne r di d n otke ep bo ok s an d re co rd s ad equa te to subs tant ia te hi s s ta tu s as a real est at e p ro fes si on al . W e th in k p et it io ne r act edwitho utreas on ab le cau se an d di d n otactingo odfai th . W e h ol d tha t p et it io ne r is li ab le fora se ct io n 6 66 2( a) pe na lty forne gl ig en ce fo r 20 09
. Any con te nt io ns we ha ve no t ad dr es se d a re i rrel ev an t, m oo t, o r m eri tl es s. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red
un de r Ru le 15 5.