1 Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the tax years in issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

T.C. Memo. 1996-554

UNITED STATES TAX COURT

BARRY H. AND MARILYN S. SCHEINER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18570-94. Filed December 23, 1996.

Herman B. Rosenthal, for petitioners.

Donna M. Young, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PANUTHOS, Chief Special Trial Judge: This case was heard

pursuant to the provisions of section 7443A(b)(3) and Rules 180,

181, and 182.1 Respondent determined deficiencies in
- 2 -

 

2 Petitioner reported nonpassive income attributable to

Scheiner & Halpern on Schedules K-1 in the amounts of $11,636 in

1991, and $11,788 in 1992. 

petitioners' Federal income taxes in the amounts of $4,661 and

$3,299 for the taxable years 1991 and 1992, respectively. The

issue remaining for decision is whether the losses petitioners

claimed are passive activity losses within the meaning of section

469. More specifically, we must decide whether petitioners

materially participated in the rental activity at Wisp

condominium hotel.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. At

the time of filing the petition herein petitioners resided at

Rockville, Maryland.

During the years at issue petitioner Barry H. Scheiner

worked as a physicist for the U.S. Department of the Army in

Adelphi, Maryland. Petitioner Marilyn S. Scheiner (hereinafter

sometimes referred to as petitioner) worked as a college

professor at Montgomery College teaching accounting and business

subjects. Petitioner was also a partner in the accounting

partnership of Scheiner & Halpern. The partnership consisted of

two partners, both of whom maintained offices in their respective

homes. While the amount of time spent by petitioner and her

partner on partnership activities is not clear,2 the services

were performed primarily during the tax return preparation

season--January through mid-April.
- 3 -

 

3 One of the units was used as a beauty parlor.

On September 8, 1987, petitioners entered into a contract to

purchase a condominium unit (unit No. 390) in the Wisp resort

located in Garrett County, McHenry, Maryland. The purchase price

was $88,900. The purchase and sale of the condominium unit took

place in February 1988.

The Wisp condominium hotel consisted of two buildings with a

total of 168 units.3 The larger building contained 100 units,

and the smaller building contained 68 units. Each owner of a

condominium unit at Wisp is a member of the council of unit

owners. The council of unit owners elects a board of directors.

Each unit owner could elect to dedicate his or her unit to a

hotel rental program. Under the hotel rental program, rental

receipts for all units in the program, less management expenses,

are divided proportionally on a monthly basis among the

participating units. Thus, a unit owner participating in the

program would not necessarily be concerned about rental of a

particular unit since the income and expenses were pooled. The

units were rented on a rotational basis to equalize wear and

tear. A unit owner could use his or her own unit when it was not

rented.

By agreement dated February 5, 1988, petitioners elected to

participate in the hotel rental program. During the years in

issue, all unit owners participated in the hotel rental program. 
- 4 -

The average rental period of a unit during the years in issue was

3 to 4 days.

On December 30, 1987, the council of unit owners entered

into a contract with MHM, Inc., a professional hotel management

corporation. MHM, Inc., was the manager of the hotel rental

program through 1991. During 1992, Richfield Hotel Management,

Inc. (Richfield), continued the management and marketing of units

in the hotel rental program.

Petitioner became a member of the board of directors in

November 1990 and was elected vice president of the board in

1991. During the years in issue, the board of directors was

required to deal with a number of serious issues with respect to

the condominium hotel complex. While the board was required to

consider issues and establish policies, it was generally the

management company that put the policies into effect. Under the

management contract, the council appointed MHM, Inc., as the

"general operating manager" of the condominium hotel. Thus, the

management company hired staff who operated the hotel, conducted

marketing and sales activities, handled payroll and accounting

services, and ensured that maintenance and repairs were

completed.

Board meetings were held monthly at Wisp, generally starting

at 11:30 a.m. and ending about 4 p.m. Each month, a lengthy

package of written material (approximately 50 pages) was sent to

each board member for review. Because of petitioner's background

in business and accounting matters, she was asked to review the
- 5 -

 

4 In his capacity as a unit owner, petitioner Barry H.

Scheiner attended three such meetings in 1991 and two in 1992. 

 

5 On the 1992 return, separate Schedules C were filed by

each petitioner reporting one-half the total loss. 

records of the condominium association to be certain that

accounting principles were properly applied.

Petitioner attended eight board of directors meetings in

1991 and six in 1992.4 Petitioner also attended the 1991 and

1992 annual meetings of the council of unit owners in her

capacity as a board member. Because petitioner was the only

board member who resided in Montgomery County, Maryland, unit

owners living nearby often contacted petitioner in regard to

various matters concerning Wisp. In 1991, petitioner spent at

least 100 hours, but not more than 148 hours, on board-related

matters. In 1992, petitioner spent at least 90 hours, but not

more than 123 hours, on board-related matters.

On Schedules C of their 1991 and 1992 Federal income tax

returns, petitioners claimed net losses in the amounts of $12,723

and $9,765, respectively, from the condominium hotel activity.5

In her notice of deficiency, respondent determined that the

losses were passive activity losses within the meaning of section

469. Therefore, the losses were allowed only to the extent of

passive income.
- 6 -

OPINION

Petitioners bear the burden of proving that respondent's

determination is erroneous. Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933).

Section 162 permits deductions for all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business. Section 212 permits deductions

for all the ordinary and necessary expenses paid or incurred

during the taxable year for the production of income. Section

469, however, limits the deductions for losses from a "passive

activity". Chapin v. Commissioner, T.C. Memo. 1996-56. In

Mordkin v. Commissioner, T.C. Memo. 1996-187 (a case involving an

owner of a condominium at Snowmass Village, Colorado), we

described the operation of section 469 as follows:

the passive activity loss for the taxable year is

generally the amount, if any, by which the passive

activity deductions for the taxable year exceed the

passive activity gross income for such year. Sec.

469(d)(1); sec. 1.469-2T(b)(1), Temporary Income Tax

Regs., 53 Fed. Reg. 5711 (Feb. 25, 1988).

As pertinent here, section 469(c) defines the term

"passive activity" to include: (1) Any activity which

involves the conduct of any trade or business and in

which the taxpayer does not materially participate,

sec. 469(c)(1), and (2) any rental activity without

regard to whether or not the taxpayer materially

participates in the activity, sec. 469(c)(2), (4).

For purposes of section 469(c)(1), the term "trade

or business" is defined in section 469(c)(6) to include

any activity in connection with a trade or business or

any activity with respect to which expenses are

allowable as a deduction under section 212.

For purposes of section 469(c)(2), the term

"rental activity" is defined in section 469(j)(8) as
- 7 -

any activity where payments are principally for the use

of tangible property. See also sec. 1.469-1T(e)(3)(i),

Temporary Income Tax Regs., 53 Fed. Reg. 5702 (Feb. 25,

1988). However, an activity involving the use of

tangible property is not a rental activity for a

taxable year, inter alia, if for such taxable year the

average period of customer use for such property is

seven days or less. Sec. 1.469-1T(e)(3)(i) and

(ii)(A), Temporary Income Tax Regs., supra.

In this case, the parties agree that the average period of

customer use of petitioners' condominium unit at Wisp was less

than 7 days during each of the years at issue. The parties thus

agree that petitioners' condominium hotel activity is not a

rental activity as defined in section 469(j)(8) and the

regulations thereunder and, thus, is not considered a passive

activity under section 469(c)(2). Nevertheless, petitioners'

activity at Wisp will constitute a passive activity under section

469(c)(1) unless they establish that they materially participated

in the activity during the taxable years in issue. In Mordkin v.

Commissioner, supra, we discussed the Code and regulations

relating to material participation as follows:

Section 469(h)(1) provides that generally an

individual shall be treated as materially participating

in an activity only if he or she is involved in the

operations of the activity on a basis that is regular,

continuous, and substantial. Congress expressly

authorized the Secretary of the Treasury (Secretary) to

prescribe such regulations as may be necessary or

appropriate to carry out the provisions of section 469,

including regulations that specify what constitutes

material participation. Sec. 469(1)(i).

Both temporary and final regulations relating to

the meaning of the terms "participation" and "material

participation" have been promulgated under section 469. 

With respect to the term "participation", final

regulations issued under section 469 provide that

generally "any work done by an individual (without
- 8 -

regard to the capacity in which the individual does the

work) in connection with an activity in which the

individual owns an interest at the time the work is

done shall be treated for purposes of this section as

participation of the individual in the activity." Sec.

1.469-5(f)(1), Income Tax Regs. Temporary regulations

issued under section 469 provide certain exceptions to

that definition of participation. As pertinent here,

section 1.469-5T(f)(2)(ii)(A), Temporary Income Tax

Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988), provides that

work done by an individual in such individual's

capacity as an investor in an activity shall not be

treated as participation by the individual in the

activity unless the individual is involved in the dayto-day management or operations of the activity. For

this purpose, work done by an individual in such

individual's capacity as an investor in an activity

includes:

(1) Studying and reviewing financial

statements or reports on operations of the

activity;

(2) Preparing or compiling summaries or

analyses of the finances or operations of the

activity for the individual's own use; and

(3) Monitoring the finances or

operations of the activity in a nonmanagerial capacity. [Sec. 1.469-

5T(f)(2)(ii)(B), Temporary Income Tax Regs.,

supra.]

Temporary regulations relating to the meaning of

the term "material participation" in section 469(h)(1)

provide that, in general,

an individual shall be treated, for purposes

of section 469 and the regulations

thereunder, as materially participating in an

activity for the taxable year if and only 

if--

(1) The individual participates in the

activity for more than 500 hours during such

year;

(2) The individual's participation in

the activity for the taxable year constitutes

substantially all of the participation in

such activity of all individuals (including
- 9 -

individuals who are not owners of interests

in the activity) for such year;

(3) The individual participates in the

activity for more than 100 hours during the

taxable year, and such individual's

participation in the activity for the taxable

year is not less than the participation in

the activity of any other individual

(including individuals who are not owners of

interests in the activity) for such year;

(4) The activity is a significant

participation activity (within the meaning of

paragraph (c) of this section) for the

taxable year, and the individual's aggregate

participation in all significant

participation activities during such year

exceeds 500 hours;

(5) The individual materially

participated in the activity (determined

without regard to this paragraph (a)(5)) for

any five taxable years (whether or not

consecutive) during the ten taxable years

that immediately precede the taxable year;

(6) The activity is a personal service

activity (within the meaning of paragraph (d)

of this section), and the individual

materially participated in the activity for

any three taxable years (whether or not

consecutive) preceding the taxable year; or

(7) Based on all of the facts and

circumstances (taking into account the rules

in paragraph (b) of this section), the

individual participates in the activity on a

regular, continuous, and substantial basis

during such year. [Sec. 1.469-5T(a),

Temporary Income Tax Regs., 53 Fed. Reg.

5725-5726 (Feb. 25, 1988).]

Petitioner argues that she materially participated in the

Wisp condominium hotel alternatively under the provisions of

section 1.469-5T(a)(3), (4) or (7), Temporary Income Tax Regs.,
- 10 -

 

6 Although sec. 1.469-5T(f)(3), Temporary Income Tax Regs.,

53 Fed. Reg. 5727 (Feb. 25, 1988), provides that the

participation of spouses may be combined for the purposes of

determining material participation, petitioners do not argue that

petitioner Barry Scheiner's attendance at board meetings in the

capacity as a unit owner should be considered for the purposes of

determining whether petitioners materially participated in the

condominium hotel activity. See supra note 4. We make no

findings in this regard and limit our discussion to petitioner

Marilyn Scheiner's activities. See sec. 469(c)(1). 

53 Fed. Reg. 5725-5726 (Feb. 25, 1988).6 We will discuss each of

petitioner's arguments separately.

Section 1.469-5T(a)(3), Temporary Income Tax Regs.

With respect to section 1.469-5T(a)(3), Temporary Income Tax

Regs., supra, petitioner argues that during each of the years in

issue, she participated in the condominium hotel activity for

more than 100 hours, and that no single individual devoted more

time to petitioners' unit than petitioner. Respondent contends

that petitioner does not meet the test of section 1.469-5T(a)(3),

Temporary Income Tax Regs., supra, since petitioner has not

established the hours spent in the activity. Respondent further

argues that, even if petitioner did establish that she spent more

than 100 hours in the activity, the time spent was in the

capacity of an investor and not in the day-to-day operation of

the activity. See sec. 1.469-5T(f)(2)(ii)(B), Temporary Income

Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988). In addition,

respondent argues that other individuals (the paid hotel

management staff) spent more time in the activity than

petitioner.
- 11 -

A preliminary question we must decide is whether the work

done by petitioner in her capacity as a board member and officer

constitutes participation in the Wisp condominium hotel activity

or, alternatively, constitutes investor participation within the

meaning of section 1.469-5T(f)(2)(ii)(B), Temporary Income Tax

Regs., supra. In Mordkin v. Commissioner, T.C. Memo. 1996-187,

we held that the work done by a taxpayer on the board of

directors dealing with a wide range of issues relating to the

operation of a condominium hotel was not investor participation

within the meaning of section 1.469-5T(f)(2)(ii)(B), Temporary

Income Tax Regs., supra. Petitioner's activities as an officer

and member of the board of directors are similar to the

activities performed by the taxpayer in Mordkin. We similarly

conclude that petitioner's activities as a board member of Wisp

do not constitute investor participation.

We have found that petitioner spent at least 100 hours, but

not more than 148 hours, on board activities in 1991, and at

least 90 hours, but not more than 123 hours, in 1992. Even if

petitioner has exceeded the 100-hour threshold, petitioner's

activities will not constitute material participation under

section 1.469-5T(a)(3), Temporary Income Tax Regs., supra, unless

she establishes that no other individual spent more time in

connection with the condominium rental activity. In this regard,

in measuring the time spent by any particular employee at Wisp,

petitioner argues that such an employee's time would need to be

divided by 167 (the number of units participating in the rental
- 12 -

program). Thus, according to petitioner, no one full-time

employee at Wisp could have participated more than petitioner. 

To this effect, petitioner allocates all of her time spent on

board matters solely to her condominium. In contrast, petitioner

ratably allocates the time spent by employees running the day-today operations of Wisp to all 167 units participating in the

rental program.

Petitioner suggests, and we accept, that all of her time

spent on board matters constitutes "participation" in the

condominium rental activity, without regard to any specific

connection of the board activities to petitioner's particular

unit. Petitioner also argues that the activities of Wisp

employees constitute "participation" for the purposes of section

1.469-5T(a)(3), Temporary Income Tax Regs., supra, only to the

extent that their services are directed towards petitioner's

specific unit. In this regard, there is nothing in the record

from which to calculate the precise amount of time spent by

employees in performing day-to-day services related solely to the

rental of petitioner's condominium. Likewise, there is no

evidence regarding the extent to which petitioner's activities as

a board member are specifically related to her unit. Given that

both petitioner and full-time staff, in their respective

capacities, served all Wisp units, we believe it reasonable to

assume that the portion of petitioner's board activities related

to the rental of her unit is commensurate with the portion of the

staff's activities related to the rental of petitioner's unit. 
- 13 -

 

7 See also Serenbetz v. Commissioner, T.C. Memo. 1996-510.

Cf. Mordkin v. Commissioner, supra. Consequently, we assume that

all work done by full-time staff constitutes "participation" in

connection with the rental of petitioner's unit. Id. Because

the participation of full-time staff exceeded petitioner's

participation during the years in issue, petitioner's activities

do not constitute material participation under section 1.469-

5T(a)(3), Temporary Income Tax Regs., supra.

7

Section 1.469-5T(a)(7), Temporary Income Tax Regs.

Petitioner argues that based on all the facts and

circumstances, she should be deemed to have materially

participated in the condominium hotel activity. Sec. 1.469-

5T(a)(7), Temporary Income Tax Regs., supra. The facts and

circumstances test provided in section 1.469-5T(a)(7), Temporary

Income Tax Regs., supra, is subject to certain limitations. A

taxpayer must participate in the activity for more than 100

hours. Sec. 1.469-5T(b)(2)(iii), Temporary Income Tax Regs., 53

Fed. Reg. 5726 (Feb. 25, 1988). Additionally, a taxpayer's

services performed in the management of an activity cannot be

considered for the purposes of establishing material

participation under section 1.469-5T(a)(7), Temporary Income Tax

Regs., supra, if other individuals performing management services

in connection with the activity were compensated for such

services. Sec. 1.469-5T(b)(2)(ii)(A), Temporary Income Tax

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). Therefore,
- 14 -

petitioner's activities as a board member cannot be considered

for the purposes of this test if other individuals providing

management services are compensated. Mordkin v. Commissioner,

supra.

The record indicates that both MHM, Inc., and Richfield

employed individuals to manage the day-to-day operation of Wisp.

Consequently, respondent argues that section 1.469-

5T(b)(2)(ii)(A), Temporary Income Tax Regs., supra, precludes

petitioner's board activities from being considered participation

under section 1.469-5T(a)(7), Temporary Income Tax Regs., supra. 

Were we to accept respondent's position, petitioner's activities

would not be considered material participation under section

1.469-5T(a)(7), Temporary Income Tax Regs., supra.

Petitioner argues that the activities of onsite management

should not be considered "management services" for the purposes

of section 1.469-5T(a)(7) and (b)(2)(ii)(A), Temporary Income Tax

Regs., supra. To support this position, petitioner cites Staff

of Joint Comm. on Taxation, General Explanation of the Tax Reform

Act of 1986, at 241 (J. Comm. Print 1987) (hereinafter the

General Explanation), which states:

The application of the material participation

standard to a condominium hotel that is not a rental

activity for purposes of the passive loss rules may be

illustrated as follows. Assume that an individual who

is an investor in the hotel does not live nearby, has a

principal business that is unrelated to operating the

hotel, is inexperienced in the hotel business, and

employs agents to perform various essential hotel

functions. However, such individual's participation in

the hotel business involves making frequent visits to

the hotel in order to conduct onsite inspections, meet
- 15 -

with onsite management, and otherwise participate in

integral functions of the business. In addition, the

individual on a regular basis uses his independent

discretion to make business decisions such as the

following: (1) regularly establishing room rental

rates, (2) establishing and reviewing hiring and other

personnel policies, including review of management

personnel, (3) reviewing and approving periodic and

annually audited financial reports, (4) participating

in budget operating costs and establishing capital

expenditures, (5) establishing the need for and level

of financial reserves, (6) selecting the banking

depository for rental proceeds and reserve funds, (7)

participating in frequent meetings at the hotel to

review operations and the business plan, and (8)

assisting in offsite business promotion activities. 

* * *

Under these circumstances, if the standard

requiring regular, continuous, and substantial

involvement is satisfied, then the taxpayer is treated

as materially participating in the hotel activity. He

is not so treated, however, in the absence of

sufficient involvement. No safe harbor should be

inferred from the preceding paragraph. * * * [Emphasis

added.]

The above-quoted language summarizes colloquies between Senators

Packwood and Hatfield on the floor of the U.S. Senate. See 132

Cong. Rec. 15032, 26685-26686 (1986) (colloquies between Senators

Packwood and Hatfield). According to petitioner, the passage

indicates Congress' intent to provide owners of condominium hotel

units with the opportunity to hire onsite management without

triggering the application of passive loss restrictions. 

Petitioner thus argues that respondent's interpretation of the

management-related limitations of section 1.469-5T(a)(7),

Temporary Income Tax Regs., supra, would preclude the hiring of

any onsite management, thereby ignoring congressional intent. 

Petitioner contends that the only "management services" to be
- 16 -

 

8 Similarly, in Mordkin v. Commissioner, T.C. Memo. 1996-

187, the taxpayer cited the colloquy between Senators Packwood

and Hatfield in arguing that sec. 1.469-5T(a)(1), Temporary

Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), was invalid

because it "required" an individual to participate in an activity

for greater than 500 hours before being treated as having

materially participated in that activity. Specifically, the

taxpayer relied upon the colloquy to argue that the determination

of whether an individual materially participates in an activity

should be based solely upon the integral nature of the work

performed by the taxpayer, and not upon the quantity of work. We

rejected the taxpayer's argument, stating:

The foregoing colloquy between Senator Hatfield and

Senator Packwood makes it clear that services performed

by a taxpayer that are deemed integral to the

operations of a condominium hotel will constitute

material participation by the taxpayer in those

operations only if the taxpayer performs those services

in such a way and "to such an extent" that it shows

that the taxpayer's involvement in those operations is

regular, continuous, and substantial. Contrary to [the

taxpayer's] contention, that colloquy does not in any

(continued...)

considered for the purposes of section 1.469-5T(a)(7) and

(b)(2)(ii)(A), Temporary Income Tax Regs., supra, are those

within the prerogative of the owners; i.e., board activities. As

no members of the Wisp board were compensated, petitioner argues

that her activities constitute material participation under

section 1.469-5T(a)(7), Temporary Income Tax Regs., supra.

We do not agree with petitioner's position. The General

Explanation passage cited by petitioner was not meant to be

construed as a safe harbor. Rather, the language cited by

petitioner indicates that taxpayers may hire onsite management

while engaging in activities sufficient to constitute material

participation, but only "if the standard requiring regular,

continuous, and substantial involvement" is otherwise satisfied.8
- 17 -

 

8(...continued)

way suggest that, in determining whether a taxpayer's

participation in the operations of an activity is

material, it is unreasonable to examine the amount and

extent of time spent by the taxpayer in those operations. 

[Mordkin v. Commissioner, supra; citation omitted.]

In this regard, we note that respondent's interpretation of

section 1.469-5T(b)(2)(ii)(A), Temporary Income Tax Regs., supra,

does not preclude petitioner from establishing material

participation under any or all of six other tests. Mordkin v.

Commissioner, T.C. Memo. 1996-187. For example, an individual

may be treated as having materially participated in a condominium

rental activity by participating for more than 500 hours,

regardless of whether full-time onsite management was employed. 

Sec. 1.469-5T(a)(1), Temporary Income Tax Regs., supra.

With respect to management participation, the legislative

history of section 469 also notes:

Participation in management cannot be relied upon

unduly both because its genuineness and substantiality

are difficult to verify, and because a general

management role, absent more, may fall short of the

level of involvement that the material participation

standard is meant to require. [S. Rept. 99-313 at 713,

734-735, 1986-3 C.B. (Vol. 3) at 734-735].

The management-related restrictions applicable to section 1.469-

5T(a)(7), Temporary Income Tax Regs., supra, reflect Congress'

concern that a taxpayer seeking to materially participate in an

activity through participation in management will hire expert

agents to manage the day-to-day operations of the activity while

the taxpayer performs merely a formal management role with
- 18 -

 

9 As an example of an abuse which Congress sought to

address in enacting sec. 469, the Senate report describes a

situation whereby outside investors could own syndication rights

in a farming activity, operated principally under the direction

of a hired agent, which has been structured to assist otherwise

passive investors to demonstrate that they play a role in

managing the farming operations. S. Rept. 99-313 at 713, 734

n.20 (1986), 1986-3 C.B. (Vol. 3) 1, 713, 734 n.20. 

limited involvement.9 Respondent's contention that the presence

of compensated onsite management should preclude petitioner's

board activities from consideration under section 1.469-5T(a)(7),

Temporary Income Tax Regs., supra, is consistent with this

concern.

We find that the activities of compensated onsite management

should be considered "management services" for the purposes of

section 1.469-5T(a)(7) and (b)(2)(ii)(A), Temporary Income Tax

Regs., supra. Therefore, we find that petitioner has failed to

establish material participation under section 1.469-5T(a)(7),

Temporary Income Tax Regs., supra.

Section 1.469-5T(a)(4), Temporary Income Tax Regs.

Petitioner argues that her activities constitute material

participation under section 1.469-5T(a)(4), Temporary Income Tax

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), in that she

"significantly participated" in the condominium hotel activity

and that her aggregate participation in significant participation

activities during the year exceeded 500 hours. In this regard,

petitioner combines her activity in the condominium hotel with

the activity in her accounting partnership.
- 19 -

With respect to petitioner's argument that she qualifies

under section 1.469-5T(a)(4), Temporary Income Tax Regs., supra,

respondent contends that petitioner failed to raise this argument

in a timely fashion. Respondent argues that because no discovery

was conducted with respect to petitioner's participation in her

accounting partnership, undue prejudice would result were we to

consider this issue. Respondent also maintains that, even if the

Court considers petitioner's argument, petitioner has failed to

adequately substantiate the requisite hours in the condominium

hotel activity and in the accounting partnership activity.

It is well settled that we will not consider issues raised

by parties when undue surprise and prejudice would result. 

Seligman v. Commissioner, 84 T.C. 191, 198 (1985), affd. 796 F.2d

116 (5th Cir. 1986). While petitioner's pre-trial memorandum

broadly argued that her activities constituted material

participation under section 469, petitioner introduced this

particular argument during closing arguments. We note, however,

that the notice of deficiency characterizes petitioner's

condominium rental activities as "passive activities" under

section 469. Moreover, respondent's pre-trial memorandum argues

that petitioner failed to meet each of the seven tests contained

in the regulations, including section 1.469-5T(a)(4), Temporary

Income Tax Regs., supra. Petitioner reported her accounting

partnership activities on her returns, and respondent was well

aware that the only issue in this trial was whether petitioner's

activity constituted material participation in the ownership of
- 20 -

her unit at Wisp. Based on all the circumstances herein, we will

consider petitioner's argument under section 1.469-5T(a)(4),

Temporary Income Tax Regs., supra.

To establish material participation under section 1.469-

5T(a)(4), Temporary Income Tax Regs., supra, petitioner's

condominium rental activity must constitute a "significant

participation" activity under section 1.469-5T(c), Temporary

Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). 

Furthermore, petitioner must participate in at least one other

significant participation activity, with the total participation

in all significant participation activities exceeding 500 hours. 

A significant participation activity is one in which the taxpayer

participates for more than 100 hours, but which fails to

constitute material participation under one of the other six

tests. Sec. 1.469-5T(c)(1)(ii) and (2), Temporary Income Tax

Regs., supra. Thus, in order for an activity to be considered a

significant participation activity, the taxpayer (1) must have

more than 100 hours of participation; (2) must have less than 500

hours of participation, as participation in excess of 500 hours

would satisfy the test contained at section 1.469-5T(a)(1),

Temporary Income Tax Regs., supra; and (3) must not be the

individual with the most hours of participation in the activity,

as a person with the greatest amount of participation in the

activity, if in excess of 100 hours, satisfies the test at

section 1.469-5T(a)(3), Temporary Income Tax Regs., supra.
- 21 -

 

10 Petitioner testified that she worked 426 hours for

Scheiner and Halpern in 1991 and 402 hours in 1992, while her

partner worked 469 hours in 1991 and 440 hours in 1992. Were we

to accept petitioner's testimony, her activity at Scheiner and

Halpern would constitute a significant participation activity

which, when added to the time spent at Wisp, might exceed 500

hours. 

Petitioner argues that her participation in Scheiner &

Halpern constitutes a significant participation activity.10

Petitioner's testimony with regard to the time spent working for

Scheiner & Halpern, however, is not corroborated by written

documentation. The regulations specify that participation in an

activity may be established by any reasonable means. While

contemporaneous records are not required, reasonable means may

include appointment books, calendars, or narrative summaries. 

Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., supra.

 Given the self-serving nature of petitioner's testimony,

coupled with the lack of corroboration in the record, we do not

accept her naked assertion that she worked the requisite amount

of hours to qualify her accounting partnership activity as a

significant participation activity. We are particularly troubled

with petitioner's ability to recall, without any records, the

number of hours of participation in her accounting partnership

which neatly places her over all of the hurdles necessary to

satisfy the requirements of section 1.469-5T(a)(4), Temporary

Income Tax Regs., supra. The record indicates that in other

aspects of her activities, petitioner maintained thorough

documentation, as would be expected of someone in her profession. 
- 22 -

Yet, with respect to the accounting partnership activity, no

documentation of the hours worked was presented to respondent or

the Court.

We are not bound to accept the unverified, undocumented

testimony of taxpayers. Hradesky v. Commissioner, 65 T.C. 87, 90

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). It is

well established that the failure of a party to introduce

evidence within his or her possession which, if true, would be

favorable, gives rise to the presumption that if produced, it

would be unfavorable. Frierdich v. Commissioner, 925 F.2d 180,

185 (7th Cir. 1991), affg. T.C. Memo. 1989-393 (amending T.C.

Memo. 1989-103). If the partnership records of Scheiner &

Halpern lent support for petitioner's contention, presumably they

would have been made a part of the record. Petitioner has not

met her burden of proving that she met the requirements of

section 1.469-5T(a)(4), Temporary Income Tax Regs., supra. 

Chapin v. Commissioner, T.C. Memo. 1996-56.

Petitioner has failed to establish material participation

with respect to her condominium rental activities under section

469 and the accompanying regulations. Therefore, we sustain

respondent's determination that the losses from such activities

were passive activity losses under section 469.

To reflect the foregoing,

 Decision will be entered

 under Rule 155.