FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CHARLES GRAGG; DELORES

GRAGG,

Plaintiffs-Appellants,

v.

UNITED STATES OF AMERICA;

INTERNAL REVENUE SERVICE

COMMISSIONER,

Defendants-Appellees.

No. 14-16053

D.C. No.

4:12-cv-03813-YGR

OPINION

Appeal from the United States District Court

for the Northern District of California

Yvonne Gonzalez Rogers, District Judge, Presiding

Submitted May 10, 2016*

San Francisco, California

Filed August 4, 2016

Before: Jerome Farris, Diarmuid F. O’Scannlain,

and Morgan Christen, Circuit Judges.

Opinion by Judge Christen

* The panel unanimously concludes this case is suitable for decision

without oral argument. See Fed. R. App. P. 34(a)(2).
2 GRAGG V. UNITED STATES

SUMMARY**

Tax

The panel held that Internal Revenue Code § 469 allows

real estate professionals to deduct rental losses from their

taxable income, but only if they materially participate in

rental activities.

Under IRC § 469(c)(1), the general rule is that any

activity in which a taxpayer does not materially participate is

passive. Under § 469(c)(2), rental activity is per se passive,

regardless of whether the taxpayer materially participates.

Under § 469(c)(7), the per se bar does not apply to real estate

professionals.

Taxpayers sought to deduct losses from rental properties

they owned, contending that Delores Gragg’s status as a real

estate professional rendered the real estate losses per se

nonpassive and deductible under IRC § 469, regardless of

material participation. The panel explained that the statutory

text, regulations, and relevant case law all point in one

direction: although taxpayers who qualify as real estate

professionals are not subject to § 469(c)(2)’s per se rule that

rental losses are passive, they still must show material

participation in rental activities before deducting rental losses

according to the general rule under § 469(c)(1).

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.
GRAGG V. UNITED STATES 3

COUNSEL

Robert L. Goldstein, Law Offices of Robert L. Goldstein, San

Francisco, California, for Plaintiffs-Appellants.

Julie Ciamporcero Avetta and Teresa E. McLaughlin,

Attorneys; Tamara W. Ashford, Acting Assistant Attorney

General; Tax Division, United States Department of Justice,

Washington, D.C.; for Defendants-Appellees.

David Radmore, Staff Attorney; Jenny Y. Li, Senior Counsel;

June Babiracki Barlow, Vice President and General Counsel;

Los Angeles, California; as and for Amicus Curiae California

Association of Realtors.

OPINION

CHRISTEN, Circuit Judge:

In the 1980s and 1990s, Congress substantially amended

the Internal Revenue Code (I.R.C.) to curb widespread abuses

of tax loopholes. One newly added provision, I.R.C. § 469,

restricted taxpayers’ ability to reduce their taxable income

using passive rental losses—that is, losses from rental

properties they own but in which they do not materially

participate. This case requires us to determine the scope of

§ 469. Specifically, it requires us to determine whether § 469

entitles real estate professionals like petitioner Delores Gragg

to deduct rental losses without showing material participation

in the rental property. We hold that it does not. Section 469

allows real estate professionals to deduct rental losses from

their taxable income, but only if they materially participate in

rental activities.
4 GRAGG V. UNITED STATES

I.

In 1986, Congress passed the Tax Reform Act of 1986 to

curb taxpayers’ deduction of losses from so-called “passive”

investments. Tax Reform Act of 1986, Pub. L. No. 99-514,

§ 501(a), 100 Stat. 2085, 2233 (codified as amended at I.R.C.

§ 469). It implemented a simple rule: taxpayers could not

reduce the taxable portion of their true income with

investment losses unless they materially participated in the

investment. Id. §§ 501(c), (h) (defining “material

participation” as “regular, continuous, and substantial”

participation). But investments in rental properties were

treated differently. The Tax Reform Act of 1986 rendered

losses from rental activity per se passive, and therefore per se

nondeductible. Id. § 501(c)(2). This per se bar applied to

rental property regardless of the extent of a taxpayer’s

participation. Id.

In 1993, Congress decided the Tax Reform Act of 1986

had gone “too far.” 139 Cong. Rec. H6134-01, H6157 (daily

ed. Aug. 5, 1993). The Committee on the Budget deemed it

“unfair that a person who performs personal services in a real

estate trade or business in which he materially participates

may not offset losses from rental real estate activities against

income from nonrental real estate activities.” H.R. Rep. No.

103-111, at 613 (1993), reprinted in 1993 U.S.C.C.A.N. 378,

844. Congress subsequently enacted § 469(c)(7) to create an

exception to the per se bar on deducting rental losses: for

taxpayers who qualify as real estate professionals,1the per se

1 The statute does not use the term “real estate professionals,” but rather

refers to “taxpayers in real property business.” I.R.C. § 469(c)(7). We

use the industry shorthand “real estate professionals” for ease of reference. 

Both parties agree that Delores qualified as a real estate professional for
GRAGG V. UNITED STATES 5

rental bar “shall not apply.” Omnibus Budget Reconciliation

Act of 1993, Pub. L. No. 103-66, § 13143(a), 107 Stat. 312,

440 (codified at I.R.C. § 469).

This case is about the scope of that exception. Delores

and Charles Gragg sought to deduct from their taxable

income rental losses they incurred in 2006 and 2007. Delores

is a licensed real estate agent who worked for a real estate

brokerage during both years. On their 2006 joint tax return,

the Graggs deducted $38,153 in losses from rental properties

they owned. On their 2007 return, they deducted $40,390 in

rental losses. The Graggs’ joint returns were audited in 2009,

and they submitted documents establishing that Delores was

a real estate professional under § 469(c)(7). The Internal

Revenue Service (IRS) requested “a written log of all . . .

rental related activities that w[ould] support the deduction

claimed.” In response, the Graggs submitted two undated

one-page notes estimating the hours Delores spent working

on the Graggs’ rental properties in 2006.

The IRS disallowed the rental losses because it concluded

that the Graggs were required to show they materially

participated in the rental properties, and had not done so. The

Graggs paid the deficiencies for both years and timely filed

administrative refund claims with the IRS for both years. 

They argued that Delores’s status as a real estate professional

rendered their rental losses per se nonpassive and

“request[ed] that the[] claims be immediately denied so that

[the Graggs could] initiate a District Court action.” The IRS

disallowed the Graggs’ claims, and the Graggs timely filed

suit for a refund in the district court under I.R.C. § 7422. The

Graggs’ complaint renewed their argument that by virtue of

the relevant time period.
6 GRAGG V. UNITED STATES

Delores’s status as a real estate professional, their rental

losses were automatically nonpassive and they did not need

to prove material participation. The government and the

Graggs filed cross motions for summary judgment. The

district court granted summary judgment in favor of the

government, and the Graggs timely appealed. We have

jurisdiction under 28 U.S.C. § 1291.

II.

The issue on appeal is whether I.R.C. § 469(c)(7)

automatically renders a real estate professional’s rental losses

nonpassive and deductible, or whether it merely removes

§ 469(c)(2)’s per se bar on treating rental losses as passive. 

The Graggs advocate for the former interpretation, and the

government argues for the latter.

The text of the statute favors the government’s

interpretation. Section 469(c)(1), which was part of the

statute as originally enacted in 1986, provides the general rule

that any activity in which a taxpayer does not materially

participate is passive:

(c)(1): The term “passive activity” means any

activity (A) which involves the conduct of any

trade or business, and (B) in which the

taxpayer does not materially participate.

The next section, 469(c)(2), is the per se rental bar. This

section was also part of the original 1986 legislation. It

establishes that rental activity is per se passive, regardless of

whether the taxpayer materially participates:
GRAGG V. UNITED STATES 7

(c)(2): Passive activity includes any rental

activity. Except as provided in paragraph (7),

the term “passive activity” includes any rental

activity.

Section 469(c)(7), added in the 1993 amendments, provides

the exception; if the taxpayer is a real estate professional, the

per se bar does not apply:

(c)(7)(A): If this paragraph applies to any

taxpayer for a taxable year . . . paragraph (2)

shall not apply to any rental real estate

activity of such taxpayer for such taxable year

. . . .

The Graggs contend these provisions, taken together,

establish that after a taxpayer qualifies as a real estate

professional under § 469(c)(7), all rental losses are

automatically rendered nonpassive and deductible,regardless

of material participation. The text of the statute does not

support this interpretation. The effect of the (c)(7) exception

is merely that “paragraph (2)”—the per se bar—“shall not

apply.” If the per se rental bar does not apply, the general

(c)(1) rule does, and the activity is passive unless the taxpayer

materially participates.

The IRS Treasury Regulations implementing § 469

reinforce this interpretation. Treasury Regulation § 1.469-

9(e)(1) states that a taxpayer who qualifies as a real estate

professional can treat rental losses as nonpassive, but only so

long as she materially participates:

Section 469(c)(2) [(the per se rental bar)] does

not apply to any rental real estate activity of a
8 GRAGG V. UNITED STATES

taxpayer for a taxable year in which the

taxpayer is a qualifying taxpayer under

paragraph (c) of this section [i.e., a real estate

professional]. Instead, a rental real estate

activity of a [real estate professional] is a

passive activity under section 469 for the

taxable year unless the taxpayer materially

participates in the activity.

Treas. Reg. § 1.469-9(e)(1) (emphasis added). A subsequent

provision confirms that even taxpayers who establish real

estate professional status must separately show material

participation in rental activities (as opposed to other real

estate activities) before claiming any rental losses as

nonpassive:

[I]f a qualifying taxpayer develops real

property, constructs buildings, and owns an

interest in rental real estate, the taxpayer’s

interest in rental real estate may not be

grouped with the taxpayer’s development

activity or construction activity. Thus, only

the participation of the taxpayer with respect

to the rental real estate may be used to

determine if the taxpayer materially

participates in the rental real estate activity

under [the material participation safe harbor

provisions in] § 1.469-5T.

Id. § 1.469-9(e)(3)(i) (emphasis added). These regulations

cannot be reconciled with the Graggs’ understanding that the

(c)(7) exception excuses real estate professionals from the

material participation requirement.
GRAGG V. UNITED STATES 9

Our court has not previously addressed the Graggs’

interpretation of § 469, but their argument has been squarely

rejected by the Tax Court, and we view Tax Court opinions

as persuasive authority. See Dobson v. C.I.R., 320 U.S. 489,

502 (1943) (“The Tax Court is informed by experience and

kept current with tax evolution and needs by the volume and

variety of its work . . . [and] uniform administration would be

promoted by conforming to [its decisions] when possible.”). 

In Perez v. C.I.R., the taxpayer argued, as the Graggs do here,

that “because she [was] a qualifying real estate professional

pursuant to section 469(c)(7)(B), all her real estate activities,

including rental activities, [were] not passive and therefore

she [was] not subject to the passive activity loss limitations.” 

100 T.C.M. (CCH) 351, at *1 (2010). The Tax Court

disagreed, ruling that “[c]aselaw clearly requires that a

taxpayer claiming deductions for rental real estate losses meet

the ‘material participation’ requirement[].” Id. at *2.

The Graggs do not seriously grapple with Perez. Instead,

they contend that Agarwal v. C.I.R., another Tax Court case,

supports their cause. It does not. The issue in Agarwal was

whether a real estate agent could qualify as a real estate

professional under § 469(c)(7)(C), notwithstanding the text of

the statute, which specified that it applied to brokerages. 

T.C. Summ. Op. 2009-29, 2009 WL 513391 at *3 (U.S. Tax

Ct. 2009). The Graggs contend that Agarwal permits material

participation to be calculated as a function of a taxpayer’s

combined real estate activities, effectively removing the

requirement that the taxpayer independently show material

participation with regard to rental activities. The court in

Agarwal did not specify how it determined material

participation, but it recognized that “the determination of

whether the qualifying taxpayer materially participated . . .

must be met with respect to each rental activity,” suggesting
10 GRAGG V. UNITED STATES

that it would not permit a taxpayer to combine rental and

nonrental activities for purposes of calculating material

participation. Id. at *4 & n.4. Agarwal provides no

compelling reason to depart from the Tax Court’s decision in

Perez, nor have we found one.

The Graggs argue on appeal that even if they must show

material participation before deducting rental losses, they

“could potentially satisfy” this requirement by meeting one or

more of the material participation safe harbor provisions in

the Treasury Regulations. But the Graggs did not make this

argument before the district court. There, they conceded that

“Plaintiff Delores Gragg does not contend that she meets the

material participation requirements . . . for each rental real

estate activity” and focused instead on the argument that

“[t]hese tests are irrelevant” to them by virtue of Delores’s

status as a real estate professional. We decline to address

their new argument that limited evidence in the record—two

undated notes estimating the total hours spent on rental

properties in 2007—satisfies the Graggs’ burden of

demonstrating material participation in rental activities for

2006 and 2007.2In the district court, the Graggs did not

attempt to demonstrate material participation in their 2006

and 2007 rental activities, and those losses are therefore

nondeductible.

Section 469’s text, regulations, and relevant case law all

point in one direction: though taxpayers who qualify as real

estate professionals are not subject to § 469(c)(2)’s per se rule

2 The Treasury Regulations provide that material participation “may be

established by any reasonable means,” and “[c]ontemporaneous daily time

reports . . . are not required if the extent of such participation may be

established by other reasonable means.” Treas. Reg § 1.469-5T(f)(4).
GRAGG V. UNITED STATES 11

that rental losses are passive, they still must show material

participation in rental activities before deducting rental

losses. Congress endeavored to narrow the scope of

permissible deductions for passive losses in real estate

investments, in part by requiring material participation before

losses may be deducted. Real estate professionals were not

exempted from this requirement.

AFFIRMED.