TAX COURT OPINION

Case: Roger J. Concannon & Mary L. Concannon
Docket Number: 14929-13S
Judge: Whalen
Opinion Type: bench
Filed: 10/20/2014
Pages: 16

UNITED STATES TAX COURT WASHINGTON, DC 20217 ROGER J. CONCANNAN & MARY L. CONCANNON, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) ) ) ORDER Docket No. 14929-13S Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the proceedings in the above-case before the undersigned at Boston, Massachusetts, containing the oral findings of fact and opinion rendered on September 11, 2014. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Laurence J. Whalen Judge Dated: Washington, D.C. October 20, 2014 SERVED OCT 2 1 2014 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bench Opinion by Judge Laurence J. Whalen September 11, 2014 Roger J. Concannon & Mary L Concannon Docket No. 14929-13S FINDINGS OF FACT AND OPINION I. The Cour 's decided to render oral A findings of fact and opinion in this case, and the following represents The Court's oral findings of fact and opinion. II. This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 179 of the Tax Court Rules of Practice and Procedure. Hereinafter all section references are to the Internal Revenue Code, as amended and in effect for 2010, the taxable year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The decision to be entered in this case is not reviewable by any other court, and this opinion should not be cited as authority. Sec. 7463(b). III. This bench opinion is made pursuant to the 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 4 1 2 3 4 authority granted by section 7459(b) and Rule 152. IV. Petitioner Roger J. Concannon appeared in these proceedings on behalf of petitioners. Derek W. 5 Kelley, Esquire, appeared on behalf of respondent. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 In this opinion, all references to petitioner are references to Mr. Concannon. V. Respondent determined a tax deficiency of $4,893 in petitioners' Federal income tax for taxable year 2010. The tax deficiency is based upon respondent's determination that a loss of $47,154 claimed on petitioners' Schedule E, Supplemental Income and Loss, from the operation of three or four "rental" properties, depending on how you count them, was a passive activity loss, as defined by section 469(d)(1). Respondent allowed $25,000 to offset the loss, pursuant to section 469(i), on the ground that petitioner had actively participated in the rental 20 activities. As a result, the amount of the loss that 21 22 23 24 25 was disallowed in the notice of deficiency is $22,154 ($47,154 less $25,000). VI. Petitioners assert that during 2010 their rental real estate activity was not a passive activity, as 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 defined by section 469(c)(1), because Mr. Concannon qualified as a "taxpayer in real estate business", described by section 469(c)(7), a so-called real estate professional, and because he had materially participated in each rental real estate property during the year. Accordingly, petitioners argue that section 469(c)(2) does not apply to their rental 8 activity, and they are entitled to deduct the entire 9 loss from those activities claimed on the Schedule E. 10 11 12 13 14 15 16 The issues for decision are whether petitioner qualifies under section 469(c)(7) as a real estate professional, and whether he materially participated in each interest in rental real estate during 2010. VII. Some of the facts have been stipulated by the parties. The Stipulation of Facts, the Second 17 Stipulation of Facts, and the Third Stipulation of 18 19 Facts filed by the parties, together with the exhibits attached thereto, were taken into evidence. 20 Petitioner Roger J. Concannon resided in Berlin, New 21 22 23 24 25 Hampshire, and Petitioner Mary L. Concannon resided in Weymouth, Massachusetts, at the time their petition in this case was filed with The Court. Petitioners' return for taxable year 2010 included a Schedule E, Supplemental Income and Loss, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 on which they claimed deductions for expenses relating to their rental real estate properties. They claimed aggregate expenses of $47,154, and they reported no income from any of the three properties. 5 Accordingly, they reported a total rental real estate 6 7 8 9 loss of $47,154 on Schedule E, and on line 17 of Form 1040. They also reported the same amount in Part V of Schedule E as the loss of a real estate professional from rental real estate activities in 10 which the real estate professional materially 11 12 13 participated. Petitioners' first property is a three unit rental property located at 199-201 East Mason, 14 Berlin, New Hampshire. Petitioners claimed a loss of 15 16 17 18 19 20 21 22 23 24 25 $24,922 from this property. During 2010, petitioner resided in the unit on the second floor which was 1,200-square feet. There were two other units on the first floor, each which was 900-square feet. Neither L h of the units on the first floor was occupied during the year. Petitioners claimed no expenses on their Schedule E for advertising of the units in this property. Petitioners' second property, a small one- bedroom unit with 500 to 600-square feet, is located at 179 Sandogardy Pond Road, Northfield, New 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 Hampshire. Petitioners claimed a loss of $5,548 from this property. The unit was unoccupied during the year. Petitioners claimed no expenses on their Schedule E for advertising on this property. Petitioners' third property, a small one-bedroom unit with 500 to 600-square feet, is located at 182 Sandogardy Pond Road, Northfield, New Hampshire. 8 Petitioner described this property as the "lakeside 9 property" because, he says, approximately 100-feet of 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the property fronts a lake. Petitioners claimed a loss of $16,684 from the property. The unit was unoccupied during the year. Petitioners claimed no expenses on their Schedule E for advertising of this property. Petitioners received a notice from the Internal Revenue Service on November 16, 2011, that their return for the taxable year 2010 had been selected for audit. Following the audit, a telephone conference was held on January 10, 2013. In preparation for that telephone conference, petitioner prepared a calendar/log of his real estate activities during 2010 that he submitted to the Internal Revenue Service. VIII. Our legal analysis in this case is necessarily 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 guided by several fundamental principles of tax litigation. First, as a general rule, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a). This principle was enunciated by the United States Supreme Court in INDOPCO Inc. v. Commissioner, 503 U.S. 79, 84 (1992). 9 Parenthetically, we note that section 7491(a), which 10 11 12 13 14 15 16 17 18 19 20 21 22 shifts the burden of proof to the Commissioner in certain cases, does not apply in this case because petitioner has not raised the issue nor has he shown that this case meets the limitations imposed by section 7491(a)(2). Second, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed. Rule 142(a); Deputy v. DuPont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2nd 821 (5th 23 Cir. 1976). 24 25 Third, The Court is not bound to accept the unverified and undocumented testimony of a taxpayer. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 Hradesky v. Commissioner, supra; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Fourth, a party's failure to introduce documentary evidence that is within his possession or control and that he implies would be favorable to him, gives rise to the presumption that, if produced, such evidence would be unfavorable. Recklitis v. Commissioner, 91 T.C. 874, 890 (1988); Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d 409 (5th Cir. 1968); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). IX. The resolution of this case is controlled by the application of the rules, set forth in section 469, governing the disallowance of passive activity losses. Generally, those rules operate to disallow the deduction of passive activity losses. See section 469(a)(1)(A). A passive activity loss is defined as the excess of the aggregate losses from 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 all passive activities for a particular year over the 22 23 24 25 aggregate income from all passive activities for the year. Sec. 469(d) (1). The term "passive activity" includes any trade or business in which the taxpayer does not "materially participate". Sec. 469(c) (1). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 Section 469(c)(2) sets forth a per se rule which states, "the term 'passive activity' includes any rental activity". Under that provision, any rental 4 activity, including a rental real estate activity 5 6 7 8 9 such as petitioners' rental properties, is defined as a "passive activity" and is automatically subject to the loss disallowance rules of section 469(a)(1). There are two exceptions to the application of the per se rule in the case of a rental real estate 10 activity. The first exception is found in section 11 12 13 14 15 469(c)(7) which applies to the rental activities of taxpayers engaged in real property trades or businesses, so-called real estate professionals. Under that exception, the losses from rental real estate activities are not treated as per se passive 16 activities, but rather as trade or business 17 18 19 20 21 22 23 24 25 activities, subject to the material participation requirements of section 469(c)(1). Sec. 469(c)(7); see also sec. 1.469-9(e)(1), Income Tax Regs. A taxpayer qualifies as a real estate professional, under section 469(c)(7)(B), if- (i) more than one-half of the personal services performed in trades or businesses by the taxpayer during the taxable year are performed in real property trades or businesses in which 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 the taxpayer materially participates, and (ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates. Section 1.469-5T(f)(4), Temporary Income Tax Regs., supra, provides the following guidance on the methods of establishing an individual's participation in an 1 2 3 4 5 6 7 8 9 activity: 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (4) "Methods of proof. The extent of an individual's participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means. Reasonable means for purposes of this paragraph may include, but are not limited, to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries." The second exception to the general rule that rental real estate activities are per se passive 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 activities (and therefore subject to the disallowance 12 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 rule of section 469(a)) is found in section 469(i). Under that provision, a taxpayer who "actively" participates in a rental real estate activity may deduct a maximum loss of $25,000 per year related to the activity. See sec. 469(i)(1) and (2). This exception is subject to phase out when the taxpayer's adjusted gross income (AGI) (determined without regard to any passive activity loss) exceeds $100,000. Sec. 469(i)(3). Under the phase out, the $25,000 offset is reduced by 50 percent of the amount by which the taxpayer's AGI exceeds $100,000. Sec. 469(i) (3) (A). We note that even if a taxpayer qualifies as a real estate professional under section 469(c)(7)(B), the taxpayer must still show that he "materially participated" in each of the taxpayer's rental real estate activities in order to deduct losses associated with that activity. See Perez v. Commissioner, T.C. Memo. 2010-232; see also Shiekh v. Commissioner, T.C. Memo. 2010-126. We also note, for purposes of determining whether a taxpayer is a real estate professional, a taxpayer's material participation is determined separately with respect to each rental property, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 unless the taxpayer makes explicit election to treat 2 all interests in rental real estate as a single 3 rental real estate activity. Sec. 469(c) (7)(A); 4 Bailey v. Commissioner, T.C. Memo. 2001-296; sec. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1.469-9(c)(3), (e)(1), Income Tax Regs. In this case, there is no evidence that petitioners ever made such an election. X. In the notice of deficiency, respondent determined that petitioner actively participated in each of the properties, and is eligible under the second exception of section 469(i) for the $25,000 offset for rental real estate activities, discussed above. Petitioner, on the other hand, argues that he is a real estate professional under section 469(c) (7) (B), the first exception, discussed above, and, as such, he is entitled to deduct the entire loss claimed on his Schedule E. As discussed above, the requirements for treatment as a real estate professional are set forth in section 469(c)(7)(B). Petitioners argue that Mr. Concannon meets the first requirement set forth in section 469(c)(7)(B)(i) because Mr. Concannon's only employment is his real estate property trade or business. As a result, according to petitioners, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 more than one-half of the personal services performed 2 3 4 5 6 7 8 9 in trades or businesses by petitioner during the taxable year are performed in real property trades or businesses. Petitioners also argue that Mr. Concannon meets the second requirement, set forth in section 469(c)(7)(B)(ii), in that he performed more than 750 hours of services during taxable year 2010 in real property trades or businesses in which the taxpayer 10 materially participates. Petitioner claims that he 11 12 13 performed at least 966 hours of work in his real property trade or business. To establish his participation in the activity, petitioners rely on 14 Mr. Concannon's testimony, and on the calendar/log of 15 Mr. Concannon's real estate activities that was 16 17 18 provided to respondent's representatives during the audit of petitioners' 2010 return. Petitioner's testimony and the calendar/log of 19 Mr. Concannon's real estate activities paint an 20 incredible picture of petitioner's alleged activities 21 with respect to the subject properties. They depict 22 23 24 25 a man in his seventies who, by himself, did whatever was necessary to maintain each of the rental properties during 2010. This included shoveling snow, cleaning roofs, repairing gutters, cleaning 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 drains, repairing door locks, painting, mowing, and 2 many other activities. It also included amazing 3 4 5 6 7 8 9 10 11 12 13 14 15 16 feats of physical work in connection with the cleaning and renewal of the lakefront at the 182 Sandogardy Pond Road property, such as (1) raking leaves and leaf remnants from the 100-foot lakefront by throwing an 18- to 20-foot rake 25- to 30-feet into the water feet and continually raking until the leaves are pulled from the water, (2) raking the wet leaves into a mulch pile at the edge of the property, (3) carrying and stacking approximately 15,000 pounds of sand in 50-pound bags over the course of several days, (4) pouring the sand on the lakefront and raking it. According to petitioner's calendar/log, petitioner would drive, approximately 150 miles, from his residence in Berlin to the lakeside property in 17 Northfield, New Hampshire, in the morning. He would 18 19 20 21 22 23 24 25 then perform such feats of work for six to eight hours during the day before driving back to his residence in Berlin. The Court reviewed petitioner's calendar/log and has noted a number of inconsistencies, such as the inclusion of hours with no description of the work performed on days marked "stay", the inclusion of 30, 60, or 90 minutes of work on the first floor 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 apartments of the East Mason property with no description of the work performed, and other inconsistencies. The Court also notes that the calendar/log was prepared for a telephone conference I 5 with representatives of respondent during audit and 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 was not prepared contemporaneously. The Court has also listened to petitioner's testimony and has evaluated his credibility. Based upon this review, The Court does not credit petitioner's calendar/log or his testimony. As a result, we find that petitioner has not established that his participation in real estate trades or businesses amounted to 750 hours during 2010. Accordingly, we find that petitioner does not qualify as a real estate professional under section 469(c)(7)(B)(ii) during 2010. Because petitioner does not qualify as a real estate professional under section 469(c)(7)(B)(ii), we do not further consider whether he meets section 469(c)(7)(B)(i). That is whether more than one-half of the personal services performed in trades or businesses by petitioner during the taxable year are performed in real property trades or businesses in which petitioner materially participates. Furthermore, we need not consider whether petitioner 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 materially participated in each property individually 17 or is subject to passive characterization as to any specific property. See sec. 469(c) (7) (A) (ii). XII. To give effect to the above, decision will be entered for respondent. XIII. This concludes The Court's oral findings of fact and opinion in this case. (Whereupon, at 6:07 p.m., the above- entitled matter was concluded.) 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com