TAX COURT OPINION

Case: Joseph R. Pranevicius
Docket Number: 25806-07S
Judge: Colvin
Opinion Type: bench
Filed: 03/18/2009
Pages: 10

UNITED STATES TAX COURT Washington , D .C . 2021 7 JOSEPH R . PRANEVICIUS , Petitioner, v . Docket No . 25806-07S COMMISSIONER OF INTERNAL REVENUE, Respondent . O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial of the above case before Special Trial Judge Lewis R . Carluzzo at Los Angeles, California, on February 13, 2009, containing his oral findings of fact and opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155 . (Signed) Lewis R. Carluzzo Special Trial Judg e Dated : Washington, D .C . March 18 ; 2009 SERVED Mar 19 2009 3 1 Bench Opinion by Special Trial Judge Lewis R . Carluzzo 2 Pranevicius v . Commissioner Docket No . 25806-07S 3 February 13, 200 9 4 The Court has decided to render oral findings of 5 fact and opinion in this case, and the following represents 6 the Court's oral findings of fact and opinion . The ora l 7 9 findings of fact and opinion shall not be relied upon as precedent in any other case . This proceeding for the redetermination of a 10 deficiency is a Small Tax Case conducted pursuant to the 11 provisions of section 7463 of the Internal Revenue Code of 12 1986, as amended, and Rules 170 through 175 of the Tax Court 13 Rules of Practice and Procedure . 14 This bench opinion is made pursuant to th e 15 authority granted by section 7459(b) of the Internal Revenue 16 Code of 1986, as amended, and Rule 152 of the Tax Cour t 17 Rules of Practice and Procedure . 18 Hereinafter in this bench opinion, unles s 19 otherwise specified, section references are to the Internal 20 Revenue Code of 1986, as amended, in effect for 2005 . Rule 21 references are to the Tax Court Rules of Practice an d 22 Procedure . 23 Joseph R . Pranevicius appeared pro se . Elaine T . 24 Fuller appeared on behalf of Respondent . 25 In a notice of deficiency dated August 7, 2007 , Heritage Reporting Corporation (202) 628-4888 4 1 Respondent determined deficiencies in Petitioner's 2004 and 2 2005 Federal income taxes and imposed a section 6651(a)(1 ) 3 addition to tax for 2004 . The issue for decision is whether 4 Petitioner is entitled to a deduction in 2005 for a los s 5 from his real estate rental activities . The resolution of 6 the issue depends upon whether Petitioner qualifies as a 7 "taxpayer in a real property trade or business" within the 8 meaning of section 469(c)(7) with respect to 2005 . 9 Some of the facts have been stipulated and are so 10 found . At the time the petition was filed, as well as at 11 all times relevant here, Petitioner resided in California . 12 Petitioner is an interior designer . During 2005, 13 as an employee of his closely held corporation, he provided 14 services as such to a numerous clients, many located in the 15 Los Angeles area, and others located across the country . In 16 a variety of ways, Petitioner has been involved in the real 17 estate-industry as a design consultant for more than 18 twenty-five years . It would not be inaccurate, as a general 19 proposition, to say that he devoted a significant amount of 20 time performing services as a design consultant during 2005, 21 but the exact amount of time spent overall, or time spent on 22 average during any week in doing so, cannot be determine d 23 from the record . 24 Sometime in the spring or summer of 2004 , 25 Petitioner purchased as single family residence in Castle Heritage Reporting Corporatio n (202) 628-4888 5 1 Harbor Isle, Fort Lauderdale, Florida, that he intended to 2 renovate and hold for rental purposes (the Castle Harbo r 3 property) . The house needed substantial renovations bot h 4 inside and out . Petitioner traveled back and forth from his 5 home in California to the Castle Harbor property in order to 6 oversee the renovation work being done . Petitioner hired a 7 project manager for the necessary day-to-day supervision of 8 the various tradesmen performing the actual renovations, but 9 the project took much longer than he originally expected . 10 The period of renovation lasted from the fall of 2004 t o 11 early spring 2005 . Phone records and credit card statements 12 substantiate the many trips that Petitioner took to Florida 13 to check on the progress of the renovations or otherwis e 14 perform services in connection with those renovations during 15 this period of time . 16 Petitioner's testimony detailed the many services 17 and activities that he performed in connection with th e 18 Castle Harbor property during 2005, both during the 19 renovation stage and the rental stage . The partie s 20 stipulated that his estimate of time spent would not be less 21 than 482 hours in connection with the Castle Harbor property 22 and another property in Florida that will be identified in 23 the following portions of this bench opinion . We suspec t 24 that he spent significantly more time in doing what he has 25 described he has done than his estimate suggests, but he Heritage Reporting Corporation (202) 628-4888 6 1 kept no contemporaneous records in which the amount of time 2 and types of services performed were recorded . Petitioner's 3 estimates of time are taken primarily from his phon e 4 records, credit card statements and general recollection of 5 the events . 6 The other Florida property just referenced , 7 located on Datura Court in Fort Lauderdale, Florida, wa s purchased by Petitioner in August 2005 (the Datura Cour t 9 property) . Like the Castle Harbor property, Petitione r 10 purchased the Datura Court property with the intent to hold 11 it for rent, and like the Castle Harbor property, the Datura 12 Court property needed renovations before it could be rented . 13 Petitioner performed the same types of services in 14 connection with the Datura Property as he did with respect 15 to the Castle Harbor property, but to a lesser extent . 16 Petitioner also owed three other rental properties 17 in California (the California properties) . He estimate s 18 that he spent no more than 68 hours performing services for 19 these properties during 2005 . 20 Petitioner's 2005 Federal income tax retur n 21 includes two Schedules E, Supplemental Income and Loss, on 22 which the rental income and expenses of the Californi a 23 properties, the Castle Harbor property and the Datura Court 24 property are reported (the Schedules E) . Taking int o 25 account that income and those expenses, the Schedules E show Heritage Reporting Corporation (202) 628-4888 7 1 an aggregate loss of $69,554 (the rental loss) which i s 2 deducted from the other income shown on Petitioner's return . 3 In the notice of deficiency that forms the basi s 4 for this case, Respondent allowed so much of the rental loss 5 as provided in section 469(1) (in this case $5,390) an d 6 disallowed the balance, that is, $64,164 . 7 In general and as relevant here, an individual is 8 not entitled to a deduction for a passive activity los s 9 incurred during the taxable year . Sec . 469(a) . A passive 10 activity loss is defined as the excess of the aggregat e 11 losses from all passive activities for the taxable year over 12 the aggregate income from all passive activities for tha t 13 year . Sec . 469(d)(1) . A passive activity is any activity 14 which involves the conduct of any trade or business in which 15 the taxpayer does not materially participate . Sec . 16 469(c)(1) . For this purpose, a "trade or business" i s 17 generally defined as any activity in connection with a trade 18 or business or any activity for the production of incom e 19 under section 212 . Sec . 469(c)(6) . Each of Petitioner's 20 rental properties held in-2005 qualified as a trade or 21 business within the meaning of section 469 . 22 In general, a rental activity is treated as a 23 passive activity regardless of whether the taxpaye r 24 materially participates . Sec . 469(c)(2), (4) . However, if 25 a taxpayer is described--in section 469(c)(7), (sometimes Heritage Reporting Corporatio n (202) 628-4888 .1 that taxpayer is referred to as a "real estat e 2 professional") section 469(c)(2) does not apply, and the 3 taxpayer's rental activity, if conducted as a trade o r 4 business or for the production of income, is not treated as 5 a passive activity if the taxpayer materially participates 6 in the activity . Sec . 469(c)(1) ; Fowler v . Commissioner , 7 T .C . Memo . 2002-223 ; sec . 1 .469-9(e), Income Tax Regs . 8 The parties disagree over whether for 200 5 9 Petitioner is a taxpayer described in Section 469(c)(7) . 10 That Section contains two tests that a taxpayer must satisfy .11 to be described within that section . One requires that the 12 taxpayer perform "more than 750 hours of personal services 13 in real property trades or businesses in which the taxpayer 14 materially participates" . Sec . 469(c)(7)(B)(ii) . This is a 15 stand alone, objective test, and was obviously the focus of 16 Petitioner's presentation at trial . We note that we accept 17 his testimony on the nature and specifics of the services he 18 performed in connection with the Florida properties, which 19 testimony as indicated above, is entirely consistent with 20 his telephone bills and credit card statements . 21 Petitioner did not elect to aggregate all of his 22 real estate interests . See sec . 469(c)(7) . At trial, the 23 Court and Respondent's counsel discussed and disagreed over 24 how that section 46 .9(c)(7) is applied in the absence of such 25 an election . Under the circumstances, however, and fo r Heritage Reporting Corporation (202) 628-4888 9 1 reasons to be discussed shortly, that disagreement need not 2 be addressed here . Furthermore, and for the same reasons, 3 we need not comment on the method in which Petitione r 4 estimated the amount of time he spent in his real estate 5 trades or businesses, other than to suggest that in the 6 future it would be in his best interest to maintain some 7 form of contemporaneous log in which the time spent and 8 nature of the services performed in his real estate 9 activities are recorded . For purposes of section 469(c)(7), 10 a taxpayer can . establish the extent of personal service s 11 performed in an activity by any reasonable means . 12 Reasonable means "may include but are not limited to the 13 identification of services performed over a period of time 14 and the approximate number of hours spent performing such 15 services during such period, based on appointment books, 16 calendars, or narrative summaries ." Sec . 1 .469-5T(f)(4), 17 Temporary Income Tax Regs ., 53 Fed . Reg . 5727 (Feb . 25 , 18 1988) . For purposes of that regulation, "ballpar k 19 guesstimates" contained in post-event records, are generally 20 given little, if any, weight in determining the extent of a 21 taxpayer's participation in a real estate trade-or business 22 for purposes of section 469(c) .(7) . See e .g ., Bailey v . 23 24 Commissioner , T .C . Memo . 2001-296 ; Carlstedt v . Commissioner , T .C . Memo . 1997-331 ; Speer v . Commissioner , 25 T .C . Memo . 1996-323 ; Goshorn v . Commissioner , T .C . Memo . Heritage Reporting Corporatio n (202) 628-4888 1 1993-578 . 2 Even if we were to find that Petitioner performed 3 more than 750 hours performing personal services in his real 1 0 4 estate trades of businesses, which would not be a n 5 unreasonable finding given his detailed and credible 6 testimony on the extent and nature of such service s 7 performed, and if only in connection with the Florid a 8 properties, only one test of section 469(c)(7) would be 9 satisfied . The second test requires that "more tha n 10 one-half of the personal services performed in trades or 11 businesses by the taxpayer during such taxable year ar e 12 performed in real property trades or businesses in which the 13 taxpayer materially participates" . Sec . 469(c)(7)(B)(i) . 14 In this case, the equation contemplated by the 15 statute requires that we measure the extent of the personal 16 services that Petitioner performed as an employee of hi s 17 personally held corporation against the personal services 18 Petitioner performed in real estate trades or businesses in 19 which he materially participated . This is where 20 Petitioner's proofs are deficient . Although we appreciate 21 his candor, after repeated attempts by the Court to have 22 Petitioner quantify the extent of services he performe d 23 during 2005 as an employee of his personally hel d 24 corporation, he was unable to do . Without that information, 25 we are unable to find that more than one-half of the Heritage Reporting Corporatio n (202) 628-4888 11 1 personal services he performed during 2005 were performed in 2 real estate trades or businesses . For that reason , 3 Petitioner is not a taxpayer described in section 469(c)(7), 4 and the provisions of section 469(c)(2) otherwise operate to 5 deny Petitioner's entitlement to the portion of the rea l 6 estate loss disallowed by Respondent . 7 To reflect the foregoing, and to give effect to 8 the agreements between the parties, decision will be entered 9 under Rule 155 . 10 This concludes the Court's oral findings of fact 11 and opinion in this case . 12 (Whereupon, at 9 :35 a .m, the bench opinion in the 13 above-entitled matter was concluded . ) 14 15 16 17 18 19 2 0 21 22 2 3 24 25 Heritage Reporting Corporation (202) 628-4888