TAX COURT OPINION

Case: Stephen Leonard & Tara Spaeth
Docket Number: 16805-08S
Judge: Colvin
Opinion Type: bench
Filed: 06/26/2009
Pages: 11

UNITED STATES TAX COURT Washington, D .C . 2021 7 STEPHEN LEONARD AND TARA SPAETH , Petitioners, V . Docket No . 16805-08 S COMMISSIONER OF INTERNAL REVENUE, ) Respondent . O R D E R Pursuant to Rule 152(b), Tax-Court Rules of Practice an d Procedure, it i s ORDERED that the Clerk of the Court herewith to petitioners and to responder pages of the transcript of the trial of Special Trial Judge Lewis R . Carluzzo at on June 11, 2009, containing his oral fi opinion rendered at the conclusion of t r shall transmit t a copy of the the above case before Bismarck, North Dakota, ndings of fact an d ial . In accordance with the oral finding decision will be entered under Rule 155 . s of fact and opinion , (Signed) Lewis R. Carluzzo Special Trial Judg e Dated : Washington, D .C . June 26, 2009 SERVED JUN 2 9 2009 1 Bench Opinion by Special Trial Judge Lewis R . Carluzzo 2 June 11, 200 9 3 STEPHEN LEONARD and TARA SPAET Docket No . 16805-089 4 The Court has decided to render ora l 5 findings of fact and opinion in this case, and th e 6 following represents the Court's oral findings of fact 7 and opinion . 8 This bench opinion shall not be relied upon 9 as precedent in any other case . 10 This proceeding for the redeterminations of 11 deficiencies is a Small Tax Cake conducted pursuant t o 12 the provisions of section 7463 of the Internal Revenu e 13 Code of 1986, as amended, and Rules 170 through 175 of 14 the Tax Court Rules of Practice and Procedure . 15 This bench opinion is made pursuant to the 16 authority granted by section 7459(b) of the Internal 17 Revenue Code of 1986, as amended , and Rule 152 of the 18 Tax Court Rules of Practice and Procedure . 19 Hereinafter in this bench opinion, unless 20 otherwise specified, section references are to th e 21 Internal Revenue Code of 1986, as amended, in effec t 22 for the years in issue . Rule references are to the 23 Tax Court Rules of Practice anci Procedure . 24 Stephen Spaeth appealed pro se and David L . 25 Zoss appeared on behalf of Respondent . Heritage Reporting Corporation (202) 628-4888 3 1 In a notice of defic liency dated April 3 , 2 2008, Respondent determined a deficiency in Stephen 3 Spaeth' s (Petitioner) 2004 Federal income tax and 4 imposed a section 6662(a) accu ~,acy-related penalty . 5 Petitioner was not yet married as of the 6 close of 2004 . He filed a timely Federal income tax 7 return as a single individual for that year . 8 Petitioners married in 2005 . They filed a timely 200 5 9 joint Federal income tax return for that year . 10 In a notice of deficiency also dated Apri l 11 3, 2008, Respondent determined a deficiency in thei r 12 2005 Federal income and imposed a section 6662(a) 13 accuracy-related penalty . 14 The issues for decision for each year are 15 (1) whether Petitioner or Petitioners as appropriate 16 is or are entitled to a deduction for a real estate 17 activity loss in excess of the amount allowed b y 18 Respondent and (2) whether Petitioner or Petitioners 19 as appropriate is or are liable for an accuracy- 20 related penalty . 21 The resolution of the first issue depends 22 upon whether Petitioner qualifies as a "taxpayer in a 23 real property trade or business" within the meaning of 24 section 469(c)(7) . 25 Some of the facts have been stipulated and Heritage Reporting Corporatio n (202) 628-4888 C 4 1 are so found . At the time the petition was filed a s 2 well as all times relevant here, Petitioners resided 3 in Minnesota . 4 During each year in issue, Petitioner was a 5 salaried employee of Bridges Medical Center (Center) . 6 he began working there in 1997 following receipt o f 7 his RN degree . 8 In 2001, he was appol'nted to director o f 9 nursing, a position he has held at all times relevan t 10 here . His salary/compensation for each year in issu e 11 was based upon a work year consisting of 2,080 hours . 12 Center's records show that Petitione r 13 actually worked 1,843 .5 hours n 2004 and 1,896 hours 14 in 2005 . As a salaried employee, Petitioner wa s 15 compensated at an annual rate regardless of the number 16 of hours actually worked even hough Center's records 17 suggest that he worked some "overtime" hours which on 18 occasion he no doubt did . On he other hand , 19 Petitioner's work responsibilities allowed him to 20 leave early on some days, particularly Fridays . 21 Petitioner's family was involved in th e 22 construction industry, and over the years through on- 23 the-job training he gained experience in carpentry and 24 other construction-related trades . 25 As a child, Petitioner vacationed with his Heritage Reporting Corporatio n (202) 628-4888 5 1 family at a cottage that his parents owned (an d 2 apparently still own) which is located on the Sout h 3 Twin Lake in Naytahwaush, Minnesota (the lake) . 4 In 1998, Petitioner bought one of th e 5 cottages bordering that lake . He renovated it and 6 made it his residence in 1999 . Over the years , 7 Petitioner acquired four other cottages along the lak e 8 front (the cottages) . Each cottage required 9 substantial improvements and Petitioner, using skills 1 10 acquired in his family's construction business, did 11 most of the work himself . 12 The cottages were held for rent and rente d 13 during the years in issue . In addition to improvements 14 made to one or the other of the cottages during 200 4 15 or 2005, Petitioner spent substantial amounts of time 1 16 maintaining the properties . For example, he had to 17 clean each cottage between rents ers, he had to remove 18 garbage, clean the beach fronts of each, water and mow 19 the lawns, make minor repairs, and make repeated trips 20 to the local dump to discard w a ste materials . 21 These physical activ i ies, of course, were 22 in addition to significant mana erial activities 23 routinely required in a real es tate rental activity , 24 for example, paying bills and communicating wit h 25 renters or prospective renters . Heritage Reporting Corporation (202) 628-4888 6 1 During 2004 and 2005 Petitioner kept record s 2 showing rental income and expenses, which records 3 include vouchers and receipts for supplies, but h e 4 kept no contemporaneous record or log of the tim e 5 spent performing services in connection wit h 6 improving, maintaining, or renting the cottages . He 7 estimates that for each year he spent more time 8 performing services in connection with the cottages 9 than he did as an employee of Center . 10 The return for each year in issue includes a 11 Schedule E, Supplemental Income and Loss . The income 12 and deductions attributable to the rental of th e 13 cottages during each year in issue are reported on the 14 Schedules E . For each year, the Schedule E shows a 15 loss in excess of $25,000, which loss is taken into 16 account in the computation of the adjusted gros s 17 income reported on each return ) 18 During 2007, each return was examined b y 19 Respondent . During the course of that examinatio n 20 Petitioner prepared summaries showing his estimates of 21 the hours spent performing services in connection with 22 the cottage rentals . Petitioner's summary shows thos e 23 hours to be 2,013 .5 and 2,093 .5 for 2004 and 2005 , 24 respectively . 25 In the notices of def iciency the loss i s Heritage Reporting Corporation (202) 628-4888 7 1 claimed on the schedule E were disallowed to th e 2 extent that each loss exceeded $25,000 . See section 3 469fj Other adjustments made in the notices o f 4 deficiency have been agreed upln or are computational 5 and need not be discussed . 6 In general and as relevant here, and 7 individual is not entitled to a deduction for a 8 passive activity loss incurred during the taxable 9 year . Section 469(a) . 10 A passive activity loss is defined as th e 11 excess of the aggregate losses from all passive 12 activities for the taxable year over the aggregate 13 income from all passive activities for that year . 14 Section 469(b)(1) . 15 A passive activity is any activity which 16 involves the conduct of any trade or business and in 17 which the taxpayer does not materially participate . 18 Section 469(c)(1) . 19 For this purpose, a "trade or business" is 20 generally defined as any activity in connection with a 21 trade or business or any activity for the production 22 of income under section 212 . Section 469(c)(6) . 23 Petitioner's cottage rental act ivities join the year s 24 in issue qualify as a trade or business within th e 25 meaning of section 469 . Heritage Reporting Corporation (202) 628-4888 8 1 In general, a rental activity is treated a s 2 a passive activity regardless whether the taxpayer 3 materially participates in tha~ activity . Section 4 469 (c) (2) , (4) . However, if a taxpayer is describe d 5 in section 469(c)(7), (sometimes that taxpayer i s 6 referred to as a "real estate professional") section 7 469(c)(2) does not apply, and the taxpayer's rental 8 activity, if conducted as a tr~de or business or for 9 the production of income, is not treated as a passiv e 10 activity if the taxpayer materially participates i n 11 the activity . Section 469(c)( ) ; Fowler v . 12 Commissioner , T .C . Memo . 2002-223 ; section 1 .469-9(e), 13 Income Tax Regs . 14 Material participation is not an issue in 15 this case . Nevertheless, the parties disagree over 16 whether Petitioner is a taxpayer described i n 17 469(c)(7) . That section contains two tests that a 18 taxpayer must satisfy to be described in that section . 19 One requires that the taxpayer perform "more 20 than 750 hours of personal services in real property 21 trades or businesses in which the taxpayer materially 22 participates" . Section 469(c)(7)(B)(ii), This is a 23 stand alone, objective test, which Petitioner clearly 24 satisfied for both years in issue . We note that we 25 accept his testimony on the nature of the services he Heritage Reporting Corporation (202) 628-4888 9 1 performed in connection with the cottages during each 2 year in issue . 3 The second test requires that "more than 4 one-half of the personal services performed in trades 5 or businesses by the taxpayer during such taxable year 6 are performed in real property trades or businesses in 7 which the taxpayer materially participates" . Section 8 469(c) (7) (B) (I) . 9 In this case, the equation contemplated by 10 the statute requires that we compare the time spent b y 11 Petitioner performing persona l services as an employe e 12 of Center, which can be determ fined with a reasonabl e 13 degree of certainty, against the time he spen t 14 performing personal services ih connection with th e 15 rental of the cottages, an amount of time, although no 16 doubt substantial, that can only be determined wit h 17 reference to Petitioner's aftei the fact estimate . 18 Petitioner points out that for purposes of 19 section 469(c)(7), a taxpayer can establish . the exten t 20 of personal services performed in an activity by any 21 reasonable means, and we agree 22 We further note that reasonable means "may 23 include but are not limited to the identification o f 24 services performed over a period of time and the 25 approximate number of hours spent performing suc h 1 Heritage Reporting (202) 628 Corporation 888 10 1 services during such period, based on appointmen t 2 books, calendars, or narrative summaries" . Section 3 1 .469-5T(f)(4), Temporary,Income Tax Regs 53 Federa l 4 Register 5727 (February 25, 19 8) i 5 _ Nevertheless, we have consistently held that 6 for purposes of that regulation, "ballpark , 7 [guesstimates] contained in post-event records, ar e 8 generally given- little, , -if , any weight in determinin g 9 the extent of a taxpayer's participation in a real 10 estate trade or business for purposes of sectio n 11 469(c) .(7) . See, for example,{ Bailey v . Commissioner , .12 T .C . Memo . 2001-296 ; Carlstedt v . Commissioner , T .C . 13 Memo . 1997-331 ; Speer v . Commi sioner , T .C . Memo . 14 1996-323 ; Goshorn v . Commissioner , T .C . .Memo . 1993- s 15 578 . . L 16 Given the number of hours involved and the 17 high threshold established by Petitioner's employment 18 at Center, ., Petitioner's summaries, no doubt prepared 19 in good faith, are best described as "too little, to o 20 late" . 21 Absent some contempo aneous log recording 22 time spent in the . cottage rental activity that would 23 allow for a detailed review of time spent on a 24 specific activity on a specifi date, we are unable to 25 find that Petitioner spent more time performing Heritage Reporting Corporatio n (202) 628-4888 1 1 1 personal services in connection with his cottag e 2 rental activity than he did as an employee of Center 3 during either year in issue . 4 Respondent's adjustments disallowing 5 portions of the Schedules E loses are sustained . 6 For each year Respondent imposed an accuracy related 7 penalty under section 6662(a) . 8 Each return was prepared by a paid income 9 tax return preparer that Petitioner had used fo r 10 several years prior to the year in issue . We ar e 11 satisfied Petitioner reasonably relied upon the return 12 preparer . 13 We are further satisfied that th e 14 underpayment of tax required t have been shown on 15 either return was due to reasonable cause . Se e 16 section 6664(c) . Respondent's imposition of th e 17 section 6662(a) accuracy related penalty is rejected 18 for both years in issue . 19 To reflect the foregoing and to give effect 20 to the agreements between the parties, decision will 21 be entered under Rule 155 . 22 This concludes the Court's oral findings of 23 fact and opinion in this case . 24 (Whereupon, the bench, opinion in the above- 25 entitled matter was concluded . ) Heritage Reporting Corporatio n (202) 628-4p88