Moss v. Comm'r of Internal Revenue, 26600–08.

• Court: U.S. Tax Court
• Writing for the Court: WELLS
• Citation: Moss v. Comm'r of Internal Revenue, 135 T.C. 365, 135 T.C. No. 18 (T.C. 2010)
• Decision Date: 20 September 2010
• Docket Number: No. 26600–08.,26600–08.
• Parties: James F. and Lynn M. MOSS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

135 T.C. 365

135 T.C. No. 18

James F. and Lynn M. MOSS, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 26600–08.

United States Tax Court.

Sept. 20, 2010.

Ps owned rental properties that generated losses for the year in issue. R contends that Ps are subject to the passive activity loss limitations of sec. 469, I.R.C. Ps offered a summary of the time P husband worked on the rental properties. The summary showed that P husband worked on the properties for less than the 750 hours required by sec. 469(c)(7)(B) (ii), I.R.C. Ps, however, contend that, in addition to the time P husband actually worked, he was “on call” for work on the rental properties during the time that he was not at his full-time job and that the “on call” hours should count toward determining whether Ps meet the requirements of sec. 469(c)(7) (B), I.R.C.

Held: P husband's “on call” time does not count toward satisfying the 750–hour requirement of sec. 469(c)(7)(B)(ii), I.R.C., because P husband did not perform any actual work on the rental properties during the “on call” hours.

Held, further: The losses from Ps' rental properties are subject to the limited offset pursuant to sec. 469(i), I.R.C.

Held, further: Ps are subject to the accuracy-related penalty for a substantial understatement of income tax pursuant to sec. 6662, I.R.C.

James F. and Lynn M. Moss, pro sese.

Kathleen K. Raup, for respondent.

WELLS, Judge:

Respondent determined a deficiency of $8,070 in petitioners' Federal income tax for their 2007 tax year and an accuracy-related penalty pursuant to section 6662(a) of $1,614.¹ We must decide the following issues: (1) Whether the loss of $40,490 claimed on petitioners' Schedule E, Supplemental Income and Loss, should be disallowed because petitioners failed to meet the restrictions on passive activity losses under section 469; and (2) whether petitioners are subject to the accuracy-related penalty pursuant to section 6662(a) for the year in issue.

FINDINGS OF FACT

Some of the facts and certain exhibits have been stipulated. The stipulations of fact are incorporated in this opinion by reference and are found accordingly.

At the time the petition was filed, petitioners lived in Mullica Hill, New Jersey.

Petitioner James Moss (Mr. Moss) works at a nuclear power plant in Hope Creek, New Jersey (Hope Creek plant), operated by Public Service Electric & Gas Co. Mr. Moss is employed as a “nuclear technician—planning”. Mr. Moss plans maintenance activities, develops “work packages” that include estimates of job time and equipment to be used, and helps to ensure compliance with Nuclear Regulatory Commission regulations.

During 2007, Mr. Moss was employed full time, 40 hours per week, generally working a shift of 7 a.m. to 3:30 p.m., Monday through Friday, for a total of approximately 1,900 hours. As part of Mr. Moss' duties at the Hope Creek plant, he also had to be available for “call out” time and “standby” time. Call out time occurs where an employee works unscheduled overtime.² Standby time occurs where an employee is ordered to await a call for emergency work outside scheduled working hours. During standby time, an employee must be “fit for duty”. Mr. Moss' 1,900 hours of work during 2007 included approximately 200 to 300 hours of call out time.

Petitioners own the following rental properties: (1) Four apartments at 301–303 2nd Street, Swedesboro, New Jersey; (2) a single-family home at 1122 Elm Avenue, Wilmington, Delaware; (3) a single-family home at 1009 East 7th Street, Wilmington, Delaware; and (4) a single-family home at 611 East 22nd Street, Wilmington, Delaware (collectively, rental properties).

During his time away from work, Mr. Moss performed activities related to the rental properties. Mr. Moss' activities regarding the rental properties included maintenance, monitoring, eviction of nonpaying tenants, collecting rents, and preparation for new tenants. During 2007, Mr. Moss kept a calendar detailing the dates that he performed the foregoing activities (calendar); however, he failed to include on the calendar the time spent performing such activities. On October 23, 2009, Mr. Moss prepared a summary of the time he spent in connection with the rental properties (summary).

Petitioners timely filed a joint Form 1040, U.S. Individual Income Tax Return, for their 2007 tax year (2007 return). Petitioners' 2007 return was prepared by a certified public accountant (C.P.A.). On Schedule E attached to their 2007 return, petitioners reported a total loss from the rental properties of $40,490. Respondent disallowed $31,318 of the loss, allowing a deductible loss of $9,172.

Petitioners timely filed a petition in this Court seeking a redetermination of their liability for the year in issue.³

OPINION

Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer has the burden of proving it incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212 (1933).⁴ Deductions are a matter of legislative grace, and taxpayers bear the burden of proving that they have met all requirements necessary to be entitled to the claimed deductions. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992).

Taxpayers are allowed deductions for certain business and investment expenses pursuant to section 162 and 212; however, section 469 generally disallows any passive activity loss for the tax year. A passive activity is any trade or business in which the taxpayer does not materially participate. Sec. 469(c)(1). A passive activity loss is defined as the excess of the aggregate losses from all passive activities for the year over the aggregate income from all passive activities for such year. Sec. 469(d)(1). A rental activity is generally treated as a per se passive activity regardless of whether the taxpayer materially participates.⁵ Sec. 469(c)(2).

There are two principal exceptions to the general rule that rental real estate activities are per se passive activities: (1) Section 469(c)(7); and (2) section 469(i). Pursuant to section 469(c)(7), the rental activities of a taxpayer who is a real estate professional are not per se passive activities but are treated as a trade or business subject to the material participation requirements of section 469(c)(1). Sec. 1.469–9(e)(1), Income Tax Regs.

A taxpayer qualifies as a real estate professional and is not engaged in a passive activity under section 469(c)(2) if:

(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which 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 [750–hour service performance requirement].

Sec. 469(c)(7)(B). In the case of a joint return, the foregoing requirements for qualification as a real estate professional are satisfied if, and only if, either spouse separately satisfies the requirements. Id. Thus, if either spouse qualifies as a real estate professional , the rental activities of the real estate professional are not per se passive under section 469(c)(2).

Section 1.469–5T(f)(4), Temporary Income Tax Regs., 53 Fed.Reg. 5727 (Feb. 25, 1988), sets forth the requirements necessary to establish the taxpayer's hours of participation as follows:

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.

We have held that the regulations do not allow a postevent “ballpark guesstimate”. Bailey v. Commissioner, T.C. Memo.2001–296; Goshorn v. Commissioner, T.C. Memo.1993–578.

Respondent does not contend that petitioners have failed to elect to treat all of the rental properties as one activity. See sec. 469(c)(7)(A) (flush language); see also sec. 1.469–9(g), Income Tax Regs. (an election in a prior year is binding for the tax year it is made and for all future years in which the taxpayer qualifies). Accordingly, we deem that issue conceded.

Petitioners contend Mr. Moss satisfies the section 469 requirements of being a real estate professional. Petitioners provided the calendar and the summary as evidence of Mr. Moss' time related to the rental properties during 2007. The calendar includes a description of the work that he performed on the rental properties and the dates on which that work was performed, but it does not include the amount of time that was spent in the performance of such work. According to the summary, petitioners estimate that during 2007 Mr. Moss spent 112.25 hours traveling to and from the rental properties and 342.75 hours working on the rental properties. Additionally, petitioners contracted with Twin Hills Management to assist Mr. Moss with repairs. Mr. Moss contends that he spent 25.5 hours traveling to and from the rental properties with the Twin Hills employees and 165 hours working alongside them.⁶ Mr. Moss contends that he spent 137.75 hours traveling to and from his rental properties and 507.75 hours working on his rental properties, for a total of 645.5 hours.

The total of 645.5 hours is less than the 750–hour service performance requirement of section 469(c)(7)(B)(ii). However, to satisfy the remaining time requirement, petitioners contend that Mr. Moss was “on call” for the rental properties for all of the hours that he was not working at the Hope Creek...