                           T.C. Memo. 1999-249



                         UNITED STATES TAX COURT



            STEVEN D. RAPP AND JUDITH A. RAPP, Petitioners v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 18039-97.                       Filed July 28, 1999.



        Scott M. Nelson and Robert B. Patterson, for petitioners.

        Blaine C. Holiday, for respondent.



                           MEMORANDUM OPINION


        DINAN, Special Trial Judge:    This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1


        1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable years in
                                                   (continued...)
                                - 2 -

     Respondent determined deficiencies in petitioners' Federal

income taxes for 1991, 1992, and 1993 in the amounts of $2,548,

$2,772, and $2,774, respectively.

     The issue for decision is whether petitioners' claimed

Schedule C losses for 1991, 1992, and 1993 constitute passive

activity losses under section 469.      The resolution of this issue

turns on whether petitioners materially participated in the

activity of renting their condominium unit during the taxable

years in issue.

     Some of the facts have been stipulated and are so found.

The stipulations of fact and attached exhibits are incorporated

herein by this reference.   Petitioners resided in Roseville,

Minnesota, on the date the petition was filed in this case.

     Petitioner husband works as a manager of a commercial unit

for Norwest Banks.   His formal education includes a bachelor's

degree from the University of Minnesota and a master's degree

from Mankato University.

     In 1988, petitioners purchased condominium unit number 6

(the unit) at Bluefin Bay, a condominium complex located in

Tofte, Minnesota.    Tofte is located on the shore of Lake Superior

in Superior National Forest, approximately 225 miles northeast of

petitioners' residence.


     1
      (...continued)
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 3 -

     Bluefin Bay consists of six buildings, each having a

different layout.    The six buildings contain a total of 54

condominium units.    Petitioners' unit is a three-bedroom unit.

     As unit owners, petitioners were members of the Bluefin Bay

Condominium Association (BBCA), the common interest owner of

Bluefin Bay.   Petitioner husband was one of BBCA's officers, at

one time serving as its president.      BBCA owns all of Bluefin

Bay's common property, including an indoor swimming pool, tennis

courts, a conference room, a parking area, water and waste

treatment facilities, and communication and cable equipment.

BBCA arranged for the Tofte Management Company (TMC) to manage

and operate the Bluefin Bay complex.      BBCA's members, the unit

owners, entered into individual management contracts with TMC.

The terms of the management contracts were the result of the

joint effort of numerous BBCA members, including petitioner

husband.

     Petitioners' management contract with TMC was effective

January 1, 1991, through the taxable years in issue.      Under the

management contract, TMC was appointed as the exclusive rental

agent for petitioners' unit.    Petitioners were required to

specifically reserve their unit in writing for the days which

they intended to personally use it.      In the event petitioners

failed to properly notify TMC of their intended use, rental

arrangements previously made by TMC with other guests would hold
                               - 4 -

priority over petitioners' personal use, unless the guests could

be assigned to another, comparable unit.

     The management contract provided for TMC to receive 45

percent of the gross rental proceeds from petitioners' unit in

exchange for its services.   Under the management contract, TMC's

duties included, but were not limited to, managing reservations,

checking in and out guests, providing housekeeping services,

collecting rents, generating financial reports, conducting damage

inspections, and making any necessary maintenance calls and

repairs.

     TMC owns and operates a restaurant located adjacent to the

condominium complex.   During the taxable years in issue, TMC's

employees staffed a reception desk near the restaurant entrance

for guests staying at Bluefin Bay.     TMC also employed managers,

activity directors, bookkeepers, a housekeeping staff, and a

maintenance staff, all of whom participated in the activity of

renting petitioners' unit.

     TMC's employees developed, drafted, and printed marketing

and promotional materials for Bluefin Bay.    TMC maintained a

toll-free telephone number for promotional and reservation

purposes.   TMC's employees answered this telephone line, booked

reservations for owners and guests, and mailed promotional and

marketing materials to interested parties.
                               - 5 -

     TMC's employees checked in guests, received deposits, and

issued keys.   They responded to maintenance calls and made any

necessary repairs.   TMC's employees opened, closed, and cleaned

the pool, hot tub, and pool house on a daily basis.   They also

maintained Bluefin Bay's tennis courts and exercise room.    In the

winters, TMC's employees plowed the parking lots and shoveled,

salted, and sanded the walkways.

     TMC's employees collected payments from guests and checked

them out of the unit.   They cleaned and inspected the unit after

guests departed.   The cleaning activity included cleaning the

interior of the unit and laundering the linens and towels.

     TMC's employees maintained daily books and records

reflecting the collected rents and fees owed by petitioners.

They issued monthly and annual reports to petitioners reflecting

the rental activity, owner charges, and TMC's share of the gross

rentals.

     Petitioners' duties under the management contract included

providing TMC with a schedule of their intended personal use,

maintaining adequate insurance on their unit, and complying with

certain "Interior Quality Standards".

     TMC made detailed inspections of petitioners' unit at least

annually and compiled lists of mandatory repairs and items which

needed to be replaced in order to satisfy the Interior Quality

Standards.   Petitioners were given the choice to personally make
                                   - 6 -

these repairs and improvements or to authorize TMC to make them.

If they failed to comply by certain dates, TMC would arrange for

the work to be performed by its employees or subcontractors and

charge petitioners accordingly.

     Petitioners traveled to Bluefin Bay 4 to 6 times during each

of the taxable years in issue.      In most cases, petitioners would

stay at Bluefin Bay in their unit for a long weekend.        They also

spent one full week each year in their unit.         Petitioners' trips

to Bluefin Bay usually combined family vacations with owner

activities such as attending board meetings and/or making some

repairs to their unit.    Petitioner husband also participated in

BBCA meetings at locations close to petitioners' residence during

the taxable years in issue.

     On Schedules C attached to their 1991, 1992, and 1993

returns, petitioners reported the following amounts with respect

to the rental of their unit:

                            1991              1992          1993

     Gross Income        $32,380.34        $31,281.31    $37,174.23
     Total Expenses      (41,463.72)       (40,864.03)   (43,834.35)
     Net Loss            ( 9,083.38)       ( 9,582.72)   ( 6,660.12)

     Petitioners claimed business loss deductions on their 1991,

1992, and 1993 returns in amounts equal to the amounts of their

net losses reported on the Schedules C.         In the statutory notice

of deficiency, respondent disallowed the claimed business loss

deductions on the ground that the claimed losses were sustained
                               - 7 -

in connection with a passive activity in which petitioners did

not materially participate.

     Section 469 generally disallows for the taxable year any

passive activity loss that exceeds passive activity income.   See

sec. 469(a), (d)(1).   A passive activity is any activity which

involves the conduct of any trade or business in which the

taxpayer does not materially participate.2   See sec. 469(c)(1).

     In general, section 469(h)(1) provides that a taxpayer shall

be treated as materially participating in an activity only if the

taxpayer is involved in the operations of the activity on a basis

which is regular, continuous, and substantial.   Section 469(l)

authorizes the Secretary to prescribe regulations as may be

necessary or appropriate to carry out the provisions of section

469, including regulations which specify what constitutes

material participation.   Sec. 469(l)(1).

     Section 1.469-5T(a), Temporary Income Tax Regs., 53 Fed.

Reg. 5725-5726 (Feb. 25, 1988), provides that an individual will




     2
          The term "passive activity" also includes any "rental
activity", regardless of whether the taxpayer materially
participates in the activity. Sec. 469(c)(2), (4). A rental
activity is any activity where payments are principally for the
use of tangible property. See sec. 469(j)(8). However,
petitioners' activity does not constitute a rental activity
within the meaning of sec. 469(j)(8) because the average customer
stay at their unit was less than 7 days. See sec. 1.469-
1T(e)(3)(ii)(A), Temporary Income Tax Regs., 53 Fed. Reg. 5702
(Feb. 25, 1988).
                                - 8 -

be treated as materially participating in an activity for the

taxable year if and only if:

          (1) The individual participates in the activity
     for more than 500 hours during such year;

          (2) The individual's participation in the
     activity for the taxable year constitutes substantially
     all of the participation in such activity of all
     individuals (including individuals who are not owners
     of interests in the activity) for such year;

          (3) The individual participates in the activity
     for more than 100 hours during the taxable year, and
     such individual's participation in the activity for the
     taxable year is not less than the participation in the
     activity of any other individual (including individuals
     who are not owners of interests in the activity) for
     such year;

          (4) The activity is a significant participation
     activity * * * for the taxable year, and the
     individual's aggregate participation in all significant
     participation activities during such year exceeds 500
     hours;

          (5) The individual materially participated in the
     activity * * * for any five taxable years (whether or
     not consecutive) during the ten taxable years that
     immediately precede the taxable year;

          (6) The activity is a personal service activity
     * * * and the individual materially participated in the
     activity for any three taxable years (whether or not
     consecutive) preceding the taxable year; or

          (7) Based on all of the facts and circumstances
     * * * the individual participates in the activity on a
     regular, continuous, and substantial basis during such year.

     These regulations provide for taxpayers to be treated as

materially participating in an activity if they satisfy one of

the seven enumerated tests.    Petitioners argue that they satisfy

the requirements of section 1.469-5T(a)(3), Temporary Income Tax
                               - 9 -

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).   Respondent argues that

petitioners have not satisfied this material participation test.

     We must initially decide whether petitioners participated in

the rental of their unit for more than 100 hours during each of

the taxable years in issue.   Section 1.469-5(f)(1), Income Tax

Regs., generally provides that any work done by an individual in

connection with an activity in which the individual owns an

interest at the time the work is done shall be treated as

participation of the individual in the activity.   We consider

petitioners' combined hours of participation in deciding whether

this material participation test is satisfied.   See sec.

469(h)(5); sec. 1.469-5T(f)(3), Temporary Income Tax Regs., 53

Fed. Reg. 5727 (Feb. 25, 1988).

     With respect to the evidence which may be used to establish

hours of participation, section 1.469-5T(f)(4), Temporary Income

Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988), provides:

          (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.

     Petitioners submitted copies of their monthly calendars from

1991, 1992, and 1993, two documents which purport to summarize
                               - 10 -

their hours of participation in the activity of renting their

unit, and petitioner husband's testimony.   Neither of the summary

documents was prepared contemporaneously.   Petitioner husband

testified that the detailed summary document (joint exhibit 6-F)

was prepared in 1994.   The other summary document was prepared at

some time after 1994 in preparation for this case and we do not

rely upon it.   We also have serious doubts about the accuracy of

the detailed summary document.   The monthly calendars corroborate

little more than the dates of petitioners' trips to Bluefin Bay

and petitioner husband's local BBCA meetings.   Petitioner

husband's testimony establishes that he spent some hours working

out the details of the individual management contracts and

serving as BBCA's president.   However, his testimony with respect

to petitioners' participation in renting the unit and performing

repairs to the unit was unpersuasive.   The maintenance records

show that petitioners filled out work orders for TMC's employees

to perform such simple repairs as replacing light bulbs.     In

addition, Dennis Rysdahl, who oversees the management and

operation of Bluefin Bay and did so during the taxable years in

issue, testified that petitioner wife's participation in making

repairs and improvements to the unit was greater than petitioner

husband's.   Mr. Rysdahl testified that petitioner wife was

involved in decorating the unit, but the maintenance records show

that petitioners left the actual work of decorating their unit to
                               - 11 -

TMC or its subcontractors.    Petitioner wife's involvement appears

to have been limited to making decisions concerning how the unit

should be decorated.    Petitioner wife did not testify about her

alleged hours of participation.

       After carefully reviewing the record, we find that

petitioners have not proved that they participated in the

activity of renting their unit for more than 100 hours during any

of the taxable years in issue.     We therefore need not decide

whether petitioners satisfy the section 1.469-5T(a)(3), Temporary

Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), second

requirement of participating in the activity of renting their

unit more than any other individual.     See Serenbetz v.

Commissioner, T.C. Memo. 1996-510.

       We conclude that petitioners did not materially participate

in the activity of renting their unit during 1991, 1992, and

1993.    Accordingly, we hold that petitioners' claimed losses from

such activity constitute passive activity losses which are not

deductible in the taxable years in issue by reason of section

469.

       To reflect the foregoing,



                                           Decision will be entered

                                      for respondent.
