                        T.C. Memo. 2010-232



                      UNITED STATES TAX COURT



                    ALMA PEREZ, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5736-09.               Filed October 25, 2010.



     Cindy L. Ho, for petitioner.

     Christian A. Speck, for respondent.



                        MEMORANDUM OPINION


     HAINES, Judge:   Respondent determined a deficiency and a

penalty under section 6662(a)1 with respect to petitioner’s 2005




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Amounts are rounded to the nearest dollar.
                                -2-

Federal income tax.   After concessions2 the sole issue presented

to the Court is whether petitioner may deduct losses from her

rental real estate activity under the passive activity loss rules

of section 469.

                            Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.   The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time she filed her

petition, petitioner lived in California.

     Petitioner timely filed her 2005 individual Federal income

tax return.   On February 5, 2009, respondent mailed a notice of

deficiency to petitioner for her 2005 Federal income tax.

Petitioner timely filed her petition on March 10, 2009.

     Petitioner was self-employed in 2005 as a real estate loan

agent and broker and reported her income and loss from her real

estate business on her 2005 Schedule C, Profit or Loss From

Business.   Additionally, petitioner reported income and expenses

from three residential rental properties on Schedule E,


     2
      Before trial the parties settled the following issues: (1)
Petitioner is not entitled to deduct $65,024 of “Other expenses”
listed on Schedule C; (2) petitioner is not entitled to deduct
$163,432 of “Commissions and fees” listed on Schedule C; (3)
petitioner understated gross income by $518,066 on Schedule C;
(4) petitioner is liable for the accuracy-related penalty under
sec. 6662, computed on the deficiency determined by the Court;
and (5) adjustments to petitioner’s Schedule A, Itemized
Deductions, self-employment tax, deduction for half of the self-
employment tax, and deductions for personal exemptions will
result from changes to petitioner’s income and are computational.
                                 -3-

Supplemental Income and Loss, and petitioner deducted losses from

those rental properties of $45,199.

     The parties agree that during 2005 petitioner was a real

estate professional pursuant to section 469(c)(7)(B).    The

parties further agree that petitioner did not meet the “material

participation” tests described in section 1.469-5T, Temporary

Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), with respect

to her rental real estate activities.

                             Discussion

     The Commissioner’s determinations in the notice of

deficiency are presumed correct, and the taxpayer bears the

burden of proving that the Commissioner’s determinations are

incorrect.    Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115

(1933).   Taxpayers are allowed deductions for certain business

and investment expenses under sections 162 and 212; however,

section 469 generally disallows any passive activity loss for the

tax year.    A passive activity loss is defined as the excess of

the aggregate losses from all passive activities for that year

over the aggregate income from all passive activities for the

year.   Sec. 469(d)(1).   A passive activity is any trade or

business in which the taxpayer does not materially participate.

Sec. 469(c)(1).

     Rental activity is generally treated as a per se passive

activity regardless of whether the taxpayer materially
                                   -4-

participates.    Sec. 469(c)(2).   The rental activities of a

taxpayer who is a real estate professional pursuant to section

469(c)(7)(B), however, are not treated as per se passive

activities.   Sec. 469(c)(7)(A)(i).

     Petitioner argues that because she is a qualifying real

estate professional pursuant to section 469(c)(7)(B), all her

real estate activities, including rental activities, are not

passive and therefore she is not subject to the passive activity

loss limitations.    Respondent contends that petitioner ignores

the plain language of section 1.469-9(e)(1), Income Tax Regs.,

which provides that “a rental real estate activity of a

qualifying taxpayer is a passive activity under section 469 for

the taxable year unless the taxpayer materially participates in

the activity”.    A “qualifying taxpayer” is a taxpayer that owns

at least one interest in rental real estate and meets the

requirements of section 469(c)(7)(B).     Sec. 1.469-9(b)(6),

(c)(1), Income Tax Regs.    Accordingly, respondent argues that

although petitioner’s status as a real estate professional

pursuant to the requirements of section 469(c)(7)(B) removes her

from the per se passive activity rule with respect to rental real

estate activity, petitioner remains subject to and must satisfy

the material participation tests of section 1.469-5T, Temporary

Income Tax Regs., supra, to claim losses from her rental real

estate activity.
                                -5-

     Petitioner argues that caselaw does not support respondent’s

application of section 1.469-9(e), Income Tax Regs.    Relying on

Pungot v. Commissioner, T.C. Memo. 2000-60,   petitioner contends

that a distinction must be drawn between taxpayers qualifying as

real estate professionals pursuant to section 469(c)(7)(B) as a

result of their jobs and those qualifying solely by virtue of

their ownership in rental real estate.   Because petitioner

qualifies as a real estate professional irrespective of her

rental real estate properties, she contends that section 1.469-

9(e), Income Tax Regs., is not applicable to her.    Petitioner

further argues that caselaw has not addressed her particular

circumstances and that the absence of a case directly addressing

her situation supports her position.

     Petitioner’s reliance on Pungot is misplaced.    In Pungot,

the taxpayer argued that section 469(c)(7)(B) is unconstitutional

under the Equal Protection Clause because it treats individuals

who perform work in a real estate trade or business as different

from those performing real estate services as an employee.      In

finding section 469(c)(7)(B) to be rationally related to a

legitimate Government interest, the Court held that in enacting

section 469(c)(7)(B) Congress intended to distinguish employees

in rental real estate activity from individuals with equity

interests in such activity.   Id.   The Court did not discuss

whether the material participation requirement applies to a
                                  -6-

taxpayer qualifying as a real estate professional pursuant to

section 469(c)(7)(B), nor did it distinguish a taxpayer

qualifying as a real estate professional by virtue of the

taxpayer’s job from one qualifying solely by virtue of property

ownership.   As the Court did not contemplate the issue before us,

Pungot is irrelevant to this discussion.

     Further, even if we were to accept that, as petitioner

contends, section 469(c)(7)(B) exempts real estate professionals

who own real estate and manage it as part of their profession

from the material participation requirement of section 469(c)(1),

those are not the facts of this case.    Petitioner’s activity as a

real estate loan agent and broker is separate from her activity

as the owner of three residential real estate properties.

Section 1.469-9(e)(3)(i), Income Tax Regs., provides that a

taxpayer may not group a rental real estate activity with any

other activity of the taxpayer.    Petitioner does not own or

manage the three residential real estate properties as part of

her profession as a real estate loan agent and broker but rather

owns those properties independent of her profession.

Accordingly, even under petitioner’s interpretation of Pungot,

her rental real estate activity remains subject to the material

participation requirement of section 469(c)(1).
                                -7-

     Caselaw clearly requires that a taxpayer claiming deductions

for rental real estate losses meet the “material participation”

requirements of section 1.469-5T, Temporary Income Tax Regs.,

supra, even where the Commissioner has conceded that the taxpayer

is a real estate professional pursuant to section 469(c)(7)(B).

See Shiekh v. Commissioner, T.C. Memo. 2010-126; Kosonen v.

Commissioner, T.C. Memo. 2000-107.    In Shiekh, the taxpayer owned

several real estate rental properties, including a 13-unit

apartment building that he managed.    As a result of this

management activity the parties agreed that the taxpayer

qualified as a real estate professional pursuant to section

469(c)(7)(B).   The taxpayer owned other real estate rental

properties as well; however, the taxpayer did not regularly

participate in the management of those properties.    Because the

taxpayer’s activity with respect to his other properties failed

to meet the material participation requirement, the Commissioner

disallowed his claimed losses with respect to those properties.

     Citing section 1.469-9(e)(1), Income Tax Regs., Shiekh held

that “rental activities of a taxpayer who is a real estate

professional are not per se passive activities under section

469(c)(2) but are treated as a trade or business subject to the

material participation requirements of section 469(c)(1)”.     Id.

(emphasis added); see also Shaw v. Commissioner, T.C. Memo. 2002-

35; Bailey v. Commissioner, T.C. Memo. 2001-296; D’Avanzo v.
                                -8-

United States, 67 Fed. Cl. 39, 41 (2005), affd. 215 Fed. Appx.

996 (Fed. Cir. 2007).   Accordingly, caselaw has consistently held

that while section 469(c)(7)(B) exempts a qualifying real estate

professional from the per se passive rental activity loss rules

of section 469(c)(2), it does not remove the taxpayer from the

material participation requirement of section 469(c)(1).

     Petitioner has failed to provide authority to support her

argument that her rental real estate activity is exempt from the

material participation requirement of section 469(c)(1) on the

grounds that she qualifies as a real estate professional as a

result of her job rather than her rental real estate activity.

Petitioner merely argues that the absence of a case directly on

point confirms her position.   While caselaw has not addressed

this particular set of facts, it has consistently held in similar

contexts that a qualified real estate professional pursuant to

section 469(c)(7)(B) remains subject to the material

participation requirement of section 469(c)(1).   Accordingly, we

sustain respondent’s determination with regard to the passive

activity losses.

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.
                            -9-

To reflect the foregoing,


                                       Decision will be entered

                                  under Rule 155.
