                   T.C. Summary Opinion 2004-62



                      UNITED STATES TAX COURT



              ANDRE AND VENA NELSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No.   10229-03S.             Filed May 14, 2004.


     Andre and Vena Nelson, pro sese.

     Thomas D. Yang, for respondent.



     WOLFE, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.    Unless otherwise indicated,

all subsequent section references are to the Internal Revenue

Code in effect at relevant times, and all Rule references are to

the Tax Court Rules of Practice and Procedure.    The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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     Respondent determined a deficiency in petitioners’ Federal

income tax of $3,472 for 2001.    The sole issue for decision is

whether the passive activity rules of section 469 preclude

petitioners from deducting the full amount of their losses from

their rental real estate activities.

                            Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.       When they filed their

petition, petitioners resided in Oak Brook, Illinois.

     Commencing in January 2001, petitioner Andre Nelson

(petitioner) was employed full time as a Technical Support Team

Manager for the Dial Corporation.        He received a $2,500 sign-on

bonus for accepting this position.       During 2001, petitioner not

only worked full time for Dial Corporation but also worked

sufficient overtime to earn $5,337 plus $656.30 of “.5 Overtime

Premium” and $545.23 of “Double Time Premium”.       He also received

an $850 “Shift Premium”.   Petitioner Vena Nelson (Ms. Nelson) is

a certified public accountant employed full time as the chief

financial officer for the Rock of Ages Baptist Church in 2001.

     During 2001 petitioners owned three apartment buildings in

Illinois that they operated as rental real properties (rental

properties).   These rental properties were:      (1) An apartment

building located at 1626 North Luna in Chicago, acquired in 1994
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(North Luna property); (2) an apartment building located at 2109

South 5th Avenue in Maywood, acquired in November 2001 (2109

Maywood property); and (3) an apartment building located at 2112

South 5th Avenue in Maywood, acquired in 1992 (2112 Maywood

property).    A total of 14 tenants resided at the three apartment

buildings.

     Petitioner personally attended to the management and

maintenance of each of his rental properties without assistance

from a management company.    Petitioner collected monthly rents,

delivered late warning notices, and took care of eviction

proceedings when necessary.   When vacancies arose, petitioner

showed the vacant unit to prospective applicants, conducted

applicant interviews, checked credit reports and references, and

attended to lease signings.   Petitioner responded to requests for

routine repairs and was responsible for general maintenance

activities such as caring for the lawns, shoveling snow in the

winter, and waste management.   In addition, petitioner was

involved in major renovation projects at two of the three rental

properties in 2001, including the modernizing of outdated

kitchens, bathrooms, and furnaces.

     Ms. Nelson was not actively involved with the rental

properties.

     Petitioner claims that he devoted more time to his rental

property activities in 2001 than to his full-time job with the
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Dial Corporation.       In a letter addressed to this Court on June

19, 2003, and incorporated in the stipulation of facts,

petitioner described his typical day in the following manner:

     • Although I have a full-time job, I work an off-shift
       which allows me time to manage the apartment
       buildings on a daily basis.
     • My typical schedule is: 8:00am - 3:00 pm apartment
       management; 4:00 pm - 12:00 midnight full-time
       employee at Dial Corporation; 1:00am - 8:00am sleep.
       My weekends are also heavily dedicated toward
       apartment management.

                    *      *     *     *      *    *    *

     Yes, this is a lot of work, but my job provides health
     insurance and other benefits for my family. I would
     not have this safety net without my full-time job at
     Dial Corporation.

     In connection with the rental properties, petitioners

reported rental real estate losses for 2001 on a Schedule E,

Supplemental Income and Loss, as follows:

Property       Rents received          Total expenses        Losses
North Luna        $15,600                  $22,479          ($6,879)
2109 Maywood        2,150                   10,729           (8,579)
2112 Maywood       29,814                   32,840           (3,026)

   Total            $47,564                ($66,048)        ($18,484)

     By notice of deficiency dated March 21, 2003, respondent

determined that petitioners’ rental real estate losses were

passive activity losses within the meaning of section 469 and

disallowed $12,248 of the $18,484 in rental real estate losses

claimed by petitioners.        As a result of this adjustment,

respondent determined a deficiency in petitioners’ 2001 tax of

$3,472.
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                            Discussion

     The taxpayer generally bears the burden of proving that the

Commissioner’s determinations are incorrect.    Rule 142(a).   Since

petitioners did not meet the substantiation and recordkeeping

requirements of section 7491(a), the burden of proof remains on

petitioners.

     Section 162 permits deductions for all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   Section 212 permits deductions

for all the ordinary and necessary expenses paid or incurred

during the taxable year for the production of income.    The

amounts deductible pursuant to these provisions are not in

dispute here.   However, section 469 generally disallows passive

activity losses for individual taxpayers.    Sec. 469(a)(1)(A).   A

passive activity loss is the amount by which the aggregate losses

from all passive activities for the taxable year exceed the

aggregate income from all passive activities for that year.      Sec.

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

in which the taxpayer does not materially participate.    Sec.

469(c)(1).

     Rental activities generally are treated as passive

activities without regard to the extent that the taxpayer

materially participates in the activity.    Sec. 469(c)(2).    Rental

activities involving real estate are not necessarily passive
                                 - 6 -

activities if the taxpayer is a qualifying taxpayer under section

469(c)(7).   See sec. 1.469-9(e)(1), Income Tax Regs.     Instead,

the rental real estate activity of a qualifying taxpayer who

materially participates in the activity is not subject to the

passive activity rules of section 469.    Sec. 469(c)(7); sec.

1.469-9(e)(1), Income Tax Regs.    A qualifying taxpayer must meet

the following requirements under section 469(c)(7)(B):

     (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.

     A taxpayer is considered to materially participate in a

trade or business if his activities are regular, continuous, and

substantial.   Sec. 469(h)(1).   In establishing whether a

taxpayer's real property activities result in passive activity

losses, each interest in rental real estate is treated as a

separate rental real estate activity unless the qualifying

taxpayer makes an election to treat all interests in rental real

estate as a single rental real estate activity.    Sec.

469(c)(7)(A); sec. 1.469-9(e)(1), Income Tax Regs.    Petitioners

did not make such a timely election, so petitioner's activities

must be regular, continuous, and substantial with regard to each

individual rental property.
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     With respect to the evidence that may be used to establish

material participation, temporary Treasury regulations

promulgated under section 469 provide:

     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.

Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg.

5727 (Feb. 25, 1988); see also sec. 1.469-9(b)(5), Income Tax

Regs.   This Court has acknowledged that these temporary

regulations are somewhat ambivalent concerning the records to be

maintained by taxpayers, but we have held that the regulations do

not allow a post-event “ballpark guesstimate”.   Fowler v.

Commissioner, T.C. Memo. 2002-223; Goshorn v. Commissioner, T.C.

Memo. 1993-578.

     In support of their argument that petitioner was a

qualifying taxpayer under section 469(c)(7)(B) for 2001,

petitioners failed to substantiate the amount of time petitioner

spent on his rental real estate activities relative to his full-

time job at the Dial Corporation.   Deductions are a matter of

legislative grace, and petitioners bear the burden of proving

that they are entitled to any of the deductions claimed.     Rule
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142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).      A

taxpayer is required to maintain records sufficient to

substantiate deductions claimed on his tax return.     Sec. 6001;

sec. 1.6001-1(a), Income Tax Regs.     Moreover, a taxpayer who

claims a deduction bears the burden of substantiating the amount

and purpose of the item claimed.     Hradesky v. Commissioner, 65

T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.

1976); sec. 1.6001-1(a), Income Tax Regs.

     To establish the amount of time petitioner spent on his

rental real estate activities, petitioners introduced a

spreadsheet summarizing the work activities he performed on a

daily basis for each of his three rental properties (daily work

log).   The daily work log was not prepared contemporaneously as

petitioner performed each activity but was composed by

petitioners, purportedly from various receipts and documents, in

preparation for trial.   Petitioners claim that they have the

underlying receipts and documents from which the spreadsheet was

prepared, but they did not think it was necessary to bring them

to Court for trial or to introduce them into evidence.     In the

absence of any corroborative evidence, we do not consider the

daily work log persuasive.

     Furthermore, the daily work log merely identifies tasks and

services performed by petitioner on a particular day.     It does

not give any indication or approximation of how much time
                               - 9 -

petitioner actually spent servicing his rental properties.

Consequently, even if we were to give weight to the daily work

log, that document by its own terms would not have established

that petitioner spent more than one-half of his time engaged in

rental real estate activities or that the time petitioner spent

on such rental real estate activities amounts to more than 750

hours of service for purposes of section 469(c)(7)(B).

     Other evidence introduced by petitioners at trial was

petitioner's letter to the Court, dated June 13, 2003, in which

petitioner described his typical work schedule and petitioners’

oral testimony at trial.   It is well established that the Court

is not bound to accept at face value such uncorroborated and

self-serving testimony from a taxpayer.   Shea v. Commissioner,

112 T.C. 183, 189 (1999); Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).   Petitioners did not provide appointment books,

calendars, or narrative summaries describing in a detailed and

convincing manner the hours that petitioner actually spent

engaged in his real property activity and did not call any

corroborating witnesses to substantiate their own testimony.   In

light of his full work schedule at the Dial Corporation,

petitioner would have to provide substantial and detailed

evidence to convince us that he managed to spend more than one-

half of his time on rental real estate activities or that he even

spent more than 750 hours on them during the year in issue.    We
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do not doubt that petitioner worked hard during the year in

issue, but he simply failed to present convincing evidence about

the amount of his work in his real property activities.    We hold

that petitioner was not a qualifying taxpayer in 2001 for

purposes of section 469(c)(7), and therefore his rental real

estate activity during 2001 is classified as passive activity.

     Although petitioners are not entitled to deduct the full

amount of their passive rental real estate losses, section 469(i)

allows a taxpayer to claim up to $25,000 per year in passive

activity losses from rental real estate activities (the $25,000

exemption), subject to a phaseout once the taxpayer’s adjusted

gross income exceeds $100,000.   To qualify for the $25,000

exemption, the taxpayer must have “actively participated” in the

rental real estate activity.   The active participation

requirement can be satisfied without regular, continuous, and

substantial involvement in an activity.    See Madler v.

Commissioner, T.C. Memo. 1998-112; S. Rept. 99-313, 737-738

(1986), 1986-3 C.B. (Vol. 3) 1, 737-738.   The active

participation standard should be met as long as the taxpayer

participates in a significant and bona fide sense in making

management decisions or arranging for others to provide services

such as repairs.   Madler v. Commissioner, supra.   The $25,000

exemption is phased out by 50 percent of the amount by which the

adjusted gross income of the taxpayer for the taxable year
                              - 11 -

exceeds $100,000.   Sec. 469(i)(3).    For this purpose, the

taxpayer’s adjusted gross income is determined without regard to

any passive activity loss.   Sec. 469(i)(3)(F)(iv).

     Respondent agrees that petitioner actively participated in

rental real estate activities and that petitioners are entitled

to the $25,000 exemption, subject to the phaseout provision.      On

their 2001 tax return, petitioners reported $135,627 in wages,

$498 in taxable interest, $793 in taxable refunds or credits, and

$611 in unemployment compensation for an adjusted gross income

(without the passive activity loss) of $137,529.     Petitioners’

adjusted gross income exceeds $100,000 by $37,529.     Fifty percent

of $37,529 is $18,764 (rounded).    Petitioners’ maximum offset

amount of $25,000 is reduced by $18,765 to $6,236.     Thus, we find

that petitioners are entitled to rental real estate losses of

$6,236 under section 469(i), as determined by respondent in the

notice of deficiency.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                        Decision will be entered for

                                   respondent.
