                        T.C. Memo. 1997-331



                      UNITED STATES TAX COURT



         WILLIAM N. AND MOIRA M. CARLSTEDT, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2418-96.                 Filed July 22, 1997.



          On the facts, Held: Ps have failed to sustain
     their burden of proving that H did not materially
     participate in the activity of CDI during 1990 and 1991
     within the meaning of sec. 469(h)(1), I.R.C., and sec.
     1.469-5T(a)(1), Temporary Income Tax Regs., 53 Fed.
     Reg. 5725 (Feb. 25, 1988), and consequently Ps may not
     offset certain undisputed passive losses against their
     share of income from CDI for those years.



     Ronald M. Soskin and Stephen E. Arthur, for petitioners.*

     Ronald T. Jordan, for respondent.




     *
        A brief amicus curiae was filed by Richard M. Lipton and
Adam Grais as attorneys for the National Realty Committee.
                                 - 2 -




                MEMORANDUM FINDINGS OF FACT AND OPINION

     NIMS, Judge1:    Respondent determined deficiencies in the

Federal income tax of petitioners, William N. Carlstedt and Moira

M. Carlstedt, in the amounts of $180,351 and $183,550, for the

taxable years ended December 31, 1990, and December 31, 1991,

respectively.    (The term petitioner will be used henceforth to

refer to William N. Carlstedt.)

     All section references are to sections of the Internal

Revenue Code in effect for the years at issue, unless otherwise

indicated.    All Rule references are to the Tax Court Rules of

Practice and Procedure.

     After concessions by petitioners, the issues for decision

are as follows:

     1.   Whether petitioner engaged in the activity of Carlstedt

Dickman, Inc. (CDI) for 500 hours or less in both 1990 and 1991,

such that petitioner did not materially participate in CDI

pursuant to section 469 and temporary regulations thereunder;

and, if so,

     2.   Whether section 1.469-2T(f)(2), Temporary Income Tax

Regs., 53 Fed. Reg. 5721 (Feb. 25, 1988), is invalid on its face

     1
        With the consent of counsel for the parties, the Chief
Judge reassigned this case, after the death of Judge Irene F.
Scott, to Judge Arthur L. Nims, III, for disposition on the
existing record.
                               - 3 -

or as applied to petitioners, resulting in respondent's incorrect

characterization of petitioners' income from CDI as nonpassive.

     Some of the facts have been stipulated and are found

accordingly.   The stipulation of facts and attached exhibits are

incorporated herein by this reference.

     Petitioners are married and resided in Indianapolis,

Indiana, at the time they filed their petition in this case.

                         FINDINGS OF FACT

     During the years at issue, petitioner was a shareholder or

partner in the following real estate-related enterprises:     (1)

CDI; (2) Citimark Development Co. (Citimark); (3) Citimark

Management, Inc. (CMI); (4) Citimark Communications, Inc. (CCI);

and (5) Monaghan Leasing Co. (Monaghan).

     Carlstedt Dickman, Inc.

     CDI, an Indiana corporation, is a general contractor that

provides design and building services, including construction

management, to retail, industrial, and health care companies.

CDI had an election in effect to be treated as an S corporation

during the years at issue.   The net income of CDI in 1990 and

1991 was $892,765 and $745,803, respectively.

     Petitioner has been president, a director, and a shareholder

of CDI since its founding in 1982.     Petitioner's wife (Mrs.

Carlstedt) was also an officer and director of CDI in 1990 and

1991.   During the years at issue, petitioner owned 80 percent of

the stock of CDI, and Michael Dickman (Dickman), vice president
                                 - 4 -

of CDI, owned 20 percent of the stock.       Petitioner was paid a

salary by CDI in 1990 and 1991 in the amounts of $93,885 and

$74,130, respectively.

     CDI earned its gross income in 1990 and 1991 from two

sources.    Approximately 93 to 95 percent of its income was

derived from commercial construction contracts obtained through a

competitive bidding process.    CDI earned the remaining 5 to 7

percent of its income from the construction of leasehold

improvements (tenant finishes) for unrelated third parties, as

well as for tenants in buildings owned by Citimark.

     In 1990 and 1991, petitioner engaged in a number of

activities on CDI's behalf.    He met with CDI project managers

(Kenneth Johnson and John Cook) and superintendents and,

occasionally, with the company's estimators.       Petitioner held

formal company meetings and field meetings concerning the general

business of CDI.    He held secretary meetings and accounting staff

meetings.    He met with CDI's bonding and insurance companies.

Petitioner also prepared for and made project presentations to

certain prospective customers.    He occasionally discussed project

bid markups with Dickman.    Petitioner made decisions regarding

the legal affairs of the company and met or spoke with CDI's

attorneys to discuss such matters.       Petitioner also made

occasional site visitations in connection with projects under

construction.
                                 - 5 -

     Petitioner was in charge of hiring, firing, and evaluating

key personnel.   He reviewed and signed contracts for construction

jobs and handled any miscellaneous nonrecurring matters related

thereto.   Petitioner reviewed company correspondence and made

phone calls relating to the business of CDI.    He also handled

miscellaneous administrative office matters, such as purchasing

athletic equipment and office furniture for the company.

Petitioner signed checks for CDI and engaged in entertainment and

other activities related to business development.    In addition to

the above, in 1991 petitioner was also involved in insurance

claim matters and tenant finishes.

     Although nominally an employee of CMI, Mrs. Carlstedt also

participated in activities on CDI's behalf.    In 1990, Mrs.

Carlstedt submitted reports for reimbursement of expenses for a

number of different items of travel and/or entertainment incurred

for CDI.   In addition, Mrs. Carlstedt was partially responsible

for distributing to employees of CDI tickets purchased by CDI to

Indianapolis Colts and Pacers games, Indianapolis 500 Festival

activities and other entertainment activities.

     The Citimark Partnerships

     Petitioner was also involved in the real estate development

business in 1990 and 1991.   In the mid-1980's, CDI had

constructed 10 buildings on two parcels of land (Allison Pointe

and Castleton Business Park) located in northeast Indianapolis.

Each of the 10 buildings was owned by a separate partnership in
                                - 6 -

which petitioner held an interest as a general partner.    (Another

partnership owned the land in Allison Pointe.)   The manner in

which the partnerships were set up to own the different

properties was common in the real estate industry.

     Petitioner's principal partners in each of the partnerships

were Dickman, Roger Eiteljorg, and Jim Eiteljorg.    Petitioner was

managing general partner of each of the partnerships.   For the

sake of simplicity, the partnerships operated collectively under

the name of Citimark.   Citimark is not a legal entity and earns

no income.   For marketing purposes, petitioner was represented as

the president of Citimark.   Similarly, Dickman, Jim Eiteljorg,

and Roger Eiteljorg held themselves out as senior vice presidents

of Citimark.

     The partnerships were initially financed with short-term

construction loans that enabled them to build the projects and

lease them up to a point.    By 1990 and 1991, the partnerships had

amassed approximately $50 million of debt as a result of short-

term financing, approximately $40 million of which was due in

December 1991.    The partners, including petitioner, had assumed

personal liability for the $40 million of loans due as a

condition of obtaining the financing.   As managing general

partner, it was one of petitioner's responsibilities to find a

source to refinance the construction loans in the form of long-

term mortgages.
                                 - 7 -

     Citimark Management, Inc.

     During the years at issue, petitioner was also president of

CMI, an Indiana corporation established in 1982, which had in

effect an election to be treated as an S corporation.    CMI

entered into agreements with Citimark to provide property

management services to the buildings owned by the partnerships.

Mrs. Carlstedt was secretary of CMI, as well as a property

manager.   CMI also employed leasing agents whose job it was to

find prospective tenants for Citimark-owned buildings.

     Citimark Communications, Inc.

     CCI is an Indiana corporation formed by petitioners in 1989.

In 1990 and 1991, petitioner owned 32 percent of the stock of CCI

and was treasurer and a director of the company.   James

Eiteljorg, Roger Eiteljorg, Dickman, and David Berry owned the

balance of the stock and, with the exception of Dickman, were

officers of the company.   CCI had elected to be treated as an S

corporation during the years in issue.

     In 1990 and 1991, CCI sold telecommunications services and

equipment both to third parties and to tenants housed in the

buildings owned by the Citimark partnerships.   CCI had two full-

time employees; neither of the petitioners was a full-time

employee of that corporation.
                                 - 8 -

     Monaghan Leasing Co.

     Monaghan is a leasing corporation owned by petitioner and

Dickman; petitioner was its president.    Monaghan acquires

construction and other equipment and leases it to CDI and the

other enterprises.   Monaghan had no employees in 1990 and 1991.

     Throughout the years at issue, the offices of CDI and

petitioner's other businesses were all located in a single office

suite at Allison Pointe, in one of the buildings owned by the

partnerships.   Petitioner occupied one office in this suite from

which he conducted all of his business activities.    Petitioner

stated that "if you walked into our office there wouldn't be

divisions between each of these companies and it would be

difficult for you to tell who worked for who".    The businesses

all shared the same phone lines.    Rent was allocated among the

businesses based on a square-foot analysis of the space each

business utilized.   None of the cost of the space, however, was

allocated to the partnerships.

     Expenses for all of the above-described entities were

generally paid through CDI.   This was viewed as the most

efficient way to handle accounting and invoicing for the entities

collectively.   Expenses were then generally allocated to a

specific company or partnership by CDI's accounting department.
                                - 9 -

During 1990 and 1991, CDI wrote 3,863 and 4,088 checks,

respectively, for business expense disbursements.    Either

petitioner or Mrs. Carlstedt, in petitioner's absence, signed all

of the checks, as petitioners had sole signature authority on

CDI's bank accounts.   The checks were prepared by the accounting

department, and related invoices and payment vouchers were

attached thereto before the checks were presented for signature.

On occasion, petitioner returned checks to the accounting

department for further explanation before signing them.    For

example, on or about February 12, 1991, petitioner returned a

check to the accounting department for an explanation concerning

an $88.25 expenditure.

     Petitioner's Partnership Activities in 1990 and 1991

     During 1990 and 1991, a number of Citimark tenants went

bankrupt, and other partnership tenants were dilatory in their

payment of rent.   Moreover, the availability of long-term

refinancing in the real estate market had become increasingly

scarce during this period.    These developments affected the

partnerships significantly.    Approximately $500,000 of interest

payments were due each month on the short-term loans, and the

partnerships also faced the prospect of having to repay the

principal of $40 million in December 1991.
                               - 10 -

     In an attempt to secure long-term financing, petitioner

developed numerous information packages valuing the buildings for

potential lenders.    These packages also included background

information about the partnerships.     Petitioner, along with Roger

Eiteljorg, contacted roughly 100 financial institutions each year

on behalf of the partnerships in an attempt to find long-term

financing.   Many were contacted twice.   Approximately 80 pension

funds and 27 life insurance companies were also contacted in this

manner.   Petitioner's efforts to refinance the partnerships

occupied much of his time, both in 1990 "and especially in '91".

     Petitioner's Estimations of Time Spent on CDI Activities in
1990 and 1991

     In mid-1990, petitioner's accountant informed him of the

possibility of offsetting his share of the partnerships' passive

losses against his income from CDI if petitioner were to spend

less than 500 hours on CDI activities for the year.    The

accountant advised petitioner to keep a reasonable record of his

time, and to review his activities for the months in 1990 that

had already passed.

     Petitioner maintained a contemporaneous calendar of a

portion of his time and activities during the years in issue.

For 1990, petitioner listed activities on his calendar related to

CDI and the partnerships totaling 641 hours.    Of that amount,
                              - 11 -

179.5 hours related to activities that petitioner determined

involved CDI and 461.5 hours related to activities that

petitioner determined involved the partnerships.   In 1991,

petitioner's calendar listed activities related to CDI and the

partnerships totaling 620 hours.   Of that amount, 257 hours

related to activities that petitioner determined involved CDI and

363 hours related to activities involving the partnerships.

     At the end of each year, petitioner also summarized the

available records of his time into a so-called diary of

activities (the diaries).   Petitioner's diaries were based on a

40-hour week, although petitioner acknowledged that he generally

had worked more hours than that per week.   In preparing the

diaries, petitioner calculated the total number of hours he had

spent on CDI and his other enterprises.   In so doing, he used his

calendar to remind him of the occurrence and length of meetings,

reviews, trips, as well as any site visits.   He then examined

other available documents to provide allowances for phone calls,

travel and entertainment, and activities not otherwise listed on

his calendar.   Petitioner testified that he included a "cushion"

of 30-40 hours of additional time worked for CDI each year in

case he forgot something.   In this manner, he came up with the

following summary of hours for 1990 and 1991:
                                - 12 -

     Year                Entity                Hours

     1990                Partnerships        1350
                         CDI                  396
                         CCI                   41
                         Encosys                1
                         Other (includes
                         outside activities) 200

     1991                Partnerships          1205.5
                         CDI                    483.5
                         CCI                    100
                         Other                  166

The underlying notes from which petitioner had prepared the

diaries were disposed of prior to trial.

     Petitioners filed joint Forms 1040, U.S. Individual Income

Tax Return, for 1990 and 1991.    On Schedules E attached to their

returns petitioners reported losses of $692,676 and $638,604, in

1990 and 1991, respectively, as petitioner's share of passive

losses from the partnerships.    Furthermore, for purposes of

section 469, petitioners classified their participation in the

business activity of CDI in 1990 and 1991 as passive.    On that

basis, petitioners reported as passive income their share of

taxable income from CDI in the amounts of $714,212 in 1990 and

$596,642 in 1991 on the Schedules E.

     On November 7, 1995, respondent issued a notice of

deficiency to petitioners for their 1990 and 1991 taxable years.

Among other adjustments, respondent disallowed petitioners'
                                - 13 -

treatment of the income from CDI as passive, and, as a result,

disallowed the use of the passive losses from the partnerships to

offset petitioners' income from CDI.

     In preparing for trial, petitioner recalculated the hours of

time he had spent on CDI activities.     Petitioner used a somewhat

different process for trial than he did in 1990 and 1991 because

his "motivation is much different * * * I have to in part defend

myself * * * [and] have to be very accurate which I wasn't

advised of in 1990 and 1991".    In his recalculation, petitioner

compiled a list of projects and activities that he was involved

with for CDI and broke each of them down into various parts.

Then, he examined all of the related documents in his possession

pertaining to such activities and assigned a time to each of the

activities based on his judgment and experience.    Occasionally,

the time allocated to an activity was also set forth in the

calendar and could be cross-referenced for accuracy.    Petitioner

did not use a cushion in making this calculation, and in this

manner he determined that he had spent 318.75 hours in 1990 and

439.8 hours in 1991 on CDI activities.

     Among the numerous estimates made in his recalculation,

petitioner determined that he held informal office meetings for 4

hours and secretarial meetings for 2.5 hours.    Some of the time
                              - 14 -

petitioner spent on the secretarial and informal office meetings

was allocated to businesses other than CDI, since the secretaries

and other employees also performed services for those other

enterprises.   Petitioner also allocated an average of 3 minutes

to each item of correspondence he read for CDI.   He allocated 5

seconds for each check that he had signed for CDI.

     Petitioner also testified that he examined telephone billing

records to determine the time he had spent on CDI-related calls.

While he stated that he was able to differentiate which calls

were made on behalf of the partnerships and which calls were made

for CDI, on cross-examination petitioner could not say on whose

behalf some of the calls were made, nor did he recognize many of

the phone numbers.   Although petitioner claimed to have called

some of the numbers to find out who they belonged to when

preparing for trial, he neglected to keep any notes or record of

his efforts.   (The record does not reflect whether petitioner

calculated time spent on incoming calls he fielded on behalf of

CDI.)   Petitioner was also unable to explain how he arrived at

his estimate of 5 hours spent on miscellaneous administrative

office matters.

     In making his calculations, petitioner did not include any

time devoted by Mrs. Carlstedt to activities for CDI other than
                              - 15 -

signing checks, such as engaging in travel and entertainment, and

performing any other miscellaneous work for CDI such as

distributing tickets to CDI employees.    Moreover, he did not

include time that he spent proposing and negotiating build-to-

suit leases for the partnerships from which CDI was certain to

earn income constructing tenant finishes.    Nor did petitioner

allocate to CDI any time that he spent on bid presentations for

projects CDI did not obtain, as many records relating to such

presentations were no longer available.    In at least one

instance, petitioner did not allocate to CDI any time spent in

determining whether an invoice belonged to CDI or the

partnerships, even though ultimately he determined the expense

was CDI's.   He claimed that this was because he was acting in his

role as managing general partner to determine it was not a

partnership expense.

     Petitioner testified that he never had any confusion as to

whether he was acting on behalf of CDI or the partnerships during

1990 or 1991.   Petitioner admitted, however, that "we may not

have been as careful on formality as we should have".    Moreover,

his contractors and clients on occasion confused CDI with the

partnerships in their correspondence.    Although certain letters

were addressed to CDI, petitioner determined that they involved a
                              - 16 -

partnership issue and allocated his time spent dealing with such

matters accordingly.   Moreover, in the minutes of certain

meetings, petitioner was listed as representing Citimark, while

at other meetings on the same matter, petitioner was listed as

representing CDI.

                              OPINION

     We must decide whether petitioner materially participated in

the activity of CDI during the years at issue for purposes of

section 469 and the temporary regulations thereunder.   If so,

then petitioners cannot offset their share of passive losses from

the partnerships against income from CDI.   If petitioner is found

not to have materially participated in CDI, we must then consider

whether 1.469-2T(f)(2), Temporary Income Tax Regs., 53 Fed. Reg.

5721 (Feb. 25, 1988), which under certain circumstances

recharacterizes as active income that which would otherwise be

considered passive, is invalid on its face or as applied to

petitioners.

     We note at the outset that the determinations of respondent

in a notice of deficiency are presumed correct, and taxpayers

bear the burden of proving that respondent's determinations are

incorrect.   Rule 142(a).
                                - 17 -

I. Whether Petitioner Materially Participated in CDI in 1990 and
1991

       Respondent argues that the income realized by petitioners

from CDI was not passive within the meaning of section 469, and,

accordingly, petitioners may not deduct their undisputed passive

losses from the partnerships against it for the years at issue.

(We note that section 469(c)(7), which provides special rules for

taxpayers in the real property business concerning the nature of

rental real estate activity, was not in effect for the years at

issue.)    Petitioners, on the other hand, contend that they may

deduct their passive losses from the Citimark partnerships

against what is, according to their position, passive income of

CDI.

       Section 469(a)(1) provides generally that any passive

activity loss claimed by a taxpayer during any taxable year is

not allowable as a deduction.    Section 469(a)(2) includes as

affected taxpayers, among others, any individual.    Section

469(d)(1) provides that the term "passive activity loss" means

the amount, if any, by which the aggregate losses from all

passive activities for the taxable year exceed the aggregate

income from all passive activities for such year.

       Section 469(c) defines a passive activity as follows:
                                - 18 -

          (1) In general.--The term "passive activity"
     means any activity--

               (A) which involves the conduct of any trade
          or business, and

               (B) in which the taxpayer does not materially
          participate.

     The parties do not dispute that CDI during the years at

issue was involved in the conduct of a trade or business for

purposes of section 469(c).     Rather, petitioners maintain that

petitioner did not materially participate in the activity of CDI

and therefore his share of CDI's income from that activity falls

within the definition set forth in section 469(c)(1).     Respondent

avers that petitioners have not sustained their burden of proof.

We agree with respondent.

     For the reasons which follow, we hold that petitioners have

failed to establish that petitioner did not materially

participate in the activity of CDI during the years at issue.

     Section 469(h) provides:

          (h) Material Participation Defined.--For purposes
     of this section--

          (1) In general.--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--
                                  - 19 -

            (A) regular,

            (B) continuous, and

            (C) substantial.

In determining whether a taxpayer materially participated in an

activity, the participation of the spouse of a taxpayer in the

activity is also taken into account.       Sec. 469(h)(5); sec. 1.469-

5T(f)(3), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25,

1988).

     In implementing section 469, Congress specifically

authorized the Secretary to prescribe regulations as to "what

constitutes * * * material participation".      Sec. 469(l)(1).

Pursuant to that authorization, section 1.469-5T(a), Temporary

Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), lists 7

alternative situations where an individual shall be treated, for

purposes of section 469, as materially participating in an

activity.    Here, respondent relies on alternative (1) of that

temporary regulation, which provides that a taxpayer will be

considered to have materially participated in an activity if "The

individual participates in the activity for more than 500 hours

during * * * [the] year".      Sec. 1.469-5T(a)(1), Temporary Income

Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988).      (At trial
                              - 20 -

respondent also raised the issue of whether petitioner materially

participated in the activity of CDI for 1990 and 1991 under the

"facts and circumstances" test of section 1.469-5T(a)(7),

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

On brief, however, respondent did not address this argument and

is taken to have abandoned this position.    See Rybak v.

Commissioner, 91 T.C. 524, 566 n.19 (1988).)

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

Reg. 5727 (Feb. 25, 1988), provides that taxpayers can establish

the extent of their participation in an activity "by any

reasonable means."   Reasonable means "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.   In that respect, "Contemporaneous

daily time reports, logs, or similar documents are not required

if the extent of * * * participation may be established by other

reasonable means."   Sec. 1.469-5T(f)(4), Temporary Income Tax

Regs., supra (emphasis added).
                              - 21 -

     We think that, in general, petitioner has attempted to give

credible testimony as to the services he performed for CDI during

the relevant period.   Under the circumstances, however, we

believe that the methods petitioner used to approximate the time

he spent performing such services during 1990 and 1991 are not

reasonable within the meaning of section 1.469-5T(f)(4),

Temporary Income Tax Regs.

     This Court has previously noted that, while the regulations

are somewhat ambivalent concerning the records to be maintained

by taxpayers, they by no means allow a   postevent "ballpark

guesstimate".   Speer v. Commissioner, T.C. Memo. 1996-323

(quoting Goshorn v. Commissioner, T.C. Memo. 1993-578).    In the

instant case, while perhaps not falling within the postevent

"ballpark guesstimate" category, Goshorn v. Commissioner, supra,

we nevertheless conclude that petitioner's estimates were, on the

whole, unreliable and inconsistent.    Petitioner's rationale for

allegedly spending less than 500 hours per year on CDI

activities, as well as the testimony of petitioners' witnesses,

fails to convince us otherwise.

     In response to petitioners' concerns, we do not question the

fact that petitioner's various enterprises were separate legal
                               - 22 -

entities.   However, the manner in which the businesses were

actually conducted reveals a cohesiveness that was not accurately

accounted for in petitioner's estimations.    The functions of the

businesses, while distinct, were closely integrated and

synergistic.    For example, benefits from leases obtained by the

partnerships flowed predictably to the other businesses,

especially to CDI.    The partners and shareholders frequently

overlapped.    Moreover, the businesses all shared the same office

and phone lines, and CDI generally functioned as a conduit for

the payment of the expenses of all of the businesses.    Despite

the time he purportedly spent on the partnerships, none of the

cost of the office space was allocated to them, notwithstanding

petitioner's claims that the entities were separate.



     Despite the foregoing, petitioner failed to allot time to

CDI for activities that were certain to redound to its benefit,

such as the build-to-suit lease proposals negotiated by

petitioner.    (We agree with petitioners that petitioner's

fiduciary duties owed by petitioner to the partnerships and CDI

may have differed due to different owners and partners such that

he could not have engaged in self-dealing between those entities
                              - 23 -

in the strict sense of the term.   However, petitioner's

activities on behalf of the partnerships never conflicted with

the interests of CDI, and only helped CDI.)   Petitioner was

inconsistent in that respect since, for example, his time spent

on meetings with the secretaries and other employees of CDI was

allocated to the other companies as well as to CDI.

     Moreover, we think that the time petitioner acknowledged

spending on purely CDI activities was understated.    Although

contemporaneous, his calendar only accounts for about one-third

of the hours listed in his diaries and is sketchy, with numerous

gaps.   The calendar frequently lists appointments with

individuals without indicating on behalf of which entity the

appointment had been made.

     Furthermore, petitioner's diary of activities is hardly the

narrative summary contemplated by the temporary regulations.

Rather, it is a numerical compilation of hours petitioner

allocated to his activities for CDI based on his review of the

calendar and uncorroborated estimates.   The notes from which the

diaries were made were disposed of prior to trial.    Moreover, in

contrast to petitioner's testimony, neither the diaries

themselves, nor a supplemental protest which petitioners filed
                               - 24 -

with the IRS Appeals Division which discusses the diaries in

depth, mentions any additional "cushion" of hours for CDI

activities.    The diaries also did not fully account for his work

time since they were based on a 40-hour week, yet he claimed

generally to have worked over 40 hours per week.    No explanation

was given as to whether any of the time not accounted for could

be allocated to CDI activities.

     Petitioner's document-based method is also unreliable, as

the documents themselves do not provide any objective measure of

time for activities extrapolated therefrom.    Rather, petitioner

assigned times to activities years later based solely on his

judgment and experience as to how long the activities must have

taken him.    Even if such uncorroborated estimates were made in

good faith, memories can fade with time, and records can be lost

or thrown out, as occurred here.

     In addition, some of the times petitioner assigned to his

activities appear on their face inadequate to the Court.

Petitioner allocated only 5 seconds for each check that he signed

for CDI, yet he was able to discern and question a relatively

minor $88.25 expense.    Petitioner allocated an average of 3

minutes per item of correspondence and claimed not even to have
                               - 25 -

read many of the carbon copies frequently sent to him by his

employees, even though he was CDI's president.    Even more

problematic is the fact that some times were not assigned at all

to activities he engaged in CDI, such as bid presentations on

projects CDI did not get, since documents for such presentations

were not always available.

     Petitioner claims that he did not spend much time on CDI

activity because his partnerships, together with various civic

and familial responsibilities, preoccupied him during the years

at issue.   While petitioner's participation in activities other

than CDI may have had a bearing on the level of his activity for

CDI, that does not necessarily mean his participation in CDI

dipped below 500 hours.   In this regard, we note petitioner's

testimony that "especially in 1991" the time he spent on the

partnerships had increased, yet by his own estimate, his time at

CDI had increased substantially that year as well.    Thus, time

spent on the two activities by petitioner was not inversely

proportional.

     In addition, petitioner's partnership activities do not seem

as onerous as he claimed.    Roger Eiteljorg was available to

assist petitioner in his efforts to secure long-term financing
                               - 26 -

for the partnerships.   Roger Eiteljorg stated that they met with

only 1 or 2 potential lenders each week over the 2-year period.

In addition, the development of information packages for

prospective lenders did not have to be done repeatedly; much

information compiled by petitioners appears to be of the type

that could have been used over again before being tailored to the

requirements of specific lenders.   Furthermore, although

petitioner and Roger Eiteljorg said that prospecting for tenants

was one of petitioner's primary responsibilities as managing

general partner of the partnerships, that was also one of CMI's

responsibilities.   No explanation was made as to why the

employees of CMI were not charged with this task, or why the time

spent on that activity by petitioner was allocated to the

partnerships and not to CMI.

     We also do not find the testimony of petitioners' witnesses

as to his participation in CDI persuasive, and there is little

objective evidence in the record to support petitioner's self-

serving estimations.    None of petitioners' witnesses could attest

to the number of hours that petitioner spent working for CDI, and

they only gave vague statements as to the extent of his

participation.   Petitioner himself stated that it was "difficult
                              - 27 -

* * * to tell who worked for who" at the office.    Dickman stated

that petitioner's hours at CDI "couldn't be very many".   Mike

Price's testimony that petitioner spent "all his time with the

partnerships" is obviously not true since, by petitioner's own

admission, he spent several hundred hours a year on CDI business.

Kenneth Johnson merely stated that petitioner spent "the majority

of his time with the partnerships".    However, he did not observe

petitioner's activities on a daily basis, and did not know the

level of petitioner's participation in CDI at the office or on

John Cook's projects.   Cf. Harrison v. Commissioner, T.C. Memo.

1996-509 ("Although this Court has not always accepted a post-

event narrative of participation, * * * we find petitioner's

description of his participation, when combined with * * *

[witness] testimony and the objective evidence in the record, to

be credible".)

     Finally, petitioner allocated no time to Mrs. Carlstedt's

activities for CDI, other than check signing.   Mrs. Carlstedt was

partially responsible for ticket distribution to CDI employees.

Moreover, she attended events which, viewed objectively, could be

construed as having business development purpose.   (Petitioners'

supplemental protest acknowledged as much.)   Mrs. Carlstedt was,
                              - 28 -

after all, a director and officer of CDI.    Nevertheless, Mrs.

Carlstedt did not testify as to her involvement with CDI, despite

petitioners' knowledge that that was one of the areas that the

Commissioner was exploring in determining whether petitioner

materially participated in CDI activities.    It is well

established that the failure of a party to introduce evidence

within his possession which, if true, would be favorable, gives

rise to the presumption that, if produced, it would be

unfavorable.   Wichita Terminal Elevator Co. v. Commissioner, 6

T.C. 1158 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

     We are left with petitioner's self-serving testimony that he

did not materially participate in the activities of CDI in 1990

and 1991.   The Court is not bound to accept the unverified,

undocumented testimony of taxpayers, and we decline to do so in

the instant case.   See Hradesky v. Commissioner, 65 T.C. 87, 90

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

     In light of the above, we hold that petitioners have failed

to meet their burden of proving that petitioner was not involved

in the operation of CDI on a basis that was regular, continuous,

and substantial in 1990 and 1991 within the meaning of section

469(h)(1) and section 1.469-5T(a), Temporary Income Tax Regs., 53
                               - 29 -

Fed. Reg. 5725 (Feb. 25, 1988); consequently, petitioners may not

offset passive losses from the partnerships against CDI income in

those years.   See Rule 142(a); Mordkin v. Commissioner, T.C.

Memo. 1996-187.

II. Whether Section 1.469-2T(f)(2), Temporary Income Tax Regs.,
Is Invalid

     Since we hold that petitioners have failed to establish

that petitioner did not materially participate in the activity of

CDI during the years at issue, we need not address the validity

of section 1.469-2T(f)(2), Temporary Income Tax Regs., 53 Fed.

Reg. 5726-5727 (Feb. 25, 1988), either in general or as applied

to petitioners in this case.   (The brief amicus filed on behalf

of the National Realty Committee addresses only this point.)

     To reflect the foregoing and issues previously conceded,



                                         Decision will be entered

                                    for respondent.
