                         T.C. Summary Opinion 2013-86



                         UNITED STATES TAX COURT



     DAVID EARL WHITE AND DEBRA ANN MCNICOLL, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 19568-12S.                      Filed November 4, 2013.



      David Earl White and Debra Ann McNicoll, pro sese.

      Donald D. Priver, for respondent.



                              SUMMARY OPINION


      GERBER, Judge: This case was heard pursuant to the provisions of section

7463 of the Internal Revenue Code in effect when the petition was filed.1


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

Pursuant to section 7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent for any other case.

      Respondent determined income tax deficiencies of $1,117 and $6,929 for

petitioners’ 2009 and 2010 tax years, respectively. The sole question for our

consideration is whether deductions for losses reported on petitioners’ Schedules

E, Supplemental Income and Loss, are limited by the passive activity rules of

section 469.

                                    Background

      Petitioners were residents of California at the time their petition was filed.

During 2007 and through November 2009, petitioner David E. White worked as a

community resource coordinator providing resources for prison parolees and

helping to facilitate their reentry into society. During November 2009 and

throughout 2010 Mr. White did similar work at San Quentin Penitentiary. During

2009 he was employed and earned wages from Seventh Step Foundation, Inc., and

the State of California totaling $30,527. During 2010 he was employed and

earned wages from the State of California of $64,037. His work hours were from

7 a.m. to 3 p.m. five days per week. Before November 2009 he worked 25 hours


      1
       (...continued)
the Tax Court Rules of Practice and Procedure.
                                            -3-

per week. Petitioner Debra A. McNicoll was employed and earned wages from

AT&T for 2009 and 2010 of $92,699 and $98,733, respectively.

       During 2009 and 2010 petitioners owned two pieces of rental property, one

in Bremerton, Washington, and the other in Colorado Springs, Colorado.

Petitioners also owned their residence in Pacifica, California. Petitioners did not

elect to treat all of their real estate interests as a single rental real estate activity

within the meaning of section 1.469-9(g), Income Tax Regs.

       Mr. White was involved in football and has been a football coach for many

years. While attending San Francisco State University Mr. White met Mr. Woods,

a football player, who became involved in the real estate business during 2004 or

2005. Mr. White was also interested in becoming involved in the real estate

business. He read books and studied techniques for successfully acquiring real

property. Ultimately, he decided that the purchase of realty where there was a

military presence provided an environment for growth and increased property

values. Mr. White, following Mr. Woods’ lead, purchased the Washington and

Colorado residential properties for investment and rental purposes during 2006

and 2007.2 Both the residences needed repairs, and Mr. White intended to


       2
        He had also purchased a home in Georgia and rehabilitated and sold it at a
profit during 2008.
                                         -4-

rehabilitate and improve the properties to enhance their value. He subcontracted

some of the work and performed some of it himself.

      Initially the properties increased in value and accumulated additional equity

value in excess of their cost. By 2009 and 2010, however, the “real estate bubble”

had burst, leaving petitioners with a debt of approximately two-thirds of a million

dollars and properties with less value than the outstanding mortgages. Petitioners

did not abandon the properties; instead they continued to repair and maintain them

during 2009 and 2010. Petitioners did not purchase any additional real property

during 2009 and 2010.

      Petitioners attached Schedules E to their 2009 and 2010 income tax returns.

On the Schedules E petitioners reported $33,600 of total rental income from their

two rental properties. Petitioners also reported expenses and depreciation that

exceeded the reported income, resulting in reported losses of $19,935 and

$26,368 for the 2009 and 2010 tax years, respectively.

      During the audit examination of their 2009 and 2010 income tax returns,

petitioners sent respondent two letters concerning the question of whether they

qualified for the exception to the passive loss rules. In a letter respondent received

on March 27, 2012, petitioners stated that 16 hours per week or 832 hours per year

were spent on their real estate activity. In that letter petitioners supported their
                                        -5-

832 hour-per-year statement by indicating that Mr. White worked from 7 a.m. to 3

p.m. at his State of California job and then devoted the hours of 4:30 p.m. to 6:30

p.m., Monday through Friday and six or more additional hours during the weekend

pursuing their real estate activity.

      In a letter dated April 2, 2012, petitioners, in further support of the hours

stated in their first letter, provided a somewhat more detailed schedule showing

some specific types of activities during each month of 2009 and 2010 and further

reflecting a total of 64 hours for each month or a total of 768 hours per year.

      Generally, Mr. White spent his time in his real estate activity in the areas of

maintenance, repairs, tenant problems, renovation, and miscellaneous

administrative matters. He also was attempting to find ways to finance and

possibly to expand their real property holdings.

      At trial Mr. White offered a document that was received as a summary of his

testimony reflecting that he spent from 3:30 p.m. to 8 p.m. afterwork hours each

weekday and from 9 a.m. to 5 p.m. on each weekend day working on his real estate

activity. Mr. White’s testimony conflicts with the 2012 letters sent to respondent,

in that his testimony is that he spent more than twice as much time (2,002 hours

per year) as originally reported to respondent (832 or 768 hours per year) during

the audit.
                                         -6-

                                     Discussion3

      Generally, a deduction in connection with business or investment income is

allowable against a taxpayer’s income. See secs. 162, 212. Section 469, however,

limits deductibility of losses from passive activity against a taxpayer’s other

income. A “passive activity loss” is defined as the excess of the aggregate losses

over the aggregate income from all passive activities for a taxable year. Sec.

469(d)(1). A “passive activity” is defined as any trade or business in which a

taxpayer does not materially participate. Sec. 469(c)(1). Rental activity, however,

is treated as “passive” regardless of whether the taxpayer “materially participates.”

Sec. 469(c)(2).

      A taxpayer who engages in the rental real estate business is not statutorily

considered to be engaged in a passive activity under section 469(c)(2) if he can

show that he is a qualifying real estate professional under section 496(c)(7). See

also sec. 1.469-9(e)(1), Income Tax Regs. Specifically, section 469(c)(7)(B) sets

forth the following requirements:




      3
       The parties did not raise the question of burden of proof. The sole question
we consider is whether petitioners are entitled to deductions in excess of income
from real estate activity against their ordinary income. Accordingly, petitioners
bear the burden of showing their entitlement to the losses under consideration.
See Rule 142(a).
                                          -7-

             (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.

In determining whether a taxpayer is a real estate professional, material

participation is considered separately with respect to each parcel of rental property

unless a taxpayer makes an election to treat all property as a single activity. See

sec. 469(c)(7)(A).4 With respect to joint income tax returns, either spouse’s

qualification as a real estate professional may satisfy the above requirements.

      Respondent maintains that Mr. White is not a real estate professional for

2009 or 2010 because: (1) he has not substantiated through a reasonable means

that he performed more than 750 hours of service in relation to his rental activities

and (2) his personal services performed in the rental activities during 2009 and/or

2010 do not exceed the hours that Mr. White spent in his jobs. Petitioners offered

evidence in an attempt to show that they have met the threshold requirement of

section 469 that would permit losses to be applied against income other than




      4
          Petitioners did not make this election for 2009 or 2010.
                                         -8-

passive income. Our task is to evaluate petitioners’ evidence and decide whether

it suffices to meet the section 469 requirements.

      Initially we note that there is no evidence in the record that Mrs. McNicoll

spent any time on the real estate activities during 2009 or 2010. With respect to

Mr. White, we must consider whether he has met the first and second requirement

of showing that he performed more than 750 hours of services each year in the

rental real estate activity and whether the hours spent were more than one-half of

the personal services performed in all trades or businesses. The evidence on these

points is contradictory.

      During the audit examination petitioners sent a letter to respondent stating

that 832 hours was spent each year in the rental real estate activity. Subsequently,

petitioners sent respondent another letter providing some detail of the type of real

estate activity, indicating that 64 hours per month or 768 hours per year were spent

engaging in the real estate activity. During 2009 Mr. White worked 25 hours per

week until November when he began working 40 hours per week for the State of

California. Accordingly, he worked approximately 1,025 hours (25 x 41) from

January through October 2009. During November and December he worked

approximately 440 hours (11 x 40). Accordingly, Mr. White would have to show

that his material participation in the real estate activity exceeded 1,465 hours for
                                         -9-

the year. For 2010 Mr. White worked 40 hours per week for a total of

approximately 2,080 hours per year, so that he would have to show that his

material participation in the real estate activity exceeded that amount. If

petitioners’ statements to respondent were accepted at face, the 750-hour test may

have been met for 2009 and 2010. At trial Mr. White supplied a new schedule of

his real estate activity for 2009 and 2010, indicating that he spent 2,002 hours each

year involved in the activity.5

      We have reviewed all of the schedules presented, both to respondent and to

the Court, and make the following observations: (1) petitioners did not keep a

daily calendar for 2009 or 2010 indicating the number of visits made to the rental

properties, quantifying the number of hours spent on their rental activities,

property investigation, and related activity, (2) petitioners instead summarized and

generalized the activities for 2009 and 2010, in which they generally explained the

activities performed concerning the rental properties and provided annual

estimates of the hours based on Mr. White’s available nonwork hours, (3) the

summary schedules presented to respondent and the Court were prepared after the

fact and appear to contain pure estimates of the timing and type of activity that


      5
      It appears that petitioners realized, after the fact, that the hours provided to
respondent during the audit examination would not suffice to pass both tests.
                                        - 10 -

petitioners contend was performed, and (4) in both schedules the basis for the total

annual time spent was Mr. White’s afterwork hours, and the summary schedules

essentially assigned all of Mr. White’s waking nonjob hours to the real estate

activity and did not provide time for other necessities of life. Overall we find the

summaries, which represent substantially all of the evidence petitioners offered, to

be estimates, some of which are unrealistic and all of which remain

uncorroborated in the record. See, e.g., Hill v. Commissioner, T.C. Memo. 2010-

200, aff’d, 436 Fed. Appx. 410 (5th Cir. 2011); Bailey v. Commissioner, T.C.

Memo. 2001-296.

      With respect to the evidence that 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:

      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.

This Court has held that, while the above regulations are somewhat ambiguous

concerning the records to be maintained by taxpayers, they do not allow a
                                        - 11 -

noncontemporaneous “ballpark guesstimate”. Hill v. Commissioner, T.C. Memo.

2010-200; Carlstedt v. Commissioner, T.C. Memo. 1997-331; Speer v.

Commissioner, T.C. Memo. 1996-323; Goshorn v. Commissioner, T.C. Memo.

1993-578.

      Because of petitioners’ failure to support their contentions that they met the

750 hours-per-year requirement or to show personal services concerning rental

real estate in an amount that exceeds one-half of all hours spent in other jobs, we

hold that petitioners have failed to meet the threshold requirements of section 469

that would permit their deduction of the loss for 2009 or 2010. Accordingly,

petitioners are not entitled to apply the 2009 or the 2010 loss from passive rental

real estate activity against other income reported for those tax years.

      To reflect the foregoing,


                                                 Decision will be entered for

                                       respondent.
