                               T.C. Memo. 2017-118



                         UNITED STATES TAX COURT



                    JAMIE OSTROM, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 24268-15.                          Filed June 19, 2017.



      Jamie Ostrom, pro se.

      Fred Edward Green, Jr., and Ric D. Hulshoff, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      COHEN, Judge: Respondent determined a deficiency of $2,475 in

petitioner’s Federal income tax for 2011. After concessions, the sole remaining

issue for decision is whether petitioner was a real estate professional in 2011. All

section references are to the Internal Revenue Code in effect for the year in issue,

and all Rule references are to the Tax Court Rules of Practice and Procedure.
                                          -2-

[*2]                            FINDINGS OF FACT

        Some of the facts have been stipulated, and the stipulated facts are

incorporated in our findings by this reference. Petitioner resided in Nevada at the

time she filed her petition.

        During 2011 petitioner worked full time at One Nevada Credit Union

(ONCU) as an information technology specialist. She worked about 40 hours per

week at ONCU. On her 2011 tax return, petitioner reported wages of $68,879.

        In 2011 petitioner owned four single-family residential properties in Las

Vegas, Nevada. Petitioner rented out and managed these properties herself. She

reported income and expenses for each on Schedule E, Supplemental Income and

Loss, attached to her 2011 return. On the Schedule E, she reported net losses from

the rental activities of $40,968, the full amount of which she claimed as a

deduction against other income on her 2011 return. Petitioner did not elect to

group her interests in the rental properties as a single rental real estate activity in

2011.

        On September 13, 2011, the Nevada Department of Business and Industry,

Real Estate Division, issued petitioner a license to provide services as a real estate

broker salesperson. Petitioner activated her real estate license with Forty Percent

Real Estate Referral Co. (Forty Percent). Although she was associated with Forty
                                           -3-

[*3] Percent as of August 26, 2011, petitioner did not report any income from

activities performed as a real estate agent in that year. In December 2014 Forty

Percent closed its brokerage and reopened as a new business named Key

Advantage Realty (Key Advantage).

      Petitioner reported gambling winnings of $94,000 on her 2011 return. Her

gambling losses equaled or exceeded her winnings. During 2011 petitioner

gambled on at least 82 days at the Hard Rock Casino. Her records indicate that

she gambled on at least 70 days at other locations.

                                       OPINION

      Respondent determined that petitioner’s net loss from rental activities for

2011 was a passive activity loss. Respondent also determined that petitioner

actively participated in her rental activities and that she could offset up to $25,000

of the rental activity loss against nonpassive income for 2011. Petitioner contends

that she is a real estate professional and that she is entitled to offset the entire loss.

      Generally, taxpayers bear the burden of proving that the adjustments set

forth in the Commissioner’s notice of deficiency are erroneous. See Rule 142(a);

Welch v. Helvering, 290 U.S. 111 (1933). Specifically, taxpayers must prove their

entitlement to claimed deductions. See INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
                                         -4-

[*4] Taxpayers bear the burden of maintaining the records needed to establish

their entitlement. See sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90

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

      Taxpayers are allowed deductions for certain business and investment

expenses under sections 162 and 212. Section 469, however, generally disallows

any passive activity loss. Sec. 469(a). A passive activity loss is defined as the

excess of the aggregate losses from all passive activities for the taxable year over

the aggregate income from all passive activities for that 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). Material participation is defined as involvement in the

operations of the activity that is regular, continuous, and substantial. Sec.

469(h)(1).

      Rental activity is generally treated as a per se passive activity regardless of

whether the taxpayer materially participates. Sec. 469(c)(2), (4). However,

section 469(c)(7) provides that the rental activities of a taxpayer in the real

property business (real estate professional) are not per se passive activities under

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

participation requirement of section 469(c)(1). See sec. 1.469-9(e)(1), Income Tax

Regs. Thus a taxpayer who qualifies as a real estate professional under section
                                         -5-

[*5] 469(c)(7) may deduct losses from rental activity against other income

provided that he or she materially participates in the activity. A taxpayer qualifies

as a real estate professional if: (1) more than one-half of the personal services

performed in trades or businesses by the taxpayer during the taxable year are

performed in real property trades or businesses in which the taxpayer materially

participates and (2) the taxpayer performs more than 750 hours of services during

the taxable year in real property trades or businesses in which the taxpayer

materially participates. Sec. 469(c)(7)(B)(i) and (ii).

      A real property trade or business is any real property development,

redevelopment, construction, reconstruction, acquisition, conversion, rental,

operation, management, leasing, or brokerage trade or business. Sec.

469(c)(7)(C). A trade or business includes a taxpayer’s status as an employee.

See Fowler v. Commissioner, T.C. Memo. 2002-223. However, in computing the

number of hours that a taxpayer performs services in real property trades or

businesses during the taxable year, personal services performed as an employee

shall not be taken into account unless the employee is also a 5% owner in the

employer. Sec. 469(c)(7)(D)(ii).

      All of the taxpayer’s real property trades or businesses are taken into

account in determining whether the 50% and 750-hour requirements are satisfied.
                                          -6-

[*6] See Hailstock v. Commissioner, T.C. Memo. 2016-146, at *17; Almquist v.

Commissioner, T.C. Memo. 2014-40, at *11. However, only those real property

trades or businesses in which the taxpayer materially participates are counted

towards meeting the requirements. See Hailstock v. Commissioner, T.C. Memo.

2016-146, at *17-*18. A taxpayer’s material participation is determined

separately with respect to each rental property that he or she owns, unless the

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.

Although petitioner failed to make such an election for 2011, respondent concedes

that petitioner materially participated in the rental activity with respect to each of

her four rental properties in 2011, because her participation constituted

substantially all of the participation in each activity. See sec. 1.469-5T(a)(2),

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

      Respondent maintains that petitioner’s rental activities were passive

activities under the per se rule of section 469(c)(2), because she failed to establish

that she was a real estate professional in 2011. Petitioner bears the burden of

proving that in 2011 she met the criteria under section 469(c)(7)(B).

      Generally, a taxpayer may establish the extent of his or her participation in

an activity by “any reasonable means”. Sec. 1.469-5T(f)(4), Temporary Income
                                        -7-

[*7] Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988). Contemporaneous records are

not necessarily required, and reasonable means may include identifying services

performed over a period of time and the approximate number of hours spent

performing such services by using appointment books, calendars, or other

narrative summaries. Id. This Court has previously noted that while the

regulations are somewhat ambiguous concerning the records to be maintained by

taxpayers, we are not required to accept a postevent “ballpark guesstimate” or

taxpayers’ unverified, undocumented testimony. See Moss v. Commissioner, 135

T.C. 365, 369 (2010); Hoskins v. Commissioner, T.C. Memo. 2013-36.

      To meet her burden, petitioner must establish that she spent more time

working in real property trades or businesses than working in other trades or

businesses. See sec. 469(c)(7)(B)(i). During 2011 petitioner was employed full

time at ONCU as an information technology specialist. She testified that ONCU

had a “real estate division” and that she would “do whatever they ask[ed] * * * if

they needed help with that”. Petitioner provided no credible evidence to support

the implication that she performed services in the nature of a real property trade or

business in the course of her employment at ONCU. In any event, petitioner

performed services as an employee and nothing in the record suggests that she

held an ownership interest in ONCU. See sec. 469(c)(7)(D)(ii). Thus her time at
                                        -8-

[*8] ONCU must be overcome by a showing that she performed more personal

services in real property trades or businesses than in her employment services at

ONCU, and her time spent there cannot count towards the 750-hour requirement

of section 469(c)(7)(B)(i).

      The services that petitioner performed in leasing and managing her rental

properties in 2011 were performed in real property trades or businesses in which

she materially participated. To the extent petitioner establishes her participation

by reasonable means, the hours she spent on these activities may be taken into

account in determining whether she qualifies as a real estate professional under

section 469(c)(7)(B). Petitioner contends that she also worked as a real estate

agent with Forty Percent in 2011 and that the services she performed as a real

estate agent should count towards meeting the requirements of section

469(c)(7)(B).

      We are not bound to accept testimony that is improbable, unreasonable, or

questionable. Ruark v. Commissioner, 449 F.2d 311, 312 (9th Cir. 197l), aff’g

T.C. Memo. 1969-48. The calendars that petitioner provided report that she

performed services for “Key Real Estate” in January and June of 2011 although

the company was known as Forty Percent until December 2014 and Key

Advantage was established in 2015. Petitioner testified generally that she showed
                                         -9-

[*9] rental properties to potential clients and performed property management

services for Forty Percent, but her tax return does not reflect income received for

any such services. There is no evidence that any services that she may have

performed for Forty Percent in 2011 were services performed other than as an

employee or that she materially participated in that business.

      Petitioner provided at different times during examination an annual log

sheet and two monthly calendars that purported to reflect the number of hours she

spent performing services for her own rental properties and as a real estate agent

for Forty Percent. The log sheet reports that she spent a total of 2,396 hours

working on her rental properties and as a real estate agent in 2011. The calendars

report that for the months of January and June 2011 petitioner worked on these

sets of activities for a combined total of 260 hours per month, which she

extrapolates to 3,120 hours for the whole year. At trial, petitioner testified that her

work “as a real estate professional” actually exceeded 4,000 hours per year.

      Petitioner’s evidence and her testimony were inconsistent regarding the

number of hours she worked in real property trades or businesses during 2011, and

there are other factors that lead us to doubt the reliability of the records she

presented. Both the log sheet and the calendars provide only generic and

repetitious descriptions of the types of services she performed. In both documents,
                                        - 10 -

[*10] she frequently fails to specify whether she performed the services for her

own rental properties or as a real estate agent for Forty Percent. This is

problematic, since petitioner has failed to establish that hours attributable to

services she performed for Forty Percent should be counted towards meeting the

requirements of section 469(c)(7)(B).

      The numbers of hours that petitioner claims she spent on tasks shown on the

log sheet and the calendars are improbable. The hours reportedly spent on real

property related activities are always the same, regardless of the date or the

specific tasks performed. Petitioner’s claimed hours appear excessive and are

unrealistic given what is known about her other activities. She spent

approximately eight hours each weekday at her full-time job at ONCU, and she

gambled extensively in 2011. In addition to these time-consuming activities,

petitioner contends that she spent between 6.5 and 11 hours every single day of the

year performing services in real property trades or businesses.

      When asked whether she prepared the calendars contemporaneously or in

response to requests made in 2016, petitioner’s testimony was evasive. She

testified that she prepared the calendars using “originals” that she kept during

2011. She never provided copies of any purported original documents.
                                       - 11 -

[*11] On consideration of the entire record, we do not accept petitioners’ claims

as to the hours she devoted to real property trades or businesses. She has not

shown that she met either requirement of section 469(c)(7)(B) and has failed to

meet her burden of proving that she qualified as a real estate professional in 2011.

      Any contentions we have not addressed are moot, irrelevant, or without

merit. To reflect the foregoing,

                                                Decision will be entered

                                       under Rule 155.
