                  T.C. Summary Opinion 2011-122



                     UNITED STATES TAX COURT



                 HATTIE M. BONDS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15479-09S.              Filed October 17, 2011.



     Hattie M. Bonds, pro se.

     Melissa J. Hedtke, for respondent.



     ARMEN, 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.1   Pursuant to section

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



     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
                                  - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined deficiencies in, and accuracy-related

penalties on, petitioner’s Federal income taxes as follows:

         Year       Deficiency       Penalty - Sec. 6662(a)
         2006        $3,211.00             $642.20
         2007         2,499.00              499.80

     The issues raised by the pleadings and tried to the Court

are as follows:

     (1) Whether petitioner held certain real property for the

production of income.    If so,

     (2) whether losses claimed by petitioner in respect of such

real property are subject to the passive activity loss rules of

section 469.    If not, or if excepted therefrom,

     (3) whether petitioner substantiated losses claimed in

respect of such real property; and

     (4) whether petitioner is liable for accuracy-related

penalties under section 6662(a).

     We note that the notice of deficiency made other adjustments

to income but that petitioner never challenged those adjustments

either in the petition or at trial, or even on brief.2


     2
       Thus: For 2006 and 2007 respondent determined that
petitioner failed to report (1) IRA distributions of $2,087 and
$319 and (2) qualified dividends of $179 and $201, respectively.
Also for 2006 and 2007 respondent determined that petitioner was
liable for the 10-percent additional tax under sec. 72(t) on
early distributions from a qualified retirement plan.
                                                   (continued...)
                               - 3 -

Accordingly, those adjustments are deemed to be conceded.     See

Rule 34(b)(4) (“Any issue not raised in the assignments of error

shall be deemed to be conceded.”); McNeil v. Commissioner, T.C.

Memo. 2011-150 n.3 (issues not raised on brief or at trial are

deemed conceded).

                            Background

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

found.   We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.

     Petitioner resided in the State of Minnesota when the

petition was filed.

     In or about 1988 petitioner moved to Minnesota and since

then has resided and worked in the metropolitan Minneapolis-St.

Paul area.   During 2006 and 2007, the taxable years in issue,

petitioner worked full time as a vice principal at a high school

in Minneapolis, earning $94,082 in 2006 and $102,748 in 2007.

     Prior to moving to Minnesota, petitioner lived in Kansas

City, Missouri, where she grew up.     Much, if not most, of her



     2
     (...continued)
Additionally for 2007 respondent determined that petitioner
failed to report interest income of $509. Finally, respondent
partially disallowed itemized deductions claimed by petitioner on
Schedules A, Itemized Deductions, for charitable contributions in
2006 and 2007. (Certain of the foregoing adjustments served to
increase petitioner’s adjusted gross income, thereby increasing
the 2-percent floor on miscellaneous itemized deductions, see
sec. 67, and hence decreasing the allowable amounts, but this was
a purely mechanical matter.)
                               - 4 -

family remains there.   Specifically during 2006 and 2007,

petitioner’s parents lived in the Kansas City area, along with

three of her four siblings and “tons” of relatives; petitioner

also has lifelong friends there.

     While living in the Kansas City area, petitioner purchased a

single-family house (Kansas City house) in the early or mid-1980s

and lived in it until she relocated to Minnesota.   Although it

has a Kansas City mailing address, the house is located outside

the city limits, within a rural subdivision southwest of the

Kansas City airport in Platte County.   The Kansas City house is

described by the county assessor as a one-story residence built

in 1972 having a stud frame with a total floor area of 1,008

square feet, a basement garage, and an appraised value as of May

15, 2010, of $91,583.

     Petitioner held onto the Kansas City house when she

relocated to Minnesota, and she continues to own it to this day.

However, she has not made personal use of it since moving.

Rather, after she relocated, petitioner rented the Kansas City

house to various tenants through 2004 or 2005.   Since then the

house has not been rented.   Petitioner attributes her failure to

rent the property during the last 6 or 7 years to a number of

factors, including the economy (“I think the economy was getting

a little bit difficult, and it became a little bit hard to

rent”), the property’s location (“there’s no bus line around
                                - 5 -

there and it’s rural and people don’t really want to be there”),

and the disinclination of realtors to accept a listing for the

property (“the realtors, they say that it’s really hard to lease

out, too”).

     Petitioner has never listed the Kansas City house for sale.

However, on one occasion she did speak with a realtor and

concluded that the appreciation of the house over the years since

her relocation to Minnesota was such that its sale would yield a

handsome gain.

     During 2006 and 2007, petitioner traveled from Minnesota to

Kansas City several times a year, a round-trip distance of some

890 miles.    In Kansas City, petitioner would stay with her

mother, as the Kansas City house was unfurnished.    When in the

area, petitioner would post flyers advertising the house for

rent; at other times, petitioner might arrange for flyers to be

posted.

     Petitioner filed Forms 1040, U.S. Individual Income Tax

Return, for 2006 and 2007 and attached to each of those returns a

Schedule E, Supplemental Income and Loss, in respect of the

Kansas City house.    Without regard to the Schedules E, petitioner

reported adjusted gross income of $95,968 for 2006 and $104,899

and 2007.    Neither the Schedule E for 2006 nor the Schedule E for

2007 reported any rents received.    However, both Schedules E
                                 - 6 -

claimed losses, attributable to a variety of expenses and

depreciation, as follows:

                                         2006          2007
         Expenses
            advertising            $     168      $     175
            auto/travel                2,003          1,746
            cleaning/
              maintenance              975             560
            insurance                  700             710
            mortgage interest        3,042           3,400
            taxes                      935             935
            utilities                1,460           1,475
            “lodging in 4 day”       1,210           1,215
            “meals at half”            462             486
                                    10,955          10,702
         Depreciation                1,974           1,974
         Loss                      $12,929         $12,676


     Petitioner’s returns for 2006 and 2007 were prepared by a

tax professional.

     In the notice of deficiency, respondent disallowed the

claimed rental losses on the basis that:        (1) The Kansas City

house was not held for the production of income; (2) the losses

resulted from a passive activity; and (3) the losses lacked

substantiation.   However, respondent did allow the deductions

claimed for real estate taxes and mortgage interest, but those

deductions were recharacterized as itemized deductions allowable

only on Schedules A.3




     3
        For 2006, respondent allowed mortgage interest in respect
of the Kansas City house of $3,464, an amount greater than that
claimed by petitioner on her return.
                                 - 7 -

                              Discussion

I.    Burden of Proof

       In general, the Commissioner’s determinations set forth in a

notice of deficiency are presumed to be correct, and the taxpayer

bears the burden of showing that those determinations are in

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

(1933).    Pursuant to section 7491(a), the burden of proof as to

factual matters shifts to the Commissioner under certain

circumstances.    Petitioner has neither alleged that section

7491(a) applies, nor has she established her compliance with its

requirements.    Accordingly, petitioner bears the burden of proof.

See Rule 142(a); Welch v. Helvering, supra at 115.

II.    Deductibility of Claimed Rental Losses

      A.   Section 212

       Respondent contends that petitioner did not hold the Kansas

City house for production of income in 2006 and 2007, suggesting

that petitioner held the property instead for personal reasons

related to the presence of family and friends in the area and the

desire to eventually retire there.       In contrast, petitioner

insists that after relocating some 22 years ago she is a

Minnesotan and does not presently contemplate returning to the

Kansas City area upon retirement.    Further, given that the Kansas

City house remains unfurnished, petitioner contends that she had

no economic reason not to try to rent the property.
                                - 8 -

     In the case of an individual, section 212 allows as a

deduction all ordinary and necessary expenses paid or incurred

during the taxable year for the production or collection of

income or for the management, conservation, or maintenance of

property held for the production of income.    Sec. 212(1) and (2).

For purposes of this section, the term “income” includes not only

income of the current year but also income that may be realized

in a subsequent year.    Sec. 1.212-1(b), Income Tax Regs.; see

Bradley v. Commissioner, T.C. Memo. 1998-170 (“The term ‘held for

the production of income’ includes held for appreciation in

value”).   “[O]rdinary and necessary expenses paid or incurred in

the management, conservation, or maintenance of a building

devoted to rental purposes are deductible notwithstanding that

there is actually no income therefrom in the taxable year”.       Sec.

1.212-1(b), Income Tax Regs.   The fact that a building may have

been formerly held by the taxpayer for use as a home is no bar to

the deductibility of ordinary and necessary expenses if the

property is subsequently converted and held for production of

income.    Murphy v. Commissioner, T.C. Memo. 1993-292; sec. 1.212-

1(h), Income Tax Regs.

     In the instant case, the record establishes that petitioner

converted the Kansas City house from personal use to property

held for production of income when she relocated to Minnesota

around 1988.    At that time, and through 2004 or 2005, petitioner
                               - 9 -

rented the property to various tenants at various times.     Since

2005 petitioner has not derived any rental income; however, given

the property’s postconversion appreciation, the possibility of

gain upon sale distinctly existed in 2006 and 2007.

     It may be that an abandonment by petitioner of any

meaningful attempt to rent the Kansas City house, coupled with

the collapse of the real estate market, might negate a finding

for some future year that the property was held for production of

income.   But for 2006 and 2007 the record supports such a

finding, and we so hold.

     B.   Section 469

     The fact that we reject respondent’s section 212

determination does not end our inquiry, as respondent also relies

on section 469.   Accordingly, we turn now to that section.

     Section 469 generally disallows for the taxable year 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), or to the extent provided

in regulations, any activity with respect to which expenses are

allowable as a deduction under section 212, sec. 469(c)(6)(B).

Rental activity is generally treated as a per se passive activity
                              - 10 -

regardless of whether the taxpayer materially participates.    Sec.

469(c)(2), (4).

     There are two principal exceptions to the general rule that

rental activities are per se passive activities.

          (1) Real Estate Professional

     The first exception to the general rule is found in section

469(c)(7).   Under that section, the rental activities of

taxpayers in real property trades or businesses (so-called real

estate professionals) are not treated as per se passive

activities but rather as trade or business activities, subject to

the material participation requirements of section 469(c)(1).

Sec. 469(c)(7); see also sec. 1.469-9(e)(1), Income Tax Regs.

     A taxpayer qualifies as a real estate professional and is

not engaged in a passive activity if:

          (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.

Sec. 469(c)(7)(B).   A taxpayer must satisfy both requirements of

section 469(c)(7)(B) in order to qualify as a real estate

professional.

     In the present case, petitioner does not contend that she is

a real estate professional, and the record does not establish
                              - 11 -

that she is.   For one thing, petitioner was employed in 2006 and

2007 and worked full time as a vice principal at a high school in

Minneapolis, earning approximately $100,000 each year.    A trade

or business includes being an employee.   Putoma Corp. v.

Commissioner, 66 T.C. 652, 673 (1976), affd. 601 F.2d 734 (5th

Cir. 1979); Fowler v. Commissioner, T.C. Memo. 2002-223.     Thus,

it cannot be said that petitioner devoted more than one-half of

her total personal services working hours to the Kansas City

house.   See sec. 469(c)(7)(B)(i); Anyika v. Commissioner, T.C.

Memo. 2011-69.

     Second, there is nothing in the record to support a finding

that petitioner satisfied the conjunctive requirement of section

469(c)(7)(B)(ii), i.e., the 750-hour service performance

requirement, for each of the years in issue.   Given the fact that

petitioner worked full time at what must have been a demanding

job as a vice principal of a high school, it seems virtually

impossible that she would have had time to devote the equivalent

of ninety-four 8-hour days to the Kansas City house.     But we need

not presume, because petitioner never alleged that she even

maintained a log or a calendar or otherwise kept track of the

time devoted to the property, and the law is clear that the

regulations do not allow a postevent “ballpark guesstimate” of

the time committed to material participation in a rental

activity.   Moss v. Commissioner, 135 T.C. 365, 369 (2010).
                                - 12 -

            (2)   Offset for Rental Real Estate Activities

     The second exception, albeit a potentially limited one, to

the general rule that rental real estate activities are per se

passive activities (and therefore subject to the disallowance

rule of section 469(a)) is found in section 469(i).      Thus, a

taxpayer who “actively” participates in a rental real estate

activity may deduct a maximum loss of $25,000 per year related to

the activity.     See sec. 469(i)(1) and (2).   This exception is

subject to phaseout when the taxpayer’s adjusted gross income

(determined without regard to any passive activity loss) exceeds

$100,000.    Sec. 469(i)(3).

     The active participation standard can be satisfied without

regular, continuous, and substantial involvement in an activity;

the standard is satisfied if the taxpayer participates in a

significant and bona fide sense in making management decisions

(such as approving new tenants, deciding on rental terms,

approving capital expenditures) or arranging for others to

provide services such as repairs.     Madler v. Commissioner, T.C.

Memo. 1998-112.

     In the instant case, it is clear that petitioner owns the

Kansas City house and that she is the one who is not only

responsible for making all management decisions but who in fact

makes such decisions.     We therefore find that petitioner

satisfied the active participation standard in 2006 and 2007 and
                             - 13 -

is therefore entitled to offset her nonpassive income for 2006

and 2007 by her substantiated rental losses, subject to the

phaseout limitation (potentially applicable only in 2007).

     C.   Substantiation

     Finally, insofar as the deductibility of the claimed rental

losses is concerned, we turn to the matter of substantiation.

Here respondent concedes that petitioner substantiated the

payment of mortgage interest of $3,464 and $3,400 for 2006 and

2007, respectively, and real estate taxes of $935 for each year.4

We turn, therefore, to the remaining deductions, all of which are

disputed.

     We begin by observing that if, in the absence of required

records, a taxpayer provides sufficient evidence that the

taxpayer has incurred a deductible expense, but the taxpayer is

unable to adequately substantiate the amount of the deduction to

which he or she is otherwise entitled, the Court may estimate the

amount of such expense and allow the deduction to that extent.

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).

However, the Court may bear heavily against the taxpayer, whose

inexactitude is of his or her own making.   Id.   Before doing so,

we must have some basis upon which an estimate may be made.



     4
        Respondent did not concede that those deductions are
allowable on Schedule E, but our analysis above makes clear that
all deductions allowable in respect of the Kansas City house
properly reside on Schedule E and not on Schedule A.
                              - 14 -

Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).    Without such a

basis, any allowance would amount to unguided largesse.     Williams

v. United States, 245 F.2d 559, 560 (5th Cir. 1957).

     Notwithstanding the foregoing, in the case of certain

expenses, section 274(d) expressly overrides the so-called Cohan

doctrine.   Sanford v. Commissioner, 50 T.C. 823, 827 (1968),

affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

Specifically, and as pertinent herein, section 274(d) provides

that no deduction is allowable for traveling expenses (including

meals and lodging while away from home) or with respect to listed

property such as a passenger automobile, see sec.

280F(d)(4)(A)(i), unless the deduction is substantiated in

accordance with the strict substantiation requirements of section

274(d) and the regulations promulgated thereunder.

     In the instant case, the documentary evidence regarding the

disputed deductions is relatively scant.   At trial, petitioner

testified that she kept her tax records in the basement of her

home in Minnesota and that the basement was flooded on three

separate occasions, once when a sump pump failed, once when her

hot water tank failed, and once after “a big storm”, which

“soaked” certain of her records, prompting her to throw them out.

However, it remains unclear why petitioner could not have

reconstructed at least some of her records by contacting third-
                              - 15 -

party payees, such as insurance and utility companies.5   Indeed,

at trial, petitioner did not testify that she made serious

attempts to do so.

     Insofar as utilities are concerned, the Kansas City house

was not occupied during 2005 and 2006, and it was located in a

rural area.   It is not clear from the record what utilities may

have been necessary and whether, if the house utilized a well

and a septic field, utilities expenses such as water and sewer

charges would have even been incurred.   On the other hand, given

weather extremes in the midcontinent, the Kansas City house would

have needed some source of power for heat during the winter and

for other essential requirements.   In the absence of adequate

records, which should have been easily obtainable from third-

party payees, we allow $1,000 for utilities expenses for each

year.

     Insofar as insurance is concerned, the Kansas City house was

mortgaged, and the mortgagee would undoubtedly have required some

form of fire and casualty insurance.   In the absence of adequate

records, which should have been easily obtainable from third-

party payees, we allow $500 for each year.

     As just mentioned, the Kansas City house was not occupied

and would not therefore have required much care insofar as


        5
        It should be recalled that the Schedules E listed
deductions for insurance and utilities expenses for both 2006 and
2007.
                              - 16 -

cleaning was concerned.   But the grass did need to be cut and

other such maintenance performed.    In the absence of adequate

records, we allow $500 for each year.

     Petitioner made an effort to rent the Kansas City house by

posting flyers (or having flyers posted) in the area.    In the

absence of adequate records, we allow $100 for advertising

expenses for each year.

     Regarding the deduction for “lodging in 4 day”, petitioner

offered four “Petty Cash” form receipts, each dated “2006”

without further specification and containing only the word

“Lodging” without further description.    None of these “receipts”

is signed; and each is for some even multiple of $100, e.g.,

$300.   Although we accept petitioner’s testimony that she stayed

with her mother when in Kansas City, we question whether

petitioner was charged by her mother for doing so and we most

certainly do not accept the “receipts” as probative of any

deductible expense.   See Tokarski v. Commissioner, 87 T.C. 74, 77

(1986); Diaz v. Commissioner, 58 T.C. 560, 564 (1972); Kropp v.

Commissioner, T.C. Memo. 2000-148.     In short, we are not

convinced that any amounts given by petitioner to her mother were

motivated by other than love and affection.    Accordingly, we

allow nothing for lodging expenses.

     Insofar as depreciation is concerned, the record is silent

regarding petitioner’s basis in the Kansas City house or its fair
                               - 17 -

market value upon conversion from personal use to production-of-

income use.    See Halle v. Commissioner, T.C. Memo. 1996-116

(basis of property converted from personal use is the lesser of

adjusted basis or fair market value on the date of conversion).

Lacking any evidence upon which to decide the amount of an

appropriate allowance, an estimate on our part would constitute a

sheer guess and therefore be proscribed largesse.    See Williams

v. United States, supra at 560; Vanicek v. Commissioner, supra at

743; see also Rule 143(c) (statements in briefs do not constitute

evidence).

     Finally, we consider the expenses claimed for auto, travel,

and meals.    We accept the fact that it was prudent to inspect the

Kansas City house from time to time and to address any issues

that ownership of property inevitably engenders.    However, there

was obviously also a personal dimension to petitioner’s trips to

Kansas City, and it is not possible to decide whether a

particular trip was principally personal or investment related.

But such quandary is one reason why the heightened substantiation

requirements of section 274(d) exist.   In the absence of the

records that such section demands, we have no discretion to make

an allowance as much as we might wish to.

     Further, if we credit petitioner’s claim regarding the

repeated flooding of her basement, the law is clear that a

taxpayer must still (1) first demonstrate that the taxpayer
                             - 18 -

maintained records during the years in issue that were sufficient

to meet the strict substantiation requirements of section 274(d)

for travel and automobile use and then (2) reasonably and

creditably reconstruct those records through secondary evidence

to show claimed expenditures and use.   Boyd v. Commissioner, 122

T.C. 305, 320 (2004); sec. 1.274-5T(c)(5), Temporary Income Tax

Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985); see Gizzi v.

Commissioner, 65 T.C. 342, 345 (1975); Fernandez v. Commissioner,

T.C. Memo. 2011-216; Davis v. Commissioner, T.C. Memo. 2006-272.

     At trial, petitioner never testified about what type of

required records (e.g., account book, diary, log, or trip sheets)

that she might have maintained; we are therefore unable to make a

finding that she satisfied the heightened substantiation

requirements of section 274(d) prior to any flood.    And the

absence of a reasonable and creditable reconstruction of

expenditures and use further precludes us from making any

allowance if we were so inclined.

     In sum, petitioner is entitled to deduct only the following

expenses on her Schedules E for the years in issue:
                                  - 19 -

           Expenses                        2006          2007
              advertising             $     100      $    100
              cleaning/
                maintenance              500             500
              insurance                  500             500
              mortgage interest        3,464           3,400
              taxes                      935             935
              utilities                1,000           1,000
                                      $6,499          $6,435


III.    Accuracy-Related Penalty

       Section 6662(a) and (b)(1) imposes a penalty equal to 20

percent of the amount of any underpayment attributable to

negligence or disregard of rules or regulations.          The term

“negligence” includes any failure to make a reasonable attempt to

comply with tax laws, and “disregard” includes any careless,

reckless, or intentional disregard of rules or regulations.           Sec.

6662(c).    Negligence also includes any failure by the taxpayer to

keep adequate books and records or to substantiate items

properly.    Sec. 1.6662-3(b)(1), Income Tax Regs.

       Section 6664(c)(1) provides an exception to the imposition

of the accuracy-related penalty if the taxpayer establishes that

there was reasonable cause for, and the taxpayer acted in good

faith with respect to, the underpayment.          Sec. 1.6664-4(a),

Income Tax Regs.    The determination of whether the taxpayer acted

with reasonable cause and in good faith is made on a case-by-case

basis, taking into account the pertinent facts and circumstances.

Sec. 1.6664-4(b)(1), Income Tax Regs.        The taxpayer bears the

burden of proving that he or she acted with reasonable cause and
                               - 20 -

in good faith.   Rule 142(a); Welch v. Helvering, 290 U.S. at 115;

Higbee v. Commissioner, 116 T.C. 438, 446 (2001); see sec.

7491(c) (regarding the Commissioner’s burden of production).

     Petitioner did not address the accuracy-related penalty

issue either at trial or on brief (nor did she raise it in her

petition), implying only that in the absence of an underpayment

there can be no penalty.   But, as mentioned much earlier, see

supra note 2 and associated text, petitioner is deemed to have

conceded certain adjustments in the deficiency notice that she

never sought to challenge.   Clearly as to the underpayments

attributable to those adjustments we conclude that respondent has

carried his burden of production and that petitioner has failed

to satisfy her burden of proof.

     As to the underpayments attributable to the Schedule E

adjustments, we likewise conclude that imposition of the

accuracy-related penalties is warranted.   Here petitioner’s

reticence in addressing the matter directly weighs heavily

against her, as does not merely her lack of substantiating

records but her failure to seriously attempt to reasonably and

creditably reconstruct essential records through secondary

evidence.

                             Conclusion

     We have considered all of the arguments made by the parties

and, to the extent that we have not specifically addressed any of
                             - 21 -

those arguments, we conclude that they are moot, irrelevant, or

without merit.

     To give effect to the foregoing,


                                        Decision will be entered

                                   under Rule 155.
