                  T.C. Summary Opinion 2002-57



                     UNITED STATES TAX COURT



         JAMES V. & JUDITH M. PATTERSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9268-00S.             Filed May 23, 2002.



     James V. Patterson, pro se.

     Robert E. Marum, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

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

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the years in issue.
                                - 2 -

     Respondent determined deficiencies in petitioners’ Federal

income taxes of $4,130 and $3,934 for the taxable years 1994 and

1996, and a section 6651(a)(1) addition to tax of $161.25 for

taxable year 1994.

     The issue for decision is whether petitioners materially

participated in the rental of a certain condominium unit during

1994 and 1996.1

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.    Petitioners resided in

Schaghticoke, New York, on the date the petition was filed in

this case.

     During 1994, petitioner husband (petitioner) was employed as

a chemical engineer, and petitioner wife was employed as a

registered nurse.    During 1996, petitioner retired, and

petitioner wife was employed as a certified nurse midwife.

     During both of the years in issue, petitioners owned a

condominium unit in North Topsail Beach, North Carolina.    The

condominium association management company, CAM Inc., provided



     1
      Petitioners did not address at trial the sec. 6651(a)(1)
addition to tax for failure to file a timely return. We
consequently consider this addition to tax to be undisputed by
petitioners. However, we note that the record supports
respondent’s determination that the addition to tax was
applicable, because petitioners’ 1994 Federal income tax return
was filed on a 1996 form and was signed by petitioners on January
15, 1997.
                                - 3 -

maintenance services for the building, grounds, beachfront, and

pool.   A management service company known as the Kennedy Company

managed the rental unit during the years in issue.       The company

handled reservations, incoming and departing guests, and

emergency repairs of the rental unit.       The company was also

responsible for advertising the availability of the unit,

negotiating leases, collecting lease payments, and providing

cleaning and repair services.       Petitioners paid the company 30

percent of rental income during 1994 and 25 percent of rental

income during 1996.    During 1996, the average rental period of

the unit was 5.6 days.    The unit was rented on the following

dates that year, with petitioners earning the specified amounts

of rental income and incurring the corresponding amounts of

management fees:

            Rental         Rental          Management
            Period         Income            Fees

           4/05-4/10        $360            $90.00
           5/05-5/08         210             52.50
           5/16-5/20         210             52.50
           5/24-5/27         195             48.75
           5/31-6/02         195             48.75
           6/06-6/09         295             73.75
           6/10-6/19         735            183.75
           6/19-6/20         135             33.75
           6/21-6/23         245             61.25
           6/29-7/13       1,470            367.50
           7/27-8/03         735            183.75
           8/03-8/17       1,470            367.50
           8/17-8/24         735            183.75
           8/24-8/31         535            133.75
           8/31-9/03         295             73.75

The management service company paid several expenses on behalf of

petitioners during 1996.    The yearly income and expense statement
                               - 4 -

from the company listed approximately five such expenses, all of

which were reimbursed by petitioners or subtracted from the

rental income.

     Petitioner paid the utility and mortgage bills on a monthly

basis, the condominium fee on a quarterly basis, and county taxes

on a yearly basis.   During March and/or April of each year, in

preparation for the rental season, petitioner would “de-

winterize” the unit.   At this time of year, petitioner would

often need to do repairs, such as ceiling repair, patching, and

painting, and he would normally shampoo the carpets.   Around

Thanksgiving each year, petitioner would spend approximately 1

week at the rental unit to prepare it for winter, when the unit

was not actively rented.   At this time, petitioner would normally

turn off the water and power, turn down the heat, bring in

outside furniture, and perform “general cleanup”.

     Petitioners filed a joint Federal income tax return for each

of the years in issue.   They claimed losses on the rental unit of

$14,781 in 1994 and $14,017 in 1996.   The 1994 return was filed

on a 1996 form and was signed by petitioners on January 15, 1997.

In the statutory notice of deficiency, respondent disallowed the

above-mentioned losses on the grounds that petitioners “did not

materially participate in the day to day operations” of the

rental property, causing the losses to be nondeductible passive

activity losses.
                                - 5 -

     Section 162 allows deductions for ordinary and necessary

expenses incurred in carrying on a trade or business.     Section

469, however, limits the deductions for losses from any “passive

activity”.   A passive activity is any activity involving the

conduct of a trade or business in which the taxpayer does not

materially participate.    Sec. 469(c)(1).   As a general rule, any

“rental activity” is passive whether or not the taxpayer

materially participates in the activity.     Sec. 469(c)(2), (4).

Under the regulations, the definition of rental activity does not

include an activity with respect to which the average period of

customer use of the property is 7 days or less.     Sec. 1.469-

1T(e)(3)(ii)(A), Temporary Income Tax Regs., 53 Fed. Reg. 5702

(Feb. 25, 1988).    The parties agree that petitioners’ rental of

the condominium unit in this case falls within this exclusion,

and the relevant issue is whether petitioners materially

participated in the activity.

     A taxpayer is treated as materially participating in an

activity only if the taxpayer is involved in the operations of

the activity on a regular, continuous, and substantial basis.

Sec. 469(h)(1).    A taxpayer can satisfy this requirement if he

meets any one of seven tests found in the regulations.     Sec.

1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb.

25, 1988).   One such test, the one which petitioners claim to
                                 - 6 -

have met, is satisfied with respect to an individual taxpayer

when:

          The individual participates in the activity for more
     than 100 hours during the taxable year, and such
     individual’s participation in the activity for the taxable
     year is not less than the participation in the activity of
     any other individual (including individuals who are not
     owners of interests in the activity) for such year;

Sec. 1.469-5T(a)(3), Temporary Income Tax Regs., 53 Fed. Reg.

5726 (Feb 25, 1988).    Generally, participation by an individual’s

spouse is treated as participation by the individual.    Sec.

469(h)(5).

     The only evidence presented regarding the amount of time

petitioners participated in the rental of the condominium unit is

their own general testimony.    Thus, it is difficult to estimate

the exact amount of time petitioners spent at the condominium, as

well as what portion of this time was for business versus

personal purposes.    However, it appears that petitioners spent

approximately 2 weeks per year at the condominium--1 week in the

Spring and 1 week in the Fall.    Even assuming petitioners spent a

full 8 hours each weekday working on the condominium, this would

amount to only 80 hours per year.    The amount of time petitioner

spent in paying condominium-related expenses throughout the year

would have been nominal and would not have amounted to 20 hours

per year.    We find that petitioners did not participate in the

activity for more than 100 hours in either of the years in issue.
                                 - 7 -

Thus, we need not address whether the participation of other

individuals was greater than that of petitioners.

     We sustain respondent’s determination that the rental of the

condominium was a passive activity subject to the limitations of

section 469.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                         Decision will be entered

                                 for respondent.
