                  T.C. Summary Opinion 2004-125



                     UNITED STATES TAX COURT



     ROBERT P. SWEET AND DAWNIELLE K. LAWSON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 331-03S.                Filed September 9, 2004.



     Robert P. Sweet and Dawnielle K. Lawson, pro sese.

     Ronald T. Jordan, for respondent.


     DEAN, 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.    Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year at issue.    The decision to be

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

should not be cited as authority.
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     Respondent determined for the year 2000 a deficiency in

petitioners' Federal income tax of $5,437 and an accuracy-related

penalty of $1,087.

     The Court considers petitioners to have conceded

respondent's determination disallowing itemized deductions of

$540 because petitioners provided neither argument nor evidence

on the issue at trial.   Bradley v. Commissioner, 100 T.C. 367,

370 (1993); Sundstrand Corp. v. Commissioner, 96 T.C. 226, 344

(1991); Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988).

     Petitioners concede that respondent correctly determined

that $1,283 of respondent's $17,986 adjustment in the statutory

notice of deficiency is a passive activity loss.   The issues

remaining for decision are whether for 2000 petitioners:   (1) Are

entitled to deduct a loss of $16,703 on Schedule E, Supplemental

Income and Loss; and (2) whether petitioners are liable for the

accuracy-related penalty under section 6662.

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

The stipulation of facts and exhibits received in evidence are

incorporated herein by reference.   At the time the petition was

filed, petitioners resided in Noblesville, Indiana.

                            Background

     Robert P. Sweet (petitioner) was employed during the year as

a real estate loan officer, and his wife, Dawnielle K. Lawson,

was not employed outside of the home.
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     In July of 1997, petitioner purchased his first condominium

unit at The Summit condominium resort (Summit) in Panama City,

Florida.   In December of 1998, he purchased a second unit at the

same location.   Petitioner's two units, 518 and 519, adjoin.

Petitioner installed doors that allowed inside access from one

unit to the other.   Each unit contains 912 square feet of living

space and sleeps 6 people.   The average rental period for both

units was more than 7 but less than 30 days.

     The Summit owners association handled the maintenance and

upkeep of the building exterior and common areas, including

swimming pools, hot tubs, exercise equipment and sauna areas,

tennis courts, beaches and beach chair rentals, restaurants,

parking, and collecting and removing trash.

     A separate entity, Advisors Realty (Advisors), operated an

on site rental agency that rented units to the public and

provided ancillary services for owners under an agreement

providing for a 30-percent commission.   Advisors provided

accounting services, advertising and promotion, cleaning

equipment and supplies, an inspection prior to return of the

damage deposits, and an annual inspection and inventory.

Advisors also received in 2000 a separate cleaning charge of

$40.751 after each owner's or owner's guest's use of a unit.    The



     1
      Evidence in the record indicates that this charge was later
increased to $65.
                               - 4 -

cleaning charge paid for Advisors' housekeeping or "maid service"

following rental departures, which in petitioner's case would

have included cleaning and linen exchange.   Petitioner provided

the maid and linen service at no "extra" charge to customers.

Each owner, however, was free to book his own guests or allow

Advisors to do it for commission.   Petitioner periodically

allowed Advisors to book guests for his units and paid the

standard commission.

     Petitioner sought to minimize the involvement of Advisors,

and avoid their commission, by executing his own marketing

activity and customer bookings.   In 2000, petitioner put together

and maintained a Web page that advertised units 518 and 519.    He

created the Web site by entering contact information and

information about the amenities offered by his condominium into a

"template" on a preexisting site called A1 Vacations.

Petitioners received gross rental income of $29,467 during 2000,

of which $11,137 was received through bookings from Advisors.

     Petitioners required their guests to call them before

contacting the front desk with problems and concerns as a way to

avoid high fees charged by the owners association for routine

maintenance items like changing light bulbs.   Petitioners also

led guests that they booked through a detailed telephone check-in

procedure.   Petitioners maintained a storage area onsite

containing certain replacement items.
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     Petitioner, from time to time, went to visit his units to

perform repairs and maintenance accompanied, occasionally, by his

wife.   It was a 785 mile trip each way.   When petitioner traveled

to the condominium for repairs and maintenance, he and his wife

stayed in one of the units.    One of those trips was to attend the

owners meeting in September.    Petitioner attends owners meetings

from time to time to "protect my investment".

     Petitioner performed other activities related to the

condominium units.   He replied to e-mails, answered the phone to

talk to people about the units, updated his online availability

calendar, tested and improved his Web site, paid bills, and

handled various banking and oversight matters.

     On petitioners' Federal income tax return for 2000, on

Schedule E, petitioners claimed a loss of $17,986 of which

$16,703 is attributable to units 518 and 519.

                              Discussion

     The Court decides this case on the preponderance of the

evidence, regardless of the allocation of the burden of proof.

Section 7491(a) is therefore inoperative.

Section 469

     Passive Activity Loss Exemption

     If a taxpayer is an individual, the "passive activity loss"

for the taxable year shall not be allowed.   Section 469(a).   The

term "passive activity loss" means the amount by which "the
                                 - 6 -

aggregate losses from all passive activities" exceeds "the

aggregate income from all passive activities" for the taxable

year.   Sec. 469(d)(1).   Except for taxpayers entitled to

treatment under section 469(c)(7), "Special rules for taxpayers

in real property business", the term "passive activity" includes

any rental activity.    Sec. 469(c)(2).   Rental activity is any

activity "where payments are principally for the use of tangible

property."    Sec. 469(j)(8).   Petitioners do not claim that the

special rules of section 469(c)(7) apply to their return for

2000.

     Section 469(i), with respect to rental real estate

activities in which an individual actively participates, provides

that the section 469(a) disallowance will not apply to a maximum

of $25,000 of passive activity losses.     An annual maximum of one

$25,000 offset is allowed for all of a taxpayer's rental

activities.    Sec. 469(i)(2), (5).   This nonapplication or

"exemption" begins to phase out where the taxpayer's adjusted

gross income (AGI) exceeds certain levels.     Sec. 469(i)(3).   The

phaseout in petitioners' case is 50 percent of the amount by

which their AGI (computed without regard to passive activity

losses) exceeds $100,000.    See sec. 469(i)(3)(A), (E)(iv).

Computed as required, petitioners' adjusted gross income is

$152,700, and the exemption is completely phased out.
                                - 7 -

      Exception for Significant Personal Services

      The parties agree that petitioners are entitled to claim the

disputed $16,703 loss from their condominium units at the Summit

as nonpassive on their Federal income tax return for 2000 only

if:   (1) Petitioners' condominium activity is described in

section 1.469-1T(e)(3)(ii), Temporary Income Tax Regs., 53 Fed.

Reg. 5702 (Feb. 25, 1988); and (2) petitioners meet one of the

material participation tests of section 1.469-5T(a), Temporary

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

      Section 1.469-1T(e)(3)(ii)(B), Temporary Income Tax Regs.,

supra (B exception) provides that an activity generating payment

for the use of tangible personal property is not rental activity

(and therefore not per se passive) if the average period of

customer use is 30 days or less and "significant personal

services" are provided by or on behalf of the owner of the

property in connection with making it available for customer use.

Petitioners contend that they fall within the B exception.

      Certain services are "excluded services" and are not

considered in determining whether significant personal services

are performed.   Section 1.469-1T(e)(3)(iv), Temporary Income Tax

Regs., supra.    Services necessary to permit the lawful use of the

property, and certain construction and repair services are
                                - 8 -

"excluded services".    Section 1.469-1T(e)(3)(iv)(B), Temporary

Income Tax Regs., supra.    Also described as excluded services

are:

       Services * * * similar to those commonly provided in
       connection with long-term rentals of high-grade
       commercial or residential real property (e.g., cleaning
       and maintenance of common areas, routine repairs, trash
       collection, elevator service, and security at entrances
       or perimeters).

       For purposes of the B exception, "personal services" means

only services performed by individuals.    Section 1.469-

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

25, 1988).    In determining whether personal services are

"significant", all relevant facts and circumstances, for example

the frequency, type, and value of the services, are taken into

account.    Id.

       At trial, petitioner adduced both oral and documentary

evidence of what he considers to have been the significant

personal services provided by or on behalf of petitioners in

making the property available for customer use.    During the

examination of petitioners' joint return, petitioner provided a

"Summary Tax Year 2000 Fact & Circumstances Condo #518 & #519"

document purporting to show "personal services" requiring 1,016

hours to perform.    Petitioner, however, prepared for and

presented at trial a second document showing the performance of

686 hours of personal services (summary for trial).
                                 - 9 -

     It is apparent from petitioner's testimony, and the two

versions of the summary for 2000, that at best the summaries

represent estimates of the time devoted to the performance of

services associated with the condominium units.    The Court will,

however, for purposes of discussion, accept as accurate the

summary for trial.

     The Court views petitioners' summary for trial as describing

five categories of activity:   (1) Responding to telephone and

Internet inquiries, and preparing and changing the Internet Web

site; (2) booking guests, confirming reservations, and arranging

for keys and parking passes; (3) travel by petitioners to and

from the property; (4) repair and cleaning of the property; and

(5) banking and bookkeeping.

     Among excluded services are services similar to those

provided in connection with long-term rentals of high-grade

commercial or residential real property.    Section 1.469-

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

(Feb. 25, 1988).   Petitioners allege that 150 hours were spent

responding to telephone and Internet inquiries to discuss the

amenities of the units, their availability, and their

desirability.   An additional 64 hours are alleged to have been

spent preparing and changing the Web site at A1 Vacations, which

contained similar information.    These activities can be fairly

described as marketing.   Similar services are provided in
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connection with long-term rentals of high-grade commercial or

residential real property.   Regardless of the hours spent, such

services are excluded services.   Id.

     Petitioner, or petitioner's agents, engaged in booking

guests, confirming reservations and security deposits, and

arranging for keys and parking passes, activities allegedly

requiring 45 hours.   The services may have been performed more

frequently than at typical high-grade commercial or residential

real properties.   Petitioners have, however, provided little

evidence as to whether the provided personal services were

significant, especially in terms of their value and the

relationship of that value to the amount charged for use of the

properties.

     Some of the reservation services were provided by Advisors

for a 30-percent commission.   But the same commission also paid

for accounting services, advertising and promotion, cleaning

equipment and supplies, an inspection prior to return of the

damage deposit, and an annual inspection and inventory.     Some of

the services are excluded services.     The Court is unable to

determine how to allocate the commission to the various services

provided.   Petitioner provided no evidence of the value of the

reservation services that he performed.     The Court concludes that

the reservation type services were not significant personal

services. The travel by petitioners, a 1,570 mile round-trip
                              - 11 -

between their home and the condominium units, to attend meetings

and to perform "maintenance" is said to have consumed 219 hours.

The Court recognizes that travel in some circumstances can be a

personal service performed in connection with making property

available for customer use.   Commuting, however, is an inherently

personal activity and as such does not constitute a "personal

service" to customers.   See Fausner v. Commissioner, 413 U.S.

838, 839 (1973) ("We cannot read section 262 of the Internal

Revenue Code as excluding such expense from 'personal'

expenses"); Commissioner v. Flowers, 326 U.S. 465 (1946); sec.

1.262-1(b)(5), Income Tax Regs. (taxpayer's choice to live at a

distance from his place of business is personal).

     Petitioners claim involvement in 96 hours' worth of

"comprehensive seasonal" repairs and maintenance of the property.

Petitioners performed the services three times together and

Dawnielle assisted him on two or three of the trips.2    The

services may have been performed more frequently than at typical

high-grade commercial or residential real properties.

Petitioners, however, failed to provide any evidence of the value

of the services they provided.   They did provide evidence that

they paid maid and linen service costs of $2,364, a figure


     2
      Petitioner testified that his wife was with him on three of
the trips. Petitioners' C.P.A. represented to Appeals Division
in a letter dated September 12, 2003, that she made two trips to
their properties.
                              - 12 -

representing about 8 percent of gross rentals.

     In Example (4) of section 1.469-1T(e)(3)(viii), Temporary

Income Tax Regs., 53 Fed. Reg. 5703 (Feb. 25, 1988), the taxpayer

is engaged in the activity of owning and operating a residential

apartment hotel where rentals are for more than 7 but less than

30 days.   The taxpayer provides daily maid and linen service at

no additional charge.   Because the value of the maid and linen

service is less than 10 percent of the amount charged to tenants,

they are not significant personal services.   The Court concludes

that petitioners' cleaning and repair services, including maid

and linen services, are not significant personal services.

     Petitioner testified that they attended owners association

meetings to protect their investment.   They also received and

deposited funds from customers, paid bills, and prepared income

and expense summaries "for tax return preparation".   Petitioners

argue that these activities should be considered as personal

services under the B exception.

     The B exception addresses cases where significant personal

services are provided by or on behalf of the owner of the

property in connection with making it available for customer use.

Petitioners press their argument by broadly interpreting the "in

connection with" language of the exception.   They fail, however,
                              - 13 -

to place enough emphasis on the "making the property available

for use by customers" language qualifying "in connection with."

     Legislative history of section 469 suggests that "section

1372(e)(5) (as in effect prior to the Subchapter S Revision Act

of 1982) is relevant" in determining whether significant services

are performed in connection with furnishing property.   S. Rept.

99-313 at 741 n.32 (1986).   The regulations provided that,

generally, only services provided to the occupant "primarily for

his convenience" are to be considered significant services.

Stover v. Commissioner, 781 F.2d 137, 139 (8th Cir. 1986), affg.

T.C. Memo. 1984-551; Bramlette Bldg. Corp. v. Commissioner, 52

T.C. 200, 203-204 (1969), affd. 424 F.2d 751 (5th Cir. 1970).

Petitioners' attendance at owners association meetings and their

banking activities have more to do with the ownership of property

than with making the properties available to customers.   The

activities are not significant personal services.

     Petitioners have also alleged that they incurred higher than

normal owners association charges, dues, and assessments for

additional amenities such as beach chair rentals, bars, a game

room and a parking lot.   Nearly all the services listed are of a

type commonly rendered by luxury apartment complexes, especially

on the Florida Coast.   See Crouch v. United States, 692 F.2d 97,

101 (10th Cir. 1982).
                                - 14 -

     The Court finds from the entire record that petitioners'

condominium activity is not described in section 1.469-

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

25, 1988).     Petitioners' condominium activity during 2000 was a

rental activity, a passive activity, and respondent's denial of

the deduction of passive activity losses is sustained.

     Accordingly, the Court sustains respondent's determination

that there is a deficiency in petitioners' income tax for the

year.

Accuracy-Related Penalty

        Respondent determined that petitioners are liable for the

section 6662(a) accuracy-related penalty.       Taxpayers are liable

for an accuracy-related penalty in the amount of 20 percent of

the portion of an underpayment of tax attributable to any

substantial understatement of income tax.       Sec. 6662(a) and

(b)(2).     A "substantial understatement" is an understatement for

the taxable year exceeding the greater of 10 percent of the

proper tax or $5,000.     Sec. 6662(d)(1)(A).    No penalty will be

imposed with respect to any portion of any underpayment if it is

shown that there was a reasonable cause for such portion and that

the taxpayer acted in good faith with respect to such portion.

Sec. 6664(c).     This determination is based on all the facts and

circumstances.     Sec. 1.6664-4(b)(1), Income Tax Regs.
                                - 15 -

     Section 7491(c) imposes on respondent the burden of

producing evidence to show that the section 6662(a) penalty is

appropriate, but respondent need not produce evidence regarding

reasonable cause.     Higbee v. Commissioner, 116 T.C. 438, 446-447

(2001).   The Court has sustained respondent's determination of

the deficiency.     Petitioners' understatement of tax exceeds the

greater of 10 percent of the proper tax or $5,000.    The Court

finds that respondent has satisfied the burden of production with

respect to the accuracy-related penalty under section 6662(a).

     Petitioners presented no evidence indicating reasonable

cause for the understated income.    Accordingly, the imposition of

the accuracy-related penalties is sustained.

     The Court has considered all of the other arguments made by

the parties, and to the extent that the arguments have not been

specifically discussed above, they have been found to be moot or

without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing.


                                                Decision will be

                                           entered for respondent.
