                        T.C. Memo. 2004-222



                      UNITED STATES TAX COURT



       ZACARIAS LAPID AND MA DELAILA LAPID, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18544-02.              Filed October 4, 2004.


     Gary R. Dettloff, for petitioners.

     Gregory C. Okwuosah, for respondent.



                        MEMORANDUM OPINION


     HOLMES, Judge:   The petitioners, Zacarias and Ma Delaila

Lapid, are an extremely hardworking couple who used some of their

savings to buy five condominiums in Florida and one house in

Nevada.   These investments were not profitable, and the Lapids

contest the Commissioner’s characterization and disallowance of

the resulting losses as passive activity losses within the
                                - 2 -

meaning of section 469.1   The case turns on whether the Lapids

were “material participants” in their various real estate

ventures.

                             Background

     The Lapids were Michigan residents when they filed their

petition.   Mrs. Lapid is a cardiac nurse on the graveyard shift

at a hospital in Troy, Michigan, and Mr. Lapid is a machinist at

an engineering company there.   They both work exceptionally long

hours.   Throughout 1999 and 2000, Mr. Lapid averaged between 9 to

10 hours a day and Mrs. Lapid worked 12 hours a night.   Their

work paid off, and they saved enough money to become investors.

     By 1999, the Lapids owned five condominiums in Florida.

Four were units in two different condominium hotels near

Orlando--a Day’s Inn and a Howard Johnson.   Condominium hotels

look like any other hotel.   Guests check in, get a room, have

full run of the hotel, and then check out.   The hotels have

people manning the front desk, and others working as housekeepers

and janitors.   The major difference between condominium and

regular hotels is that each room in a condo hotel is owned by an

investor who typically is not affiliated with the hotel’s

management company.   The brand name on the hotel (e.g., Day’s

Inn, Howard Johnson), is the management company’s, not the



     1
       Section references are to the Internal Revenue Code of
1986, as amended.
                                 - 3 -

investor’s, so guests have no idea who owns their rooms.

     Onsite hotel management ran the day-to-day operations of the

hotel condos.   These included checking in guests, making routine

repairs, cleaning the units, and preparing financial statements

and summaries for the unit owners.       The companies kept a portion

of the revenues collected as payment for their work.

     The Lapids’ other Florida condominium was a unit in a

complex named The Hacienda del Sol, which they rented out to

longer-term tenants.   Mrs. Lapid first employed a manager, whom

she fired due to “integrity problems” (the evidence does not show

when), and she has managed the property herself since then.      In

late 2000, the Lapids bought a house in Henderson, Nevada to add

to their portfolio.    Mrs. Lapid also managed this property, with

the help of some of her Nevada relatives.      She and her husband

would periodically visit both the house and the condo to inspect

them and to make small repairs, though she contracted out larger

ones.

     Even though Mrs. Lapid was a full-time nurse, she credibly

testified that she was able to devote a great deal of time to her

real estate activities.   While her supervisors expected her to be

available in case of an emergency, they also needed her to be

quiet so that her patients could sleep.      Thus, most of her time

at the hospital was spent monitoring her patients by watching

machines while at her station.    To allow the nurses to maintain a
                                   - 4 -

quiet atmosphere yet stay awake, her supervisors encouraged them

to read while on duty.    This enabled Mrs. Lapid to spend two to

three hours a night going over financial statements and summaries

the management companies had sent her.      Other hospital staff

often joked about Mrs. Lapid and her briefcase stuffed with

paperwork, and she introduced into evidence samples of what she

reviewed.    These included:

     •      owners’ summary reports,

     •      maintenance reports,

     •      condo associations’ audited financial statements,

     •      inspection summaries,

     •      condominium newsletters; and

     •      condominium associations’ annual meeting and election
            materials.

     Petitioners filed joint returns in 1999 and 2000.      In 1999,

they claimed a total loss of $21,021 from the Florida properties.

In 2000, they claimed a total loss of $25,000 from the Florida

and Nevada properties combined.      Respondent denied these losses

and sent them a notice of deficiency.       Petitioners filed a timely

petition and their case was tried in Detroit.

                               Discussion

     The Code allows taxpayers to deduct most business-related

and profit-seeking expenses under sections 162 and 212; however,

section 469 limits these deductions when they arise from “passive

activities.”    Passive activities include both (1) trade or
                                - 5 -

business activities where the taxpayer does not materially

participate, and (2) rental activities.    Sec. 469(c)(1) and (2).

The notice of deficiency that respondent sent the Lapids

disallowed their losses precisely because respondent called all

their investments “rental activity,” and so per se passive.

     Petitioners argue that none of the Lapids’ investments were

rental activities, and that the amount of time that Mrs. Lapid

poured into monitoring these investments made her a material

participant--transforming what would ordinarily be a passive

activity into an active one.    This means, they argue, that the

passive activity rules do not apply and the Lapids’ losses should

be allowed.

     Respondent now agrees that at least the hotel condos were

trade or business activities, but he still asserts that most of

Mrs. Lapid’s time should not count toward whether she materially

participated.    However, the bulk of his argument now is

metronomically (twelve times in the fourteen pages of the reply

brief) calling Mrs. Lapid’s testimony “vague, uncorroborated, and

self-serving.”

     The parties point us in the right direction at times but,

unlike them, we divide this case in two.    First, we analyze the

Lapids’ hotel condos as a trade or business.    We then decide

whether what Mrs. Lapid was doing counts as “material

participation.”    Second, we look at the Lapids’ nonhotel condo
                                - 6 -

and house to see whether the Lapids’ losses on them were all

passive.   Our analysis shows that the problem with Mrs. Lapid’s

testimony is not that it’s self-serving, but that it is testimony

which even if credible doesn’t help either half of her case.

A.   The Hotel Condos

     The parties now agree that the hotel condos were rented to

customers for periods averaging less than seven days.    And, as

petitioners point out, under the regulations a rental activity

does not include an activity where the average period of customer

use is seven days or less.    Sec. 1.469-1T(e)(3)(ii)(A), Temporary

Income Tax Regs., 53 Fed. Reg. 5702 (Feb. 25, 1988); see also

Scheiner v. Commissioner, T.C. Memo. 1996-554.    We must treat the

hotel condos as a trade or business.

     Whether a loss from a trade or business is a passive

activity loss generally depends on whether the taxpayer claiming

the loss “materially participated” in that trade or business.      We

may not treat a taxpayer as a material participant unless his

involvement is regular, continuous, and substantial.    Sec.

469(h)(1).

     The regulations allow us to treat petitioners as “material

participants” if, but only if, they meet one of seven tests

listed in the regulation.    The Lapids argue that they meet four:

     •     Participation in the activity for more than 500 hours
           per year. Sec. 1.469-5T(a)(1), Temporary Income Tax
           Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988);
                                  - 7 -

     •    Participation in the activity for more than 100 hours,
          and a showing that no other individual participated in
          the activity more than the taxpayer. Sec. 1.469-
          5T(a)(3), Temporary Income Tax Regs., supra;

     •    Participation in the activity for more than 100 hours,
          plus participation in all significant trade or business
          activities that totals 500 hours. Sec. 1.469-5T(a)(4),
          Temporary Income Tax Regs., supra; and

     •    Participation in the activity on a regular, continuous,
          and substantial basis during the year. Sec. 1.469-
          5T(a)(7), Temporary Income Tax Regs., supra.

     This last test is the one that most closely follows the

language of section 469(h)(1).     However, in Mordkin v.

Commissioner, T.C. Memo. 1996-187, we concluded that section

469's material participation standard implied that materiality

could be measured by time spent.     We thus upheld the Secretary’s

decision to build safe harbors letting taxpayers prove material

participation by showing they spent a particular number of hours

on a particular activity.   Id.

     It is not obvious, though, whether a taxpayer in the Lapids’

situation has to treat each property as a separate activity when

arguing that he has spent the required number of hours

participating “in the activity.”     So we first ask whether the

Lapids’ four hotel condos were four activities or only one, or

something in between.2


     2
       The regulations make clear that taxpayers generally cannot
combine trade or business activities with rental activities.
Sec. 1.469-4(d)(1), Income Tax Regs. As the hotel condos are
trade or business activities and the nonhotel properties are
rental activities, we cannot combine them to measure whether Mrs.
                                                   (continued...)
                                 - 8 -

     The regulations guide us by listing five factors:

          (i)   Similarities and differences in types of trades or
                businesses;

         (ii)   The extent of common control;

     (iii)      The extent of common ownership;

         (iv)   Geographical location; and

          (v)   Interdependencies between or among the activities
                * * * [Sec. 1.469-4(c)(2), Income Tax Regs., supra.]

     Petitioners’ hotel condos are all part of a similar trade or

business, are owned by the same people, and are all near each

other in Florida.     Even though there does not seem to be much

interdependence between them, we assume that all four are one

activity.

     The key problem in petitioners’ case, then, is whether they

can prove that they spent the required number of hours

participating in the activity even if all the hotel condos

together are a single activity.     The regulations state that

taxpayers can prove the extent of their activity through any

reasonable means.     Sec. 1.469-5T(f)(4), Temporary Income Tax

Regs., supra at 5727.     “Contemporaneous daily time reports, logs,

or similar documents are not required if the extent of such

participation may be established by other reasonable means.”       Id.


     2
      (...continued)
Lapid spent the time required to claim the benefit of the safe
harbors listed in the regulation.
                                - 9 -

However, the same regulation also tells us not to count certain

activities in deciding whether petitioners have spent enough time

on their activity for their participation to be material.    The

most important of these exclusions is time spent on investment

activities, which does not count unless the taxpayer is directly

involved in the day-to-day management or operations of the

activity.    Sec. 1.469-5T(f)(2)(ii)(A) and (B), Temporary Income

Tax Regs., supra at 5727; see also Mordkin.    According to the

regulations, investment activity includes:

     1.     Studying and reviewing financial statements or
            reports on operations of the activity;

     2.     Preparing or compiling summaries or analyses of
            the finances or operations of the activity for the
            individual’s own use; and

     3.     Monitoring the finances or operations of the
            activity in a non-managerial capacity.

Sec. 1.469-5T(f)(2)(ii)(B)(1) through (3), Temporary Income

Tax Regs., supra.

     While Mrs. Lapid testified that she spent many hours every

night studying and tracking her investments, the evidence she

submitted shows that she was actually just reviewing financial

statements and reports on operations.    Because the regulation

specifically defines such monitoring as investment activity, we

cannot include that time in calculating whether she met the

material participation standard in three of the safe harbors she

is aiming for.   This is true despite our belief that Mrs. Lapid
                              - 10 -

did indeed spend a lot of time tracking her properties.

Regardless of whether we believe Mrs. Lapid’s testimony (or think

it “vague, uncorroborated, and self-serving”), we cannot consider

the vast majority of the hours she spent monitoring her

investments in deciding whether she was a material participant.

     Unable to count the hours that Mrs. Lapid spent on

investment activity,3 the petitioners’ claim to the loss on their

hotel condos quickly collapses.   Though we believe that the

Lapids did at least occasionally visit the condos, the record is

devoid of any evidence that they spent anywhere near 500 hours

doing so.   That the hotels did the routine onsite work of

property management undermines the Lapids’ ability to show any

significant amount of time that would count as “participation” in

the activity.   And they completely failed to compare the time

they spent with the time spent by individuals actually onsite.

     Petitioners do claim, based on all the facts and

circumstances, that Mrs. Lapid participated in the activity on a

regular, continuous, and substantial basis during the year.    See

sec. 1.469-5T(a)(7), Temporary Income Tax Regs., supra at 5726.

The regulations state that the taxpayer’s hours spent on

management can count under this test only if no other person is


     3
       While the regulations permit us to include Mr. Lapid’s
time on these activities, sec. 1.469-5T(f)(3), Temporary Income
Tax Regs., supra at 5727, petitioners presented no evidence that
he spent any time on them beyond performing minor repairs.
                                - 11 -

compensated for performing management services related to that

property.    Sec. 1.469-5T(b)(2)(ii)(A), Temporary Income Tax

Regs., supra at 5726.     The record before us, however, contains

reams of evidence showing that the hotels withheld some of the

Lapids’ revenues as payment for providing services such as

cleaning, check-ins, and the like.       So even if Mrs. Lapid did

substantially manage the hotel properties, this catchall test

provides no benefit to her.

     For these reasons, we must find that the petitioners did not

materially participate in the trade or business of the hotel

condos.     These activities were passive, and so we reject

petitioners’ challenge to the disallowance of their related loss

deduction.

B.   The Nonhotel Properties

     The nonhotel condo and Nevada house are both rental

activities rather than a trade or business, so we must analyze

whether they are passive activities under section 469(c)(2).         The

material participation standard ordinarily does not apply to

rental activities.     Sec. 469(c)(2).    But it does become relevant

when petitioners argue that one of them is a “real estate

professional.”

     Petitioners did submit a proposed amended tax return that

changed Mrs. Lapid’s occupation from “R.N.” to “Real Estate

Manager.”     They failed to raise the point in their briefs,
                                - 12 -

however, and we therefore conclude that they have abandoned it.

Lunsford v. Commissioner, 117 T.C. 183, 187 (2001); Nicklaus v.

Commissioner, 117 T.C. 117, 120 n.4 (2001).

     Even if we didn’t, the argument lacks merit.     To be a real

estate professional under section 469(c)(7), the taxpayer must

(among other requirements) have “materially participate[d]” in

real estate trades or businesses for at least 750 hours in the

tax year.     Sec. 469(c)(7)(B)(ii).   But “material participation”

has the same meaning here as described above.     See sec. 1.469-

9(b)(5), Income Tax Regs.     So the time Mrs. Lapid spent on

investment activities would still not count toward the 750-hour

requirement.     We therefore find in the alternative that she is

not a real estate professional for purposes of section

469(c)(7).4

     As the petitioners brought up no other arguments,5 we find

that the nonhotel properties are a passive activity and any



     4
       And even if Mrs. Lapid were a real estate professional
for purposes of section 469(c)(7), we would have to consider
each of her real estate rental activities separately, sec.
469(c)(7)(A)(ii), unless she elected to combine them into a
single activity, sec. 1.469-9(g)(1), Income Tax Regs. As we find
that Mrs. Lapid is not a real estate professional, these rules do
not apply, and we need not consider whether she made the required
election.
     5
       While petitioners brought up no other arguments,
respondent did mention section 469(i) on brief. This section
allows a maximum $25,000 deduction for passive activity losses
connected with rental real estate. Petitioners, however, fail
to qualify for this deduction because their modified adjusted
gross income (i.e., their adjusted gross income computed without
regard to their claimed losses) was too high.
                             - 13 -

related losses are not deductible.    Sec. 469(a)(1)(A).   Since the

petitioners’ real estate activities generated only passive

losses,

                                     A decision will be entered for

                              respondent.
