                  T.C. Summary Opinion 2010-90



                     UNITED STATES TAX COURT



            MARCEL AND JENNIFER AJAH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18458-08S.              Filed July 8, 2010.



     Jennifer Ajah, pro se.

     Diana P. Hinton, for respondent.



     PANUTHOS, Chief 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



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


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

precedent for any other case.

     Respondent determined a $19,797 deficiency in petitioners’

2005 Federal income tax, an addition to tax under section

6651(a)(1) of $3,815, and a section 6662(a) accuracy-related

penalty of $3,959.2   The deficiency is based on respondent’s

disallowance of petitioners’ claimed losses from rental real

estate activities.    The issues for decision are:   (1)   Whether

the section 469 passive activity rules preclude deducting losses

from rental real estate activities; (2) whether an addition to

tax under section 6651(a)(1) is applicable; and (3) whether an

accuracy-related penalty under section 6662(a) is applicable.3

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

found.    The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time of filing the

petition, petitioners were residents of the State of New York.

For matters of convenience, we will combine our findings and

discussion herein.

     Petitioner Jennifer Ajah (Mrs. Ajah) is an attorney, and

petitioner Marcel Ajah (Dr. Ajah), her husband, is a medical

doctor.    Petitioners owned two rental properties in 2005.    One


     2
      All dollar amounts are rounded to the nearest dollar.
     3
      Other adjustments were made to petitioners’ return that
were computational and, therefore, will not be discussed.
                                - 3 -


was a commercial property located in Jamaica, New York, which was

the location of Dr. Ajah’s medical practice.    The second was a

single-family residence in Baltimore, Maryland.    Only Mrs. Ajah

was involved in the rental real estate activities.4

     The rental property in Maryland was sold for $80,000 in

2005.    Petitioners did not report the sale on their 2005 joint

Federal income tax return.

     Petitioners’ joint Federal income tax return for 2005 was

prepared by an accountant and filed on July 25, 2006.

Petitioners supplied the accountant with the requisite

documentation for the completion of their Federal income tax

return and complied with the accountant’s request for more

information.    There is no record of an extension request’s being

filed.    The return, as filed, showed an adjusted gross income of

$192,070.    Mrs. Ajah’s 2005 Form W-2, Wage and Tax Statement,

showed earnings of $67,500, and Dr. Ajah’s showed earnings of

$130,000.    A Schedule C, Profit or Loss From Business, was also

submitted showing $51,807 of net profit from a business.     After

exemptions and deductions, petitioners’ return reflected a refund

of $724.    With the return, petitioners filed Schedule E,


     4
      Dr. Ajah did not appear at trial and did not execute the
stipulation of facts. Therefore, the Court will dismiss this
case as to petitioner Marcel Ajah for lack of prosecution. See
Rule 123(b). The Court will enter a decision as to petitioner
Marcel Ajah consistent with the decision to be entered as to
petitioner Jennifer Ajah.
                                - 4 -


Supplemental Income and Loss, reporting rental income for both

properties of $36,500 and total expenses, including depreciation,

for both properties of $97,415.   Petitioners claimed losses of

$60,915 in connection with the rental properties.   No election to

aggregate the rental properties was filed with the return.

     Respondent’s motion for summary judgment was denied because

there was a genuine issue of material fact as to whether Mrs.

Ajah was a real estate professional in 2005.

Burden of Proof

     The Commissioner’s determinations are presumed correct, and

the taxpayer bears the burden of proving that a determination set

forth in a notice of deficiency is incorrect.   See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    Deductions are a

matter of legislative grace, and the taxpayer bears the burden of

proving that he is entitled to any deduction claimed.   Rule 142;

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

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

factual matters shifts to the Commissioner under certain

circumstances.    Mrs. Ajah neither alleged that section 7491(a)

applies nor established her compliance with the substantiation

and recordkeeping requirements.    See sec. 7491(a)(2)(A) and (B).

Mrs. Ajah, therefore, bears the burden of proof.    See Rule

142(a).
                                - 5 -


Section 469 Losses From Rental Real Estate Activities

     Mrs. Ajah argues that all of the passive losses from rental

real estate activities should be allowed to be taken as a

deduction against passive income because she was a real estate

professional in 2005.   In general, passive activity credits and

losses are not allowed.    Sec. 469(a).   A passive activity is

defined as “any activity--(A) which involves the conduct of any

trade or business, and (B) in which the taxpayer does not

materially participate.”    Sec. 469(c)(1).   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).

Rental real estate activity is generally treated as a per se

passive activity regardless of whether the taxpayer materially

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

     Exceptions to the general per se passive activity rule

include:   (1) If the taxpayer is in a real property business (a

real estate professional) under section 469(c)(7)(B), then he is

treated as involved in a trade or business and subject to the

material participation requirements of section 469(c)(1); and (2)

if the taxpayer actively participates in the rental real estate

activities, then he is entitled to an offset of up to $25,000

against his passive activity losses under section 469(i).
                               - 6 -


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).   In the case of a joint return, the same

spouse must satisfy each requirement.    Id.

     In establishing whether a taxpayer’s real property

activities result in passive activity losses, each interest in

rental real estate is treated as a separate rental real estate

activity unless the qualifying taxpayer makes an election to

treat all interests in rental real estate as a single rental real

estate activity.   Sec. 469(c)(7)(A).   The taxpayer must clearly

notify the Commissioner of his intent to make an election to

treat multiple real estate activities as a single activity.    See

Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781,

795 (11th Cir. 1984).   A statement of election must be filed with

the taxpayer’s original return declaring that the election is

under section 469(c)(7)(A).   Sec. 1.469-9(g)(3), Income Tax Regs.

     Section 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed.

Reg. 5727 (Feb. 25, 1988) provides:
                               - 7 -


     The extent of an individual’s participation in an activity
     may be established by any reasonable means. Contemporaneous
     daily time reports, logs, or similar documents are not
     required if the extent of such participation may be
     established by other reasonable means. Reasonable means for
     purposes of this paragraph may include but are not limited
     to the identification of services performed over a period of
     time and the approximate number of hours spent performing
     such services during such period, based on appointment
     books, calendars, or narrative summaries.

This Court has acknowledged that these temporary regulations do

not explicitly state what records a taxpayer needs to maintain,

but we have consistently held that they do not allow a postevent

“ballpark guesstimate”.   Fowler v. Commissioner, T.C. Memo. 2002-

223; Goshorn v. Commissioner, T.C. Memo. 1993-578.

     Mrs. Ajah argues that she qualifies as a real estate

professional for the year in issue.    She relies upon certificates

from the Long Island Board of Realtors, Inc., the Multiple

Listing Service of Long Island, Inc., and the State of New York

Department of State Division of Licensing Services.    These

certificates reflect, respectively, that for 2005 she pledged to

adhere to the realtor code of ethics, had completed required

courses on broker rules and regulations, and was licensed as a

real estate broker.   Mrs. Ajah testified that she worked at least

20 hours a week for the 52 weeks of 2005 on the two rental

properties.   Mrs. Ajah did not offer any evidence as to the

number of hours she worked as an attorney in 2005.    No

contemporaneous record, calendar, appointment book, or any other
                                 - 8 -


method of recording time spent between rental real estate

activities and activities as an attorney was provided.      Thus, the

Court is unable to conclude that more than one-half of Mrs.

Ajah’s personal services were devoted to the rental properties.

     We conclude that Mrs. Ajah’s method of calculating her time

spent participating in the rental activities constitutes an

impermissible “ballpark guesstimate”.     See Fowler v.

Commissioner, supra; see also Goshorn v. Commissioner, supra.

Mrs. Ajah did not establish by reasonable means that she

performed more than one-half of her personal services in real

property trades or businesses.

     Petitioners did not file an election with their return to

treat the two rental real estate interests as one activity.

Petitioners did aggregate the rental properties on their Schedule

E and may have done so in the past.      This Court has consistently

held that aggregating rental properties on Schedule E is not a

deemed election under the requirements of section 469(c)(7)(A).

Trask v. Commissioner, T.C. Memo. 2010-78 (citing Kosonen v.

Commissioner, T.C. Memo. 2000-107 (aggregation of losses was not

clear notice of election under section 469(c)(7))).       Therefore,

Mrs. Ajah would need to perform 750 hours of service for each

rental real estate interest for a total of 1,500 hours to meet

the test in section 469(c)(7)(B)(ii).     If Mrs. Ajah’s testimony

(working a minimum of 20 hours per week) was accepted as the
                                - 9 -


number of hours engaged in real estate activities, her total

hours for both rental properties would be 1,040 hours, less than

the required 1,500 hours.

     Because we have concluded that Mrs. Ajah was not a real

estate professional under section 469(c)(7)(B), her rental real

estate activities in 2005 were per se passive activities.      See

sec. 469(c)(2), (4).   We must now decide whether Mrs. Ajah is

entitled to a $25,000 offset under section 469(i).      A taxpayer

who “actively participated” in a rental real estate activity can

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

activity.   Sec. 469(i)(1) and (2).     This exception is fully

phased out, however, when adjusted gross income (AGI) equals or

exceeds $150,000.   Sec. 469(i)(3)(A).     Petitioners reported AGI

of $192,070.

     Accordingly, petitioners cannot deduct any of the passive

activity losses for 2005, and respondent’s determination is

sustained with respect to the section 469 disallowance.

Addition to Tax Under Section 6651(a)(1)

     Section 6651(a)(1) imposes an addition to tax for failure to

file a return on the date prescribed (determined with regard to

any extension of time for filing) unless the taxpayer establishes

that the failure is due to reasonable cause and not due

to willful neglect.    United States v. Boyle, 469 U.S. 241, 243

(1985).   “Reasonable cause as applied in section 6651 has been
                                - 10 -


defined as the ‘exercise of ordinary business care and

prudence.’”     Estate of Duttenhofer v. Commissioner, 49 T.C. 200,

204 (1967) (quoting Se. Fin. Co. v. Commissioner, 153 F.2d 205,

205 (5th Cir. 1946), affg. 4 T.C. 1069 (1945)), affd. 410 F. 2d

302 (6th Cir. 1969); see also sec. 301.6651-1(c)(1), Proced. &

Admin. Regs.     The section 6651(a)(1) addition to tax is equal to

5 percent of the amount of tax required to be shown on the return

if the failure is not for more than 1 month, with an additional 5

percent to be added for each month or partial month during which

the failure to file continues, not to exceed 25 percent in the

aggregate.

     Initially, the Commissioner has the burden of production

with respect to any penalty, addition to tax, or additional

amount.   Sec. 7491(c).    The Commissioner satisfies this burden of

production by coming forward with sufficient evidence that

indicates that it is appropriate to impose the penalty.     See

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).     Once the

Commissioner satisfies this burden of production, the taxpayer

must persuade the Court that the Commissioner’s determination is

in error by supplying sufficient evidence of an applicable

exception.     Id.

     Respondent satisfied his burden here.     Petitioners’ return

was not filed until July 25, 2006, more than 3 months after the

due date.     There is no record of an extension request’s being
                               - 11 -


filed for petitioners’ return.    Therefore, it is up to

petitioners to persuade the Court that their failure to file was

due to reasonable cause and not willful neglect.

     Mrs. Ajah relied on her claim that she and her husband

signed an extension request and gave it to their accountant to

show that they had reasonable cause for not timely filing their

return.    The burden of prompt filing cannot be shifted from

petitioners to their employee or agent, which would include

petitioners’ accountant.    See United States v. Boyle, supra at

249-250.    The fact that petitioners’ accountant was expected to

attend to the matter did not relieve petitioners from their duty

to comply with the statute.    See id. at 250.

     Mrs. Ajah also argues that there was no willful neglect

because the return, as filed, reflected a refund of $724;

therefore, no tax was owed.    Mrs. Ajah’s argument that the return

did not have to be timely filed because they believed a refund

was due is misplaced.    All individuals who have gross income that

equals or exceeds the exemption amount must file a Federal income

tax return.    Sec. 6012(a)(1)(A).5   Petitioners had gross income

well in excess of the exemption amount and were required to

timely file a Federal income tax return.




     5
      Petitioners fail to meet the criteria for any of the
exceptions listed in sec. 6012.
                                - 12 -


     Therefore, there was no reasonable cause for petitioners’

failure to timely file their 2005 Federal income tax return, and

they are liable for an addition to tax under section 6651(a)(1).

Accuracy-Related Penalty Under 6662(a)

     Section 6662(a) and (b)(2) provides that a taxpayer may be

liable for a penalty of 20 percent of the portion of an

underpayment of tax attributable to a substantial understatement

of income tax.     An understatement of income tax is substantial if

it exceeds the greater of 10 percent of the tax required to be

shown on the return or $5,000.    Sec. 6662(d)(1)(A).   Respondent

has the burden of production with respect to the accuracy-related

penalty.   See sec. 7491(c).

     Ten percent of the tax required to be shown on petitioners’

return was $4,535.    Petitioners’ understatement must exceed

$5,000 to be deemed substantial.    Petitioners understated   their

tax by $19,797.6    Therefore, respondent has met his burden of

production.

     Although a substantial understatement of income tax is

determined by a straightforward mathematical equation, the

reasonable cause and good faith exception of section 6664 still

applies if warranted.    The exception is for any portion of an



     6
      Because we find that there was a substantial understatement
of income tax, there is no need to discuss other attributions to
which the accuracy-related penalty would apply.
                                - 13 -


underpayment if there was reasonable cause and the taxpayer acted

in good faith for that portion.    Sec. 6664(c).   Whether a

taxpayer acted with reasonable cause and good faith is determined

by the relevant facts and circumstances on a case-by-case basis.

Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec. 1.6664-

4(b)(1), Income Tax Regs.    “Reliance on an information return,

professional advice, or other facts, however, constitutes

reasonable cause and good faith if, under all the circumstances,

such reliance was reasonable and the taxpayer acted in good

faith.”   Sec. 1.6664-4(b)(1), Income Tax Regs.; see United States

v. Boyle, supra at 251.     An honest misunderstanding of fact or

law that is reasonable in the light of the experience, knowledge,

and education of the taxpayer may indicate reasonable cause and

good faith.   Remy v. Commissioner, T.C. Memo. 1997-72; sec.

1.6664-4(b)(1), Income Tax Regs.    The most important factor is

the extent of the taxpayer’s effort to assess the proper tax

liability.    Stubblefield v. Commissioner, supra; sec. 1.6664-

4(b)(1), Income Tax Regs.

     Section 469 and its regulations cover a highly complex area

of the tax code.   Although Mrs. Ajah is an attorney who runs her

own firm, she is not a tax attorney, and it is not unreasonable

for her to seek guidance in this complicated area.     She and her

husband enlisted the advice and help of an accountant to complete

their 2005 Federal income tax return.    We find Mrs. Ajah’s
                              - 14 -


testimony credible that they presented the accountant with the

proper documents and complied with requests for additional

information when asked.   The accountant then assured petitioners

that they were entitled to the losses generated by the rental

real estate activities.   “To require the taxpayer to * * * seek a

‘second opinion,’ * * * would nullify the very purpose of seeking

the advice of a presumed expert in the first place.”   United

States v. Boyle, 469 U.S. at 251 (citing Haywood Lumber & Mining

Co. v. Commissioner, 178 F.2d 769, 771 (2d Cir. 1950), modifying

12 T.C. 735 (1949)).   We find, after considering all the facts

and circumstances, that petitioners are not liable for the

accuracy-related penalty under section 6662(a) for 2005.

     To reflect the foregoing,


                                         An appropriate order and

                                    decision will be entered.
