                         T.C. Memo. 2011-79



                       UNITED STATES TAX COURT



       ANDREW ROQUE BOSQUE AND ALMA BOSQUE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14403-09, 23544-09.      Filed April 4, 2011.



     Andrew Roque Bosque and Alma Bosque, pro sese.

     Christina Ciu and Thomas R. Mackinson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    In these consolidated cases respondent

determined deficiencies in petitioners’ Federal income tax and

accuracy-related penalties as follows:
                               - 2 -

                                                  Penalty
           Year            Deficiency           Sec. 6662(a)

           2006             $12,790                $2,558
           2007              12,154                 2,430

     The issues for decision are:     (1) Whether rental real estate

losses petitioners claimed on their Schedules E, Supplemental

Income and Loss, for 2006 and 2007 are subject to the passive

activity loss limitations under section 469;1 (2) whether

petitioners are entitled to a deduction of $7,729 for business

use of their home claimed on their 2006 Schedule C, Profit or

Loss From Business, for Abe Consulting, Inc. (ACI Schedule C);

(3) whether petitioners are entitled to a deduction of $14,500

for rental or lease of business property claimed on their 2006

ACI Schedule C; (4) whether petitioners are entitled to a

deduction of $28,445 for legal and professional services claimed

on their 2006 Schedule C for the Law Offices of Andrew B. Bosque

& Associates (law practice Schedule C); (5) whether petitioners

are entitled to a deduction of $1,389 for rental or lease of

business property claimed on their 2006 law practice Schedule C;

and (6) whether petitioners are liable for accuracy-related

penalties under section 6662(a) for 2006 and 2007.2


     1
        Unless otherwise indicated, all 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
         Respondent determined that petitioners failed to report
                                                    (continued...)
                               - 3 -

                         FINDINGS OF FACT

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

The stipulations of facts and the attached exhibits are

incorporated herein by this reference.   Petitioners resided in

San Jose, California, when they filed their petitions.

     In 2006 and 2007 Andrew Roque Bosque (Mr. Bosque) worked as

a self-employed attorney and also performed services for Abe

Consulting, Inc. (ACI), a business he organized in 2005.   Alma

Bosque (Mrs. Bosque) worked full time as a nurse.3   Petitioners

also owned three rental real estate properties.

Rental Real Estate

     Petitioners owned the following rental real estate

properties:   (1) A single-family home in Lathrop, California

(Lathrop property), approximately 1 hour from petitioners’ home;

(2) a single-family home in Sloughhouse, California (Sloughhouse

property), approximately 2.5 hours from petitioners’ home; and




     2
      (...continued)
wages of $6,270 for 2006. Petitioners did not challenge this
determination in their petition or at trial, and the issue is
deemed conceded. See Rule 34(b)(4).

     Respondent’s determinations with respect to petitioners’
itemized deductions and self-employment tax are computational
adjustments that will be resolved by our decisions on the primary
issues.
     3
        Mrs. Bosque earned wages of $127,970 in 2006 and $142,543
in 2007.
                                - 4 -

(3) a single-family home in Reno, Nevada (Reno property), over 4

hours from petitioners’ home.

     Petitioners tried many different methods to solicit tenants.

They hired a real estate agent to help them find tenants, and Mr.

Bosque discussed the properties with Charles Hinds (Mr. Hinds),

the real estate agent’s husband, for 1 hour three times a week.

Mr. Bosque advertised the Lathrop and Sloughhouse properties on

Craigslist.   He spent 1 hour three times a week updating the

advertisements and replying to inquiries he had received.

Lastly, Mr. Bosque visited the Lathrop and Sloughhouse properties

once a month and posted flyers in area restaurants and

businesses.   It took him approximately 9 hours to drive to and

from the properties and post the flyers.   Mr. Bosque kept daily

logs detailing the time he spent updating the Craigslist

advertisements, replying to inquiries, and visiting the Lathrop

and Sloughhouse properties.4

     Petitioners had little success renting out their properties

in 2006 and 2007.5   As a result they suffered losses in each year

and claimed the losses on their 2006 and 2007 Schedules E.6

Petitioners completed the Schedules E as though Mr. Bosque


     4
        Petitioners introduced no evidence of any activity
related to the Reno property.
     5
        Petitioners received rental income of $2,000 for 2006 and
$14,500 for 2007.
     6
        Petitioners claimed rental real estate losses of $139,467
and $152,426 for 2006 and 2007, respectively.
                                 - 5 -

qualified as a “real estate professional”.    Petitioners did not

file an election with their 2006 or 2007 return to treat all

interests in rental real estate as a single rental real estate

activity pursuant to section 469(c)(7)(A).

Abe Consulting, Inc.

     Mr. Bosque organized ACI for the purpose of recruiting

individuals to become real estate agents.    During 2006 he

designed PowerPoint presentations highlighting the benefits of

becoming a real estate agent and delivered them to his recruits

at either his home or his office in Milpitas, California.7

     1.   Business Use of Home

     In 2001 petitioners added to their home a room which Mr.

Bosque used as an office for both ACI and his law practice during

the years in issue.    Petitioners claimed on both their 2006 ACI

Schedule C and their 2006 law practice Schedule C a deduction for

the business use of their home.    Instead of apportioning the

business use of their home between ACI and the law practice,

petitioners claimed as a deduction the full amount of the

business use of their home twice; i.e., $7,729 for ACI and $7,551

for the law practice.   Respondent allowed the deduction claimed




     7
        Mr. Bosque’s daily log showed that he performed services
for ACI on 20 occasions in 2006 and on 1 occasion in 2007. His
Oct. 19, 2006, entry showed that he performed services for ACI
from 5-7 p.m., but no other entry showed a beginning and ending
time.
                               - 6 -

on petitioners’ law practice Schedule C but disallowed the

deduction claimed on their ACI Schedule C.

     2.   Rental or Lease of Business Property

     Petitioners claimed on their 2006 ACI Schedule C a deduction

of $14,500 for the rental or lease of business property.

Respondent disallowed the deduction after petitioners failed to

provide substantiation.   At trial petitioners admitted to having

no documentation to substantiate the claimed deduction.

Law Office of Andrew B. Bosque & Associates

     Mr. Bosque continued to practice law in 2006 although his

practice was “placed in [sic] the back burner” while he

concentrated on his real estate activities.   He worked out of his

home and his office in Milpitas, meeting with clients at both

locations.

     1.   Legal and Professional Services

     In 2006 Mr. Bosque used the services of three paralegals.8

He did not pay his paralegals a set salary or hourly rate;

rather, he paid them what he thought was a fair price for the

work that they did and the urgency with which he needed the work

completed.9




     8
        Mr. Bosque explained that Terry Johns (Mr. Johns), one of
his paralegals, was his real estate expert.
     9
        Mr. Bosque treated his paralegals as independent
contractors but did not issue Forms 1099-MISC, Miscellaneous
Income, to them.
                               - 7 -

     Petitioners claimed on their 2006 law practice Schedule C a

deduction of $28,445 for legal and professional services for the

paralegal fees Mr. Bosque paid.   Respondent disallowed the

deduction after petitioners failed to provide substantiation.

     At trial petitioners introduced copies of checks written

from the Andrew B. Bosque & Associates checkbook.    In 2006 Mr.

Bosque wrote a total of 45 checks to his paralegals.    Some of the

checks specified which case the paralegal had worked on, while

others stated “paralegal fees”.

     2.   Rental or Lease of Business Property

     Petitioners claimed on their 2006 law practice Schedule C a

deduction of $1,389 for rental or lease of business property.

Respondent disallowed the deduction after petitioners failed to

provide substantiation.   At trial Mr. Bosque admitted that he did

not “exactly know what * * * [the deduction for rental or lease

of business property] pertains to” and that currently petitioners

did not have any documentation to substantiate it.

                              OPINION

     The Commissioner’s determinations in the notice of

deficiency are presumed correct, and taxpayers bear the burden of

proving that the Commissioner’s determinations are incorrect.10

See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).



     10
        Petitioners do not contend that sec. 7491(a) applies in
the instant cases to shift the burden of proof to respondent.
                                - 8 -

Taxpayers also bear the burden of proving that they have met all

requirements to be entitled to any claimed deductions.      Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

I.   Deductibility of Rental Real Estate Losses

      Taxpayers are allowed deductions for certain business and

investment expenses pursuant to sections 162 and 212; however,

section 469 generally disallows any passive activity loss for the

tax year.    A passive activity is any trade or business 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 year over the

aggregate income from all passive activities for such year.        Sec.

469(d)(1).    A rental activity is generally treated as a per se

passive activity regardless of whether the taxpayer materially

participates.11 Sec. 469(c)(2).

      A.   Real Estate Professional

      Pursuant to section 469(c)(7), the rental activities of a

taxpayer who is in the real property business (real estate

professional) are not per se passive activities but are treated

as a trade or business subject to the material participation

requirements of section 469(c)(1).      Sec. 1.469-9(e)(1), Income

Tax Regs.



      11
        A rental activity is “any activity where payments are
principally for the use of tangible property.” Sec. 469(j)(8).
                                - 9 -

     A taxpayer qualifies as a real estate professional and is

not engaged in a passive activity under section 469(c)(2) 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
     [750-hour service performance requirement].

Sec. 469(c)(7)(B).    In the case of a joint return, the foregoing

requirements for qualification as a real estate professional are

satisfied if, and only if, either spouse separately satisfies the

requirements.   Id.   Thus, if either spouse qualifies as a real

estate professional, the rental activities of the real estate

professional are not per se passive under section 469(c)(2).

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

Reg. 5727 (Feb. 25, 1988), sets forth the requirements to

establish the taxpayer’s hours of participation as follows:

     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.

We have held that the regulations do not allow a postevent

“ballpark guesstimate”.    Bailey v. Commissioner, T.C. Memo. 2001-

296; Goshorn v. Commissioner, T.C. Memo. 1993-578.
                              - 10 -

     Petitioners contend that they satisfy the section 469

requirements of being a real estate professional.12   Mr. Bosque

spent 6 hours a week updating the Craigslist advertisements,

responding to inquiries, and discussing the rental properties

with Mr. Hinds.   He also spent 9 hours a month driving to and

from the Lathrop and Sloughhouse properties, posting flyers in

nearby businesses, and checking on the properties.    Mr. Bosque’s

activities related to the rental real estate properties total 420

hours per year,13 less than the 750-hour service performance

requirement of section 469(c)(7)(B).

     Petitioners argue that we should consider the hours Mr.

Bosque worked for ACI in our determination of whether he

qualifies as a real estate professional.   Assuming without

deciding that ACI is a real property trade or business,

petitioners presented minimal evidence as to how many hours Mr.

Bosque performed services for ACI during 2006 and 2007.    Mr.


     12
        On brief it appears that petitioners attempt to combine
their hours of service. As mentioned supra, either spouse
separately must satisfy the requirements of sec. 469(c)(7)(B).
We dismiss the possibility of Mrs. Bosque’s qualifying as a real
estate professional in 2006 or 2007. She worked full time as a
nurse during the years at issue, and petitioners presented no
evidence that would allow us to conclude that she performed more
than 750 hours of services with respect to real property trades
or businesses.
     13
        Mr. Bosque spent 312 hours per year updating the
Craigslist advertisements, responding to inquiries, and
discussing the properties with Mr. Hinds and 108 hours per year
visiting the Lathrop and Sloughhouse properties, for a total of
420 hours.
                                   - 11 -

Bosque’s daily log shows 20 days in 2006 and 1 day in 2007 on

which he performed services for ACI, and only 1 entry shows

beginning and ending times.14      Petitioners provided no evidence

that would allow us to approximate the number of hours Mr. Bosque

performed services for ACI on the remaining 20 days.

     On the basis of the record, we conclude that petitioners

have failed to show that Mr. Bosque meets the 750-hour service

performance requirement of section 469(c)(7)(B)(ii) for the years

in issue.    Because petitioners have failed to show that Mr.

Bosque meets the 750-hour service performance requirement, we

hold that he is not a real estate professional for purposes of

section 469(c)(7) and that petitioners’ rental real estate

activities must therefore be treated as a passive activity under

section 469(c)(2).    Consequently, it is not necessary to address

whether Mr. Bosque spent more than 50 percent of his time in real

property trades or businesses or whether he materially

participated in those businesses.

     B.     Active Participation

     Although we find that petitioners’ rental real estate losses

are passive activity losses, an exception to the general rule




     14
        Mr. Bosque’s entry on Oct. 19, 2006, reports that he
performed services for ACI from 5-7 p.m. Even if we assumed that
Mr. Bosque performed services for ACI for 2 hours on each of the
20 other days, he still falls short of the 750-hour service
performance requirement.
                                   - 12 -

that passive activity losses cannot currently be deducted is

provided in section 469(i)(1), which provides as follows:

          (1) In general.--In the case of any natural person,
     subsection (a) shall not apply to that portion of the
     passive activity loss or the deduction equivalent * * * of
     the passive activity credit for any taxable year which is
     attributable to all rental real estate activities with
     respect to which such individual actively participated in
     such taxable year * * *.

The section 469(i) exception is limited to $25,000 per year.

Sec. 469(i)(2).     The $25,000 maximum “offset”, however, begins to

phase out for taxpayers whose adjusted gross income (AGI) exceeds

$100,000 and is completely phased out for taxpayers whose

AGI is $150,000 or more.     Sec. 469(i)(3)(A).    For this purpose,

AGI is derived without regard to “any passive activity loss or

any loss allowable by reason of subsection (c)(7)” (modified

AGI).     Sec. 469(i)(3)(F)(iv).    We have said that the active

participation standard is met as long as the taxpayer

participates in a significant and bona fide sense in making

management decisions or arranging for others to provide services

such as repairs.     See Madler v. Commissioner, T.C. Memo.

1998-112.

        Respondent concedes that petitioners actively participated

in their rental real estate activities during 2006 and 2007.

Consequently, petitioners are entitled to offset their nonpassive

income for 2006 and 2007 by $25,000, subject to the phase-out

limitation described above.
                                 - 13 -

II.   Schedule C Deductions

      Section 162(a) provides:    “There shall be allowed as a

deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business”.    Taxpayers are required to maintain records sufficient

to establish the amounts of allowable deductions and to enable

the Commissioner to determine the correct tax liability.     Sec.

6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999).     When

taxpayers establish that they have incurred deductible expenses

but are unable to substantiate the exact amounts, we can estimate

the deductible amounts, but only if the taxpayers present

sufficient evidence to establish a rational basis for making the

estimates.    See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

      A.   ACI Schedule C--Business Use of Home

      As a general rule, section 280A(a) provides that no

deduction shall be allowed with respect to the business use of a

dwelling unit that is used by the taxpayer during the year as a

residence.    However, section 280A(c)(1) provides an exception for

certain business use of a dwelling unit, provided, however, that

a portion of the dwelling unit is exclusively used on a regular

basis for that business purpose.

      Petitioners claimed on both their 2006 ACI Schedule C and

their 2006 law practice Schedule C deductions for the business
                                - 14 -

use of their home.   Although Mr. Bosque used the same room for

both businesses, petitioners claimed the full amount of the

deduction on each business’ Schedule C.

     Respondent argues that because Mr. Bosque used the same room

in the house for both businesses, petitioners are entitled to

only one deduction for the business use of their home.

Respondent reasons further that since petitioners were allowed to

deduct the expense for the business use of their home on their

2006 law practice Schedule C, they are not entitled to the

deduction claimed on their 2006 ACI Schedule C.

     Mr. Bosque admitted that he used the same home office for

both his law practice and ACI.    As respondent states on brief, to

allow petitioners two deductions would be to double the amount of

the allowed deduction under section 280A(c).   Accordingly, we

sustain respondent’s determination that petitioners are not

entitled to the deduction for business use of their home claimed

on their 2006 ACI Schedule C.

     B.   ACI--Rental or Lease of Business Property

     Petitioners claimed on their 2006 ACI Schedule C a deduction

of $14,500 for rental or lease of business property.   Petitioners

did not have any documentation to substantiate the expense.   They

also have failed to provide evidence that would allow us to

estimate a deduction under the Cohan rule discussed supra.    See

Cohan v. Commissioner, supra at 543-544.    Accordingly, we sustain
                               - 15 -

respondent’s determination that petitioners are not entitled to

the deduction claimed on their 2006 ACI Schedule C for rental or

lease of business property.

     C.   Law Practice--Legal and Professional Services

     Petitioners claimed on their 2006 law practice Schedule C a

deduction of $28,445 for legal and professional services for the

fees Mr. Bosque paid his three paralegals.    Respondent argues

that petitioners have not provided sufficient evidence to

substantiate the deduction.    We disagree.

     Mr. Bosque credibly testified about the amounts of and the

purposes for petitioners’ claimed deduction for legal and

professional services.   Petitioners provided copies of 45 checks

from the Andrew B. Bosque & Associates checkbook made out to Mr.

Bosque’s three paralegals.    Each check contained either a case

name, the words “paralegal fees”, or both.

     Respondent also argues that petitioners have not shown that

the fees paid to Mr. Johns were paid in carrying on Mr. Bosque’s

law practice.   Specifically, respondent points out that during

trial Mr. Bosque stated that Mr. Johns was his real estate

expert, and petitioners did not provide evidence that Mr.

Bosque’s law practice handled real estate cases.

     We believe that the payments to Mr. Johns by Mr. Bosque were

made in carrying on Mr. Bosque’s law practice.    Of the 10 checks

Mr. Bosque wrote to Mr. Johns, 9 contained a case name or
                                - 16 -

description of a case.     On the facts, we believe there is

sufficient evidence that Mr. Johns’ services were provided to Mr.

Bosque’s law practice.

       Accordingly, we find that petitioners are entitled to the

deduction for legal and professional services claimed on their

2006 law practice Schedule C.

       D.   Law Practice--Rental or Lease of Business Property

       Petitioners claimed on their 2006 law practice Schedule C a

deduction of $1,389 for rental or lease of business property.      At

trial Mr. Bosque admitted that he did not know what the deduction

pertained to and that petitioners currently did not have

documentation to substantiate the deduction.     Accordingly, we

sustain respondent’s determination that petitioners are not

entitled to the deduction for rental or lease of business

property claimed on their 2006 law practice Schedule C.

III.    Accuracy-Related Penalty

       Respondent determined that petitioners are liable for

section 6662(a) accuracy-related penalties for 2006 and 2007.15

Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer may be

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


       15
         Respondent determined that petitioners’ underpayments
for 2006 and 2007 are attributable to (1) negligence or disregard
of rules and regulations and (2) a substantial understatement of
income tax. Because we find that petitioners substantially
understated their Federal income tax for 2006 and 2007, we need
not decide whether petitioners’ underpayments are attributable to
negligence or disregard of rules or regulations. See sec.
6662(b).
                              - 17 -

underpayment of tax attributable to (1) negligence or disregard

of rules or regulations or (2) a substantial understatement of

income tax.   An “understatement” is the difference between the

amount of tax required to be shown on the return and the amount

of tax actually shown on the return.   Sec. 6662(d)(2)(A).   A

“substantial understatement” exists if the understatement exceeds

the greater of (1) 10 percent of the tax required to be shown on

the return for a taxable year or (2) $5,000.   See sec.

6662(d)(1)(A).   The burden of production is on respondent to

produce evidence that it is appropriate to impose the relevant

penalty.   See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438,

446 (2001).

     Respondent determined the amounts of tax required to be

shown on petitioners’ 2006 and 2007 returns to be $13,029 and

$12,154, respectively.   Petitioners reported total tax of $239

for 2006 and zero for 2007.   Although we decided supra p. 16 that

petitioners are entitled to the deduction for legal and

professional services that respondent disallowed, the Rule 155

calculation will show that petitioners substantially understated

their Federal income tax for 2006 and 2007.    Accordingly, we find

that respondent has met his burden of production.

     The accuracy-related penalty is not imposed with respect to

any portion of the underpayment as to which the taxpayer shows

that he acted with reasonable cause and in good faith.    Sec.
                               - 18 -

6664(c)(1); Higbee v. Commissioner, supra at 448.      Petitioners

offered no evidence that they acted with reasonable cause and in

good faith.

       Accordingly, we hold that petitioners are liable for section

6662(a) accuracy-related penalties for 2006 and 2007 which shall

be computed on the underpayments of tax computed under Rule

155.

       In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.     To reflect

the foregoing,


                                          Decisions will be entered

                                     under Rule 155.
