                  T.C. Summary Opinion 2005-146



                     UNITED STATES TAX COURT



         RICHARD B. MAY AND JANE M. MAY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5032-04S.               Filed October 11, 2005.


     Richard B. May and Jane M. May, pro sese.

     Jennifer S. McGinty, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1   The decision to

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

should not be cited as authority.


     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1996
and 1997, the taxable years in issue. All monetary amounts are
rounded to the nearest dollar.
                                  - 2 -

     Respondent determined deficiencies in, and an addition to,

petitioners’ Federal income taxes for the taxable years 1996 and

1997 as follows:

                                           Addition to tax
            Year     Deficiency           Sec. 6651(a)(1)
            1996     $10,385                    $200
            1997       6,878                     ---

     After petitioners’ concessions,2 the issue for decision is

whether petitioner Richard B. May (petitioner) elected under

section 469(c)(7)(A) to treat his various rental real estate

activities as a single activity for the years in issue.      We hold

that he did not.

     An adjustment to the amount of petitioners’ itemized

deductions for each of the years in issue is a purely

computational matter, the resolution of which is dependent on our

disposition of the disputed issue.

                            Background

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

found.   We incorporate by reference the parties’ stipulation of

facts, supplemental stipulation of facts, and accompanying

exhibits.




     2
        Petitioners concede: (1) They are not entitled to claim
the dependency exemption deductions disallowed by respondent in
the notice of deficiency, and (2) they are liable for the
addition to tax for failure to timely file their Federal income
tax return for 1996.
                               - 3 -

     At the time that the petition was filed, petitioners resided

in Buffalo, New York.

     During the years in issue, petitioner worked for the City of

Buffalo as a court advocate in a program known as Hispanics

United of Buffalo.   In his civil service job, petitioner worked

approximately 28-30 hours per week.     Petitioner Jane M. May (Mrs.

May) worked as a full-time teacher for the Buffalo Board of

Education.

     Since 1974, petitioner has been buying, selling, renting,

and managing real estate properties.3    At the beginning of 1996,

he owned 18 doubles consisting of 36 rental units, two lots, and

three garages in North Buffalo, New York.4    (These properties are

collectively referred to as the rental properties.)     By the end

of 1996, he had sold two of the doubles.     During the years in

issue, he rented approximately 30 of the units to tenants with

special needs, e.g., handicapped people, senior citizens, and

people receiving social services, and he rented the remaining

units to other tenants.   Petitioner personally manages the rental

properties, which includes finding tenants for the units,

collecting and depositing rent, making the mortgage payments, and

inspecting the units.   Although petitioner makes minor repairs,

     3
        On the basis of the record, it appears that Mrs. May was
not involved in petitioner’s real estate activities.
     4
        “Doubles” are residential duplexes with units situated on
the ground and second levels.
                               - 4 -

he hires independent contractors for major repairs.    In addition,

he assists his tenants with various tasks, including completing

paperwork for those tenants receiving social services.

Petitioner spends approximately 40-45 hours per week managing the

rental properties.

     In 1996, petitioners hired Joseph Mineo, a certified public

accountant, to prepare their 1993 return.   Mr. Mineo continued to

prepare petitioners’ returns for all relevant years.

     Petitioners attached to their 1993 return a Schedule E,

Supplemental Income and Loss, on which they aggregated

petitioner’s rental income and expenses as if petitioner’s rental

real estate activities were a single activity.   Petitioners

consistently followed this practice on the Schedules E attached

to their 1994, 1995, 1996, and 1997 returns.   Petitioners,

however, did not attach to any of these returns a statement

electing to treat petitioner’s rental real estate activities as a

single activity.

     On April 13, 1999, petitioners filed a joint Federal income

tax return for 1996.   On April 4, 2000, petitioners filed a joint

return for 1997.   Petitioners attached to each of these returns a

Schedule E on which they identified the rental real estate

property as “Res Rental, Buffalo, NY” and claimed the following:
                                  - 5 -

                                  Total Expenses
                                    (Including
     Year      Rents received     Depreciation)       Net loss
     1996         $94,050            $167,397         $73,347
     1997          87,030             154,324          67,294

     In the notice of deficiency, respondent determined, inter

alia, that petitioner’s rental real estate losses were passive

activity losses that were limited to $25,000 each year.

     Petitioners timely filed a petition with the Court disputing

respondent’s determinations.

                                Discussion5

     Generally, section 469 disallows a deduction for passive

activity losses incurred by individual taxpayers for the taxable

year.    Sec. 469(a)(1).   A passive activity loss is the excess of

the aggregate losses from all passive activities for the taxable

year over the aggregate income from all passive activities for

such year.    Sec. 469(d)(1).    In general, a passive activity is

any trade or business in which the taxpayer does not materially

participate.    Sec. 469(c)(1).    Rental activities are

presumptively passive, without regard to whether the taxpayer

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

     The presumptive rule that a rental activity is a passive

activity, however, does not apply to the rental real estate


     5
        We decide this case without regard to the burden of
proof. Accordingly, we need not decide whether the general rule
of sec. 7491(a) is applicable in this case. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001).
                               - 6 -

activities of a taxpayer in the real property business (real

estate professional) 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).

     This exception applies as if each interest of the taxpayer

in rental real estate were a separate activity unless the

taxpayer elects to treat all interests in rental real estate as a

single rental real estate activity.    Sec. 469(c)(7)(A); see sec.

1.469-9(g)(1), Income Tax Regs.   To make such an election, the

taxpayer must file a statement with the taxpayer’s original

income tax return for the taxable year declaring that he or she

is a qualified taxpayer for the taxable year and is making the

election pursuant to section 469(c)(7)(A).   Sec. 1.469-9(g)(3),

Income Tax Regs.   Such an election is binding for the taxable

year in which it is made and for all future years in which the

taxpayer is a qualifying taxpayer even if there are intervening

years in which the taxpayer is not a qualifying taxpayer.   Sec.

1.469-9(g)(1), Income Tax Regs.   The election may be made in any

year in which the taxpayer is a qualifying taxpayer, and the
                               - 7 -

failure to make the election in one year does not preclude the

taxpayer from making the election in a subsequent year.   Id.

     For purposes of the real estate professional exception, the

parties agree that petitioner materially participated in his

rental real estate activities only if his rental real estate

activities are treated as a single activity.   See 469(h)(1); sec.

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

25, 1988).   The parties further agree that petitioner would not

satisfy the material participation requirement to qualify as a

real estate professional with respect to each of petitioner’s

rental properties considered separately.   Therefore, the issue in

dispute is whether petitioner elected to treat his rental real

estate activities as a single activity pursuant to section

469(c)(7)(A).

     The Omnibus Budget Reconciliation Act of 1993 (OBRA), Pub.

L. 103-66, sec. 13143(a), 107 Stat. 440, added section

469(c)(7)(A) to the passive activity loss rules effective for

taxable years beginning after December 31, 1993.   Under section

469(c)(7)(A), a taxpayer may elect to treat all interests in

rental real estate as one activity for purposes of qualifying as

a real estate professional.   Section 1.469-9(h), Proposed Income

Tax Regs., 60 Fed. Reg. 2561 (Jan. 10, 1995), required a taxpayer

wishing to make such an election to file a statement with the

taxpayer’s original return declaring that the election is under
                                - 8 -

section 469(c)(7)(A).    The final regulation, which is

substantially the same as the proposed regulation, became final

on December 22, 1995, and is generally effective for taxable

years beginning on or after January 1, 1995, and to elections

made under section 1.469-9(g), Income Tax Regs., with returns

filed on or after January 1, 1995.      See sec. 1.469-11(a)(3),

Income Tax Regs.    Therefore, to satisfy the literal requirements

for making an election to treat all rental real estate activities

as a single activity under section 469(c)(7)(A), a taxpayer must

file an election with his or her original return.

     Petitioners concede that they did not attach to any relevant

return a statement electing to treat petitioner’s rental real

estate activities as a single activity.      Therefore, petitioner

did not satisfy the literal requirements of section 469(c)(7)(A)

to treat all interests in rental real estate as a single

activity.

     Petitioners contend, however, that they made a “deemed

election” by consistently aggregating the rental income and

expenses from the rental properties on their tax returns since

1993.    Petitioners assert that such practice complies with the

OBRA sec. 13143(a), 107 Stat. 440, and the regulations

thereunder.6   In petitioners’ view, this practice of aggregating

     6
        Petitioners appear to rely on sec. 1.469-9(d)(2), Income
Tax Regs., for the proposition that a taxpayer must be consistent
                                                   (continued...)
                               - 9 -

the rental income and expenses as a single activity on Schedule E

constitutes “a significant revelation to the Commissioner that

that’s how the taxpayer [petitioner] was electing to act” to

treat his rental properties as a single activity.   We disagree.

     In Kosonen v. Commissioner, T.C. Memo. 2000-107, the

taxpayer aggregated his rental income and expenses in one column

on the Schedules E attached to his 1994, 1995, and 1996 returns.

Similar to the petitioners in the instant case, the taxpayer in

Kosonen argued that aggregating his rental activity losses on his

returns showed that he had elected to treat his rental real

estate activities as a single activity under section 469(c)(7).

The Court held, however, that the fact that the taxpayer

aggregated his losses was not clear notice that he intended to

elect under section 469(c)(7).7   The Court reasoned that a

taxpayer must clearly notify the Commissioner of the taxpayer’s

intent to make an election.   Kosonen v. Commissioner, supra

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


     6
      (...continued)
in the treatment of his or her real property trades or
businesses. This section, however, is not determinative of the
issue in dispute.
     7
        The Court expressly noted that the instructions for the
1994 Form 1040, U.S. Individual Income Tax Return, and Schedule
E, Supplemental Income and Loss, required the taxpayer to
aggregate his rental real estate losses; thus, the fact that the
taxpayer had done so was not clear notice that he intended to
make the election under sec. 469(c)(7). See Kosonen v.
Commissioner, T.C. Memo. 2000-107.
                                - 10 -

781, 795 (11th Cir. 1984)).    To make an election, “the taxpayer

must exhibit in some manner * * * his unequivocal agreement to

accept both the benefits and burdens of the tax treatment

afforded” by the governing statute.      Kosonen v. Commissioner,

supra (quoting Young v. Commissioner, 83 T.C. 831, 839 (1984),

affd. 783 F.2d 1201 (5th Cir. 1986)).      “A taxpayer has not made

an election if it is not clear from the return that an election

has been made.” Id.

                              Conclusion

     On the basis of the record, it is not clear from any of

petitioners’ relevant returns that petitioner made an election

under section 469(c)(7)(A).    Petitioners’ consistent treatment of

aggregating the rental income and expenses on their Schedules E

is not a deemed election to treat the rental real estate

activities as a single activity under the requirements of section

469(c)(7)(A).   Accordingly, petitioner did not elect to treat his

rental real estate activities as a single activity under section

469(c)(7)(A).   Respondent’s determination is therefore sustained.

     Although petitioner does not qualify as a real estate

professional, respondent allowed petitioners to deduct $25,000

for each of the taxable years in issue pursuant to the $25,000

offset for rental real estate activities under section 469(i).
                             - 11 -

     We have considered all of the other arguments made by

petitioners, and, to the extent that we have not specifically

addressed them, we conclude that they are without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect our disposition of the disputed issue, as well as

petitioners’ concessions,



                                   Decision will be entered

                              for respondent.
