                     T.C. Summary Opinion 2010-115



                        UNITED STATES TAX COURT



        GREGORY JOHN BAHAS AND LINDA A. BAHAS, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 29381-09S.             Filed August 16, 2010.


        Gregory John Bahas and Linda A. Bahas, pro sese.

        Emly B. Berndt, for respondent.



     JACOBS, Judge:     This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.     Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case.

     Respondent determined:     (1) A deficiency in petitioners’

Federal income tax of $9,560 and a section 6662(a) penalty of
                               - 2 -

$1,912 for 2006, and (2) a deficiency of $2,408 for 2007.    After

concessions,1 the sole issue for decision is whether petitioners

are entitled to claimed losses of $36,617 for 2006 and $10,874

for 2007 from rental real estate property.   Resolution of this

issue depends upon whether section 469(c)(7) applies to the

rental real estate activities of Linda Bahas (Mrs. Bahas).

     All section references are to the Internal Revenue Code in

effect for the years at issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

                            Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioners resided in

Ohio when they filed the petition.

     During 2006 and 2007 Mrs. Bahas was a licensed real estate

agent, and Mr. Bahas designed computer networks as a technical

applications manager.   Mrs. Bahas worked full time for Snyder &

Snyder Real Estate, Inc. (Snyder & Snyder), an Ohio corporation

which for tax purposes elected to be treated as an S corporation.

Barbara Snyder (Ms. Snyder) owned all the stock of Snyder &

Snyder.



     1
      Petitioners did not challenge other determinations
respondent made; hence, in accordance with Rule 34(b)(4),
petitioners are deemed to have conceded these determinations.
Respondent conceded the sec. 6662(a) penalty of $1,912 for 2006.
                                - 3 -

     On December 22, 2004, Mrs. Bahas and Ms. Snyder entered into

an employment agreement.   At the time Mrs. Bahas did not have a

real estate license.   Pursuant to that agreement, Mrs. Bahas was

hired to be the office manager of Snyder & Snyder and Ms.

Snyder’s assistant.    She received an hourly wage ($7.50 per hour)

for her duties as Snyder & Snyder’s office manager.    As the

assistant to Ms. Snyder, Mrs. Bahas received the same $7.50

hourly wage “during normal business hours” but no hourly wage

“outside of normal business hours”.     Rather, she was entitled to

receive “10% of the gross sales of Barbara Snyder on a bi-weekly

basis.”   Starting January 1, 2006, by which date it was assumed

Mrs. Bahas would be a licensed real estate agent, Mrs. Bahas

would receive (as a licensed real estate agent assistant to Ms.

Snyder) “6 percent of the net profits of Snyder & Snyder to be

paid once a year upon completion of the [company’s] tax return.”

According to pay stubs she received from Snyder & Snyder, Mrs.

Bahas worked there during 2006 for 1,759.5 hours and during 2007

for 1,869.5 hours.

     During 2006 and 2007 petitioners jointly owned and managed

three rental properties in Akron, Ohio.    Their ownership of these

properties was not related to Mrs. Bahas’s employment at Snyder &

Snyder.   Petitioners spent less than 750 hours managing these

properties during each of 2006 and 2007.
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     Petitioners timely filed Forms 1040, U.S. Individual Income

Tax Return, for 2006 and 2007.    They attached a Schedule E,

Supplemental Income and Loss (From rental real estate, royalties,

partnerships, S corporations, estates, trusts, REMICs, etc.),

to each of the returns and reported a loss of $39,154 for 2006

and a loss of $12,195 for 2007 in connection with their rental

properties.

     Respondent determined that:    (1) The losses petitioners

claimed from their rental properties were passive activity

losses, (2) petitioners had no passive activity income against

which these rental losses could be offset, (3) petitioners did

not meet the requirements of section 469(c)(7), and (4) $2,537 of

the rental loss claimed for 2006 (and none for 2007) was

allowable.

                            Discussion

                          Burden of Proof

     In general, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears

the burden of proving that the determinations are 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(a); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934).
                                  - 5 -

     Section 7491(a) provides that under certain circumstances,

the burden of proof with respect to factual matters shifts to the

Commissioner.   Petitioners neither alleged nor proved that this

section is herein applicable.     Hence, petitioners bear the burden

of proof.

                    Petitioners’ Rental Losses

     Generally, the deduction of passive activity losses is

suspended.   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 amount (if any) by which--(A) the aggregate

losses from all passive activities for the taxable year, exceed

(B) the aggregate income from all passive activities for such

year.”   Sec. 469(d)(1).    A rental real estate activity is

generally treated as a passive activity without regard to whether

the taxpayer materially participates in the activity.     Sec.

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

     There are exceptions to the general rule suspending the

deduction of passive activity losses with respect to taxpayers

engaged in a rental real estate activity.     One such exception is

found in section 469(i), where the taxpayer is an individual and

actively participates in rental real estate activities.     In such

a case, the individual may deduct up to $25,000 (subject to a
                                 - 6 -

phaseout if the individual’s adjusted gross income exceeds

$100,000) of his/her losses.     See sec. 469(i).2

     Another exception is where the taxpayer materially

participates in a real property trade or business.     A taxpayer

qualifies for this exception 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, as in the matter at hand, the

“materially participates” exception set forth in section

469(c)(7) applies if either spouse separately satisfies both

requirements set forth in section 469(c)(7)(B).      And a taxpayer

is treated as materially participating in a real property

activity only if the taxpayer is involved in the operations of

the activity on a basis which is regular, continuous, and

substantial.   Sec. 469(h)(1).

     In establishing whether a taxpayer’s real property

activities result in passive activity losses, each interest of


     2
      As noted supra p. 4, respondent allowed petitioners a
$2,537 rental loss deduction for 2006 pursuant to sec. 469(i).
Petitioners’ gross income exceeded the gross income limitation
provided in sec. 469(i)(3) for 2007.
                               - 7 -

the taxpayer in multiple rental properties is treated as a

separate rental real estate activity, unless the qualifying

taxpayer makes an election to treat all interests in the rental

properties as a single rental real estate activity.   Sec.

469(c)(7)(A).   The taxpayer must clearly notify the Commissioner

of his/her intent to make an election to treat multiple real

estate activities as a single activity.   See Estate of Higgins v.

Commissioner, 897 F.2d 856, 860 (6th Cir. 1990), affg. 91 T.C. 61

(1988); Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d

781, 795 (11th Cir. 1984).   The 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.   Merely listing the rental properties and

aggregating their losses on Schedule E is not sufficient to

constitute an election to aggregate petitioners’ rental

properties.   See Trask v. Commissioner, T.C. Memo. 2010-78

(citing Kosonen v. Commissioner, T.C. Memo. 2000-107 (aggregation

of real estate rental losses was not clear notice of election

pursuant to section 469(c)(7))).   Petitioners did not file a

statement of election with either their 2006 or their 2007 tax

return.

     Mrs. Bahas maintains that she was engaged in a real property

business in 2006 and 2007 because she worked more than 750 hours

per annum as a licensed real estate agent assistant for Ms.
                               - 8 -

Snyder.   She asserts that in that capacity she actively showed

and sold houses to home buyers as an agent for Ms. Snyder

and/or Snyder & Snyder and therefore should be able to “use my

hours from Snyder and Snyder to make my 750 hours”.

     Mrs. Bahas misconstrues section 469.    Because petitioners

did not elect to aggregate their real estate rental activities,

pursuant to section 469(c)(7)(A) petitioners must treat each of

these interests in the rental real estate as if it were a

separate activity.   See sec. 469(c)(7)(A)(ii).   Thus, Mrs. Bahas

is required to establish that she worked for more than 750 hours

each year with respect to each of the three rental properties.

But, petitioners presented no documents or other evidence with

respect to the number of hours Mrs. Bahas worked managing the

three rental properties in question.    Indeed, the parties

stipulated that “petitioners spent less than 750 hours managing

the rental properties” in question.3

     Moreover, the hours Mrs. Bahas worked at Snyder & Snyder do

not qualify as hours worked in a real property trade or business

for purposes of section 469(c)(7)(B)(ii).    In this regard,

section 469(c)(7)(D)(ii) provides:



     3
      We note that Mrs. Bahas did not   establish that more than
one-half of the personal services she   performed in 2006 and 2007
were with respect to any of the three   rental properties. Thus,
she also failed to establish that she   met the requirement set
forth in sec. 469(c)(7)(B)(i).
                              - 9 -

     Personal services as an employee.--For purposes of
     subparagraph (B), personal services performed as an employee
     shall not be treated as performed in real property trades or
     businesses. The preceding sentence shall not apply if such
     employee is a 5-percent owner (as defined in section
     416(i)(1)(B)) in the employer.

     Relying on Internal Revenue Service (IRS) Publication 925,

Passive Activity and At-Risk Rules, published in 2006, Mrs. Bahas

argues that because she was entitled to receive 6 percent of

Snyder & Snyder’s net profits as compensation for her efforts as

a licensed real estate assistant, she owned more than a 5-percent

profits interest in Snyder & Snyder.    Mrs. Bahas claims her

position is supported by a passage on page 5 of IRS Publication

925 which states:

          Do not count personal services you performed as an
     employee in real property trades or businesses unless you
     were a 5% owner of your employer. You were a 5% owner if
     you owned (or are considered to have owned) more than 5% of
     your employer’s outstanding stock, outstanding voting stock,
     or capital or profits interest.

     Mrs. Bahas’s position is flawed.    Snyder & Snyder is an Ohio

corporation, owned entirely by Ms. Snyder.    A 5-percent owner for

purposes of section 469(c)(7)(D)(ii) is defined in section

416(i)(1)(B)(i), which provides:

          (I) if the employer is a corporation, any person who
     owns (or is considered as owning within the meaning of
     section 318) more than 5 percent of the outstanding stock of
     the corporation or stock possessing more than 5 percent of
     the total combined voting power of all stock of the
     corporation, or

          (II) if the employer is not a corporation, any person
     who owns more than 5 percent of the capital or profits
     interest in the employer.
                                - 10 -

Mrs. Bahas’s employment agreement does not provide for the

transfer of any stock to her.    Moreover, Mrs. Bahas candidly

admitted at trial that her right to 6 percent of the net profits

of Snyder & Snyder would terminate should her employment with

Snyder & Snyder cease.   Thus, Mrs. Bahas’s employment agreement

with Snyder & Snyder only defined how Mrs. Bahas would be

compensated for services rendered; i.e., her compensation would

be based, in part, on the profits of the company.    Therefore, we

conclude that Mrs. Bahas did not meet the 5-percent ownership

requirement of section 469(c)(7)(D)(ii).

     To summarize, Mrs. Bahas did not qualify for the exception

to the passive activity loss rules for taxpayers in a real

property business as provided in section 469(c)(7).    Hence,

petitioners are not entitled to the disallowed passive activity

deductions during the years at issue.

     To reflect the foregoing and the parties’ concessions,


                                           Decision will be entered

                                     for respondent with respect to

                                     the deficiencies in income

                                     taxes for 2006 and 2007, and

                                     for petitioners with respect

                                     to the section 6662(a) penalty

                                     for 2006.
