                        T.C. Summary Opinion 2014-103



                        UNITED STATES TAX COURT



      HOWARD C. CANTOR AND PATRICIA M. ALLEN, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20858-11S.                       Filed November 6, 2014.



      Darren Marie Larsen, for petitioners.

      Steven Roth, for respondent.



                             SUMMARY OPINION


      CARLUZZO, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the
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petition was filed.1 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.

      In a notice of deficiency dated June 22, 2011 (notice), respondent

determined deficiencies of $2,156 and $10,278 in petitioners’ 2007 and 2008

Federal income tax, respectively, and imposed a $987.75 section 6651(a)(1)

addition to tax for 2008. After concessions, the issue for decision is whether

petitioners are entitled to deductions for losses from their rental real estate activity

for either year in issue. The resolution of the issue depends upon whether Howard

C. Cantor (petitioner) is a taxpayer to whom section 469(c)(7)(B) applies for either

of those years.

                                     Background

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

petition was filed, petitioners resided in California.

      At all times relevant, petitioner was the owner of ABS Glass, a sole

proprietorship organized by him in 1991. At first, ABS Glass was in the business

of providing automobile parts. Later, the business focused on automobile

      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for the relevant period. Rule references are to
the Tax Court Rules of Practice and Procedure.
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windshield repairs and replacements. Starting in or around 1995, in addition to its

auto glass business, ABS Glass offered services more specifically described below

in connection with residential2 buildings.

      On May 4, 2001, the State of California issued a “C17-Glazing” contractor’s

license to ABS Glass. The license remained in effect for the years in issue.

According to the Cal. Code Regs. tit. 16, sec. 832.17 (2006): “[A] glazing

contractor selects, cuts, assembles and/or installs all makes and kinds of glass,

glass work, mirrored glass, and glass substitute materials for glazing; executes the

fabrication and glazing of frames, panels, sashes and doors; and/or installs these

items in any structure.”

      During the years in issue and through ABS Glass, petitioner provided

glazing services involving: (1) repairs and/or installation of automobile

windshields and windows and (2) repairs and/or installation of glass and glass

products in buildings. As described by petitioner, at some point during its history

ABS Glass was divided into two working divisions: (1) an “automotive” division

and (2) a “residential” division. During the years in issue the business premises of

ABS Glass, a 1,500-square-foot facility in Santa Barbara, California, was divided

      2
        Following petitioner’s lead, we use the term “residential” for convenience.
The record suggests that the activities related to “residential” properties might
relate to commercial properties as well.
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into at least three sections--one dedicated to general office/management functions,

one dedicated to the automotive division, and one dedicated to the residential

division.

      During the years in issue petitioner worked approximately 45 to 50 hours

per week at ABS Glass. His role there was much as is expected from a sole

proprietor. He managed and actively participated in all aspects of the business.

He did whatever needed to be done in order to ensure the success of the business,

including, as described by petitioner, cleaning the business premises when

necessary. Petitioner was more actively involved with the residential division of

ABS Glass than he was with the automotive division.

      The residential division offered various services, including the repair and

installation of glass for: (1) shower and bathtub enclosures; (2) windows; (3)

shelving; (4) table tops; (5) mirrors; and (6) cabinets. In connection with these

activities, petitioner: (1) received calls from customers and potential customers;

(2) generated job-cost estimates after on-site visits; (3) negotiated contracts; (3)

ordered materials and supplies; (4) fabricated glass products, such as table tops

and mirrors; (5) installed glass products such as windows, doors, mirrors and

shower and bathtub enclosures; (6) billed customers; and if necessary; (7) acted as

bill collector with respect to outstanding debts from customers.
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      Petitioner did not maintain any form of contemporaneous log in which he

recorded the time spent in connection with either the automotive division or the

residential division of ABS Glass. He obviously spent more than 750 hours per

year during each year in issue providing services in connection with the residential

division of ABS glass, but the record does not allow for an allocation of time spent

on the various activities listed in the preceding paragraph.

      Also during 2007 and 2008 petitioners owned four rental properties, two as

the members of Alcan Development LLC (Alcan), and two in their individual

capacities (collectively, petitioners’ rental real estate activity).

      Petitioners’ 2007 and 2008 joint Federal income tax returns were prepared

by a certified public accountant. As relevant, each return includes a Schedule C,

Profit or Loss From Business, relating to ABS Glass, and a Schedule E,

Supplemental Income and Loss, showing rental real estate income and expense

deductions attributable to the four rental properties.

      The Schedules C for ABS Glass included with the 2007 and 2008 returns

show $694,504 and $701,127 of gross receipts, respectively. Petitioners entered

the North American Industry Classification System (NAICS) code “811120” in

box B on the 2007 and 2008 Schedules C. According to the NAICS, a standard
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used by Federal statistical agencies in classifying businesses, the code entered on

the Schedules C relates to “Automotive Body, Paint, Interior, and Glass Repair”.

      The 2007 Schedule E reported a total rental real estate loss of $16,020; the

2008 Schedule E reported total rental real estate income of $6,223.

      Alcan’s Forms 1065, U.S. Return of Partnership Income, for 2007 and 2008

show net rental real estate losses of $43,503 and $47,283, respectively. The

Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc., attached to

the Forms 1065, allocate the losses to petitioners.

      The rental real estate losses reported on the 2007 Schedule E and the 2007

and 2008 Schedules K-1 are taken into account in the adjusted gross income

reported on petitioners’ 2007 and 2008 returns. The deductions attributable to

these losses are disallowed in the notice. Other adjustments made in the notice

have been resolved by the parties and will not be discussed.

                                     Discussion

      As we have observed in countless opinions, deductions are a matter of

legislative grace, and the taxpayer bears the burden of proof to establish

entitlement to any claimed deduction.3 Rule 142(a); INDOPCO, Inc. v.


      3
      Petitioners do not claim that the provisions of sec. 7491(a) are applicable,
and we proceed as though they are not.
                                          -7-

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Commissioner,

292 U.S. 435, 440 (1934). This burden requires the taxpayer to substantiate

deductions claimed by keeping and producing adequate records that enable the

Commissioner to determine the taxpayer’s correct tax liability. Sec. 6001;

Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d

821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).

A taxpayer claiming a deduction on a Federal income tax return must demonstrate

that the deduction is allowable pursuant to some statutory provision and must

further substantiate that the expense to which the deduction relates has been paid

or incurred. See sec. 6001; Hradesky v. Commissioner, 65 T.C. at 89-90; sec.

1.6001-1(a), Income Tax Regs.

      According to respondent, the rental real estate loss incurred for each year is

deductible only as allowable under section 469--a point petitioners do not dispute.

In general, that section precludes a taxpayer from currently deducting a loss from a

“passive activity”, a term that is defined to include any rental activity regardless of

the taxpayer’s level of participation. Sec. 469(a), (c)(1), (2), (4).

      There is an exception to this general rule for an individual described in

section 469(c)(7) and sometimes referred to as a “real estate professional”. Under

section 469(c)(7)(B) a taxpayer is a real estate professional for a taxable year if:
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(1) 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 (2) 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.4

      A real property trade or business means any real property development,

redevelopment, construction, reconstruction, acquisition, conversion, rental,

operation, management, leasing, or brokerage trade or business. Sec.

469(c)(7)(C). The determination of whether a taxpayer’s activities constitute a

real property trade or business “is based on all of the relevant facts and

circumstances.” Sec. 1.469-9(d)(1), Income Tax Regs. 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. Sec.

469(c)(7)(B).

      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). The

disagreement between the parties focuses on whether petitioner is a real estate

      4
        Respondent concedes that petitioners materially participated in their rental
real estate activity within the meaning of sec. 1.469-5T(a)(2), Temporary Income
Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985), for both years in issue.
                                          -9-

professional, that is, whether he is a taxpayer to whom section 469(c)(7)(B)

applies.5 According to petitioners, he is; according to respondent, he is not.

      We first consider whether ABS Glass, or any of the services it provided,

constituted a real property trade or business as contemplated by section

469(c)(7)(C). Obviously, the services performed by petitioner in connection with

the automotive division of ABS Glass are not services petitioner performed in a

real property trade or business. According to petitioners, the services petitioners

provided in connection with the residential division of ABS Glass are

“construction” or “reconstruction” activities that qualify the residential division of

ABS Glass as a real property trade or business under section 469(c)(7)(C) for both

years in issue. As petitioners view the matter, the time petitioner spent performing

services in connection with the residential division of ABS Glass qualifies him as

a real estate professional as described in section 469(c)(7)(B). Petitioners’

position assumes that all of the services petitioner performed for the residential

division of ABS Glass constitute “construction” or “reconstruction” activities, but

we are not so sure that they do.

      The words “construction” and “reconstruction” are not defined in section

469, the regulations promulgated thereunder, caselaw addressing that section, or

      5
          Mrs. Allen does not claim to be a taxpayer so described.
                                        -10-

the statute’s legislative history. Consequently, the words are construed consistent

with their ordinary and common meanings. Texaco Inc. & Subs. v. Commissioner,

101 T.C. 571, 575 (1993), aff’d, 98 F.3d 825 (5th Cir. 1996); see Commissioner v.

Brown, 380 U.S. 563, 570-571 (1965); Crane v. Commissioner, 331 U.S. 1, 6-7

(1947); Rome I, Ltd. v. Commissioner, 96 T.C. 697, 704 (1991); Union Pac. Corp.

v. Commissioner, 91 T.C. 32, 38-40 (1988); First Sav. & Loan Ass’n v.

Commissioner, 40 T.C. 474, 482 (1963).

      Webster’s II New Riverside University Dictionary 303 (1984) defines the

term “construction” as “[t]he act or process of constructing” and defines the term

“constructing” as “[t]o put together by assembling parts”. Webster’s II New

Riverside University Dictionary 983 defines the term “reconstruction” as “[t]he act

or result of reconstructing” and defines the term “reconstructing” as “[t]o construct

again.” Nothing in the dictionary definitions limits the terms to real property

construction or reconstruction, but the statute expressly imposes such a limitation.

      Keeping that limitation in mind, we assume without finding that installing

original or replacement windows in newly built or existing buildings constitutes

“construction” or “reconstruction” within the meaning of section 469(c)(7). On

the other hand, we find that cutting and installing mirrors and table tops, cutting
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and installing shower and bath glass enclosures, and replacing window panes do

not.

       Section 469(c)(7)(B) requires that we compare the time petitioner spent in

real property trades or businesses against the time he spent in other trades or

businesses during each year in issue. Petitioner explained the services he provided

as the sole proprietor of ABS Glass in generalized terms, and his explanation

shows that he performed services in real property trades or businesses as well as

other types of trades or businesses. He did not keep a contemporaneous log

showing how much of his time was spent in any particular activity, and we cannot

otherwise make that determination from his testimony or any of the other evidence

admitted in this case.

       Because petitioner provided services in both real property trades or

businesses and other trades or businesses during the years in issue, and because

the evidence does not allow for a finding that he spent more time in the real

property trades or businesses than he did in the other trades or businesses during

either year in issue, he is not an individual described in section 469(c)(7) for either

of those years. It follows that the real estate loss deductions here in dispute are

subject to the limitations imposed in section 469. Respondent’s determinations in

that regard are sustained.
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To reflect the foregoing and the parties’ concessions,


                                        Decision will be entered

                                under Rule 155.
