                        T.C. Memo. 1996-554



                      UNITED STATES TAX COURT



         BARRY H. AND MARILYN S. SCHEINER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18570-94.               Filed December 23, 1996.



     Herman B. Rosenthal, for petitioners.

     Donna M. Young, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION



     PANUTHOS, Chief Special Trial Judge:     This case was heard

pursuant to the provisions of section 7443A(b)(3) and Rules 180,

181, and 182.1   Respondent determined deficiencies in


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

petitioners' Federal income taxes in the amounts of $4,661 and

$3,299 for the taxable years 1991 and 1992, respectively.         The

issue remaining for decision is whether the losses petitioners

claimed are passive activity losses within the meaning of section

469.       More specifically, we must decide whether petitioners

materially participated in the rental activity at Wisp

condominium hotel.

                             FINDINGS OF FACT

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

the time of filing the petition herein petitioners resided at

Rockville, Maryland.

       During the years at issue petitioner Barry H. Scheiner

worked as a physicist for the U.S. Department of the Army in

Adelphi, Maryland.       Petitioner Marilyn S. Scheiner (hereinafter

sometimes referred to as petitioner) worked as a college

professor at Montgomery College teaching accounting and business

subjects.       Petitioner was also a partner in the accounting

partnership of Scheiner & Halpern.         The partnership consisted of

two partners, both of whom maintained offices in their respective

homes.       While the amount of time spent by petitioner and her

partner on partnership activities is not clear,2 the services

were performed primarily during the tax return preparation

season--January through mid-April.



       2
        Petitioner reported nonpassive income attributable to
Scheiner & Halpern on Schedules K-1 in the amounts of $11,636 in
1991, and $11,788 in 1992.
                                - 3 -

     On September 8, 1987, petitioners entered into a contract to

purchase a condominium unit (unit No. 390) in the Wisp resort

located in Garrett County, McHenry, Maryland.    The purchase price

was $88,900.    The purchase and sale of the condominium unit took

place in February 1988.

     The Wisp condominium hotel consisted of two buildings with a

total of 168 units.3    The larger building contained 100 units,

and the smaller building contained 68 units.    Each owner of a

condominium unit at Wisp is a member of the council of unit

owners.    The council of unit owners elects a board of directors.

     Each unit owner could elect to dedicate his or her unit to a

hotel rental program.     Under the hotel rental program, rental

receipts for all units in the program, less management expenses,

are divided proportionally on a monthly basis among the

participating units.    Thus, a unit owner participating in the

program would not necessarily be concerned about rental of a

particular unit since the income and expenses were pooled.    The

units were rented on a rotational basis to equalize wear and

tear.    A unit owner could use his or her own unit when it was not

rented.

     By agreement dated February 5, 1988, petitioners elected to

participate in the hotel rental program.    During the years in

issue, all unit owners participated in the hotel rental program.




     3
          One of the units was used as a beauty parlor.
                                 - 4 -

The average rental period of a unit during the years in issue was

3 to 4 days.

     On December 30, 1987, the council of unit owners entered

into a contract with MHM, Inc., a professional hotel management

corporation.   MHM, Inc., was the manager of the hotel rental

program through 1991.   During 1992, Richfield Hotel Management,

Inc. (Richfield), continued the management and marketing of units

in the hotel rental program.

     Petitioner became a member of the board of directors in

November 1990 and was elected vice president of the board in

1991.   During the years in issue, the board of directors was

required to deal with a number of serious issues with respect to

the condominium hotel complex.    While the board was required to

consider issues and establish policies, it was generally the

management company that put the policies into effect.    Under the

management contract, the council appointed MHM, Inc., as the

"general operating manager" of the condominium hotel.    Thus, the

management company hired staff who operated the hotel, conducted

marketing and sales activities, handled payroll and accounting

services, and ensured that maintenance and repairs were

completed.

     Board meetings were held monthly at Wisp, generally starting

at 11:30 a.m. and ending about 4 p.m.    Each month, a lengthy

package of written material (approximately 50 pages) was sent to

each board member for review.    Because of petitioner's background

in business and accounting matters, she was asked to review the
                                   - 5 -

records of the condominium association to be certain that

accounting principles were properly applied.

       Petitioner attended eight board of directors meetings in

1991 and six in 1992.4      Petitioner also attended the 1991 and

1992 annual meetings of the council of unit owners in her

capacity as a board member.      Because petitioner was the only

board member who resided in Montgomery County, Maryland, unit

owners living nearby often contacted petitioner in regard to

various matters concerning Wisp.      In 1991, petitioner spent at

least 100 hours, but not more than 148 hours, on board-related

matters.      In 1992, petitioner spent at least 90 hours, but not

more than 123 hours, on board-related matters.

       On Schedules C of their 1991 and 1992 Federal income tax

returns, petitioners claimed net losses in the amounts of $12,723

and $9,765, respectively, from the condominium hotel activity.5

In her notice of deficiency, respondent determined that the

losses were passive activity losses within the meaning of section

469.       Therefore, the losses were allowed only to the extent of

passive income.




       4
       In his capacity as a unit owner, petitioner Barry H.
Scheiner attended three such meetings in 1991 and two in 1992.
       5
        On the 1992 return, separate Schedules C were filed by
each petitioner reporting one-half the total loss.
                               - 6 -

                              OPINION

     Petitioners bear the burden of proving that respondent's

determination is erroneous.   Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933).

     Section 162 permits deductions for all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   Section 212 permits deductions

for all the ordinary and necessary expenses paid or incurred

during the taxable year for the production of income.   Section

469, however, limits the deductions for losses from a "passive

activity".   Chapin v. Commissioner, T.C. Memo. 1996-56.    In

Mordkin v. Commissioner, T.C. Memo. 1996-187 (a case involving an

owner of a condominium at Snowmass Village, Colorado), we

described the operation of section 469 as follows:

     the passive activity loss for the taxable year is
     generally the amount, if any, by which the passive
     activity deductions for the taxable year exceed the
     passive activity gross income for such year. Sec.
     469(d)(1); sec. 1.469-2T(b)(1), Temporary Income Tax
     Regs., 53 Fed. Reg. 5711 (Feb. 25, 1988).

          As pertinent here, section 469(c) defines the term
     "passive activity" to include: (1) Any activity which
     involves the conduct of any trade or business and in
     which the taxpayer does not materially participate,
     sec. 469(c)(1), and (2) any rental activity without
     regard to whether or not the taxpayer materially
     participates in the activity, sec. 469(c)(2), (4).

          For purposes of section 469(c)(1), the term "trade
     or business" is defined in section 469(c)(6) to include
     any activity in connection with a trade or business or
     any activity with respect to which expenses are
     allowable as a deduction under section 212.

          For purposes of section 469(c)(2), the term
     "rental activity" is defined in section 469(j)(8) as
                              - 7 -

     any activity where payments are principally for the use
     of tangible property. See also sec. 1.469-1T(e)(3)(i),
     Temporary Income Tax Regs., 53 Fed. Reg. 5702 (Feb. 25,
     1988). However, an activity involving the use of
     tangible property is not a rental activity for a
     taxable year, inter alia, if for such taxable year the
     average period of customer use for such property is
     seven days or less. Sec. 1.469-1T(e)(3)(i) and
     (ii)(A), Temporary Income Tax Regs., supra.

     In this case, the parties agree that the average period of

customer use of petitioners' condominium unit at Wisp was less

than 7 days during each of the years at issue.   The parties thus

agree that petitioners' condominium hotel activity is not a

rental activity as defined in section 469(j)(8) and the

regulations thereunder and, thus, is not considered a passive

activity under section 469(c)(2).   Nevertheless, petitioners'

activity at Wisp will constitute a passive activity under section

469(c)(1) unless they establish that they materially participated

in the activity during the taxable years in issue.   In Mordkin v.

Commissioner, supra, we discussed the Code and regulations

relating to material participation as follows:

          Section 469(h)(1) provides that generally an
     individual shall be treated as materially participating
     in an activity only if he or she is involved in the
     operations of the activity on a basis that is regular,
     continuous, and substantial. Congress expressly
     authorized the Secretary of the Treasury (Secretary) to
     prescribe such regulations as may be necessary or
     appropriate to carry out the provisions of section 469,
     including regulations that specify what constitutes
     material participation. Sec. 469(1)(i).

          Both temporary and final regulations relating to
     the meaning of the terms "participation" and "material
     participation" have been promulgated under section 469.
     With respect to the term "participation", final
     regulations issued under section 469 provide that
     generally "any work done by an individual (without
                         - 8 -

regard to the capacity in which the individual does the
work) in connection with an activity in which the
individual owns an interest at the time the work is
done shall be treated for purposes of this section as
participation of the individual in the activity." Sec.
1.469-5(f)(1), Income Tax Regs. Temporary regulations
issued under section 469 provide certain exceptions to
that definition of participation. As pertinent here,
section 1.469-5T(f)(2)(ii)(A), Temporary Income Tax
Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988), provides that
work done by an individual in such individual's
capacity as an investor in an activity shall not be
treated as participation by the individual in the
activity unless the individual is involved in the day-
to-day management or operations of the activity. For
this purpose, work done by an individual in such
individual's capacity as an investor in an activity
includes:

          (1) Studying and reviewing financial
     statements or reports on operations of the
     activity;

          (2) Preparing or compiling summaries or
     analyses of the finances or operations of the
     activity for the individual's own use; and

          (3) Monitoring the finances or
     operations of the activity in a non-
     managerial capacity. [Sec. 1.469-
     5T(f)(2)(ii)(B), Temporary Income Tax Regs.,
     supra.]

     Temporary regulations relating to the meaning of
the term "material participation" in section 469(h)(1)
provide that, in general,

     an individual shall be treated, for purposes
     of section 469 and the regulations
     thereunder, as materially participating in an
     activity for the taxable year if and only
     if--

           (1) The individual participates in the
     activity for more than 500 hours during such
     year;

          (2) The individual's participation in
     the activity for the taxable year constitutes
     substantially all of the participation in
     such activity of all individuals (including
                              - 9 -

          individuals who are not owners of interests
          in the activity) for such year;

               (3) The individual participates in the
          activity for more than 100 hours during the
          taxable year, and such individual's
          participation in the activity for the taxable
          year is not less than the participation in
          the activity of any other individual
          (including individuals who are not owners of
          interests in the activity) for such year;

               (4) The activity is a significant
          participation activity (within the meaning of
          paragraph (c) of this section) for the
          taxable year, and the individual's aggregate
          participation in all significant
          participation activities during such year
          exceeds 500 hours;

               (5) The individual materially
          participated in the activity (determined
          without regard to this paragraph (a)(5)) for
          any five taxable years (whether or not
          consecutive) during the ten taxable years
          that immediately precede the taxable year;

               (6) The activity is a personal service
          activity (within the meaning of paragraph (d)
          of this section), and the individual
          materially participated in the activity for
          any three taxable years (whether or not
          consecutive) preceding the taxable year; or

               (7) Based on all of the facts and
          circumstances (taking into account the rules
          in paragraph (b) of this section), the
          individual participates in the activity on a
          regular, continuous, and substantial basis
          during such year. [Sec. 1.469-5T(a),
          Temporary Income Tax Regs., 53 Fed. Reg.
          5725-5726 (Feb. 25, 1988).]

     Petitioner argues that she materially participated in the

Wisp condominium hotel alternatively under the provisions of

section 1.469-5T(a)(3), (4) or (7), Temporary Income Tax Regs.,
                              - 10 -

53 Fed. Reg. 5725-5726 (Feb. 25, 1988).6   We will discuss each of

petitioner's arguments separately.

Section 1.469-5T(a)(3), Temporary Income Tax Regs.

     With respect to section 1.469-5T(a)(3), Temporary Income Tax

Regs., supra, petitioner argues that during each of the years in

issue, she participated in the condominium hotel activity for

more than 100 hours, and that no single individual devoted more

time to petitioners' unit than petitioner.   Respondent contends

that petitioner does not meet the test of section 1.469-5T(a)(3),

Temporary Income Tax Regs., supra, since petitioner has not

established the hours spent in the activity.    Respondent further

argues that, even if petitioner did establish that she spent more

than 100 hours in the activity, the time spent was in the

capacity of an investor and not in the day-to-day operation of

the activity.   See sec. 1.469-5T(f)(2)(ii)(B), Temporary Income

Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).   In addition,

respondent argues that other individuals (the paid hotel

management staff) spent more time in the activity than

petitioner.




     6
        Although sec. 1.469-5T(f)(3), Temporary Income Tax Regs.,
53 Fed. Reg. 5727 (Feb. 25, 1988), provides that the
participation of spouses may be combined for the purposes of
determining material participation, petitioners do not argue that
petitioner Barry Scheiner's attendance at board meetings in the
capacity as a unit owner should be considered for the purposes of
determining whether petitioners materially participated in the
condominium hotel activity. See supra note 4. We make no
findings in this regard and limit our discussion to petitioner
Marilyn Scheiner's activities. See sec. 469(c)(1).
                              - 11 -

     A preliminary question we must decide is whether the work

done by petitioner in her capacity as a board member and officer

constitutes participation in the Wisp condominium hotel activity

or, alternatively, constitutes investor participation within the

meaning of section 1.469-5T(f)(2)(ii)(B), Temporary Income Tax

Regs., supra.   In Mordkin v. Commissioner, T.C. Memo. 1996-187,

we held that the work done by a taxpayer on the board of

directors dealing with a wide range of issues relating to the

operation of a condominium hotel was not investor participation

within the meaning of section 1.469-5T(f)(2)(ii)(B), Temporary

Income Tax Regs., supra.   Petitioner's activities as an officer

and member of the board of directors are similar to the

activities performed by the taxpayer in Mordkin.   We similarly

conclude that petitioner's activities as a board member of Wisp

do not constitute investor participation.

     We have found that petitioner spent at least 100 hours, but

not more than 148 hours, on board activities in 1991, and at

least 90 hours, but not more than 123 hours, in 1992.   Even if

petitioner has exceeded the 100-hour threshold, petitioner's

activities will not constitute material participation under

section 1.469-5T(a)(3), Temporary Income Tax Regs., supra, unless

she establishes that no other individual spent more time in

connection with the condominium rental activity.   In this regard,

in measuring the time spent by any particular employee at Wisp,

petitioner argues that such an employee's time would need to be

divided by 167 (the number of units participating in the rental
                               - 12 -

program).   Thus, according to petitioner, no one full-time

employee at Wisp could have participated more than petitioner.

To this effect, petitioner allocates all of her time spent on

board matters solely to her condominium.     In contrast, petitioner

ratably allocates the time spent by employees running the day-to-

day operations of Wisp to all 167 units participating in the

rental program.

     Petitioner suggests, and we accept, that all of her time

spent on board matters constitutes "participation" in the

condominium rental activity, without regard to any specific

connection of the board activities to petitioner's particular

unit.   Petitioner also argues that the activities of Wisp

employees constitute "participation" for the purposes of section

1.469-5T(a)(3), Temporary Income Tax Regs., supra, only to the

extent that their services are directed towards petitioner's

specific unit.    In this regard, there is nothing in the record

from which to calculate the precise amount of time spent by

employees in performing day-to-day services related solely to the

rental of petitioner's condominium.     Likewise, there is no

evidence regarding the extent to which petitioner's activities as

a board member are specifically related to her unit.     Given that

both petitioner and full-time staff, in their respective

capacities, served all Wisp units, we believe it reasonable to

assume that the portion of petitioner's board activities related

to the rental of her unit is commensurate with the portion of the

staff's activities related to the rental of petitioner's unit.
                              - 13 -

Cf. Mordkin v. Commissioner, supra.    Consequently, we assume that

all work done by full-time staff constitutes "participation" in

connection with the rental of petitioner's unit.     Id.   Because

the participation of full-time staff exceeded petitioner's

participation during the years in issue, petitioner's activities

do not constitute material participation under section 1.469-

5T(a)(3), Temporary Income Tax Regs., supra.7

Section 1.469-5T(a)(7), Temporary Income Tax Regs.

     Petitioner argues that based on all the facts and

circumstances, she should be deemed to have materially

participated in the condominium hotel activity.    Sec. 1.469-

5T(a)(7), Temporary Income Tax Regs., supra.    The facts and

circumstances test provided in section 1.469-5T(a)(7), Temporary

Income Tax Regs., supra, is subject to certain limitations.      A

taxpayer must participate in the activity for more than 100

hours.   Sec. 1.469-5T(b)(2)(iii), Temporary Income Tax Regs., 53

Fed. Reg. 5726   (Feb. 25, 1988).   Additionally, a taxpayer's

services performed in the management of an activity cannot be

considered for the purposes of establishing material

participation under section 1.469-5T(a)(7), Temporary Income Tax

Regs., supra, if other individuals performing management services

in connection with the activity were compensated for such

services.   Sec. 1.469-5T(b)(2)(ii)(A), Temporary Income Tax

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).    Therefore,



     7
         See also Serenbetz v. Commissioner, T.C. Memo. 1996-510.
                              - 14 -

petitioner's activities as a board member cannot be considered

for the purposes of this test if other individuals providing

management services are compensated.   Mordkin v. Commissioner,

supra.

     The record indicates that both MHM, Inc., and Richfield

employed individuals to manage the day-to-day operation of Wisp.

Consequently, respondent argues that section 1.469-

5T(b)(2)(ii)(A), Temporary Income Tax Regs., supra, precludes

petitioner's board activities from being considered participation

under section 1.469-5T(a)(7), Temporary Income Tax Regs., supra.

Were we to accept respondent's position, petitioner's activities

would not be considered material participation under section

1.469-5T(a)(7), Temporary Income Tax Regs., supra.

     Petitioner argues that the activities of onsite management

should not be considered "management services" for the purposes

of section 1.469-5T(a)(7) and (b)(2)(ii)(A), Temporary Income Tax

Regs., supra.   To support this position, petitioner cites Staff

of Joint Comm. on Taxation, General Explanation of the Tax Reform

Act of 1986, at 241 (J. Comm. Print 1987) (hereinafter the

General Explanation), which states:

          The application of the material participation
     standard to a condominium hotel that is not a rental
     activity for purposes of the passive loss rules may be
     illustrated as follows. Assume that an individual who
     is an investor in the hotel does not live nearby, has a
     principal business that is unrelated to operating the
     hotel, is inexperienced in the hotel business, and
     employs agents to perform various essential hotel
     functions. However, such individual's participation in
     the hotel business involves making frequent visits to
     the hotel in order to conduct onsite inspections, meet
                              - 15 -

     with onsite management, and otherwise participate in
     integral functions of the business. In addition, the
     individual on a regular basis uses his independent
     discretion to make business decisions such as the
     following: (1) regularly establishing room rental
     rates, (2) establishing and reviewing hiring and other
     personnel policies, including review of management
     personnel, (3) reviewing and approving periodic and
     annually audited financial reports, (4) participating
     in budget operating costs and establishing capital
     expenditures, (5) establishing the need for and level
     of financial reserves, (6) selecting the banking
     depository for rental proceeds and reserve funds, (7)
     participating in frequent meetings at the hotel to
     review operations and the business plan, and (8)
     assisting in offsite business promotion activities.
     * * *

          Under these circumstances, if the standard
     requiring regular, continuous, and substantial
     involvement is satisfied, then the taxpayer is treated
     as materially participating in the hotel activity. He
     is not so treated, however, in the absence of
     sufficient involvement. No safe harbor should be
     inferred from the preceding paragraph. * * * [Emphasis
     added.]

The above-quoted language summarizes colloquies between Senators

Packwood and Hatfield on the floor of the U.S. Senate.   See 132

Cong. Rec. 15032, 26685-26686 (1986) (colloquies between Senators

Packwood and Hatfield).   According to petitioner, the passage

indicates Congress' intent to provide owners of condominium hotel

units with the opportunity to hire onsite management without

triggering the application of passive loss restrictions.

Petitioner thus argues that respondent's interpretation of the

management-related limitations of section 1.469-5T(a)(7),

Temporary Income Tax Regs., supra, would preclude the hiring of

any onsite management, thereby ignoring congressional intent.

Petitioner contends that the only "management services" to be
                              - 16 -

considered for the purposes of section 1.469-5T(a)(7) and

(b)(2)(ii)(A), Temporary Income Tax Regs., supra, are those

within the prerogative of the owners; i.e., board activities.    As

no members of the Wisp board were compensated, petitioner argues

that her activities constitute material participation under

section 1.469-5T(a)(7), Temporary Income Tax Regs., supra.

     We do not agree with petitioner's position.   The General

Explanation passage cited by petitioner was not meant to be

construed as a safe harbor.   Rather, the language cited by

petitioner indicates that taxpayers may hire onsite management

while engaging in activities sufficient to constitute material

participation, but only "if the standard requiring regular,

continuous, and substantial involvement" is otherwise satisfied.8

     8
        Similarly, in Mordkin v. Commissioner, T.C. Memo. 1996-
187, the taxpayer cited the colloquy between Senators Packwood
and Hatfield in arguing that sec. 1.469-5T(a)(1), Temporary
Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), was invalid
because it "required" an individual to participate in an activity
for greater than 500 hours before being treated as having
materially participated in that activity. Specifically, the
taxpayer relied upon the colloquy to argue that the determination
of whether an individual materially participates in an activity
should be based solely upon the integral nature of the work
performed by the taxpayer, and not upon the quantity of work. We
rejected the taxpayer's argument, stating:

     The foregoing colloquy between Senator Hatfield and
     Senator Packwood makes it clear that services performed
     by a taxpayer that are deemed integral to the
     operations of a condominium hotel will constitute
     material participation by the taxpayer in those
     operations only if the taxpayer performs those services
     in such a way and "to such an extent" that it shows
     that the taxpayer's involvement in those operations is
     regular, continuous, and substantial. Contrary to [the
     taxpayer's] contention, that colloquy does not in any
                                                   (continued...)
                             - 17 -

In this regard, we note that respondent's interpretation of

section 1.469-5T(b)(2)(ii)(A), Temporary Income Tax Regs., supra,

does not preclude petitioner from establishing material

participation under any or all of six other tests.    Mordkin v.

Commissioner, T.C. Memo. 1996-187.    For example, an individual

may be treated as having materially participated in a condominium

rental activity by participating for more than 500 hours,

regardless of whether full-time onsite management was employed.

Sec. 1.469-5T(a)(1), Temporary Income Tax Regs., supra.

     With respect to management participation, the legislative

history of section 469 also notes:

     Participation in management cannot be relied upon
     unduly both because its genuineness and substantiality
     are difficult to verify, and because a general
     management role, absent more, may fall short of the
     level of involvement that the material participation
     standard is meant to require. [S. Rept. 99-313 at 713,
     734-735, 1986-3 C.B. (Vol. 3) at 734-735].

The management-related restrictions applicable to section 1.469-

5T(a)(7), Temporary Income Tax Regs., supra, reflect Congress'

concern that a taxpayer seeking to materially participate in an

activity through participation in management will hire expert

agents to manage the day-to-day operations of the activity while

the taxpayer performs merely a formal management role with




     8
      (...continued)
     way suggest that, in determining whether a taxpayer's
     participation in the operations of an activity is
     material, it is unreasonable to examine the amount and
extent of time spent by the taxpayer in those operations.
[Mordkin v. Commissioner, supra; citation omitted.]
                              - 18 -

limited involvement.9   Respondent's contention that the presence

of compensated onsite management should preclude petitioner's

board activities from consideration under section 1.469-5T(a)(7),

Temporary Income Tax Regs., supra, is consistent with this

concern.

     We find that the activities of compensated onsite management

should be considered "management services" for the purposes of

section 1.469-5T(a)(7) and (b)(2)(ii)(A), Temporary Income Tax

Regs., supra.   Therefore, we find that petitioner has failed to

establish material participation under section 1.469-5T(a)(7),

Temporary Income Tax Regs., supra.

Section 1.469-5T(a)(4), Temporary Income Tax Regs.

     Petitioner argues that her activities constitute material

participation under section 1.469-5T(a)(4), Temporary Income Tax

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), in that she

"significantly participated" in the condominium hotel activity

and that her aggregate participation in significant participation

activities during the year exceeded 500 hours.   In this regard,

petitioner combines her activity in the condominium hotel with

the activity in her accounting partnership.




     9
        As an example of an abuse which Congress sought to
address in enacting sec. 469, the Senate report describes a
situation whereby outside investors could own syndication rights
in a farming activity, operated principally under the direction
of a hired agent, which has been structured to assist otherwise
passive investors to demonstrate that they play a role in
managing the farming operations. S. Rept. 99-313 at 713, 734
n.20 (1986), 1986-3 C.B. (Vol. 3) 1, 713, 734 n.20.
                              - 19 -

     With respect to petitioner's argument that she qualifies

under section 1.469-5T(a)(4), Temporary Income Tax Regs., supra,

respondent contends that petitioner failed to raise this argument

in a timely fashion.   Respondent argues that because no discovery

was conducted with respect to petitioner's participation in her

accounting partnership, undue prejudice would result were we to

consider this issue.   Respondent also maintains that, even if the

Court considers petitioner's argument, petitioner has failed to

adequately substantiate the requisite hours in the condominium

hotel activity and in the accounting partnership activity.

     It is well settled that we will not consider issues raised

by parties when undue surprise and prejudice would result.

Seligman v. Commissioner, 84 T.C. 191, 198 (1985), affd. 796 F.2d

116 (5th Cir. 1986).   While petitioner's pre-trial memorandum

broadly argued that her activities constituted material

participation under section 469, petitioner introduced this

particular argument during closing arguments.   We note, however,

that the notice of deficiency characterizes petitioner's

condominium rental activities as "passive activities" under

section 469.   Moreover, respondent's pre-trial memorandum argues

that petitioner failed to meet each of the seven tests contained

in the regulations, including section 1.469-5T(a)(4), Temporary

Income Tax Regs., supra.   Petitioner reported her accounting

partnership activities on her returns, and respondent was well

aware that the only issue in this trial was whether petitioner's

activity constituted material participation in the ownership of
                              - 20 -

her unit at Wisp.   Based on all the circumstances herein, we will

consider petitioner's argument under section 1.469-5T(a)(4),

Temporary Income Tax Regs., supra.

     To establish material participation under section 1.469-

5T(a)(4), Temporary Income Tax Regs., supra, petitioner's

condominium rental activity must constitute a "significant

participation" activity under section 1.469-5T(c), Temporary

Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).

Furthermore, petitioner must participate in at least one other

significant participation activity, with the total participation

in all significant participation activities exceeding 500 hours.

A significant participation activity is one in which the taxpayer

participates for more than 100 hours, but which fails to

constitute material participation under one of the other six

tests.   Sec. 1.469-5T(c)(1)(ii) and (2), Temporary Income Tax

Regs., supra.   Thus, in order for an activity to be considered a

significant participation activity, the taxpayer (1) must have

more than 100 hours of participation; (2) must have less than 500

hours of participation, as participation in excess of 500 hours

would satisfy the test contained at section 1.469-5T(a)(1),

Temporary Income Tax Regs., supra; and (3) must not be the

individual with the most hours of participation in the activity,

as a person with the greatest amount of participation in the

activity, if in excess of 100 hours, satisfies the test at

section 1.469-5T(a)(3), Temporary Income Tax Regs., supra.
                                - 21 -

     Petitioner argues that her participation in Scheiner &

Halpern constitutes a significant participation activity.10

Petitioner's testimony with regard to the time spent working for

Scheiner & Halpern, however, is not corroborated by written

documentation.    The regulations specify that participation in an

activity may be established by any reasonable means.     While

contemporaneous records are not required, reasonable means may

include appointment books, calendars, or narrative summaries.

Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., supra.

          Given the self-serving nature of petitioner's testimony,

coupled with the lack of corroboration in the record, we do not

accept her naked assertion that she worked the requisite amount

of hours to qualify her accounting partnership activity as a

significant participation activity.      We are particularly troubled

with petitioner's ability to recall, without any records, the

number of hours of participation in her accounting partnership

which neatly places her over all of the hurdles necessary to

satisfy the requirements of section 1.469-5T(a)(4), Temporary

Income Tax Regs., supra.     The record indicates that in other

aspects of her activities, petitioner maintained thorough

documentation, as would be expected of someone in her profession.



     10
        Petitioner testified that she worked 426 hours for
Scheiner and Halpern in 1991 and 402 hours in 1992, while her
partner worked 469 hours in 1991 and 440 hours in 1992. Were we
to accept petitioner's testimony, her activity at Scheiner and
Halpern would constitute a significant participation activity
which, when added to the time spent at Wisp, might exceed 500
hours.
                                - 22 -

Yet, with respect to the accounting partnership activity, no

documentation of the hours worked was presented to respondent or

the Court.

     We are not bound to accept the unverified, undocumented

testimony of taxpayers.    Hradesky v. Commissioner, 65 T.C. 87, 90

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).     It is

well established that the failure of a party to introduce

evidence within his or her possession which, if true, would be

favorable, gives rise to the presumption that if produced, it

would be unfavorable.     Frierdich v. Commissioner, 925 F.2d 180,

185 (7th Cir. 1991), affg. T.C. Memo. 1989-393 (amending T.C.

Memo. 1989-103).   If the partnership records of Scheiner &

Halpern lent support for petitioner's contention, presumably they

would have been made a part of the record.    Petitioner has not

met her burden of proving that she met the requirements of

section 1.469-5T(a)(4), Temporary Income Tax Regs., supra.

Chapin v. Commissioner, T.C. Memo. 1996-56.

     Petitioner has failed to establish material participation

with respect to her condominium rental activities under section

469 and the accompanying regulations.    Therefore, we sustain

respondent's determination that the losses from such activities

were passive activity losses under section 469.

     To reflect the foregoing,

                                         Decision will be entered

                                         under Rule 155.
