                           T.C. Memo. 1996-187



                         UNITED STATES TAX COURT



        ARNOLD P. MORDKIN AND CINDY MORDKIN, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 14259-93.               Filed April 17, 1996.


       Patrick E. McGinnis, for petitioners.

       Janice D. Newell and Mary P. Kimmel, for respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION

       CHIECHI, Judge:    Respondent determined the following defi-

ciencies in, additions to, and accuracy-related penalties on

petitioners' Federal income tax:

                     Additions to Tax     Accuracy-Related Penalties
                         Section                    Section
Year    Deficiency      6651(a)(1)1                 6662(a)

1989     $10,628          $18,337                  $2,126
1990      11,010           19,348                     796

1
   All section references are to the Internal Revenue Code (Code)
in effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                                - 2 -


     The issues remaining for decision are:

     (1)    Is the loss at issue for each of the years 1989 and

1990 a passive activity loss within the meaning of section 469?

We hold that it is.

     (2)    Are petitioners liable for each of the years 1989 and

1990 for the addition to tax under section 6651(a)?    We hold that

they are.

     (3)    Are petitioners liable for each of the years 1989 and

1990 for the accuracy-related penalty under section 6662(a)?      We

hold that they are.

                          FINDINGS OF FACT

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

     Petitioners resided in Newport Beach, California, at the

time the petition was filed.    They filed joint Federal income tax

returns for the years 1989 and 1990.

     Petitioner Arnold P. Mordkin2 is an attorney who was ad-

mitted to practice law in California in 1963 and who specialized

during all relevant periods in personal injury and medical

malpractice matters.    During the years at issue, petitioner, who

resided in California, practiced law on a full-time basis as an

employee of Arnold P. Mordkin, Inc. (Mordkin, Inc.), a profes-

sional corporation located in California, and Mordkin, Inc. was a

stockholder of Bridgman, Mordkin, Gould & Shapiro, Inc., a

2
   References to petitioner in the singular are to petitioner
Arnold P. Mordkin.
                              - 3 -

professional corporation also located in California.   During

those years, petitioner's legal practice was his primary source

of income.

Crestwood Condominiums

     In March 1982 and October 1985, petitioner purchased unit

no. 2303 and unit no. 2301, respectively, at a condominium

development known as Crestwood Condominiums (Crestwood) that is

located in Snowmass Village, Colorado (Snowmass Village).    During

the years at issue, Crestwood had 141 condominium units that were

owned by various persons.

     During all relevant periods, Crestwood Condominium Associa-

tion, Inc. (Crestwood Association), a membership association

whose members consisted of all the Crestwood condominium owners,

was responsible for the operations at Crestwood.   During those

periods, Crestwood Association had a nine-member board of direc-

tors (board) that was elected by the members of that association

and that oversaw, and made policy regarding, its operations.

     During all relevant periods, Crestwood Association ran two

separate and distinct operations:   (1) Those operations affecting

all Crestwood condominium owners that involved providing services

to, and fulfilling the obligations of, those owners, including

maintaining and repairing Crestwood's common areas and building

structures and obtaining, as required, casualty, public liability

and property damage, workmen's compensation and employer's

liability insurance as well as other types of insurance that
                               - 4 -

Crestwood Association deemed appropriate with respect to the real

property, buildings, and other improvements at Crestwood (Crest-

wood Association owners' operations) and (2) those operations

affecting only those Crestwood condominium owners who desired to

rent their condominium units that involved marketing and managing

the rental of those units for short-term periods and providing

extensive hotel-type services to the patrons of such rental

operations, including on-site management, daily housekeeping

service, 24-hour switchboard service, full-service front desk,

grocery and liquor shopping service, dinner reservation service,

free laundry facilities, and transportation service (Crestwood

Association lodge operations).3

     During all relevant periods, each condominium unit at

Crestwood was entitled to one membership in Crestwood Associa-

tion.   Crestwood condominium unit owners were entitled to vote on

prescribed matters involving the affairs of Crestwood Associa-

tion, provided that there was always only one membership in

Crestwood Association per condominium unit.4

     Crestwood condominium unit owners were obligated to pay an

annual assessment to fund the payment of all estimated expenses

3
   Even though Crestwood Association lodge operations were not
separately incorporated, Crestwood Association ran those opera-
tions under the name "Crestwood Condominium Association, Inc.,
d.b.a. Crestwood Lodge, Inc."
4
   If there were two or more owners of a Crestwood condominium
unit, those owners held and shared the membership related to that
unit in the same proportionate interest and by the same type of
tenancy in which the title to that unit was held.
                               - 5 -

arising out of or connected with the maintenance and operation of

Crestwood's common areas, furnishing utility services to the

Crestwood condominium units, and other duly authorized functions

of Crestwood Association, including management expenses, taxes,

common lighting and heating, premiums for all insurance that

Crestwood Association was required or permitted to carry, water

and sewer charges, trash collection, repairs and maintenance,

wages for employees of Crestwood Association, and legal and

accounting fees.   In addition, Crestwood condominium unit owners

were obligated to pay special assessments imposed by Crestwood

Association for the cost of any construction or reconstruction,

unexpected repair or replacement of improvements at Crestwood,

and similar expenditures.

     During all relevant periods, each Crestwood condominium

owner desiring to participate in the Crestwood Association lodge

operations was required to enter into a management agreement

(management agreement) with Crestwood Condominium Association,

Inc., d.b.a. Crestwood Lodge, Inc. (manager).   During relevant

periods, petitioner entered into such an agreement with respect

to each of his condominium units.   Under the management agree-

ment, petitioner employed the manager as the exclusive managing

and rental agent to manage his condominium units.   Specifically,

the manager agreed to perform, inter alia, the following serv-

ices:   Hiring and supervising employees to handle the marketing

and rental of those units and all other services required of the
                               - 6 -

manager, promoting Crestwood as a desirable property available

for rental to those who desired lodging during vacation and

recreational stays in the Snowmass Village area, entering into

rental agreements on behalf of petitioner, collecting rent from

tenants, inspecting petitioner's condominium units, maintaining

and purchasing necessary equipment and supplies, providing

housekeeping and related services, and making necessary repairs

and alterations to those units.   In return, petitioner agreed to

pay the manager an operating charge to offset the cost of the

services provided by the manager and all actual costs and expens-

es incurred by the manager in providing such services.   The

operating charge was to be determined as follows:

     The proportion which the OWNER shall pay for each
     billing period shall be a uniform percentage (identical
     for all properties managed by the MANAGER) of gross
     rental receipts, which percentage shall be determined
     by the MANAGER each year by analyzing the percentage of
     expenses for all properties managed by the MANAGER, as
     reflected in the annual audit. At the end of each
     fiscal year the MANAGER will adjust the OWNER'S total
     operating charge for the year to the percentage re-
     flected in the annual audit as the actual percentage of
     expenses. If the actual expenses exceed the operating
     charge for the year, the OWNER agrees to pay the ex-
     cess; if the actual expenses are less than the operat-
     ing charge, the MANAGER agrees to refund the differ-
     ence.

     During the years at issue, petitioner rented both of his

condominium units.   The average period of customer use for peti-

tioner's condominium units was less than seven days.

Participation by Individuals Other Than Petitioner
                                 - 7 -

in the Operations of Crestwood Association

      During the years at issue, Crestwood Association maintained

a full-time nonmanagement staff of 40 to 85 employees (Crestwood

staff) and a full-time management staff of six to eight employees

(Crestwood management staff).5    The Crestwood staff and the

Crestwood management staff ran the daily Crestwood Association

owners' operations and lodge operations.    With respect to the

daily Crestwood Association lodge operations, in accordance with

the terms of the management agreements between certain Crestwood

condominium owners, including petitioner, and Crestwood Associa-

tion, the Crestwood staff and the Crestwood management staff

managed and operated the rental of individual condominiums by

performing the tasks and providing the services required of the

manager in that agreement.

      During the years at issue, Larry Dempsey (Mr. Dempsey), vice

president, chief operating officer, and general manager of

Crestwood Association, was primarily responsible for the day-to-

day management of Crestwood Association owners' operations and

lodge operations.   During those years, Mr. Dempsey worked between

40 to 80 hours a week and was compensated for his services.     His

duties included management of personnel;6 communication with

5
   The Crestwood management staff included a general manager,
assistant general manager, maintenance manager, reservations
manager, rooms division manager, housekeeping manager, and
controller.
6
    Mr. Dempsey dealt with day-to-day personnel matters, including
                                                    (continued...)
                               - 8 -

Crestwood condominium owners; execution of documents, contracts,

and checks; implementation of the respective annual budgets for

the Crestwood Association owners' operations and lodge opera-

tions; preparation of items to be discussed at board meetings;

and preparation of monthly reports about the daily operations of

Crestwood Association to transmit to board members.   In addition

to his day-to-day responsibilities, Mr. Dempsey undertook special

projects on behalf of Crestwood Association, such as communica-

tions with the county assessor to ensure proper valuation of

condominium units for property tax purposes.   Mr. Dempsey's

decision-making authority with respect to the operations of

Crestwood Association was guided by policies and procedures that

were established either by the board or by controlling documents

such as the bylaws of Crestwood Association.

     During the years at issue, Gretchen Gahm (Ms. Gahm), assis-

tant general manager of Crestwood Association, assisted Mr.

Dempsey with the day-to-day management of Crestwood Association

owners' operations and lodge operations.   During those years, Ms.

Gahm worked between 40 to 70 hours a week and was compensated for

her services.   In addition to her day-to-day responsibilities,

Ms. Gahm was involved in quality assurance activities of Crest-

wood Association.   The purpose of quality assurance was to im-

6
 (...continued)
those relating to the management staff. He was required to
consult with the board in dealing with matters relating to the
hiring and firing of individuals in key personnel positions and
in creating new positions.
                               - 9 -

prove all aspects of the daily operations of Crestwood Associa-

tion.   Ms. Gahm sought to achieve those objectives by interview-

ing the Crestwood management staff and evaluating the policies

and procedures of the Crestwood Association owners' operations

and lodge operations.   Although board members, including peti-

tioner, were involved in activities relating to quality assur-

ance, Ms. Gahm directed the process and was primarily responsible

for its implementation.

     During each of the years at issue, Mr. Dempsey and Ms. Gahm

attended the board meetings that were held at Crestwood in the

months of January, April, and September.   During those meetings,

Mr. Dempsey and Ms. Gahm advised the board members of the finan-

cial results of the operations of Crestwood Association and of

significant issues relating to those operations.7   In addition,

they made recommendations on key issues such as the selection of

contractors for the installation of the fire protection system at

Crestwood and the assumption of a lease by Crestwood Association

on nearby residential property in order to provide housing for

its employees.



7
   At the board meetings that took place during the years at
issue, Mr. Dempsey and Ms. Gahm apprised the board of important
issues relating to the operations of Crestwood Association,
including the installation of a fire protection system at Crest-
wood, the proposal by the town of Snowmass Village for terminat-
ing its ownership of Crestwood parking lots and roads, the
occurrence of fires on the Crestwood property, and employee
housing.
                              - 10 -

     During the years at issue, the Crestwood management staff

influenced the operations of Crestwood Association by recommend-

ing proper rental rates based on surveys and studies, proposing

capital improvements and providing cost estimates for such im-

provements, suggesting adoption of particular employee health

insurance plans, preparing budget drafts, and dealing with gov-

ernmental entities.

Petitioner's Involvement in the
Operations of Crestwood Association

     During 1989 and 1990, petitioner was president of Crestwood

Association, chairperson of the board of Crestwood Association,

and chairperson of the executive committee of that board (exec-

utive committee) that was vested with the authority of the board

and was to act in the absence of a meeting of the board.   On

April 7, 1990, petitioner was appointed chairperson of the man-

agement compensation committee of the board (management compensa-

tion committee).   Petitioner received no compensation during the

years at issue for serving in any of those positions.

     During the years at issue, as chairperson of the executive

committee, petitioner considered various issues relating to the

operations of Crestwood Association.   During 1989, as chairperson

of the executive committee, petitioner considered issues relating

to the installation of a fire sprinkler system at Crestwood.

Although during the January 1989 board meeting the board had

given the executive committee the authority to enter into the
                                - 11 -

final contract with respect to the installation of a fire sprink-

ler system at Crestwood, after considering that issue, the execu-

tive committee chose not to act on it and instead decided to

leave the matter for consideration by the entire board.   During

1990, as chairperson of the executive committee, petitioner

considered a Crestwood condominium owner's request to combine two

condominium units and drafted a letter to another Crestwood con-

dominium owner to address that owner's complaint regarding the

placement of humidifiers in all condominium units.

     During 1990, as chairperson of the management compensation

committee, petitioner discussed the issue of management compensa-

tion with Mr. Dempsey and suggested the implementation of an

incentive program for the Crestwood management staff.

     During each of the years at issue, petitioner attended the

three board meetings that were held at Crestwood in the months of

January, April, and September, and, as chairperson of the board,

presided over those meetings.    He arrived at Crestwood in Decem-

ber about two weeks prior to each of the board meetings held in

January 1989 and 1990.   While at Crestwood during that two-week

period preceding each of those meetings, he attended one or two

owners' receptions at which owners, board members, and senior

management staff had the opportunity to interact and discuss

matters relating to the operations of Crestwood Association and

an employee Christmas party in order to gain insight as to the
                              - 12 -

operations of Crestwood Association.    Petitioner also attended

owners' receptions that were held immediately after the January

1989 and January 1990 board meetings.

     Petitioner arrived at Crestwood approximately one to two

days prior to each of the board meetings held in April 1989 and

1990 and two to three days prior to each of the board meetings

held in September 1989 and 1990.

     Prior to each of the board meetings held in January, April,

and September of each of the years 1989 and 1990, while petition-

er was present at Crestwood, he spent time attending to matters

that related to Crestwood Association owners' operations and

lodge operations.   For example, he met with the Crestwood manage-

ment staff to discuss, inter alia, personnel issues, the status

of rentals, owner inquiries, and patron complaints.

     In preparation for an upcoming board meeting during each of

the years 1989 and 1990, petitioner met with Mr. Dempsey and Ms.

Gahm to discuss the agenda for the board meeting, met with the

Crestwood management employees to obtain their perspectives on

issues that were to be raised at the upcoming board meeting, and

worked with those employees to prepare information packets of-

fered to board members and owners.

     In addition to spending time on matters relating to Crest-

wood Association owners' operations and lodge operations, prior

to each of the board meetings in 1989 and 1990, petitioner spent

an undisclosed amount of time inspecting his two condominium

units.
                               - 13 -

     Petitioner spent a total of approximately 16 to 24 hours

prior to each of the board meetings held in January and September

of each of the years 1989 and 1990 and a total of approximately

eight to 16 hours prior to each of the board meetings held in

April of each of the years 1989 and 1990 to attend to matters

that related to Crestwood Association owners' operations and

lodge operations and to attend to matters that related exclusive-

ly to his two condominium units (i.e., inspecting those units).

     During the years at issue, each of the board meetings over

which petitioner presided lasted approximately three to six

hours.   During those meetings, the board, inter alia, reviewed

reports that were submitted by individual committees of the board

relating to rental rates and usage,8 insurance,9 capital improve-

ments,10 budgets,11 facilities,12 nominations,13 and management


8
   The Crestwood management staff conducted studies and surveys
to determine the proper rental rates and made recommendations to
the board. The board considered those recommendations and made
the final decision with respect to rental rates.
9
   The Crestwood management staff and the insurance committee of
the board apprised the board of various employee health insurance
plans and the cost of each plan and made recommendations to the
board about the selection of a particular plan. They also ap-
prised the board of insurance premium increases and renewal of
those insurance plans. The board made the final decision with
respect to the selection and renewal of such plans.
10
   Proposals for capital improvements were made by the Crestwood
management staff and/or the capital improvements committee of the
board. The board examined each proposal, considered the cost of
each proposal, and generally adopted the proposals made with
regard to capital improvements.
11
   The respective annual budgets for the Crestwood Association
owners' operations and lodge operations were prepared by the
                                                   (continued...)
                              - 14 -

compensation.   At the board meetings that occurred during the

years at issue, the board, inter alia, also reviewed reports

submitted by the Crestwood management staff relating to the

following issues:   (1) The operations of Crestwood Association,

(2) its financial results, (3) the installation of a fire protec-

tion system at Crestwood,14 (4) the proposal by the town of Snow-

mass Village for terminating its ownership of Crestwood's parking

lots and roads,15 (5) the occurrence of fires on the Crestwood

11
 (...continued)
budget committee of the board with assistance from the Crestwood
management staff and submitted by that committee to the board for
approval.
12
   The facilities committee of the board advised the board of
the quality of housekeeping services, quality of maintenance
services, and structural problems with the Crestwood buildings,
and it proposed that certain improvements be made to the rental
units.
13
   During each of the board meetings in September 1989 and 1990,
the board considered the nominations of candidates to serve as
its members.
14
   During each of the board meetings in January and April 1989,
the board considered issues relating to the installation of a
fire protection system at Crestwood, reviewed the bids submitted
by various contractors for the installation of such a system, and
selected contractors after giving consideration to the recommen-
dations made by the Crestwood management staff. During each of
the board meetings in September 1989 and January 1990, the
Crestwood management staff apprised the board of issues relating
to the completion of that project.
15
   The town of Snowmass Village owned and maintained the parking
lots and roadways of Crestwood. The town sought to terminate
that ownership and to shift the maintenance responsibilities to
Crestwood Association. During the April 1989 board meeting, the
Crestwood management staff advised the board of that matter, and
the board charged the Crestwood management staff with the respon-
sibility of resisting the town's attempt to terminate that owner-
                                                   (continued...)
                             - 15 -

property, (6) employee housing,16 (7) structural repairs to the

Crestwood buildings, and (8) the creation of a new position on

the Crestwood staff.

     In addition to the foregoing issues, at its meetings during

the years at issue, the board, inter alia, considered issues

relating to the election of officers, inquiries and complaints

raised by owners and patrons of Crestwood condominiums, a pro-

posed amendment to the bylaws of Crestwood Association dealing

with nepotism, the promotion of rental operations, the revision

of the guide for prospective buyers of Crestwood condominium

units, and the rehiring of Crestwood Association's outside audi-

tor.17

     Moreover, during the board meetings held in January of each

of the years at issue, the board reviewed respective audit re-

ports for the Crestwood Association owners' operations and lodge


15
 (...continued)
ship. During each of the board meetings in September 1989,
January 1990, and September 1990, the Crestwood management staff
apprised the board of the town's actions with respect to that
issue.
16
   During the September 1989 board meeting, based on recommenda-
tions made by the Crestwood management staff, the board resolved
to assume a lease on nearby residential property in order to
provide housing for the employees of Crestwood Association.
During each of the board meetings in January 1990 and September
1990, the Crestwood management staff apprised the board of issues
relating to employee housing.
17
   During the September 1990 board meeting, the board acknowl-
edged the expiration of Crestwood Association's contract with its
outside auditor and authorized the Crestwood management staff to
renegotiate a new contract with that auditor.
                               - 16 -

operations that were prepared by the outside auditor of Crestwood

Association.

       During each of the years at issue, the Crestwood Association

had an annual meeting of all its members (owners' meeting) that

was held at Crestwood immediately after the January board meet-

ing.    As president of Crestwood Association, petitioner presided

over that meeting.    The owners' meeting lasted approximately one

to two hours.    The owners attending that meeting received a

summary audit report and were advised of significant activities

of the board.

       During the years at issue, in his capacity as a board member

and/or an officer of Crestwood Association, petitioner was in-

volved in quality assurance activities of Crestwood Association.

Petitioner expressed a strong interest in quality assurance and

collaborated with Ms. Gahm to ensure the implementation of poli-

cies to improve all aspects of the daily Crestwood Association

owners' operations and lodge operations.    During the years at

issue, petitioner communicated by telephone with Ms. Gahm and

other members of the Crestwood staff regarding quality assurance

and met with them in person regarding that matter during his

visits to Crestwood in the months of January, April, and Septem-

ber of each of the years at issue.

       Throughout each of the years at issue, petitioner reviewed

the respective monthly financial statements of Crestwood Associa-

tion owners' operations and lodge operations and had telephonic
                              - 17 -

conversations with Mr. Dempsey regarding items that appeared on

those statements.   He also discussed matters relating to any

upcoming board meeting with the Crestwood management staff prior

to arriving at Crestwood.   In addition, petitioner had telephonic

conversations with the Crestwood management staff regarding

matters relating to the operations of Crestwood Association, the

installation of the fire protection system at Crestwood, the

proposal by the town of Snowmass Village to terminate its owner-

ship of Crestwood roads and parking lots, and employee housing.

Petitioner also contacted the respective chairpersons of the

various committees of the board (e.g., insurance, rental rates

and usage, budget, nominations, and management compensation

committees) to gain insight as to their activities.

     Petitioner spent at least 6.7 hours during 1989 and 9.8

hours during 1990 on telephone calls between southern California

and Colorado.

     During each of the years at issue, petitioner spent a total

of at least 75 hours, but no more than 135 hours, in attending to

matters relating to the Crestwood Association owners' operations

and lodge operations and in attending to matters relating ex-

clusively to his two condominium units at Crestwood.

Petitioner's Involvement in the Operations
of Crestwood Association During the Years
1985 through 1988

     During the years 1985 through 1988, petitioner was a member

of the board and served on various committees of that board.    The
                             - 18 -

board's activities during those years were similar to its ac-

tivities during 1989 and 1990.   During each of the years 1985

through 1988, petitioner spent substantially less than 500 hours

in attending to matters relating to Crestwood Association owners'

operations and lodge operations and spent less time in those

operations than he spent in those operations during each of the

years at issue.

Petitioners' Federal Income Tax Returns

     For the years 1987 and 1988, petitioners' Federal income tax

returns reflected tax liabilities of $16,405 and $62,341, respec-

tively.

     Petitioners filed a Form 4868, Application for Automatic

Extension of Time to File U.S. Individual Income Tax Return

(application for automatic extension) dated April 13, 1990,

requesting a four-month extension of time to file their Federal

income tax return for 1989 (1989 return).   Line 1 of the applica-

tion for automatic extension that petitioners filed for 1989

provided as follows:

     Total tax liability for 1989. This is the amount you
     expect to enter on line 24 of Form 1040A, or line 55 of
     Form 1040. If you do not expect to owe tax, enter zero
     (-0-) . . . . . . . . . . . . . . . . . . . . . . . . .

     Caution: You MUST enter an amount on line 1 or your
     extension will be denied. You can estimate this
     amount; but be as exact as you can with the information
     you have. If we later find that your estimate was not
     reasonable, the extension will be null and void.

Petitioners' application for automatic extension for 1989 indi-
                              - 19 -

cated on line 1 a zero estimated Federal income tax liability for

petitioners for that year, was signed by petitioners, and was

sent to the Internal Revenue Service (Service).

     Petitioners filed a Federal income tax return for 1989 dated

October 15, 1990.   In that return, petitioners reported total

salaries of $315,662.   The portion of those reported salaries

that was attributable to petitioner's legal practice was

$311,000.   In their 1989 return, petitioners reported a loss of

$45,666 attributable to petitioner's rental activity at Crest-

wood.   Petitioners used that reported loss of $45,666 to offset

other income reported in their 1989 return.   Petitioners' 1989

return showed a tax liability of $66,958.   That return was signed

by petitioners as taxpayers and was signed by "Edward A. Cronick,

CPA" as return preparer.

     Petitioners filed an application for automatic extension

dated April 12, 1991, requesting a four-month extension of time

to file their Federal income tax return for 1990 (1990 return).

Line 1 of that application was virtually identical to line 1 of

the application for automatic extension for 1989 and provided

exactly the same caution.   Petitioners' application for automatic

extension for 1990 indicated on line 1 a zero estimated Federal

income tax liability for petitioners for that year, was not

signed by petitioners, was signed by "Edward A. Cronick CPA" as

preparer of the application, and was sent to the Service.
                               - 20 -

       Petitioners filed a Form 2688, Application for Additional

Extension of Time to File U.S. Individual Income Tax Return dated

August 9, 1991, requesting an additional two-month extension of

time to file their 1990 return.    That application indicated that

petitioners needed the additional time to "collect and summarize

the information necessary to file an accurate return."    That

application was not signed by petitioners, was signed by "Edward

A. Cronick CPA" as preparer of the application, and was sent to

the Service.

       Petitioners filed a Federal income tax return for 1990 dated

October 14, 1991.    In that return, petitioners reported total

salaries of $359,962.    The portion of those reported salaries

that was attributable to petitioner's legal practice was

$349,000.    In their 1990 return, petitioners reported a loss of

$48,082 attributable to petitioner's rental activity at Crest-

wood.    Petitioners used that reported loss of $48,082 to offset

other income reported in their 1990 return.    Petitioners' 1990

Federal income tax return showed a tax liability of $70,742.

That return was signed by petitioners as taxpayers and was signed

by "Edward A. Cronick, CPA" as return preparer.

       Petitioner did not have any formal tax or accounting train-

ing.    However, petitioner was a sophisticated businessman and had

been involved in several tax shelters that were challenged by the

Service.    In addition, during the board meeting held in January
                                - 21 -

1988, petitioner and other board members were informed by accoun-

tants of the limitations imposed on the Crestwood condominium

owners in deducting for Federal income tax purposes losses from

their respective rental activities at Crestwood.

                                OPINION

     Petitioners bear the burden of proving that respondent's

determinations are erroneous.    Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

The General Framework of Section 469 and the Regulations
Thereunder and the Positions of the Parties

     Pursuant to section 469(a), a passive activity loss of an

individual for the taxable year is generally not allowed as a

deduction for such year.18   For this purpose, the passive activ-

ity 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 con-

duct of any trade or business and in which the taxpayer does not

materially participate, sec. 469(c)(1), and (2) any rental ac-

tivity without regard to whether or not the taxpayer materially


18
   Under sec. 469(b), a disallowed passive activity loss for a
taxable year is generally treated as a deduction allocable to a
passive activity for the next taxable year.
                              - 22 -

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

     For purposes of section 469(c)(1), the term "trade or busi-

ness" 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 activi-

ty" is defined in section 469(j)(8) as any activity where pay-

ments 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 cus-

tomer 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 the instant case, the parties have stipulated that the

average period of customer use of petitioner's condominiums at

Crestwood was less than seven days during each of the years at

issue.   Respondent concedes on brief, and the parties thus agree,

that, consequently, petitioner's rental activity at Crestwood

during each such year is not a rental activity as defined in

section 469(j)(8) and the regulations thereunder and thus is not

a passive activity under section 469(c)(2).   See sec. 1.469-

1T(e)(3)(i) and (ii)(A), Temporary Income Tax Regs., supra.

     The parties do not dispute that petitioner's rental activity

at Crestwood during each year at issue constitutes an activity
                              - 23 -

that is treated as a trade or business under section 469(c)(6).

Consequently, petitioner's rental activity at Crestwood will

constitute a passive activity under section 469(c)(1) for each of

those years if he did not materially participate in that activity

during each such year.   See sec. 469(c)(1).

     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(l)(1).

     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

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 pur-

poses 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
                              - 24 -

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

           (3) The individual participates in the activity
                              - 25 -

     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 participa-
     tion 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 immedi-
     ately 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).]

     Petitioners challenge the validity of section 1.469-

5T(a)(1), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25,

1988), and argue that, in any event, they satisfy that regulation

as well as section 1.469-5T(a)(6) and (7), Temporary Income Tax

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).19   According to peti--



19
   In their trial memorandum, petitioners argued that petitioner
materially participated in his rental activity at Crestwood
because he satisfies sec. 1.469-5T(a)(5), Temporary Income Tax
Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). Petitioners do not
advance that argument on brief. Accordingly, we conclude that
petitioners have abandoned it. See Rybak v. Commissioner, 91
T.C. 524, 566 n.19 (1988).
                              - 26 -

tioners, petitioner materially participated in his rental activ-

ity at Crestwood during each of the years at issue, that activity

thus is not a passive activity within the meaning of section

469(c)(1), and the loss petitioners reported in their return for

each of those years therefore is not a passive activity loss as

defined in section 469(d)(1) that is subject to disallowance by

section 469(a)(1).   Respondent counters that section 1.469-

5T(a)(1), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25,

1988), is valid and that in no event do petitioners satisfy that

regulation or section 1.469-5T(a)(6) or (7), Temporary Income Tax

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

Certain Preliminary Issues

     Before turning our attention to the regulatory provisions on

which petitioners rely to establish that petitioner materially

participated during each of the years at issue in his rental

activity at Crestwood, we shall address two preliminary issues.

     The first preliminary issue we address is whether respondent

is correct in contending that the work done by petitioner in

connection with the operations of Crestwood Association was work

done in his capacity as an investor in Crestwood under section

1.469-5T(f)(2)(ii)(B), Temporary Income Tax Regs., 53 Fed. Reg.

5727 (Feb. 25, 1988), that does not constitute participation for

purposes of section 469 because it is excluded by section 1.469-

5T(f)(2)(ii)(A), Temporary Income Tax Regs., supra.   Our answer

is no.   During 1989 and 1990, as president of Crestwood Associa-
                               - 27 -

tion, chairperson of the board of Crestwood Association, chair-

person of the executive committee, and chairperson of the manage-

ment compensation committee, petitioner spent time dealing with a

wide range of issues relating to the operations of Crestwood

Association.    By way of illustration, petitioner dealt with

issues relating to the installation of the fire protection system

at Crestwood, the proposal by the town of Snowmass Village for

terminating its ownership of the Crestwood roads and parking

lots, employee housing, quality assurance, and management com-

pensation.   The work done by petitioner in his capacity as a

board member and an officer of Crestwood Association was work he

did in the management of the operations of Crestwood Association

and was not the type of work that is considered investor par-

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

Temporary Income Tax Regs., supra.

     The second preliminary issue we address is whether petition-

er's involvement as a board member and an officer in the opera-

tions of Crestwood Association constitutes participation by

petitioner in his rental activity at Crestwood within the meaning

of section 1.469-5(f)(1), Income Tax Regs.    We note that, in

those capacities during the years at issue, petitioner dealt with

a wide range of issues that affected not only the two Crestwood

condominium units he owned, but also all other Crestwood condo-

minium units.    At trial and on brief, petitioners assume, with no

discussion or explanation of the basis for such an assumption,
                             - 28 -

that all of the work done by petitioner during the years at issue

in his capacity as a board member and an officer of Crestwood As-

sociation in connection with the operations of Crestwood Assoc-

iation constitutes work done by him in connection with his rental

activity at Crestwood that satisfies the definition of the term

"participation" in section 1.469-5(f)(1), Income Tax Regs.

Respondent does not dispute, or even address, that assumption.

Therefore, we shall proceed on the same assumption, although we

are in no way deciding herein that it is a correct assumption.20

In this connection, assuming arguendo, as petitioners and respon-

dent do, that all of the work done by petitioner during the years

at issue in his capacity as a board member and an officer of

Crestwood Association were work done by him in connection with

his rental activity at Crestwood within the meaning of section

1.469-5(f)(1), Income Tax Regs., on the instant record, we find

below that petitioners nonetheless have failed to prove that such

work, together with any work petitioner may have done that re-

lated exclusively to his two condominium units, constitutes

material participation by petitioner in his rental activity at

Crestwood for purposes of section 469 and the regulations there-

under.



20
   We note that on the record before us we have no way of deter-
mining how much of the work done by petitioner during the years
at issue in connection with the operations of Crestwood Associa-
tion related, or should be treated as related, solely to his two
condominium units.
                                - 29 -

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

     Petitioners' Challenge to the Validity of Section
     1.469-5T(a)(1), Temporary Income Tax Regs.

     Although their argument is not altogether clear, as we

understand it, petitioners contend that section 1.469-5T(a)(1),

Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), is

invalid because, by requiring an individual to participate in an

activity for more than 500 hours during a taxable year in order

to be treated as materially participating in that activity for

such year, that regulation is quantitative, rather than qualita-

tive, in nature, and, consequently, it is an unreasonable inter-

pretation of section 469(h)(1).

     Initially, we note that temporary regulations have binding

effect and are entitled to the same weight as final regulations.

Peterson Marital Trust v. Commissioner, 102 T.C. 790, 797 (1994),

affd.        F.3d     (2d Cir., Mar. 4, 1996); Truck & Equip. Corp.

v. Commissioner, 98 T.C. 141, 149 (1992); see LeCroy Research

Sys. Corp. v. Commissioner, 751 F.2d 123, 127 (2d Cir. 1984),

revg. on other grounds T.C. Memo. 1984-145.    Therefore, in deter-

mining the validity of temporary regulations, we apply the same

analysis as that used in determining the validity of final regul-

ations.     Schaefer v. Commissioner, 105 T.C. 227, 229 (1995).

        The judicial deference accorded to a regulation generally

depends on whether the regulation is classified as a legislative

or an interpretative regulation.     See Dresser Indus., Inc. v.
                                - 30 -

Commissioner, 911 F.2d 1128, 1137-1138 (5th Cir. 1990), affg. in

part and revg. in part 92 T.C. 1276 (1989).    The source of the

authority under which a regulation is promulgated will be deter-

minative of such classification.     Id. at 1137.   A legislative

regulation that is "issued under a specific grant of authority to

define a statutory term or prescribe a method of executing a

statutory provision" is to be accorded more weight than an inter-

pretative regulation that is promulgated under the more general

authority of section 7805(a).    See United States v. Vogel Fer-

tilizer Co., 455 U.S. 16, 24 (1982) (quoting Rowan Cos. v. United

States, 452 U.S. 247, 253 (1981)).

     There are two possible sources of authority for the issuance

by the Secretary of section 1.469-5T(a)(1), Temporary Income Tax

Regs., supra, the validity of which petitioners challenge:

(1) The general authority granted to the Secretary by section

7805(a)21 or (2) the specific legislative authority granted to

the Secretary by section 469(l)(1) to prescribe regulations that

specify what constitutes material participation.

     If section 1.469-5T(a)(1), Temporary Income Tax Regs.,

supra, that petitioners challenge were promulgated pursuant to

the general authority granted to the Secretary by section

7805(a), it would be considered an interpretative regulation.



21
   Sec. 7805(a) provides in pertinent part that "the Secretary
shall prescribe all needful rules and regulations for the enfor-
cement of this title".
                              - 31 -

See Dresser Indus., Inc. v. Commissioner, supra at 1137-1138.     An

interpretative regulation must be upheld if it "implement[s] the

congressional mandate in some reasonable manner".   National

Muffler Dealers Association, Inc. v. United States, 440 U.S. 472,

476-477 (1979) (quoting United States v. Cartwright, 411 U.S.

546, 550 (1973)).   In determining whether an interpretative

regulation implements the congressional mandate in some reasona-

ble manner, we must examine whether it "harmonizes with the plain

language of the statute, its origin, and its purpose."   National

Muffler Dealers Association, Inc. v. United States, supra at 477.

Such a regulation cannot be declared invalid, unless it is "un-

reasonable and plainly inconsistent with the revenue statutes".

Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501 (1948).

The Supreme Court recently set forth the following standard for

ascertaining the validity of an interpretative regulation:

     Under the formulation now familiar, when we confront an
     expert administrator's statutory exposition, we inquire
     first whether "the intent of Congress is clear" as to
     "the precise question at issue." Chevron U.S.A. Inc.
     v. Natural Resources Defense Council, Inc., 467 U.S.
     837, 842 (1984). If so, "that is the end of the mat-
     ter." Ibid. But "if the statute is silent or
     ambiguous with respect to the specific issue, the
     question for the court is whether the agency's answer
     is based on a permissible construction of the statute."
     Id., at 843. If the administrator's reading fills a
     gap or defines a term in a way that is reasonable in
     light of the legislature's revealed design, we give the
     administrator's judgment "controlling weight." Id., at
     844. [NationsBank v. Variable Annuity Life Ins. Co.,
     513 U.S. ___, ___, 115 S. Ct. 810, 813-814 (1995);
     citations omitted.]

In determining the validity of an interpretative regulation, the
                                - 32 -

Supreme Court has acknowledged that "The choice among reasonable

interpretations is for the Commissioner, not the courts."

National Muffler Dealers Association, Inc. v. United States,

supra at 488.

     If section 1.469-5T(a)(1), Temporary Income Tax Regs.,

supra, that petitioners challenge were promulgated pursuant to

the specific legislative authority of section 469(l)(1), it would

be considered a legislative regulation.     See Dresser Indus., Inc.

v. Commissioner, supra at 1137.     A legislative regulation must be

upheld unless it is "arbitrary, capricious, or manifestly con-

trary to the underlying statute."     Id.

     Petitioners contend that the regulation they challenge

should be classified as an interpretative regulation.     Although

section 469(l)(1) delegates legislative authority to the Secre-

tary to prescribe regulations that specify what constitutes

material participation, in arguing the validity of section 1.469-

5T(a)(1), supra, respondent applies the standard used in judging

the validity of an interpretative regulation.     We need not

resolve the question whether section 1.469-5T(a)(1), Temporary

Income Tax Regs., supra, is an interpretative or a legislative

regulation.     This is because assuming arguendo, as petitioners

contend, and respondent does not dispute, that that regulation

were an interpretative, and not a legislative, regulation, we

would nonetheless uphold its validity because we conclude that

section 1.469-5T(a)(1), Temporary Income Tax Regs., supra,
                                - 33 -

implements the congressional mandate in a reasonable manner, the

standard of review for an interpretative regulation.   A fortiori

that regulation would not be arbitrary, capricious, or manifestly

contrary to the underlying statute, the higher standard of review

for a legislative regulation.

     In determining the validity of section 1.469-5T(a)(1),

Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), we

note first that that regulation in effect establishes a safe

harbor under which an individual may establish, without more,

that he or she satisfies the definition of material participation

in section 469(h)(1).    However, neither petitioner nor any other

individual subject to section 469 is required to meet the minimum

hourly requirement of section 1.469-5T(a)(1), Temporary Income

Tax Regs., supra, in order to be treated as materially partici-

pating in an activity.   An individual may satisfy the material

participation requirement by qualifying under that or any one of

six other alternative tests set forth in section 1.469-5T(a)(2)

through (7), Temporary Income Tax Regs., 53 Fed. Reg. 5725-5726

(Feb. 25, 1988).   For example, an individual may be treated as

materially participating in an activity if his or her participa-

tion in that activity during the taxable year constitutes "sub-

stantially all of the participation in such activity of all in-

dividuals (including individuals who are not owners of interests

in the activity) for such year".    Sec. 1.469-5T(a)(2), Temporary

Income Tax Regs., supra; see also H. Conf. Rept. 99-841 (Vol.
                                - 34 -

II), at II-148 (1986), 1986-3 C.B. (Vol. 4) 134, 148.

     In any event, we shall consider the language of section

469(h)(1) and its underlying legislative history to determine

whether section 1.469-5T(a)(1), Temporary Income Tax Regs., 53

Fed. Reg. 5725 (Feb. 25, 1988), is a reasonable construction of

that statute.   That Code section provides:

     A taxpayer shall be treated as materially participating
     in an activity only if the taxpayer is involved in the
     operations of the activity on a basis which is--

          (A) regular,
          (B) continuous, and
          (C) substantial.

     Although neither section 469(h)(1) nor any other provision

in section 469 prescribes any specific standards for determining

whether a taxpayer is involved in the operations of an activity

on a regular, continuous, and substantial basis, the material

participation test imposed by that section is, without question,

time sensitive in nature.   A taxpayer cannot be involved in the

operations of an activity unless that taxpayer spends time in

connection with those operations.    While the determination of

whether an individual's involvement in the operations of an

activity constitutes participation for purposes of section 469

requires an examination of the nature of the individual's in-

volvement in those operations, the determination of whether an

individual's participation is material requires an examination of

the amount and extent of such involvement.    Section 469(h)(1)

prescribes that the amount and extent of such involvement be
                              - 35 -

regular, continuous, and substantial.   We conclude that the

material participation test imposed by section 469(h)(1) impli-

cates the amount and extent of time that a taxpayer spends being

involved in the operations of an activity.

     In advancing their argument that section 1.469-5T(a)(1),

Temporary Income Tax Regs., supra, is invalid because it is

quantitative, rather than qualitative, in nature, petitioners

rely on the following colloquy on the floor of the U.S. Senate

between Senator Hatfield and Senator Packwood:

     Mr. HATFIELD. Such a taxpayer's involvement in the
     hotel room rental business includes making the follow-
     ing management decisions which an owner of such busi-
     ness commonly or customarily makes in conducting such
     business: First, the taxpayer actively and regularly
     establishes the rental rate of the hotel room; second,
     the taxpayer participates in establishing and reviewing
     hiring and other personnel policies, including review
     of management personnel; third, the taxpayer reviews
     and approves periodic and annually audited financial
     reports; fourth, the taxpayer participates in budgeting
     operating costs and establishing capital expenditures;
     fifth, the taxpayer establishes the need for and level
     of financial reserves; sixth, the taxpayer selects the
     banking depository for rental proceeds and reserve
     funds; seventh, the taxpayer has frequent meetings at
     the hotel with his agent and onsite contract management
     to review operations and the business plan, and to
     conduct onsite inspections; eighth, the taxpayer as-
     sists in offsite business promotion activities; * * *

              *     *     *     *       *    *     *

     Mr. PACKWOOD. If the taxpayer can demonstrate that he
     had performed and is performing all those functions
     which you have described which are integral to the
     operations of hotel room rental business and is per-
     forming them in such a way and to such an extent that
     it demonstrates that the taxpayer's involvement in the
     operation of the activity is substantial, continuous
     and ongoing, you are correct, such activity would be
                                - 36 -

     material participation in the operation of the hotel
     room rental business. [132 Cong. Rec. 15032 (1986).]

     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.    Id.   Contrary to petitioner's contention, that

colloquy does not in any 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.

     Indeed, a review of other portions of the legislative his-

tory of section 469 confirms that the material participation test

implicates the amount and extent of the time spent by a taxpayer

in connection with the operations of an activity.    For instance,

that legislative history indicates that a taxpayer is most likely

to participate materially in an activity if involvement in that

activity is the taxpayer's principal business and the taxpayer

devotes most of his or her time to that business and does not

devote a comparable amount of time to another business (principal

business factor).     S. Rept. 99-313 (1986), 1986-3 C.B. (Vol. 3)

713, 732-733.    The legislative history of section 469 also indi-
                              - 37 -

cates that a taxpayer's regular presence at the place where the

principal operations of an activity are conducted is indicative

of material participation (regular presence factor).   S. Rept.

99-313, supra, 1986-3 C.B. (Vol. 3) at 733.   Although neither the

principal business factor nor the regular presence factor is

conclusive in the determination of material participation, the

relevance of both factors in that determination demonstrates that

the time actually spent by an individual in connection with the

operations of an activity is an important factor in the deter-

mination of material participation.

     We further note that the legislative history of section 469

indicates that, in order for a taxpayer to participate materially

in an activity, the taxpayer must significantly contribute to

services that are deemed integral to the operations of the ac-

tivity.   S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 732.     It

seems to us that a taxpayer cannot contribute significantly to

such services unless that taxpayer devotes time in connection

with such services.

     A discussion in the legislative history of section 469 with

respect to the performance of management services sheds addi-

tional light on the meaning and quantitative nature of the term

"material participation".   That legislative history provides in

pertinent part:

     Participation in management cannot be relied upon
     unduly both because its genuineness and substantiality
     are difficult to verify, and because a general manage-
                                - 38 -

     ment role, absent more, may fall short of the level of
     involvement that the material participation standard in
     the provision is meant to require. [S. Rept. 99-313,
     supra, 1986-3 C.B. (Vol. 3) at 734-735.]

That legislative history further states in pertinent part:

     It is clarified that an individual who works full-time
     in a line of business consisting of one or more busi-
     ness activities generally is likely to be materially
     participating in those activities * * * even if the
     individual's role is in management rather than opera-
     tions.

          This clarification * * *. * * * recognizes the
     substantial likelihood that, despite the difficulty in
     many circumstances of ascertaining whether the manage-
     ment services rendered by an individual are substantial
     and bona fide, such services are likely to be so when
     the individual is rendering them on a full-time basis
     and the success of the activity depends in large part
     upon his exercise of business judgment. [H. Conf.
     Rept. 99-841 (Vol. II), supra, 1986-3 C.B. (Vol. 4) at
     147-148.]

     In addition, we believe that a material participation test

that focuses on the amount and extent of time spent by a taxpayer

in connection with the operations of an activity is consistent

with the underlying purpose of section 469.   Congress added the

passive activity loss rules to the Code in 1986 as a response to

the prevalent use of tax shelters and as an attempt to foster

equity within the tax system.    S. Rept. 99-313, supra, 1986-3

C.B. (Vol. 3) at 713-714; see Adler v. United States, 32 Fed. Cl.

736, 738 (1995).   Prior to 1986, taxpayers often reduced their

tax liability by investing in business ventures that generated

tax losses in excess of economic losses and by using those

artificial losses to offset unrelated income (e.g., salary or
                               - 39 -

portfolio income).    S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3)

at 713.    The passive activity loss rules in section 469 curtail

the use of tax shelters by restricting a taxpayer's ability to

use the losses sustained in the operation of a trade or business

to shelter unrelated income, unless the taxpayer materially

participates in the operation of that trade or business.    Id. at

716.

       A material participation test that implicates the amount and

extent of time a taxpayer spends being involved in the operations

of a particular activity helps to achieve the underlying purpose

of section 469, since the greater the amount of time devoted by

the taxpayer to the activity, the greater the likelihood that the

taxpayer invested in the activity based on the nontax economic

profit potential of the activity as opposed to the potential for

return on the investment in the form of a reduction of taxes on

unrelated income.    In addition, it seems to us that a material

participation test that considers the amount and extent of time

spent by a taxpayer in an activity will have the intended effect

of restricting the use of losses from certain types of trade or

business activities that Congress decided to treat as passive

activities, since few persons who make an investment in a tradi-

tional tax shelter devote a substantial amount of time to any

such investment.

       Based on our examination of section 469 and its legislative

history, and section 1.469-5T(a)(1), Temporary Income Tax Regs.,
                               - 40 -

53 Fed. Reg. 5725 (Feb. 25, 1988), we reject petitioners' argu-

ment that, because that regulation is quantitative in nature, it

is an unreasonable interpretation of section 469(h)(1) and thus

is invalid.22   We conclude that that regulation implements sec-

tion 469(h)(1) in a reasonable manner by providing as one of

seven alternative ways for an individual to satisfy the material

participation test of section 469(h)(1) that an individual shall

be treated as materially participating in an activity for a

taxable year if he or she participates in the activity for more

than 500 hours during such year.   Accordingly, we hold that

regulation to be valid.

     Application of Section 1.469-5T(a)(1),
     Temporary Income Tax Regs.

     Petitioners claim that petitioner should be treated as

having materially participated in his rental activity at

Crestwood for each of the years at issue under section 1.469-


22
   Petitioners also contend that sec. 1.469-5T(a)(1), Temporary
Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), is invalid
because it is ambiguous in that it does not provide adequate
guidelines for defining how to compute the number of hours
devoted to a particular activity. An interpretative regulation
must be upheld if it "implement[s] the congressional mandate in
some reasonable manner". National Muffler Dealers Association,
Inc. v. United States, 440 U.S. 472, 476-477 (1979) (quoting
United States v. Cartwright, 411 U.S. 546, 550 (1973)). Such a
regulation cannot be declared invalid, unless it is "unreasonable
and plainly inconsistent with the revenue statutes". Commis-
sioner v. South Texas Lumber Co., 333 U.S. 496, 501 (1948). The
lack of precision by a regulation in defining its own terms may
not necessarily be a basis for holding that regulation invalid,
provided that the regulation is construed in a manner so that it
harmonizes with the plain language of the statute, its origin,
and its purpose.
                              - 41 -

5T(a)(1), Temporary Income Tax Regs., supra, because he was

involved in that activity for more than 500 hours during each of

those years.   Respondent disagrees with petitioners' contention.

     Based on our examination of the entire record before us, we

find that petitioners have failed to establish through any rea-

sonable means as required by section 1.469-5T(f)(4), Temporary

Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988),23 that,

during each of the years at issue, petitioner's participation in

his rental activity at Crestwood exceeded 500 hours.   On that

record, we have found as a fact that, during each of those years,

petitioner spent a total of at least 75, but no more than 135,

hours in attending to matters relating to the operations of

Crestwood Association and in attending to matters relating exclu-


23
   Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg.
5727 (Feb. 25, 1988), sets forth the manner in which an individu-
al may prove the degree of his or her participation in an activ-
ity. It provides that although a taxpayer is not required to
maintain contemporaneous daily time reports, logs, or similar
documents, the taxpayer must substantiate the level of his or her
participation through reasonable means. Reasonable means in-
clude, 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." Sec.
1.469-5T(f)(4), Temporary Income Tax Regs., supra.

   Our finding that petitioner spent during each year at issue a
total of at least 75, but no more than 135, hours on matters
relating to the operations of Crestwood Association and on
matters relating exclusively to his two Crestwood condominium
units is based on the actual amount of time spent by him on such
matters as established by the record and our estimate of the time
spent by him on such matters where the record does not establish
the actual amount of time spent, but contains sufficient evidence
from which we were able to estimate the amount of such time.
                             - 42 -

sively to his two Crestwood condominium units.   Accordingly, we

find that petitioners have failed to establish that petitioner is

to be treated as having materially participated during each of

the years at issue in his rental activity at Crestwood under

section 1.469-5T(a)(1), Temporary Income Tax Regs., 53 Fed. Reg.

5725 (Feb. 25, 1988).

Section 1.469-5T(a)(6), Temporary Income Tax Regs.

     Petitioners claim that petitioner should be treated as

having materially participated in his rental activity at Crest-

wood for each of the years at issue under section 1.469-5T(a)(6),

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

because his rental activity at Crestwood was a personal service

activity and he materially participated in that activity for the

three taxable years preceding each of the taxable years at issue.

Respondent disagrees with petitioners' contention.

     Section 1.469-5T(d), Temporary Income Tax Regs., supra,

defines the term "personal service activity" as follows:

          (d) Personal service activity. An activity con-
     stitutes a personal service activity * * * if such
     activity involves the performance of personal services
     in--

               (A) The fields of health, law, engineering,
     architecture, accounting, actuarial science, performing
     arts, or consulting; or

               (B) Any other trade or business in which
     capital is not a material income-producing factor.

The regulations under section 469 do not provide a definition of

what constitutes an activity in which capital is not a material
                              - 43 -

income-producing factor.   Nor has that phrase in the regulations

under section 469 been construed by the courts.   However, courts

have faced the question of whether capital is a material income-

producing factor in other contexts.    See, e.g., Friedlander v.

United States, 718 F.2d 294 (9th Cir. 1983); Gord v. Commission-

er, 93 T.C. 103 (1989); Moore v. Commissioner, 71 T.C. 533

(1979).   In those other contexts, the courts have followed the

general rule that capital is a material income-producing factor

if a substantial portion of the gross income of the business is

attributable to the employment of capital in the business, which

is likely to be the case if the operation of the business re

quires substantial inventories or substantial investments in

plant, machinery, or other equipment.   See, e.g., Moore v. Com-

missioner, supra at 538.   Capital is not a material income-

producing factor if the gross income of the business consists

principally of fees, commissions, or other compensation for

personal services.   Id.

     On the instant record, we find that petitioner's rental

activity at Crestwood is not a personal service activity within

the meaning of section 1.469-5T(d), Temporary Income Tax Regs.,

supra, even though it involved the furnishing of certain hotel-

type services to patrons (e.g., on-site management, daily house-

keeping service, and 24-hour switchboard service).   Petitioner's

rental activity at Crestwood did not involve the performance of

personal services in the fields that are specifically identified
                              - 44 -

in that regulation.   We further find on the record before us that

that activity necessarily employed capital as a substantial,

material income-producing factor.   In other words, a substantial

portion of the gross income of petitioner's rental activity at

Crestwood was attributable to his capital investment in his two

condominium units, the furnishings in those units, and the common

elements of Crestwood consisting of the land, buildings, and

other physical facilities of Crestwood.   Consequently, we find

that petitioners have failed to establish that petitioner is to

be treated as having materially participated during each of the

years at issue in his rental activity at Crestwood under section

1.469-5T(a)(6), Temporary Income Tax Regs., supra.24

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

     Petitioners claim that petitioner should be treated as

having materially participated in his rental activity at Crest-

wood for each of the years at issue under section 1.469-5T(a)(7),

Temporary Income Tax Regs., supra (facts and circumstances test)

because, based on all of the facts and circumstances, he was

involved in that activity on a regular, continuous, and substan-

tial basis during each such year.   Respondent disagrees with that

contention.


24
   Since petitioners have failed to satisfy the first prong of
the test under sec. 1.469-5T(a)(6), Temporary Income Tax Regs.,
53 Fed. Reg. 5726 (Feb. 25, 1988), we need not, and do not,
address whether petitioners satisfy the second prong of that
test, i.e., whether petitioner materially participated in that
activity for any three taxable years (whether or not consecutive)
preceding each of the taxable years at issue.
                             - 45 -

     In advancing their claim that petitioner materially par-

ticipated in his rental activity at Crestwood under the facts and

circumstances test, petitioners disregard the following limita-

tions with respect to the applicability of that test that are set

forth in section 1.469-5T(b)(2)(ii) and (iii), Temporary Income

Tax Regs., supra:

          (ii)   Certain management activities. An indi-
     vidual's services performed in the management of an ac-
     tivity shall not be taken into account in determining
     whether such individual is treated as materially par-
     ticipating in such activity for the taxable year under
     paragraph (a)(7) of this section unless, for such
     taxable year--

                 (A) No person (other than such individual)
     who performs services in connection with the management
     of the activity receives compensation described in
     section 911(d)(2)(A) in consideration for such ser-
     vices; and

                 (B) No individual performs services in
     connection with the management of the activity that
     exceed (by hours) the amount of such services performed
     by such individual.

          (iii) Participation less than 100 hours. If an
     individual participates in an activity for 100 hours or
     less during the taxable year, such individual shall not
     be treated as materially participating in such activity
     for the taxable year under paragraph (a)(7) of this
     section.

     Respondent contends that the foregoing limitations preclude

petitioner from being treated under the facts and circumstances

test as having materially participated for each of the years at

issue in his rental activity at Crestwood.

     We have found as a fact that during each of the years at

issue petitioner spent a total of at least 75, but no more than
                              - 46 -

135, hours in attending to matters relating to the operations of

Crestwood Association and in attending to matters relating ex-

clusively to his two Crestwood condominium units.   If during

either of the years at issue petitioner were involved in his

rental activity at Crestwood for 100 hours or less, pursuant to

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

petitioner would not be treated under the facts and circumstances

test as having materially participated in that activity for

either year.

     Assuming arguendo that petitioner were involved in his

rental activity at Crestwood for more than 100 hours during each

of the years at issue, petitioner nonetheless could not be treat-

ed under the facts and circumstances test as having materially

participated in that activity for either of those years because

of the limitations set forth in section 1.469-5T(b)(2)(ii)(A) and

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

1988).   During 1989 and 1990, petitioner was involved in his

rental activity at Crestwood almost exclusively through the

performance of management services in connection with the opera-

tions of Crestwood Association.   During each of those years,

individuals other than petitioner, including Mr. Dempsey, vice

president, chief operating officer, and general manager of Crest-

wood Association, and Ms. Gahm, assistant general manager of

Crestwood Association, participated in petitioner's rental ac-

tivity at Crestwood by performing management services in connec-
                              - 47 -

tion with the operations of Crestwood Association.   Since Mr.

Dempsey, Ms. Gahm, and others were compensated during each of the

years at issue for the performance of management services in

connection with petitioner's rental activity at Crestwood, pur-

suant to section 1.469-5T(b)(2)(ii)(A), Temporary Income Tax

Regs., supra, the performance of management services by petition-

er cannot be taken into account for the purpose of determining

whether petitioner is to be treated under the facts and circum-

stances test as having materially participated in that activity

for each of those years.

     In addition, the performance of management services during

each of the years at issue in connection with petitioner's rental

activity at Crestwood by individuals other than petitioner

exceeded, by hours, the performance of management services by

petitioner in connection with that activity.25   Consequently,


25
   During each of the years at issue, petitioner spent a total
of at least 75, but no more than 135, hours in performing manage-
ment services in connection with the operations of Crestwood
Association and in attending to matters relating exclusively to
his two Crestwood condominium units. Mr. Dempsey and Ms. Gahm
each spent at least 40 hours a week in order to carry out their
management responsibilities in those operations. Moreover, there
were at least four to six other management employees who spent an
undisclosed amount of time in performing management services in
the operations of Crestwood Association. In comparing the time
spent by petitioner and by Mr. Dempsey, Ms. Gahm, and other
Crestwood management staff in providing management services in
connection with the operations of Crestwood Association, we have
assumed arguendo that all the work done by petitioner in his
capacity as a board member and an officer of Crestwood Associa-
tion was work done by him in connection with the rental of his
                                                   (continued...)
                             - 48 -

pursuant to section 1.469-5T(b)(2)(ii)(B), Temporary Income Tax

Regs., supra, the performance of management services by petition-

er cannot be taken into account for the purpose of determining

whether petitioner is to be treated under the facts and circum-

stances test as having materially participated in that activity

for each of those years.

     On the record before us, we find that petitioners have

failed to establish that petitioner is to be treated as having



25
 (...continued)
two condominium units. Consistently, we also assumed arguendo
that all the work done by Mr. Dempsey, Ms. Gahm, and others in
connection with the management of the operations of Crestwood
Association was done by them in connection with the rental of
petitioner's condominium units. In this regard, we note that, as
was true of the record relating to the time spent by petitioner
in connection with the Crestwood Association operations, we have
no way of determining from the record before us how much of the
time spent during the years at issue by Mr. Dempsey, Ms. Gahm,
and others in performing management services related solely to
petitioner's rental of his two condominium units during those
years. We also note that, given the responsibilities and func-
tions performed by petitioner as a board member and an officer of
Crestwood Association and by Mr. Dempsey, Ms. Gahm, and others in
performing management services for the Crestwood Association
operations, we believe it reasonable to assume on the record
before us that the portion of the total time spent by petitioner
in performing management services relating to the rental of his
two condominium units would bear the same ratio to the total time
he spent in all Crestwood Association operations as the portion
of the total time spent by Mr. Dempsey, Ms. Gahm, and others
relating to the management of the rental of petitioner's condo-
minium units bears to the total time they spent on all Crestwood
Association operations. Consequently, we believe that even if
the record enabled us to make findings as to the amount and
extent of time spent by petitioner and by Mr. Dempsey, Ms. Gahm,
and others on the management of petitioner's two condominium
units, petitioner's time so spent would not exceed their time so
spent.
                              - 49 -

materially participated during each of the years at issue in his

rental activity at Crestwood under section 1.469-5T(a)(7), Tem-

porary Income Tax Regs., supra.

Conclusion

     Based on our review of the entire record before us, we find

that petitioners have failed to show that petitioner materially

participated during either of the years at issue in his rental

activity at Crestwood within the meaning of section 469 and the

regulations thereunder.   Accordingly, we further find that the

loss at issue for each of those years is a passive activity loss

within the meaning of section 469.

Additions to Tax and Accuracy-Related Penalties

     Section 6651

     Respondent determined that petitioners are liable for each

of the years 1989 and 1990 for the addition to tax under section

6651(a)(1) because they failed to file timely their Federal

income tax return for each such year.   Specifically, respondent

contends that petitioners failed to file timely those returns

because petitioners' respective applications for automatic exten-

sion for those years were invalid.

     In the case of failure to file an income tax return on the

date prescribed for filing, section 6651(a)(1) imposes an addi-

tion to tax equal to five percent of the amount required to be

shown in the return, with an additional five percent to be added

for each month or partial month during which such failure con-
                              - 50 -

tinues, not to exceed 25 percent in the aggregate.    The addition

to tax under section 6651(a)(1) does not apply if it is shown

that the failure to file was due to reasonable cause and not due

to willful neglect.   In order to prove reasonable cause, the tax-

payer must show that, despite the exercise of ordinary business

care and prudence, he or she was nevertheless unable to file the

return within the prescribed time.     Crocker v. Commissioner, 92

T.C. 899, 913 (1989).

     Section 6072(a) provides that individuals who file their

returns on the basis of the calendar year shall file those re-

turns on or before April 15 following the close of the calendar

year.   For purposes of section 6651(a)(1), the determination of

the prescribed date for filing a return must be made by reference

to any extension of the time for filing the return.    Section

6081(a) provides that the Secretary may grant a reasonable exten-

sion of time for the filing of any return and that such an exten-

sion shall not exceed six months.    Section 1.6081-4(a)(1), Income

Tax Regs., provides that an individual who is required to file a

Federal income tax return shall be allowed an automatic four-

month extension of time after the date prescribed for filing of

the return, provided that the requirements set forth in that

regulation are satisfied.

     A taxpayer's application for automatic extension is not

valid if it does not comply with the requirements set forth in

section 1.6081-4(a), Income Tax Regs.    See Crocker v. Commis-
                                - 51 -

sioner, supra at 911.    One of the requirements set forth in that

section is that that application must show a proper estimate of

the taxpayer's tax liability for the taxable year for which the

taxpayer is seeking an extension.       Sec. 1.6081-4(a)(4), Income

Tax Regs.   In addition, an application for automatic extension

must be accompanied by a full remittance of the unpaid portion of

that estimated tax liability.     Id.    A taxpayer's estimate of his

or her tax liability is proper if, considering the information

available at the time the application for automatic extension is

filed, it is a bona fide and reasonable estimate.          Crocker v.

Commissioner, supra at 908.     A taxpayer is obligated to make a

reasonable attempt to gather information necessary to the proper

estimation of his or her tax liability.       Id.   If in the tax-

payer's application for automatic extension the taxpayer "esti-

mated his tax liability to be zero, even though he had, at the

time he submitted the request, ample evidence discrediting the

estimate," that application would be invalid.        Id.

     For each of the years at issue, petitioners were required to

file their return by April 15 following the close of each such

year.   Sec. 6072(a).   Petitioners filed applications for auto-

matic extension for the years 1989 and 1990 dated April 13, 1990,

and April 12, 1991, respectively.       Since petitioners filed an

application for automatic extension for each of the years at

issue, the determination of whether their returns for those years

were timely filed will depend on whether those applications are
                               - 52 -

valid.    See Crocker v. Commissioner, supra at 911.

     In their respective applications for automatic extension for

1989 and 1990, petitioners estimated their respective tax liabil-

ities to be zero.   As filed, petitioners' 1989 and 1990 returns

showed tax liabilities of $66,958 and $70,742, respectively,

after taking account of the losses at issue.   Those returns

reported that petitioners received salaries during 1989 and 1990

of $315,662 and $359,962, respectively.   Even assuming arguendo

that petitioners were entitled for each year at issue to a deduc-

tion for the loss in question here, petitioners have failed to

establish that they could have reasonably believed that the

deduction for each such year for such loss, together with other

expenses for which they were entitled to deductions, were of such

a magnitude to cause their taxable income for each of those years

to be reduced to zero.   It is also significant that for the years

1987 and 1988, the two years preceding the taxable years at

issue, petitioners' Federal income tax returns reflected positive

tax liabilities in the amounts of $16,405 and $62,341, respec-

tively.

     Petitioners argue that the respective estimates of their

Federal income tax liabilities for 1989 and 1990 that were shown

in their respective applications for automatic extension for

those years were reasonable because they relied on the advice of

their accountant for the preparation of those applications.

Petitioners' failure to estimate properly their taxes cannot be
                               - 53 -

excused merely because they may have relied on the advice of a

tax professional.    Berlin v. Commissioner, 59 F.2d 996, 997 (2d

Cir. 1932); see United States v. Boyle, 469 U.S. 241, 249-250

(1985).    Petitioners failed to call their accountant as a witness

to explain what information petitioners may have provided or what

advice he may have given them regarding the preparation of the

application for automatic extension for each of the years at

issue.    Accordingly, on the instant record, petitioners have

failed to establish that any reliance by them on the advice of

their accountant was reasonable or in good faith.

     Petitioners further argue that petitioner is not a tax

specialist and that he was not aware that their applications for

automatic extension for 1989 and 1990 could be invalidated due to

improper estimates of their respective tax liabilities for those

years.    Petitioners' argument is baseless.   It is particularly

significant that each of the applications for automatic extension

for the years at issue carried a clear warning on its face that

an unreasonable estimate of the taxpayer's tax liability would

cause the extension to be declared "null and void."     Petitioners

signed their application for automatic extension for 1989.

Accordingly, at the time they signed that application, petition-

ers knew that an unreasonable estimate in that application of

their tax liability for 1989 would cause the extension to be

declared "null and void."    Although petitioners did not sign

their application for automatic extension for 1990, having signed
                               - 54 -

their application for automatic extension for 1989, they knew, or

should have known, that, as with their application for automatic

extension for 1989, an unreasonable estimate in their application

for automatic extension for 1990 of their tax liability for that

year would cause the extension to be declared "null and void."

     We also note that although petitioner was not a tax special-

ist, he was an attorney and a sophisticated businessman.    Given

his professional background, petitioner should have been aware of

the importance of providing accurate information when applying

for an extension of time to file petitioners' 1989 and 1990

returns.

     Petitioners also argue that they were not able to estimate

properly their respective tax liabilities for 1989 and 1990

because they were involved in several ventures and the records

reflecting the income and loss from those ventures were lengthy

and complicated.    Petitioners have failed to show that they made

any reasonable attempt to gather the necessary information or to

compile the available information to arrive at a reasonable

estimate of their respective income tax liabilities for the years

at issue.

     On the instant record, we find that petitioners have not

established that they made bona fide and reasonable estimates of

their tax liabilities for 1989 and 1990.    We further find that

their applications for automatic extension for those years were

invalid.    Accordingly, petitioners were required to file their
                                - 55 -

1989 and 1990 returns by April 15, 1990, and April 15, 1991,

respectively.26    See sec. 6072(a); Crocker v. Commissioner, 92

T.C. at 911.    Petitioners filed Federal income tax returns for

1989 and 1990 dated October 15, 1990, and October 14, 1991,

respectively.     Thus, we hold that they failed to file timely

their return for each of the years at issue.27

     Although petitioners' argument is not entirely clear, they

appear to contend that, assuming arguendo that their application

for automatic extension for each of the years at issue were to be

declared invalid, they nonetheless should not be liable for each

such year for the addition to tax for failure to file timely

their return.     Specifically, petitioners appear to contend that

their failure to file timely was due to reasonable cause, and not

due to willful neglect, because of the unavailability and com-

plexity of their financial records.      Unavailability of records

does not necessarily establish reasonable cause for failure to

file timely.    See Electric & Neon, Inc. v. Commissioner, 56 T.C.

26
   Petitioners filed an application for an additional extension
of time to file their 1990 return dated Aug. 9, 1991. Since we
have found petitioners' application for automatic extension for
that year to be invalid, the subsequently filed application for
an additional extension of time to file is also invalid. See
Clayton v. Commissioner, 102 T.C. 632, 651 (1994).
27
   Petitioners did not file an application for an additional
extension of time to file their 1989 return. Assuming arguendo
that petitioners' application for automatic extension for 1989
had been valid, their 1989 return would nonetheless not have been
filed timely, since they would have been required to, but did
not, file that return by Aug. 15, 1990. See sec. 1.6081-4(a),
Income Tax Regs.
                               - 56 -

1324, 1343 (1971), affd. without published opinion 496 F.2d 876

(5th Cir. 1974).    A taxpayer is required to file timely based on

the best information available and to file thereafter an amended

return if necessary.    Estate of Vriniotis v. Commissioner, 79

T.C. 298, 311 (1982).    Petitioners did not show what, if any,

efforts they made to obtain information concerning their income

and expenses, nor did they compile the available information to

prepare a reasonably accurate tax return.    Under these circum-

stances, we conclude that petitioners have not demonstrated that

their failure to file timely their 1989 and 1990 returns was due

to reasonable cause and not due to willful neglect.    We therefore

sustain respondent's determination imposing the addition to tax

on petitioners for each of the years 1989 and 1990 for their

failure to file timely returns for each of those years.

     Section 6662

     Respondent determined that petitioners are liable for each

of the years 1989 and 1990 for the accuracy-related penalty under

section 6662(a) because their underpayment of tax for each of

those years was due to negligence or disregard of rules or regu-

lations.   For purposes of section 6662(a), the term "negligence"

includes any failure to make a reasonable attempt to comply with

the Code, failure to exercise due care, or failure to do what a

reasonable person would do under the circumstances.    Sec.

6662(c); Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir.

1992), affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91
                                - 57 -

T.C. 686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990).      The

term "disregard" includes any careless, reckless, or intentional

disregard of the Code and the temporary or final regulations is-

sued thereunder.    Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax

Regs.

       The accuracy-related penalty under 6662(a) does not apply to

any portion of an underpayment if it is shown that there was a

reasonable cause for such portion and that the taxpayer acted in

good faith with respect to such portion.    Sec. 6664(c)(1).    The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends upon the pertinent facts and circum-

stances.    Sec. 1.6664-4(b)(1), Income Tax Regs.   Factors taken

into account include the taxpayer's efforts to assess his or her

proper tax liability and the knowledge and experience of the

taxpayer.    Id.   Reliance on the advice of a professional, such

as an accountant, does not necessarily demonstrate reasonable

cause and good faith unless, under all the circumstances, such

reliance was reasonable and the taxpayer acted in good faith.

Id.

       Petitioners' underpayment for each of the years at issue

results partially from their having used the reported losses from

petitioner's rental activity at Crestwood to offset nonpassive

income.28    Petitioners claim that petitioner is not a tax spe

28
      Petitioners challenge respondent's determinations imposing
                                                      (continued...)
                              - 58 -

cialist and that he relied on the advice of their accountant in

offsetting those losses against nonpassive income.    A taxpayer's

duty to file an accurate return cannot be avoided by placing

responsibility on an agent.   Pritchett v. Commissioner, 63 T.C.

149, 174 (1974).   Each taxpayer has a duty to comply with the

Federal income tax laws and to become familiar with those laws.

A taxpayer may avoid the imposition of the accuracy-related

penalty by demonstrating that he or she relied on the advice of a

tax professional and that such reliance was reasonable and in

good faith.   Sec. 1.6664-4(b)(1), Income Tax Regs.   In order for

reliance on the advice of a tax professional to be reasonable,

the taxpayer must establish that correct information was provided

to the professional and that the item incorrectly reported in the

return was the result of the professional's error.    See Ma-Tran

Corp. v. Commissioner, 70 T.C. 158, 173 (1978).   The taxpayer

must also prove that a reasonable person would have relied upon

the advice provided.   See Illes v. Commissioner, 982 F.2d 163,

166 (6th Cir. 1992), affg. per curiam T.C. Memo. 1991-449.

Petitioners failed to call their accountant as a witness to

explain what information petitioners may have provided him or

what advice he may have given them regarding the use of losses


28
 (...continued)
the accuracy-related penalties for 1989 and 1990 only to the
extent that they relate to their having used the reported losses
from petitioner's rental activity at Crestwood to offset non-
passive income.
                               - 59 -

from petitioner's rental activity at Crestwood to offset nonpas-

sive income.   Moreover, although petitioner is not a tax special-

ist, he is highly educated and is a sophisticated businessman.

He had invested in several tax shelters in the past that were

challenged by the Service.    In fact, petitioner had specific

knowledge of the limitations imposed on the deductibility of

losses sustained from his rental activity at Crestwood because he

was informed of those limitations during the board meeting held

in January 1988.   Based on our review of the instant record, we

find that petitioners have failed to establish that any reliance

by them on the advice of their accountant was reasonable or in

good faith.

     Petitioners further claim that they are not liable for the

years at issue for the accuracy-related penalties under section

6662(a) because the facts and circumstances relating to petition-

er's involvement in his rental activity at Crestwood establish

that he materially participated in that activity.    On the instant

record, we find that application of section 469 and the pertinent

regulatory provisions to the facts surrounding petitioner's

involvement in his rental activity at Crestwood would not have

enabled petitioners to conclude reasonably that that involvement

rose to the level of material participation during each of the

years at issue.    We also note that we have held section 1.469-

5T(a)(1), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25,

1988), which petitioners challenge, to be valid.    On the record
                             - 60 -

herein, we find that petitioners had no reasonable basis for

having used the losses relating to petitioner's rental activity

at Crestwood that they reported in their Federal income tax

returns for 1989 and 1990 to offset their reported income from

other sources for those years.    See, e.g., Cramer v. Commis-

sioner, 101 T.C. 225, 254 (1993), affd. 64 F.3d 1406 (9th Cir.

1995); Grant v. Commissioner, 84 T.C. 809, 827 (1985), affd.

without published opinion 800 F.2d 260 (4th Cir. 1986).

     On the instant record, we find that petitioners have not

established that they acted with reasonable cause and in good

faith when they used the reported losses from petitioner's rental

activity at Crestwood to offset nonpassive income.    We therefore

sustain respondent's determination imposing the accuracy-related

penalty on petitioners for each of the years 1989 and 1990.

     To reflect the foregoing and the concessions of the parties,



                                      Decision will be entered

                                 under Rule 155.
