                          T.C. Memo. 1999-258



                        UNITED STATES TAX COURT



   WALTER A. BARNISKIS AND MARY SUE BARNISKIS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 18029-97.                    Filed August 4, 1999.



        Scott M. Nelson and Robert B. Patterson, for petitioners.

        Blaine C. Holiday, for respondent.



                          MEMORANDUM OPINION


        DINAN, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1


        1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable years in
                                                   (continued...)
                                - 2 -

     Respondent determined deficiencies in petitioners' Federal

income taxes for 1991, 1992, and 1993 in the amounts of $2,675,

$2,842, and $2,366, respectively.

     The issue for decision is whether petitioners' claimed

Schedule C losses for 1991, 1992, and 1993 constitute passive

activity losses under section 469.      The resolution of this issue

turns on whether petitioners materially participated in the

activity of renting their condominium unit during the taxable

years in issue.

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

The stipulations of fact and attached exhibits are incorporated

herein by this reference.    Petitioners resided in New Hope,

Minnesota, on the date the petition was filed in this case.

     Petitioner husband works as an engineering manager for

Honeywell Corporation at its sensor guidance products division in

Minneapolis, Minnesota.   His formal education consists of a

bachelor's degree in electrical engineering from the University

of Notre Dame and some graduate courses in the electrical

engineering program at the University of Minnesota.     Petitioner

wife works as a librarian.

     In October 1987, petitioners purchased condominium unit

number 40 (the unit) at Bluefin Bay, a condominium complex


     1
      (...continued)
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 3 -

located in Tofte, Minnesota.    Tofte is located on the shore of

Lake Superior in Superior National Forest, approximately 250

miles northeast of petitioners' residence in New Hope.

     Bluefin Bay consists of six buildings, each having a

different layout.    The six buildings contain a total of 54

condominium units.    Petitioners' unit is located in a building

which has three floors and consists of 20 condominium units,

including 10 one-story units on the first floor and 10 two-story

units on the second and third floors.     Petitioners' unit is a

two-story unit.    Since there are exterior doors on both floors,

the unit may be rented in its entirety or by individual floor by

simply unlocking or locking an interior, adjoining door.

     Petitioners were members of the Bluefin Bay Condominium

Association (BBCA), the common interest owner of Bluefin Bay.

BBCA owns all of Bluefin Bay's common property, including an

indoor swimming pool, tennis courts, a conference room, a parking

area, water and waste treatment facilities, and communication and

cable equipment.    BBCA arranged for the Tofte Management Company

(TMC) to manage and operate the Bluefin Bay complex.     Prior to

1991, BBCA had member committees who would collectively decide

the nature and extent of the services to be performed by TMC.

Other member committees were responsible for establishing minimum

standards for the individual units.     In response to increasing

difficulties in making decisions through the committee process,
                               - 4 -

BBCA and TMC decided to simplify the relationships between the

unit owners and TMC by negotiating for individual written

management contracts between each unit owner and TMC.    The

contracts were modeled after the policies that BBCA's committees

had developed in preceding years.   With the exception of a few

unit owners who lived at Bluefin Bay all year, most of the unit

owners entered into management contracts with TMC.

     Petitioners' management contract with TMC was effective

January 1, 1991, through the taxable years in issue.    Under the

management contract, TMC was appointed as the exclusive rental

agent for petitioners' unit.   Petitioners were required to

specifically reserve their unit in writing for the days which

they intended to personally use it.    In the event petitioners

failed to properly notify TMC of their intended use, rental

arrangements previously made by TMC with other guests would hold

priority over petitioners' personal use, unless the guests could

be assigned to another, comparable unit.

     The management contract provided for TMC to receive 45

percent of the gross rental proceeds from petitioners' unit in

exchange for its services.   Under the management contract, TMC's

duties included, but were not limited to, managing reservations,

checking in and out guests, providing housekeeping services,

collecting rents, generating financial reports, conducting damage
                                - 5 -

inspections, and making any necessary maintenance calls and

repairs.

     TMC owns and operates a restaurant located adjacent to the

condominium complex.    During the taxable years in issue, TMC's

employees staffed a reception desk near the restaurant entrance

for guests staying at Bluefin Bay.      TMC also employed managers,

activity directors, bookkeepers, a housekeeping staff, and a

maintenance staff, all of whom participated in the activity of

renting petitioners' unit.

     TMC's employees developed, drafted, and printed marketing

and promotional materials for Bluefin Bay.     TMC maintained a

toll-free telephone number for promotional and reservation

purposes.   TMC's employees answered this telephone line, booked

reservations for owners and guests, and mailed promotional and

marketing materials to interested parties.

     TMC's employees checked in guests, received deposits, and

issued keys.   They responded to maintenance calls and made any

necessary repairs.   TMC's employees opened, closed, and cleaned

the pool, hot tub, and pool house on a daily basis.     They also

maintained Bluefin Bay's tennis courts and exercise room.     In the

winters, TMC's employees plowed the parking lots and shoveled,

salted, and sanded the walkways.

     TMC's employees collected payments from guests and checked

them out of the unit.    They cleaned and inspected the unit after
                               - 6 -

guests departed.   The cleaning activity included cleaning the

interior of the unit and laundering the linens and towels.

     TMC's employees maintained daily books and records

reflecting the collected rents and fees owed by petitioners.

They issued monthly and annual reports to petitioners reflecting

the rental activity, owner charges, and TMC's share of the gross

rentals.

     Petitioners' duties under the management contract included

providing TMC with a schedule of their intended personal use,

maintaining adequate insurance on their unit, and complying with

certain "Interior Quality Standards".

     TMC made detailed inspections of petitioners' unit at least

annually and compiled lists of mandatory repairs and items which

needed to be replaced in order to satisfy the Interior Quality

Standards.   Petitioners were given the choice to personally make

these repairs and improvements or to authorize TMC to make them.

If they failed to comply by certain dates, TMC would arrange for

the work to be performed by its employees or subcontractors and

charge petitioners accordingly.

     Petitioners traveled to Bluefin Bay 5 or 6 times during each

of the taxable years.   In most cases, petitioners would stay at

Bluefin Bay in their unit for a long weekend.    They also spent 1

full week each summer in their unit.    Petitioners' trips to

Bluefin Bay usually combined family vacations with owner
                                - 7 -

activities such as attending board meetings and/or making some

repairs to their unit.    Petitioner husband also attended several

BBCA meetings in St. Paul, Minnesota, during the taxable years in

issue.   Petitioners sold their unit on or about October 31, 1997.

     On Schedules C attached to their 1991, 1992, and 1993

returns, petitioners reported the following amounts with respect

to the rental of their unit:

                             1991         1992        1993

     Gross Income          $36,554      $40,202     $38,029
     Total Expenses        (46,096)     (50,360)    (46,454)
        Net Loss            (9,542)     (10,158)     (8,425)

     Petitioners claimed business loss deductions on their 1991,

1992, and 1993 returns in amounts equal to the amounts of their

net losses reported on the Schedules C.      In the statutory notice

of deficiency, respondent disallowed the claimed business loss

deductions on the ground that the losses were sustained in

connection with an activity in which petitioners did not

materially participate.

     Section 469 generally disallows for the taxable year any

passive activity loss that exceeds passive activity income.         See

sec. 469(a), (d)(1).   A passive activity is any activity which

involves the conduct of any trade or business in which the

taxpayer does not materially participate.2         See sec. 469(c)(1).


     2
          The term "passive activity" also includes any "rental
activity", regardless of whether the taxpayer materially
                                                   (continued...)
                               - 8 -

     In general, section 469(h)(1) provides that 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 regular, continuous, and substantial.   Section 469(l)

authorizes the Secretary to prescribe regulations as may be

necessary or appropriate to carry out the provisions of section

469, including regulations which specify what constitutes

material participation.   See sec. 469(l)(1).

     Section 1.469-5T(a), Temporary Income Tax Regs., 53 Fed.

Reg. 5725-5726 (Feb. 25, 1988), provides that an individual will

be treated as materially participating in an activity for the

taxable year 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
     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


     2
      (...continued)
participates in the activity. Sec. 469(c)(2), (4). A rental
activity is any activity where payments are principally for the
use of tangible property. See sec. 469(j)(8). However,
petitioners' activity does not constitute a rental activity
within the meaning of sec. 469(j)(8) because the average customer
stay at their unit was less than 7 days. See sec. 1.469-
1T(e)(3)(ii)(A), Temporary Income Tax Regs., 53 Fed. Reg. 5702
(Feb. 25, 1988).
                               - 9 -

     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 * * * for the taxable year, and the
     individual's aggregate participation in all significant
     participation activities during such year exceeds 500
     hours;

          (5) The individual materially participated in the
     activity * * * for any five taxable years (whether or
     not consecutive) during the ten taxable years that
     immediately precede the taxable year;

          (6) The activity is a personal service activity
     * * * 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
     * * * the individual participates in the activity on a
     regular, continuous, and substantial basis during such year.

     Petitioners argue that they satisfy the requirements of

section 1.469-5T(a)(3), Temporary Income Tax Regs., 53 Fed. Reg.

5726 (Feb. 25, 1988).   Respondent argues that petitioners have

not satisfied this material participation test.

Petitioners' Participation

     We must first decide whether petitioners participated in the

rental of their unit for more than 100 hours during each of the

taxable years in issue.   Section 1.469-5(f)(1), Income Tax Regs.,

generally provides that any work done by an individual in

connection with an activity in which the individual owns an

interest at the time the work is done shall be treated as

participation of the individual in the activity.   We consider
                             - 10 -

petitioners' combined hours of participation in deciding whether

this material participation test is satisfied.    See sec.

469(h)(5); sec. 1.469-5T(f)(3), Temporary Income Tax Regs., 53

Fed. Reg. 5727 (Feb. 25, 1988).

     With respect to the evidence which may be used to establish

hours of participation, section 1.469-5T(f)(4), Temporary Income

Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988), provides:

     The extent of an individual's participation in an
     activity may be established by any reasonable means.
     Contemporaneous daily time reports, logs, or similar
     documents are not required if the extent of such
     participation may be established by other reasonable
     means. Reasonable means for purposes of this paragraph
     may include 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.

     In their brief, petitioners characterized their personal

time records as detailed records of their participation.      We have

carefully reviewed these personal time records and find that the

exhibit which purports to summarize petitioners' total hours of

participation is not accurate.    The summary exhibit lists

petitioners' total hours of participation as 174 hours for 1991,

239 hours for 1992, and 154.5 hours for 1993.    We compute the

total hours of participation as listed in the underlying records

to be 149.50 hours for 1991, 146.25 hours for 1992, and 108.25

hours for 1993.
                              - 11 -

     Furthermore, section 1.469-5T(f)(2)(ii)(A), Temporary Income

Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988), provides that work

performed by an individual in the individual's capacity as an

investor in an activity shall not be treated as participation of

the individual in the activity unless the individual is involved

in the day-to-day management or operations of the activity.    We

find that petitioners were not involved in the day-to-day

management or operations of their unit because TMC managed and

operated the entire Bluefin Bay complex on a daily basis.

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

53 Fed. Reg. 5727 (Feb. 25, 1988), provides that investor

activities include:

          (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.

     We find that several of the activities described in

petitioners' personal time records constitute investor

activities.   In particular, petitioners' activities of organizing

their personal records, preparing their taxes, paying bills, and

reviewing their monthly statements of the rentals of their unit
                              - 12 -

all constitute investor activities.3     Petitioners have failed to

establish that they materially participated in the rental

activity.   Even if we were to assume that petitioners expended

100 hours in their rental activity during the years in issue,

they have not proved that their participation was greater than

the management company's participation.

Other Individuals' Participation

     The second requirement of the section 1.469-5T(a)(3),

Temporary Income Tax Regs., supra, material participation test is

that petitioners' participation in the activity of renting their

unit must not have been less than the participation in such

activity of any other individuals.     Petitioners must establish

that no other individuals participated in the activity of renting

their unit for more time than they did during the years in issue.

     Dennis Rysdahl, the founder, president, secretary, and

general manager of TMC, was involved in the construction of

Bluefin Bay in 1984 and, more recently, an adjacent development

called Tofte Cove.   Mr. Rysdahl currently oversees the management

and operation of Bluefin Bay and did so during the taxable years

in issue.

     In a letter dated June 30, 1997, to the Bluefin Bay and

Tofte Cove owners, Mr. Rysdahl solicited contributions to a fund


     3
          We find that the listed hours of participation include
38.5 hours, 25.25 hours, and 27.25 hours of investor activities
for 1991, 1992, and 1993, respectively.
                               - 13 -

which some of the owners had created to challenge respondent's

position in cases such as this one.     Mr. Rysdahl stated in the

letter that he was personally contributing on behalf of the unit

that he owned and explained his motivation as follows:

          [I] do so mainly based on the concern that, since
     tax benefits are useful to at least some of our owners,
     a victory in this case would make ownership of a unit
     more desirable for some prospective buyers, and
     therefore help retain the re-sale value of our units.

     Immediately prior to the submission of this June 30, 1997,

letter as evidence, Mr. Rysdahl had testified as follows:

     Q:   Mr. Rysdahl, you, in fact, own a unit at Bluefin
     Bay, don't you?

     A:   I am a 50 percent owner in one unit at Bluefin
     Bay. Actually I'm a 50 percent owner in a unit at
     Tofte Cove Townhomes, which is a more recent and
     adjacent development. I no longer own any part of a
     unit at Bluefin Bay.

     Q:   But it -- and it's your opinion or belief that the
     outcome of this case will affect the resale value of
     your unit?

     A:   No.   It won't affect the resale value of my unit.

     Mr. Rysdahl later testified about the type and extent of

TMC's employees' participation in the management and operation of

Bluefin Bay.    In light of his personal and business interests in

the outcome of this case, we discredit Mr. Rysdahl's testimony

concerning the number of hours spent by TMC's employees in the

activity of renting petitioners' unit.     We rely on his testimony

only to the extent it is corroborated by other reliable evidence.
                              - 14 -

     The monthly statements generated by TMC during 1991 and 1992

reveal that both or one of the floors of petitioners' unit were

used by 238 different guests during 1991 and by 227 different

guests during 1992.   TMC's maintenance records for petitioners'

unit show that petitioners were separately charged for 18 hours

of labor during 1991 and 41 hours of labor during 1992.   These

charges were in addition to the 45-percent gross rental fee paid

by petitioners under the management contract.   The maintenance

records do not reflect the maintenance staff's work on the

facilities and grounds outside of petitioners' unit.

     Based on the record, we find that petitioners have failed to

prove that they participated in the activity of renting their

unit more than TMC's employees during the years in issue.    The

record contains only Mr. Rysdahl's biased testimony about the

number of hours TMC's employees devoted to petitioners' unit,

which we do not rely upon without corroboration.4   It is clear,

however, that the front desk staff checked in and out over 200 of

petitioners' guests each year.   In addition, the housekeeping

staff inspected and cleaned petitioners' unit after each of their

guests checked out.   The frequency with which these services were

required convinces us that TMC's employees devoted a substantial

amount of time to petitioners' unit.   We are unable to conclude


     4
          Although available to Mr. Rysdahl, TMC's business
records of its employees' work hours and assignments were not
made part of the record in this case.
                                - 15 -

from this record that petitioners' participation during the years

in issue was greater than the participation of TMC's employees.

       We conclude that petitioners did not materially participate

in the activity of renting their unit during 1991, 1992, and

1993.     Accordingly, we hold that petitioners' claimed losses from

such activity constitute passive activity losses which are not

deductible in the taxable years in issue by reason of section

469.    Cf. Oberle v. Commissioner, T.C. Memo. 1998-156; Chapin v.

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

        To reflect the foregoing,



                                           Decision will be entered

                                      for respondent.
