                    T.C. Summary Opinion 2011-43



                       UNITED STATES TAX COURT



         JOSE B. MAGNO AND SUSAN A. O’CONNELL, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4600-10S.                 Filed April 6, 2011.



     John E. Ellsworth, for petitioners.

     Brett A. Saltzman, for respondent.



     LARO, Judge:    This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1    Pursuant to section 7463(b), the decision




     1
      Subsequent section references are to the applicable
versions of the Internal Revenue Code, and Rule references are to
the Tax Court Rules of Practice and Procedure. Some dollar
amounts are rounded.
                               - 2 -

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

opinion shall not be treated as precedent for any other case.

     Respondent determined deficiencies in petitioners’ Federal

income taxes of $23,847, $36,684, and $30,145, and accuracy-

related penalties of $4,769, $7,337, and $6,029, for 2005, 2006,

and 2007 (subject years), respectively.   After concessions,2 we

must decide whether:   (1) Losses related to rental properties

owned by petitioners and claimed on their Federal income tax

returns for the subject years are subject to the passive activity

limitations of section 469; and (2) petitioners are liable for

section 6662(a) accuracy-related penalties for the subject years.

We hold for respondent as to both issues.

                            Background

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

The stipulated facts and the exhibits submitted therewith are

incorporated by this reference.




     2
      In addition to the concessions explicitly agreed to by the
parties, we consider petitioners to have conceded respondent’s
determination that for 2006 they may not deduct $17,141 of
mortgage interest claimed on Schedule E, Supplemental Income and
Loss, by virtue of the fact that petitioners did not address that
issue at trial or on brief. We hold without further comment that
petitioners may not deduct $17,141 of Schedule E mortgage
interest for 2006 because they have failed to introduce any
evidence with respect to the payment of that interest. See
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985); Masloff v.
Commissioner, T.C. Memo. 1998-257; see also Mendes v.
Commissioner, 121 T.C. 308, 316 (2003).
                                - 3 -

     Petitioners Jose B. Magno (Mr. Magno) and Susan A. O’Connell

(Ms. O’Connell) resided in Illinois when their petition was

filed.    During the subject years Mr. Magno worked as a financial

planner.    From 1998 until July 2003 petitioners lived in Michigan

(first residence).

     In early 2003 petitioners began constructing a second house

in Michigan (second residence) and thereafter tried multiple

times to sell the first residence but without success.      When

their sales efforts failed, petitioners often rented that

property.    Tenants occupied the first residence without

interruption from July 2003 until the lease expired in August

2005.    Petitioners tried to sell the first residence from August

2005 until March 2006.    During that time Mr. Magno performed

general maintenance on the property, prepared it for sale, and

marketed it to prospective buyers.      Despite Mr. Magno’s efforts,

however, the first residence did not sell, and petitioners again

rented that property.

     In March 2006 petitioners leased the first residence to

tenants who broke the lease after 2 months.     Petitioners

commenced an action against those tenants for breach of contract,

and Mr. Magno assisted the prosecution of that case.     The lawsuit

settled, and petitioners again sought to sell the first residence

without success.    Petitioners instead chose to lease the property

from November 2006 until November 2007.     In connection with that
                                 - 4 -

rental, Mr. Magno prepared the lease, verified the tenant’s

employment, and showed the property.

     In 2006 Ms. O’Connell was offered a job promotion which

would require petitioners to move from Michigan to Illinois.     Ms.

O’Connell accepted the promotion, and petitioners tried to sell

or lease the second residence.    Petitioners secured tenants, and

they leased the second residence from October 2006 through the

end of 2007.   During that time Mr. Magno performed maintenance on

the second residence, which required him to travel 370 miles from

Illinois to Michigan.    These trips typically required Mr. Magno

to spend 2 days in Michigan, during which time he stayed with

family or at a hotel.    Mr. Magno paid for these hotel stays with

cash or a credit card.

     During each of these trips, Mr. Magno repaired or supervised

the repair of the second residence.      The tasks which Mr. Magno or

his contractors performed included, among others, fixing a tub,

installing a sump pump, fixing an icemaker, removing a bone from

a garbage disposal, replacing heads on a sprinkler system,

winterizing that sprinkler system, and removing lint from a

clothes dryer and vent.   When the repairs required Mr. Magno to

purchase parts, he paid with cash or a credit card and received

receipts.   When he was unable to complete the repairs himself,
                               - 5 -

Mr. Magno hired repairmen to do so, though he could not recall

the names of the individuals he hired.3

     Petitioners timely filed their Federal income tax return for

each of the subject years and reported on Schedules E total

rental real estate losses of $30,117, $57,275, and $86,321,

respectively.   On each of those returns petitioners reported Mr.

Magno’s occupation as a provider of financial planning services.

Petitioners also reported on Schedules C, Profit or Loss From

Business, that Mr. Magno operated a financial services or

planning business during the subject years.   Respondent issued to

petitioners a notice of deficiency dated November 20, 2009,

disallowing the Schedule E losses because respondent had

determined that section 469 prohibited recognition of the losses.

Petitioners petitioned the Court, and on September 27, 2010, a

trial was held in Chicago, Illinois.

                            Discussion

I.   Burden of Proof

     The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden of

proving that those determinations are incorrect.   Rule 142(a)(1);

Welch v. Helvering, 290 U.S. 111, 115 (1933).   Under section

7491(a), the burden of proof as to factual matters may shift to


     3
      Mr. Magno also modified mortgages on the first and second
residences in 2007.
                               - 6 -

the Commissioner in certain circumstances.   Petitioners have not

alleged that section 7491(a) applies, nor have they established

their compliance with the substantiation and recordkeeping

requirements of the Internal Revenue Code.   See sec.

7491(a)(2)(A) and (B).   Accordingly, petitioners bear the burden

of proof.

II.   Real Estate Activities

      Petitioners argue mainly that Mr. Magno is a qualifying real

estate professional because he meets the requirements of section

469(c)(7)(B) and that the rental portions of his real estate

activities are not passive because he materially participated in

those activities.4   Respondent argues that Mr. Magno’s rental

real estate activities are per se passive and that petitioners

may not deduct losses associated with those activities because

Mr. Magno is not a qualifying real estate professional.5    We

agree with respondent.

      A taxpayer is generally allowed a deduction for all the

ordinary and necessary expenses paid or incurred in connection

with a trade or business or for the production of income.    See


      4
      Petitioners do not contend that they are entitled to the
offset under sec. 469(i), nor are they.
      5
      Respondent does not argue in the main that the claimed
rental expenses should be disallowed on the grounds that the
first and second residences were not converted from personal use
property to property held for the production of income. See,
e.g., Saunders v. Commissioner, T.C. Memo. 2002-143, affd. 75
Fed. Appx. 494 (6th Cir. 2003).
                                 - 7 -

secs. 162, 212.    Section 469(a)(1), however, limits the

deductibility of losses from these activities where those losses

arise from passive activities.    A passive activity is any

activity which involves the conduct of any trade or business in

which the taxpayer does not materially participate.      Sec.

469(c)(1).   The disallowed passive activity loss equals the

excess of the aggregate losses from all passive activities for a

taxable year over the aggregate income from all passive

activities for that year.    Sec. 469(d)(1); sec. 1.469-2T(b)(1),

Temporary Income Tax Regs., 53 Fed. Reg. 5711 (Feb. 25, 1988).

     Rental real estate activity is generally treated as a per se

passive activity regardless of whether the taxpayer materially

participates.   Sec. 469(c)(2), (4).     However, a taxpayer may

avoid having his or her real estate activity classified as a per

se passive activity if the taxpayer is a qualifying real estate

professional.   A taxpayer may qualify as a real estate

professional if:

          (i) More than one-half of the personal services
     performed in trades or businesses by the taxpayer
     during such taxable year are performed in real property
     trades or businesses in which the taxpayer materially
     participates, and

          (ii) such taxpayer performs more than 750 hours of
     service during the taxable year in real property trades
     or businesses in which the taxpayer materially
     participates.

Sec. 469(c)(7)(B).    Where, as here, a joint return has been made,

the foregoing requirements are satisfied if either spouse
                                 - 8 -

separately satisfies those requirements.     Id.   Thus, if Mr. Magno

meets the foregoing requirements, petitioners’ rental activities

are not per se passive and the normal passive activity loss rules

of section 469(c)(1) will apply.     We consider in turn

petitioners’ ability to meet each of the requirements under

section 469(c)(7)(B).

     A.      Other Personal Services Mr. Magno Performed

     Petitioners argue that the hours Mr. Magno spent on his

rental real estate activities accounted for more than one-half of

the total hours of personal services he performed in trades or

businesses during the subject years.     See sec. 469(c)(7)(B)(i).

We are not persuaded.     Petitioners did not elect to treat their

interests in the first and second residences as a single rental

activity, and they must therefore prove that Mr. Magno meets the

requirements of section 469(c)(7)(B) as to each property.     See

sec. 469(c)(7)(A); sec. 1.469-9(g), Income Tax Regs.

     During the audit stage of this proceeding, Mr. Magno told

respondent’s revenue agent that he worked approximately 25 to 30

hours per week on his financial planning and services business.

That conversation was documented in the revenue agent’s notes,

and the revenue agent testified credibly to its contents at

trial.     At trial, however, Mr. Magno testified that he worked

principally as a financial consultant from January through August

2005.     He also testified that he became a full-time manager of
                                 - 9 -

the first and second residences in 2006 and 2007 and that he

reduced the number of hours which he devoted to his financial

consulting services business to “about” 500 hours per year.

     We credit the testimony of respondent’s revenue agent and

therefore conclude that Mr. Magno must have worked more than

1,250 hours during each subject year in real property trades or

businesses to qualify as a real estate professional under section

469(c)(7)(B)(i).6   Mr. Magno was not able to corroborate with

written documentation his assertions that more than one-half of

the personal services he performed in trades or businesses during

the subject years were performed in real property trades or

businesses.   Accordingly, we find that Mr. Magno has not proven

that he meets the requirements of section 469(c)(7)(B)(i).

     B.   750-Hour Requirement

     Assuming arguendo that we were persuaded by petitioners’

claim that more than one-half of Mr. Magno’s personal services

performed in trades or businesses during the subject years were

performed in real property trades or businesses, petitioners are

still unable to satisfy the 750-hour requirement of section

469(c)(7)(B)(ii).   Petitioners argue that Mr. Magno spent more

than 750 hours on each of petitioners’ rental real estate

activities during each of the subject years.   The extent of Mr.



     6
      The product of 25 hours per week for 50 weeks per year is
1,250 hours.
                                 - 10 -

Magno’s participation in petitioners’ real estate activities may

be proven by “any reasonable means.”      See sec. 1.469-5T(f)(4),

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

Reasonable means include the identification of services performed

over a period of time and the approximate number of hours spent

performing those services, based on appointment books, calendars,

or narrative summaries.    Id.   It is well settled that although

the phrase “any reasonable means” is broad, a taxpayer may not

use a postevent “ballpark guesstimate” of the time committed to

the rental activity.    See Hill v. Commissioner, T.C. Memo. 2010-

200; Lee v. Commissioner, T.C. Memo. 2006-193; Goshorn v.

Commissioner, T.C. Memo. 1993-578; cf. D’Avanzo v. United States,

67 Fed. Cl. 39, 42 (2005) (adopting same standard).

     Petitioners rely solely on the testimony of Mr. Magno to

prove that they devoted the requisite number of hours to qualify

their rental activities under section 469(c)(7)(B)(ii).     In so

doing, they present no calendars, narrative summaries, mileage

logs, receipts, or any other records which would support Mr.

Magno’s testimony, even though by Mr. Magno’s own admission they

possessed such items.   The failure of petitioners to introduce

such evidence creates a presumption that such information was not

favorable to them.   See Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947).   But here we are concerned with more than just the
                               - 11 -

lack of corroborating evidence.    In certain material respects, we

found the testimony of Mr. Magno to be vague and unpersuasive.

See Mowafi v. Commissioner, T.C. Memo. 2001-111.

       For example, Mr. Magno testified that between August 2005

and March 2006 he devoted 250 hours to repairing or supervising

the repair of the first residence.      That testimony does not allow

us to determine how much time Mr. Magno personally spent making

such repairs or whether such activity was material under section

469.    See D’Avanzo v. Commissioner, supra at 44-45; cf. Trask v.

Commissioner, T.C. Memo. 2010-78 (crediting a taxpayer for time

spent to repair or supervise the repair of rental properties

where the taxpayer maintained detailed work logs which identified

the properties repaired and the contractors used).     We are also

troubled by the fact that Mr. Magno is unable to recall basic

details about those repairs such as the dates they were performed

or the names of third parties whom he hired.

       We also find Mr. Magno’s estimates of the time he devoted to

petitioners’ rental activities to be excessive in relation to the

tasks performed.    See Hill v. Commissioner, supra.    Mr. Magno

testified that he spent between 8 and 10 hours per day for 2 or 3

days to complete such seemingly simple tasks as removing a bone

from a garbage disposal, removing lint from a clothes dryer and a

dryer vent, and winterizing a sprinkler system.     We do not credit

Mr. Magno’s assertion that he would drive approximately 740 miles
                               - 12 -

over the course of 16 or 20 hours to perform such simple and

routine tasks.   See Rapp v. Commissioner, T.C. Memo. 1999-249.

Such is especially so given that Mr. Magno did not offer any

records to substantiate these trips or the expenses incurred

during them.7

     Given the lack of corroborating evidence, we simply cannot

accept as fact that Mr. Magno worked the requisite number of

hours to qualify as a real estate professional for each of his

rental real estate activities.    See Scheiner v. Commissioner,

T.C. Memo. 1996-554.    We find that Mr. Magno’s method for proving

the time he devoted to his rental activities is not reasonable

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

Cf. Trask v. Commissioner, supra (relying on a taxpayer’s

testimony as proof that he spent more than 750 hours to resolve

over 80 issues for 11 pieces of property during a 1-year period).

     C.   Conclusion

     We hold that Mr. Magno is not a qualifying real estate

professional under section 469(c)(7)(B) and that petitioners’

rental real estate activities are treated as per se passive under

section 469(c)(2).8    See Fowler v. Commissioner, T.C. Memo. 2002-



     7
      Mr. Magno testified that the record included copies of gas
receipts, but we find no such receipts in the record.
     8
      Given that holding, we need not consider whether Mr. Magno
materially participated in petitioners’ rental real estate
activities.
                               - 13 -

223.    It follows that the losses petitioners sustained in

connection with their real estate activities may not be used to

reduce their nonpassive income.    See sec. 469(a).

III. Accuracy-Related Penalties

       Respondent determined that petitioners are liable for

accuracy-related penalties under section 6662(a) for the subject

years.    Section 6662(a) and (b)(1) imposes an accuracy-related

penalty equal to 20 percent of any portion of an underpayment of

tax required to be shown on the return that is attributable to

negligence or disregard of rules or regulations.

       The term “negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the internal

revenue laws and any failure to keep adequate books and records

or to substantiate items properly.      Sec. 6662(c); see also sec.

1.6662-3(b)(1), Income Tax Regs.    Negligence may also be defined

as lack of due care or the failure to do what a reasonable and

ordinarily prudent person would do under similar circumstances.

Neely v. Commissioner, 85 T.C. 934, 947 (1985).

       Respondent bears the burden of production with respect to

petitioners’ liability for the accuracy-related penalties

included in the notice of deficiency and must therefore produce

evidence that it is appropriate to impose those penalties.     See

sec. 7491(c); see also Higbee v. Commissioner, 116 T.C. 438, 446

(2001).    Once respondent has met his burden of production,
                               - 14 -

petitioners must then adduce proof sufficient to persuade the

Court that they were not negligent and that they did not act

carelessly, recklessly, or with an intentional disregard of rules

or regulations.   Higbee v. Commissioner, supra at 446-447; see

also sec. 6662(c).   Alternatively, petitioners may avoid

liability for the accuracy-related penalties by showing that

there was reasonable cause for the underpayment and that they

acted in good faith.    See sec. 6664(c)(1).

     We find that respondent has met his burden of production

because petitioners offered no documentation to support their

claim that they performed the requisite number of hours to be

engaged in a real property trade or business.   See Smith v.

Commissioner, T.C. Memo. 1998-33.    Petitioners did not address

their liability for the accuracy-related penalties at trial or on

brief, and on the basis of the record at hand, we find that

petitioners were negligent.    They maintained no books and made no

apparent effort to substantiate the hours which Mr. Magno

purportedly spent on petitioners’ real estate activities.   See

Stewart v. Commissioner, T.C. Memo. 2010-184.    We believe that an

ordinarily reasonable and prudent person with Mr. Magno’s

expertise in financial planning would have sought the advice of a

tax expert before claiming more than $173,000 in losses over a 3-

year period.   Petitioners made no such effort and in failing to

do so were negligent.    Cf. Fowler v. Commissioner, supra (finding
                              - 15 -

a taxpayer who relied on the advice of an accountant not liable

for an accuracy-related penalty even though the taxpayer did not

meet the requirements of section 469(c)(7)(B)).

     Nor does reasonable cause exist to excuse petitioners from

the accuracy-related penalties.    We recognize that section 469

and the regulations thereunder cover a highly complex area of the

Internal Revenue Code, but complexity alone does not excuse a

taxpayer from taking reasonable steps to determine the law and

comply with it.   Niedringhaus v. Commissioner, 99 T.C. 202, 222

(1992); see also sec. 1.6664-4(b)(1), Income Tax Regs.

Petitioners made no apparent effort to comply with the tax law or

to seek out the advice of someone who could help them do so.     We

therefore hold petitioners liable for accuracy-related penalties

for the subject years.

     We have considered all arguments made by the parties, and to

the extent that we have not specifically addressed them, we

conclude that they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.
