                          T.C. Memo. 2011-69



                        UNITED STATES TAX COURT



YUSUFU YERODIN ANYIKA AND CECELIA FRANCIS-ANYIKA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23437-08.                Filed March 24, 2011.



     Yusufu Yerodin Anyika and Cecelia Francis-Anyika, pro sese.

     Lisa Blades, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:     Respondent determined deficiencies of $5,302

and $4,599 in petitioners’ Federal income taxes for their 2005

and 2006 tax years, respectively.    Respondent also determined

penalties pursuant to section 6662(a) of $1,055.40 and $827.80,

respectively.    The issues we must decide are:   (1) Whether

petitioners are real estate professionals as defined in section
                              - 2 -

469(c)(7)(B); (2) if petitioners are not real estate

professionals, whether their rental real estate losses are phased

out pursuant to section 469(i); (3) whether petitioners are

liable for a section 6662(a) penalty for substantial

understatement of income tax and/or negligence for 2005; (4)

whether petitioners are liable for a section 6662(a) penalty for

negligence for 2006; and (5) whether petitioners are liable for a

penalty pursuant to section 6673(a)(1).1

                        FINDINGS OF FACT

     Some of the facts and certain exhibits have been stipulated.

The parties’ stipulations of fact are incorporated in this

opinion by reference and are found accordingly.   At the time they

filed their petition, petitioners resided in Pennsylvania.

     Petitioners, Yusufu Yerodin Anyika (Mr. Anyika) and Cecelia

Francis-Anyika (Mrs. Francis-Anyika), are married and filed joint

returns for tax years 2005 and 2006.   Mr. Anyika is employed as

an engineer, and he works 37.5 hours per week, 48 weeks per year.

Mrs. Francis-Anyika is employed as a nurse, and she works 24

hours per week.

     Mr. Anyika has been purchasing, renovating, managing, and

selling rental properties since the 1990s.   He views his rental



     1
      All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                               - 3 -

real estate activity as a second job and as an investment.

During 2005 and 2006, Mr. Anyika owned two rental properties.

     Petitioners used TurboTax software to prepare their 2005 and

2006 tax returns, and they did not consult a tax professional.

Petitioners reported $133,117 and $167,630 in wages on their 2005

and 2006 tax returns, respectively.    On their 2005 tax return,

petitioners deducted $23,551 in rental real estate losses.      On

audit, respondent disallowed all but $5,428 of the claimed

deductions.   On their 2006 tax return, petitioners deducted

$15,265 in rental real estate losses.    On audit, respondent

disallowed the entire amount of petitioners’ claimed rental real

estate deductions.   As a result of the disallowances and a few

other adjustments that petitioners do not dispute, respondent

adjusted petitioners’ tax liabilities from $14,451 to $19,753 for

their 2005 tax year and from $20,552 to $25,151 for their 2006

tax year.   In accordance with the adjustments, respondent

determined deficiencies in petitioner’s taxes of $5,302 and

$4,599, respectively, and issued a notice of deficiency.

     After receiving respondent’s notice of deficiency,

petitioners timely petitioned this Court.    This case was

originally scheduled for trial on November 16, 2009, but was

rescheduled for March 2010.   Unfortunately, in spite of the

continuance and in spite of our order compelling petitioners to

answer respondent’s interrogatories and turn over documents they
                                - 4 -

planned to use as evidence at trial, petitioners failed to

provide respondent with any of the requested items.     Petitioners

contend that they had reached an agreement with respondent’s

counsel that respondent’s counsel would obtain the requested

documents from the Internal Revenue Service employee responsible

for auditing petitioners’ returns.      Respondent denies that such

an agreement ever existed.   Respondent has moved, pursuant to

section 6673(a)(1), for sanctions against petitioners on the

basis of their failure to cooperate with respondent’s requests

for documents.

                               OPINION

     Generally, the Commissioner’s determination of a deficiency

is presumed correct, and the taxpayer has the burden of proving

it incorrect.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).   Deductions are a matter of legislative grace, and

taxpayers bear the burden of proving that they have met all

requirements necessary to be entitled to the claimed deductions.

Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992).   The burden of proof on a factual issue that affects a

taxpayer’s liability for tax may be shifted to the Commissioner

where the “taxpayer introduces credible evidence with respect to

* * * such issue.”   Sec. 7491(a)(1).    Petitioners have neither

claimed nor shown that they complied with the substantiation
                               - 5 -

requirements of section 7491(a).    Therefore, the burden of proof

remains on petitioners.   See Rule 142(a).

     Section 469 generally disallows any passive activity loss.

A passive activity is the conduct of any trade or business in

which the taxpayer does not materially participate.     Sec.

469(c)(1).   A passive activity loss is defined as the excess of

the aggregate losses from all passive activities for the year

over the aggregate income from all passive activities.     Sec.

469(d)(1).   A rental activity generally is treated as a per se

passive activity regardless of whether the taxpayer materially

participates.2   Sec. 469(c)(2).   In establishing whether a

taxpayer’s real property activities result in passive activity

losses, each interest in rental real estate is treated as a

separate rental real estate activity unless the qualifying

taxpayer makes an election to treat all interests in rental real

estate as a single real estate activity.     Sec. 469(c)(7)(A).

     An exception to the rule that a rental activity is per se

passive is found in section 469(c)(7), which provides that the

rental activities of a taxpayer who is a real estate professional

are not per se passive activities but are treated as a trade or

business subject to the material participation requirements of

section 469(c)(1).   Sec. 1.469-9(e)(1), Income Tax Regs.



     2
      A rental activity is “any activity where payments are
principally for the use of tangible property.” Sec. 469(j)(8).
                                - 6 -

     A taxpayer qualifies as a real estate professional and is

therefore not engaged in a passive activity under section

469(c)(2) 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
     services during the taxable year in real property trades or
     businesses in which the taxpayer materially participates.

Sec. 469(c)(7)(B).    In the case of a joint return, the foregoing

requirements for qualification as a real estate professional are

satisfied if, and only if, either spouse separately satisfies the

requirements.   Id.   Thus, if either spouse qualifies as a real

estate professional, the rental activities of the real estate

professional are not per se passive under section 469(c)(2).

     Section 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed.

Reg. 5727 (Feb. 25, 1988), sets forth the requirements necessary

to establish the taxpayer’s hours of participation as follows:

     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.
                                 - 7 -

Although “reasonable means” may be interpreted broadly, a

postevent “ballpark guesstimate” will not suffice.    Moss v.

Commissioner, 135 T.C. 365, 369 (2010) (and cases cited therein).

     Even if taxpayers fail to qualify as real estate

professionals under section 469(c)(7) and must therefore treat

losses from their rental properties as passive activity losses,

they may still be eligible to deduct a portion of their losses

pursuant to section 469(i)(1).    Section 469(i) provides a limited

exception to the general rule that passive activity losses are

disallowed.   A taxpayer who actively participates in a rental

real estate activity may deduct a maximum loss of up to $25,000

per year related to the activity.    The deduction is phased out as

adjusted gross income, modified by section 469(i)(3)(E), exceeds

$100,000, with a full phaseout occurring when modified adjusted

gross income equals $150,000.    Sec. 469(i)(3)(A).

     Petitioners contend Mr. Anyika satisfies the section 469

requirements for being a real estate professional.    To support

their contention, they rely principally on Mr. Anyika’s testimony

that he worked the equivalent of 8 hours per day, 5 days per

week, 48 weeks per year doing maintenance, repairs, and

renovations to petitioners’ rental properties.    In their petition

and at trial, petitioners contended that Mr. Anyika qualified as

a real estate professional because he had spent at least 750

hours actively managing the rental properties.    On Form 4564,
                               - 8 -

Information Document Request, submitted by petitioners during

their audit, petitioners declared, under penalty of perjury, that

Mr. Anyika devoted 800 hours per year to working on the rental

properties during 2005 and 2006.   During the trial, the Court

explained that, in order to qualify as a real estate professional

under section 469(c)(7)(B), a taxpayer must spend at least 750

hours materially participating in the real estate business and,

additionally, must devote more than one-half of his total

personal services working hours to his real estate business.

     It was only after the Court had explained the law that Mr.

Anyika understood, for the first time, that he would have to have

spent at least 1,800 hours engaged in the real estate business in

order to qualify as a real estate professional under section

469(c)(7)(B).   After understanding that, to qualify, he had to

spend more hours engaged in managing the rental properties than

he did working as an engineer, Mr. Anyika began to contend that

he had spent the equivalent of 8 hours per day, 5 days per week,

48 weeks per year (1,920 hours per year) working on the rental

properties.   After being confronted during trial by the evidence

of his prior signed statement that he worked 800 hours per year

on the rental properties, Mr. Anyika stated that he was “speaking

from memory with the exact numbers”, and that to be sure, he

would need to look over the numbers more closely.   In addition to

Mr. Anyika’s testimony, petitioners submitted real estate titles
                               - 9 -

and various bills and receipts to substantiate Mr. Anyika’s work

on the rental properties.

     Unfortunately for petitioners, Mr. Anyika’s testimony at

trial that he devoted approximately 1,920 hours per year to

working on the rental properties contradicts his prior statement

during the audit that he worked only 800 hours per year on the

rental properties.   Mr. Anyika made the 800-hour estimate on a

Form 4564, which he signed under penalty of perjury.

     We do not find Mr. Anyika’s testimony that he worked

approximately 1,920 hours per year on the rental properties

credible.   Not only does it contradict his earlier signed

statement, but it also changed during trial once Mr. Anyika

realized that he would need to have devoted more hours to his

real estate properties than to his job as an engineer (i.e., he

would need to have spent more than 1,800 hours working on the

rental properties), instead of the 750 hours he had originally

believed would be sufficient for him to qualify as a real estate

professional under section 469(c)(7).3   We therefore conclude

that Mr. Anyika was not a real estate professional under section

469(c)(7) for 2005 or 2006.   Accordingly, we hold that


     3
      Even if we did find Mr. Anyika’s trial testimony credible,
he admitted in his testimony that his numbers were simply an
estimate and that he did not remember the exact hours; and such a
rough, after-the-fact estimate of his hours would not qualify as
a “reasonable means” of establishing the extent of his
participation in the rental activity. See Moss v. Commissioner,
135 T.C. 365, 369 (2010).
                              - 10 -

petitioners’ rental activities during 2005 and 2006 were passive

activities pursuant to section 469(c)(2).

     Even though we have held that petitioners’ rental activities

were passive, we still must consider whether petitioners are

eligible to deduct a portion of their real estate losses pursuant

to section 469(i)(1) because of Mr. Anyika’s active participation

in managing the rental properties.     The active participation

standard is met as long as the taxpayer participates in a

significant and bona fide sense in making management decisions or

arranging for others to provide services such as repairs.     See

Moss v. Commissioner, 135 T.C. at 371; Madler v. Commissioner,

T.C. Memo. 1998-112.   It is clear from the record that

petitioners fully own the rental properties and that Mr. Anyika

has personally been very active in managing the rental

properties.   Moreover, respondent concedes that Mr. Anyika

actively participated in real estate activities during 2005 and

2006.   Accordingly, we hold that petitioners are entitled to

deduct a portion of their real estate losses pursuant to section

469(i)(1).

     However, petitioners’ income is subject to the phaseout

under section 469(i)(3)(A).   During both 2005 and 2006,

petitioners’ modified adjusted gross income was more than

$100,000, requiring that the $25,000 maximum deduction be reduced
                                 - 11 -

by 50 percent of the amount by which their income exceeded

$100,000.   Sec. 469(i)(3)(A).

     We next consider the penalties determined pursuant to

section 6662.   Subsection (a) of section 6662 imposes an

accuracy-related penalty of 20 percent of any underpayment that

is attributable to causes specified in subsection (b).

Subsection (b) applies the penalty to any underpayment

attributable to, inter alia, a “substantial understatement” of

income tax, sec. 6662(b)(2), or “negligence or disregard of rules

or regulations”, sec. 6662(b)(1).

     There is a “substantial understatement” of income tax for

any tax year where the amount of the understatement exceeds the

greater of 10 percent of the tax required to be shown on the

return for the tax year or $5,000.        Sec. 6662(d)(1)(A).   However,

the amount of the understatement may be reduced by any portion of

the understatement attributable to any item for which there was

substantial authority for the taxpayer’s treatment, or with

respect to which the relevant facts were adequately disclosed on

the taxpayer’s return and there was a reasonable basis for the

taxpayer’s treatment.   Sec. 6662(d)(2)(B).

     Section 6662(a) also imposes a penalty for negligence or

disregard of rules or regulations.        Under section 6662(c),

“negligence” is “any failure to make a reasonable attempt to

comply with the provisions of this title”.        We have defined
                                  - 12 -

negligence as “a lack of due care or a failure to do what a

reasonable and prudent person would do under the circumstances.”

Bunney v. Commissioner, 114 T.C. 259, 266 (2000).      Failure to

maintain adequate books and records or to substantiate items

properly constitutes negligence.      Sec. 1.6662-3(b)(1), Income Tax

Regs.    A taxpayer is considered to have disregarded rules or

regulations even if such disregard is “careless”, meaning that

the taxpayer “does not exercise reasonable diligence to determine

the correctness of a return position that is contrary to the rule

or regulation.”    Sec. 1.6662-3(b)(2), Income Tax Regs.

       Generally, the Commissioner bears the burden of production

with respect to any penalty, including the accuracy-related

penalty.    Sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446

(2001).    To meet that burden, the Commissioner must come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty.      Higbee v. Commissioner, supra at

446.    The Commissioner has the burden of production only; the

ultimate burden of proving that the penalty is not applicable

remains on the taxpayer.    Id.

       Respondent contends that the section 6662 penalty for 2005

is justified on the basis of substantial understatement of income

tax and/or negligence.    See sec. 6662(b).   For their 2005 tax

year, petitioners understated their tax liability by $5,302, an

amount which is greater than both $5,000 and 10 percent of the
                              - 13 -

amount required to be shown on their return, $1,975.    Petitioners

do not argue that the amount of their understatement should be

reduced because they had substantial authority for any item or

because their position with respect to any item was adequately

disclosed.   Accordingly, we hold that petitioners are liable for

the section 6662(a) and (b)(2) penalty for 2005 because they

substantially understated their income tax.

     Respondent contends that petitioners are liable for the

section 6662 penalty for 2006 on the basis of negligence.    See

sec. 6662(b)(1).   Petitioners did not consult a tax professional

when preparing their return for either year.   Rather, petitioners

based their deductions on their belief that Mr. Anyika was a real

estate professional.   However, petitioners have not explained how

they arrived at their conclusion that Mr. Anyika qualified as a

real estate professional, and Mr. Anyika acknowledged during

trial that he had misunderstood the relevant statute and the

requirements for being a real estate professional.    A reasonable

person in Mr. Anyika’s position, understanding that the tax law

governing the deductions he claimed was complex, would have

consulted a tax professional instead of merely assuming that he

qualified on the basis of his own conclusions.    Even if Mr.

Anyika had been correct in his understanding of the law, he was

negligent in ensuring that he complied with it.    At trial, Mr.

Anyika was unsure of the number of hours he had spent working on
                               - 14 -

the rental properties, and his testimony and prior statement

regarding the number of those hours were inconsistent.    It is

clear that Mr. Anyika did not carefully document the hours he

worked on the rental properties and that petitioners therefore

failed to keep records adequate to substantiate the deductibility

of their real estate losses.   Such a failure is evidence of

negligence.   See sec. 1.6662-3(b)(1), Income Tax Regs.   On the

basis of the record, we conclude that respondent has met the

burden of production in showing that petitioners were negligent

in preparing their tax returns for 2005 and 2006.

     Section 6664(c) provides a reasonable cause and good faith

exception to penalties under section 6662.    Section 6662

penalties will not apply to any portion of an underpayment to the

extent that the taxpayer had reasonable cause and acted in good

faith for that portion.   Sec. 6664(c)(1).   The decision as to

whether the taxpayer acted with reasonable cause and in good

faith depends upon all the pertinent facts and circumstances.

See sec. 1.6664-4(b)(1), Income Tax Regs.    Relevant factors

include the taxpayer’s efforts to assess his proper tax

liability, including the taxpayer’s reasonable and good faith

reliance on the advice of a professional such as an accountant.

See id.   Furthermore, an honest misunderstanding of fact or law

that is reasonable in the light of the experience, knowledge, and
                              - 15 -

education of the taxpayer may indicate reasonable cause and good

faith.   See Remy v. Commissioner, T.C. Memo. 1997-72.

     Petitioners contend that they used TurboTax software to

prepare their returns for both years and that the software

program is to blame for any miscalculations in their income.

However, petitioners have not provided any evidence showing the

information that they entered into the software program, a

preliminary showing that would be required to decide whether the

software program is in any way at fault for petitioners’

underpayment.   See Paradiso v. Commissioner, T.C. Memo. 2005-187.

Such software is only as good as the information the taxpayer

puts into it.   See Bunney v. Commissioner, supra at 267.     We have

held that the misuse of tax preparation software, even if

unintentional or accidental, is no defense to penalties under

section 6662.   See Lam v. Commissioner, T.C. Memo. 2010-82.

     Respondent has produced evidence that petitioners were

negligent in not maintaining records necessary to substantiate

that Mr. Anyika qualified as a real estate professional and that

they did not act as reasonable persons would have to ensure their

compliance with the tax laws; and petitioners have not shown that

their deficiencies were due to anything other than their own

negligence or disregard of the rules and regulations.

Petitioners are therefore liable for the section 6662 penalties.

See Higbee v. Commissioner, 116 T.C. at 449.   Their use of
                               - 16 -

TurboTax does not establish reasonable cause and good faith.      See

Lam v. Commissioner, supra.

     Respondent has satisfied the burden of production with

respect to the section 6662(a) penalties.    Petitioners’

understatement of income tax on their 2005 return is substantial

under section 6662(d)(1)(A) because it exceeds $5,000 and is

greater than 10 percent of the amount required to be shown on

their return.    Petitioners’ 2005 and 2006 returns were both filed

negligently.    The burden therefore is on petitioners to prove

they acted with reasonable cause and in good faith.    We conclude

that petitioners failed to carry their burden.    Accordingly, we

hold that petitioners are liable for the section 6662(a)

accuracy-related penalties for their 2005 and 2006 tax years.

     Finally, we consider whether petitioners are liable for a

penalty pursuant to section 6673(a)(1).    Section 6673(a)(1)

provides that this Court may require the taxpayer to pay a

penalty not in excess of $25,000 whenever it appears to this

Court that:    (a) The proceedings were instituted or maintained by

the taxpayer primarily for delay; (b) the taxpayer’s position is

frivolous or groundless; or (c) the taxpayer unreasonably failed

to pursue available administrative remedies.    Respondent has

moved that the Court impose a penalty, contending that

petitioners instituted or maintained this proceeding primarily
                                - 17 -

for delay and that petitioners’ position is frivolous or

groundless.

     Although petitioners’ behavior was negligent and evidenced a

lack of respect for the relevant law and the Court’s procedures,

it does not appear from the record that petitioners’ primary

purpose in instituting or maintaining their case was delay.

Petitioners were uncooperative and failed to reply to

respondent’s requests for documents or to this Court’s order

compelling the same, but we note that petitioners are pro se and

to a certain extent appeared confused by the proceedings.    No

doubt their confusion was due in part to Mr. Anyika’s failure to

read some of the documents sent to him, but negligent

disorganization does not amount to purposeful delay.

Additionally, although petitioners were mistaken about the

applicable law and although the evidence they offered did little

to support their position, their shortcomings do not make their

case frivolous or groundless.    See DeMoss v. Commissioner, T.C.

Memo. 1993-636.   Accordingly, we decline to impose a penalty

under section 6673.

     In reaching these holdings, we have considered all the

parties’ arguments, and, to the extent not addressed herein, we

conclude that they are moot, irrelevant, or without merit.
                        - 18 -

To reflect the foregoing,


                                  An appropriate order and

                             decision will be entered.
