                  T.C. Summary Opinion 2004-39



                     UNITED STATES TAX COURT



         ALFREDO A. AND JANE R. GALAGAR, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5906-02S.             Filed March 25, 2004.


     Alfredo A. Galagar, pro se.

     Ric D. Hulshoff, for respondent.



     PAJAK, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   Unless otherwise

indicated, 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.   The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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     Respondent determined deficiencies of $5,982 and $1,484 in

petitioners’ 1998 and 1999 Federal income taxes, respectively.

After a concession by petitioners as to the deficiency for

taxable year 1999, this Court must decide:   (1) Whether

petitioner Alfredo A. Galagar (petitioner) was a real estate

professional under section 469(c)(7) during taxable year 1998,

and, if not, (2) whether petitioners’ claimed rental real estate

loss is subject to the phaseout provision for rental real estate

activities under section 469(i).

     Some of the facts in this case have been stipulated and are

so found.   Petitioners resided in Yorba Linda, California, at the

time they filed their petition.    Because petitioners did not meet

the substantiation and recordkeeping requirements of section

7491(a)(2), the burden of proof remains on petitioners.    Rule

142(a).

     During taxable year 1998, petitioners owned and rented a

single family home in Chino, California (the rental property).

In connection with the rental property, petitioners attached

Schedule E, Supplemental Income and Loss, to their jointly filed

Form 1040, U.S. Individual Income Tax Return.   On Schedule E,

petitioners reported rental income in the amount of $14,748, and

total expenses in the amount of $36,001, for a rental real estate

loss of $21,253.   Petitioners claimed that loss on Line 17 of

their Form 1040.   Respondent disallowed $20,721 of petitioners’
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claimed $21,253 rental real estate loss.    Respondent allowed $532

of petitioners’ claimed rental real estate loss.

     Section 469(a) generally disallows passive activity losses.

Section 469(d)(1) defines passive activity loss as the excess of

passive activity losses over passive activity income for the

taxable year.   Section 469(c)(1) defines passive activity as any

activity which involves the conduct of any trade or business, and

in which the taxpayer does not materially participate.

     Under section 469(c)(2), passive activity includes any

rental activity, “without regard to whether or not the taxpayer

materially participates in the activity.”   Sec. 469(c)(4).

However, under section 469(c)(7), section 469(c)(2) does not

apply to the rental real estate activities of a taxpayer in the

real property business (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
     services during the taxable year in real property trades or
     businesses in which the taxpayer materially participates.

Sec. 469(c)(7)(B).

     A contemporaneous daily log is not required to establish the

hours spent on real estate activities if established by “other

reasonable means.”   Sec. 1.469-5T(f)(4), Temporary Income Tax

Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).   Reasonable means
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includes “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.”      Id.

     Petitioner contends that during taxable year 1998, he spent

more than 750 hours on his real estate activities and therefore

qualifies as a real estate professional under section 469(c)(7).

On his 1998 Form 1040, petitioner listed his occupation as a real

estate professional.   At trial, petitioner stated that he paid a

management company to collect the rental payments from tenants

and pay some of the repair expenses pertaining to the rental

property.   Petitioner further stated that the rental property was

“run down” and that he supervised the repair work performed on

the roof, pool, and landscape.    Petitioner admitted that he

estimated the time he spent and did not keep a log of his time.

No appointment book, calendar, or narrative summaries were

submitted at trial.

     We have only petitioner’s own oral testimony that he spent

the requisite number of hours on his real estate activities.

Petitioner failed to establish by any reasonable means that he

spent more than 750 hours on his real estate activities.    Thus,

we must conclude that he was not a real estate professional under

section 469(c)(7)(B) during taxable year 1998.

     Section 469(i) generally allows a $25,000 offset for rental
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real estate activities.   Section 469(i)(1) provides, in relevant

part, that “in the case of any natural person,” the passive

activity loss disallowance under section 469(a) “shall not apply

to that portion of the passive activity loss * * * attributable

to all rental real estate activities with respect to which such

individual actively participated in such taxable year”.    Active

participation includes making management decisions or arranging

for others to provide services such as repairs.    Cf. Madler v.

Commissioner, T.C. Memo. 1998-112.

     Section 469(i)(2) imposes a $25,000 limitation on section

469(i)(1).   But section 469(i)(3)(A) provides that “the $25,000

amount under paragraph (2) shall be reduced (but not below zero)

by 50 percent of the amount by which the adjusted gross income of

the taxpayer for the taxable year exceeds $100,000.”    Section

469(i)(3)(E)(iv) provides that “adjusted gross income shall be

determined without regard to * * * any passive activity loss”.

     Assuming arguendo that petitioner actively participated in

his rental real estate activities during taxable year 1998,

petitioner could claim the $25,000 offset allowed under section

469(i)(1), subject to a phaseout.    We find that the phaseout

under section 469(i)(3)(A) applies here.    On their 1998 Form

1040, petitioners reported wage income of $148,514, taxable

interest of $402, and ordinary dividends of $21.    For purposes of

section 469(i)(3)(A) and (E), petitioners’ adjusted gross income
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is $148,937.    Petitioners’ adjusted gross income exceeds $100,000

by $48,937.    Fifty percent of $48,937 is $24,468 (rounded).   The

maximum offset amount is $25,000.    Thus, under section 469(i),

petitioners are entitled to a rental real estate loss of $532 for

taxable year 1998, the amount determined by respondent.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                          Decision will be entered

                                     for respondent.
