                          T.C. Memo. 1998-17



                       UNITED STATES TAX COURT



              GEORGE AND BOZENNA POHOSKI, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9027-96.                         Filed January 13, 1998.



     Philip Garrett Panitz, for petitioners.

     Donna F. Herbert, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:    Respondent determined a $28,143 deficiency in

petitioners' 1993 Federal income tax, and an accuracy-related

penalty of $2,662 pursuant to section 6662(a).

     After concessions, we must decide: (1) Whether petitioners

materially    participated   in   the   rental   of   their   two   Hawaiian

condominiums for purposes of the passive activity loss rules
                                     - 2 -


pursuant to section 469(a); and (2) whether petitioners are liable

for the accuracy-related penalty pursuant to section 6662(a).

     All section references are to the Internal Revenue Code as in

effect for the year in issue.            All Rule references are to the Tax

Court Rules of Practice and Procedure.

                              FINDINGS OF FACT

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

stipulation of facts and the attached exhibits are incorporated

herein by this reference.

     At   the   time   the    petition     was   filed,   George   and   Bozenna

Pohoski, husband and wife, resided in Camarillo, California.

Background

     During 1993, Mr. Pohoski was employed as an engineer with the

U.S. Department of Defense, and Mrs. Pohoski was employed as a

nurse.    Both petitioners worked an average of 40 hours per week.

Petitioners have two children.

     Throughout    the       year   in     issue,   petitioners     owned   two

condominiums in Camarillo, California (the Camarillo condominiums),

and two condominiums in Hawaii.            The Camarillo condominiums were

generally rented out on a long-term lease basis.                   Petitioners

managed the Camarillo condominium properties themselves, collecting

the rents, making repairs, and maintaining the books and records.

Respondent concedes that the rental of the Camarillo condominiums

was properly reported by petitioners on their 1993 joint Federal

income tax return.
                                     - 3 -


1. Hawaiian Condominiums

     In 1991, petitioners purchased a condominium at the Valley

Isle Resort on the island of Maui, Hawaii (the Maui condo).                 In

1992, petitioners purchased a condominium at the Wavecrest Resort

on the island of Molokai, Hawaii (the Molokai condo).                Both of

these condominiums were purchased as rentals to vacationers.               Each

condominium included one bedroom, one bathroom, a living room,

kitchen, dining room, and lanai.1

     A. Maui Condo

     As owners of the Maui condo, petitioners were members of the

Homeowners' Association at the Valley Isle Resort (Homeowners'

Association).    The Homeowners' Association entered into a contract

with Rainbow Reservations, Inc. (Rainbow Reservations) to operate

the front desk for the Valley Isle Resort condominiums.               Rainbow

Reservations    also   provided     management   services   for    individual

condominium owners. During 1993, Rainbow Reservations entered into

management contracts with owners of approximately 40 of the 120

condominium units at the Valley Isle Resort.

     Generally, Rainbow Reservations provided a variety of services

for the condominium owners with whom they had management contracts,

including the rental of the condominium units, collection of rents,

after-hours    front   desk    services,     maid   services,     repair    and

maintenance     services,     and   redecorating     services.        Rainbow



     1
          A lanai is a Hawaiian term for a porch or veranda.
                                        - 4 -


Reservations       also    provided     biennial   "deep    cleans"     of   each

condominium.       For these services, Rainbow Reservations charged a

commission of 40 percent of the gross rents.

       As   part   of     its   front    desk   service    contract   with    the

Homeowners' Association, Rainbow Reservations checked guests in and

out of the condominiums, issued parking permits, answered questions

regarding entertainment or other activities in the area, and

provided additional services as needed.              During 1993, the front

desk's normal business hours were between 8 a.m. and 5 p.m.,

although the front desk stayed open longer between July and early

October for a sprinkler refit at the resort.              The front desk staff

consisted of two to four persons at any one time.

       Rainbow Reservations provided its own advertising for all of

the units it managed in Hawaii, including Valley Isle Resort.                  In

general, the advertisements were directed toward travel agents,

although some were directed toward the public.

       Petitioners did not enter into the typical management contract

with   Rainbow     Reservations.        Instead,   petitioners    and    Rainbow

Reservations agreed that petitioners would rent the Maui condo

themselves and perform the majority of services otherwise provided

by Rainbow Reservations.           Petitioners and Rainbow Reservations

entered into an "Amendment to Rental Agreement Between Owner And

Rainbow     Reservations,       Inc."    (the   addendum    agreement)       which

provided:
                         - 5 -


Effective * * * November 1, 1992 owner will be
responsible for renting unit directly.    In the event
Rainbow Reservations wishes to rent unit to one of its
clients, Rainbow Reservations will contact owner and
clear the time before committing the unit. Owner will
control the MASTER CALENDAR.

Rainbow Reservations agrees to coordinate the maid
service, and maid company will bill the owner directly
unless agreed otherwise.    Owner(s) agrees to notify
Rainbow Reservations of his guest arrivals and pay all
costs associated. Rainbow Reservations will continue to
provide front desk counter service for all owner's
guests, which will include, greeting of guests, key
distribution (unless agreed to otherwise), coordination
of maid service, and collection of any due rents (if
notified by owner).

     The owner will continue to contract for necessary
maintenance services and the Rental manager is hereby
authorized to contact the following for emergency
maintenance repairs. Rental manager will contact owner
if said repair exceeds $200.00[.]

   *       *       *       *        *       *       *

Owner agrees to perform all advertising of said premises,
to institute and prosecute actions to evict tenants and
recover possession of premises, to sue and recover rents,
and to settle and release such actions.      In no event
shall Rainbow Reservations be liable to the owner as long
as the owner remains the principal rental agent. Rainbow
Reservations agrees to collect any rents due owner, upon
notification by owner before the arrival of guests.

   *       *       *       *        *       *       *

The owner shall compensate Rainbow Reservations for all
above mentioned services by guaranteeing 20% commission
on all daily rents collected by owner. It is agreed that
all linen charges, maid services and check in supplies
shall be paid by the owner. Owner will be responsible
for paying his own transient tax fees to the State of
Hawaii. In the event the owners [sic] unit is vacant for
30 days or more, owner will compensate Rainbow
Reservations * * * [for the front desk services].
                                      - 6 -


     Under the addendum agreement, Rainbow Reservations collected

the rent from petitioners' tenants and placed the funds into a

trust account.    Rainbow Reservations then deducted from the rental

proceeds its commission and the costs of maid or other services it

provided.   At the end of each month, a check representing the net

proceeds from the rental of the Maui condo was forwarded to

petitioners.      As     part   of   this    process,    Rainbow    Reservations

maintained records of the rental proceeds for petitioners, and

issued a Form 1099 to petitioners at the end of the year.

     Although     the     addendum    agreement     provided       that    Rainbow

Reservations     would    receive     a     20-percent   commission,       Rainbow

Reservations actually received a 25-percent commission during 1993

as a result of its performing special services for petitioners.

Additionally,     Rainbow       Reservations      was    permitted        to   rent

petitioners' Maui condo directly during times when the condo was

vacant, subject to petitioners' approval.                 For those bookings,

which only occurred once or twice during 1993, Rainbow Reservations

earned a 40-percent commission.

     As part of its front desk services, Rainbow Reservations

issued keys and parking permits to petitioners' tenants (unless

petitioners made other arrangements).              The front desk was also

available for petitioners' tenants to answer questions, obtain

additional linens, or receive complaints.

     The Maui condo was rented for 22 weeks during 1993, with an

average stay for a tenant of 6.5 days.             Petitioners' base charge
                               - 7 -


for the Maui condo was $80 per night, with additional fees for

rollaway beds, the use of entertainment equipment, or daily linen

or cleaning services which raised the rate to approximately $120

per night.

     In between each booking, the maid service cleaned the Maui

condo in preparation for the next tenant.

     B. Molokai Condo

     The front desk at the Wavecrest Resort was operated by one of

the local residents at the resort. The front desk service included

maid service which was provided at the end of each tenant's stay.

There were no fixed hours at the front desk, and often phone calls

were forwarded to an answering machine.      The front desk lacked

authority to make repairs or perform any work at the Molokai condo

except in the case of emergencies.     If the Molokai condo was not

rented for extended periods of time, petitioners paid a special

front desk fee.   The Wavecrest Resort did not advertise its rental

units.

     Petitioners paid a commission of approximately 25 percent of

gross receipts to the front desk at the Wavecrest Resort, in

addition to a reserve account payment for capital improvements of

common areas at the resort.

     During 1993, petitioners rented out the Molokai condo for

approximately 5 weeks.    The average stay was 6.5 days, and the

rental rates were the same as that for the Maui condo.
                                    - 8 -


     C. Petitioners' Participation in the Hawaiian Condos

     To promote the Hawaiian condominiums during 1993, petitioners

placed two advertisements in Hawaii Magazine, one each for the

rentals of the Maui and Molokai condos. The advertisements ran for

the entire year, and the magazine was released bimonthly.                The

advertisements    listed   petitioners'     home    telephone   number   for

information on renting the condominiums.

     Petitioners also marketed the Hawaiian condominiums through

several travel agents during 1993.          The travel agents referred

clients   to   petitioners,   and   in   exchange   petitioners   referred

airline bookings and other travel and entertainment arrangements to

the travel agents.

     Further, Mr. Pohoski set up a worldwide web page on the

Internet which described petitioners and displayed pictures of the

Hawaiian condominiums. Additionally, as they traveled to different

sites as part of their regular employment (Mr. Pohoski traveled to

military installations, and Mrs. Pohoski traveled to hospitals),

petitioners posted business cards on bulletin boards advertising

the availability of their Hawaiian condominiums.

     Petitioners received an average of two to three telephone

calls per day regarding the rental of their Hawaiian condominiums,

for a total of more than 500 calls during 1993.          Petitioners also

often received e-mail messages from prospective tenants. Telephone

calls were usually received during the evenings and weekends when
                                    - 9 -


petitioners were home, but if they were not home, messages were

left on their home answering machine.

     The telephone callers usually sought a description of the

condominiums and their proximity to beaches, restaurants, stores,

entertainment, and other major resorts.              Most callers requested

brochures and maps which petitioners mailed to the prospective

tenants.    Approximately 80 to 90 percent of the time, Mr. Pohoski

replied in writing to the prospective tenants rather than by

telephone because it was less expensive to mail information than

speak on the telephone.        Mr. Pohoski customized his letters to the

prospective     tenants   to   address     their    specific   interests   and

concerns. Petitioners also made telephone calls to the prospective

tenants, most of which took place during the evenings and weekends,

and sometimes during the day from work.

     When   a   reservation     with   a   tenant    was   made,   petitioners

recorded the booking information (name of tenant, arrival and

departure times, and rate) on a master calendar they maintained.

Petitioners then contacted the front desk of the resort in which

the tenant was booked and informed the front desk of the rental

arrangements and the dates.

     Petitioners maintained a database on their home computer of

each of their tenants for future marketing purposes.               Petitioners

also tracked their income on a monthly basis in another database.
                                    - 10 -


     For 2 weeks during 1993, petitioners and their children went

to Hawaii for a "working vacation".            While there, Mr. Pohoski

completed various maintenance and repair tasks at the Hawaiian

condominiums.    At the Maui condo where he worked approximately 10

days during their stay, Mr. Pohoski: Stripped the furniture and

transported it for reupholstering; repaired the lanai furniture;

cleaned   sink   traps;   performed    touchup     painting;   repaired   and

replaced the molding along the walls; installed cable wire for a

second television; ran a telephone line into the bedroom; repaired

the sliding screen and closet doors; purchased new bedspreads and

curtains; and installed new shower heads, towel bars, and shelving

units in the bathroom.

     At the Molokai condo where he worked approximately 4 days

during the working vacation, Mr. Pohoski: Repaired the garbage

disposal and sink faucet; performed touchup painting; reglued

moldings along the wall; repaired the sliding closet door; and

replaced the shower head in the bathroom.

     The materials and tools used for the maintenance and repair

work at the Hawaiian condominiums were mostly purchased in Hawaii,

but many were purchased on the U.S. mainland and shipped to Hawaii

because of the high cost of such products in Hawaii.

2. Federal Income Tax Returns

     Petitioners filed a joint 1993 Federal income tax return

reporting   an   adjusted   gross    income   of   $75,910.     On   separate
                                     - 11 -


Schedules C, Profit or Loss From Business, petitioners reported a

net loss of $17,641 from the operation of the Maui condo, and a net

loss of $16,336 from the operation of the Molokai condo.                    On both

Schedules     C,     petitioners      indicated      that        they     materially

participated in their rental activities.2

3. Notice of Deficiency

     In     the     notice    of     deficiency,     respondent           disallowed

petitioners'       losses    from    the     operation      of    their    Hawaiian

condominiums.       In the parties' stipulation agreement, respondent

concedes that the expenses incurred were ordinary and necessary

trade or business expenses. Respondent also conceded at trial that

substantiation is not being challenged.            The passive activity loss

rules under section 469(a) constitute respondent's sole basis for

disallowing petitioners' losses from their Hawaiian condominiums.

                                     OPINION

Issue 1.    Passive Activity Losses

     Pursuant      to   section     469(a)    a   passive    activity       loss   is

generally not allowed as a deduction for the year sustained.                        A

passive activity loss is defined as the excess of the aggregate


     2
          Petitioners filed a third Schedule C, Profit or Loss
From Business, reporting a net loss of $11,714 from Mrs.
Pohoski's home health care nursing business. Petitioners also
filed a Schedule E, Supplemental Income and Loss, showing a net
loss of $24,546 from the rental of their condominiums in
Camarillo, California.
                                        - 12 -


losses from all passive activities for the taxable year over the

aggregate income from all passive activities for that year.                       Sec.

469(d)(1).         Passive activities are those which involve the conduct

of    a    trade    or   business    and     in   which   the   taxpayer   does   not

materially participate.             Sec. 469(c)(1).

          Rental activity ordinarily is treated as a passive activity

regardless of whether the taxpayer materially participates.                       Sec.

469(c)(2), (4).          An exception exists for rental activity in which

the       average    rental   does     not    exceed      7   days.   Sec.   1.469-

1T(e)(3)(ii)(A), Temporary Income Tax Regs., 53 Fed. Reg. 5702

(Feb. 25, 1988).          In the instant case, the parties agree that the

average rental did not exceed 7 days.

          Petitioners contend that they materially participated in the

rental of both the Maui and Molokai condominiums, thus making

section 469(a) inapplicable. Material participation in an activity

is defined as regular, continuous, and substantial involvement.

Sec. 469(h)(1).           The participation of a spouse is taken into

account in determining material participation.                   Sec. 469(h)(5).

          A. Establishing Participation

          As a preliminary matter, respondent asserts that petitioners

failed to substantiate the extent of their participation in the

rental of their condominiums in the manner contemplated by section
                                 - 13 -


1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb.

25, 1988).   That regulation provides 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.

     At trial, petitioners introduced a narrative summary of their

rental activities with respect to their participation in the

Hawaiian condominiums in the form of a letter, dated October 17,

1996, to Ms. Ingrid Giammichele, an Internal Revenue Service (IRS)

Appeals officer in California.      The narrative summary details the

expenses, time, and effort put forth by petitioners in operating

their Hawaiian condominiums.     Respondent claims, however, that the

narrative summary is merely a postevent "ballpark guesstimate" that

is   insufficient   to   prove   participation.      See    Carlstedt   v.

Commissioner, T.C. Memo. 1997-331; Speer v. Commissioner, T.C.

Memo. 1996-323; Goshorn v. Commissioner, T.C. Memo. 1993-578.

      Although petitioners' narrative summary is a postevent review

of   their   1993   participation   with   respect   to    the   Hawaiian

condominiums, we may nonetheless find the summary sufficient to

establish petitioners' participation where it is supported by

credible testimony and other objective evidence.          See Harrison v.
                                     - 14 -


Commissioner, T.C. Memo. 1996-509. Our acceptance of the narrative

summary, however, does not require us to accept the accuracy of the

amount of time petitioners claim they spent participating in the

rental of the condominiums.         Id.

      Mr. Pohoski credibly testified that petitioners maintained

contemporaneous records (although such records were not introduced

at trial).   These records included a calendar that indicated the

name of the tenant, the daily rental rate, and the arrival and

departure times for the tenants at the condominiums, as well as a

database listing on petitioners' computer all prospective tenants.

We believe that these records laid the foundation for petitioners

to determine the amount of time they spent with respect to many of

their rental activities as provided in the narrative summary.

      Further, other evidence, such as the management contract

between petitioners and Rainbow Reservations and the testimony of

Marcia   Alders,     the   sole    shareholder     and    manager    of    Rainbow

Reservations, supports petitioners' claims of their relative level

of   participation    at   the    Maui    condo.     We     thus   conclude   that

petitioners have sustained their initial burden of establishing

through reasonable means their participation in the rental of the

Hawaiian condominiums.

      B. Material Participation Safe Harbor

      Petitioners     assert      that    their    rental     of   the    Hawaiian

condominiums satisfies the safe harbor requirements for material
                               - 15 -


participation provided in section 1.469-5T(a)(3), Temporary Income

Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).3         That section

provides for material participation if:

      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 activity of any other
      individual (including individuals who are not owners of
      interests in the activity) for such year[.]

Id.

      Respondent argues that (1) petitioners did not spend at least

100 hours participating in the rental of each of the Hawaiian

condominiums, and (2) other individuals participated more in the

activities than did petitioners.

      We are satisfied that petitioners participated in the rental

of their Hawaiian condominiums on a regular, continuous, and

substantial basis.

      At trial, Mr. Pohoski testified that he spent 800 hours

participating in the rental of the two Hawaiian condominiums during

1993, 650 hours at the Maui condo, and 150 hours at the Molokai

condo.    Of those total hours, Mr. Pohoski testified that 100 hours

      3
          In their pretrial memorandum, petitioners claimed that
they satisfied the safe harbor requirements of sec. 1.469-
5T(a)(1), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25,
1988). That section allows a finding of material participation
if the taxpayer participates in the activity for more than 500
hours during the taxable year. At trial, Mr. Pohoski testified
that he and Mrs. Pohoski spent 650 hours working on the Maui
condominium. However, in their posttrial brief, petitioners did
not address this safe harbor and conceded that they spent only
325.50 hours working on the Maui condominium.
                                - 16 -


of repair and maintenance work was completed during petitioners' 2-

week working vacation in Hawaii at the Maui condo, and 50 hours of

work was completed at the Molokai condo.     Further, Mr. Pohoski

testified that he spent between 5 and 15 minutes talking with each

prospective tenant who called, between 30 minutes and 1 hour each

week talking with travel agents, 80 hours creating a web page for

the Internet, 30 to 45 minutes per day checking his e-mail, and 2

hours per month posting business cards when he or Mrs. Pohoski

traveled to different sites as part of their employment.

     On brief, petitioners reduced their total claimed hours of

participation in the Hawaiian condominiums to 601 and provided a

breakdown of these hours as follows:

                                                             Total
Activity                 Hours at Maui   Hours at Molokai    Hours

Telephone calls             41.5               41.5            83
from prospective
renters

Travel agent contact        19.5               19.5            39

Web page construction       40.0               40.0            80

E-mail responses to         112.5             112.5           225
prospective renters

Posting 3 x 5 cards          12.0              12.0            24
at bases, in public
areas

Repairs and decorating      100.0              50.0           150
of Hawaii condos

   Total                    325.5             275.5           601
                                - 17 -


     Despite our concluding, supra, that petitioners satisfied

their intitial burden of proof, we find several problems with

petitioners' claim of time spent participating in the rental of

their Hawaiian condominiums.    Cf. Harrison v. Commissioner, supra.

First, petitioners'   claim    of   150   hours   of   work   during   their

Hawaiian "working vacation" is implausible.         Assuming petitioners

actually stayed for 14 days, their claim would amount to an average

of 10.7 hours of work per day, which was apparently performed only

by Mr. Pohoski because no testimony presented ever referred to work

performed by Mrs. Pohoski while in Hawaii.        Yet there was never any

discussion of breaks for meals, travel, or leisure time with the

family--all of which certainly occurred.

     Second, the breakdown of time spent on telephone calls from

prospective tenants, travel agent contacts, and e-mail responses to

prospective tenants is suspicious.        Petitioners allocate the total

time evenly between the Maui and Molokai condos, yet they clearly

had much more success in renting the Maui condo than the           Molokai

condo.   We find it unlikely that an equal amount of time was spent

with regard to each condominium, and we find that less time was

spent with respect to the Molokai condo.

     Third, we find the time spent with respect to checking and

responding to e-mail excessive.     Mr. Pohoski's testimony suggested

many more telephone calls than e-mail responses, yet much more time

was allocated to checking and responding to his e-mail than calling
                                   - 18 -


back or writing prospective tenants.           Additionally, it is likely

that petitioners received e-mail other than that relating to the

renting of their Hawaiian condominiums, and that such time was

included in the 225 hours allocated to checking the e-mail.

     Finally,    we   are    mindful   that   petitioners   were    full-time

employees, each working 40 hours per week, and were the sole

managers of their Camarillo, California, condominiums.

     Using our best judgment, we find that petitioners spent

between 200 and 250 hours participating in the rental of their Maui

condo rather than the 325.5 hours proposed by petitioners.                  We

further   find   that       petitioners   spent     less   than    100   hours

participating in the rental of their Molokai condo, rather than the

275.5 hours proposed by petitioners.          However, there still remains

the question of the amount of time spent by others working on the

rental of petitioners' condominiums.

     We first consider the Maui condo.            Ms. Alders testified that

the front desk spent approximately 5 to 10 minutes checking in a

tenant for petitioners' Maui condo. Mr. Pohoski estimated that the

maid service spent an average of 2 to 3 hours cleaning the Maui

condo after the departure of a tenant.              Ms. Alders opined that

petitioners "spent far more time" in operating the Maui condo than

Rainbow Reservations.        No testimony was presented with respect to

participation by other individuals at the Maui condo, nor was

testimony given with respect to the Molokai condo.
                                - 19 -


     Petitioners claim that Ms. Alders' testimony is sufficient to

satisfy the requirement that they spent more time operating the

Maui condo than any other individual.         Indeed, we find that

petitioners clearly spent more time than Rainbow Reservations in

marketing, renting, and repairing the Maui condo.4    Cf. Chapin v.

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

     Respondent asserts, however, that petitioners have failed to

take into consideration the front desk contract between Rainbow

Reservations and the Homeowners' Association, of which petitioners

were members.     Under that contract, Rainbow Reservations operated

the front desk for all condominiums, regardless of whether a

management contract was executed.        As part of that contract,

Rainbow Reservations agreed to check in and out all tenants at the

Valley Isle Resort, issue parking permits, and answer questions or

assist tenants during the front desk business hours of between 8

a.m. and 5 p.m.    As a result, the front desk was available 9 hours

per day, 7 days per week, to assist the tenants of each condominium




     4
          If checking in and out each tenant at the front desk
took a total of 30 minutes, and maid service took an additional 3
hours each time a tenant departed, the total time spent by the
front desk and cleaning personnel for the 22 weeks petitioners'
Maui condo was rented would be 77 hours. We do not believe that
the front desk's other responsibilities, including rent
collection and disbursements, additional linen or maid service,
or other special services, consumed more than another 120 hours,
or at least not more than petitioners' participation time.
                                - 20 -


at the Valley Isle Resort.5     Further, Mr. Pohoski admitted under

cross-examination that the front desk services were necessary in

the operation of the Maui condo, and it would have been very

difficult and inconvenient otherwise.

      Respondent argues on brief that: "All of the hours that * * *

[the front desk was] open and available should be counted as time

spent by them in connection with the [rental] activity.     The time

spent by the front desk operators should not be divided among the

units for which they were responsible."        As support for this

argument, respondent directs the Court to Goshorn v. Commissioner,

T.C. Memo. 1993-578, and Serenbetz v. Commissioner, T.C. Memo.

1996-510.    Respondent has misinterpreted these cases.

      In Goshorn v. Commissioner, supra, the taxpayers owned a 28-

foot sailboat which they docked at a marina near Dallas, Texas,

while they were living in Connecticut. An arrangement was made for

the marina to rent out the sailboat for charters during the year.

The taxpayers claimed to have spent more time than the marina staff

in operating and maintaining the boat. In rejecting the taxpayer's

claim, we reasoned that "all of the activity that directly related

to the actual rental of the boat was performed by the Marina and

not   by   petitioner."   Id.   (Emphasis   added.)   Applying   this


      5
          The front desk operated by Rainbow    Reservations was
available to assist petitioners' tenants for    9 hours per day, 7
days per week, for 22 weeks during 1993 (the    number of weeks the
Maui condo was rented), for a total of 1,386    hours.
                                          - 21 -


reasoning to the situation herein before us, we examine only the

actual services performed by Rainbow Reservations in support of the

Maui condo, and not services that are not directly related to

petitioners' rental.           In this regard, it is evident that the time

spent checking tenants in and out, the maid services, the managing

of   the   rent    collection       and    disbursements,      and     the   other   few

miscellaneous          tasks   performed      by     Rainbow     Reservations        for

petitioners did not exceed 200 hours during 1993, and certainly did

not exceed the time spent by petitioners.                   We do not believe it

appropriate       to     consider     as    participation        for     purposes     of

determining whether petitioners qualify for the safe harbor under

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

5702 (Feb. 25, 1988), the mere availability of the front desk

personnel.

      In Serenbetz v. Commissioner, supra, the taxpayers owned a

Vermont condominium which was part of a partnership that rented out

the condominiums to third parties. The day-to-day operation of the

partnership was managed by an on-site staff of nine employees who

conducted    the       marketing    and    renting    of   the   condominiums        and

maintained the books and records. The taxpayers attempted to prove

that they spent more time than the on-site staff in operating their

rental by dividing the total number of staff hours worked by the

number of employees (9) and by the number of condominium units in

the partnership (40).              We rejected the taxpayers' methodology
                                          - 22 -


observing: "The language of sec. 1.469-5T(a)(3), Temporary Income

Tax Regs., contains nothing which suggests that participation

should     be   computed       on    a    per    unit    basis.    See     Goshorn   v.

Commissioner, T.C. Memo. 1993-578."                Id.

       We believe that only the actual time spent on a rental is

relevant to determining whether a taxpayer materially participates

in that rental.        In the case herein, unlike Goshorn and Serenbetz,

petitioners have provided ample evidence of both their level of

participation and that of Rainbow Reservations with respect to the

Maui condo. Cf. Scheiner v. Commissioner, T.C. Memo. 1996-554.                       As

stated    previously,      petitioners'         efforts     far   exceeded    that   of

Rainbow Reservations personnel at the Maui condo.                        Thus, we hold

that petitioners materially participated in the rental of their

Maui condo during 1993.             Consequently, petitioners may deduct the

losses sustained therefrom.

       We now turn our attention to the Molokai condo in which we

have already found that petitioners participated less than 100

hours.     Assuming arguendo that petitioners participated for more

than 100 hours in the rental of the Molokai condo, petitioners

offered no evidence of the time spent by other individuals in the

rental of that condominium.               See Chapin v. Commissioner, supra.

Petitioners assert that the lack of a fixed front desk service at

the Wavecrest Resort prevents a finding that any individual spent

more     time   than    they        did   in    operating    the    Molokai     condo.
                                    - 23 -


Petitioners, however, are required to put forth some indication of

the actual time spent by the Wavecrest Resort staff during 1993,

including    the   front    desk   services    during    the   5   weeks   that

petitioners rented out the Molokai condo, maid service, and any

other services performed by others.           See Goshorn v. Commissioner,

supra.    Petitioners did not do so.     Consequently, we are unable to

conclude that petitioners' participation in the rental of their

Molokai condo was greater than others.6          See Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933). Thus, we hold that petitioners did

not materially participate in the rental of their Molokai condo.

     To summarize, the losses sustained by petitioners during 1993

in the operation of their Maui condo are deductible, and the losses

sustained in the operation of their Molokai condo are passive

activity    losses,   and   thus   nondeductible,       pursuant   to   section

469(a).

Issue 2. Accuracy-Related Penalty

     Section 6662 imposes an accuracy-related penalty equal to 20

percent of the portion of the underpayment attributable to a

substantial understatement of tax.       Respondent seeks to impose the

penalty with respect to Mrs. Pohoski's claimed Schedule C expenses

for her work as a nurse, and for petitioners' claimed passive


     6
          For the same reasons, petitioners' assertion on brief
that they may also come within the safe harbor provided in sec.
1.469-5T(a)(2), Temporary Income Tax Regs., 53 Fed. Reg. 5725
(Feb. 25, 1988), must fail.
                                        - 24 -


activity losses with respect to the Hawaiian condominiums (which as

a result of our holding above refers only to the Molokai condo).

Petitioners did not address this matter on brief, but generally

suggested at trial that they had substantial authority for the

reporting of their rental activities.

       A substantial understatement means an understatement which

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

on the return or $5,000.          Sec. 6662(d)(1).      The understatement is

reduced by      that    portion    of    the   understatement     for   which    the

taxpayer had substantial authority.              Sec. 6662(d)(2)(B)(i).

       The   substantial       authority   standard    requires    an   objective

examination of the law and the application of the law to the

relevant facts.         Sec. 1.6662-4(d)(2), Income Tax Regs.            There is

substantial authority for the tax treatment of an item only if the

weight of the authorities supporting the treatment is substantial

in relation to the weight of authorities' supporting contrary

treatment.      Sec. 1.6662-4(d)(3)(i), Income Tax Regs.                Among the

authorities a taxpayer may rely upon are IRS information or press

releases, and notices, announcements, and other administrative

pronouncements published in the Internal Revenue Bulletin by the

IRS.    Sec. 1.6662-4(d)(3)(iii), Income Tax Regs.

       Mr. Pohoski testified that he relied upon IRS Publication 925,

Passive      Activity    and   At-Risk     Rules.     Assuming    arguendo      that

Publication 925 is authority, Mr. Pohoski testified that he only
                                    - 25 -


relied upon that publication for the requirements relating to

record keeping, not for determining whether petitioners' activities

qualified as material participation. Thus, petitioners have failed

to prove that they had substantial authority for reporting material

participation   in   the   Hawaii    condominiums.      See   Swicegood   v.

Commissioner, T.C. Memo. 1989-467.

     Petitioners     offered   no    testimony   with   respect   to   Mrs.

Pohoski's Schedule C expenses relating to her nursing work.            Rule

142(a).

     Thus, we hold that petitioners are liable for the accuracy-

related penalty, pursuant to section 6662, with respect to the

Molokai condo and Mrs. Pohoski's nursing activities.

     To reflect the foregoing and the concessions of the parties,


                                                 Decision will be entered

                                         under Rule 155.
