                         T.C. Summary Opinion 2015-27



                         UNITED STATES TAX COURT



          RICHARD S. LEYH AND ELLEN P. O’NEILL, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 29908-13S.                         Filed April 13, 2015.



      Richard S. Leyh and Ellen P. O’Neill, pro sese.

      Brooke S. Laurie, for respondent.



                              SUMMARY OPINION


      GERBER, 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



      1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
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Pursuant to section 7463(b), the decision 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 a $12,011 income tax deficiency and a $2,404.20 section

6662(a) penalty for petitioners’ 2010 taxable year. The issues for our

consideration are: (1) whether petitioner Ellen P. O’Neill performed more than

750 hours of services in her rental real estate activity so as to be entitled to deduct

losses from non-passive-activity income within the meaning of section 469, and

(2) whether petitioners are liable for the accuracy-related penalty under section

6662(a).

                                     Background

       Petitioners resided in the vicinity of Austin, Texas, at the time their petition

was filed. Ellen P. O’Neill (petitioner) worked regularly in the rental real estate

activity. Mr. Leyh also worked full time but was not engaged in the rental real

estate activity.

       The real estate activity involved petitioners’ ownership of 12 rental

properties. Petitioner was responsible for the operation of the rental real estate

activity and had been so engaged for a number of years. Eleven of the properties

were single family residences, and one was a condominium unit. Petitioner

performed some of the repairs and most of the maintenance on the properties. For
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example, if a tenant called about a plumbing or appliance problem, petitioner

would personally resolve the problem. Additionally, she handled the rental

activity, including advertising for, interviewing, and vetting of potential tenants.

She did all of the paperwork, bookkeeping, and research for potential properties to

purchase. During 2010 petitioner performed extensive research regarding

potential Florida rental properties for acquisition.

      Petitioners resided on a ranch in Dripping Springs, Texas, that was

approximately 26 to 30 miles from the rental properties, depending on the route

taken. The 12 rental properties were in Austin, Texas, the drive to which took

approximately 42 to 55 minutes, again depending on the route taken and the traffic

conditions.

      Petitioner regularly drove to the Austin area to resolve problems, perform

maintenance, and administer and operate the rental properties. Petitioner

maintained a contemporaneous log detailing the type of rental property activity

that she engaged in each day. Respondent had audited petitioner’s returns for

years before 2010, and petitioner had become aware of the requirements for

deducting losses from a rental real estate activity from non-passive income. In

particular, she knew that she had to “materially” participate in the business by

spending 750 hours or more involved in the activity during the taxable year.
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      When it came time to have the 2010 income tax return prepared, petitioners’

return preparer from earlier years was not available and petitioner spent time

searching for a certified public accountant (C.P.A.) to prepare petitioners’ 2010

return. Petitioners provided their information, including information regarding the

rental real estate activity, to the C.P.A., and they deducted a $69,531 loss from the

rental real estate activity on their return to reduce their non-passive-activity

income.

      Respondent examined the 2010 return, and petitioners offered petitioner’s

log in support of their position that they were entitled to deduct the real estate

losses from their non-passive-activity income. Although the log detailed the dates,

types of activity, and number of hours that petitioner spent in the activity, the

number of hours spent traveling from petitioners’ residence to the rental properties

had not been included. The original log that they presented to respondent during

the audit accounted for 632.5 hours spent in the real estate activity.

      Petitioner revised and resubmitted the log to reflect the hours spent

traveling to the properties, but respondent refused to accept the additional hours.

Without the travel time, the hours in the log totaled less than the threshold of 750

hours. Including the travel time, petitioner’s hours totaled 846, exceeding the

750-hour threshold by almost 100 hours.
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      Petitioner’s methodology in revising the log was to determine whether the

activity for any day reflected in the log took place in Austin or near her residence

in Dripping Springs. For each occasion where the activity occurred in Austin, she

computed a 45-minute trip or 1-1/2 hours round trip for that day. For example, on

a particular day that reflected only 1-1/2 hours involved in the activity in Austin,

petitioner added 1-1/2 hours for the travel to Austin from her home in Dripping

Springs, for a total of three hours engaged in the activity for that day.

                                     Discussion

      The primary issue is the narrow and purely factual question of whether

petitioner spent 750 hours or more as a real estate professional involved in her

rental real estate activity. Respondent concedes that petitioner meets all other

requirements to be entitled to deduct losses from a rental real estate activity from

non-passive income.

      Generally, section 469 disallows a deduction attributable to a “passive

activity loss” that is used to reduce non-passive-activity income for any taxable

year. Sec. 469(a), (d)(1). A “passive activity” is a business in which the taxpayer

does not “materially participate.” Sec. 469(c)(1). Material participation in an

activity is regular, continuous, and substantial involvement. Sec. 469(h)(1).
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      For purposes of determining whether a taxpayer is a real estate professional,

a taxpayer’s material participation is determined separately with respect to each

rental property unless the taxpayer makes an election to treat all interests in rental

real estate as a single rental real estate activity. Sec. 469(c)(7)(A); sec. 1.469-

9(e)(1), Income Tax Regs. Petitioners made an election to treat their rental

properties as a single activity. According to section 1.469-9(g)(1), Income Tax

Regs., this election is binding for the taxable year in issue.

      Rental activity, however, is generally treated as passive per se regardless of

whether there is material participation. Sec. 469(c)(2), (4). Petitioner, however,

seeks to qualify under section 469(c)(7)(B), which provides that a real estate

professional may engage in a nonpassive real estate business if he or she meets

certain requirements. In particular, the taxpayer’s rental activity will not be per se

passive if he or she meets two requirements. First, more than one-half of the

personal services performed by the taxpayer in trades or businesses are performed

in the real property trades or businesses in which the taxpayer materially

participates. Second, the taxpayer performs more than 750 hours of services

during the tax year in the real property trades or businesses in which the taxpayer

materially participates. Sec. 469(c)(7)(B)(i) and (ii); Shaw v. Commissioner, T.C.

Memo. 2002-35; Bailey v. Commissioner, T.C. Memo. 2001-296.
                                          -7-

        Respondent agrees that petitioner materially participated and spent more

than one-half of her time in the rental real estate activity but does not agree that

petitioner performed 750 hours of services in the activity. Respondent contends

that petitioner did not meet the 750-hour test because the hours reported in the

original log presented to respondent fell short of the 750-hour requirement.

Respondent further contends that petitioner’s revised log was insufficient to

remedy the perceived shortfall in the original log.

        The pertinent requirements are set forth in section 1.469-5T(f)(4),

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

        The focal point of the controversy, therefore, is whether petitioner’s revised

log is sufficient to show that she spent at least 750 hours in the activity. We hold

that it is.

        The record reflects that petitioner kept a contemporaneous log and

accurately recorded her rental real estate activity for each day she engaged in the
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activity. The total hours originally recorded on the log, however, did not account

for petitioner’s travel time from her Dripping Springs home to Austin.

Accordingly, petitioner identified those days that she was in Austin and involved

in the activity and added 1-1/2 hours for travel to and from her home in Dripping

Springs. With those additional hours, petitioner would have met the threshold

hour requirement of the regulation.

      Respondent, however, contends that the times on the original log were

inclusive of all of petitioner’s activity travel. Petitioner testified and had clear and

crisp recall of the activity reflected on the log and was easily able to identify those

occasions when the activity occurred in Austin. Respondent’s counsel cross-

examined petitioner but was able to show only a few minor discrepancies that

petitioner admitted were in error. Altogether, petitioner has shown that she spent

more than 750 hours engaged in the rental real estate activity during 2010.

      Respondent relies on a series of Memorandum Opinions of this Court where

there was inadequate recordkeeping and insufficient evidence to support the

threshold hour requirement. In those cases, the Court recognized that the

recordkeeping requirements of the regulations are somewhat ambiguous

concerning the records to be maintained by taxpayers but that the regulations do

not allow a postevent “ballpark guesstimate”. See Bailey v. Commissioner, T.C.
                                         -9-

Memo. 2001-296; Speer v. Commissioner, T.C. Memo. 1996-323; Goshorn v.

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

      Those cases did not involve a detailed contemporaneous log such as the one

petitioner maintained. Petitioner provided day-by-day explanations of the specific

rental real estate activity in her log. Further, from the log it was easy to identify

days when the activity took place in Austin. Finally, petitioner has shown that the

travel time was not included in the original log. Petitioner’s log and her revised

log showing the travel time are well within the guidelines of section 1.469-

5T(f)(4), Temporary Income Tax Regs., supra.

      Accordingly, petitioners are entitled to apply the losses from the real estate

activity against their non-passive-activity income, and they have shown that

respondent’s determination is in error. Because we hold that petitioners are

entitled to the disallowed loss deduction, there is no underpayment of income tax

and the accuracy-related penalty of section 6662(a) is, therefore, not applicable.

      To reflect the foregoing,


                                               Decision will be entered for

                                        petitioners.
