                   T.C. Summary Opinion 2011-119



                      UNITED STATES TAX COURT



             VICTOR AND FRANCISCA ANI, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20312-09S.               Filed October 11, 2011.



     Victor and Francisca Ani, pro se.

     Jon D. Feldhammer, for respondent.



     HAINES, Judge:   This case was heard pursuant to section 7463

of the Internal Revenue Code in effect when the petition was

filed.1   Pursuant to section 7463(b), the decision to be entered




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended and in effect for the years
at issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. Amounts are rounded to the nearest
dollar.
                                 -2-

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 for 2005 and 2006 (years at issue) of $1,869 and

$15,325, respectively, and an accuracy-related penalty under

section 6662(a) of $3,065 for 2006.    The issues for decision

after concessions2 are whether petitioners may deduct losses from

their rental real estate activity under the passive activity loss

rules of section 469 for the years at issue and whether

petitioners are liable for the accuracy-related penalty under

section 6662(a) for 2006.

                              Background

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

The stipulation of facts, together with the attached exhibits, is

incorporated herein by this reference.     At the time petitioners

filed their petition, they resided in California.

     Petitioners timely filed their 2005 and 2006 individual

Federal income tax returns.    Petitioner Victor Ani (Mr. Ani)

worked as a barber, and petitioner Francisca Ani worked full time

as a nurse.   Mr. Ani reported his barber shop income and expenses


     2
      Respondent concedes that petitioner Victor Ani materially
participated in the rental activities and thus may qualify for
the $25,000 offset provided by sec. 469(i). Respondent also
concedes that petitioners have elected to treat all of the rental
properties as one activity under sec. 469(c)(7)(A) (flush
language).
                                -3-

on Schedules C, Profit or Loss From Business.   He also received

Forms W-2, Wage and Tax Statement, for 2005 and 2006 for barber

services he provided to a nursing home in Clovis, California, and

a juvenile hall in San Leandro, California.

     Petitioners also owned five rental properties, which Mr. Ani

managed.   He negotiated leases, dealt with tenants, collected

rent, coordinated repairs, and paid bills associated with the

properties.   Petitioners reported the rental property income and

expenses on Schedules E, Supplemental Income and Loss, and

deducted losses of $64,856 and $125,510 for 2005 and 2006,

respectively, on the basis of their claim that Mr. Ani was a real

estate professional pursuant to section 469(c)(7)(B).

     To substantiate their claim that Mr. Ani was a real estate

professional, petitioners submitted three documents.    Two of the

documents, which covered the years at issue, were prepared by

petitioners’ accountant using information Mr. Ani provided.    The

first document purports to be a sampling of activities that Mr.

Ani performed in the management of the rental properties.    The

second document sets out hours spent on barber activities versus

real estate activities for 2005 and 2006.   According to the

second document, Mr. Ani spent a total of 1,377 hours on barber

activities and 956 hours on real estate activities in 2005 and a

total of 1,380 hours on barber activities and 886 hours on real

estate activities in 2006.   The third document, prepared by Mr.
                                 -4-

Ani in anticipation of trial, purports to estimate the amount of

time Mr. Ani spent on barber activities and real estate

activities during the years at issue.      The estimates inflate the

hours spent on real estate activities and conflict with the

information in the other two documents.

     On May 27, 2009, respondent sent petitioners a notice of

deficiency for 2005 and 2006 which disallowed the losses from

petitioners’ rental real estate under the passive activity loss

rules of section 469.   Petitioners filed a timely petition with

this Court.

                              Discussion

I.   Passive Activity Rules

     The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden of

proving that the Commissioner’s determinations are incorrect.

Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Taxpayers are allowed deductions for certain business and

investment expenses under sections 162 and 212.     However, section

469 generally disallows the deduction of any passive activity

loss.   A passive activity loss is defined as the excess of the

aggregate losses from all passive activities for that year over

the aggregate income from all passive activities for the year.

Sec. 469(d)(1).   A passive activity is any trade or business in
                                  -5-

which the taxpayer does not materially participate.

Sec. 469(c)(1).

     Rental activity is generally treated as a per se passive

activity regardless of whether the taxpayer materially

participates.   Sec. 469(c)(2).   However, the rental activities of

a taxpayer who is a real estate professional pursuant to section

469(c)(7)(B) are not treated as per se passive activities.     Sec.

469(c)(7)(A)(i).

     To qualify as a real estate professional, a taxpayer must

satisfy both of the following requirements:

          (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).   For couples filing “a joint return, the

requirements of the preceding sentence are satisfied if and only

if either spouse separately satisfies such requirements.”      Id.

     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
                                 -6-

     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.

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 thereat).

     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 loss 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 that Mr. Ani satisfies the section 469

requirements for being a real estate professional.   We disagree.

The three documents petitioners submitted in support of their

contention that Mr. Ani is a real estate professional contain

conflicting information.    With respect to the estimates Mr. Ani

prepared, petitioners failed to provide underlying documentary
                                 -7-

evidence to substantiate the estimated hours.    Additionally, the

estimates inflate the number of hours spent on the real estate

activities substantially over the hours shown on the other two

documents that Mr. Ani’s accountant prepared using information

Mr. Ani provided.    The estimates are simply postevent ballpark

guesstimates to which we attach no weight.

     With respect to the two documents Mr. Ani’s accountant

prepared, the first document was prepared as a sampling of the

types of activities that could take place but was not complete

enough to establish hours for each activity.    The second document

provided sufficient detail with respect to hours spent on the

barber and real estate activities when coupled with Mr. Ani’s

testimony.   According to the second document, Mr. Ani spent a

total of 1,377 hours performing barber services and 956 hours

managing petitioners’ rental properties in 2005, and 1,380 hours

performing barber services and 886 hours managing petitioners’

rental properties in 2006.    Thus, Mr. Ani spent more time in 2005

and 2006 working as a barber than he did managing petitioners’

rental properties.

     Accordingly, we find that Mr. Ani does not satisfy the first

part of the definition of a real estate professional under

section 469(c)(7)(B).    That definition required Mr. Ani to

perform more than one-half of his personal services in trades or

businesses during the taxable years in real property trades or
                                 -8-

businesses in which he materially participated.    He did not.    As

a result, we find that Mr. Ani was not a real estate professional

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

that petitioners’ rental activities during those years 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. Ani’s active participation in

the management of 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, supra at 371; Madler

v. Commissioner, T.C. Memo. 1998-112.    It is clear from the

record that petitioners wholly own the rental properties and that

Mr. Ani has personally been very active in managing the rental

properties.   Moreover, respondent concedes that Mr. Ani

materially participated in real estate activities during the

years at issue.    Accordingly, we hold that petitioners are

entitled to deduct a portion of their real estate losses pursuant

to section 469(i)(1).    However, petitioners’ deduction may be

limited by the phaseout calculation under section 469(i)(3)(A).
                                  -9-

II.   Accuracy-Related Penalty

      Respondent determined that petitioners are liable for the

accuracy-related penalty under section 6662(a) for 2006.    Section

6662(a) and (b)(2) imposes a 20-percent accuracy-related penalty

upon any underpayment of tax resulting from a substantial

understatement of income tax.    An understatement is substantial

if it exceeds the greater of 10 percent of the tax required to be

shown on the return or $5,000.    Sec. 6662(d)(1)(A).

      Respondent bears the burden of production with respect to

petitioners’ liability for the accuracy-related penalty

determined in the notice of deficiency and must therefore produce

evidence that it is appropriate to impose that penalty.    See sec.

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

(2001).   Petitioners accurately reported their income on their

2006 Federal income tax return.    However, petitioners were unable

to deduct losses claimed on Schedule E because of the passive

activity loss rules of section 469.     Thus, respondent calculated

that petitioners understated their tax liability by $13,524.3

Petitioners had reported taxes of $199 on their 2006 return.    The

amount of the understatement was substantial because it exceeded

the greater of:   (1) 10 percent of the tax required to be shown




      3
      This amount will have to be recalculated in the Rule 155
computation depending upon the outcome of the sec. 469(i)(3)(A)
calculations.
                                 -10-

on the return for the taxable year, or (2) $5,000.    Consequently,

respondent has satisfied his burden of production.

     The accuracy-related penalty is not imposed, however,

with respect to any portion of the underpayment of tax if the

taxpayer can establish that he acted with reasonable cause and in

good faith.   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.    Sec. 1.6664-

4(b)(1), Income Tax Regs.   Circumstances indicating that a

taxpayer acted with reasonable cause and in good faith include

“an honest misunderstanding of fact or law that is reasonable in

light of all of the facts and circumstances, including the

experience, knowledge, and education of the taxpayer.”     Id.

     Petitioners did not address their liability for the

accuracy-related penalty at trial or on brief, except for a

single sentence in their answering brief stating that they are

not liable for the accuracy-related penalty.   Though they hired

an accountant, petitioners maintained no contemporaneous books,

logs, or records to substantiate the hours Mr. Ani purportedly

spent managing the rental properties.   Given the circumstances,

we find that they did not act with reasonable cause and in good

faith, and therefore we hold petitioners are liable for the

accuracy-related penalty under section 6662(a) for 2006.
                                 -11-

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,


                                             Decision will be entered

                                        under Rule 155.
