                  T.C. Summary Opinion 2009-153



                     UNITED STATES TAX COURT



    SEAN KIERAN HEGARTY AND KERRY ANN HEGARTY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3730-07S.               Filed October 6, 2009.



     Sean Kieran Hegarty and Kerry Ann Hegarty, pro sese.

     James L. May, Jr., for respondent.



     CARLUZZO, Special Trial 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   Pursuant to section

7463(b), the decision to be entered is not reviewable by any



     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, in effect for the year
in issue. Rule references are to the Tax Court Rules of Practice
and Procedure.
                               - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

     In a notice of deficiency dated November 21, 2006,

respondent determined a $23,366 deficiency in petitioners’ 2003

Federal income tax.   The issue for decision is whether a trade or

business conducted through a limited liability company owned by

petitioners constituted a passive activity under section 469(c).

The resolution of the issue depends upon whether petitioners

“materially participated” in that trade or business during 2003.

                             Background

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

At the time the petition was filed, petitioners resided in

Florida. (References to petitioner are to Sean Kieran Hegarty).

     During the year in issue, petitioner was employed full time

by Carteret Mortgage Corp.   Kerry Ann Hegarty was employed as a

real estate salesperson.

     On August 1, 2003, petitioners formed Blue Marlin, L.L.C.

(Blue Marlin), a Maryland limited liability company, each owning

a 50-percent interest.   Blue Marlin was organized to conduct a

charter fishing activity (the business)2 using what petitioner

described as a “46-foot Post luxury cruiser” that petitioners




     2
      Respondent agrees that the charter fishing activity
constituted a trade or business within the meaning of sec. 162(a)
during the year in issue.
                                - 3 -

purchased earlier that year.3   The amount of time petitioners

participated in the business was recorded in a written log

petitioner maintained, but that log was lost during petitioners’

move from the Washington, D.C. area to Florida.    Using numerous

receipts for expenditures made in connection with the business,

petitioner reconstructed the amount of time petitioners

participated in the business during 2003.    The evidence presented

demonstrates that petitioners’ participation in the business

exceeded 100 hours during 2003.   Furthermore, we are satisfied

that with minor exceptions during that year petitioners were the

only individuals who participated in the business.

     For Federal tax purposes Blue Marlin did not elect to be

treated as an entity separate from petitioners.    See sec. 7701;

sec. 301.7701-3(b), Proced. & Admin. Regs. (commonly referred to

as the “check-the-box” regulations).    The income and expenses

attributable to the business are reported on a Form 1065, U.S.

Return of Partnership Income.   That return, which was not

examined by respondent, shows income of $9,583, expenses totaling

$74,161 (which includes depreciation of $26,173), and a net loss

of $64,578.   The net loss from Blue Marlin is deducted on a

Schedule E, Supplemental Income and Loss, included with

petitioners’ timely filed joint 2003 Federal income tax return



     3
      Petitioners retrofitted the vessel with the necessary
equipment to convert it into a fishing boat fit for charter.
                                 - 4 -

and is taken into account in the $267,187 adjusted gross income

reported on that return.

     In the notice of deficiency respondent disallowed the

deduction attributable to the loss from Blue Marlin.     According

to respondent, as far as petitioners are concerned, during 2003

the business was a passive activity because they did not

materially participate in that business.     Other adjustments made

in the notice of deficiency are computational and need not be

addressed.

                             Discussion

     Respondent relies upon section 469 to support the

disallowance of the loss from Blue Marlin.     That section

generally disallows for the taxable year any passive activity

loss.   Sec. 469(a)(1).   The term “passive activity loss” is

defined as the excess of the aggregate losses from all passive

activities for the taxable year over the aggregate income from

all passive activities for that year.     Sec. 469(d)(1).   A passive

activity is any activity which involves the conduct of any trade

or business and in which the taxpayer does not materially

participate.   Sec. 469(c)(1).   For this purpose, a “trade or

business” is generally defined as any activity in connection with

a trade or business or any activity for the production of income

under section 212.   Sec. 469(c)(6).
                                 - 5 -

     A taxpayer is treated as materially participating in an

activity only if the taxpayer is involved in the operations of

the activity on a basis which is regular, continuous, and

substantial.   Sec. 469(h)(1).   The participation of the

taxpayer’s spouse is taken into account in the determination of

the extent to which a taxpayer materially participates in an

activity.   Sec. 469(h)(5).

     The applicable regulations provide that if:    (1) The

individual participates in the activity for more than 500 hours

during such year; or (2) the individual’s participation in the

activity for the taxable year constitutes substantially all of

the participation in such activity of all individuals (including

individuals who are not owners of interests in the activity) for

such year; or (3) 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; or (4) the activity is a

significant participation activity for the taxable year, and the

individual’s aggregate participation in all significant

participation activities during such year exceeds 500 hours; or

(5) the individual materially participated in the activity for

any 5 taxable years (whether or not consecutive) during the 10
                                - 6 -

taxable years that immediately precede the taxable year; or (6)

the activity is a personal service activity, and the individual

materially participated in the activity for any 3 taxable years

(whether or not consecutive) preceding the taxable year; or (7)

based on all of the facts and circumstances, the individual

participates in the activity on a regular, continuous, and

substantial basis during such year, then the individual will be

treated as materially participating in an activity for purposes

of section 469.   Sec. 1.469-5T(a)(1) through (7), Temporary

Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988).

     According to respondent, because the business was conducted

through a limited liability company, petitioners are treated as

limited partners in considering whether they materially

participated in the business.   That being so, and relying upon

section 469(h)(2) and section 1.469-5T(e)(1) and (2), Temporary

Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988),4 respondent

argues that they did not materially participate in the business

because they have not established that their participation in the

business during 2003 exceeded 500 hours.


     4
      Sec. 469(h)(2) states, “Except as provided in regulations,
no interest in a limited partnership as a limited partner shall
be treated as an interest with respect to which a taxpayer
materially participates.” As relevant here, sec. 1.469-5T(e)(1)
and (2), Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25,
1988), provides that as limited partner a taxpayer shall be
treated as having materially participated in an activity only if
the taxpayer participated in the activity for more than 500 hours
during the taxable year.
                               - 7 -

     We would be reluctant to find that they did, but for reasons

discussed in Garnett v. Commissioner, 132 T.C. __, __ (2009)

(slip op. at 22), such a finding is not necessary.   In Garnett we

found the Commissioner’s reliance upon section 469(h)(2) to be

misplaced and held that the material participation of a taxpayer

who participated in a business conducted through a limited

liability company is determined with reference to any of the

seven tests listed in section 1.469-5T(a)(1) through (7),

Temporary Income Tax Regs., supra.

     As noted, a taxpayer is treated as having materially

participated in the activity if the taxpayer participates in the

activity for more than 100 hours during the taxable year and the

taxpayer’s participation in the activity for the taxable year is

not less than the participation of any other individual.     Sec.

1.469-5T(a)(3), Temporary Income Tax Regs., supra.   We are

satisfied that petitioners participated in the business for more

than 100 hours during 2003. We are further satisfied that their

participation was not less than the participation of any other

individual during that year.   See sec. 1.469-5T(a)(2), Temporary

Income Tax Regs., supra.   It follows that petitioners materially

participated in the business during 2003, and the deduction

attributable to that business is not subject to limitation under

section 469.
                                 - 8 -

     Respondent’s disallowance of the deduction of the loss

attributable to Blue Marlin is rejected.

     To reflect the foregoing,


                                           Decision will be entered

                                     under Rule 155.
