                                                   JAMES F. AND LYNN M. MOSS, PETITIONERS v.
                                                      COMMISSIONER OF INTERNAL REVENUE,
                                                                 RESPONDENT
                                                        Docket No. 26600–08.               Filed September 20, 2010.

                                                 Ps owned rental properties that generated losses for the
                                               year in issue. R contends that Ps are subject to the passive
                                               activity loss limitations of sec. 469, I.R.C. Ps offered a sum-
                                               mary of the time P husband worked on the rental properties.
                                               The summary showed that P husband worked on the prop-
                                               erties for less than the 750 hours required by sec.
                                               469(c)(7)(B)(ii), I.R.C. Ps, however, contend that, in addition to
                                               the time P husband actually worked, he was ‘‘on call’’ for work
                                               on the rental properties during the time that he was not at
                                               his full-time job and that the ‘‘on call’’ hours should count
                                               toward determining whether Ps meet the requirements of sec.
                                               469(c)(7)(B), I.R.C. Held: P husband’s ‘‘on call’’ time does not
                                               count toward satisfying the 750-hour requirement of sec.
                                               469(c)(7)(B)(ii), I.R.C., because P husband did not perform any
                                               actual work on the rental properties during the ‘‘on call’’
                                               hours. Held, further, the losses from Ps’ rental properties are
                                               subject to the limited offset pursuant to sec. 469(i), I.R.C.
                                               Held, further, Ps are subject to the accuracy-related penalty

                                                                                                                                    365




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                                      366                135 UNITED STATES TAX COURT REPORTS                                       (365)


                                               for a substantial understatement of income tax pursuant to
                                               sec. 6662, I.R.C.

                                           James F. and Lynn M. Moss, pro sese.
                                           Kathleen K. Raup, for respondent.
                                         WELLS, Judge: Respondent determined a deficiency of
                                      $8,070 in petitioners’ Federal income tax for their 2007 tax
                                      year and an accuracy-related penalty pursuant to section
                                      6662(a) of $1,614. 1 We must decide the following issues: (1)
                                      Whether the loss of $40,490 claimed on petitioners’ Schedule
                                      E, Supplemental Income and Loss, should be disallowed
                                      because petitioners failed to meet the restrictions on passive
                                      activity losses under section 469; and (2) whether petitioners
                                      are subject to the accuracy-related penalty pursuant to sec-
                                      tion 6662(a) for the year in issue.

                                                                          FINDINGS OF FACT

                                        Some of the facts and certain exhibits have been stipu-
                                      lated. The stipulations of fact are incorporated in this
                                      Opinion by reference and are found accordingly.
                                        At the time the petition was filed, petitioners lived in
                                      Mullica Hill, New Jersey.
                                        Petitioner James Moss (Mr. Moss) works at a nuclear
                                      power plant in Hope Creek, New Jersey (Hope Creek plant),
                                      operated by Public Service Electric & Gas Co. Mr. Moss is
                                      employed as a ‘‘nuclear technician—planning’’. Mr. Moss
                                      plans maintenance activities, develops ‘‘work packages’’ that
                                      include estimates of job time and equipment to be used, and
                                      helps to ensure compliance with Nuclear Regulatory
                                      Commission regulations.
                                        During 2007, Mr. Moss was employed full time, 40 hours
                                      per week, generally working a shift of 7 a.m. to 3:30 p.m.,
                                      Monday through Friday, for a total of approximately 1,900
                                      hours. As part of Mr. Moss’ duties at the Hope Creek plant,
                                      he also had to be available for ‘‘call out’’ time and ‘‘standby’’
                                      time. Call out time occurs where an employee works
                                      unscheduled overtime. 2 Standby time occurs where an
                                        1 Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and

                                      Procedure, and all section references are to the Internal Revenue Code, as amended, for the year
                                      in issue. Amounts are rounded to the nearest dollar.
                                        2 A regular workweek is 5 regularly scheduled basic workdays of 8 hours each. Overtime is

                                      all hours worked outside of the regular workweek.




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                                      (365)                           MOSS v. COMMISSIONER                                          367


                                      employee is ordered to await a call for emergency work out-
                                      side scheduled working hours. During standby time, an
                                      employee must be ‘‘fit for duty’’. Mr. Moss’ 1,900 hours of
                                      work during 2007 included approximately 200 to 300 hours
                                      of call out time.
                                         Petitioners own the following rental properties: (1) Four
                                      apartments at 301–303 2d Street, Swedesboro, New Jersey;
                                      (2) a single-family home at 1122 Elm Avenue, Wilmington,
                                      Delaware; (3) a single-family home at 1009 East 7th Street,
                                      Wilmington, Delaware; and (4) a single-family home at 611
                                      East 22nd Street, Wilmington, Delaware (collectively, rental
                                      properties).
                                         During his time away from work, Mr. Moss performed
                                      activities related to the rental properties. Mr. Moss’ activities
                                      regarding the rental properties included maintenance, moni-
                                      toring, eviction of nonpaying tenants, collecting rents, and
                                      preparation for new tenants. During 2007, Mr. Moss kept a
                                      calendar detailing the dates that he performed the foregoing
                                      activities (calendar); however, he failed to include on the cal-
                                      endar the time spent performing such activities. On October
                                      23, 2009, Mr. Moss prepared a summary of the time he spent
                                      in connection with the rental properties (summary).
                                         Petitioners timely filed a joint Form 1040, U.S. Individual
                                      Income Tax Return, for their 2007 tax year (2007 return).
                                         Petitioners’ 2007 return was prepared by a certified public
                                      accountant (C.P.A.). On Schedule E attached to their 2007
                                      return, petitioners reported a total loss from the rental prop-
                                      erties of $40,490. Respondent disallowed $31,318 of the loss,
                                      allowing a deductible loss of $9,172.
                                         Petitioners timely filed a petition in this Court seeking a
                                      redetermination of their liability for the year in issue. 3

                                                                                  OPINION

                                        Generally, the Commissioner’s determination of a defi-
                                      ciency is presumed correct, and the taxpayer has the burden
                                      of proving it incorrect. Rule 142(a); Welch v. Helvering, 290
                                      U.S. 111, 115 (1933). 4
                                        3 Petitioners also sought a redetermination for their 2006 tax year in their petition to this

                                      Court. Because the petition was not timely filed as to that year, we dismissed that portion of
                                      the instant case for lack of jurisdiction.
                                        4 Petitioners do not contend that sec. 7491(a) should apply in the instant case to shift the bur-

                                                                                                   Continued




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                                      368                135 UNITED STATES TAX COURT REPORTS                                       (365)


                                        Deductions are a matter of legislative grace, and taxpayers
                                      bear the burden of proving that they have met all require-
                                      ments necessary to be entitled to the claimed deductions.
                                      Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
                                      84 (1992).
                                        Taxpayers are allowed deductions for certain business and
                                      investment expenses pursuant to sections 162 and 212; how-
                                      ever, section 469 generally disallows any passive activity loss
                                      for the tax year. A passive activity is any trade or business
                                      in which the taxpayer does not materially participate. Sec.
                                      469(c)(1). A passive activity loss is defined as the excess of
                                      the aggregate losses from all passive activities for the year
                                      over the aggregate income from all passive activities for such
                                      year. Sec. 469(d)(1). A rental activity is generally treated as
                                      a per se passive activity regardless of whether the taxpayer
                                      materially participates. 5 Sec. 469(c)(2).
                                        There are two principal exceptions to the general rule that
                                      rental real estate activities are per se passive activities: (1)
                                      Section 469(c)(7); and (2) section 469(i). Pursuant to section
                                      469(c)(7), the rental activities of a taxpayer who is a real
                                      estate professional are not per se passive activities but are
                                      treated as a trade or business subject to the material partici-
                                      pation requirements of section 469(c)(1). Sec. 1.469–9(e)(1),
                                      Income Tax Regs.
                                        A taxpayer qualifies as a real estate professional and is not
                                      engaged in a passive activity under section 469(c)(2) 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 partici-
                                      pates, 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 [750-hour service performance requirement].
                                        [Sec. 469(c)(7)(B).]

                                      In the case of a joint return, the foregoing requirements for
                                      qualification as a real estate professional are satisfied if, and
                                      only if, either spouse separately satisfies the requirements.
                                      Id. Thus, if either spouse qualifies as a real estate profes-
                                      den of proof to respondent, nor did they establish that it should apply to the instant case.
                                        5 A rental activity is ‘‘any activity where payments are principally for the use of tangible prop-

                                      erty.’’ Sec. 469(j)(8).




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                                      (365)                           MOSS v. COMMISSIONER                                         369


                                      sional, the rental activities of the real estate professional are
                                      not per se passive under section 469(c)(2).
                                        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 estab-
                                      lished 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 pur-
                                      poses of this paragraph may include but are not limited to the identifica-
                                      tion 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.

                                      We have held that the regulations do not allow a postevent
                                      ‘‘ballpark guesstimate’’. Bailey v. Commissioner, T.C. Memo.
                                      2001–296; Goshorn v. Commissioner, T.C. Memo. 1993–578.
                                         Respondent does not contend that petitioners have failed to
                                      elect to treat all of the rental properties as one activity. See
                                      sec. 469(c)(7)(A) (flush language); see also sec. 1.469–9(g),
                                      Income Tax Regs. (an election in a prior year is binding for
                                      the tax year it is made and for all future years in which the
                                      taxpayer qualifies). Accordingly, we deem that issue con-
                                      ceded.
                                         Petitioners contend Mr. Moss satisfies the section 469
                                      requirements of being a real estate professional. Petitioners
                                      provided the calendar and the summary as evidence of Mr.
                                      Moss’ time related to the rental properties during 2007. The
                                      calendar includes a description of the work that he per-
                                      formed on the rental properties and the dates on which that
                                      work was performed, but it does not include the amount of
                                      time that was spent in the performance of such work.
                                      According to the summary, petitioners estimate that during
                                      2007 Mr. Moss spent 112.25 hours traveling to and from the
                                      rental properties and 342.75 hours working on the rental
                                      properties. Additionally, petitioners contracted with Twin
                                      Hills Management to assist Mr. Moss with repairs. Mr. Moss
                                      contends that he spent 25.5 hours traveling to and from the
                                      rental properties with the Twin Hills employees and 165




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                                      370                135 UNITED STATES TAX COURT REPORTS                                       (365)


                                      hours working alongside them. 6 Mr. Moss contends that he
                                      spent 137.75 hours traveling to and from his rental prop-
                                      erties and 507.75 hours working on his rental properties, for
                                      a total of 645.5 hours.
                                         The total of 645.5 hours is less than the 750-hour service
                                      performance requirement of section 469(c)(7)(B)(ii). However,
                                      to satisfy the remaining time requirement, petitioners con-
                                      tend that Mr. Moss was ‘‘on call’’ for the rental properties for
                                      all of the hours that he was not working at the Hope Creek
                                      plant in his regular job. Essentially, petitioners claim that
                                      Mr. Moss could have been called to perform work at the
                                      rental properties at any time that he was not working at
                                      the Hope Creek plant, and, therefore, such on call hours
                                      should count toward meeting the 750-hour service perform-
                                      ance requirement. We do not agree with petitioners’ conten-
                                      tion that Mr. Moss’ ‘‘on call’’ hours may be used to satisfy the
                                      750-hour service performance requirement. Section 469(c)(7)
                                      applies where the taxpayer ‘‘performs more than 750 hours
                                      of services’’. Sec. 469(c)(7)(B)(ii) (emphasis added); see also
                                      sec. 1.469–9(b)(4), Income Tax Regs. (‘‘Personal services
                                      means any work performed by an individual in connection
                                      with a trade or business’’ (emphasis added)). While Mr. Moss
                                      was ‘‘on call’’ for the rental properties, he could have been
                                      called in to perform services; however, these services were
                                      never actually performed by him. 7 Accordingly, we conclude
                                      that Mr. Moss’ time ‘‘on call’’ for the rental properties does
                                      not satisfy any part of the 750-hour service performance
                                      requirement.
                                         Additionally, petitioners claim that Mr. Moss’ calendar and
                                      summary reflect only 75 percent to 85 percent of his time.
                                      However, petitioners failed to provide any further informa-
                                      tion regarding other personal services Mr. Moss may or may
                                      not have performed with respect to the rental properties. On
                                      the basis of the record, we conclude that petitioners have
                                      failed to show that Mr. Moss met the 750-hour service
                                      performance requirement of section 469(c)(7)(B)(ii) for the
                                      year in issue. Because petitioners have failed to show that
                                        6 The time related to Mr. Moss’ work with Twin Hills is not the result of an estimate but rath-

                                      er was calculated from bills Twin Hills sent during 2007.
                                        7 Apparently, petitioners confuse the 750-hour service performance requirement of sec.

                                      469(c)(7)(B)(ii) with the call out and standby time policies of Mr. Moss’ employment at the Hope
                                      Creek plant.




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                                      (365)                           MOSS v. COMMISSIONER                                         371


                                      Mr. Moss met the 750-hour service performance requirement,
                                      we hold that he is not a real estate professional for purposes
                                      of section 469(c)(7) and that petitioners’ rental real estate
                                      activities must therefore be treated as a passive activity
                                      under section 469(c)(2). Consequently, it is not necessary to
                                      address whether Mr. Moss spent more than 50 percent of his
                                      time in the real estate trade or business or whether he mate-
                                      rially participated in that business.
                                        The second exception to the general rule that rental real
                                      estate activities are per se passive activities is provided in
                                      section 469(i)(1), which provides as follows:
                                         (1) IN GENERAL.—In the case of any natural person, subsection (a) shall
                                      not apply to that portion of the passive activity loss or the deduction
                                      equivalent * * * of the passive activity credit for any taxable year which
                                      is attributable to all rental real estate activities with respect to which such
                                      individual actively participated in such taxable year * * *.

                                      The section 469(i) exception is limited to $25,000. Sec.
                                      469(i)(2). The $25,000 maximum ‘‘offset’’, however, begins to
                                      phase out for taxpayers whose adjusted gross income (AGI)
                                      exceeds $100,000 and is completely phased out for taxpayers
                                      whose adjusted gross income is $150,000 or more. Sec.
                                      469(i)(3)(A). For that purpose, adjusted gross income is
                                      derived without regard to ‘‘any passive activity loss or any
                                      loss allowable by reason of subsection (c)(7)’’ (modified AGI).
                                      Sec. 469(i)(3)(F)(iv). We have said that the active participa-
                                      tion 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 Madler v. Commissioner, T.C. Memo. 1998–112.
                                         During 2007, Mr. Moss actively participated in the rental
                                      properties by personally maintaining them as well as per-
                                      forming other managerial functions. As concluded above, Mr.
                                      Moss’ rental real estate activities are section 469(c)(2) pas-
                                      sive activities, and therefore the losses from the rental prop-
                                      erty claimed on Schedule E of $40,490 should be added back
                                      to petitioners’ AGI of $91,166 to determine their modified AGI.
                                      See sec. 469(i)(3)(F)(iv). Adding back the Schedule E losses to
                                      petitioners’ AGI yields a modified AGI of $131,656. Because
                                      petitioners’ modified AGI exceeds $100,000 by $31,656, the
                                      $25,000 allowable loss amount must be reduced by 50 per-
                                      cent for each dollar of modified AGI that exceeds $100,000, or




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                                      372                 135 UNITED STATES TAX COURT REPORTS                                       (365)


                                      $15,828, to an allowable loss of $9,172. See sec. 469(i)(3)(A).
                                      Consequently, on the basis of our holding above and the fore-
                                      going calculation, we sustain respondent’s determination that
                                      petitioners have an allowable loss for their rental real estate
                                      activities of $9,172 8 and a disallowed loss of $31,318. 9
                                         Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer
                                      may be liable for a penalty of 20 percent on the portion of
                                      an underpayment of tax: (1) Due to negligence or disregard
                                      of rules or regulations or (2) attributable to a substantial
                                      understatement of income tax. ‘‘Negligence’’ is defined as any
                                      failure to make a reasonable attempt to comply with the
                                      provisions of the Internal Revenue Code, and ‘‘disregard’’
                                      means any careless, reckless, or intentional disregard. Sec.
                                      6662(c). ‘‘Understatement’’ means the excess of the amount of
                                      the tax required to be shown on the return over the amount
                                      of the tax imposed which is shown on the return, reduced by
                                      any rebate. Sec. 6662(d)(2)(A). A ‘‘substantial understate-
                                      ment’’ of income tax is defined as an understatement of tax
                                      that exceeds the greater of 10 percent of the tax required to
                                      be shown on the tax return or $5,000. Sec. 6662(d)(1)(A). The
                                      understatement is reduced to the extent that the taxpayer
                                      has: (1) Adequately disclosed his or her position and has a
                                      reasonable basis for such position, or (2) has substantial
                                      authority for the tax treatment of the item. Sec.
                                      6662(d)(2)(B). With regard to the accuracy-related penalty,
                                      respondent bears the burden of production pursuant to sec-
                                      tion 7491(c), and petitioners bear the burden of proof. See
                                      Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
                                         The accuracy-related penalty is not imposed with respect
                                      to any portion of the underpayment as to which the taxpayer
                                      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 of
                                      the pertinent facts and circumstances. Sec. 1.6664–4(b)(1),
                                      Income Tax Regs. Relevant factors include the taxpayer’s
                                      efforts to assess his proper tax liability, including the tax-
                                      payer’s reasonable and good faith reliance on the advice of a
                                      professional such as an accountant. Id. Furthermore, an
                                           8 This
                                               is the amount respondent allowed in the notice of deficiency.
                                           9 This
                                               is the $40,490 reported as loss on Schedule E minus the $9,172 allowable loss. Any pas-
                                      sive activity loss that is disallowed is treated as a deduction allocable to such activity in the
                                      next taxable year. Sec. 469(b).




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                                      (365)                           MOSS v. COMMISSIONER                                         373


                                      honest misunderstanding of fact or law that is reasonable in
                                      the light of the experience, knowledge, and education of the
                                      taxpayer may indicate reasonable cause and good faith. Sec.
                                      1.6664–4(b)(1), Income Tax Regs.
                                         On the basis of the record, we conclude that petitioners’
                                      understatement will be greater than $5,000. See sec.
                                      6662(b)(2), (d)(1)(A)(ii). Therefore, we hold that respondent
                                      has met his burden of production regarding the accuracy-
                                      related penalty pursuant to section 6662(a).
                                         As to petitioners’ burden, they contend that they qualify
                                      for an exception to the accuracy-related penalty. Petitioners
                                      contend that the accuracy-related penalty should be waived
                                      because they were allegedly mistreated by the Internal Rev-
                                      enue Service (IRS). 10 However, the IRS’ treatment of peti-
                                      tioners is not relevant to the reduction of the accuracy-
                                      related penalty pursuant to section 6662(d)(2)(B) or section
                                      6664(c). Both exceptions relate to the taxpayer’s actions, not
                                      the Commissioner’s actions. See secs. 6662(d)(2)(B), 6664(c).
                                      Accordingly, we conclude that petitioners have failed to prove
                                      that they had a reasonable basis or substantial authority for
                                      deducting the losses claimed on Schedule E. See sec.
                                      6662(d)(2)(B). Mr. Moss also testified that he relied on his
                                      C.P.A. to determine whether he was a real estate profes-
                                      sional; however, he also testified that he did not provide his
                                      C.P.A. with the number of hours that he spent working on
                                      the rental properties. Therefore, we conclude that petitioners
                                      have also failed to show that they acted with reasonable
                                      cause and in good faith in deducting the losses claimed on
                                      Schedule E. See sec. 6664(c)(1). On the basis of the record,
                                      we hold that petitioners are liable for the accuracy-related
                                      penalty pursuant to section 6662(a) for the year in issue.
                                         The Court has considered all other arguments made by the
                                      parties and, to the extent we have not addressed them
                                      herein, we consider them moot, irrelevant, or without merit.




                                        10 Petitioners allege that the IRS misaddressed documents, spelled petitioners’ name wrong on

                                      documents, and would not ‘‘give you a straight answer’’.




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                                      374                135 UNITED STATES TAX COURT REPORTS                                       (365)


                                           On the basis of the foregoing,
                                                                           Decision will be entered for respondent.
                                                                               f




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