PURSUANT TO INTERNAL REVENUE CODE
 SECTION 7463(b),THIS OPINION MAY NOT
  BE TREATED AS PRECEDENT FOR ANY
            OTHER CASE.
                        T.C. Summary Opinion 2014-13



                        UNITED STATES TAX COURT



      JOHN ERWIN SMITH AND JANET HANANI SMITH, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 14306-12S.                       Filed February 19, 2014.



      John Erwin Smith and Janet Hanani Smith, pro sese.

      Craig A. Ashford, for respondent.



                             SUMMARY OPINION


      ARMEN, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code (Code) in effect when the
                                         -2-

petition was filed.1 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 deficiency in petitioners’ Federal income tax for

2009 of $9,673.

      The sole issue for decision is whether deductions for losses claimed by

petitioners on their Schedules E, Supplemental Income and Loss, are limited by

the passive activity rules of section 469.2 We hold that they are.

                                    Background

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

incorporate by reference the parties’ stipulation of facts and accompanying

exhibits.

      Petitioners resided in California at the time that the petition was filed.

      Petitioner John Erwin Smith holds a master of science degree in electrical

engineering and is by profession a software engineer. Over the years he has also


      1
         Unless otherwise indicated, all subsequent section references are to the
Internal Revenue Code (Code) in effect for the year in issue. All Rule references
are to the Tax Court Rules of Practice and Procedure.
      2
        Other adjustments in the notice of deficiency are essentially mechanical in
nature and will be given effect on the basis of the outcome of the issue regarding
the passive activity losses.
                                           -3-

purchased a number of properties, principally single-family residences in need of

repair, which he then improves and either holds for rent or seeks to sell for a

profit.

          In 2007 petitioners purchased a single-family home on Solitude Way,

Rocklin, California (Solitude Way property), which they and their five children

then occupied as their personal residence. Petitioners continued to use the

Solitude Way property as the family residence without interruption until they

moved out in 2011.

          When petitioners purchased the Solitude Way property, Mr. Smith intended

to improve the property and ultimately offer it for rent or sale consistent with his

past practice. In that regard, and throughout 2009, Mr. Smith spent much of his

leisure time working to improve the property, particularly the drainage of the

backyard.

          At no time in 2009 was the Solitude Way property either rented or held out

for rent by petitioners. Rather, as previously stated, it was used as their personal

residence.

          Petitioners timely filed their 2009 Federal income tax return. On it,

petitioners reported total wage income of $172,922, including $96,801 of wages
                                         -4-

earned by Mr. Smith. After subtracting their losses listed on their Schedules E and

making other adjustments, petitioners reported adjusted gross income of $158,243.

      Petitioners attached two Schedules E to their return and listed five rental

real estate properties thereon: (1) a single-family home at Vargas Drive, San Jose,

California (Vargas Drive property); (2) a single-family home at Amber Lane,

Pleasanton, California (Amber Lane property); (3) a single-family home at

Garfield Drive, Petaluma, California (Garfield Drive property); (4) a farm at

Gibson Hill Road, Albany, Oregon; and (5) a residential rental at Santiago Court,

Novato, California (Santiago Court property). Petitioners did not include the

Solitude Way property on either of their Schedules E. Petitioners did, however,

claim a home mortgage interest deduction and a real estate tax deduction in

respect of the Solitude Way property on their Schedule A, Itemized Deductions,

for 2009.

      On their Schedules E petitioners reported a net loss of $26,971. Petitioners

did not make the election to group their rental activities as a single activity at the

time they prepared and filed their return, nor did they seek to make the election at

any time thereafter.

      In 2011 petitioners prepared a log reflecting the time spent in 2009 devoted

to both the Solitude Way property and their properties listed on their Schedules E.
                                         -5-

Each entry in the log includes the date, type of activity, and the property or

properties connected with the activity. At trial petitioners acknowledged that the

entries in the log are estimates of the time Mr. Smith spent performing specified

activities on given days.

      The log estimates the total hours spent on real estate activities to be 1,411.2

hours. Petitioners added 10 hours of time spent brokering the properties, bringing

the total to 1,421.2 hours. The log reflects that petitioners devoted the following

hours to each property: 134.7 hours to the Vargas Drive property; entries related

to the Santiago Court property but no time allocated; 24 hours to the Garfield

Drive property; 28 hours to the property labeled Rental CA; 12 hours to the Amber

Lane property; 42.5 hours to the property labeled Rental Utah; 1,068 hours to the

Solitude Way property; 102 hours designated to all properties for routine

maintenance such as collecting rent; and 10 hours to brokering the properties.

      Petitioners’ log further estimates that Mr. Smith spent 1,240 hours working

as a software engineer for his employers during 2009.

      In March 2012 respondent issued petitioners a notice of deficiency,

determining a deficiency of $9,673 for 2009. The notice of deficiency disallowed

petitioners’ passive activity loss deductions claimed on their Schedules E.

Petitioners filed a timely petition for redetermination with the Court.
                                       -6-

                                    Discussion

I. Burden of Proof

      In general, the Commissioner’s determination in a notice of deficiency is

presumed correct, and the taxpayer bears the burden of proving that the

determination is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Pursuant to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances. Petitioners have neither

alleged that section 7491(a) applies nor have they established their compliance

with its requirements. Accordingly, petitioners bear the burden of proof. See Rule

142(a); Welch v. Helvering, 290 U.S. at 115.

      Deductions are allowed solely as a matter of legislative grace. Deputy v. du

Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934). A taxpayer bears the burden of proving entitlement to any deduction

claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); Welch v. Helvering, 290 U.S. at 115. In addition, a taxpayer is required to

maintain records sufficient to substantiate deductions claimed on a Federal income

tax return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. In other words, the

taxpayer bears the burden of proving entitlement to the deductions claimed, and

this includes the burden of substantiation. Rule 142(a); Hradesky v.
                                        -7-

Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir.

1976).

II. Real Estate Professional

      Section 469(a) generally disallows for the taxable year any passive activity

loss. A “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” includes, with

certain exceptions, any trade or business in 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),

(4). In general, material participation is defined as regular, continuous, and

substantial involvement by an individual in the operations of an activity. Sec.

469(h)(1).

      There is an exception that allows the current deductibility of losses

associated with rental activities that would ordinarily be disallowed under section

469. Moss v. Commissioner, 135 T.C. 365, 368 (2010). Thus, a taxpayer who

engages in the rental real estate business is not engaged in a passive activity under

section 469(c)(2) if the taxpayer can show that he or she is a qualifying real estate
                                          -8-

professional under section 469(c)(7). See also sec. 1.469-9(e)(1), Income Tax

Regs.

        A taxpayer qualifies as a real estate professional whose rental activities are

not deemed per se passive 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 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).3 For joint filers, the same spouse must satisfy each of the above

conjunctive requirements. Sec. 469(c)(7)(B)(ii). Here, petitioners allege (and the

record supports) that Mr. Smith was the spouse who was primarily involved in the

real estate activities.

        Respondent contends that petitioners may not include the Solitude Way

property in their time estimates because that property was their personal residence

throughout 2009; therefore, in respondent’s view, petitioners have not established

that they worked the requisite number of hours to qualify as real estate

        3
        An individual must establish that he or she materially participated in each
of the rental activities unless the individual makes an election to treat all interests
in rental real estate as a single rental activity. Sec. 1.469-9(e)(1), Income Tax
Regs. Petitioners concede they made no such election.
                                         -9-

professionals under section 469(c)(7)(B). Respondent further contends that the

time log provided by petitioner should not be accepted because it was created

postevent and contains “ballpark guesstimate[s]” of dates and time spent on real

estate activities.

       In contrast, petitioners contend that they only used the Solitude Way

property as their personal residence to allow Mr. Smith to more easily prepare the

property for rental. Therefore, in petitioners’ view, hours spent improving the

Solitude Way property should be included in determining whether petitioners

materially participated in real estate trades or businesses.

       In seeking to make their case, petitioners point to section 280A regarding

the business use of home, as well as section 1.280A-1(e)(6), Proposed Income Tax

Regs., 45 Fed. Reg. 52399 (Aug. 7, 1980), as amended, 48 Fed. Reg. 33320 (July

21, 1983). Petitioners argue that the Code and the regulation provide that days

spent engaging in repair and maintenance work on a dwelling unit are not

considered days of personal use of the property. According to petitioners, because

Mr. Smith performed repair and maintenance work on the Solitude Way property

approximately full time during 2009, their dwelling in the property was not for

personal use and the hours spent improving the property are includible in
                                        - 10 -

determining whether Mr. Smith materially participated in real estate trades or

businesses during 2009.

      A. Inclusion of Hours Spent Working on the Solitude Way Property

      An activity involving the use of tangible property may be considered a

rental activity if such property is “used by customers or held for use by

customers”. Sec. 1.469-1T(e)(3)(i)(A), Temporary Income Tax Regs., 53 Fed.

Reg. 5702 (Feb. 25, 1988); sec. 1.469-9(b)(3), Income Tax Regs. In the instant

case, petitioners used the Solitude Way property throughout 2009 as their family

residence. Mr. Smith spent much of his leisure time in 2009 improving the

Solitude Way property, especially the backyard, with the intent that the Solitude

Way property might be rented out and used by tenants in the future; however, the

property was not actually rented out at any time during 2009, nor was it held out

for rent at any time in 2009. Therefore, regardless of petitioners’ intent to rent out

the Solitude Way property at a later date, it was not a rental activity in 2009

because it was neither used by customers nor held for use by customers. See sec.

1.469-1T(e)(3)(i)(A), (ii)(A), Temporary Income Tax Regs., supra.

      Because the Solitude Way property was not part of a real estate trade or

business at any time in 2009, time spent improving the property may not be

included in establishing compliance with the real estate professional test of section
                                        - 11 -

469(c)(7)(B) for rental real estate activities. See Bailey v. Commissioner, T.C.

Memo. 2001-296. Therefore, after eliminating the hours Mr. Smith spent working

on the Solitude Way property from the activity log, the log reflects a total of only

353.2 hours spent working on other properties in 2009. Thus, even if petitioners

had elected to group their rental activities, which they did not, 353.2 hours is less

than the 1,240 hours Mr. Smith spent performing personal services in his

employment, see sec. 469(c)(7)(B)(i), and less than the 750-hour requirement

specified by section 469(c)(7)(B)(ii). Accordingly, petitioners do not qualify as

real estate professionals under section 469(c)(7).

      Petitioners’ reliance on section 1.280A-1(e)(6), Proposed Income Tax

Regs., supra, is misplaced.4 Such section states that a taxpayer shall not be

deemed to have used a dwelling unit for personal purposes on any day on which

the principal purpose of the unit’s use was to perform repair or maintenance work

on the dwelling unit. However, throughout 2009 the principal purpose of

petitioners’ use of the Solitude Way property was not to perform repair or


      4
        In addition, we note that proposed regulations that have not been adopted
are generally not authoritative. See Canterbury v. Commissioner, 99 T.C. 223,
246 n.18 (1992) (citing F.W. Woolworth Co. v. Commissioner, 54 T.C. 1233,
1265-1266 (1970)); see also Flahertys Arden Bowl, Inc. v. Commissioner, 115
T.C. 269, 278 (2000) (stating that “[p]roposed regulations are not authoritative”),
aff’d, 271 F.3d 763 (8th Cir. 2001).
                                        - 12 -

maintenance work but rather to provide shelter, i.e., a home, for petitioners and

their five children, which was purely personal use. In short, section 280A is

simply inapposite given the actual use of the Solitude Way property.

      B. Time Log Estimates

      Even if the time Mr. Smith spent working on the Solitude Way property

could be considered and included in petitioners’ total hours working on real estate

activities, petitioners would not satisfy the requirements of section 469(c)(7)

because of the inadequacy of their log. In this regard, we observe that individuals

may establish the extent of their participation in an activity by “any reasonable

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

(Feb. 25, 1988). Although “reasonable means” is interpreted broadly, we have

held that the phrase does not include a postevent “ballpark guesstimate”. Speer v.

Commissioner, T.C. Memo. 1996-323 (citing Goshorn v. Commissioner, T.C.

Memo. 1993-578).

      The method used by petitioners to determine the time spent by Mr. Smith

performing services in his real estate activities was not reasonable within the

meaning of section 1.469-5T(f)(4), Temporary Income Tax Regs., supra. Thus,

petitioners rely on a reconstructed schedule of hours prepared in 2011 to

approximate daily or weekly time spent on each property in 2009. Although we
                                          - 13 -

found petitioners to be credible witnesses, we conclude that petitioners have not

demonstrated material participation because their records are postevent “ballpark

guesstimate[s]”. Accordingly, petitioners have not demonstrated that Mr. Smith

was a real estate professional in 2009.

III. Offset of Rental Real Estate Activities

       Another exception that operates to allow the current deductibility of losses

associated with rental activities ordinarily disallowed under section 469, albeit a

potentially limited exception, is found in section 469(i). Thus, even if a taxpayer’s

rental real estate activities are treated as passive activities, a portion of the passive

activity losses associated with those activities may be deductible under section

469(i)(1). Thus, a taxpayer who “actively” participates in a rental real estate

activity may deduct a maximum loss of $25,000 per year related to the activity.

See sec. 469(i)(1) and (2). This exception is subject to a phaseout when the

taxpayer’s adjusted gross income (AGI) (determined without regard to any passive

activity loss) exceeds $100,000 and phases out entirely when adjusted gross

income reaches $150,000. Sec. 469(i)(3)(A); Moss v. Commissioner, 135 T.C. at

371.
                                        - 14 -

      Petitioners reported AGI (determined without regard to any passive activity

loss) of more than $150,000 on their 2009 return. Therefore, the phaseout

calculation serves to preclude any deductible loss for 2009.

                                    Conclusion

      In holding for respondent we have considered all of the arguments advanced

by petitioners, and, to the extent not expressly addressed, we conclude that those

arguments do not support a result contrary to that reached herein.

      In order to give effect to the foregoing,


                                                       Decision will be entered for

                                                 respondent.
