                        T.C. Memo. 2000-107



                      UNITED STATES TAX COURT



                  MATTI KOSONEN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4259-98.                 Filed March 28, 2000.



     Andrew I. Panken and Robert A. DeVellis, for petitioner.

     Carmino J. Santaniello, Bradford A. Johnson, Gerald A.

Thorpe, and Frances Regan, for respondent.



                        MEMORANDUM OPINION


     COLVIN, Judge:   Respondent determined that petitioner is

liable for deficiencies in income tax of $20,369 for 1994 and

$24,747 for 1995.

     The issue for decision is whether, as petitioner contends,

petitioner elected under section 469(c)(7) to treat his seven
                                - 2 -

rental real estate activities as one activity for 1994 and 1995.

We hold that he did not.

       Section references are to the Internal Revenue Code in

effect during the years in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.

                             Background

       The parties submitted this case fully stipulated under Rule

122.

A.     Petitioner

       Petitioner lived in Stamford, Connecticut, when he filed his

petition.    He was a pilot for United Airlines in 1994 and 1995.

He worked 609 hours for United Airlines in 1994 and 681 hours in

1995.

B.     Petitioner’s Rental Real Estate Activities

       In 1994 and 1995, petitioner owned seven single and two-

family residential properties that he rented to others (the seven

properties).    Six of the seven properties are in Stamford,

Connecticut, and one is in St. Petersburg, Florida.    Petitioner

bought six of the properties from 1979 to 1984 and the seventh on

November 9, 1994.    Petitioner performed 877 hours of service

relating to his real estate rentals in 1994 and 977 hours of

service in 1995.    He did not use any of the seven properties for

personal purposes in 1994 or 1995.
                                 - 3 -

     Petitioner had passive losses from six of the properties

before 1994.   As of January 1, 1994, he had suspended losses

(i.e., losses which he could not deduct) totaling $215,860 from

his seven properties.

C.   Proposed Regulation

     On January 10, 1995, the Secretary proposed a regulation

which stated that a taxpayer may make an election under section

469(c)(7) by filing a statement with the taxpayer’s original

return in which the taxpayer declares that he or she is a

qualifying taxpayer for the taxable year, and that the election

is under section 469(c)(7)(A).    See sec. 1.469-9, Proposed Income

Tax Regs., 60 Fed. Reg. 2557 (Jan. 10, 1995).1


     1
        Sec. 1.469-9, Proposed Income Tax Regs., 60 Fed. Reg.
2561 (Jan. 10, 1995), provides in pertinent part as follows:

          (g) Election to treat all interests in rental
     real estate as a single rental real estate activity–-
     (1) In general. A qualifying taxpayer may make an
     election to treat all of the taxpayer’s interests in
     rental real estate as a single rental real estate
     activity. This election is binding for the taxable
     year in which it is made and for all future years in
     which the taxpayer is a qualifying taxpayer. However,
     if there is a material change in a taxpayer’s facts and
     circumstances, the taxpayer may revoke the election
     using the procedure described in paragraph (g)(3) of
     this section.

         *     *    *      *      *      *   *     *     *

          (3) Filing a statement to make or revoke the
     election. A qualifying taxpayer makes the election to
     treat all interests in rental real estate as a single
     rental real estate activity by filing a statement with
                                                   (continued...)
                               - 4 -

D.   Petitioner’s Income Tax Returns

     1.   Preparation

     John L. Berry Associates prepared petitioner’s 1994 and 1995

income tax returns.   In March 1995, John L. Berry (Berry)

contacted the Technical Support Department for Commerce Clearing

House (CCH) to ask how a real estate professional can elect to

treat all of his or her real estate interests as one activity.

The record does not state how CCH answered Berry’s question.

Petitioner timely filed his 1994 return.

     2.   Petitioner’s 1994 Form 1040, Schedule E, Forms 8582,
          and Statements in Support of Forms 8582

          a.   Petitioner’s 1994 Form 1040 and Schedule E

     The Instructions for the 1994 Form 1040, U.S. Individual

Income Tax Return, and Schedules A, B, C, D, E, F, and SE (the

instructions) direct a taxpayer to list on Schedule E,

Supplemental Income and Loss, each rental property, report the

income and loss for each property, calculate the net gain or loss

for each property, and report the combined net gains and losses

on line 17 of Form 1040.




     1
      (...continued)
     the taxpayer’s original income tax return for the
     taxable year. This statement must contain a
     declaration that the taxpayer is a qualifying taxpayer
     for the taxable year and is making the election
     pursuant to section 469(c)(7)(A). The taxpayer may
     make this election for any taxable year in which
     section 469(c)(7) is applicable. * * *
                                 - 5 -

     Petitioner reported losses of $56,954 on line 42 of the

Schedule E that he attached to his 1994 income tax return, and on

line 17 (rental real estate income or loss) on his 1994 Federal

income tax return.    He subtracted $56,954 from his other income

to calculate his adjusted gross income for 1994.

     Petitioner attached three first pages and one second page of

Schedule E to his 1994 income tax return.   He reported the income

and expenses for six of his rental properties on two of the first

pages (three on each) and income and expenses for the seventh

rental property and totals for the seven rental properties on the

third first page.    Petitioner reported the following on lines 22

and 23 of his 1994 Schedule E:

                               Line 22,    Line 23,
                               Income     Deductible
             Property          or loss       loss
          19 Cold Springs     ($6,626)     ($6,626)
          9 Cold Springs      (20,971)     (20,971)
          241-21 Hamilton      (2,531)      (2,531)
          15 Cold Spring      (12,590)     (12,590)
          106 1st St.          (5,720)      (5,720)
          63 Belltown          (8,516)      (8,516)
          80 Lawn               1,939       (1,939)

     The explanation for line 24 of the 1994 Schedule E instructs

taxpayers to add positive amounts shown on line 22 but not to

include any losses.   Petitioner reported $1,939 on line 24.

     The explanation for line 25 of the 1994 Schedule E instructs

taxpayers to enter the total amount of royalty losses from line

22 and rental real estate losses from line 23.   Petitioner

reported a $58,893 loss on line 25.
                                - 6 -

     The explanation for line 26 on the 1994 Schedule E instructs

taxpayers to combine lines 24 and 25 and enter the total amount

of rental real estate income or loss on lines 26 and 40 on

Schedule E and on line 17 on Form 1040.    Petitioner reported a

$56,954 loss on lines 26 and 40.

     The explanation for line 42 on the 1994 Schedule E instructs

real estate professionals to enter the net income or loss they

report anywhere on Form 1040 from all rental real estate

activities in which they materially participate.    Petitioner

entered a $56,954 loss on line 42 of his 1994 Schedule E.

            b.   Petitioner’s Forms 8582 and Supporting Statements
                 Attached to His 1994 Return

     Petitioner attached to his 1994 income tax return two Forms

8582, Passive Activity Loss Limitations.    Petitioner added

“ALTERNATIVE MINIMUM TAX” to the top of his second Form 8582.      On

the first Form 8582, he reported $1,939 for activities with net

income and $215,860 as prior year unallowed losses, for a net

loss of $213,921.   In Part II (special allowance for rental real

estate with active participation) of the first Form 8582, he

reported that his modified adjusted gross income exceeded

$150,000.    In Part III (total losses allowed) of both Forms 8582,

he reported $1,939 on line 10 (total income) and line 11 (total

losses allowed from all passive activities for 1994).

     Petitioner attached to his 1994 income tax return statements

in support of the Forms 8582.   On Statement 29, Form 8582, Active
                                - 7 -

Rental of Real Estate--Worksheet 1, petitioner reported net

income of $1,939, no current net loss for any property, prior

year unallowed loss of $215,860, and a total overall loss of

$213,921.    On Statement 30, Form 8582, Allocation of Unallowed

Losses, and on Statement 31, Form 8582, Allowed Losses,

petitioner reported that his total loss and total unallowed loss

was $213,921.

     On Statement 32, Form 8582, Summary of Passive Activities,

petitioner reported that each rental property except for 80 Lawn

Avenue, Stamford, Connecticut, had a passive gain or loss of

zero, that his prior years’ carryover after his current year net

rental activity income was $1,939, and that the total allowed

losses for 1994 reported on Form 8582, line 11, was $1,939.

     On Statement 33, Form 8582, Modified AGI, petitioner

reported that his rental loss was $56,954.    Petitioner attached

no other statements or other information relating to his first

Form 8582.

     Petitioner did not attach a statement to his 1994 return

stating that he was electing to treat his real estate activities

as one activity.    He did not combine his 1994 Schedule E rental

real estate losses with his previously suspended losses.

E.   Final Regulations

     Section 1.469-9(g), Income Tax Regs., providing how to make

an election under section 469(c)(7), became final on December 21,
                               - 8 -

1995.   See T.D. 8645, 1996-1 C.B. 73.   The final regulation,

which is substantially like the proposed regulation, is generally

effective for taxable years beginning on or after January 1,

1995, and is also effective for elections under section

469(c)(7)(A) and paragraph (g) of this regulation that are made

with returns filed on or after January 1, 1995.    See T.D. 8645,

1996-1 C.B. at 75.

F.   Petitioner’s 1995 and 1996 Returns

     Petitioner timely filed his 1995 return.    He reported the

seven rental properties on his 1995 return as he had on his 1994

return.

     Petitioner attached a statement to his 1996 return

indicating that he qualified as a real estate professional and

elected to treat all of his rental real estate activities as one

activity under section 469(c)(7).

                            Discussion

A.   Passive Loss Rules for Real Estate Professionals

     The issue for decision is whether, as petitioner contends,

petitioner elected for 1994 and 1995 to treat his seven rental

real estate activities as one activity under section 469(c)(7).

     A taxpayer may not deduct passive activity losses claimed by

the taxpayer in any taxable year.   See sec. 469(a)(1).   A passive

activity loss is the amount, if any, by which losses from all

passive activities for a taxable year exceed income from all
                               - 9 -

passive activities for that year.   See sec. 469(d)(1).   A passive

activity is a trade or business in which the taxpayer does not

materially participate.   See sec. 469(c)(1).

     Rental activities are automatically passive (i.e., per se

passive), see sec. 469(c)(2), whether or not the taxpayer

materially participates in the activity, see sec. 469(c)(4).

However, rental activities are not per se passive in taxable

years beginning after December 31, 1993, for taxpayers in the

real property business (real estate professionals).   See sec.

469(c)(7).2   Respondent determined, but no longer contends, that

petitioner is not a real estate professional under section

469(c)(7)(B).3   We treat that as respondent’s concession that

section 469(c)(7) applies to petitioner for the years in issue.

     If section 469(c)(7) applies, each interest of the taxpayer

in rental real estate is treated as a separate activity for

purposes of section 469 unless the taxpayer elects to treat all




     2
        Sec. 469(c)(7) became effective for taxable years
beginning after Dec. 31, 1993. See Omnibus Budget Reconciliation
Act of 1993, Pub. L. 103-66, sec. 13143(a), (c), 107 Stat. 312,
440.
     3
        Petitioner said in his opening brief that respondent
conceded that petitioner is a real estate professional for
purposes of sec. 469. Respondent did not address that issue in
the reply brief, and we treat it as conceded by respondent. See
Burbage v. Commissioner, 82 T.C. 546, 547 n.2 (1984), affd. 774
F.2d 644 (4th Cir. 1985); Wolf v. Commissioner, T.C. Memo.
1992-432, affd. 13 F.3d 189 (6th Cir. 1993).
                               - 10 -

interests in rental real estate as one activity.   See sec.

469(c)(7)(A)(ii) and flush language of sec. 469(c)(7).

     Petitioner may deduct the net losses from his rental real

estate activities in 1994 and 1995 if, as he contends, he elected

in 1994 to treat them as one activity under section 469(c)(7).

B.   Whether Petitioner Materially Participated in Any of the
     Seven Rental Real Estate Activities

     Petitioner contends in the petition that he materially

participated in each of his rental real estate activities.

However, petitioner did not so contend on brief.   We deem that

issue to be waived.    See Burbage v. Commissioner, 82 T.C. 546,

547 n.2 (1984), affd. 774 F.2d 644 (4th Cir. 1985); Wolf v.

Commissioner, T.C. Memo. 1992-432, affd. 13 F.3d 189 (6th Cir.

1993).

     Even if petitioner contended that he materially participated

in each of his rental real estate activities, the record does not

show that he did so.   An individual taxpayer materially

participates in an activity if:   (a) He or she participates more

than 500 hours during the year; (b) his or her participation is

substantially all of the participation of individuals in that

activity for the year; (c) he or she participates more than 100

hours and that participation equals the participation of all

other individuals during the year; (d) the activity is a
                              - 11 -

significant participation activity4 and his or her aggregate

participation in all significant participation activities for the

year exceeds 500 hours; (e) he or she materially participates for

5 out of 10 years immediately preceding the present year; (f) the

activity is a personal service activity and he or she materially

participated for any 3 years preceding the present year; or (g)

he or she participated on a regular, continuous, and substantial

basis during the year.   See sec. 1.469-5T(a), Temporary Income

Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988).   Petitioner spent a

total of 877 hours on his seven real estate rental activities,

but there is no evidence of how many hours he spent on any

specific rental property for any year.

     Respondent concedes that petitioner materially participated

in his rental real estate activities if they are treated as one

activity.   Thus, respondent concedes that petitioner may deduct




     4
        A significant participation activity is one in which the
taxpayer participates for more than 100 hours but does not
materially participate under one of the other six tests. See
sec. 1.469-5T(c)(1)(ii) and (2), Temporary Income Tax Regs., 53
Fed. Reg. 5725, 5726 (Feb. 25, 1988). Thus, for an activity to
be a significant participation activity, the taxpayer (1) must
have more than 100 hours of participation; (2) must have less
than 500 hours of participation because participation greater
than 500 hours would meet the test in sec. 1.469-5T(a)(1),
Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988);
and (3) must not be the individual with the most participation in
the activity because a person with the most participation in the
activity, if greater than 100 hours, meets the test in sec.
1.469-5T(a)(3), Temporary Income Tax Regs., 53 Fed. Reg. 5726
(Feb. 25, 1988).
                              - 12 -

his rental losses if he elected under section 469(c)(7) to treat

his rental real estate activities as one activity.

C.   Whether Petitioner Elected on His 1994 Income Tax Return To
     Treat His Rental Real Estate Activities as One Activity

     1.   Whether Aggregating Net Losses From Schedule E on Line
          17 of Form 1040 is an Election Under Section 469(c)(7)

     Petitioner contends that the fact that he aggregated his

losses from his rental real estate activities on his tax returns

for 1994 and 1995 shows that he elected under section 469(c)(7)

to treat them as one activity.   We disagree.

     To make an election, a taxpayer must clearly notify the

Commissioner of the taxpayer’s intent to do so.    See Knight-

Ridder Newspapers Inc. v. United States, 743 F.2d 781, 795 (11th

Cir. 1984).   To make an election, “the taxpayer must exhibit in

some manner * * * his unequivocal agreement to accept both the

benefits and burdens of the tax treatment afforded” by the

governing statute.   Young v. Commissioner, 83 T.C. 831, 839

(1984), affd. 783 F.2d 1201 (5th Cir. 1986).    A taxpayer has not

made an election if it is not clear from the return that an

election has been made.   See Young v. Commissioner, 783 F.2d at

1206.

     The instructions for the 1994 Form 1040 and Schedules A, B,

C, D, E, F, and SE require petitioner to aggregate his rental

real estate losses on line 17 of Form 1040.     Thus, the fact that
                              - 13 -

petitioner aggregated his losses is not clear notice that he

intended to elect under section 469(c)(7).

     2.   Whether Reporting That Net Losses Were Active Is an
          Election Under Section 469(c)(7)

     Petitioner argues that he treated his net losses as active

rather than passive and that he thereby elected to treat his

rental real estate activities as one activity under section

469(c)(7).   As evidence that he treated his net losses as active,

he points out that he reported on lines 22 through 26 and 42 of

Schedule E, line 1d of Form 8582, and statements in support of

Form 8582 of his 1994 return that, except for one property, none

of the properties had a passive gain or loss and that he did not

add his 1994 losses to previously suspended losses.   On line 42

of Schedule E, he reported the loss of $56,954 as though he were

a real estate professional and had sustained that loss in an

activity or activities in which he materially participated.

Petitioner contends that this shows that he elected to treat his

rental real estate activities as one activity under section

469(c)(7).   We disagree.

     Petitioner’s reporting that his net losses were active is

not clear notice that he elected under section 469(c)(7) because

he would also have reported that his net losses were active if he

had materially participated in each of the seven rental real

estate activities and had not elected under section 469(c)(7).

See sec. 469(c) and (d); sec. 1.469-5T, Temporary Income Tax
                               - 14 -

Regs., supra; 1994 Instructions for Form 1040 and Schedules A, B,

C, D, E, F, and SE, at E-3.    Thus, petitioner’s 1994 return did

not give respondent clear notice that he was electing to treat

all of his rental real estate activities as one activity under

section 469(c)(7).

     3.   Whether Petitioner’s Intention To Elect Under Section
          469(c)(7) Establishes That He Did So

     Petitioner contends that he intended to elect under section

469(c)(7), and that we should take his intent into account in

deciding whether he did so.    We disagree.   See Young v.

Commissioner, 783 F.2d at 1206 (taxpayer’s intent is irrelevant

to making an election).

     4.   Whether the Lack of Guidance on How To Elect Under
          Section 469(c)(7) Excuses Petitioner From Clearly
          Notifying Respondent That He Wanted To Elect

     Petitioner points out that, when he filed his 1994 return,

the Commissioner had issued no guidance (other than proposed

regulations) about how to elect under section 469(c)(7) and

contends that, as a result, his return satisfied the election

requirement.   We disagree.   The lack of guidance does not

eliminate the statutory requirement to elect.     See Young v.

Commissioner, 783 F.2d at 1206 (the statute requires a binding

election with or without regulations).    In any event,

petitioner’s argument would not excuse his failure to elect for

1995 because the regulations were adopted in final form well

before his 1995 return was due.
                                - 15 -

     5.   Whether the Result of Concluding That Petitioner Did
          Not Elect Under Section 469(c)(7) Is Too Harsh

     Petitioner contends that in deciding whether a taxpayer

properly elected, we must consider whether the sanction imposed

on the taxpayer for failure to comply would be excessive and out

of proportion to the default.    Petitioner contends that the

result here is harsh and out of proportion to any failure to

elect properly.   Petitioner cites American Air Filter Co. v.

Commissioner, 81 T.C. 709, 719 (1983), to support his contention

that we must consider the harshness of the result if we find that

he did not elect as he claimed.

     In American Air Filter Co. v. Commissioner, supra, we

considered whether the result was harsh as a factor in deciding

whether the taxpayer substantially complied with regulations

which stated how to make an election.    American Air Filter Co.

does not apply here because the issue here is not whether

petitioner substantially complied with a regulation.    If

petitioner did not elect under section 469(c)(7) in 1994 as he

contends, then his 1994 and 1995 losses are suspended under

section 469(b) as they were in years before 1994, and he may not

deduct the rental losses that he incurred in 1994 and 1995.     We

do not believe that result is harsh or out of proportion to

petitioner’s failure to elect.
                              - 16 -

     6.   Whether Petitioner Substantially Complied With the
          Requirement To Elect Under Section 469(c)(7)

     Petitioner contends that he substantially complied with the

requirement to elect under section 469(c)(7).    We disagree for

reasons stated above.   Petitioner has not shown that he gave

respondent clear notice that he was making an election under

section 469(c)(7) for 1994 or 1995.

D.   Conclusion

     Petitioner treated the rental real estate activities on his

1995 return in the same manner as his 1994 return.      We conclude

that petitioner did not elect on his 1994 or 1995 return to treat

his rental real estate activities as a single activity under

section 469(c)(7).5

     To reflect the foregoing,


                                           Decision will be entered

                                      for respondent.




     5
        In light of our conclusion, we need not decide
respondent’s contention that sec. 1.469-9(g), Income Tax Regs.,
requiring a taxpayer to attach a statement to his or her original
return, applies to petitioner’s 1994 return.
