                          T.C. Summary Opinion 2017-6



                         UNITED STATES TAX COURT



             ALVIN JONES AND CHANEE JONES, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 19645-14S.                         Filed February 7, 2017.



      Alvin Jones, pro se.

      Shannon E. Loechel, for respondent.



                              SUMMARY OPINION


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

provisions of section 74631 of the Internal Revenue Code in effect when the

petition was filed. Pursuant to section 7463(b), the decision to be entered is not


      1
        Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended and in effect for the years in issue. Rule references are
to the Tax Court Rules of Practice and Procedure.
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reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      In notices of deficiency dated June 10, 2014 (notices), respondent

determined deficiencies in petitioners’ 2011 and 2012 Federal income tax as

follows:

                            Year                  Deficiency

                            2011                      $4,636
                            2012                      16,457

      After concessions, the issue for decision is whether petitioners are entitled

to deduct losses from their rental real estate activity, the resolution of which

depends upon whether section 469(c)(7) applies to Mr. Jones (petitioner).2

                                     Background

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

petition was filed, petitioners resided in Georgia.




      2
        Mrs. Jones does not claim to be a taxpayer in a real property business. She
worked full time for Turner Services, Inc., during both years in issue. She did not
appear at trial and did not sign the stipulation of facts admitted into evidence at
trial. Accordingly, on October 8, 2015, we dismissed the case as to her for lack of
prosecution. See Rule 123. The decision to be entered with respect to her,
however, will be consistent with the decision to be entered with respect to
petitioner.
                                          -3-

         At all times relevant petitioner owned and operated Georgia First Insurance,

LLC (Georgia First).3 In February 2011 petitioner began selling American Family

Insurance insurance policies through Georgia First.

         According to payroll records from Georgia First, petitioner was paid for

519.99 hours of work during 2011 and 173.33 hours during 2012. For 2011 the

payroll records reflect petitioner’s hours only from May through December. The

payroll records show the extent of petitioner’s compensation from Georgia First;

they do not necessarily show the total time that he spent performing services in

connection with the business. The payroll records also show that petitioner

employed three people, including an agency manager, during 2011 and 2012.

         Among other things and in addition to his managerial duties with respect to

Georgia First, petitioner was responsible for taking photographs of any houses or

properties subject to an insurance policy to be underwritten through Georgia First.

To that end, petitioner drove to many locations within Georgia during the years in

issue.

         In addition to the personal services he performed in connection with

Georgia First, petitioner performed personal services with respect to 10 rental real


         3
       Georgia First is a single-member limited liability company treated as a sole
proprietorship for Federal income tax purposes.
                                         -4-

estate properties that petitioners owned in 2011 and 11 rental real estate properties

that petitioners owned in 2012 (rental properties). Each rental property was a

single-family home. Three of the rental properties are in Texas, and the remaining

properties are in Georgia. Petitioner described at least nine of the rental properties

as “section 8” housing.4

      During the years in issue petitioners did not engage a management

company, and as between petitioners, petitioner was primarily responsible for

managing and maintaining the rental properties. With respect to the section 8

housing rental properties, petitioner spent considerable time complying with the

requirements of that program, which included, among other things, annual

inspections, tenant qualification, and the initial qualification of the one rental

property purchased in 2012. Petitioner also met with prospective tenants,

corresponded with tenants, negotiated and prepared leases, purchased supplies for

repairs, met with contractors, oversaw repairs, personally made repairs, paid

various bills, and collected rent due from tenants.

      4
       The section 8 housing program under the United States Housing Act of
1937 authorizes a private landlord who rents to a low-income tenant to receive
assistance payments from the Department of Housing and Urban Development
(HUD) in an amount calculated to make up the difference between the tenant’s
rent payments and the contract rent agreed upon by the landlord and HUD. See
Cisneros v. Albine Ridge Grp., 508 U.S. 10, 12 (1993); see also 42 U.S.C. sec.
1437f (2006).
                                        -5-

      Petitioner maintained contemporaneous logs of the hours he claims to have

devoted to the rental properties during 2011 and 2012. According to the logs

petitioner spent 951 hours and 1,040 hours performing services for the rental

properties for 2011 and 2012, respectively. Many of the hours reported on the

logs relate to the travel time between Georgia and Texas. Most of the hours

reported on the logs are attributable to petitioner although some of them might be

attributable to Mrs. Jones. The entries in the logs provide generalized and

abbreviated descriptions of the work that petitioner performed on a specific

property on a specific day and the amount of time that he spent on the activity

described.

      Petitioners’ timely filed joint 2011 and 2012 Federal income tax returns

were prepared by a paid income tax return preparer. On each of those returns

petitioners reported income and expenses attributable to the rental properties on a

Schedule E, Supplemental Income and Loss. The Schedules E show net losses of

$32,790 and $54,959 for 2011 and 2012, respectively. Those losses are taken into

account in the $88,593 and $106,080 adjusted gross income reported on

petitioners’ 2011 and 2012 returns, respectively.

      Petitioners’ 2011 and 2012 returns each also include a Schedule C, Profit or

Loss From Business, related to Georgia First. On the Schedules C petitioner
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reported driving 17,742 and 19,777 business miles in connection with Georgia

First during 2011 and 2012, respectively.

      The notices disallowed deductions for the rental real estate losses.

According to respondent’s explanation in the notices, “the requirements of section

469(c)(7)” were not met by either petitioner for either year. Therefore, according

to the notices, the rental real estate losses are limited by section 469. Some of the

adjustments made in the notices have been agreed to between the parties or

conceded by one or the other of them, and other adjustments are computational.

Those adjustments will not be discussed.

                                     Discussion

      As a general rule, the Commissioner’s determination in a notice of

deficiency is presumed correct, and the taxpayer bears the burden of proving by a

preponderance of the evidence that the determination is improper. See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).5 Deductions are a matter

of legislative grace, and taxpayers bear the burden of proving that they are entitled

to any claimed deductions. Rule 142(a); see INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992).


      5
      Petitioners do not claim that the provisions of sec. 7491(a) are applicable,
and we proceed as though they are not.
                                          -7-

      A taxpayer is generally allowed deductions for certain business and income-

producing expenses. See secs. 162, 212. Section 469(a) generally disallows for

the taxable year a deduction for any passive activity loss. A passive activity loss is

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 trade or business or activity for the production of income

in which the taxpayer does not materially participate. Sec. 469(c)(1), (6).

      Rental activity is generally treated as per se passive regardless of whether

the taxpayer materially participates. Sec. 469(c)(2). However, the rental activity

of a taxpayer is not treated as per se passive if the taxpayer satisfies the

requirements of section 469(c)(7)(B).6 Sec. 469(c)(7)(A)(i). If a taxpayer is

described in that section (sometimes that taxpayer is referred to as a “real estate

professional”), then section 469(c)(2) does not apply and the taxpayer’s rental real

estate activity, if conducted as a trade or business or for the production of income,

      6
        There is an additional exception for rental real estate activity losses of a
natural person(s). See sec. 469(i). The deduction is phased out as adjusted gross
income, modified by sec. 469(i)(3)(F), exceeds $100,000, with a full phaseout
occurring when modified adjusted gross income equals $150,000. Sec.
469(i)(3)(A). In the notices of deficiency respondent determined that because of
the phaseout provisions, petitioners are entitled to a $10,869 deduction for 2011
and are precluded from currently deducting any of their rental real estate loss for
2012, a point they do not dispute if they are not otherwise entitled to a deduction
for the entire loss shown on each Schedule E.
                                          -8-

is not treated as a passive activity if the taxpayer materially participates in the

activity. Sec. 469(c)(1); Fowler v. Commissioner, T.C. Memo. 2002-223; sec.

1.469-9(e), Income Tax Regs. Petitioners’ rental real estate activity constitutes a

“real property” trade or business within the meaning of section 469.7 See sec.

469(c)(7)(C). We proceed without finding that petitioner materially participated

in the rental real estate activity during 2011 and 2012. See sec. 469(h).

      Although the application of section 469 can be complicated, the

disagreement between the parties is relatively simple--the parties disagree as to the

number of hours petitioner spent providing personal services during 2011 and

2012 to Georgia First and the number of hours he spent performing personal

services in connection with petitioners’ rental real estate activity. In addition to

another requirement, to be considered a real estate professional (i.e., a taxpayer to

whom section 469(c)(7)(A) applies) and entitled to the deductions here in dispute,

petitioners must establish that the hours petitioner spent in connection with their

rental real estate activity exceed the hours he spent performing personal services

for Georgia First. See sec. 469(c)(7)(B)(i).




      7
        Because of an election they made for Federal income tax purposes,
petitioners’ interests in the rental properties are treated as one activity. See sec.
469(c)(7)(A).
                                         -9-

      According to petitioner, during the years in issue his “primary focus in

business every day of the week” was his rental properties. Petitioner did not keep

a log of the hours that he devoted to Georgia First but generally testified that “the

nature of the [insurance] business * * * [did] not require * * * [him] to be there”.

The only direct evidence on the point is petitioner’s testimony, which finds some

support in Georgia First’s payroll records showing that petitioner employed three

people, including an agency manager, to conduct his insurance business. The

payroll records also show that during the years in issue petitioner was paid for

519.99 hours of work during 2011 and 173.33 hours during 2012. Petitioner

acknowledges, however, that the payroll records show only the hours for which he

received compensation; they do not reflect the actual time he spent performing

services for Georgia First. That fact is clear when we take into consideration the

substantial business miles petitioner drove during the years in issue in addition to

other tasks we expect he performed for Georgia First.

      The temporary regulations provide that hours of participation may be

established by “[c]ontemporaneous daily time reports, logs, or similar documents”.

Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25,

1988). But participation can also be established by other reasonable means, such

as “appointment books, calendars, or narrative summaries” that identify the
                                         - 10 -

services performed and “the approximate number of hours spent performing such

services”. Id. For purposes of that regulation, we are not required to accept

postevent “ballpark guesstimates”, nor are we bound to accept the unverified

testimony of taxpayers in the absence of adequate documentation. See, e.g., Lum

v. Commissioner, T.C. Memo. 2012-103; Estate of Stangeland v. Commissioner,

T.C. Memo. 2010-185.

      Other than petitioner’s general testimony that he spent more time

performing services for petitioners’ rental real estate activity than he did for

Georgia First, petitioners did not present any evidence (such as time logs) or

estimates of the total time petitioner spent performing services for Georgia First

from which we can determine with any degree of certainty how many hours he

dedicated to Georgia First during the years in issue. Because petitioners have

failed to establish how many hours petitioner spent performing services for

Georgia First, petitioners have failed to establish that petitioner spent more time

on petitioners’ rental real estate activity during the years in issue than he did for

Georgia First. Accordingly, petitioners have not shown that petitioner is a

taxpayer to whom section 469(c)(7)(A) applies. It follows that respondent’s

disallowance of the loss deductions here in dispute is sustained.
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To reflect the foregoing,


                                          Decision will be entered

                                     under Rule 155.
