The opinion
T.C. Summary Opinion 2007-191
UNITED STATES TAX COURT
CAROLYN D. FENDERSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18961-05S. Filed November 13, 2007.
Thomas I. Hausman and Patricia M. Ritzert, for petitioner.
Anita A. Gill, for respondent.
CARLUZZO, Special Trial Judge: This case was heard
pursuant to the provisions of section 7463.1 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.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, in effect for the
relevant period.
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Respondent determined a $22,584 deficiency in petitioner’s
2002 Federal income tax. The issue for decision is whether
petitioner is entitled to a deduction for a loss from her real
estate activities. The resolution of the issue depends, in part,
upon whether section 469(c)(7) applies to petitioner for the year
in issue.
Background
Some of the facts have been stipulated and are so found. At
the time the petition was filed in this case, petitioner resided
in Ohio.
In January 2000, petitioner started employment as an account
manager for Symantec Corporation, a company that markets a
popular computer security software program (Symantec). She was
so employed during 2002, and although expected to develop new
business, she was primarily responsible for servicing eight
existing customers. To that end, she regularly kept in contact
with those customers and was always available to them in order to
ensure that any problems or concerns any might have would be
properly and promptly resolved. If the customer’s problem were
of a technical nature, petitioner would arrange for one or more
Symantec software engineers to get involved.
During the first year of her employment with Symantec,
petitioner frequently traveled to customers and potential
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customers in Cleveland and Pittsburgh. She spent at least 50
hours a week doing so.
Petitioner’s compensation from Symantec was composed of a
base salary, stock options, and sales commissions based on sales
of software licenses. Depending on the size and nature of the
sale transaction, a series of licenses involved in a single sale
might be “rolled out” over a period of years following the year
of the sale. Her commissions were paid when the “roll out”
occurred. As a result, petitioner received commissions in one
year that related to sales made during a previous year or years.
In 2002 petitioner’s compensation from Symantec totaled
$186,487. Some of the commissions included in that amount relate
to sales of software licenses made in years prior to 2002.
According to petitioner, she spent about 15 hours a week working
for Symantec during 2002. She maintained a calendar that tracked
her activities and appointments in connection with her employment
at Symantec, which ended during 2003.
As of the close of 2002 petitioner owned several parcels of
residential real estate that she held for rent, or rented during
that year (collectively, the rental units). Some of the rental
units were leased in accordance with Federal or State programs
that provided rent subsidies to the tenant(s)/lessee(s) (the rent
subsidy programs). On her timely filed 2002 Federal income tax
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return, the rental units are identified by addresses, as follows:
(1) East 149th St.; (2) Euclid Hgts. Blvd.; (3) Wickford Rd.;
(4) Continental; (5) E. 97th; (6) Parkhill; (7) E. 131st St.;
(8) Parkgate; (9) Graham; and (10) Endura.2
For the most part, and generally speaking, petitioner was
responsible for renting and managing the rental units. She
advertised when a unit was available. She conducted and attended
open houses showing the units. She arranged for utilities to be
turned on when necessary. She requested and reviewed credit
reports with respect to prospective tenants. She painted and
cleaned the units when necessary, and she arranged for repairs to
be made in those situations when she was not competent to make
the repairs herself.
In addition to activities related to a specific rental unit,
petitioner attended real estate auctions and reviewed listings of
real estate for sale by Government authorities and private
sellers. From time to time, she also met with officials from the
Federal or State Government agencies that administered the rent
subsidy programs.
Separate and apart from the calendar that petitioner kept in
connection with her employment at Symantec, petitioner maintained
2
At trial petitioner explained that the Graham and Endura
rental units were actually owned by her brother.
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a calendar in which she recorded her activities related to the
rental units (petitioner’s calendar). Some of the entries made
in the calendar relate specifically to one or another of the
rental units; many entries merely show the words “auction”, or
“sheriff’s listings”. Some of the entries appear to be
reminders, or relate to upcoming events, rather than a record of
an event that actually occurred. For example, on those days when
the word “auction” is noted, it cannot be determined whether
petitioner actually attended an auction, or merely marked her
calendar to show that the event was scheduled on that date.
Similarly, many notations show a 4-hour period for “gas” or
“electric” with respect to one or another of the rental units.
Again, it cannot be determined whether petitioner actually spent
4 hours on that date waiting for someone from one utility company
or another, or whether petitioner merely noted the date and time
frame when the utility company employee was scheduled to arrive.
Some of the entries contained in petitioner’s calendar are
clearly personal in nature. For example, on July 4, petitioner
noted “Carol’s house, take salad and merlot”. On other dates, a
person’s name is listed, but the relevance of that person’s
involvement, if any, with a particular rental unit cannot be
determined from the entry on the calendar.
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Petitioner’s 2002 tax return includes five Schedules E,
Supplemental Income and Loss, on which the rental income and
expenses of the rental units are reported (the Schedules E).3
Taking into account that income and those expenses, the Schedules
E show an aggregate loss of $57,906 (the rental loss) which is
deducted from the other income shown on petitioner’s return.
In February 2005, prior to the completion of the examination
of petitioner’s 2002 return, petitioner submitted a second 2002
return. This second return, which was not processed by
respondent, included a Schedule C, Profit or Loss From Business,
but no Schedule E. The income and expenses originally reported
on the Schedules E are shown on the Schedule C. Otherwise, there
is no difference between the two returns. In a letter dated
February 10, 2005, to respondent, petitioner stated that she
wanted to “amend” her 2002 return, and further that she “[wished]
to utilize the affirmative election” of section 469(c)(7)(A). It
is not clear whether the letter and the second return, which was
not processed by respondent, were submitted together.
In the notice of deficiency that forms the basis for this
case, the rental loss deduction was disallowed because, according
to an explanation contained in the notice, “rental activities of
any kind, regardless of material participation, are considered
3
On one of the Schedules E petitioner aggregated the
amounts shown on the other four.
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passive activities unless the requirements of section 469(c)(7)
* * * are met”. Other adjustments made in the notice of
deficiency are not in dispute.
Discussion
In general and as relevant here, an individual is not
entitled to a deduction for a passive activity loss incurred
during the taxable year. Sec. 469(a). 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 is any activity which involves the conduct of any trade
or business and in which the taxpayer does not materially
participate. Sec. 469(c)(1). For this purpose, a “trade or
business” is generally defined as any activity in connection with
a trade or business or any activity for the production of income
under section 212. Sec. 469(c)(6).
In general, a rental activity is treated as a passive
activity regardless of whether the taxpayer materially
participates. Sec. 469(c)(2),(4). If a taxpayer is described in
section 469(c)(7), section 469(c)(2) does not apply, and the
taxpayer’s rental activity, if conducted as a trade or business
or for the production of income, is a passive activity unless
the taxpayer materially participates in the activity. Sec.
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469(c)(1); Fowler v. Commissioner, T.C. Memo. 2002-223; sec.
1.469-9(e), Income Tax Regs.
The parties disagree on a number of different points
concerning the application and relevance of section 469 to
petitioner’s rental activities. Among those disagreements, they
dispute whether section 469(c)(7) applies. Petitioner claims
that section 469(c)(7) applies to her for the year in issue, and
therefore section 469(c)(2) does not apply for that year;
respondent disagrees. Under the circumstances, if section
469(c)(7) does not apply to petitioner for 2002, then she is
subject to section 469(c)(2) for that year, which means that the
rental loss is a passive activity loss and she is not entitled to
the rental loss deduction here in dispute.
Section 469(c)(7) does not apply to a taxpayer unless, in
addition to another requirement, “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”. Sec. 469(c)(7)(B)(i). In this case, the equation
contemplated by the statute requires that we measure the extent
of the personal services that petitioner performed as an employee
of Symantec against the personal services petitioner performed in
real estate trades or businesses in which she materially
participated.
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The parties proceeded as though the extent of personal
services performed in a trade or business is measured by hours.
We do likewise and start with petitioner’s trade or business as
an employee of Symantec. According to petitioner, she spent
approximately 15 hours per week working for Symantec. She
described in general terms how that time was spent, but she
provided little in the way of specifics. Although she maintained
a written record regarding her activities as an employee of
Symantec, the written record was not made available to the Court.
Petitioner’s compensation from Symantec, the lack of any
written evidence corroborating her testimony on time she claims
to have spent performing personal services for Symantec during
2002, the extent of her obligations to her customers as an
account manager of Symantec, and the amount of hours she spent
working for Symantec in previous years strongly suggest that she
spent more than 15 hours per week performing personal services
for Symantec during 2002, but the suggestion is no substitute for
evidence. As it stands, the only evidence on the point is
petitioner’s testimony. Assuming, without finding, that
petitioner’s estimate is accurate, we proceed as though
petitioner spent 780 hours (15 hours per week x 52 weeks)
performing services as an employee of Symantec during the year in
issue.
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Next we turn to the personal services performed by
petitioner in real estate trades or businesses in which she
materially participated.
For purposes of section 469, a taxpayer materially
participates in an activity only if the taxpayer is involved in
the operation of the activity on a basis which is regular,
continuous, and substantial.4 Sec. 469(h)(1). We are satisfied
that with respect to each real estate activity involving a rental
unit, petitioner’s “participation in the activity for the taxable
year constitutes substantially all of the participation in such
activity of all individuals (including individuals who are not
owners of interests in the activity) for such year”. Sec. 1.469-
5T(a)(2), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25,
1988). Consequently, for purposes of section 469, petitioner may
be treated as having materially participated in the operation of
each of the rental units, and we proceed as though she did.5
4
Circumstances that, in and of themselves, establish
material participation in a given activity can be found in sec.
1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb.
25, 1988).
5
Argument could be made that for purposes of sec. 469, a
taxpayer’s participation in an activity is not treated as
“regular, continuous, and substantial” during any year if the
individual participates in the activity for 100 hours or less
during that year. See Oberle v. Commissioner, T.C. Memo. 1998-
156; sec. 1.469-5T(b)(2)(iii), Temporary Income Tax Regs., 53
Fed. Reg. 5726 (Feb. 25, 1988). Under the circumstances we need
not decide the point.
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According to petitioner, she performed more than 100 hours
of personal services in connection with each of the rental units.
In support of her claim in this regard, she submitted a schedule
of the hours spent on each unit (Exhibit 3-J). Exhibit 3-J shows
a total of 1,062.18 hours spent on all rental units. The exhibit
itself is a summary of a document that shows the date, nature of
the activity, and time spent on a property-by-property basis
(Exhibit 4-P). Exhibit 4-P, in turn, is, according to
petitioner, based upon items listed in petitioner’s calendar.
Although the calendar was prepared contemporaneously with the
events recorded in it, Exhibit 3-J and Exhibit 4-P were prepared
years later during either the examination of petitioner’s 2002
return or in preparation for this proceeding.
In reliance on her calendar and the above-referenced
exhibits, petitioner argues that more than one-half of her time
spent in performing personal services in trades or businesses
during 2002 was spent in performing personal services in real
estate trades or businesses (1,062.18 hours performing personal
services in her real estate trades or businesses versus 780 hours
performing personal services as an employee of Symantec). As
petitioner views the matter, she has satisfied the requirements
of section 469(c)(7)(B), and therefore section 469(c)(2) does not
apply. Sec. 469(c)(7)(A).
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Petitioner’s view, however, presupposes that the amounts of
hours shown on Exhibits 3-J and 4-P are supported by entries made
in her calendar. This does not appear to be the case.
A number of inconsistencies between items shown on
petitioner’s 2002 return, her calendar, and the exhibits were
brought out during petitioner’s cross-examination at trial.
Furthermore, upon careful review of those documents, we are
unable to reconcile estimates of time shown on Exhibits 3-J and
4-P with entries made in petitioner’s calendar. On many dates,
the estimate of time spent on a particular activity exceeds
the amount of time shown on that calendar for that date. For
example, on Exhibit 4-P petitioner shows more than 9 hours spent
performing various types of services at Parkgate on January 3,
2002. The hours presumably are incorporated in the total hours
shown for that property on Exhibit 3-J. Entries on her calendar
for that date, however, do not support the number of hours or the
type of activities described in Exhibit 3-J.
A taxpayer can establish personal services performed in an
activity by any reasonable means. Reasonable means “may include
but are not limited to the identification 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.” Sec. 1.469-5T(f)(4),
Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).
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Among Exhibit 3-J, Exhibit 4-P, and petitioner’s calendar, we
find petitioner’s calendar to be the only record that complies
with the above regulation.6 For purposes of that regulation,
“ballpark [guesstimates]” contained in postevent records, such as
Exhibits 3-J and 4-P are entitled to little, if any, weight in
determining the extent of a taxpayer’s participation in an
activity. Bailey v. Commissioner, T.C. Memo. 2001-296; Carlstedt
v. Commissioner, T.C. Memo. 1997-331; Speer v. Commissioner, T.C.
Memo. 1996-323; Goshorn v. Commissioner, T.C. Memo. 1993-578.
We have carefully and repeatedly reviewed petitioner’s
calendar. After doing so, we find that the estimates of time
spent on specific properties shown in Exhibits 3-J and 4-P are
overstated, at least to the extent as follows:
6
This is not to suggest that petitioner’s calendar is not
without problems. Petitioner explained that some entries made in
the calendar were made before the activity occurred, and she did
not adjust the entries later to reflect the actual duration of
the activity. See, e.g., Fowler v. Commissioner, T.C. Memo.
2002-223.
Furthermore, although the calendar contains many entries
related to petitioner’s rental activities, such as evictions,
collecting rent, inspections, meeting with contractors,
mediation, auctions, credit checks, listing reviews, screening of
prospective applicants, etc., there is nothing to connect these
activities to a specific rental unit or rental activity.
Similarly, the calendar contains numerous entries that do not, in
and of themselves, show how the activity was related to a rental
activity. For example, some entries on the calendar show only
the name of an individual and a phone number. Other entries
simply show the address of a rental unit. Some entries are
obviously not related to any rental activity. Finally, there are
some entries that are illegible.
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Rental Unit Hours per Exhibits Hours per calendar
3-J and 4-P (maximum)
East 149th St. 119.57 110
Euclid Hgts Blvd. 120.81 80
Wickford Rd. 101.03 45
Continental 153.53 117
E. 97th 115.57 80
Parkhill 106.95 110
E. 131st 133.73 60
Parkgate 103.49 60
Woodstock 107.50 97
Total hours 1,062.18 759
Relying upon the entries in petitioner’s calendar, we find
that petitioner spent 759 hours performing personal services in
connection with her real estate trades or businesses in which she
materially participated during 2002.7 Because petitioner spent
at least 780 hours performing personal services as an employee of
Symantec during 2002 she does not qualify for the provisions of
section 469(c)(7). This means that section 469(c)(2) operates to
treat all of petitioner’s real estate activities as passive
activities regardless of whether she materially participated in
any of them.
It follows that under the provisions of section 469(a)
petitioner is not entitled to the rental loss deduction, and
respondent’s disallowance of that deduction is sustained.
7
Whether the hours listed for Woodstock, a property not
included on any of the Schedules E, should be taken into account
in the analysis is a moot question. The outcome remains the same
whether hours are included or ignored.
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To reflect the foregoing,
Decision will be entered
for respondent.