T.C. Memo. 1998-17
UNITED STATES TAX COURT
GEORGE AND BOZENNA POHOSKI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9027-96. Filed January 13, 1998.
Philip Garrett Panitz, for petitioners.
Donna F. Herbert, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Respondent determined a $28,143 deficiency in
petitioners' 1993 Federal income tax, and an accuracy-related
penalty of $2,662 pursuant to section 6662(a).
After concessions, we must decide: (1) Whether petitioners
materially participated in the rental of their two Hawaiian
condominiums for purposes of the passive activity loss rules
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pursuant to section 469(a); and (2) whether petitioners are liable
for the accuracy-related penalty pursuant to section 6662(a).
All section references are to the Internal Revenue Code as in
effect for the year in issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
stipulation of facts and the attached exhibits are incorporated
herein by this reference.
At the time the petition was filed, George and Bozenna
Pohoski, husband and wife, resided in Camarillo, California.
Background
During 1993, Mr. Pohoski was employed as an engineer with the
U.S. Department of Defense, and Mrs. Pohoski was employed as a
nurse. Both petitioners worked an average of 40 hours per week.
Petitioners have two children.
Throughout the year in issue, petitioners owned two
condominiums in Camarillo, California (the Camarillo condominiums),
and two condominiums in Hawaii. The Camarillo condominiums were
generally rented out on a long-term lease basis. Petitioners
managed the Camarillo condominium properties themselves, collecting
the rents, making repairs, and maintaining the books and records.
Respondent concedes that the rental of the Camarillo condominiums
was properly reported by petitioners on their 1993 joint Federal
income tax return.
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1. Hawaiian Condominiums
In 1991, petitioners purchased a condominium at the Valley
Isle Resort on the island of Maui, Hawaii (the Maui condo). In
1992, petitioners purchased a condominium at the Wavecrest Resort
on the island of Molokai, Hawaii (the Molokai condo). Both of
these condominiums were purchased as rentals to vacationers. Each
condominium included one bedroom, one bathroom, a living room,
kitchen, dining room, and lanai.1
A. Maui Condo
As owners of the Maui condo, petitioners were members of the
Homeowners' Association at the Valley Isle Resort (Homeowners'
Association). The Homeowners' Association entered into a contract
with Rainbow Reservations, Inc. (Rainbow Reservations) to operate
the front desk for the Valley Isle Resort condominiums. Rainbow
Reservations also provided management services for individual
condominium owners. During 1993, Rainbow Reservations entered into
management contracts with owners of approximately 40 of the 120
condominium units at the Valley Isle Resort.
Generally, Rainbow Reservations provided a variety of services
for the condominium owners with whom they had management contracts,
including the rental of the condominium units, collection of rents,
after-hours front desk services, maid services, repair and
maintenance services, and redecorating services. Rainbow
1
A lanai is a Hawaiian term for a porch or veranda.
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Reservations also provided biennial "deep cleans" of each
condominium. For these services, Rainbow Reservations charged a
commission of 40 percent of the gross rents.
As part of its front desk service contract with the
Homeowners' Association, Rainbow Reservations checked guests in and
out of the condominiums, issued parking permits, answered questions
regarding entertainment or other activities in the area, and
provided additional services as needed. During 1993, the front
desk's normal business hours were between 8 a.m. and 5 p.m.,
although the front desk stayed open longer between July and early
October for a sprinkler refit at the resort. The front desk staff
consisted of two to four persons at any one time.
Rainbow Reservations provided its own advertising for all of
the units it managed in Hawaii, including Valley Isle Resort. In
general, the advertisements were directed toward travel agents,
although some were directed toward the public.
Petitioners did not enter into the typical management contract
with Rainbow Reservations. Instead, petitioners and Rainbow
Reservations agreed that petitioners would rent the Maui condo
themselves and perform the majority of services otherwise provided
by Rainbow Reservations. Petitioners and Rainbow Reservations
entered into an "Amendment to Rental Agreement Between Owner And
Rainbow Reservations, Inc." (the addendum agreement) which
provided:
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Effective * * * November 1, 1992 owner will be
responsible for renting unit directly. In the event
Rainbow Reservations wishes to rent unit to one of its
clients, Rainbow Reservations will contact owner and
clear the time before committing the unit. Owner will
control the MASTER CALENDAR.
Rainbow Reservations agrees to coordinate the maid
service, and maid company will bill the owner directly
unless agreed otherwise. Owner(s) agrees to notify
Rainbow Reservations of his guest arrivals and pay all
costs associated. Rainbow Reservations will continue to
provide front desk counter service for all owner's
guests, which will include, greeting of guests, key
distribution (unless agreed to otherwise), coordination
of maid service, and collection of any due rents (if
notified by owner).
The owner will continue to contract for necessary
maintenance services and the Rental manager is hereby
authorized to contact the following for emergency
maintenance repairs. Rental manager will contact owner
if said repair exceeds $200.00[.]
* * * * * * *
Owner agrees to perform all advertising of said premises,
to institute and prosecute actions to evict tenants and
recover possession of premises, to sue and recover rents,
and to settle and release such actions. In no event
shall Rainbow Reservations be liable to the owner as long
as the owner remains the principal rental agent. Rainbow
Reservations agrees to collect any rents due owner, upon
notification by owner before the arrival of guests.
* * * * * * *
The owner shall compensate Rainbow Reservations for all
above mentioned services by guaranteeing 20% commission
on all daily rents collected by owner. It is agreed that
all linen charges, maid services and check in supplies
shall be paid by the owner. Owner will be responsible
for paying his own transient tax fees to the State of
Hawaii. In the event the owners [sic] unit is vacant for
30 days or more, owner will compensate Rainbow
Reservations * * * [for the front desk services].
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Under the addendum agreement, Rainbow Reservations collected
the rent from petitioners' tenants and placed the funds into a
trust account. Rainbow Reservations then deducted from the rental
proceeds its commission and the costs of maid or other services it
provided. At the end of each month, a check representing the net
proceeds from the rental of the Maui condo was forwarded to
petitioners. As part of this process, Rainbow Reservations
maintained records of the rental proceeds for petitioners, and
issued a Form 1099 to petitioners at the end of the year.
Although the addendum agreement provided that Rainbow
Reservations would receive a 20-percent commission, Rainbow
Reservations actually received a 25-percent commission during 1993
as a result of its performing special services for petitioners.
Additionally, Rainbow Reservations was permitted to rent
petitioners' Maui condo directly during times when the condo was
vacant, subject to petitioners' approval. For those bookings,
which only occurred once or twice during 1993, Rainbow Reservations
earned a 40-percent commission.
As part of its front desk services, Rainbow Reservations
issued keys and parking permits to petitioners' tenants (unless
petitioners made other arrangements). The front desk was also
available for petitioners' tenants to answer questions, obtain
additional linens, or receive complaints.
The Maui condo was rented for 22 weeks during 1993, with an
average stay for a tenant of 6.5 days. Petitioners' base charge
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for the Maui condo was $80 per night, with additional fees for
rollaway beds, the use of entertainment equipment, or daily linen
or cleaning services which raised the rate to approximately $120
per night.
In between each booking, the maid service cleaned the Maui
condo in preparation for the next tenant.
B. Molokai Condo
The front desk at the Wavecrest Resort was operated by one of
the local residents at the resort. The front desk service included
maid service which was provided at the end of each tenant's stay.
There were no fixed hours at the front desk, and often phone calls
were forwarded to an answering machine. The front desk lacked
authority to make repairs or perform any work at the Molokai condo
except in the case of emergencies. If the Molokai condo was not
rented for extended periods of time, petitioners paid a special
front desk fee. The Wavecrest Resort did not advertise its rental
units.
Petitioners paid a commission of approximately 25 percent of
gross receipts to the front desk at the Wavecrest Resort, in
addition to a reserve account payment for capital improvements of
common areas at the resort.
During 1993, petitioners rented out the Molokai condo for
approximately 5 weeks. The average stay was 6.5 days, and the
rental rates were the same as that for the Maui condo.
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C. Petitioners' Participation in the Hawaiian Condos
To promote the Hawaiian condominiums during 1993, petitioners
placed two advertisements in Hawaii Magazine, one each for the
rentals of the Maui and Molokai condos. The advertisements ran for
the entire year, and the magazine was released bimonthly. The
advertisements listed petitioners' home telephone number for
information on renting the condominiums.
Petitioners also marketed the Hawaiian condominiums through
several travel agents during 1993. The travel agents referred
clients to petitioners, and in exchange petitioners referred
airline bookings and other travel and entertainment arrangements to
the travel agents.
Further, Mr. Pohoski set up a worldwide web page on the
Internet which described petitioners and displayed pictures of the
Hawaiian condominiums. Additionally, as they traveled to different
sites as part of their regular employment (Mr. Pohoski traveled to
military installations, and Mrs. Pohoski traveled to hospitals),
petitioners posted business cards on bulletin boards advertising
the availability of their Hawaiian condominiums.
Petitioners received an average of two to three telephone
calls per day regarding the rental of their Hawaiian condominiums,
for a total of more than 500 calls during 1993. Petitioners also
often received e-mail messages from prospective tenants. Telephone
calls were usually received during the evenings and weekends when
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petitioners were home, but if they were not home, messages were
left on their home answering machine.
The telephone callers usually sought a description of the
condominiums and their proximity to beaches, restaurants, stores,
entertainment, and other major resorts. Most callers requested
brochures and maps which petitioners mailed to the prospective
tenants. Approximately 80 to 90 percent of the time, Mr. Pohoski
replied in writing to the prospective tenants rather than by
telephone because it was less expensive to mail information than
speak on the telephone. Mr. Pohoski customized his letters to the
prospective tenants to address their specific interests and
concerns. Petitioners also made telephone calls to the prospective
tenants, most of which took place during the evenings and weekends,
and sometimes during the day from work.
When a reservation with a tenant was made, petitioners
recorded the booking information (name of tenant, arrival and
departure times, and rate) on a master calendar they maintained.
Petitioners then contacted the front desk of the resort in which
the tenant was booked and informed the front desk of the rental
arrangements and the dates.
Petitioners maintained a database on their home computer of
each of their tenants for future marketing purposes. Petitioners
also tracked their income on a monthly basis in another database.
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For 2 weeks during 1993, petitioners and their children went
to Hawaii for a "working vacation". While there, Mr. Pohoski
completed various maintenance and repair tasks at the Hawaiian
condominiums. At the Maui condo where he worked approximately 10
days during their stay, Mr. Pohoski: Stripped the furniture and
transported it for reupholstering; repaired the lanai furniture;
cleaned sink traps; performed touchup painting; repaired and
replaced the molding along the walls; installed cable wire for a
second television; ran a telephone line into the bedroom; repaired
the sliding screen and closet doors; purchased new bedspreads and
curtains; and installed new shower heads, towel bars, and shelving
units in the bathroom.
At the Molokai condo where he worked approximately 4 days
during the working vacation, Mr. Pohoski: Repaired the garbage
disposal and sink faucet; performed touchup painting; reglued
moldings along the wall; repaired the sliding closet door; and
replaced the shower head in the bathroom.
The materials and tools used for the maintenance and repair
work at the Hawaiian condominiums were mostly purchased in Hawaii,
but many were purchased on the U.S. mainland and shipped to Hawaii
because of the high cost of such products in Hawaii.
2. Federal Income Tax Returns
Petitioners filed a joint 1993 Federal income tax return
reporting an adjusted gross income of $75,910. On separate
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Schedules C, Profit or Loss From Business, petitioners reported a
net loss of $17,641 from the operation of the Maui condo, and a net
loss of $16,336 from the operation of the Molokai condo. On both
Schedules C, petitioners indicated that they materially
participated in their rental activities.2
3. Notice of Deficiency
In the notice of deficiency, respondent disallowed
petitioners' losses from the operation of their Hawaiian
condominiums. In the parties' stipulation agreement, respondent
concedes that the expenses incurred were ordinary and necessary
trade or business expenses. Respondent also conceded at trial that
substantiation is not being challenged. The passive activity loss
rules under section 469(a) constitute respondent's sole basis for
disallowing petitioners' losses from their Hawaiian condominiums.
OPINION
Issue 1. Passive Activity Losses
Pursuant to section 469(a) a passive activity loss is
generally not allowed as a deduction for the year sustained. A
passive activity loss is defined as the excess of the aggregate
2
Petitioners filed a third Schedule C, Profit or Loss
From Business, reporting a net loss of $11,714 from Mrs.
Pohoski's home health care nursing business. Petitioners also
filed a Schedule E, Supplemental Income and Loss, showing a net
loss of $24,546 from the rental of their condominiums in
Camarillo, California.
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losses from all passive activities for the taxable year over the
aggregate income from all passive activities for that year. Sec.
469(d)(1). Passive activities are those which involve the conduct
of a trade or business and in which the taxpayer does not
materially participate. Sec. 469(c)(1).
Rental activity ordinarily is treated as a passive activity
regardless of whether the taxpayer materially participates. Sec.
469(c)(2), (4). An exception exists for rental activity in which
the average rental does not exceed 7 days. Sec. 1.469-
1T(e)(3)(ii)(A), Temporary Income Tax Regs., 53 Fed. Reg. 5702
(Feb. 25, 1988). In the instant case, the parties agree that the
average rental did not exceed 7 days.
Petitioners contend that they materially participated in the
rental of both the Maui and Molokai condominiums, thus making
section 469(a) inapplicable. Material participation in an activity
is defined as regular, continuous, and substantial involvement.
Sec. 469(h)(1). The participation of a spouse is taken into
account in determining material participation. Sec. 469(h)(5).
A. Establishing Participation
As a preliminary matter, respondent asserts that petitioners
failed to substantiate the extent of their participation in the
rental of their condominiums in the manner contemplated by section
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1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb.
25, 1988). That regulation provides as follows:
The extent of an individual's participation in an
activity may be established 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 purposes of this paragraph
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.
At trial, petitioners introduced a narrative summary of their
rental activities with respect to their participation in the
Hawaiian condominiums in the form of a letter, dated October 17,
1996, to Ms. Ingrid Giammichele, an Internal Revenue Service (IRS)
Appeals officer in California. The narrative summary details the
expenses, time, and effort put forth by petitioners in operating
their Hawaiian condominiums. Respondent claims, however, that the
narrative summary is merely a postevent "ballpark guesstimate" that
is insufficient to prove participation. See Carlstedt v.
Commissioner, T.C. Memo. 1997-331; Speer v. Commissioner, T.C.
Memo. 1996-323; Goshorn v. Commissioner, T.C. Memo. 1993-578.
Although petitioners' narrative summary is a postevent review
of their 1993 participation with respect to the Hawaiian
condominiums, we may nonetheless find the summary sufficient to
establish petitioners' participation where it is supported by
credible testimony and other objective evidence. See Harrison v.
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Commissioner, T.C. Memo. 1996-509. Our acceptance of the narrative
summary, however, does not require us to accept the accuracy of the
amount of time petitioners claim they spent participating in the
rental of the condominiums. Id.
Mr. Pohoski credibly testified that petitioners maintained
contemporaneous records (although such records were not introduced
at trial). These records included a calendar that indicated the
name of the tenant, the daily rental rate, and the arrival and
departure times for the tenants at the condominiums, as well as a
database listing on petitioners' computer all prospective tenants.
We believe that these records laid the foundation for petitioners
to determine the amount of time they spent with respect to many of
their rental activities as provided in the narrative summary.
Further, other evidence, such as the management contract
between petitioners and Rainbow Reservations and the testimony of
Marcia Alders, the sole shareholder and manager of Rainbow
Reservations, supports petitioners' claims of their relative level
of participation at the Maui condo. We thus conclude that
petitioners have sustained their initial burden of establishing
through reasonable means their participation in the rental of the
Hawaiian condominiums.
B. Material Participation Safe Harbor
Petitioners assert that their rental of the Hawaiian
condominiums satisfies the safe harbor requirements for material
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participation provided in section 1.469-5T(a)(3), Temporary Income
Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).3 That section
provides for material participation if:
The individual participates in the activity for more than
100 hours during the taxable year, and such individual's
participation in the activity for the taxable year is not
less than the participation in the activity of any other
individual (including individuals who are not owners of
interests in the activity) for such year[.]
Id.
Respondent argues that (1) petitioners did not spend at least
100 hours participating in the rental of each of the Hawaiian
condominiums, and (2) other individuals participated more in the
activities than did petitioners.
We are satisfied that petitioners participated in the rental
of their Hawaiian condominiums on a regular, continuous, and
substantial basis.
At trial, Mr. Pohoski testified that he spent 800 hours
participating in the rental of the two Hawaiian condominiums during
1993, 650 hours at the Maui condo, and 150 hours at the Molokai
condo. Of those total hours, Mr. Pohoski testified that 100 hours
3
In their pretrial memorandum, petitioners claimed that
they satisfied the safe harbor requirements of sec. 1.469-
5T(a)(1), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25,
1988). That section allows a finding of material participation
if the taxpayer participates in the activity for more than 500
hours during the taxable year. At trial, Mr. Pohoski testified
that he and Mrs. Pohoski spent 650 hours working on the Maui
condominium. However, in their posttrial brief, petitioners did
not address this safe harbor and conceded that they spent only
325.50 hours working on the Maui condominium.
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of repair and maintenance work was completed during petitioners' 2-
week working vacation in Hawaii at the Maui condo, and 50 hours of
work was completed at the Molokai condo. Further, Mr. Pohoski
testified that he spent between 5 and 15 minutes talking with each
prospective tenant who called, between 30 minutes and 1 hour each
week talking with travel agents, 80 hours creating a web page for
the Internet, 30 to 45 minutes per day checking his e-mail, and 2
hours per month posting business cards when he or Mrs. Pohoski
traveled to different sites as part of their employment.
On brief, petitioners reduced their total claimed hours of
participation in the Hawaiian condominiums to 601 and provided a
breakdown of these hours as follows:
Total
Activity Hours at Maui Hours at Molokai Hours
Telephone calls 41.5 41.5 83
from prospective
renters
Travel agent contact 19.5 19.5 39
Web page construction 40.0 40.0 80
E-mail responses to 112.5 112.5 225
prospective renters
Posting 3 x 5 cards 12.0 12.0 24
at bases, in public
areas
Repairs and decorating 100.0 50.0 150
of Hawaii condos
Total 325.5 275.5 601
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Despite our concluding, supra, that petitioners satisfied
their intitial burden of proof, we find several problems with
petitioners' claim of time spent participating in the rental of
their Hawaiian condominiums. Cf. Harrison v. Commissioner, supra.
First, petitioners' claim of 150 hours of work during their
Hawaiian "working vacation" is implausible. Assuming petitioners
actually stayed for 14 days, their claim would amount to an average
of 10.7 hours of work per day, which was apparently performed only
by Mr. Pohoski because no testimony presented ever referred to work
performed by Mrs. Pohoski while in Hawaii. Yet there was never any
discussion of breaks for meals, travel, or leisure time with the
family--all of which certainly occurred.
Second, the breakdown of time spent on telephone calls from
prospective tenants, travel agent contacts, and e-mail responses to
prospective tenants is suspicious. Petitioners allocate the total
time evenly between the Maui and Molokai condos, yet they clearly
had much more success in renting the Maui condo than the Molokai
condo. We find it unlikely that an equal amount of time was spent
with regard to each condominium, and we find that less time was
spent with respect to the Molokai condo.
Third, we find the time spent with respect to checking and
responding to e-mail excessive. Mr. Pohoski's testimony suggested
many more telephone calls than e-mail responses, yet much more time
was allocated to checking and responding to his e-mail than calling
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back or writing prospective tenants. Additionally, it is likely
that petitioners received e-mail other than that relating to the
renting of their Hawaiian condominiums, and that such time was
included in the 225 hours allocated to checking the e-mail.
Finally, we are mindful that petitioners were full-time
employees, each working 40 hours per week, and were the sole
managers of their Camarillo, California, condominiums.
Using our best judgment, we find that petitioners spent
between 200 and 250 hours participating in the rental of their Maui
condo rather than the 325.5 hours proposed by petitioners. We
further find that petitioners spent less than 100 hours
participating in the rental of their Molokai condo, rather than the
275.5 hours proposed by petitioners. However, there still remains
the question of the amount of time spent by others working on the
rental of petitioners' condominiums.
We first consider the Maui condo. Ms. Alders testified that
the front desk spent approximately 5 to 10 minutes checking in a
tenant for petitioners' Maui condo. Mr. Pohoski estimated that the
maid service spent an average of 2 to 3 hours cleaning the Maui
condo after the departure of a tenant. Ms. Alders opined that
petitioners "spent far more time" in operating the Maui condo than
Rainbow Reservations. No testimony was presented with respect to
participation by other individuals at the Maui condo, nor was
testimony given with respect to the Molokai condo.
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Petitioners claim that Ms. Alders' testimony is sufficient to
satisfy the requirement that they spent more time operating the
Maui condo than any other individual. Indeed, we find that
petitioners clearly spent more time than Rainbow Reservations in
marketing, renting, and repairing the Maui condo.4 Cf. Chapin v.
Commissioner, T.C. Memo. 1996-56.
Respondent asserts, however, that petitioners have failed to
take into consideration the front desk contract between Rainbow
Reservations and the Homeowners' Association, of which petitioners
were members. Under that contract, Rainbow Reservations operated
the front desk for all condominiums, regardless of whether a
management contract was executed. As part of that contract,
Rainbow Reservations agreed to check in and out all tenants at the
Valley Isle Resort, issue parking permits, and answer questions or
assist tenants during the front desk business hours of between 8
a.m. and 5 p.m. As a result, the front desk was available 9 hours
per day, 7 days per week, to assist the tenants of each condominium
4
If checking in and out each tenant at the front desk
took a total of 30 minutes, and maid service took an additional 3
hours each time a tenant departed, the total time spent by the
front desk and cleaning personnel for the 22 weeks petitioners'
Maui condo was rented would be 77 hours. We do not believe that
the front desk's other responsibilities, including rent
collection and disbursements, additional linen or maid service,
or other special services, consumed more than another 120 hours,
or at least not more than petitioners' participation time.
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at the Valley Isle Resort.5 Further, Mr. Pohoski admitted under
cross-examination that the front desk services were necessary in
the operation of the Maui condo, and it would have been very
difficult and inconvenient otherwise.
Respondent argues on brief that: "All of the hours that * * *
[the front desk was] open and available should be counted as time
spent by them in connection with the [rental] activity. The time
spent by the front desk operators should not be divided among the
units for which they were responsible." As support for this
argument, respondent directs the Court to Goshorn v. Commissioner,
T.C. Memo. 1993-578, and Serenbetz v. Commissioner, T.C. Memo.
1996-510. Respondent has misinterpreted these cases.
In Goshorn v. Commissioner, supra, the taxpayers owned a 28-
foot sailboat which they docked at a marina near Dallas, Texas,
while they were living in Connecticut. An arrangement was made for
the marina to rent out the sailboat for charters during the year.
The taxpayers claimed to have spent more time than the marina staff
in operating and maintaining the boat. In rejecting the taxpayer's
claim, we reasoned that "all of the activity that directly related
to the actual rental of the boat was performed by the Marina and
not by petitioner." Id. (Emphasis added.) Applying this
5
The front desk operated by Rainbow Reservations was
available to assist petitioners' tenants for 9 hours per day, 7
days per week, for 22 weeks during 1993 (the number of weeks the
Maui condo was rented), for a total of 1,386 hours.
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reasoning to the situation herein before us, we examine only the
actual services performed by Rainbow Reservations in support of the
Maui condo, and not services that are not directly related to
petitioners' rental. In this regard, it is evident that the time
spent checking tenants in and out, the maid services, the managing
of the rent collection and disbursements, and the other few
miscellaneous tasks performed by Rainbow Reservations for
petitioners did not exceed 200 hours during 1993, and certainly did
not exceed the time spent by petitioners. We do not believe it
appropriate to consider as participation for purposes of
determining whether petitioners qualify for the safe harbor under
section 1.469-5T(a)(3), Temporary Income Tax Regs., 53 Fed. Reg.
5702 (Feb. 25, 1988), the mere availability of the front desk
personnel.
In Serenbetz v. Commissioner, supra, the taxpayers owned a
Vermont condominium which was part of a partnership that rented out
the condominiums to third parties. The day-to-day operation of the
partnership was managed by an on-site staff of nine employees who
conducted the marketing and renting of the condominiums and
maintained the books and records. The taxpayers attempted to prove
that they spent more time than the on-site staff in operating their
rental by dividing the total number of staff hours worked by the
number of employees (9) and by the number of condominium units in
the partnership (40). We rejected the taxpayers' methodology
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observing: "The language of sec. 1.469-5T(a)(3), Temporary Income
Tax Regs., contains nothing which suggests that participation
should be computed on a per unit basis. See Goshorn v.
Commissioner, T.C. Memo. 1993-578." Id.
We believe that only the actual time spent on a rental is
relevant to determining whether a taxpayer materially participates
in that rental. In the case herein, unlike Goshorn and Serenbetz,
petitioners have provided ample evidence of both their level of
participation and that of Rainbow Reservations with respect to the
Maui condo. Cf. Scheiner v. Commissioner, T.C. Memo. 1996-554. As
stated previously, petitioners' efforts far exceeded that of
Rainbow Reservations personnel at the Maui condo. Thus, we hold
that petitioners materially participated in the rental of their
Maui condo during 1993. Consequently, petitioners may deduct the
losses sustained therefrom.
We now turn our attention to the Molokai condo in which we
have already found that petitioners participated less than 100
hours. Assuming arguendo that petitioners participated for more
than 100 hours in the rental of the Molokai condo, petitioners
offered no evidence of the time spent by other individuals in the
rental of that condominium. See Chapin v. Commissioner, supra.
Petitioners assert that the lack of a fixed front desk service at
the Wavecrest Resort prevents a finding that any individual spent
more time than they did in operating the Molokai condo.
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Petitioners, however, are required to put forth some indication of
the actual time spent by the Wavecrest Resort staff during 1993,
including the front desk services during the 5 weeks that
petitioners rented out the Molokai condo, maid service, and any
other services performed by others. See Goshorn v. Commissioner,
supra. Petitioners did not do so. Consequently, we are unable to
conclude that petitioners' participation in the rental of their
Molokai condo was greater than others.6 See Rule 142(a); Welch v.
Helvering, 290 U.S. 111 (1933). Thus, we hold that petitioners did
not materially participate in the rental of their Molokai condo.
To summarize, the losses sustained by petitioners during 1993
in the operation of their Maui condo are deductible, and the losses
sustained in the operation of their Molokai condo are passive
activity losses, and thus nondeductible, pursuant to section
469(a).
Issue 2. Accuracy-Related Penalty
Section 6662 imposes an accuracy-related penalty equal to 20
percent of the portion of the underpayment attributable to a
substantial understatement of tax. Respondent seeks to impose the
penalty with respect to Mrs. Pohoski's claimed Schedule C expenses
for her work as a nurse, and for petitioners' claimed passive
6
For the same reasons, petitioners' assertion on brief
that they may also come within the safe harbor provided in sec.
1.469-5T(a)(2), Temporary Income Tax Regs., 53 Fed. Reg. 5725
(Feb. 25, 1988), must fail.
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activity losses with respect to the Hawaiian condominiums (which as
a result of our holding above refers only to the Molokai condo).
Petitioners did not address this matter on brief, but generally
suggested at trial that they had substantial authority for the
reporting of their rental activities.
A substantial understatement means an understatement which
exceeds the greater of 10 percent of the tax required to be shown
on the return or $5,000. Sec. 6662(d)(1). The understatement is
reduced by that portion of the understatement for which the
taxpayer had substantial authority. Sec. 6662(d)(2)(B)(i).
The substantial authority standard requires an objective
examination of the law and the application of the law to the
relevant facts. Sec. 1.6662-4(d)(2), Income Tax Regs. There is
substantial authority for the tax treatment of an item only if the
weight of the authorities supporting the treatment is substantial
in relation to the weight of authorities' supporting contrary
treatment. Sec. 1.6662-4(d)(3)(i), Income Tax Regs. Among the
authorities a taxpayer may rely upon are IRS information or press
releases, and notices, announcements, and other administrative
pronouncements published in the Internal Revenue Bulletin by the
IRS. Sec. 1.6662-4(d)(3)(iii), Income Tax Regs.
Mr. Pohoski testified that he relied upon IRS Publication 925,
Passive Activity and At-Risk Rules. Assuming arguendo that
Publication 925 is authority, Mr. Pohoski testified that he only
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relied upon that publication for the requirements relating to
record keeping, not for determining whether petitioners' activities
qualified as material participation. Thus, petitioners have failed
to prove that they had substantial authority for reporting material
participation in the Hawaii condominiums. See Swicegood v.
Commissioner, T.C. Memo. 1989-467.
Petitioners offered no testimony with respect to Mrs.
Pohoski's Schedule C expenses relating to her nursing work. Rule
142(a).
Thus, we hold that petitioners are liable for the accuracy-
related penalty, pursuant to section 6662, with respect to the
Molokai condo and Mrs. Pohoski's nursing activities.
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.