T.C. Summary Opinion 2002-57
UNITED STATES TAX COURT
JAMES V. & JUDITH M. PATTERSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9268-00S. Filed May 23, 2002.
James V. Patterson, pro se.
Robert E. Marum, for respondent.
DINAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the years in issue.
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Respondent determined deficiencies in petitioners’ Federal
income taxes of $4,130 and $3,934 for the taxable years 1994 and
1996, and a section 6651(a)(1) addition to tax of $161.25 for
taxable year 1994.
The issue for decision is whether petitioners materially
participated in the rental of a certain condominium unit during
1994 and 1996.1
Some of the facts have been stipulated and are so found.
The stipulations of fact and the attached exhibits are
incorporated herein by this reference. Petitioners resided in
Schaghticoke, New York, on the date the petition was filed in
this case.
During 1994, petitioner husband (petitioner) was employed as
a chemical engineer, and petitioner wife was employed as a
registered nurse. During 1996, petitioner retired, and
petitioner wife was employed as a certified nurse midwife.
During both of the years in issue, petitioners owned a
condominium unit in North Topsail Beach, North Carolina. The
condominium association management company, CAM Inc., provided
1
Petitioners did not address at trial the sec. 6651(a)(1)
addition to tax for failure to file a timely return. We
consequently consider this addition to tax to be undisputed by
petitioners. However, we note that the record supports
respondent’s determination that the addition to tax was
applicable, because petitioners’ 1994 Federal income tax return
was filed on a 1996 form and was signed by petitioners on January
15, 1997.
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maintenance services for the building, grounds, beachfront, and
pool. A management service company known as the Kennedy Company
managed the rental unit during the years in issue. The company
handled reservations, incoming and departing guests, and
emergency repairs of the rental unit. The company was also
responsible for advertising the availability of the unit,
negotiating leases, collecting lease payments, and providing
cleaning and repair services. Petitioners paid the company 30
percent of rental income during 1994 and 25 percent of rental
income during 1996. During 1996, the average rental period of
the unit was 5.6 days. The unit was rented on the following
dates that year, with petitioners earning the specified amounts
of rental income and incurring the corresponding amounts of
management fees:
Rental Rental Management
Period Income Fees
4/05-4/10 $360 $90.00
5/05-5/08 210 52.50
5/16-5/20 210 52.50
5/24-5/27 195 48.75
5/31-6/02 195 48.75
6/06-6/09 295 73.75
6/10-6/19 735 183.75
6/19-6/20 135 33.75
6/21-6/23 245 61.25
6/29-7/13 1,470 367.50
7/27-8/03 735 183.75
8/03-8/17 1,470 367.50
8/17-8/24 735 183.75
8/24-8/31 535 133.75
8/31-9/03 295 73.75
The management service company paid several expenses on behalf of
petitioners during 1996. The yearly income and expense statement
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from the company listed approximately five such expenses, all of
which were reimbursed by petitioners or subtracted from the
rental income.
Petitioner paid the utility and mortgage bills on a monthly
basis, the condominium fee on a quarterly basis, and county taxes
on a yearly basis. During March and/or April of each year, in
preparation for the rental season, petitioner would “de-
winterize” the unit. At this time of year, petitioner would
often need to do repairs, such as ceiling repair, patching, and
painting, and he would normally shampoo the carpets. Around
Thanksgiving each year, petitioner would spend approximately 1
week at the rental unit to prepare it for winter, when the unit
was not actively rented. At this time, petitioner would normally
turn off the water and power, turn down the heat, bring in
outside furniture, and perform “general cleanup”.
Petitioners filed a joint Federal income tax return for each
of the years in issue. They claimed losses on the rental unit of
$14,781 in 1994 and $14,017 in 1996. The 1994 return was filed
on a 1996 form and was signed by petitioners on January 15, 1997.
In the statutory notice of deficiency, respondent disallowed the
above-mentioned losses on the grounds that petitioners “did not
materially participate in the day to day operations” of the
rental property, causing the losses to be nondeductible passive
activity losses.
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Section 162 allows deductions for ordinary and necessary
expenses incurred in carrying on a trade or business. Section
469, however, limits the deductions for losses from any “passive
activity”. A passive activity is any activity involving the
conduct of a trade or business in which the taxpayer does not
materially participate. Sec. 469(c)(1). As a general rule, any
“rental activity” is passive whether or not the taxpayer
materially participates in the activity. Sec. 469(c)(2), (4).
Under the regulations, the definition of rental activity does not
include an activity with respect to which the average period of
customer use of the property is 7 days or less. Sec. 1.469-
1T(e)(3)(ii)(A), Temporary Income Tax Regs., 53 Fed. Reg. 5702
(Feb. 25, 1988). The parties agree that petitioners’ rental of
the condominium unit in this case falls within this exclusion,
and the relevant issue is whether petitioners materially
participated in the activity.
A taxpayer is treated as materially participating in an
activity only if the taxpayer is involved in the operations of
the activity on a regular, continuous, and substantial basis.
Sec. 469(h)(1). A taxpayer can satisfy this requirement if he
meets any one of seven tests found in the regulations. Sec.
1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb.
25, 1988). One such test, the one which petitioners claim to
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have met, is satisfied with respect to an individual taxpayer
when:
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;
Sec. 1.469-5T(a)(3), Temporary Income Tax Regs., 53 Fed. Reg.
5726 (Feb 25, 1988). Generally, participation by an individual’s
spouse is treated as participation by the individual. Sec.
469(h)(5).
The only evidence presented regarding the amount of time
petitioners participated in the rental of the condominium unit is
their own general testimony. Thus, it is difficult to estimate
the exact amount of time petitioners spent at the condominium, as
well as what portion of this time was for business versus
personal purposes. However, it appears that petitioners spent
approximately 2 weeks per year at the condominium--1 week in the
Spring and 1 week in the Fall. Even assuming petitioners spent a
full 8 hours each weekday working on the condominium, this would
amount to only 80 hours per year. The amount of time petitioner
spent in paying condominium-related expenses throughout the year
would have been nominal and would not have amounted to 20 hours
per year. We find that petitioners did not participate in the
activity for more than 100 hours in either of the years in issue.
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Thus, we need not address whether the participation of other
individuals was greater than that of petitioners.
We sustain respondent’s determination that the rental of the
condominium was a passive activity subject to the limitations of
section 469.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.