T.C. Summary Opinion 2005-146
UNITED STATES TAX COURT
RICHARD B. MAY AND JANE M. MAY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5032-04S. Filed October 11, 2005.
Richard B. May and Jane M. May, pro sese.
Jennifer S. McGinty, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time that the petition was filed.1 The decision to
be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1996
and 1997, the taxable years in issue. All monetary amounts are
rounded to the nearest dollar.
- 2 -
Respondent determined deficiencies in, and an addition to,
petitioners’ Federal income taxes for the taxable years 1996 and
1997 as follows:
Addition to tax
Year Deficiency Sec. 6651(a)(1)
1996 $10,385 $200
1997 6,878 ---
After petitioners’ concessions,2 the issue for decision is
whether petitioner Richard B. May (petitioner) elected under
section 469(c)(7)(A) to treat his various rental real estate
activities as a single activity for the years in issue. We hold
that he did not.
An adjustment to the amount of petitioners’ itemized
deductions for each of the years in issue is a purely
computational matter, the resolution of which is dependent on our
disposition of the disputed issue.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts, supplemental stipulation of facts, and accompanying
exhibits.
2
Petitioners concede: (1) They are not entitled to claim
the dependency exemption deductions disallowed by respondent in
the notice of deficiency, and (2) they are liable for the
addition to tax for failure to timely file their Federal income
tax return for 1996.
- 3 -
At the time that the petition was filed, petitioners resided
in Buffalo, New York.
During the years in issue, petitioner worked for the City of
Buffalo as a court advocate in a program known as Hispanics
United of Buffalo. In his civil service job, petitioner worked
approximately 28-30 hours per week. Petitioner Jane M. May (Mrs.
May) worked as a full-time teacher for the Buffalo Board of
Education.
Since 1974, petitioner has been buying, selling, renting,
and managing real estate properties.3 At the beginning of 1996,
he owned 18 doubles consisting of 36 rental units, two lots, and
three garages in North Buffalo, New York.4 (These properties are
collectively referred to as the rental properties.) By the end
of 1996, he had sold two of the doubles. During the years in
issue, he rented approximately 30 of the units to tenants with
special needs, e.g., handicapped people, senior citizens, and
people receiving social services, and he rented the remaining
units to other tenants. Petitioner personally manages the rental
properties, which includes finding tenants for the units,
collecting and depositing rent, making the mortgage payments, and
inspecting the units. Although petitioner makes minor repairs,
3
On the basis of the record, it appears that Mrs. May was
not involved in petitioner’s real estate activities.
4
“Doubles” are residential duplexes with units situated on
the ground and second levels.
- 4 -
he hires independent contractors for major repairs. In addition,
he assists his tenants with various tasks, including completing
paperwork for those tenants receiving social services.
Petitioner spends approximately 40-45 hours per week managing the
rental properties.
In 1996, petitioners hired Joseph Mineo, a certified public
accountant, to prepare their 1993 return. Mr. Mineo continued to
prepare petitioners’ returns for all relevant years.
Petitioners attached to their 1993 return a Schedule E,
Supplemental Income and Loss, on which they aggregated
petitioner’s rental income and expenses as if petitioner’s rental
real estate activities were a single activity. Petitioners
consistently followed this practice on the Schedules E attached
to their 1994, 1995, 1996, and 1997 returns. Petitioners,
however, did not attach to any of these returns a statement
electing to treat petitioner’s rental real estate activities as a
single activity.
On April 13, 1999, petitioners filed a joint Federal income
tax return for 1996. On April 4, 2000, petitioners filed a joint
return for 1997. Petitioners attached to each of these returns a
Schedule E on which they identified the rental real estate
property as “Res Rental, Buffalo, NY” and claimed the following:
- 5 -
Total Expenses
(Including
Year Rents received Depreciation) Net loss
1996 $94,050 $167,397 $73,347
1997 87,030 154,324 67,294
In the notice of deficiency, respondent determined, inter
alia, that petitioner’s rental real estate losses were passive
activity losses that were limited to $25,000 each year.
Petitioners timely filed a petition with the Court disputing
respondent’s determinations.
Discussion5
Generally, section 469 disallows a deduction for passive
activity losses incurred by individual taxpayers for the taxable
year. Sec. 469(a)(1). 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
such year. Sec. 469(d)(1). In general, a passive activity is
any trade or business in which the taxpayer does not materially
participate. Sec. 469(c)(1). Rental activities are
presumptively passive, without regard to whether the taxpayer
materially participates in the activity. Sec. 469(c)(2), (4).
The presumptive rule that a rental activity is a passive
activity, however, does not apply to the rental real estate
5
We decide this case without regard to the burden of
proof. Accordingly, we need not decide whether the general rule
of sec. 7491(a) is applicable in this case. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001).
- 6 -
activities of a taxpayer in the real property business (real
estate professional) if:
(i) 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, and
(ii) such taxpayer performs more than 750 hours of
services during the taxable year in real property
trades or businesses in which the taxpayer materially
participates.
Sec. 469(c)(7)(B).
This exception applies as if each interest of the taxpayer
in rental real estate were a separate activity unless the
taxpayer elects to treat all interests in rental real estate as a
single rental real estate activity. Sec. 469(c)(7)(A); see sec.
1.469-9(g)(1), Income Tax Regs. To make such an election, the
taxpayer must file a statement with the taxpayer’s original
income tax return for the taxable year declaring that he or she
is a qualified taxpayer for the taxable year and is making the
election pursuant to section 469(c)(7)(A). Sec. 1.469-9(g)(3),
Income Tax Regs. Such an 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 even if there are intervening
years in which the taxpayer is not a qualifying taxpayer. Sec.
1.469-9(g)(1), Income Tax Regs. The election may be made in any
year in which the taxpayer is a qualifying taxpayer, and the
- 7 -
failure to make the election in one year does not preclude the
taxpayer from making the election in a subsequent year. Id.
For purposes of the real estate professional exception, the
parties agree that petitioner materially participated in his
rental real estate activities only if his rental real estate
activities are treated as a single activity. See 469(h)(1); sec.
1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb.
25, 1988). The parties further agree that petitioner would not
satisfy the material participation requirement to qualify as a
real estate professional with respect to each of petitioner’s
rental properties considered separately. Therefore, the issue in
dispute is whether petitioner elected to treat his rental real
estate activities as a single activity pursuant to section
469(c)(7)(A).
The Omnibus Budget Reconciliation Act of 1993 (OBRA), Pub.
L. 103-66, sec. 13143(a), 107 Stat. 440, added section
469(c)(7)(A) to the passive activity loss rules effective for
taxable years beginning after December 31, 1993. Under section
469(c)(7)(A), a taxpayer may elect to treat all interests in
rental real estate as one activity for purposes of qualifying as
a real estate professional. Section 1.469-9(h), Proposed Income
Tax Regs., 60 Fed. Reg. 2561 (Jan. 10, 1995), required a taxpayer
wishing to make such an election to file a statement with the
taxpayer’s original return declaring that the election is under
- 8 -
section 469(c)(7)(A). The final regulation, which is
substantially the same as the proposed regulation, became final
on December 22, 1995, and is generally effective for taxable
years beginning on or after January 1, 1995, and to elections
made under section 1.469-9(g), Income Tax Regs., with returns
filed on or after January 1, 1995. See sec. 1.469-11(a)(3),
Income Tax Regs. Therefore, to satisfy the literal requirements
for making an election to treat all rental real estate activities
as a single activity under section 469(c)(7)(A), a taxpayer must
file an election with his or her original return.
Petitioners concede that they did not attach to any relevant
return a statement electing to treat petitioner’s rental real
estate activities as a single activity. Therefore, petitioner
did not satisfy the literal requirements of section 469(c)(7)(A)
to treat all interests in rental real estate as a single
activity.
Petitioners contend, however, that they made a “deemed
election” by consistently aggregating the rental income and
expenses from the rental properties on their tax returns since
1993. Petitioners assert that such practice complies with the
OBRA sec. 13143(a), 107 Stat. 440, and the regulations
thereunder.6 In petitioners’ view, this practice of aggregating
6
Petitioners appear to rely on sec. 1.469-9(d)(2), Income
Tax Regs., for the proposition that a taxpayer must be consistent
(continued...)
- 9 -
the rental income and expenses as a single activity on Schedule E
constitutes “a significant revelation to the Commissioner that
that’s how the taxpayer [petitioner] was electing to act” to
treat his rental properties as a single activity. We disagree.
In Kosonen v. Commissioner, T.C. Memo. 2000-107, the
taxpayer aggregated his rental income and expenses in one column
on the Schedules E attached to his 1994, 1995, and 1996 returns.
Similar to the petitioners in the instant case, the taxpayer in
Kosonen argued that aggregating his rental activity losses on his
returns showed that he had elected to treat his rental real
estate activities as a single activity under section 469(c)(7).
The Court held, however, that the fact that the taxpayer
aggregated his losses was not clear notice that he intended to
elect under section 469(c)(7).7 The Court reasoned that a
taxpayer must clearly notify the Commissioner of the taxpayer’s
intent to make an election. Kosonen v. Commissioner, supra
(citing Knight-Ridder Newspapers Inc. v. United States, 743 F.2d
6
(...continued)
in the treatment of his or her real property trades or
businesses. This section, however, is not determinative of the
issue in dispute.
7
The Court expressly noted that the instructions for the
1994 Form 1040, U.S. Individual Income Tax Return, and Schedule
E, Supplemental Income and Loss, required the taxpayer to
aggregate his rental real estate losses; thus, the fact that the
taxpayer had done so was not clear notice that he intended to
make the election under sec. 469(c)(7). See Kosonen v.
Commissioner, T.C. Memo. 2000-107.
- 10 -
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. Kosonen v. Commissioner,
supra (quoting 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.” Id.
Conclusion
On the basis of the record, it is not clear from any of
petitioners’ relevant returns that petitioner made an election
under section 469(c)(7)(A). Petitioners’ consistent treatment of
aggregating the rental income and expenses on their Schedules E
is not a deemed election to treat the rental real estate
activities as a single activity under the requirements of section
469(c)(7)(A). Accordingly, petitioner did not elect to treat his
rental real estate activities as a single activity under section
469(c)(7)(A). Respondent’s determination is therefore sustained.
Although petitioner does not qualify as a real estate
professional, respondent allowed petitioners to deduct $25,000
for each of the taxable years in issue pursuant to the $25,000
offset for rental real estate activities under section 469(i).
- 11 -
We have considered all of the other arguments made by
petitioners, and, to the extent that we have not specifically
addressed them, we conclude that they are without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect our disposition of the disputed issue, as well as
petitioners’ concessions,
Decision will be entered
for respondent.