T.C. Summary Opinion 2007-127
UNITED STATES TAX COURT
PAUL M. AND WANDA E. HARMON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11911-06S. Filed July 26, 2007.
Wanda E. Harmon, pro se.
Emily Giometti, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2001,
the taxable year at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Petitioners claimed deductions for a rental real estate loss
of $68,796 for the taxable year 2001 that respondent denied,
resulting in a deficiency in petitioners’ income tax for the year
of $18,937. The sole issue for decision is whether petitioner-
wife was a real estate professional and thus not subject to the
passive activity loss rule of section 469(c)(2) and (4).2
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts and accompanying exhibits.
At the time the petition was filed, Paul M. Harmon (Mr.
Harmon) and Wanda E. Harmon (petitioner or Mrs. Harmon) resided
in Oakland, California.3
With a background in English and a master’s degree in
counseling, petitioner was employed by both Golden Gate
2
The two other adjustments contained in the notice of
deficiency are mechanical in nature and are dependent on the
final calculation of petitioners’ adjusted gross income.
3
Although Mr. and Mrs. Harmon both signed the petition, as
only Mrs. Harmon appeared in person at trial and as this case
solely concerns Mrs. Harmon’s status as a real estate
professional, we refer to Mrs. Harmon alone as petitioner. We
refer to Mr. and Mrs. Harmon jointly as petitioners.
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University and The Casey Family Outreach Program (Casey) in
2001.4
Petitioner’s work with Casey focused on working with at-risk
youths in the foster care system by developing Casey’s tutoring
program. Petitioner also worked to find employment for the
youths involved in the Casey program. She attended regular staff
meetings, visited group homes, and was available on call.
Petitioner’s job description indicates that her position was a
“full-time, exempt position that at times [required] workweeks in
excess of 40 hours”. According to Casey’s payroll records,
petitioner worked a total of 2,080 hours in 2001.
In addition to working for Casey, petitioner worked for
Golden Gate University’s graduate school of business as an
adjunct professor. She developed and taught an online course for
the spring and summer semesters where the students were
responsible for at least one semester project, a midterm
examination, and a final examination.
Petitioners own a residential property on Lyon Street in
Oakland, California (the Lyon Street property or the property),
which they bought in the late 1980s and rent out, often to low-
income tenants. The property is a fourplex containing two one-
bedroom apartments, one two-bedroom apartment, and one three-
4
“Casey Family Programs’ mission is to provide and
improve—and ultimately to prevent the need for—foster care.”
Http://www.casey.org/AboutCasey/.
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bedroom apartment. It also has a laundry room with a coin-
operated washer and dryer. Petitioner performed the majority of
the work on the property in order to minimize expenses. She
would show the apartments, process rental applications, collect
rent, and perform general maintenance work.
Petitioners claimed deductions on their 2001 Federal income
tax return for a rental real estate loss of $68,796 relating to
the Lyon Street property. Respondent determined that this loss
resulted from a passive activity and disallowed it.5 Petitioners
argue that, as a real estate professional, Mrs. Harmon is not
subject to the passive activity loss rules normally applicable to
rental property. We disagree and consequently hold for
respondent.
Discussion
A. Burden of Proof
Taxpayers are permitted deductions only as a matter of
legislative grace, and only as specifically provided by statute.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). In
addition, the Commissioner’s determinations are generally
presumed correct, and the taxpayer bears the burden of proving
those determinations wrong. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933). The burden of proof may, under certain
5
Respondent does not dispute that petitioners have
substantiated the claimed expenses.
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circumstances, shift to the Commissioner under section 7491(a) if
the taxpayer introduces credible evidence with respect to any
factual issue relevant to ascertaining the taxpayer’s income tax
liability. See Higbee v. Commissioner, 116 T.C. 438, 441 (2001).
However, the burden of proof remains on petitioners in this case
as they have neither alleged that section 7491(a) is applicable
nor introduced sufficiently credible evidence with respect to the
factual issues relevant to ascertaining their income tax
liability. See id.
B. Losses From Rental Activities
Section 469 generally disallows for the taxable year any
passive activity loss. 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 trade or business in which the taxpayer does not
materially participate. Sec. 469(c)(1). Rental activity, such
as petitioners’ renting out the Lyon Street property, is
generally treated as a per se passive activity regardless of
whether the taxpayer materially participates. Sec. 469(c)(2) and
(4). Under section 469(c)(7)(B), however, the rental activity of
a taxpayer in a real property trade or business (real estate
professional) is not per se a passive activity. Instead, it is
treated as a trade or business and subject to the material
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participation requirements of section 469(c)(1). Sec.
1.469-9(e)(1), Income Tax Regs. Petitioners argue that Mrs.
Harmon is a real estate professional.
A taxpayer qualifies as a real estate professional and is
not engaged in a passive activity 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). A trade or business includes being an
employee. Putoma Corp. v. Commissioner, 66 T.C. 652, 673 (1976),
affd. 601 F.2d 734 (5th Cir. 1979); Fowler v. Commissioner, T.C.
Memo. 2002-223. In the case of a joint return, the same spouse
must satisfy each requirement. Sec. 469(c)(7)(B). In the
present case, that means that petitioner must satisfy both
requirements of section 469(c)(7)(B). Accordingly, we focus on
her participation in the rental activity related to the Lyon
Street property.
1. 750-Hour requirement
Petitioners’ position is that Mrs. Harmon spent 774.5 hours
on rental activities in 2001, thus exceeding the 750-hour
requirement of section 469(c)(7)(B)(ii). “The extent of an
individual’s participation in an activity may be established by
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any reasonable means.” Sec. 1.469-5T(f)(4), Temporary Income Tax
Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).6 Although “reasonable
means” is interpreted broadly, we have held that the phrase does
not include a postevent “ballpark guesstimate”. See Fowler v.
Commissioner, supra; Goshorn v. Commissioner, T.C. Memo. 1993-
578.
Despite having made use of a Palm Pilot during 2001–-the
pages of which could have been printed out and submitted for
review–-petitioners submitted two items to establish the amount
of time Mrs. Harmon spent working on the property: Calendar
pages filled out by hand and a purported summary of the
activities shown on the calendar. Both items were compiled after
petitioners had been asked by respondent to produce documentation
in anticipation of trial.
Petitioner testified that she created the calendar by
referring to entries in her Palm Pilot. She compiled the summary
by estimating how long she had spent on the activity. For
example, on one day, she had noted in her Palm Pilot that she
painted. This translated into a calendar entry of “painting all
day” with a time of 10 hours noted on the summary; petitioner
6
Temporary regulations are entitled to the same weight as
final regulations. See Peterson Marital Trust v. Commissioner,
102 T.C. 790, 797 (1994), affd. 78 F.3d 795 (2d Cir. 1996); Truck
& Equip. Corp. v. Commissioner, 98 T.C. 141, 149 (1992).
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decided on the 10-hour figure because “she knew she had all day
to do it” and because Home Depot opened at 7 o’clock.
We do not find petitioners’ calendar or summary to be
persuasive. See Wichita Terminal Elevator Co. v. Commissioner, 6
T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). The
summarization in particular appears to be more akin to the
unacceptable ballpark guesstimates we have rejected in the past
than it is to “reasonable means” that would establish that Mrs.
Harmon actually spent 774.5 hours on real estate activities in
2001.
2. More than one-half of the personal services performed in
trades or businesses by the taxpayer
Assuming, arguendo, that we were persuaded by petitioners’
claim that Mrs. Harmon spent 774.5 hours on real estate
activities in 2001, petitioners are still unable to satisfy the
other portion of the test outlined in section 469(c)(7)(B) for
treatment as a real estate professional. According to section
469(c)(7)(B)(i), petitioners have to prove that more than
one-half of Mrs. Harmon’s personal services performed in trades
or businesses in 2001 were performed in real property trades or
businesses. Petitioners are unable to do so.
Petitioners argue that Mrs. Harmon’s other personal service
commitments were sufficiently minimal so as to permit the 774.5
hours she claims to have spent on rental activities to constitute
more than one-half of the personal services she performed in
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2001, satisfying section 469(c)(7)(B)(i). We disagree. Although
petitioner was contracted to perform–-and was paid for--full-time
employment with Casey, she argues that she worked only 8 hours
per week. The evidence, however, contradicts petitioners’ claim.
See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (stating “we
are not required to accept the self-serving testimony of
petitioner * * * as gospel.”).
The job description for petitioner’s position at Casey
specifically states that her position at times required workweeks
in excess of 40 hours. Her employment contracts were for full-
time employment during the relevant time periods. Even Casey’s
payroll records indicate that petitioner worked a full-time
schedule: 2,080 per year is the equivalent of 40 hours per week.
Although it may be possible that she did not work a 40-hour week
each week as documented by payroll–-professional salaried
employees often are not on a fixed schedule yet something must be
entered into the accounting software--it is not reasonable to
assume that a nonprofit organization would pay anyone in excess
of $55,000 per year plus benefits for working only 8 hours per
week.7 The 2,080 hours Casey’s payroll records show far exceed
the 774 hour maximum petitioner would have been able to work and
still meet the test outlined in section 469(c)(7)(B).
7
That works out to approximately $132 per hour.
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In addition, although she minimizes the amount of time she
spent working for Golden Gate University, teaching even an on-
line version of a course must take some time, and this time would
have to be factored into any analysis of petitioner’s performance
of personal services in 2001.
C. Conclusion
Because petitioner did not qualify as a real estate
professional, we need not consider whether she materially
participated in the rental activities. See sec. 469(c)(7)(B).
Further, we note that section 469(i) provides an exception
to the general rule that passive activity losses are disallowed.
A taxpayer who “actively [participates]” in a rental real estate
activity can deduct a maximum loss of $25,000 per year related to
the activity. Sec. 469(i)(1) and (2). This exception is fully
phased out, however, when adjusted gross income (AGI) equals or
exceeds $150,000. Sec. 469(i)(3)(A), (E). Petitioners’ 2001 AGI
exceeded $150,000. Accordingly, they cannot deduct any amount of
the passive activity loss in 2001. But see sec. 469(b)
(explaining that disallowed losses may be treated as a deduction
allocable to the activity in a succeeding taxable year).
Respondent’s determination is sustained, and to reflect our
disposition of the disputed issue,
Decision will be entered
for respondent.