T.C. Summary Opinion 2009-177
UNITED STATES TAX COURT
ESTHER NJOROGE AND PAUL KIBIRO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18133-08S. Filed November 30, 2009.
Esther Njoroge and Paul Kibiro, pro sese.
Ronald S. Collins, Jr., for respondent.
RUWE, Judge: This case was heard pursuant to the provisions
of section 74631 of the Internal Revenue Code in effect when the
petition was filed. 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, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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Respondent determined a $12,327 deficiency in petitioners’
2005 Federal income tax. In the notice of deficiency, respondent
made adjustments to petitioners’ income on the bases of:
Discharge of indebtedness income; disallowance of rental real
estate activity losses; and resultant computational adjustments
to itemized deductions.2 Petitioners have conceded the discharge
of indebtedness income issue. Accordingly, the only issue
remaining for decision is whether petitioners are entitled to
deduct claimed rental real estate activity losses of $40,503.
Background
Some of the facts have been stipulated. The stipulation of
facts and the attached exhibits are incorporated herein by this
reference. At the time the petition was filed, petitioners
resided in Delaware.
2
Although neither party has addressed it, we note that
respondent also disallowed a $3,250 tuition and fees expense
deduction petitioners claimed on the 2005 return. Furthermore,
petitioners have not asserted that respondent’s computational
adjustments to itemized deductions are erroneous.
Rule 34(b)(4) provides that the petition in a deficiency
action shall contain: “Clear and concise assignments of each and
every error which the petitioner alleges to have been committed
by the Commissioner in the determination of the deficiency or
liability. * * * Any issue not raised in the assignments of
error shall be deemed to be conceded.”
Petitioners have not pleaded error regarding the
disallowance of the deduction for tuition and fees expense, nor
have they pleaded error regarding the computational adjustments
to itemized deductions. Accordingly, we deem any issue regarding
the tuition and fees expense deduction and the computational
issue regarding itemized deductions conceded by petitioners.
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Petitioners are husband and wife. In or about 2003 and
2004, petitioners acquired residential rental properties in
Worcester and Springfield, Massachusetts (the rental properties).
At the time the rental properties were acquired, petitioner
Esther Njoroge (Mrs. Njoroge) was working as a nurse.
Petitioners had very little knowledge about real estate at the
time they determined to invest. During 2005 petitioners lived in
Worcester, about an hour’s drive from the Springfield property.
Petitioners timely filed a joint Form 1040, U.S. Individual
Income Tax Return, for 2005. During 2005 both petitioners were
employed as nurses. Petitioners reported wages, salaries, tips,
etc., of $157,614, and adjusted gross income of $113,861. Of
these wages, $43,000 was earned by Mrs. Njoroge. On their 2005
Form 1040 Schedule E, Supplemental Income and Loss, petitioners
reported $11,008 in rents received and $51,511 in expenses. Thus
petitioners reported a total rental real estate loss of $40,503.
Respondent mailed a notice of deficiency to petitioners,
dated April 22, 2008. In the notice of deficiency, respondent
disallowed the entire $40,503 loss that petitioners reported from
the rental properties.
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Discussion
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proving entitlement to the
deductions claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
U.S. 435, 440 (1934). Pursuant to section 7491(a) the burden of
proof may be shifted to the Commissioner where a taxpayer has
introduced credible evidence regarding factual issues relevant to
ascertaining his tax liability. Rule 142(a)(2). Petitioners
have neither claimed nor shown eligibility for a shift in the
burden of proof. Consequently, the burden of proof remains with
petitioners.
Section 469(a) generally disallows any passive activity loss
for any taxable year. 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). The term “passive
activity” is defined as any activity involving the conduct of any
trade or business in which the taxpayer does not materially
participate. Sec. 469(c)(1). Rental activity is treated as a
per se passive activity whether or not the taxpayer materially
participates in the activity. Sec. 469(c)(2), (4).
There are two principal exceptions to the general
disallowance rule of section 469(a) for rental real estate
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activity. The first exception is found in section 469(i).
Section 469(i)(1) provides:
(1) In general.–-In the case of any natural
person, subsection (a) shall not apply to that portion
of the passive activity loss or the deduction
equivalent * * * of the passive activity credit for any
taxable year which is attributable to all rental real
estate activities with respect to which such individual
actively participated in such taxable year * * *.
This exception in section 469(i) is limited to losses that do not
exceed $25,000. Sec. 469(i)(2). The $25,000 maximum “offset”,
however, begins to phase out for taxpayers whose adjusted gross
income exceeds $100,000 and is completely phased out for
taxpayers whose adjusted gross income is $150,000 or more. Sec.
469(i)(3)(A). For this purpose, adjusted gross income is
determined without regard to “any passive activity loss or any
loss allowable by reason of subsection (c)(7).” Sec.
469(i)(3)(F).
On their 2005 Form 1040, petitioners reported adjusted gross
income of $113,861. On their attached Schedule E they reported
$40,503 of either passive activity losses or losses determined
under section 469(c)(7). Consequently, for this purpose,
petitioners’ adjusted gross income is modified by adding the
$40,503 loss back to the reported adjusted gross income of
$113,861; i.e., petitioners’ modified adjusted gross income, for
purposes of section 469(i), is $154,364. Because petitioners’
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modified adjusted gross income is more than $150,000, they are
not entitled to any offset under section 469(i).
The second exception, under section 469(c)(7), applies
special rules if the taxpayer is a real estate professional.
Under section 469(c)(7)(B) a taxpayer qualifies as a real estate
professional, and the rental real estate activity of the taxpayer
is not a per se passive activity under section 469(c)(2), 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.
See Bailey v. Commissioner, T.C. Memo. 2001-296. In the case of
a joint return the requirements of section 469(c)(7)(B) are
satisfied if and only if either spouse separately satisfies the
requirements. Sec. 469(c)(7)(B) (flush language). As a result,
if either spouse qualifies as a real estate professional, the
rental activities of such spouse are not per se passive under
section 469(c)(2). See sec. 469(c)(7)(A)(i).
Although a taxpayer may establish the extent of his or her
participation in a real estate business by “any reasonable
means”, sec. 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed.
Reg. 5727 (Feb. 25, 1988), a postevent “ballpark guesstimate”
will not suffice, see Lee v. Commissioner, T.C. Memo. 2006-193;
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Bailey v. Commissioner, supra; Carlstedt v. Commission, T.C.
Memo. 1997-331; Speer v. Commissioner, T.C. Memo. 1996-323;
Goshorn v. Commissioner, T.C. Memo. 1993-578.
The record is devoid of any evidence establishing that
either petitioner met the requirements of section 469(c)(7)(B).
Petitioners have not provided even a “ballpark guesstimate” of
the number of hours either of them spent on the rental real
estate activity. Nothing in the record establishes whether more
than one-half of the personal services performed by either of
petitioners was performed in their rental real estate activity or
whether either of them spent more than 750 hours in that
activity. Mr. Kibiro testified that he and his wife did not keep
“meticulous records” regarding the rental properties, and
petitioners produced no such records at trial. Although Mrs.
Njoroge testified that she traveled to the Springfield property
two or three times a week, there is no indication of the number
of hours she spent working on the rental properties.
Consequently, petitioners have not established that they meet the
requirements of either section 469(c)(7)(B)(i) or (ii). Because
petitioners have failed to establish that either spouse qualifies
as a real estate professional under section 469(C)(7)(B), their
rental real estate activity is per se passive under section
469(c)(2).
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Petitioners have not met the requirements of any of the
exceptions to the general disallowance rule of section 469(a).
Accordingly, we sustain respondent’s determination to disallow
the $40,503 loss.
To reflect the foregoing,
Decision will be entered
for respondent.