PURSUANT TO INTERNAL REVENUE CODE
SECTION 7463(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.
T.C. Summary Opinion 2013-15
UNITED STATES TAX COURT
RENATO R. GHILARDI AND MARILYN GHILARDI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3640-11S. Filed February 21, 2013.
Renato R. Ghilardi and Marilyn Ghilardi, pro sese.
Eugene Kornel, Jessica Browde, and Gerard Mackey, for respondent.
SUMMARY OPINION
GALE, 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
1
Unless otherwise noted, all section references are to the Internal Revenue
Code of 1986, as in effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
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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.
Respondent determined deficiencies in petitioners’ 2008 and 2009 Federal
income tax of $10,880 and $10,048, respectively, and accuracy-related penalties
under section 6662(a) of $2,176 and $2,009.60, respectively. The issues for decision
are: (1) whether section 469 precludes petitioners’ deductions of rental real estate
losses for 2008 and 2009 in excess of those respondent allowed; and (2) whether
petitioners are liable for accuracy-related penalties.2
Background
Some of the facts have been stipulated and are so found. The stipulation of
facts and the accompanying exhibits are incorporated herein by this reference. At the
time the petition was filed, petitioners resided in New York.
Mr. Ghilardi was a licensed real estate salesperson during the years at issue.
He operated under the supervision of a real estate broker and reported net losses on
Schedules C, Profit or Loss From Business, attached to petitioners’ joint Federal
income tax returns for the years at issue. Mr. Ghilardi did not close any transactions
as a real estate salesperson in 2008 or 2009, and he reported no income from such
2
The notice of deficiency also increased the taxable amount of petitioners’
Social Security benefits by $1 for each year. Petitioners have not contested those
adjustments.
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work for either year. During those years Mr. Ghilardi also worked between 15 and
18 hours per week as a driver education instructor. Mrs. Ghilardi worked as a
software writer for a computer technology company.
Mr. Ghilardi owned 50% of a two-unit residential rental property during the
years at issue. Petitioners reported deductible losses from the rental property of
$53,604 for 2008 and $46,449 for 2009 on Schedules E, Supplemental Income and
Loss, attached to their returns for those years.
Respondent disallowed the rental real estate losses petitioners claimed for
2008 and 2009 in the respective amounts of $48,825 and $40,185.50 on the grounds
that the losses were generated by a passive activity, resulting in a deficiency for each
year.3 Petitioners timely petitioned for redetermination.
Discussion
Rental Real Estate Losses
Deductions are a matter of legislative grace, and the burden of showing
entitlement to a claimed deduction is on the taxpayer.4 Rule 142(a); INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992). Section 469 generally prohibits individual
3
Pursuant to sec. 469(i) respondent allowed petitioners’ deductions for rental
real estate losses of $4,779 for 2008 and $6,263.50 for 2009.
4
Petitioners have not claimed or shown entitlement to any shift in the burden
of proof pursuant to sec. 7491(a).
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taxpayers from currently deducting “passive activity” losses. A passive activity is,
generally speaking, the conduct of any trade or business in which the taxpayer does
not “materially participate”. Sec. 469(c)(1). In general, a taxpayer is treated as
materially participating in a trade or business if the taxpayer is involved in the
operations of the trade or business on a regular, continuous, and substantial basis.5
Sec. 469(h)(1). A “passive activity loss” is the amount by which the aggregate
losses from all passive activities for the taxable year exceed the aggregate income
from all passive activities for such year. Sec. 469(d)(1).
Rental activities are generally treated as per se passive activities regardless of
whether the taxpayer materially participates. Sec. 469(c)(2), (4). However, the
rental activities of taxpayers in real property trades or businesses (real estate
professionals) are not per se passive activities but are treated as trades or businesses
subject to the material participation requirements of section 469(c)(1).6 Sec. 1.469-
5
Congress delegated the Secretary authority to prescribe regulations which
specify what constitutes “material participation”. Sec. 469(l)(1). The Secretary
promulgated seven regulatory tests in sec. 1.469-5T(a), Temporary Income Tax
Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988). A taxpayer who satisfies any one of the
seven tests meets the material participation requirement.
6
A real property trade or business means any real property development,
redevelopment, construction, reconstruction, acquisition, conversion, rental,
operation, management, leasing, or brokerage trade or business. Sec. 469(c)(7)(C).
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9(e)(1), Income Tax Regs. Under section 469(c)(7)(B) a taxpayer is a 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.
In the case of a joint return, the foregoing requirements for qualification as a real
estate professional are satisfied if, and only if, either spouse separately satisfies the
requirements. Sec. 469(c)(7)(B). Thus, if either spouse qualifies as a real estate
professional, the rental activities of the real estate professional are not per se passive
under section 469(c)(2).
With respect to the evidence that a taxpayer may use to establish his or her
hours of participation in a trade or business, section 1.469-5T(f)(4), Temporary
Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988), provides:
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
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services during such period, based on appointment books, calendars, or
narrative summaries.
While the regulations allow taxpayers some latitude in establishing the extent of their
participation in an activity, we have consistently held that they do not allow a
postevent “ballpark guesstimate”. See Goshorn v. Commissioner, T.C. Memo.
1993-578; see also Moss v. Commissioner, 135 T.C. 365, 369 (2010); Fowler v.
Commissioner, T.C. Memo. 2002-223.
Petitioners argue that their rental real estate losses are not passive activity
losses because Mr. Ghilardi was a real estate professional and he materially
participated in the operation of the rental property.7 Petitioners did not offer any
contemporaneous evidence of the time Mr. Ghilardi spent performing services in real
property trades or businesses during the years at issue. Instead, to substantiate their
claim they rely on a narrative and calendars Mr. Ghilardi prepared after the Internal
Revenue Service (IRS) began its examination of petitioners’ 2008 and 2009 returns.8
The calendars and the narrative purport to show that Mr. Ghilardi spent over 750
hours performing services as a real estate salesperson in each of 2008 and 2009.
7
Petitioners do not contend that Mrs. Ghilardi was a real estate professional
during the years at issue.
8
Mr. Ghilardi generated blank 2008 and 2009 calendars on a Web site and
printed them. He wrote shorthand notations on the calendars and explained the
notations in a one-page email he sent to an IRS employee (narrative).
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Petitioners did not offer any evidence indicating the amount of time Mr. Ghilardi
spent performing services with respect to the rental property.
We have found postevent narratives sufficient to establish taxpayers’
participation in an activity when such narratives are supported by credible testimony
and other objective evidence. See Assaf v. Commissioner, T.C. Memo.
2005-14; Pohoski v. Commissioner, T.C. Memo. 1998-17; Harrison v.
Commissioner, T.C. Memo. 1996-509. However, the materials petitioners submitted
and Mr. Ghilardi’s supporting testimony are not credible. According to the calendars
and narrative Mr. Ghilardi performed the following activities throughout 2008 and
2009: (1) showed rental properties for two hours every Tuesday; (2) viewed new
real estate listings for three hours every Wednesday; (3) showed homes to
prospective buyers for five hours every Sunday, including the Sunday after Christmas
and Easter Sunday; and (4) attended a one-hour meeting every weekday, except on
certain Federal holidays. Thus, petitioners ask us to believe that Mr. Ghilardi’s
weekly real estate activities were identical in nature and duration for two consecutive
years, slightly exceeding the 750 hours per year necessary to qualify him as a real
estate professional for each year. We decline to do so, especially in the light of the
complete lack of corroborating evidence and petitioners’ admission that Mr. Ghilardi
closed no transactions and earned no income as a real estate salesperson during the
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years at issue. The calendars and the narrative do not appear to be a good-faith
attempt to reconstruct Mr. Ghilardi’s activities for 2008 and 2009; at best, they
represent a postevent ballpark guesstimate, the likes of which we have consistently
rejected.
We conclude that the method petitioners used to approximate Mr. Ghilardi’s
participation in real property trades or businesses is not reasonable within the
meaning of section 1.469-5T(f)(4), Temporary Income Tax Regs., supra. Petitioners
have failed to prove that Mr. Ghilardi spent more than 750 hours performing services
in real property trades or businesses during either year at issue. See sec.
469(c)(7)(B)(ii). They have also failed to prove that Mr. Ghilardi spent more time
performing services in real property trades or businesses than he spent teaching
driver education. See sec. 469(c)(7)(B)(i). Because Mr. Ghilardi does not qualify as
a real estate professional under section 469(c)(7), petitioners’ rental real estate
activity is treated as a per se passive activity under section 469(c)(2).9
Even though we have held that petitioners’ rental real estate losses were
passive, they are able to deduct a portion of those losses under section 469(i).
Section 469(i) provides a limited exception to the general rule that passive activity
9
Because petitioners failed to establish that Mr. Ghilardi was a real estate
professional for either year at issue, we need not analyze whether he materially
participated in the rental real estate activity.
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losses are disallowed. A taxpayer who “actively participated” in a rental real estate
activity for the taxable year may deduct a loss of up to $25,000 per year related to
the activity.10 Sec. 469(i)(1). The $25,000 maximum allowable deduction is reduced
by 50% of the amount by which adjusted gross income (AGI), as modified by section
469(i)(3)(F), exceeds $100,000 and is thus fully phased out when modified AGI
reaches $150,000. Sec. 469(i)(3)(A).
In the notice of deficiency respondent conceded that petitioners “actively
participated” in the rental real estate activity that gave rise to the claimed losses for
2008 and 2009 and pursuant to section 469(i) allowed them deductions for rental real
estate losses of $4,779 for 2008 and $6,263.50 for 2009. However, it is apparent
that respondent erroneously calculated the loss petitioners are entitled to claim for
each year. The notice of deficiency correctly determined that, in petitioners’ case,
modified AGI under section 469(i)(3)(F) equals AGI after the application of section
469(c)(2) and (a), plus the deductions allowed under section 219 for qualified
retirement contributions, less the taxable amount of Social Security benefits under
section 86. See also sec. 1.469-9(j), Income Tax Regs. However, respondent
10
The “active participation” standard is met as long as the taxpayer
participates in a significant and bona fide sense in making management decisions or
arranging for others to provide services such as repairs. See Madler v.
Commissioner, T.C. Memo. 1998-112.
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erroneously used total (or gross) income for each year instead of AGI as the starting
point in calculating petitioners’ allowable deductions. As a consequence,
petitioners’ $6,000 deduction for qualified retirement contributions for each year was
effectively added back twice, thereby overstating modified AGI by $6,000 for each
year. The result is that respondent’s computations understate the deductions
allowable to petitioners under section 469(i) by $3,000 for each year.11
Consequently, we conclude and hold that petitioners are entitled to deductions
for their rental real estate losses of $7,779 and $9,263 for 2008 and 2009,
respectively.
11
For 2008 petitioners’ AGI after application of sec. 469(a) and (c)(2) was
$142,498 ($88,894 in reported AGI plus $53,604 in claimed losses from passive
activities). They claimed a $6,000 deduction for qualified retirement contributions
and had $14,056 of taxable Social Security benefits. Thus, their modified AGI for
2008 was $134,442 ($142,498 + $6,000 - $14,056 = $134,442). Accordingly,
under sec. 469(i) petitioners were allowed to deduct $7,779 of their rental real
estate losses for 2008, calculated as follows: $25,000 - ($134,442 - $100,000) / 2 =
$7,779.
For 2009 petitioners’ AGI after application of sec. 469(a) and (c)(2) was
$140,346 ($93,897 in reported AGI plus $46,449 in claimed losses from passive
activities). They claimed a $6,000 deduction for qualified retirement contributions
and had $14,872 of taxable Social Security benefits. Thus, petitioners’ modified
AGI was $131,474 ($140,346 + $6,000 - $14,872 = $131,474). Accordingly, under
sec. 469(i) petitioners were allowed to deduct $9,263 of their rental real estate
losses for 2009, calculated as follows: $25,000 - ($131,474 - $100,000) / 2 =
$9,263.
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Accuracy-Related Penalties
Section 6662(a) and (b)(2) imposes a penalty of 20% of an underpayment of
tax required to be shown on a return that is attributable to a substantial
understatement of income tax. An “understatement” is the excess of the amount of
tax required to be shown on a return over the amount of tax shown on the return.
Sec. 6662(d)(2)(A). An understatement is substantial when it exceeds the greater of
10% of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A).
The Commissioner bears the burden of production with respect to a taxpayer’s
liability for penalties. Sec. 7491(c). To satisfy that burden, the Commissioner must
offer sufficient evidence to indicate that it is appropriate to impose the penalty. See
Higbee v. Commissioner, 116 T.C. 438, 446 (2001). If the Commissioner satisfies
his burden of production, the taxpayer bears the burden of proving it is inappropriate
to impose the penalty because of reasonable cause, substantial authority, or a similar
provision. Id.
Respondent determined that petitioners are liable for accuracy-related
penalties for 2008 and 2009 because their underpayments of tax for those years are
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due to negligence and/or a substantial understatement of income tax.12 Petitioners’
disallowed deductions for their rental real estate losses, as redetermined by this
Court, result in income tax understatements that exceed both 10% of the tax required
to be shown on petitioners’ returns for those years and $5,000. Thus, respondent has
met his burden of production.
The section 6662(a) penalty is not imposed on any portion of an underpayment
as to which the taxpayer acted with reasonable cause and in good faith. Sec.
6664(c)(1). The determination of whether a taxpayer acted with
reasonable cause and good faith is made on a case-by-case basis, taking into account
all pertinent facts and circumstances, the most important of which is the taxpayer’s
effort to assess his or her proper tax liability. Sec. 1.6664-4(b)(1), Income Tax
Regs.
Petitioners claim they used TurboTax software to prepare their returns and
accurately answered the questions it presented to them. They argue they are not
liable for accuracy-related penalties because their actions were not “deliberately
negligent” or intentional. However, a showing that the errors on petitioners’ returns
were not intentional would fall far short of demonstrating reasonable cause, which
12
Because we conclude hereinafter that there were substantial
understatements of income tax on petitioners’ 2008 and 2009 returns, we need not
address whether petitioners were also negligent. See sec. 6662(b).
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concerns whether a good-faith effort to comply was made. Petitioners claimed losses
of $53,604 and $46,449 for 2008 and 2009, respectively, with respect to the rental
real estate activity--amounts approximately half of their reported income for each
year. At trial Mr. Ghilardi admitted that he did not consult with anyone regarding
how to report the results of the rental real estate activity and acknowledged that he
was unaware of the passive activity loss rules until the IRS selected petitioners’
returns for examination. Further, petitioners provided no evidence of the information
that they entered into TurboTax, a preliminary showing that would be required to
decide whether the software program is in any way at fault for petitioners’
underpayments. See Anyika v. Commissioner, T.C. Memo. 2011-69; Paradiso v.
Commissioner, T.C. Memo. 2005-187.
Given the magnitude of the claimed losses, we conclude that petitioners have
failed to show that they made a reasonable effort to assess the proper treatment of
their rental real estate losses. Accordingly, they did not have reasonable cause for
the underpayments for either year. We therefore sustain respondent’s determination
of the accuracy-related penalties for 2008 and 2009.
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To reflect the foregoing,
Decision will be entered
under Rule 155.