§469 — Passive activity losses and credits limited

Respondent also argues that Petitioners are precluded by section 469 from claiming such credits because they did not have any taxable income from passive activities in the years at issue and that Petitioners are liable for accuracy-related penalties under section 6662(a) because their underpayments for those years are attributable to negligence. See § 6662(a), (b)(1), (c). Petitioners counter that section 469 does not apply with respect to credits under section 48, that they had sufficient bases

§ 469(a)(1), (c)(1). Rental activity is passive unless the taxpayer qualifies as a real estate professional as defined in section 469(c)(7)(B). I.R.C. § 469(c)(2). If a taxpayer meets the definition of a real estate professional, then section 469(c)(2) does not apply, and the taxpayer’s rental real estate activity, if conducted as a trade or business or for the production of income, is not treated as a passive activity if the taxpayer materially participates in the activity.

§ 469(a)(1), (c)(1). Rental activity is passive unless the taxpayer qualifies as a real estate professional as defined in section 469(c)(7)(B). I.R.C. § 469(c)(2). If the taxpayer meets the definition of a real estate professional, then section 469(c)(2) does not apply, and the taxpayer’s rental real estate activity, if conducted as a trade or business or for the production of income, is not treated as a passive activity if the taxpayer materially participates in the activity.

tes in the rental activities, then these activities 5The stipulation states: "Petitioners' son * * * resided at their rental property located at 15 5th Avenue in Highland Heights, Kentucky (15 5th Avenue), throughout 2012 and 2013." - 14 - [*14] are treated as nonpassive activities and the section 469(a) disallowance does not apply to that portion ofthe claimed loss deductions.

tes in the rental activities, then these activities 5The stipulation states: "Petitioners' son * * * resided at their rental property located at 15 5th Avenue in Highland Heights, Kentucky (15 5th Avenue), throughout 2012 and 2013." - 14 - [*14] are treated as nonpassive activities and the section 469(a) disallowance does not apply to that portion ofthe claimed loss deductions.

1.469-9(g)(3), Income Tax Regs. Petitioners filed a statement with their 2013 income tax return electing to treat all oftheir interests in rental real estate as a single rental real estate activity. Since petitioners concede that BC LLC and Lumpkin were not real estate activities during the tax years at issue, there is only one rental property and the election does not apply.

The Hardys distinguish their facts from the facts ofthis example. They argue that Dr. Hardy's ownership interest in MBJ and his medical practice do not constitute an appropriate economic unit as a single activity because the activities are different types ofbusinesses: MBJ is a rental surgical facility and Dr. Hardy's practice is an active medical practice. Additionally, they argue that they did not have a principal purpose ofcircumventing section 469 when they treated the activities as separate

469(c)(1). Rental activity is generally treated as per se passive regardless ofwhether the taxpayer materially participates unless the taxpayer qualifies as a real estate professional under the exception provided by section 469(c)(7)(B).7 See sec. 469(c)(2), (4). Ifa taxpayerqualifies as a real estate professional, the section 469(c)(2) disallowance does not apply and the taxpayer's rental real estate activity, ifconducted as a trade or business or for the production ofincome, is not treated as

The Court concludes that petitioner did not meet the definition ofa real estate professional." Rental activity (including commercial rental real estate activity) is passive unless the taxpayer qualifies as a real estate professional as defined in section 469(c)(7)(B). Sec. 469(c)(2). Ifa taxpayermeets that definition (sometimes that taxpayer is referred to as a real estate professional), then section 469(c)(2) does not apply and the taxpayer's rental real estate activity, ifconducted as a trade

Lamas participated in work customarily done by owners, and he did not do this work with a purpose ofavoiding the section 469 loss limitations. Mr. Lamas worked restoring Shoma assets and opportunities and finding potential investors for Shoma projects. In contrast to the example in the regulations, these activities are customarily done by owners. Further, Mr. Lamas' purpose was to protect his investment in Shoma by helping Shoma to survive. Accordingly, the avoidance exception does not apply.

Because OCPIN and West Coast were not engaged in real property businesses, let alone rental activities, section 469(c)(7) does not apply to them and we must examine whether Dr.

Because OCPIN and West Coast were not engaged in real property businesses, let alone rental activities, section 469(c)(7) does not apply to them and we must examine whether Dr.

Because OCPIN and West Coast were not engaged in real property businesses, let alone rental activities, section 469(c)(7) does not apply to them and we must examine whether Dr.

Because OCPIN and West Coast were not engaged in real property businesses, let alone rental activities, section 469(c)(7) does not apply to them and we must examine whether Dr.

4There is an additional exception for rental real estate activity losses ofa (continued...) - 7 - described in that section (sometimes that taxpayer is referred to as a "real estate professional"), then section 469(c)(2) does not apply and the taxpayer's rental real estate activity, ifconducted as a trade or business or for the production ofincome, is not treated as a passive activity ifthe taxpayermaterially participates in the activity.

5There is an additional exception for rental real estate activity losses ofa natural person(s); however, that exception does not apply here because the (continued...) -10- [*10] Consequently, the first issue is whether Mr.

In short, section 280A is simply inapposite given the actual use ofthe Solitude Way property.

(2) Does the allowance provided by section 469(i) apply to the Adeyemos' rental real-estate business? We hold that the allowance does not apply.

In addition, in the FPAA issued to Jimastowlo for 2006 and in his answer to the petition filed on behalfofOil Coming with respect to 2005, respondent asserts that the passive activity loss limitation rules ofsection 469 apply; i.e., that the exception to those rules afforded by section 469(c)(3) for working interests in oil and gas property is inapplicable to Jimastowlo for 2006 and to Oil Coming for 2005.

469(c)(1). In addition, with an exception that is inapplicable herein, see sec.

The Court held that a member ofan Iowa LLC, unlike a limited partner, was not prohibited by State law from participating in the partnership's business and, consequently, more closely resembled a general partner. Id. at 380. Accordingly, the special rules ofsection 469(h)(2) did not apply to an interest in an Iowa LLC.

Because a member of an Iowa L .L .C ., unlike a limited partner, was not prohibited by State law from participating in the partnership's business and more closely resembled a general partner, we concluded that a member of an Iowa L .L .C . came within the general partner exception of section 1 .469-5T(e)(3)--(ii), Temporary Income Tax 13 - Regs ., sura .

Both section 469 and the regulations thereunder clearly distinguish between net income from an “item of property” and net income from the entire “activity”,8 which might include rental income from multiple items of property.9 Under the authority of section 469(l)(2), the Secretary could have 8Sec.

In the alternative, petitioner - 4 - contends that if the leasing activity is determined to be a passive activity, the passive activity losses can be grouped with his share of income from VBR in accordance with the grouping exception found in section 1.469-4(d)(1)(A), Income Tax Regs. Taxpayers generally bear the burden of proving that the Commissioner’s determination is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). The record reflects that section 7491 does not apply in this

469, I.R.C., and that the loss offset part of the income. R disallowed the offset because, R determined, the recharacterization rule of sec. 1.469-2(f)(6), Income Tax Regs., deemed the income nonpassive. Held: The recharacterization rule is valid. Held, further, the written binding contract exception of sec. 1.469- 11(c)(1)(ii), Income Tax Regs., is inapplicable to the facts herein.

469(e)(1)(A); sec. 1.469-2T(c)(3)(i), Temporary Income Tax Regs., 53 Fed. Reg. 5686, 5713 (Feb. 25, 1988). Congress and the Secretary reasoned that “the rationale for treating portfolio- type income as not from the passive activity does not apply [in these instances], since deriving such income is what the business activity actually, in whole or in part, involves.” S.

However, a closely held C corporation, unlike the other taxpayers to whom section 469 applies, also may use its PAL for a taxable year to offset net active income for such year, and the amount so used will not be disallowed under section 469(a).

5, 1987), neither mentions section 469 nor suggests that the characterization of losses as passive or nonpassive be treated as an affected item. From such silence petitioners conclude that the section 469 issue involves a nonpartnership item within the meaning of section 6231(a)(4), to which section 6229 does not apply.

Because we conclude for other reasons that petition- er's flow-through loss from N444SS was a passive loss, we need not decide this question.

- 15 - [*15] We are not convinced, on this record, that petitioners satisfied the requirements ofsection 469(g) when Fifth Third foreclosed on the Via Capri and Via Murano properties in December 2008.

Because he did not materially participate in the rental activities, we need not decide whetherpetitioner's activities as a licensed sales agent qualify as a "real property trade or business" under section 469(c)(7)(B) and (C).

We need not decide this issue because, as we find infra, petitioners do not meet the requirements ofsec.

least for 2002 (the only year for'which petiti.oner .reported.the DPM rental activity as nonpassive), DPM's rental activity was incidental to its primary activity of holding investment properties for future appreciation .25 We need not decide whether DPM's rental activity 24( .

Petitioner alleged that even if she is unable to deduct he r rental real estate activity losses under section 469 ,'-she should be entitled to deduct the costs of her rental real estate activity under 'sections 212, 162 and/or 195 .'6 5The'Court need not decide whether she materially participated in her rental real estate activity .

Thus, the Court need not decide whether they materially participated.

Petitioners have not alleged that section 7491(a) applies; however, the Court need not decide whether the burden shifted to respondent since there is no dispute as to any factual issue .

4 We need not decide whether vacation and sick leave hours should be taken into account in the computation of the hours that petitioner spent performing personal services as an employee of the Department.

We do not agree entirely with any of those arguments.

We do not agree entirely with any of those arguments.

We disagree with this contention.

Iovine is a real estate professional under section 469(c)(7)(B).8 We disagree with petitioners, finding that Mr.

We do not agree with petitioners' contention thit Mr.

553(b) and (c).] We disagree with petitioners' assertion that sections 1.469-2(f)(6) and 1.469-4(a), Income Tax Regs., are invalid when applied to a material participant of an activity conducted by a C corporation.

Section 469 provides special rules for real estate activities.

Served 10/03/24 2 losses as a real estate professional pursuant to section 469 and (2) is liable for a section 6662(a) accuracy-related penalty.

Section 469 provides, in the case of an individual, that neither “the passive activity loss” nor “the passive activity credit” shall be allowed for the taxable year.

469 applies because petitioners did not materially participate in Falcon.

Deciding this in petitioner's favor would not change the result here because, as we hold below, petitioners' real estate loss deductions are disallowed by section 469.

Accordingly, we hold that Mr.

We hold he did meet the requirements.

We have ruled that section 280A does not apply to the Idaho property, and we have allowed deductions for some expenses but not others that will affect the size oflosses carried forward to 2012 pursuant to section 469.

Levitz is a real estate professional pursuant to section 469.

Petitioners reported a loss for their rental real estate activities on Schedule E, Supplemental Income and Loss, as though petitioner wife qualified as a "real estate professional." Pursuant to section 469(c)(7)(A), petitioners elected to treat all of their rental real estate interests as a single activity for Federal income tax purposes in 2014.

The statement must contain a declaration that the taxpayer is a qualifying taxpayer for the taxable year and is making the election pursuant to section 469(c)(7)(A).

This declaration must state that she "is a * * * [real estate professional] for the taxable year and is making the election pursuant to section 469(c)(7)(A)." Sec.

Finally, respondent argues that the deficiency case presented an issue of first impression in that there was no caselaw applying section 469 to the horse breeding industry.

Accordingly, because respondent has failed to show otherwise, we hold that petitioners were at risk with respect to Mr.

For all ofthe audit years, petitioners elected pursuant to section 469(c)(7)(A) to treat all interests in rental real estate as a single activity.

The statement must contain a declaration that the taxpayer is a qualifying taxpayer for the taxable year and is making the election pursuant to section 469(c)(7)(A).

Accordingly, we hold that petitioners have not demonstrated that Mr.

Respondent further determined that petitioners held the Woodland Hills house for the production ofincome; that the losses reported, pursuant to section 469, were passive; that petitioners owed income tax of$18,425 and $32,256, relating to 2009 and 2010, respectively; and that petitioners were liable for section 6662(a) accuracy-relatedpenalties.

However, pursuant to section 469(c)(7)(A)(i), the rental activity ofa taxpayer is not treated as a per se passive activity ifthe taxpayer satisfies the requirements ofsection 469(c)(7)(B).

We hold that a married taxpayer filing separately must separately satisfy the requirements ofsection 469(c)(7)(B) to avoid per se passive activity loss treatment.

Because we find on this record thatthe Far Rockaway property was a rental property in 2009, we hold that petitioner is entitled to deduct $16,138 in mortgage interest and $753 in real estate taxes as trade or business expenses under section 162.

eduction against income from that activity for the next taxable year.¹4 A passive activity is an activity involving the conduct ofa trade or business in which the taxpayer does not materially participate.¹5 Section 469 does not define "activity".16 The Secretary, however, has prescribed regulations pursuant to section 469(1) that specify what constitutes an "activity".

However, the rental activities ofa taxpayerwho is a real estate professional pursuant to section 469(c)(7)(B) are not treated as per se passive activities.

After concessions,2 the issues for decision are: (1) whether loss deductions claimed on petitioner's Schedule E, Supplemental Income and Loss, should be disallowed for 2008 and 2009 under section 469 (we hold that they should); (2) whetherpetitioner is liable under section 6651(a)(1) for an addition to tax for late filing ofa tax return for 2008 (we hold that he is); and (3) whether petitioner is liable for accuracy-relatedpenalties under section 6662(a) (we hold that he is not).

We hold that they did.

In the notice ofdeficiency 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.

- 7 - However, the rental activities ofa taxpayer who is a real estate professional pursuant to section 469(c)(7)(B) are not treated as per se passive activities.

on 7703) for the taxable year, any participation by such person's spouse in the activity during the taxable year (without regard to whether the spouse owns an interest in the activity and without regard to whether the spouses file ajoint return for the taxable year) shall be treated, for purposes ofapplying section 469 and the regulations thereunder to such person, as participation by such person in the activity during the taxable year.

- 7 - However, the rental activities ofa taxpayer who is a real estate professional pursuant to section 469(c)(7)(B) are not treated as per se passive activities.

Because ofpetitioners' failure to support their contentions that they met the 750 hours-per-yearrequirement or to show personal services concerning rental real estate in an amount that exceeds one-halfofall hours spent in otherjobs, we hold that petitioners have failed to meet the threshold requirements ofsection 469 that would permit their deduction ofthe loss for 2009 or 2010.

We hold that they are not.

We hold that petitioners are entitled to their claimed bases increases in Auto Acceptance and their claimed S corporation losses for the years 2004, 2005, and 2006.

Manalo materially participated in either ofpetitioners' rental real estate activities.7 Accordingly, we hold that petitioners are not entitled to deduct their rental real estate losses for 2007 or 2008 on the basis ofthe real estate professional exception provided by section 469(c)(7).8 6 Although never asserted by petitioners at trial or on brief, we conclude, based on all the facts and circumstances, th

For the reasons explained herein, we hold that Mr.

Pursuant to section 469(c)(7), the r ntal activities ofa taxpayerwho is in the real property business (real estate profess onal) are not per se passive activities but are treated as a trade or business subject t the material participation requirements ofsection 469(c)(1).<'Sec.

However, the Secretary has prescribed regulations pursuant to section 469(l) that specify what constitutes an "activity".

We hold for respondent as to both issues.

The first issue is whether petitioners' rental real estate losses for the years at issue were passive activity losses subject to the limitation under section 469(a).2 We hold that petitioners' losses were not passive activity losses for two of their rental properties but were passive activity losses for the remaining four properties.

Petitioners did not file an election with their 2006 or 2007 return to treat all - interests in rental real estate-as a single rental real estate activity pursuant to section 469(c) (3) (A).

eficiencies in petitioners' Federal income taxes: Year Deficiency 2003 $234,610 2004 207,595 2005 197,331 SERVRo AUG 1 1 2011 - 2 - After concessions by petitioners,1 the primary issue for decision is whether losses from petitioners' real estate activities constitute losses from passive activities pursuant to section 469.2 FINDINGS OF FACT The parties have stipulated some facts, which we find accordingly.

Ani was a real estate professional pursuant to section 469(c) (7) (B) .

- 8 - incurred in carrying on a trade or business engaged in for profit pursuant to section 183; (2) the timeshare units were dwelling units used.by petitioners or other owners as residences pursuant to section 280A; or (3) the timeshare activity losses were passive losses pursuant to section 469.

Petitioners did not file an election with their 2006 or 2007 return to treat all - interests in rental real estate-as a single rental real estate activity pursuant to section 469(c) (3) (A).

The issues we must decide are: (1) Whether petitioners are real estate professionals as defined in section SERVED MAR M 2011 - 2 - 469(c) (7) (B); (2) if petitioners are not real estate professionals, whether their rental real estate losses are phased out pursuant to section 469(i); (3) whether petitioners are liable for a section 6662(a) penalty for substantial understatement of income tax and/or negligence for 2005; (4) whether petitioners are liable for a section 6662(a) penalty for negligen

The determination of whether the taxpayer materially participated in his real property business pursuant to section 469(c) (1) must be made with respect to each rental activity unless the taxpayer made the election to treat all of his rental activities as a single activity.

2) whether petitioner has substantiated $509 of the $26,393 in real property taxes claimed as a deduction on his 2003 tax return; (3) whether the losses related to petitioner's rental property in Culver City, California, and claimed on his 2004 tax return are subject to passive activity limitations pursuant to section 469 ;2 (4) whether the expenses relating to petitioner's rental property in Ventura, California, and claimed on Schedule E attached to his 2004 tax return are deductible as rental

2000-107 (aggregation of real estate rental losses was not clear notice of election pursuant to section 469(c)(7))) .

whether petitioner was a real estate professional, and if so, whether he elected to treat his rental real estate activities as a single activity pursuant to section 469(c)(7)(A ) for 2001 .

he following issues remain for our decision :' (1) Whether, pursuant to section 1031(a), petitioners may defer recognition of the gain realized upon the sale of certain real property for tax year 2003 ; (2) whether losses from petitioners' rental properties constitute losses from a passive activity pursuant to section 469 for tax years 2003 and 2004 ; and (3) whether petitioners are liable for the accuracy-related penalty pursuant to section 6662 for tax years 2003 and 2004 .

Respondent claims that because the $44,000 casualty loss was from rental activity, it should still be limited to $25,000 pursuant to section 469 .

469 provides, in pertinent part, as follows : SEC .

We hold that they are not .

Accordingly, and on the basis of the foregoing, we hold - 16 - that petitioner has not met his burden with respect to this issue, and is therefore not entitled to claim a suspended loss deduction for the dispositions of his interests in the aforementioned passive activities for 2003 .

We hold that petitioner was not a qualifying taxpayer in 2001 for purposes of section 469(c)(7), and therefore his rental real estate activity during 2001 is classified as passive activity.

We hold that they are.

Pursuant to section 469(a), a passive activity loss generally is not allowed as a deduction for the year in which it is sustained.

Jahina did not establish that she was a real estate professional pursuant to section 469(c)(7).

We hold that section 6501(e)(1)(A)(i) does not require that a partner materially participate, as defined by section 469, in the trade or business activity.

We hold that they did not.

As modified, clarified, and enacted, section 469 provides, in pertinent part, as follows: SEC.

We hold that petitioners are entitled to rental expense deductions for interest payments of $4,500 in 1994 and $5,000 in 1995.

We hold that petitioner was not engaged in the trade or business of gambling in 1996.

Petitioners also contend that it was arbitrary, capricious, and/or manifestly contrary to the underlying statute for respondent, when applying section 469, to disallow the characterization of petitioner’s pro rata share of the management fees expense as nonpassive.

Petitioner cites section 469 and compares its rules and regulations with section 1402(a)(13), but we do not find the sections analogous.

Rogerson would not prevail even if he were correct about the procedural validity of the five of ten test, because we find that he was regularly, continuously, and substantially involved in the operations of RAEG during 2014, 2015, and 2016 within the meaning of section 469(h). Accordingly, we need not decide whether the five of ten test is procedurally valid and turn instead to Mr. Rogerson’s final argument. c. Application of the Five of Ten Test Mr. Rogerson argues that even if the five of ten

Section 469 However, even assuming that the Schedules K-1 substantiated expenses related to those rental real estate activities, the Larkins' claim ofdeductible losses from those activities would founder on section 469: In the case ofan individual or entity listed in section 469(a)(2), section 469 disallows any current deduction for a passive activity loss. Sec. 469(a)(1), (b). A passive activity loss is equal to the aggregate losses from all ofthe taxpayer's passive activities minus the aggrega

- 8 - taxpayermeets the requirements for the exceptions provided under section 469(c)(7) or (i). The Court addresses each exception below. A. Mr. Rapp Did Not Meet the Definition ofa Real Estate Professional Under Section 469(c)(7). Whether the rental real estate loss deductions petitioners claimed for 2009 and 2010 are deductible without limitation under the passive activity loss rules depends on whether Mr. Rapp met the definition ofa real estate professional under section 469(c)(7)(B) for the

469(d)(1).¹° A passive activity is any trade or business in which the taxpayer does not materially participate or any rental real estate activity regardless ofmaterial participation. Sec. 469(a)(1), (c)(1) and (2). Ifa taxpayer can prove that she is a qualifying taxpayer in a real property trade or business (i.e., a real estate professional), her rental real estate activities will not be considered per se passive activities. Sec. 469(c)(7)(A). Thus, the activities are treated as nonpassive, and

Thus, unlike the material participation requirement, the active participation requirement can be satisfied without regular, continuous, and substantial involvement in operations. See Madler v. Commissioner, T.C. Memo. 1998-112. The parties stipulated that petitioners actively participated in their rental real estate activity during 2011. In his amended answer respondent asserted (and the parties later stipulated) that petitioners' adjusted gross income was $138,452 (and not $114,802 as reported

Section 469(a) generally disallows for the taxable year a deduction for any passive activity loss. A passive activity loss is the excess ofthe 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 or activity for the production ofincome in which the taxpayer does not materially participate. Sec. 469(c)(1), (6). Rental activity is generally treated as per se

In the case ofan individual taxpayer, section 469 disallows any current deduction for a "passive activity loss". Sec. 469(a)(1), (b). A passive activity loss is the excess ofthe 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 or any rental activity regardless ofmaterial participation. Sec. 469(c)(1

Section 469, which limits passive activity losses such as these from a rental activity, creates an exception for taxpayers in a real property business, but such taxpayers must establish the number ofhours devoted to the activity, among other things. Sec. 469(c)(7). Petitioner invokes section 469(i), which defines and limits passive activity losses

469(d)(1). A passive activity is any trade or business or activity for the production ofincome in which the taxpayer does not materially participate. Sec. 469(c)(1), (6). Rental activity is generally treated as per se passive regardless ofwhether the taxpayer materially participates. Sec. 469(c)(2). However, the rental activity ofa taxpayer is not treated as per se passive ifthe taxpayer satisfies the requirements ofsection 469(c)(7)(B).5 Sec. 469(c)(7)(A)(i). Ifa taxpayer is described in that s

First, petitioners argue that section 469 does not, on its face, apply to S corporations, and consequently, section 1.469- 4(a), Income Tax Regs., defining a taxpayer's activities to include those conducted through an S corporation, "is contrary to the statutory instructions given by Congress when it enacted section 469". Petitioners cite Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), for their contention that section 1.469-4(a), Income Tax Regs., is invalid. Seco

Passive activity loss In the alternative, even assuming the property was held for production of income in a rental endeavor, losses from the Robinsons' real estate activities would be (as the Commissioner correctly contends) subject to the passive activity loss limits ofsection 469, which prohibit taxpayers from claiming losses from passive activities, specifically losses generated from the rental ofreal property. Sec. 469(a), (c)(2), (4), (6). The Robinsons invoke an exception to that general r

Section 469(a)(1) provides that a taxpayer's passive-activity loss is disallowed for the year ifthe taxpayer is - 10 - "described in" section 469(a)(2).8 The following taxpayers are "described in" section 469(a)(2): individuals, estates, trusts, closely held C corporations, and personal service corporations. A passive-activity loss is the amount by which the aggregate losses from all the taxpayer's passive activities for the year exceeds the aggregate income from all the taxpayer's passive acti

Second, section 1.469-9(c)(2), Income Tax Regs., provides that “[a] closely held C corporation meets the requirements of paragraph (c)(1) of this section by satisfying the requirements of section 469(c)(7)(D)(i).” Section 469(h) provides that for the purposes of section 469 a taxpayer is treated as materially participating in an activity only if the taxpayer is involved in the operation of the activity on a basis which is regular, continuous, and substantial.

469(a). A passive activity is any activity which involves the conduct of ny trade or business in which the taxpayer does not materially participate. _S_ee sec 469(c)(1). "Material participation" is defined generally in the statute and more specifically in the regulations. See sec. 469(h); sec. 1.469-5T, Temporary I come Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988). In general, a rental activity is treated as a passive activi y regardless of whether the taxpayer materially participates. See sec.

ers Partner, docket No. 21586-09; Oil Coming We Are Humming, LLC, John J. Petito, Tax Matters Partner, docket No. 22706-09; and Jimastowlo Oil LLC, John J. Petito, Tax Matters Partner, docket No. 11263-10. SERVED Aug 26 2013 - 2 - [*2] losses under I.R.C. sec. 469, and asserting accuracy-related penalties under I.R.C. sec. 6662. After a trial addressing the issues raised in the FPAAs (substantive issues), we issued an order directing the parties to address our concern that the so-called income p

Section 469 does not define “activity”. See Schwalbach v. Commissioner, 111 T.C. 215, 223 (1998). However, the Secretary has prescribed regulations pursuant to section 469(1) that specify what constitutes an “activity”. Section 1.469-4(c), Income Tax Regs., sets forth rules for grouping activities together to determine what constitutes a single “ac

ith the day-to-day activities of ICE lessened. Petitioners’ and ICE’s Tax Returns Petitioners’ returns for the years in issue reported the income and loss from the leasing of towers and land to ICE as passive activity income and loss for purposes of section 469. Those returns listed each of the individual land and tower rentals as a separate activity. ice’s returns for the years in issue did not separately report the income or loss from its various activities. Rather, ICE reported its total net

Accordingly, petitioner's attempt to distinguish her situation because she materially participated in operating the Inn is misplaced. Petitioner misapprehends the significance of material participation. As noted supra p. 20, material participation is significant for determining whether a trade or business is a passive activity. For example, the taxpayer in Bailey did not materially participate in operating the Lake Arrowhead property. Consequently, because the Lake Arrowhead activity was not a r

The Court did not discuss whether the materi'al participation requirement applies to a -6- taxpayer qualifying as a real estate profess onal pursuant to section 469(c) (7) ()B), nor did it distinguish a taxpayer qualifying as a real estate professional by irtue of the - taxpayer's job from one qualifying solely by virtue of property ownership. As the Court did not contemplate}the issue before us, Pungot is irrelevant to this discussion. Further, even if we were to accept that, as petitioner con

As previously discussed, members of L .L .P .s and L .L .C .s, unlike limited partners in State law limited partnerships, are not barred by State law from materially participating in the entities' business . Accordingly, .it cannot be presumed that they do not materially participate . Rather, it is necessary to examine the-facts and circumstances to ascertain the nature and .extent of their participation . That -factual inquiry is appropriately made, we believe, pursuant to the general tests for

interests in the L.L.C.s, including the holding L.L.C.s, and the L.L.P.s. In the notice of deficiency respondent disallowed certain of these claimed losses on the ground that petitioners had failed to meet the material participation requirements of section 469. Discussion A. Passive Activity Losses 1. In General Section 469(a)(1) limits the deductibility of losses from certain passive activities of individual taxpayers. Passive losses disallowed in one year generally may be carried over to the

Pursuant to section 469(g)(1)(A) and (B), if a taxpayer disposes of his entire interest in a passive activity to an unrelated person in a transaction in which all gain or loss is recognized, suspended passive activity losses (remaining after the application of section 469(b)) are deductible without limitation (i .e ., they are treated as losses "not from a passive activity") in the year of disposition . ' Section 469 generally applies to taxable years beginning after December 31, 1986, and does

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 activity which involves the conduct of any trade or business and in which the taxpayer does not materially participate . Sec . 469 ( c)(1) . For this purpose, a "trade or business " is generally defined as any activity in connection with a trade or busine

- 2 - Federal income tax (tax): Accuracy-Related Year Deficiency Addition to Tax Penalty 1995 $12,112 $0.00 $2,308.60 1996 12,050 602.35 2,410.00 1997 28,819 2,881.40 5,763.80 1998 16,671 0.00 3,334.20 1999 19,665 0.00 3,933.00 The only issue remaining for decision is whether the appli- cation of section 469 to petitioner’s claimed partnership losses for the respective years at issue violates the Due Process Clause of the Fifth Amendment to the Constitution of the United States.

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

These investments were not profitable, and the Lapids contest the Commissioner’s characterization and disallowance of the resulting losses as passive activity losses within the - 2 - meaning of section 469.1 The case turns on whether the Lapids were “material participants” in their various real estate ventures.

Suffice it to say that the recharacterization rule of section 1.469-2(f) (6), Income Tax Regs., is a legislative regulation that was properly promulgated by the Secretary pursuant in part to the specific grant of authority stated in section 469(1) that allows him to prescribe all necessary or appropriate regulations to carry out the provisions of section 469, including regulations: (1) Defining the terms "activity" and "material participation", sec.

Suffice it to say that the recharacterization rule of section 1.469-2(f)(6), Income Tax Regs., is a legislative regulation that was properly promulgated by the Secretary pursuant in part to the specific grant of authority stated in section 469(l) that allows him to prescribe all necessary or appropriate regulations to carry out the provisions of section 469, including regulations: (1) Defining the terms “activity” and “material participation”, sec.

ciencies in petitioners’ Federal income taxes for 1999 and 2000 as follows: Year Deficiency $17,011 M CO CO co 14,443 to O O o The issue to be decided is whether losses from petitioners’ rental activity constitute passive activity losses pursuant to section 469. Background The parties have submitted the instant case fully stipulated, without trial, pursuant to Rule 122. The parties’ stipulations of fact are incorporated herein by reference and are found as facts in the instant case. Petitioners

After petitioners’ concessions,2 the issues to be decided are: (1) Whether petitioners’ rental losses for the taxable years 1991, 1992, and 1993 in the amounts of $115,390, $48,974, and $21,309, respectively, are section 469 passive activity losses, and (2) whether petitioners are liable for the section 6662(a) accuracy-related penalty for 1991.

6662(a) 1994 $35,283 $3,683 1995 17,023 3,202 The issues presented are: (1) Whether rental real estate losses claimed by petitioners are subject to the passive activity loss limitations under section 469; (2) whether interest paid on tax deficiencies is deductible as Schedule C business expenses; and (3) whether petitioners are liable for accuracy-related penalties under section 6662(a).

r equipment leasing activity on Schedule C, Profit or Loss From Business (Sole Proprietorship), of their 1996 Federal income tax return.3 In the notice of deficiency, respondent disallowed the entire loss on the ground that the leasing activity was subject to the passive loss limitations of section 469. Discussion Section 469(a)(1) limits the deductibility of losses from certain passive activities. Generally, a passive activity includes the conduct of a trade or business in which the taxpayer do

If section 469(c)(7) applies, each interest of the taxpayer in rental real estate is treated as a separate activity for purposes of section 469 unless the taxpayer elects to treat all 2 Sec.

Section 469 generally disallows a taxpayer’s passive activity loss or credit. See sec. 469(a). A taxpayer’s passive activity loss is the amount by which the aggregate losses from all passive activities for the taxable year exceed the aggregate gains from all passive activities for such year. See sec. 469(d)(1). Income from passive activities, i.e.,

Petitioner’s 1994 Federal income tax return reported that: (1) He realized a $69,100 loss on the rental of the club, (2) he realized income of $175,149 on the rental of the office building, (3) the rental of the club and the rental of the office building were separate passive activities under section 469, and (4) the loss from one activity offset an equal amount of the income from the other activity, resulting in the inclusion in petitioner’s 1994 taxable income of $106,049 of rental income.

The parties agree that section 469 does not apply to petitioner after 1993 by reason of the amendment of section 469 that added the special rules for taxpayers in the real property business set forth in section 469(c)(7).

With respect to respondent's recomputed loss of $30,174 ($73,129 - $42,955), respondent determined that section 469 applied to limit petitioners' current deduction to $25,000.

Upon examination, respondent disallowed the claimed losses, reasoning that petitioner's ownership of the condominium unit constituted a passive activity for purposes of section 469, thereby precluding petitioners from offsetting losses attributable to the unit against nonpassive income.

n indebtednes properly allocable to a trade or business (other than the trade or business of performing services as an employee), (B) any investment interest (within the meaning of subsection (d)), (C) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer, (D) any qualified residence interest (within the meaning of paragraph (3)), and (E) any interest payable under section 6601 on any unpaid portion of the tax imposed by se

n indebtednes properly allocable to a trade or business (other than the trade or business of performing services as an employee), (B) any investment interest (within the meaning of subsection (d)), (C) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer, (D) any qualified residence interest (within the meaning of paragraph (3)), and (E) any interest payable under section 6601 on any unpaid portion of the tax imposed by se

Charles operated rental real estate giving rise to pal’s under section 469 in 1988, 1989, and 1990.

s’ respective motions to amend their pleadings; and (2) whether the statutory period of limitations bars respondent from recharacterizing petitioners’ distributive share of partnership losses as passive losses subject to the limitations set forth in section 469. Petitioners resided in West Palm Beach, Florida, at the time they filed their petition. Background The background facts related below are derived from the pleadings, the exhibits attached thereto, and other materials in the Court’s recor

Rental Expenses Section 469 limits the allowance of passive activity losses.

pplies for any taxable year shall (continued...) - 9 - however, petitioners' modified adjusted gross income was greater than $150,000, with the result that the $25,000 offset was phased out.5 Petitioners argue that they meet the requirements of the section 469 material participation test in that the rental properties were petitioners' former homes rented out and petitioner materially participated in their active management.

passive activity, and (II) with respect to which the taxpayer does not materially participate. (C) TERMS. — For purposes of this paragraph, the terms “activity”, “passive activity”, and “materially participate” have the meanings given such terms by section 469. The income described in section 469(e)(1) includes “interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business”, sometimes known as portfolio income. The dispute in this case revolves around wh

ose activities for 1995 and 1996 ($102,845 and $120,278, respectively). Respondent alternatively determined that the losses from petitioners’ Schedule C activities constituted passive activity losses that were subject to the deduction limitations of section 469. Moreover, respondent imposed section 6662(a) accuracy-related penalties for the years in issue. OPINION Schedule C Activities The primary issue is one of fact: whether petitioners entered into or carried on all or any of their Schedule C

We must decide the following issues: (1) Whether the loss of $40,490 claimed on petitioners’ Schedule E, Supplemental Income and Loss, should be disallowed because petitioners failed to meet the restrictions on passive activity losses under section 469; and (2) whether petitioners are subject to the accuracy-related penalty pursuant to section 6662(a) for the year in issue.

6662(a) 1995 $75,255 $15,051 1996 103,514 20,703 - 2 - The issues presented are: (1) Whether losses claimed by petitioner are subject to the passive activity loss limitations under section 469 and (2) whether petitioner is liable for the accuracy-related penalty under section 6662(a).

6662(a) 1993 $3,616 $723 1994 6,089 1,218 The issues we must decide are: (1) Whether respondent properly recharacterized rental income petitioners received during the taxable years at issue as nonpassive income pursuant to section 469, and (2) whether petitioners are liable for accuracy-related penalties for the taxable years at issue.

Internal Revenue Code section 469 changes the net income from the related rental property B from non-passive to passive income!] Further, on Schedule E, Part V of your 1994 return, your total net profit that you reported on your return was $33,318.

Respondent's post-trial brief states that this discrepancy is: "due to the nature of the § 469 (passive activity loss) computational - 29 - adjustment required.

come tax, respectively, and accuracy-relatedpenalties of$1,013 and SERVED Dec 14 2015 - 2 - [*2] $2,049 for tax years 2009 and 2010, respectively, under section 6662(a).¹ The issues for decision are whether (1) the passive activity loss rules under section 469 limit petitioners' loss deductions for tax years 2009 and 2010, and (2) whether petitioners are liable for accuracy-relatedpenalties pursuant to section 6662(a).

O'Neill performed more than 750 hours ofservices in her rental real estate activity so as to be entitled to deduct losses from non-passive-activity income within the meaning ofsection 469, and (2) whether petitioners are liable for the accuracy-relatedpenalty under section 6662(a).

After concessions, the issues for decision are whether section 469 precludes petitioners' claimed deductions for rental real estate losses and whether petitioners are liable for the penalties.

-15- Short ofengaging in a detailed analysis ofthe passive loss rules prescribed in section 469," we simply note that, consistentwith petitioner's admission that she did not rent out the property during 2008, she was not engaged in a rental activity and is not entitled to claim a deduction for a rental real estate loss under the provisions ofsection 469(i).

The Code allows taxpayers to deduct most business-related and profit- - seeking expenses under sections 162 and 212, but section 469 limits these deductions when they arise from "passive activities." Passive activities include both (1) trade or business activities where the taxpayer doesn't materially participate, and (2) rental activities.

However, section 469 generally disallows the deduction ofany passive activity loss.

Shareholders' material participation Section 469 generally disallows the current deduction ofany "passive activity" loss.

) SERVED Jan 18 2012 - 2 - The issues for decision are whether petitioners' involvement in a Colorado cattle ranch constituted a passive activity under section 469 and, if so, whether the accuracy- related penalties should be sustained.

e expenses petitioners reported on Schedule E, Supplemental Income and Loss, other than the adjustments for the "E Street" property for all years in issue; however, respondent contends that all ofpetitioners' rental real estate losses are limited by sec. 469. Petitioners petitioned the Court for redetermination ofa $3,000 long-term capital loss adjustment for 2007, but they did not raise this issue at trial or on (continued...) - 3 - [*3] are: (1) whether petitioners are entitlled to amortize th

,532 with respect to the 2006joint income tax return ofpetitioners. The issue for decision is whether losses and a business energy investment credit claimed in connectionwith a "micro-utility" activity are limited by the passive activity rules under section 469. Unless otherwise indicated, all section references are to the Internal Revenue ! SSVED APR 1 0 2012 - 2 - Code in effect for the year in issue, and all Rule references are to the Tax Court Rules ofPractice and Procedure. FINDINGS OF FACT

section 469 and whether petitioners have shown reasonable cause for the late filing of their return . - 2 - .Unless otherwise indicated, all section references are t o the Internal Revenue Code in effect for the year in issue . FINDINGS OF FACT Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by thi

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 .

In the context of the passive loss rules under section 469, a taxpayer’s participation in an activity may be established by any reasonable means.

6662(a) 1999 $4,886 $977.20 2000 5,642 1,128.40 The issues for decision are: (1) Whether the passive activity rules of section 469 preclude petitioners from deducting the full amounts of losses from their rental real estate activities for the 1999 and 2000 taxable years, and (2) whether petitioners are liable for accuracy-related penalties for the 1999 and 2000 taxable years pursuant to section 6662(a).

The issues for decision are: (1) With respect to petitioner’s rental activities, whether the losses petitioner incurred are subject to the passive activity loss limitations of section 469; (2) with respect to petitioner’s business activities, (a) whether petitioner received unreported income as determined by respondent, and (b) whether petitioner is entitled to a business expense deduction disallowed by respondent; and (3) whether petitioner is liable for the accuracy-related penalty under secti

Section 469 generally prevents a taxpayer from deducting passive activity losses from income unrelated to a passive activity, requiring that passive losses be used only to offset passive income. Sec. 469; Schwalbach v. Commissioner, 111 T.C. 215, 223 (1998). A taxpayer's right to make use of passive activity losses in any year is limited to the amo

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 acti

ownership percentage in each partnership. The reduction from the management income was treated as a loss from a trade or business. R disallowed the management fee expense deductions on the grounds that the expenses were passive within the meaning of sec. 469, I.R.C., and that P was not entitled to treat the *This Opinion supplements a previously released opinion: Hillman v. Commissioner, 114 T.C. 103 (2000). - 2 - income and expenses as “self-charged” items under sec. 469, I.R.C., and sec. 1.469

–- $7,015 Gardening $475 -- Depreciation 19,652 1,844 20,127 8,859 Net loss (20,127) (8,859) Applying the passive activity loss limitation of section 469, petitioners for 1992 deducted $25,000 in total Schedule E losses from the 5401-9 S.

indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee), (B) any investment interest (within the meaning of subsection (d)), (C) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer, (D) any qualified residence interest within the meaning of paragraph (3)), and (E) any interest payable under section 6601 on any unpaid portion of the tax imposed by sec

Subsection (c)(7), governing taxpayers in a real property business, was added to section 469 as part of the Revenue Reconciliation Act of 1993, Pub.

Whether the remaining rental losses claimed by petitioners in 1996 and 1997 constitute passive activity losses under section 469 depends on: (1) Whether petitioner was a real estate professional under section 469(c)(7) during 1997 and (2) whether - 8 - petitioners materially participated in the operation of their Lake Arrowhead property during 1996 and 1997.

rns, petitioner recognized losses of $115,977 and $92,037, respectively, attributable to the rental properties. Respondent determined that these losses were passive losses the recognition of which was prohibited by the passive activity loss rules of section 469. OPINION Respondent determined and argues that petitioner may not deduct his claimed losses on account of the rules of section 469, 2 Petitioner asks the Court to find as a fact that he worked in Massachusetts fewer than 3 days a week, re

Before turning to the specific contentions of the parties in support of their respective positions, we shall set forth the general framework of section 469 and the regulations thereunder.

ether petitioners are entitled to treat management fees that generated nonpassive income and passive deductions and were paid and received by passthrough entities in which petitioners held an interest as offsetting self-charged items for purposes of section 469. Background Petitioners resided in Bethesda, Maryland, at the time their petition was filed. During the 1993 calendar year, David H. Hillman (petitioner) owned 100 percent of the stock of Southern Management Corp. (SMC). During the 1994 c

Section 469 and the Self-Rented Property Rule Pursuant to section 469(a), in general, a taxpayer is denied both a passive activity loss and a passive activity credit for the taxable year in which they arise. A passive activity loss is defined as the amount by which the aggregate losses from all passive activities exceeds the aggregate income from a

Section 469 was generally enacted to reduce the number of tax shelters prevalent at the time of its enactment. The Senate Finance Committee report provides that the extensive use of rental activities for tax shelter purposes under prior law, combined with the reduced level of personal involvement necessary to conduct such activities, made it clear

rs' Federal income taxes for 1991, 1992, and 1993 in the amounts of $2,548, $2,772, and $2,774, respectively. The issue for decision is whether petitioners' claimed Schedule C losses for 1991, 1992, and 1993 constitute passive activity losses under section 469. The resolution of this issue turns on whether petitioners materially participated in the activity of renting their condominium unit during the taxable years in issue. Some of the facts have been stipulated and are so found. The stipulatio

241, 245 (1985). Petitioners presented no evidence showing that Mr. Morin filed a return for 1993, that they filed returns for 1994 and 1995, or that these failures to file were due to reasonable cause and not due to willful neglect. Accordingly, we hold that Mr. Morin is liable for an addition to tax pursuant to section 6651(a)(1) for 199

rs' Federal income taxes for 1991, 1992, and 1993 in the amounts of $2,675, $2,842, and $2,366, respectively. The issue for decision is whether petitioners' claimed Schedule C losses for 1991, 1992, and 1993 constitute passive activity losses under section 469. The resolution of this issue turns on whether petitioners materially participated in the activity of renting their condominium unit during the taxable years in issue. Some of the facts have been stipulated and are so found. The stipulatio

Section 469 disallows the deduction of net losses from any activity in which the taxpayer does not materially participate. Sec. 469(c). An individual materially participates in an activity when involved in the operations of the activity on a regular, continuous, and substantial basis. Sec. 469(h)(1). Temporary regulations provide, in relevant part,

nce. 6In the notice of deficiency for Mr. and Mrs. Thorpe, respondent disallowed rental real estate losses associated with the office condominium resulting from the recharacterization of the office rental income as constructive dividends. Generally, sec. 469 provides that the deduction allowed for a limited amount of passive losses arising from rental real estate activities becomes phased out as the taxpayer's adjusted gross income reaches certain levels. Sec. 469(i). To the extent sec. 469 disa

nce. 6In the notice of deficiency for Mr. and Mrs. Thorpe, respondent disallowed rental real estate losses associated with the office condominium resulting from the recharacterization of the office rental income as constructive dividends. Generally, sec. 469 provides that the deduction allowed for a limited amount of passive losses arising from rental real estate activities becomes phased out as the taxpayer's adjusted gross income reaches certain levels. Sec. 469(i). To the extent sec. 469 disa

Discussion This case presents an issue, among other things, under the passive loss rules of section 469, and more specifically the provisions of section 469(e)(1)(A), which provides: - 7 - (e) Special rules for determining income or loss from a passive activity.--For purposes of this section-- (1) Certain income not treated as income from passive activity.--In determining the income or loss from any activity-- (A) In general.--There shal

(CDI) for 500 hours or less in both 1990 and 1991, such that petitioner did not materially participate in CDI pursuant to section 469 and temporary regulations thereunder; and, if so, 2.

r the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. - 2 - The issues remaining for decision are: (1) Is the loss at issue for each of the years 1989 and 1990 a passive activity loss within the meaning of section 469? We hold that it is. (2) Are petitioners liable for each of the years 1989 and 1990 for the addition to tax under section 6651(a)? We hold that they are. (3) Are petitioners liable for each of the years 1989 and 1990 for the accuracy-relate

Speer, who owned all the stock of Pioneer Data Processing, Inc.; (3) whether petitioners’ claimed losses from two subchapter S corporations during the taxable years 1988 through 1990 are passive activity losses as defined in section 469;2 (4) whether petitioners are liable for the addition to tax for negligence under section 6653(a)(1) for the taxable year 1988; (5) whether petitioners are liable for the accuracy-related penalty under section 6662 for the taxable years 1989 and 1990; (6) whether

eater than that allowed by respondent; and, if so, (3) whether petitioners had amounts "at risk" under section 465 to enable them to deduct losses from the operation of Forest Park Medical Center; and, if so, (4) whether the passive loss rules under section 469 either restrict or disallow petitioners' losses from the operation of the medical center; 1 Respondent conceded the additions to tax for fraud for B.

was in connection with their investment. The Treasury regulations provide that "Work done by an individual in the individual's capacity as an investor in an activity shall not be treated as participation in the activity for purposes of this section [sec. 469] unless the individual is directly involved in the day-to-day management or operations of the activity." Sec. 1.469-5T(f)(2)(ii)(A), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988). Here, the day-to-day management or operations

ental agent handles all leasing arrangements, cleaning between tenants, and routine repairs and maintenance. Ps allege that they spend more than 170 hours during the nonrental season on cleaning and maintaining the condominium. Held: For purposes of sec. 469, I.R.C., Ps' participation in the activity does not constitute participation on a regular, continuous, and substantial basis. Accordingly, the losses incurred are subject to the passive loss rules of sec. 469, I.R.C. E. Gregory Lardieri and

italize the remaining expenses. 5. Whether petitioners may deduct points that they paid in connection with certain loans in 1992. We hold that they may not. 6. Whether petitioners' losses from their airplane leasing activity are passive losses under section 469. We hold that they are. 7. Whether petitioners are liable for the accuracy-related penalty under section 6662(a) for 1991 and 1992. We hold that they are not. Section references are to the Internal Revenue Code in effect for the years in

etitioners had the requisite profit motive for otherwise allowable and substantiated deductions even if the total of the deductions exceeds the rental income from the property, subject of course to the limitations on losses from rental activities in section 469. That is not to say, however, that petitioners are entitled to the deductions and resulting losses shown on the Schedules E, and we look at each deduction separately in the following paragraphs. A. Auto and Travel Expenses To support the

7 (A) interest paid or accrued on indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee), (B) any investment interest (within the meaning of subsection (d)), (C) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer, (D) any qualified residence interest (within the meaning of paragraph (3)), (E) any interest payable under section 6601 on any unpaid por

Guthrie’s advice, petitioners filed a section 469 grouping election with their 2017 return, covering TI and GMCP (which collectively owned 100% of LSLP).

liable for a section 6663 fraud penalty, or alternatively, a section 6662(a) accuracy-related penalty, for the years in issue; and (6) whether the Hoyals’ participation in the operations of Novato Development constituted material participation under section 469.9 OPINION These consolidated cases involve the flow of income between two taxpayers and their related entities for tax years 2012 and 2013.

Stegman is subject to the passive loss limitation of section 469 for tax year 2010; 6.

e estimated tax payments, including whether the failure to file addition applies at the increased rate for a fraudulent failure to file; and (6) whether Mr. Simpson’s participation in the operations of Novato constituted material participation under section 469. OPINION These consolidated cases involve the flow of income between two taxpayers and their related entities for tax years 2012 and 2013. The principal issues we must decide are (1) whether Scenic Trust’s and Reality Kats’s income should

Real Estate Losses Section 469 generally disallows deductions for passive activity losses.

Section 163(a) allows a deduction for “all interest paid or accrued within the taxable year on indebtedness.” However, section 163(h)(1) provides that noncorporate taxpayers cannot deduct any “personal interest.” Section 163(h)(2) carves out several different types of interest from the definition of personal interest.

Section 469 Limitations Taxpayers may deduct costs for certain business and investment expenses under section 162. If the taxpayer is an individual, section 469 generally disallows any passive activity loss deduction for the taxable year and treats it as a deduction or credit for the next taxable year. § 469(a) and (b). A passive activity loss is d

In the case of individual taxpayers, section 469 disallows a deduction for “passive activity loss.” § 469(a)(1), (b).

20 The unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, §§ 401–406, 96 Stat. 324, 648– 71, do not apply to Hacker Investment. Hacker Investment qualifies as a small partnership under section 6231(a)(1)(B)(i) and did not elect, pursuant to section 6231(a)(1)(B)(ii), t

Whoriskey does not satisfy the requirements to be considered a real estate professional under section 469, and thus petitioners have not met the burden of proving that they qualify for an exception to the passive activity disallowance of their rental real estate loss deduction for tax year 2016.

Beers prepared concerning Taxpayer 3’s 2012 return could be read to indicate that she considered the passive loss limitations of section 469 as the only possible explanation for Taxpayer 3’s failure to report her full share of the S corporation’s loss, without also considering the potential impact of section 1366(d).

for Ryder Ranch Co., LLC. He questions whether the Ryders materially participated in the ranch business and whether that business substantiated certain expenses. Here is a summary of these contested losses: Reason for disallowance Sec. 162 (Lack of Sec. 469 Year Adjustment substantiation) (Passive loss) 2003 $531,583 X 2004 927,497 X 2005 1,054,725 X X 2006 979,454 X X 2007 575,878 X Material Participation. The Commissioner argues that any loss sustained by Ryder Ranch is passive because the Ry

But the notice of deficiency issued to Eric did not mention “material par- ticipation” as an alternative ground for disallowing his losses, and it was not men- tioned in respondent’s pleadings, so this argument was not properly raised. See Pagel, Inc. v. Commissioner, 91 T.C. 200, 211-212 (1988), aff’d, 905 F.2d 1190 (8th Cir. 1990). On S

But the notice of deficiency issued to Eric did not mention “material par- ticipation” as an alternative ground for disallowing his losses, and it was not men- tioned in respondent’s pleadings, so this argument was not properly raised. See Pagel, Inc. v. Commissioner, 91 T.C. 200, 211-212 (1988), aff’d, 905 F.2d 1190 (8th Cir. 1990). On S

for Ryder Ranch Co., LLC. He questions whether the Ryders materially participated in the ranch business and whether that business substantiated certain expenses. Here is a summary of these contested losses: Reason for disallowance Sec. 162 (Lack of Sec. 469 Year Adjustment substantiation) (Passive loss) 2003 $531,583 X 2004 927,497 X 2005 1,054,725 X X 2006 979,454 X X 2007 575,878 X Material Participation. The Commissioner argues that any loss sustained by Ryder Ranch is passive because the Ry

for Ryder Ranch Co., LLC. He questions whether the Ryders materially participated in the ranch business and whether that business substantiated certain expenses. Here is a summary of these contested losses: Reason for disallowance Sec. 162 (Lack of Sec. 469 Year Adjustment substantiation) (Passive loss) 2003 $531,583 X 2004 927,497 X 2005 1,054,725 X X 2006 979,454 X X 2007 575,878 X Material Participation. The Commissioner argues that any loss sustained by Ryder Ranch is passive because the Ry

for Ryder Ranch Co., LLC. He questions whether the Ryders materially participated in the ranch business and whether that business substantiated certain expenses. Here is a summary of these contested losses: Reason for disallowance Sec. 162 (Lack of Sec. 469 Year Adjustment substantiation) (Passive loss) 2003 $531,583 X 2004 927,497 X 2005 1,054,725 X X 2006 979,454 X X 2007 575,878 X Material Participation. The Commissioner argues that any loss sustained by Ryder Ranch is passive because the Ry

for Ryder Ranch Co., LLC. He questions whether the Ryders materially participated in the ranch business and whether that business substantiated certain expenses. Here is a summary of these contested losses: Reason for disallowance Sec. 162 (Lack of Sec. 469 Year Adjustment substantiation) (Passive loss) 2003 $531,583 X 2004 927,497 X 2005 1,054,725 X X 2006 979,454 X X 2007 575,878 X Material Participation. The Commissioner argues that any loss sustained by Ryder Ranch is passive because the Ry

alties pursuant to section 6662(a) of$32,542 SERVED Apr 13 2020 - 2 - [*2] and $16,329 for the 2011 and 2012 taxable years (years at issue), respectively.¹ After concessions, there is one issue remaining for decision: whether petitioners are entitled to treat as nonpassive certain rental real estate losses they previously treated as passive under section 469 on their Schedules E, Supplemental Income and Loss, for the years at issue.

000, their amended returns for those years claimed part ofthe losses from the rental ofthe Gearhart property ($25,000 for 2009 and $13,972 for 2010) that petitioners had treated as disallowed in their entirety under the passive activity loss rules ofsection 469. S_e_e sec. 469(i) (allowing for the deduction ofup to $25,000 oflosses from specified rental real estate activities, subject to phaseout for taxpayers with adjusted gross income between $100,000 and $150,000). -12- [*12] 2012 The Form 10

They have accordingly failed to carry their burden ofproving that either ofthem satisfied the 750-hour service require- ment that a taxpayer must meet to qualify as a "real estate professional." Because section 469 precludes deduction oftheir passive activity loss, we sustain respond- ent's disallowance ofthe $27,488 deduction they claimed.

Sections 162(a) and 212(1) generally allow taxpayers to deduct their business and investment expenses, but section 469 limits those deductions when they arise from "passive activities." A "passive activity" is "any activity * * * which involves the conduct ofany trade or business, and * * * in which the taxpayer does not materially participate." Sec.

Nondeductible personal interest is defined to exclude (among other things) "interest paid or incurred on indebtedness properly allocable to a trade or business" and "any interest which is taken into account under section 469 in computing income or loss from a passive activity." Sec.

Sections 162(a) and 212(1) allow taxpayers to deduct certain business and investment expenses, but section 469 limits those deductions when they arise from "passive activities".

ductions. Rental Activity Losses Respondent argues in his pretrial memorandum and in his opening briefthat petitioner is not entitled to deduct the rental losses for 2014 to the extent they exceed $25,000 because ofthe passive activity limitations ofsection 469. See sec. - 13 - [*13] 469(i). Nothing in the record, however, suggests that the loss deductions claimed exceeded $25,000, or that any overall limitation was the reason for disallowance. We see no reason, therefore, to discuss further the

ductions. Rental Activity Losses Respondent argues in his pretrial memorandum and in his opening briefthat petitioner is not entitled to deduct the rental losses for 2014 to the extent they exceed $25,000 because ofthe passive activity limitations ofsection 469. See sec. - 13 - [*13] 469(i). Nothing in the record, however, suggests that the loss deductions claimed exceeded $25,000, or that any overall limitation was the reason for disallowance. We see no reason, therefore, to discuss further the

Principal Purpose We note as well that the regulations say that hours spent on an activity don't count toward material participation if"[o]ne ofthe principal purposes for the performance ofsuch work is to avoid the disallowance, under section 469 and the regulations thereunder, ofany loss or credit from such activity." Sec.

Petitioners, husband and wife, resided in California at the time they filed their petition for redetermination with the Court.2 The sole issue for decision is whether a loss of$42,882 that petitioners reported on Schedule E, Supplemental Income and Loss, is disallowed under the passive activity loss limitations prescribed in section 469.3 Background4 I.

Principal Purpose We note as well that the regulations say that hours spent on an activity don't count toward material participation if"[o]ne ofthe principal purposes for the performance ofsuch work is to avoid the disallowance, under section 469 and the regulations thereunder, ofany loss or credit from such activity." Sec.

se ofa home for 2008, (2) disallowed petitioners' claimed rental real estate loss deductions from rental properties for 2008-10 because respondent determined that petitioners' rental real - 6 - [*6] estate activity was passive within the context ofsection 469 (but allowed an amount as determined under section 469(i)), (3) determined that petitioners had unreported Schedule C gross receipts for 2008-10, and (4) determined that petitioners were liable for section 6662(a) accuracy-related penalties

ax returns for the entities generating such losses". Respondent also sought documents showing that petitioners had sufficient bases to deduct the NOLs, and evidence concerning the "at risk" rules under section 465 and passive loss limitations under section 469. On September 25, 2015, petitioners responded that "[a]Il documents called for in Respondent's Motion to Compel that Respondents [sic] have access to after exercising due diligence have now been turned over to Respondent." On October 15, 2

Consequently, section 469 does not disallow petitioners' deductions for losses from rental properties, and respondent's determination in this regard is not sustained.

oners a notice ofdeficiency for the taxable years at issue that disallowed petitioners' claimed rental real estate loss deductions because respondent determined that petitioners' rental real estate activities were passive activities in the context ofsection 469. The notice of deficiency also disallowed petitioners' claimed Schedule C deductions for travel - 6 - [*6] expenses and car and truck expenses, charitable contribution deductions,job expense deductions and certain miscellaneous deductions

Section 469, however, generally disallows any passive activity loss. Sec. 469(a). A passive activity loss is defined as the excess ofthe 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 taxpa

Consequently, section 469 does not disallow petitioners' deductions for losses from rental properties, and respondent's determination in this regard is not sustained.

respondent's determination that petitioners owed additional tax was due to his disallowance ofpetitioners' $147,135 deduction for real estate losses. Respondent - 4 - [*4] disallowed the deduction because ofthe passive activity loss rules found in section 469. On July 31, 2013, respondent mailed petitioners notice ofthe deficiency here in question, showing a corrected tax liability of$64,704 and including an adjustment disallowing the $147,135 deduction. Petitioners concede that the adjustment

(French Lick), for 2010 and 2011 are limited by section 280A; and ifnot, whether those deductions are limited by the passive loss rules ofsection 469; and (2) whether petitioner is liable for the accuracy-relatedpenalties under section 6662(a).

In its examina- tion report the IRS proposed: (1) to disallow deductions for petitioner's Schedule E losses for all three years on the ground that they were passive losses under - 4 - [*4] section 469; (2) to disallow a claimed deduction for a net operating loss (NOL) carryforwardto 2009 arising from petitioner's reported Schedule E loss for 2008; (3) to disallow a portion ofpetitioner's Schedule C deductions for lack of substantiation; (4) to impose accuracy-related penalties under section 6662

According to respondent, the rental loss incurred for each year is deductible only as allowable under section 469--a point petitioners do not dispute.4 In general and as relevant here, that section provides that an individual is not entitled to a deduction for a loss from a passive activity.

and expenses ofeach property in separate columns and reported an additional separate column for "General Rental Expenses." In the notices of - 5 - deficiency respondent determined that the claimed loss deductions for the years in issue with respect to petitioner's real estate activities were subject to the passive activity loss limitations under section 469.3 Respondent also disallowed petitioners' "General Rental Expenses" deductions for 2008 and 2009.

and expenses ofeach property in separate columns and reported an additional separate column for "General Rental Expenses." In the notices of - 5 - deficiency respondent determined that the claimed loss deductions for the years in issue with respect to petitioner's real estate activities were subject to the passive activity loss limitations under section 469.3 Respondent also disallowed petitioners' "General Rental Expenses" deductions for 2008 and 2009.

at 111, we considered section 469(1)(2), which provided: "The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions ofthis section, including regulations" addressing the treatment ofexpenses allocable to passive or nonpassive mcome.

Section 469, which limits passive activity losses such as these from a rental activity, creates an exception for taxpayers in a real property business, but such taxpayers must establish the number ofhours devoted to the activity, among other things. Sec. 469(c)(7). Petitioner invokes section 469(i), which defines and limits passive activity losses

Section 469 prevents taxpayers from reducing nonpassive income by losses attributable to passive activities.60 Rental activities are generally considered to be passive activities under section 469(c)(2). 60Hillman v. Commissioner, 118 T.C. 323, 329 (2002); Langille v. Commissioner, T.C. Memo. 2010-49, aff'd, 447 Fed. Appx. 130 (11th Cir. 2011). -

Section 469 prevents taxpayers from reducing nonpassive income by losses attributable to passive activities.60 Rental activities are generally considered to be passive activities under section 469(c)(2). 60Hillman v. Commissioner, 118 T.C. 323, 329 (2002); Langille v. Commissioner, T.C. Memo. 2010-49, aff'd, 447 Fed. Appx. 130 (11th Cir. 2011). -

6662(a) 27926-12 2007 $34,602 $6,630.20 27994-12 2008 34,429 6,089.20 The issues for our consideration are: (1) whether losses from petitioners' boat charter activity are subject to the passive activity loss limitations ofsection 469; (2) whetherpetitioners are entitled to deduct travel and meals and entertainment expenses in excess ofthe amounts respondent allowed; and (3) whether petitioners are liable for accuracy-relatedpenalties.

Section 469 Taxpayers are allowed deductions for certain business and investment expenses under sections 162 and 212. However, ifthe taxpayer is an individual, section 469 generally disallows any passive activity loss for the taxable year and treats it as a deduction allocable to the same activity for the next taxable year. Sec. 469(a) and (b). A p

But as so often in tax law, there is an exception to the exception--the Code excludes from this exception investment interest, interest allocable to a trade or business, interest allocable to passive activities (as under section 469), any "qualified residence interest," as well as a few other categories.

But as so often in tax law, there is an exception to the exception--the Code excludes from this exception investment interest, interest allocable to a trade or business, interest allocable to passive activities (as under section 469), any "qualified residence interest," as well as a few other categories.

6662(a) 27926-12 2007 $34,602 $6,630.20 27994-12 2008 34,429 6,089.20 The issues for our consideration are: (1) whether losses from petitioners' boat charter activity are subject to the passive activity loss limitations ofsection 469; (2) whetherpetitioners are entitled to deduct travel and meals and entertainment expenses in excess ofthe amounts respondent allowed; and (3) whether petitioners are liable for accuracy-relatedpenalties.

But as so often in tax law, there is an exception to the exception--the Code excludes from this exception investment interest, interest allocable to a trade or business, interest allocable to passive activities (as under section 469), any "qualified residence interest," as well as a few other categories.

The issues for decision are whether section 469 precludes petitioners' deductions for rental losses claimed and whetherpetitioners are liable for the penalty.

- 3 - [*3] subject to the passive loss limitation under section 469 and asserted an accuracy-relatedpenalty under section 6662(a).

Respondent determined a deficiency in petitioners' 2010 Federal income tax of$11,816 and an accuracy-relatedpenalty under section 6662(a) of$2,363.2 The issues for decision are: (1) whether section 469 bars petitioners from deducting a loss from their rental real estate activity for 2010; and (2) whether petitioners are liable for an accuracy-relatedpenalty.

Deductibility ofExpenses for Rental and Nonrental Activity Taxpayers are generally allowedto deduct business and investment expenses under sections 162 and 212,5 but section 469 puts strict limits on current 5 All section references are to the Internal Revenue Code in effect for the tax years in issue.

The issues for decision are: (1) whetherpetitioners may deduct losses from John Jason Bogner's (hereinafterpetitioner) rental real estàte activities under the passive activity loss rules set forth in section 469, and (2) whetherpetitioners are liable for accuracy-relatedpenalties under section 6662(a) for the years in issue.

The issues for consideration are (1) whether petitioners' deductions for rental real estate losses for 2008 and 2010 are limited by section 280A; and ifnot whether those deductions are limited by the passive loss rules ofsection 469, and (2) to what extent petitioners' rental real estate loss deduction for 2009 is limited by section 280A.

According to respondent, the rental real estate loss incurred for each year is deductible only as allowable under section 469--a point petitioners do not dispute.

6,480 2011 4,425 After concessions,¹ the only issue for our consideration is whether a portion ofpetitioners' loss deductions claimed on Schedule E, Supplemental Income and Loss, should be disallowed for 2010 and 2011 under the passive loss rules of section 469. Background Some ofthe facts have been stipulated and are so found. Petitioners resided in California when they filed the petition. 'Petitioners conceded that they received unreported taxable interest income of$168 and $200 for tax years

l who materially participated in a real estate trade or business for either tax year 2008 or 2009; (2) whether the rental income petitioner received for use ofhis properties in Maine and Connecticut is nonpassive income under the self-rental rules ofsection 469; (3) whetherpetitioner's rental real estate losses for 2009 are limited by section 280A; and (4) whetherpetitioner is liable for the accuracy-relatedpenalty under section 6662(a) for tax year 2009.

In a notice ofdeficiency respondent determinedthat portions ofthe claimed 2009 and 2010 loss deductions with respect to petitioner's real estate activities were subject to the passive loss limitations under section 469.5 Respondent also disallowed petitioner's claimed vehicle expense deductions for her bookkeeping business for 2010.

Deductibility ofExpenses for Rental and Nonrental Activity Taxpayers are generally allowedto deduct business and investment expenses under sections 162 and 212,5 but section 469 puts strict limits on current 5 All section references are to the Internal Revenue Code in effect for the tax years in issue.

ues that settle all issues in this case exceptthe one addressed herein. 3The parties agree that the addition to tax under sec. 6651(a)(1) will apply to any deficiency in petitioner's income tax derived from a passive activity loss disallowance under sec. 469. -3- [*3] Background Petitioner has enjoyed horsé racing since he was an adolescent. He became involved in thoroughbred horse breeding and racing in 1990 when he purchased his first racehorse, a Minnesota-bredyearling (a one-year-oldhorse).

The issues for decision are: (1) whether petitionermay deduct losses from her rental real estate activities underthe passive activity loss rules set forth in section 469, and (2) whetherpetitioner is liable for accuracy-relatedpenalties under section 6662(a).

However, section 469 generally disallows the deduction ofany passive activity loss.

the accuracy-relatedpenalty, and: (1) whetherpetitioners are entitled to certain deductions not claimed on theirjoint 2006 Federal income tax return; and (2) whether petitioners' rental real estate activity is a passive activity within the meaning ofsection 469. Background Some ofthe facts have been stipulated and are so found. Petitioners are, and were at all times relevant, married to each other. They are, and were when the petition was filed, residents ofCalifornia. 1Unless otherwise indicate

Temporary regulations relating to the meaning ofthe term "material participation" in section 469(h)(1) provide that,.in general, an individual shall be treated, for purposes of section 469 and the regulations thereunder, as materially participating in an activity for the taxable year ifand only ifhe meets one ofthe following criteria: (1) the individual participates in the activity for more than 500 hours during such year; (2) the individual's participation in the activity for the taxable year c

ic expenses that give rise to the loss deduction for each year are contemplated by section 212 and do not seem to be in dispute. Instead, according to respondent, the rental property loss incurred for each year is deductible only as allowable under section 469. In general, that section precludes a taxpayer from currently deducting a loss from a "passive activity", a term that is defined to in lude any rental activity regardless ofthe taxpayer's level ofparticipation. Sec. 469(a), (c)(1), (2), (4

The issues for decision are (1) whether petitioners' rental loss deductions are limited by section 469, which depends on SERVED APR - 2 2013 -2- [*2] whether Mohammad Hassanipour (petitioner) was a real estate professional who materially participated in managing each rental property, and (2) whether petitioners are liable for the penalty.

Consequently, petitioners' real estate activity in respect - 17 - ofthe duplex is subject to the passive activity loss limitations under section 469, and we sustain respondent's determination disallowing all losses related thereto.

6662(a) 2008 $16,187 $3,237.40 2009 15,749 3,149.80 2010 12,666 2,533.20 After concessions, the issues for decision are whether section 469 precludes petitioners' deductions for rental losses claimed and whether petitioners are liable for the penalties.

income tax under section 469 ofthe U.K.

After concessions by the parties,2 the issues for decision are: (1) whether petitioners may depreciate and deduct section 179 expenses for a Mercedes-Benz (MB) 450 GL automobile purchased in October 2009; (2) whether petitioners may deduct losses from their rental real estate activities under the passive activity loss rules in section 469; and (3).whether petitioners are liable for accuracy-related penalties under section 6662(a).

However, section 469 generally disallows the deduction ofany passive activity loss.

The record does not include a copy ofpetitioners' (or DiDonato's) Federal income tax return showing a proper election was made under section 469 to aggregate the real estate activities as a single activity.

The issues for consideration are (1) whether the passive activity loss rules of section 469 limit the loss deductions petitioners claimed for 2006 and 2007 with respect to petitioner husband's bull breeding activity and (2) whether petitioners are liable for accuracy-related penalties under section 6662(a).

income tax under section 469 of the U.K.

tax return ofpetitioner and Wendi Michiko Uyemura. The issue for decision is whether losses and a business energy investment credit claimed with respect to petitioner's "micro-utility" sales activity are limited by the passive activity rules under section 469. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules ofPractice and Procedure. FINDINGS OF FACT Some ofthe facts have been

fScott R. Wilson (petitioner) and Christine R. Yano. The issue for decision is whether losses claimed in 2006 and 2007 with respect to petitioner's Al[NED APR to 2012 - 2 - "micro-utility" activity are limited by the passive activity loss rules of section 469. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules ofPractice and Procedure. FINDINGS OF FACT Some ofthe facts have been

work) in an activitylunder section 469, travel time from a personal residence is inherently personal hours that do not represent participation in a business.

62(a). SERVED JUN 1 2 2012 - 2 - whether petitioners are entitled to a bonus depreciation deduction under section 1400N(d)2 for real properties purchased during 2006; and (2) whether petitioners' real estate losses are passive activity losses under section 469. For the reasons stated herein, we find that petitioners are not entitled to a bonus depreciation deduction under section 1400N(d).3 Moreover, we find that petitioners' real estate losses are passive activity losses and therefore are not d

However, except as provided in section 469,(c) (7), the term "passive activity" also includes a hental activity regardless of whether a taxpayer materially jarticipatès in the activity. Sec. 469(c) (2), (4). . A passive activity loss is defined as the excess, if any, of the aggregate losses from passive activities during a taxabl

s follows: Even ifPetitioner substantiates the deductions claimed for real estate rental activities for taxable years 2005 through 2008, any losses related to such activities would be limited pursuant to the passive activity loss rules set forth in I.R.C. § 469. FINDINGS OF FACT Some ofthe facts have been stipulated. The stipulation offacts filed by the parties and the exhibits attached thereto are hereby incorporated in this opinion. . The principal adjustments to petitioner's returns for the y

and tried to che Court are as follows: (1) Whether petitioner held certain real property for the production of income. If so, (2) whether losses claimed by petitioner in respect of such real property are subject to the passive activity loss rules of section 469. If not, or if excepted therefrom (3) whether petitioner substantiated losses claimed in respect of such real property; and (4) whether petitioner is liable for accuracy-re Lated penalties under section 6662(a). We note that the notice of

General Rules Congress designed section 469 to prevent taxpayers from reducing taxable income by losses attributable to passive activities .

ould not deduct expenses for ResEnt consulting activities on decedent's Schedules C because ResEnt is not a trade or business . Respondent also argues that petitioners' losses from R & L Air are passive activity losses and should be suspended under section 469 . A . Burden of Proof Section 7491(a)(1) provides that If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by sub

; see also' Krukowski v .

The.~issues for, decision are : (1 ) Whether the section 469 passive activity rules preclude deducting losses from rental real estate activities ; (2)4whether an addition to tax under section 6651 (a)(1) .is'applicable ; .

The section 469 passive activity loss rules generally disallow the current deduction of losses and credits from activities in which the taxpayer does not materially participate . Rental activity is generally treated as a per se passive activity regardless of whether the taxpayer materially participates . Sec . 469(c)(2) . Section 469(i)(1), however, pe

Respondent further argues that, even if we find that any of those losses carried .over and were available as NOL deductions for any year in issue, the passive activity loss rules of section 469 preclude petitioners from claiming those deductions .

.the answer, respondent asserts that the claimed meals and entertainment and-vehicle expenses are not deductible . Respondent also asserts, in the alternative, that any otherwise deductible expenses are limited by the passive activity loss rules of section 469 and . that a penalty should be imposed because of a substantial understatement of income tax for purposes of section 6662 . Discussion The expenses in dispute in this case all,require -- substantiation of amount, time, place ; and busines

Section 469 Schedule E Expenses Relating to Rental of Cabin Section 469(a)(1) and (d)(1) generally prohibits a taxpayer from claiming deductions attributable to '.'passive activities" in an amount which exceeds the income generated by that taxpayer's "passive activities". Madler v . Commissioner , T .C. Memo . 1998- 112 ; Scheiner v . Commissioner

In the answer, respondent asserted that petitioner's rental losses were limited by section 469 relating to passive activities.

(GMCC), and from-flow- through adjustments to GMCC's income tax returns ; (9) whether petitioner's reported-losses from horse activities for taxable years 1991 through 1994 are limited by section 469 ; and (10) whether petitioner is liable for the section 6662 accuracy- related penalty for all years at issue .

The sole issue for decision is whether the passive loss rules of section 469 preclude petitioners from deducting losses incurred from their dog racing activity .

In a sense, this superseded the Schedule E adjustments in the notice of deficiency . On brief respondent concedes the matter raised in the answer, in effect returning the Schedule E adjustments to their previous status . Respondent did not determine a section 6662 penalty in the notice of deficiency issued to Lisa . Accordingly, no sectio

Discussion Respondent relies upon section 469 to support the disallowance of the loss from Blue Marlin .

However, as discussed above, petitioner is limited to a loss of - 19 - $25,000 from rental activities under section 469 and petitioner has already been allowed that amount .

nvolving the $19,475 loss claimed with respect the boat are somewhat involved . Because the income from the boat was shown as being derived from rentals, respondent determined that the resulting loss was from a passive activity within the meaning of section 469 . With certain exceptions, losses from passive activities cannot be deducted from nonpassive income (such as wages) but may be carried forward and deducted against future years' passive income . An exception involves a rental real estate

Losses From Rental Activities Section 469 generally disallows for the taxable year any passive activity loss .

Discussion Section 469 generally disallows for the taxable year an y passive activity loss .

al independent of the Hoyt organization, e.g., to inquire about its significance. Before signing his 1991 tax return, petitioner also received two letters from the Internal Revenue Service, containing information regarding material participation and section 469. 6. The Bales Memorandum Opinion The case of Bales v. Commissioner, T.C. Memo. 1989-568, pertained to Hoyt cattle partnerships (not including TBS 89-1) and their 1974 through 1981 taxable years. The Court in Bales decided that those partn

The issues for decision are: (1) Whether the passive activity rules of section 469 preclude petitioners from deducting losses from their rental real estate activities in the taxable year 2000, and (2) whether petitioners are liable under section 6662(a) for an accuracy-related penalty.

Respondent argues that the reasons for disallowing the losses to - 11 - petitioners include the limitation of partnership losses to the partner's basis in a partnership interest, the at-risk limitation under section 465, the passive loss limitation rules under section 469, and the S corporation loss limitation rules under section 1366, which are all "affected item bases" for disallowing losses at the partner level .

The Code allows taxpayers to deduct most business and investment expenses under sections 162 and 212;1 however, section 469 limits these deductions when they arise from “passive” activities.

f Petitioner's 1991 and 1992 Tax Returns In 1994, Internal Revenue Agent W. Dillard conducted a field audit of petitioner's 1991 and 1992 tax returns, specifically examining petitioner' s Schedule C horse activity under the passive activity rules of section 469. Mr. Wessman handled the audit on behalf of petitioner. On May 9, 1995, respondent sent petitioner a letter stating: "We examined your tax return[s] [for 1991 and 1992] and made no changes to the tax you reported." - 14 - 2. . Prior Tax C

The Code allows taxpayers to deduct most business and investment expenses under sections 162 and 212;1 however, section 469 limits these deductions when they arise from “passive” activities.

Respondent argues that the reasons for disallowing the losses to petitioners include the limitation of partnership losses to the partner’s basis in a partnership interest, the at-risk limitation under section 465, the passive loss limitation rules under section 469, and the S corporation loss limitation rules under section 1366, which are all “affected item bases” for disallowing losses at the partner level.

rn.”8 The revenue agent’s letter further stated that if petitioner was confused by, or questioned the accuracy of, the information provided by 8 Mr. Hoyt’s letter to the Hoyt investors addressed arguments with respect to material participation under sec. 469. - 8 - respondent, then petitioner should “consider having an independent accountant or attorney review this matter”. On March 6, 1992, respondent sent to petitioner a letter which again informed petitioner that Durham was under examination

The issues for decision are whether petitioner was engaged in an equipment leasing activity for profit under section 183,2 and whether the section 469 passive activity rules limit his depreciation deductions.

ona reported on its sale of the $79 million receivable is allowed, that loss arose from a film activity that was a separate activity from its portfolio investment activities for purposes of applying the at- risk limitation rules. Additionally, under sec. 469, respondent argues that to the extent the losses SMP reported on its sales of the $150 million and $81 million receivables and the portions of its Corona membership interests, and any flow-through losses from Corona, are allowed, those losse

In January 1992, respondent mailed Hoyt investors, including petitioner, a letter regarding the application of section 469 (relating to passive activity loss limitations).

Section 469 Passive Activity Loss Exemption If a taxpayer is an individual, the "passive activity loss" for the taxable year shall not be allowed. Section 469(a). The term "passive activity loss" means the amount by which "the - 6 - aggregate losses from all passive activities" exceeds "the aggregate income from all passive activities" for the tax

469; see also Form 8582, Passive Activity Loss Limitations. The expenses consisted of cleaning and maintenance, commissions, insurance, legal and professional fees, management fees, mortgage interest, supplies, and taxes. Petitioner attached no documentation to his revised Form 1040 to support the claimed amounts for expenses and depreciation.

In January 1992, prior to the time petitioners signed their 1991 return, respondent mailed Hoyt investors, including petitioners, a letter regarding the application of section 469 (relating to passive activity loss limitations).

ns claimed. Accordingly, we sustain respondent’s determination on this issue. 5. Passive Loss Limitation Respondent determined that rental losses reported on Eric’s, Brad’s, and Mark’s returns are subject to the passive loss limitations contained in section 469. Petitioners offer no evidence with which we can find that they fall within the auspices of any of the exceptions articulated in the regulations.68 See Kessler v. Commissioner, T.C. Memo. 2003-185; sec. 1.469-1T(e)(3)(ii)(A) through (F),

ns claimed. Accordingly, we sustain respondent’s determination on this issue. 5. Passive Loss Limitation Respondent determined that rental losses reported on Eric’s, Brad’s, and Mark’s returns are subject to the passive loss limitations contained in section 469. Petitioners offer no evidence with which we can find that they fall within the auspices of any of the exceptions articulated in the regulations.68 See Kessler v. Commissioner, T.C. Memo. 2003-185; sec. 1.469-1T(e)(3)(ii)(A) through (F),

In January 1992, respondent mailed Hoyt investors, including petitioners, a letter regarding the application of section 469 (relating to passive activity loss limitations).

ns claimed. Accordingly, we sustain respondent’s determination on this issue. 5. Passive Loss Limitation Respondent determined that rental losses reported on Eric’s, Brad’s, and Mark’s returns are subject to the passive loss limitations contained in section 469. Petitioners offer no evidence with which we can find that they fall within the auspices of any of the exceptions articulated in the regulations.68 See Kessler v. Commissioner, T.C. Memo. 2003-185; sec. 1.469-1T(e)(3)(ii)(A) through (F),

Contrary to petitioner’s assertion, the disallowed loss deductions were the result of the application of the section 469 passive activity loss rules, not the claimed expense deductions--respondent has not challenged the legitimacy of the expenses themselves.

Congress directed the Secretary of the Treasury (Secretary) to prescribe such regulations as may be necessary or appropriate to carry out the provisions of section 469, including regulations that specify what constitutes material participation.

n the mortgages represented petitioners’ individual expenses (as opposed to partnership expenses) reportable as rental expenses on Schedule E of petitioners’ returns and that the deductibility of that interest is subject to the passive loss rules of section 469. Those adjustments resulted in increases in petitioners’ self-employment tax. The parties agree that the interest payments totaled $242,964 in 1996 and $128,988 in 1997 and that petitioner husbands each constructively received half of eac

problem with BAC in 1991 while observing the divorce trial, yet the trial in the divorce case did not occur until 1993. - 46 - business expenses, whether BAC’s deductions were substantiated, and whether the claimed losses were passive losses under section 469. If we were to accept petitioner’s concession and refuse to apply the duty of consistency, respondent would be deprived of the opportunity to evaluate BAC’s correct tax status or to determine the proper tax effect of BAC’s activities for t

r each of those years, and respondent’s determinations in this regard are sustained.2 2 On each Schedule E, petitioner reports a “Deductible rental real estate loss”, a concept that contemplates the limitations on passive activity losses provided in sec. 469. Except for a glancing reference in respondent’s trial memorandum, neither party addressed the application of that section to the deductions here in dispute. Even if the Pepper Pike residence was considered “property held for the production

problem with BAC in 1991 while observing the divorce trial, yet the trial in the divorce case did not occur until 1993. - 46 - business expenses, whether BAC’s deductions were substantiated, and whether the claimed losses were passive losses under section 469. If we were to accept petitioner’s concession and refuse to apply the duty of consistency, respondent would be deprived of the opportunity to evaluate BAC’s correct tax status or to determine the proper tax effect of BAC’s activities for t

--- MAJORITY --- SUPPLEMENTAL OPINION Gerber, Judge: In an earlier Opinion filed by the Court in this case we decided that petitioners were entitled to treat management fees as offsetting self-charged items for purposes of section 469. The Court of Appeals for the Fourth Circuit disagreed and reversed our holding. Hillman v. Commissioner, 263 F.3d 338 (4th Cir. 2001), revg. 114 T.C. 103 (2000). Due to the reversal, we must now consider petitioners’ alternative argument concerning whether they co

Discussion Section 469 sets forth the passive activity loss rule which generally allows losses generated by passive activities to be offset only against gains from other passive activities.

rmed no personal services for his tenants in connection with his real estate rental property activity. Petitioner was not a real estate dealer. Respondent conceded that petitioner’s real estate rental property activity was not passive as defined in section 469. Petitioner explained his long-term objective for his real estate rental property activity as a “401(k) or * * * profitsharing or something to retire on, because I don’t have any other thing besides that. * * * Basically if I can get enoug

spondent made various adjustments to petitioner’s depreciation deductions related to her rental activities. Further, respondent disallowed suspended losses from previous years and losses generated in 1996 and 1997 as a result of the limitation under sec. 469. Petitioner did not present evidence regarding these issues. As a result, petitioner is deemed to have conceded the items. Rules 142(a), 149(b); Burris v. Commissioner, T.C. Memo. 2001-49. - 3 - In 1994, petitioner’s father, Joe Scott (Mr. S

e secs. 163(d)(5)(A)(i), 469(e)(1). - 4 - by a taxpayer in an activity involving the conduct of a trade or business “which is not a passive activity” and with respect to which the taxpayer does not “materially participate”, as the terms are used in section 469. Sec. 163(d)(5)(C). Respondent agrees that the interest paid to Wilmington Trust is interest on petitioner’s investment in silver coins. Respondent contends, however, that petitioners’ deduction is limited to the amount of the “investment

between $130,000 and $150,000 per year. Since 1988, Dr. Prieto has run his own successful medical practice in San Francisco, California. Mrs. Prieto also worked in her husband’s medical practice. She spends a considerable 1 Respondent concedes that sec. 469 is not applicable. - 3 - amount of time working in the medical practice. Dr. Prieto’s medical practice employed Lori Sasaki as a bookkeeper. From 1991 through 1998, petitioners had no substantial income-producing assets or any other substanti

* * * As an alternative ground for disallowing the claimed Schedule E rental expenses for 1991 and 1992, respondent determined that the claimed losses are not allowable per Section 469 of the Internal Revenue Code because you did not actively participate in the management of the rental properties and because you have no other passive income to offset the passive losses.

While we agree that petitioner’s rental activity was subject to the passive activity rules of section 469, petitioner has not proved that he had losses which were suspended in prior years.

Section 469 limits a taxpayer's ability to deduct losses from passive activities. Generally, a taxpayer may deduct losses from passive activities from income from passive activities only and may not use such losses to offset income from nonpassive activities. See sec. 469(a), (d). Passive activity includes any rental activity. See sec. 469(c)(2). S

The issue is whether petitioner's aircraft leasing activity is a passive activity under section 469.1 Petitioner resided in Springfield, Oregon, at the time he filed his petition.

First, rental activity will not be treated as such for purposes of section 469 where the average period of customer use of the property is 30 days or less and where significant personal services are provided by or on behalf of the owner of the property in connection with making the property available for use by customers.

dend income in the amounts of $28,197 for 1991 and $13,651 for 1992. In addition, their taxable income was increased in the amounts of $32,976 and $1,547 for 1991 and 1992, respectively, pursuant to the passive activity loss limitation provisions of section 469. For taxable years 1992 and 1993, respondent characterized petitioners' reported self-employment income as wage income and disallowed deductions of $10,000 and $9,500, respectively, for their contribution to a Simplified Employee Pension/

Hillman’s estimate of “over 500 hours” appears scripted to meet respondent’s alternative argument that the show horse activity was a section 469 “passive activity”, - 20 - rather than recollected as a good faith estimate.6 Moreover, to the extent Dr.

In our Opinion, we held, among other things, that respondent's recharacterization of petitioners' distributive share of partnership losses for 1989 and 1990 as passive for purposes of section 469 (the section 469 issue) constituted an "affected item" within the meaning of section 6231(a)(5), and was thereby subject to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.

n indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee), (B) any investment interest (within the meaning of subsection (d)), (C) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer, (D) any qualified residence interest (within the meaning of paragraph (3)), and (E) any interest payable under section 6601 on any unpaid portion of the tax imposed by s

claim a maximum loss of $25,000 per year related to the rental real estate.6 The general provisions for deductibility of ordinary and necessary business expenses under section 162 must be read in conjunction with the passive activity loss rules of section 469. These sections must be construed together with more specific provisions prevailing over general ones. Cf. United States v. Estate of Romani, 523 U.S.__, 118 S. Ct. 1478 (1998). Petitioners cannot completely circumvent the passive activity

n indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee), (B) any investment interest (within the meaning of subsection (d)), (C) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer, - 6 - (D) any qualified residence interest (within the meaning of paragraph (3)), and (E) any interest payable under section 6601 on any unpaid portion of the tax impose

In our opinion, we held, among other things, that respondent’s recharacterization of petitioners’ distributive share of partnership losses for 1989 and 1990 as passive for purposes of section 469 (the section 469 issue) constituted an “affected item” within the meaning of section 6231(a)(5), and was thereby subject to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.

Pursuant to section 163(h)(2), personal interest does not include interest which is investment interest, interest which is taken into account under section 469 in - 6 - computing income or loss from a passive activity of the taxpayer (passive activity interest), or qualified residence interest.4 The term "investment interest" is defined to mean interest "which is paid or accrued on indebtedness properly allocable to property held for investment." Sec.

T.C. Memo. 1997-90 UNITED STATES TAX COURT DOUGLAS E. KAHLE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 19712-94. Filed February 20, 1997. P, an individual, owned rental real estate, which produced passive losses under sec. 469, I.R.C. P was also a partner in partnership A, which had nonpassive losses from a nonrental real estate operation. Held, P could not combine the rental operation and nonrental operation into a single undertaking, and thus could not deduct passiv

$133,709 in 1989. 3. Passive Loss Limitations: Whether Petitioner Materially Participated in the Management of Bob Wade Ford The next issue for decision is whether the losses petitioners claimed from Bob Wade Ford are passive activity losses under section 469. More specifically, we must decide whether petitioner materially participated in the business of Bob Wade Ford. Individuals generally may not deduct losses from a passive activity. Sec. 469(a). A passive activity is a trade or business in

44) 1The amounts in this column were not deducted dollar-for-dollar on petitioner's returns because petitioner treated the rental of the Cloudia as a passive activity subject to the limitation on the deduction of passive activity losses set forth in sec. 469. 2No net income (loss) figure is computed for this year because petitioner claims that the vessel was not placed in service until 1987. Petitioner did not maintain any formal or consistent method of recording his expenditures with respect to

osses attributable to Bass Associates on their 1987, 1988, or 1989 individual income tax 2The partnership returns reported gross income and expenses from rental real estate as follows: 1988 1989 1990 Gross income $66,292 $71,166 $74,266 Total expenses 174,570 185,181 177,133 - 5 - returns; these losses were suspended pursuant to the provisions of section 469.3 On December 30, 1990, petitioner conveyed his interest in Bass Associates to Mr.

Pursuant to section 163(h)(2), personal interest does not include interest which is investment interest, interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer (passive activity interest), or qualified residence interest.

nary and necessary business expenses and reporting a corresponding amount as rental income on their Schedule E, petitioners were converting ordinary income into passive income to take advantage of what otherwise would be unused passive losses under section 469. Respondent also argued that because petitioners filed a joint return, they are precluded from reallocating income among one taxable unit. Petitioners argued that a tenancy by the entirety exists as a separate legal entity with which Mr. C

vity, and (II) with respect to which the taxpayer does not materially participate. * * * * * * * (C) Terms.--For purposes of this paragraph, the terms "activity", "passive activity", and "materially participate" have the meanings given such terms by section 469. The income described in section 469(e)(1) includes "interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business", sometimes known as portfolio income. The dispute in this case revolves around wh

Respondent filed an amended answer and alleged that petitioner failed to substantiate the claimed expenses as required by section 274(d), and that section 469 precludes petitioner from deducting the expenses.

We did not deal with the more narrow question of whether the income from such a covenant is derived from a trade or business regularly carried on within the meaning of the unrelated business income tax, which confronts us in the present case.

Fred had installed Andrew as the managing partner of W & A in an attempt to comply with a provision of section 469, added to the Internal Revenue Code by the Tax Reform Act of 1986.

Fred had installed Andrew as the managing partner of W & A in an attempt to comply with a provision of section 469, added to the Internal Revenue Code by the Tax Reform Act of 1986.

Fred had installed Andrew as the managing partner of W & A in an attempt to comply with a provision of section 469, added to the Internal Revenue Code by the Tax Reform Act of 1986.

(2) Passive activity loss under section 469-1T, Income Tax Regs., 53 Fed.

Fred had installed Andrew as the managing partner of W & A in an attempt to comply with a provision of section 469, added to the Internal Revenue Code by the Tax Reform Act of 1986.

Fred had installed Andrew as the managing partner of W & A in an attempt to comply with a provision of section 469, added to the Internal Revenue Code by the Tax Reform Act of 1986.

Fred had installed Andrew as the managing partner of W & A in an attempt to comply with a provision of section 469, added to the Internal Revenue Code by the Tax Reform Act of 1986.

Fred had installed Andrew as the managing partner of W & A in an attempt to comply with a provision of section 469, added to the Internal Revenue Code by the Tax Reform Act of 1986.

Fred had installed Andrew as the managing partner of W & A in an attempt to comply with a provision of section 469, added to the Internal Revenue Code by the Tax Reform Act of 1986.

- petitioners' Federal income taxes in the amounts of $4,661 and $3,299 for the taxable years 1991 and 1992, respectively. The issue remaining for decision is whether the losses petitioners claimed are passive activity losses within the meaning of section 469. More specifically, we must decide whether petitioners materially participated in the rental activity at Wisp condominium hotel. FINDINGS OF FACT Some of the facts have been stipulated and are so found. At the time of filing the petition h

Fred had installed Andrew as the managing partner of W & A in an attempt to comply with a provision of section 469, added to the Internal Revenue Code by the Tax Reform Act of 1986.

rs Association v. Commissioner, T.C. Memo. 1989-342. Similarly, in Schaefer v. Commissioner, 105 T.C. 227 (1995), we sustained a Treasury regulation under which income from a covenant not to compete is not considered “passive” income for purposes of sec. 469. In Schaefer, we dealt only with the validity of a regulation that specifically classified income from a covenant not to compete as nonpassive income. We did not deal with the more narrow question of whether the income from such a covenant i

petitioners Joseph E. Machado and Robert R. Machado bred and raced horses for profit and whether losses petitioners Joseph E. Machado and Robert R. Machado realized from partnership investments are limited by the passive activity loss provision of section 469. FINDINGS OF FACT Some of the facts have been stipulated and are so found. At the time the petitions were filed, petitioners Joseph E., Robert R., and Kerry S. Machado resided in Long Beach, California. Hereinafter, references to petitione