In Uncategorized on 06/04/2013 at 05:32

Section 469 incomprehensible? Maybe to Professor George S. Jackson, who in the October 24, 2011 edition of Tax Notes “states that section 469 contains ‘almost 4,500 words’  (we did not count) and ‘exemplifies why federal tax law is incomprehensible for most citizens.’ George S. Jackson, ‘Passive Activity Limitations: Time for a New Paradigm?’, 133 Tax Notes 447, 459 (2011).”

The quote is from Peter H. Hofinga and Margaret M. Wong, 2013 T. C. Sum. Op. 43, filed 6/3/13, at p. 5.

Nothing daunted, STJ Lew (The Right Spelling) Carluzzo sails right in: “Describing section 469 as ‘incomprehensible’ is probably an overstatement; that section, however, is hardly uncomplicated. The dispute between the parties in this case, however, allows us to avoid a discussion of many of the complexities of section 469, and a summarization of the relevant provisions of that section is sufficient.” 2013 T. C. Sum Op. 43, at p. 5. (Footnote omitted).

And barring the neologism “summarization” (how about just “summary”, STJ Lew?), STJ Lew does just that.

It’s the usual “rental realty is always passive” meets material participation meets the $150K AGI limit meets real estate pro. And that’s the 750 hour barrier.

Pete and Maggie elect to treat all their rentals as a single activity: good move. If you want to be a pro, elect “all”, unless there’s some overriding reason for compartmentalizing. So Pete does materially participate, taking all the rentals together. But the $150K AGI ceiling prevents Pete from taking rental losses against ordinary income. If AGI exceeds the magic number, you’re still passive even if you participate.

So Pete’s only hope is the Section 469(c)(7) real estate pro, the 750-hour floor. You have to log (and the operative word here is “log”) a minimum of 750 hours of material participation per tax year, and at least half of all your personal services in all your trades or businesses must be in real estate.

But Pete, who really ran the show, is on the disabled list and, despite continuances, can’t make it to trial, so Maggie is on her own. And she admits she’s not a pro.

Pete did nothing but real estate, so he has the one-half test beat.

STJ Lew: “Ideally, a taxpayer who claims to be described in section 469(c)(7) would maintain a contemporaneous log or record showing with particularity the amount of time devoted to the rental real estate activity on an event-by-event basis. Ideally, the log would be detailed enough to allow for someone who reviewed it to make an informed judgment as to the accuracy of the information reported. The creation and availability of a detailed log is important, especially if that reviewing ‘someone’ is an Internal Revenue Service employee considering the log in connection with an examination of the taxpayer’s return on which rental real estate losses are deducted. Apparently, petitioners were not aware of the importance of keeping such a log and, as noted, neither kept a log during either year in issue.” 2013 T. C. Sum. Op. 43, at p. 8. (Citations omitted, but read them.)

But there is a saver. Reg. Section 1.469-5T(f)(4) provides for an “any reasonable method” test. There needn’t be a contemporaneous log, but appointment books, calendars and narrative summaries can be acceptable.

Unfortunately, what Maggie produces conflates her hours with Pete’s, and only Pete’s hours count. Also, Pete employed managing agents to do some of the work, so Maggie’s logs (and she did them twice) can’t really substantiate the requisite hours for Pete.

STJ Lew notes that Maggie’s testimony about what Pete did probably was hearsay, but as this is a small-claimer, he’ll let it in anyway. Especially as he’s going to find for IRS, which he does.

Takeaway- If you want to be a pro, get one of the timekeeping software programs (like lawyers use) and enter your hours every day as you do the work. Specify the properties (give each one a billing code), what you did and when you did it–every phone call, every e-mail. As Diana Ross and the Supremes, and the Temptations, put it in their 1968 hit, “Every minute, every hour, I’m gonna shower you” with data and more data, IRS. As Diana and the guys put it “I’m Gonna Make You Love Me,” IRS.

And tell ‘em STJ Lew made you do it.


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