January 5, 2020 - Douglas Myser

Tax court finds against taxpayer. To be a real estate professional, a taxpayer must meet the following two tests under IRC Section 469(c)(7)(b): More than half of the personal services performed in trades or businesses by the taxpayer during the calendar year are performed in real property trades or businesses in which the taxpayer materially participates, and the taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates. Married couples are not allowed to meet theses tests by combining their hours, even if they file a joint return. Rather, at least one of the spouses must meet these tests individually. Most often, the problems arise when the taxpayers are asked to show documentation that these requirements are met--and this case is not different. Tax court finds against taxpayer.

Petitioners jointly filed for 2014 a timely Form 1040, U.S. Individual Income Tax Return. They reported total adjusted gross income of $202,409, of which $9,648 represented taxable Social Security benefits. They included with their return a Schedule E, Supplemental Income and Loss. Petitioners claimed the entire $27,488 loss as an offset to income on line 17. The IRS selected petitioners 2014 return for examination and determined that neither of them qualified as a "real estate professional". It accordingly issued a notice of deficiency that disallowed the $27,488 loss deduction and determined an accuracy related penalty. Petitioners timely petitioned the  IRS Tax Court.

The taxpayers has a calendar year for each of their two rental properties that claimed to show the number of hours worked each day on the rental properties, with a total of 360 entries on the two calendars. The calendars indicate what was done and time claimed to be spent but did not indicate which spouse undertook each activity. The court noted that the handwriting appeared identical on each of the calendars and that while some entries were recorded on the date the work was performed, most were recorded at the end of the week in question or even later.

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