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| William Delaney, EA Westwood, MA |
Taxpayers
Roberta and William Birdsong claimed that real property rental losses were
fully deductible (and not subject to the passive activity loss limitation of
$25,000) because Roberta qualified as a real estate professional and met the
requirements of Sec. 469(c) as to material participation, and at least 750
hours of services performed.
Under
Temporary Reg. 1.469-5T(f)(4)…
“The
extent of an individual’s participation in an activity may be established by any reasonable means. Contemporaneous daily time report, logs, or
similar documents are not required if
the extent of such participation may be established by other reasonable
means. Reasonable means for purposes of
this paragraph may include but are not limited to the identification of
services performed over a period of time and the approximate number of hours
spent performing such services during such periods, based on appointment books,
calendars, or narrative summaries.” (emphasis added)
In
Roberta Birdsong and William H. Birdsong v. Comm. of Internal Revenue, T.C.
Memo 2018-148 (9/10/2018), the IRS conceded that Roberta satisfied the material
participation requirements of Sec. 469(c)(7)(B)(i) “because she was not
otherwise employed in 2014.” However,
the IRS asserted that Roberta had not satisfied the 750 hour test under Sec.
469(c)(7)*B)(ii) because the logs presented “were not contemporaneous and contained
inaccuracies.” The Court disagreed---see
below.
William
is employed full-time as an emergency physician. Roberta divides her time between “caring for
their children and managing their rental properties. The rental properties consisted of one five
unit building and another four unit building.
Roberta introduced two spreadsheets – the first documents 844.75 hours
managing rental properties in 2014; the second documents 1,136.25 hours for the
same period. The second adds “previously
omitted tasks such as investor hours and driving time between the rental
properties and…locations pertinent to the management of the units.”
Taxpayers
used Roberta’s calendar and receipts to reconstruct time for the first half of
2014. For the second half, a
contemporaneous, detailed, phone log was used, together with receipts and
invoices to support the entries.
“Petitioners
testified credibly and in detail about petitioner wife’s activities and
extensive management of their rental properties…We find petitioners’ narrative
summary and thorough time logs convincing because petitioners owned numerous
rental units that petitioner
wife operated alone.” Referencing
Hailstock v. Commissioner , TC Memo 2016-146, “Although we caution petitioners
wife to construct more strictly contemporaneous time logs for her future
endeavors, we find her credible testimony and time logs to be a “reasonable means” of proof. (emphasis added)
What
to take from this Case. It is important
that satisfactory evidence which meet the test of material participation and
750 hours be maintained. In this Case,
the taxpayers also elected to treat both rental properties as one for purposes
of the 750 hour rule. While they easily
met the requirement of the temporary regulation, the IRS auditor did not place
great weight on the regulation and asserted that contemporaneous records were
not maintained (even though they are not a requirement if other reasonable
means will serve the same purpose.
Now
that we have the new Sec. 199A pass-through deduction in place, it is important
to note that this type of taxpayer will meet the trade or business definition
of a pass-through entity (although a loss will be suspended and not
pass-through). It is the only
non-Schedule C filer which meets the definition.
