T.C. Memo. 2020-136



                           UNITED STATES TAX COURT



           RONALD J. LUCERO AND MARY L. LUCERO, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 588-18.                              Filed September 29, 2020.



      Ronald J. Lucero and Mary L. Lucero, pro sese.

      Charles A. S. Wiseman, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      PUGH, Judge: In separate notices of deficiency both dated October 10,

2017, respondent determined deficiencies of $6,404 for Mr. Lucero for 2014 and

$8,192 for petitioners for 2015.1


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                          (continued...)
                                        -2-

[*2] After concessions by petitioners, the remaining issue for decision is whether

any of petitioners’ real estate losses reported on their Schedule E, Supplemental

Income and Loss, are limited by section 280A or 469 for the years in issue.

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulated

facts are incorporated in our findings by this reference. Petitioners were residents

of California when they timely filed their petition.

I. The Rental Property

      During the years in issue Mr. Lucero owned a short-term-rental property

(Sea Ranch property) in The Sea Ranch, California, that is several hours from

petitioners’ home in Sacramento, California. He rented the property to tenants for

146 nonconsecutive days in 2014 and 152 nonconsecutive days in 2015.

Petitioners paid a property management company, Sea Ranch Escapes, LLC (Sea

Ranch Escapes), to manage the property’s day-to-day rental operations, which

included advertising to prospective tenants, collecting deposit fees and rent,

maintaining and cleaning the property between stays, landscaping, assisting


      1
       (...continued)
Revenue Code of 1986, as amended and in effect at all relevant times. Rule
references are to the Tax Court Rules of Practice and Procedure. All monetary
amounts are rounded to the nearest dollar.
                                        -3-

[*3] petitioners in hiring repair subcontractors, and responding to tenants’

comments and complaints. Mr. Lucero retained control over certain

administrative decisions, such as setting rental rates and approving expenses over

$100 (unless there was an emergency).

        To save money petitioners performed some upkeep on the Sea Ranch

property themselves. Mr. Lucero drove to the Sea Ranch property approximately

six to nine times each year to landscape, clean and inventory, and make and/or

oversee any necessary repairs. In 2015 Mrs. Lucero accompanied him to help

clean, decorate, and inventory. Some of those trips required one or both of them

to stay multiple nights at the Sea Ranch property. They also stayed at the Sea

Ranch property with family for approximately one week during Christmas each

year.

        Petitioners did not keep any contemporaneous logs, calendars, or other

documentation stating the number of hours they spent on activities related to the

Sea Ranch property for the years in issue. Rather, Mr. Lucero created a log while

the case was with the Internal Revenue Service Office of Appeals (IRS Appeals)

that attempted to reconstruct, using invoices and receipts, the number of hours

petitioners spent on these activities. In that log Mr. Lucero estimated that he spent

a total of 267 hours on activities for the Sea Ranch property in 2014 and that he
                                         -4-

[*4] and Mrs. Lucero spent a total of 273 hours on activities in 2015. The

activities included paying bills, buying supplies, performing maintenance and

repairs, traveling between petitioners’ Sacramento home and the Sea Ranch

property, coordinating with Sea Ranch Escapes, and preparing petitioners’ tax

returns.

II. Petitioners’ Tax Returns and Examination

      Mr. Lucero prepared and filed timely (with the assistance of a paid preparer)

his 2014 Form 1040, U.S. Individual Income Tax Return, electing single filing

status. Included with the return was a Schedule E on which he reported total rents

received for the Sea Ranch property of $26,223 and expenses of $43,854 for a net

loss of $17,631. He prepared and filed timely (with the assistance of a paid

preparer) petitioners’ 2015 Form 1040, electing married-filing-jointly filing status.

Included with the return was a Schedule E on which petitioners reported total rents

received for the Sea Ranch property of $26,710 and expenses of $51,200 for a net

loss of $24,490. The notices of deficiency disallowed any deduction for the entire

Schedule E real estate loss for each year in issue.
                                         -5-

[*5]                                  OPINION

I. Burden of Proof

       Ordinarily, the burden of proof in cases before the Court is on the taxpayer.

Rule 142(a); Welch v. Helvering, 

, 115 (1933). Under section

7491(a)(1), “[i]f, 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 subtitle A or B, the Secretary shall have the

burden of proof with respect to such issue.” Higbee v. Commissioner, 

, 442 (2001). Petitioners have neither claimed nor shown that they have

presented credible evidence sufficient to shift the burden of proof to respondent as

to any relevant factual issue under section 7491(a).

       The Commissioner may bear the burden of proof with respect to “[a] new

theory that is presented [by him] to sustain a deficiency”. Wayne Bolt & Nut Co.

v. Commissioner, 

, 507 (1989); see also Rule 142(a)(1) (stating that

the Commissioner bears the burden of proof for “new matter[s]”). The new theory

shifts the burden to the Commissioner if “it either alters the original deficiency or

requires the presentation of different evidence”; it remains with the taxpayer if the

new theory “merely clarifies or develops the original determination”. Wayne Bolt
                                         -6-

[*6] & Nut Co. v. Commissioner, 

; see also Shea v. Commissioner,

, 191-197 (1999).

      At trial respondent for the first time argued that section 280A precluded

petitioners’ deducting their real estate losses. For purposes of our analysis we

assume, but do not decide, that respondent’s section 280A arguments required the

presentation of different evidence relating to petitioners’ personal days and

personal expenses at the property, and therefore respondent bears the burden of

proof for his new position. 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.

II. Schedule E Real Estate Losses

      A. Petitioners’ Use of the Sea Ranch Property as a Residence

      Respondent argued that petitioners used the Sea Ranch property as a

residence and a vacation rental for purposes of section 280A rather than as a

residential or business rental property and, thus, are not entitled to deduct their

rental real estate losses related to the property. Ordinarily, no deduction is

allowed with respect to a dwelling unit used by the taxpayer as a residence during

the taxable year. Sec. 280A. A dwelling unit is considered to be a taxpayer’s

residence if its use for personal purposes exceeds the greater of 14 days or 10% of
                                          -7-

[*7] the days the unit is rented at a fair rental value in a taxable year. Sec.

280A(d)(1).

      A taxpayer is deemed to have used a dwelling unit for personal purposes

when, for any part of a day, the taxpayer or any member of the taxpayer’s family

uses the unit for personal purposes or any individual uses the unit unless a fair rent

is charged for the use.

Days spent primarily repairing and

maintaining the unit will not count toward personal use merely because other

individuals on the premises are engaged in some other activity.

also Rose v. Commissioner, T.C. Memo. 2019-73, at *24-*25; Van Malssen v.

Commissioner, T.C. Memo. 2014-236, at *14-*15 (discussing the history of

section 280A(d)(2)).

      On the whole, we were not convinced by Mr. Lucero’s testimony regarding

the total hours he spent maintaining the Sea Ranch property, but on this point we

accept his broader claim that most of his trips to the property were for upkeep. If

we accept his testimony that every trip petitioners made to the Sea Ranch property,

other than at Christmas, was for repairs or maintenance, then the time they spent at

the Sea Ranch property for personal purposes totaled fewer than 14 days in each

year. Respondent did not dispute that petitioners rented the Sea Ranch property to

tenants for 146 days in 2014 and 152 days in 2015 or allege that petitioners
                                         -8-

[*8] charged any of their tenants below-market rent. As respondent did not

present any evidence of petitioners’ expenses that were attributable to their

personal use of the property, see sec. 280A(e), we conclude that section 280A does

not limit any of the real estate loss deductions petitioners can claim with respect to

the Sea Ranch property for the years in issue.

      B. Passive Loss Limitation

      A passive activity is any activity involving the conduct of a trade or

business--or an income-producing activity--in which a taxpayer does not

materially participate. Sec. 469(c)(1), (6). Section 469 limits a taxpayer’s

deductible loss from passive activities in a taxable year to the taxpayer’s income

from passive activities.

loss from passive activities

exceeding the income from those activities constitutes a passive activity loss and

any deduction is therefore disallowed for that taxable year; it may be carried over,

however, to the next taxable year to offset passive activity income for that next

year.

(d)(1); sec. 1.469-2T(b)(1), Temporary Income Tax

Regs., 53 Fed. Reg. 5711 (Feb. 25, 1988).

      Petitioners’ operation of the Sea Ranch property constituted an activity that

was a trade or business under section 469(c)(6) and a passive activity under

section 469(c)(1) unless they can establish that they were materially participating
                                          -9-

[*9] in the activity during the years in issue. See, e.g., Bailey v. Commissioner,

T.C. Memo. 2001-296, 

, at *7-*9. Rental activity is ordinarily

passive, regardless of whether the taxpayers materially participate in the activity.

Sec. 469(c)(2), (4); Bailey v. Commissioner, 

, at *3; sec. 1.469-

1T(e)(1)(ii), Temporary Income Tax Regs., 53 Fed. Reg. 5702 (Feb. 25, 1988).2

However, an activity that involves the use of tangible property is not a rental

activity if “[t]he average period of customer use for such property is seven days or

less” in a taxable year (short-term rental). Sec. 1.469-1T(e)(3)(ii)(A), Temporary

Income Tax 

. On average the Sea Ranch property was used for short-

term rentals in both of the years in issue, so petitioners’ short-term-rental activities

were not rental activities under the statute.3

      We therefore must decide whether Mr. Lucero materially participated in the

short-term-rental activities. Material participation requires that a taxpayer be

involved in the activity on a regular, continuous, and substantial basis.4 Sec.


      2
         Neither party claims, nor do we find, support for applying the special rules
for real estate professionals. See sec. 469(c)(7).
      3
        Because we conclude that this was not a “rental activity” within the
statute’s meaning we also need not consider application of sec. 469(i).
      4
       If a taxpayer is married, activity by the taxpayer’s spouse counts in
determining “material participation” by the taxpayer. See sec. 469(h)(5); sec.
                                                                      (continued...)
                                        - 10 -

[*10] 469(h)(1). A taxpayer is considered to have materially participated in an

activity if he satisfies any one of seven regulatory tests. Sec. 1.469-5T(a),

Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988). He may

establish hours of material participation by any reasonable means.

Fed. Reg. 5727. Contemporaneous reports, logs, or similar documentation are

not required if the taxpayer can establish his qualification by other reasonable

means.

include identifying services performed over a

period of time and the approximate time spent performing those services using

appointment books, calendars, or narrative summaries.

of hours do not suffice. Moss v. Commissioner, 

, 369

(2010); see, e.g., Balocco v. Commissioner, T.C. Memo. 2018-108, at *21; Bailey

v. Commissioner, 

, at *6.

      Respondent determined that Mr. Lucero did not satisfy the material

participation requirement for either year in issue. Mr. Lucero contends that he met

the third test for material participation in both years. See sec. 1.469-5T(a)(3),

Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). That test

requires that the individual participate in the activity more than 100 hours during


      4
       (...continued)
1.469-5T(f)(3), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).
                                         - 11 -

[*11] the taxable year and that the individual’s participation in the activity not be

less than the participation of any other individual (including individuals who are

not owners of interests in the activity) for the year. See id.5 Mr. Lucero primarily

relies on a log he created while the case was with IRS Appeals in which he

attempted to reconstruct the number of hours he and Mrs. Lucero spent on

activities related to the Sea Ranch property using receipts and invoices.

      The log includes time Mr. Lucero spent paying bills, coordinating with Sea

Ranch Escapes, and preparing petitioners’ tax returns. Section 1.469-

5T(f)(2)(ii)(A), Temporary Income Tax 

, provides that work

performed by an individual in his “capacity as an investor in an activity shall not

be treated as participation in the activity * * * unless the individual is directly

involved in the day-to-day management or operations of the activity.” Petitioners


      5
        We note that sec. 1.469-5T(a)(7), Temporary Income Tax Regs., 53 Fed.
Reg. 5726 (Feb. 25, 1988), also provides a catchall “facts and circumstances” test
for material participation. See Estate of Stangeland v. Commissioner, T.C. Memo.
2010-185, 

, at *15; Lapid v. Commissioner, T.C. Memo. 2004-
222, 

, at *4. Like the third test in the regulation, the catchall
test requires that an individual participate in an activity more than 100 hours
during the taxable year. See sec. 1.469-5T(b)(2)(iii), Temporary Income Tax

. Mr. Lucero cannot satisfy this test either because he paid Sea Ranch
Escapes to manage the property for him and many of his management hours are
precluded by sec. 1.469-5T(b)(2)(iii), Temporary Income Tax 

.
See, e.g., Bailey v. Commissioner, T.C. Memo. 2001-296, 

,
at *9; Chapin v. Commissioner, T.C. Memo. 1996-56, 

, at *4.
                                        - 12 -

[*12] were not involved in the day-to-day management or operations of the Sea

Ranch property because Sea Ranch Escapes managed and operated the property.

Mr. Lucero’s time spent paying bills, coordinating with Sea Ranch Escapes, and

preparing petitioners’ tax returns constitute investor activities that do not count

toward the 100-hour requirement. See Bailey v. Commissioner, 

, at *8; Barniskis v. Commissioner, T.C. Memo. 1999-258, 

, at *5.

      We also exclude the time Mr. Lucero spent driving between the Sea Ranch

property and his Sacramento home. We recognize that petitioners drove several

hours each way, but they “bear the expense of commuting (driving time) because it

is a personal expense unless an allocation for additional expenses can be made

between personal and business expenses.” Ellison v. Commissioner, T.C. Memo.

2017-134, at *14 n.6 (citing Fausner v. Commissioner, 

, 839 (1973));

see also Commissioner v. Flowers, 

, 473 (1946); sec. 1.262-1(b)(5),

Income Tax Regs.

      Additionally, Mr. Lucero’s log reported hours for tasks that appear

excessive in relation to the task described, such as spending two hours shopping

for coffee filters at Bed Bath & Beyond, and included time shopping both for the

Sea Ranch property and for personal items, such as one hour shopping at Gualala
                                       - 13 -

[*13] Supermarket for 2 items for the Sea Ranch property (garbage bags and facial

tissue) and more than 20 personal grocery items. We have found the credibility of

a taxpayer’s records to be diminished when the number of hours reported appears

excessive in relation to the task described. See Antonyshyn v. Commissioner,

T.C. Memo. 2018-169, at *11; Hill v. Commissioner, T.C. Memo. 2010-200, 

, at *5, aff’d, 436 F. App’x 410 (5th Cir. 2011). The inclusion of

time for trips that combined business and personal purchases further erodes the

log’s reliability. See Rose v. Commissioner, at *28-*29.

      Because these defects permeate the log, we need not make specific

adjustments to exclude remaining categories of hours. The log itself is not reliable

and, therefore, is not a reasonable means of establishing material participation

hours. See

It amounts to “postevent ‘ballpark guestimate[s]’” and does

not establish that Mr. Lucero spent 100 hours on short-term-rental activities for

the Sea Ranch property in either year in issue. See Moss v. Commissioner, 

.

      Even if we were to assume that Mr. Lucero spent 100 hours on short-term-

rental activities during those years, the record does not include any documents that

show the number of hours other individuals, such as Sea Ranch Escapes, spent on

those activities in connection with the Sea Ranch property. See sec.
                                         - 14 -

[*14] 1.469-5T(a)(3), Temporary Income Tax 

. Mr. Lucero testified

that he was heavily involved with the Sea Ranch property and that Sea Ranch

Escapes spent much less time than he did on the short-term rental activities for the

property, but he also testified that he only visited the property “six to eight times a

year”. Petitioners did not present any other evidence demonstrating Sea Ranch

Escapes’ participation. We conclude that petitioners have failed to show that Mr.

Lucero’s participation in short-term-rental activities exceeded the participation of

any other individuals in either of the years in issue. See Hoskins v. Commissioner,

T.C. Memo. 2013-36, at *14; Akers v. Commissioner, T.C. Memo. 2010-85, 

, at *3-*4.

      Petitioners therefore have not met their burden of proving that Mr. Lucero

materially participated in short-term-rental activities related to the Sea Ranch

property for either of the years in issue. Accordingly, their real estate losses were

passive activity losses for purposes of section 469, and we sustain respondent’s

disallowance of petitioners’ real estate loss deductions for both years in issue.

      Any contentions we have not addressed we deem irrelevant, moot, or

meritless.
                                  - 15 -

[*15] To reflect the foregoing,


                                           An appropriate decision will be

                                  entered.