Friday, November 25, 2011

They Also Serve

James F. Moss, et ux. v. Commissioner, 135 T.C. No. 18, Code Sec(s) 469; 6662.

This was originally published on October 8th, 2010.

God doth not need
Either man's work or his own gifts. Who best
Bear his mild yoke, they serve him best. His state
Is kingly: thousands at his bidding speed,
And post o'er land and ocean without rest;
They also serve who only stand and wait

So this is another post about a development in the passive activity loss rules.  The rules require us to group our trade or business activities into different buckets depending on our level of participation.  Losses in the passive activity bucket can be used against gains from passive activities, but a net loss is suspended until the related activity is fully disposed of.  A special feature of the rules is that rental activities are "per se" passive.  Persons who are in real estate trades or businesses can be exempted from this "per se" passive rule.  They may need to make a special election to take advantage of this benefit.

I've discussed the election in a previous post.  I've also discussed the biggest problem, people have, which is proving how they spend their time. James Moss has introduced a new angle.  Mr. Moss worked full time at a nuclear power plant.  The total hours worked at this job for 2007 came to 1900.  Included in his work hours were 200 to 300 hours of "call out" or "standby time".  Apparently, this was time where he had to be ready to go in, if they needed him.  Maybe it was the days when Homer Simpson was working alone, but I'm pretty sure that's a different power plant.

Mr. Moss also rented out some property that he owned.  There was a four unit apartment building and three single family homes.  He apparently kept meticulous track of his time. (His "day job" involved planning the maintenance activities of a nuclear power plant, so the habits there may have carried over).  He spent 507.75 hours working on his properties and 137.75 hours travelling two and fro for a grand total of 645.50 hours.  The court noted that the IRS did not say that Mr. Moss failed to make the election to group his properties, so they figured he must have.

You guys who know all the answers, I need you to slow down here.  Mr. Moss has done better than most real estate exception wannabees in tax court.  The court isn't calling his time records a ballpark guesstimate and they are giving him credit for the election.  It doesn't make him win, but he deserves a cheer.  Sadly, one of the necessary, though not sufficient, conditions is that you have 750 hours in a real estate trade or business.  So by his own meticulous records Mr. Moss loses.  He has another argument, though.  All the time that he wasn't working at the power plant, he was "on-call" for his tenants.  That should easily put him over the 750 hours.  OK wise guys.  He actually has to beat 1900 hours, because another condition is that you spend more time in real estate than anything else.  Well by my reckoning the "on-call" theory could be another 6,000 hours.

Sadly the tax court wouldn't buy it.  So he has to pay the tax.  He also got hit with an accuracy related penalty.  He proffered two arguments.  The first was that the penalty should be waived, because the IRS mistreated him.  Sadly we don't get the details.  The other was reliance on his CPA, but it is indicated that he did not tell his CPA how many hours he worked. 

First reader to identify the poem above can chose the topic of a future post.

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