Tax Court Limits Northern California Couples' Real Estate Rental Loss Due To Passive Activity Rule

With the economic downturn the U.S. tax court has seen its fair share of cases tackling the limitation of real estate losses.

In Hassanipour v. Commissioner, the U.S. Tax Court, held that a couple's losses from their rental activities were limited under IRC section 469, finding that they failed to show that the husband was a real estate professional failing to prove that he spent more time on rental activities than at his full-time job as a research associate. This case should serve as a sober reminder to taxpayers of the importance of maintaining a credible contemporaneous calendar of hours spent working on real estate or rental activities.

During 2008, Mr. Hassanipour owned an apartment complex in Vallejo, California, and had a 50% interest in a single-family residence in Lake Tahoe, California. He performed various duties in relation to the rental properties including repairs, administrative tasks, communicating with tenants and other management activities. Mr. Hassanipour's co-owner collected rents and paid bills with respect to the Lake Tahoe property.

Mr. Hassanipour was also employed full time as a research associate for Geron Corp. At Geron Corp., he was expected to work 40 hours per week. According to Geron Corp.'s timesheets, Mr. Hassanipour reported a total of 1,936 hours for 2008, not including paid vacation days or holidays. At trial, however, Mr. Hassanipour, argued that he only worked 35 or a total of 1,610 hours for 2008.

Section 469(c)(7)(B) defines the taxpayers relieved from passive loss treatment as those who perform more than one-half of their personal services in real property trades or businesses in which they materially participate, and who perform more than 750 hours of services in real property trades or businesses in which they materially participate. This means that in order to qualify as a real estate professional, Mr. Hassanipour would have to spend more hours working in his real estate activities than working at Geron Corp.

In an attempt to prove his hours spent on rental activities related to the Vallejo apartments, Mr. Hassanipour presented estimates, summaries, and a generic calendar copyrighted in 2009 but allegedly kept contemporaneously on dates commencing December 31, 2007. Mr. Hassanipour recorded 1,182.9 total hours spent on the Vallejo apartments. Mr. Hassanipour did not keep a contemporaneous record of time spent in relation to the Lake Tahoe property but estimated that he spent 150 to 200 hours in relation to the Tahoe property and over 500 hours performing tasks not reflected in his calendar.

The Court did not accept Mr. Hassanipour's evidence:

[B]ecause of the many indicia of unreliability...Mr. Hassanipour's testimony is undermined by the records of his employer, by his questionable claims about the contemporaneous calendar, and by the vagueness and inherent improbability of his estimates. Some of the estimates that he seeks to add to the hours recorded in the calendar duplicate tasks or time recorded in the calendar. He has not adequately explained the inconsistencies in his evidence, arguing, erroneously, that respondent has the burden of showing, for example, that a calendar copyrighted in 2009 would not have been available in 2008 (or in 2007, the year of the first allegedly contemporaneous entry). There is no evidence of the time the coowner of the Lake Tahoe property spent collecting rents and paying bills. On consideration of the entire record, Mr. Hassanipour's reconstruction reducing the hours worked at Geron Corp. and increasing the hours devoted to rental activities is not credible.

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