Monday, August 15, 2016

Material Participation - Proving Hours

A very practitioner friendly case just came out in Hailstock v. Commissioner, TC Memo 2016-146. In the case, the taxpayer never kept contemporaneous records of her hours worked on rental properties. This is one area the IRS has been very particular about. Frequently, auditors asks for contemporaneous logs of the activities and when none is given, they will classify the activity as a rental (or deny real estate pro status).


This case gives practitioners a good citation to fight this, "Although we caution petitioner to construct contemporaneous time logs for her future real estate endeavors, we find her detailed and credible testimony to be a 'reasonable means of proof.'" The reasonable means of proof test comes from Reg. 1.469-5T(f)(4), which states: "The extent of an individual's participation in an activity may be established by any reasonable means. Cotemporaneous daily time reports, logs, or similar documents are not to be 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 a period, based on appointment books, calendars, or narrative summaries."


These rules are good to keep in mind whenever going into an audit with a real estate professional or if material participation may be an issue in the case.


Relevant Citations:
Reg 1.469-5T
Hailstock v. Commissioner, TC Memo 2016-146

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