Tax Court Cases for Real Estate Professional Status (REPS)

By Jason Watson, CPA
Posted Sunday, May 25, 2025

Here is a snapshot of some issues the Tax Court has dealt with-

Wallach, Tax Court Summary 2012-94

The taxpayer was a real estate agent who attempted to deduct several travel expenses including Hawaii and Lake Tahoe. He attempted to claim the travel was for investment purposes by researching additional real estate, but his recordkeeping was shoddy and was denied the deduction.

Trzeciak, Tax Court Memo 2012-83

Taxpayer claimed that time traveling to and from rental properties added to the 750-hour and material participation requirements. IRS agent and Appeals officer said No. But it appears from the court records that perhaps the IRS would entertain travel time had the taxpayer asserted a home office deduction for rental property activities. The Tax Court was dealing with a different issue and did not address this on point.

Truskowsky, Tax Court Summary 2003-130

Unless a taxpayer can prove day-to-day managerial involvement, then travel time between a taxpayer’s house and the rental activity is considering commuting and therefore does not qualify towards the hourly requirements for real estate professional and material participation. Commuting according to IRC Section 162 is not deductible. Sorry.

Leyh, Tax Court Summary Opinion 2015-27

Real estate investor had only 632.5 hours on her time log but explained during audit that she had failed to record the time spent traveling among her 12 rental properties. The IRS countered that her log was inclusive of travel time, but based on her testimony at trial, the Tax Court found that she had not included travel time in the time log and allowed her to restate the time log.

Lee, Tax Court Memo 2006-193

In terms of recordkeeping and proving hourly involvement, the Tax Court has acknowledged that “reasonable means” is interpreted broadly. Nevertheless, a post event “ballpark guesstimate” will not suffice. Leave it to the Tax Court to bust out some slang.

Pohoski, Tax Court Memo 1998-17

The court stated the second test of material participation was not satisfied when taxpayers failed “to put forth some indication of the actual time spent by” third-party non-owners such as property management companies.

Manalo, Tax Court Summary 2012-30

To push the taxpayers over the 100-hour hurdle, petitioners introduced at trial three revised logs, including a last-minute log purporting to be a reconstruction of the hours of services Mr. Manalo performed with respect to the rental activities. The estimates in these revised logs, however, were uncorroborated and unreliable. The revised logs were prepared at various instances over a two-year period after the conclusion of IRS agent’s examination and are, according to petitioners, based on emails and archived documents. Those emails and archived documents, however, were never introduced into evidence at trial. The Tax Court stated, “The rule is well established that the failure of a party to introduce evidence within his possession and which, if true, would be favorable to him, gives rise to the presumption that if produced it would be unfavorable.” Yuck!

Kutney, Tax Court Summary 2012-20

Taxpayer used hourly estimates that varied throughout trial. The Tax Court considered this a post event “ballpark guestimate” and denied the real estate professional designation.

Moss, 135 Tax Court 365 (2010)

The rental property owner argued that he should be permitted to include hours spent “on call,” when a tenant could contact him if necessary. The court denied the tax position because the taxpayer was not actually performing services during those hours, the time could not be counted toward the 750-hour requirement.

Escalante, Tax Court Summary Opinion 2015-47

The rental property owner listed hundreds of hours for writing checks and reviewing mortgage statements. The Tax Court considered how long it would take them to write their own checks based on their own experience of daily life.

Lucero, Tax Court Memo 2020-136

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 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.

Iovine, Tax Court Summary 2012-32

Taxpayer was a pilot who worked for American Airlines and worked 812 hours according to timesheets provided. The taxpayer was not able to prove that he spent more than 812 hours on his real estate activities. More importantly he failed to make the election to treat all rental properties as a single activity.

Miller, Tax Court Memo, 2011-219

The taxpayer was a boat pilot. Although he was employed full-time, he worked less than 1,000 hours as a boat pilot. His time logs were kept contemporaneously and appeared to be credible. Further, witnesses testified on the taxpayer’s behalf on the taxpayer’s incredible work ethic and bolstered his credibility. The Tax Court agreed.

Fitch, Tax Court Memo 2012-358

One spouse was a licensed real estate agent while the other spouse worked on the rental properties. The Tax Court found that they satisfied test #2 of the material participation tests since their participation in the rental real estate constituted substantially all of the participation. Mr. Fitch testified extensively as to the activities he performed with respect to his rental properties including advertising, bookkeeping, accounting, dealing with contractors, decorating, resolving fence disputes, making repairs, paying taxes, and procuring insurance. Occasionally hiring a contractor to perform technical tasks does not disqualify the substantial day-to-day management of the rental properties from constituting “substantially all of the participation”.

Chambers, Tax Court Summary 2012-9

Tax Court allows a limited partner in a partnership to count that time towards material participation. Generally limited partners on paper cannot by definition materially participate, however, the actions of the taxpayer actually suggested a general partner and not a limited partner. The taxpayer eventually lost on the 750-hour rule for real estate professional status.

Aren’t we all better criminals after watching Law & Order or American Justice Files? Kidding aside, use these tax court cases as a rubric of what not to do. There are a buttload or boatload depending on your geographical vernacular of other tax court cases.