Franco v. Commissioner

Jose Franco (plaintiff), a licensed architect, operated a small architectural business. In 2013, Franco spent about 650 hours providing architectural services. That year, Franco also owned and managed two rental properties: a fourplex and a single-family home. Because his tenants neglected trash disposal, Franco made weekly visits to set out, clean, and return the bins to their storage locations. Franco also performed minor repairs, coordinated larger ones, communicated with tenants, collected rent, maintained insurance, purchased materials, paid bills, and kept records. When two tenants moved out of the fourplex in 2013, Franco spent additional time coordinating their departures, preparing the apartments for new tenants, advertising the units, and working with new tenants as they signed leases and moved in. Franco also spent time that year negotiating a tax installment plan and resolving redundant insurance coverage with his mortgage lender. Based on his rental-activity log, receipts, emails, and other business records, Franco estimated that he spent about 1,137 hours managing the rentals in 2013. On his taxes, Franco reported $101,950 in rental income and $169,832 in expenses, resulting in a $67,882 net loss. The commissioner of the Internal Revenue Service (defendant) assessed a deficiency, asserting that Franco could deduct only $25,000 of the loss under § 469(i). Franco petitioned the tax court for a redetermination, arguing that he qualified as a real estate professional under § 469(c)(7) and was therefore exempt from the passive loss limitation.