Problem $5-33($LO$.5,6,7)$

You have just met with Scott Myers $(603$ Pittsfield Drive, Champaign, IL $61821),$ a successful full$-$time real estate developer and investor. During your meeting, you discussed his tax situation because you are starting to prepare his current Federal income tax return. During your meeting, Scott mentioned that he and his wife, Susan, went to great lengths to maximize their participation in an apartment complex that they own and manage. In particular, Scott included the following activities in the $540$ hours of participation for the current year:

Time spent thinking about the rentals.

Time spent by Susan on weekdays visiting the apartment complex to oversee operations of the buildings $($i$.$e$.,$ in a management role$).$

Time spent by both Scott and Susan on weekends visiting the apartment complex to assess operations. Scott and Susan always visited the complex together on weekends, and both counted their hours $($i$.$e$.,$ one hour at the complex was two hours of participation$).$

Time spent on weekends driving around the community looking for other potential rental properties to purchase. Again, both Scott's and Susan's hours were counted, even when they drove together.

After reviewing Scott's records, you note that the apartment complex generated a significant loss this year.

Complete the letter to Scott describing your position on the deductibility of the loss.

SWFT$,$ LLP

$5191$ Natorp Boulevard

Mason, OH $45040$December $16,2024$Scott Myers

$603$ Pittsfield Drive

Champaign, IL $61821$Dear Scott,Based on our discussion, I understand that you are attempting to qualify under the special rule

to be considered an active participantfor real estate professionals

in order to deduct against your

passivenonpassive

income any losses generated by this rental activity. Consequently, you should document a sufficient number of hours so that you will meet the

active participationreal estate professional

standard.Your activities to date

appear todo not appear to

be within the bounds of the tax law as it is written, which states the taxpayer performs more than

$500$ hours of services$750$ hours of services

in the real property trades or businesses as

an active participanta material participant

$.$ You need to be careful to avoid any appearance of or taking any actual fraudulent actions on your or your wife's part. Essentially, the issue is whether the participation hours generated are

consistent with prior yearsless than $500$ hoursof substance or merely of form

$.$ Another issue is whether one of the principal purposes of the tasks being performed is to avoid the

allowancedisallowance

of passive losses or credits.Should you need more information or need me to clarify anything, please call.Sincerely,Jake Smith, CPA