## Facts

- Arnold P. Mordkin and Cindy Mordkin owned two condominium units in the Crestwood Condominiums and rented them to others.
- Crestwood Condominium Association, Inc. was an owners’ association responsible for common operations and short-term rental support services (including concierge services for short-term renters).
- During 1989 and 1990, Arnold Mordkin served in unpaid association leadership roles, including president, chair of the board, and chair of key committees.
- Mordkin spent at least 75 and no more than 135 hours per year on association matters during 1989 and 1990.
- The taxpayers reported losses from the two units as non-passive, claiming Mordkin materially participated in the rental activity and could offset the losses against other income.
- The IRS issued deficiency notices for 1989 and 1990, recharacterizing the losses as passive under I.R.C. § 469 and asserting additions to tax under § 6651(a)(1) and accuracy-related penalties under § 6662(a).
- The taxpayers petitioned the United States Tax Court for redetermination.

## Issues

1. Whether Mordkin’s unpaid association leadership work (75–135 hours per year) constituted material participation in the rental activity for his two units, permitting non-passive loss treatment under I.R.C. § 469.
2. Whether the taxpayers were liable for additions to tax under § 6651(a)(1) and accuracy-related penalties under § 6662(a) for the years at issue.

## Decision

- The Tax Court held that Mordkin did not materially participate in the relevant rental activity under the applicable regulatory tests.
- The Court characterized the Crestwood unit losses as passive losses subject to the limitations of I.R.C. § 469.
- The Court sustained the Commissioner’s determinations of deficiencies and sustained additions to tax under § 6651(a)(1) and accuracy-related penalties under § 6662(a), subject to any computational adjustments.

## Legal Principles

- Under I.R.C. § 469 and its regulations, losses from passive activities generally may not offset non-passive income; rental activities are commonly passive unless an exception applies.
- Material participation requires involvement on a regular, continuous, and substantial basis and must satisfy one of the regulatory tests (including hours-based tests).
- Time spent in entity-level governance or oversight does not automatically count as participation in the taxpayer’s own rental activity; the taxpayer must establish the relevant activity grouping and that the work performed qualifies as participation in that activity.
- Additions to tax for failure to file under § 6651(a)(1) apply absent proof of reasonable cause and lack of willful neglect.
- Accuracy-related penalties under § 6662(a) may apply for negligence or substantial understatement unless the taxpayer establishes a qualifying defense such as reasonable cause and good faith.

## Conclusion

The Tax Court ruled that unpaid condominium association leadership work totaling 75–135 hours annually did not satisfy the material participation standards for the taxpayers’ rental activity, so the condominium losses were passive under § 469 and could not be used to offset non-passive income; the Court also sustained the IRS’s asserted additions to tax and accuracy-related penalties for 1989 and 1990.


Mordkin v. Comm’r, T.C. Memo. 1996-187, 71 T.C.M. (CCH) 2796 (1996)