While it is not impossible to qualify as a real estate professional under IRC §469(c)(7) if the taxpayer has a non-real estate full time job, it certainly is going to be difficult. The limited number of hours in the year created a credibility problem for the taxpayer in Penley v. Commissioner, TC Memo 2017‑65, causing the Tax Court to find he had proven he qualified as a real estate professional.

In this case, the taxpayer had a full-time job that was described by the Court:

During 2012 Mr. Penley was a full-time employee of HSS, Inc. (HSS). From January through September 2012 Mr. Penley worked as an entry-level field sterilization technician, and from October through December 2012 he worked as a sales account representative. Although Mr. Penley performed many of his duties from petitioners’ home, he would travel to client sites as needed. These trips could take under half an hour in the case of a local client, or they could on occasion require him to travel several hours throughout Colorado. In all, Mr. Penley spent at least 2,194 hours, including occasional overtime, during 2012 performing his duties for HSS.

To qualify as a real estate professional under IRC §469(c)(7)(B) the taxpayer must meet the following two criteria:

More than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and
The taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.

In Mr. Penley’s case, this meant that he had to show he spent at least 2,195 hours performing services in a real property trade or business to overcome the hours he spent working for his employer.

Before getting into the details of what records he could produce, it makes sense to first just consider how much work would be involved to meet this criterion. The minimum numbers hours Mr. Penley had to be working at his non-real estate job and on his real estate related activities had to be at least 4,389 hours (2195 + 2194).

Since 2012 was a leap year that meant there were 366 days on which Mr. Penley could perform that work. Assuming he worked every day of those 366 days, he would have need to average 11.99 hours per day—or, effectively, ½ of the time available in the entire year.

Mr. Penley claimed that, in fact, he spent 2,520 hours on his real estate activities, pushing his average now to nearly 13 hours per day.

The Tax Court had trouble buying the theory that Mr. Penley had achieved this super-work-a-holic status, finding:

Petitioners’ primary substantiation at trial for the hours Mr. Penley worked during 2012 was a monthly calendar. The calendar indicates the property where Mr. Penley worked on a particular day and contains a brief description of the work performed, an estimate of the number of hours worked, and the number of miles driven to and from the property.

We find that this calendar greatly exaggerates the time Mr. Penley spent on his real estate activities. Generally Mr. Penley claims, for 2012, to have worked on his real estate activities 10-14 hours on each Saturday and Sunday during 2012 and an additional 4-6 hours most weekdays, in addition to another full-time job.

… Virtually all of the entries are rounded to the nearest hour or half-hour, do not specify a start or end time for the work, include the time spent driving to and from the property, and do not separate out any time for meals or other breaks. See Merino v. Commissioner, T.C. Memo. 2013-167, at *8-*12; Rapp v. Commissioner, 78 T.C.M. (CCH) at 177-178 (discounting testimony that lacked specifics about time work was performed); Pohoski v. Commissioner, T.C. Memo. 1998-17, 75 T.C.M. (CCH) 1574, 1579 (1998) (noting that the large number of hours claimed seemed implausible, especially given that the calendar did not contain breaks for meals or leisure time with family). Corroborating evidence, such as credit card statements, phone bills, and emails relating to the purchase of Evergreen Park, demonstrates meaningful real estate activity by petitioners during 2012. However, petitioners have not provided the Court with a sufficient explanation to reconcile this documentary evidence of their activities such as a brief email, a phone call, or a hardware store purchase with the large blocks of time (often 4 hours to 14 hours) shown on the calendar. See Hill v. Commissioner, T.C. Memo. 2010-200, 100 T.C.M. (CCH) 220, 223 (2010) (finding that the excessive hours claimed by the taxpayer, relative to the tasks performed, diminished the credibility of the taxpayer’s estimates), aff’d, 436 F. App’x 410 (5th Cir. 2011). We find that petitioners’ calendar does not fall within the regulation’s “any reasonable means”. See sec. 1.469-5T(f)(4), Temporary Income Tax Regs., supra.

Thus, the Court found that Mr. Penley failed to qualify as a real estate professional.