Gregg v. United States: no proration for a short first year

By Max Medvedev · 6 Aug 2026

Gregg v. United States, 186 F. Supp. 2d 1123 (D. Or. 2000), settles the question every late-year buyer reaches for: the material participation hour thresholds do not shrink because the activity only ran for part of the year. Close in October, and the same "more than 100 hours" has to fit into the remaining weeks.

What happened

The activity at issue was not up and running for the whole tax year. That put one question in front of the federal district court in Oregon: when a business exists for only part of a year, do the hour thresholds in the material participation tests scale down with it?

It is the question a buyer eventually reaches — usually in February, usually while adding up a log that stops somewhere in the eighties.

What the court held

No proration. Section 469 and its regulations set fixed hour counts, and the regulation's phrasing carries the weight: under Reg. §1.469-5T(a), an individual is treated as materially participating if and only if one of the seven tests is satisfied for the year. "If and only if" means strict compliance. A threshold written as more than 100 hours is more than 100 hours in a two-month year exactly as it is in a twelve-month one.

The tell

There is no bad log entry in this case. The tell is on the settlement statement — a placed-in-service date that leaves too few weeks behind it, paired with the assumption that a partial year buys a partial threshold.

Work through what a late close actually leaves you:

• The 500-hour test is effectively gone. Test 1 needs more than 500 hours with no comparison to anyone else. In the last eight or ten weeks of a year, that is 50 to 60 hours a week on one property.
• Test 3 is the only live route, and it keeps both legs. More than 100 hours and more than any other single individual. The second leg gets harder in a short year, not easier: a cleaner turning the property every few days accumulates hours at the same rate you do, and a setup crew or a manager can pass you inside eight weeks.
• The hours you are most tempted to count are the ones that do not count. Pre-purchase scouting, deal analysis, and courses are investor and start-up time. Operational hours count once the property is placed in service — listed and available to guests. Setup and furnishing before the first listing sits in a gray area, and a record that leans on it is leaning on the weakest part of the pile.

That is the whole trap. The late buyer's calendar is full of acquisition work, and almost none of it lands inside the window that counts.

What this means for your records

The placed-in-service date is a planning variable, not a formality. It sets the day the countable clock starts, and Gregg is why the clock is still full size after it starts late.

Two consequences fall out of that.

First, both sides of the trade stay full size while your weeks shrink. The deduction does not prorate either — 100% bonus depreciation is permanent under OBBBA for property acquired after 19 January 2025, and the cost-seg carve-out lands in the year the property is placed in service. So a December close can produce a full-size first-year deduction sitting on top of an hour count that never had room to arrive. The §469 gate, not the depreciation math, is where that year fails.

Second, a running total is worth more than a good memory. A log kept as the work happens tells you in the third week of October that you are at 41 hours with ten weeks left, and that your cleaner is at 38. That is a number you can still act on — take back turnovers, split vendor work so no single person out-hours you, bring a spouse's hours in, since §469(h)(5) counts them as yours. A log reconstructed in April tells you the same thing four months after the last day you could have changed it.

The record that supports all of this is unglamorous: date, what was actually done, how long it took, who did it, and the artifact behind it — the guest thread, the invoice, the receipt, the timestamped photo. Entries dated when the work happened, with the other side's hours logged alongside your own, because the 100-hour test is a race you cannot score without both runners' times.

See where the calendar leaves you

A short year is not automatically a lost year — it is a year with a smaller window and the same bar. Run your placed-in-service date and hours through the estimator to see which of the seven tests is still reachable and which one already closed.

For the full method behind the record — what counts, what never counts, and what corroboration an examiner actually tests — start at how to prove your short-term rental hours.