Penley v. Commissioner: when the hours stop being believable

By Max Medvedev · 6 Aug 2026

Penley v. Commissioner, T.C. Memo 2017-65, is the implausibility case. The taxpayer claimed roughly 2,520 hours of participation, supported by a log with no start or stop times. The court did not trim the number down to something it believed. It found the total implausible and discarded the log. Size alone can break a record.

What happened

The claim was about 2,520 hours. The log behind it recorded no start times and no stop times — durations without endpoints.

Those two facts, together, are the case.

What the court held

The total was not credible, and the log was discarded rather than reduced. The material participation position failed with it.

That is worth sitting with, because it is not how most owners imagine an examination going. The intuition is that a log gets audited line by line, some entries survive, some are struck, and you land wherever the arithmetic leaves you. Penley is the other outcome: the total was tested first, it failed, and nothing underneath it got a hearing.

The tell

The size of the number was the problem. For scale, a full-time job at 40 hours a week for 50 weeks is 2,000 hours. The claim here was larger than that — on a rental. A number that big has to survive an arithmetic question before it survives any factual one, and the arithmetic question is the first thing an examiner is trained to ask. The IRS Passive Activity Loss audit guide tells examiners to establish the taxpayer's time on all activities during the initial interview, deliberately capturing the day job, the commute, and everything else, so the guide's own test can be applied: are the claimed hours "reasonable in light of other obligations"? Distance draws the same skepticism — a remote, out-of-state property paired with a busy schedule is a shape examiners are told to look at twice.

Missing start and stop times removed every defense. This is the quieter half of the case and the more useful one. With start and stop times, a challenged entry is a small argument: here is the Tuesday afternoon, here is the message thread it came from, here is why it took 90 minutes. Without them, no individual entry can be examined at all, so the record has no small arguments available — only one large one, standing or falling as a block. The block fell.

The over-claim bought nothing. Test 1 needs more than 500 hours. Test 3, the workhorse for a single property, needs more than 100 hours and more than any other single individual. A 2,520-hour claim is five times the higher threshold and twenty-five times the lower one. It purchased no additional margin against either test, and it purchased the credibility question that decided the case. Over-claiming is a trade where one side is empty.

What this means for your records

The rule that falls out of Penley is that a log should record work, not chase a target. That sounds obvious until you notice that a log built without start and stop times has no mechanism for recording anything else — a duration with no endpoints is a judgment, and judgments drift toward the number you need.

Three things follow.

Start and stop times, captured when the work happens. An entry that begins at 4:10pm and ends at 5:35pm is 1.4 hours because that is what it was, not because 1.5 looked reasonable in April. Uneven durations are the natural output of measurement, and they are also what keeps identical round numbers — a separate tell in their own right — from accumulating.

Your other obligations belong in the file. The day job's hours are part of what makes the rental hours credible, because feasibility is the examiner's opening move, not a closing argument. A record that already answers "when did you do this, given everything else" has removed the question rather than waiting for it.

And the total you want is the smallest one that wins. More than 100 hours, and more than the single highest other individual — which means logging the cleaner's and the manager's hours as carefully as your own. Eight hundred hours you can support are worth more than twelve hundred you cannot, because the second pile invites the court to discard both.

See which test your hours actually reach

The useful question is not how large the total is — it is which threshold it clears and who it has to beat. Run your hours and your vendors' hours through the estimator to see where each of the seven tests lands.

The method behind a record that survives the feasibility question is in how to prove your short-term rental hours.