Facts and Relevant Tax Provisions. For the 2007, 2008, and 2009 tax years,

Appellants sought refunds on their federal income taxes based on losses incurred in

connection with three vacation rental properties in Mexico, Colorado, and

Hawai’i.2 The only question here is whether Appellants’ operation of the vacation

properties was “rental activity” under 26 U.S.C. § 469.3

1 The parties also confirmed at oral argument on the summary judgment motions that there were no disputed material facts. 2 The Colorado and Mexico properties were included all three years, while the Hawai’i property was not included in 2007. Appellants grouped these three properties, which are the focus of this case, together with thirty-three other rental properties they owned as a single rental real estate activity. 3 Internal Revenue Code Section 469 generally disallows deductions based on passive activity losses. 26 U.S.C. § 469(a)(1). “Rental activity” is typically a passive activity under the Code. Id. at 469(c)(2). However, the parties agree that Greg Eger’s material participation in the real property trade or business permitted him to deduct losses from rental activity under Section 469(c)(7)(A)–(B).

2 “Rental activity” is defined in the Code as “any activity where payments are

principally for the use of tangible property.” 26 U.S.C. § 469(j)(8). The Treasury

regulations have added that an activity is generally “rental activity” when “tangible

property held in connection with the activity is used by customers or held for use

by customers.” 26 C.F.R. § 1.469-1T (e)(3)(i)(A). These regulations, however,

exclude from the definition of “rental activity” the use of tangible property when

the “average period of customer use for such property is seven days or less” during

that tax year. 26 C.F.R. § 1.469-1T(e)(3)(ii)(A). This exclusion is at the heart of

the parties’ dispute.

Discussion. The parties first disagree on who the relevant “customer” was

for the vacation properties. For each property, Appellants entered into an

agreement with a third-party management company to handle marketing and rental

of the property.4 When people rented the vacation property, Appellants were paid

a portion of the rental cost. Appellants contend that the management companies

were the customers for purposes of calculating the average period of use. The

Government asserts that the individuals who actually rented out the properties were

the customers. The question of who is properly considered the customer is critical

4 Two of these agreements were labeled “Rental Program Agreement,” and the third was referred to as a “Consulting Agreement.”

3 in this case because Appellants have not argued that the renters used the property

for an average of more than seven days.

Because neither the Code provisions nor Treasury regulations at issue define

“customer,” we interpret words “as taking their ordinary, contemporary, common

meaning.” Perrin v. United States, 444 U.S. 37, 42 (1979). When deciding who is

a customer between individuals paying to stay in a property and the company

responsible for marketing the property and managing payments, few people who

are not creative tax lawyers would argue it is the latter.

Moreover, we must read this regulation, and the term “customer,” “in their

context and with a view to their place in the overall statutory scheme.” Wilderness

Soc’y v. United States FWS, 353 F.3d 1051, 1060 (9th Cir. 2003) (quoting FDA v.

Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000)). As discussed

above, the Code definition of “rental activity” is “any activity where payments are

principally for the use of tangible property.” 26 U.S.C. § 469(j)(8). So the

payment is tied to the “use” of the property. The regulations then state that “rental

activity” is generally when “tangible property held in connection with the activity

is used by customers or held for use by customers.” 26 C.F.R. § 1.469-1T

(e)(3)(i)(A). Reading these provisions together, the individual paying to use the

4 property is the “customer.” In this case, it is the renters, not management

companies, paying to use the properties.

Appellants’ agreements with the management companies show that they

were intended to pay the management companies a percentage of rent received at

the vacation properties in exchange for services the management companies

provided. The management companies acted as Appellants’ representatives, not

customers of the properties.5

Finally, we reach the same conclusion when consulting dictionary

definitions of “customer,” which is appropriate to better understand the plain

language of the regulations. See Af-Cap Inc. v. Chevron Overseas (Congo) Ltd.,

475 F.3d 1080, 1088 (9th Cir. 2007). The American Heritage dictionary defines a

“customer” as “one that buys goods or services.” The American Heritage

Dictionary of the English Language 450 (4th ed. 2000). The most relevant

definition in Black’s Law Dictionary is similar, saying a customer is “[a] buyer or

purchaser of goods or services; esp., the frequent or occasional patron of a business

establishment.” Customer, Black’s Law Dictionary (11th ed. 2019). These

5 For example, the Colorado and Hawai’i agreements stated that the management company would “act as the sole and exclusive rental agent to offer” the property for rental. The Mexico agreement stated that the management company would “provide services to [Appellants] with regard to the use of [their property] by others when it is available for that purpose.”

5 dictionary definitions further support the conclusion that the renters of the vacation

properties were the customers, because they were the ones actually purchasing a

service, as opposed to the rental companies who were themselves being paid for

providing a service to Appellants.

Because Appellants did not attempt to prove that the average stay by renters

was greater than seven days, summary judgment in favor of the Government was

appropriate.6 Appellants have not demonstrated that the use of the properties fell

within the definition of “rental activity.”

AFFIRMED.

6 The district court’s reasoning for granting summary judgment in favor of the Government was different; however, this Court may affirm “on any ground supported by the record, even if not relied upon by the district court.” United States ex rel. Ali v. Daniel, Mann, Johnson & Mendenhall, 355 F.3d 1140, 1144 (9th Cir. 2004) (citing Simo v. Union of Needletrades, 322 F.3d 602, 610 (9th Cir. 2003)).

6