Tax Court Memoranda (Current), Ben Bartlett and Tammy R.
Bartlett v. Commissioner., U.S. Tax Court, CCH Dec. 59,602(M), T.C. Memo.
2013-182, T.C.M. , (Aug. 8, 2013)
Ben Bartlett
and Tammy R. Bartlett v. Commissioner.
U.S. Tax
Court, Dkt. No. 19031-11, TC Memo. 2013-182, August 08, 2013.
[*6] OPINION
I. Section 469 Passive Activity
Losses
Generally, a taxpayer bears the burden of proving the
Commissioner's determinations in a notice of deficiency are erroneous. Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant
to section
7491(a)(1) the taxpayer may shift the burden of proof to the
Commissioner if the taxpayer complies with the relevant substantiation
requirements in the Internal Revenue Code, maintains all required records,
and cooperates with the Commissioner with respect to witnesses, information,
documents, meetings, and interviews.Sec. 7491(a)(2)(A) and (B). The
taxpayer bears the burden of proving compliance with the conditions of section 7491(a)(2)(A) and
(B).See, e.g., Winslow v. Commissioner, 139 T.C. 270, 271
n.2 (2012); Hill v. Commissioner, T.C. Memo. 2010-200, aff'd
per curiam, 436 Fed. Appx. 410 (5th Cir. 2011).
Petitioners contend that they have met this burden because (1)
respondent did not allege that petitioners failed to cooperate with
respondent and (2) petitioners claim that they introduced credible evidence.
However, there were discrepancies and inconsistencies in their evidence.
Petitioners have failed to persuasively argue that the burden of proof shifts
to respondent. The burden of proof remains with petitioners.
[*7] Respondent contends that petitioners' losses related to
their bull breeding activity should be disallowed because petitioners did not
materially participate in the bull breeding activity.
Section
469(a) disallows the passive activity loss of an individual
taxpayer. The term “passive activity loss” means the amount, if any, by which
the aggregate losses from all passive activities for the taxable year exceed
the aggregate income from all passive activities for such year. Sec. 469(d)(1); see
also Dirico v. Commissioner, 139 T.C. 396, 402 (2012). A passive activity
is a trade or business in which a taxpayer does not materially participate. Sec. 469(c)(1).
A taxpayer materially participates in an activity when he or she is involved
on a regular, continuous, and substantial basis. Sec. 469(h)(1).
Participation generally means all work done in connection with an activity by
an individual who owns an interest in the activity. Sec. 1.469-5(f),
Income Tax Regs.
A taxpayer establishes material participation by satisfying any
one of seven tests provided in the regulations. Sec. 1.469-5T(a), Temporary
Income Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25, 1988); see also
Lum v. Commissioner, T.C. Memo. 2012-103. Petitioners assert that the
following three tests are relevant to this case:
*******
(3) The individual participates in the activity for more than
100 hours during the taxable year, and such individual's participation in the
activity for the taxable year is not less than the participation in the
activity of any other individual (including individuals who are not owners of
interests in the activity) for such year; [or]
*******
(7) Based on all of the facts and circumstances * * *, the
individual participates in the activity on a regular, continuous, and
substantial basis during such year.
Sec. 1.469-5T(a)(1), (3), (7), Temporary Income Tax Regs., supra. 1 To satisfy the
facts and circumstances test under section 1.469-5T(a)(7), Temporary Income
Tax Regs., supra, a taxpayer must participate in an activity for
more than 100 hours [*9] during the
taxable year. Sec. 1.469-5T(b)(2)(iii), Temporary Income Tax Regs., 53 Fed.
Reg. 5726 (Feb. 25, 1988).
A taxpayer can prove participation by any reasonable means. Sec.
1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25,
1988). Reasonable means “may include but are not limited to the
identification of services performed over a period of time and the
approximate number of hours spent performing such services during such
period, based on appointment books, calendars, or narrative summaries.” Id. While
the regulations permit some flexibility with respect to the evidence required
to prove material participation, we are not required to accept postevent “ballpark
guesstimates”, nor are we bound to accept the unverified, undocumented
testimony of taxpayers. See, e.g., Lum v. Commissioner,
T.C. Memo. 2012-103; Estate of Stangeland v. Commissioner, T.C.
Memo. 2010-185.
Petitioner husband testified that he spent a total of more than
1,000 hours on the bull breeding activity during the tax years at issue.
There is no indication in the record that petitioner husband engaged in any
recreational activities while he was on the ranch. Likewise, there is no
indication that petitioner wife traveled with petitioner husband to the ranch
or was otherwise involved in Rainbow Ranch. During the years at issue she
earned wages from other sources.
[*10] With respect to tax year 2006 petitioner husband testified
that he worked on the ranch repairing fences; cross-fencing the land;
building corrals, shelters, and solar wells; installing “bucking shoots” for
training young bulls to buck; and improving the range land by reseeding,
cutting sagebrush, planting wheat crops for feed, and planting a more
desirable bud-style grass. He also testified that he traveled to South Dakota
to pick up a particular bull and then drove that bull from South Dakota to
Rainbow Ranch.
With respect to tax year 2007 petitioner husband testified that
he helped his cows during calving season. Petitioner husband described
calving season as “intense”; he recalled being very involved in the calving
process. He further testified that he started training the young bulls that
year, sorting them, developing their bucking skills, and training them to
buck properly.
For each tax year at issue petitioner husband estimated that he
spent 7 to 10 hours per week researching the bull breeding business and
studying live auctions online. He also testified that he spent time managing
the bull breeding activity from Wyoming, deciding what items to purchase,
from which bloodlines to breed, and where to build the corrals, among other
things. He further testified that he made several emergency trips to Rainbow
Ranch.
[*11] Petitioners admit that they did not keep any records
regarding petitioner husband's work on Rainbow Ranch or his research.
Petitioners, however, provided two schedules that allegedly detail the
numbers of hours petitioner husband spent on the bull breeding activity for
each tax year. Petitioner husband testified that he created these schedules
in 2009 when petitioners' returns were audited. He used his credit card
statements to determine his work schedule during the tax years at issue.
Petitioner husband first determined which days he made purchases in or around
Burley, Idaho. Then he tried to recall what he was purchasing on those days
and what task he was doing on Rainbow Ranch. Finally, he assigned a number of
hours to each task. Petitioner husband testified that the schedules do not
reflect all of the work he did for Rainbow Ranch; rather, he included only up
to 500 hours of work each year.
At trial Mr. Tuckett on behalf of petitioners testified that he
had an arrangement with petitioner husband: Mr. Tuckett could graze his
livestock on Rainbow Ranch, and in exchange he would help petitioner husband
with the ranch. As part of this agreement, when Mr. Tuckett checked on his
livestock on Rainbow Ranch—which he did daily—he would also check on
petitioner husband's livestock. Mr. Tuckett further testified that even though
he helped petitioner [*12] husband
with tasks around the ranch, he was not paid to work for petitioner husband.
Mr. Tuckett recalled seeing petitioner husband at the ranch, but
petitioner husband usually had workers with him when he was there. Petitioner
husband estimated that the three ranch hands worked 40 hours per week while
they stayed on the ranch. Petitioner husband testified that he supervised the
ranch hands while he was in Wyoming.
Mr. Tuckett did not estimate how many hours he saw petitioner
husband on the ranch during the tax years at issue.
Petitioners' son also testified for petitioners. In particular,
petitioners' son recalled researching the bull breeding activity with his
father, determining which bloodlines to use and studying the auctions online.
Petitioners' son testified that he accompanied his father on the trip to
South Dakota in 2006. Petitioners' son did not estimate how many hours he saw
petitioner husband working on the bull breeding activity during the tax years
at issue.
Kerry Friedrich, a longtime employee at Growin' Green Co.,
testified for petitioners. Mr. Friedrich testified that petitioner husband
was the hardest worker at Growin' Green Co., keeping the most hours and doing
whatever was necessary to finish a job. Mr. Friedrich remembered that
petitioner husband was at Rainbow [*13] Ranch
“a couple times a month” during Growin' Green Co.'s busy season and “more
often” than that during Growin' Green Co.'s off-season. Mr. Friedrich,
however, could not provide any exact dates when petitioner husband was away,
nor did he provide a more definite estimate of how often petitioner husband
was at Rainbow Ranch.
Although petitioners provide a credible narrative summary of
petitioner husband's participation, they maintained no contemporaneous
records or documentation of his participation such as appointment books,
calendars, or logs. Contemporaneous daily time reports, logs, or similar
documents are not required if other reasonable means of establishing a
taxpayer's participation exist. Sec. 1.469-5T(f)(4), Temporary Income Tax
Regs., supra. Petitioners claim that their schedules of hours
worked reasonably establish petitioner husband's participation. We disagree.
The credit card statements provide no information regarding how
many hours petitioner husband spent on a given day on the bull breeding
activity. Therefore, the hours petitioner husband claims he worked are merely
“guesstimates”. Moreover, petitioners' schedules are riddled with
contradictions. On several occasions the credit card statements place
petitioner husband in Wyoming or Utah when the schedules of hours claim he
was working in Burley, [*14] Idaho.
Also, on at least one occasion petitioner husband claimed he spent 28 hours
on the bull breeding activity during a 24-hour period.
Our analysis of the time petitioner husband spent in tax years
2006 and 2007 working on matters relating to Rainbow Ranch is made difficult
by the lack of any contemporaneous records or other records and documentation
regarding what he did specifically day to day and how much time he spent on
matters relating to the bull breeding activity. In this case the lack of
records and documentation is not cured by estimates made years after the fact
in writing or by testimony. See, e.g., Iversen v.
Commissioner, T.C. Memo. 2012-19;Fowler v. Commissioner, T.C.
Memo. 2002-223; Goshorn v. Commissioner, T.C. Memo. 1993-578.
Petitioner husband, Mr. Tuckett, petitioners' son, and Kerry
Friedrich were credible witnesses. We do not doubt that petitioner husband
spent time on Rainbow Ranch activities while in Wyoming. We also acknowledge
that petitioner husband participated in and/or assisted with the bull
breeding operation, ranch maintenance, and improvements while in Idaho.
The weight of the evidence before us, however, does not
establish that during each of the tax years at issue (1) petitioner husband
spent 500 hours on the [*15] bull
breeding activity; 2 or (2) petitioner
husband worked more than Mr. Tuckett, who was at the ranch every day, or the
ranch hands, who worked on the ranch 40 hours per week for approximately four
months, regardless of whether petitioner husband worked more than 100 hours
on the bull breeding activity. See Iversen v. Commissioner, T.C.
Memo. 2012-19. Petitioners have failed to meet the criteria of the 500-hour
or 100-hour tests.
The weight of the evidence before us also fails to establish
that petitioner husband worked on the bull breeding activity in a regular,
continuous, and substantial manner. During the tax years at issue petitioner
husband ran Growin' Green Co., a highly successful, full-time business over
200 miles from Rainbow Ranch. He was actively involved with and in charge of
Growin' Green Co. The evidence shows that petitioner husband was at the ranch
approximately 58 days in tax year 2006 and approximately 35 days in tax year
2007. Petitioner husband's sporadic trips to Rainbow Ranch coupled with his
intense work ethic [*16] with
respect to Growin' Green Co. do not suggest that he worked on the bull
breeding activity in a regular or continuous manner.
Petitioners, however, claim that petitioner husband spent 7 to
10 hours per week researching for Rainbow Ranch while also managing the ranch
from Wyoming. If petitioner husband were researching, running, supervising,
managing, and involved with all significant activities of Rainbow Ranch, as
petitioners seem to claim, we would expect petitioners to have offered into
evidence extensive research notes, files, to-do lists, home and mobile phone
records, business plans, project descriptions, instructions to employees, and
the like, documenting and establishing petitioner husband's active
involvement in the regular, continuous, and substantial management and
day-to-day activities of the bull breeding activity. That documentary
evidence is absent.
Even if petitioners had provided documentary evidence regarding
petitioner husband's management activities, we would not take into account
those management activities under the facts and circumstances test. A
taxpayer's management activities are not taken into account under the facts
and circumstances test (1) if another person also receives compensation for
management services relating to the activity or (2) if another person spends
more time on management services relating to the activity than the taxpayer.
[*17] Sec. 1.469-5T(b)(2)(ii)(A) and (B), Temporary Income Tax
Regs., supra; cf. sec. 1.469-5T(f)(2)(ii)(A) and
(B), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988) (stating
that an individual's investor activities, including studying and reviewing
financial statements or reports on operations as well as monitoring the
finances or operations of the activity in a nonmangerial capacity, do not
qualify as participation in an activity unless the individual is directly
involved in the day-to-day management of the activity).
On petitioners' 2006 Federal income tax return petitioners
included $16,750 of management fees in their calculation of Schedule F
expenses. On petitioners' 2007 Federal income tax return petitioners included
$13,509 of management fees and “outside service” in their Schedule F
calculation of expenses. Petitioner husband testified that these fees were
paid to Mr. Tuckett. Although Mr. Tuckett claims that he was never paid by
petitioner husband and petitioner husband claims that the payments made to
Mr. Tuckett were merely reimbursements, petitioner husband wrote a letter to
the Internal Revenue Service during his audit stating that the bull breeding
activity incurred “management cost throughout the year”. The record therefore
contains substantial inconsistency on the question whether petitioner paid
Mr. Tuckett for management services.
[*18] Petitioner husband did not engage in the bull breeding
activity in a regular, continuous, and substantial manner. On this record we
conclude that petitioners have failed to meet the criteria of the facts and
circumstances test, regardless of whether petitioner husband worked more than
100 hours on Rainbow Ranch.
Petitioners did not materially participate in the bull breeding
activity as required under section 469 and the related
regulations. Accordingly, we sustain respondent's determination regarding
petitioners' bull breeding activity.
II. Section 6662(a) Accuracy-Related
Penalty
Respondent determined that petitioners are liable for
accuracy-related penalties pursuant to section 6662(a) for tax years 2006 and
2007. Section
6662(a) adds to the tax required to be shown on the
taxpayer's return 20% of any underpayment attributable to, among other things,
any substantial understatement of income tax within the meaning of section 6662(b)(2).
The phrase “substantial understatement of income tax” means an understatement
that exceeds the greater of $5,000 or 10% of the income tax required to be
shown on the tax return for the taxable year. Sec. 6662(d)(1)(A).
Under section
7491(c) the Commissioner bears the burden of production
regarding the taxpayer's liability for any penalty. See also Higbee
v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the Commissioner has
met [*19] this burden, the
taxpayer must provide persuasive evidence that the Commissioner's
determination is incorrect. See Rule 142(a); Higbee
v. Commissioner, 116 T.C. at 447.
Respondent determined that petitioners should have reported
income tax liabilities of $145,628 and $311,160 on their 2006 and 2007
Federal income tax returns, respectively. Respondent also determined that
petitioners understated their income tax by $39,510 for tax year 2006 and by
$51,076 for tax year 2007, both of which exceed 10% of the income tax
petitioners should have reported on their 2006 and 2007 Federal income tax
returns. Respondent has shown that petitioners substantially understated
their income tax liabilities for tax years 2006 and 2007.
Petitioners therefore are liable for the accuracy-related
penalties unless they can show they had reasonable cause for and acted in
good faith regarding part of each of the underpayments. See sec. 6664(c)(1); sec. 1.6664-4(a),
Income Tax Regs. For purposes ofsection 6664(c) a taxpayer may
establish reasonable cause and good faith by showing reliance on professional
advice. Sec.
1.6664-4(b)(1), Income Tax Regs. A taxpayer relies reasonably on
professional advice if he or she proves the following by a preponderance of
the evidence: (1) the adviser was a competent professional who had sufficient
expertise to justify reliance, (2) the [*20] taxpayer
provided necessary and accurate information to the adviser, and (3) the taxpayer
actually relied in good faith on the adviser's judgment.See Neonatology
Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd,
299 F.3d 221 (3d Cir. 2002); see also Rule 142(a);Welch
v. Helvering, 290 U.S. at 115.
Petitioners failed to provide any evidence about the information
they provided to their tax return preparers, both of whom were certified
public accountants, regarding Rainbow Ranch. Moreover, neither tax return
preparer testified at trial. Petitioners have not shown that they had
reasonable cause or acted in good faith.
Accordingly, petitioners are liable for the accuracy-related
penalties under section
6662(a). Any contentions we have not addressed are irrelevant,
moot, or meritless.
To reflect the foregoing,
Decision will be entered for respondent.
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