T.C. Sum m ary Opi ni on 20 16 -7 9

UNITED STAT ES TAX COURT

DW IGHT MCDONALD AND DONNA MCDONALD, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 32 66 -1 5S . Fi le d Dec em be r 1, 2 01 6. Dwig htMcDo na ldan d Do nn a Mc Don al d, p ro ses e. Erik a B. Co rm ie r an d R . Jef frey Knig ht , forres po nd en t.

SUMM ARY OPINION LAUBER, Ju dg e: Thi s ca se was h eardpu rs ua ntto th e p ro vi si on s o f se ct io n 74 63 of t he Int ern al Rev enue Co de ineffec t wh enth e p et it io n was fil ed . Pur su 1

All st atut ory

refe ren ces are t o t he Int ern al Rev enue Co de ineffe ctat a ll 1 rel ev an t t im es , andall Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d Pro cedur e. W e ro un d a ll m on et ary am ou nt s t o t he ne ares t d ol la r.- 2 -

an t t o s ect io n 7 46 3( b) , th e d eci si on to be en te redis no t re vi ewab le by any ot he r co urt, an d t hi s o pi ni on sh al l n otbe tre at edas p rece de ntforan y ot he r cas e. W ith re sp ectto pe ti ti on ers ’ Fed eral in co m e ta x fo r 20 09 -2 01 1, the Int ern al Rev enue Serv ic e (IR S o r res po nd en t) d et erm in edde fic ie nc ie s an d a n a ccu racyrel at edpe na lty

as f ol lo ws: Pena lt y Year D efi ci en cy sec . 66 62 (a) 20 09 $3 ,40 7 -0 - 20 10 4,9 71 -0 - 20 11 10 ,25 8 2,05 2 Pet it io ne rs ha ve co nc ed edth e d efi ci en ci es an d p en al ty in fu ll . The s ol e is su e rem ai ni ng forde ci si on is whet he r pe ti ti on er Do nn a Mc Don al d i s en ti tl ed un de r se ct io n 6 01 5( c) t o re li ef fro m joi ntan d s ev eral li ab il it y as t o p orti on s o f th e li ab il it ie s s ho wn ab ov e. Pet it io ne r Dwig htMcDo na ldop po se s h er re qu es t fo r rel ie f, bu t we ag ree wi thres po nd en t tha t s he is en ti tl edto it . Back gr ou nd The pa rti es fil eda st ip ul at io n o f fact s wi th acco m pa nyin g e xh ib it s tha t i s in co rp or at edby thi s re fere nc e. At the ti m e th ei r pe ti ti on was fi le d, p et it io ne rs were d iv or cedan d re si de d i n s ep arat e lo cat io ns inRh od e Is la nd . Dur in g 2 00 9- 20 11 pe ti ti on er Dwig htMcDo na ldwork edful l t im e as a se ni orIT sp eci al is t atIBM C or p. He al so en ga ge d i n aren ta l re al est at e act iv ity- 3 -

th ro ug h Gu lf C oa stSo ut h Ho ld in gs , LLC (Gul f Co as t). Th ro ug h Gu lf C oa sthe he ldforren ta l 1 0 re si de nt ia l re al est at e p ro pe rti es inFlo rid a an d Al ab am a (o ne pr op erty was s ol d i n 2 01 0) . Mr. McDo na ldact iv el y pa rti ci pa te d i n t hi s re nt al real es ta te act iv ity , bu t h e rel ie d fo r da y -to -d ay m an ag em en t o n p ro pe rty m an ag em en t co m pa ni es inFlo rid a an d Al ab am a, res pe ct iv el y . Dur in g 2 00 9- 20 11 pe ti ti on er Do nn a Mc Don al d o wne d a ndop erat eda tr av el ag en cy bu si ne ss , Trave l Pl us , LLC. In 2 00 9 s he att en de d n ur si ng sch oo l p artti m e. Sh e g radua te d i n 2 01 0 a ndwork edas apart- ti m e nur se in20 10 an d 2 01 1. Sh e h ad no kn owl ed ge of F ed eral tax law an d re li eden ti rel y on Mr. Mc Don al d a ndth ei r cert ifi edpubl ic acco un ta nt(C.P.A.) to pre pa re the ir r eturns . Pet it io ne rs joi nt ly owne d s om e o f th e ren ta l re al est at e p ro pe rti es , andMrs . McDo na ld ’s nam e ap pe aredon th e m ortg ag es forth os e p ro pe rti es . Howev er, s he di d n otdi rect ly part ic ip at e in Mr. Mc Don al d’s re al est at e b us in es s. Sh e kne w th at Mr. Mc Don al d d ev ot edsubs tant ia l t im e to th e rec or dk eep in g a ndfin an ci al asp ect s of th is bu si ne ss , andsh e o ccas io na ll y an swe redth e te le ph on e whe n t he m an ag em en t co m pa ni es cal le d s eek in g h is gu id an ce o n v ari ou s p oi nt s. Thro ug ho utth ei r m arri ag e Mr. M cDo na ldwas p rimaril y res po ns ib le forth e co up le ’s fin an ces . Mrs . McDo na ldtes ti fie d t ha t M r. McDo na ldm ai nt ai ne d a lo ck edroo m

inth ei r ho us e whe re h e st or edIBM- rel at eddo cu m en ts an d fi na nc ia l- 4 -

reco rd s re la ti ng to hi s re al est at e b us in es s. Mr s. M cDo na ldcred ib ly test ifi edth at sh e d idno t h av e acc es s t o t hi s s to rag e ro om or t o t he fin an ci al reco rd s s to redinit . Pet it io ne rs sep arat edin20 11 an d fi na li zedth ei r di vo rce i n M ay 20 12 . In th e m ari ta l s et tl em en t ag reem en t the pa rti es ackno wled ge d t ha t M r. McDo na ld

“ own s a b us in es s kno wn as Gul f Co as t,” a ndhe was award edso le own ers hi p o f th e Fl or id a an d Al ab am a ren ta l p ro pe rti es . Mrs . McDo na ldex pl ic it ly w ai ve d a ny in te res t s he m ig htbe th ou gh t t o h av e in Gul f Co as t. Pet it io ne rs fil edde li nque ntjoi ntin co m e ta x re tu rn s fo r 20 09 -2 01 1, wh ic h were p rep aredby O tra nd o, Po rcar o & Ass oc ia te s, a Rho de Isl an d a cco un ti ng firm . The fir stof the se returns was fi le d o n J un e 1 3, 2 01 1. Mr s. M cDo na ldwentto th e firm ’s off ic e to si gn th e co m

pl et edreturns . She cred ib ly test ifi edth atth ei r C.P.A. di d n otrev ie w th e returns with h er o r pr ov id e a d et ai le d e xp la na ti on of the va rio us li ne en tri es ap pe ari ng on th e returns . Howev er, the C.P.A. hadadvi se d p et it io ne rs so m e y ears earl ie r (ap pa ren tl y in20 09 ) th aton e o r bo th of t he m qu al ifi edas r eal es ta te pro fes si on al s b y

vi rtu e o f th e subs ta nt ia l t im e an d e ffo rt d ev ot edto th e ren ta l re al est at e act iv ity . In cl ud edinpe ti ti on ers ’ return fo r eac h year was a Sch edul e E, Sup pl em en ta l In co m e an d Lo ss , rep orti ng in co m e an d e xp en se s o f Mr. M cDo na ld ’s real es ta te bu si ne ss . On th es e Sch edul es E pet it io ne rs rep orte d, fr om th e Fl or id a an d- 5 -

Alab am a p ro pe rti es , ren ta l re al est at e lo ss es of $ 11 9,2 46 , $7 8,0 02 , and$5 8,5 50 fo r 20 09 , 20 10 , and20 11 , res pe ct iv el y . The IRS s el ect edpe ti ti on ers ’ 20 09 -2 01 1 re tu rn s fo r ex am in at io n andm ad e th e fo ll owi ng ad

jus tm en ts . • The IRS al lo wedpe ti ti on ers to de du ct$2 5,0 00 of S ch edul e E lo ss es for each y ear o n t he gro un d t ha t M r. McDo na ld“ act iv el y pa rti ci pa te d” inth e ren ta l real est at e b us in es s. See sec . 46 9( i). Th e IRS di sa ll owe d a ll lo ss de du ct io ns in ex ces s o f $2 5,0 00 as n on de du ct ib le pa ss iv e lo ss es , det erm in in g t ha t M r. McDo na ldwas n ota real est at e p ro fes si on al , i.e., th athe di d n ot“ m at eri al ly pa rti ci pa te ” in a “ real pro pe rty trad e o r bu si ne ss .” See s ec. 4 69 (c)( 7) . • The I RS d et erm in edth atpe ti ti on ers ha d re cei ve d t ax ab le refu nd s o f St at e in co m e ta x o f $3 ,30 9, $ 3,3 64 , and$3 ,33 7 fo r 20 09 , 20 10 , and20 11 , res pe ct iv el y . • The IRS d et erm in edth atfor20 10 Mrs . McDo na ldha d u nr ep orte d wag e in co m e o f $9 ,59 9, as rep orte d t o t he IRS o n t wo Fo rm s W-2, Wage an d Tax St at em en t. • As a c or ol la ry

of d is al lo win g t he Sch edul e E lo ss de du ct io ns for20 09 , th e IRS d et erm in edth atpe ti ti on ers were n oten ti tl edto de du ct io ns forne t o pe rat in g lo ss (NOL) carryforwar ds attrib ut ab le to th e Sch edul e E bu si ne ss of $ 5,1 46 an d $1 3,0 86 for20 10 an d 2 01 1, re sp ect iv el y .- 6 -

On No ve m

be r 4, 2 01 4, the IRS s en t p et it io ne rs a ti m el y no ti ce o f de fic ie nc y de te rm in in g d efi ci en ci es intax an d an a ccu racy-rela te d p en al ty in the am ou nt s sh own ab ov e. See s up ra p . 2. Pet it io ne rs ti m el y pe ti ti on edth is Co urt fo r red et erm in at io n, as si gn in g e rro r pr in ci pa ll y to th e IRS ’ de te rm in at io n t ha t the y di d no t qua li fy

as r eal est at e p ro fes si on al s u nd er s ect io n 4 69 (c)( 7) (B). Aft er the pe ti ti on was fi le d, M rs . McDo na ldsubm it te d F orm 88 57 , Reque stforInn oc en t Sp ou se Rel ie f, reque st in g re li ef fro m joi ntan d s ev eral li ab il it y , whi chMr. McDo na ldha s o pp os ed . Dis cu ss io n A. Rel ie f Fro m

Jo in t an d S ev eral Liab il it y Marrie d t ax pa y ers m ay

ele ctto fil e a joi ntFed eral in co m e ta x re tu rn . Sec. 60 13 (a). Aft er m ak in g t hi s el ect io n, ea chsp ou se is joi nt ly andsev eral ly liab le for th e en ti re t ax du e fo r th aty ear. Se c. 60 13 (d )(3 ); B ut le r v. C omm is si on er, 1 14 T.C. 27 6, 2 82 (20 00 ). In c ert ai n c irc um st an ces , a sp ou se who ha s fi le d ajoi ntreturn m ay see k re li ef fro m

joi ntan d s ev eral li ab il it y un de r pr oc edur es setforth in se ct io n 6 01 5. Un le ss ot he rwis e p ro vi de d i n s ect io n 6 01 5, the tax pa y er b ears th e bu rd enof p ro vi ng hi s o r he r en ti tl em en t t o s uc h re li ef. Ru le 14 2( a); Altv. Co m m is si on er, 1 19 T.C. 30 6, 3 11 (20 02 ), aff’d, 1 01 F. App ’x 34 (6t h C ir. 2 00 4) .- 7 -

The sco pe an d s tand ardof r ev ie w th atwe ap pl y insu chcas es are d e n ov o. Po rte r v. Co m m is si on er, 1 32 T.C. 20 3, 2 10 (20 09 ). Sect io n 6 01 5 a ffo rd s re li ef fro m joi ntan d s ev eral li ab il it y on th ree p os si bl e gr ou nd s. See sec . 60 15 (b ), (c), (f) . Mrs . McDo na ldsee ks rel ie f on ly und er se ct io n 6 01 5( c). Itpro vi de s fo r al lo cat io n o f th e ta x l iabi li ty betweenth e sp ou se s as if the y ha d fi le d s ep arat e returns rep orti ng th ei r res pe ct iv e it em s o f in co m e an d de du ct io n. “ Fo r pu rp os es of s ect io n 6 01 5( c), unl ik e fo r pu rp os es of s ect io n 60 15 (b ) an d (f

), equi tabl e co ns id erat io ns * * * ar e o f no im po rt.” Che sh ire v. Co m m is si on er, 1 15 T.C. 18 3, 1 94 (20 00 ), aff’d, 2 82 F.3d32 6 (5 th Cir . 20 02 ). If rel ie f is av ai labl e und er s ect io n 6 01 5( c), s ub se ct io n (d ) sp eci fie s the m etho d fo r al lo cat in g t he tax li ab il ity . A reque st in g s po us e m ay ele ctto have sec ti on 60 15 (c) app ly if th ree co nd it io ns are m et . The reque st in g s po us e m us t: (1) ha ve joi ne d i n t he fil in g o f a joi ntreturn fo r th e y ear a t i ss ue ; (2 ) be di vo rcedor l eg al ly sep arat edfro m th e no nr eque st in g s po us e atth e ti m e rel ie f is so ug ht ; an d (3 ) se ekrel ie f no lat er tha n two y ears aft er the da te on whi chth e IRS fir stco m m en ces co ll ect io n a ct iv it y for th e y ear a t i ss ue . See s ec. 6 01 5( c)(1 ), (3 ). The p art ie s ag ree t ha t M rs . McDo na ld m eet s the se th ree thr es ho ldrequi rem en ts .- 8 -

Notwiths ta nd in g s at is fact io n o f th es e th res ho ldtes ts , an e le ct io n t o h av e se ct io n 6 01 5( c) ap pl y

is in va li d “ [i]f th e Sec ret ary de m on st rat es th atanin di vi du al m ak in g an e le ct io n u nd er thi s s ub se ct io n h adactua l kno wled ge , at the ti m e su ch in di vi du al si gn edth e return, o f an y it em gi vi ng ris e to a de fic ie nc y (ora po rti on th ereo f) wh ic h i s n otall oc ab le to su chin di vi du al un de r subs ect io n (d ).” Sec . 60 15 (c)( 3) (C); see Ch arl to n v . Comm is si on er, 1 14 T.C. 33 3, 3 41 (20 00 ); M art inv. Co m m is si on er, T.C. Mem o. 2 00 0- 34 6. Th e reg ul at io ns ex pl ai n t hi s ru le as fo ll ows : If * * * th e Sec ret ary de m on st rat es th at* * * the reque st in g s po us e ha d a ctua l kno wled ge of a n e rro ne ou s i te m th atis all oc ab le to th e no nr eque st in g s po us e, th e el ect io n t o a ll oc at e th e d efi ci en cy at tri bu tabl e to th atit em

is in va li d, an d t he reque st in g s po us e rem ai ns li ab le forth e p orti on of the de fic ie nc y attrib ut ab le to th atit em . * * * Sec. 1 .60 15 -3 (c)( 2) (i) , Inc om e Tax Reg s. Th is “ actua l kno wled ge ” ex cep ti on do es no t ap pl y if the reque st in g s po us e “ es tabl is he s tha t * * * [sh e] sig ne d t he return un de r du res s.” Se c. 60 15 (c)( 3) (C) (l as t s en te nc e). Mrs . McDo na lddo es no t co nt en d t ha t s he si gn edth e 2 00 9- 20 11 joi ntreturns un de r du res s. Inde ci di ng whethe r Mrs . McDo na ldm ad e a v al idele ct io n t o h av e se ct io n 60 15 (c) app ly, we are t hu s re qu ire d t o d et erm in e whe th er, atth e ti m e sh e si gn ed th e returns , sh e h ad“ actua l kno wled ge * * * o f an y it em gi vi ng ris e to a de fic ien cy ” th atwas a ll oc ab le to Mr. Mc Don al d. Se c. 60 15 (c)( 3) (C). By requ iri ng th at- 9 -

th e Sec ret ary de m on st rat e actua l kno wled ge of a n e rro ne ou s i te m , th e st atut e p ut s th e b ur de n o f pr oo f on res po nd en t, an d t he reg ul at io ns co nf irm th is . See s ec. 1.6 01 5- 3( c)(2 )(i ), In co m e Tax Reg s. (“ The Serv ic e, havi ng bo th th e b ur de n o f pr oduc ti on an d t he bu rd enof p ers ua si on , m us t es tabl is h, b y

a pr ep on de ran ce o f th e ev id en ce, tha t the reque st in g s po us e h adactua l kno wled ge of t he erro ne ou s it em inord er t o i nv al id at e th e el ect io n.” ). The st atut e d oe s n otad dr es s b ur de n o f pr oo f inth e si tu at io n we f ace h ere, whe re the IRS s up po rts rel ie f fro m joi ntan d s ev eral li ab il it y an d t he no nr eque st in g s po us e o pp os es it . In s uc h c as es we “ in qu ire whet he r actua l kn owl ed ge ha s b eenest ab li sh edby a prep on de ran ce o f th e ev id en ce” p res en te d b y al l thr ee p art ie s. Mc Dan ie l v . Comm is si on er, T.C. Mem o. 2 00 9- 13 7, 9 7 T.C.M . (CCH) 17 86 , 17 89 ; s ee Po un ds v. Co m m is si on er, T.C. Mem o. 2 01 1- 20 2, 1 02 T.C.M. (CC H) 18 4, 1 87 .

“ Actu al kn owl ed ge ” m ean s “ anactua l an d c le ar awar en es s (a s o pp os edto reas onto kn ow) ” ab ou t the it em gi vi ng ris e to th e d efi ci en cy . Che sh ire , 11 5 T.C. at19 5. A ta xp ay er l ack s ac tu al kn owl ed ge if s he “ is un aware of t he cir cu m st an ces th atgi ve ris e to erro r on th e ta x re tu rn .” Kin g v . Comm is si on er, 1 16 T.C. 19 8, 20 4 (2 00 1) (qu ot in g B okum v. Co m m is si on er, 9 4 T.C. 1 26 , 14 5- 14 6 (1 99 0) , aff’d, 99 2 F .2d11 32 (11 th Cir . 19 93 )). Inth e co nt ex t o f a d is al lo wedde du ct io n, the- 10 -

rel ev an t que st io n i s wh ethe r th e reque st in g s po us e “ ha d a ctua l kno wled ge of t he factua l ci rcu m st an ces whi chm ad e th e it em un al lo wab le as ade du ct io n.” Id.; You ng v. Co m

m is si on er, T.C. Mem o. 2 01 2- 25 5, at*1 2; sec . 1.6 01 5- 3( c)(2 )(i )(B) , In co m e Tax Reg s. The pa rti es ’ di sp ut e fo cu se s o n t he di sa ll owe d S ch edul e E lo ss de du ct io ns , whi chth e p art ie s ag ree a re erro ne ou s i te m s al lo cab le to Mr. Mc Don al d. Mr s. McDo na ldis en ti tl edto rel ie f with re sp ectto th es e it em s u nl es s s he “ ha d a ctua l kn owl ed ge of t he factua l ci rcu m st an ces whi chm ad e th e * * * [Sch edul e E lo ss es ] un al lo wab le as ade du ct io n.” See Ki ng , 11 6 T.C. at20 4. Du rin g t he ex am in at io n th e IRS ag reedth atpe ti ti on ers were en ti tl edto de du ct$2 5,0 00 of s uc h l os se s an nu al ly becau se Mr. Mc Don al d “ act iv el y pa rti ci pa te d” inth e rea l es ta te bu si ne ss . See s ec. 4 69 (i) . The fac tu al cir cu m st an ce wh ic h m ad e th e b al an ce o f th os e lo ss es un al lo wab le as ade du ct io n was th atMr. Mc Don al d was no t a r eal est at e p ro fes si on al , i.e., th athe di d n ot“ m at eri al ly part ic ip at e” i n a“ real pro pe rty trad e o r bu si ne ss .” See s ec. 4 69 (c)( 7) . W e acc or di ng ly m

us t d eci de whet he r Mrs . McDo na ldha d “ actua l kno wle dg e” tha t M r. McDo na lddi d n otqu al ify as a re al est at e p ro fes si on al un de r th e go ve rn in g s ta tu to ry

st an da rd s. A ta xp ay er qua li fie s as a real est at e p ro fes si on al on ly if: (1 ) m or e th anha lf o f th e p ers on al servi ces he pe rfo rm s i n t rad es or- 11 -

bu si ne ss es du rin g t he tax ab le y ear a re p erfo rm edinreal pro pe rty bu si ne ss es in whi chhe m at eri al ly part ic ip at es an d (2 ) he pe rfo rm s m or e th an75 0 h ou rs of se rv ic es durin g the tax ab le y ear i n re al pro pe rty bu si ne ss es inwhi chhe m at eri al ly pa rti ci pa te s. Sec . 46 9( c)(7 )(B) . On the ba si s o f th e p rep on de ran ce o f th e ev id en ce, we fi ndth atMrs . McDo na ldlac ke d “ anactua l an d c le ar awar en es s,” C he sh ire , 11 5 T.C. at19 5, tha t he r fo rm er s po us e fai le d t o qua li fy as areal est at e p ro fes si on al . She ha d n o kno wle dg e o f Fed eral tax law an d was advi se d b y th ei r C.P.A. in 20 09 th atsh e o r Mr. McDo na ld(or

bo th of t he m) di d qua li fy as areal est at e p ro fes si on al . She ha d n o reas onto qu es ti onth e C.P.A.’s advi ce: Altho ug h s he di d n otkn ow the ex act sc op e o f Mr. M cDo na ld ’s ren ta l re al est at e act iv it y , sh e was aware t ha t h is pa rti ci pa ti on inth e act iv ity was s ig ni fic an t. Sh e kne w th athe de vo te d s ub st an ti al ti m e to th e rec or dk eep in g a ndfin an ci al asp ect s o f th e rea l es ta te bu si ne ss ; tha t h e ke ptvo lu m es of f

in an ci al reco rd s i n alo ck edroo m to whi chsh e h adno acce ss ; an d t ha t the m an ag em en t co m pa ni es rou ti ne ly call edhi m when de ci si on s ab ou t the ren ta l p ro pe rti es ne ed edto be m ad e. Und er the se cir cu m st an ces , we fin d t ha t M rs . McDo na ldlac ke d “ actua l kno wled ge of t he factua l ci rcu m st an ces whi chm ad e th e * * *[S ch edul e E lo ss es ] un al lo wab le as ade du ct io n.” Kin g, 1 16 T.C. at 2 04 ; cf . Ph em ei st er v . Comm is si on er, T.C. Mem o. 2 00 9- 20 1 (f in di ng th atreque st in g- 12 -

sp ou se ha d “ actua l kno wled ge ” whe re s he ranth e d ay -to -d ay op erat io ns an d was aware of d efec ti ve reco rdke ep in g a ndot he r fac ts lea di ng to th e co nc lu si onth atth e act iv ity was n oten ga ge d i n fo r pr of it ). 2 B. Sect io n 6 01 5( d) All oc at io n Onc e itha s b eende te rm in edth atth e reque st in g s po us e is en ti tl edto rel ie f un de r se ct io n 6 01 5( c), s ub se ct io n (d ) sp eci fie s the ap pr op ria te all oc at io n o f th e de fic ie nc y . It p ro vi de s tha t erro ne ou s i te m s “ sh al l b e al lo cat edto eachsp ou se as th ou gh each ha d fi le d asep arat e return fo r th e ta xabl e y ear.” Est at e o f Cap eh artv. Co m m is si on er, 1 25 T.C. 21 1, 2 15 (20 05 ). The re qu es ti ng sp ou se is th enli ab le

“ on ly for h is /h er p ro po rti on at e sh are o f th e d efi ci en cy .” Ib id . The reg ul at io ns pro vi de gu id an ce as to th e al lo cat io n o f sp eci fic it em s.

“ Erro ne ou s i te m s o f in co m e are all oc at edto th e sp ou se who was the so ur ce o f th e in co m e.” Sec . 1.6 01 5- 3( d) (2 )(i ii ), In co m e Tax Reg s. “ Inth e ab se nc e o f cl ear a nd Mr. Mc Don al d c on te nd s tha t M rs . McDo na ldha d a ctua l kno wled ge of h is 2 real est at e b us in es s b ecau se sh e co own edso m e o f th e ren ta l p ro pe rti es , ans wered cal ls fro m

th e m an ag em en t co m

pa ni es , andwas a dv is edby the ir C .P.A. th aton e o r bo th of t he m

qu al ifi edas areal est at e p ro fes si on al . W e ag ree t ha t M rs . McDo na ld ha d a ctua l kno wled ge th atMr. Mc Don al d was en ga ge d i n areal est at e b us in es s. The rel ev an t que st io n, h owe ve r, is whethe r sh e h adactua l kno wled ge th athe r ex hu sb an d, wh il e m at eri al ly part ic ip at in g i n areal est at e b us in es s, d idno t p art ic ip at e su ffi ci en tl y

to qu al ify as a re al est at e p ro fes si on al un de r th e g ov ern in g s ta tu to ry st an da rd s. As ex pl ai ne d i n t he tex t, the pre po nd eran ce o f th e ev id en ce co nv in ces us th atsh e d idno t h av e su chkn owl ed ge .- 13 -

co nv in ci ng ev id en ce s up po rti ng a di ffer en t al lo cat io n,” anerro ne ou s i nc om e it em rel at in g t o jo in tl y

own edass et s “ is ge ne ral ly allo cat ed50 % to each sp ou se .” Ib id .

“ Erro ne ou s d educ ti on s re la te d t o abu si ne ss or i nv es tm en t ar e al lo cat edto th e sp ou se who own edth e b us in es s o r in ve st m en t.” Id . subd iv . (iv ). Accu racyrel at edpe na lt ie s “ are a ll oc at edto th e sp ou se who se it em ge ne rat edth e p en al ty.” Id . subp ara. (4 )(i v) (B). Und er the se st an da rd s, we co nc lu de th atth e d efi ci en ci es an d p en al ty for 20 09 -2 01 1 s ho ul d b e al lo cat edas f ol lo ws. • Mrs . McDo na ldfai le d t o re po rt wa ge in co m e o f $9 ,59 9 fo r 20 10 . Becau se sh e was th e so ur ce o f th atin co m e, th e p orti onof t he de fic ie nc y att rib ut ab le to th is it em

is all oc ab le to he r. See i d. p ara. (d )(2 )(i ii ). • Pet it io ne rs fai le d t o re po rt S ta te in co m e ta x re fund s o f $3 ,30 9, $ 3,3 64 , and $3 ,33 7 fo r 20 09 , 20 10 , and20 11 , res pe ct iv el y . “ Inth e ab se nc e o f cl ear andco nvi nc in g e vi de nc e supp orti ng a di ffer en t al lo cat io n,” th e p orti on s o f th e d efi ci en ci es att rib ut ab le to th es e it em s wi ll be all oc at ed50 % to each sp ou se . See i bi d. • Mr. M cDo na ldown edan d o pe rat ed , th ro ug h Gu lf C oa st , th e rea l es ta te bu si ne ss th atge ne rat edth e err on eo us Sch edul e E lo ss de du ct io ns . The p orti on s o f th e d efi ci en ci es att rib ut ab le to th es e it em s wi ll th us be all oc at ed10 0% t o h im . See id . subd iv . (iv ). Becaus e th e NOL deduc ti on s cl ai m edfor20 10 an d 2 01 1 a ro se- 14 -

fro m th e Sch edul e E lo ss es , th e p orti on s o f th e d efi ci en ci es att rib ut ab le to th e NOL deduc ti on s wi ll li ke wis e b e al lo cat ed10 0% t o h im . • The a ccu racy-rela te d p en al ty of $2 ,05 2 fo r 20 11 wil l b e al lo cat edto Mrs . McDo na ldto th e ex te ntth e d efi ci en cy is att rib ut ab le to he r 50 % sh are o f th e unr epo rte d S tate in co m e ta x re fund . The b al an ce o f th e acc ur acy-rela te d p en al ty w il l be all oc at edto Mr. Mc Don al d. Se e id . subd iv . (iv )(B) . To re fle ctth e fo reg oi ng , An ap pr op ria te de ci si on wil l b e en te red .