T .C. Su m m ary Op i n io n 2 01 7 -6 6

UNITED STATES TAX COURT

KURT HICKAM AND M ICHELLE HICKAM , Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

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.

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an d M i ch el l e Hi ck am , p ro s e. San d eep Si n gh an d Th o m as R. M ack i n so n , fo r res po n d en t.

SUM M ARY OPINION LEYDEN, Sp eci al Tri al J u d g e: Th i s cas e was h eardp u rs u an tt o the p ro v is i o n s o f s ect i o n 7 4 6 3 o f t h e In t ern al Rev en u e Co d e i n effect wh en th e p et i t i o n was fi l ed
. 1 Pu rs u an t t o s ect i o n 7 4 6 3(b ), th e d eci si on t o b e en t eredi s n o t

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al (co n ti n u ed ...)- 2
-

rev i ewab l e b y

an y o ther co u rt , an d t h i s o p i n i o n s h al l n o tb e t reat ed as p reced en t fo r an y o th er cas e. In a n o t ice o f d efi ci en cy d at edDecem b er 1 6 , 2 0 15 , res p on d en td et erm i n ed d efi ci en ci es i n p et i ti o n ers ’ Fed eral i n co m e t ax o f $ 9 ,7 5 2 an d$ 1 6 ,4 7 5 fo r 2 0 1 1 an d 2 0 1 2 , res p ect i v el y . Res p o n d en tal so d et erm i n ed accu racy -rel at edp en al t i es u n d er
s ect i on 6 6 6 2 (a) o f $ 1 ,9 5 0 .4 0 an d$ 3,2 9 5 fo r 2 0 1 1 an d 2 0 1 2 , res p ect i vel y . Th e i s s u es fo r d eci si o n are wh et h er p et i t i o n ers 2 are: (1 ) en t i tl ed t o d edu ct
ren t al real es t at e l o s s es fo r 2 0 1 1 an d2 0 1 2 an d (2 ) l i ab l e fo r accu racy -rel at ed p en al t i es u n d er s ect i o n 6 6 6 2 (a) fo r 2 0 1 1 an d2 0 1 2
. Pet i t i o ners ’ ren t al real es t at e l o s s d edu ct i o ns fo r 2 0 1 1 an d2 0 1 2 are l i m i t ed b y th e p as s i v e act i v i ty l o s s ru l es i n s ect i o n 4 6 9 , an dth ey are n o tl i ab l e fo r an
accu racy -rel at edp en al ty

u n d er s ect i o n 6 6 62 (a) fo r 2 0 1 1 o r 2 0 1 2
.

1 (...co n t in u ed ) Rev enu e Co de i n effect fo r t h e rel ev an ty ears , an d al l Ru le referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.

2 M i ch el l e Hi ck am

d i dn otap p ear i n Co u rtattri al , b u t th e Co urt ’ s d eci s i o n wi l l b e b i n di n g up o n b o th s p ou s es .- 3
- Back gro u n d So m e o f t h e fact s are s t i p u l at edan dare s o fo u nd . Th e s t i p u l at io n o f fact s
an d th e at t ach edex h i b i t s are i n co rp o rat edh erei n b y th is referen ce. Pet i t i o n ers
res i dedi n Cal i fo rn ia wh en th ey t i m el y fi l edth ei r p et i t i o n. I. M o rt g ag e Bro k erag e Serv i ces an dLo an Ori g i n at i o n Serv i ces Du ri ng 2 0 1 1 an d2 0 1 2 Du ri n g 2 0 1 1 an d2 0 1 2 M r. Hi ck am b ro k eredreal es t at e m o rt g ag es an do t h er l o an s as an i nd ep en d en t co n tract o r fo r a m o rt g ag e b ro k erag e co m p an y wh ere h e
was a b ran ch m an ag er. Duri n g 2 0 1 2 M r. Hi ck am was al s o p ai d wag es b y an
em pl o y er fo r o ri g i n at i n g l oan s . 3 Inb o th p o s i ti o n s M r. Hi ck am ’ s b ro k eredo r
o ri g i nat edl o an s were s ecu redb y real es tat e. Fo r 2 0 1 1 an d 2 0 1 2 M r. Hi ck am was a l icen s edreal es t at e ag en t , b u tth e reco rdd o es n o ts h o w wh eth er h e wo rk edas a real es t at e ag en tdu ri ng th os e y ears . Du ri n g 2 0 1 1 an d2 0 1 2 M r. Hi ck am b ro k eredan do ri gi n at ed m o rt gag e l o an s fo r cl ien ts t o b uy

real es t at e; refi n an ce ex i s t i n g l o an s ; an d s ecu re rev ers e
m o rt g ag es , co m

m erci al l o an s , an d, o ccas i o nal l y , co ns tru ct i o n l o an s . M r. Hi ck am

3 M r. Hi ck am

d i dn o tex p l ai n wh y

h e was p ai d as an i n d ep en d en t co n tract or fo r h i s ro l e as a b ran ch m an ag er i n 2 0 1 1 an d 2 01 2 an das an em p l o y ee o f h i s em pl o y er i n 2 0 1 2
.- 4
-

d i dn o t o p erat e, d ev el o p , red ev el o p , co n s tru ct , reco n s tru ct , o r ren treal es t at e i n b ro k eri n g m o rt g ag es o r o ri g i n at i n g l o an s. 4 Wh en h e b ro k eredm o rt g ag es an do ri g i n at edl o an s , M r. Hi ck am fo l lo weda
s tru ctu redwo rkro u t i n e wh ich h e referred t o as th e “ Co re Co ach i n g Sy s t em ”. Un d er t h is s y s tem

h e en g ag edi n cert ai n act i v i ti es o n a g i v end ay . OnM o n d ay s h e fo l l o w edup wi th real t o rs as t o wh et h er t h ey h adh adan y

o pen h o u s es an dcl i en t referral s du ri n g t he p reced i ng week en d . OnTu es day s h e cal l edreal t o rs t o g etfi l e
s t atu s up d at es . OnW ed n es d ay s h e up d at edcl i en t s. On Th u rs d ay s h e en gag edi n

“ referral p art n er i nt eract i o n s”. On Fri d ay s h e fo l l owedup wi th real t o rs t o as k wh et h er t h ey n eed edan y m at eri al s fo r t hei r up co m i ng o p en h ou s es . M r. Hi ck am ’ s du t i es al s o i n cl u d edo v ers eei n g o n e t o th ree o th er i n d ep en den tco n tract o rs an d wo rk i n g wi th p ro ces s ors o r as s i s t an t s o n h i s cl i en t fi les . Occas i o n al l y , h e wo u l dm eetwi th an ap prai s er o r i n s pect the co n d i t i o n o f a p ro p erty th at was t o s ecu re a l oan . Th e co m p an y fo r wh ich M r. Hi ck am

wo rk edas a b ran ch m an ag er p ro v i d ed h i m wi th an o ffi ce. M r. Hi ck am ’ s wo rkh o u rs were fl ex i b l e, an d h e was n o t al way s req ui redt o p erfo rm h i s wo rkatth e o ffi ce.

4 Ona h an dfu l o f o ccas io n s o v er t h e y ears M r. Hi ck am ad v i s edfo rm er cl i en ts fo r wh o m

h e h ad b ro k ered a m o rt g ag e o n h o w t o l eas e p ro pert y an d rev i ewedth ei r l eas es .- 5
-

Du ri n g 2 0 1 1 an d2 0 1 2 M r. Hi ck am d i dn o treco rdth e am o u n t o f t i m e h e
s p en t b ro k eri n g m o rt g ag es an do ri g i n at i ng l o an s . II. Ren t al Real Es t at e Act iv i ty Du ri n g 2 01 1 an d 2 0 1 2 In ad d i t i o n t o b ro keri n g m o rt g ag es an do ri g i n at i n g l o an s, M r. Hi ck am
m an ag edan dm ai n t ai n edth e fo l l o wi n g th ree ren t al real es t at e p ro pert i es (t h ree p ro p ert i es ): A d dres s Ci ty St at e

1 28 5 No rv al W ay San J o s e Cal
. 4 62 5 To p az St
. Cap i t o la Cal
. 9 18 Del M ar Av e. San J o s e Cal
. Th e p ro p ert i es at1 28 5 No rv al W ay (No rv al p ro p ert y ) an d4 6 2 5 To p az St reet (To p az p ro pert y ) were s i n g l e-fam i l y h o m es , an dth e p ro pert y

at9 1 8 Del M ar Av enu e (Del M ar p ro p ert y ) was a n i ne-u n i tap art m en tb u i l d i n g . In 2 01 1 an d 2 0 1 2 M r. Hi ck am

l i v edap pro x i m at el y tw o m i l es fro m th e No rv al an dTo p az p ro p ert i es . Th e reco rdd o es n ots h o w wh o o wn edthe No rv al p ro p ert y o r t h e To p az p ro p ert y

duri n g th e y ears at i s s u e. M r. Hi ck am

equ al l y o wn edth e Del M ar p ro p ert y wi th h i s b ro ther an dh i s p aren t s . Ho wev er, h i s b ro ther an dh i s p aren t s d i dn o tp art i ci p at e i n t h e
m an ag em en to r m ai n t en an ce o f t h e Del M ar p ro pert y b ecau s e t hey

d i dn otres i d e- 6
-

i n the area. In s t ead , they

p ai dM r. Hi ck am

$ 6 ,0 0 0 p er y ear t o l o o k aft er t he p ro p erty . He rep o rt edth atam o u n tas “ o th er i n co m e” o n p et i t i o ners ’ jo i n tFed eral i n co m e t ax retu rn s fo r 2 0 1 1 an d2 0 1 2
. Du ri n g 2 0 1 1 M r. Hi ck am p l acedad s t o l eas e t h e t h ree p ro p ert i es an d
rev i ewedl eas e ap p l i cat i o n s . He m etwi th p ro sp ect i v e t en an t s , o b t ai n edthei r cred i t rep o rt s , cal l edth ei r referen ces an dp ri o r l an d l o rd s , an dp rep aredthei r l eas es . Aft er a t en an tv acat eda p ro p ert y o r a u n i t, M r. Hi ck am i n s p ect ed th e p ro p ert y o r
u n i tfo r d am ag e. M r. Hi ck am

al s o p eri o d ical l y i n s p ect ed th e co n d i ti o n s o f t h e t h ree p ro p ert i es duri ng th e t erm s o f t h e l eas es t o s ee wh et h er t h e p ro p ert ies h adan y d am ag e o r n eed edan y

rep ai rs , s p o k e wi th the t en an t s an dth e g ard en ers , an d
en s u red th atg arb ag e can s were ret u rn edt o th ei r ap p ro p ri at e l o cat io n s aft er t h e g arb ag e was co l l ect ed
. If a p ro p ert y

o r a u n its u st ai nedm i n o r d am ag e, M r. Hi ck am wo u l dp u rch as e th e m at eri al s an dp erfo rm th e requ i redrep ai rs . If th e p ro p ert y s us t ai n ed m ajo r d am ag e, M r. Hi ck am

wo u l ds eekb i d s , m eetwi th co n tract o rs , an d o v ers ee t h e rep ai rs .- 7
-

M o s t o f t h e u n i t s i n th e Del M ar p ro pert y were rem o del eddu ri ng 2 0 1 1 an d 2 0 1 2 . M r. Hi ck am

t o o kad v an t ag e o f a u n it ’ s turn o v er t o co m p l et e i t s rem o d el i ng . Fo u r u n i t s an dfi v e u n it s tu rn edo v er i n 2 01 1 an d2 01 2 , res p ect i v el y . M r. Hi ck am

d i dn o tk eep co n t em

p o ran eo u s reco rd s o f t h e h o u rs h e s p en to r th e s erv i ces h e p erfo rm ed wi th res p ectt o th e t h ree p ro pert i es . Wh en th e In t ern al Rev enu e Serv i ce (IRS) au d i t edp et i t i o n ers ’ 2 0 1 1 an d2 0 1 2 t ax return s , an di n
res p o n s e t o th e au d i t , M r. Hi ck am p rep areda l o g o f h i s h o u rs an dh i s s erv i ces wi t h
res p ectt o t h e t h ree p ro p ert i es . So m et i m e aft er 2 0 1 1 M r. Hi ck am p rep areda d o cu m en tt it l ed“No n Co n t em p o ran eo u s Recreat i o n [s i c] o f Ti m e” (2 0 1 1 l o g ) wi th h an dwri t t en en tri es . Th e 2 01 1 l og g ro up eds erv i ces wi th res p ectt o th e t hree p ro p ert i es i n t o fi v e cat eg o ri es : “ Del M ar, No rv al , To p az, P.O. Bo x, an d Bi l l s /Pap erwo rk/ Bi d s / Ap p s ”. M r. Hi ck am

wro t e th e n u m

b er o f h o u rs h e es t im at edh e h ads p en tfo r each cat eg o ry o n a p art i cu l ar d ay

o f t h e m o n th. Fo r i n s t an ce, fo r Satu rd ay , J an uary8 , 2 0 1 1 , M r. Hi ck am

wro t e t h ath e s p en to n e h o ur wi th res p ect t o “ Del M ar”, o n e h o u r wi th res p ectt o “No rv al W ay ”, an dtwo h o u rs wi th res p ectt o

“ Bi l l s / Pap erwo rk/Bi d s / Ap p s ”. Th e 2 0 1 1 l o g d o es n otex p l ai n t h e p art i cu l ar
s erv i ces p erfo rm edi n an y o f t he fi v e cat eg o ri es .- 8
-

Th e 2 0 1 1 l og al s o g ro up edM r. Hi ck am ’ s m o rt g ag e b ro k erag e s erv i ces an d h i s l o an o ri g i n at i o n s erv i ces i n t o s i x cat eg o ri es : “ Pi p el i ne Rev i ew, M ark et in g /Pro m o , Cl i en tIn t erface, Offi ce/ Bi l l s / Do cu m en t at i o n , Trai ni n g / Li cen s in g , an dReferral Part n ers / Ph as e”. As wi th th e en tri es wi th res p ect t o the t h ree p ro pert i es , M r. Hi ck am wro t e t h e n um

b er o f h o u rs h e es t im at edh e h ad
s p en t fo r each cat eg o ry

fo r a p art i cu l ar d ay

o f t he m o n th . Th es e en tri es al s o d o n o t
ex p lai n th e p art icu l ar s erv i ces p erfo rm edi n an y o f th e s ix cat eg o ri es . So m et i m e aft er 2 0 1 2 M r. Hi ck am p rep areda n o n co n tem p o ran eo us cal en d ar fo r each m o n th (co l l ect i v el y , 2 0 1 2 cal en d ars ). Th e 2 0 1 2 cal en d ars co nt ai ned
en tri es i n o n e-h ou r i n crem en ts fo l lo wedb y o n e wo rdo r a t w o -wo rdp h ras e. Th e
en tri es referred t o th e t h ree p ro p ert i es o r M r. Hi ck am ’ s m o rt g ag e b ro k erag e
s erv i ces an d h i s l oan o ri g in at i o n s erv i ces . Ho wev er, n o n e o f t h e p h ras es ex p l ai n s th e s erv i ces M r. Hi ck am

p erfo rm ed
. III. Pet i t i o ners ’ 2 0 1 1 an d2 0 1 2 Tax Retu rn s Pet i t i o ners t i m el y

fi l edth ei r 2 0 1 1 an d2 0 1 2 t ax retu rn s , rep o rt in g g ro s s i n co m e o f $ 17 0 ,6 4 4 an d$ 2 6 6 ,4 4 7 fo r 2 0 1 1 an d 2 01 2 , res pect i vel y . M r. Hi ck am i n cl u d edi n each y ear’ s rep o rt edg ro s s i n co m e t he $ 6 ,0 0 0 h i s b ro th er an dh i s p aren t s h adp ai dh i m

i n th aty ear fo r m an ag i n g the Del M ar p ro p ert y .- 9
-

Each i n cl u d ed a Sch edu l e E, Sup p l em en t al In co m e an dLo s s , rep o rt i n g g ro s s ren t al i nco m e an dex p en ses fo r t h e t h ree p ro p ert i es . Inth o s e Sch edu l es E p et i t i o n ers rep o rt edn etl o s ses fo r t h e No rv al an dTo p az p ro pert i es an dn etp ro fi t s fo r t h e Del M ar p ro p ert y . Pet i ti o n ers d i dn otrep o rtan y o th er i n co m e fro m

o th er
ren t al real es t at e s erv i ces o r o ther p ro p ert y m an ag em en t s erv ices fo r 2 0 1 1 o r 2 0 1 2
. In th ei r Sch edul es E p et i t i o n ers cl ai m edren tal real es tat e l o s s d edu ct io n s o f $ 4 7 ,7 3 0 an d$ 4 8 ,9 4 5 fo r 2 0 1 1 an d2 0 1 2, res p ect iv el y , fo r t h e t h ree p ro p ert i es . 5 Pet i t io n ers at t ach edt o th ei r 2 0 1 1 t ax retu rn an el ect io n t o treat the t h ree p ro p ert i es
as o n e act i vi ty . Di s cu ss i o n I. Bu rd en o f Pro o f Gen eral ly , th e Co m

m i s s i o n er’ s d et erm i n at i o n o f a d efi ci en cy i s p res u m ed
co rrect , an dth e t ax p ay er b ears th e b u rd en o f p ro v i n g i ti n co rrect . See Ru le

5 In th e Sch edu l es E p et i t i o ners rep ort edn o np as s i v e i n co m e, u nrel at edt o a ren t al real es t at e act i vi ty , fro m “ KM Hi ck am

Part n ers hi p ” t o tal i n g $ 1 26 ,2 7 0 an d $ 7 1 ,0 6 5 fo r 2 0 1 1 an d2 0 1 2 , res p ect i v el y . Pet i t i o n ers s ub tract edth e rep o rt edn et ren t al real es t at e l o s s es fo r th e t h ree p ro p ert i es fo r 2 0 1 1 an d 2 0 1 2 fro m th e rep o rt edp art n ers h i p i n co m e. Th e res u l t i n g n ett o t al i n co m e o f $ 7 8 ,5 40 an d $ 2 2 ,1 2 0 fo r 2 0 1 1 an d2 0 1 2 , res p ect i v el y , was rep o rt edo n l i n e 1 7 o f p et i t i o n ers ’ 2 0 1 1 an d2 0 1 2 t ax retu rn s . Pet i t i o n ers each fi l edSch edu l es SE, Sel f-Em p l o ym en t Tax , fo r 2 0 1 1 an d2 0 1 2 , cal cu l at i n g th e s el f-em p l o ym en t t ax o n th ei r res pect i v e p o rt i on s o f t h e p art n ers h i p i n co m e. M r. Hi ck am d idn o t t es t i fy

ab o u tth e wo rkh e o r M rs . Hi ck am

h adp erfo rm edfo r t h e p art n ers hi p .- 1 0 -

1 4 2 (a); W el ch v . Hel v eri n g , 2 90 U.S. 1 1 1 , 1 1 5 (1 9 33 ). M o rev er, d educt i o n s are a
m at t er o f l eg i s l at i ve g race, an dth e t ax p ay er b ears th e b urd en o f p ro v i n g
en t i t l em en tt o an y

d edu ct io n cl ai m ed . See INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 99 2 ); New Co l o n i al Ice Co
. v . Hel v eri n g, 2 9 2 U.S. 4 3 5 , 4 40 (1 9 3 4 ). Un d er s ect i o n 7 49 1 (a), t h e b u rd en o f p ro o f m ay s h i ftt o th e Co m

m i s si o n er i f t h e t ax p ay er p ro du ces cred i bl e ev i d en ce wi th res pect t o an y rel ev an t fact u al i s s u e an d
m eet s o th er req u i rem en t s . Pet it i o n ers h av e n ei th er arg u edth ats ect i o n 7 4 9 1 (a) ap p li es n o r es t ab l i s hedth ati t s req u i rem en t s are m et . Th e b u rd en o f p ro o f rem ai n s wi th p et i t i o n ers . II. Wh et h er M r. Hi ck am ’ s Ren tal Real Es t at e Act iv i ty W as a Pas s i v e Act i vi ty Sect io n s 1 6 2 (a) an d2 1 2 (1 ) g en eral ly p erm i ta t ax pay er t o d edu ct o rd i n ary
an d n eces s ary

ex p en ses p ai do r i n cu rredi n carry i n g o n a t rad e o r b u s i n es s o r fo r th e p ro du ct i o n o f i n co m e. In th e cas e o f an i nd i v i du al s ect i o n 4 6 9 g en eral l y d i s al lo ws an y

cu rren t d educt i o n fo r a p as s i v e act i v i ty l o s s . Sec. 4 6 9 (a)(1 )(A), (2 )(A). A p as s i v e act i v i ty l o s s i s equ al t o th e ag greg at e l o s s es fro m al l p as s i v e act i vi t i es fo r a t ax ab le y ear o v er t h e ag g reg at e i n co m e fro m al l p as s i v e act i v i t i es fo r t h aty ear. Sec. 4 6 9 (d )(1 ). 6

6 Th e effect o f th e p as s i v e act iv i ty l o s s d i sal l owan ce ru l e i s th atd edu ct i o n s (co n ti n u ed ...)- 1 1 -

Gen eral ly , a p as s i v e act i v i ty i s an y trad e o r b u s i n es s i n wh i ch th e t ax p ay er d o es no tm at eri al l y

p art i ci p at e. Sec. 4 6 9 (c)(1 ). Ren t al act i v i ty i s g en eral l y

treat ed
as p er s e p as s i ve reg ard les s o f wh et h er t h e t ax p ay er m at eri al l y p art i ci p at es u n l es s th e t ax p ay er q ual i fi es as a real es t at e p ro fes s i o n al u n d er t h e ex cep t i o n p ro v i d edb y
s ect i on 4 6 9 (c)(7 )(B). 7 See s ec. 4 6 9 (c)(2 ), (4 ). If a t ax p ay er q u al i fi es as a real
es t at e p ro fes s i o n al , the s ect i o n 4 6 9 (c)(2 ) d i s al lo w an ce d o es n o tap p l y an dth e t ax p ay er’ s ren t al real es t at e act i v i ty , i f co n duct edas a t rad e o r b u s i n es s o r fo r t h e p ro duct i o n o f i n co m e, i s n o ttreat edas a p as s i v e act i v i ty i f t he t ax p ay er m at eri al ly p art i ci p at es i n th e act i v i ty . Sec. 4 6 9 (c)(1 ), (7 )(A); Fo wl er v . Co m m i s s i o ner, T.C.

6 (...co n t in u ed ) rel at ed t o p as s i v e act iv i t i es are al l o wedag ai n sti n co m e fro m p as s i v e act i v i t i es an d th e ex ces s (i .e., th e am o u n t b y wh i ch th e d educt i o n s rel at edt o th e p as s i v e act i vi t i es ex ceed th e i n co m e fro m p as si v e act i v i t i es ) can n o tb e d edu ct edfro m i n co m e fro m

act iv i t i es o th er t h an p as s i v e act i v it i es . See Kru ko ws k i v . Co m m i s s i o n er, 2 7 9 F.3 d5 4 7 , 5 4 9 (7 th Ci r. 2 0 0 2 ), aff’ g 1 1 4 T.C. 3 6 6 (2 0 0 0 ).
7 Th ere i s an ad d i t io n al ex cep t io n u n d er s ec. 4 6 9 (i ) al lo wi n g th e t ax p ay er t o d eductren t al real es t at e l o s s es . Un d er s ec. 4 6 9 (i ), a t ax p ay er wh o act iv el y p art i ci p at es i n ren t al real es t at e act i v i ti es m ay d edu ctup t o $ 2 5,0 0 0 p er y ear fo r rel at ed p as s i v e act i v i ty

l o s s es . See s ec. 4 6 9 (i )(1 ) an d (2 ). Th e $ 2 5 ,0 0 0 d edu ct i o n am ou n tb eg i n s t o p h as e o utwh en th e t ax p ay er’ s ad ju s t edg ro s s i n co m e (AGI), d et erm i n edwi th ou treg ardt o an y p as s i v e act iv i ty

l o s s (m o d i fi edAGI), ex ceed s $ 1 0 0 ,0 0 0 an di s p h as edo u t en t i rel y wh en the t ax p ay er’ s AGI reach es $ 1 5 0 ,0 0 0
. Sec. 4 6 9(i )(3 ). Th e Co u rtd o es n o t n eedt o d eci d e wh et h er p et it i on ers qu al i fy fo r th i s ex cep t i o n b ecau s e p et i t i o ners ’ AGI b efo re t h e d i s al l o w an ce o f t h e p as s i v e act i vi ty l os s es was $ 1 7 0 ,6 4 4 an d$ 2 6 6 ,4 4 7 fo r 2 0 1 1 an d2 0 1 2 , res pect i v el y , wh ich ex ceed edth e $ 1 5 0 ,0 0 0 cei l i n g u n d er s ec. 4 6 9 (i )(3 ) fo r b o th o f t h e y ears ati s s u e.- 1 2 -

M em o. 2 0 0 2 -2 2 3 , 2 0 02 Tax Ct . M em o LEXIS 2 3 0, at* 10 -* 1 1 ; s ec. 1 .4 6 9 -9 (e), In co m e Tax Reg s . Wh et h er t he d is al lo wedren t al real es t at e l o s s d edu ct i o n s p et i t i o n ers cl ai m ed fo r 2 0 1 1 an d 2 0 1 2 are d edu ct i bl e wi th o u t l i m i t at i o n u n der t h e p as s i v e act i v i ty l o s s
ru l es d ep en d s o n wh et h er M r. Hi ck am 8 m etth e d efi n i t i o n o f a real es t at e p ro fes s i on al u nd er s ect i o n 4 6 9 (c)(7 )(B) fo r t h e y ears at i ss u e. Th e Co u rth o l ds thatn ei th er M r. Hi ck am ’ s m o rt g ag e b ro k erag e s erv i ces n o r h i s l o an o ri g i n at i o n s erv i ces are p erfo rm ed i n a real p ro p ert y trad e o r b u s i n es s wi th i n th e m ean i n g o f s ect i on 4 6 9(c)(7 )(C), t hatth e h o urs h e s p en t p erfo rm i n g h i s
m o rt g ag e b ro k erag e s erv i ces an dh i s l o an o ri g i n at i o n s erv i ces are n o t i ncl u d edfo r p u rp os es o f t he real es tat e p ro fes s i o n al t es t , an dth at h e d i dn o tm eetth e d efi n i ti o n
o f a real es t at e p ro fes s i o n al u n der s ect i o n 4 6 9 (c)(7 )(B) fo r 2 0 1 1 o r 2 0 1 2. Th erefo re, t h e Co u rtd o es n o t n eedt o ad dres s th e d efi n i ti o n o f “ m at eri al p art i ci p at i o n ” s etfo rt h i n s ect i o n 4 6 9 (h ).

8 In th e cas e o f a jo in t Fed eral i n co m e t ax retu rn , th e req u i rem en t s are m eti f ei th er s p o u s e s ep arat el y

s at i sfi es th e req u irem en ts . Sec. 4 6 9(c)(7 )(B)(i i ). Pet i t io n ers h av e co n ced edthatM rs . Hi ck am d idn o t en gag e i n an y

s erv i ces wi t h res p ectt o t h e t h ree p ro p ert i es du ri n g 2 01 1 o r 2 0 1 2
.- 1 3 -

A. M r. Hi ck am ’ s M o rt g ag e Bro k erag e Serv i ces an dLo an Ori g i n at i o n Serv i ces M r. Hi ck am

arg u es th atth e Co u rts h o u l d t reat h is m o rt gag e b ro kerag e
s erv i ces an d h i s l oan o ri g in at i o n s erv i ces as p erfo rm edi n real p ro p ert y trad es o r b u s i n es s es an dan y h o u rs h e s p en tp erfo rm i ng th os e s erv i ces s h o u l d b e i ncl u d ed fo r p u rp o s es o f s at i s fy i n g th e real es t at e p ro fes s io n al t es t . Th e Co u rtd i s ag rees . Sect io n 4 6 9 (c)(7 )(C) d efi n es a real p ro p ert y trad e o r b us i n es s fo r p u rp o s es
o f t h e real es tat e p ro fes s i o n al t es tas fo l l ows :

(C) Real p ro p ert y trad e o r b us i n es s .--Fo r p u rp o s es o f t h i s p arag rap h , th e t erm

“ real p ro pert y

trad e o r b u s i n es s ” m ean s an y real p ro p ert y d ev el o p m en t , red ev el o p m en t, co ns tru ct i o n , reco ns tru ct i o n , acq u i s it i o n , co n vers i o n, ren t al , o p erat i o n, m an ag em en t , l eas i n g , o r b ro k erag e t rad e o r b u s i n es s . [Em p h as is ad d ed
. ] M r. Hi ck am

fo cu s es o n th e wo rd“ o perat i o n ” an d arg u es th ath i s m o rt g ag e b ro k erag e s erv i ces an dh is l o ano ri g i n at i on s erv i ces are p erfo rm edi n trad es o r b u s i n es s es i n real p ro p ert y o p erat i on b ecau se t h e u n d erl y i n g as s et s i n b o th
s erv i ces are real p ro p ert y . M r. Hi ck am al s o arg u es th atres p o n d en terred i n ret ro act i v el y

ap p l y in g an IRS Ch i ef Co u n s el Adv i ce (CCA) i ss u ed i n 2 0 1 4 t o d i s al lo w p et i t i on ers ’ 2 0 1 1 an d 2 0 1 2 ren t al real es t at e l o ss d edu ct i on s . See CCA 2 0 1 5 0 4 0 10 (Dec. 1 7 , 2 0 1 4 ) (co n cl u d i n g t h ata m ort g ag e b ro k er wh o i s a b ro k er o f fi nan ci al i n s tru m en t s i s n o ti n a real p ro p ert y b ro k erag e t rad e o r b u s in es s ).- 1 4 -

Res p o n d en tco n t en d s th atth e s t atu t e i s cl ear t h atm o rt g ag e b ro k erag e an d l o an o ri g i n at i o n s erv i ces are n o treal p ro p ert y trad es o r b u s i nes s es . Res p o n d en t fu rt her co n t en d s th atth e CCA, rat h er t h an es t ab l i sh i n g a n ew i n t erp ret at io n o f t h e l aw, co rrect l y

rel i ed up o n th e s t atu t e. M r. Hi ck am ’ s m o rt gag e b ro k erag e s erv i ces an dh i s l o an o ri g i n at i o n s erv i ces rel at e t o b ro k eri ng an do ri g i n at i n g res i d en t ial an dco m m erci al l o an s an dn o tt o th e
o p erat i o n o r b ro kerag e o f real p ro p ert y . Th e Co u rth o ld s th atn ei th er M r. Hi ck am ’ s m ort g ag e b ro k erag e s erv i ces an d h i s l o an o ri gi n at i o n s erv i ces co n s t i tu t e real p ro p ert y

trad es o r b u s i n es s es fo r p u rp o s es o f s ect i on 4 6 9 (c)(7 )(C). Th e Co u rt ’ s h o l d i n g i s b as edo n i t s i n t erp ret at i o n o f s ect i o n 4 6 9 (c)(7 )(C) an dn o to n th e CCA. M r. Hi ck am ’ s arg um en tth ath i s m o rt g ag e b ro k erag e s erv i ces an d h i s l o an
o ri g i nat io n s erv i ces are p erfo rm edi n trad es o r b u s i n es ses i n “ real p ro p ert y
o p erat i o n ” b ecau s e t h e u n d erl y i n g as s et s are real p ro p ert y i s t o o at ten u at ed . Hi s arg u m en ti g n o res th e wo rd s “ real p ro p ert y ” t hatp reced e t he s p eci fi c act i v it i es l i st edi n th e s t atu te; th o s e wo rd s m o d i fy each o f t h o se act i v i t ies , i n cl u d i n g

“ o p erat i o n ”. Al th o u g h th e l o an s h e b ro k eredan do ri g i n at edwere s ecu redb y real p ro p erty , M r. Hi ck am ’ s m o rt gag e b ro k erag e s erv i ces an d h i s l o an o ri g i n at i o n
s erv i ces d i d n o t i n v o lv e o p erat i n g th e real p ro p ert i es th ats ecu redth os e l o an s .- 1 5 -

Fu rt her, wh i l e M r. Hi ck am ’ s m o rt g ag e b ro k erag e s erv i ces co ns t i tu t e a

“ b ro k erag e” t rad e o r b us i nes s, th ey d o es n o tco n s t itu t e a “ real p ro p ert y b ro k erag e” trad e o r b u si n es s . M r. Hi ck am d i dn o tb ro k er real es t at e du ri n g ei th er y ear at i s su e. Rat h er, h e b ro k ered l o an s b etween b u y ers an dfi n an ci al i n s t i tu t i o ns . Th e l eg i s lat i v e h i s t ory o f t h e s t atu t e s up po rt s th e co ns equ en ce o f t h i s d i s t i n ct i o n . Co n g res s co n s id eredi n cl u d i n g “ fi n an ce o p erat i o n s ” i n th e act i v i t i es l i st edi n s ect i o n 4 69 (c)(7 )(C) b u ts p eci fi cal l y d i dn o td o s o . See H.R. 2 26 4 , 1 0 3 d Co n g ., s ec. 1 3 1 43 (1 9 9 3); H.R. 1 4 1 4 , 1 0 2 dCo n g . (1 9 91 ); S. 1 2 57 , 1 0 2 dCo n g . (1 9 9 1); H.R. 3 7 3 2, 1 01 s tCo n g . (1 9 8 9 ); S. 2 3 8 4 , 1 0 1 s t Co n g. (1 98 9 ). M r. Hi ck am

rel i es o n Perez v . Co m

m i s si o n er, T.C. M em o . 2 0 1 0 -2 3 2 , 2 0 1 0 Tax Ct . M em o LEXIS 2 7 0 , t o arg u e t h ata l o an ag en tqual i fi es as a real es t at e p ro fes s i on al an dth erefo re a m o rt g ag e b ro ker q ual i fi es as a real es tat e p ro fes s i o n al
. M r. Hi ck am ’ s rel ian ce o n Perez i s m i s p l aced . InPerez, t he t ax p ay er was a s el fem pl o y edreal es t at e l o an ag en tan d b ro ker fo r t h e y ear at i s s u e an drep o rt edh er i n co m e an d d edu ct i o ns i n a Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i n es s . Id ., 2 0 1 0 Tax Ct . M em o LEXIS 2 7 0 , at* 2 . Sh e al s o o wn edth ree res i d en t ial real es tat e p ro p ert i es i n d ep en d en to f h er p ro fes s i o n as a real es t at e l o an ag en t an d b ro k er. Id
. Sh e d edu ct eda l o s s fro m th e t hree res i d en t i al ren t al p ro p ert i es i n a Sch edu l e E. Id
.- 1 6 -

Th e p art i es i n th atcas e ag reedth atdu ri n g the t ax y ear at i s s u e t h e t ax p ay er
was a real es t at e p ro fes s i o n al u n d er s ect i o n 4 6 9(c)(7 )(B) wi th res pect t o the t h ree
res i den t ial ren t al p ro p ert i es s h e o wn ed i n d ep en den t o f b ei n g a real es t at e l o an ag en t an d b ro ker. Id . As a res u l t , the Co u rtwas as k edt o d eci de wh et h er t h e t ax p ay er was s ub

j ect t o an dh adt o s at i s fy

the “ m at eri al p art i ci p at i o n” req ui rem en t
s etfo rt h i n s ect i o n 4 6 9 (h ). Id . at* 4 -* 5 . Th e Co u rtd i dn o tco n s i d er wh et h er t h e t ax p ay er’ s s erv i ces as a real es t at e l oan ag en t an db ro k er co n st i tu t ed a real p ro p erty trad e o r b u s i n es s fo r p u rp o s es o f s ect i o n 4 6 9 (c)(7 )(B) b ecau s e t h e p art ies h ad ag reedo n th at is s u e. See i d . at* 2 . Inth i s cas e t h e p art i es h av e n otag reed , an d th e Co urt m

us t co n s i d er t h e i s s u e. Perez d o es n o ts upp o rt p et i t io n ers ’ arg u m en t . M r. Hi ck am

n ei th er o p erat edreal p ro p ert y n o r b ro k eredreal p ro p ert y as p art
o f h i s m o rt g ag e b ro k erag e s erv i ces an dh i s l o ano ri g i n at i o n s erv i ces . Acco rd i n g l y , th e Co u rth o l d s th atn ei th er s erv i ce co n s t itu t es a real p ro p ert y trad e o r b u s in es s . B. M r. Hi ck am ’ s Qu al i fi cat i o n As a Real Es t at e Pro fes s i o n al To qu al i fy

as a real es t at e p ro fes s i o n al a t ax p ay er m u s t o wnatl eas to n e i n t eres ti n ren t al real es t at e an d m eetb o th t es t s u n d er s ect i o n 4 6 9(c)(7 )(B). 9 Th e

9 In ap p l y i n g t h e t wo t es t s th e t ax p ay er m ay el ectt o treat al l i n t eres t s i n ren t al real es t at e as o n e act i v i ty . Sec. 4 6 9 (c)(7 )(A) (fl u s h l an g u ag e). Pet i t i o n ers (co n ti n u ed ...)- 1 7 -

fi rs tt es treq u i res th at“ m ore t h an o n e-h al f o f t h e p ers o nal s erv i ces p erfo rm edi n trad es o r b us in es s es b y

th e t ax pay er du ri ng s u ch t ax ab l e y ear are p erfo rm edi n real p ro p erty trad es o r b u s in es s es i n wh i ch th e t ax p ay er m at eri al l y p art i ci p at es .” Sec. 4 6 9 (c)(7 )(B)(i ). Th e s eco n dt es treq u i res th at the t ax p ay er p erfo rm m o re th an 7 5 0 h o u rs o f s erv i ces du ri n g the t ax ab l e y ear i n real p ro p ert y trad es o r b u si n es s es i n wh i ch th e t ax p ay er m at eri al l y p art ici p at es . Sec. 4 6 9 (c)(7 )(B)(i i ). Fai l u re t o s at i s fy ei th er t es tfo r 2 01 1 o r 2 01 2 m ean s fo r t he co rres po n di n g y ear t h atM r. Hi ck am was
n o ta real es t at e p ro fes s i o n al an dth atthe l os s es fro m M r. Hi ck am ’ s ren t al real
es t at e act i v i ty

are n o td edu ct ib l e u n d er t he s ect i o n 4 6 9 (c)(7 )(A)(i ) ex cep t i o n t o th e p as s i v e act i v i ty

l os s l i m i t at io n s . Onth e b as is o f th e reco rdth e Co u rt d et erm i n es th at M r. Hi ck am ’ s ren t al real es t at e act i v i ty

wi th res p ectt o th e t h ree p ro p ert i es co n s t i tut eda real p ro p ert y trad e o r b u si n es s fo r 2 0 1 1 an d 2 0 12 . See s ec. 4 69 (c)(7 )(C). Ho wev er, p et i t i o n ers h av e fai l edt o pro ve h o w m u ch t i m e M r. Hi ck am

s p en to n h is ren t al real es t at e act i vi ty du ri ng 2 0 1 1 an d2 0 1 2
.

9 (...co n t in u ed ) el ect edwi th th ei r 2 0 1 1 t ax return t o treat th e t h ree p ro p ert ies as o n e act i v i ty fo r 2 0 1 1 . See s ec. 1 .4 6 9 -9 (g )(1 ), In co m e Tax Reg s . (“ Th i s el ect io n i s b in d i n g fo r t he t ax ab l e y ear i n wh i ch i ti s m ad e an dfo r al l fu tu re y ears ”.). Th e el ect io n was al s o effect i v e fo r 2 0 1 2 . See i d . Th erefo re, t h e Co u rtap p l i es the t es t s u n der s ec. 4 6 9 (c)(7 )(B) t o M r. Hi ck am ’ s co m b i n edren t al real es t at e act i vi t i es fo r t he t h ree p ro p ert i es .- 1 8 -

To s at i s fy th e fi rs tt es tu n d er s ect i o n 4 6 9 (c)(7 )(B)(i ), p et i t i o n ers h av e t o p ro v e h o w m

u ch t i m e M r. Hi ck am

s p en t o n h i s m o rt gag e b ro k erag e s erv i ces an d h i s l o an o ri g i n at i o n s erv i ces --h i s o th er p ers o n al s erv i ce t rad es o r b u s i n es s es --i n 2 0 1 1 an d2 0 1 2 . To s at i s fy th e s eco n dt es tp et i ti o n ers h av e t o p ro v e th atM r. Hi ck am p erfo rm edm o re t han 7 5 0 h ou rs o f s erv i ces i n 2 0 1 1 an d 2 0 1 2 i n real p ro p erty trad es o r b u s in es s es i n wh i ch h e m at eri al l y p art i ci p at ed . Th e Co u rth o l d s th atp et i t i o n ers h av e n o t m etth ei r b u rd en o f p ro vi n g th at M r. Hi ck am s at i s fi edth e two t es t s u nd er s ect i on 4 6 9 (c)(7 )(B) t o m eetth e d efi n i t i o n o f a real es t at e p ro fes s i on al fo r 2 0 11 o r 2 0 1 2
. A t ax p ay er m ay

u s e an y reas o n ab l e m ean s t o es t ab l i sh h i s h o u rs o f p art i ci p at i o n . Sec. 1
. 4 6 9 -5 T(f)(4 ), Tem p o raryIn co m e Tax Reg s ., 5 3 Fed . Reg
. 5 7 2 7 (Feb . 2 5 , 1 9 8 8 ). “ Co n t em p o ran eo u s d ai ly

t i m e rep o rt s , l o g s , o r s i m i l ar d o cu m en t s are n o treq ui redi f t h e ex t en t o f s u ch p art i ci p at i o n m ay b e es tab l i s h ed b y o th er reas o nab l e m ean s .” Id . Reas o n ab le m ean s “ m ay i n cl u d e b utare n o t l i m i ted t o th e i d en t i fi cat io n o f s erv i ces p erfo rm edo v er a p eri odo f t i m e an dth e ap p ro x i m at e n u m

b er o f h o u rs sp en tp erfo rm i ng s u ch s erv i ces du ri n g s u ch p eri o d , b as edo n ap p o i n tm en tb oo k s , cal en d ars , o r n arrat iv e s u m m ari es .” Id . Th e Co u rt h as o bs erv edth atth e reg u l at io n s “ co n cern i ng th e reco rd s t o b e m ai n t ai n edb y t ax p ay ers * * * b y

n o m ean s al l o w a p o s t ev en t‘ b al l p arkg u es s t i m at e’ ”. Carl s t ed t- 1 9 -

v . Co m m i s s i o n er, T.C. M em o . 1 9 9 7 -3 3 1 , 1 9 9 7 Tax Ct
. M em o LEXIS 3 9 0 , at* 2 4 (ci t i n g Sp eer v . Co m

m is s i o n er, T.C. M em o . 1 9 9 6 -3 2 3). Us i n g th e 2 0 11 l o g an d t h e 2 0 12 cal en d ars , M r. Hi ck am t es t i fi edth ath e h ad p erfo rm ed1 ,5 8 3 an d1 ,2 0 0 h o urs o f s erv i ces i n 2 0 11 an d2 0 1 2 , res p ect i v el y , wi t h
res p ectt o h i s m ort g ag e b ro kerag e s erv ices an d h i s l o an o ri g i n at i o n s erv i ces an d 8 3 6 an d7 5 9 h o u rs o f s erv i ces i n 2 0 1 1 an d 2 0 1 2 , res pect i v el y , wi th res pect t o th e th ree p ro p ert i es . M r. Hi ck am b eg an reco n s tru ct i n g the h o u rs o f s erv i ces h e p erfo rm edwi th res p ectt o th e m o rt g ag e b ro k erag e s erv i ces an dth e l oan
o ri g i nat io n s erv i ces an dth e t h ree p ro p ert i es aft er h i s 2 0 1 1 an d2 0 1 2 t ax retu rn s
were au di t ed
. He p rep aredth e 2 0 1 1 l o g an dth e 2 0 1 2 cal en d ars i n res p o n s e t o th e
au d it . M r. Hi ck am

t es ti fi edth ath e h adcreat edth e 2 0 1 1 l o g an dth e 2 0 1 2 cal en d ars u s in g l eas es , b an ks t at em en t s , ch eckb o o k s , b i l l s , an d recei p t s t o
reco n s tru ctth e am o u n to f t i m e h e s p en tl eas i ng , o p erat i n g, an dm ai n tai n i n g th e th ree p ro p ert i es , b u th e d i d n o tp res en tan y o f t h i s co rro b o rat in g ev i den ce attri al
. M r. Hi ck am

al s o t es t i fi edth ath i s acco u n t an th ads u gg es t edh e es t i m at e t h e
am ou n to f t i m e fo r each act iv i ty p erfo rm edt o p rep are t h e 2 0 1 1 l o g an dth e 2 0 1 2 cal en d ars . Acco rd i ng t o res p o nd en tth e 2 0 1 1 l o g an d th e 2 0 1 2 cal en d ars are n o t rel i ab l e an dth erefo re d o n ot es t ab l i s h th e am o u n t o f t i m e M r. Hi ck am d ed i cat edt o- 2 0 -

h i s m o rt g ag e b ro k erag e s erv i ces an dh i s l o ano ri g i n at i o n s erv i ces o r t h e t h ree p ro p ert i es . Th e Co u rtag rees wi th res p on d en tan dd o es n o tfi n dth e 2 01 1 l og o r th e 2 0 12 cal en d ars t o b e rel i ab le. Th ey were p rep aredwel l aft er th e y ears ati s s u e wi th v ag u e, n o n d es cri p t i v e en tri es an d b al l p ark es ti m at es o f th e t i m e d ed icat ed t o th e t h ree p ro p ert i es . Pet i t i o ners d i dn o tp ro v id e an y o th er cred ib l e ev i d en ce 1 0 t o s up p o rtM r. Hi ck am ’ s t es t i m o n y

th ath e h adp erfo rm ed1 , 5 83 h o u rs an d 1 ,2 00 h o u rs o f
s erv i ces i n 2 0 1 1 an d 2 0 1 2 , res p ect i v el y , wi th res p ectt o h is m ort g ag e b ro kerag e
s erv i ces an d h i s l oan o ri g in at i o n s erv i ces an d8 3 6 an d 7 8 9 h o urs o f s erv i ces i n 2 0 1 1 an d2 0 1 2 , res p ect i v el y , wi t h res p ectt o th e t h ree p ro p ert i es . A t ax p ay er’ s u n co rro b o rat edt es t i m o n y n eedn otb e rel i ed up o n . Bai l ey v . Co m m i s s i o n er, T.C. M em o . 2 0 0 1 -2 9 6 , 2 0 01 Tax Ct . M em o LEXIS 3 3 2 , at* 1 6
. Th e Co u rti s n o t req u i redt o accep tu n v eri fi edt es t i m o n y o f t ax pay ers i n th e ab s en ce o f ad equ at e d ocu m en t at i o n . See, e.g ., Lu m v . Co m m i ss i o n er, T.C. M em o . 2 0 1 2 -1 0 3 , 2 0 1 2 Tax Ct . M em o LEXIS 1 0 2 , at * 9; Es t at e o f St an g el an dv . Co m m i s s i o n er, T.C. M em o . 2 0 1 0 -1 8 5 , 2 0 10 Tax Ct . M em o LEXIS 2 2 1 , at* 3 5
.

1 0 Ev en th ou g h th e p art ies s t ip u l at edl eas es fo r t h e u n i t s i n the Del M ar p ro p erty , th e l eas es d i dn ot p ro v i d e an y i n d i cat io n o f t h e am o u n to f t i m e M r. Hi ck am d ev o t edt o t h e res p ect i v e u n it s l i s t edfo r th e p ro p ert y .- 2 1 -

Wh i l e t h e Co u rtb el i ev es th atM r. Hi ck am d ed i cat edt im e t o h i s m o rt g ag e b ro k erag e s erv i ces , h i s l o an o ri g i n at i o n s erv ices , an d t h e t h ree p ro p ert i es du ri n g th e y ears ati s s u e, h e d i dn o t p ers u ad e t h e Co u rtth atth e am o un to f t i m e h e l i s t ed
o n th e 2 01 1 l o g an dth e 2 01 2 cal en d ars accu rat el y rep res en t ed h i s h o urs o f
s erv i ces fo r 2 0 1 1 o r 2 0 1 2
. Pet i t i o ners h av e fai ledt o s u s t ai n th ei r b urd en o f p ro v i n g thatM r. Hi ck am
was a real es t at e p ro fes s i o n al fo r 2 0 1 1 o r 2 0 1 2 . Acco rd i n g l y , p et i t i o n ers m ay n ot d eductth e ren t al real es t at e l o ss es cl ai m edo n thei r 2 0 1 1 o r 2 0 12 t ax retu rn u n d er th e real es t at e p ro fes si o nal ex cep t i o n p ro v i d edu n d er s ect i o n 4 6 9 (c)(7 ). III. Sect io n 6 6 6 2 (a) Accu racy -Rel at edPen al t i es Res p o n d en td et erm i n edaccu racy -rel at edp en al t i es fo r 2 01 1 an d2 01 2 b ecau s e p et i ti o n ers ’ u n d erp aym en t s were du e t o s ub s t an t i al u nd ers t at em en t s o f i n co m e t ax o r n eg l i g en ce o r d i s reg ardo f ru les an dreg u l at i o n s . Sec. 6 6 6 2(a) an d (b )(1 ) an d (2 ). On l y o n e s ect i o n 6 6 6 2 accu racy -rel at ed p en al ty m ay b e i m p o s ed wi th res p ect t o an y g i v en p o rt i o n o f an u nd erp aym en t , ev en i f t h atp o rt i o n i s at tri b u t ab l e t o m o re t h an o n e t y p e o f co n du ct l i s t edi n s ect i on 6 6 6 2(b ). See New Ph o en i x Su n ri s e Co rp . v . Co m m i s s i o n er, 1 3 2 T.C. 1 6 1 , 1 8 7 (2 0 0 9 ), aff’ d , 4 0 8 F. Ap p ’ x 9 0 8 (6 th Ci r. 2 0 1 0 ); s ec. 1 .6 6 6 2 -2 (c), In co m e Tax Reg s . Nev ert h el es s , th e Co u rtco n s i d ers b o th g ro u n d s fo r i m p o s i ti o n o f t h e p en al ty .- 2 2 -

Un d er s ect i o n 7 49 1 (c) t h e Co m m i s s io n er b ears th e b u rd eno f p ro du ct i o n wi th reg ardt o th e l iab i l i ty o f i n d i v i dual s fo r p en al t i es . See Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 (2 0 0 1). To m eetth atb u rd en th e Co m m i s s i o n er
m u stp ro du ce s u ffi ci en t ev i d en ce t o s h o w th ati t i s ap p ro p ri at e t o i m p o s e t h e
accu racy -rel at edp en al ty . See i d . As ex p l ai n edb el ow t h e Co u rtco ncl u d es th at
res p o n d en t h as m eth i s b u rd en o f p ro du ct i o n wi th res p ectt o a s ub st an t i al
u n d ers t at em en to f i n co m e t ax un d er s ect i o n 6 6 6 2(b )(2 ) o r, i n th e al t ern at i v e, wi t h
res p ectt o n eg l i g en ce o r d is reg ardo f ru l es o r reg u l at i o n s u n d er s ect i o n 6 6 6 2 (a)
an d (b )(1 ), fo r 2 0 1 1 an d2 0 1 2
. On ce t h e Co m

m i s s io n er m eet s h i s b u rd en o f p ro duct i on , a t ax p ay er m u s t
co m e fo rward wi th p ers u as i v e ev i d en ce t h atth e Co m m i s s i o n er’ s d et erm i n at i o n i s i n co rrect . Ru l e 1 4 2 (a); s ee Hi gb ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 7. Th e t ax p ay er m ay

m eetth i s b u rd en b y

p ro v i n g th ath e o r s h e act edwi th reas o n ab l e
cau s e an d i n g oo dfai th wi th res p ectt o th e u n d erp aym en t . See s ec. 6 6 6 4(c)(1 ); Hi g bee v . Co m

m i ss i o n er, 1 1 6 T.C. at4 4 7 ; s ec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s. As ex pl ai n edb el ow, p et i t io n ers p ro v i d edp ers u as i v e ev id en ce t h atth ey act edwi t h
reas on ab l e cau s e an di n g oo dfai th wi th res pect t o the u n derp aym en to f t ax fo r 2 0 1 1 an d2 0 1 2
.- 2 3 -

A. Sub s t an t i al Un d ers t at em en t Th e Co u rth as s u s t ai n ed th e d i s al l owedd edu ct i o ns i n th e n ot i ce o f d efi ci en cy

fo r 2 0 1 1 an d2 0 1 2 . Th e res u lti s a s ubs t an t i al u n d ers t at em en to f i n co m e t ax fo r 2 0 1 1 an d2 0 1 2. An“ u n ders t at em en t” m ean s the ex ces s o f th e
am ou n to f t h e t ax req u i redt o b e s h o wno n th e t ax retu rn o v er t h e am o u n to f t ax th ati s s h o wno n th e t ax retu rn , redu cedb y an y reb at e. Sec. 6 6 6 2 (d )(2 )(A). Th ere i s a s ub s t an t i al u n d ers t at em en t o f i n co m e t ax fo r an y t ax ab l e y ear i f t h e am o u n to f th e u n ders t at em en tex ceed s the g reat er o f 1 0 % o f t h e t ax req ui redt o b e s h own o n th e t ax retu rn o r $ 5 , 0 0 0
. Sec. 6 6 6 2 (d )(1 )(A). Pet i t i o ners ’ 2 0 1 1 t ax return s h o weda t ax o f $ 1 8 ,3 5 8 . Res p o nd en t d et erm i n edth e am o u n to f t ax req u iredt o b e s h o wn o n p et i t i o n ers ’ 2 0 1 1 t ax retu rn
was $ 28 ,1 1 0 . Thu s , th e u n d ers t at em en to f t ax th atres p o nd en td et erm i nedfo r 2 0 1 1 was $ 9 ,7 5 2 . Th at am o u ntex ceed s $ 5 , 0 0 0, wh i ch i s g reat er t h an $ 2 ,8 1 1 .8 0 , 1 0 % o f t h e t ax req u i red t o b e s h o wno n p et i t io n ers ’ 2 0 1 1 t ax retu rn . Pet i t i o ners ’ 2 0 1 2 t ax return s h o weda t ax o f $ 3 9 ,2 4 4 . Res p o nd en t d et erm i n edth e am o u n to f t ax req u iredt o b e s h o wn o n p et i t i o n ers ’ t ax retu rn was $ 5 5 ,7 1 9 . Thu s, th e u n d ers t at em en to f t ax th atres p o nd en t d et erm i nedfo r 2 0 1 1
was $ 16 ,4 7 5 . Th at am o u nt ex ceed s $ 5 ,5 7 1
. 9 0 , 1 0 % o f th e t ax req u i redt o b e
s h o wno n p et i t i o n ers ’ 2 01 2 t ax retu rn , wh i ch i s g reat er t h an $ 5 , 0 0 0
.- 2 4 -

Th erefo re, p et it i o n ers h av e s ub s t an ti al l y u n d ers t at edth ei r i n co m e t ax fo r 2 0 1 1 an d2 0 1 2 an d are l iab l e fo r t h e accu racy -rel at ed p en al t i es u n d er s ect i o n 6 6 6 2 (a) an d (b )(2 ) fo r 2 0 1 1 an d2 0 1 2
. B. Neg l ig en ce o r Di s reg ard o f Ru l es o r Reg u l at i o n s Th e accu racy -rel at edp en al ty m ay al s o b e i m

p o sedu n der s ect io n 6 6 6 2 (a) b ecau s e o f n eg l i g en ce o r d i s reg ardo f ru l es o r reg u l at i o n s . Sec. 6 6 6 2 (b )(1 ). In th e al t ern at i v e p et i t i o ners are l i ab le fo r t h e accu racy -rel at edp en al ti es fo r 2 0 1 1 an d 2 0 1 2 b ecau s e t h ey

were n eg l i g en tan dd i s reg ard ed ru l es o r reg u l at i on s . Neg l i g en ce i n cl u d es an y

fai l u re t o m ak e a reas on ab l e at t em p t t o co m p l y wi th th e p ro v i s i on s o f t h e In t ern al Rev enu e Co de an d an y fai l u re t o k eep ad equ at e b o o k s an dreco rd s o r t o s ub s t an t i at e i t em s p ro p erl y . Sec. 6 6 6 2(c); s ee Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 8; s ec. 1
. 6 6 6 2 -3 (b )(1 ), In co m e Tax Reg s . Neg li g en ce h as al s o been d efi n edas th e fai l u re t o ex erci s e du e care o r th e fai l u re t o d o wh at a reas o n ab l e p ers on wo u l dd o u n d er t h e ci rcu m s tan ces . See Neel y v . Co m m i s s i o n er, 8 5 T.C. 9 34 , 9 4 7 (1 9 8 5 ). “ Di s reg ard ” i n cl u d es an y carel es s , reck l es s , o r i n t en t io n al d i s reg ardo f ru l es o r reg u l at i o n s. Sec. 6 6 6 2 (c); s ee Hi g b ee
v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 8
. Res p o n d en th as m eth i s b u rd en o f p ro du ct i on wi th res p ectt o p et it i on ers ’
n eg li g en ce an dd i s reg ardo f ru l es o r reg ul at i o n s b ecau s e M r. Hi ck am fai l edt o- 2 5 -

m ai n t ai n ad equ at e reco rd s t o s ub s tan t i at e t h e ren t al real es t at e l o s s i t em u n d erl y i n g th e d edu ct i o n fo r 2 0 1 1 o r 2 0 1 2. C. Reas on ab l e Cau s e fo r t h e Un d erp aym en to f Tax A p en al ty wi l l n otb e i m

p o s edu n der s ect i o n 6 6 6 2 (a), h o wev er, i f a t ax p ay er
es t ab l i s h es th ath e o r s h e act edwi th reas o n ab l e cau s e an d i n g o o dfai th. Sec. 6 6 6 4 (c)(1 ). Ci rcu m st an ces th ati n d i cat e reas on ab l e cau s e an dg o o dfai th i n cl u d e rel i an ce o n th e ad v i ce o f a t ax p ro fes s i o n al o r anh o n es tm i s u n d ers t an d i n g o f t h e l aw t h ati s reas o n ab l e i n th e l i g h to f al l the fact s an dci rcu m st an ces . Sec. 1 .6 6 6 4
- 4 (b ), In co m e Tax Reg s .; s ee Hi g b ee v . Co m m i s si o n er, 1 1 6 T.C. at4 49 . Rel ev an t fact s an dci rcu m s t an ces fo r t h e Co u rtt o co n s id er i n cl ud e t h e kn o wl ed g e an d
ex p eri en ce o f t h e t ax p ay er. Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Pet i t i o ners arg uedthatthey rel iedi n g o o dfai th o n th ei r acco u n t an t ’ s
reco m m en d at i o n an dth atth i s rel i an ce was reas o nab l e cau s e fo r t hei r
u n d erp aym en t o f t ax fo r 2 0 1 1 an d2 0 1 2. Th e qu es ti o n o f wh et h er M r. Hi ck am
was a real es t at e p ro fes s i o n al was p art ial l y res ol v ed o n t ech n i cal g ro u n d s --wh et h er h i s m o rt g ag e b ro k erag e s erv i ces an dl o an o ri g i n at i o n s erv i ces co n s t itu tedreal p ro p erty trad es o r b u s in es s es u n d er s ect i o n 4 6 9 (c)(7 )(C). Al th o ug h th e Co u rt fo u n d t h atn ei th er s erv i ce co ns t i tut eda real p ro pert y trad e o r b u s i n es s an d
n o twi th s t an d i n g h i s fai l u re t o m ai n t ai n ad equ at e reco rd s , th e Co u rtfi n d s t h atM r.- 2 6 -

Hi ck am act edreas o n ab l y

an di n g o o d fai th i n t ak i n g th at p o s i t i o n fo r t he y ears at i s su e. Pet i t i o n ers are t h erefo re n o tl i ab l e fo r a s ect i o n 6 6 6 2(a) accu racy -rel at ed p en al ty fo r 2 0 1 1 o r 2 0 1 2. Th e Co u rth as co n s i d eredal l o f t h e p art ies ’ arg u m en t s , an d , t o th e ex t en tn o t ad dres s edh erei n , th e Co u rtco ncl u d es th ey are m o o t , i rrel ev an t , o r wi th o u tm eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredfo r
res p o nd en t as t o the d efi ci en ci es an dfo r p et i t i o ners as t o th e s ect io n 6 6 6 2(a) p en al ti es .