T.C. M em o . 2 0 2 0 -7 0

UNITED STATES TAX COURT
DANIEL E. LARKIN AND CHRISTINE L. LARKIN, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 6 3 4 5-1 4. Fi l edM ay 2 8 , 2 0 2 0
.

In 2 0 0 8 , 2 0 0 9 , an d 2 0 1 0 Ps , an at t o rn ey an da h o m em ak er wh o were U.S. n o n res i d en tci t i zen s , o wn ed i n t eres t s i n v ari o u s en t i ti es an d real p ro p ert i es i n th e Un i t edSt at es an dEu ro p e. Ps ’ jo in tFed eral i n co m e t ax retu rn s fo r 2 0 0 8 , 2 0 0 9, an d2 01 0 cl ai m edSch edu l e A d edu ct i o n s, Sch edu le E l o s s es , s el f-em p l o y edh eal t h i n s u ran ce d edu ct i o n s, an d fo rei gn t ax cred i t s . By n o ti ce o f d efi ci en cy

i s s u edi n 2 0 1 3 , R d is al l o wed s om e o f Ps ’ d edu ct i o ns an dSch edu l e E l o s s es , an d t h e fo rei g n t ax cred i t s . R al s o d et erm i n ed t h at Ps are l i ab l e fo r accu racy -rel at edp en al t i es an d ad d i ti o n s t o t ax . Hel d : Ps fai l ed t o s ub s t an t i at e t h ei r Sch edu le A d edu ct i o n s b ey o n dth e am o u n ts th atR al read y al l o wed
. Hel d , fu rt h er, Ps d o n o tqu al i fy as real es t at e p ro fes s i o n al s an d are t h erefo re p ro h i b i t edfro m d edu ct i ng th ei r Sch edu l e E ren t al real es t at e l o s s es aft er th e p as s i v e act i v i t y l o s s l i m i t at i o n .- 2
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[* 2 ] Hel d , fu rt h er, Ps are n o ten ti t ledt o the ad d it i on al s el fem p l o y edh eal t h i n s u ran ce d educt i o n s b ey o n dth e am ou n t s th atR al l o wedfo r 2 0 0 9 an d2 01 0
. Hel d , fu rt h er, Ps are n o ten ti t ledt o a fo rei g n t ax cred i t carry o v er t o 2 00 9
. Hel d , fu rt h er, Ps are l i ab l e fo r t h e I.R.C. s ec. 6 6 6 2 (a) accu racy -rel at edp en al ti es fo r 2 0 0 9 an d2 0 1 0 an dare l i ab l e fo r t h e ad d i ti o n t o t ax u n der I.R.C. s ec. 6 6 5 1(a)(1 ) fo r 2 0 0 8 , 2 0 0 9 , an d2 0 1 0
.
Geral dEdwardKubas i ak , St ev en J
. Ro tu n n o , an d Dan i el F. Cu l l en , fo r p et i t i o n ers . M ay ah So l h -Cad e, fo r res p o n d en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION GUSTAFSON, J ud ge: Th e In t ern al Rev en u e Serv i ce (“ IRS”) i s s uedt o p et i t i o n ers , Dan iel E. Lark i n an dCh ri s t i n e L. Lark i n , a s t atu t ory n o t i ce o f d efi ci en cy

(“ SNOD”) p urs u an tt o s ect i o n 6 2 1 2 1 o n No vem b er 1 5 , 2 01 3 , fo r t h e Lark i n s ’ 2 0 0 8, 2 0 0 9 , an d 2 0 1 0 t ax y ears . Th i s cas e ari s es fro m th e Lark i n s ’

1 Un l es s o t h erwi s e i nd i cat ed , al l ci t at i o ns o f s ect i on s refer t o t h e In tern al Rev en u e Co de o f 1 98 6 (2 6 U.S.C.; “ t he Co de”), as am en d edas i n effect atal l rel ev an t t i m es , an d al l Ru l e referen ces are t o the Tax Co urtRu l es o f Pract ice an d Pro cedure. Do l lar am o u n t s are ro u n d edt o t h e n eares td o l l ar.- 3
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[* 3 ] t i m el y

p et i t i o n p u rs u an tt o s ect i o n 6 2 1 3 fo r red et erm in at i o n o f t h e d efi ci en ci es , ad d it i on s t o t ax , an daccu racy -rel at ed p en al t i es 2 d et erm i n edb y th e IRS. Aft er s t i pu l at i o n s an dco n ces s i o n s b y the p art i es , th e i s su es fo r d eci s i o n are: (1 ) wh et h er t h e Lark i n s are en t i t l ed t o ad d i t i o nal i t em i zed d edu ct i o n s cl ai m edo n Sch edul e A, “ It em i zedDedu ct i o n s ”, fo r t he y ears ati ss u e (we h o l dth at t h ey are n o t ); (2 ) wh et h er t h e Lark i n s are en t i t l ed t o a ren t al real es t at e l o s s d edu ct i o n cl ai m edo n Sch edul e E, “ Sup p l em en t al In co m e an dLo s s”, aft er p as s i v e l i m i t at i o n , fo r t h e y ears ati s su e (we h o ld t h atth ey are n o t ); (3 ) wh et h er t h e Lark i n s are en t i t l ed t o ad d i t i o nal s el f-em p l o y edh eal t h i n s u ran ce d edu ct i o n s fo r t ax y ears 2 00 9 an d2 0 1 0 (we h o l d t h atth ey are n o t ); (4 ) wh et h er t h e Lark i n s are en t i t l ed t o a fo rei g n t ax cred it (“ FTC”) (o r t o an FTC carry o v er) fo r 2 0 0 9 (we h o l d t h atth ey are n o t ); (5 ) wh et h er t h e Lark i n s are l i ab l e fo r ad d i t i o n s t o t ax p u rs u an t t o
s ect i on 6 6 5 1 (a)(1 ) fo r t h e y ears ati s s u e (we h o l dthatth ey are); an d

2 Th e SNOD d et erm i n ed t h e accu racy -rel at edp en al t i es o n al tern at i ve g ro u nd s ; b u tth e Co m

m i s si o ner h as co n ced edal l s u ch g ro u n d s ex cep tn eg l i g en ce u n d er s ect i o n 6 6 6 2 (a) an d(b )(1 ), s o we d o n o tfu rt h er d i s cu s s t he al tern at i v e g ro u nd s .- 4
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[* 4 ] (6 ) wh et h er t h e Lark i n s are l i ab l e fo r accu racy -rel at ed p en al t i es p u rs u an tt o
s ect i on 6 6 6 2 (a) fo r t he y ears ati s s u e (we h o l d t h atth ey are n o tl i ab l e fo r 2 0 0 8 b u t t h atth ey are l i ab l e fo r 2 0 0 9 an d2 0 1 0 ). FINDINGS OF FACT Atth e t im e t h ey

fi l edth ei r p et i t i o n, M r. an dM rs . Lark i n res i d edi n Su rrey , En g lan d , i n th e Un i t edKi n gd o m (“ U.K.”). Th e Lark i n s were m arri edU.S. ci t i zen s
an d res i d edi n En gl an datal l t i m es du ri ng th e rel ev an t y ears . Dan iel E. Lark i n M r. Lark i n i s a h i g h l y edu cat edat t o rn ey wi t h m o re t h an 2 0 y ears ’
ex p eri en ce d eal in g i n a v ari et y o f co m p l ex tran s act i o n al m at t ers . Fo r al l rel ev an t y ears , M r. Lark i n was a p art n er at Squ i re, San d ers & Dem p s ey , LLP (“ SSD”), wh i ch was b as edi n Cl ev el an d , Oh i o . He p rev i o u sl y wo rk edfo r Pri cewat erh o u seCo o p ers LLP an datth e t im e o f tri al was em p l o y edb y an o t h er
m u lt i n at i o n al l aw fi rm . M r. Lark i n t es t i fi ed t h ath e ad v i s es i n s t i tu t i o n al cl i en t s o n l eg al an dfi n an ci al m at t ers . Ch ri s t i n e L. Lark i n M rs . Lark i n i s a “ ho m em ak er”, as th e Lark i n s rep o rt edo n thei r i n co m e t ax ret u rn s . Th e Lark i n s cl ai m thatM rs . Lark i n i s a real es t at e p ro fes si o n al (fo r t h e p u rp os es o f qu al i fy i ng fo r Sch edu l e E ren t al real es t at e d edu ct i o n s), b u twe fi n d- 5
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[* 5 ] th ati n th e y ears ati s s u e M rs . Lark i n d idn o t s p en d as m u ch as 7 5 0 h o u rs p er y ear i n real p ro p ert y t rad es o r b u s i n es s es . M r. Lark i n ’ s U.K. i nco m e In each o f t h e y ears ati s s u e, M r. Lark i n recei v edfro m SSD g u aran teed p aym en t s an da d i s tri b ut i v e s h are o f o rd i n ary i n co m e, wh i ch co n s t i tu t edm o s to f t h e Lark i n s ’ i n co m e. W e are u n ab l e t o fi ndth at , as o f 2 0 0 8 , M r. Lark i n h adp ai d U.K. i n co m e t ax i n p ri or y ears fo r wh i ch an FTC h adn o tb een al l o wedth atm i g h t b e carri edo v er i n t o th e y ears ati s s u e. Ho m e m o rt g ag e i n t eres t In 2 0 0 1 th e Lark i ns p u rch as ed a p l o to f l an di n t he o u t s ki rt s o f Lo n d o n . Th ey d i v i d edi ti n t o two l o t s an db u il tth ei r res id en ce o n o n e o f t h em . (Th e s eco n d l o ti s d i s cu s s edb el o w.) In th e y ears at i s s u e, t h e Lark i ns s t i l l o wn edth ath o u s e i n En g lan dan dp ai di n t eres to n a m o rt g ag e l o an s ecu red b y th ath o us e, fo r wh i ch th e b al an ce du e i n 2 0 08 was $ 2 ,4 32 ,1 5 2. In 2 0 0 8 t h ey p ai dm o rt g ag e i n t eres to f $ 2 4 ,2 7 0 (an am ou n trep ort edb y th i rd -p art y

p ay ees an dal l o w edb y

the IRS as a Sch edu l e A d edu ct i o n ). Onth ei r 2 0 0 9 retu rn th e Lark i n s rep o rt edm ort g ag e i n t eres to f $ 1 7 ,0 0 0 , wh i ch th e IRS al l o wedas a Sch edu l e A d edu ct i o n al on g wi t h
an ad di t i o n al $ 7 ,2 2 3 , t o t al i n g $ 2 4 ,2 2 3 (p res u m ab l y rep o rt edb y

th i rd -p art y p ay ees ). Des p i t e the Lark i ns ’ co n t en t i o n s th at t h ey co u l d d edu ctad d i t i on al- 6
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[* 6 ] m o rt g ag e i n t eres tp ai di n 2 0 08 , 2 0 0 9 an d2 01 0 , th e am ou n ts fo r 2 0 0 8 an d 2 0 0 9 are n otati s s u e. W e fi n dth atth ey h av e n o ts ub s t an t i at edad d i t i o n al
m o rt g ag e i n t eres tp aym en ts i n 2 0 1 0
. Real es t at e i n t eres t s Th e Lark in s as s ertth atdu ri ng th e rel ev an tp eri o d , th ey m ai n tai n ed
o wn ers hi p i n t eres ts i n fo u r p ro p ert i es as p arto f a ren t al real es t at e act i v i t y : Den t o n Ho m es l o t. Th e s eco n do f t h e t wo l o t s o u t s i d e Lo n do n t hatth e Lark i n s acq u i redi n 2 0 0 1 i s referred t o as th e “ Den t o n Ho m es l ot ”. Th ey s o l di tt o a d ev el o per i n 2 0 0 7 . W e fi n d t h at i n th e y ears ati s s u e t h ey d i d n o t ret ai n an i n t eres ti n , n o r co n du ctan y s ub s t an t i al act i v i t y

i n co n n ect i o n wi t h, t he Den t o n Ho m es l o t
. Bel m o n tp ro pert y . In2 00 7 th e Lark i n s p urch as eda co n d o m i ni u m ap art m en ti n Ch i cag o th atthey refer t o as “ t h e Bel m o n t p ro p ert y ”. Th e Lark i n s ’ d au gh t ers l i v edatth e Bel m o n t p ro p ert y duri n g atl eas ts o m e p arto f t h e y ears at i s su e. W e d o n o tfi n d t h atan y p ay i n g t en an t s l i v edatth e Bel m o n t p ro p ert y du ri n g t h es e y ears o r t h atth e Lark i n s o wn edan y i n t eres t i n t h e Bel m o n tp ro p ert y aft er 2 0 0 8
. Fran ce p ro p ert y . Th e Lark i n s al leg e t h at du ri n g t he y ears ati ss u e th ey co o wn eda p ro p ert y

i n Fran ce al o n g wi t h M rs . Lark i n ’ s s is t er an d b ro t h er t h atth ey- 7
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[* 7 ] p eri o d i cal l y

ren t ed t o th irdp art i es as a l arg e v acat i o n h o m e. In th e ab s en ce o f p ro o f, we fi n dth atth ey

d i dn o tes t ab l is h th atth ey o w neds u ch a p ro p ert y . Lak e h o u s e. Th e Lark i ns co n s i d er a h ou s e i n W i s co n s i n (“ t he l ak e h o u s e”) t o b e t h ei r “ s eco ndh om e”. Th ey p u rch as ed t h e l ak e h o u s e al o ng wi t h an o t h er
co upl e, an dth e t wo co upl es o wn th ei r i n t eres t s i n d i rect l y th ro u gh Treet o p s LLC,
an en ti t y t h atth ey

fo rm edt o p u rch as e an dh ol dth e l ak e h o u s e, t h e s o l e as s eto f Treet o p s LLC. Th e Lark i n s o wn edth ei r s hare o f Treet o p s LLC th ro u g h an o t h er
en t i t y , Larm o d t LLC. Duri ng 2 0 09 an d2 0 1 0 , th e Lark i n s each o wn ed3 5 %-- t o t al i n g 7 0 %--o f Larm o d tLLC, 3 an dtwo o f th e Lark i n s ’ d au g ht ers each o wn ed 1 0 % o f Larm o d tLLC. (Th e ev i d en ce d o es n o ts h o w wh o o wn edthe rem ai n i n g 1 0 % o r wh et h er t h ato wn er was an i n d i v i du al .) In 2 0 0 8 Larm o dtLLC o wn ed5 0 %
o f Treet o p s LLC, b u twe h av e n o ev i d en ce as t o th e Lark i n s ’ p reci s e eq u it y

3 Th e ev id en ce o f t h e o wn ers h i p o f Larm o d t LLC i s i t s Sch edul es K-1 , “ Part n er’ s Sh are o f In co m e, Dedu ct i o n s , Cred i t s , et c.”, fo r 2 0 0 9 an d2 0 1 0 , th o u g h t h e reco rdd o es n o t co n t ai n Sch edu l es K-1 s u ffi ci en tt o acco u ntfo r 1 0 0 % o f Larm od tLLC’ s o wn ers h i p fo r ei t h er o f th es e y ears . No 2 0 08 Sch edu l es K-1 fo r Larm od tLLC are i n ev i d en ce. (In th ei r p ri o r cas e, “ [t ] h e reco rdd o es n o tfu rt h er i d en t i fy Larm o d t , L.L.C., o r i t s o wn ers ”, Lark i n v . Co m m i ss i o ner (“ Lark i n I”), T.C. M em o . 2 01 7 -5 4 , at* 2 6 n . 1 9 , aff’ di n p art , rev ’ d i n p art , Lark i n v . Co m m i s s i o n er (“ Lark i n II”), No . 1 7 -1 2 5 2, 2 0 20 W L 2 3 01 4 6 2 (D.C. Ci r. Ap r. 2 1 , 2 0 2 0 ), b u t we d eci d e t h i s cas e o n i t s o wn ev i d en ce.)- 8
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[* 8 ] i n t eres ti n Larm o dtLLC. 4 W e fi n d t h atthe l ak e h o u s e was n o tren tedo u t du ri n g an y

o f t h e y ears at i s s u e. In v es t m en ti n t eres t In th e SNOD t h e IRS co n ced edth at t h e Lark i n s p ai dd edu ct i b l e i n ves t m en t i n t eres ti n th e y ears ati s s ue--$ 6 ,3 1 0 i n 2 0 0 8 , $ 5 ,2 7 8 i n 2 0 0 9 , an d$ 6 ,1 5 0 i n 2 0 1 0
-- an d t h e p art i es h av e s t i p u lat edth at“ t h e Sch edu l e A--In ves t m en tIn t eres tal read y

4 Th e ev id en ce o f t h e o wn ers h i p o f Treet o p s LLC i s th e Sch edu le K-1 fo r 2 0 0 8 i ss u edb y

Treet o p s LLC t o Larm o d tLLC refl ect i n g a 5 0 % equ i t y i n t eres t
. (In Lark i n I we fo u n d t h ati n th e y ears 2 0 03 -0 6 th e Lark i n s ’ equ i t y i n teres ti n Treet o p s LLC was 6 5%, s ee Lark i n I, at* 8 -* 9 , b u to ur o p i n io n i n th i s cas e i n v o l v es d i fferen ty ears an di s b as edo n d i fferen tev i den ce.) In Lark i n I t h ere was n o ev i den ce ab o u tth e o wn ers h i p o f Larm od t LLC o r th e as s et s i to w n ed , an dwe d et erm i n edth atTreet o p s LLC was a “ sm al l p art n ers h i p ” wi t h i n th e m ean i n g o f s ect i on 6 2 3 1 (a)(1 )(B) b ecau s e t h e reco rdes t ab l i s h edth ati th ad atm o s ttwo p art n ers (each m arri edco up l e t reat edas a s i n g le p art ner). Th erefo re i t em s o n th e Sch edu l es K-1 fo r Treet o ps LLC i n Lark in I were s ub ject t o red et erm i n at i o n i n t h atcas e rat h er t h an req u i ri n g p art n ers h i p-l ev el p ro ceed i n g s u nd er t h e u n i fi ed au d itan dl i t i g at i o n p ro cedures o f t h e Tax Equi t y an dFi s cal Res po n si b i l i t y Acto f 1 9 8 2 (“ TEFRA”). See i d . at * 6 3 . Fo r t h e y ears n o w ati s s u e i tap p ears th at Treet o p s LLC was n ot a “ s m al l p art n ers h i p ” wi t h in t he m ean i n g o f s ect i o n 6 2 3 1 (a)(1 )(B) b ecau s e o n e o f i t s o wn ers , Larm od t LLC, was n o t“ an i n d i v i du al (o t h er t h an a n o n res i d en t al i en ), a C co rp o rat i o n , o r an es t at e o f a d eceas ed p art n er.” Th e ev i d en ce i s i ns u ffi ci en t t o d et erm i n e wh et h er Larm od t LLC i t s el f wo u l db e s ub

jectt o TEFRA; i ts h o ws th at9 0 % o f Larm o d tLLC was o wn edb y i n d i v i du al s i n th e Lark i n fam i l y , b u tfo r al l we kn ow t h e o wn er o f th e rem ai n i n g 1 0 % was a n o n res i d en t al i en , a p art n ers h i p , o r anLLC, i n wh ich cas e Larm o d t LLC, t o o , was n o ta “ s m al l p art n ers h i p ” b u twas i n s t ead s ub jectt o TEFRA. W e accep tth e s t atu s an do w n ers h i p o f Larm o dtLLC an dTreet o p s LLC as s h o wn b y t h e Sch edu l es K-1 ; we as s u m e co rrect th e Lark i n s ’ al l eg at io n s ab o u t o w n ers h i p o f t h e LLCs wh ere Sch edu l es K-1 are m i s s i n g ; an dwe d o n o tat t em p tt o red et erm i n e an y p art n ers h i p i t em s i n th i s p ro ceed i n g .- 9
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[* 9 ] al l o wedo n t h e n o t i ce o f d efi ci en cy , i n th e am o un t s o f $ 5,2 7 8 an d $ 6 ,1 5 0 , fo r t ax y ears 2 0 0 9 an d2 01 0 , res p ect i v el y , was fro m Larm o d t , LLC”. W e d o n o t d i s tu rb th e IRS’ s co n ces s i o ns i n th e SNOD. W e fi n dth atthe Lark i n s h av e n o t
s ub s t an t i at edad d i t i o n al am o un t s o f i n v es t m en t i n t eres tth atth ey al l eg e t h ey

p ai d t o fo u r o t h er en t i t i es i n 2 0 0 9 an d 2 0 1 0 . (In v es t m en ti n t eres ti s n o tati s s u e fo r 2 0 0 8 . See i n fra p artI.B.1 .) St at e i nco m e t ax an dp ers o nal p ro p ert y t ax M r. Lark i n ’ s l aw fi rm

SSD wi t h hel dan dp ai do ver St at e an dl ocal i n co m e t ax fo r M r. Lark i n i n am o un t s n o g reat er t h an $ 7 ,1 3 6 fo r 2 0 0 8 , $ 6 ,0 1 5 fo r 2 0 1 0 , an d $ 2 ,3 0 5 fo r 2 0 1 0 . Th e Lark i n s al s o p ai d $ 3 0 0 i n p ers o n al p ro p ert y t ax i n 2 0 0 9
. Real es t at e t ax Fo r 2 0 0 9 an d2 01 0 t h e Lark i n s d i dn o tp ro v e t h atthey p ai d --an dwe fi n d t h atth ey d i dn o t p ay --an y ad d it i o n al am ou n t s o f i n co m e t ax o r p ro p ert y t ax . (Real
es t at e t ax i s n o tati s s u e fo r 2 0 08 . See i n fra p artI.B.1 .) Sel f-em p l o y edh eal t h i n su ran ce Th e Lark in s p u rch as edh eal t h i n s u ran ce fo r t h em s el v es i n 2 0 0 8 (wh i ch i s
n o ti n d i s p u t e), 2 0 0 9 , an d 2 0 1 0. Fo r th ei r h eal t h i n s u ran ce p rem i u m s , th e p art i es h av e s ti p u l at edth at“ [p ] et i t i on ers are en t i t l edt o Sel f-Em p l o y edHeal t h In s u ran ce d educt i o n s l i m i t edt o th e am o u n to f $ 1 5 ,5 1 1 fo r t ax y ear 2 0 0 8 .” Fo r t h e- 1 0 -

[* 1 0 ] s ub s eq u en ty ears , we fi n dth atth e Lark i n s p ai dn o m o re t h an $ 7,1 78 i n 2 0 0 9
an d $ 2 ,1 9 2 i n 2 01 0
. Tax ret u rn s M r. Lark i n h i m s el f p rep ared p et i t i o n ers ’ jo i n tFo rm s 1 0 4 0 , “ U.S. In d i v i du al In co m e Tax Return ”, fo r t h e y ears ati s s u e. 2 0 0 8 Fo rm

1 0 40 Th e Lark in s req u es t edan dwere g ran t edan ex ten s i o n t o fi le t h ei r 2 0 0 8 t ax ret u rn o n o r b efo re Decem b er 1 5 , 2 0 0 9 , b u tfai l edt o fi l e t h e 2 0 0 8 retu rn b y th e
ex t en d edd ead li n e. Th e IRS recei v edth ird -p art y i n fo rm at i o n reg ard in g th e Lark i n s ’ i n co m e fo r 2 0 0 8 an dfi l eda s ub s t i tu t e fo r ret u rn (“ SFR”) o n J u n e 1 4 , 2 0 1 1 . (Th e 2 0 0 8 SFR i s n o t i n th e reco rd ; h owev er, t he Lark i n s n ev er co n t es t ed i t s ex i s t en ce o r v al i d it y .) Th e ad ju s tm en t s i n th e SNOD fo r 2 0 0 8 are b as edi n p art
o n th e SFR. An FTC was cl ai m edo n th e Fo rm 1 0 4 0 th at M r. Lark i n p rep ared (b u td i d
n o tfi l e) fo r 2 0 0 8
. (No FTC i s ati s s u e fo r 2 0 0 8 , s ee i n fra p artI.B.3 , b ut t he Lark i n s ’ 2 0 0 8 rep o rt i n g i s rel ev an t t o th ei r cl ai m o f an FTC carry o v er i n t o 2 0 0 9 .) Th e Fo rm 1 1 1 6, “ Fo rei g n Tax Cred i t ”, fo r 2 0 08 s h o wedth at t h e Lark i n s ’ cl ai m o f
an FTC o f $ 1 6 ,7 8 5 , o f wh i ch $ 5 7 8 was cred i tedag ai n s t t h ei r t ax fo r 2 0 08 , was- 1 1 -

[* 1 1 ] b as edo n a “ carryb acko r carry o v er”, b u ta d et ai l ed co m p u t at i on o f t h e carri ed FTC was n o tat t ach edt o th e fo rm . M r. Lark i n p rep ared a Fo rm 1 0 4 0 fo r 2 0 0 8 an ds ub m i t t edi tt o a rev en u e ag en t o n Au g u s t2 3 , 2 0 1 2 . Itap p ears th atthe Co m m i s s i o n er co n s i d ered s o m e o f t h e i n fo rm at i o n fro m

thatFo rm

1 0 4 0 i n p rep ari n g th e SNOD. Ho wev er, we fi n d (as th e Co m

m i s s i o n er co n t en d s ) t h atth e Lark i n s d i dn o tfi l e a ret u rnfo r 2 00 8 . See i n fra p artVII.A. 2 0 0 9 retu rn Th e Lark in s req u es t edan dwere g ran t edan ex ten s i o n t o fi le t h ei r 2 0 0 9 t ax ret u rn o n o r b efo re Oct o b er 1 5 , 2 0 1 0 . Th e Lark i n s fi l edth ei r 2 0 0 9 t ax retu rn m o re t h an a y ear l at e o n No v em b er 8 , 2 0 1 1
. Th e Lark in s cl ai m ed an FTC s u ffi ci en tt o co v er t h ei r U.S. i nco m e t ax du e
o n th ei r ret u rn fo r 2 0 0 9 . M r. Lark i n at t ach edt o th e Fo rm 1 0 4 0 a Fo rm

1 1 1 6 , cl ai m i ng an FTC “ carryb acko r carry o v er” o f $ 16 ,3 0 7 , o f wh ich $ 4 ,0 1 4 was ap p li edag ai n s tth ei r t ax fo r 2 0 0 9 . Bu t a d et ai l edco m pu t at i o n o f t he carri edFTC
was n otat t ach ed
. Th e IRS fo u n dth at t h e Lark i n s’ s el f-p rep ared 2 0 0 9 ret u rn co nt ai ned
m at h em at i cal erro rs an dcl ai m s o f cred i t s ex ceed i n g th o s e al l owedb y th e Co d e. Th e IRS ad

ju s t ed t h e t o t al s o f i n co m e an dt ax as rep o rt ed o n t h e ret u rn s , res u l t i n g- 1 2 -

[* 1 2 ] i n a co rrect ad

j u s t edg ro ss i n co m e o f $ 1 6 0 ,8 69 an dt ax ab l e i n co m e o f $ 5 4 ,4 7 1 , as s es sed t ax o f zero aft er ap p l i cat io n o f a rep ort edfo rei g n t ax cred i t , an d i s su edth e Lark i ns a refu n do f $ 1 4 0 fo r t ax y ear 2 0 0 9. 2 0 1 0 retu rn Th e Lark in s req u es t edan dwere g ran t edan ex ten s i o n t o fi le t h ei r 2 0 1 0 t ax ret u rn o n o r b efo re Oct o b er 1 5 , 2 0 1 1 , wh i ch was a Sat u rd ay , s o thatth e ret u rn
wo u l dh av e b een t i m el y

i f fi l edM o n d ay , Oct o b er 1 7 , 2 0 1 1. Th e Lark i ns d i dn o t
m eetth i s d ead l i n e b u t fi l edth ei r 2 0 1 0 ret urn al m o s ta m o n t h l at e o n No vem b er 1 6 , 2 0 1 1
. Th e IRS fo u n dth at t h e Lark i n s’ s el f-p rep ared 2 0 1 0 ret u rn co nt ai ned
m at h em at i cal erro rs an dcl ai m s o f cred i t s ex ceed i n g th o s e al l owedb y th e Co d e. Th e IRS ad

ju s t ed t h e t o t al s o f i n co m e an dt ax as rep o rt ed o n t h e ret u rn , res u l t i n g i n an ad j u s tedg ro s s i n co m e o f $ 6 4 ,9 5 5 , t ax ab l e i nco m e o f zero , an dan
o v erp aym en t o f t ax o f $ 2 , 3 5 6 fo r 2 0 1 0
. Th e Lark i n s ’ reco rd -k eep i n g M r. Lark i n t o o k res p on s i b i l i t y fo r t h e Lark i n s ’ t ax return p rep arat i on , wh ich i n cl u d edco n s u l t i ng wi t h tax p ro fes s i o n al s ath is v ari o u s p l aces o f wo rk --i n th i s
cas e, SSD. Hi s t es ti m on y s u g ges t edth at h e co u l db ackup t he p o si ti o n s t ak en o n t h e Lark i n s ’ retu rn s b y , i n t er al i a, t raci n g al l eg edi n v es t m en t i n t eres tt o s peci fi c- 1 3 -

[* 1 3 ] el i g i b l e i n v es t m en t s p ro fferedi n h i s ex h ib i t s an dp o i n t in g t o s peci fi c i t em s i n the p ro ffered ex h i b i t s , s u ch as th e Sch edu l es K-1 , wh i ch wo u l ds upp o sed l y
ex p lai n th e fi g u res rep o rt edo n th e ret u rn s . Ho wev er, wh en p res s ed , h e was
u n ab le t o ex p l ai n rep ort in g p o si t i o n s h e h adt ak en o n t h e ret u rn s . M an y o f t h e
ex h ib i t s th e Lark i n s h av e o ffered are s t an d ardt ax fo rm s th atare u s edt o p rep are i n co m e t ax retu rn s (i .e., i n fo rm at i o n retu rn s s u ch as th e Sch edul es K-1 fo r t h ei r i n t eres t s i n v ari o u s cl o s el y h el den t i t i es ), an dy etm an y o f t h es e d ocu m en t s are i n co m pl et e an dfai l t o fu l l y

s up p o rtth e ex t en to f th e Lark i n s ’ cl ai m edo w n ers h i p i n a g i v en y ear o r t he co nt i n u i ty o f o wn ers h i p o v er t h e co u rs e o f t he y ears ati s s u e. Reco rd s t h atth e Lark i n s h av e s ub m i tt edt o s ub s tan t i at e p aym en to f ex p en s es fo r wh i ch th ey

cl ai m d edu ct i o ns , s u ch as cred i tcards t at em en t s , d o n o ts eg reg at e d educt i b l e ex p en s es fro m th o s e th atare n o t d edu ct i b l e. Des p i te t h e Lark i n s ’
as s ert i o n th atth ey

en g ag ed i n s i g n i fi can t ren t al real es t at e act iv i t y , th ey h av e
s ub m i t t edn o to n e d o cu m en tev i d en ci n g a co n t ract fo r ren t al o r l eas e o f an y o f t h ei r p ro p ert i es t o a t h irdp art y . Th e o n l y l eas e t h e Lark i n s o ffered i n t o ev i d en ce
s h o wedM r. Lark i n as l es see an dwas ad m i t t edi n s upp o rt o f th ei r cl ai m fo r a h o u s in g ex cl u s i o n . Ov eral l , th ere i s a d eart h o f reco rd s t o s upp o rt t h e Lark i n s ’ d i s p u t edretu rn p o s it io n s .- 1 4 -

[* 1 4 ] Th e Lark in s i m

p l y n o n et h el es s th at s uch reco rd s ex i s t , as s ert i n g th at“ t h ey
were n ev er s ub m i t tedt o th e IRS b ecau s e th ey were n o treq u es ted ”. Th is
ex p lan at i o n i s n ota v al i d ex cu s e fo r t h ei r fai l ure t o s ub s t an t i at e t h ei r d edu ct i b l e
ex p en s es attri al , as we ex p lai n b el o w i n p artI.C.2
. SNOD an dp et i t i o n Th e IRS co ndu ct edan ex am i n at i o n fo r t h e Lark i n s ’ y ears 2 0 08 , 2 00 9 , an d 2 0 1 0 . Rev en u e Ag en tSab ri na Th o rn e d et erm i n edt o d i s al l o w th e d edu ct i o n s d i s cu s s edh erei n . Inad d i t i o n , s h e i n i t i al l y d et erm i n ed t h ataccu racy -rel at ed p en al t i es s h o u ldb e as s ert ed“ un d er IRC 6 6 6 2(c)”, i .e., fo r “ neg l i g en ce”; an dh er i m m ed i at e s up erv i s o r ap p ro v edh er p en al ty d et erm i n at i o n i n wri t i n g o n J an u ary 1 5 , 2 0 1 3. Ten m o n t h s l at er t h e IRS i s s u edth e SNOD o n No v em b er 1 5 , 2 0 1 3 , d i s al l o wi n g d edu ct i o n s an dd et erm i n i n g ad d it i on s t o t ax an daccu racy rel at ed p en al t i es fo r al l y ears ati s s u e. M r. an d M rs . Lark i n t i m el y fi l edth ei r p et i t i o n o n M arch 1 9 , 2 0 1 4. Pret ri al p ro ceed i n g s Tri al was s ch edu l edfo r J an u ary 5 , 2 01 5
. Atth e Lark i n s ’ req u es tthe cas e
was co n t in u ed , an dtri al was res ch edu l edfo r J u n e 1 , 2 0 1 5 . Th e Lark i n s ag ai n req u es t eda co n t i n u an ce, t h ei r requ es twas g ran t ed , an dtri al was res ch edu l edfo r Oct o b er 1 9 , 2 0 1 5 --n i n e m o n t h s aft er t h e o ri g i nal l y s ch edu l edtri al d at e i n J an u ary- 1 5 -

[* 1 5 ] 2 0 1 5 , 1 7 m on t h s aft er t h e Lark i n s fi l edth ei r p et it i o n i n M arch 2 0 1 4 , 2 3 m o n t h s aft er t h e i ss u an ce o f t h e SNOD i n No v em b er 2 0 1 3 , an dal m o stfo u r y ears aft er t h e Lark i n s ’ fi l i n g o f t h e ret u rn fo r t h e l at es ty ear at i ss u e (i .e., th e 2 0 1 0 ret u rn fi l edi n No vem

b er 2 01 1 ). W e i s s uedo u r s tan d i n g p ret ri al o rd er o n M ay 1 9 , 2 0 1 5 . Th ato rd er req u i red each o f t h e p art ies t o fi l e a p ret ri al m em o ran du m . Th e Lark i ns d i dn o td o s o , b u t t h e Co m m i s s i o n er d i d. On Oct o b er 1 3 , 2 01 5 , th e Co u rth el da t el ep h o n e co nferen ce wi t h
res p o n d en t’ s co u n s el an d t h e Lark i n s (wh o atth att im e rep res en t edth em s el v es ). Du ri n g thatco n feren ce M r. Lark i n req ues t ed a t h i rd co nt i n uan ce. Th e Co u rt p o i n t edo u tt o h i m th ath e was m ak i n g t h atreq u es tl es s th an 3 0 d ay s b efo re t h e t ri al s es s i o n , wh i ch u n d er Ru l e 1 3 3 i s p res u m p t i v el y d i l at ory . Th e Co u rts t at ed t h ati ts aw n o g ro u n d s warran t in g a co n t i n u an ce an dd en iedth e req u es t
. Th e Lark in s d i dn o tap p ear p ers o n al l y at t he cal en dar cal l o n Oct o b er 1 9 , 2 0 1 5 , b u ts en t a n ewl y

ret ai n edat t o rn ey (wh o s ai dh e was n o tav ai l ab l e t o try th e
cas e t hatweek ) t o ap p ear fo r t hem an d m o v e fo r an o t h er co n t i n u an ce. W e d en i ed t h e co n t i n u an ce an d s ch edu l edth e cas e fo r t ri al th e n ex td ay , o n Oct o b er 2 0 , 2 0 1 5
. Atth e Lark in s ’ co u ns el ’ s req u es twe recal ledth e cas e i n th e aft ern o o n o f Oct o b er 1 9 , 2 0 1 5
. Th e n ew co u n s el wh o h adap p earedth atm o rn i n g m o v edt o- 1 6 -

[* 1 6 ] wi th d raw fro m

the cas e (a m o t i o n we g ran t ed ), an dn ewer co u n sel fi l edan
en t ry o f ap p earan ce an dag ai n m o v ed fo r a co n t i nu an ce. W e d en i edth e m o t i o n
an d t ri edth e cas e as s ch edu l ed
. Th e Lark i n s ’ m o t i o n s t o s up p l em en tthe reco rd Atth e co n cl u s i o n o f t ri al , p et i t i o n ers ’ co u n s el req u es t edth atth e Co u rtl eav e t h e t ri al reco rdo p en fo r 3 0 t o 4 5 d ay s s o th atth e Lark i n s co u l dad dt o t h e t ri al
reco rdad d i t io nal ex h i b i t s th ey h o p edt o b e ab l e t o fi n d. Th e Co u rts t at ed : I’ m g o i n g t o d en y

y o u r v ery

b ro adm o t i o n t o l eav e t h e reco rdo p en s o t h aty o ucan b ri n g i n an yt h i n g th at rel at es t o an y d edu ct i o n al read y

at i s su e i n t h e cas e. Ho wev er, I am

g o i n g t o d o s o wi t h o utp reju di ce t o y o u r ren ewi n g t h atm o t i o n wh en y o uh av e s p eci fi c d o cu m en t s th at y o u wi s h t o o ffer. * * * Yo uare free t o fi l e wh at ev er m o t i o n y o uwi s h
. I wi l l t el l y o uth ata m o t i o n fi l edaft er 4 5 d ay s [i .e., aft er Decem b er 4 , 2 0 1 5 ] , wh en Res p o n d en t [’ s co u ns el ] b eg i n s t o wo rko n h er b ri ef an d i n v es t s t im e i n i t , an dth en y o uwo u l db e ch an g i n g t he g ro u n d u n d ern eat h h er, t h atwo ul dn o tb e ju s t
. On Decem

b er 2 , 2 0 15 , th e Lark i n s m o v edt o s up p l em en tth e reco rdwi t h ad d it i o n al d o cu m en t s , an dth e Co m m is s i o n er d i d n o t o b

ject . Th e Co u rt d eferred t h e p art i es ’ fi l in g o f p o s t -t ri al b ri efs s o th atth ey co u l d at tem

pt ad d i t i o n al
s t ip u l at i o n s , wh ich they

fi l ed J un e 6 an dJ u ly

2 7 , 2 0 1 6 , an dwh i ch ren d ered m o o t t h e Lark i n s ’ m o t i o n t o s up p l em en tth e reco rd
.- 1 7 -

[* 1 7 ] Th e Co u rtd i rect edth e p art i es t o p ro p o s e a b ri efi n g s ch edul e as t o t h e
rem ai n i n g i s s u es , b uto n Au g u s t3 , 2 0 1 6 --m o re t h ann i n e m o n t h s aft er t h e
co n cl u s i o n o f t h e t ri al --t h e Lark i n s fi l eda s eco ndm o t i o n t o s up p l em en tth e t ri al
reco rd , t o wh i ch the Co m m is s i o n er o b

ject ed ; b u tatth e Co urt ’ s i n s t ru ct i o n th e p art i es at t em

p t edan dwere ab l e t o fi l e a s eco n ds up p lem en t al s t ip u l at i o n o f fact s t h atren d ered m o o tth e Lark i n s ’ s eco n dm o t i o n (t o t h e ex t en t t h ey d i d n o t co n ced e t h e m o t i o n ). Th e Co u rtd en i edas m o o t o r as co n ced edth e t wo m o t i o n s t o
s up p lem en t , an dth e Co u rtth en s eta b ri efi n g s ch edu l e, cal l i n g fo r an o p en i n g b ri ef b y th e Lark i n s , an an s w eri ng b ri ef b y t he Co m m i s s i on er, an d a rep l y

b ri ef b y th e Lark i n s . Ho wev er, wh en th e Lark i n s fi l edth ei r rep l y b ri ef o n Ap ri l 2 8 , 2 0 1 7, t h ey al s o fi ledo n th ats am e d at e--m o re t h an 1 8 m o n t h s aft er th e co n cl u s i o n o f t ri al --a t h i rd m o t i o n t o s up p lem en tth e reco rdwi t h p ro p o s edex h i b it s (n otad m i t t edattri al
o r t h ereaft er) t hatthey

ci t edi n th ei r rep l y

b ri ef. Th e Co m

m i ss i o n er o bject edt o th e t h i rd m o t i o n an dm ov edt o s t ri k e fro m th e Lark i n s ’ rep l y

b ri ef al l referen ces t o th e p ro p os edn ew ex h i b i t s . Fo r t h e reas o ns ex p l ai n edb el o w i n p artI.D, we wi l l d en y t h e Lark i n s ’ th i rdm ot io n t o s up p l em en tth e reco rdan dwi l l g ran tth e Co m m i s s i o n er’ s m ot io n t o s t ri ke.- 1 8 -

[* 1 8 ] Graev v . Co m

m i s s i on er On Decem

b er 2 0, 2 01 7 , aft er t h e p art i es h adfi ledth ei r b ri efs i n t h i s cas e, t h i s Co u rti s s u edi t s Op i n i o n i n Graev v . Co m m i s s i o n er, 1 49 T.C. 4 8 5 (2 0 1 7 ),
s up p lem en t i n g an do v erru l i n g i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ), ad d res s i ng th e effect o f
s ect i on 6 7 5 1 (b )(1 ) o n p en al t y l i ab i l i t i es . By

o rd er o f Feb ru ary

8 , 2 0 1 8 , we s eti n
m o ti o n a p ro cedu re fo r ad d res si n g th e ap p l i cat i o n o f Graev t o th i s cas e, an dth at p ro ces s co n cl u d edwi t h th e p art i es ’ fi l i n g o n M arch 2 2 , 2 0 1 8 , a s up p l em en t al
s t ip u l at i o n th ats et s o u t t h e fact s s t at edab o v e co n cern i n g s up erv i s o ry ap p ro v al o f p en al t i es , an dth ei r fi l i n g s up p l em en t al b ri efs i n Ap ri l an dM ay 2 0 1 8
. Rel at edcas es Befo re fi l in g th ei r p et i t i on i n th i s cas e, t h e Lark i n s h ad co m m en cedtwo
o t h er cas es (d o ck et No s . 1 4 8 8 6 -0 8 an d1 9 9 4 0 -0 9 ) t h atco n cern t h ei r t ax ab l e y ears 2 0 0 3 thro u g h 2 0 0 6 . OnAp ri l 3 , 2 0 1 7 , du ri n g the t i m e wh en th e Lark i n s were p rep ari n g t o fi l e t h ei r rep ly b ri ef i n th i s cas e, t h e Co urti s s u edi t s o p i n io n i n th o s e earl ier co n s o l i d at edcas es --Lark i n v . Co m m is s i o n er (“ Lark i n I”), T.C. M em o . 2 0 1 7 -5 4 . OnOct ob er 3 1 , 2 0 17 , th e Lark i ns fi l edn o ti ces o f ap p eal i n th o s e cas es i n the U.S. Co u rto f Ap p eal s fo r t h e Di s t ri cto f Co l u m b ia Ci rcu it , Do ck et No . 1 7 -1 2 5 2 , wh i ch i s s u edi t s u np ub l i s h edo p i n i o n o n Ap ri l 2 1 , 2 0 2 0 , o rd eri n g Lark i n I affi rm edi n p artan d (as t o i ss u es t h e Co m m i s si on er h adco n ced ed )- 1 9 -

[* 1 9 ] v acat edan drem an d ed i n p art . Lark i n v . Co m m i s s i o ner (“ Lark i n II”), No
. 1 7 -1 25 2 , 2 0 2 0 W L 2 3 0 14 6 2 (Ap r. 2 1 , 2 02 0 ). So m e i s s u es fo r t h e y ears 2 0 0 3 th ro u g h 2 0 0 6 i n th o s e rel at edcas es are
s i m i l ar t o s o m e o f th e i s s u es i n th i s cas e fo r t h e y ears 2 0 0 8 t h ro u g h 2 0 10
. Ho wev er, n ei t her p art y

h as rai s edth e i s s u e o f co l lat eral es t o p pel , 5 s ee Co m m i s s i o n er v . Su nn en , 3 3 3 U.S. 5 9 1 , 5 9 8 -5 99 (1 9 4 8 ), wh i ch i s a “ s p eci al
m at t er” t h atRu l e 3 9 wo ul dreq u i re t o b e p l ead ed ; an dwe d eci de t h e d i s p u t ed i s su es i n th i s cas e o n th e b as i s o f t h e ev i d en ce ad m i t t edi n th i s cas e. Is s u es i n d i s p u te Aft er s t i p u l at i on s an dco n ces s i o n s b y th e p art i es , the fo l l owi n g i s s u es
rem ai n i n d i s p ut e: 6

5 Th e p en d en cy

o f t he ap p eal i n Lark i n I wh i l e t hi s cas e was b ei n g b ri efed wo u l dn o th av e p recl u d edth e i n v o cat i o n o f co l lat eral es t o p p el . See M art i n v . M al ho yt , 8 3 0 F.2 d 2 3 7 , 2 64 (D.C. Ci r. 1 9 8 7 ) (n o t i n g th atfo r p u rp o s es o f ap p l y i n g t h e d o ctri n e o f co ll at eral es t o p p el , th e p en d en cy o f an ap p eal d o es n o t au t o m at i cal l y

d i m i n i s h th e p recl u s i v e effect s o f a p ri o r ad ju d i cat i o n ).
6 Pu rs u an tt o Ru le 9 1 (a) t h e p art i es s t i p u l at edth e i n cl u si on o f $ 5 o f t ax ab l e i n t eres tfo r 2 00 9 ; h o wev er, i ti s cl ear t o th e Co u rtth atth e p art i es i n t en d edt o s t ip u l at e t h e i n cl u s io n o f $ 5 o f t ax ab l e i nt eres t fo r 2 0 1 0 , th e y ear i nd i cat edo n th e SNOD fo r t h atad

ju s t m en t
.- 2 0 -

[* 2 0 ] Sch edul e A i t em i zedd edu ct i o n s In Sch edu l es A s ub m i tt edwi th th ei r 2 0 09 an d2 0 10 t ax retu rn s (an dwi t h t h ei r u nt i m el y

Fo rm 1 0 4 0 fo r 2 0 0 8 ), t h e Lark i n s o ri g i nal l y cl ai m edd edu ct i o n s o f cert ai n am ou nt s . In th e SNOD t h e IRS al l o wedSch edu l e A d edu ct i o n s o f l es s er
am ou n t s . Inth ei r b ri efs 7 th e Lark i n s arg u e t h atth ey are en t it l edt o ad d i t i o nal Sch edu l e A d edu ct i o n s as fo l l o ws fo r 2 0 0 8 , 2 0 0 9 , an d2 0 1 0 : M ort g ag e In v es tm en t Year i n t eres t i n teres t Tax es 2 00 8 $ 2 8 ,6 6 7 $ 4 ,0 2 3 $ 3 , 4 6 5 2 00 9 -0
- 4 ,8 82 6 ,0 1 5 2 01 0 6 ,6 7 3 9 ,3 11 5 ,4 0 0 Fo r t h e reas o n s ex p l ai n edb el o w i n p artI.B.1 , Sch edu l e A d edu ct i o n s fo r 2 0 0 8 are
n o tp ro p erl y ati ss u e. Th e Co m m i s s i o n er co n t en ds th atth e Lark i n s are en t i t l edt o
n o ad d i t i o n al Sch edu l e A d edu ct i on s .

7 So m e o f t h e am o u n t s o f d edu ct i on s cl ai m ed i n th e Lark i n s ’ o p en i n g b ri ef are i n creas edi n t h ei r rep l y b ri ef, b u tth ere are i n co n s i s t en ci es i n th e rep ly b ri ef wh ere t h ey

ap p ear t o h av e co p i eds m al l er am ou n ts fro m t h ei r o p en i n g b ri ef. W e as s u m e th atth e Lark i n s arg ue fo r t h e am o u n t s i n t h e rep l y b ri ef, ex cep tth atwe as s u m e th ey

cl ai m fo r 2 0 0 8 th e l arg er am o u n t o f m o rt g ag e i n t eres ts t at edi n t h ei r o p en in g b ri ef, t h o ug h th ei r rep l y b ri ef arg u es fo r “ atl eas t ” a s m al l er am o un t
.- 2 1 -

[* 2 1 ] Sch edul e E real es t at e ex p en s es As t o th e fo u r p ro p ert y

i n t eres ts d es cri b edab o v e, t he Lark in s arg u e t h at t h ey are en t i t l edt o d edu ctSch edu l e E ren t al real es t at e l os s es , n o treduced b y th e p as s i v e l o s s l i m it at i o n o f s ect i o n 4 6 9 , i n th e fu l l am o u n t s th atth ey rep o rt edo n t h ei r Fo rm s 1 0 40 an dth atwere d i s al l owedi n t he SNOD--i .e., $ 3 5 , 5 9 1 fo r 2 0 0 8 , $ 4 2 ,8 1 0 fo r 2 0 0 9 , an d $ 2 8,2 4 0 fo r 2 0 1 0 . Fo r t h e reas o n s ex p lai n edb el o w i n p artI.B.2 , Sch edu l e E d edu ct i o n s fo r 2 00 8 are n otp ro p erl y ati s su e. Th e Co m m i s s i o n er co n t en d s th atth e Lark i n s ’ l o s s d edu ct io n s are fo recl o s edb y
s ect i on 4 6 9
. Sel f-em p l o y edh eal t h i n su ran ce Th e Lark in s cl ai m

th ey are en t i t l edt o d edu ct i o n s fo r s el f-em p l oy edh eal t h i n s u ran ce o f $ 1 5 ,7 0 0 fo r 2 0 0 9 an d$ 1 2 ,7 00 fo r 2 0 1 0
. Th e Co m m i s si o n er
co n ced edth atth e Lark i n s s ub s t an t i at edd educt i o n s o f $ 7 ,1 7 8 fo r 2 0 09 an d$ 2 ,1 9 2 fo r 2 0 1 0 , an d t h e d i fferen ces b et ween th e cl ai m edam o u n t s an dth e co n ced ed
am ou n t s rem ai n ati s s u e. Fo rei g n tax cred i t In th e SNOD t h e Co m

m i s s i on er d i s al l o wedthe FTC cl ai m ed fo r 2 0 0 9 . Th e Lark i n s d i s p u t edth atd i s al l o wan ce i n th ei r p et i t io n . Fo r t he reas o n s ex p l ai n ed b el o w i n p artI.B.3 , an FTC fo r 2 0 0 8 i s n o tp ro p erl y ati s s u e.- 2 2 -

[* 2 2 ] Pen al t ies an d ad d it i o n s t o t ax Fo r each o f t he y ears ati s s u e, t h e Co m m i s s i o n er co n t en ds th atp et i t i o n ers are l i ab l e fo r an accu racy -rel at ed p en al t y u n der s ect i o n 6 6 6 2 (a) an dfo r an ad d i ti o n t o t ax u n d er s ect i on 6 6 5 1 (a)(1 ) fo r fai l u re t o t i m el y fi l e t hei r ret u rn . OPINION I. Gen eral p ri n ci p les A. Ab an d o n edi s s u es Th e Lark in s ’ o p en i n g b ri ef ch al len g es s o m e (b u t n o tal l ) o f t h e IRS’ s d et erm i n at i o n s i n t h e SNOD. W e co n s i d er an y i s s u e o r arg u m en tth atth e Lark i ns d i dn o t ad v an ce o n b ri ef as h av i n g b een ab an d on ed . See M en d es v . Co m m i s s i o n er, 1 2 1 T.C. 3 0 8 , 3 1 2 -3 1 3 (2 0 0 3); Ni ck lau s v . Co m m i s s i o n er, 1 1 7 T.C. 1 1 7 , 1 2 0 n .4 (2 0 0 1 ); Ry b akv . Co m

m i s s i on er, 9 1 T.C. 5 2 4 , 5 6 6 n .1 9 (1 9 8 8 ). W e d eci d e o n l y t h e i ss u es th atth e Lark i ns p l ead ed , ad d res s edo n b ri ef, an dd i dn o t
co n ced e. B. Is s u es n otp l ead edo r t ri edb y co n s en tfo r 2 0 0 8 A p et i t i o n fo r red et erm i n at i o n o f a d efi ci en cy d et erm i n edi n an SNOD

“ s h al l b e co m

p l et e, s o as t o en ab l e as cert ai n m en to f t h e i s su es i n ten d edt o b e p res en t ed .” Ru le 3 4 (a)(1 ). Th e p et i t i o n s h al l , am o n g o t h er t h i n g s , co n tai n “ [c] l ear
an d co n ci s e as s i gn m en t s o f each an dev ery erro r wh i ch th e p et i t i o n er al l eg es t o- 2 3 -

[* 2 3 ] h av e b een co m

m i t t edb y th e Co m m i ss i on er i n th e d et erm i n at io n o f th e d efi ci en cy

* * * . * * * An y

i ss u e n o trai s edi n th e as s i g nm en t s o f erro r s hal l b e d eem edt o b e co n ced ed .” Ru l e 3 4 (b )(4 ); s ee al so Fo ley M ach . Co . v . Co m m i s s i o n er, 9 1 T.C. 4 34 , 4 4 1 (1 9 8 8 ) (h o ld i n g th atth e Co urtd o es n otco n s i der i s su es wh i ch are n o trai s edb y th e p l ead i n g s). In cert ai n ci rcu m s t an ces , an i s s u e
n o trai sedb y

th e p l ead i n g s m ay

b e “ t ri edb y

ex p res s o r i m

p l i edco n s en to f t h e p art i es , * * * [an d ] treat edi n al l res p ect s as i f t h ey h adb een rai s edi n th e p l ead i n g s .” Ru l e 4 1(b )(1 ). Bu twe h av e h el d t h atwh en a p art y i s n o taware o f an i s su e attri al , h e can n o tb e h el dt o h av e ex p res s l y o r i m p l i ed l y co n s en t edt o th e t ri al o f t hati s s u e, as req u ired fo r ap p li cat i on o f Ru l e 4 1 (b ). See M ark ward tv . Co m m i s s i o n er, 6 4 T.C. 9 89 , 9 9 8 (1 9 7 5 ). In th ei r rep l y

b ri ef, t h e Lark i n s at tem

ptt o rai s e n ew i ss u es rel at edt o 2 0 0 8 , b u twe d o n o ten t ert ai n th em b ecau s e we fi ndth atn o n e o f t h es e i s s u es was p ro p erl y p l ead edo r t ri edb y

co n s en t
. 1
. Sch edu l e A d educt i o n s fo r 2 00 8 W e h o ldth atSch edu l e A d edu ct i o ns --m o rt gag e i n t eres t , i nv es t m en t i n t eres t , an d St at e an dl o cal t ax d edu ct io n s --fo r 2 0 08 are n o tati s s u e. Th e p et i t i o n d i s p u t edth e d i s al l o wan ce o f i n v es t m en ti n t eres tan dreal es t at e t ax d edu ct io n s fo r- 2 4 -

[* 2 4 ] 2 0 0 9 an d2 01 0 an dd is p ut edth e d i s al l o w an ce o f m o rt gag e i n t eres tfo r 2 0 1 0 b u twas s i l en tas t o an y

Sch edu l e A d edu ct i on s fo r 2 0 08
. Th e Co m m is s i o n er’ s p ret ri al m em oran du m refl ect edh i s u nd ers t an d i n g th at i t em i zedd edu ct io n s were i n d i s p u t e (as i ss u e “ 8 ”) “ fo r t ax y ears 2 0 0 9 an d2 0 1 0 ”
an d was s i l en tas t o 2 0 0 8 . (As we h av e n o t ed , th e Lark i ns d i dn o tfi le t h e req u i red p ret ri al m em o ran du m . ) At th e b eg i n n i n g o f t ri al th e Co urtu n d ert o o k t o co n fi rm
ex p li ci t l y th e i s s u es t o b e d eci ded . Th e Co m m i s s i on er g av e h is l i st o f i s su es , wh i ch were fewer t h anth e l i s ti n h i s p ret ri al m em o ran du m b u twh i ch d i di n cl u d e h i s i s s ue “ 8 ” (i .e., i t em i zedd edu ct i o n s fo r 2 0 0 9 an d2 0 1 0). In res p o n s e t o th e Co u rt ’ s qu ery , p et i ti o n er’ s co u ns el as s en tedt o th e Co m m i ss i o ner’ s l i s t an dag reed t h atth ere were “ [n ] o ex t ra i s s u es rai s edb y ei t h er p art y .” Th e Lark in s g av e n o t es t i m o ny as t o d educt i o n s fo r i n v es tm en ti n t eres to r m ort g ag e i n t eres tfo r 2 0 0 8
. Th e o nl y t es t i m on y

the Lark in s o ffered reg ard in g real es t at e t ax es fo r 2 0 08 p ert ai n edt o t h ei r res i d en ce i n En g l an d , an dM r. Lark i n ’ s d i s cu s s i on o f t h o s e t ax es
was t o d i s t in g u i sh th em

fro m th e o t h er i t em s o ffered i n th e Ex h i b i t5 th ath e p ro ffered i n s up po rto f h i s h o u s i n g ex cl us i o n (an i s su e l at er co nced edb y th e Co m m i s s i o n er). Th e Lark in s’ fi rs tco n t en t i o n th at t hey s h o ul db e al l o w ed ad d it i o n al Sch edu l e A d edu ct i on s fo r 2 00 8 (o th er t han th o s e al l o wedi n th e SNOD) was i n th ei r p o s t-t ri al b ri ef. Fo r s ub s t an t i at i o n o f real es t at e t ax es an d- 2 5 -

[* 2 5 ] i n v es t m en ti n t eres t , th e b ri ef ci tes o n l y th e 2 0 08 Sch edu l e K-1 fo r Treet o p s LLC, b u tat t ri al thi s d o cu m en twas n o tp ro ffered t o s ubs t an ti at e i n v es t m en ti nt eres to r real es t at e t ax d edu ct i o n s . Rat h er, M r. Lark i n ’ s o nl y t es t i m o ny ab ou tthi s Sch edu le K-1 was n o n s p eci fi c. He t es t i fi edg en eral l y ab o u t t h e p ro ces s o f p rep ari ng t h e Sch edu les K-1 fo r Larm o dtLLC an dTreet o p s LLC du ri n g th e y ears ati s su e (e.g ., as p arto f a n arrat i v e an s wer reg ard i ng th e real
es t at e act i v i ti es i n wh i ch h e an d h i s wi fe p art i ci p at ed ); ab o u t t he fact th atth e d i s t ri b u t i v e s h ares o f i t em s fro m Treet o p s LLC th atp et it i on ers cl ai m edwere

“ ro ll edup t h ro u g h t h e Larm o d tLLC K-1 ” b efo re b ei n g rep o rt edo n th ei r i n d i v i du al t ax ret u rn ; an d ab ou tth e “ fact ” t hat“ ev ery y ear * * * [t h ey ] wo u l d at t ach a Treet o p s [LLC Sch edu l e] K-1 al o n g wi t h a Larm o d t[LLC Sch edu l e] K-1 ”--an as s ert i o n n o to t h erwi s e s up po rt edb y th e reco rd . Th e p o s t -t ri al
co n ten t i o n s as t o Sch edu l e A d edu ct i o n s fo r 2 0 08 were n ei t h er p l ead ed n o r t ri ed b y co n s en t , s o th ey

are n o tp ro p erl y

i n th e cas e. 2
. Sch edu l e E d edu ct i o n s fo r 2 0 0 8 W e h o ldth atl o ss es al l eg ed l y s u s t ai n edfo r ren t al real es t at e act i v it y th at were rep o rt edo n th e Lark i n s ’ Sch edu l e E fo r 2 0 0 8 are n o tp ro p erl y ati ss u e. As we h av e n o t ed , th e Lark i n s d i dn o tfi l e an i n co m e t ax retu rn fo r 2 0 0 8 , b u tth ey d i d
s ub m i ta Fo rm

1 0 40 (p rep ared b y

M r. Lark i n) t o a rev en u e ag en t du ri n g an au d i t- 2 6 -

[* 2 6 ] an d b efo re t h e i s s u an ce o f t h e SNOD, wh i ch was ev i d en t l y p rep ared u s i n g i n fo rm at i o n co n si d ered i n au d i tfro m th atFo rm

1 0 40 . Th e p et i t i o n th atth e Lark i n s fi l edaft er recei v i n g th e SNOD d i sp u t edth e “ p ro p o s edredu ct i o n s t o [Sch edul e E] l o s s es cl ai m edi n 2 0 0 9 an d2 0 1 0 ”, b u t i t rai s edn o i ss u es reg ard i n g
an d m ad e n o referen ce t o Sch edu l e E l os s es fo r 2 0 08
. Th e Co m m is s i o n er’ s p ret ri al m em oran du m refl ect edh i s u nd ers t an d i n g th at Sch edu l e E ren t al real es t at e l o s s es were i n d is p u te (as i s s u e “ 9 ”) “ fo r t ax y ears 2 0 0 9 an d2 0 1 0 ” an dwas s i l en t as t o 2 0 0 8 . Ag ai n , th e Lark i n s d i d n o tfi l e a p ret ri al m em o ran du m ; an dattri al t h e Lark in s co n fi rm ed , th ro u g h co u n s el , th at t h ere were n o “ ex tra i s s u es rai s edb y ei t h er p art y .” Attri al M r. Lark i n t es ti fi ed(co n s i st en twi t h th e Fo rm 1 0 4 0 h e p rep ared ) t h atth e o n l y

p ro p ert y fo r wh ich h e rep o rt edren t al real es t at e act i v i t y o n Sch edu l e E fo r 2 0 0 8 was th e Bel m o n tp ro p ert y ; an dh e g av e t hi s t es t i m o n y as p art
o f h i s ex p l an at i o n fo r wh y h e h adt ak en a “ cap i tal wri t e-d o w n ” fo r t h e p ro p ert y o n Sch edu l e D, “ Cap i t al Gai n s an dLo s s es ”, aft er ch an g i n g th e m an n er i n wh i ch h e rep o rt edh i s act i vi t y on th atp ro p ert y fro m Sch edu l e C, “ Pro fi t o r Lo ss Fro m Bu s i nes s”, o f h is retu rn fo r 2 00 7 t o Sch edu le E fo r 2 0 0 8 . Th i s t es t i m o n y d i dn o t rai s e th e i s su e o f Sch edu l e E l os s es fo r 2 0 0 8, an d t h e i ss u e was n o ttri ed b y- 2 7 -

[* 2 7 ] co ns en t . Ag ai n, t he fi rs tt i m e t h e Lark i n s rai s edSch edu l e E l o ss es fo r 2 0 0 8
was i n th ei r p o s t -t ri al b ri ef--t oo l at e t o try th e i s su e i n th is cas e. 3
. FTC fo r 2 0 0 8 An FTC i s p ro p erl y

at i s s u e o n l y

fo r 2 0 0 9 , an dn o tfo r 2 0 08 . Th e o n l y FTC ad ju s t m en ti n th e SNOD was fo r 2 0 0 9 . Th e o nl y FTC co n t en t i on i n t he p et i t i o n -- an d t h us th e o nl y

s u ch cl ai m i n th e p l ead i n g s i n th i s cas e--was : “ T he Serv ice p ro p os es t o d i s al l o wFTC cl ai m edfo r 2 0 0 9
. Th i s rep res en t s carry fo rwardFTC”. Th e Co m m is s i o n er’ s p ret ri al m em oran du m refl ect edh i s u nd ers t an d i n g th at t h e o n ly FTC i s su e i n th i s cas e (i s s u e “ 1 2 ”) i s “ [w] h et h er t h e Lark i n s are en t i t l ed t o a Fo rei g n Tax Cred i t i n th e am o u n to f $ 1 6 ,2 0 7 fo r t ax y ear 2 0 09 ”; th e Lark i n s d i dn o t fi l e t h e req u i redp ret ri al m em o ran du m ; an dattri al th ey co n fi rm ed , th ro u g h
co u ns el , th atthere were “ no ex t ra i s s ues rai s edb y ei t h er p art y .” Du ri n g M r. Lark i n ’ s t es ti m o n y , th e Co u rtas k edp et i t i o n ers ’ co un s el : “ Is th e d i s pu t e ab o u t fo rei gn t ax cred itfo r 2 0 0 9 o n l y ? ” Co u n s el rep l i ed : “ Yes , Yo u r Ho n o r.” To th e
s am e effect , th e Lark i n s ’ fi rs tp o s t -t ri al fi li n g --a m o ti o n t o s up pl em en tth e reco rd

-- s t at ed : “ Th i s i s s u e i s wh et h er Pet i t i o ners are en t i t l edt o a fo rei g n t ax cred i tfo r t h e p aym en t o f t ax es t o th e Un i t edKi n g d o m i n 2 0 09 .” In th ei r p o st -t ri al b ri efs , h o wev er, t h e Lark i n s at t em p t edt o ch an g e co u rs e: Th ei r o p en i n g b ri ef p u rp o rt edt o ad da co nt en t i o n as t o an FTC fo r 2 0 0 8 , b u twe- 2 8 -

[* 2 8 ] wi ll n o ten t ert ai n th i s co nt en t i o n s i n ce i t co n fl i ct s wi t h th ei r s t at em en t s at t ri al an dth e p l ead i n g s up o n wh i ch th e cas e i s b as ed
. Th e Lark in s ’ o p en i n g b ri ef was equ i v o cal ab ou twh ether t h ei r FTC cl ai m
was fo r U.K. t ax es p ai di n th e y ears ati s s u e (we fi n d t h atn o s u ch t ax es were p ai d )
o r aro s e i n st eadfro m

carry o v ers fro m

p ri o r y ears . Bu t t h e Lark i n s ’ rep ly b ri ef
s t at edth at“ [t ] h e i s su e i s n o t i f Pet i t i o n ers h ad an y i n co m e o r i f t h ey p ai dan y fo rei gn t ax es du ri n g t h e y ears 2 0 08 -2 0 1 0, t he i s s u e i s wh et h er t h ey p ro p erl y u s eda fo rei gn t ax cred itcarry o v er fro m p ri o r y ears .” W e t h erefo re ad d res s the FTC o n l y as t o 2 0 0 9 an do n l y

as t o carry ov ers fro m p re-p et i t i o n y ears --i .e., i n th e wo rd s o f t he p et i t i o n , “ FTC cl ai m edfo r 2 0 0 9 ”
as “ carry fo rwardFTC”--an d we t reat as co n ced edan y o t h er FTC cl ai m s . C. Bu rd en o f p ro of 1
. Gen eral ru l e Th e IRS’ s d et erm i n at i o n s are p res u m edco rrect , an d t ax p ay ers g en eral l y b ear t he b u rd en t o p ro v e t h ei r en t i t l em en t t o an y d edu ct i o n s t h ey cl ai m . Ru l e 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 ). Tax pay ers m u s ts at i s fy

th e
s p eci fi c req u i rem en t s fo r an y d edu ct i o n cl ai m ed . INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ).- 2 9 -

[* 2 9 ] Th e t ax p ay er m

us tcarryh i s b urd en o f p ro o f wi th ev i d en ce o ffered attri al , t o wh ich h is b ri ef s ho u l drefer. 8 Wh ere t h e ev i d en ce p res en t edat t ri al i s i n s u ffi ci en tt o s up p o rta fi n d i n g t h ata p art i cu l ar ex p en s e i s d edu ct ib l e, we m u s t
s u s t ai n th e IRS’ s d et erm i nat i o n s an dd i sal l o w th e d edu ct i o n .

2
. Reco rd -k eep i n g Sect io n 6 0 0 1 req u i res th at“ [e] v ery p ers o n l i ab l e fo r an y

t ax i m po s edb y th i s t i tl e, o r fo r t h e co ll ect i o n t h ereo f, s h al l k eep s u ch reco rd s, ren d er s u ch s t at em en t s , m ak e s u ch retu rn s, an dco m p l y wi t h s u ch ru l es an dreg u l at i o n s as th e Secret ary
m ay fro m t i m e t o t i m e p res cri b e.” (Em p h as i s ad ded .) A t ax p ay er i s th u s req u i red t o k eep s u ffi ci en treco rd s t o s ub s t an t i at e h i s g ro ss i nco m e, d edu ct i o n s , cred i t s , an d
o t h er t ax at t ri b u t es . See al s o 2 6 C.F.R. s ec. 1 .6 0 0 1 -1 (a), In co m e Tax Reg s . 9

8 See Ru l e 1 5 1 (e)(3 ) (“ A l l b ri efs * * * s h al l co n t ai n * * * [p ] ro p o sed fi nd i ng s o f fact * * * b as edo n th e ev i d en ce * * * . * * * [T] h ere s h al l b e i ns ert ed referen ces t o t h e p ag es o f t h e t ran s cri p to r t h e ex h i b i t s o r o t h er s o u rces rel i edup o n t o s up p o rtth e s t at em en t
. ”); Ad ey em o v . Co m m i s s i o n er, T.C. M em o . 2 0 1 4 -1 , at * 2 8 ; D’ Erri co v . Co m

m i ss io n er, T.C. M em o . 2 0 1 2 -1 4 9 , s l i p o p . at 1 9 (“ W e n eed n o t(an dwi l l n o t ) u nd ert ak e t h e wo rk o f s o rt i n g t h ro u gh ev ery p i ece o f ev i d en ce p et i t i o n ers h av e p ro v i dedi n an at t em p t t o fi n ds up p ortfo r p et i t i o n ers ’ u lt i m at e l eg al p o s i t i o n s t ak en i n th i s cas e”).

9 See al s o 2 6 C.F.R. s ec. 1 .4 4 6 -1 (a)(4 ), In co m e Tax Reg s . (“ E ach t ax p ay er i s req u i redt o m ak e a ret u rn o f h i s t ax ab l e i n co m e fo r each t ax ab l e y ear an d m u s t m ai n t ai n s u ch acco u n t i n g reco rd s as wi l l en ab l e h i m t o fi l e a co rrect retu rn . See s ect i on 6 0 0 1 an d t h e reg u l at io ns th ereu n d er. Acco u n t i n g reco rd s i n cl u d e th e t ax p ay er’ s reg u l ar b o o k s o f acco u n tan d s uch o th er reco rd s an dd at a as m ay b e (co n ti n u ed ...)- 3 0 -

[* 3 0 ] Th e reg u l at i o n s i m p l em en t i n g t h ats t atu t e i n cl ud e 2 6 C.F.R. s ect io n 1 .6 00 1 -1 (a), In co m e Tax Reg s ., wh i ch p ro v id es : “ [A] n y p ers o n req u i redt o fi l e a ret u rn o f i n fo rm at io n wi t h res p ectt o i n co m e, s h al l k eep s uch p erm an en tb o o k s o f
acco u n t or reco rd s * * * as are s u ffi ci en t t o es tab l is h th e am o u n t o f g ro s s i n co m e, d educt i o n s , cred i t s , o r o t h er m at t ers req u i redt o b e s h o wn b y s u ch p ers on i n an y ret u rn o f s u ch t ax ”. Tax p ay ers are req u i redt o ret ai n th ei r b o o k s an dreco rd s as l o n g as th ey m ay b eco m e m at eri al : Ret en t i on o f reco rd s .--Th e b o o k s o r reco rd s req u i redb y th i s s ect i o n s h al l b e k ep tatal l t i m es av ai l ab l e fo r i n s p ect i o n b y au t h o ri zed i n t ern al rev en u e o ffi cers o r em p lo y ees , an ds h al l b e ret ai n eds o l o n g as th e co n t en t s th ereo f m ay b eco m e m at eri al i n th e ad m i n i s trat i o n o f an y i n t ern al rev en u e l aw. [2 6 C.F.R. s ec. 1 .6 0 01 -1 (e), In co m e Tax Reg s .] 3
. Th e Co h an ru l e Th e Co d e’ s s ub s t an t iat i o n ru les are s ubjectt o s o m e fl ex i b i li t y . When a t ax p ay er ad eq u at el y es t ab l i s h es th ata d educt i bl e ex p en s e was p ai d o r i n cu rred b u t d o es no tes t ab l i s h th e p reci s e am ou n t , th e Co u rt m ay i n s o m e i n s t an ces es t i m at e t h e al l owab l e d edu ct i o n, b eari n g h eav i l y ag ai n s tth e t ax p ay er wh o s e i nex act i tu d e

9 (...co n t in u ed ) n eces s ary t o s up p ort t h e en t ri es o n h i s b oo k s o f acco u n t an do n h i s return , as fo r ex am p l e, a reco n ci l i at io n o f an y d i fferen ces b et ween s u ch b o o k s an dh i s retu rn ”).- 3 1 -

[* 3 1 ] i s o f h is o wn m ak i n g . Co h an v . Co m m i s s i o n er, 3 9 F.2 d5 4 0 , 5 43 -5 4 4 (2 d Ci r. 1 9 30 ). Th ere m

u s t , h o wev er, b e s uffi ci en t ev i d en ce i n th e reco rdt o p ro v i d e a b as i s up o n wh i ch an es t i m at e m ay b e m ad e an dt o p erm i t t h e Co u rtt o co n cl u d e t h ata d edu ct ib l e ex p en s e, rat h er t han a n o n d edu ct i b le p ers on al ex p en s e, was i n cu rred i n atl eas tth e am ou n tal l o wed . Van i cekv . Co m m i s s i o n er, 8 5 T.C. 7 3 1 , 7 4 3 (1 98 5 ). W e m

u s th av e s o m e b as i s o n wh i ch s u ch an es t i m at e m ay b e m ad e. Id . (ci t i n g W i l l i am s v . Un i t edSt at es , 2 4 5 F.2 d5 5 9 (5 t h Ci r. 1 9 5 7 )).

4
. W i t n es s cred i b i l it y Attri al M r. Lark i n was th e s o l e wi tn es s fo r p et i t i o n ers . W e o bs erv e t h e
can d or, s i n ceri t y , an dd em ean or o f a wi t n es s i n o rd er t o ev al u at e h is t es t i m o n y . Th e m ere fact th atM r. Lark i n ’ s t es t i m o n y was u n o pp o s edd o es n o t m ean t h atwe wi l l m ak e fi nd in g s co n s i s t en twi t h i t. W e wi l l n o t accep tth e t es ti m o ny o f a wi t n es s atface v al u e t o th e ex ten ti t i s i m p l au si b l e o r n o tcred i b l e i n v i ew o f t h e t o t al i t y o f t h e s u rro u n d i ng ci rcu m s t an ces . Neo n at o l og y As so cs ., P.A. v
. Co m m i s s i o n er, 1 1 5 T.C. 4 3 , 8 4 (2 0 0 0 ), aff’ d , 2 9 9 F.3 d 2 21 (3 d Ci r. 2 00 2 ). In g en eral , M r. Lark i n ’ s t es t i m o n y o n co n t es t edm at ters was n o tco n v i n ci n g . Acco rd in g ly , we g en eral l y d o n o trel y

o n h is t es ti m o n y

t o s up p o rtthe Lark i n s ’ p o s i t i on s , ex cep tt o th e ex t en th i s t es ti m o n y i s co rro b orat edb y

rel i ab l e d o cu m en t ary

ev i d en ce.- 3 2 -

[* 3 2 ] 5
. Sh i ft i n g th e b u rd en o f p ro o f Sect i o n 7 4 9 1 (a) p ro v i d es an ex cep ti o n t h ats h i ft s t he b u rd en o f p ro o f t o th e Co m m i s s i o n er as t o an y

fact ual i s s u e rel ev an t t o a t ax p ay er’ s l i ab i l i t y fo r i n co m e t ax i f: (1 ) t h e t ax pay er i nt ro du ces cred ib l e ev i d en ce wi t h res p ect t o th e i s su e an d (2 ) t h e t ax p ay er h as s at i sfi edcert ai n o t h er co n d it i on s , i n cl u d i n g th ath e h as
co m p l iedwi t h t h e s ub s t an t i at i on req u i rem en t s fo r an y i t em s etfo rt h i n th e Co d e
an d h as m ai nt ai n edal l reco rd s req u i redb y th e Co d e. See s ec. 7 4 9 1(a)(1 ) an d(2 ). A t ax pay er b ears th e b u rd en o f p ro v i n g th ath e h as m et t h e req u i rem en t s o f
s ect i on 7 4 9 1 (a). Ro l fs v . Co m m i s s i o n er, 1 3 5 T.C. 4 7 1 , 4 8 3 (2 0 1 0 ), aff’ d, 6 6 8 F.3 d8 8 8 (7 t h Ci r. 2 0 1 2). Su ch “ cred i b le ev id en ce” i s ev i d en ce o f a q u al i t y th at , aft er cri t i cal an al y s i s , a co u rtwo u l dfi n d su ffi ci en t up o n wh i ch t o b as e a d eci s io n o n th e i s s u e i f n o
co n traryev i d en ce were s ub m i t t ed . A t ax p ay er wh o p ro v id es o n l y s el f-s erv i n g 1 0

1 0 As we recen t l y

o b s erv edi n Keel s v . Co m m i s s io n er, T.C. M em o . 2 0 2 0 -2 5, at* 1 5 -* 1 6 : W i t n es s t es t i m o n y

co u l dal m o s tal w ay s b e s ai d t o b e “ sel f-s erv i n g ”, b u tth at fact o r al o ne i s n ota reas o n t o au t o m at i cal l y rejectth e ev i d en ce as u n rel i ab l e. * * * W e d eci d e wh et h er a wi t n es s ’ t es t i m o n y i s cred i b l e b y

rel y i n g o n o b

ject iv e fact s, t he reas o nab l en es s o f t h e t es t i m o n y , th e co n s is t en cy o f t h e wi t n es s ’ s t at em en ts , an dth e wi t n es s ’ d em ean o r. * * * W e m ay d i sco u n tt es t im on y

wh i ch we fi n d t o b e u n wo rt hy

o f b el i ef, * * * b u twe m ay n o tarb i t rari l y

d i s reg ard (co n ti n u ed ...)- 3 3 -

[* 3 3 ] t es t i m o n y

an di n co n cl u s i v e d o cu m en tat i o n fai l s t o p ro v i de cred i bl e
ev i d en ce. See Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 38 , 4 42 -4 46 (2 0 0 1 ); s ee al s o Bl o dg et t v . Co m

m i s s i o n er, 3 94 F.3 d1 0 3 0 , 1 03 5 -1 0 3 9 (8 t h Ci r. 2 0 05 ) (h o l d i n g th e
s am e), aff’ g T.C. M em o . 2 0 0 3 -2 1 2
. Th e Lark in s arg u e t h atthe d o cu m en t ary ev i d en ce t h ey s ub m i t ted , co m b i n ed wi t h M r. Lark i n ’ s t es t i m o n y at t ri al , i s s u ffi ci en tt o s h i ft t he b u rd en o f p ro o f. W e d i s ag ree. As we s h ow b el o w , th e Lark i n s ’ d o cu m en taryev i d en ce i s l ack in g o n al m o s tev ery

i s s u e, an d t h ei r t es t i m o n i al ev i d en ce--co n s is t i n g s ol el y o f M r. Lark i n ’ s t es ti m o n y --was n o tco n v i n ci n g en o ug h t o p ro v e an y fact s wi t h o u t
s i gn i fi can tco rro b o rat i n g ev i d en ce (wh i ch i s l arg el y ab s en t). Th e Lark i ns h av e n o t p ers u ad edu s t h ats ect i o n 7 4 91 (a) ap p l i es t o s h i ftth e b u rd eno f p ro o f t o th e Co m m i s s i o n er. W e co n cl u d e th atth e Lark in s b ear t h e b u rd en o f p ro o f as t o th e d efi ci en ci es d et erm in ed
.

1 0 (...co n t i nu ed ) t es t i m o n y th ati s co m

p et en t , rel ev an t , an du n co n t rad i ct ed* * *
.- 3 4 -

[* 3 4 ] D. Ev i d en ce s ub m i t t edaft er t ri al

1
. Th e Lark in s ’ m o t io n t o s up p lem en tth e reco rd Th e d o cu m en ts we m

u s t ad dres s i n co n n ect i o n wi t h t h e Lark i n s ’ th i rd
m o ti o n t o s up p l em en t t h e reco rd 1 1 al l p ert ai n t o th ei r cl ai m edfo rei gn t ax cred i t carry o ver. Th e d o cu m en t s are: (1 ) a l et t er fro m th e IRS t o the Lark in s d at ed Decem b er 1 5 , 2 0 15 , reg ard in g th ei r Fo rm 1 0 40 fo r 2 0 0 7 an d en cl o s in g a Fo rm 4 5 4 9 , “ In co m e Tax Ex am i n at i o n Ch an g es ”, refl ect i n g t h atth e IRS “ wi l l fu l l y redu ce t h e t ax s ho wn ab o ve, al o n g wi t h an y rel at edp en al t i es an di nt eres t ”; (2 ) t h e SNODs i s s u edt o th e Lark i ns i n Ap ri l 2 0 08 an dM arch 2 00 9 , co v eri n g thei r t ax y ears 2 0 0 3 th ro u g h 2 0 0 6 ; an d(3 ) t h e Lark in s ’ an s w eri n g b ri ef b efo re u s i n Lark i n I. Th e Lark in s arg u e t h atthe IRS’ s l et t er an dFo rm 4 5 4 9 s up po rtth ei r p o s i t io n

“ t h atth e t ax retu rn s fi l edi n 2 0 0 8 (an d2 0 0 9 an d2 0 1 0 ) were fi l ed i n g o o dfai t h an d t o the b es t o f Pet it i on ers ’ ab i l i ty g i v en t h e fact t hatth ey

d i dn o th av e t h e ‘ fi n al ’ ret u rn fo r 2 0 0 7 .” Th ey as s ertwi t h res p ectt o th e SNODs an dan s weri n g b ri ef t h at

“ o n e can n o ts ay

o r arg ue t h atPet i t i o n ers were n eg l i g en t i n p rep ari n g th ei r 2 0 0 8

1 1 Two o f t h e d o cu m en t s t h e Lark i ns o ffered --a fo rm fro m HM Rev en u e & Cu s t om s an da l et t er fro m Pri ceW at erh ou s eCo o pers LLC--p ert ai n t o an i s s u e t h at t h e Co m m i s s i o n er h as co n ced ed . As fo r t h es e d ocu m en t s , th e m o t i o n t o reo p en t h e reco rdi s n ow m o o tan dwe d o n o tad d res s th em fu rt h er.- 3 5 -

[* 3 5 ] t ax retu rn s wh en th ey d i dn o tkn o wth e p reci s e am o u n to f Fo rei g n Tax Cred i t s th atwere av ai lab l e wh enth ei r 2 0 0 8 t ax retu rn was fi l ed * * * [an dth at t h es e d o cu m en t s ] p u t[] i n co n t ex tPet i t io n ers [s ic] b el ief as t o th e Fo rei g n Tax Cred i tth atwas av ai l ab l e t o th em fo r 2 00 8
. ” Th e Lark i n s ack no wl ed g e t h atth ey fi led a 2 0 0 7 t ax retu rn that“ s o u g h ta Fo rei gn Tax Cred it , an dth e Cred i twas al l o wed
. ” As refl ect edi n the Fo rm 4 5 4 9 , th e am ou n to f FTC al l o wedwas $ 1 3 5 ,4 1 1 , an am o un tthatco rres p o n d edex act l y wi t h t h e am o u n to f t h e Lark i n s ’ redu ced tax l i ab il i t y . Th e reco m p u t at i o n o f t he Lark i n s ’ t ax l i ab i l i t y fo r 2 0 0 7 d et ai led i n th e fo rm

d o es n o ts h o w th e reas o n s fo r t h e ad ju s t m en t s , th e
co m p u t at i o n o f t h e FTC ap p l i edt o t h ei r t ax l i ab i l it y fo r 2 0 07 , o r wh et h er an y FTC
rem ai n s t o carryfo rward
. Wh et h er t o reo p en th e reco rdt o recei v e ad d i t io n al ev id en ce i s a m at t er wi t h i n th e d i s cret i o n o f t h e t ri al co u rt . Zen it h Rad i o Co rp . v . Hazel t i n e Res earch , In c., 4 0 1 U.S. 3 2 1 , 3 3 1 (1 9 7 1 ); Bu t l er v . Co m m i s si o n er, 1 1 4 T.C. 2 7 6 (2 0 0 0 ), ab ro g at edo n o t her g ro u n d s b y Po rt er v . Co m

m i s s i o ner, 1 3 2 T.C. 2 0 3 , 2 0 6 -2 0 8 (2 0 0 9). A m ot i o n t o reo p en th e reco rdwi l l n o t b e g ran t edu n les s , am on g o t h er req u i rem en t s , th e ev i d en ce rel iedo n : i s n o t m erel y cu m u l at i v e o r i m

p each i n g , i s
m at eri al t o th e i ss u es i n vo l v ed , an dp ro b ab l y wo u l d ch an ge t h e o u t co m e o f t h e
cas e. Bu t l er. v . Co m

m i s s i o ner, 1 1 4 T.C. at2 8 7 . W e al so t ak e i n t o acco un to t h er- 3 6 -

[* 3 6 ] fact o rs , s u ch as “ t h e ch aract er o f t h e ad d i t io n al * * * [ev id en ce] an dth e effect o f g ran t i n g th e m ot i o n ”. See Pu rv i s v . Co m m i s si o n er, T.C. M em o . 2 0 2 0 -1 3 , at* 3 0 (qu o t i n g SEC v
. Ro g ers , 7 9 0 F.2 d 1 4 5 0 , 1 4 6 0 (9 t h Ci r. 1 98 6 )). Fo r t h e fo l l o w i n g reas on s , we wi l l d en y th e Lark i n s’ m o t i o n . 2
. Del ay Th e Lark in s were g ran t edtwo co nt i n u an ces o f t h ei r t ri al . Aft er t ri al th ey
m o vedt o reo p en th e reco rd , an dthe Co u rtd i rect edth e Co m m is si o n er t o co o p erat e wi t h th e Lark i n s , res u l t in g i n th e fi l i n g o f a s up p lem en t al s t ip u l at i o n. Th ey fi l eda
s eco n dm o t i o n t o reo p en th e reco rd , wi t h an equ iv al en tres ul t . Th e Lark i n s’ th i rd
m o ti o n t o s up p l em en t t h e reco rdwas fi l eds i m u l t an eo u s ly

wi th th ei r rep l y

b ri ef-- wh en th e Co m

m i s s io n er’ s o p p ortu ni t y

t o res p o ndt o s u ch ev i d en ce u n d er t h e
ex i s t in g b ri efi n g s ch edu l e was fo recl o s ed . Th e Lark i n s h av e b een g i ven
rem ark ab l e l at i tud e fo r p rep ari n g an d p res en t i n g th ei r cas e. Th i s fi n al ad d i t i o n al req u es ti s wel l p as t t h e b reak i n g p o i n t
. In th ei r m o t i o n th e Lark i n s s eem t o arg u e, i n effect , thatth ey were s u rp ri s ed b y a n ew co n t en t i o n m ad e b y th e Co m m is s i o n er i n h is p o s t-t ri al an s weri n g b ri ef (an dth atth ey

o u g h tth erefo re t o b e al l o w edt o p u to n ev i d en ce t o co u n t er t h at
co n ten t i o n ). Th e n ew co n t en t i o n s up p o s ed l y rai s edb y th e Co m m i s si o n er was th at t h e ab s en ce i n th i s cas e o f ev i d en ce reg ard i n g t h e Lark i n s ’ earl ier t ax y ears- 3 7 -

[* 3 7 ] (i n v o l v edi n Lark in I) res u l t s i n th e Lark i n s’ h av i n g fai ledt o s ub s t an t i at e t h e fo rei gn t ax cred itcarry o v er cal cu l at ed fo r t h o se earl i er y ears an dth erefo re h av i n g fai l edt o d em o n s t rat e t he carry o v er av ai l ab l e fo r 2 0 0 9. Th e Lark i n s arg u e t h atth e Co m m i s s i o n er ch an g edco u rs e an d“ i s es s en t i al l y t ak i n g th e p o s i t io n th atth e i n fo rm at i o n ab o utth e p ri o r t ax y ears i s rel ev an t ” t o t h e fo rei g n t ax cred i ti s s u e wi t h res p ect t o th e d efi ci en cy fo r each y ear as wel l as th e ap p l i cab l e p en al t i es . In fact , th e Co m

m i ss i o n er’ s p ret ri al m em oran du m , fi l edm o re t h an t w o week s b efo re t ri al , h ads t at eds u cci n ct l y : “ [T] he m at eri al s th ath av e b een p ro v i d ed b y th e p et i t i o n ers t o th e res po n d en tare i n co m p l et e an d u n cl ear i n s h o wi n g t h e p aym en t h i s t ory

o f cl ai m edfo rei g n t ax p aym en t s .” (Em p h as i s ad d ed .) An dev en i f t h e Co m

m i s s i o n er h adn o ts o s t at ed , i trem ai ns tru e (as we ex p l ai n b el o w i n p artV) th ata t ax p ay er cl ai m i n g a carry o v er o f a fo rei g n t ax cred i tm u s tes t ab l i s h b o t h th e ex i s t en ce o f t he cred i t an dth e am ou n to f an y cred i tth atrem ai n s (aft er ap p li cat io n t o p rev i o u s y ears ) t o b e carri edo v er t o th e y ear at i s s ue. In h eren ti n t h e Lark i n s ’ o wn cl ai m

o f a cred i tcarry fo rward --wh at ev er t h e Co m m i s s i o n er m ay
o r m ay n oth av e s t at edb efo re t ri al --i s th e Lark i n s’ o b l i g at i o n t o p ro ve t h atth e cred i taro s e i n p as ty ears an dwas n o ten t i rel y ap p l i edi n p as ty ears . Th ey can n o t h av e b een s u rp ri s edo r p reju d icedwh en th e Co m m i s s i o ner arg u edth atth ey h ad fai l edt o d o s o .- 3 8 -

[* 3 8 ] Befo re an y

au d ito r l i t i g at i o n , th e Lark in s h ad a du t y t o m ai n t ai n reco rd s t o
s ub s t an t i at e t h ei r ret u rn p o si t i o n s . See 2 6 C.F.R. s ec. 1 .6 00 1 -1 (e), In co m e Tax Reg s. (“ b o o ks o r reco rd s * * * s h al l b e ret ai n eds o l o n g as t h e co nt en t s th ereo f
m ay b eco m e m at eri al i n th e ad m i n i s t rat io n o f an y i n t ern al rev en u e l aw”); s ee al so Bai l ey v . Co m m i s s i o ner, T.C. M em o . 2 0 1 2-9 6 , 2 0 1 2 W L 1 0 8 2 9 2 8 , at* 1 7 (“ Th ere i s n o p ro v i s i o n i n s ect io n 6 0 01 o r t h e reg u l at io n s t h ereu n d er t h atex cu ses t ax p ay ers fro m

ret ai n i ng th ei r reco rd s i f t h e IRS fai l s t o n o t i fy th em o f an i m m i n en t ch al l en g e”), aff’ d , No . 1 3 -1 4 5 5 , 2 0 1 4 W L 1 4 2 25 8 0 (1 s tCi r. 2 0 1 4 ). Th e p res en ce o f t h e FTC carry fo rwardi ss u e i n t hi s cas e fro m i t s o n s etb el i es th e Lark i n s ’ as s ert i on th at t h e p res en ce o r ab s en ce o f d o cu m en tat i o n t o s ub s t an t i at e t h e carry fo rward(o r an al leg edex cu s e fo r t h e l ackth ereo f) i s s om eh o w n ewl y rel ev an t
. Th ey

p res en tn o v al i dju st i fi cat i o n fo r th ei r d el ay i n o fferi n g ev i d en ce. To al l ow t h e Lark i n s t o s up p l em en tth e reco rdwi t h th es e d o cu m en t s atth i s ju n ctu re wo u l dn o ts erv e t h e i n t eres ts o f ju s t i ce. Cf. Fi ed zi u szk o v . Co m m i s s i o n er, T.C. M em o . 2 0 1 8 -7 5 , at* 2 6 (fi n di n g ju s ti ce b y reo p en i n g th e
reco rdt o ad d res s a s ect i o n 6 7 5 1 (b ) i s s u e wh en th e s t at e o f t he l aw o n th at i s s u e h ad ch an g edaft er th e reco rdcl o s ed an dn ei t h er p art y h adn o t i ce o f o r rai sedth e i s su e du ri n g th e p ro ceed i n g s ), aff’ d , 7 9 6 F. Ap p ’ x 9 4 7 (9 t h Ci r. 2 0 2 0). Th e effect
o f g ran t i n g th e m o t io n wo u l db e u n fai r t o th e Co m m i s s i o n er, s i n ce i t wo u l dal l o w- 3 9 -

[* 3 9 ] th es e d o cu m en t s t o co m e i n t o th e reco rd aft er h e l i t ig at edan en t i re cas e t h ro u g h t ri al an dp o s t-t ri al bri efi n g . See Pu rv i s v . Co m m i s s io n er, T.C. M em o . 2 0 2 0 -1 3 , at* 3 0-* 31
.

3
. M at eri al i t y Ev en i f th e Lark in s co u lds h o w th atth ei r n eedfo r ev i d en ce rel at edt o th e FTC carry fo rwardwas n o tap p aren tb efo re t ri al , we wo u l d d en y th ei r m o t i o n . W e
s h o u ldreo p en t h e reco rdo n l y wh ere t h e p ro ffered ev i d en ce i s m at eri al rat h er t h an
cu m u l at i v e o r i m

p each i n g, s ee Bu t l er v . Co m m i s s io n er, 1 1 4 T.C. at2 8 7 ;
reo p en in g th e reco rdi s g en eral l y n o t warran t edu n l es s th e ev i d en ce o ffered wi l l h av e a p ro b ab le i m

p acto n th e o u t co m e o f t h e cas e. Rel ev an cy al o ne i s n o t
en o ug h t o m eetth e m at eri al i t y s t an d ardt o reo p enth e reco rd ; rat h er, t h e Co u rt

“ wi l l n o t g ran ta m o t i o n t o reo pen th e reco rdu n l es s * * * th e ev i d en ce p ro b ab l y
wo u l dch an g e t h e o u tco m e o f t h e cas e.” Id . at2 8 6 -2 8 7 . Th e Lark i n s h av e n o t
s h o wn th e m at eri al i t y th ati s req u i redb efo re we co u ldg ran tth ei r req ues tt o reo p en t h e reco rd
. Th e d o cu m en ts th e Lark i n s n o w as k u s t o ad m itd o n o tad dan yt h i n g
m at eri al t o wh eth er t h ey

are en t i t l edt o an FTC carry o v er o r s ho u l db e l i ab l e fo r
an y p en al t y ari s i n g fro m

cl ai m i n g an FTC carry o v er. Th e SNODs are s i m p l y
cu m u l at i v e o f M r. Lark i n ’ s t es t i m o n y th atth e earl i er y ears were u n d er- 4 0 -

[* 4 0 ] ex am i n at i on , wh ich (h e s ay s ) l eft h i m i n an u ncert ai n p o s i t i o n i n th e p rep arat i o n o f h is return s fo r t he y ears at i s s ue. W e ad d res s t h is arg u m en t b el o w i n p art VII an ds h ow t h at , as a m at t er o f l aw, i ti s u n av ai li n g . M oreo v er, as a
m at t er o f fact th e co n t en t i o n t h atwh en the ret u rnwas du e M r. Lark i n co u l dn o t
co m p u t e h i s FTC carry o ver i s s el f-co n trad ict ed , b ecau s e h e u n eq u iv o cal l y t o o kthe p o s i t i on attri al th atth e FTC carry ov er t o 2 0 0 9 co u l db e cal cu l at edu s i n g th e i n fo rm at i o n fro m h i s 2 0 0 7 an d 2 0 0 8 retu rn s an dSch edu l es K-1 fro m SSD fo r t h e y ears ati s s u e. Th erefo re t h e Lark i n s can n o t p ers uas i v el y arg u e t h atu ncert ai n t y

i n t h ei r al l o wab l e fo rei g n t ax cred i tfo r y ears b efo re 2 0 0 7 p rev en t edth em fro m
m ak i n g a cl ai m , o n t h e b as i s o f t h e i n fo rm at i o n av ai l ab l e t o th em atthe t i m e t h ey p rep ared th ei r ret urn s fo r t he y ears ati ss u e, fo r an FTC carry o v er t o 2 0 0 9
-- p art i cu l arl y

wh en th ey

d i di n fact m ak e s u ch a cl ai m . Th e IRS Fo rm

4 5 49 s h o wi n g t h at$ 1 3 5 ,4 1 1 o f FTC was u s edan dal l o wedi n 2 0 0 7 l ik ewi se h as l i t tl e b eari ng o n t h i s cas e; i t s ho ws th at t h e Lark i n s ap p aren t l y h ad s uffi ci en ti n fo rm at i on t o cl ai m an FTC fo r 2 0 0 7 th atwas u lt i m at el y al l o wed
. Th ey n o w arg u e t h att o cl ai m

th e FTC fo r a l at er y ear was i m p o s s ib l e an dy etthat t h ey are en t i t l edt o i t . Becau s e t h e Fo rm 4 5 4 9 co n tai n s n o i n fo rm at i on ab o u tth e
co m p u t at i o n o f t h e FTC o r wh et h er an y rem ai n s t o carryfo rward , s ee 2 6 C.F.R.- 4 1 -

[* 4 1 ] s ec. 1 .9 0 5 -2 (a)(2 ), In co m e Tax Reg s ., th i s d o cu m en tcan n ots erv e t h e p u rp os e o f s ub s tan t i at in g t h e cred i t
. Th e i n fo rm at i o n o ffered d o es n o tju s t i fy reo p en i n g t h e reco rdu n d er t h e
co n si d erat io n s s etfo rt h i n Bu t ler v . Co m m i s s io n er, 1 1 4 T.C. at2 8 6 -2 8 7 . Fo r t h es e
reas on s we wi ll d en y

th e Lark in s ’ th i rdm ot i o n t o s upp l em en t t h e reco rd an dwi ll g ran tthe Co m

m i s s io ner’ s m o t i o n t o s t ri k e an y referen ces i n t h e Lark i ns ’ rep l y b ri ef t o th e m at eri al thatwas the s ub ject o f t h e m o t i o n . II. Sch edu l e A d edu ct i o n s Tax p ay ers wh o i t em i ze t h ei r d edu ct io n s are al l o wedt o d edu ct i n t eres tp ai d du ri n g th e t ax ab le y ear wi t h res p ect t o cert ai n ty p es o f i n d eb t ed n es s . Sec. 1 6 3
. A. M o rt g ag e i nt eres t 1 2 1
. Gen eral p ri n ci p l es Sect io n 1 6 3 (h )(3 ) p ro v i d es t h ati n t eres to n a q u al i fi edres id en ce i s d educt i b l e b y

n o n -co rp orat e t ax p ay ers . Qu al i fi edres i d en ce i n t eres ten co m p as s es i n t eres tp aym en ts o n tw o ty p es o f d eb t : acq ui s i t i o n i nd eb t edn es s an dh o m e eq u i t y i n d eb t ed n es s . Sec. 1 6 3 (h )(3 )(A). “ Acqu i s i t i on i n d eb ted n es s ” g en eral ly m ean s d eb t i n cu rred i n , o r t h at res u lt s fro m th e refi nan ci n g o f d eb t i n cu rred i n ,

1 2 Cf. Lark i n I, at* 6 2 -* 6 4 (h ol d i ng th ath om e m o rt g ag e i n teres td edu ct edfo r t h e y ears 2 0 0 3 -0 6 was n ots ub s t an t i at ed ); Lark i n II, 2 0 2 0 W L 2 3 0 1 46 2 , at* 1 (affi rm i n g ).- 4 2 -

[* 4 2 ] “ acq u i ri n g , co n s tru ct in g , o r s ub s t an t i al l y i m p ro v i n g ” a q u al i fi edres i d en ce. Sec. 1 6 3(h )(3 )(B)(i ). “ Ho m e eq u i t y i n d eb ted n es s” g en eral ly

m ean s i n d eb t ed n es s , o t h er t han acq u i si t i on i n d eb t ed n es s , th ati s s ecu redb y a qu al i fi edres id en ce an d t h atd o es n o tex ceed t h e d i fferen ce b et ween t h e h o m e’ s fai r m ark etv al u e an dth e
am ou n to f acq u i s i t i o n i n d eb t ed n es s . Sec. 1 6 3 (h )(3 )(C)(i ). Th e d edu ct i o n fo r i n t eres to n a q u al i fi edres i d en ce i s s ub j ectt o a $ 1 m i l l i on l i m i t fo r “ [t ] h e ag g reg at e am o un ttreat edas acq u is i ti o n i n d eb t ed n es s fo r an y p eri o d ” an da $ 1 0 0 ,0 0 0 l i m i tfo r “ [t ] h e ag g reg at e am o u n ttreat edas h o m e eq u i t y i n d eb t ed n es s fo r an y

p eri od ”. Secs . 1 6 3 (h )(3 )(B)(i i ), (C)(i i ). 2
. An al y s i s Th e Lark in s co n t en dthatth ey are en t i t l edt o ad d i t i o n al m o rt g ag e i nt eres t d educt i o n s fo r 2 00 8 an d2 0 1 0
.

a. 2 00 8 Fo r 2 0 0 8 t he SNOD al l o wedi n t eres tp aym en td edu ct i o ns fo r $ 2 4 ,2 7 0 , an
am ou n trep o rt edb y

th i rdp art i es . Th e Lark in s arg u e t h ey are en t i tl edt o an- 4 3 -

[* 4 3 ] ad di t i o n al m o rt g ag e i n t eres td educt i on i n t he am o u n to f $ 2 8 , 6 6 7
. 1 3 Th e
m o rt g ag e i n t eres td edu ct i on fo r 2 0 0 8 i s n o t p ro p erl y ati s s u e. See s up ra p artI.B.1
. b
. 2 01 0 Th e Lark in s cl ai m

th ey are en t i t l edt o d edu ct$ 6 ,6 7 3 o f m ort g ag e i n teres tfo r 2 0 1 0 . Ho wev er, t h e acco u nts t at em en t s l acks u ffi ci en td et ai l s t o p ro v e t h e i n t eres t p ai dwas fo r acq u i s i t io n i nd eb t ed n es s o r h om e eq u i t y o n a qual i fi edres i den ce, an d t h erefo re t h e Lark i n s are n o ten t i tl edt o a d edu ct i o n . B. In v es t m en t i n t eres t 1 4 Pers on al i n teres ti s n o n d edu ct i bl e u n l es s i tfal l s u n d er o n e o f t h e ex cep t i o ns
en u m erat edi n s ect i o n 1 6 3(h )(2 ), wh i ch al l o ws fo r t h e d educt i o n o f “ in v es tm en t

1 3 Th e Lark in s at t em

p tt o s ub s t an t i at e t h ei r p o s i t i o n b y d o cu m en t ary ev i d en ce co n s i s t i n g o f a l et t er wi t h an i n teres tp aym en t s ch edu l e an ds ev eral b an k s t at em en t s fro m

Ban k Leu m i. Th o u g h t h e l et t er refers t o th e l o anas a “ m ort g ag e l o an ”, t h ere i s n o ev i den ce t o i nd i cat e wh et her t he u n d erl y i n g d eb ti s t h e t y p e o f d eb t al l o wed --i
. e., acqui s it i on i n d eb t ed n es s o r h o m e equ i t y i nd eb ted n es s . Th e ev i d en ce t h e Lark i n s p ro vi dedal s o fai l s t o es t ab l is h th atth e l o ani s fo r a q u al i fi ed res i den ce wi t h i n t h e m ean i n g o f s ect io n 1 6 3 . (Co n t rary t o th ei r arg u m en t , th e b an k’ s act i o n o f ad d res s i n g t h e l et t er t o th ei r “ h om e ad d res s ” d o es n o t s ub s t an t i at e t h i s p o i n t .) M o reo ver, t h e Lark i n s i m p ro p erl y at t em p tt o d edu ct1 0 0 % o f th e i n t eres tp aym en ts fro m

the l o an ev en th o ug h the am o u nto f i n d eb t ed n es s--i .e., $ 2 .4 3 m i l l i o n , aft er ap pl y i n g t h e s t i p u l at edex ch an g e rat e--i s o ver t he $ 1 m i l l i o n l i m i t p ro vi d ed b y s ect i o n 1 6 3 (h )(3 ). See s ec. 1 6 3 (h )(3 )(B)(i i ), (C)(i i ); s ec. 1 .1 63 -1 0 T, Tem

p o raryIn co m e Tax Reg s ., 5 2 Fed . Reg
. 4 8 4 10 (Dec. 2 2, 1 9 8 7 ).
1 4 Cf. Lark i n I, at* 5 6 (h ol d i n g th ati n ves t m en ti n t eres tcl ai m edfo r each o f t h e y ears 2 0 0 3 -0 6 was n ots ub s t an t i at ed ); Lark i n II, 2 0 2 0 W L 2 3 0 1 46 2 , at* 1 (affi rm i n g ).- 4 4 -

[* 4 4 ] i n t eres t ”. In v es t m en ti nt eres t i s d efi n edas i n teres t wh i ch i s p ai d o r accru ed
o n i n d eb t ed n es s p ro p erl y al l o cab l e t o p ro p ert y h el dfo r i n ves t m en t . See s ec. 1 6 3 (d )(3 ). Ani n di vi du al ’ s d edu ct i o n fo r i n ves t m en t i n t eres tex p en s es can n o t
ex ceed h is n eti n v es t m en t i n co m e. Sec. 1 63 (d )(1 ).

1
. Th e Lark in s ’ b ri ef v s . th e Lark i ns ’ “ Tab l e 1 ” Aft er co n ced i n g s o m e o f wh atth ey rep o rt edo n thei r ret u rn s , th e Lark i n s
co n ten d i n th ei r p o s t -t ri al b ri ef “ t h atth e en t i t i es t o wh o m th ey d i dm ak e p aym en t s
o f i n v es t m en ti n t eres tare Ban ko f Am eri ca, Bl ack h o rs e, Co u t t s an dFi d el i ty (IRA). Th es e am o u n t s t o t al $ 1 5 ,7 6 0 , $ 2 5 ,7 3 0 an d$ 2 4 ,8 7 5 fo r t h e y ears 2 0 0 8 , 2 0 0 9 an d2 0 1 0 res p ect i v el y .” Ho wev er, t he Lark i n s ’ o w n ch arts et t in g o u tth ei r al l eg edi n v es t m en t i n t eres t(i n “ Tab le 1 ” at t ach ed t o th e s am e b ri ef) s ay s rad i cal l y
o t h erwi s e. Th e ch art d o es l i s t am o u n ts o f i n t eres tal l eg ed l y at t ri bu t ab le t o th o s e fo u r n am eden ti t i es (an dt o Larm o dtLLC an dTreet o p s LLC); h o wev er, t h e y earl y t o t al s are n o t as th e Lark i n s s t at e i n th ei r b ri efs b u ti n st eadare m u ch l o wer--i .e., $ 1 0 ,3 3 3 , $ 1 0,1 6 0, an d$ 15 ,4 61 . Th e l arg er am o u n t s i n th e b ri ef are u n ex p l ai n ed
an d u n s ub s t an ti at ed , an d we co n s i der fu rth er o nl y the s m al l er am o u n t s i n Tab l e 1
-- an d o n l y t h e am o un t s fo r 2 0 0 9 an d2 0 1 0 , s i n ce i n v es t m en ti n teres tfo r 2 0 0 8 i s n o t p ro p erl y ati s s u e. See s up ra p artI.B.1
.- 4 5 -

[* 4 5 ] 2
. In t eres tp ai d v i a Larm od tLLC an dTreet o p s LLC Th e Lark in s ’ ch arto f i n v es t m en t i nt eres to n Tab l e 1 i n cl u d es th ei r s h ares o f t h e i n t eres tp aym en t s b y

Larm od tLLC, wh i ch acco u n t fo r $ 5 ,2 7 8 fo r 2 0 0 9 an d $ 6 ,1 5 0 fo r 2 01 0 . Th es e are t h e am o u n t s thatwere al l o wedi n t h e SNOD an dth at t h e p art i es h av e s t i p u l at edare at t ri b u t ab l e t o th e Lark i n s ’ o wn ers h i p i n t eres t s i n Larm od tLLC. Acco rd i n g l y , reg ard i n g th es e i t em s th ere i s n o d i s p u t e t h atwe are cal l edup o n t o res ol v e.

3
. Fo u r o t h er en t i t i es As we n ot edab o v e, t h e Lark i ns ’ ch art o f i n v es t m en ti n teres to n Tab le 1 i n cl u d es al l eg edp aym en t s t o fo u r o t h er en t i t i es (al th o u g h s om e o f t h e am o u n t s are d es cri b edo n th atch artas i nt eres t“ ch arg ed ”, n ot“p ai d ”). Th e s ub st an t i at i o n th at t h e Lark i n s p ro ffer fo r t h e i n v es t m en ti n teres tcl ai m edas p ai dt o th e o t h er fo u r
en t i t i es co n s i s t s o f m o n th l y s t at em en t s fro m t ho s e en t i ti es . Wh i l e t h e Co urt accep t s th atth e Lark i n s m ay h av e m ad e p aym en t s t o th es e fi n an ci al i n st itu t i o n s , t h e Lark i n s d i dn o tp ro v e t h atth e p aym en t s were wi t h in t he ex cep t i o n s etfo rt h i n
s ect i on 1 6 3 (h )(2 )(B), i .e., “ i n v es t m en ti n t eres t(wi th i n t h e m ean i n g o f
s ub s ect i o n (d ))”. Th e Lark i n s ad m i ti n th ei r p o s t-t ri al rep l y b ri ef t h at “ Pet i t i o n ers d i dn o t p ro v i d e a d et ai l ed t rack i n g o f t h e b o rro wedm o n ey t o a p art icu l ar i n v es t m en t ” an di ns t eadrel y o n M r. Lark i n ’ s t es t i m o n y t o s ub st an t i at e t h ei r- 4 6 -

[* 4 6 ] d edu ct i o n. Hi s t es t i m o n y was n o t co n v i n ci n g ; an dacco rd i n g l y , the Lark i ns fai l edt o s ub s t an t i at e an y i n v es t m en ti n t eres t d edu ct i o n s cl ai m edi n ex ces s o f t h e
am ou n t s res p o n d en tal read y al l o wedfo r 2 0 09 an d2 0 1 0
. C. Tax es 1 5 Sect io n 1 6 4 (a)(1 ) al lo w s a d educt i o n fo r “ St at e an d l o cal , an dfo rei g n , real p ro p ert y t ax es ” p ai d wi t h i n the t ax ab l e y ear; an ds ect i o n 1 6 4 (a)(3 ) al l ows a d educt i o n fo r “ St at e an dl o cal , an dfo rei gn , i n co m e * * * t ax es .” Th e Lark i n s cl ai m th ey are en t i t l ed t o ad d i t i o n al i t em i zedd edu ct i o n s fo r t ax es p ai di n t h e
am ou n t s o f $ 3 , 4 6 5 fo r 2 0 0 8 , $ 2 ,5 0 8 fo r 2 0 09 , an d$ 2 ,0 6 0 fo r 2 0 1 0 . Th e t ax d educt i o n fo r 2 0 0 8 i s n o t p ro p erl y ati s s u e. See s up ra p artI.B.1
. 1 6 Fo r t h e reas o n s d i s cu s s edh ere, we h o l dth e Lark i n s are n o ten t i t l edt o ad d i t i o n al d edu ct io n s fo r t ax es fo r 2 00 9 an d2 0 1 0 :

1 5 Cf. Lark i n I, at* 6 4 -* 6 5 (h ol d i ng th atl o cal real es tat e t ax es rep o rt edfo r 2 0 0 3 an d2 0 0 4 were s ubs t an ti at ed ); Lark i n II, 2 0 2 0 W L 2 3 0 1 4 6 2 , at* 3 (affi rm i n g ).

1 6 Do cu m en t at i o n g en erat edb y SSD (an en t i t y

i n wh i ch M r. Lark in was a p art n er b u twh i ch we d o n o tas s u m e h e co n t ro l l ed ) s h owi n g t ax p aym en t s i tm ad e fo r 2 0 0 8 s up p o rt s th e Lark i n s’ p o s i t i o n th atth ey p ai dSt at e an dl o cal t ax es o f $ 7 ,1 3 6 , an dwe fi n d t h atth ey d i dp ay th i s am o u n tas wi t h h el d an dp ai do v er b y SSD. Ho wev er, t hi s am o u n t i s l es s th an th e $ 8 , 8 76 d edu ct i o n fo r t ax es thatwas al l o wed in th e SNOD.- 4 7 -

[* 4 7 ] 1
. 2 00 9 In th ei r o p en in g p os t -tri al b ri ef th e Lark in s cl ai m eda t o t al o f $ 8 ,9 2 7 i n d educt i b l e t ax es fo r 2 0 0 9 . Onau d i t res p o n den th adal l oweda d educt i o n o f o n l y $ 6 ,4 1 9 fo r t ax es p ai db y

th e Lark i n s --co n s is t in g o f $ 6 ,1 1 9 i n St at e an dl o cal t ax es (wh ich we fi n ds ub st an t iat edb y an SSD d o cu m en t rep o rt i n g $ 6 ,0 1 5 , wh i ch th e Lark i n s d es cri be as “ Sq u i re San d ers 2 0 0 9 Tax Retu rn Sch edu l e 4 St at e an d M u n ici p al No n -Res i d en t Tax es W i t hh el do n b eh al f o f D. Lark in ” (em p h as i s ad d ed )) an d$ 3 0 0 i n p ers o n al p ro p ert y t ax . Th e Lark i n s cl ai m edth ey were en t it l ed t o an ad di t i o n al d edu ct i on fo r t h e d i fferen ce, i .e., an ad d i t io n al $ 2,5 0 8 fo r t ax es p ai d . Th ei r Tab l e 1 l is t edth is ad d i t i o n al am o un tas “ Sq u i re San d ers 2 0 0 9 Tax Ret u rn Sch edu l e 6 M u n ici p al Tax p ai dan dch arg edt o D. Lark i n . ” (Em ph as i s ad d ed .) As th e Co m

m i s si o ner p o in t s o u ti n h i s an s weri n g b ri ef, th e d o cu m en t at i o n
o n wh i ch the Lark i n s rel y ex p l i ci t l y

s t at es thatth e am ou n twas “ t o b e u s edfo r ci t y
res i den t t ax cred i tp u rp o s es o n l y an dd o [es ] n o trep res en tfed eral i n co m e t ax d educt i o n s .” In th ei r rep l y b ri ef, t he Lark i n s at t em

p ta d i fferen tap pro ach : Pet i t i o ners h av e p u tfo rt h s up p o rtfo r anad d i t i on al “ i n co m e t ax ” d edu ct i o n o f $ 6 , 0 1 5 , n o t ad d i t i o n al real es t at e t ax es . (Ex . 7 -P # 2 6 3 ). Pet i t i o ners co n ced e t h e n o n d edu ct i b il i ty o f th e ad d i t i o n al $ 2,9 1 2 o f i n co m e t ax es p rev i o u s l y cl ai m ed
. As a res ul t , th i s Co u rt s ho u l dal l o w t h e ad di ti o n al $ 6 ,0 1 5 o f i n co m e t ax es , p l u s th e am o u n to f $ 6 ,1 1 9 i n real es tat e t ax es p rev i ou sl y al l o wedfo r a t ot al o f $ 1 2,1 3 4
.- 4 8 -

[* 4 8 ] Bu tth ei r p ro o f fo r t h i s s up p o s ed“ ad d i t i o n al ‘ i n co m e t ax ’ d educt i o n ” i s th e
o n l y v i s i b l e p ro o f t h ats up p o rt edth e IRS’ s al l o wan ce i n t he SNOD. 1 7 Th e Lark i n s h av e n o ad di ti o n al p ro o f o f an y fu rt h er i n co m e t ax d edu ct io n , an dwe al l o w
n o t h i n g m o re t h an th e SNOD al l o wed
.

2
. 2 01 0 On Sch edu l e A o f t h ei r Fo rm 1 0 40 fo r 2 0 1 0 , th e Lark i n s cl ai m eda d educt i o n fo r St at e an dl o cal t ax es o f $ 2 ,3 0 5 , wh i ch th e SNOD d i dn o td i s al l o w,
an d wh i ch th e Co m

m i s s io n er co n ced es . Tab l e 1 i n th ei r o p en i n g b ri ef s h o ws th at , as fo r 2 0 0 9 , th i s d educt i b l e am o u n tco rres p o nd s t o “ Sq ui re San ders 2 0 1 0 Tax Ret u rn Sch edu l e 4 St at e an dM u n i ci p al No n -Res i d en tTax es wi t h h el d o n b eh al f o f D. Lark i n ”. (Em

p h as i s ad d ed .) Ho w ev er, t h e Lark in s al s o cl ai m edo n th ei r 2 0 1 0 ret u rn a real es t at e t ax d edu ct i o n o f $ 5 , 4 0 0, wh i ch was d is al l owedi n t h e SNOD
an d as to wh i ch “ Pet i t i o ners co n ced e thatth ey h av e n o ad di t i o n al d o cu m en t at i o n t o s up p o rtth e $ 5 ,4 0 0 o f real es t at e t ax es cl ai m ed .” In s t ead , t h e Lark i n s n o w at t em p tt o cl ai m

an ad d it io n al $ 2 ,0 6 0 d edu ct i o n fo r i n co m e t ax b y referri n g (as th ey o ri g i n al l y

d id fo r 2 0 0 9, b efo re co n ced i n g i t ) t o

1 7 Th e Lark in s’ cu rren tat t em p t edch aract eri zat i o n o f t h e $ 6 ,1 1 9 d edu ct i o n i s co n trad i ct edb y t h ei r o wn Sch edu l e A. Th e $ 6 ,1 19 d edu ct i o n thatth e IRS al l o wed i s cl earl y p l aced b es i d e “ s t at e an dl o cal t ax es ” o n Sch edul e A, rat h er th an “ real es t at e t ax es ” (a s ect i o n fi l ledi n wi t h th e am ou n to f $ 5 , 4 0 0 , wh i ch was d i s al lo wed ), as th e Lark in s n o w cl ai m .- 4 9 -

[* 4 9 ] a “ Sq u i re San d ers 2 0 1 0 Tax Retu rn Sch edu l e 6 To tal Al l o cab l e Tax es p ai d b y fi rm an dch arg edt o D. Lark i n .” (Em p h as i s ad d ed .) Th e Co m m i s s i o n er’ s
an s weri n g b ri ef d em o n s t rat ed(as i td i dfo r 2 0 0 9 ) t hatth e 2 0 1 0 d o cu m en t at i o n o n wh i ch th e Lark i n s rel i edfo r t h atarg u m en t ex p l i ci t l y s t at es thatth e am o u n twas “ t o b e u s edfo r ci t y

res i d en t t ax cred i tp u rp os es o n l y an dd o [es ] n o trep res en tfed eral i n co m e t ax d edu ct i o ns . See Sch edu l e 4 fo r s tat e an dm un i ci p al t ax es thatare d educt i b l e fo r fed eral i n co m e t ax p u rp o s es .” In th ei r rep l y

b ri ef, t h e Lark i n s fal l s i l en t as t o rel i an ce o n th e SSD

“ Sch edu l e 6 ” fo r an ad d it i o n al i n co m e t ax d edu ct io n an ds eem t o at t em p tt o rev iv e a d educt io n fo r real es tat e t ax o f $ 5 ,4 0 0 --ack n owl ed g i n g ag ai n t h atth ey l ack d o cu m en t at i o n fo r t h atam ou ntb u ts t at i n g s i m p l y th atth ey “ b el i ev e t h at i ti s
co n si s t en twi t h real es t at e t ax es fo r p ri o r y ears .” Th ey d o n o tactual l y

p o i n tt o an y
s u ch am o u n t s cl ai m edfo r p ri o r y ears ; b u tev en i f th ey co u l d d o s o , th ey

wo u l dn o t t h ereb y s ub s t an ti at e a cl ai m

o f real es t at e t ax es p ai di n 2 0 10
. Th e Lark in s d i dn o ts h o w en t i t l em en t t o an y d edu ct i o n fo r i nco m e t ax es o r real es t at e t ax es b ey o n dwh atth e IRS al l o wedi n th e SNOD.- 5 0 -

[* 5 0 ] III. Sch edu l e E ren t al real es t at e ex p en s es 1 8 A. Lacko f s ub s t an ti at i o n Sect io n s 1 6 2 an d2 1 2 g en eral l y p erm i tt ax p ay ers t o d edu cto rd i n ary an d
n eces s ary ex p en ses p ai do r i n cu rred i n carry in g o n 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. Th e Lark i n s en g ag edi n ren t al real es t at e act i v i t i es , th o u g h t h e qu an tu m

o f th o s e act i v i t i es was ex t rem el y m o d es t . Th ey d idn o to ffer i n t o
ev i d en ce d o cu m en t at i on i n th e fo rm o f l eas es , ren t al ag reem en t s , recei pt s , co m m u n icat io ns wi t h t en an t s , d ep reci at i o n cal cu l at i on s , o r an y ty p e o f reco rd s
s ub s t an t i at i n g ex p en s es i n cu rred i n ren t al real es t at e act iv i t y fo r an y o f t h ei r p ro p ert i es (t h e Bel m on tco n d o m i n i u m i n Ch i cag o , 1 9 th e l ak e h o u se i n W i s co n s i n , 2 0

1 8 Cf. Lark i n I, at* 6 1 (h ol d i n g th atren t al ex p en s es rep o rt edfo r 2 0 0 3 were n o ts ub s t an t i at edb ecau s e n o ev i d en ce s h o weds u ch ex p en s es were i n cu rred an d p ai do r were at t ri b u t ab l e t o p ro p ert y h el dfo r t h e p ro du ct i on o f i n co m e); Lark i n II, 2 0 2 0 W L 2 3 0 1 4 6 2, at* 1 -* 2 (affi rm in g ). In Lark i n I n o i s s u e was rai sedwi t h res p ectt o t h e ap p li cab i l it y o f s ect i o n 4 6 9.
1 9 Th e o nl y

res i d en t s o f t he Bel m o ntp ro p ert y wh o m the Lark in s i d en t i fi ed were t h ei r d au gh t ers . M o reo v er, o n th ei r u n t i m el y 2 0 0 8 Fo rm

1 0 40 s ub m i t t edt o t h e IRS, t h ey

rep o rt eda l o s s o f $ 7 5 ,0 0 0 o n t h e s up p o s eds al e o f t h e Bel m o n t p ro p ert y , th o u g h th ey

n o w as s ertth atth ey

d i dn o ts el l th e p ro pert y

i n 2 0 0 8.
2 0 Th e Lark in s ad m i tth atth ey p ers o nal l y

u s edth e l ak e h o u s e--t h ei r “ s eco n d h o m e”--fo r at leas tfo u r t o s i x week s du ri n g each o f t h e y ears ati s s u e an dth atth ey d o n o t l i k e t o ren ti to u t . Th ey o ffered n o ev i d en ce i d en t i fy i n g an y t en an t ; an d t h ey al l eg e o n l y

th atth ey ren t edo u tth e l ak e h o u s e fo r, “ atm os t ”, t h ree week s a y ear.- 5 1 -

[* 5 1 ] a p ro p ert y

i n Fran ce, an da fi n an ci al i n teres ti n th e Den t o n Ho m es l o ti n En g lan d 2 1 ). Th e Lark in s d i do ffer 2 0 0 9 an d2 0 10 Sch edu l es K-1 fo r Larm o d tLLC i s su edt o b o t h M r. an dM rs . Lark i n , s h o wi n g d edu ct i bl e ex p en ses t o t al i n g $ 9 ,0 7 8 fo r 2 0 0 9 an d $ 1 1 , 1 1 6 fo r 2 0 1 0 . Th e p art i es h av e s t i p u lat edth atthe am o u n t s o f

“ i n teres tex p en s e” rep o rt ed b y Larm o d tLLC o n t h es e Sch edu l es K-1 were t h e
am ou n t s th at t h e Co m

m i s s i on er d i d n o td i s al l o was i n v es t m en t i n teres tfo r 2 0 0 9
an d 2 0 1 0 . W e as s u m e t h atth e rem ai n d er o f t h es e am o u n t s o n th e Sch edu l es K-1 fo r Larm o d tLLC was ex p en d edfo r t h e ren t al act i v it i es an d was p ro p erl y rep o rt ab l e o n Sch edul e E. 2 2

2 1 Th e Lark in s cl ai m

thataft er s el l i ng th e Den t o n Ho m es l o ti n 2 00 7 th ey n o n et h el es s ret ai n edan i n t eres ti n th e p ro p ert y an dth atth ey

s t i l l h o l da n o t e o n t h e l o t , wh i ch (t hey

co n t en d ) “ was p arto f Pet i t i o n ers ’ ‘ real p ro p ert y , trad es o r b u s i n es s es ’ p u rs u an t t o In t ern al Rev en ue Co d e Sect i o n * * * 4 6 9 (c)(7 )(C).” Ho wev er, o n th e u n t i m el y 2 0 0 8 Fo rm 1 0 4 0 th atth ey s ubm i t t edt o th e IRS, t h ey rep o rt eda l o s s o f $ 23 5 ,0 0 0 o n th e s up p o s eds al e o f a “ n ot e fro m Den t o n Ho m es .”

2 2 Th e rep o rt i n g o f an i t em o n a ret u rn d o es n o ts ubs t an t i at e t h ati t em . See Lawi n g er v . Co m

m i s s i o n er, 1 0 3 T.C. 4 2 8 , 4 3 8 (1 9 9 4 ) (“ Tax retu rn s d o n o t es t ab l i s h t h e t ru th o f t he fact s s t at ed t h erei n ”). Ho wev er, b ecau se t h e ev i d en ce d o es no ts h o w th e i den t i t y o r n atu re o f t h e fi ft h u n n am edp art n er o f Larm o d tLLC, we can n o tt el l d efi n i t i v el y wh eth er i twas a “ s m al l p art n ers h i p” u n der s ect i o n 6 2 3 1 (a)(1 )(B), s ee s up ra n o t e 4 , o r wh et h er i n s t eadi tm i g hth av e b een a TEFRA p art n ers hi p wh o s e i t em s we co u l dn o tad ju s t i n th i s d efi ci en cy

cas e. Nei t h er p art y h as m ad e an y

co n t en ti on n o r p u to n an y ev i d en ce as t o wh eth er TEFRA wo u l db ar o u r d is al l o wan ce o f t h e d edu ct i o n s rep o rt edo n th e Sch edu l es K-1 an dcl ai m edb y (co n ti n u ed ...)- 5 2 -

[* 5 2 ] B. Sect io n 4 6 9 Ho wev er, ev en as s um i n g thatth e Sch edu l es K-1 s ub s t an t i at edex p en s es rel at ed t o tho s e ren t al real es t at e act i v i t i es , the Lark i n s ’ cl ai m o f d edu ct i b l e l o s s es fro m th o s e act i v i t ies wo u l dfo un d er o n s ect i o n 4 6 9 : In th e cas e o f an i n d i vi du al o r
en t i t y l i s t edi n s ect i o n 4 6 9 (a)(2 ), s ect i o n 4 69 d i sal l ows an y cu rren td educt i o n fo r a p as s i v e act i v i t y

l os s . Sec. 4 6 9 (a)(1 ), (b ). A p as s i ve act i v i t y l o s s i s equ al t o t h e ag g reg at e l o ss es fro m

al l o f t h e t ax pay er’ s p as s iv e act iv i t i es m i nu s th e ag g reg at e i n co m e fro m

al l p as s iv e act i v i t i es . Sec. 4 6 9 (d )(1 ). Gen eral l y , a p as s i v e act i v i t y 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 n o tm at eri al l y p art i ci p at e, s ee s ec. 4 6 9 (a)(1 ), (c)(1 ); an dren t al act i v i t y (i .e., an y act i v i t y wh ere p aym en t s are

2 2 (...co n t i nu ed ) t h e Lark i n s attri al
. On e ap p ro ach we m i g h t t ak e i s s i m p l y t o i m p o s e o n t h e Lark i n s --wh o are t h e p ro p o n en t s o f t h e Sch edul es K-1 --t h e b u rd en o f s h o w i n g th e fact s t h at , u n d er TEFRA, wo ul dreq u ire u s t o h o n or Larm od t LLC’ s ap paren t rep o rt i n g o f t h es e i t em s . Si n ce t h ey fai ledt o d o s o, we co u l dfi n dthatTEFRA d o es no tap p l y

an d co u l ds i m

p l y d i s al l ow t h e d edu ct i o n s as u n s ub s t an t i at ed . Cf. Lark i n II, 2 0 2 0 W L 2 3 0 1 4 6 2 , at* 1 (“ Th e Lark in s al s o as s ertv ari o u s co n cl u s o ry l eg al p o s i t i o n s wi t h o u tci t i n g an y s o u rce o f l aw, as wh en th ey cl ai m , wi t h o u t s up p ort , th at* * * thei r ren t al co s td edu ct i o n i s ‘ a l arg e p art n ers h i p i t em en t i t l edt o d eferen ce’ ”). Ho wev er, we i n s t eadeffect i v el y as s u m e (i n p artIII.A) t h at Larm od tLLC was a TEFRA p art n ers h i p , an dth atth es e am o u nt s co n st i tu t e p art n ers hi p i t em s , the rep o rt i n g o f wh i ch we can n o tad j u s ti n th is d efi ci en cy

cas e; b u twe fi n d(i n fra p artIII.B) t h atev en i f we h o n o r Larm o d tLLC’ s rep o rt i n g o n i t s Sch edu l es K-1 , th e i tem s wh enp as s edth ro ug h t o t h e Lark i n s are n o td edu ct i b l e fo r t h em atth e i n di v i du al p art n er l ev el
.- 5 3 -

[* 5 3 ] p ri n ci pal l y

fo r t h e u s e o f t an gi b l e p ro p ert y , s ec. 4 6 9(j)(8 )) i s g en eral l y a p er
s e p as s i v e act iv it y , s ee s ec. 4 6 9 (c)(2 ). An ex cep ti o n t o t h at g en eral ru l e i s fo u n d i n s ect io n 4 69 (c)(7 ), wh ich
ex em p t s th e ren t al act i v i t y

o f t h e t ax p ay er fro m t h e d efi ni ti o n o f p as s i v e act i v i t y
u n d er s ect i o n 4 6 9 (c)(2 ) b u tco n t i n u es t o treat ren tal real es tat e act i v i t y as a t rad e
o r b u si n es s s ub

ject t o th e m at eri al p art i ci p at i on req u i rem en t s o f s ect i o n 4 6 9 (c)(1 ). Th e t ax p ay er wi l l qu al ify fo r t h i s ex cep t i o n (as a “ real es t at e p ro fes s i on al ”, i n th e
n o n -s t atu t o ry

l i n g o o f t h e cas el aw) i f: (1 ) m o re t h an o ne-h al f o f t he p ers o n al
s erv i ces p erfo rm edi n t rad es o r b u s i nes s es b y th e t ax p ay er duri n g t h e t ax ab l e y ear i s p erfo rm edi n real p ro pert y trad es o r b u s i n es ses i n wh i ch s h e m at eri al l y p art i ci p at es an d (2 ) t h e t ax p ay er p erfo rm s m o re t h an 7 50 h o u rs o f s erv i ces du ri n g t h e 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 pay er
m at eri al l y

p art i ci p at es . Sec. 4 6 9 (c)(7 )(B). A t ax pay er m at eri al l y p art i ci p at es i n an act i vi t y “ o nl y i f t he t ax p ay er i s i n v o l v edi n the o p erat i o n s o f t h e act i v i t y o n a b as i s wh i ch i s --(A) reg ul ar, (B) co nt i n u o u s , an d(C) s ub st an t i al
. ” Sec. 4 6 9(h )(1 ). W i t h res p ect t o th e ev i d en ce t h at m ay b e u s edt o es t ab l is h h o u rs o f p art i ci p at i o n , 2 6 C.F.R. s ect i o n 1 .4 6 9 -5 T(f)(4 ), Tem p oraryIn co m e Tax Reg s ., 5 3 Fed
. Reg . 5 7 2 7 (Feb . 2 5 , 1 9 8 8 ), p ro v i d es :- 5 4 -

[* 5 4 ] Th e ex t en to f an i nd i v i du al ’ s p art i ci p at i o n i n an act i vi t y m ay b e es t ab l i sh edb y an y

reas o n ab l e m ean s. Co n t em p o ran eo u s d ai l y

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 u i red i f t h e ex t en to f s u ch p art i ci p at io n m ay

b e es t ab l i s hedb y

o t her reas o n ab l e m ean s . Reas o n ab l e m ean s fo r p u rp os es o f t h is p arag rap h m ay i n cl u d e b u tare n o tl i m i t edt o th e i d en t i fi cat i o n o f s erv ices p erfo rm edo ver a p eri o d o f t i m e an dth e ap p ro x i m at e n u m ber o f h o u rs s p en tp erfo rm i n g s u ch s erv ices du ri n g s u ch p eri o d , b as edo n ap po i nt m en tb o o k s , cal en d ars , o r n arrat i ve s u m

m ari es . Th e reg u lat i on qu o t ed ab o v e d o es n o tal l o w a p art y t o rel y o n a p o s t-ev en t

“ b al l p arkg u es s ti m at e” o r u n v eri fi ed , u n d o cu m en t edt es t i m o n y . See M os s v . Co m m i s s i o n er, 1 3 5 T.C. 3 6 5 , 3 6 9 (2 0 1 0); Lu m v . Co m m i s s io n er, T.C. M em o . 2 0 1 2 -1 0 3 , 2 0 1 2 W L 1 1 93 1 8 2 , at* 4
. Pet i t i o ners arg ue t h atM rs . Lark i n i s a “ real es t at e p ro fes s i o nal ” wh o qu al i fi es fo r t h e m at eri al p art i ci p at i o n ex cep t i o n ap p l i cab l e t o t h e p as s i v e act i v i t y l o s s l i m i tat i o n fo r ren tal real es t at e act i v i t y as d efi nedi n s ect i o n 4 6 9(c)(7 )(B). Al t h o u g h s h e i d en t ifi edh ers el f as a “ h o m em ak er” o n th ei r t ax retu rn fo r each o f t h e y ears ati s s u e, p et i t i o n ers co n t en d t h atM rs . Lark i n d ev o t eda s ub st an t i al
am ou n to f t i m e t o m an ag i ng th e afo rem en t i o n edp ro p ert i es , thatth i s t i m e
co n st i tu t edm o re t h an h al f o f h er p ro fes s io n al s erv i ces , th ats h e m at eri al l y p art i ci p at edi n the m an ag em en to f t h e p ro p ert y , an d t hatth e t i m e d ev o tedt o th e real es t at e act i v i t y

ex ceed ed7 5 0 h o u rs --n earl y 1 5 h o urs p er week --fo r each o f t h e y ears ati s s u e. Rem ark ab l y , M rs . Lark i n d i dn o tt es t ify ab o uth er s up p o sed- 5 5 -

[* 5 5 ] en gag em en ti n t h i s act i v i t y . Rat her, t o s up p ortth ei r cl ai m , p et i t i o n ers rel y
o n M r. Lark i n ’ s t es t i m o ny an da n o n -co n t em

p oran eo u s s u m

m ary t i m e l o g 2 3 p rep ared fo r p u rp o s es o f t ri al
. Th i s ev i d en ce i s i ns u ffi ci en tt o s at i s fy th e req u i rem en t s o f s ect i o n 4 6 9 . Th e t i m e l o g , creat edi n res p o ns e t o d i s cu s s i o n s wi th res p o nd en t , was al l eg ed l y th e
res u l t o f M r. Lark in ’ s rev i ew o f em ai l s , n ot es o f b o ard m eet i n gs , an do t h er p ri m ary s o urces . Yetth e Lark i n s d idn o to ffer i n t o ev i d en ce t h o s e u n d erl y i n g d o cu m en t s . Th e t i m e l o g d i dn o tqu al i fy as a reco rdo f a reg ul arl y co n du ct ed act i vi t y fo r p u rp o s es o f Ru le 8 0 3 (6 ) o f t h e Fed eral Ru l es o f Ev i d en ce, n o r as a
s u m m ary o f t h o s e al l eg edu n d erl y in g d o cu m en t s fo r p u rp o s es o f Ru l e 1 0 0 6
. Rat h er, th e l og was ad m i t tedi nt o ev i d en ce o n l y fo r d em o n s t rat i v e p u rp o s es . W e fi ndth atth i s ev i d en ce i s ex act ly the t y p e o f p o s t -ev en t“ b al lp arkg u es st i m at e” t h at we d i sap pro vedi n M o s s v . Co m m i s s i o n er, 1 3 5 T.C. at3 6 9 (“ t h e reg u l at i o n s d o
n o tal l ow a p o st -ev en t‘ bal l p arkg u es s t i m at e’ ”).

2 3 Pet i t i o ners ’ t i m e l o g, wh i ch was ad m i t t eds o l el y as a d em o ns t rat i v e ex h ib i t , s u m

m ari zes th e h o u rs t h atth e Lark i n s al l eg ed l y s p en tm an ag i n g t h ei r i n v es t m en t s an di n d icat es t h at t h e t i m e M rs . Lark i n s p en tm an ag in g p et i t i o n ers ’ fo u r p ro p ert y

i n t eres t s t o tal ed7 6 4 h o u rs i n 2 0 0 8, 7 9 2 h o u rs i n 2 0 0 9 , an d7 7 2 i n 2 0 1 0 . Th e “ lo g” co n t ai n s n o d es cri p t i o n o f h o w th es e h o u rs were s p en t, al l o cat i n g o n l y a cert ai n n u m

b er o f h o u rs p er p ro p ert y p er m o n t h . It s i n fo rm at i o n i s b are an d d ev oi do f d et ai l , as was M r. Lark i n ’ s t es t i m o n y o n th is i s su e.- 5 6 -

[* 5 6 ] Si n ce M rs . Lark in fai l s t o m eetth e 7 5 0-h o u r req u irem en t, i ti s n o t
n eces s ary t o ad d res s th e “ m o re th an o n e-h al f o f p ers o n al s erv i ces ” req u i rem en to r t o d i s cu s s th e s ub seq u en tan al y s i s o f m at eri al p art i ci p at i on i n t h e l i g h to f t h e Lark i n s ’ fai l u re t o m ak e t h e el ect i on t o treat al l o f t hei r real es t at e act i v i ti es as o ne act i vi t y . See s ec. 4 6 9 (c)(7 )(A); s ec. 1 .4 6 9 -9 (e)(1 ), (g ), In co m e Tax Reg s . Ev en i f t h e Co u rtp erfo rm ed t h i s an al y s i s , we wo u ldfi n dth e ev id en ce t h e Lark in s p ro v id edd efi ci en tfo r t h e reas o n s d i s cu s sedab o v e. Fo r al l o f t h es e reas o n s, p et it i o n ers fai l edt o s hi ft t h e b u rd en t o res p o n d en t , an d t h ei r ren t al real es tat e act i v i t i es m u s tb e treat edas p as s i v e u nd er
s ect i on 4 6 9 (c)(2 ). See s ec. 4 6 9 (c)(7 )(B)(i i ). Th erefo re, t hey are n o t en t i tl edt o d eductth e l o ss es fo r t h o s e real es t at e act i v i t ies s h o w n o n th ei r Sch edu les E i n 2 0 0 8 , 2 0 0 9 , an d 2 0 1 0. IV. Sel f-em

pl o y edh eal t h i n su ran ce A s el f-em p l o y edt ax p ay er m ay

d edu cth eal t h i ns u ran ce co s ts p ai dfo r
m ed i cal care fo r h i m s el f an d h i s fam i l y , s ub jectt o th e s p eci al ru les o f
s ect i on 1 6 2 (l ). Pu rs u an tt o s ect i o n 1 6 2 (l ), t h e d edu ct i o n m ay n o tex ceed th e

“ t ax p ay er’ s earn edi n co m e (wi t h i n th e m ean i n g o f s ect i o n 4 01 (c)) d eri v edb y th e t ax p ay er fro m

th e t rad e o r b u s i n es s wi t h res pect t o wh i ch t h e p l an p ro v i d i n g th e
m ed i cal care co verag e i s es t ab li s h ed .” Sec. 1 6 2 (1 )(2 )(A).- 5 7 -

[* 5 7 ] Th e Lark in s cl ai m

d edu ct i o n s fo r h eal t h i n s u ran ce p rem i u m s o f $ 1 5 , 7 0 0 fo r 2 0 0 9 an d$ 1 2 ,7 0 0 fo r 2 0 1 0
. (Res po n d en tco n ced edth atth e Lark i n s are en t i t l edt o
s el f-em p l o y ed h eal th i n su ran ce d edu ct i o n s fo r 2 0 0 8 i n th e am o u n tth ey cl ai m ed
an d , fo r th e o t her y ears , i n th e am o u n ts fo r wh i ch th e Lark i n s p ro ffered recei p t s
s h o wi n g p aym en t --i
. e., $ 7 ,1 7 8 fo r 2 0 0 9 an d $ 2 ,1 9 2 fo r 2 0 1 0 .) Th e Lark in s ad m i t t h ey l ackreco rd s th atrefl ectth e fu l l am o u n t s o f t hei r cl ai m edd edu ct i o n s fo r 2 0 0 9
an d 2 0 1 0 . Ho wev er, wi th o u ts p eci fi cal l y ci t i n g Co h an , they

arg u e t h atCo u rt
s h o u ldal l o w i n fu l l th e d edu ct i o n s cl ai m ed s in ce (t h e Lark i n s co n t en d ) t hey p ro v edth atth ey

s p en ts o m e am o u nt s o n h eal t h i n su ran ce an dth e d edu ct i o ns th ey
s eekare reas o n ab le. W e fi n dth atth e Lark i n s d i d n o tp ro ve t h atth ey s p en t t he am o u n t s o n h eal t h i n s u ran ce cl ai m ed . Whi l e Co h an d o es al lo w th e Co u rtt o es t i m at e an o t h erwi s e al l o wab le d edu ct i on fo r s el f-em p l o y edh eal t h i n s u ran ce, t h e Lark i n s’ recei p t s d i d
n o ti n d i cat e co n s i s ten tp aym en t s an dd i dn o ts h o w co v erag e du ri n g t h e en t i re y ear,
an d t h e Lark i n s d idn o t p ro v i d e a s u ffi ci en tex p l an at io n fo r h o wth ey cal cu l at ed t h e am o un t s th ey

rep o rt edfo r 2 0 0 9 an d2 0 1 0
. W e h o l d t h at , ev enu n d er t h e m o re fl ex i bl e s t an d ardp ro v i d edb y Co h an , th e Lark i n s fai l edt o p res en ts u ffi ci en t
ev i d en ce t o s ub st an t i at e t h e am o u n t s rep o rt ed . See W i l l i am s , 2 4 5 F.2 dat5 6 0
.- 5 8 -

[* 5 8 ] V. Fo rei g n t ax cred i t 2 4 Sect io n 9 0 1 (a) g en eral l y

al lo ws a t ax p ay er FTCs fo r fo rei g n i nco m e t ax es p ai d , s ubjectt o th e l i m i t at i o n i m p o sedb y s ect i o n 9 0 4 , wh i ch i n tu rn l i m i t s th e cred i tt o th e am ou n to f U.S. t ax o n fo rei g n i n co m e. See g en eral l y s ecs . 9 0 1, 9 0 4
. An FTC i s al lo wedo nl y

t o t he ex t en tthatth e t ax p ay er can p ro v e i t was “pai do r
accru ed ” wi t h res pect t o i n co m e fro m s o u rces wi t ho u t t h e Un i t edSt at es . Sect i o n 9 0 5 (b )(1 ) an d(2 ). Ev en i f a t ax p ay er p ro v es p aym en to f fo rei g n t ax , a cred i tfo r t h e t ax fo r a p art i cu l ar y ear m ay b e l i m i t edb y

s ect i o n 9 0 4 (a); h o wev er, a t ax p ay er
m ay carryb ackt o th e fi rs tp reced i n g t ax ab l e y ear o r carry fo rwardt o an y o f t h e fi rs t1 0 s u cceed i n g t ax ab l e y ears an y ex ces s fo rei gn t ax p ai d o r accru edfo r t h e y ear at i s s u e. Sec. 9 04 (c). Th e Lark i n s ’ o n l y cl ai m i n thi s cas e as t o an FTC i s t h atfo r 2 0 09 t h ey

are en t i t l edt o a carry fo rwardcred i to f $ 1 6,2 0 7 ari s i ng fro m an al l eg edcarry ov er fro m

p ri o r y ears . Onth is i s su e, t h e Lark i n s rel y o n M r. Lark i n ’ s

2 4 In Lark i n I, at* 71 -* 7 3 , th e Co m m is si o n er co n ced edth atth e Lark i n s “p ai d i n co m e t ax es t o th e U.K. ag g reg at i n g £ 2 1 8,9 14 du ri ng FYE M arch 3 1 , 2 00 0 , 2 0 0 1 , an d2 0 0 2 .” Ho wev er, we fo un di n th atcas e t h atth e Lark i n s fai l edt o s ub s t an t i at e t h e ex i st en ce o f a cred i tth atco u l db e carri edo v er t o t h e s ub s eq u en t y ears 2 0 0 3 , 2 0 0 4, 2 0 0 5 an d2 0 0 6 . Id . at * 72 -* 7 3 (“ A t ax pay er cl ai m i ng a carry o ver o f a cred i tm

u s tes t ab l i s h b o t h the ex i s t en ce o f t h e cred i tan dth e am o u n t o f an y cred i t t h atm ay

b e carri edo v er t o a s ub seq u en t y ear”); cf. Lark i n II, 2 0 2 0 W L 2 3 0 1 4 6 2 , at * 1 -* 3 (affi rm in g ). Th ere, as h ere, t h e o nl y s ub s tan t i at i o n o ffered wi t h res p ect t o an FTC carry o ver was th e Lark i n s ’ u n co rro b o rat edas s ert i o n th at t h e t ax was p ai di n a p as ty ear an dth ey s ho u l drecei v e a carry o v er cred i t
.- 5 9 -

[* 5 9 ] t es t i m o n y

fo r t h e p ro p o s i t i o n t h atu s i n g the 2 0 0 7 an d2 0 0 8 retu rn s , al o n g wi t h th e 2 0 0 8 Sch edu l e K-1 fo r SSD, t h e FTC “ can b e cal cu l at ed ”. Th e Lark in s s u g g es tthatu n res o lv edi s s u es fro m p ri o r y ears atth e al l eg ed t i m e o f fi l i n g , co m

bi nedwi t h M r. Lark i n ’ s s t atu s as a p art n er i n a b u s i n es s d o i n g b u s i n es s o v ers eas an dth e m et ho do f SSD’ s p aym en to f fo rei g n i n co m e t ax es , m ak es i t“ reas o n ab l e t o co n cl u d e t h at [p ] et i t i on ers p ai dfo rei g n i n co m e t ax es an d t h atth e am o u n tcl ai m edi s reas o n ab l e.” Ho wev er, m ere “ reas o nab l e[n es s] ” i n a p art y ’ s co n t en t i o n s i s n o tth e s tan d ardfo r s ub s tan t iat i n g FTCs (n or t he s t an d ard fo r s h i ft i n g th e b u rd en o f p ro o f t o th e Co m m is s i o n er). A t ax pay er cl ai m i n g an FTC carry o v er m

us tes t ab l i s h b o t h th e ex i s t en ce o f t h e cred i tan d t h e am o un to f
an y cred i tth at rem ai n s (aft er ap p l i cat i o n t o p rev i o u s y ears ) t o b e carri edo ver t o t h e y ear at i s s u e. See Ru l e 1 4 2 (a)(1 ); Seg el v . Co m m i s s io n er, 8 9 T.C. 8 1 6, 8 4 2 (1 9 8 7); cf. Kei t h v . Co m

m i s s i o n er, 1 1 5 T.C. 6 0 5 , 6 2 1 (2 0 0 0 ). Su ch cred i t s h al l b e al l o wed “ o n l y i f t h e t ax p ay er es t ab l i s h es t o the s at i sfact i o n o f t he Secret ary --(1 ) t h e t o t al am o u nto f [n o n -U.S. s o u rced ] i n co m e * * * , (2 ) t h e am o un to f [n o n -U.S.
s o u rced ] i n co m e d eri v edfro m each co u n t ry , [an d ] th e t ax p ai do r accru edt o wh i ch i s cl ai m edas a cred i t * * * , an d(3 ) al l o th er i n fo rm at i o n n eces s ary fo r t h e
v eri fi cat i o n an d co m

pu t at i on o f s u ch cred i t s.” Sec. 9 0 5 (b ).- 6 0 -

[* 6 0 ] Th e “ [c] on d i t i o n s [i m p o s edb y the Secret ary ] o f al l o wan ce o f cred i t ” p u rs u an t t o s ect io n 9 05 are, i n rel ev an t p art : [T] o cl ai m

th e b en efi t s o f t h e fo rei g n t ax cred it , th e cl ai m fo r cred i t s h al l b e acco m

p an i edb y Fo rm 1 1 1 6 i n th e cas e o f an i nd i vi du al * * *
. * * * Th e fo rm

m us t b e carefu l l y

fi l l edi n wi t h al l t he i n fo rm at io n cal l edfo r an dwi t h t h e cal cu l at i o n s o f cred i t s i nd i cat ed
. Ex cep t wh ere i ti s es t ab l i sh edt o th e s at i sfact i o n o f t h e d i s t ri ctd i rect or t hati t i s i m p o s s i b l e fo r th e t ax p ay er t o fu rn i s h s u ch ev i d en ce, t he t ax p ay er m u s tp ro v i d e up o n req u es tth e recei ptfo r each s u ch t ax p aym en t i f cred iti s s ou g h tfo r t ax es al read y p ai d * * *
. 2 6 C.F.R. s ec. 1
. 9 0 5 -2 (a), In co m e Tax Reg s . (em p h as i s ad d ed ). Oth er th an th e Fo rm s 1 1 1 6 s ub m i t t edwi th th e Lark i n s ’ t ax return s fo r 2 0 0 8 an d 2 0 0 9 , wh i ch are d ev oi do f an y

i n fo rm at i o n as t o h o w th e FTCs cl ai m edfo r t h os e y ears were cal cu l at ed , th ere i s n o i n fo rm at i o n i n o u r reco rdth atm i g h tb ear o n th e Lark i n s ’ cl ai m o f an FTC carry o v er fo r 2 0 0 9. W e fi n dth atth e Lark i n s fai l edt o s ub s t an t i at e t h e ex i s t en ce an d am o u n to f t h e FTC wi t h cred i bl e ev i d en ce. Th e d o cu m en t s th atth ey ad v an ce i n s upp o rto f t h ei r p os i t i o n fai l t o p ro vi d e an y s p eci fi c am o un t s o f fo rei g n t ax es th atwere p ai d (an d , rel ev an tt o th e ap p l i cat i o n o f t h e l i m i t at i o n ats ect i o n 9 0 4(d ), fai l t o p ro v i d e
an y ch aract eri zat i o n o f t h e i n co m e o n wh i ch th ey were p ai d) i n t h e rel ev an ty ears . Th e Lark i n s ’ 2 0 0 7 ret u rn i s n o ti n ev i d en ce, s o we are u nab l e t o as cert ai n wh at
am ou n to f cred i twas al l owedfo r t h aty ear o r h o w i twas co m p u t ed(n o r i s th ere- 6 1 -

[* 6 1 ] an y o t h er ev i den ce t o thateffect ). 2 5 Th e Lark i n s ’ Fo rm 1 0 4 0 fo r 2 0 08 , t h o u g h p u rp o rt i n g t o cl ai m a cred i to f $ 1 6 ,7 8 5 an di n d i cat in g o n th e at t ach ed Fo rm 1 1 1 6 a “ carry o v er” o f cred i t, o m i t s th e “ d et ai l edco m p u t at i o n ” t h at t he fo rm req u i res . Las t l y , th e Sch edul es K-1 fro m SSD fo r 2 00 8 , 2 0 0 9 , an d 2 0 1 0 s h edl i tt l e l i gh t o n wh et h er t he Lark in s p ai dan y am o u n to f fo rei g n t ax fo r wh i ch t h ey co u l d cl ai m a carry ov er o f cred i t fo r 2 0 0 9 . In s t ead , th e Sch edul es K-1 co n tai n the fo l l o w i n g s t at em en t wi t h res p ectt o fo rei g n t ax es : Th e Fi rm d edu ct s fo rei g n t ax es i n co m pu t i n g DNI, b u tth ey

are n ota d edu ct i o n i n th e co m

p u t at i o n o f Ord in ary

In co m e an dare req u iredt o b e s t at ed sep arat el y . Dep en d i n g o n the i nd i vi du al p art n er’ s t ax ci rcu m s t an ces y o u m ay

b e ab l e t o cl ai m

a t ax cred itfo r t h i s am o u n t (Fo rm 1 1 1 6 ). An y am o u n tn o t cred i t ab l e t h i s y ear m ay b e carri ed b acko n e y ear an d fo rwardfo r t en y ears . M r. Lark i n ’ s Sch edu l e K-1 fo r 2 0 0 9 fro m SSD co n t ai n s o n ly a few i t em s i n Part II,

“ Part n er’ s Sh are o f Cu rren tYear In co m e, Dedu ct i o n s, Cred i t s an dOth er It em s ”: i .e., g u aran t eedp aym en ts o f $ 3 7 2 ,1 4 9 ; s el f-em p l o y m en tearn i n g s o f $ 3 7 2,1 4 9 ; d i s t ri b u t i o n s o f $ 3 74 , 7 5 0 ; an d , i n th e b o x fo r “ fo rei g n tran s act io n s”, t h e wo rd

“ v ari o us ”. W e fi n dn o i n di cat i o n as t o an y am o un t s th at SSD act u al l y p ai dfo r fo rei gn t ax es o n b eh al f o f M r. Lark i n . (An dth e p arag rap h rel at i n g t o fo rei g n

2 5 No r d o t h e d o cu m en t s s ubs t an t i at e t h e am o u n t (s ) o f t h e Lark i ns ’ U.S. t ax l i ab i l i t i es fo r t h os e y ears , an o t h er el em en tn eces s ary t o s h o wthatth ey were en t i t l edt o carryo v er s p eci fi c am o u n t s o f FTC. See Lark in II, 2 0 20 W L 2 3 0 1 4 6 2 , at* 3
.- 6 2 -

[* 6 2 ] t ax es s ug g es t s th ati f M r. Lark i n p ai dth em th ro ug h SSD, t hey

s h o u l dap p ear
as a s ep arat el y s tat edi t em o n h i s Sch edul e K-1 .) Th e Lark in s ’ cl ai m t h at a p rev i ou s y ear’ s u n res o l v ed i s s ue was t o b l am e fo r
an y u n cl ari t y , o r t h at t h e Co urts h ou l dal lo w a carry ov er s i m p l y b ecau s e i t was al l o wed in a p ri or y ear, i s u n av ai l i n g . Each t ax y ear s t an d s o n i t s o wn an dm u s tb e
s ep arat el y

co ns i dered , an dth e Co m m i s s i o n er i s n o tb o u n dfo r an y g iv en y ear t o al l o w a d edu ct i o n p erm i t t edfo r a p ri o r y ear. See Un i t edSt at es v . Sk el l y Oi l Co ., 3 9 4 U.S. 6 7 8 , 6 8 4 (1 9 6 9 ); Pek ar v . Co m m i s s i o ner, 1 1 3 T.C. 1 58 , 1 6 6 (1 9 99 ). Pet i t i o ners d i dn o tp ro v id e s u ffi ci en t d o cu m en t at io n , cal cu l at i o n s, o r
ev i d en ce t h ats ubs t an t i at es th e FTC carry o v er cl ai m edfo r 2 0 0 9 . Becau s e th ey fai l edt o p ro v e t h ey

are en t i t ledt o an FTC, we wi l l s u s t ai n th e d i s al l o w an ce o f t h i s cred i t
. VI. Sect io n 6 6 5 1 (a)(1 ) ad d i t i o n s t o t ax Sect io n 6 6 5 1 (a)(1 ) i m

p o s es an ad d i t io n t o t ax fo r fai lu re t o fi l e a ret u rn b y i t s du e d at e u n les s t h e t ax p ay er d em o n s t rat es th atth e fai l ure t o fi l e was du e t o
reas on ab l e cau s e an dn o tdu e t o wi l l fu l n eg l ect
. Th e ad di ti o n t o t ax equ al s 5 % o f t h e am o un to f t ax req u i redt o b e s h o wn o n t h e ret u rn , l es s an y t ax act u al l y

p ai d (i
. e., th e am o u n to f t h e t ax th ati s du e an dn o t p ai d ) fo r each m o n t h (o r fract i o n t h ereo f) t h at t he ret u rn i s l at e, b u tm ay n o tex ceed 2 5 % i n t o t al . See s ec.- 6 3 -

[* 6 3 ] 6 6 5 1 (a)(1 ), (b )(1 ). Th u s , th e m ax i m u m ad d it i o n t o t ax i s reach edwh en a ret u rn i s fi ve m o n t h s l at e. Reas o n ab le cau s e m ay ex i s ti f a t ax pay er ex erci s ed
o rd i n ary b u s i n es s care an dp ru d en ce an dwas n o net h el es s u n ab l e t o fi l e a ret u rn wi t h i n th e t i m e p res cri b edb y l aw. See 2 6 C.F.R. s ec. 3 0 1 .6 65 1 -1 (c)(1 ), Pro ced . & Ad m i n . Reg s. W i l l fu l n eg l ectco n n o t es “ a co n s ci o u s, i n t en t i o n al fai l u re o r reck l es s i n d ifferen ce” wi t h res p ectt o t i m el y fi l i ng . Un i t ed St at es v . Bo y l e, 4 6 9 U.S. 2 4 1 , 2 4 5 (1 9 8 5 ). Res p o n d en td et erm i n edthatth e Lark i ns are l i ab l e fo r ad d it i o n s t o t ax p u rs uan tt o s ect i o n 6 6 51 (a)(1 ) fo r 2 0 08 , 2 0 0 9 , an d2 0 10 fo r fai l u re t o fi l e t i m el y . Th e Co m m is s i o n er b ears th e b u rd en o f p ro du ct i o n wi t h res p ectt o th e ad d it i o n t o t ax u n der s ect i o n 6 6 5 1 (a)(1 ). See s ec. 7 4 9 1 (c); Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 6-4 4 7 . To m eetth i s b u rd en , h e m u st p ro du ce
s u ffi ci en tev i d en ce t h ati ti s ap p ro p ri at e t o i m p o se t he ad d i t i o n t o t ax . On ce t h e Co m m i s s i o n er h as m eth i s b u rd en , th e b u rd eno f p ro o f as t o reas on ab l e cau s e o r
o t h er m i t i g at in g fact ors s h i ft s t o th e t ax p ay er. See Hi g b ee v . Co m m i s si o n er, 1 1 6 T.C. at4 4 7
. Ev en i f th e Lark in s ’ 2 0 0 8 retu rn , du e Decem ber 2 0 0 9 , was (co n t raryt o o u r fi nd i ng ) fi l edi n J un e 2 0 1 1 o n t h e d at e t he Lark i n s al l eg e i t was m ai l ed(i .e., ab o u t 1 8 m o n t h s l at e), t he m ax i m um ad d i t i o n t o t ax h adb een reach edwel l b efo re t h at- 6 4 -

[* 6 4 ] d at e, atth e t i m e i twas fi v e m o n t h s l at e. Th e Lark i n s ’ 2 0 0 9 retu rn , du e o n Oct o b er 1 5 , 2 0 1 0 , was fi l edo n No v em b er 8 , 2 0 1 1 (m o re t h an 1 2 m o n t h s l at e). Th e Lark i n s ’ 2 0 1 0 ret u rn , du e o n M o n d ay , Oct ob er 1 7 , 2 0 1 1 , was fi l ed o n No v em b er 1 6 , 2 0 1 1 (o n e m on t h l at e). Acco rd i n g l y , res p o n d en th as m eth i s b u rd en
o f p ro du ct i o n wi t h res p ectt o the ad d i t i on s t o t ax . Th e Lark in s arg u e t h atthey are n o tl i ab l e fo r t he ad d it i o n s t o t ax b ecau s e t h ey h adreas o n ab l e cau s e--i .e., th ei r ret u rn s fo r p rev io u s y ears were u n d er
ex am i n at i o n b y

th e IRS o n th e res p ect i v e du e d at es fo r t h ei r 2 0 0 8 , 2 0 0 9, an d2 0 1 0 ret u rn s . Bu t as th e Lark i n s ack n o wl ed g e, t h i s Co u rth as n o t fo u n dthato p en y ears
co n st i tu t e a s uffi ci en treas o n fo r fi n d i ng reas o nab l e cau s e fo r l at e fi l i n g . Acco rd Den enb u rg v . Un i t edSt at es , 9 2 0 F.2 d3 0 1 , 3 0 6 n . 1 0 (5 t h Ci r. 1 9 9 1 ) (s t at i n g th at
an au di to f a p ri or t ax y ear was n ots u ffi ci en tt o es t ab l i s h reas o n ab l e cau s e fo r l at e fi li n g o f a s ub seq uen taffect edy ear); s ee Es t at e o f Du t ten h o fer v . Co m m is s i o n er, 4 9 T.C. 2 0 0 (1 9 67 ) (h o l d i n g t h att ax p ay er d i dn ot es t ab l i s h reas o n ab l e cau s e t o
ex cu se l at e fi l i n g wh ere t h ere was p en di n g es tat e l i t i g at i o n thatm ig h t affect t ax l i ab i l i t y ati s s u e), aff’ d , 4 1 0 F.2 d3 0 2 (6 t h Ci r. 1 96 9 ); Nam ak ian v . Co m m i s s i o n er, T.C. M em o . 2 01 8 -2 0 0 , at* 1 2 (“ t h e p en d en cy o f l i t i g at i o n , ev en wh ere t h e d eci s i o n fo r an earl i er y ear m ay affect th e d et erm i n at i o n o f a t ax p ay er’ s l i ab i l i t y fo r a l at er y ear, i s n o t reas o n ab l e cau s e fo r fai lu re t o t i m el y fi l e”).- 6 5 -

[* 6 5 ] W e h o ldth atth e Lark i n s d i dn o th av e reas o nab l e cau s e fo r t he u n t i m el y fi li n g o f t h ei r ret u rn s , an dwe s u s t ai n res p o n d en t ’ s d et erm i n at i on th atth ey are l i ab l e fo r ad d i t i o n s t o t ax u n d er s ect io n 6 6 5 1 (a)(1 ) fo r 2 00 8 , 2 0 0 9 , an d 2 0 1 0
. VII. Accu racy -rel at edp en al ty Sect io n 6 6 6 2 i m

p os es an “ accu racy -rel at edp en al t y ” o f 2 0 % o f t h e p o rt i o n
o f an u nd erp aym en t o f t ax at t ri b u t ab l e t o (am o ng o t her t h i n g s) t h e t ax p ay er’ s
n eg li g en ce o r d i sreg ardo f ru les o r reg u l at i o ns . Sec. 6 66 2 (a), (b )(1 ), (c). A. 2 00 8 Sect io n 6 6 6 4 (b ) p ro v i d es : “ Th e p en al t ies p ro v i d edi n th i s p art[i
. e., t i t l e 2 6 , s ub t i t le F, ch ap t er 6 8 , s ub ch ap t er A, p artII (“ Accu racy -Rel at edan dFrau d Pen al t i es ”, s ecs . 6 6 6 2 -6 6 64 )] s h al l ap p l y o n l y i n cas es wh ere a ret u rn o f t ax i s fi led ”. Th e p ri n ci p al p en al ty fo r n o tfi li n g a ret u rn i s t h e ad d i t io n t o t ax u n d er
s ect i on 6 6 5 1 (a)(1 ) (d i s cu s s edab o v e). Wh en a t ax pay er fai ls t o fi l e a ret u rn , th e
accu racy -rel at edp en al ti es (s u ch as th e n eg l i g en ce p en al t y ati s su e h ere) d o n o t ap p ly
. Th o u g h th e ev i d en ce i s equ i v o cal , we h av e fo un d --as th e Co m m i s s i o n er
co n ten d s--t h atth e Lark i n s d i dn o tfi l e a ret u rn fo r 2 0 0 8
. Th e Lark i ns co n t en dth at t h ey fi l edth ei r retu rnfo r 2 0 0 8 aro u n dth e s am e t i m e t h ey fi l edthei r o t her ret u rn s ati ss u e, “ wi t hi n ab o u ttwo week s atth e en do f No v em b er, m ay be i n t o t h e fi rs tfew- 6 6 -

[* 6 6 ] d ay s o f Decem

ber, 2 0 1 1 .” Th e co p y

o f th e 2 00 8 Fo rm

1 0 4 0 i n ev i d en ce refl ect s a h an d wri t t en d at e o f “ 2 8 Oct2 01 1 ” b u tn o co n cl u s i v e i n di cat io n o n th e face o f t h e d o cu m en tth ati twas s ub m i t t edt o o r recei v edb y th e IRS. 2 6 Th e Co m m i s s i o n er h as s ub m i t t edi n ev i d en ce a Fo rm 4 34 0 , “ Cert i fi cat e o f As s es s m en t s an d Paym en ts ”, t h atrefl ect s s ev eral en t ri es co m m en ci n g i n No v em b er 2 0 11 , th ati n di cat e an “ am en d edretu rn fi l ed ” fo r 2 0 0 8 ; b u t t h e Co m m i s s i o n er n o n et h el es s rep eat ed l y m ai n t ai n s i n h i s b ri ef t h at“ [p ] et i t i o ners fai l edt o fi le a t ax retu rn (Fo rm 1 0 40 ) fo r t ax y ear 2 0 0 8 .” Th e Co m m i s s i o n er refers t o th e Fo rm

4 3 4 0 as ev i den ce t h atth e Lark i n s d i dn otfi l e a ret u rn fo r 2 0 0 8 , an d we accep t h i s s t at em en t as t o th e m ean i n g o f t h e en t ri es i n h i s reco rd s . Th e
res o l ut i o n o f t h i s i s s u e b ears o n l y o n th e ap p l icat i o n o f t h e accu racy -rel at ed p en al t y d et erm i n ed b y t h e Co m m i s s i o n er, an i s s u e o n wh i ch h e b ears the b u rd en o f p ro duct i o n u n d er s ect i on 7 49 1 (c) an dfo r wh i ch th e n o n -fi l i n g o f t h e 2 0 0 8 retu rn i s fav o rab l e t o th e Lark i n s . Hav i n g fo u nd , as th e Co m m i s s i o n er i n s i s t s , th atth e Lark i n s d i dn o tfi l e a ret u rn fo r 2 0 0 8 , we can n o ts u s t ai n a n eg l i g en ce p en al t y fo r 2 0 0 8
.

2 6 Fad ed h an d w ri t i n g acro s s th e t o p o f t h e ret u rni nd i cat es “ d el i n q . retu rn * * * [i l l eg i b l e] 8 -2 3 -1 2 ”.- 6 7 -

[* 6 7 ] B. 2 00 9 an d 2 0 10

1
. Th e Co m

m is s i o ner’ s b u rd en o f p ro du ct i o n Un d er s ect i o n 7 49 1 (c), t h e Co m m i s s i on er b ears the b u rd en o f p ro duct i o n
an d m u s tp ro duce s u ffi ci en tev i d en ce t h atth e i m p o s i t i o n o f t he p en al t y

i s ap p ro p ri at e i n a g iv en cas e--i n th i s cas e, ev id en ce t h atth e u nd erp aym en t i s at t ri b u t ab l e t o n eg l i g en ce. On ce t h e IRS m eet s th i s b urd en , th e t ax p ay er m u s t
co m e fo rward wi t h p ers u as i v e ev i d en ce t h atth e IRS’ s d et erm i n at io n i s i n co rrect
. Ru l e 1 4 2 (a); Hi g b ee v . Co m m i s s i o n er, 1 16 T.C. at4 4 6 -4 4 7
. a. Sh o wi n g o f n eg l i g en ce Neg l i g en ce can b e ei t h er t h e l acko f du e care o r t h e fai l u re t o actreas o n ab l y
u n d er t h e ci rcu m s tan ces . See Neel y v . Co m m i ss i o n er, 8 5 T.C. 9 3 4 , 9 4 7 (1 9 8 5 ). Neg li g en ce “ i n cl u d es an y fai l ure t o m ak e a reas o n ab l e at t em p tt o co m p l y wi t h

* * * [t h e i nt ern al rev en ue l aws ] ”, s ec. 6 6 62 (c), i n cl u d in g an y fai l u re b y

th e t ax p ay er t o k eep ad equ at e b o o ks 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 , 2 6 C.F.R. s ec. 1 .6 6 62 -3 (b )(1 ), In co m e Tax Reg s. W e fi n dth atth e Lark i n s ’
reco rd -k eep i n g was i n d i sarray --t o an ex t en tthats u g g es t s ei t h er t h atth ey d o n o t k eep ad eq u at e reco rd s t o sub st an t i at e t h ei r i n co m e t ax p os i t i o ns , o r t h ats u ch
reco rd s , i f av ai l ab l e, were n o to ffered . Th e reco rd s th at were o ffered , s u ch as th e

“ l o g” o f M rs . Lark in ’ s t i m e al l eg ed l y s p en t m an ag i n g the Lark i n s ’ real es t at e- 6 8 -

[* 6 8 ] i n t eres t s , are g ro s s l y i n ad eq u at e t o s ub s t an ti at e t h ei r co n t en ti o n s. In s h o rt , t h e Lark i n s fai l edt o t i m el y rep o rtl arg e am o u n t s o f i n co m e, an dth ey cl ai m ed
s ub s t an t i al d edu ct i o ns fo r wh i ch th ey h ad ei t h er i n s u ffi ci en tp ro of o r n o p ro o f at al l . W e fi n dth atth ey

were n eg l i g en ti n the p rep arat io n o f th ei r ret u rn s fo r t h e y ears fo r wh ich the s ect i o n 6 6 6 2 accu racy -rel at edp en al t y h as b een p ro perl y d et erm i n ed --i .e., 2 00 9 an d 2 0 1 0
.

b
. Sup erv i s o ry

ap p ro val Th e Co m m is s i o n er’ s b urd en o f p ro du ct i o n u nd er s ect i on 7 4 9 1(c) al s o req u i res h i m

t o s h o wth at , i n co m

p l i an ce wi t h s ect i o n 6 7 5 1 (b )(1 ), t h e i m m ed i at e
s up erv i s o r o f t h e i n d iv i du al IRS em p l o y ee wh o m ad e t he “ i n i t i al d et erm i nat i o n ” o f t h e p en al t y

ap p ro v edth atp en al t y

i n wri t in g . See Graev v Co m m i ss i o n er, 1 4 9 T.C. 4 8 5 . Inth i s cas e t h e p art i es h av e s t i p u l at edth atth e s up erv i s o r g av e h i s ap p ro v al 1 0 m o n t h s b efo re t h e i s su an ce o f t h e SNOD; an dth e Lark i n s m ad e n o co n t en t i o n t h atan y o n e i n the IRS m ad e an y co m m u ni cat i o n t o t hem

o f an i n i t i al d et erm i n at i o n b efo re t h atap pro v al . Th e Co m m i s s i o n er h as therefo re carri edh i s b u rd eno f p ro du ct i o n as t o s ect i o n 6 75 1 (b )(1 ). See Fro s tv . Co m m i s s i o n er, 1 5 4 T.C. _

_ _ , _

_ _ (s l i p o p . at2 3 ) (J an . 7 , 2 0 2 0 ). Th e Lark in s co n t en dthatth e s up erv i so r’ s ap p ro val d i dn ots at i s fy
s ect i on 6 7 5 1 (b )(1 ). Th ey arg u e: “ Th e cl ear i m

p li cat i o n u n der s ect io n 6 75 1 (b )(1 )- 6 9 -

[* 6 9 ] req u i ri n g t h e ‘ i m

m ed iat e s up erv i s o r’ t o h av e ‘ p ers on al l y ap p ro ved(i n wri t in g )’ th e i ni ti al d et erm i n at i o n o f t h e as ses s m en to f a p en al t y , i s th atth e
s up erv i s o r act ual l y

h av e kn o wl ed g e o f fact s t o s up p o rta b as i s fo r t h e p en al t y ”-- b u ti n th i s i n s t an ce (t h e Lark i n s m ai n t ai n) i t ap p ears th at t he s up erv i so r l ack ed i n fo rm at i o n an d m ad e u n warran t edco n cl u si o n s . Th at i s , th ey wo ul du nd erm i n e t h e p en al t y

ap p ro v al b y

s h o wi ng th ati twas g ran t edi n ap p ro p ri at el y . Ho wev er, t h e qu es t i o n u n d er s ect i o n 6 7 51 (b )(1 ) i s s i m p l y wh et h er th e
s up erv i s o r i n fact ap pro vedthe p en al t y , n o t“ t h e p ro p ri ety o f t h e Co m

m i s s i o n er’ s ad m i n is t rat i v e p o li cy

o r p ro cedu re u n d erl y i n g h i s p en al t y d et erm i n at i o n s”, Rai fm anv . Co m

m i ss i o n er, T.C. M em o . 2 0 1 8 -1 0 1, at * 6 1 , n or wh et h er t h e
s up erv i s o r “ ad eq u at el y

co n t em p l at edth e * * * [Lark i n s ’ ] reas o n ab l e cau s e d efen s e”, i d. at* 6 0 , n or an y o t h er as p ecto f t he m eri t s o f t h e p en al t y d et erm i n at i o n . Th e Lark i n s can m ak e s u ch m eri t s ch al l en g es as a p arto f t h ei r
cas e, b u tn o tas a m ean s o f i nv al i d at i n g th e IRS’ s co m p l i an ce wi th
s ect i on 6 7 5 1 (b )(1 ).

2
. Reas on ab l e cau s e an dg o odfai t h
a. St an dard s Th e s ect i on 6 6 6 2(a) p en al t y i s n o ti m p o s edi f a t ax p ay er can d em on s t rat e: (1 ) t h ath e h adreas o nab l e cau s e fo r t h e u n d erp aym en tan d(2 ) t hath e act edi n- 7 0 -

[* 7 0 ] g o o dfai t h
. Sec. 6 6 6 4 (c)(1 ). W h et h er a t ax p ay er act edwi t h reas o nab l e
cau s e an d i n g oo dfai t h i s a fact s -an d-ci rcu m s t an ces d eci si o n , an dthe m o s t i m p o rt an tfact o r i s t h e ex t en to f t h e t ax pay er’ s effo rt s t o as s es s h i s p ro p er t ax l i ab i l i t y . 2 6 C.F.R. s ec. 1 .6 6 64 -4 (b )(1 ), In co m e Tax Reg s. Al s o i m p o rt an ti s th e t ax p ay er’ s kn o wl ed g e an dex p eri en ce. Id . W e fi ndth at M r. Lark i n ’ s p ro fes s i o n al
ex p eri en ce as an at t o rn ey wh o h as s pen ta s i g n ifi can tam o u nto f h i s t i m e i n th e fi nan ci al s ect o r wei g h s ag ai n s t h i m i n th i s reg ard
. A t ax p ay er m ay

es t ab l i s h reas o n ab l e cau s e an dg o o dfai t h b y d em o n s t rat i n g
reas on ab l e rel i an ce o n t h e ad v i ce o f an i n d ep en d en t , co m p et en t p ro fes s i on al ad v is er as t o th e t ax treat m en to f an i t em . See Neo nat o l o g y As s o ci at es , P.A. v
. Co m m i s s i o n er, 1 1 5 T.C. at9 8
. To p rev ai l o n th is d efen s e, a t ax pay er m u s t
es t ab l i s h t h at : (1 ) t h e ad v i ser was a co m p et en tp ro fes s i o n al wh o h ads u ffi ci en t
ex p ert i s e t o ju s t i fy

rel ian ce; (2 ) t h e t ax p ay er p ro v i d edn eces s ary an daccu rat e i n fo rm at i o n t o th e ad v i s er; an d (3 ) t h e t ax p ay er actu al l y rel i ed i n g o o dfai th o n th e ad v is er’ s ju d gm en t . Id . at9 9
.

b
. Th e Lark i n s ’ co n t en t i o n s Th e Lark in s co n t en dthati s s u es fro m p rev i o u s y ears , m i s u nd ers t an di n g s ab o utth e qu al i fi cat i o n s fo r cert ai n d edu ct i o n s , thei r s up p o s ed ly g oo d -fai t h b el ief t h atM rs . Lark i n qu al i fi edas a “ real es t at e p ro fes s i o n al ”, an dth e co m p l ex i t y o f t h e- 7 1 -

[* 7 1 ] Co d e co m

b i n e t o creat e s u ffi ci en treas o n t o fi n dreas o n ab l e cau se fo r th ei r
u n d erp aym en t s. Fi n al ly , th e Lark i n s cl ai m th ey s ou g h tth e ad v i ce o f p ro fes s i on al s . c. An al y s i s Th e Lark in s d i dn o tm ak e a p l au s i b l e s h owi n g o f reas o nab l e cau s e an dg o o d fai t h
. Th ei r reco rd -k eep i n g was i n d is array ; th ey fai l edt o t i m el y rep o rt l arg e
am ou n t s o f i n co m e; th ey

cl ai m eds ubs t an ti al d edu ct i o ns fo r wh i ch th ey h adn o p ro o f atal l an d ot h ers fo r wh i ch th ei r p ro o f was i n s u ffi ci en t
. Th e Lark in s are s o p h i st i cat edb u s in es s p eo p l e. M r. Lark in i s a h i g h l y edu cat edat t orn ey

wi t h m o re t h an 2 0 y ears ’ ex p eri en ce d eal i n g i n a v ari et y o f
co m p l ex tran sact i o n al m at t ers . He was cert ai n l y cap ab l e o f k eep i n g ap p ro p ri at e,
co n tem p o ran eo u s reco rd s , p rep ari n g d et ai l edn o t es , an dd i s t i n g u is h i n g p ers o n al fro m b u si n es s ex p en s es , y etth e ev i den ce h e u s edt o s ub s t an ti at e t h ei r d edu ct i o n s
s h o ws th ath e fai l edt o m ak e t h es e effo rt s . M r. Lark i n d i sreg ard edi n s tru ct i o n s fo r p ro p erl y co m p l et i n g h i s ret u rn s , as ev i den ced b y h i s fai l u re t o at t ach u nd erl y i n g d o cu m en t s an dth e fo rm s an dcal cu l at i o ns req u i redt o cl ai m cert ai n l os s d educt i o n s . Su ch i n accu rat e an dm i s l ead i n g i n co m e t ax rep o rt i n g d o es n otrefl ect
a reas on ab l e at t em

p t t o co m p l y wi t h th e Co d e.- 7 2 -

[* 7 2 ] Th ere i s n o ev i d en ce b es i d es M r. Lark in ’ s t es t i m on y th atth e Lark i n s s o u g h t ad v ice i n the p rep arat io n o f t h ei r ret u rn s . Th e ev id en ce s h o ws th atM r. Lark i n d i d l i tt l e m o re t h an b ri efl y co n su l t wi t h i n d i v idual s ath i s p lace o f em p l o y ; an d h e d i d
n o ts ay wh o th o se i n d i v i dual s were, wh ati n fo rm at i on th e Lark i n s p ro v id edt o t h em , o r wh ats p eci fi c ad v ice t h ey s up p o sed l y

g av e. M o reo v er, M r. Lark i n cl earl y
as s u m edth e u lt i m at e res p o n si b i l i t y fo r t h e p rep arat i o n o f h i s retu rn s . Becau s e t h e Lark i n s h av e n o t m etth ei r b u rd en t o es t ab l i s h th e rel ev an t fact s u nd er Neo nat ol o gy

As so cs ., P.A. v . Co m

m i ss i on er, 1 1 5 T.C. at9 8, we co ncl u d e th at t h ei r ret u rn p o s i t i o ns were a p ro du cto f M r. Lark i n ’ s d eci s i o n s rat h er th an th o s e o f i n fo rm edt ax co u n s el
. W e fi n dth e Lark i n s n ei th er h adreas o n ab l e cau s e n or act ed i n g o o dfai t h wi t h reg ardt o t h e p o s i ti o n s th ey m ai n t ai n ed o n th ei r ret urn s . To th e ex t en twe
s u s t ai n res p o n den t ’ s d et erm i nat i o ns , we al so h o l dth atth e Lark i n s are l i ab l e fo r t h e accu racy -rel at edp en al t ies fo r 2 0 0 9 an d 2 0 1 0
.- 7 3 -

[* 7 3 ] Co n cl us i o n Th e d et erm i n at i o n s i n t h e IRS’ s SNOD are s u s t ai n edi n p art , as ex p l ai n ed ab o ve. So th atth e l i ab i l i t i es fo r t he y ears at i ss u e can b e co m p u t ed i n l ig h to f t h i s
o p i n i o n an do f t h e p art i es ’ co n ces s i o n s , An ap p ro p ri at e o rd er wi l l b e i s s u ed , an dd eci s i on wi l l b e en t ered
u n der Ru l e 1 5 5
.