T.C. Sum m ary Opi ni on 20 14 -5 3

UNITED STAT ES TAX COURT

JOHN J ASON BOGNER AND JODY L. BOGNER, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 24 24 2- 12 S. Fil edJu ne 16 , 20 14 .
Jo hn Jas on Bo gn er an d J od y L. Bog ne r, pr o s es e. Mi ch ael S. Hens le y , forres po nd en t.

SUMM ARY OPINION PANUTHOS, Chi ef Sp eci al Trial Ju dg e: Thi s ca se was h eardpu rs ua ntto th e p ro vi si on s o f se ct io n 7 46 3 o f th e In te rn al Rev enue Co de ineffe ctwhen th e pe ti ti on was fi le d. Purs ua ntto sec ti on 74 63 (b ), th e d eci si on to be en te redis no t rev ie wab le by any

ot he r co urt, an d thi s o pi ni on sh al l n otbe tre at edas p rece de nt- 2 -

fo r an y ot he r cas e. Unl es s o th erwi se in di cat ed , subs eque ntsec ti on refe ren ces are to th e In te rn al Rev enue Co de (Co de ) ineffe ctforth e y ears inis su e, an d a ll Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e. Res po nd en t d et erm in edde fic ie nc ie s i n p et it io ne rs ’ Fed eral in co m e ta x o f $5 ,77 5 a nd$5 ,27 6 fo r th e ta x years 2 00 9 a nd20 10 , res pe ct iv el y . Res po nd en t al so de te rm in edsec ti on 66 62 (a) a ccu racy-rela te d p en al ti es of $ 1,1 55 an d $ 1,0 55 for 20 09 an d 2 01 0, re sp ect iv el y . The is su es forde ci si on are: (1) whet he r pe ti ti on ers m ay de du ctlo ss es fro m Jo hn Jas on Bo gn er’s (h erei na fte r pe ti ti on er) re nt al real est at e act iv it ie s und er the pa ss iv e act iv ity

lo ss rul es setforth insec ti on 46 9, an d (2 ) whe th er p et it io ne rs are li ab le foraccu racy-rela te d p en al ti es un de r se ct io n 6 66 2( a) fo r th e y ears inis su e. Bac kg ro un d So m e o f th e fac ts ha ve be enst ip ul at ed , andwe in co rp or at e th e st ip ul at io n o f fact s b y th is refe ren ce. At the ti m e th e p et it io n was fil ed , pet it io ne rs res id edin Cal ifo rn ia . Pet it io ne r worke d fu ll ti m e as a fi nanc ia l an al y stforNort hr op Grumm an th ro ug ho utth e y ears inis su e. Pet it io ne r Jo dy L. Bo gn er wo rk edas aful l-t im e em pl oyee at I nt ern at io na l Re ct ifi er dur in g t he y ears inis su e. Pet it io ne rs ha d t wo ch il dr enwho were l iv in g wi th th em .- 3 -

Pet it io ne r m an ag edth ree r en ta l p ro pe rti es du rin g t he y ears inis su e. Pet it io ne r own edon e o f th e ren ta l p ro pe rti es , andhi s fa th er o wne d the ot he r two . Pet it io ne r’s ren ta l p ro pe rty was a 3 ,00 0- squa re-f oo t h om e, with fi ve be dr oo m s an d th ree b athr oo m s. Th is pro pe rty was s itua te d o n a n 8 ,90 0- squa re-f oo t l ot . The two ren ta l p ro pe rti es pe ti ti on er’s fat he r own edwere s in gl e-fa m il y res id en ces in res id en ti al subu rb ande ve lo pm en ts . Pet it io ne r m ai nt ai ne d a ndm an ag edth es e p ro pe rti es th ro ug ho utth e y ears in is su e. Mai nt en an ce an d m an ag em en t o f th e p ro pe rti es in cl ud edrep ai rin g t he pr op ert ie s, l an ds cap in g a ndm owi ng th e y ard s, co ll ect in g re nt , fin di ng pro sp ect iv e te na nt s, d oi ng m ark etres earc h, an d p erfo rm in g v ari ou s o th er s erv ic es rel at in g t o th e m an ag em en t an d m ai nt en an ce o f ren ta l p ro pe rti es . On jo in tl y

fil edFed eral in co m e ta x re tu rn s fo r 20 09 an d 2 01 0 p et it io ne rs rep orte d re nt al pro pe rty inc om e an d e xp en se s o n S ch edul es E, Sup pl em en ta l In co m e an d Lo ss , andde du ct edlo ss es of $ 19 ,84 8 a nd$1 9,3 38 , res pe ct iv el y . The Sch edul e E in co m e was rep orte d a ndex pe ns e d educ ti on s wer e cl ai m edwith res pe ctto pe ti ti on er’s ren ta l p ro pe rty. In a n ot ic e o f de fic ie nc y res po nd en t de te rm in edth atth e cl ai m ed20 09 an d 2 01 0 l os s d educ ti on s wi th res pe ctto pe ti ti on er’s ren ta l p ro pe rty were subjec t t o t he pa ss iv e lo ss li mit at io ns un de r- 4 -

se ct io n 4 69 . Res po nd en t al so de te rm in edaccu racy-rela te d p en al ti es un de r se ct io n 66 62 (a). Dis cu ss io n Inge ne ral , th e Co m

m is si on er’s d et erm in at io n s etforthina no ti ce o f de fic ie nc y

is pre su m edco rrec t, an d the tax pa y er b ears th e b ur de n o f pr ov in g t ha t th e d et erm in at io n i s i n e rro r. Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (1 93 3) . Purs ua ntto sec ti on 74 91 (a), the bu rd enof p ro of as t o fa ctua l m at te rs sh ift s t o t he Co m

m is si on er u nd er ce rta in cir cu m st an ces . Peti ti on ers di d n otass ert th atsec ti on 74 91 (a) app li es . See s ec. 7 49 1( a)(2 )(A) an d (B ). Ther efo re, pe ti ti on ers be ar the bu rd enof p ro of . See Ru le 14 2( a). I. Rea l Es ta te Pro fes si on al Sect io n 4 69 (a) g en eral ly dis al lo ws fo r th e ta xabl e y ear a ny pas si ve act iv ity lo ss . A pas si ve act iv ity

lo ss is th e ex ces s o f th e ag gr eg at e lo ss es fro m all pa ss iv e act iv it ie s fo r th e ta xabl e y ear o ve r th e ag gr eg at e in co m e fro m all pa ss iv e act iv it ie s fo r th aty ear. Se c. 46 9( d) (1 ). A pas si ve act iv ity is an y tra de or b us in es s i n wh ic h th e ta xp ay er d oe s n otm at eri al ly part ic ip at e. Sec. 4 69 (c)( 1) . Ren ta l ac ti vi ty is g en eral ly treat edas p er s e p as si ve reg ard le ss of wh ethe r th e ta xp ay er m at eri al ly part ic ip at es . Sec. 4 69 (c)( 2) . Howev er, the ren ta l ac ti vi ty of a ta xp ay er i s n ottre at edas p er s e p as si ve if the tax pay er s at is fie s the- 5 -

requi rem en ts of s ect io n 4 69 (c)( 7) (B). Sec . 46 9( c)(7 )(A)(i ). A tax pa y er qua li fie s as a real est at e p ro fes si on al an d i s n oten ga ge d i n ape r se pa ss iv e act iv ity if: (i) m or e th anon e-h al f of

th e p ers on al servi ces pe rfo rm edin tra de s o r bu si ne ss es by the tax pa y er dur in g s uc h t ax ab le y ear a re pe rfo rm edinreal pro pe rty trad es or b us in es se s i n wh ic h t he tax pa y er m at eri al ly part ic ip at es , and (ii ) su chtax pa y er p erfo rm s m or e th an75 0 h ou rs of s erv ic es du rin g t he tax ab le y ear i n re al pro pe rty trad es or b us in es se s i n wh ic h th e ta xp ay er m at eri al ly part ic ip at es . Sec. 4 69 (c)( 7) (B). Th e te rm “ real pro pe rty trad e o r bu si ne ss ” in cl ud es real pr op erty ren ta l, o pe rat io n, an d m an ag em en t. Sec . 46 9( c)(7 )(C) . In the cas e o f a joi ntreturn, the same spo us e m us t s at is fy

each requi rem en t. Id . Pet it io ne r cl ai m edhe sp en t 1 ,78 0 h ou rs an d 1 ,78 9 h ou rs work in g o n t he ren ta l p ro pe rti es in20 09 an d 2 01 0, re sp ect iv el y . Peti ti on er fu rth er as se rts th athe worke d 1 ,76 0 h ou rs an d 1 ,75 2 h ou rs in20 09 an d 2 01 0, re sp ect iv el y , as an em pl oyee fo r North ro p Gru m m an . In s up po rt o f hi s as se rti on s, p et it io ne r pr ov id ed act iv ity lo gs do cu m en ti ng th e ti m e h e p ur po rte dl y sp en t o n t he ren ta l ac ti vi ti es in 20 09 an d 2 01 0 a s wel l as a se lf- pr ep aredti m es he etof t he ho ur s tha t h e worke d fo r North ro p Gru m

m an . Peti ti on er d idno t p res en t an y ad di ti on al do cu m en ts to supp ort the ti m es he et s re pr es en ti ng th e h ou rs th athe pu rp orte dl y work edfor- 6 -

North ro p Gru m

m anno r fo r th e act iv ity

lo g p ur po rte dl y supp orti ng servi ces pe rfo rm edon th e ren ta l p ro pe rti es . 1 Eve n i f we as su m e th atpe ti ti on er wo rk ed1,7 60 ho ur s an d 1 ,75 2 h ou rs in 20 09 an d 2 01 0, re sp ect iv el y , forNort hr op Grum m an , we do no t ac cep t h is act iv ity lo g c oupl edwith thi s t es ti m on y rel at in g t o t he ren ta l ac ti vi ti es as r el iabl e o r cred ib le . A revi ew of

th e act iv ity

lo g a ndtes ti m on y

rel at in g t o t he ren ta l ac ti vi ti es le ad s u s t o t he co nc lu si on th e p et it io ne r di d n otsp en d m or e h ou rs at t he real est at e act iv ity th anat h is ful l-t im e em

pl oym en t atNort hr op Grumm an . Accor di ng to pe ti ti on er’s l og s h e sp en t al m os t ev ery sp are h ou r in th os e y ears work in g o n t he ren ta l p ro pe rti es , in cl ud in g 1 0 h ou rs on Ju ly 4 of e ach y ear, 1 2 a nd10 ho ur s o n Feb ru ary 14 , 20 09 an d 2 01 0, re sp ect iv el y , and9 an d 1 0 h ou rs , res pe ct iv el y , on Decem be r 25 of e ach y ear. Al th ou gh he m an ag edth ree r en ta l p ro pe rti es ineach y ear, thr ou gh ou t 2 00 9 a lo ne pe ti ti on er’s rec or ds refl ectth athe rep ai redor wo rk ed on th e sp rin kl er s y st em s o n a ny of th e g iv enpro pe rti es on 64 sep arat e o ccas io ns , an d t hr ou gh ou t 2 01 0 h e worke d o n s pr in kl er s y st em s o n 2 0 s ep arat e o ccas io ns . In ad di ti on , onMarc h 1 6 a nd17 , 20 09 , th e rec or ds refl ecteig htho ur s t o p rep are a nd
A ful l-t im e job with a40 -h ou r work wee k wo ul d re su ltin2,0 80 rep orte d 1 ho ur s o f ti m e worke d o ve r a o ne -y ear p eri od , whi chwou ldin cl ud e p ai d v acat io n ti m e an d p ai d h ol id ay s. Pet it io ne r di d n otad equa te ly exp la inwhy orho w hi s fu ll -ti m e em

pl oym en t atNort hr op Grumm ande vi at edfro m th is no rm .- 7 -

de li ve r anev ic ti onno ti ce t o b e fi le d i n c ou rt. Co in ci de nt al ly, on Marc h 1 5 a nd16 of th e n ex t year, pet it io ne r’s reco rd s re fle ctth athe pe rfo rm edth e v ery sam e act iv ity forth e sa m e ex actam ou ntof t im e. A rev ie w of p et it io ne r’s act iv ity lo gs le ad s t o the co nc lu si on th atth e lo gs are i na ccu rat e an d e xa gg erat ed . Giv enth e la ckof c red ib le do cum en ta ti onan d t es ti m on y an d t he ex ag ge rat edcla im s as to th e am ou ntof t im e p et it io ne r sp en t o n the ren ta l pr op ert ie s, the Co urt co nc lu de s tha t p et it io ne r di d n otest ab li sh th atm or e th an on e-h al f of

th e p ers on al servi ces he pe rfo rm edrel at edto real pro pe rty trad es or bu si ne ss es . See s ec. 4 69 (c)( 7) (B)( i). Ev enif we wer e to co nc lu de th atpe ti ti on er m at eri al ly part ic ip at edinreal pro pe rty trad es or b us in es se s, h e h as no t s at is fie d th e requi rem en ts of s ect io n 4 69 (c)( 7) (B)( i). Th eref or e, pe ti ti on er was en ga ge d i n a p as si ve lo ss act iv ity

with re sp ectto hi s re nt al pro pe rty in 2 00 9 a nd20 10 . II. Accu racy-Rel at edPen al ty Sect io n 6 66 2( a) an d (b )(1 ) an d (2 ) im po se s a p en al ty of 20 % of t he po rti on of anun de rp aym en t o f ta x attrib ut ab le to th e ta xp ay er’s n eg li ge nc e, di sr eg ardof ru le s o r reg ul at io ns , or s ub st an ti al un de rs tate m en t o f in co m e ta x. “Neg li ge nc e” in cl ud es an y

fai lu re t o m ak e a rea so nabl e at te m ptto co m pl y with t he Co de , in cl ud in g a ny fail ur e to ke ep ad equa te bo ok s an d re co rd s o r to subs ta nt ia te it em s pr op erl y . See s ec. 6 66 2( c); sec . 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. A “ subs ta nt ia l- 8 -

un de rs ta te m en t” in cl ud es anun de rs ta te m en t o f in co m e ta x t ha t ex ceed s the gre at er of 10 % of the tax requi redto be sh own on th e return o r $5 ,00 0. Se e se c. 66 62 (d ); se c. 1.6 66 2- 4( b) , Inc om e Tax Reg s. The sec ti on66 62 (a) a ccu racy-rela te d p en al ty doe s n otap pl y with re sp ectto an y po rti onof a n und erp aym en t i f th e ta xp ay er p ro ve s tha t the re was reas on ab le cau se forsu chpo rti on an d tha t h e act edingo odfai th with re sp ectth eret o. Se c. 66 64 (c)( 1) . The d et erm in at io n o f whe th er a t axpa y er ac te d wi th reas on ab le cau se an d i n g oo d fa ith d ep en ds on th e p ert in en t fa ct s an d c irc um st an ces , in cl ud in g t he ta xp ay er’s eff

orts to ass es s the pro pe r ta x l iabi li ty; th e kno wled ge an d t he ex pe rie nc e o f th e ta xp ay er; an d any reli an ce o n t he advi ce o f a p ro fes si on al , su ch as anacco un ta nt . Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Gen eral ly, th e m os t im po rta ntfact oris th e ta xp ay er’s eff ort t o a ss es s the tax pay er’s p ro pe r ta x li ab il ity . Id. The un de rp aym en ts of t ax requi redto be sh own on pe ti ti on ers ’ returns for 20 09 an d 2 01 0 a re at tri bu tabl e to ne gl ig en ce fo r th ei r fai lu re t o k eep ad equa te bo ok s an d re co rd s o r to subs ta nt ia te th ei r it em s p ro pe rly. T he un de rp aym en ts are al so th e res ul t o f subs ta nt ia l u nd ers ta te m en ts of i nc om e ta x, b ecau se th e un de rs ta te m en ts of $ 5,7 75 an d $ 5,2 76 for20 09 an d 2 01 0, re sp ect iv el y , exc eed- 9 -

$5 ,00 0, wh ic h i s g reat er than 1 0% o f th e ta x re qu ire d t o b e sh own on th e returns . 2 See s ec. 6 66 2( b) (2 ), (d )(1 ); s ec. 1 .66 62 -4 (b )(1 ), In co m e Tax Reg s. Re sp on de nt ’s bu rd enof p ro du ct io n h as be ensat is fie d. Se e se c. 74 91 (c). Acco rd in gl y , bec au se res po nd en t h as m ethi s b ur de n o f pr oduc ti on , pet it io ne rs m us t co m e fo rwardwith pe rs ua si ve ev id en ce tha t the accu racy-rela te d p en al ti es sh ou ldno t b e im po se d with re sp ectto th e und erp aym en ts be cau se th ey act edwith re as on ab le cau se an d i n go odfai th . See s ec. 6 66 4( c)(1 ); Rul e 1 42 (a); Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). Pet it io ne r arg ue d t ha t h is ti m e lo g “ pr ov es ” th athe work edm or e th anha lf of hi s t im e as a real est at e p ro fes si on al , th athe act edingo odfai th when he pr ep aredpe ti ti on ers ’ ta x re turn s, an d t ha t “ itba si cal ly giv es m e--t hi s i s a reas on ab le cau se an d areas on ab le ba si s wh enI di d my tax es .” Altho ug h p et it io ne r cl ai m s h e act edreas on ab ly andingo odfai th with res pe ctto hi s p os it io n t ha t h e was a real est at e p ro fes si on al inth e y ears inis su e, we ha ve co nc lu de d t ha t h is reco rd s ar e n otaccu rat e o r rel iabl e an d t ha t h is te st im on y was n otcred ib le . Accor di ng ly, we are s at is fie d t ha t the un de rp aym en ts were due to ne gl ig en ce. Pet it io ne r of fere d n o o th er ar gu m en t o r ev id en ce t o s ho w th atth ere was reas on ab le cau se forth e d educ ti on s cl ai m edan d t ha t h e act edin Pet it io ne rs rep orte d t ax du e o f $9 ,33 1 fo r 20 09 an d $ 13 ,21 9 fo r 20 10 . 2- 10 -

go odfai th with re sp ectto th e und erp aym en ts . Res po nd en t’s d et erm in at io n o f accu racy-rela te d p en al ti es un de r se ct io n 6 66 2( a) fo r 20 09 an d 2 01 0 i s s us ta in ed . W e h av e co ns id eredall of t he pa rti es ’ arg um en ts , and , to th e ex te ntno t ad dr es se d h erei n, we co nc lu de th atth ey are m oo t, i rrel ev an t, o r witho utm eri t. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red fo r res po nd en t.