TAX COURT OPINION

Case: Saurabh Baveja
Docket Number: 432-14
Judge: Gustafson
Opinion Type: bench
Filed: 03/20/2015
Pages: 21

UNITED STATES TAX COURT WASHINGTON, DC 20217 SAURABH BAVEJA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent PA ) ) ) ) Docket No. 432-14. ) ) ) ORDER Pursuant to the opinion of the Court as set forth in the transcript of the proceedings at Washington, D.C., on March 6, 2015, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before undersigned judge at Washington, D.C., containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. March 20, 2015 SERVED Mar 20 2015 Capital Reporting Company 3 1 Bench Opinion by Judge David Gustafson 2 March 6, 2015 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Saurab h Baveja v. Commissioner Docket No. 432-14 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code (26 U.S.C.), and Rule 152 of the Tax Court Rules of Practice and Procedure; and it shall not be relied on as precedent in any other case. By notice of deficiency dated November 19, 2013, the Internal Revenue Service ("IRS") determined deficiencies in the Federal income tax of petitioner Saurabh Baveja for the years 2010 and 2011, along 17 with accuracy-related penalties under section 18 19 20 21 22 23 24 25 6662(a). The principal issue for decision is whether real estate losses claimed by Mr. Baveja are limited by section 469--an issue that depends largely on whether he qualifies as a "real estate professional" under the demanding standard of section 469(c)(7). For the reasons explained hereafter, we hold that he did not prove that he meets that standard, and we largely sustain the IRS's determinations. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 Trial of this case was conducted on March 3, 2015, in Washington, D.C. Mr. Baveja represented himself; and Monica Cendejas represented respondent, the Commissioner. We find the following facts: FINDINGS OF FACT 6 Mr. Baveja's background 7 8 9 10 11 12 Mr. Baveja is a remarkably hard-working man. He finished college in three years, taking 26-1/2 credit hours in his busiest semester. After college he worked for the Department of Defense, starting his work day at 4:30 a.m. so that he could earn a Masters Degree (his first of two), and he finished a two-year 13 Masters program in one year. 14 Mr. Baveja's activities 15 16 In 2010 and 2011, Mr. Baveja was unmarried. In those years he undertook at least three significant 17 activities: 18 19 20 First, Mr. Baveja had a full-time job as an information technology ("IT") specialist--with the U.S. Department of Agriculture ("USDA") in 2010 and 21 with the National Aeronautics and Space 22 Administration ("NASA") in 2011. (Stip. 6, 24.) In 23 24 25 each of those jobs, he worked 1,840 hours per year. His typical work day began at 7:00 a.m. and ended at 3:30 p.m. (Stip. 7, 25), which evidently included a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 half hour for lunch. He "teleworked" (i.e., worked from home) two days per week. (Stip. 8, 26.) Second, in a 10-week period in 2010, Mr. Baveja spent 60 total hours teaching a course in English for Speakers of Other Languages at Montgomery College. (Stip. 10-12.) Over a 20-week period in 2011 he spent 95 total hours. (Stip. 31.) During his teaching season, he typically worked two evenings per week, from 6:00 to 9:00 p.m. Third, Mr. Baveja acquired and managed rental properties--five properties in 2010 (Stip. 13) and six properties in 2011 (Stip. 32). He held a real estate license. He did not hire a management firm to run his rental properties (Stip. 14, 33) but ran them himself. In that connection, Mr. Baveja viewed and inspected properties for possible purchase, negotiated prices, made offers, advertised, recruited and interviewed tenants, reviewed applications, composed rental agreements, purchased supplies, shopped for insurance and other needs and services, did repairs, hired and oversaw contractors for more complex repairs, mowed lawns, removed snow, changed light bulbs, met with tenants, collected rents, pursued delinquent rents, arbitrated disputes, cleaned up from floods and other problems, paid 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 bills, and performed a plethora of other 2 miscellaneous tasks. He did this work on evenings, 3 4 weekends, vacation time, and holidays. We are persuaded that he worked on each of these properties 5 more than any other individual did. 6 7 8 9 10 11 12 13 14 15 16 17 However, we lack reliable evidence sufficient to enable us to quantify the hours that he spent in his real estate activity. It is clear that on his full- time IT jobs and his teaching he spent a total of 1900 hours in 2010 and 1935 hours in 2011. We believe that he may have spent more than 750 hours per year on his real estate activity, but he did not convince us that he spent as many as 1900 hours per year in that activity. Thus, Mr. Baveja did not prove that in 2010 or 2011 more than half of the services he performed in trades or businesses were performed in his real estate activities. 18 Mr. Baveja's "Schedule A" expenses 19 20 21 22 23 24 25 In addition to the expenses Mr. Baveja incurred for his real estate activity, discussed below, he incurred expenses that he reported on Schedule A to his returns. He has reduced the amounts of such expenses that he claims (see Exs. 19-P, 20-P), and we address here his reduced claims. As unreimbursed employee business expenses, Mr. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 Baveja incurred dues and publications of $339 in 2010 and $50 in 2011, and office supplies of $344 in 2010 and $198 in 2011. Mr. Baveja paid a tax preparation fee of $460 in 2010 and $400 in 2011. Mr. Baveja drove his automobile to work at USDA and NASA, from USDA and NASA to home or Montgomery 8 College, from Montgomery College to home, and on 9 various trips and errands relevant to his real estate 10 activity, as well as on whatever personal trips he 11 took that year. He did not maintain any log of the 12 miles he drove for his real estate activity, and 13 14 15 16 17 under the exacting standard of section 274 (discussed below), we are not able to quantify them. The miles he drove to his IT jobs and home again are normal commuting. However, we know the specific number of days that he drove to his second job at Montgomery 18 College, and we accept his reckoning of the 19 20 additional miles required for that second job--i.e., 760 in 2010 and 1600 in 20ll--and the resulting 21 mileage charge is an employee business expense of his 22 23 24 25 second job. Mr. Baveja maintained in one of the bedrooms of his home an office to which some of his household expense could be allocated. However, he did not use 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 the office exclusively for his real estate business but also for his teleworking for his IT jobs. For the IT jobs, his principal place of work was not the home office but rather work space provided by USDA and NASA. Mr. Baveja incurred expense for his cell phone, which he used in part for his real estate activity. But he explained that he owned a single mobile device 9 with two multiple numbers billed on a single account, 10 11 and the only line he described being at his home he called a "fax line". He thus did not prove that he 12 maintained (and did not attempt to deduct the cost 13 14 15 16 17 of) a separate personal phone line. Mr. Baveja paid $450 in 2010 and $285 in 2011 to apply to law school (and apparently to take the law school admissions test), but he did not practice law, and obtaining a law degree, while it might have some 18 utility for real estate management, would credential 19 20 21 22 23 him for a completely new line of work and is not an expense of his real estate activity or his IT jobs. (Several real estate-related expenses listed on Schedule A that should have been claimed on Schedule E are discussed below.) 24 Mr. Baveja's real estate records and tax return 25 Mr. Baveja incurred expenses in his real estate 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 activity that exceeded his revenue from that 2 activity. That is, he incurred losses. Mr. Baveja 3 4 5 6 7 8 9 10 11 12 13 14 15 carefully retained his receipts and other paperwork for his real estate activity, and he provided them to his accountant when it was time to prepare a tax return. The IRS does not dispute that Mr. Baveja has substantiated the amount and nature of the real estate activity deductions he claimed on his tax return. However, Mr. Baveja omitted from the expenses deducted on his return three payments of condo fees that should have been included there--checks 1207, 1715, and 1725, totaling $2,093.50. He also wrongly included on Schedule A several real estate expenses he incurred and should have deducted on Schedule E-- 16 miscellaneous supplies of $2,182 in 2011; travel of 17 18 19 20 21 22 23 24 25 $2,331 in 2010 and $1,955 in 2011; and $339 to purchase a laptop computer in 2010. Mr. Baveja timely filed his Federal income tax returns for 2010 and 2011. Each of these returns included a Schedule E, "Supplemental Income and Loss", for his real estate activities. There is no indication that Mr. Baveja elected to treat all his interests in rental real estate as one activity, and he does not allege that he did. His Schedule E shows 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 $2,085 of "Rent & royalty income" and shows $51,135 of "Rent & royalty losses"; and he carried the net of those two figure's--$49,050--and reported it as rental loss in the "Income" section of the return, thus reducing the amount of taxable income he otherwise had received as wages from his IT jobs. IRS examination The IRS examined Mr. Baveja's 2010 and 2011 tax returns. After the conclusion of the examination, the IRS disallowed the losses claimed from the real estate activity reported on Schedule E and disallowed his unreimbursed employee business expense deductions on Schedule A. The IRS issued the statutory notice of deficiency on November 19, 2013. In that notice the IRS determined deficiencies of tax and accuracy- related penalties under section 6662(a). On January 7, 2014, Mr. Baveja timely filed his petition in this Court challenging the IRS's determinations. At that time he resided in Maryland. (Stip. 1.) I. Burden of proof OPINION The IRS's determination is presumed correct, and the taxpayer generally bears the burden to prove his entitlement to any deductions he claims. Rule 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 142(a). Deductions are a matter of legislative grace, and taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001-1(a); see also id. sec. -1(e) ("The books or records * * * shall be retained so long as the contents thereof may become material in the administration of any internal revenue law"). II. Real estate losses Taxpayers are allowed deductions for certain business and investment expenses under sections 162 and 212. Section 469, however, generally disallows any passive activity loss. A passive activity is any trade or business in which the taxpayer does not 18 materially participate. Sec. 469(c)(1). Material 19 20 21 22 23 24 25 participation is defined as involvement in the operations of the activity that is regular, continuous, and substantial. Sec. 469(h)(1). However, rental activity is generally treated as a per se passive activity regardless of whether the taxpayer materially participates. Sec. 469(c)(2), (4). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 An exception to the rule that a rental activity is per se passive is found in section 469(c)(7), which provides that the rental activities of a taxpayer in real property trades or businesses are not per se passive activities under section 469(c)(2) but are treated as a trade or business subject to the 7 material participation requirements of section 8 9 469(c)(1), provided that the taxpayer qualifies as a real estate professional. He will so qualify if: (1) 10 more than one-half of the personal services performed 11 12 13 14 15 16 in trades or businesses by the taxpayer during the taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and (2) the taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer 17 materia.lly participates. Sec. 469(c)(7) (B) (i) and 18 19 20 21 22 23 24 25 (ii). We assume that Mr. Baveja spent more than 750 hours and concentrate instead on the first of these requirements: If Mr. Baveja spent "more than one-half of [his] personal services" in real estate activity, then the hours spent on that activity would have exceeded the hours that he spent at his IT and teaching jobs-- i.e., 1900 hours in 2010 and 1935 hours in 2011. He 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 claims that he did so and alleges that on real estate activities he spent 2,643 hours in 2010 (Ex. 5-P) and 2,865 hours in 2011 (Ex. 12-P). With respect to the evidence that may be used to establish hours of participation, 26 C.F.R. section 1.469-5T(f)(4) provides: "The extent of an individual's participation in an activity may be established by any reasonable 9 means. Contemporaneous daily time reports, logs, or 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 similar documents are not required if the extent of such participation may be established by other reasonable means. Reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries." The regulation quoted above does not allow a party to rely on a post-event "ballpark guesstimate" or unverified, undocumented testimony, see Moss v. Commissioner, 135 T.C. 365, 369 (2010). Mr. Baveja did not maintain contemporaneous, detailed logs that verify his hours spent, and we are not persuaded by his testimony. Mr. Baveja stresses that the regulation allows proof by "any reasonable 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 means", which proof may be something other than a 2 3 4 5 6 7 contemporaneous log. That is correct as far as it goes, but what constitutes "reasonable proof" will vary depending on the nature of the allegation. Someone who is otherwise unemployed and alleges that on real estate activity he spends 15 hours a week, 50 weeks a year, totaling 750 hours, makes a relatively 8 modest claim that might be reasonably proved with 9 modest evidence. Someone who has a regular part-time 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 job but likewise alleges 750 hours on real estate has some explaining to do and probably needs impressive proof. But Mr. Baveja, who had a full-time job and a side job and had to commute between those jobs and alleges that he spent an additional 40 hours a week on real estate is making an allegation of a much higher order of magnitude. He is claiming almost superhuman performance. Mr. Baveja's reconstructed time estimates do not account for time lost to normal daily activities such as eating, sleeping, bathing, grocery shopping, laundry, and cleaning his house. Did he never read the newspaper, read a book, browse the web, write or read letters or email, socialize, watch television, go to a movie, attend religious services, chat on the phone, visit with friends or family, wait in line at the DMV, take his car in for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 repairs? To be sure, Mr. Baveja was not obliged to prove every minute of every day spent on the minutiae of daily life; but his estimates of his time spent on real estate discount the amount of time one must spend doing ordinary daily activities. It is not absolutely impossible that someone could disclaim 7 many of these activities and work the hours that Mr. 8 9 10 11 12 13 14 15 16 17 Baveja alleges, but it is so extremely unlikely that the "reasonable proof" for the allegation would have to be of the highest probative value. Mr. Baveja's evidence is not on that level. The logs that Mr. Baveja did proffer for 2010 and 2011 (Exs. 6-P, 13-P) were not prepared contemporaneously in 2010 and 2011 but later, allegedly by his consulting calendars and other records and papers that enabled him to reconstruct his activity. These non-contemporaneous logs include 18 multiple days which show very slight tasks that might 19 20 have taken only minutes, whereas Mr. Baveja's allegations require that he was busy with real estate 21 activity for hours every day. Some of the listed 22 23 24 25 tasks were allegedly performed on days when the Commissioner proved at trial that Mr. Baveja was out of town. And these logs do not state any amounts of time spent on any tasks. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 5 6 7 8 9 10 11 To bolster the plausibility of his claims for 2010 and 2011, Mr. Baveja provided a log for a year not at issue--2014--that he says was contemporaneously prepared, and that does state hours expended, and that does show hours totaling more than 1900. However, by 2014 Mr. Baveja managed not six properties but several more; and even if that 2014 log should be thoroughly credited, we could not be sure that it was representative of 2010 and 2011. But even the detailed log prepared by no one but Mr. Baveja, and supported only by Mr. Baveja's testimony 12 without any corroboration, would not carry the day, 13 14 15 16 17 18 given the almost inevitably incredible nature of his allegations. Because we are not persuaded that Mr. Baveja spent more time on his real estate activities in 2010 and 2011 than he spent on his other work, he has not established that he is a "real estate professional" 19 within the meaning of section 469(c)(7). This is, of 20 21 22 course, no slur on the "professionalism" of Mr. Baveja's real estate work, but only a determination under the statutory standard. His real estate 23 activities are therefore per se passive, and his 24 ability to offset the losses against his other income 25 is limited by section 469. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 3 4 5 6 At trial Mr. Baveja lamented that the rules almost seem "bent upon disproving" an entitlement to claim deductions. In a sense, he is correct. The statute shows an obvious intention by Congress to severely limit one's ability to use real estate losses to offset (and escape tax on) other income. 7 Mr. Baveja's claims fall afoul of the limitation that 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Congress imposed. Since Mr. Baveja did show "material participation" with respect to each of the properties and actively participated in all of them, he is entitled to claim a portion of the losses limited by section 469(i), the amount of which can be calculated under Rule 155. II. Schedule A deductions A. Automobile expenses Commuting from home to one's first job is a personal, nondeductible expense. Commissioner v. Flowers, 326 U.S. 465, 473-474 (1946); 26 C.F.R. secs. 1.162-2(e), 1.262-1(b)(5). However, a taxpayer who has arrived at his first work location and has ended his regular commute may deduct the transportation expenses he incurs in traveling to a second job or to a second location on a primary job. Taylor v. Commissioner, T.C. Memo 1981-8. For 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 2 3 4 5 potentially deductible mileage, taxpayers may use one of two methods to substantiate transportation expenses. One method is to substantiate each element of an automobile-related deduction by adequate records--such as diaries or account books--that are 6 maintained by the taxpayer "at or near the time" when 7 8 9 the expense was incurred. 26 C.F.R. sec. 1.274- 5T(c)(1) and (2). Alternatively, the taxpayer may substantiate each element of an expense with "other 10 sufficient evidence". Id. para. (c)(3). Using this 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 alternative method, the taxpayer must establish each element of the automobile-related deduction with a detailed personal statement corroborated by other evidence. Id. para. (c)(3)(i). A taxpayer's own statement alone is not sufficient. See Wolfgram v. Commissioner, T.C. Memo. 2010-69, slip op. at 24 ("Testimony alone, without corroborative evidence, does not satisfy the requirements of section 274(d)"). Under this standard, we were able to accept Mr. Baveja's substantiation of his mileage from his USDA and NASA jobs to his Montgomery College job, since the distance was fixed and knowable and the number of days driven was demonstrated. However, we have no means of determining the mileage that he drove for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 non-recurring real estate errands. B. Home office The expenses allocable to a home office may be deducted only if "a portion of the dwelling unit ... is [A] exclusively used on a regular basis ... [B] as the principal place of business for any trade or business of the taxpayer." Sec. 280A(c)(1) (A). Mr. Baveja's home office was not used exclusively for his real estate activities but was instead also used for telecommuting for his USDA and NASA jobs (for which his home office was not his principal place of business). He is therefore not entitled to any home office deduction. C. Telephone Under section 262(b), "any charge (including taxes thereon) for basic local telephone service with respect to the 1st telephone line provided to any residence of the taxpayer shall be treated as a personal expense". That is, the charge for one's first phone is a personal, non-deductible expense. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Only one's second phone can be a deductible business 22 23 24 25 expense. Mr. Baveja did not demonstrate that he pays for any phone service other than the phone for which he attempted to deduct the cost. He has therefore not shown an entitlement to a deduction for telephone 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 service. D. Law school applications Mr. Baveja's expenses related to applying to law school programs are nondeductible personal expenditures. Educational expenses are deductible only if the education maintains or improves skills required by the individual in his or her employment or other trade or business or meets the express requirements of the employer. See Diaz v. Commissioner, 70 T.C. 1067, 1073-1074 (1978) (citing 26 C.F.R. sec. 1.162-5(a).) Educational expenditures that would qualify the taxpayer for a new trade or business are nondeductible personal expenditures. See Diaz, 70 T.C. at 1074 (citing 26 C.F.R. sec. 1.162-5(b)). Although a law degree might have been beneficial to Mr. Baveja in his real estate endeavors, attending law school would have trained 18 Mr. Baveja for a new line of work, practicing law. 19 Attending law school would not have maintained or 20 21 22 23 24 25 improved a required skill of Mr. Baveja's full time jobs or his real estate activities. It would have qualified him for a new trade or business (the practice of law) and therefore his educational expenses are non-deductible personal expenses. III. Accuracy-related penalty 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Section 6662 1mposes an "accuracy-related penalty" of 20 percent of the portion of the underpayment of tax that is attributable to the taxpayer's negligence or disregard of rules or regulations or that is attributable to any substantial understatement of income tax. The precise amount of the 2010 and 2011 understatements that will result from the adjustments that we have sustained is yet to be determined pursuant to Rule 155, but it seems clear that it will be "substantial" under section 6662(d)--i.e., that it will exceed both $5,000 and 10 percent of the tax that should have been reported. We therefore need not reach the issue of negligence. Mr. Baveja cannot successfully invoke any of the defenses that a taxpayer might assert against an accuracy-related penalty: He had no "substantial authority" for his position (see sec. 6662(d)(2) (B)); he did not disclose on his return (see sec. 6662(d)(2)(B)) that he was unable to show the quantum of his time spent on the real estate activities; and he did not show reasonable cause and good faith for his erroneous reporting (see sec. 6664(c)(1)). This third potential defense might be available if the evidence showed, for example, that it was a close 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 22 call whether Mr. Baveja could prove that his hours spent in real-estate-related activity exceeded his hours spent on his other employment. But his proof was altogether lacking; his logs were patently defectiire. Even if we assume he had subjective "good faith" in making his allegations, it is quite clear that there is no objective "reasonable cause" for his claim. We therefore hold that Mr. Baveja is liable for the accuracy-related penalty for 2010 and 2011. So that the liabilities can be recalculated, decision will be entered pursuant to Rule 155. This concludes the Court's oral Findings of Fact and opinion in this case. (Whereupon, at 9:46 a.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com