TAX COURT OPINION

Case: Frank Johnson & Shannon Johnson
Docket Number: 3115-17S
Judge: Goeke
Opinion Type: bench
Filed: 01/23/2018
Pages: 10

ORIGINAL UNITED STATES TAX COURT WASHINGToN, DC 20217 FRANK JOHNSON & SHANNON JOHNSON, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 3115-17S. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at New Orleans, Louisiana containing his oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. January 23, 2018 SERVED JAN 252018 Bench Opinion by Judge Joseph Robert Goeke December 15, 2017 Frank Johnson and Shannon Johnson v. Commissioner of 3 Internal Revenue Docket No. 3115-17S THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This opinion is rendered pursuant to Internal 1 2 3 4 5 6 7 8 9 10 11 12 Revenue Code section 7459(b) and the Tax Court Rules of 13 Practice and Procedure Rule 152. Hereinafter, references 14 15 to sections are to the Internal Revenue Code and Rule references are to the Tax Code Rules of Practice and 16 Procedure. 17 This case was heard pursuant to the provisions 18 of section 7463 in effect when the petition was filed. 19 Pursuant to section 7463(b), the decision to be entered is 20 not reviewable by any other court. 21 22 This case is a deficiency case, where the respondent issued a notice of deficiency to the 23 petitioners, and the petitioners timely filed a petition 24 with this Court, thus triggering our jurisdiction. At the 25 time the petition was filed, the petitioners were (973)406-2250|operations@escrbers.net|www.escribers.net 4 1 2 3 4 5 6 7 8 9 residents of Louisiana. The notice of deficiency determined deficiencies in income tax for 2013 and 2014 in the amounts of $10,883 and $8,234.31. Additions to tax under section 6662(a) were also determined for both years. The petitioners had previously filed joint Federal income tax returns for both of the years in question. The evidence at trial consisted of two stipulations of facts with accompanying exhibits and the 10. testimony of both of the petitioners. During the years in 11 question, petitioner, Frank Johnson worked full time for 12 Monsanto company. His wife, Mrs. Johnson, worked for 13 Amtrak. 14 During 2013, Mr. Johnson worked a total of 2,369 15 hours for Monsanto, and during 2014, he worked a total of 16 2,275.25 hours for Monsanto. 17 18 During both years in question, the petitioners had interest in six rental properties with 19 rental 19 units, for which they claimed expenses and reported income 20 on Schedule E of their joint Federal income tax returns. 21 Three of the units were apparently associated with a 22 partnership for which the petitioners received a K-1 for 23 both years in question, and the losses associated with 24 that K-1 are not at issue in this case. The other three 25 units were claimed on Schedule E as part of real estate BEREI (973)406-2250|operations@escribersmet|www.escribers.net 5 1 2 3 4 losses for both the years 2013 and 2014. During 2014, Mr. Johnson maintained a calendar diary on which he contemporaneously reported the work he performed on the rental properties. In 2013, he did not 5 maintain a detailed diary. Mrs. Johnson did not maintain 6 7 8 9 records of the work she performed on the rental properties contemporaneous to either the years 2013 or 2014. Mr. Johnson's 2014 calendar detailed 2,279.75 hours of work on the rental properties. As previously 10 stated, he maintained no calendar for 2013 that was 11 12 13 contemporaneous with all the events in that year. The calendar he submitted reflected less than 900 hours in 2013. Mr. Johnson testified credibly at trial but 14 admitted that the amounts reflected for 2013 were 15 estimates. 16 He was the primary repairman for the 19 rental 17 units. He either performed or oversaw all repairs or 18 maintenance work on these units, and the work on the units 19 was fairly extensive. He spent over 100 hours working on 20 each of the three properties at issue during 2014. 21 The losses reflected on Schedule E of the joint 22 Federal income tax returns for 2013 and 2014 respectively, 23 as disallowed in the notice of deficiency, were $37,292 24 for 2013 and $26,044 for 2014. In addition to the 25 disallowance of these losses, the notice of deficiency BEEE (973)406-2250|operationseesalbers.netj www.esaibers.net 6 also makes several other determinations. The other issues have been settled, but the only issues that remain involve determination whether the petitioners have complied with section 469 for purposes of the Schedule E losses. Regarding the rental real estate activity, section 469(a) (1) (A) generally disallows passive activity losses. A passive activity is defined as the amount by which the aggregate losses from all passive activities for a year exceed the aggregate income in all passive activities for such year. Section 469(i) provides taxpayers may deduct up to $25,000 in passive activity losses attributable to rental real estate activities; however, there's a phaseout 1 2 3 4 5 6 7 8 9 10 11 12 13 14 based upon the income of the taxpayers. In the present 15 situation, the phaseout eliminates any possibility that 16 the petitioners would be able to deduct the $25,000 in 17 either 2013 or 2014. Therefore, in order to sustain the 18 deductions in question, petitioners must qualify for one 19 of the exceptions to the passive activity loss rules of 20 section 469. 21 22 23 24 25 In analyzing this issue, we first determine who has the burden of proof. Generally, in cases before our court, petitioners bear the burden of proof, pursuant to section 7491(a). Petitioners have not maintained that this burden would be shifted pursuant to certain (973)406-2250|opentionseescribersnet|www.escríbersnet 1 2 provisions provided in section 7491(a), and we find that petitioners bear the burden of proof in the present 3 matter. 4 5 6 7 8 9 10 11 The exception which would allow the petitioners to deduct the expenses claimed on their Schedule Es for the years 2013 and 2014 are based upon an analysis of whether one of the petitioners, at least, performed over one-half of their total personal services during the taxable year in a real estate trade or business in which they materially participated; section 469(c) (7). (cid:16)042 In the case of a joint return as stated, only 12 one of the spouses must satisfy this requirement; section 13 469(c)(7)(B). If the taxpayers.can demonstrate they 14 qualify under the exception in section 469(c)(7)(B), their 15 activities are treated as a trade or business, and the 16 losses claimed on their joint returns would be allowable; 17 Treasury Reg. section 1.469-1(e)(1). 18 There's a tiered analysis involved. First, we 19 must determine whether either petitioner materially 20 participated for purposes of each of the properties since 21 there's no election to consolidate the activities for 22 purposes of the material participation test provided by 23 section 469(h)(1). 24 We reference the regulations with regard to the 25 material participation test. Section 1.469-ST(a) of the (973)406-2250|operationseestra:ersnet}wwwhscribersnet 8 1 2 3 Treasury Regulations provides seven specific ways in which a taxpayer may be treated as materially participating. We find on the record in this case that Mr. Johnson 4 materially participated in each of the properties for the 5 6 7 8 9 year 2014 based upon several of the provisions of the regulation. He participated in the activity as the primary person or only person involved in performing certain duties with respect to the three properties. And his participation exceeded 100 hours for each of the three 10 properties for both of the years. 11 12 Therefore, he meets the material participation test for the properties. However, that does not end our 13 analysis. We must also determine whether, in total, 14 material participation for each of the years exceeded the 15 amount of time Mr. Johnson was working for Monsanto. 16 Otherwise, he would fail the portion of the test that 17 18 requires that at least one-half of a person's personal services be spent with respect to the trade or business of 19 the real estate activity; section 469(c)(7)(B)(i). 20 21 First, we note that Mrs. Johnson has failed to substantiate to our satisfaction her material 22 participation based upon a lack of records and that Mr. 23 Johnson has also failed to show adequate participation in 24 2013. His testimony does not overcome the lack of 25 contemporaneous records of his work. Generally, we are } cribers (973)406-2250loperationspescribersnet|wwvrascribers.net 9 not required to rely upon self-serving estimate not supported by documentation. We do, however, no e that based upon the record before us for 2014 and Mr Johnson's testimony, it is.clear he performed substantial and detailed maintenance and repair activities on the rental properties. We acknowledge that Mr. Johnson had a difficult task in estimating his hours for 2014 The fact that he kept a contemporaneous diary with detal gives credibility to his testimony concerning the hou s he spent for 2014. On the contrary, for 2013, the lack o substantiation requires a finding for responden with respect to the determination of whether the pet tioners . 1 2 3 4 5 6 7 8 9 10 11 12 13 14 . meet the requirements of section 469 for 2013. 15 However, for 201,4, we find petitione have 16 proven that Mr... Johnson spent over one-half of his time, 17 18 as required by the section to substantiate a r 1 estate deduction. So to summarize, the petitioners arò allowed 19 -the real estate expenses at issue for 2014, and they are 20 not. allowed the real estate expenses as disalló ed in the 21 .notice 04 deficiency- for 2013. 22 23 24 25 As. previously stated, because of the petitioners' concession, there are other adjustaents in both yea.r.s in question that must be taken into iccount in thes computations that would be presented to the Court. Therefore, a Rule 155 computation is required with respect 10 to both years in question. We now turn to the question of whether the addition to tax under section 6662(a) is applicable. We note that the addition to tax under section 6662(a) is subject to section 6664(c), which provides in subsection (1) as follows: "No penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion." The petitioners testified that they relied upon their return preparer, and their return does reflect the assistance of a return preparer. However, there's no showing that the return preparer meets the qualifications that might generally be required to establish reliance for purposes of the reasonable cause exception. However, given the complexity in the application of section 469 and 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 our determination that the petitioners did actively 20 participate in the real estate in both the years in 21 22 23 24 question, we believe they have shown reasonable cause and good faith in claiming the deductions in question in both the years. While we determined that the petitioners' 25 deductions for 2013 were disallowed for lack of ) cribers (973)406-2250|operationseescribers.netj WWWASCriben.net I 11 substantiation, this does not mean that the petitioners failed to claim the expenses in question in good faith. It is clear that the real estate was a major portion of the petitioners' lives, and they devoted substantial time to the activity in both years in question. That fact and the complexity of the law in question causes us to determine that petitioners had reasonable cause and that, for both years in question, the addition to tax under section 6662(a) is not applicable. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:25 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 (973)406-2250loperations@escribers.net|www.escribers.net