TAX COURT OPINION

Case: Frank P. Reilly
Docket Number: 10576-12S
Judge: Goeke
Opinion Type: bench
Filed: 02/15/2013
Pages: 8

UNITED STATES TAX COURT WASHINGTON, DC 20217 FRANK P. REILLY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 10576-12S. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk ofthe Court shall transmit herewith to petitioner and to respondent a copy ofthe pages ofthe transcript ofthe trial in the above case before Judge Joseph Robert Goeke at San Francisco, California, 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, a decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. February 15, 2013 SERVED FEB 2 0 2013 Capital Reporting Company 3 1 2 3 S 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bench Opinion by Judge Joseph Robert Goeke February 7, 2013 Frank P. Reilly y. Commissioner Docket No. 10576-12S THE CLERK: Recalling from the calendar docket number 10576-12S, Frank P. Reilly. 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 case was heard pursuant to the provisions of Section 7463 of the Internal Revenue Code in effect when the Petition was filed. Pursuant to Section 7463(b), the decision to be entered is not reviewable by any other court. Section references hereinafter in this Bench Opinion are to the Internal Revenue Code, and rule references are to the Tax Court Rules of Practice and Procedure. This opinion is rendered pursuant to Section 152 of the Tax Court Rules. The Court has jurisdiction over this case pursuant to our jurisdiction to review deficiencies after the issuance by Respondent of a Notice of 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 1 Deficiency and the filing of a timely petition by the 2 Petitioner. Respondent issued a Notice of Deficiency 3 4 5 6 7 8 9 to the Petitioner for the years 2008 and 2009, determining income tax deficiencies and the addition to tax under Section 6662 (a). The computations in the Notice of Deficiency reflect that the deficiencies are solely attributable to increases in self-employment tax in 2008 and 2009. At the trial, the case was a great deal of 10 testimony regarding the rather complex manner in 11 which the Petitioner has conducted various business 12 activities for years beginning in the mid-1990s. 13 14 15 16 17 18 19 20 21 22 There was also Stipulation of Facts and the admission of various exhibits. The Petitioner was a male model who operated a Schedule C corporation in which the income he received as a male model was sourced in years prior to the years in question in this case. The Petitioner also began a real estate activity in Jackson Hole, Wyoming through a bed and breakfast operation called Rancho Alegre Lodge, Inc. That operation was conducted as a sub-chapter S corporation for federal income tax purposes. But 23 Petitioner also reported Schedule C income and 24 25 expense related to that operation on his personal return, in addition to items reflected on the 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company I 1 2 3 4 Schedule S corporation return associated with the bed and breakfast operation. The deficiencies relate to adjustments made in the Notice of Deficiency shifting income from 5 5 Petitioner's Schedule C activities related to the bed 6 7 8 9 10 11 12 13 14 15 16 and breakfast operation, to a Schedule E, which was not contained in the return, but was determined to be an appropriate manner for the Petitioner to report the real estate activities. What is clear is that the Petitioner had significant losses in the years 2008, 2009, such that there was no ordinary income adjustments generated by any of the adjustments in the Notice of Deficiency. However, by shifting certain income items and certain expense items from the Schedule C associated with the bed and breakfast real estate 17 activity to a Schedule E as determined by the 18 examination division of the Internal Revenue Service, 19 Petitioner is left with an increased amount of 20 21 22 23 24 25 Schedule C self-employment income, thus generating the adjustments in question. In particular, Respondent's determination shifts $120,000 in income reflected on the Schedule C real estate activities and associated mortgage, interest expense, insurance expense, depreciation expense, taxes and licenses and 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 6 1 utilities. This resulted in 2008 in a revised 2 3 4 5 6 Schedule C for the bed and breakfast operations, reflecting $42,000 in gross income and expenses of roughly $16,000. And, in addition, $15,000 of additional income in 2008 was determined to be necessary as an adjustment because of an error by 7 Petitioner's return preparer, which Petitioner 8 9 conceded at trial. So, the question before the Court is 10 whether the remaining adjustments over and above the 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 $15,000 adjustment are appropriate. The Court, in analyzing the Schedule C and the testimony at trial, determines that although Respondent's $120,000 adjustment and the other expense items should have been reported on a Schedule E, that Petitioner also should have reported the $42,000 in income and all the remaining expenses on the bed and breakfast Schedule C as items on a Schedule E. Thus, those items would have been offset in a Schedule E by the other related real estate expenses, which generated real estate losses in 2008 and 2009. A similar analysis follows from 2009, as Respondent made similar adjustments, except there is no $15,000 agreed adjustment in 2009. So, the Court believes that the expenses 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 and income items reflected on the Schedule C for bed and breakfast lodge for 2008, 2009 should have been reflected on a Schedule E in both those years. Thus, the Court believes that the Notice of Deficiency has incorrectly overstated the amount of self-employment income, and the only appropriate self-employment income adjustment is the $15,000 2008 adjustment. The Court's analysis is based upon the facts of the case, and the fact that there is no basis to distinguish the items shifted by the Respondent to the Schedule E from those that Respondent retained bhem as Schedule C for purposes of LRO increasing the self-employment tax. There will be an adjustment that flows from the Court's analysis, at least in the year 2008, but a Rule 155 computation will be necessary. We now turn to whether the Petitioner is subject to the addition to tax for any adjustment 19 which remains after the Court's analysis. The 20 Petitioner has provided testimony from the 21 Petitioner's father, who credibly testified that he 22 dutifully maintained the books and records of the 23 Petitioner's various business activities for all the 24 25 years in question. He advised he made certain errors. But he credibly testified that he provided 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 1 all the information that he had dutifully maintained 8 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to Petitioner's return preparer, who was a qualified tax expert and a C.P.A. We believe that the Petitioner correctly relied upon the return preparer and reasonably left to the return preparer the allocation of Petitioner's income between Schedule C personal income and Schedule E real estate activities. The fact that the return preparer may have incorrectly allocated some of this income should not cause the Petitioner to be subject to the addition to tax because a defense to the additions tax under Section 6662 is reasonable reliance upon a tax professional. And we believe that the facts of this case demonstrates such reasonable reliance. Therefore, we determine that the accuracy related penalty under Section 6662(a) is not applicable in either 2008 or 2009. As previously stated, a Rule 155 computation will be necessary to redetermine self- employment income in 2008. Based upon the facts that we have described in our determinations, there will be no deficiency in 2009. So, a decision will be entered for the Petitioner relative to the additions to tax and the deficiency in 2009And 2008 will remain for computation. 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 9 This concludes the Court's oral findings of fact of opinion in this case. (Whereupon, at 10:10, 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 twww.CapitalReportingCompany.com