TAX COURT OPINION

Case: Bor-Jenq Wang & Szumin Lu Wang
Docket Number: 30785-12
Judge: Goeke
Opinion Type: bench
Filed: 09/25/2014
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 BOR-JENQ WANG & SZUMIN LU WANG, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 30785-12. ) ) ) ) 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 Los Angeles, California, on September 12, 2014, 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 for respondent. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. September 25, 2014 SERVEo SEP 2 620M Capital Reporting Company 3 1 2 3 4 5 6 7 8 Bench Opinion by Judge Joseph Robert Goeke September 12, 2014 Bor-Jeng Wang and Szumin Lu Wang v. Commissioner Docket No. 30785-12 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. These Oral Findings of Fact and 9 Opinion shall not be relied upon as precedent in any 10 11 12 13 other case. This opinion is rendered pursuant to Rule 152 of the Tax Court Rules of Practice and Procedure, and Internal Revenue Code Section 7459(b). 14 Hereinafter rule references are to the Tax Court 15 16 17 18 Rules of Practice and Procedure, and section references are to the Internal Revenue Code. The Court has jurisdiction over this matter pursuant to Section 6213(a), as Respondent issued a 19 Notice of Deficiency to the Petitioners for the years 20 21 2010 and 2011 asserting a deficiency in income tax and the addition to tax under Section 6662(a). 22 Petitioners timely filed a Petition in this case. 23 24 25 . And at the time they filed the Petition they resided in California. . Some of the issues have been settled. What 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company remains for the Court to determine two issues. âAL The 1 6 4 first is whether Petitioners qualify for the exception under Section 469(c)(7), defined as a real estate professional, which would allow them to deduct losses incurred in real estate activities in 2010 and 2011 in the amounts of $123,149 and $162,562 respectively. The second issue is whether the accuracy related penalty under Section 6662(a) applies for both of the years in question. 1 2 3 4 5 6 7 8 9 10 The parties presented an extensive 11 Stipulation of Facts and the Petitioner husband 12 13 14 15 16 17 18 19 20 21 22 23 24 25 testified at trial. The issues before the Court concern three distinct real estate properties, one in the Boston, Massachusetts area and two in the Chicago, Illinois area. During the years 2010 and 2011 the Petitioners did not maintain contemporaneous logs of the time spent by Petitioner husband regarding the real estate activities and his other work activities. The logs submitted during the examination by the Internal Revenue Service of this case were not prepared contemporaneous with the years in question. And the parties have stipulated that those logs were not accurate. Given these circumstances the Petitioner bears the burden of proof in this case under Rule 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 142(a), as Section 7491(a) does not apply to shift the burden of proof to the Respondent. Respondent does have the burden of production regarding the addition to tax. At trial Petitioner introduced more information regarding his efforts to show the time he spent in real estate activities in 2010 and 2011. Because the activities of Petitioner wife did not relate at all to these real estate activities she did not appear at trial and did not testify. However, 10 Petitioner husband maintained that he did spend the 11 12 13 14 15 16 17 18 19 20 21 22 23 requisite amount of time pursing real estate activities in order to support the deductions pursuant to the statutory exception. However, his testimony and the logs he produced were not credible, as they did not accurately reflect his activities in 2010 and 2011. Based not only on the inconsistencies in the log, but also the simple lack of credibility of his testimony. The legal issue in this case presents an often litigated question about the extent of a taxpayer's activities in real estate business for purposes of establishing that those activities generate non-passive losses under Section 469. The 24 Stipulation of Facts has a very detailed 25 reconstruction of the amount of time Petitioner 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 husband spent at his full time job for Baxter International. Mr. Wang does not own more than five percent of Baxter International, and Baxter International is not engaged in real property 5 activities as a trade or business. None of the 6 activities Mr. Wang performed for Baxter 7 8 9 10 11 12 13 International were connected with a real property trade or business. His work related to quality control engineering concerning medical devices. In 2010 Mr. Wang and his family relocated from Illinois to California. And his relocation was reimbursed by Baxter International. In 2011 he continued to work for Baxter International in 14 California. The three real properties which generate 15 the dispute in this case are located across the 16 United States from Mr. Wang's place of business in 17 California, as previously stated. And the parties 18 19 20 21 22 23 24 25 have stipulated that those activities were managed by persons employed by Mr. Wang during the years in question. Section 469(a)(1)(A) operates to generally disallow passive activity losses. A passive activity loss is defined as the excess of the aggregate losses from all passive activities for a year over the aggregate income from all passive activities for the 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 7 1 2 year. Section 469(d)(1), passive activities include any trade or business in which the taxpayer does not 3 materially participate, Section 469(c)(1). Section 4 5 6 7 8 9 10 11 12 469(c)(2) provides that except as provided in Section 469(c)(7), the term passive activity definitively includes any rental activity. Section 469(c)(7)(B) defines the taxpayers relieved from passive loss treatment as those who perform more than one half of their personal services in real property trades or businesses in which they materially participate, and who perform more than 750 hours of services in real property trades or businesses in which they 13 materially participate. For taxpayers filing a joint 14 15 16 17 18 19 20 21 22 23 24 25 return only one need qualify. In the present case, as we previously stated, that one person is Mr. Wang. Petitioners maintain that Mr. Wang qualifies as an individual who engaged in real estate activities in a manner sufficient to qualify under Section 469(c)(7). Mr. Wang testified that he spent over one half of the total time he spent on any business activity in the real estate business associated with the three rental properties. However, as we stated previously we find his testimony to not be credible and we find the records he produced to simply not be sufficient to support 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 8 1 the fact that he spent over half of his business 2 activities on the real estate business. His work for 3 4 5 6 7 8 9 10 11 12 13 Baxter International was serious and extensive. And he was not located near the rental properties. His assertions that he spent a great deal of time on the telephone talking to people about real estate activities while may be correct in a general sense, certainly do not support the types of time and the duration of time that he alleges. We also believe his position is inconsistent with Section 1.469-5T(f)(4) of the Temporary Income Tax Regulations. In other cases we have held that these regulations do not permit a 14 *guestimatedof the time committed to participate in a 6- 15 16 17 18 19 20 21 22 23 24 25 rental activity. Moss v. Commissioner, 135 TC, 365, 369 (2010), Bailey v. Commissioner, TC Memo 2001-296, and Goshhorn v. Commissioner, TC Memo 1993-578. Also see Vandergraph v. Commissioner, TC Memo 2012-14. We finally turn to whether the addition to tax under Section 6662(a) is applicable to the years in question, 64eee we have found that Petitioners do not qualify for the exception under Section 469(c)(7), and that the claimed real estate losses are passive and are not allowable. Section 6662(a) imposes an accuracy related penalty equal to 20 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 9 percent of any understatement resulting from a substantial understatement of income tax. A substantial understatement is defined as an understatement of tax which exceeds both $5,000 and 10 percent of the tax required to be shown on the return, Section 6662(d)(1) (A). Respondent determined that Petitioners understated their income taxes by $46,649 in 2010. This amount meets the thresholds for the application of the substantial understatement penalty. And we have sustained Respondent's determinations. Hence Petitioners are liability for the penalty unless they can establish a reasonable cause so as to exempt themselves from the addition to tax. Our determinations relative to the deficiency in income tax in 2010 mean that Respondent has carried the burden of production in that year. Likewise our determination in 2011 sustains the threshold amounts required for the application of Section 6662(a) to 2011. Petitioners therefore must carry the burden of showing they had a reasonable cause in order to avoid the addition to tax for both the years before the Court, Section 6664(c)(1). At trial Petitioners provided no evidence that would establish they had a reasonable cause or acted in 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 Capital Reporting Company 10 good faith with respect to claiming the large real estate deductions at issue in this case. And as we stated we did not find the testimony of Petitioner husband to be credible. Therefore, we sustain the additions to tax. And the decision in this case will be entered for the Respondent for both of the years in question. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 9:42 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 twww.CapitalReportingCompany.com