TAX COURT OPINION

Case: Larry Wayne & Helga Rogers
Docket Number: 17129-11
Judge: Goeke
Opinion Type: bench
Filed: 12/21/2012
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 LARRY WAYNE AND HELGA ROGERS,) Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) Docket No. 17129-11. ) ) ) ) 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 San Antonio, Texas, 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 for respondent. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. December 21, 2012 SERVED JAN - 3 2013 Capital Reporting Company Larry Wayne & Helga Rogers 11-05-2012 1 Bench Opinion by Judge Joseph Robert Goeke November 3 2 3 4 5, 2012 Larry Wayne & Helga Rogers Docket No. 17129- 11 THE COURT: The Court has decided to render 5 oral findings of fact and opinion in this case, and 6 7 the following represents the Court's oral findings of fact and opinion. The oral finding of the fact and 8 opinion shall not be relied upon as precedent in any 9 other case. 10 This opinion is rendered pursuant to the 11 authority and Internal Revenue Code Section 7459 A 12 and Rule 152 of the Tax Court Rules of Practice and 13 Procedure. Hereinafter, section references are to 14 the Internal Revenue Code and rural references are to 15 16 the Tax Court Rules of Practice and Procedure. This case is before the Court based upon 17 our jurisdiction to review deficiencies determined by 18 Respondent when a timely petition was filed following 19 issuance by Respondent of a statutory notice of 20 deficiency. In the present case, the statutory 21 notice of deficiency was issued on April 20th, 2011, 22 to the Petitioners, Larry and Helga Rogers. For the 23 24 years 2007 and 2008, the deficiencies and additions to tax determined by Respondent are in the amounts of 25 $1,337, $7,711 in deficiencies respectively, and (866) 448 - DEPO www.CapitalReportingCompany.com 2012 , Capital Reporting Company Larry Wayne & Helga Rogers 11-05-2012 1 $267.40 and $1,542.20 as additions to tax under 2 Section 6662 for the years 2007 and 2008 4 3 4 respectively. The issues before the Court arise because 5 of Respondent's disallowance of Schedule C and 6 Schedule E expenses claimed by the Petitioner's on 7 their income tax returns for 2007 and 2008. In 2007, 8 Petitioners claimed a loss from rental property 9 activities under Schedule E in the amount of $5,352. 10 11 In 2008, Petitioners claimed a Schedule E loss in the amount of 21,400 -- strike that -- $21,542, and a 12 Schedule C loss in the amount of $22,628. 13 Petitioners also failed to report certain social 14 15 security income in 2008 which is not disputed. The underlying expenses were claimed 16 relative to real property in Bryson, Texas. At the 17 time the petition in this case was filed, the 18 Petitioners resided in Austin, Texas. The property 19 in.Bryson, Texas, was inherited by Mr. Rogers upon 20 21 the death of his father in 1999. At the time of the death of Mr. Rogers' father, the property was 22 appraised to have a value of $9,000. The property 23 consisted of two acres based upon the testimony of 24 Mr . Rogers and included a trailb 25 In the years prior to the year.s at issue, (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Larry Wayne & Helga Rogers 11-05-2012 5 1 Mr. Rogers has consistently claimed expenses relative 2 to alleged rental activity at the property. The 3 actual rental in om of the property was relatively 4 minor. The $2, O of rental income was received in 5 2001, $2, 450 . Thereafter, only $400 of rental income 6 was received, and Mr. Rogers believed this was in 7 20057 A Respondent's proposed 8 stipulation, which was deemed admitted, reflects this 9 amount in 2006. Regardless, no income in excess of 10 this $400 amount was received on the property in 11 question after 2001. Nevertheless, through 2009, 12 Petitioners claimed rental expenses beginning in 2005 13 in excess of $35,000 relative to this real estate 14 property. 15 In addition to the Schedule E expenses in 16 2008, Mr. Rogers explained that he had a business 17 activity which he characterized as GOMA. He 18 described that GOMA activities as relating to his 19 willingness to assist individuals with problems they 20 may have had with their personal computers. He 21 reported in 2008 $75 worth of income related to this 22 activity while reflecting a net loss totalling $22, 628 . 23 24 It is clear based upon his testimony that 25 some of the expenses associated with the GOMA (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Larry Wayne & Helga Rogers 11-05-2012 6 1 Schedule C loss are the same automobile expenses 2 3 4 5 6 7 8 9 claimed relative to the Schedule E real estate losses. Mr. Rogers testified that the Schedule E losses were associated with miles for his automobile in driving from his home in Austin to the property he inherited from his father, which he estimated to be several hundred miles away. The expense log he submitted relative to the property was merely claiming the entire amount of 10 expenses for his truck in both the years in question, 11 because the expenses not associated with driving to 12 the rental property he claimed were associated with 13 14 the GOMA activity; however, he claimed the same automobile expenses for both the Schedule C and the 15 Schedule E activities. 16 17 18 The relatively meager income reported for these activities over the years in issue and in prior years compared with the expenses claimed might cause 19 one to analyze the transaction as an economic sham; 20 however, Mr. Rogers testified that he believed the 21 expenses were associated with either the GOMA 22 activity or the real estate activity. The issue 23 before the Court is whether he was engaged in a 24 legitimate trade or business relative to either one 25 of these activities. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Larry Wayne & Helga Rogers 11-05-2012 1 2 3 4 5 6 7 8 The Petitioners failed to provide any credible evidence to Respondent in the course of their audit, and therefore they retained the burden of proof under Rule 142 and Section 7491 however, the burden of proof does not play a rule in our resolution of this case as we believe Mr. Rogers testified credibly about what he did, and we believe the actual records of the income and expense of the 9 activity are well documented in the record. 10 While the expense activities claimed..t-he 11 were not properly documented in conformity with the 12 13 requirements of Section 274, we do not reach that substantiation issue because we first must analyze 14 whether Petitioners had a legitimate trade or 15 business. As stated previously, it might be possible 16 to analyze the present transaction in the context of 17 18 current case law dealing with economic sham; however, this case law normally is only applicable in 19 situations where a transaction is reported to obtain 20 an artificial tax loss. The present case deals with 21 what we believe is an artificial loss, but is not one 22 generated by a complex tax shelter-type transaction. 23 Nevertheless, it is a transaction which lacks 24 economic reality given the substantial expenses 25 claimed .isi the relatively minor amounts of income (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Larry Wayne & Helga Rogers 11-05-2012 8 1 2 reported in 2008 and the relatively minor amounts of rental income ever reported relative to the real 3 estate. Even accepting that the transaction is not 4 an economic sham, Petitioner must establish that the 5 activity was motivated by a desire to obtain a 6 profit. nSrhamiral company 'the United States, 43 7 8 9 F3rd 594,599 6th Circuit, 2006. The objective and subjective facts simply do not establish that there was any motivation to 10 make a profit in the present case. Mr. Rogers 11 testified that relative to his GOMA activities, he 12 13 never or rarely charged anyone for whom he provided computer services. The fact that he did not charge 14 for these activities belies his lack of subjective 15 profit motive. Also, the fact that virtually no rent 16 was generated on the underlying property in question 17 18 for the years 2002 through the years in issue in the case and into 2009 established that there was no 19 legitimate expectation of profit from the rental 20 activity. The fact that the Petitioners duplicated 21 automobile expense claimed on Schedule E and Schedule 22 C in 2008 also makes it appear that the present 23 activities were simply designed to generate losses 24 which would offset theë=r income as wage in the 25 years 2007 and 2008. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Larry Wayne & Helga Rogers 11-05-2012 We therefore find that Petitioners were not 9 engaged in trade or business of conducting a real 1 2 3 estate activity in either 2007 or 2008, nor were they 4 engaged in A trade or business of conducting a 5 Schedule C activity under the name of GOMA in 2008. 6 A final issue is whether the addition to tax under 7 Section 6662 is applicable to the years in question. 8 We believe that Respondent has carried the burden of 9 going forward relative to the additions to tax·by 10 establishing the underlying adjustments to income 11 were warran . 12 13 Mr. Rogers did not offer any explanation that would support why he believed the substantial 14 deductions he claimed relative to the meager amounts 15 of income reported warranted a determination that he 16 was engaged in either the trade or business of 17 renting real estate or the trade or business of 18 provided computer services. 19 20 21 22 We believe Respondent has established that there was a substantial understatement of income tax in 2007 and 2008, and that, regarding 2008, there was a negligent disregard of the rules and regulations 23 which is established by the duplication of automobile 24 expense. Given the fact that Mr. Rogers did not 25 offer any reasonable basis to support the substantial (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Larry Wayne & Helga Rogers 11-05-2012 1 2 3 4 expenses claimed on the 2007 and 2008 return without any legitimate business activity to support the expenses, we sustain Respondent's determination of the addition to tax for both of the years in 10 5 question. This ends the Court's oral findings of fact and opinion in this case. We can go off the record. (Whereupon, at 2:52 p.m., the bench opinion in the above-entitled matter was concluded.) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 2 4 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2012