TAX COURT OPINION

Case: Marcel & Jennifer Ajah
Docket Number: 18458-08S
Judge: Panuthos
Opinion Type: summary
Filed: 07/08/2010
Pages: 14

-T .C . Summary Opinion 2010-9 0 a:. UNITED' STATES TAX COURT (cid:127)MARCEL AND JENNIFER AJAH, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 18458 - 08S . Filed July 8, 2010 . Jennifer Ajah, pro se . Diana P . Hinton , for respondent . PANUTHOS, Chief Special Trial Judge : This case was hear d pursuant to the provisions . of. section 7463 of the Internal .Fevenue Code in effectwhen_the petition was filed .' Pursuant t o section 7463(b), .the decision to be entered is not reviewable b y .'Unless otherwise indicated,-all-section references are to the internal Revenue Code in effect for the year in issue . All Rule references are' to the Tax Court Rules 'of Practi .ce -an d Procedure . SERVED JUL : - 8 2010 any other court, and this opinion shall not be treated as precedent for any other case . Respondent determined a $19.,7 :97 deficiency in petitioners' 2005 Federal income tax, an addition . to tax under section 6651 ( a)(1) 'of $3,815, and a section 6662 ( a) accuracy - related penalty of $3,959 .2 The deficiency is based on .,respondent's disallowance of petitioners ' claimed losses from rental real estate activities . The .~issues for, decision are : (1 ) Whether the section 469 passive activity rules preclude deducting losses from rental real estate activities ; (2)4whether an addition to tax under section 6651 ( a)(1) .is'applicable ; . and (3) whether an accuracy - related penalty under section 6662(a) is applicable . ' Some of the , facts have been stipulated, and they ° are,so found . The stipulation . of facts and the attached exhibits ar e incorporated herein by this reference . At the time of-Ifil ling th e petition, petitioners were residents o"f the State of New York ." For-matters of convenience , we will combine our findings and discussion herein . Petitioner Jennifer Ajah (Mrs . Ajah )' is an attorney, and petitioner Marcel Ajah (Dr . Ajah),-' her husband , is a medica l doctor . Petitioners owned two rental properties in 2005 . On e 2All dollar amounts are rounded to the nearest . dollar . 3Other adjustments were made to petitioners ' return tha t were computational and,'therefore, will not be discussed . Ij was a'commercial property located-in Jamaica,- New York, .which was the location .of Dr . Ajah's medical practice . The second was a single-family . residence in Baltimore,~Maryland .. Only Mrs .Ajah was involved in the rental real estate activities .' . - The rental . property in Maryland was sold for $80,000-i n 2005 . -Petitioner(cid:127)s° did not report thesale on their 2005,'join t Federal income tax return . Petitioners' joint-Federal income tax return for 2005 was , .prepared by an accountant and filed on July 25, 2006 . Petitioners supplied the accountant wilth'the requisit e documentation for the completion of their Federal income tax return and complied with .the accountant's request for mor e information There is no record of anextension request''s bein g filed . The return, as . filed, showed an .-adjusted,gross income of { .$192,070 . Mrs Ajah's2005 Form W-2, Wage .and Tax Statement,' showed earnings of $67,500, and Dr .- Ajah' .s showed earnings of , : $130,000 . A Schedule C Profit or Loss From Business, was also submitted showing $51, .807 of net profit from a(cid:127)business . After exemptions and deductions, ; petitioners, return reflected a refund of $724 .- With the return,- petitioners . filed Schedule E , 'Dr . Ajah did not appear at trial and did .not execute the stipulation of facts . Therefore, the Court will dismiss this case as to . petitioner Marcel Ajah for lack of prosecution . Se e .Rule 123(b) . The Court . will enter,a decision as to petitioner Marcel Ajah consistent with the decision to be entered as to petitioner Jennifer Ajah . Supplemental,~Income and .Loss, reporting rentall income forboth , propertiesof'$36,500 and total expenses ;-, including depreciation , for both properties of-$97,415 .. Petitioners-claimed losses of. $60,915 in connection with the .rentallproperties= . No election' aggregate the .;rental propert .ies .was- ~filed with the return . .Respondent.'s motion for summary judgment was denied ,because ' there was .a genuine issue of material'fact as-to whether .Mrs . The Commissioner' s . determinationstare presumed correct,,and, . the taxpayer bears the burden of proving that ., a, determination-set ' forth in .a notice of . deficiency is,incorrect . See. Rule 1-42(a)' ; Welch v' . Helverina ,- 29.0 U .S . 111,., 115 (1933) Deductions are a~ . mattertlof ;legisla .t.ive grace, and°the .taxpayer bears the burde n proving that > .he .is .entitled . to any , deduction . claimed . Rule 142 ;, New Colonial Ice Co . v . Helvering, 292 U .S . .435,e 440 (1934) . , 'Pursuant . to section 7491 (a) ,' , ;the ;burden . of .proof as to- factual matters shifts-to the Commissioner under-certai n circumstances . Mrs . Ajah neither :alleged that .section 749 1 (a) . applies nor'established,her compliance, with . the . substantiatio n and recordkeepingrequirements . See sec . 7491(a)(2)(A) .and (B) . Mrs . Ajah, .therefore, bears the burden of proof . See"Rul e 142 (a) .. Section 469 Losses From Rental Real Estate Activitie s Mrs . Ajah argues that all . of the passive losses from rental real estate activities s°hould be allowed to .be'taken'as a deduction against passive-income because she was a real estate professional in 2005 . In general, passive activity credits and losses are ..not allowed ... Sec- . 469(a) . ; A, passive activity i s defined as "any activity.--(A) which involves the conduct of any trade or business,'and'(B) in which the taxpayer does not materially participate .", Sec . 469(c) :(}l) . A passive activit y loss is defined as ,the-excess-of the aggregate losses from al l passive activities for the taxable yeajr~over the aggregate income from .all passive activities' for . that yjear . Sec . 469 (d) (1) Rental , real. estate activity is generally treated as a per se. passive activity regardless-of-whether t.he'taxpayer materially participates :. Sec . 469 (c) (2) ., ,(4 ) Exceptions to the general per se passive activity rule include : ( 1) If the taxpayer is in a 'real property business (a real estate professional ) under section 469(c )( 7)(B),, .then he is treated as involved in a .trade or business and 'subject .to the material participation requirements ofsection 469(c)(1) ; and (2) ° if, the taxpayer actively participates in the rental real'estate activities, then-he is entitled to- :an offset of . tip to $25, 000 against his passive activity losses under section'"469(1) . A taxpayer qualifies as a real estate professional and is not, engaged .in .a'pass ve activity if : (i) more than one-half of . ,the personal-services- performed in trades . or businesses by the taxpayer . during such taxable year .are,performed .in real property trades or businesses in which the taxpayer materially participates , and (ii) such taxpayer performs more than 750 hours of -- services during the taxable year in real property trades o r businesses in which the taxpayer materially participate s Sec . 469(c)(7)(B) ,In the case of a, joint return,, the same spouse must satisfy each requirement .- Id . .In establishing whether a taxpayer's,realrpropert y activities . result in . passive activity losses, each interest i n rental real estate-is treated as a separate rental reaLestat e activity : unless the qualifying taxpayer-makes-an election to . .treat all interests in rental real estate as a single rental real . , .estate activity . Sec . 469(c)(7),.(A), . The taxpayer must clearly,, notify the . Commissioner of his intent to'rtmake~an election to treat,multiplereal .estate activities as a single : activity . Se e Knight-Ridder Newspapers, Inc . v . United States , 743 F(cid:127) .2d 781 , 795 (11th Cir . 1984) . A statementof election must be filed with * the-,taxpayer's original, return declaring that . the election is,. - under. section 469(c) (7) ;.(A) ., - Sec .,, 1, .469-9 (g) (3) , Income .Tax Regs . Section ; .1 . 469-5T (f)(4) , Temporary Income Tax- Regs . , . .53 .. Fed . Reg . 5727 (Feb . 25 ; 1988) provides : The extent' of an individual's: participation in~an activity may be established by any reasonable means . Contemporaneous daily time reports,-logs, .or,siml~lar 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 . This Court has acknowledged that these temporary regulations do not explicitly state what records a taxpayer needs to maintain, ti but we have consistently held that they do not allow a postevent "ballpark guesstimate" . Fowler v . Commissioner , T .C . Memo . 2002- 223 ; Goshorn V . Commissioner , T .C . Memo . 1993-578 . Mrs ., Ajah argues that she qualifies as a real estat e professional for the year in issue . She relies upon certificates from the Long-Island Board of Realtors, Inc ., the Multiple Listing Service of Long Island, Inc ., and the State of New Yor k Department of State Division of Licensing Services . These certificates: reflect, respectively, that for 2005 she pledged t o adhere to the realtor code of ethics, had completed require d courses on broker rules and regulations, and was licensed as a real estate broker . Mrs . Ajah testified that she worked at least 20 hours a week for the 52 weeks of 2005 on'the two renta l properties . Mrs . Ajah did not offer any evidence as to th e number of hours she worked as an attorney in 2005 . contemporaneous record, calendar, appointment book, or any othe r I method of recording time spent between, rental real .; estat e activities and activities as an ,attorney :was provided . Thus,-the .. Court is unable to,conclude that more . than one-half of Mrs : h's personal services were :devoted to the rental . properties . We conclude that Mrs . Ajah's method of calculating her. time spent participating in the rental activities constitutes a n x w impermissible "ballpark guesstimate" . See Fowler .v . . r .4 Commissioner , supra ; see also Goshorn v . Commissioner , supra . Mrs ., Ajah"did,,not establish by reasonable means that, sh e performed more than one-half of her personal services in rea l .property trades or businesses . Petitioners did not file an election with their return t o treat the two rental real estate interests as one activity . Petitioners,did aggregate the rental properties on their': Schedul e E and may have done'so in the past . This . Court has consistentl y held that, aggregating rental properties on Schedule ,E is not a deemed 'electionunder the requirements of section 469(c)(7)(A) . Trask v . Commissioner , T .C . Memo . 2010-78, (citing Kosonen v . Commissioner , T .C . Memo . 2000-107 (aggregation of losse s clear notice of election under section 469(c)(7))) .. Therefore , Mrs . Ajah .would-need to perform 750 hours of service for eac h .rental real estate interest for a total of 1,500 hours to mee t the test in section 469(c)(7,)(B)(ii) If Mrs . Ajah's testimon y (working a minimum of 20 hours per week) was accepted as the number .ofhours engaged in-real estate°activities,'her total hours for both rental properties would be 1,040 hours", less tha n the required 1,500-hours . Because we have concluded that Mrs . Ajah was . not a rea l estate professional under section 4'69 (c) (7) (B), her . rental real estate . activities in 2005 were per se passive : activities .' 'See sec . 469(c)(2 .),' (4) . We must now decide whether Mrs .- Ajah° .is entitled to a $25,000 offset .,under section 469(i) . A taxpaye r who actively participated"' .in a rental real estate activity can deduct a maximum loss of $25,000 per year :related to th e activity . Sec . 469(i) .(1) and (2) . This exception is full y phased out, however, when adjusted gros s income (AGI) equals, o r exceeds $150,000 . Sec . 469(i)°(3)'(A) Petitioners reported AGI. . of $192,070 . Accordingly, .petitioners cannot deduct any of the passiv e activity losses for 2005 and respondent's determination is- sustained with respect to the section 1469 disallowance .. Addition-to Tax'Under Section 6651(a)(1) _ Section 6651(a)(1) . imposes an addition to tax for .failure to file a return on the date prescribed (determined with regard to any extension of time for filing) unless the taxpayer-establishe s that the failure is due to reasonable cause and not du e to willful neglect . United States vv . Boyle , 469 U .S . 241, 24 3 (1985) . "Reasonable cause'as applied n section 6651 has been - 10 - defined!as the 'exercise of ordinary business care and,-,' prudence .='" - Estate of Duttenhofer v . Commissioner ,, 49 .T .C ., 200,,,, 204,(1967) (quoting Se . Fin . Co . v . Commissioner , 153 F .2d 205 ), 205 (5th Cir . 1946) 7;, affg . 4 T .C ., 1069-"(1945)) , affd . 410 F . 2d 302 (6th Cir . 1969) ; see also sec .. 301 .6651-1(c) (1) , Proced, . &,. Admin . Regs . The,section 6651-(a) (1) addition .. to tax . is equal . t o 5 percent-'of the amount of .taxrequired to be shown on the return if the failure is not for more than- .1 month, with an additional 5- percent, to be added foreach month or partial month .during; which'' the failure to file continues,-not to,exceed 25 percent in th e aggregate . . Initially, the Commissioner :h15 the burden of production with .-respect,to any penalty, addition, to tax, or additiona l amount . Sec . 7491(c) The Commissioner satisfie s this, .burden of , production by coming forward with sufficient evidence,"that indicates,that .it .,is appropriate to-impose'the penalty-.''See, Higbee v . Commissioner , 11'6, T .C . 438, 446 (2001)), . Once the . .Commissioner satisfies this burden ofproduction, the taxpayer must persuade the Court that, the Commissioner's determination is in error byysupplying sufficient : evidence of .an applicable exception . Id . Respondent satisfied his burden here . .,,Petitioners' ;return,. was not : filed . until July 25, 2006,,more than ,3 months after th e due date . There is no record of an extension request's being' filed for . petitioners'"return . 'Therefore, it is up t o petitioners to persuade the Court that their failure .-to file wa s due to reasonable cause and not-willful neglect . Mrs . Ajah relied on her claim that she . and her husband- , signed an extension request and gave iit 'to 'their ' accountant to show that they had - reasonable cause for not timely filing thei r return . The burden of prompt filing cannot be shifted from petitioners to their employee or agent',-which would include petitioners' accountant . See United'.Sltates v. Boyle , supra at 249-250 . The fact that petitioners' allccountantwas expected t o attend to the matter did not relieve petitioners from . their duty to comply with the statute . See id . at 250 . Mrs . Ajah also argues that there was no willful neglect because the . return, as filed, reflected a refund of $724 ; therefore, no tax was owed . Mrs .. Ajah's argument that the retur n did not have to be timely filed because,they believed .a refund was due is misplaced . All individuals', whohave gross income tha t equals or exceeds the exemption amount$must file-a . Federal income tax return ., Sec . 6012 (a) (1) (A) .5 'Petitioners had gross income well in excess of the exemption amount and were required ,to, timely file a Federal-income tax return . SPetitioners fail . to meet'the criteria for any of th e exceptions listed-in sec . 6012 .' - 12 - Therefore, there was no reasonable cause for petitioners' failure to timely file their 2005 Federal income tax return, and . they are liable for an addition to tax under, section 6651(a)(1), . .: Accuracy-Related~PenaltyUnder 6662 (a ) Section 6662,(a) and (b) .(2) provides that a taxpayermay be liable for a penalty of 20 percent of theportion of an underpayment of'tax attributable to a substantial understatement . of income ..tax . An understatement of income tax is substantial if . it exceeds .the greater of 10,percent of .the tax required to be : shown on the . return or $5,000 . Sec . 666.2(d)(1)(A) . Respondent has the burden of production with respect to the accuracy-relate d penalty . See sec . 7491(c) . Ten percent of the tax required to be . shown on- petitioners' return was $4,535 . Petitioners' understatement must exceed $5,000 ; tobe deemed substantial . Petitioners understated \their tax by $19,7,97 .6 Therefore, respondent has met his burden of production .. Although, a substantial, understatement of income tax i s determined bya straightforwardmathematical .equation, the reasonable cause and goodfaith exception-of section-6,664 still.. applies if warranted . The exception is_for,any portion of a n 'Because we find that there was a substantial understatement' of income tax, there .is no .need to, discuss other attributions't o which the accuracy-related penalty would apply .. underpaymentfif there . was, . reasonable . cause . and the taxpayer .acted in good faith for that portion . . Sec . 6664(c) . Whether a taxpayer acted .with reasonable cause and good faith is determine d by the relevant facts and-circumstances on a . case-by-case basis . Stubblefield v . Commissioner , T .C . Memo . 1996-537 ; sec . 1 :6664- 4(b)-(-1), Income Tax Regs . "Reliance on=an information return, professional advice, or other facts,'h'owever, constitutes reasonable cause and good faith if,'-under all the . circumstances , such reliance was reasonable and the taxpayer acted in goo d faith ." Sec . : 1 .6664-4 ( b)(1), Income Tax Regs . ;, see United State s v . Boyle,-supra at 251 . : An honest misunderstandingof fact or, law that is reasonable in'the .light(cid:127)of1 .the experience, knowledge, and education of the taxpayer may indicate reasonable cause an d good faith . Remy v . Commissioner , T .C . Memo . 1997 - 72 ; sec . 1 .6664 - 4(b)(1), Income TaxPoRegs . The most important factor is the extent of the taxpayer ' s effort to assess the proper tax liability . Stubblefield v . Commissioner , supra ; sec . 1 .6664- 4(b)(1), Income Tax Regs . Section 469 and its regulations cover a . highly complex area of the tax code . Although Mrs . Ajah is an attorney who runs her own firm , she is not a tax attorney , and it is not unreasonable for her to seek guidance in this complicated area . She and her husband enlisted the advice .and help of an accountant to complet e their 2005 Federal income tax return . We find Mrs . Ajah' s f testimony : credible, that they presented-the accountant with th e proper ."documents and complied with requests!for additional : information-when asked . The accountant :then assured petitioners .. that-they were entitled to-the losses generated by th e real : estate activities . :" "To . require the taxpaye r 'second opinion, ' *Y * would nullify the very purpose . of;.seekin g the advice of a .-presumed expert in°the_first .place ." United . States v- . :Boyle , 469 U .S . at .251 (citing . Haywood Lumber &-Mining , Co . v . Commissioner , „ 178 F .2d 769, 771 (2d-. Cir :: : 1950.) ,,. modifying 12'T .C 735 (1949)) . We find , after considering all the facts- and circumstances ; that petitioners are not liable ., for,. the , accuracy-related penalty under section 6662(a) ,fo r To reflect the foregoing, . An appropriate order an d decision will be entered .