TAX COURT OPINION

Case: Cheryl Elizabeth & Don Edward Hill
Docket Number: 16394-07L
Judge: Dean
Opinion Type: memo
Filed: 09/13/2010
Pages: 19

T .C . Memo . 2010-20 0 UNITED STATES TAX COUR T CHERYL ELIZABETH HILL AND DON EDWARD HILL, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket 0o . 16394-07L . Filed September 13, 2010 . Cheryl Elizabeth .Hill and Don Edward Hill, pro sese . Derek B1 . Matta , for respondent . MEMORANDUM'FINDINGS OF FACT AND OPINIO N DEAN, S ec ial Trial Judge : The petition in this case was filed in response to a Notice of Determination Concerning Collection Action (s) Under Section 6320 and/or 6330 (notice o f determination) . Respondent later issued a supplemental notice o f determination . The issue for decision is whether petitioners ' b 0$ tax liability is properly reported on their 2004 Federal incom e tax return . FINDINGS OF FAC T Some of the facts have been stipulated and are so found . The stipulation of facts and the attached exhibits are incorporated herein by this reference . When petitioners filed their petition, they resided in Texas . Petitioners timely filed their 2004 Form 1040, U .S . Individual Income Tax Return, reporting tax due of $56,320 after consideration of withholdings . Petitioners failed to pay the ta x reported to be , due ; on their 2004: return . Upon receipt of petitioners' 2004 return respondent assessed the reported tax due and issued to petitioners a,notice .o.f,_ Federal tax lien filing . Petitioners timely requested a hearing pursuant-to section 6320 . Respondent issued his notice of determination denying petitioners' request for relief . Petitioners later submitted an amended Federal income tax return for 2004 claiming : (1) Losses for Cheryl Elizabeth Hill' s (petitioner) "Real Estate Investor" business on Schedule Profit or Loss From Business ; and (2) a $10,000 exception to the I 10-percent additional tax on an early retirement distribution 3 pursuant to< section 72(t) as first-time home . buyers .' On-the amended ret u rn, after consideration of . .prior withholdings . petitioner s reported tax due of $15,384 . After c onsideration of the 2004 amended-return respondent : issued a sup lemental notice of determination-to,petitioners denying in fill their: claims on the amended return . During 2004 petitioner worked'approximately 187 days as a librarian a t a local elementary school . She spent time,af .ter ' school and o n weekends looking for and researching rental real estate prope sties . H ome Pu r chases In 200 3 petitioner purchased a home in Georgia, an d petitioners, both of whom were retired at-the-time, intended t o move into that home . Circumstances changed in 2004, .. however, an d petitioner s instead decided to offer the home for rent . Later i n 2004 petitioner purchased a second home that was a { manufacture and her husb I home .' She originallypurchased the home for - herself . and but thereafter decided to offer this home fort rent as well Sheencounteredconsiderable difficulty, however ; finding a su itable community for the . manufactured home . Th e .first location proved unsatisfactory, .and the second location was unable to support her fully electrical manufactured hom e 'Unless otherwise indicated, subsequent section references are to the I ternal Revenue Code, as amended, and Rule references are to the Tax Court Rules of Practice and Procedure . Because of the°inabilityto.find a-satisfactory manufactured- home community, petitioner-decided-to purchase a tract of,,land for the home . Petitioner first purchased a 3-acre . plot . of-land . in Brazoria .County, Texas, before realizing-that she would be unable to place her home on the land because the home failed .to . comply with the county's wind restriction requirements, . She : :, purchased a-second tract of land, an 11-acre plot, and was able to place . her home on the land without any (apparent), complication . She transported her manufactured home four :times,r: in 2004 before finding property suitable for her home . - Petitioner was unable to secure renters for the Georgia home .. and the manufactured home in 2004 ; .consequently,-she did not ; ear n income ..from renting property during 2004 . II . Retirement Account : Withdrawal s In 2004 petitioners withdrew money,from retirement-accounts .. . , to fund various expenditures,, including the purchase of a first home . Petitioners realized that when=an early distribution from a retirement account is used to purchase a home by a first-time,,- home buyer, $10 ;000 of the distribution is excepted from . .the,10 percent-additional tax-on early retirement account distributions . Accordingly, on their amended,return- :petit-ioners claimed that a° portion of-a $6 5 ,000 distribution from Brazos Valley Credit-Union,, qualified for the $10,000 exception . Respondent, .determined°..that d petitioners had already°been,granted the $10,000 exception for- Franklin Te pleton Bank & Trust distributions in 2004 . 5 - Evidentilary .Matter s OPINIO N In gene ral, the Court conducts trials in accordance with the rules' of evi dence for trials without a jury in the U .S . Distric t Court for t e District of Columbia, and accordingly, follows th e Federal Rule s of Evidence . Sec . 7453 ; . Rule d43(a) ; Clough v . Commissioner 119 T .C . 183 ;'188(cid:127)- .(2002 ) Respon ent objects to several documents petitioners proffered i to evidence . A%. Narrative Log s Petiti o ner proffered narrative logs reflective of her renta l real estate activities throughout 2004 . Respondent alleges tha t the logs coast-itute" inadmissible . hearsay . Hearsay is a statement, "other than one made by the declarant while testifying at,the trial or hearing, offered in evidence to rove the truth of the matter asserted ." SeeFed . R . . Evid . 801(c ) Petitioner's narrative logs are-reconstructive accounts . she drafted after respondent' initiated the lien action . These narrative logs constitute inadmissible hearsay unless some exception to the hearsay rule applies . Petitioner has no t demonstrated that an exception to, hearsay exists under which the Court may admit, .the .,narrative logs ; therefore,, the narrative ; logs ., will be excluded . See Fed .'R . Evid . 803 . . B . Real Estate Lien Not e Respondent objects to petitioner's proffer of a real estate . lien note on the basis . of authenticity . ' Rule 901(a) of the Federal,Rules of . Evidence provides that' "The requirement-of authentication ' or identification as a condition precedent to admissibility-is satisfied by evidence sufficient to support a finding that the matter in question-is, : what its proponent' claims ." Rule'901(b)°of the$Federal Rules of Evidence sets forth a nonexclusive list of "examples o f authentication or identification conforming with .the requirements of .[Rule 901]", none of which are relevant her e The real estate lien-note 'comprises five pages , but appears to consist of two separate incomplete ' documents . When'questioined regarding the inconsistency of the documents , petitioner explained that she ,.. just gave , respondent what she had and that she . had "no'idea what that is ." The real estate lien note is incomplete and, because petitioner was unable to identify2 (cid:127) the documents ' or,explain why the-note appeared to consist of two, separate incomplete documents, respondent ' s objection will-be- sustained . 'Respondent further alleged that this document violatesthe best evidence rule, but the Court'need not consider this argument . C . Rat and Payment Schedul e Respondent objects to the . admission into evidence of petitioner's' mortgage rate and payment schedule on the basis of relevancy . 3 Relevant evidence means evidence having-any tendency to make the existenc of any fact that is of consequence to the determinatio of the action'more probable or less probable tha n it would be githout the evidence . -Fed . R . Evid . .401 . Petitioner seeks to introduce the rate and payment . schedule , which she ac essed in 2007, to demonstrate that she obtained a mortgage in 004 for her 11-acre tract of land . She attempted t o demonstrate that although she accessed the document in 2007, the rate and payment schedule shows that she obtained a mortgage i n 2004 . The 1 ine to which petitioner. directs,the Court, however, is blackened out and is therefore illegible . This document doe s not contain legible data relevant to the 2004 tax year and is irrelevant f or purposes of determining petitioner's 2004 tax liability . See id . II . Burde n of Proo f Section 7491(a)(1)provides that, . subject . to certain limitations, where'a taxpayer introduces credible=evidence with respect to . a factual issue relevant to ascertaining the . , 'Respondent also objected to the admission of the document into evidence on the basis of hearsay, authenticity, and the best evidence rule . taxpayer's tax liability, the burden of proof shifts to the Commissioner . with respect to that issue . ; Credible evidence is ; evidence the Court would . find sufficient : upon which to . base a decision on the issue in favor of the taxpayer if no contrar y evidence were submitted . Ruckriegel v . Commissioner ,'T .C . Memo . 2006-78 . Section 7491(a)(1) applies only if .the taxpayer complie s with the relevant substantiation requirements in the Internal . Revenue'Code, maintains all required .records, .and cooperates ; with the Commissioner with respect to witnesses, information , documents, meetings, and interviews . Sec . 7491(a)(2)(A),and .( B The taxpayer bears .the burden of proving compliance .with the , conditions of section 7491(a) (2) .:(A) and ( B) . See, e .g . , Ruckriegel v . Commissioner , supra . Petitioners neither propos e facts'-to support their compliance with the conditions of . sectio n 7491 (a) (2) (A) and a(B) nor persuasively- argue that responden t bears the burden of proof on any issue,because of section-,, 7491(a)(1) . We therefore conclude that section 7491(a)(1) doe s not apply . III . De Novo Review of Underlying Tax Liabilit y Under section 6320 ( a) the Secretary is required to notif y the taxpayer in writing of the filing .of a Federal tax lien and inform the taxpayer of his right to a hearing . . .Section 6330(a)s . similarly,provides,that no levy may be made on a taxpayer' s 9 - property or right to property unless the Secretary notifies the taxpayer in writing of his right to a hearing before the levy is made . If the taxpayer requests a hearing under either section 6320 or 6330, a hearing shall be held before an impartial officer or . employee of the Internal Revenue Service Office of Appeals . Secs . 6320(b) (1) , (3), 633O(b) (1) , (3) . At the hearing a taxpayer may raise any relevant issue, including appropriate spousal defe ses, challenges to the appropriateness of the collection action, and collection alternatives . Sec . 6330(c)(2)(A) . A taxpayer is precluded from contesting the existence or amount of the underlying tax liability unless the taxpayer did not receive a notice of deficiency for the tax in question or id not otherwise have an opportunity to dispute the tax liability . Sec . 6330(c)(2)(B) ; see also Sego v . Commissioner , 114 T .C . 604, 609 (2000) . Where the validity of the underlying tax liability is at issue in a collection review proceeding, he Court will review the matter de .novo . Goza v . Commissioner , 114 T .C . 176, 181-182 (2000) . Petitioners were entitled to challenge their underlying liability in the hearing, see, e .g ., Montgomery v . Commissioner , 122 T .C . 1 ( 004) ; therefore, the Court considers de novo the merits of pe itioners' challenges . - 10 - The deductibility of the losses from petitioner's rental ., properties on Schedule C depends on whether she qualifies as a real estate professional under section-469(c)(7) . Taxpayers are allowed deductions for certain business an d investment expenses under sections 162 and'212 ; however, section 469(a ) generally disallows for the taxable year any passive activity loss . A passive activity loss is defined as the exces s of the aggregate losses from all .passive activities for the' taxable year over the aggregate income .from all passiv e activities for that year . Sec . 469(d)(1) . A passive activity is , any tradeor business in which the taxpayer does not materially , participate .'. Sec . 469 ( c)(1) . Rental activity is treated as a per se passive activity- regardless -of whether the taxpaye r materially participates . Sec . 469(c)(2), (4) . Under section 469(c)(7)(B),'the rental activities of . taxpayer in the real property business (real estate professional) are not per se passive activities under section 469 .(c)(2) -but are, treated as a trade or business subject to the material participation-requirements of section 469(c) . Sec . 1 .469- 9(e) (1) . ;, Income Tax Regs . Under,section 469(c)(7)(B), a taxpayer qualifies as a real estate professional and .is not engaged in .a passive activity under section 469(c)(2) if : (i) more than one-half of the personal services performed in trades or businesses by the taxpayer during t - 11 - such tabcable 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 service during the taxable year in real property trades or busines es in which the taxpayer materially participates . Unless the taxpayer-elects to aggregate his interests, each of the taxpayer's interests in real estate is .treated as a separate activity . ' Sec . 469(c)(7)(A) . In the ase of a joint return, the same spouse must satisfy each require ent . Sec . 469(c)(7)(B) . Thus, if either. spouse qualifies as a real estate professional, the rental activities of the real estate professional are not a per se passive activity under section 469(c)(2) . Instead, the real estate professional's rental activities would be treated as a passive activity under section 469(c)(1) unless the taxpayer materially participated in the activity . Material participation is defined as involvement in the operations of the activity that is regular, continuous, and substantial . Sec . 469(h)(1) . With respect to the evidence that may be used to establish hours of participation, section 1 .469-5T(f)(4), Temporary Income Tax Regs ., 5 Fed . Reg . 5727 (Feb . 25, 1988), provides : The ext nt of an individual's participation in an activity may be established by any reasonable means . Contemporaneous daily time reports, logs, or similar documents are not required if the extent of suc h 4Petiti6ner did not elect to -aggregate her rental real estate interests . - 1 2 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 service s 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 narrativ e summarie s Petitioner ' s rental real estate activity consisted of research on and development of two rental properties , a home purchased in 2003 and a home purchased-in 2004 , neither of which :: was originally planned as a rental property . Petitioner worke d approximately 7 .5 hours per day'for 187 days , a total*of (cid:127) 1,40 .2 ."5 l hours , . as a school-librarian in 2004 ° During those 187 working days, she alleged , she devoted an additional . ;-6'hours .. of her'time° researching'and developing her rental : real .estate activity ., She further asserts that on each vacation day, each Saturday°an d Sunday, and each holiday, she devoted 8 hours to her rental real estate activity . She estimated working .a_total of 2,840 hours on her rental real estate activity during 2004 . On the basis of petitioner's estimates, she worked an average of over 11 .hours a. day throughout 2004 . Her estimate-may have been bolstered by he r assumption that there are '11 72 weekends in a .year" . Petitioner claimed . that she spent numerous hours each day researching real estate property and development . Despite her alleged extensive research, as discussed supra , petitioner encountered. significant difficulty finding an appropriat e location for her. manufactured home . In addition,,_,she presented J 13 - little evidence as to the activities she devoted to her Georgia home in 2004 . The met nods petitioner used to approximate the time that she spent performing rental services during 2004 are not reasonable within the meaning of section 1 .469-5T(f)(4), Temporary Income Tax Regs ., s ra . Petitioner's estimates are uncorroborated an d do not relia bly reflect the hours that she devoted to her renta l real estate activity . Petitioner assigned hours to activitie s years later, ,in preparation for trial, that were based solely o n her judgment as to how much time the activities must have taken her . This C urt has previously noted that, while the regulations are somewhat ambiguous concerning the records to be maintained by taxpayers, t ey do not allow a postevent "ballpark guesstimate" . Carlstedt v .lCommissioner , T .C . Memo . 1997-331 ; Speer v . Commissioner T .C . Memo . 1996-323 ; Goshorn v . Commissioner , T .C . Memo . 1993- 5 1 8 . The fol owing factors further diminish the credibility and accuracy of etitioner's claim : (1) The number of hours claimed appears exce ~sive in relation to the tasks described, given the amount of ti me she worked as a librarian throughout the year ; and (2) the Geor gia property and the manufactured, home were vacan t during 2004 . Further ore, the Court is not convinced that the hour s petitioner c Maimed she spent on her rental real estate activity - 14 - accounted for :more than one-half of the total hours of personal services she performed in a trade or business in 2004 . She therefore does not qualify as a real estate professional pursuant to section 469(c)(7), and her rental activities during 2004 were passive activities pursuant to section 469(c) .(2) . .5_Consequently ., petitioner's passive activity losses for 2004 are limited by,, section 469 . A taxpayer who "actively participated" in a rental real estate, activity may deduct a maximum . loss of $25,000 per year- related to the activity . Sec . 469(i)(1), and (2) ; , This exception- is fully phased out, however, when adjusted gross income ;equals or exceeds $15.0,000 . Sec . .469(i)(3)(A) . Petitioners reported adjusted gross income, of $312,981 for 2004 ; consequently, they ., are not entitled to deduct any of the losses associated wit h petitioner ' s rental real estate activity for the 2004 tax-year . . Petitioner alleged that even if she is unable to deduct he r rental real estate activity losses under section 469 ,'- she should be entitled to deduct the costs of her rental real estate activity under 'sections 212, 162 and/or 195 .'6 5The'Court need not decide whether she materially participated in her rental real estate activity . 469(c)(4) . See sec . 6Sec . 469 limits the deductions that would otherwise be permitted under secs . 162 and 212 . Because petitioner's passive activity deduction is limited pursuant to sec . 469, petitioner may not deduct her expenses pursuant to secs . 162 and 212 . 15 - Petitio er's argument that she is entitled to a deduction pursuant to section 195 is misplaced . Section 195 provides that no deduction shall be allowed for startup expenditures . Therefore, e en if she incurred startup costs associated with a business, sh would not be entitled : to a deduction pursuant to . section 195 . IV . Penalty for Early Withdrawal From Pensio n Section 72(t)(1) generally imposes a 10-percent additional tax on early distributions from "a qualified retirement plan (as defined in s ction 4974(c))," unless the distributions com e within one o several statutory exceptions . With re pect .to the distribution at issue, the parties do not dispute hat petitioners' accounts were qualified employee retirement p ans and that petitioner did not "roll over" he r distribution pursuant to section 408(d)(3) . Therefore, in order for petition r to prevail, she must show that the distribution s fall under o : e of the exceptions under section 72(t)(2) . With re pect to section 72(t), this Court has repeatedly held that it is bound by the list of statutory exceptions enumerated is section 72(t)(2) . See, e .g ., Arnold v . Commissioner ill T . C . 250, 255-256 (1998) ; Schoof v . Commissioner 110 T .C . 1, 11 (1998 ) ; Clark v . Commissioner , 101 T .C . 215, 22, - 225 (1993 ) ; Swihart v . Commissioner , T .C . Memo . 1998-407 ; Pu : ~liam v . Commissioner , T .C . Memo . 1996-354 ; Roundy v . Commissioner , T .C . Memo . 1995-298, affd . 122 F .3d :835 (9th Cir . 16 - 1997) . As relevant herein, section 72(t)(2)(F) exempts distributions from the early--withdrawal additional tax to the extent such distributions are qualified first-time home buyer distributions . See sec . 72(t)(2)(F), (8) . The maximum amount of a distributio n that may be treated as a qualified first-time home buyer distribution is $10,000 . Sec .' 72(t) (8) (B)' . Any amount of a distribution that petitioners received in excess of'$10,000 remains subject to the 10-percent additional tax required by section 72(t) . 'Id' . Respondent alleges that petitioners were already granted th e $10,000 exception and petitioners presented no argument or . evidence demonstrating that they had not already received th e $10,000 exception as first-time home buyers . Accordingly , petitioners are not entitled to an additional $10,000 exception . V . Interest Abatement ' Section 6404(e)(1) provides in pertinent part that the Secretary may abate the assessment of interest on : (1) Any 'Petitioners also requested an abatement of penalties, but the record does not show what,penalties', if any, were assessed against diem ., Accordingly, the Court is unable to determine whether they are entitled to an abatement of penalties . - 17 - deficiency a tributable to any error or delay by an officer or employee of he IRS in performing a ministerial or managerial act .; 8 or- (2) .any payment of any tax described in section 6212(a ) to the exte n that any error or delay in such . payment i s attributable to such officer or employee being erroneous o r dilatory i n performing a ministerial or managerial act . A mini s Serial act is a procedural or mechanical act that does not inv lve the exercise of judgment or discretion by th e Commissioner Sec . 301 .6404-2(b)(2), Proced . & Admin . Regs . Section 6404 (e) provides a taxpayer relief only if no significant aspect of th error or delay can be attributed to the taxpaye r and only aft ~,r the Commissioner has contacted the taxpayer i n writing abou the deficiency or payment in question . H . Rept . 99-426, at 8 4 (1985), 1986-3 C .B . (Vol . 2) 1, 844 ("Thi s provision do s not therefore permit-the abatement of interest for the period o .time between the date the taxpayer files a return and the date the IRS commences an audit, regardless of the length of that tim e period .") . A manag rial act is an administrative act that occurs during the processi g"of a taxpayer's case involving the temporary o r permanent l o s of records or the exercise of judgment or 8Petitic underpayment petitioners' sec . 6404(e) ners'do not have-a deficiency but rather a n of tax . See secs . 6211, 6404(e)(1)(A) . Therefore, interest abatement claim will be determined under ;1) (B) . See secs . 6211, 6212(a) . - 18, - discretion, relating to management of personnel . .Sec . 301 .6404 . 2(b)-(1), Proced . & Admin . Regs . Petitioners allege that respondent's refusal to accept their 2004 amended return was without justification and a denial of due process . Even though the Commissioner has administrativel y permitted their use, the filing of an amended return is,not a matter of right, as there is no statutory provision expressly authorizing one to be filed . Badaracco v . Commissioner , .464 U .S . . 386, 393 (1984) . Acceptance of an amended return has repeatedly been held to be a matter which is within the discretion of the Commissioner . . Colvin v . . Commissioner , T .C . Memo . 2004-67, affd . 122 Fed . Appx . 788 (5th Cir . 2005) . Furthermore,(cid:127)petitioners have failed to identify a ministerial or managerial delay by an IRS employee that cause d ,them to forgo making payments on their . income tax liability .- . They .self-reported their income tax liability and chose to forgo' making payments to pursue alternative avenues of relief . Accordingly, the Court is unable to conclude that any delay-in' payment on petitioners' account was not due in significant part to their own act of nonpayment . See sec . 6404(e)(1)(B), . Petitioners' request for an abatement of interest is denied . . As petitioners made no allegation in the petition that respondent abused his discretion in filing the . disputed tax lien, - 19 - that the proposed method of collection is inappropriate, or tha t there is any spousal defense , the Court holds for respondent . To reflect the foregoing, Decision will be entere d for respondent .