t c memo united_states tax_court william c and cristina lowe petitioners v commissioner of internal revenue respondent docket no filed date in p husband h invested in da a limited_partnership engaged in renting real_estate and he retained that investment until da’s termination in da generated losses in every year of its existence except and on the basis of a conversation with his return preparer h believed the losses to be nondeductible although the and losses were deducted on his returns for those years frequent job changes caused h to move several times after but because he believed da would continue to generate nondeductible losses he did not advise da of his changes of address never received the schedules k-1 from da and therefore was unable to continue his prior practice of turning over the schedules k-1 to his return preparers and did not report the gains and losses reflected on those schedules k-1 the and returns confirm that ps reported neither the gain nor the losses for the other years the parties stipulate that ps did not report the gain ps were unable to furnish copies of the and returns r alleges that ps are taxable on dollar_figure of unreported long-term_capital_gain reflected on the schedule_k-1 issued to h by da ps allege that pursuant to sec_469 and g i r c they may carry forward dollar_figure of suspended passive_activity_losses from and as a complete offset to the unreported and gains r also determined that ps are liable for the sec_6662 i r c accuracy- related penalty held the and losses constitute suspended passive_activity_losses and the excess of those losses over the unreported gain may be carried forward as a partial offset to ps’ unreported long-term_capital_gain from da held further ps have not produced credible_evidence that there are any suspended passive_activity_losses from or available for carryover to and therefore no carryover from those years is permitted held further r’s penalty against ps is sustained in part under sec_6662 i r c patrick j o’brien for petitioners kelly r morrison-lee for respondent memorandum findings_of_fact and opinion halpern judge by notice_of_deficiency dated date respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure and an accuracy-related_penalty of dollar_figure petitioners assign error to both of those determinations the issues for decision are the extent if any to which there exist unused or suspended passive_activity_losses arising in taxable years before and attributable to petitioner william c lowe’s mr lowe’s interest in a real_estate limited_partnership that pursuant to sec_469 and g are available to petitioners as offsets to the unreported long-term_capital_gain mr lowe realized upon the termination of his investment in the partnership and whether petitioners are liable for the accuracy-related_penalty under sec_6662 the notice contains certain other adjustments that are purely computational their resolution depends upon our resolution of the first issue in dispute findings of fact2 some facts are stipulated and are so found the stipulation of facts with accompanying exhibits is incorporated herein by this reference at the time the petition was filed petitioners resided in lake forest illinois unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure pursuant to rule e each party in the answering brief is required to set forth any objections together with the reasons therefor to any proposed findings of any other party petitioners have filed an answering brief but they have failed to set forth objections to respondent’s proposed findings_of_fact accordingly we must conclude that petitioners have conceded that respondent’s proposed findings_of_fact are correct except to the extent that those findings are clearly inconsistent with either evidence in the record or petitioners’ proposed findings_of_fact see eg 118_tc_106 n affd 353_f3d_1181 10th cir mr lowe’s background and job history mr lowe earned a b s in physics from lafayette college in he then was employed by ibm as an engineer and by had become a corporate vice president and president of ibm’s entry systems division although his formal training was in physics he had some responsibilities for business decisions in his area in general however mr lowe depended upon the chief financial officer to support the financial decisions relating to the products with which he was concerned during mr lowe resided in chappaqua new york he became an executive for xerox corp in and remained at xerox until during that period he continued to reside in chappaqua he then embarked upon a series of job changes and relocations in he became the chief_executive_officer ceo of gulfstream aerospace in savannah georgia and he moved to hilton head south carolina in he became the ceo of new england business services in groton massachusetts and he moved to concord massachusetts and in he became executive vice president north america for moore corp headquartered in lake forest illinois which became his new place of residence then in late or early petitioner cristina lowe’s mrs lowe’s mother passed away and petitioners moved to tucson arizona to be with mrs lowe’s father in petitioners moved back to lake forest illinois mr lowe’s investment in douglas associates in while mr lowe was at ibm a financial adviser from chase bank used by mr lowe and a number of other ibm executives advised mr lowe to get involved in some limited_partnerships he specifically recommended that mr lowe invest in douglas associates a limited_partnership engaged in renting real_estate thereupon mr lowe invested dollar_figure in douglas associates in exchange for a limited_partnership_interest douglas associates issued schedules k-1 partner’s share of income credits deductions etc the schedules k-1 to mr lowe for each year of its existence and mr lowe retained his limited_partnership_interest in douglas associates for that entire period the schedules k-1 reported mr lowe’s annual share of douglas associates’ gains and losses as follows year gain loss dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure 1big_number the schedule_k-1 which covered douglas associates’ final taxable_year ending date also reported that mr lowe’s share of unrecaptured depreciation gain from flow through entity was dollar_figure respondent does not argue that that amount reduces the amount of suspended passive_activity_losses that may be available to offset the dollar_figure long-term_capital_gain mr lowe realized upon the termination of his investment in douglas associates therefore we will ignore that amount in determining the amount of suspended passive_activity_losses if any available for that purpose the and schedules k-1 reported mr lowe’s losses for those years on line ordinary_income loss the schedules k-1 for all subsequent years reported his gains or losses on the line entitled reconciliation or ‘analysis’ of partner’s capital_account and or that entitled income or ‘net income’ loss from rental_real_estate_activities mr lowe received the schedules k-1 and turned them over to his tax_return_preparer having failed to notify douglas associates of his various changes of address between and mr lowe did not receive any of the schedules k-1 issued for those years the schedules k-1 were addressed to mr lowe at his address in lake forest illinois which indicates that someone had advised douglas associates that mr lowe resided at that address presumably mr lowe’s failure to receive them is attributable to petitioners’ late or early move from lake forest to tucson arizona the schedule_k-1 was mistakenly addressed to mr lowe at a different address in lake forest illinois at a time when petitioners were still residing in tucson tax reporting of the gains and losses reflected on the schedules k-1 mr lowe reported the losses attributed to him on the and schedules k-1 jointly with his former spouse for and jointly with mrs lowe for as currently deductible on the returns filed for those years on the joint returns petitioners filed for through they reported neither the gains for and nor the losses for the other years reflected on the schedules k-1 for those years mr lowe was unable to obtain copies of his and returns and those returns are not in evidence mr lowe’s returns were prepared by joseph cannistra co in mount kisco new york his returns were prepared by at least six different tax preparers generally located near his residence which as noted supra changed several times during those years opinion i petitioners’ entitlement to a passive_activity_loss carryover a applicable law sec_469 dealing with passive_activity_losses and credits was added to the internal_revenue_code by sec_501 of the tax_reform_act_of_1986 tra publaw_99_514 100_stat_2233 theretofore there had been no generally applicable limitation on a taxpayer’s ability to use losses from a the return is also not in evidence but the parties stipulate that petitioners did not report on that return the dollar_figure gain reported on the douglas associates schedule k- particular trade_or_business activity to offset income from other such activities that circumstance gave rise to the proliferation of tax_shelters permitting taxpayers to reduce or avoid taxes on salary or other positive_income through the use of losses often in excess of real economic costs incurred in advance of any income from the shelters see h conf rept vol ii at ii-137 1986_3_cb_1 s rept pincite 1986_3_cb_1 in pertinent part sec_469 provides that an individual’s passive_activity_loss for any taxable_year shall not be allowed sec_469 defines a passive_activity as one which involves the conduct of any trade_or_business in which the taxpayer does not materially participate sec_469 defines a passive_activity_loss as the amount for the taxable_year by which aggregate losses from all passive activities exceed aggregate income from those activities thus losses arising from a passive_activity are deductible only against income from that activity or another passive_activity see s rept supra pincite c b vol pincite sec_469 provides that any passive_activity_loss disallowed under subsection a shall be treated as a deduction allocable to that same passive_activity in the next taxable_year if the with exceptions not here relevant an individual is not treated as materially participating in any activity of a limited_partnership of which he is a limited_partner eg mr lowe is not treated as materially participating in douglas associates’ activities see sec_469 sec_1_469-5t temporary income_tax regs fed reg date carried-over passive_activity_loss becomes a nonallowable passive_activity_loss for the carryover year it is carried over to the succeeding year disallowed or suspended losses may be carried over indefinitely until they are used see s rept supra pincite c b vol pincite bittker lokken federal taxation of income estates and gifts par pincite- 3d ed pursuant to sec_469 and b if a taxpayer disposes of his entire_interest in a passive_activity to an unrelated_person in a transaction in which all gain_or_loss is recognized suspended passive_activity_losses remaining after the application of sec_469 are deductible without limitation ie they are treated as losses not from a passive_activity in the year of disposition sec_469 generally applies to taxable years beginning after date and does not apply to losses from pre- taxable years carried forward to post-1986 taxable years tra sec_501 and sec_469 provides a 5-year phase-in for passive_activity_losses from interests held before because disallowed or suspended losses from a passive_activity are allowable in full upon a fully taxable disposition of that activity see discussion infra it is necessary to determine the portion of each year’s passive_activity_loss carryover that is allocable to each of the taxpayer’s passive activities assuming the taxpayer owns interests in more than one see s rept pincite 1986_3_cb_1 sec_1_469-1 income_tax regs sec_1 1t f temporary income_tax regs fed reg date in this case the nonpassive activity loss characterization would apply only to the extent mr lowe’s suspended_loss carryover exceeded his unreported capital_gain on the disposition of his interest in douglas associates the new law’s date of enactment_date pursuant to which an increasing percentage of such losses becomes subject_to the new rules with percent of such losses becoming subject thereto for taxable years beginning in or after b arguments of the parties petitioners argue that the losses set forth on the schedules k-1 issued to mr lowe by douglas associates for and totaling dollar_figure and from which they have received no tax_benefit are passive_activity_losses which more than offset any gains from douglas associates ie the and gains totaling dollar_figure respondent argues because petitioners have failed to substantiate the transactions surrounding the alleged passive_activity_losses petitioners cannot satisfy the statutory requirements for carrying forward suspended passive_activity_losses he concludes that those alleged losses cannot be properly carried forward because they are not suspended passive_activity_losses pursuant to the parties stipulate and the and returns verify that the losses reported on the and schedules k-1 were deducted as nonpassive or active losses and petitioners concede that the alleged passive_activity_loss carryover is net of claimed active losses petitioners do not dispute the status of the unreported gain as an offset to their alleged suspended passive_activity_loss carryover to what they seek is to apply all passive losses net of claimed active losses and unreported gains to offset any_tax liability for emphasis supplied section alternatively respondent argues that even if we decide that the losses set forth on the and schedules k-1 totaling dollar_figure constitute suspended passive_activity_losses available as a carryover they must be offset by the unreported gain of dollar_figure leaving only dollar_figure in suspended passive_activity_losses as an offset to the unreported gain of dollar_figure resulting in net unreported gain of dollar_figure c burden_of_proof in pertinent part rule a provides as a general_rule the burden_of_proof shall be upon the petitioner in certain circumstances however if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the proper tax_liability sec_7491 places the burden_of_proof on the commissioner sec_7491 rule a credible_evidence is evidence that after critical analysis a court would find constituted a sufficient basis for a decision on the issue in favor of the taxpayer if no contrary evidence were submitted 122_tc_143 bernardo v commissioner tcmemo_2004_199 n sec_7491 applies only if the taxpayer complies with substantiation requirements maintains all required records and cooperates with the commissioner’s requests for witnesses as explained infra sec i d respondent believes that petitioners’ duty to be consistent forecloses their claim that the losses are available to offset their unreported passive_activity gain information documents meetings and interviews sec_7491 for the reasons discussed infra section e a we find that petitioners have failed to introduce credible_evidence that any of the losses reflected on the schedules k-1 for and the pre-‘93 losses constitute suspended passive_activity_losses it follows that petitioners retain the burden of proving that those losses are available to offset their gain on the disposition of mr lowe’s interest in douglas associates a burden that because of the absence of credible_evidence on that issue petitioners cannot sustain see bernardo v commissioner supra n see also 535_f3d_1221 10th cir citing bernardo v commissioner supra affg tcmemo_2006_174 therefore our discussion of that issue may be viewed as setting forth the basis for our determination that petitioners have failed to introduce credible_evidence and carry their burden_of_proof see bernardo v commissioner supra see also rendall v commissioner supra pincite the parties also disagree as to the status of the losses reflected on the schedules k-1 for and the post- ‘93 losses as suspended passive_activity_losses we need not decide whether sec_7491 applies to that issue because we resolve it upon a preponderance_of_the_evidence therefore resolution of the issue does not depend upon which party bears the burden_of_proof see eg bergquist v commissioner t c slip op pincite d respondent’s motion for leave to file amendment to answer to conform to the evidence on date respondent moved pursuant to rule b for leave to file an amendment to the answer to conform to the evidence the motion in the motion respondent raises the duty_of_consistency as an affirmative defense to what he considers petitioners’ attempt to characterize the losses alleged by respondent to have been reported as active losses on the returns as suspended passive_activity_losses available to offset their unreported passive_activity gaindollar_figure petitioners oppose the motion we need not rule upon the motion because as noted supra we find that petitioners have failed to introduce credible_evidence that the pre-‘93 losses constitute suspended passive_activity_losses that finding together with the parties’ stipulation that petitioners reported the and losses as active losses so that petitioners concede they may not be carried forward as suspended passive_activity_losses renders moot respondent’s motion which in substance seeks the same result as noted supra note the parties stipulate that the losses reported on the and schedules k-1 were deducted as active losses for those years the amendment to answer filed with the motion erroneously refers to passive gains in e discussion introduction the parties’ joint exhibits include copies of petitioners’ and returns those returns show that petitioners did not report or deduct the post-‘93 losses petitioners’ tax treatment of the pre-‘93 losses is not evidenced by copies of returns filed for those years the only support for petitioners’ argument that those losses were never deducted and therefore remain available for carryover to is mr lowe’s testimony to that effect because of that evidentiary difference we separately consider those two groups of alleged passive_activity_losses the post-‘93 losses a analysis respondent states that petitioners have failed to provide a valid explanation as to why mr lowe invested in douglas associates and that mr lowe failed to explain why he had very limited records relating to his roughly 20-year participation in that partnership and why he never inquired further relating to his dollar_figure investment therein respondent concludes because petitioners have failed to substantiate the transactions surrounding the alleged passive_activity_losses they cannot satisfy the statutory requirements for carrying forward suspended passive_activity_losses respondent also cites a taxpayer’s right under sec_469 to carry forward suspended passive_activity_losses to the year in which the taxpayer disposes of his entire_interest in the passive_activity to an unrelated party provided all gain_or_loss on the disposition is recognized he then states mr lowe has not substantiated that this ie that there is a suspended_loss is true for any of the passive_activity_losses and thus he cannot carry any of them forward emphasis supplied we disagree as regards the post-‘93 losses mr lowe testified that he invested in douglas associates upon the advice of a financial adviser who provided investment advice to ibm executives like him the adviser suggested that he become involved in limited_partnerships and specifically that he invest in douglas associates the parties have stipulated that from through douglas associates was a limited_partnership engaged in the activity of renting real_estate and that mr lowe held a limited_partnership_interest therein according to the schedules k-1 issued by douglas associates which are unchallenged mr lowe’s investment in douglas associates did give rise to the alleged losses both pre- and post-‘93 and the and returns provide unchallenged verification that the post-‘93 losses were not claimed on those returns and did not give rise to any_tax benefit to petitioners before moreover pursuant to sec_469 and h and sec_1_469-5t temporary income_tax regs fed reg date which together establish that mr lowe’s limited_partnership_interest in douglas associates constituted a passive_activity it is clear that the post-‘93 losses constituted passive_activity_losses lastly there is no dispute that all of the other requirements of sec_469 for carrying forward the post-‘93 losses to offset the capital_gain on termination of mr lowe’s interest in douglas associates have been met respondent does not dispute that as reflected on the schedule_k-1 the partnership was terminated in a fully taxable transaction and respondent does not allege that that termination constituted a disposition of the limited_partnership interests involving a related_party within the meaning of sec_469 b conclusion the post-‘93 losses constitute suspended passive_activity_losses that may be carried forward to pursuant to sec_469 and g a the pre-‘93 losses a analysis because the and returns are not in evidence petitioners’ position that the pre-‘93 losses constitute suspended passive_activity_losses available for carryover to is based solely upon mr lowe’s testimony that testimony is not persuasive mr lowe testified that beginning with his receipt of the schedule_k-1 his process was to turn the schedules k-1 over to my tax preparer who i depended upon to deal with them properly and put my returns in proper form he further testified that the c p a firm that prepared his return as well as all subsequent returns through told him that the loss was a passive loss that he could not do anything with the loss and that his expectation from that point forward was that’s the way they would be treated mr lowe expressed his belief that the losses reflected on the schedules k-1 for those years were never claimed and that the same was true for he had no explanation as to why the and losses were reported as active losses on the returns for those years and he testified that it was a surprise to me to discover that those losses had been claimed mr lowe’s testimony that the pre-‘93 losses were not claimed is implausible in several respects to begin with before the enactment of sec_469 in the concept of active versus passive losses did not exist for deductibility purposes and with the exception of the sec_1211 limitations on the deductibility of capital losses losses_incurred by an individual in connection with a trade_or_business or in a transaction entered into for profit were fully deductible under sec_165 and moreover as noted supra section i a sec_469 did not become effective until and until it only affected a portion of the losses from preenactment investments such as mr lowe’s interest in douglas mr lowe’s practice of turning over the schedules k-1 to his accountants of course ceased after when he no longer received any from douglas associates associates lastly the schedules k-1 for and listed the losses for those years on a line entitled ordinary_income loss dollar_figure under those circumstances we find incredible mr lowe’s testimony that his professional tax-advisor did not deduct the losses reflected on the schedules k-1 for and and told him in connection with the preparation of his return that the loss was a passive loss and that he couldn’t do anything with it petitioners’ argument that the pre-‘93 losses subject_to sec_469 in whole or in part were not deducted is not based upon the returns for those years which are not in evidence or even upon mr lowe’s recollection based upon his prior review of those returns but instead upon his belief that those losses were never claimed that belief based upon an alleged conversation that took place some years earlier is belied by the return which shows that the firm responsible for preparing the returns treated the loss reflected on the schedule_k-1 as a deductible ordinary_loss the return at the very least implies that neither the return preparer nor the reviewer s if any were aware of the sec_469 limitations on the deductibility of passive_activity_losses and that they therefore continued to deduct in full after for subsequent years the schedules k-1 listed mr lowe’s pass-through gain_or_loss on a line entitled income or ‘net income’ loss from rental_real_estate_activities and or on a line entitled reconciliation of partner’s capital_account the losses reflected on the schedules k-dollar_figure on the other hand if we assume that mr lowe’s return preparers applied sec_469 to mr lowe’s passive_activity_losses reflected on the schedules k-1 for and including the phase-in rules of sec_469 applicable to there is no evidence of the extent to which those passive_activity_losses may have been used as offsets to passive_activity income or gain from interests other than mr lowe’s interest in douglas associates thereby making them unavailable for carry forward to dollar_figure b conclusion mr lowe has not provided credible_evidence of the existence of pre-‘93 passive_activity_losses available for carry forward to pursuant to sec_469 and g a f conclusion petitioners may carry forward to post-‘93 losses of dollar_figure the ordinary_loss treatment in by a new return preparer of the loss reflected on the schedule_k-1 is perhaps explainable if we assume that that preparer followed the questionable practice of treating the schedule_k-1 loss for just as the schedule_k-1 losses had been treated by the prior return preparer for prior years of course that practice if it existed necessarily stopped beginning in when mr lowe stopped receiving schedules k-1 from douglas associates and therefore was unable to furnish them to his return preparers the and returns both of which reflect investments in partnerships other than douglas associates indicate that mr lowe may very well have maintained such investments during the entire period ii sec_6662 penalty a applicable law sec_6662 provides for a penalty equal to percent of the portion of any underpayment_of_tax attributable to among other things negligence or intentional disregard of rules or regulations without distinction negligence any substantial_understatement_of_income_tax or any substantial_valuation_misstatement see sec_6662 - although the notice states that respondent bases his imposition of the penalty of dollar_figure on one or more of the three above-referenced grounds on brief he relies upon only the first two of those grounds negligence and substantial_understatement_of_income_tax negligence has been defined as lack of due care or failure to do what a reasonably prudent person would do under like circumstances see eg 98_tc_695 it also includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax_return sec_1_6662-3 income_tax regs for individuals a substantial_understatement_of_income_tax exists if the amount of the understatement for the taxable_year exceeds the greater of-- i percent of the tax required to be shown on the return for the taxable_year or ii dollar_figure sec_6662 sec_6664 provides that the accuracy-related_penalty shall not be imposed with respect to any portion of an underpayment if it is shown that there was reasonable_cause for that portion and the taxpayer acted in good_faith with respect to that portion further the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case- by-case basis taking into account all pertinent facts and circumstances circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer sec_1_6664-4 income_tax regs b analysis even with a dollar_figure offset to petitioners’ unreported capital_gain for it is clear that there was a substantial_understatement of petitioners’ income_tax within the meaning of sec_6662dollar_figure alternatively we find that that understatement was attributable to negligence within the meaning of sec_6662 on mr lowe’s part he did not exercise due care or do what a reasonably prudent person would do rather he adopted an attitude of total indifference to his investment in mr lowe petitioners’ taxable unreported long-term_capital_gain for as determined herein is dollar_figure dollar_figure - dollar_figure applying the 15-percent maximum capital_gain rate under sec_1 applicable to net_capital_gain realized in taxable years ending on or after date petitioners’ understatement_of_tax attributable to that gain is dollar_figure percent of dollar_figure that understatement exceeds dollar_figure and percent of the tax required to be shown on petitioners’ return which as computed by respondent is dollar_figure an amount that presumably will be reduced by our allowance of a portion of the passive_activity_loss carryover claimed by petitioners douglas associates that indifference caused him not to notify douglas associates of his various changes of address after and that inaction resulted in his not receiving the schedule_k-1 or including on his return the long-term_capital_gain of dollar_figure reflected on that schedule_k-1 mr lowe’s stated assumption that douglas associates would perpetually generate nondeductible losses so that there was no reason for him to make certain that he would receive the schedules k-1 after he changed his address in was not a reasonable or prudent assumption even if it was based upon advice from a professional tax_return_preparer the reasonableness of mr lowe’s predicating such an assumption upon that advice is undercut by his testimony that the advice related only to the initial year of the investment a year which preceded the effective date of the passive loss provisions and that it was his own expectation from that point forward that the losses would continue to be nondeductible moreover it was not reasonable for an individual of mr lowe’s background and experience to make a dollar_figure investment with the sole expectation that it would do no more than generate perpetual losses of no economic benefit to him he knew or should have known that douglas associates owned real_estate of some potential value which might be sold at some time and that such a sale in part because of the property’s depreciated tax basis might produce a taxable gain to the investors for that reason alone mr lowe was negligent in turning his back on the schedules k-1 the same reasons that form the basis for our finding that petitioners’ underpayment of the tax_liability was attributable to mr lowe’s negligence also form the basis for our finding that there was no reasonable_cause for that underpayment and that mr lowe failed to act in good_faith with respect thereto see sec_6664 c conclusion petitioners are liable for the sec_6662 penalty as applied to the underpayment_of_tax determined herein to reflect the foregoing decision will be entered under rule