Court Opinion

ID: 4262481
Source: CourtListenerOpinion
Date Created: 2018-04-10 00:00:20.820862+00
Date Added: 2024-06-11T14:04:10.976092
License: Public Domain

Case: 17-60315   Document: 00514421368    Page: 1   Date Filed: 04/09/2018

        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                            United States Court of Appeals

                                No. 17-60315
                                                                     Fifth Circuit

                                                                   FILED
                                                                April 9, 2018

MARY L. HATCHER; BRADLEY J. HATCHER,                          Lyle W. Cayce
                                                                   Clerk
             Petitioners–Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE,

             Respondent–Appellee.

_______________________________________________________

cons w/ 17-60318

MARY L. HATCHER, also known as Mary L. Bell,

             Petitioner–Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE,

             Respondent–Appellee.

                      Appeals from the Decision of the
                         United States Tax Court
                             TC No. 23243-13
     Case: 17-60315      Document: 00514421368         Page: 2    Date Filed: 04/09/2018

                           No. 17-60315 c/w No. 17-60318
Before STEWART, Chief Judge, and HAYNES and WILLETT, Circuit Judges.
PER CURIAM:*
       The married Appellants Mary and Bradley Hatcher filed a petition
against the Commissioner of Internal Revenue asserting primarily that the
Commissioner miscalculated their tax burden and, as a result, imposed upon
them illegitimate accuracy-related penalties. The tax court sided with the
Commissioner. On appeal, the Hatchers contend the tax court clearly erred in
finding they were ineligible for two deductions: one related to a business debt
and the other related to a rental property. They also contest the corresponding
accuracy-related penalties. We hold that the tax court did not clearly err in any
of its factual determinations, and we AFFIRM the judgment of the United
States Tax Court.
                                  I. BACKGROUND
A.     The Hatchers
       Mary Hatcher (formerly Mary Bell) received an undergraduate degree in
business and a graduate degree in corporate finance. From 2000 to 2009, she
worked full-time as a corporate executive at the Blockbuster Corporation. She
held various positions at Blockbuster, including corporate treasurer and, later,
head of finance and accounting. Her duties included overseeing Blockbuster’s
cash management, lender relationships, debt deals, loan agreements, and
taxes. In 2010, Mary transitioned from working full-time at Blockbuster to
working as a consultant. After the transition, she continued to work with
Blockbuster as an independent contractor. Mary also advised a broadcasting
and technology firm about content development.

       * Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.

                                             2
     Case: 17-60315    Document: 00514421368      Page: 3    Date Filed: 04/09/2018

                         No. 17-60315 c/w No. 17-60318
      In July 2010, Mary married Bradley Hatcher, who worked as a real
estate professional. He began this career in the mid-1990s, specializing in
commercial loan origination. In 2010, Bradley decided to prepare a property
located at 6163 Anita Street in Dallas, Texas, for rental. Bradley testified that
for the first half of 2010 he spent between 10 and 15 hours per week preparing
the property, which he rented beginning in June 2010. He continued to perform
maintenance on the property for the remainder of the year, devoting roughly
10 hours per month to this work. Separately, Bradley spent an indeterminate
amount of time “preparing and prepping for” loans that he anticipated
refinancing for potential clients.
B.    The Carpenter Debt
      Before marrying Bradley, Mary was romantically involved with Brad
Carpenter from 2004 to 2005. During this time, Mary formally lent money to
Carpenter. Her loans to Carpenter were intended to cover his “personal
expenses and the development of a golf-themed comic strip, ‘In the Rough.’” 1
Mary disclosed these loans to her employer, Blockbuster.
      Before lending money to Carpenter, Mary did not investigate his
financial background or his ability to repay the loan. The loans were not
secured by any collateral. Mary did not profit from her lending; she did not
receive an ownership interest in the comic strip, nor did she charge any fees
associated with her lending. Her loans to Carpenter were the only formal loans
that she made between 2004 and 2010.
      In total, Mary loaned Carpenter $430,500. She first transferred funds to
him in March 2004. A promissory installment note establishing a principal
amount of $75,000 and outlining the repayment terms accompanied the

      1  Carpenter used the funds from one transaction—totaling $50,000—to cover the
purchase of a Hummer vehicle; Mary knew that Carpenter planned to purchase a vehicle
with the funds.
                                         3
     Case: 17-60315   Document: 00514421368       Page: 4   Date Filed: 04/09/2018

                        No. 17-60315 c/w No. 17-60318
transfer. Even after their romantic relationship ended in 2005, Mary continued
to loan Carpenter money. In June 2006, Carpenter signed a promissory note
establishing a principal loan amount of $430,500 (plus interest) to be repaid by
December 31, 2007. Mary and Carpenter amended the note in February 2008
and again in April 2010. The April 2010 note obligated Carpenter to repay the
loan by December 31, 2010; he owed $582,553.16 at the time—the principal
plus interest.
      Mary and Carpenter exchanged e-mails in December 2010 regarding
Carpenter’s failure to repay the loans. During this exchange, Carpenter
expressed hope that he could repay Mary. He wrote on December 16: “As It
[sic] stands currently, I have a very good chance to take care of you.” The next
day, however, he wrote, “I HAVE NO MONEY.” By the end of 2010, Carpenter
had repaid a mere $7,000.
C.    MBH Partners, LLC
      In October 2010, Mary registered MBH Partners, LLC with the State of
Texas. Mary was the sole member of MBH until April 2011, when she added
her husband Bradley as a member. Mary intended MBH to be an umbrella
organization under which she could “consolidate [her] business interest[s],”
including her advisory and consulting services.
      Upon its formation, MBH’s sole asset was the Carpenter promissory
note—now valued at $600,847.09. Mary contributed no other cash or assets to
MBH, which had no clients nor reported any income in 2010. MBH also did not
engage in any lending or debt collection activities that year.
      In February 2011, MBH sent Carpenter a final notice of default and
acceleration of debt. Later that month, MBH sued Carpenter for his failure to
repay the debt. In February 2012, MBH won a judgment against Carpenter for
$573,174.63 (plus post-judgment interest) and $50,000 in attorney fees. MBH
then sought to enforce the judgment. In a post-judgment motion to compel
                                       4
     Case: 17-60315       Document: 00514421368         Page: 5     Date Filed: 04/09/2018

                            No. 17-60315 c/w No. 17-60318
discovery, MBH alleged that Carpenter had deposited nearly $18,000 into a
bank account—but he failed to explain his income sources. These collection
efforts continued until at least April 2012.
D.     Tax Filings
       Mary prepared the Hatchers’ 2010 joint federal income tax return. Mary
testified that she relied on IRS guidance when filing the return. The Hatchers
reported a negative adjusted gross income of $257,816.40. They also attached
a Schedule C (Form 1040: Profit or Loss From Business) for MBH. The return
claimed a $600,847.09 bad debt expense for a “Note Receivable from
BCarpenter.” The Hatchers also reported a passive activity loss of $21,624.58
from real estate for the 2010 tax year. The Hatchers did not classify Bradley
as a real estate professional when reporting this loss.
       The Hatchers suffered a net operating loss 2 for 2010. Consequently,
Mary filed a Form 1045 Application for Tentative Refund with regard to her
2008 taxes. Mary sought to carry back the 2010 net operating loss of
$342,086.04 as a deduction for tax year 2008. Carrying that net operating loss
back to 2008, Mary calculated that her 2008 tax burden should be decreased
by $105,353.17. The IRS subsequently issued Mary a refund for that amount.
E.     Deficiency Notices
       In July 2013, the IRS issued the Hatchers a notice of deficiency for the
2010 tax year. The IRS found the Hatchers responsible for a $100,924.00
deficiency and a $20,184.80 accuracy-related penalty under Internal Revenue

       2 A taxpayer incurs a “net operating loss” when the allowable tax deductions exceed
the taxpayer’s taxable income in a given tax year. If a taxpayer suffers a net operating loss,
he or she may be permitted to deduct that loss from his or her taxable income in another
given year. If a taxpayer chooses to deduct the net operating loss from a past year’s taxable
income, that is called a “carryback.” See generally INTERNAL REVENUE SERVICE, Publication
536 (2016), Net Operating Losses (NOLs) for Individuals, Estates, and Trusts (Sept. 11, 2017),
https://www.irs.gov/publications/p536 (last visited Feb. 15, 2018).
                                              5
     Case: 17-60315       Document: 00514421368         Page: 6    Date Filed: 04/09/2018

                            No. 17-60315 c/w No. 17-60318
Code (“I.R.C.”) 3 § 6662 (2017). The alleged deficiency resulted primarily from
the IRS’s decision not to permit the Hatchers to claim either the bad debt
deduction or the passive real estate loss deduction.
       That same month, the IRS issued a notice of deficiency to Mary regarding
the 2008 tax year. The IRS found Mary responsible for a $106,733.00 deficiency
and a $21,346.60 accuracy-related penalty under I.R.C. § 6662. The IRS did
not permit Mary to carry back the 2010 net operating loss deduction.
F.     Tax Court Proceedings
       In September 2013, Mary mailed a petition to the tax court, requesting
a reconsideration of the IRS’s determination that she could not carry back her
net operating loss from 2010 as a way to reduce her 2008 tax burden. In
October 2013, the Hatchers mailed a petition to the tax court requesting a
redetermination of their alleged deficiency for tax year 2010. The Hatchers
timely mailed both petitions. See I.R.C. §§ 6213(a), 7502.
       The tax court exercised jurisdiction over the petitions pursuant to I.R.C.
§§ 6213(a), 6214, and 7442. The court consolidated the two cases. Before trial,
the parties entered a stipulation of facts with exhibits, which they later
supplemented. The tax court conducted a trial in October 2015. The Hatchers
represented themselves, and they were the only witnesses. The four primary
issues at trial were: (1) whether the Hatchers were entitled to a bad debt
deduction in 2010 based on the Carpenter debt; (2) whether Mary could claim
a corresponding carryback loss deduction for tax year 2008 due to the
Carpenter debt; (3) whether the Hatchers could deduct passive real estate
losses regarding Bradley’s management of the Anita property in Dallas; and
(4) whether accuracy-related penalties could be imposed under I.R.C. § 6662.

       3 The I.R.C. is published in Title 26 of the United States Code. All references to the
I.R.C. or “Code” in this opinion refer to the Internal Revenue Code of 1986.
                                             6
     Case: 17-60315        Document: 00514421368           Page: 7      Date Filed: 04/09/2018

                             No. 17-60315 c/w No. 17-60318
At the close of the trial, the tax court ordered post-trial briefing. 4 The parties
complied.
       In October 2016, the tax court issued its Memorandum Findings of Fact
and Opinion. The court then ordered the parties to “file computations for entry
of decision under tax court Rule 155, or file a joint status report on or before
December 13, 2016.” After the tax court granted an extension, the parties filed
their computations on January 13, 2017.
       On January 24, 2017, the tax court decided that there was “a deficiency
in income tax due from the [Hatchers] for the taxable year 2010 in the amount
of $100,625.00; and [t]hat there [was] a penalty due from the [Hatchers] under
the provisions of I.R.C. § 6662 for the taxable year 2010 in the amount of
$17,953.60.” Regarding Mary’s 2008 tax obligations, the tax court decided
“[t]hat there [was] a deficiency in income tax due from [Mary] for the taxable
year 2008 in the amount of $105,353.00; and [t]hat there [was] a penalty due
from [Mary] under the provisions of I.R.C. § 6662 for the taxable year 2008 in
the amount of $21,070.60.”
                                     II. DISCUSSION
       The Hatchers timely filed notices of appeal in each proceeding. See I.R.C.
§ 7483; FED. R. APP. P. 13(a). Upon the Hatchers’ unopposed motion, this Court
consolidated the appeals. We have jurisdiction over the appeals pursuant to
I.R.C. § 7482(a)(1).
       We review the tax court’s factual findings for clear error and review its
legal conclusions de novo. Arevalo v. Comm’r, 469 F.3d 436, 438 (5th Cir. 2006).
“Clear error exists when this court is left with the definite and firm conviction
that a mistake has been made.” Green v. Comm’r, 507 F.3d 857, 866 (5th Cir.

       4  Typically, a tax court proceeding involves establishing the evidentiary record during
a trial before a judge, followed by post-trial briefing by the parties. Here, the tax court ordered
one round of simultaneously filed post-trial briefs.
                                                7
     Case: 17-60315       Document: 00514421368          Page: 8     Date Filed: 04/09/2018

                            No. 17-60315 c/w No. 17-60318
2007) (citation omitted). If “there are two permissible views of the evidence,
the factfinder’s choice between them cannot be clearly erroneous.” Brinkley v.
Comm’r, 808 F.3d 657, 664 (5th Cir. 2015) (quoting Anderson v. City of
Bessemer City, N.C., 470 U.S. 564, 574 (1985)).
       This opinion cites numerous tax court opinions. 5 Although non-binding,
the Supreme Court has recognized the persuasive value of these opinions.
Dobson v. Comm’r, 320 U.S. 489, 502 (1943) (“The Tax Court is informed by
experience and kept current with tax evolution and needs by the volume and
variety of its work. While its decisions may not be binding precedents for courts
dealing with similar problems, uniform administration would be promoted by
conforming to them where possible.”).
A.     The Tax Court Did Not Clearly Err in Finding that the Hatchers
       Could Not Claim a Business Debt Deduction under I.R.C. § 166(a)
       for Tax Year 2010.

       The central argument on appeal is whether the Code permits the
Hatchers to deduct the Carpenter debt as a bad business debt. Generally, a
taxpayer may deduct from income “any debt which becomes worthless within
the taxable year.” I.R.C. § 166(a)(1). The Code distinguishes between business
and nonbusiness debt. Among other consequences, a debt’s classification
affects whether a taxpayer may deduct the debt as a carryback loss.

       5 The United States Tax Court classifies its opinions in a number of ways. See
generally UNITED STATES TAX COURT, Taxpayer Information: After Trial (Dec. 12, 2017),
https://www.ustaxcourt.gov/taxpayer_info_after.htm (last visited Feb. 15, 2018). There are
“Bench Opinions,” “Summary Opinions,” “Tax Court Opinions,” and “Memorandum
Opinions.” Bench Opinions and Summary Opinions may not be relied upon as precedent
before the tax court. Id. Tax Court Opinions and Memorandum Opinions, however, may be
relied upon as precedent. Id. Generally, Memorandum Opinions are issued in “regular case[s]
that [do] not involve a novel legal issue,” and Tax Court Opinions are issued in “regular
case[s] when the Tax Court believes [the case] involves a sufficiently important legal issue or
principle.” Id. This opinion cites only “Tax Court Opinions” and “Memorandum Opinions.”
                                              8
    Case: 17-60315     Document: 00514421368     Page: 9   Date Filed: 04/09/2018

                        No. 17-60315 c/w No. 17-60318
      The Hatchers assert that the Carpenter debt became worthless in 2010
and the debt is a bad business debt. Thus, they should be allowed to deduct the
debt from their 2010 tax burden. This deduction creates a net operating loss,
which Mary can deduct as a carryback loss on her 2008 tax return.
      The tax court disagreed. The court found that the Carpenter debt was a
nonbusiness debt that did not become worthless in 2010. Thus, the Hatchers
could not invoke this deduction for tax year 2010, nor could they claim a net
operating loss. And because there was no 2010 net operating loss, Mary could
not deduct the debt as a carryback loss on her 2008 tax return.
      We conclude that the tax court did not clearly err in finding that the
Carpenter debt did not become worthless in 2010. This conclusion means that
the Hatchers may not deduct the debt for tax year 2010. Therefore, we do not
need to address whether the tax court erred in classifying the debt as either a
business or nonbusiness debt because any classification error would be
harmless. See Brinkley, 808 F.3d at 664.
      1. The Carpenter Debt Did Not Become Worthless in 2010.
      “To deduct a bad debt, the debt must have become ‘worthless within the
taxable year.’” Estate of Mann, 731 F.2d 267, 275 (5th Cir. 1984) (quoting I.R.C.
§ 166(a)(1)). This is a factual determination, id. (citations omitted), so the tax
court’s decision is reviewed for clear error. Cox v. Comm’r, 68 F.3d 128, 131
(5th Cir. 1995).
      The burden is on the taxpayer to “prove that on January 1 of the taxable
year the debt[] had some intrinsic or potential value, and that by December 31
the debt[] had lost all such value.” Estate of Mann, 731 F.2d at 275. The
taxpayer must prove that “there are reasonable grounds for abandoning any
hope of repayment in the future.” Id. To meet this burden, “[t]he taxpayer must
demonstrate an identifiable event that rendered the debt worthless.” Cox, 68
F.3d at 131–32 (footnote omitted). “If and when such a debt becomes wholly
                                        9
   Case: 17-60315     Document: 00514421368     Page: 10   Date Filed: 04/09/2018

                        No. 17-60315 c/w No. 17-60318
worthless must be determined from the facts and circumstances known or
which reasonably could have been known at the end of the year of asserted
worthlessness,” Estate of Mann, 731 F.2d at 278, but “proof of subsequent
events may be allowed . . . insofar as they may be relevant to the
reasonableness of a conclusion that a debt became worthless in the particular
year in issue,” id. at 278 n.19. Even a debtor’s bankruptcy “is not enough by
itself to establish worthlessness.” Cox, 68 F.3d at 132 (footnote omitted).
      The tax court—assuming arguendo the Carpenter debt was a business
debt—concluded that the Hatchers “did not carry their burden of proving that
the note was wholly worthless as of December 31, 2010.” Hatcher v. Comm’r,
112 T.C.M. 415, 2016 WL 5849079, at *6 (2016). The Hatchers relied
primarily upon Carpenter’s December 2010 e-mail to Mary in which he
proclaimed that he had “no money.” Yet, to the tax court, this did not
demonstrate that the Hatchers had reasonable grounds for abandoning any
hope of repayment. See id. at *7. The court focused on the Hatchers’ subsequent
decision to sue Carpenter in an attempt to enforce repayment of the note. See
id. The Hatchers “served post-judgment discovery on Mr. Carpenter in an
effort to collect on this judgment, alleging that he had substantial monthly
income and unexplained bank deposits,” and they negotiated with Carpenter
in late 2012 “in an effort to recover at least some portion of the debt.” Id. The
tax court concluded that in light of the Hatchers’ “extensive business and
finance backgrounds, it [was] implausible that they would have kept throwing
good money after bad if they genuinely believed the Carpenter note had become
wholly worthless two years previously.” Id.
      On appeal, the Hatchers devote one paragraph to explaining why the
Carpenter debt became worthless in 2010. Mary requested payment from
Carpenter multiple times, exchanged numerous e-mails with him regarding
this subject, and eventually received an e-mail from Carpenter proclaiming his
                                       10
   Case: 17-60315       Document: 00514421368   Page: 11   Date Filed: 04/09/2018

                          No. 17-60315 c/w No. 17-60318
lack of money. According to the Hatchers, these facts prove that the tax court
erred by finding that the Carpenter debt did not become worthless in 2010.
      We conclude that the tax court did not clearly err. The Hatchers identify
only one event to substantiate their claim that they reasonably believed the
debt became worthless in 2010: Carpenter’s e-mail proclamation that he had
“no money.” But there is no evidence that the Hatchers verified—or attempted
to verify—Carpenter’s financial situation. Nor did Carpenter make his
statement under oath. Given that this circuit does not treat even a debtor’s
bankruptcy as independently establishing the worthlessness of a debt, see Cox,
68 F.3d at 132, it follows a fortiori that a party’s unverified declaration of
insolvency is insufficient to do so. Thus, the e-mail alone cannot prove the
debt’s worthlessness.
      Also, the tax court properly looked to the Hatchers’ subsequent efforts to
collect from Carpenter as evidence that they lacked reasonable grounds to
abandon hope of repayment. They sent a final notice of default and acceleration
of debt in February 2011; they filed a lawsuit later that month and ultimately
received a judgment against Carpenter a year later; and Mary transferred half
of the value of the Carpenter note to Bradley. Looking at events that occurred
in the year following when the debt allegedly became worthless is an accepted
method of assessing the alleged worthlessness of the debt during the tax year
in question. See Estate of Mann, 731 F.2d at 278 n.19. We agree with the tax
court’s assessment that the Hatchers, in light of their business backgrounds,
likely would not have recklessly pursued litigation against Carpenter unless
they held out hope that he could repay the debt. Overall, the tax court relied
on adequate evidence to find that the Carpenter debt did not become worthless
in 2010, and there are no grounds for us to reverse the court’s factual
determination. See Green, 507 F.3d at 866.

                                       11
     Case: 17-60315   Document: 00514421368      Page: 12    Date Filed: 04/09/2018

                         No. 17-60315 c/w No. 17-60318
       This provides an adequate basis to resolve the first issue on appeal
without addressing whether the debt is a business or nonbusiness debt. That
is, even if the Carpenter debt is classified as a business debt, the debt still did
not become worthless in 2010—and thus the Hatchers are unable to claim a
deduction under I.R.C. § 166(a).
       2. Mary May Not Carry Back a Net Operating Loss Deduction.
       In light of our determination that the Carpenter debt did not become
worthless in 2010, it follows that we affirm the tax court’s determination that
Mary was not entitled to a corresponding carryback loss for 2008. See I.R.C.
§§ 166, 172; Generes, 405 U.S. at 95–96; Estate of Mann, 731 F.2d at 272 n.7.
B.     The Tax Court Did Not Clearly Err in Finding that Bradley Was
       Not a Qualified Real Estate Professional for Tax Year 2010.

       The next issue is whether the tax court correctly prohibited the Hatchers
from deducting a passive activity loss. This depends on whether Bradley was
a qualified real estate professional for tax year 2010. This is a factual
determination. See Bailey v. Comm’r, 82 T.C.M. 868, 2001 WL 1360438,
at *4–6 (2001); see also Hill v. Comm’r, 436 F. App’x 410, 412 (5th Cir. 2011)
(treating the tax court’s determination of whether a taxpayer is a real estate
professional as a fact question subject to clear-error review).
       The I.R.C. includes “rental activity” as a “passive activity.” See
§ 469(c)(2). Generally, a “passive activity loss” is not an allowable deduction for
individual taxpayers. Id. § 469. However, there is an exception to this general
rule for individual taxpayers who materially participate in a “real property
trade or business,” which is defined as “any real property development,
redevelopment, construction, reconstruction, acquisition, conversion, rental,
operation, management, leasing, or brokerage trade or business.” Id.
§ 469(c)(7). A taxpayer seeking to qualify for the § 469(c)(7) exception must
satisfy two requirements:
                                        12
    Case: 17-60315      Document: 00514421368         Page: 13    Date Filed: 04/09/2018

                           No. 17-60315 c/w No. 17-60318
           (1) [M]ore 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;]

           (2) [S]uch taxpayer performs more than 750 hours of services
               during the taxable year in real property trades or
               businesses in which the taxpayer materially participates.

Id. § 469(c)(7). 6
       Taxpayers may demonstrate their material participation by “any
reasonable means,” including “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.” 26 C.F.R. § 1.469-5T(f)(4). A taxpayer is not required to
produce “[c]ontemporaneous daily time reports, logs, or similar documents” so
long as the taxpayer can demonstrate the extent of his or her participation
through “other reasonable means.” Id.
       The tax court has recognized repeatedly that “while the regulations are
somewhat ambivalent concerning the records to be maintained, they by no
means allow . . . [the taxpayer to rely on a] post-event ballpark guesstimate.”
Goshorn v. Comm’r, 66 T.C.M. 1499, 1993 WL 500167, at *3 (1993);
accord Bailey, 2001 WL 1360438, at *6 (rejecting a taxpayer’s uncorroborated,
pre-trial estimates of time spent on real estate rental activities); Carlstedt v.
Comm’r, 74 T.C.M. 170, 1997 WL 407788, at *8 (1997) (rejecting
estimates that “were, on the whole, unreliable and inconsistent”).
       The crux of the issue on appeal is whether the tax court erred in finding
that Bradley performed fewer than 750 hours of relevant services during tax

       6If spouses file jointly, only one spouse needs to satisfy the § 469(c)(7) exception
requirements. See I.R.C. § 469(c)(7)(B).
                                            13
   Case: 17-60315    Document: 00514421368     Page: 14   Date Filed: 04/09/2018

                        No. 17-60315 c/w No. 17-60318
year 2010. The tax court found that that Bradley “performed at most 450 hours
of services in real property businesses during 2010.” Hatcher, 2016 WL
5849079, at *8 (emphasis added). The court calculated this sum based on
Bradley’s testimony about his time spent working on the Anita property in
Dallas. See id. Although the Hatchers “maintained no documentation of the
time they devoted to the Anita property,” the court found that “Bradley
credibly testified that he devoted 10 to 15 hours per week to the property
during the first half of 2010 and 10 hours per month during the second half.”
Id. Also, the tax court did not find that Bradley could reliably quantify any
additional hours spent originating real estate loans or preparing loans for
refinancing through MBH. See id.
      On appeal, the Hatchers assert that the tax court clearly erred by failing
to include in its calculation the hours that Bradley spent “preparing [real
estate] loans for refinancing.” The Hatchers highlight Bradley’s previous
experience working on commercial real estate financing, his advisory activities
through MBH, and his testimony before the tax court that he had expected to
refinance a number of loans that he had previously originated. The Hatchers
assert that “there could have been very significant services through MBH” that
the tax court did not account for. And these additional hours could push
Bradley above the 750-hour requirement. Thus, the Hatchers request that the
panel remand this issue to the tax court with instructions to calculate and add
Bradley’s hours working through MBH to the hours he spent working on the
Anita property.
      We conclude that the tax court had an adequate basis for its
determination that Bradley spent—at most—450 hours working in the real
estate business for tax year 2010. The Hatchers bear the burden of proving
that, during tax year 2010, Bradley performed more than 750 hours of services
in the real estate business. See I.R.C. § 469(c)(7). They may quantify Bradley’s
                                      14
     Case: 17-60315   Document: 00514421368     Page: 15   Date Filed: 04/09/2018

                        No. 17-60315 c/w No. 17-60318
service hours through any reasonable means, but they cannot merely offer a
“ballpark guesstimate” of how many hours Bradley worked. See Goshorn, 1993
WL 500167, at *3. The Hatchers failed to carry this burden. At most, Bradley’s
testimony supports finding that he performed 450 hours of work on the Anita
property. The Hatchers offer no reliable way—beyond an assertion that is
contradicted by the record—to prove that Bradley worked more than 750 hours
in the real estate business in 2010.
       The tax court was correct to exclude Bradley’s advisory work from the
hours calculation. First, Bradley failed to present any reasonable means of
ascertaining how many hours he worked on real estate business through MBH.
Second, MBH had no clients in 2010, and Bradley did not become an MBH
employee until April 2011. Thus, the record contradicts his claim that he
worked in the real estate business through MBH in 2010.
       In sum, the tax court did not ignore any credible evidence supporting a
higher estimate of the hours Bradley spent working as a real estate
professional. This is a factual determination by the tax court, which we review
for clear error, and nothing in the record establishes that the tax court clearly
erred. See Green, 507 F.3d at 866. Thus, we affirm the tax court’s
determination.
C.     The Tax Court Did Not Clearly Err in Determining that the
       Hatchers Could Be Subject To Accuracy-Related Penalties
       Under I.R.C. § 6662.

       Section 6662 outlines how and when accuracy-related penalties may be
imposed due to a tax burden understatement. One situation justifying a
penalty is when a taxpayer is responsible for a “substantial understatement of

                                       15
    Case: 17-60315       Document: 00514421368        Page: 16     Date Filed: 04/09/2018

                           No. 17-60315 c/w No. 17-60318
income tax.” I.R.C. § 6662(b). 7 A “substantial understatement” is an
understatement that exceeds the greater of: “(i) 10 percent of the tax required
to be shown on the return for the taxable year, or (ii) $5,000.” Id.
§ 6662(d)(1)(A). Penalties for a substantial understatement may also apply to
any corresponding carryback loss deductions that result in underpayment. See
26 C.F.R. § 1.6662-4 (explaining that a penalty may arise when an
underpayment results from a deduction due to a “tainted item . . . for which
there is neither substantial authority nor adequate disclosure”). The resulting
financial penalty added to the tax burden is “an amount equal to 20 percent of
the portion of the underpayment” at issue. I.R.C. § 6662.
       Section 6664, however, provides a safe haven: “No penalty shall be
imposed under section 6662 . . . with respect to any portion of an underpayment
if it is shown that there was a reasonable cause for such portion and that the
taxpayer acted in good faith with respect to such portion.” I.R.C. § 6664(c)(1)
(emphasis added); see Green, 507 F.3d at 871. The taxpayer bears the burden
of proof when invoking this defense. Klamath Strategic Inv. Fund v. United
States, 568 F.3d 537, 548 (5th Cir. 2009).
       A court must decide whether “in light of all of the facts and
circumstances, including the experience, knowledge, and education of the
taxpayer,” the taxpayer’s mistake resulted from a reasonable, honest
misunderstanding of fact or law. 26 C.F.R. § 1.6664-4(b)(1); see Brinkley, 808
F.3d at 669. “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.” 26 C.F.R. § 1.6664-4(b)(1). “The most
important factor is the extent of the taxpayer’s effort to assess his proper

       7 The Commissioner bears the burden of production when seeking to impose a penalty
for a substantial understatement. Id. § 7491(c); see McLauchlan v. Comm’r, 558 F. App’x 374,
380 (5th Cir. 2014).
                                            16
   Case: 17-60315     Document: 00514421368     Page: 17    Date Filed: 04/09/2018

                        No. 17-60315 c/w No. 17-60318
liability in light of all the circumstances.” Brinkley, 808 F.3d at 669 (quoting
Klamath Strategic Inv. Fund, 568 F.3d at 548). The tax court’s determination
of whether the defense applies is a question of fact that we review for clear
error. See Green, 507 F.3d at 871.
      The tax court concluded that the Hatchers cannot rely on the good-faith
safe haven because they did not act with reasonable cause and in good faith in
claiming the business debt deduction and corresponding loss carryback.
Hatcher, 2016 WL 5849079, at *10. The tax court first addressed Mary’s
background: she is “a sophisticated financial professional with an M.B.A. in
corporate finance.” Id. at *9. Mary “testified that she relied principally on IRS
Publication 535, Business Expenses, to determine that the Carpenter note was
a business bad debt that had become worthless during 2010.” Id. But Mary’s
testimony did not persuade the tax court; the court believed that Mary’s actions
belied any good-faith reliance on Publication 535. Mary did not follow the
publication’s explicit directions regarding when a bad business debt deduction
may include accrued interest. See id. She also ignored the publication’s
explanation of when a debt becomes worthless and failed to explain why the
Carpenter debt was a business debt. See id. Mary offered “no plausible
business reason” for contributing the Carpenter note to MBH as its only asset;
the tax court inferred that Mary’s “actual reason for making this contribution
was to put the Carpenter note into a ‘business’ to enhance the appearance that
it was business related.” Id. The court concluded that the Hatchers’ “overall
conduct does not show that they made a good-faith effort to determine their
correct tax liability with respect to the Carpenter note.” Id.

                                       17
    Case: 17-60315       Document: 00514421368        Page: 18     Date Filed: 04/09/2018

                           No. 17-60315 c/w No. 17-60318
       On appeal, the Hatchers again rely on their good faith defense. 8 The
Hatchers defend their accounting in two ways. First, they invoke Mary’s
experience at Blockbuster. During her time there, she “interfaced with the IRS
regularly, dealt with IRS statutes and guidelines on a daily basis, and
maintained a good relationship with the IRS on behalf of Blockbuster.” Second,
the Hatchers argue that Mary reasonably relied on guidance from the IRS—
specifically, Publication 535—and her prior knowledge to conclude that “it was
appropriate to take the business deduction on the Carpenter loan for tax year
2010.” Thus, the Hatchers believe that the tax court clearly erred in permitting
the Commissioner to impose an accuracy-related penalty on the Hatchers for
2010 and Mary, specifically, for the 2008 carryback.
       We find that the tax court did not clearly err in determining that the
good faith defense should not apply. The tax court may consider the taxpayer’s
experience, knowledge, and education. See Brinkley, 808 F.3d at 669. Here, the
tax court considered Mary’s background when assessing whether the Hatchers
acted in good faith. Although the Hatchers testified that they reasonably relied
on Publication 535, their failure to follow that publication’s requirements
undermines any claims of good-faith reliance. The Hatchers failed to explain
how the Carpenter debt was a bona fide business debt, ignored the
publication’s instructions regarding accrued interest, and neglected the
publication’s explanation of how and when a debt becomes worthless (and thus
qualifies for a deduction). Considering these circumstances, the tax court did
not clearly err by concluding that the Hatchers did not make a good-faith effort
to determine their correct tax liability. See Green, 507 F.3d at 866. Thus, we
affirm the tax court’s decision to permit the imposition of accuracy-related

       8The Hatchers seemingly accept that if the claimed bad debt deduction is not allowed,
they are responsible for a substantial understatement of their 2010 tax burden and the
underpayment for tax year 2008 due to Mary’s corresponding loss carryback.
                                            18
     Case: 17-60315   Document: 00514421368      Page: 19   Date Filed: 04/09/2018

                        No. 17-60315 c/w No. 17-60318
penalties regarding the business debt deduction for tax year 2010 and the 2008
tax year carryback loss deduction.
D.     The Tax Court Correctly Allocated the Burden of Proof at Trial.
       The Hatchers also offer a cursory argument that the tax court erred by
not shifting the burden of proof at trial to the Commissioner. The tax court’s
burden of proof allocation is a legal issue subject to de novo review. See
Whitehouse Hotel Ltd. P’ship v. Comm’r, 615 F.3d 321, 332 (5th Cir. 2010)
(citations omitted). “As a general rule, the Commissioner’s determination of a
tax deficiency is presumed correct, and the taxpayer has the burden of proving
the determination to be erroneous.” Brinkley, 808 F.3d at 663 (citing Tax Ct.
R. 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933)). However, the burden
of proof shifts if a taxpayer introduces credible evidence regarding facts
relevant to determining her tax liability; complies with relevant substantiation
requirements; maintains the required records, and cooperates with reasonable
requests by the IRS for meetings, documents, and interviews. See I.R.C.
§ 7491(a).
       Our caselaw dictates that “the operation of this burden-shifting scheme
is irrelevant when both parties have met their burdens of production and the
preponderance of the evidence supports one party.” Brinkley, 808 F.3d at 664
(citations omitted); see Whitehouse Hotel, 615 F.3d at 332 (“The tax court need
not decide whether the burden shifted where, as here, both parties offered
some admissible evidence.”). If both parties satisfy their respective production
burdens by offering credible evidence, “the party supported by the weight of
the evidence will prevail regardless of which party bore the burden of
persuasion, proof or preponderance.” Whitehouse Hotel, 615 F.3d at 332
(quoting Blodgett v. Comm’r, 394 F.3d 1030, 1039 (8th Cir. 2005)); see Blodgett,
394 F.3d at 1039 (“[A] shift in the burden of preponderance has real
significance only in the rare event of an evidentiary tie.”).
                                        19
   Case: 17-60315     Document: 00514421368     Page: 20    Date Filed: 04/09/2018

                        No. 17-60315 c/w No. 17-60318
      Here, the Hatchers initially bore the burden of proving the
Commissioner’s deficiency determination to be erroneous. See Brinkley, 808
F.3d at 663. Both sides apparently agree that the Hatchers complied with
I.R.C. § 7491(a), so the burden of proof should shift to the Commissioner. Yet,
the tax court did not need to explicitly decide whether the burden of proof
shifted because both parties offered admissible, credible evidence for trial. See
Whitehouse Hotel, 615 F.3d at 332. The tax court, therefore, could decide the
case in favor of the party whose case was supported by the weight of the
evidence. See id. And because there was no apparent “evidentiary tie,” there is
no justification for disturbing the tax court’s decisions. See Blodgett, 394 F.3d
at 1039. Also, as discussed previously, “the preponderance of the evidence
favors the Commissioner’s deficiency determination, so any error in the [tax]
court’s allocation of the burden of proof is harmless.” Brinkley, 808 F.3d at 664.
Thus, there are no grounds to reverse the tax court’s judgment on the basis of
the burden of proof issue.
                              III. CONCLUSION
      None of the Hatchers’ arguments justifies holding that the tax court
clearly erred in its factual determinations. There is also no legal basis for
reversing the tax court’s judgment. Accordingly, we AFFIRM.

                                       20