Court Opinion

ID: 6340261
Source: CourtListenerOpinion
Date Created: 2022-05-12 19:01:37.397751+00
Date Added: 2024-06-11T15:49:14.322282
License: Public Domain

United States Tax Court

                         T.C. Memo. 2022-49

                      MICHAEL J. ROGERSON,
                            Petitioner

                                   v.

           COMMISSIONER OF INTERNAL REVENUE,
                       Respondent

                              —————

Docket No. 5848-20.                                 Filed May 12, 2022.

                              —————

            Between 2005 and 2013, P was the president and
      100% owner of S1, an S corporation engaged (directly or
      through wholly owned entities) in manufacturing aircraft
      parts and components (aerospace business). S1 and its
      wholly owned entities had multiple product lines, some of
      which involved digital products and some of which involved
      analog products.

            In 2014, P began reorganizing the aerospace
      business to separate the digital products, analog products,
      and corporate functions. Following the reorganization, P
      owned the business directly through three S corporations:
      S1 (digital products), S2 (analog products), and S3
      (corporate functions), each of which filed its own tax
      return.

            In addition to the aerospace business, P owned two
      yachts that he intended to charter. However, P did not
      charter the yachts during the years at issue.

             Each year, from at least 2005 to 2013, S1 filed Form
      1120S, U.S. Income Tax Return for an S Corporation,
      reflecting all the results of the aerospace business that it
      and its wholly owned entities conducted. For these years,
      S1’s returns did not separate out the various activities of

                           Served 05/12/22
                                    2

[*2]   the aerospace business for purposes of the rules under
       I.R.C. § 469.

             On his personal income tax returns for 2005 to 2013,
       P reported his involvement in S1’s overall aerospace
       business as nonpassive for purposes of I.R.C. § 469. But on
       his 2014, 2015, and 2016 tax returns, P reported his
       involvement in S2 as passive and his involvement in the
       remaining portion of the aerospace business (in S1 for 2014
       and in S1 and S3 for 2015 and 2016) as nonpassive. He
       also reported his involvement in his yacht activities as
       nonpassive for 2014, 2015, and 2016.

              R issued a notice of deficiency for tax years 2014,
       2015, and 2016, determining among other things that P
       materially participated in S2 and therefore was required to
       treat income from S2 as nonpassive for the years at issue.
       The notice further determined that P’s yacht activities
       were passive rental activities and that P was liable for
       accuracy-related penalties under I.R.C. § 6662(a).

              P challenges R’s notice, arguing among other things
       that (1) P did not materially participate in S2 during the
       years at issue, (2) R’s reliance on the test for material
       participation set out in Temp. Treas. Reg. § 1.469-5T(a)(5)
       is a new matter not pleaded by R, (3) Temp. Treas. Reg.
       § 1.469-5T(a)(5) is procedurally and substantively invalid,
       (4) P’s yacht activities qualify as nonpassive based on the
       rental exceptions of Temp. Treas. Reg. § 1.469-1T(e)(3)(ii),
       and (5) the accuracy-related penalties should not apply
       because P had reasonable cause and acted in good faith
       with respect to any underpayment.

              Held: Under Temp. Treas. Reg. § 1.469-5T(a)(5) and
       Treas. Reg. § 1.469-5(j)(1), P materially participated in S2
       during 2014, 2015, and 2016 because he materially
       participated in S1’s overall business of manufacturing
       aircraft parts and components for at least five of the ten
       immediately preceding years.

             Held, further, P’s contention that R’s reliance on
       Temp. Treas. Reg. § 1.469-5T(a)(5) is a new matter not
       pleaded by R is rejected.
                                           3

[*3]          Held, further, P’s arguments regarding the
       substantive validity of Temp. Treas. Reg. § 1.469-5T(a)(5)
       fail because the regulation is not contrary to I.R.C. § 469.

              Held, further, we need not address P’s argument
       that Temp. Treas. Reg. § 1.469-5T(a)(5) is procedurally
       invalid because, even assuming for the sake of argument
       that P’s argument is correct, P would not prevail under the
       text of I.R.C. § 469.

              Held, further, P’s yacht activities are rental
       activities that do not qualify for the exceptions described in
       Temp. Treas. Reg. § 1.469-1T(e)(3)(ii).

              Held, further, the accuracy-related penalties under
       I.R.C. § 6662(a) do not apply because P had reasonable
       cause and acted in good faith with respect to his
       underpayments of tax.

                                     —————

Steven R. Mather, for petitioner.

Monica D. Polo and Samuel M. Warren, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

       TORO, Judge: This deficiency case calls on us to apply the
passive activity loss rules of section 469. 1 Enacted by Congress as part
of the Tax Reform Act of 1986, Pub. L. No. 99-514, § 501(a), 100 Stat.
2085, 2233, the rules limit a taxpayer’s use of losses generated by
passive activities to offset unrelated income generated by nonpassive
activities.

      Petitioner Michael Rogerson is a successful entrepreneur.
A patent holder and certified commercial pilot, Mr. Rogerson has owned
and led an eponymous group of companies in the aerospace industry

        1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, all
regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in
effect at all relevant times, and all Rule references are to the Tax Court Rules of
Practice and Procedure. We round all monetary amounts to the nearest dollar.
                                    4

[*4] since the late 1970s. Also a sailing and boating enthusiast, during
the tax years 2014, 2015, and 2016, Mr. Rogerson owned two yachts that
he intended to charter.

       The issues for our decision relate to the federal income tax
consequences of Mr. Rogerson’s participation in these two endeavors.
Specifically, we must decide three questions: (1) whether, for the tax
years 2014, 2015, and 2016, Mr. Rogerson materially participated in
certain of his aerospace activities, with the result that income from those
activities must be treated as nonpassive (we conclude he did);
(2) whether Mr. Rogerson’s yacht activities during the same years were
per se passive as rental activities (we conclude they were); and
(3) whether Mr. Rogerson is liable for accuracy-related penalties on the
underpayments of tax resulting from our first two holdings (we conclude
he is not).

       As we explain in greater detail below, in light of the answers to
the first two questions, Mr. Rogerson may not offset losses resulting
from his passive yacht activities against income from his nonpassive
aerospace activities. He is not liable for the accuracy-related penalties
the Commissioner determined, however, because Mr. Rogerson had
reasonable cause and relied in good faith on his certified public
accountant in connection with the preparation of the returns at issue.

                          FINDINGS OF FACT

       The parties have filed First and Second Stipulations of Fact, both
with attached exhibits, and a Stipulation of Settled Issues, all of which
are incorporated by this reference. Trial of this case was held remotely
on May 5 and 6, 2021. Mr. Rogerson resided in Nevada when he filed
his petition.

I.    Aerospace Activities

      A.     Establishment of the Rogerson Companies

       In the late 1970s, Mr. Rogerson had a summer job in the
aerospace industry. When an acquaintance called to ask for help finding
a new part, Mr. Rogerson decided that he would build the part himself.
He engaged an engineer to design the part and a manufacturer to build
it, and soon established his first company: Rogerson Aircraft Controls,
Inc. The company manufactured electromechanical products and
eventually changed its name to Rogerson Aircraft Corporation (RAC),
which still operates today.
                                       5

[*5] Over the next 40 years, Mr. Rogerson grew his business by
acquiring and developing new product lines, all of which were held
directly or indirectly by RAC. Business operations were located in
California, in Irvine and Pasadena. Mr. Rogerson served as the chief
executive officer of RAC and its subsidiaries at all times, personally held
patents used in certain product lines, and obtained his commercial
pilot’s license to better understand the industry. By the end of 2013, the
Rogerson companies included the following units, which Mr. Rogerson
referred to as “brands”:

                                   Location of                   Owned Since
 Name of Unit     Product Line                   Product Type
                                   Operations                   at Least 2005?

    Rogerson
    Aircraft        Controls
                                     Irvine        Analog            Yes
    Controls        systems
   (Controls)
   Rogerson
    Aircraft        Lavatory
                                     Irvine        Analog            Yes
    Systems         systems
   (Systems)
                  Auxiliary fuel
 Rogerson ATS                        Irvine        Analog            Yes
                    systems
     Kratos
    Pressure        Pressure
                                     Irvine        Analog            Yes
    Products         gauges
   (Pressure)
     Kratos           Analog
                                   Pasadena        Analog            Yes
  Instruments      instruments
   Rogerson        Digital flat
                                   Pasadena        Digital           Yes
    Kratos        panel displays
                    Passenger
 InTheAirNet
                  entertainment      Irvine        Digital           Yes
    (ITAN)
                     systems

       B.       2014 Reorganization

      By 2014, Mr. Rogerson was making an effort to separate the
Rogerson companies’ product lines based on whether they included
legacy analog products or contemporary digital products. With the
exception of analog instruments made by Kratos Instruments, the
analog product lines were located together at RAC’s facilities in Irvine.
                                          6

[*6] During 2014, Mr. Rogerson gave further consideration to the
organization of the Rogerson companies. In his view, the digital
products of Rogerson Kratos were different from the analog products
made by Kratos Instruments. Additionally, Mr. Rogerson had spoken
with attorneys about estate planning and thought that “there was really
no way the businesses would keep operating . . . after [his] demise.”
Accordingly, Mr. Rogerson wanted to reorganize the Rogerson
companies.

       In 2014, Mr. Rogerson decided that Kratos Instruments’
operations should be moved from Pasadena to Irvine. He further
decided to reorganize the Rogerson companies’ legal structure: While all
product lines had previously been owned directly or indirectly by RAC,
Mr. Rogerson determined that the digital and the analog product lines
would be divided and held (directly or indirectly) by two separate legal
entities, each of which Mr. Rogerson would own directly.

       Mr. Rogerson’s plans were implemented in 2014 and 2015. First,
RAC transferred all its interests in the analog product lines (including
interests in legal entities that manufactured analog products) to
Rogerson ATS, a corporation wholly owned by RAC, effective January 1,
2014. 2 RAC then transferred 100% of the stock of Rogerson ATS to
Mr. Rogerson, also effective January 1, 2014. Kratos Instruments’
employees, inventory, and equipment were physically moved from
Pasadena to Irvine during the second half of 2014, and the move was
nearly complete by January 2015. Rogerson ATS changed its name to
Rogerson Aircraft Equipment Group (RAEG), effective November 5,
2014.    Finally, effective January 1, 2015, RAC transferred to
Mr. Rogerson 100% of the stock of Rogerson Corporation (RC), a
management company that provided services to the other Rogerson
companies. 3

      After the 2014 reorganization was completed, Mr. Rogerson held
his aerospace business through three corporations: RAC, RAEG, and
RC. RAC (directly or indirectly) owned Rogerson Kratos and ITAN and
was primarily engaged in manufacturing and selling digital products.

       2 Rogerson ATS’s own business making auxiliary fuel systems had dwindled to
almost nothing by the time of the transfer, because newer aircraft generally do not
require such systems.
         3 RC changed its name to Rogerson Capital in 2016. Additionally, certain steps

of the reorganization not relevant to our analysis have been omitted from the summary
above.
                                            7

[*7] RAEG (directly or indirectly) owned Controls, Systems, Pressure,
and Kratos Instruments and was engaged in manufacturing and selling
analog products. 4 RC employed the executive team and provided
finance, legal, human resources, sales, and other support to RAC and
RAEG.

        C.      Management of RAEG

       Before and after the 2014 reorganization, the operations of
RAEG’s business units remained generally the same. With the
exception of the physical relocation of Kratos Instruments to Irvine, the
units manufactured the same products in the same locations and sold
those products to the same customers. Indeed, at least some major
customers were unaware of the reorganization as late as 2016. A small
number of employees who declined to move with Kratos Instruments to
Irvine were terminated, but otherwise staffing generally remained the
same. And Mr. Rogerson continued to oversee the business as a whole.

      Mr. Rogerson remained the CEO of RAC, RAEG, and RC from the
time of their incorporation through the years at issue. While other
company employees, including a small number of executives, ran the
day-to-day operations of each corporation, Mr. Rogerson was actively
engaged with them all, including RAEG, in particular by monitoring
operations and production, communicating with management on
employment issues, and taking a hands-on approach to sales and
customer relations.

       With respect to RAEG specifically, Mr. Rogerson received regular
reports on the company’s results, attended meetings to discuss the
results, and took action when they fell below expectations. 5 He ordered
the Kratos Instruments move from Pasadena to Irvine and oversaw its
progress, including setting the timeline, making decisions with respect
to staffing matters, and deciding on the wording of materials explaining
the move to employees and customers. As one company executive put it

        4The parties stipulated that RAEG reported ITAN’s activity on its tax returns
during the years at issue, but other evidence confirms that ITAN was owned by RAC
rather than RAEG for 2014, 2015, and 2016. We are not obliged to accept a stipulation
between the parties when it is clearly contrary to facts disclosed by the record. Cal-
Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989). And, in any event, the
question of ITAN’s ownership is not dispositive to the outcome of this case.
        5 On more than one occasion during the years at issue, RAEG executives stated

that Mr. Rogerson’s direct involvement, whether in the form of “ongoing and specific
directives,” “edict[s],” or other directions, would be required to complete an initiative.
                                      8

[*8] when discussing the phrasing of an employee offer letter: “Michael
gets the last word.” Mr. Rogerson directed executives as to which
engineers within the Rogerson companies could work on Kratos
Instruments projects. He approved capital expenditures and provided
input on accounting issues. He also was involved in the refurbishment
of the Irvine facilities to accommodate the Kratos Instruments move.

       On employment matters, Mr. Rogerson hired and fired
executives, set department budgets, and weighed in on staffing at all
levels of the company. During the years at issue, he was asked to
approve all bonuses and even an hourly rate increase of $0.50.
Generally, not even the president of RAEG was authorized to increase
salaries or provide bonuses to RAEG employees—those decisions were
made by Mr. Rogerson.

       Consistent with his authority over staffing matters, Mr. Rogerson
knew employees by their first names, communicated with them directly,
and weighed in on how and when they should be replaced. When one
employee was out on medical leave, Mr. Rogerson directed that his
replacement should be hired from outside the company rather than
promoted from within, citing “mid management depth” that was “too
thin.” Mr. Rogerson alerted executives when he felt certain employees
were not pulling their weight, noting in one instance that an engineer
“did not carry his own load during the [Kratos Instruments] move” and
that Mr. Rogerson “[did not] see rewarding him by having [another
engineer] doing his job now.”

       During this period, Mr. Rogerson was perhaps most extensively
involved in sales and customer relations. On multiple occasions, he
personally met with RAEG customers and potential customers and
participated in customer negotiations. He traveled to visit customers,
including internationally, and also hosted customers at RAEG’s offices. 6
He drafted press releases, received reports on customer visits that he
did not attend, and got personally involved when disputes with
customers arose. More than once, Mr. Rogerson told RAEG executives
that he would resolve a problem by meeting personally with the
customer involved. And customers sometimes reached out directly to
Mr. Rogerson with complaints. His approval was required for any bid

       6 At least one trip during the years at issue was to an RAEG customer in

Indonesia.
                                         9

[*9] provided to a customer with an aggregate value over $100,000; in
one month in 2016, that approval was requested at least a dozen times.

       As part of his activities, Mr. Rogerson discussed RAEG with
company executives, both in person and on the phone. During the years
at issue, he communicated with RC and RAEG executives regarding
RAEG’s finances, its operations, the Kratos Instruments move, and the
potential sale of the company. The RAEG president and the Rogerson
companies’ chief financial officer, together or separately, spent at least
10 to 15 hours per month with Mr. Rogerson on RAEG financial and
operational matters. Mr. Rogerson also communicated with those
individuals and others via email, including on weekends and holidays.

      In short, Mr. Rogerson was an actively engaged CEO throughout
the years at issue. And his level of involvement in RAEG in particular
and in the Rogerson companies more generally during those years was
substantially the same as it was during the years preceding the 2014
reorganization.

II.    Mr. Rogerson’s Yachts

       In addition to being interested in aviation, Mr. Rogerson was a
sailing enthusiast from an early age. He eventually developed an
interest in powerboats, and during the years at issue he owned two
yachts—the TOTO and the Falcon Lair—that he intended to make
available for charter.

       A.      The TOTO

       Mr. Rogerson purchased the TOTO, a 1983 Palmer Johnson 110-
foot cutter, in or around 1999. 7 In 2014, 2015, and 2016, Mr. Rogerson
kept the TOTO at a marina in Fort Lauderdale, Florida. Insurance
policies that covered the TOTO for the period May 22, 2015, to May 22,
2017, permitted charters for a maximum of 12 weeks each year. 8 The
TOTO was not commercially registered from 2014 to 2016 and was not
available for charter during those years.

       7 Mr. Rogerson owned the TOTO through a limited liability company named
Toto, LLC.
        8 The policies defined a charter agreement as a “written contract between the

owner of the insured yacht and the charterer in which the insured yacht is rented for
one or more voyages or a fixed period of time.”
                                          10

[*10] The TOTO was managed by a four-person crew, including a
captain, a deckhand, a stewardess, and an individual that would help
with the engine room and serve as a deckhand when needed. Because
the TOTO was not chartered, the crew did not provide services to any
customers during 2014, 2015, and 2016. For at least a portion of those
years, the TOTO was in a shipyard for repairs.

        B.      The Falcon Lair

       In 2014, Mr. Rogerson purchased the Falcon Lair, a 225-foot
vessel built in 1983. 9 The yacht underwent a major refit during 2014
and early 2015 before being relaunched during the summer of 2015.
During 2014, 2015, and 2016, the Falcon Lair was held at various
marinas in Europe. Insurance policies covering the Falcon Lair for the
periods May 27, 2014, to May 27, 2015, and July 15, 2016, to July 14,
2017, prohibited charters unless approved by the insurer in advance in
writing, or else prohibited charters outright. 10

      Like the TOTO, the Falcon Lair was not commercially registered
during 2014, 2015, and 2016, nor was it chartered. Nevertheless,
Mr. Rogerson engaged a management company to manage the Falcon
Lair. The management company was responsible for arranging the
Falcon Lair’s trips from harbor to harbor, including by provisioning the
yacht with fuel and food.

      The Falcon Lair initially was operated by a 12-person crew, but
that number dropped to 8 or 9 while the yacht was in the shipyard for
refurbishment. Because the Falcon Lair was not chartered, the crew did
not provide services to any customers during 2014, 2015, and 2016.
When the Falcon Lair was not in the shipyard for repairs or

        9Mr. Rogerson established two limited liability companies to manage and hold
the Falcon Lair: Platinum Marine Ventures, LLC (Platinum), and Sterling Marine
Ventures, LLC (Sterling). Platinum generally paid the Falcon Lair’s operating
expenses, including the costs of crew, fuel, and guests. Sterling held legal title to the
Falcon Lair and paid expenses associated with insurance, depreciation, and freight
fees, among others.
       10 One policy, for example, stated that the Falcon Lair’s “use” was “Private

Pleasure and / or Corporate Entertaining” and that the yacht was “Warranted to be
used solely for private pleasure purposes and not to be hired or chartered unless
approved and permission endorsed hereon.” The record does not reflect any such
endorsement.
                                    11

[*11] refurbishment, Mr. Rogerson and his family sometimes used the
yacht for personal trips.

III.   Tax Reporting

       A.    Tax Preparation

      From 2002 through the years at issue, Mr. Rogerson’s personal
income tax returns and the tax returns of the Rogerson companies were
prepared by Tony Chang, a certified public accountant and tax
professional.

      Mr. Chang worked for one major accounting firm from 1994 to
1996 and for a second major accounting firm from 1996 to 2002. He then
opened his own boutique practice with a partner. Mr. Rogerson and his
companies had been clients of the second major accounting firm and
continued to use Mr. Chang and his partner after they opened their
boutique practice.

       By 2014, Mr. Chang had been preparing Mr. Rogerson’s personal
income tax returns and the tax returns of the Rogerson companies for at
least 12 years. He was familiar with the various entities in the corporate
structure and the mechanics of the 2014 reorganization. He also was
familiar with Mr. Rogerson’s yacht activities. For each year from 2014
to 2016, Mr. Chang considered the application of the passive loss rules
to Mr. Rogerson’s activities and provided advice to Mr. Rogerson about
how the activities should be reported on his personal income tax returns.
As part of Mr. Chang’s analysis, he collected information from Mr.
Rogerson and other executives at the Rogerson companies, generally by
having informal discussions with those individuals rather than
requesting documentation. For each of the years at issue, Mr. Rogerson
reported his activities consistent with Mr. Chang’s advice.

       B.    Aerospace Activities

       From at least 2005 to 2013, RAC filed Form 1120S, U.S. Income
Tax Return for an S Corporation, reflecting all the results of
Mr. Rogerson’s aerospace business. For these years, no effort was made
on the RAC returns to separate out the various activities of the Rogerson
companies for purposes of the passive activity loss rules of section 469.
In his personal income tax returns, Mr. Rogerson reported his
involvement in RAC’s combined activity as nonpassive.
                                          12

[*12] Starting in 2014, RAC and RAEG each filed separate Forms
1120S. In his personal income tax returns for 2014, 2015, and 2016,
Mr. Rogerson reported his involvement in RAC as nonpassive and his
involvement in RAEG as passive.            Based on Schedules K-1,
Shareholder’s Share of Income, Deductions, Credits, etc., issued by RAC,
Mr. Rogerson reported a loss of $3,926,922 for 2014, income of $163,814
for 2015, and a loss of $2,855,771 for 2016. For the same years, he
reported income of $7,093,760, $3,238,454, and $4,762,543 based on
Schedules K-1 issued to him by RAEG.

      RC filed a separate Form 1120S starting in 2015, and
Mr. Rogerson reported his involvement in RC as nonpassive. For the
taxable years 2015 and 2016, Mr. Rogerson reported ordinary income of
$391,615 and $380,027, respectively, based on Schedules K-1 issued by
RC.

       C.        Yacht Activities

      In his 2014 personal income tax return, Mr. Rogerson sought to
apply a passive loss carryforward of $3,409,986 related to his pre-2014
TOTO activity to offset the passive income that he reported from
RAEG. 11 For 2014, 2015, and 2016, however, Mr. Rogerson reported his
involvement in both the TOTO and the Falcon Lair as nonpassive. With
respect to the TOTO, Mr. Rogerson claimed losses of $1,110,387,
$583,165, and $818,841 in 2014, 2015, and 2016, respectively. With
respect to the Falcon Lair, he claimed losses of $2,009,554, $4,993,719,
and $5,028,440 during the same years. 12

IV.    Examination and Notice of Deficiency

      Revenue Agent Amanda Dougherty conducted an examination of
Mr. Rogerson’s tax returns for 2014, 2015 and 2016. 13 As part of the
examination, Ms. Dougherty considered whether Mr. Rogerson properly
characterized his aerospace and yacht activities as passive and
nonpassive and ultimately determined that he did not.

       11 The parties have since stipulated that the correct amount of the carryover is

$3,382,990.
       12 The total loss for the tax year 2015 shown above is net of $147,050 of income
related to the Falcon Lair. That income arose from the favorable resolution of a
lawsuit.
       13   At the time of the examination, Ms. Dougherty’s name was Amanda Davis.
                                           13

[*13] Near the conclusion of the examination, Ms. Dougherty mailed
Mr. Rogerson a Letter 5153, dated March 20, 2018, with an attached
examination report proposing, among other adjustments, an accuracy-
related penalty under section 6662(a) for each tax year at issue. The
letter was the first written communication sent to Mr. Rogerson
regarding the penalties under section 6662(a) and was mailed before
Ms. Dougherty had secured supervisory approval of the penalty
assertion from her supervisor, Acting Group Manager Mayank Patel.
When Mr. Rogerson failed to respond to the letter, Mr. Patel sent to
Mr. Rogerson a signed “30-day letter” (Letter 950) on April 11, 2018,
which again asserted the penalties under section 6662(a) and offered
Mr. Rogerson the option to appeal. Additionally, on April 5, 2018,
Ms. Dougherty prepared Form 300, Civil Penalty Approval Form.
Mr. Patel signed the Civil Penalty Approval Form on June 25, 2018.

       Mr. Rogerson appealed his case to the Internal Revenue Service
Office of Appeals (IRS Appeals), 14 but was unable to reach a resolution
with that office. On March 17, 2020, the Commissioner issued to
Mr. Rogerson a notice of deficiency that recharacterized his activity with
respect to RAEG as nonpassive and with respect to the yachts as
passive. 15 Regarding RAEG, the notice stated, among other things, that
Mr. Rogerson “materially participated in RAEG” and therefore that “the
income should be treated as non-passive income.”              The notice
determined deficiencies in Mr. Rogerson’s federal income tax of
$2,136,552, $1,884,960, and $1,558,158, plus accuracy-related penalties
of $427,310, $376,992, and $311,632, for 2014, 2015, and 2016,
respectively. Mr. Rogerson timely petitioned the Court seeking a
redetermination of the deficiencies and penalties.

        14On July 1, 2019, the Office of Appeals was renamed the Independent Office
of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981, 983
(2019). We will use the name in effect at the times relevant to this case, i.e., the Office
of Appeals.
        15 With respect to the yachts, the notice elaborated that “Appeals previously

determined that a similar activity . . . was a valid rental activity despite the extremely
limited rental income generated; therefore, [Revenue Agent Dougherty] in being
consistent with the prior Appeals ruling has allowed the activity to remain but limited
the Passive Losses to the passive income available.”
                                         14

[*14]                               OPINION

I.      Burden of Proof

       In general, the Commissioner’s determinations set forth in a
notice of deficiency are presumed to be correct, and the taxpayer bears
the burden of showing that those determinations are in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). But the
Commissioner bears the burden of proof with respect to any “new
matter” he raises. See Rule 142(a). Where relevant, we discuss burden
of proof in the individual issue sections below. 16

II.     Section 469 Issues

       Individual taxpayers may generally deduct, under sections 162
and 212 respectively, ordinary and necessary expenses paid or incurred
in carrying on a trade or business or for the production of income. But
the Code disallows any current deduction for a “passive activity” loss.
I.R.C. § 469(a)(1), (b). A passive activity loss is the amount (if any) by
which the aggregate losses from the taxpayer’s passive activities for a
taxable year exceed the aggregate income from passive activities for that
year. I.R.C. § 469(d)(1). Thus, under the Code, passive losses cannot be
used to offset income from nonpassive activities. See Beecher v.
Commissioner, 481 F.3d 717, 721 (9th Cir. 2007), aff’g Cal Interiors Inc.
v. Commissioner, T.C. Memo. 2004-99. A disallowed passive activity loss
is not lost; rather, it is deferred or suspended and remains available as
a deduction against future passive income. I.R.C. § 469(b).

       In light of these rules, a great deal turns on whether an activity
is passive or nonpassive under section 469. We therefore provide a brief
discussion of how one makes that determination and then apply the
relevant principles to Mr. Rogerson’s case.

        A.     Passive Activities

      A passive activity generally is an activity involving the conduct of
a trade or business in which the taxpayer does not materially

        16 Generally speaking, a burden of proof analysis is required only in the rare

instance of an evidentiary tie. See, e.g., Knudsen v. Commissioner, 131 T.C. 185, 189
(2008), supplementing T.C. Memo. 2007-340; see also FRGC Inv., LLC v.
Commissioner, 89 F. App’x 656 (9th Cir. 2004), aff’g T.C. Memo. 2002-276. As we
discuss further below, we resolve this case on the preponderance of the evidence, and
therefore Mr. Rogerson’s arguments regarding the burden of proof are unavailing. See,
e.g., Dagres v. Commissioner, 136 T.C. 263, 279 (2011).
                                    15

[*15] participate. I.R.C. § 469(c)(1). Moreover, subject to certain
exceptions not relevant here, rental activities are passive regardless of
whether the taxpayer materially participates. See I.R.C. § 469(c)(2), (4),
(7).

      B.     Material Participation

       A taxpayer’s participation in an activity is “material” only if his
involvement in the operations of the activity is regular, continuous, and
substantial. I.R.C. § 469(h)(1). Temporary regulations first issued in
1988 provide seven tests for determining when this standard is satisfied.
See Temp. Treas. Reg. § 1.469-5T(a) (stating that an individual will be
treated as materially participating in an activity “if and only if” one of
the seven tests is satisfied). Because, as explained below, we can resolve
Mr. Rogerson’s case based on one of the regulatory tests (the “five of ten”
test), we do not discuss the remaining ones.

             1.     The Five of Ten Test

       For purposes of section 469(h)(1), a taxpayer is treated as
materially participating in an activity if he materially participated in
the activity for any five out of the ten years immediately preceding the
taxable year. Temp. Treas. Reg. § 1.469-5T(a)(5). The preamble to the
temporary regulations adopting the test explained its purpose as
follows:

             These rules are included because the Service
      believes that an activity in which an individual has
      materially participated over a long period of time . . . is
      likely to represent the individual’s principal livelihood
      rather than a passive investment. In particular, the
      Service does not believe that withdrawal from a
      longstanding active business . . . should convert an
      individual’s earnings from the business to passive income.

T.D. 8175, 1988-1 C.B. 191, 203.

       By its terms, the five of ten test applies to an activity that is the
same over time. But the regulations also explain how to apply the test
when a taxpayer’s activities change over time. In these circumstances,
final regulations call for a comparison of the taxpayer’s current-year
activities with his preceding-year activities. Specifically, Treasury
Regulation § 1.469-5(j)(1) provides as follows:
                                           16

[*16] For purposes of [the five of ten test], a taxpayer has
      materially participated in an activity for a preceding
      taxable year if the activity includes significant section 469
      activities[17] that are substantially the same as significant
      section 469 activities that were included in an activity in
      which the taxpayer materially participated (determined
      without regard to [the five of ten test]) for the preceding
      taxable year.

       In other words, if there is substantial similarity between the
current-year activity and activities that the taxpayer materially
participated in during a preceding year, then that preceding year counts
as one year in applying the five of ten test to the current-year activity.
See id. If there is substantial similarity between the current-year
activity and activities that the taxpayer materially participated in for
five of the last ten years, then the five of ten test is satisfied and the
taxpayer is treated as materially participating in the current-year
activity for the current year. See id.; Temp. Treas. Reg. § 1.469-5T(a)(5).

       The history of Treasury Regulation § 1.469-5(j)(1) confirms this
interpretation. When temporary regulations first established the five of
ten test in 1988, they did not initially address how the test should apply
to a situation in which an individual’s business activities evolve during
the ten-year period. See T.D. 8175, 1988-1 C.B. at 203; see also T.D.
8253, 1989-1 C.B. 121, 122 (noting the omission). In 1989, however, the
Department of the Treasury (Treasury) and the IRS 18 issued additional
temporary regulations under section 469 (1989 amendments). The 1989
amendments added Temporary Treasury Regulation § 1.469-4T to
define the concept of an “activity” for purposes of section 469. See T.D.
8253, 1989-1 C.B. at 122–23. The definition included the concept of an
“undertaking,” which was the smallest unit that could constitute an
activity. Id at 122.

      As relevant here, the 1989 amendments also made certain
changes to Temporary Treasury Regulation § 1.469-5T, including
adding paragraph (j)(1), T.D. 8253, 1989-1 C.B. at 158, the precursor to
Treasury Regulation § 1.469-5(j)(1). The preamble to the 1989
amendments explained the new rule as follows:

       17 We explain further below the origin and meaning of the phrase “significant
section 469 activities.”
       18   For simplicity, we refer to both Treasury and the IRS as “Treasury.”
                                     17

[*17]          Under § 1.469-4T, the business and rental
        operations that constitute an activity may change from
        year to year. The existing regulations do not address how
        the material participation tests that are based on
        participation in prior years will apply in cases in which
        such changes occur. Accordingly, this document amends
        § 1.469-5T to provide that, for purposes of the material
        participation tests that are based on participation in prior
        years, a taxpayer is treated as materially participating in
        an activity for a prior taxable year if the activity includes
        an undertaking involving substantially the same
        operations as an undertaking that was included in an
        activity in which the taxpayer materially participated
        during such prior taxable year.

T.D. 8253, 1989-1 C.B. at 126. The text of the temporary rule tracked
the preamble’s explanation:

        For purposes of [the five of ten test], a taxpayer has
        materially participated in an activity for a preceding
        taxable year if such activity includes an undertaking that
        involves substantially the same business and rental
        operations as an undertaking that was included in an
        activity in which the taxpayer materially participated . . .
        for such preceding taxable year.

Temp. Treas. Reg. § 1.469-5T(j)(1), T.D. 8253, 1989-1 C.B. at 158. Like
the current rule, therefore, the rule issued as part of the 1989
amendments required a comparison of the taxpayer’s current-year
activity to his preceding-year activity. If the activities were sufficiently
similar—i.e., if they included undertakings that involved similar
business operations—and if the taxpayer materially participated in the
preceding-year activity, then the taxpayer would also be treated as
materially participating in the current-year activity during the
preceding year. See id.

       By 1992, Treasury determined that the 1989 definition of activity,
including the concept of undertaking, was too complicated and
mechanical and that a more flexible approach was required. See
Limitation on Passive Activity Losses and Credits—Definition of
Activity, 57 Fed. Reg. 20,802, 20,803 (proposed May 15, 1992). As a
result, Treasury issued Proposed Treasury Regulation § 1.469-4, 57 Fed.
Reg. at 20,804, to replace Temporary Treasury Regulation § 1.469-4T.
                                         18

[*18] Simultaneously, Treasury finalized other parts of the 1989
amendments, including the clarification of the five of ten test that
previously appeared at Temporary Treasury Regulation § 1.469-5T(j)(1).
T.D. 8417, 1992-1 C.B. 173, 186. 19 Treasury did not, however, finalize
the original temporary regulations—i.e., rules that were issued in 1988
and not amended in 1989. Those regulations, which include the seven
regulatory tests for determining material participation and certain
related rules, continued in their temporary form. Thus, today, the five
of ten test appears in a temporary regulation, while the rule explaining
how the five of ten test should be applied appears in a final regulation.

       When it was finalized in 1992, the rule explaining how the five of
ten test should be applied was modified slightly to its current form,
essentially replacing the concept of an “undertaking” with that of a
“significant section 469 activit[y].” See Treas. Reg. § 1.469-5(j)(1). In
describing the change, Treasury stated:

              The final regulations generally adopt the
       amendments as originally proposed. They only make
       certain minor technical modifications to the amendments,
       including changes that conform them to the proposed
       regulations under § 1.469-4, relating to the definition of
       activity.

T.D. 8417, 1992-1 C.B. at 174.

       Thus, the differences between the explanatory rule as originally
proposed at Temporary Treasury Regulation § 1.469-5T(j)(1) and the
final rule at Treasury Regulation § 1.469-5(j)(1) were not intended to be
significant. And while the final rule’s phrasing is somewhat convoluted,
the text and regulatory history leave us with no doubt regarding its
meaning. Specifically, the rule provides that even if a taxpayer’s mix of
activity changes over time, the taxpayer is treated as materially
participating in a current-year activity if that activity substantially
overlaps with activities that the taxpayer materially participated in for

        19 Treasury finalized the 1989 amendments to avoid potential disputes about

whether they would expire under section 7805(e)(2), which provides that all temporary
regulations expire three years after the date they are issued. See T.D. 8417, 1992-1
C.B. at 174. Section 7805(e)(2) was enacted in 1988 and applies only to temporary
regulations issued after November 20, 1988. See Technical and Miscellaneous Revenue
Act of 1988, Pub. L. No. 100-647, § 6232, 102 Stat. 3342, 3734. Accordingly, section
7805(e)(2) potentially applied to the 1989 amendments, but not to the original
temporary regulations. See T.D. 8175, 1988-1 C.B. at 233–34.
                                      19

[*19] five of the last ten years. See Treas. Reg. § 1.469-5(j)(1); Temp.
Treas. Reg. §. 1.469-5T(a)(5). As one commentator put it, “any
significant overlap between activities for different tax years causes them
to be treated as the same activity for purposes of the 5-out-of-10-years
test.” Libin Zhang, Passive Loss Rules, 549-3rd Tax Mgmt. (BNA),
at IV.A.5.

              2.     Application to Mr. Rogerson and RAEG

       In this case, we apply the material participation rules, and the
five of ten test in particular, to determine whether Mr. Rogerson’s
involvement in RAEG was passive or nonpassive during 2014, 2015, and
2016. The Commissioner contends that Mr. Rogerson’s involvement was
nonpassive because Mr. Rogerson has failed to carry his burden to
establish that he did not materially participate in RAEG. Additionally,
the Commissioner argues that Mr. Rogerson satisfies the five of ten test
for material participation. 20 For the reasons described below, we agree
that Mr. Rogerson materially participated in RAEG under the five of ten
test, and therefore that his involvement in the activity must be treated
as nonpassive.

       Applying the five of ten test to RAEG for the tax years 2014, 2015,
and 2016 requires us to examine Mr. Rogerson’s pre-2014 involvement
in the activities that ultimately constituted RAEG. See Temp. Treas.
Reg. § 1.469-5T(a)(5). Moreover, given that the organization of
Mr. Rogerson’s activities changed during the relevant years (e.g.,
because of the 2014 reorganization), Treasury Regulation § 1.469-5(j)(1)
informs our analysis.

       Turning first to Mr. Rogerson’s tax reporting, we have found at
his request that all the results of his aerospace business, including the
RAEG-related activity, were reported on RAC’s income tax returns from
2005 to 2013. We have further found, again at Mr. Rogerson’s request,
that no effort was made during these years to separate the various
activities of the Rogerson companies for purposes of the passive activity
loss rules. In other words, RAC treated the aerospace business,
including the activities that became part of RAEG, as a single,
undifferentiated activity on its tax returns and when it issued Schedules
K-1 to Mr. Rogerson. Mr. Rogerson reported his involvement in this

        20 The Commissioner makes certain other arguments based on the amount of

time Mr. Rogerson spent on RAEG during 2014, 2015, and 2016, but in light of our
analysis under the five of ten test, we need not reach those arguments.
                                    20

[*20] consolidated activity as nonpassive on his personal income tax
returns and similarly did not attempt to separate the activities. Cf.
Treas. Reg. § 1.469-4(d)(5)(i) (providing that a shareholder of an S
corporation may not treat activities grouped together by his corporation
as separate activities). According to his own tax returns, therefore, Mr.
Rogerson maintained that he materially participated in his aerospace
business as a whole from at least 2005 to 2013.

       Mr. Rogerson does not seem to dispute that his involvement in
the overall business was nonpassive during those years; indeed, he
maintains that Rogerson Kratos, which also was part of the aerospace
business from 2005 to 2013, required large amounts of his time, and that
he was involved with product development, manufacturing, and sales
for the Rogerson Kratos product lines. Mr. Rogerson continued to report
his activity with respect to Rogerson Kratos (i.e., RAC), as well as RC,
as nonpassive during the years 2014 to 2016. And Mr. Chang,
Mr. Rogerson’s tax return preparer, testified with respect to the
consolidated RAC activity that “it was pretty clear [Mr. Rogerson] was
involved in that business.”

        There also is no dispute that, for the years 2005 to 2013, the
product lines that ultimately were combined into RAEG in 2014 were a
significant part of the consolidated RAC activity that Mr. Rogerson
characterized as nonpassive. As described above, for purposes of
applying the five of ten test, a taxpayer is treated as materially
participating in an activity (here, RAEG) during a preceding year if the
activity was included in an activity, or substantially overlaps with an
activity (here, the aerospace business as a whole), in which the taxpayer
materially participated for the preceding year. Treas. Reg. § 1.469-
5(j)(1).

       There can be no question there is substantial overlap between
RAEG’s activities in 2014 and later years and the activities of the overall
aerospace business before 2014. Documentary evidence and the
testimony of multiple witnesses confirms that the products, employees,
and customers of the Rogerson companies were generally the same
before and after the 2014 reorganization. In other words, the business
activities that became part of RAEG were the same before and after the
reorganization, but organized differently. And each of the RAEG
product lines had been part of the RAC consolidated activity since long
before the relevant ten-year period. As Mr. Rogerson states in his
opening brief: “[T]he RAEG Activity that commenced in 2014 is really
the compilation and consolidation of multiple product lines from various
                                          21

[*21] entities that had been conducted on a historical basis.” Pet’r’s
Simultaneous Opening Br. 73.

      In light of these facts and the applicable regulations, we conclude
that, in 2014, 2015, and 2016, Mr. Rogerson’s RAEG activity
substantially overlapped with an activity (i.e., the aerospace business as
a whole) that he materially participated in from at least 2005 to 2013.
Under Treasury Regulation § 1.469-5(j)(1), therefore, the five of ten test
has been met for each of 2014, 2015, and 2016, and Mr. Rogerson is
treated as materially participating in RAEG for those years. See also
Temp. Treas. Reg. § 1.469-5T(a)(5) (setting forth the five of ten test).

                3.      Mr. Rogerson’s Counterarguments

       Mr. Rogerson makes three primary arguments regarding the five
of ten test: (1) the test is a new matter not properly before the Court,
(2) the regulation containing the test is substantively and procedurally
invalid, and (3) even if it does apply, the test does not require that
Mr. Rogerson be treated as materially participating in RAEG. As we
explain below, none of these arguments changes our conclusion.

                        a.      New Matter

       To begin with, Mr. Rogerson argues that the five of ten test is a
new matter not pleaded by the Commissioner. Therefore, Mr. Rogerson
contends, the matter is not properly before the Court or, in the
alternative, the Commissioner bears the burden of proof. 21 See Shea v.
Commissioner, 112 T.C. 183, 191 (1999). This argument borders on
frivolous. 22

         Mr. Rogerson also contends that the Commissioner bears the burden of proof
        21

with respect to certain other arguments raised by the Commissioner. Because we
resolve this case without reaching those arguments, we need not address
Mr. Rogerson’s further contentions.
         22 As one component of the argument, Mr. Rogerson characterizes the five of

ten test as an “estoppel” theory. Pet’r’s Simultaneous Suppl. Br. 8. But Mr. Rogerson’s
characterization demonstrates a misunderstanding of the rule. The five of ten test
does not estop anyone from doing anything. Rather it provides guidance on how the
statutory material participation test applies when either a relevant activity or a
taxpayer’s participation in a relevant activity changes over time. And Treasury
Regulation § 1.469-5(j)(1) provides more specific guidance on the application of the five
of ten test. As Mr. Rogerson notes, it is a “Definitional Reg.” Pet’r’s Simultaneous
Suppl. Br. 2.
                                          22

[*22] The Commissioner is considered to have raised a new matter
when the theory or basis upon which he relies was not stated in the
notice of deficiency and the new theory or basis requires the
presentation of different evidence. Id. at 197. But a new theory that
merely clarifies or develops the original determination is not a new
matter in respect of which the Commissioner bears the burden of proof.
Id. at 191 (citing Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500,
507 (1989)).

       The notice of deficiency in this case stated that Mr. Rogerson’s
income from RAEG should be treated as nonpassive because he
“materially participated in RAEG.” Consistent with the notice, the
Pretrial Memoranda of each party reflects an understanding that the
nature of Mr. Rogerson’s participation in RAEG would be addressed at
trial.

       As already discussed, the five of ten test is one of the seven
regulatory tests for determining whether a taxpayer materially
participated in an activity. See discussion in Opinion Part II.B.1 above.
Indeed, Mr. Rogerson’s own Pretrial Memorandum explained that the
applicable regulations include “seven tests to determine whether a
taxpayer has materially participated.” 23 Pet’r’s Pretrial Mem. 6. We
therefore have no trouble concluding that the Commissioner’s reliance
on the five of ten test is a clarification or development of his original
determination and not a new matter. See Estate of Abraham v.
Commissioner, 408 F.3d 26, 36 (1st Cir. 2005) (stating there is no
requirement that a notice of deficiency be as detailed as a trial brief),
aff’g T.C. Memo. 2004-39, amended 429 F.3d 294 (1st Cir. 2005); Ax v.
Commissioner, 146 T.C. 153, 170–71 (2016) (construing a notice of
deficiency with “reasonable breadth” to conclude that it encompassed
assertions later made by the Commissioner). 24 Nor do we perceive any
surprise or prejudice to Mr. Rogerson where the Commissioner has
consistently maintained—in his notice of deficiency, Answer, and

        23The Pretrial Memorandum also claimed that only three of the tests were
relevant to this case, not including the five of ten test. But that statement simply
represents Mr. Rogerson’s view of the case and, of course, is not binding on the
Commissioner or the Court.
        24 In Ax, we also cited the following statement from Abatti v. Commissioner,

644 F.2d 1385, 1390 (9th Cir. 1981), rev’g T.C. Memo. 1978-392: “[I]f a deficiency notice
is broadly worded and the Commissioner later advances a theory not inconsistent with
that language, the theory does not constitute new matter, and the burden of proof
remains with the taxpayer.” Ax, 146 T.C. at 171 n.18.
                                      23

[*23] Pretrial   Memorandum—that             Mr.     Rogerson      materially
participated in RAEG.

      In summary, we conclude the five of ten test is properly before
this Court. And, although we do not decide this issue based on the
burden of proof, the burden with respect to the five of ten test remains
with Mr. Rogerson.

                     b.     Regulation Validity

       Mr. Rogerson also contends, for the first time in his Supplemental
Briefing, that the five of ten test is an invalid rule, both substantively
and procedurally. We address these arguments in turn.

                            i.     Substantive Validity

       Mr. Rogerson argues that the five of ten test is substantively
invalid because it contradicts section 469. Specifically, Mr. Rogerson
contends that material participation exists under the statute only to the
extent that a taxpayer’s involvement in an activity is regular,
continuous, and substantial during the year under consideration, citing
section 469(h). Because the five of ten test analyzes taxpayer
participation in an activity during prior years for purposes of
determining participation in the current year, Mr. Rogerson views the
test as contrary to the statute. We disagree.

       Contrary to Mr. Rogerson’s assertion, section 469 does not
mandate the consideration of only present-year activity in determining
material participation. Rather, section 469(h)(1) provides that “[a]
taxpayer shall be treated as materially participating in an activity only
if the taxpayer is involved in the operations of the activity on a basis
which is—(A) regular, (B) continuous, and (C) substantial.” Nothing in
the section addresses the timing of the taxpayer’s involvement. Further,
the statute dictates that “[t]he Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out provisions
of this section, including regulations [that] specify what constitutes . . .
material participation . . . for purposes of this section.” I.R.C. § 469(l)(1).
In other words, the statute is silent on the relevant period for assessing
                                           24

[*24] a taxpayer’s involvement and directs the Secretary to fill in any
gaps via regulation. 25

        In light of these provisions, we easily conclude that the five of ten
is not contrary to section 469 and that the authorities Mr. Rogerson cites
are inapplicable. 26

                                ii.     Procedural Validity

       Next, Mr. Rogerson argues that the five of ten test is procedurally
invalid because the temporary regulation in which it appears was
enacted in violation of the notice and comment requirements of the
Administrative Procedure Act (APA). See 5 U.S.C. § 553(b) and (c).
Specifically, Mr. Rogerson observes that the five of ten test appears in
Temporary Treasury Regulation § 1.469-5T, which was issued in 1988
without notice and comment. As described in Opinion Part II.B.1 above,
certain parts of the original package were amended in 1989 and finalized
in 1992, including Treasury Regulation § 1.469-5(j)(1). But the seven
tests for material participation remain in their original temporary form.

      Mr. Rogerson’s argument raises an interesting issue that has
been analyzed by judges and legal scholars. See, e.g., Intermountain Ins.
Serv. of Vail, LLC v. Commissioner, 134 T.C. 211, 238–48 (2010)
(Halpern & Holmes, JJ., concurring), supplementing T.C. Memo.
2009-195, rev’d and remanded on other grounds, 650 F.3d 691 (D.C. Cir.
2011), vacated and remanded, 566 U.S. 972 (2012); Eleanor D. Wood,
Note, Rejecting Tax Exceptionalism: Bringing Temporary Treasury
Regulations Back in Line With the APA, 100 Minn. L. Rev. 839 (2015)

        25The provisions Mr. Rogerson cites—section 469(a)(1), (c)(1), and (f)—do not
support a different conclusion. In relevant part, section 469(a)(1) simply states that
passive activity losses are disallowed “for the taxable year,” and section 469(c)(1)
provides that a passive activity is any activity in which a taxpayer does not materially
participate. That section 469 specifies the year in which the loss is disallowed says
nothing about the timeframe for assessing a taxpayer’s participation in an activity.
Nor does the special rule for carryover losses from a former passive activity in section
469(f)—an issue that is irrelevant in the case of a former nonpassive activity—preclude
Treasury from issuing other rules for taxpayers who change their participation levels
over time.
        26 The determination that the five of ten test is not contrary to section 469 also

resolves Mr. Rogerson’s argument that the five of ten test is unconstitutional, because
that argument is premised on the existence of a direct conflict between the statute and
the regulation. Additionally, because this conclusion fully addresses Mr. Rogerson’s
arguments, we need not decide on the appropriate standard of review for temporary
Treasury regulations such as those at issue here.
                                          25

[*25] (collecting authorities); cf. Mann Constr., Inc. v. United States, 27
F.4th 1138, 1148 (6th Cir. 2022) (“Because the IRS’s process for issuing
Notice 2007-83 did not satisfy the notice-and-comment procedures for
promulgating legislative rules under the APA, we must set it aside.”).
We need not resolve this issue, however, because it does not change the
result in Mr. Rogerson’s case, as described below.

       For purposes of this discussion, we will assume (only for the sake
of analysis) that Mr. Rogerson is correct and that the five of ten test is a
procedurally invalid regulation that cannot be applied here. Because
Mr. Rogerson’s challenge to the regulation is that it was issued without
first being subject to notice and comment, accepting his theory would
mean that other temporary regulations issued as part of the same
package would also be invalid. This would include all seven regulatory
tests for determining material participation and the related rules in
Temporary Treasury Regulation § 1.469-5T.

       Assuming solely for the sake of analysis that (as Mr. Rogerson
argues) the seven regulatory tests for material participation would need
to be disregarded, we would be left with the general statutory rule of
section 469(h) to determine whether Mr. Rogerson materially
participated in RAEG during 2014, 2015, and 2016. As noted above,
that provision states as follows: “A taxpayer shall be treated as
materially participating in an activity only if the taxpayer is involved in
the operations of the activity on a basis which is—(A) regular,
(B) continuous, and (C) substantial.” 27 Based on the record before us,
we are convinced that Mr. Rogerson’s involvement in RAEG satisfied
this standard for 2014, 2015, and 2016. 28

        27 One of the seven regulatory tests is similar to the statutory rule, but with

some additional limitations related to the number of hours required and the types of
hours that qualify. See Temp. Treas. Reg. § 1.469-5T(a)(7), (b)(2), (f)(2); see also
Mordkin v. Commissioner, T.C. Memo. 1996-187, slip op. at 24, 45–48 (describing
limiting rules). The effect of these rules is to limit a taxpayer’s ability to qualify as
materially participating, which in this case could help Mr. Rogerson. But if one accepts
the premise of Mr. Rogerson’s argument that Temporary Treasury Regulation § 1.469-
5T(a)(5) is procedurally invalid, then the other portions of the regulation would also
need to be ignored and therefore would not afford him any protection.
        28This conclusion is consistent with Treasury Regulation § 1.469-5(f)(1), which
was finalized in 1992 and states that
        any work done by an individual (without regard to the capacity in
        which the individual does the work) in connection with an activity in
                                       26

[*26] Mr. Rogerson was a hands-on CEO during the years at issue.
No major decisions could be made without his input, and no detail was
too small for his attention. For example, Mr. Rogerson weighed in on
accounting and financial reporting minutiae, interacted directly with
company employees, and line-edited company documents, such as offer
letters and press releases. Top RAEG executives reached out to him for
permission to undertake routine actions, such as responding to customer
inquiries or providing small bonuses or raises to company employees.
On one occasion, RAEG’s president sought approval from Mr. Rogerson
to offer an employee a raise of $0.50 per hour. On other occasions,
executives confirmed that Mr. Rogerson’s direct involvement, whether
in the form of “ongoing and specific directives,” “edict[s],” or other
directions, would be required to get things done.

      Mr. Rogerson’s involvement in sales and customer relations
further belies any assertion that he was not substantially involved in
RAEG’s operations. Mr. Rogerson traveled to meet with RAEG
customers, including on one occasion to Indonesia. He also met with
RAEG customers at RAEG’s offices. Indeed, the record reflects more
than one instance in which Mr. Rogerson told RAEG executives that he
would resolve a problem by meeting personally with the customer
involved. Customers sometimes reached out to Mr. Rogerson directly to
discuss issues, and Mr. Rogerson was involved in multiround
negotiations with customers on pricing and other matters. He also
approved any bid provided to a customer with an aggregate value over
$100,000; in one month in 2016, that approval was requested at least a
dozen times.

       In the face of a record demonstrating that he spoke and emailed
with executives regularly on RAEG matters, Mr. Rogerson asserts that
most of these interactions took only minutes of his time. Even assuming
that to be the case, however, Mr. Rogerson’s ability to respond to
detailed inquiries so quickly shows his detailed knowledge of every
aspect of the business. Indeed, many of Mr. Rogerson’s communications
reflect first-hand experience with RAEG’s employees, customers, and
products that extends far beyond what could have been acquired by a
passive investor.

      which the individual owns an interest at the time the work is done
      shall be treated for purposes of this section as participation of the
      individual in the activity.
                                   27

[*27] To summarize, Mr. Rogerson would not prevail even if he were
correct about the procedural validity of the five of ten test, because we
find that he was regularly, continuously, and substantially involved in
the operations of RAEG during 2014, 2015, and 2016 within the
meaning of section 469(h). Accordingly, we need not decide whether the
five of ten test is procedurally valid and turn instead to Mr. Rogerson’s
final argument.

                    c.    Application of the Five of Ten Test

       Mr. Rogerson argues that even if the five of ten test is valid and
potentially applicable here, he should still prevail. Specifically,
Mr. Rogerson asserts that applying the rules defining an “activity” for
purposes of section 469 to the RAEG product lines before and after the
2014 reorganization results in two possible alternatives. First, RAEG
could be viewed as an entirely new activity following the 2014
reorganization, with the result that there are no prior years of
involvement for purposes of applying the five of ten test. Second, if a
comparison of Mr. Rogerson’s involvement in the RAEG activities before
and after 2014 is required despite the 2014 reorganization,
Mr. Rogerson contends that the five of ten test still does not apply
because his involvement in the RAEG product lines was passive even
before 2014. We take these arguments in turn.

                          i.     New Activity Argument

       Treasury Regulation § 1.469-4(c)(1) discusses the concept of an
“activity” for purposes of section 469 and provides as follows: “One or
more trade or business activities or rental activities may be treated as a
single activity if the activities constitute an appropriate economic unit
for the measurement of gain or loss for purposes of section 469.” If a
taxpayer decides based on all the facts and circumstances that multiple
activities constitute a single economic unit and therefore may be treated
as a single activity, the regulations refer to that determination as
“grouping.” See Treas. Reg. § 1.469-4(c)(2).

      In support of his first proposed alternative—i.e., that for purposes
of the five of ten test, RAEG did not exist as activity before 2014—
Mr. Rogerson states as follows:

      It is clear that the Rogerson companies did not actually
      segregate [R]AEG as a separate “activity” before 2014. No
      position was taken on any RAC return before 2014
      reflecting anything other than a single activity.
                                     28

[*28] [Mr.] Chang clearly believed no such determination was
      appropriate because everything related to the Rogerson
      companies was reported on a single RAC return.

Pet’r’s Simultaneous Suppl. Br. 25. Accordingly, Mr. Rogerson appears
to contend that before the 2014 reorganization, the aerospace business
as a whole (as reflected on RAC’s returns) was the relevant activity
under the regulations and that RAEG should therefore be treated as a
new activity for 2014, 2015, and 2016. If RAEG was a new activity
starting in 2014, Mr. Rogerson further contends, then the five of ten test
cannot apply, because Mr. Rogerson would have no history of
involvement in the activity.

       Mr. Rogerson’s argument is foreclosed by Treasury Regulation
§ 1.469-5(j)(1). As discussed in detail in Opinion Part II.B.1 above, that
rule does not require the taxpayer’s precise activity to have existed in
prior years for purposes of applying the five of ten test. Indeed, the
entire point of the rule is to address situations in which circumstances
change over time. The rule applies as long as the taxpayer’s current-
year activity (here, RAEG) “includes significant section 469 activities”
(here, the RAEG product lines or RAEG as a whole) “that are
substantially the same as significant section 469 activities there were
included in [a preceding-year activity] in which the taxpayer materially
participated” (here, the aerospace business as a whole). In other words,
all that is required is substantial overlap between the current and
preceding-year activities. The record here leaves no doubt that the
activity conducted by RAEG in 2014, 2015, and 2016 overlaps
substantially with the “single activity” reflected on RAC’s prior
returns—i.e., the aerospace business as a whole.

                           ii.    Passive Activity Argument

       Mr. Rogerson’s second alternative—that his involvement in the
RAEG product lines was passive even before 2014—faces a factual
problem. There is no question that before 2014 Mr. Rogerson’s
involvement in the aerospace business as a whole was nonpassive.
Similarly, there is no dispute that Mr. Rogerson reported his
involvement in the aerospace business as a whole, including the
activities that became part of RAEG, as nonpassive. In light of Treasury
Regulation § 1.469-5(j)(1), these facts are sufficient to satisfy the five of
ten test with respect to RAEG in 2014, 2015, and 2016.
                                          29

[*29] In an attempt to escape the implications of his prior reporting,
Mr. Rogerson contends that neither he nor RAC ever made an
affirmative decision to group the RAEG product lines with his other
aerospace activities. According to Mr. Rogerson, RAC’s returns made no
effort to indicate whether they reported “one activity or many activities,
grouped or not.” Pet’r’s Simultaneous Answering Br. 34. The
implication seems to be that, if the product lines that became part of
RAEG were not formally grouped with RAC in prior years, then
Mr. Rogerson’s reporting and activity with respect to RAC as a whole
would be irrelevant in applying the five of ten test to the RAEG product
lines in subsequent years. But Mr. Rogerson is incorrect.

       The regulations Mr. Rogerson cites required RAC to perform a
grouping analysis for the years before 2014. See Treas. Reg. § 1.469-
4(d)(5)(i) (“[A]n S corporation . . . must group its activities under the
rules of this section.”). Mr. Rogerson concedes that, before 2014, RAC
reported the consolidated results of the entire aerospace business
without differentiation. 29 This approach indicates that RAC treated the
aerospace business as a single activity (or as multiple activities grouped
into a single activity) for purposes of section 469. Mr. Rogerson concedes
as much, stating: “No position was taken on any RAC return before 2014
reflecting anything other than a single activity.” Pet’r’s Simultaneous
Suppl. Br. 25. And Mr. Rogerson was not free to distinguish between
his various aerospace activities for purposes of section 469 for any year
in which RAC combined them. See Treas. Reg. § 1.469-4(d)(5)(i)
(providing that a shareholder of an S corporation may not treat
activities grouped together by his corporation as separate activities).
Accordingly, RAC’s treatment of the aerospace business as a single
activity before 2014 required Mr. Rogerson to take the same approach.
He did so and determined that his involvement in the overall business
was active. The five of ten test requires nothing more.

        29 Mr. Rogerson cites Hardy v. Commissioner, T.C. Memo. 2017-16, in which

our Court concluded that taxpayers who merely report an S corporation’s activity as
nonpassive do not thereby group that activity with their other nonpassive activity. But
that case considered whether activity reported on a Schedule K-1 had been grouped
with other activity not reported on the Schedule K-1; it did not consider whether
undifferentiated amounts reported on a single Schedule K-1 had been grouped
together. Id. at *15–16. Additionally, Hardy analyzed only the grouping regulations
under Treasury Regulation § 1.469-4 and did not consider the five of ten test.
                                          30

[*30] Having addressed Mr. Rogerson’s involvement with RAEG, we
next turn to the proper characterization under section 469 of
Mr. Rogerson’s yacht activities for 2014, 2015, and 2016.

        C.      Rental Rules and the Yacht Activities

                1.      Rental Activities

       As noted above, rental activities are passive regardless of a
taxpayer’s participation, subject to certain exceptions. See I.R.C.
§ 469(c)(2), (4), (7). 30 A rental activity is “any activity where payments
are principally for the use of tangible property.” I.R.C. § 469(j)(8); see
also Temp. Treas. Reg. § 1.469-1T(e)(3)(i) (stating that an activity is a
rental activity if during the taxable year tangible property held in
connection with the activity is used by customers or held for use by
customers and gross income (or expected gross income) attributable to
the activity represents amounts paid or to be paid principally for the use
of the tangible property).

      Neither of Mr. Rogerson’s yachts (the TOTO and the Falcon Lair)
was chartered during 2014, 2015, or 2016, but the parties agree that
Mr. Rogerson intended to charter the yachts. Accordingly, the yachts
were tangible property held for use by customers, and any income from
the yacht activities would have represented amounts paid principally for
the use of the tangible property. The yacht activities therefore were
rental activities unless an exception applies. 31 See I.R.C. § 469(j)(8);
Temp. Treas. Reg. § 1.469-1T(e)(3)(i).

                2.      Exceptions to Rental Activity

       The regulations provide six exceptions to the definition of “rental
activity,” two of which are relevant to our analysis. Specifically, an
activity involving the use of tangible property is not a rental activity if
for the taxable year—(1) the average period of customer use for the

        See also, e.g., Kessler v. Commissioner, T.C. Memo. 2003-185; Tarakci v.
        30

Commissioner, T.C. Memo. 2000-358; Frank v. Commissioner, T.C. Memo. 1996-177.
         31 The Commissioner argues that, for purposes of analyzing the yacht

activities, the TOTO should be viewed as a separate activity from the Falcon Lair and
that each of the entities through which Mr. Rogerson held and operated the Falcon
Lair (Platinum and Sterling) also should be analyzed separately. By contrast,
Mr. Rogerson argues that all his yacht activities should be treated as a single activity.
Because our conclusion would be the same regardless of how the yacht activities are
grouped, we need not resolve this issue.
                                        31

[*31] property is seven days or less; or (2) the average period of customer
use for such property is 30 days or less, and significant personal services
are provided by or on behalf of the owner of the property in connection
with making the property available for use by customers. Temp. Treas.
Reg. § 1.469-1T(e)(3)(ii)(A) and (B).

       For purposes of these rules, a period of customer use is the period
“during which a customer has a continuous or recurring right to use” the
property. Treas. Reg. § 1.469-1(e)(3)(iii)(D). The average period of
customer use is calculated by dividing the aggregate number of days in
all periods of customer use of the property by the number of periods of
customer use. Id. subdiv. (iii)(C). 32 And finally, to determine whether
services are significant personal services, all of the relevant facts and
circumstances are considered, including the frequency with which the
services are provided, the type and amount of labor required to perform
the services, and the value of the services relative to the amount charged
for the use of the property. Temp. Treas. Reg. § 1.469-1T(e)(3)(iv)(A).

      Mr. Rogerson claims that his yacht activities qualify for both
exceptions. We disagree.

                      a.      Seven Days or Less Exception

       As to the first exception, Mr. Rogerson has not requested any
findings of fact or provided any evidence to allow us to conclude that his
yacht activities involved charters of seven days or less during the years
at issue or any other year. Mr. Rogerson claims that “[n]either TOTO
nor Falcon Lair was available to be ‘rented’ for weeks at a time” and that
“the Yacht Charter Activity was intended to provide short-term use for
day trips and other short-term excursions.” Pet’r’s Simultaneous
Opening Br. 78. But regardless of these plans, no customers chartered
the yachts during 2014, 2015, or 2016. And unlike the affirmative rule
for defining a rental activity, which considers a taxpayer’s intended or
expected use of property, the exceptions to that rule turn on what
actually happened during the taxable year. Compare Temp. Treas. Reg.
§ 1.469-1T(e)(3)(i) (allowing consideration of potential customer use and
expected income in identifying a rental activity), with id. subdiv. (ii)(A)
and (B) (establishing exceptions based on the “average period of
customer use”), and Treas. Reg. § 1.469-1(e)(3)(iii)(C) and (D)

        32 The rules are slightly more nuanced with respect to activities involving

multiple classes of property, but those nuances are irrelevant for purposes of our
analysis. See Treas. Reg. § 1.469-1(e)(3)(iii)(A) and (B).
                                          32

[*32] (calculating the average period of customer use based on actual
customer activity). Without any customer use, it is impossible to
establish (as required by the regulations) the average period of customer
use for the yachts. Accordingly, Mr. Rogerson fails to qualify for the first
exception. 33

                        b.      30-day Exception

       Mr. Rogerson’s argument for the second exception falls short for
the same reason. A claim in Mr. Rogerson’s brief that “[n]o charter
would have been for more than 30 days,” Pet’r’s Simultaneous Opening
Br. 79, is not evidence, and again, the absence of any actual customer
use of the yachts precludes us from determining that the average period
of customer use was 30 days or less. Similarly, the fact that the TOTO
and the Falcon Lair each had crews that conceivably could have
provided services does not establish that significant personal services
were in fact provided to customers. See Temp. Treas. Reg. § 1.469-
1T(e)(3)(ii). Mr. Rogerson has requested no findings of fact nor produced
any evidence about the kinds of services that crew members could or
would provide to customers. And, more to the point, we know that no
services were provided during the years at issue because the yachts were
not chartered.

       Mr. Rogerson has failed to establish that his yacht activities
qualify under the exceptions provided in the temporary regulations. The
activities therefore constituted rental activities and were per se passive
during the years at issue. 34 See I.R.C. § 469(c)(2), (4), (j)(8); Temp. Treas.
Reg. § 1.469-1T(e)(3)(i). 35

        33 We express no view as to the outcome of a case in which the evidence

demonstrates that one or more of the exceptions under Temporary Treasury
Regulation § 1.469-1T(e)(3)(ii) had been met in prior years, but not during the years at
issue. This case does not present such a scenario.
        34Mr. Rogerson’s argument that he materially participated in the yacht
activity would not change this conclusion, because rental activities are considered
passive without regard to the taxpayer’s level of participation. I.R.C. § 469(c)(2), (4).
We therefore need not address it further.
        35 On January 12, 2021, just over two months before the trial of this case was

scheduled to begin in March, the Commissioner filed a Motion for Leave to File an
Amendment to Answer to further allege under section 183 that Mr. Rogerson did not
engage in his yacht activities with an objective of realizing a profit. Mr. Rogerson
objected on the ground that permitting the amendment would prejudice his
preparation for trial. He further argued that the amendment came too late and
                                          33

[*33] III.      Accuracy-Related Penalties

    Lastly we must determine whether the section 6662 penalties the
Commissioner determined in the notice of deficiency properly apply.

       The Commissioner bears the burden of production with respect to
an individual taxpayer’s liability for a penalty and is required to present
sufficient evidence showing that the penalty is appropriate. I.R.C.
§ 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). To meet
this burden for a penalty under section 6662(a), the Commissioner must
show that he complied with the procedural requirements of section
6751(b)(1). See I.R.C. § 7491(c); Frost v. Commissioner, 154 T.C. 23, 34
(2020). Once the Commissioner satisfies his burden of production, the
taxpayer bears the burden of proving that the Commissioner’s penalty
determination is incorrect or that the taxpayer has an affirmative
defense such as reasonable cause. See Rule 142(a); Higbee, 116 T.C.
at 446–47.

       Because we conclude that Mr. Rogerson had reasonable cause and
relied in good faith on his adviser Mr. Chang in connection with the
preparation of the 2014 to 2016 returns, we conclude that the penalties
do not apply.

        A.      Section 6662(a) Penalty

       Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20%
of the portion of an underpayment of tax required to be shown on a
taxpayer’s return that is attributable to “[n]egligence or disregard of

essentially was designed to permit the Commissioner a “do-over” after the period for
discovery had already run. After holding a status conference with the parties, the
Court advised them that it intended to deny the Motion. The Court observed that
permitting amendment would not be in the interest of justice in light of the procedural
posture of the case, the timing of the request after the close of discovery, and the
prejudice to Mr. Rogerson in preparing for trial on the existing issues, while at the
same time being required to prepare for trial a different issue that turned on much
different evidence. The Court also noted that the notice of deficiency specifically
highlighted the issue sought to be challenged in the proposed amendment, while
observing that the Commissioner had decided not to raise the issue in light of a prior
resolution by IRS Appeals. The Court also advised the parties that the Motion would
be formally addressed in any opinion issued in the case. Trial of this case was later
postponed from March to May at the parties’ request. Upon further consideration, for
the reasons noted above, we will deny the Commissioner’s Motion. See Waterman v.
Commissioner, 91 T.C. 344, 349–51 (1988) (leave to amend may be denied upon a
showing of prejudice to the petitioner); Law v. Commissioner, 84 T.C. 985, 990 (1985)
(whether leave will be granted is a question falling within the discretion of the Court).
                                          34

[*34] rules or regulations” and/or a “substantial understatement of
income tax.” Negligence includes “any failure to make a reasonable
attempt to comply with the provisions of this title.” I.R.C. § 6662(c). An
understatement of income tax is a “substantial understatement” if it
exceeds the greater of 10% of the tax required to be shown on the return
or $5,000. I.R.C. § 6662(d)(1)(A). The Commissioner here has asserted
section 6662(a) penalties on the basis of both negligence and substantial
understatement.

        B.      Reasonable Cause and Good Faith

        A taxpayer may avoid a section 6662(a) penalty by showing that
there was reasonable cause for the underpayment and that the taxpayer
acted in good faith. I.R.C. § 6664(c)(1). 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 of the pertinent facts and
circumstances, including the taxpayer’s efforts to assess the proper tax
liability and the taxpayer’s knowledge, experience, and education.
Treas. Reg. § 1.6664-4(b)(1).

       Mr. Rogerson contends, among other things, that he had
reasonable cause for the position he took on his tax returns because he
reasonably relied on Mr. Chang’s advice. 36 Reasonable reliance on
professional advice may constitute reasonable cause and good faith if
the taxpayer proves, by a preponderance of the evidence, that (1) the
adviser was a competent professional with sufficient expertise to justify
reliance, (2) the taxpayer provided necessary and accurate information
to the adviser, and (3) the taxpayer actually relied in good faith on the
adviser’s judgment. See Alt. Health Care Advocates v. Commissioner,
151 T.C. 225, 246 (2018); Neonatology Assocs., P.A. v. Commissioner, 115
T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002); see also Charlotte’s
Office Boutique, Inc. v. Commissioner, 425 F.3d 1203, 1212 n.8 (9th Cir.
2005) (quoting the three-pronged test with approval), aff’g T.C. Memo.
2004-43 and 121 T.C. 89 (2003).

        36 One of Mr. Rogerson’s alternative arguments is that the penalties were not

timely approved under section 6751(b). The U.S. Court of Appeals for the Ninth Circuit
recently considered this question in the context of an assessable penalty under section
6707A, which, as the Ninth Circuit noted, is not subject to the Code’s deficiency
procedures. See Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th
1066, 1071 (9th Cir. 2022), rev’g and remanding 154 T.C. 68 (2020). In light of our
determination that Mr. Rogerson is not liable for the section 6662(a) penalties, we need
not consider the penalty approval issue.
                                   35

[*35]        1.     Competent Tax Adviser

        There is no precise threshold of competence that a tax adviser
must have to justify a taxpayer’s reliance. Rather, our practical test
looks for expertise in the context of the facts of each case. CNT Inv’rs,
LLC v. Commissioner, 144 T.C. 161, 224 (2015); see also 106 Ltd. v.
Commissioner, 136 T.C. 67, 77 (2011) (finding the taxpayer’s longtime
attorney and accounting firm, who “would have appeared competent to
a layman,” and especially so to the taxpayer, had adequate expertise),
aff’d, 684 F.3d 84 (D.C. Cir. 2012); Neonatology Assocs., P.A., 115 T.C.
at 99 (holding that an insurance agent who did not claim to be a tax
professional and had a direct financial interest in the transaction at
issue lacked sufficient expertise to advise on the tax consequences of
complex life insurance transactions).

      Applying this practical test, we find that Mr. Chang was a
competent tax adviser with sufficient expertise to justify reliance. Mr.
Chang was a professionally licensed and experienced tax return
preparer with his own practice. He knew Mr. Rogerson’s personal and
business affairs from his long relationship with Mr. Rogerson and his
companies. There is no indication in the record that Mr. Rogerson had
any reason to doubt Mr. Chang’s competence to provide the advice he
sought.

             2.     Provision of Information

      To meet the second requirement of reasonable reliance, the
taxpayer must provide necessary and accurate information to the
adviser. See Alt. Health Care Advocates, 151 T.C. at 246. Additionally,
the taxpayer cannot “fail[] to disclose a fact that [he] knows, or
reasonably should know, to be relevant to the proper tax treatment of
an item.” Treas. Reg. § 1.6664-4(c)(1)(i). But a taxpayer is not obligated
to share details that a reasonably prudent taxpayer would not know, or
that he neither would know nor reasonably should know are relevant.
CNT Inv’rs, LLC, 144 T.C. at 228.

      We conclude that Mr. Rogerson provided Mr. Chang with
necessary and accurate information during their discussions about Mr.
Rogerson’s activities and the positions taken on Mr. Rogerson’s returns.
Mr. Chang was Mr. Rogerson’s long-time adviser and demonstrated his
familiarity with Mr. Rogerson’s affairs at trial. Additionally, Mr. Chang
and Mr. Rogerson both credibly testified that Mr. Rogerson provided Mr.
Chang with information regarding his level of involvement (generally in
                                          36

[*36] the form of hours estimates) in each of his activities each year for
purposes of applying the passive loss rules. 37 And while ultimately we
resolve this case on grounds unrelated to the number of hours Mr.
Rogerson spent on his various activities during the years at issue, we do
not believe that Mr. Rogerson knew or reasonably should have known
that factors other than his hours were relevant to the treatment of his
activities. See id. Mr. Chang, an experienced tax professional, focused
his analysis and advice on Mr. Rogerson’s activity levels, and Mr.
Rogerson had no reason to question that approach. As the Supreme
Court has said,

              When an accountant or attorney advises a taxpayer
       on a matter of tax law, such as whether a liability exists, it
       is reasonable for the taxpayer to rely on that advice. Most
       taxpayers are not competent to discern error in the
       substantive advice of an accountant or attorney. To require
       the taxpayer to challenge the attorney, to seek a “second
       opinion,” or to try to monitor counsel on the provisions of
       the Code himself would nullify the very purpose of seeking
       the advice of a presumed expert in the first place. See
       Haywood Lumber [& Mining Co. v. Commissioner, 178 F.2d
       769, 771 (2d Cir. 1950), modifying 12 T.C. 735 (1949)].
       “Ordinary business care and prudence” do not demand
       such actions.

United States v. Boyle, 469 U.S. 241, 251 (1985).

               3.      Good Faith Reliance on Advice

       The last requirement is that a taxpayer must have actually
received advice and relied upon it in good faith. Neonatology Assocs.,
P.A., 115 T.C. at 99. Advice is “any communication, including the
opinion of a professional tax advisor, setting forth the analysis or
conclusion of a person, other than the taxpayer, provided to (or for the

        37 The Commissioner argues that Mr. Rogerson’s failure to keep logs of his

hours was negligent, but the Commissioner’s own regulations state that logs are not
required. See Temp. Treas. Reg. § 1.469-5T(f)(4). Moreover, as the extensive
discussion in Opinion Part II demonstrates, we do not resolve this case on the basis of
hours Mr. Rogerson spent on each activity during the years at issue. We further note
that this Court has found that a taxpayer acted with reasonable cause and good faith
when a deficiency is the result of an issue of first impression and the taxpayer’s
position is reasonably debatable. See Williams v. Commissioner, 123 T.C. 144, 153–54
(2004).
                                     37

[*37] benefit of) the taxpayer and on which the taxpayer relies, directly
or indirectly.” Treas. Reg. § 1.6664-4(c)(2).

       Mr. Chang credibly testified at trial that he provided Mr.
Rogerson with advice regarding the proper reporting of his activities
under the passive loss rules for 2014, 2015, and 2016 and that Mr.
Rogerson’s reporting on his personal income tax returns was consistent
with that advice. Mr. Rogerson likewise credibly testified that he
received advice from Mr. Chang regarding the application of the passive
loss rules to his activities and that he followed that advice. We believe
their testimony and conclude that Mr. Rogerson reasonably relied on
Mr. Chang’s advice.

       We note that we find credible Mr. Rogerson’s reliance upon Mr.
Chang’s advice in part because Mr. Chang had been preparing Mr.
Rogerson’s individual returns and the Rogerson companies’ returns for
over a decade. See Schwalbach v. Commissioner, 111 T.C. 215, 230–31
(1998) (finding reasonable reliance where taxpayers consulted their
long-time business and tax adviser, he advised them on what he believed
was the correct reporting position, and they followed his advice). And
Mr. Chang demonstrated his knowledge of the returns and the facts
underlying them at trial. That Mr. Rogerson is a well-educated,
sophisticated businessman does not preclude him from relying on Mr.
Chang, his long-term tax adviser, to advise him regarding technical tax
matters and prepare his returns. See Boyle, 469 U.S. at 251.

       In light of these considerations, taking into account all of the facts
and circumstances, we hold that Mr. Rogerson is not liable for the
section 6662 accuracy-related penalties.

IV.   Conclusion

       For the reasons described above, we conclude that Mr. Rogerson
materially participated in RAEG for the tax years 2014, 2015, and 2016,
with the result that income from that activity must be treated as
nonpassive in each of those years.          We further conclude that
Mr. Rogerson’s yacht activities during the same years were per se
passive as rental activities and therefore that the income associated
with those activities must likewise be passive. Finally, we conclude that
the penalties the Commissioner determined in the notice of deficiency
do not apply.
                                  38

[*38] To reflect the foregoing,

      An appropriate order will be issued, and decision will be entered
under Rule 155.