T.C. Memo. 2018-26
UNITED STATES TAX COURT
FARROKH E. POURMIRZAIE AND MINOO S. POURMIRZAIE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25558-14. Filed March 8, 2018.
Held: Ps' rental real estate activities were passive activities within the meaning of I.R.C. sec. 469, and, therefore, Ps' loss deductions from those activities were limited by I.R.C. sec. 469(i). Ps did not establish that P-W was a real estate professional because we find that she spent only 416 hours during each audit year in real property trade or business activities.
Held, further, I.R.C. sec. 6662(a) accuracy-related penalties sustained.
Framta Saechao and Robert L. Goldstein, for petitioners.
Daniel J. Bryant, for respondent. -2-
[*2] MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: Respondent determined deficiencies in, and accuracy-
related penalties with respect to, petitioners' Federal income tax for their taxable
years 2010, 2011, and 2012 (audit years):
Penalty Audit year Deficiency sec. 6662(a) 2010 $14,299 $2,860 2011 13,139 2,628 2012 15,313 3,063
Unless otherwise stated, all section references are to the Internal Revenue
Code in effect during the audit years and all Rule references are to the Tax Court
Rules of Practice and Procedure. All dollar amounts have been rounded to the
nearest dollar.
At the trial of this case, petitioners conceded all issues other than
(1) respondent's adjustments disallowing a portion of their rental real estate losses
for each of the audit years and (2) the penalties. Respondent made the adjustments
on the grounds that petitioners' rental real estate activities during the audit years
were passive activities within the meaning of section 469 and, therefore, their loss
deductions from those activities were limited by section 469(i). The parties agree -3-
[*3] that the issue that we must decide is whether petitioner wife (Mrs.
Pourmirzaie) was a real estate professional during the audit years. The parties use
the term "real estate professional" to describe an individual (1) more than half of
whose time spent performing personal services in one or more businesses during a
taxable year is spent performing such services in a real property business and (2)
who, during that taxable year, performs more than 750 hours of services in real
property trades or businesses in which she materially participates. See sec.
469(c)(7).
Petitioners bear the burden of proof. See Rule 142(a). Because petitioners
have failed to prove that during any of the audit years Mrs. Pourmirzaie performed
more than 750 hours of services in a real property business, she was not during
any of the audit years a real estate professional, and we will sustain respondent's
adjustments with respect to petitioners' rental real estate losses. We will also
sustain the section 6662(a) penalties.
FINDINGS OF FACT
Petitioners resided in California when they filed the petition. The parties
have stipulated certain facts and the authenticity of certain documents. The facts
stipulated are so found, and documents stipulated are accepted as authentic. -4-
[*4] Petitioners' Returns
For each of the audit years, petitioners made a joint return of income on
Form 1040, U.S. Individual Income Tax Return (collectively, audit-year returns).
On their 2010 and 2011 Forms 1040, petitioners showed no tax due. For 2010,
however, respondent rebated to them $544 on account of a section 36A making-
work-pay credit. On their 2012 return, they showed a tax due of $1,143, and there
was no rebate. On each of the audit-year returns, petitioners reported a substantial
loss from rental real estate properties: $125,501, $112,449, and $73,2971 for
2010, 2011, and 2012, respectively. For all three years, those properties included:
1. a four-unit residential property in San Jose, California (San Jose
property);
2. a single-family condominium in San Diego, California, in which
petitioners owned a partial interest (San Diego property);
3. a single-family residence in Tucson, Arizona (Tucson property);
4. a single-family condominium in Bremerton, Washington (Bremerton
property); and
1 Unaccountably, respondent's notice of deficiency shows a rental real estate loss reported by petitioners for 2012 of only $72,297. We will sustain an adjustment based on that amount. -5-
[*5] 5. a single-family residence in Discovery Bay, California (Discovery Bay
property).
Petitioners' reported rental real estate loss for 2010 included a loss from one
additional property, a "Marriott timeshare", not otherwise identified by petitioners
(Marriott timeshare).
For all of the audit years, petitioners elected pursuant to section
469(c)(7)(A) to treat all interests in rental real estate as a single activity.
San Jose Property
During the audit years, petitioners shared responsibility for management of
the San Jose property. They did not keep an office at the property nor store tools
there. Neither did they keep contemporaneous records of the time they spent at the
property. Mrs. Pourmirzaie testified that they spent 15 to 20 hours a week there.
She could not, however, for any particular visit, recollect when they arrived or
when they departed. The length of any visit, she added, "depend[][ed] on the work
that * * * was there." She testified that they were always there on Saturdays and
Sundays, and, on average, they would be there from 10 a.m. to 5 or 6 p.m. on
Saturdays and from 12 noon to 5 or 6 p.m. on Sundays. On their visits, she
continued, they took care of necessary maintenance tasks, collected rent, if
necessary, and generally ensured that the property was in good order. She testified -6-
[*6] that both she and Mr. Pourmirzaie worked at the property during those visits.
In fact, she added, "he's a workaholic. He loves to work on that property, even
though he has a full-time job." She testified that, during the week, she visited the
property to conduct surveillance because of the poor neighborhood.
San Diego Property
During the audit years, petitioners also shared responsibility for
management of the San Diego property. Mrs. Pourmirzaie could not remember
specifically what types of management activities she performed beyond visiting
the property to prepare it for, and to meet, any new tenant. She could not recall
how many times in 2010 she visited the San Diego property although, when she
did visit the property, she testified: "We like San Diego so when we go there, we
stay longer, you know. I love San Diego."
Tucson Property
Petitioners did not directly manage the Tucson property. Instead, they hired
a property manager, with whom Mrs. Pourmirzaie testified that she communicated
"[m]aybe one or two hours * * * [i]n a year, a month. * * * I don't remember. I
don't recall." -7-
[*7] Bremerton Property
During the audit years, petitioners dealt with the tenants at the Bremerton
property by telephone although Mrs. Pourmirzaie could not recall how long in
2010 she spent on the telephone with a tenant: "Not very long."
Discovery Bay Property
During the audit years, she and her husband managed the Discovery Bay
property. There was one tenant during those years, and she dealt with him
principally by telephone. She testified that she visited the property during 2010
but could not recall how often or how many hours she spent there.
Marriott Timeshare
Petitioners offered no evidence with respect to the Marriott timeshare.
Calendars
The parties have stipulated two calendars, one for 2010 (2010 calendar) and
one for 2011 (2011 calendar). The two calendars purport to show time petitioners
spent at their rental properties during those two years. Petitioners prepared the
two calendars from memory during the course of respondent's examination of their
audit-year returns. The 2010 calendar has entries for every Saturday and Sunday
in 2010 other than Sunday, October 31 (Halloween), and Saturday, December 25
(Christmas Day). The usual, uniform entry for both Saturday and Sunday is, -8-
[*8] without identifying a location (but we assume the San Jose property),
"Weekly Cleaning and Repairing", from 10 a.m. to 6 p.m. on Saturday and from 10
a.m. to 4 p.m. on Sunday. There are occasional entries for time spent in San
Diego. There are twice a month entries for midweek "Security Surveillance",
uniformly from 8 to 10 p.m., and there are assorted other entries on various dates,
such as "Home Depot", "Paperwork and Bill Paying", and "Post Office", some
lacking time entries and some, like "Paperwork and Bill Paying", showing twice
monthly time entries, usually from 7 to 8 p.m. The 2010 calendar does not specify
who, as between Mr. or Mrs. Pourmirzaie, performed the listed tasks.
The 2011 calendar is similar although it does show monthly totals of hours
for each petitioner, totaling, for the whole year, 1,133 hours and 905 hours for Mr.
and Mrs. Pourmirzaie, respectively. The 2011 calendar shows 2 hours of
surveillance from 8 to 10 p.m. on April 27 and 3 hours on paperwork and bill
paying from 7 to 10 p.m. on April 29. Monthly statements for petitioners'
checking account at Wells Fargo Bank for the months of April and May 2011
show check card purchases for food and lodging on April 28 and 29 in London,
England, and at Heathrow airport. There are no domestic purchases shown for
either of those dates. The 2011 calendar shows both petitioners working at an
unspecified property from 10 a.m. until 4 p.m. on August 7. The Wells Fargo -9-
[*9] Bank statement for August 2011 shows food purchases in Dallas, Texas, on
that date. The 2011 calendar shows one or both petitioners working at unspecified
properties for 40 hours on September 9 through 13. The Wells Fargo Bank
statement for September 2011 shows food and other purchases and a cash
withdrawal in Philadelphia, Pennsylvania, on those dates. The 2011 calendar
shows Mrs. Pourmirzaie working at an unspecified property on October 22 and 23.
The Wells Fargo Bank statement for October shows food and other purchases in
New York, New York, Boca Raton, Florida, and Philadelphia, Pennsylvania, on
those dates.
There is no calendar for 2012.
Penalty Approval
Internal Revenue Agent Tuan Nguyen examined petitioners' audit-year
returns and, among other things, proposed the accuracy-related penalties here in
issue. Mr. Nguyen's supervisor was Supervisory Internal Revenue Agent Michael
J. Adams, who approved in writing Mr. Nguyen's determination of those penalties
on the basis of petitioners' underpayment due to a substantial understatement of
income tax for each of the audit years. - 10 -
[*10] OPINION
I. Introduction
We must decide whether for any of the audit years Mrs. Pourmirzaie was a
real estate professional. Since we decide that she was not, we must decide
whether petitioners are liable for the section 6662(a) accuracy-related penalties
determined by respondent. We decide that they are.
II. Section 469
Section 469 generally disallows a deduction for any passive activity loss for
an individual. A passive activity loss is the amount by which aggregate losses
from all passive activities during the taxable year exceed the aggregate income
from all passive activities during the year. Sec. 469(d)(1).
A passive activity is a trade or business in which the taxpayer does not
materially participate. Sec. 469(c)(1). Rental activities are per se passive, even if
a taxpayer materially participates in such activities. Sec. 469(c)(2). An activity is
a rental activity if gross income attributable to the activity is paid principally for
the use of tangible property. See sec. 1.469-1T(e)(3), Temporary Income Tax
Regs., 53 Fed. Reg. 5702 (Feb. 25, 1988).
An exception to the per se passive rule exists for taxpayers who are real
estate professionals. Sec. 469(c)(7). A taxpayer is a real estate professional if - 11 -
[*11] (1) more than one-half of the personal services performed in trades or
businesses by the taxpayer during the taxable year are performed in real property
trades or businesses in which the taxpayer materially participates and (2) the
taxpayer performs more than 750 hours of services during the taxable year in real
property trades or businesses in which the taxpayer materially participates. Sec.
469(c)(7)(B). Where taxpayers file a joint return, either spouse must satisfy the
above requirements separately. Id.
Participation in an activity may be established by any reasonable means.
Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25,
1988). Reasonable means include identification of services performed and the
approximate number of hours spent performing such services based on
appointment books, calendars, or narrative summaries. Id. Contemporaneous logs
or similar documents are not required to the extent participation may be
established by other reasonable means. Id. And while the regulations permit some
flexibility with respect to the evidence required to prove participation, we are not
required to accept postevent "ballpark guesstimates", nor are we bound to accept
the unverified, undocumented testimony of taxpayers. See, e.g., Lum v.
Commissioner, T.C. Memo. 2012-103, 2012 WL 1193182, at *4. - 12 -
[*12] Petitioners propose that, on the basis of daily entries on the 2010 and 2011
calendars, we find that Mrs. Pourmirzaie spent 790 hours and 949 hours during
those years, respectively, at the San Jose property doing, generally, routine
cleaning, repairs, gardening, bill paying, and surveillance. They propose that, on
the basis of her testimony, we find that she spent 15 to 20 hours a week at the San
Jose property carrying out those tasks. They propose that, on the basis of entries
in the 2010 and 2011 calendars, we find that Mrs. Pourmirzaie spent 275 hours
and 178 hours during those years, respectively, at the San Diego property doing,
generally, "remodeling, repairing, and interviewing tenants to rent out the
property." On the basis of Mrs. Pourmirzaie's testimony, petitioners propose that
we find that she "spent one or two hours per month or year" managing the Tucson
property. Petitioners propose no finding with respect to the number of hours that
Mrs. Pourmirzaie spent during any of the audit years managing either the
Bremerton or the Discovery Bay property. They propose that we find that, in
2010, Mrs. Pourmirzaie spent approximately 1,064 hours on her rental activities
and that, in 2011, she spent approximately 1,127 hours on her rental activities.2
2 On brief, petitioners reverse those hourly estimates, proposing that we find that she spent 1,127 hours and 1,064 hours on her rental activities during 2010 and 2011, respectively. The 2010 calendar does not, for numerous dates, specify who, (continued...) - 13 -
[*13] We will make none of the proposed findings of fact that petitioners ask us to
make. We have little confidence that the 2010 and 2011 calendars accurately
reflect the dates and the times that petitioners, and, in particular, Mrs. Pourmirzaie,
spent at either the San Jose or the San Diego property. The calendars were
prepared from memory, after the audit years, during the course of respondent's
examination of the audit-year returns, without benefit of any contemporaneous
time records. The calendars show an exactitude as to the dates and the times
petitioners were at the San Jose and San Diego properties not matched by Mrs.
Pourmirzaie's memory at trial, where she testified that, for any 2010 visit to the
San Jose property, she could not recollect the time they went or returned and the
length of their visit depended on the amount of work to be done. With respect to
the San Diego property, she testified that she could not recall how many times she
visited the property in 2010 or the types of management activities that she
performed. On her visits to San Diego, she added, she stayed longer than was
necessary because "I love San Diego."
Further, the record contains Wells Fargo bank statements that seemingly
contradict petitioners' calendar entries that show one or the other, or both, working
2 (...continued) Mr. or Mrs. Pourmirzaie, performed the described tasks. We accept the switched hours as a mistake and have corrected the totals. - 14 -
[*14] at a property on April 27, August 7, September 9 through 13, and October
22 and 23, 2011, and doing paperwork and paying bills (which, we assume, they
did at home) on April 29, 2011. When Mrs. Pourmirzaie was asked by
respondent's counsel to explain the seeming discrepancy for August 7, 2011, she
answered:
As I mentioned, we just go through our memory, we don't remember exactly, but we do put hours in * * * [the San Jose property]. I mean, it's not like we're working for a company, we [don't] clock in, we [don't] clock out. But we do spend a lot of time in that property.
And I think that time is when we had a--probably wedding. I don't remember.
Nor, independent of the two calendars, can we accept Mrs. Pourmirzaie's
testimony of time she worked at the San Diego and San Jose properties. Mrs.
Pourmirzaie testified that she and her husband shared responsibility for
management of both properties. She was clear that, on weekends, they both
visited the San Jose property for a total of 14 hours each. Her husband, she
testified, was a workaholic. Nevertheless, she proposes that we find that she,
herself, spent 15 to 20 hours a week at the San Jose property carrying out
management tasks. If we add to her suggested totals the 14 hours a week that her
husband was at the San Jose property performing management tasks, then we have - 15 -
[*15] the couple spending 29 to 34 hours a week managing a four-unit residential
apartment building at which they neither kept an office nor stored any tools.
Simply stated, we do not believe it.
Nevertheless, petitioners have convinced us that they owned the rental real
estate properties in question and that, during the audit years, Mrs. Pourmirzaie
spent considerable time managing the properties, including regular visits to the
San Jose property. Petitioners' evidence does not support their proposed findings
of fact that in 2010, Mrs. Pourmirzaie spent approximately 1,064 hours on her
rental real estate activities and that, in 2011, she spent approximately 1,127 hours
on her rental real estate activities. Taking into account the substantial (and, on
many days, equal) time spent by Mr. Pourmirzaie, on management activities, we
find that Mrs. Pourmirzaie spent an average of one day a week, 8 hours, in real
estate trade or businesses activities; i.e., 416 hours during each of the audit years.
Because she does not meet the 750-hour requirement of section 469(c)(7)(B)(ii),
she was not a real estate professional for purposes of section 469(c)(7) during the
audit years. Therefore, we need not address whether Mrs. Pourmirzaie spent more
than 50% of her time in real estate trades or businesses under section
469(c)(7)(B)(i). - 16 -
[*16] III. Accuracy-Related Penalty
Section 6662(a) and (b)(2) provides for an accuracy-related penalty of 20%
of the portion of an underpayment of tax attributable to "[a]ny substantial
understatement of income tax." Section 6662(d)(2)(A) defines the term
"understatement" as the excess of the tax required to be shown on the return over
the amount shown on the return as filed, reduced by any rebate. In the case of an
individual, an understatement of income tax is "substantial" if it exceeds the
greater of 10% of the tax required to be shown on the return or $5,000. Sec.
6662(d)(1)(A). An understatement is reduced, however, by the portion
attributable to the treatment of an item for which the taxpayer had "substantial"
authority. Sec. 6662(d)(2)(B)(i). Section 6664(c)(1) provides an exception to the
imposition of the section 6662(a) accuracy-related penalty if it is shown that there
was reasonable cause for the underpayment and the taxpayer acted in good faith.
The Commissioner bears the burden of production with respect to penalties.
See sec. 7491(c). To carry that burden, he must produce evidence regarding the
appropriateness of imposing the penalty. Higbee v. Commissioner, 116 T.C. 438,
446 (2001). In some circumstances, that includes evidence that the initial
determination of the penalty received written supervisory approval. See sec.
6751(b)(1); Graev v. Commissioner, 149 T.C. __ (Dec. 20, 2017), supplementing - 17 -
[*17] 147 T.C. __ (Nov. 30, 2016). The taxpayer's concessions may be taken into
account in determining whether the Commissioner has met his burden. Oria v.
Commissioner, T.C. Memo. 2007-226, 2007 WL 2318367, at *4. Once the
Commissioner carries his burden of production, the taxpayer bears the burden of
proving that she is entitled to relief because of substantial authority or under
section 6664(c)(1). See Higbee v. Commissioner, 116 T.C. at 446.
The deficiency that respondent determined for each audit year exceeds
$5,000, which is the greater of 10% of the total corrected tax liability shown on
the notice of deficiency for each audit year or $5,000. Thus, for each of the audit
years there was a substantial understatement of income tax. His revenue agent's
initial determination of the penalties received written approval by the revenue
agent's supervisor. Respondent has, therefore, met his burden of production.
Petitioners have shown no substantial authority for any portion of their
understatements of income tax, nor have they proposed that we find any facts that,
if found, would establish that they had reasonable cause and acted in good faith
with respect to any portion of the tax they underpaid. In defense to the section
6662(a) penalty, they rely only on their proving, which they have not, that there is
no deficiency. We will sustain the section 6662(a) penalties on the grounds that, - 18 -
[*18] for each of the audit years, petitioners' underpayment was due to a
substantial understatement of income tax.
Decision will be entered for
respondent.