                              T.C. Memo. 2013-151



                        UNITED STATES TAX COURT



     PATRICK D. MONTGOMERY AND PATRICIA A. MONTGOMERY,
                          Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 25089-10.                        Filed June 17, 2013.



      Patrick D. Montgomery and Patricia A. Montgomery, pro sese.

      Christopher A. Pavilonis, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MORRISON, Judge: The respondent in this case (the IRS) issued a notice

of deficiency to petitioners Patrick D. Montgomery and Patricia A. Montgomery.

In the notice the IRS determined a deficiency of $7,174 for tax year 2005, a

deficiency of $164,612 for 2006, and an addition to tax under section 6651(a)(1)
                                         -2-

[*2] of $3,836.66 for 2006. Some adjustments in the notice of deficiency have

been settled. The issues remaining for decision are:

      (1)    Did Patricia Montgomery materially participate in UDI Underground,

             LLC, in 2007? We hold that she did materially participate.

      (2)    What are the section 1366(d)(1) limits on Patrick and Patricia

             Montgomery’s shares of losses of Utility Design, Inc., for the tax year

             2007? We hold that the limit for Patrick Montgomery is $95,591 and

             the limit for Patricia Montgomery is $1,781.

      (3)    Are the Montgomerys liable for an addition to tax under

             section 6651(a)(1)? We hold that they are liable.

      All section references are to the Internal Revenue Code as in effect in the

years at issue, and all Rule references are to the Tax Court Rules of Practice and

Procedure.

                               FINDINGS OF FACT

      At the time of filing their petition, and at all other relevant times, the

Montgomerys were a married couple residing in Florida.

      Before 2005 the Montgomerys moved from Ohio to Florida to take over the

operations of Utility Design, Inc., from Patrick’s father. During 2007 Utility
                                        -3-

[*3] Design, Inc., was an S corporation in which both Patrick Montgomery and

Patricia Montgomery were shareholders.

      Utility Design, Inc., performed engineering work on telephone-related

infrastructure. Because of conflict-of-interest rules, it could not perform

construction work on the same projects for which it performed engineering work.

Patrick Montgomery decided to form a separate entity to perform construction

work on telephone-related infrastructure. The new entity, UDI Underground LLC,

began operations on April 2, 2007.

      For the 2007 taxable year UDI Underground, LLC, was a limited liability

corporation that was treated as a partnership for federal income tax purposes. It

filed a Form 1065, U.S. Return of Partnership Income. The Form 1065 stated that

the members of UDI Underground, LLC, were:

              Name                   Type of member          Ownership interest
      Zach Durant                 LLC member-manager                10%
      Patricia Montgomery            Other LLC member               40%
      Ander Roth                     Other LLC member               15%
      Charles Roth                   Other LLC member               15%
      Curry Meadows
       Properties, LLC               Other LLC member               20%
                                        -4-

[*4] Consistent with the Form 1065, the IRS contends that Patricia Montgomery

was a 40% member of UDI Underground, LLC, and Patrick Montgomery was not

a member. The Montgomerys’ litigation position regarding their respective

membership interests in UDI Underground, LLC, is unclear. We find that Patricia

Montgomery was a 40% member and Patrick Montgomery was not a member. We

also find that Zach Durant was the member-manager of UDI Underground, LLC,

during 2007.

        Utility Design, Inc., borrowed the following amounts in 2006 and 2007: (1)

$1 million from SunTrust Bank on August 25, 2006, (2) $60,000 from Patrick

Montgomery on September 26, 2007, (3) $30,000 from Patrick Montgomery on

October 5, 2007, and (4) $15,000 from Patrick Montgomery on November 13,

2007. The Montgomerys personally guaranteed the $1 million loan from SunTrust

Bank.

        Patricia Montgomery acted as an office manager for UDI Underground,

LLC, in 2007. Patrick Montgomery managed the company’s operations and

worked to secure a contract with AT&T.

        The Montgomerys filed their 2006 income-tax return on November 2, 2007.

They requested and received an extension of the time to file, so the return was due

on October 15, 2007.
                                        -5-

[*5] Patrick Montgomery and Patricia Montgomery both received Forms W-2,

Wage and Tax Statement, from Utility Design, Inc., for the 2007 tax year. They

reported the Form W-2 amounts on their joint Form 1040, U.S. Individual Income

Tax Return, for 2007. Neither received Forms W-2 from UDI Underground, LLC,

for 2007. They did not report receiving salary or wage income from UDI

Underground, LLC, on their joint federal income-tax return.

      Around December 2008 Utility Design, Inc., defaulted on the $1 million

loan from SunTrust Bank. The Montgomerys thus became liable for that debt

through their personal guarantees of the loan. The Montgomerys defaulted on the

debt, and in November 2009 a judgment was issued against them for $425,169.54.

                                     OPINION

      A net operating loss for a tax year is defined as the excess of a taxpayer’s

deductions for the year over gross income. Sec. 172(c). A net operating loss for a

tax year is carried back to the two tax years preceding the tax year. Sec.

172(b)(1)(A)(i). Net operating loss carrybacks are deductions for the preceding

two tax years. Sec. 172(a). The Montgomerys claim that they had a joint net

operating loss in 2007 and that the loss is carried back to 2005 and 2006. In their

calculation of their joint net operating loss for 2007 they included: (1) losses UDI

Underground, LLC, incurred in 2007 that were allegedly passed through to
                                        -6-

[*6] Patricia Montgomery as a 40% member of UDI Underground, LLC, and (2)

losses Utility Design, Inc., incurred in 2007 that were allegedly passed through to

Patrick Montgomery and Patricia Montgomery, who were both shareholders in

Utility Design, Inc. The IRS challenges the amount of the net operating loss for

2007 on two grounds: (1) that Patricia Montgomery did not materially participate

in UDI Underground, LLC, during 2007, and (2) that portions of Patrick and

Patricia Montgomery’s passthrough losses from Utility Design, Inc., are

disallowed under section 1366(d)(1).

      The taxpayer generally bears the burden of proof unless the conditions in

section 7491(a) are satisfied. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Our holding that Patricia Montgomery materially participated in UDI

Underground, LLC, during 2007, is supported by the preponderance of evidence.

See Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 210 n.16 (1998). Thus,

it is unnecessary to determine which party (i.e., the Montgomerys or the IRS) has

the burden of proof regarding the factual issues underlying the question of whether

Patricia Montgomery materially participated in UDI Underground, LLC, during

2007. The Montgomerys have not convinced us that they met the conditions in

section 7491(a) with respect to any disputed factual issues underlying the amounts
                                        -7-

[*7] disallowed under section 1366(d)(1). Therefore, the Montgomerys have the

burden of proof with respect to all disputed factual issues underlying that issue.

1.    Did Patricia Montgomery materially participate in UDI Underground, LLC,
      in 2007?

      A portion of the Montgomerys’ claimed joint net operating loss for 2007

stems from losses UDI Underground, LLC, incurred that were allegedly passed

through to Patricia Montgomery as a 40% member of UDI Underground, LLC.

The IRS contends that some or all of her share of these losses is disallowed under

section 469(a), which disallows a taxpayer’s passive-activity loss for the year. A

passive-activity loss is equal to the aggregate income from all the taxpayer’s

passive activities minus the aggregate losses from all the taxpayer’s passive

activities. Sec. 469(d)(1). In the IRS’s view, Patricia Montgomery’s activities

with respect to UDI Underground, LLC, are a passive activity within the meaning

of section 469(c)(1). The petitioners contend that Patricia Montgomery’s

activities with respect to UDI Underground, LLC, are not a passive activity.

      A passive activity is defined as any activity which involves the conduct of

any trade or business in which the taxpayer does not materially participate. Sec.

469(c)(1). “Participation” generally means all work done in connection with an

activity by the taxpayer. Sec. 1.469-5(f), Income Tax Regs. An individual
                                          -8-

[*8] taxpayer’s participation in an activity is material if he or she is involved on a

regular, continuous, and substantial basis. Sec. 469(h)(1). An individual taxpayer

is considered to have materially participated in an activity if and only if any one of

seven tests set forth in the regulations is met. Sec. 1.469-5T(a), Temporary

Income Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25, 1988); Garnett v.

Commissioner, 132 T.C. 368, 372 n.10 (2009). We hold that Patricia

Montgomery’s activities with respect to UDI Underground, LLC, meet the first

and seventh tests, which are:1 (1) the individual participates in the activity for

more than 500 hours during such year; and (7) on the basis of all of the facts and

circumstances, the individual’s participation was regular, continuous, and

substantial during such year. Sec. 1.469-5T(a), Temporary Income Tax Regs.,

supra.2

      In determining whether any of the seven tests are satisfied, the participation

of the individual’s spouse is taken into account. Sec. 469(h)(5); see 1.469-


      1
      Since the first and seventh tests are met, it is unnecessary to consider
whether any of the other five tests are met. Furthermore, the Montgomerys do not
contend that any of the other five tests are met.
      2
        Under the seventh test, which is worded similarly to the statute itself, an
individual is treated as materially participating in an activity if “[b]ased on all the
facts and circumstances * * *, the individual participates in the activity on a
regular, continuous, and substantial basis”. Sec. 1.469-5T(a)(7), Temporary
Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).
                                         -9-

[*9] 5T(f)(3), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).

Therefore, Patrick Montgomery’s participation in UDI Underground, LLC, is

counted in determining whether Patricia Montgomery materially participated.

      Section 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727

(Feb. 25, 1988), sets forth rules for the type of proof to be considered in

determining the extent of an individual’s participation in an activity. It states:

      The extent of an individual’s participation in an activity may be
      established by any reasonable means. Contemporaneous daily time
      reports, logs, or similar documents are not required if the extent of
      such participation may be established by other reasonable means.
      Reasonable means for purposes of this paragraph may include but are
      not limited to the identification of services performed over a period of
      time and the approximate number of hours spent performing such
      services during such period, based on appointment books, calendars,
      or narrative summaries.

      For 2007 the Montgomerys credibly testified that Patricia Montgomery

handled all of the office functions, managed payroll, prepared documents, met

with members of the company and attended business meetings. Additionally,

Patrick Montgomery credibly testified that Patricia Montgomery worked on

company matters daily and discussed the company’s business with him daily.

      Patrick Montgomery started the company in 2007 and brought in other

individuals as investors. He secured a contract with AT&T. He handled various
                                       - 10 -

[*10] operational aspects of the business including arranging the construction

work, buying equipment, and hiring and firing employees.

      Both Patricia Montgomery and Patrick Montgomery were integral in the

process of setting up and establishing UDI Underground, LLC. The company

began in April 2007 with no employees. The Montgomerys hired 250 employees

on behalf of UDI Underground, LLC, by the end of 2007. Although the

Montgomerys performed some services for Utility Design, Inc., during 2007, this

older company already had established its business operations. The Montgomerys

spent more of their work time on UDI Underground, LLC, than on Utility Design,

Inc. They did not hold any jobs outside the two companies. They credibly

testified that they worked thousands of hours for UDI Underground, LLC, during

2007. We find that the Montgomerys participated in UDI Underground, LLC, for

more than 500 hours during 2007. On the basis of all the facts and circumstances

we also find that the Montgomerys participated in UDI Underground, LLC, on a

regular, continuous, and substantial basis during 2007.

      The IRS argues that the types of proof the Montgomerys presented do not

satisfy section 1.469-5T(f)(4), Temporary Income Tax Regs., supra. The

Montgomerys readily admit that they did not maintain reports or logs of their

hours. However, under the regulation, “daily time reports, logs, or similar
                                       - 11 -

[*11] documents are not required if * * * participation may be established by other

reasonable means.” Id. The Montgomerys provided details of the nature of the

activities they conducted in starting and managing UDI Underground, LLC. The

tasks they described included founding the company, negotiating contracts with

AT&T, hiring 250 employees, and conducting daily business. They credibly

testified they worked on the business “day in and day out.” They were credible

witnesses and were forthcoming with information about their activities regarding

UDI Underground, LLC. We find that the proof the Montgomerys provided meets

the requirements of section 1.469-5T(f)(4), Temporary Income Tax Regs., supra.

      We hold that Patricia Montgomery materially participated in the activities of

UDI Underground, LLC, during 2007.

2.    What are the section 1366(d)(1) limits on the amounts of losses taken into
      account with respect to Patrick Montgomery’s and Patricia Montgomery’s
      shares of the S Corporation Utility Design, Inc.?

      A portion of the Montgomerys’ claimed joint net operating loss for 2007

stems from losses Utility Design, Inc., incurred for its 2007 tax year and that were

allegedly passed through to Patrick Montgomery and Patricia Montgomery as

shareholders of Utility Design, Inc., for their 2007 tax year. The parties dispute

the amounts by which the losses are limited by section 1366(d)(1).
                                        - 12 -

[*12] Section 1366(a) requires S corporation shareholders, when calculating their

taxable income for the year, to take into account their pro rata share of the S

corporation’s items of income, loss, deduction, or credit for the S corporation’s tax

year that ends in the tax year of the shareholder. Sec. 1.1366-1(a), Income Tax

Regs. However, the S corporation’s loss taken into account by a shareholder

cannot exceed the amount calculated under section 1366(d)(1) for the shareholder

for the tax year of the corporation.

      The 2007 tax year of Utility Design, Inc., ended on December 31, 2007.

The 2007 tax year of the Montgomerys also ended on December 31, 2007.

Therefore, Utility Design, Inc.’s losses for 2007 pass through to the Montgomerys

for their 2007 tax year. However, Patrick and Patricia Montgomery each has a

section 1366(d)(1) limitation for the respective losses passed through from Utility

Design, Inc.,’s 2007 tax year.

      The section 1366(d)(1) limitation is equal to the shareholder’s adjusted

basis of stock at the end of the corporation’s tax year of the loss, plus the

shareholder’s adjusted basis of any debt of the S corporation to the shareholder at

the end of the corporation’s year of the loss. Sec. 1366(d)(1)(A) and (B); see secs.

1.1366-2(a)(3), 1.1367-1(d)(1), 1.1367-2(d), Income Tax Regs.
                                         - 13 -

[*13] Thus, the section 1366(d)(1) limitation has two components: (1) a stock

portion, i.e., the shareholder’s adjusted basis of stock of the S corporation at the

end of the year of loss, and (2) a debt portion, i.e., the shareholder’s adjusted basis

of debt of the S corporation to the shareholder at the end of the year of loss. See

sec. 1.1366-2(a), Income Tax Regs.

      Like the adjusted basis of any property, the adjusted bases of stock and debt

of an S corporation are determined under general rules set forth under section

1011. See sec. 1.1367-1(a)(2), Income Tax Regs. (besides adjustments to basis

required by section 1367, other adjustments to basis of stock are determined under

other applicable provisions of the Internal Revenue Code).3 The adjusted basis of

      3
       Sec. 1.1367-1(a)(2), Income Tax Regs., discusses adjustments to basis of S
corporation stock, not debt. Sec. 1.1367-2, Income Tax Regs., its counterpart for
S corporation debt, makes no explicit statement that basis rules from other parts of
the Code apply to S corporation debt as sec. 1.1367-1(a)(2), Income Tax Regs.,
does for stock. However, a leading treatise opines that the general basis rules
govern debt of S corporations to their shareholders:

      The Code contains many rules that may affect the basis of stock or
      debt in the hands of a shareholder. In general, those rules may apply
      to the stock or debt of an S corporation.20
             20
             Treas. Reg. § 1.1367-1(a)(2) provides that other rules in the
      Code may affect the basis of an S corporation’s stock. Treas. Reg. §
      1.1367-2 does not make the same statement regarding an S
      corporation’s debt, but the same principle should apply.

                                                                         (continued...)
                                        - 14 -

[*14] property is equal to its initial basis supplemented with adjustments. Sec.

1011(a). The initial basis of property generally is the cost of the property. Sec.

1012(a); sec. 1.1012-1(a), Income Tax Regs. The initial basis of stock generally is

the cost of the stock. Estate of Leavitt v. Commissioner, 90 T.C. 206, 212 (1988),

aff’d, 875 F.2d 420 (4th Cir. 1989). The initial basis of debt is the cost of the debt

to the lender; i.e., the amount of principal advanced by the lender. See Tigers Eye

Trading, LLC v. Commissioner, 138 T.C. 67, 122 (2011) (“[A] shareholder in an S

corporation has a separate tax basis in loans the shareholder makes to the S

corporation equal to the amount of the loans.” (Emphasis added.)); see also

Deborah H. Schenk, Federal Taxation of S Corporations, sec. 7.06[3] (2013)

(LEXIS) (“The shareholder’s basis in corporate debt ordinarily is the amount of

money loaned to the corporation.”).

      In addition to the general rules for determining basis (i.e., those found in

section 1011), there are special rules that require annual adjustments to the

      3
          (...continued)

      *             *         *          *           *           *          *
               30
             A corporate debt obligation should be “property” for the
      purposes of IRC § 1012.

James S. Eustice & Joel D. Kuntz, Federal Income Taxation of S Corporations,
par. 9.02 & n.20, 9.02[1][b] n.30 (4th ed. 2001).
                                        - 15 -

[*15] shareholder’s adjusted basis of stock of an S corporation and to the

shareholder’s adjusted basis of debt of the S corporation to the shareholder. These

rules are found in section 1367(a) and 1367(b)(2), respectively. See also secs.

1.1367-1(a)(1), (b), (c), 1.1367-2, Income Tax Regs. According to regulations, the

adjustments are “determined as of the close of the corporation’s taxable year, and

the adjustments generally are effective as of that date.” Secs. 1.1367-1(d)(1)

(stock), 1.1367-2(d)(1) (debt), Income Tax Regs. For the purposes of calculating

the components of the section 1366(d)(1) limitation for a particular year, only

certain of the special adjustments for the year are taken into account. These are set

forth in section 1366(d)(1). See also sec. 1.1366-2(a)(3)(I) and (ii), Income Tax

Regs.

        The first component of the section 1366(d)(1) limitation for Utility Design,

Inc.’s 2007 year, i.e., the stock component, is equal to:

        •     the adjusted basis of the stock at the beginning of 2007,

        •     supplemented by the general basis adjustments during 2007,

        •     and then adjusted by the appropriate special adjustments for 2007.

The second component of the section 1366(d)(1) limitation for Utility Design,

Inc.’s 2007 year, i.e., the debt component, is equal to:

        •     the adjusted basis of debt at the beginning of 2007 year,
                                       - 16 -

[*16] •     supplemented by the general basis adjustments during 2007,

      •      and then adjusted by the appropriate special adjustments for 2007.

      In determining the section 1366(d)(1) limitation amounts, we begin with the

adjusted bases of stock and debt at the beginning of Utility Design, Inc.’s 2007

year. The IRS contends that the adjusted bases of stock and debt were zero for

Patrick Montgomery and zero for Patricia Montgomery. The Montgomerys

contend that the adjusted bases were $424 for Patrick Montgomery and $200 for

Patricia Montgomery. The Montgomerys have adduced no evidence to support

their claim that the bases were $424 and $200 at the beginning of 2007. They cite

“IRS Work paper #: 504-1.2” to support their claim. They assert in their brief that

this workpaper substantiates the following propositions: “Patrick Montgomery’s

basis in his UDI [an abbreviation for Utility Design, Inc.] stock was $800 as of 1-

1-07. If this is allocated between Patrick and Patricia, he would get 53%, or $424,

and Patricia would get 25%, or $200.”4 But the workpaper is not in the record.

Therefore, we cannot rely on it. The Montgomerys also claim that their 2007

amended return (and the Schedule E, Supplemental Income and Loss, attached to

      4
        The Montgomerys assert that “IRS Work paper #:504-1.2” states that
Patrick Montgomery owned 53% of the shares of Utility Design, Inc., and Patricia
Montgomery owned 25% of the shares. However, it is unclear why, if Patrick
Montgomery’s basis alone was $800, the Montgomerys would want to take further
steps to allocate that basis between them.
                                        - 17 -

[*17] it) support their beginning-of-the-year adjusted basis figures of $424 and

$200. They do not explain how the return supports their contention, and nothing

on the return appears to show either a total basis of $800 in Utility Design, Inc.’s

stock on January 1, 2007, or bases of $424 and $200 in Patrick and Patricia

Mongtomery’s respective shares. Therefore, we hold that the adjusted bases of

stock and debt were zero for both Patrick Montgomery and Patricia Montgomery

at the beginning of 2007.

      We now consider the effect of year-of-loss special adjustments on bases of

stock and debt. Neither party contends that any special adjustments for 2007

should be made. We conclude that no special adjustments for 2007 should be

made to the adjusted basis of the stock or debt components.

      We now consider the effect of general basis adjustments to stock and debt

for events occurring in 2007. In its brief the IRS contends that the general basis

adjustments to stock and debt result in an end-of-year limitation for both stock and

debt of $95,591. (These adjustments include increases of $105,000 in Patrick

Montgomery’s limitation amount for loans he made to Utility Design, Inc., in

2007, i.e., the September 26, 2007 loan of $60,000, the October 5, 2007 loan of

$30,000, and the November 13, 2007 loan of $15,000.) The Montgomerys do not

challenge these general 2007 basis adjustments except that they assert that Patrick
                                        - 18 -

[*18] Montgomery’s adjusted basis in debt of Utility Design, Inc., to him should

be increased by $425,169,54 to reflect that in 2009 a judgment was imposed on the

Montgomerys as a result of their guarantee of the $1 million loan SunTrust Bank

made to Utility Design, Inc., in 2006.5 Thus, the only remaining issue to resolve

regarding the section 1366(d) limit is to determine the effect of this judgment on

the basis of debt owed by Utility Design, Inc., to Patrick Montgomery.

      When an S corporation shareholder guarantees a loan by a bank to the S

corporation, no debt has been created between the S corporation and the

shareholder. See Underwood v. Commissioner, 63 T.C. 468, 475-476 (1975),

aff’d, 535 F.2d 309, 311-312 (5th Cir. 1976); Perry v. Commissioner, 47 T.C. 159,

163 (1966), aff’d, 392 F.2d 458 (8th Cir. 1968). However, once the S corporation

shareholder pays the bank pursuant to a guarantee, the S corporation becomes

indebted to the shareholder. As we held in Underwood v. Commissioner, 63 T.C.

at 476, “it is the payment by the guarantor of the guaranteed obligation that gives

rise to indebtedness on the part of the debtor to the guarantor. The mere fact that

the debtor defaults and thereby renders the guarantor liable is not sufficient.”

Patrick Montgomery did not make any payments on the SunTrust Bank loan

      5
      The judgment was against both Montgomerys. It is unclear why they
contend Patrick Montgomery’s basis in debt should be increased but Patricia
Montgomery’s basis in debt should not.
                                         - 19 -

[*19] during 2007. Therefore his guarantee of the SunTrust Bank loan did not

give rise to a debt to him from Utility Design, Inc., during 2007.6

      In conclusion, we hold that the basis limitation for Patrick Montgomery’s

share of Utility Design, Inc., was $95,591 for 2007. Patricia Montgomery’s

limitation was $1,781.

3.    Are the Montgomerys Liable For an Addition to Tax Under Section
      6651(a)(1)?

      Section 6651(a)(1) imposes an addition to tax of 5% of the “amount

required to be shown as tax on * * * [a] return” for failure to file if “the failure is

for not more than 1 month”. The addition to tax is imposed unless a taxpayer has

      6
        The Montgomerys rely on Gilday v. Commissioner, T.C. Memo. 1982-242,
1982 Tax Ct. Memo LEXIS 512. In Gilday, shareholders of an S corporation that
owed a debt to a bank gave the bank a personal note for the amount of the S
corporation’s debt. In exchange, the bank canceled the debt of the S corporation.
The shareholders thus “moved from positions as guarantors of corporate debt to
positions as primary obligors.” Id., 1982 Tax Ct. Memo LEXIS 512, at *6.
Patrick Montgomery did not move to the position as primary obligor in 2007.
       We also note for the sake of completeness that the U.S. Court of Appeals for
the Eleventh Circuit, the court to which this case could be appealed, held in Selfe
v. United States, 778 F.2d 769 (11th Cir. 1985), that there is an exception to the
rule that guaranteeing a debt of an S corporation is insufficient to increase basis.
The Montgomerys do not attempt to rely on Selfe, and the record does not
demonstrate that the loan from SunTrust Bank falls within this limited exception.
Unlike the Montgomerys, the taxpayer in Selfe had undertaken a loan personally
which was then assumed by an S corporation (with the taxpayer guaranteeing the
loan). Testimony from a bank officer showed that the bank still “look[ed]
[primarily] to the shareholder as the primary obligor.” Id. at 774. No such
evidence from the lender is in the record before us.
                                       - 20 -

[*20] reasonable cause for filing late. Id. Taxpayers bear the burden of proving

“reasonable cause” under section 6651(a). See Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001). The Montgomerys filed their income tax return on

November 2, 2007. They had filed for an extension of the due date; their tax

return was due on October 15, 2007. Because the Montgomerys filed their return

late and do not claim that they had reasonable cause for doing so, we hold that

they are responsible for a 5% addition to tax for the 2006 tax year.

      We have considered all of the arguments the parties have made, and to the

extent that we have not discussed them, we find them to be irrelevant, moot, or

without merit.

      To reflect the foregoing,


                                                     Decision will be entered

                                                under Rule 155.
