                        T.C. Memo. 2012-19



                      UNITED STATES TAX COURT



         ALFRED A. AND BRENDA C. IVERSEN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5300-10.               Filed January 18, 2012.



     Thomas Edward Brever, for petitioners.

     John P. Healy, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies in

petitioners’ 2005 and 2006 joint Federal income taxes of $103,848

and $70,356, respectively, and accuracy-related penalties under

section 6662.1


     1
      All section references are to the Internal Revenue Code in
                                                   (continued...)
                                - 2 -

     The issues for decision are whether petitioners’

involvement in a Colorado cattle ranch constituted a passive

activity under section 469 and, if so, whether the accuracy-

related penalties should be sustained.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

At the time of filing the petition, petitioners resided in

Minnesota.

     Petitioner Alfred Iversen (Mr. Iversen), as a teenager,

spent summers on his grandparents’ 400-acre farm and ranch near

Thief River Falls, Minnesota.

     Mr. Iversen served in the U.S. Navy on antisubmarine warfare

planes.   After military service, he earned his master’s degree in

mechanical engineering from the University of Minnesota.

     In 1979 Mr. Iversen founded PMT Corp. (PMT), which over the

years has become a large and successful manufacturer and

worldwide seller of surgical and medical equipment.   PMT sells

its medical equipment throughout the United States and in more

than 30 foreign countries.   PMT is a Minnesota corporation.

Petitioners own a controlling interest in the stock of PMT.




     1
      (...continued)
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
                                - 3 -

     In both 2005 and 2006, as president of PMT Mr. Iversen

worked more than 40 hours a week, and he received from PMT a

total of approximately $6 million in salary and other income.

     In 1998 petitioners formed Stirrup Ranch, LLC (Stirrup

Ranch), as a limited liability company through which they

purchased a 14,000-acre cattle and horse ranch (ranch) in Fremont

County, Colorado, near Canon City, Colorado.    Petitioners owned

100 percent of Stirrup Ranch.

     The ranch is in the Colorado Rockies at an altitude of

approximately 9,000 feet.    The primary activity conducted by

Stirrup Ranch is the commercial raising and selling of Black

Angus and Hereford cattle.    In addition to owning the ranch,

Stirrup Ranch leases another 28,000 acres from the Bureau of Land

Management.   The total of the owned and leased acreage on which

Stirrup Ranch grazes its cattle consists of 42,000 acres.

     During 2005 and 2006 Stirrup Ranch owned approximately 300

head of cattle and 30 horses.

     The main ranch house on the Stirrup Ranch property is a

20,000-square-foot lodge with a log exterior and wraparound

decks.   The house has a large great room with vaulted ceilings, a

floor to ceiling fireplace, and leather couches and chairs.      The

house also includes meeting rooms, office space, a conference

room, a recreation room, and a number of bedrooms and bathrooms.
                               - 4 -

     In 2005 and 2006 Stirrup Ranch employed full time on its

property in Colorado two individuals--a ranch manager and a ranch

hand.   Over the course of 2005 and 2006 Stirrup Ranch employed

three different ranch managers.   Seasonally, Stirrup Ranch

employed onsite at the ranch additional ranch hands.   The Stirrup

Ranch ranch manager lives on the ranch property in a house

separate from the lodge.

     A job description for the onsite Stirrup Ranch ranch

manager, written by one of the ranch managers (and which the

parties stipulate is a “description of the ranch manager’s

general duties during 2005 and 2006”) states as follows:

     The ranch manager is responsible for all ranching
     operations on the 42,000 total acres of the Stirrup
     Ranch. This includes but is not limited to 5 major
     categories: livestock management; natural resource
     management; maintenance and improvement projects;
     employee and subcontractor supervision; and working
     with government agencies (BLM, State Land board and US
     Forest Service) on our leased lands.

     A few of the ranch goals that [the ranch manager is]
     continually working toward are: maximizing hay meadow
     production; water development; and increasing stocking
     rate. Besides the year-round Stirrup Ranch head of
     cattle [the ranch manager] also custom graze[s] other
     peoples’ cattle to increase seasonal pasture
     utilization and cash flow. [The ranch manager’s]
     responsibilities require * * * at least 60 hrs/week.

     During 2005 and 2006 petitioners spent almost all of their

time in Minnesota--Mr. Iversen performing his executive

responsibilities as president of PMT.
                                - 5 -

     While in Minnesota Mr. Iversen also would make and receive

telephone calls and send and receive emails and faxes relating to

Stirrup Ranch matters.    In evidence for 2005 are telephone

records which indicate that Mr. Iversen made telephone calls

lasting a total of 3.75 hours to locations in Colorado using

PMT’s telephones.    No telephone records were offered into

evidence relating to 2006, and no telephone records were offered

into evidence relating to petitioners’ home and mobile phones for

either 2005 or 2006.

     In evidence for 2005 are four emails or faxes relating to

Stirrup Ranch sent to Mr. Iversen from employees working at the

ranch in Colorado.    For 2006 there are in evidence three emails

or faxes to Mr. Iversen relating to Stirrup Ranch sent from

employees working at the ranch in Colorado.

     During 2005 and 2006 the onsite Stirrup Ranch ranch manager

did not have general check signing authority for Stirrup Ranch;

rather, Mr. Iversen retained for himself Stirrup Ranch check

signing authority.    Occasionally, Mr. Iversen would grant a power

of attorney authorizing the ranch manager to sign Stirrup Ranch

checks.   The canceled checks of Stirrup Ranch that are in

evidence for 2005 indicate that many of the checks signed by Mr.

Iversen were routine salary checks for the ranch manager and the

ranch hand.   For 2006 no record of Stirrup Ranch checks is in

evidence.
                                 - 6 -

     During 2005 and 2006, on each occasion when he traveled from

Minnesota to Colorado to visit the ranch, Mr. Iversen did so on a

private NetJets airplane paid for by PMT.2   These flights

originated from the Minneapolis-St. Paul airport and terminated

at the Pueblo, Colorado, airport.

     According to a NetJets airplane flight tracking record in

evidence, during 2005 Mr. Iversen made 11 trips to the ranch, and

(not counting outbound travel days from Minneapolis to Pueblo,

Colorado, because of his late arrival) he spent a total of 23

days onsite in Colorado at the ranch.    On 19 of those days one or

more of petitioners’ children accompanied Mr. Iversen to the

ranch on the NetJets airplane.

     According to a handwritten list petitioners prepared for

trial, during 2006 Mr. Iversen made 11 trips to the ranch and

spent 19 days onsite at the ranch (again not counting outbound

travel days).3   The evidence does not indicate who traveled with

Mr. Iversen to the ranch in 2006.


     2
      In August 2006 on one trip to the ranch petitioners drove a
truck.
     3
      For 2006 no airplane flight tracking record regarding Mr.
Iversen’s airplane trips to the ranch was provided to respondent,
and none was offered into evidence. However, the handwritten
list of Mr. Iversen’s 2006 flights to the ranch was prepared by
petitioners and conditionally admitted into evidence. After
trial petitioners apparently provided to respondent a flight
record of Mr. Iversen’s flights to the ranch in 2006. Respondent
points to a number of minor discrepancies between the handwritten
list and the 2006 flight record provided after trial and objects
to admission of the handwritten list on grounds of hearsay and
lack of foundation. The discrepancies appear to be minor, and we
overrule respondent’s objection to Exhibit 13.
                               - 7 -

     Occasionally in 2005 and 2006 Mr. Iversen hosted at the

ranch PMT employees, sales representatives, clients, and

potential clients.   The PMT guests at the ranch would have

meetings relating to PMT business, and they would hunt elk and

other wildlife.   The guests would stay overnight in the ranch

lodge.

     Mr. Iversen would participate in the PMT meetings conducted

at the ranch, and he occasionally would hunt on the ranch with

PMT employees, other guests, and family members.

     While at the ranch, Mr. Iversen also would assist the ranch

manager and ranch hand with various ranch chores-–mending fences;

rounding up cattle; branding, inoculating, and castrating cattle;

and cleaning the barn.

     Documents in evidence relating to Stirrup Ranch’s leases of

Federal grazing land designate Mr. Iversen as “permittee/

licensee” and the onsite Stirrup Ranch ranch manager as “ranch

manager”.

     For her part, while at the ranch in 2005 and 2006 Mrs.

Iversen participated in some activities relating to the family,

the cattle, and the horses.

     While visiting the ranch in 2005 and 2006, other Iversen

family members occasionally would assist with ranch chores.

     Neither Mr. Iversen nor Mrs. Iversen maintained a log, a

diary, notes, or other record of the work they performed on a
                               - 8 -

day-to-day basis relating to Stirrup Ranch--whether performed

onsite at the ranch in Colorado or in Minnesota.

     In 2005 and 2006 neither petitioner received any salary or

wages for work relating to Stirrup Ranch.

     Petitioners’ 2005 and 2006 joint Federal income tax returns

were prepared and filed on their behalf by Martin Nergaard, who

is an attorney, a certified public accountant, the director of a

regional accounting firm, and a former Internal Revenue Service

employee.   Mr. Nergaard concluded that under the passive loss

rules of section 469 Mr. Iversen in 2005 and 2006 materially

participated in the activities of Stirrup Ranch, and Mr. Nergaard

prepared petitioners’ 2005 and 2006 joint Federal income tax

returns accordingly, claiming loss deductions for Stirrup Ranch

of $288,066 for 2005 and $197,077 for 2006.

     On audit respondent concluded that Mr. Iversen did not

materially participate in the activities of Stirrup Ranch,

disallowed the loss deductions claimed relating to Stirrup Ranch,

and determined the $103,848 and $70,356 deficiencies in

petitioners’ respective 2005 and 2006 Federal income taxes and

the section 6662 accuracy-related penalties.

                              OPINION

     For purposes of the limitation under section 469 on losses

from passive activities, material participation is defined as
                               - 9 -

involvement in an activity on a regular, continuous, and

substantial basis.   Sec. 469(h)(1)(A)-(C).

     Activity performed in an individual’s capacity as an

investor does not qualify as participation in an activity, unless

the individual is directly involved in the day-to-day management

of the activity.   Sec. 1.469-5T(f)(2)(ii)(A) and (B), Temporary

Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).    Investor-

related activities not qualifying as material participation

include:   (1) Studying and reviewing financial statements or

reports on operations; (2) preparing or compiling summaries or

analysis of the finances or operations of the activity for the

individual’s own use; and (3) monitoring the finances or

operations of the activity in a nonmanagerial capacity.       Id.

     Participation in an activity may be shown by any reasonable

means, including calendars, appointment books, or narrative

summaries identifying work performed and the approximate number

of hours spent performing the work.    Sec. 1.469-5T(f)(4),

Temporary Income Tax Regs., supra.

     Contemporaneous daily time reports, logs, or similar

documents are not required if other reasonable means exist of

establishing a taxpayer’s participation.      Id.

     Under the 500-hour test of subparagraph (1) and under the

facts and circumstances test of subparagraph (7) of section

1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb.
                               - 10 -

25, 1988), petitioners contend that in 2005 and 2006 they

materially participated in the management and activities of

Stirrup Ranch on a regular, continuous, and substantial basis.4

     Respondent emphasizes that under section 1.469-

5T(b)(2)(ii)(A) and (B), Temporary Income Tax Regs., 53 Fed. Reg.

5726 (Feb. 25, 1988), a taxpayer’s management activities under

the facts and circumstances test shall not be taken into account

if another person also receives compensation for management

services relating to the activity or if another person performs

more management services (by time) relating to the activity than

the taxpayer.

     Petitioners claim that in spite of the fact that a ranch

manager was employed onsite at the ranch, Mr. Iversen was the

real day-to-day ranch manager and he made essentially all of the

significant decisions relating to the operation, activities, and

management of Stirrup Ranch.

     Petitioners claim that when he was at the ranch Mr. Iversen

worked from dawn to dusk on Stirrup Ranch matters and that when

he was in Minnesota (in order to keep up on the details of all



     4
      Petitioners acknowledge that they do not meet the tests
relating to regular, continuous, and substantial participation
set forth in subpars. (2) and (3) of sec. 1.469-5T(a), Temporary
Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), and no
evidence indicates that petitioners meet the tests set forth in
subpars. (4), (5), and (6) of sec. 1.469-5T(a), Temporary Income
Tax Regs., supra.
                               - 11 -

significant aspects of Stirrup Ranch and make practically all

decisions relating to the operation, activities, and management

of Stirrup Ranch) Mr. Iversen spent 2 to 3 hours a day on

telephone calls, emails, and fax communications with the onsite

Stirrup Ranch ranch manager.

     Petitioners claim that in each of 2005 and 2006, whether at

the ranch in Colorado or from petitioners’ home in Minnesota, Mr.

Iversen spent a total of at least 400 hours working on matters

relating to Stirrup Ranch, Mrs. Iversen spent at least another

100 to 150 hours working on matters relating to the horses at the

ranch, and that they together meet the 500-hour test of section

1.469-5T(a)(1), Temporary Income Tax Regs., supra.5

     Mr. Iversen describes his involvement with Stirrup Ranch

activities as follows:

     [The onsite Stirrup Ranch ranch manager and ranch hand]
     do nothing without telling me, and they cannot buy
     anything, negotiate anything, kill anything, shoot
     anything, and I lay down the rules as far as what
     they’re supposed to do.

     Our analysis of the time and activity petitioners spent in

2005 and 2006 working on matters relating to Stirrup Ranch is

made difficult by the lack of meaningful contemporaneous or other



     5
      Under subpar. (3) of sec. 1.469-5T(f), Temporary Income Tax
Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), Mrs. Iversen’s
participation in the activities of Stirrup Ranch count under both
the 500-hour and the facts and circumstances tests of sec. 1.469-
5T(a)(1) and (7), Temporary Income Tax Regs., 53 Fed. Reg. 5725,
5726 (Feb. 25, 1988).
                              - 12 -

records and documentation regarding specifically what petitioners

did on a day-to-day basis and how much time they spent on matters

relating to Stirrup Ranch.   In this case, the lack of records and

documentation are not cured by estimates made years after the

fact in writing or by testimony.   See Goshorn v. Commissioner,

T.C. Memo. 1993-578.

     Petitioners acknowledge that some portion of their time

while at the ranch in Colorado (when PMT employees and clients

and petitioners’ family were present) was spent on activities

relating to PMT and the family, not on Stirrup Ranch’s cattle and

horse activities.

     While he was in Minnesota Mr. Iversen clearly was busy with

his responsibilities as president of PMT, and the documented

record in this case is particularly thin as to how much time Mr.

Iversen spent on Stirrup Ranch matters--whether in Minnesota or

Colorado.

     The fact that the airplane flights from Minnesota to the

ranch were paid for by PMT indicates to us that Mr. Iversen’s

time spent at the ranch often and primarily related to the

affairs of PMT, not to the management and activities of Stirrup

Ranch.

     The airplane logs in evidence for 2005 indicate that during

4 months of 2005, Mr. Iversen made no trips to the ranch and that

he was at the ranch for 1 day in each of April, June, September,
                               - 13 -

and October 2005.    According to the airplane flight logs, on each

trip to Stirrup Ranch in 2005 on which Mr. Iversen stayed at the

ranch more than 1 day, an Iversen family member went along.

     The evidence does not indicate those occasions when Mr.

Iversen was at the ranch without PMT employees and/or clients

also being present.

     Telephone records that are in evidence do not support

petitioners’ claim that Mr. Iversen spent frequent and numerous

hours on the phone while in Minnesota talking to the Stirrup

Ranch ranch manager in Colorado about Stirrup Ranch activities or

any other subject.

     If, in spite of the fact that there was an onsite Stirrup

Ranch ranch manager, Mr. Iversen was running, supervising,

managing, and involved with all significant activities of Stirrup

Ranch, as petitioners seem to claim, we would expect petitioners

to have offered into evidence extensive files, to-do lists, home

and mobile phone records, business plans, project descriptions,

instructions to employees, etc., documenting and establishing Mr.

Iversen’s active involvement in the regular, continuous, and

substantial management and day-to-day activities of Stirrup

Ranch.   That documentary evidence is absent.

     We do not doubt that while in Minnesota Mr. Iversen spent

time on Stirrup Ranch activities--talking on the telephone to the

ranch manager, reading articles on cattle ranching, receiving
                              - 14 -

bills and correspondence, and writing checks in payment of ranch

bills.   Also, we acknowledge that while in Colorado at the ranch

Mr. Iversen participated and assisted with the cattle operation,

ranch maintenance, and improvements.

     However, the weight of the evidence before us does not

establish that during 2005 and 2006 petitioners spent anywhere

near 500 hours on Stirrup Ranch activities, that petitioners

engaged in regular, continuous, and substantial activities

relating to Stirrup Ranch, or that petitioners materially

participated in the activities of Stirrup Ranch as required under

section 469 and the related regulations.

     Further, a significant portion of the time Mr. Iversen spent

on Stirrup Ranch activities appears to have been more in the

capacity of an investor not involved in the day-to-day activities

and which therefore would not count under the facts and

circumstances test.   See sec. 1.469-5T(f)(2)(ii)(B), Temporary

Income Tax Regs., supra.   The presence at the ranch of a full-

time paid ranch manager for most of 2005 and 2006 disqualifies

much of Mr. Iversen’s time working on Stirrup Ranch activities

from counting under the facts and circumstances test.

     We sustain respondent’s deficiency determinations herein for

both 2005 and 2006.

     With regard to the section 6662(a) accuracy-related

penalties for 2005 and 2006 that respondent determined, we are
                              - 15 -

persuaded that petitioners had good faith and reasonable cause in

claiming the losses that we disallow.

     Petitioners credibly testified that they believed the

claimed losses qualified under the active participation rules of

section 469.   Petitioners’ testimony was supported by the

testimony of their accountant.

     Petitioners’ accountant should have known better,

particularly if the accountant was shown no more evidence and

documentation than was shown to us.    Regardless of the

incorrectness of their accountant’s advice, we conclude that

petitioners reasonably and in good faith relied on their

accountant in claiming the losses disallowed.      We reject

respondent’s determination of the section 6662(a) accuracy-

related penalties.


                                      Decision will be entered

                                 under Rule 155.
