                        T.C. Memo. 2010-241



                      UNITED STATES TAX COURT



          ROSS P. AND JANE M. THOMANN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4017-09.                Filed November 1, 2010.



     Bob A. Goldman, for petitioners.

     Stephen A. Haller, for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   Respondent determined deficiencies and

accuracy-related penalties under section 6662(a)1 with respect to

petitioners’ income taxes for 2004, 2005 and 2006 (the years at


     1
      All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                - 2 -

issue).   For 2004 respondent determined a $17,6032 deficiency and

a $3,521 penalty.   For 2005 respondent determined a $46,092

deficiency and a $9,218 penalty.   For 2006 respondent determined

a $17,348 deficiency and a $3,470 penalty.

     After concessions, there are two issues to decide.    The

first issue is whether petitioners as non-corporate lessors may

expense under section 179 for the years at issue their cost bases

in various assets used in the farm operation when they do not

have a written lease.   We hold that they may not.   The second

issue is whether petitioners are liable for the penalties.     We

hold that they are.

                            Background

     This case was submitted fully stipulated under Rule 122.

The stipulation of facts and the stipulation of settled issues

and their accompanying exhibits are incorporated by this

reference.   Petitioners resided in Columbus Junction, Iowa at the

time they filed the petition.

     Petitioners owned and operated a 504 acre farm.    Around 2000

petitioners orally agreed to lease 124 acres of their farmland as

well as various buildings, grain storage bins and equipment to

Circle T Farms, Inc. (Circle T), a hog farrow-to-finish business




     2
      All monetary amounts are rounded to the nearest dollar,
unless otherwise indicated.
                                   - 3 -

petitioners owned.3      Petitioners and Circle T never memorialized

the lease in writing.

     Petitioners caused Circle T to prepare annual minutes for

2000 and for the years at issue.       The annual minutes for 2000

stated that Circle T would pay petitioners $70,000 annually to

lease the various buildings, grain storage bins and equipment.

The annual minutes for the years at issue, however, failed to

specify what property Circle T was “renting” from petitioners and

did not provide details of any changes or additions to the lease.

The annual minutes for the years at issue merely provided the

dollar amounts without describing the property being “leased.”

     Petitioners leased the remaining 380 acres of their farmland

to C & A, Inc. (C & A), an unrelated party, during the years at

issue.       Petitioners and C & A did not memorialize the lease in

writing.       Petitioner Ross Thomann (Mr. Thomann) and C & A

apparently also orally entered into a farming agreement in 1985

yet did not memorialize the farming agreement in writing until

2006.       The 2006 written farming agreement “covered any future

year[’]s crops, so long as neither party requested a change on or

before Sept[ember] 1 of the calendar year.”       Mr. Thomann and C &

A used the 380 acres of farmland petitioners leased to C & A in

their farming agreement but failed to include or summarize the



        3
      Farrow-to-finish operations raise hogs from birth to
slaughter weight, about 240 to 270 pounds.
                                - 4 -

lease terms for the farmland in the 2006 written farming

agreement.

       Petitioners hired a tax adviser to prepare and file their

Federal income tax returns for the years at issue.    Petitioners

elected to expense under section 179 the full costs of various

farm-related property purchased during the years at issue.

Petitioners expensed on their return for 2004 $52,000 for

drainage tile and a fence installed on the land petitioners

leased to C & A and $10,000 for materials to remodel their farm

office (office materials), including furniture and fixtures.

Petitioners expensed on their return for 2005 $63,488 for a grain

bin.    Petitioners expensed on their return for 2006 $8,467 for a

pickup truck and $31,000 for a grain bin and a grain dryer.      The

parties stipulate that the grain bins and the grain dryer were

orally leased to Circle T, yet neither party has provided

documentation showing the terms of the leases.

       Respondent examined petitioners’ returns for all years at

issue.    As relevant here, respondent disallowed petitioners’

section 179 expense deductions for the farm-related property.

       Respondent issued petitioners the deficiency notice, and

petitioners timely filed a petition.

                             Discussion

       We must decide whether petitioners may expense farm-related

property when they lease the farmland orally and no document
                                - 5 -

contains any material terms regarding the personal property.

Respondent argues that petitioners failed to establish that the

office materials deducted in 2004 were section 179 property and

therefore petitioners may not deduct the office materials under

section 179.    Respondent also contends that as non-corporate

lessors, petitioners are barred from claiming a section 179

deduction for the amounts paid for the grain bins, grain dryer,

drainage tile, pickup truck and fence.    Petitioners counter that

all farm-related property is section 179 property and that they

qualify for an exception to the non-corporate lessor limitation.

We shall consider the parties’ arguments after first addressing

the burden of proof.

       It is a fundamental tax principle that the Commissioner’s

determinations are generally presumed correct, and taxpayers bear

the burden of proving otherwise.    Rule 142(a).   Accordingly,

petitioners have the burden of proof as to whether they may

expense the cost bases of the farm-related property under section

179.

       Moreover, tax deductions are a matter of legislative grace,

and taxpayers must show that they are entitled to any deduction

claimed.    Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493

(1940).    Taxpayers must keep sufficient records to substantiate

their deductions and enable the Commissioner to determine their

correct tax liability.    Sec. 6001; Meneguzzo v. Commissioner, 43
                                - 6 -

T.C. 824, 831-832 (1965).    In the case of section 179 deductions,

the taxpayer must maintain records reflecting how and from whom

the section 179 property was acquired and when it was placed in

service.    Sec. 1.179-5(a), Income Tax Regs.   In addition, the

section 179 election must specify the total section 179 expense

claimed and specify the portion of that deduction allocable to

each item.    Sec. 179(c)(1); sec. 1.179-5(a), Income Tax Regs.

     We now consider whether petitioners may deduct the cost

bases of the farm-related property under section 179.     For

property to qualify as section 179 property, it must be

classified as section 1245 property.    See sec. 179(d)(1)(B).

Respondent does not dispute that the grain bins, grain dryer,

drainage tile, pickup truck and fence qualify as section 179

property.    Respondent argues, however, that petitioners failed to

establish that the office materials qualify as section 1245

property, and therefore those materials do not qualify as section

179 property.    We now focus on the specific property.

Office Equipment

     The parties stipulated that petitioners purchased office

materials to remodel petitioners’ office, and the office

materials included office furniture and fixtures.     Section 1245

property does not include a building or its structural

components.    Sec. 1245(a)(3)(B).   “Structural components” include

plumbing fixtures, lighting fixtures and other components related
                                - 7 -

to the operation and maintenance of the building.      See sec. 1.48-

1(e)(2), Income Tax Regs. (defining “structural components” for

purposes of section 1245); sec. 1.1245-3(c)(2), Income Tax Regs.

(making definition in section 1.48-1(e), Income Tax Regs.

applicable to section 1.1245-3(c)(1), Income Tax Regs.).

     We cannot determine whether the office materials qualify as

section 1245 property.    Petitioners failed to present any

evidence showing what office materials were expensed on their

return for 2005.   Petitioners also failed to satisfy the section

179 substantiation requirements and therefore have not met their

burden.   Accordingly, petitioners are denied a section 179

deduction for the office materials.

Grain Bins, Grain Dryer, Drainage Tile, Pickup Truck and Fence

     We now consider the grain bins, grain dryer, drainage tile,

pickup truck and fence.    While the entire cost of section 179

property may generally be deducted in the year of purchase, a

taxpayer generally will not be permitted a section 179 deduction

if the taxpayer is not a corporation and the taxpayer purchased

the property for leasing purposes.      Sec. 179(d)(5).   The parties

do not dispute that petitioners are non-corporate lessors of the

farm-related property.    Petitioners argue, however, that they

fall within an exception to this limitation.

     Non-corporate lessors may expense the cost basis of section

179 property by meeting a two-prong test.      First, the term of the
                                - 8 -

lease, taking into account options to renew, must be less than 50

percent of the class life of the leased property.   Sec.

179(d)(5)(B).   Second, petitioners’ section 162 business expenses

for the leased property claimed during the initial 12-month

period following the transfer of the property to the lessee must

exceed 15 percent of the rental income produced by such property.

Id.

      Petitioners assert that they satisfied the first prong

because they annually renewed the terms of the leases of their

farm-related property with Circle T and C & A.   Petitioners

therefore contend that the lease term is a year long so as to be

less than 50 percent of the class life of the farm-related

property.   Respondent argues the lease terms are indefinite and

therefore petitioners cannot satisfy the first prong.   We agree.

      All lease agreements between petitioners and Circle T and C

& A were oral, and none of the farm-related property lease

agreements was memorialized in writing.   Moreover, petitioners

have not presented any evidence regarding the terms for the

leased farm-related property.   The failure of a party to

introduce evidence, which, if true, would be favorable to that

party gives rise to the presumption that the evidence would be

unfavorable if produced.   Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947).   Petitioners assert that Circle T’s annual minutes
                               - 9 -

support their claim that they had an annual lease with Circle T

covering the pickup truck, grain dryer and two grain bins.     We

disagree.   The annual minutes do not mention any of the farm-

related property.   Moreover, the minutes fail to establish that

petitioners leased the pickup truck, grain bins or grain dryer

annually to Circle T.

     Petitioners also contend that we should look to the 2006

written farming agreement with C & A to determine that the drain

tile and the fence were subject to an annual lease.     Petitioners

expensed the cost bases of the drain tile and the fence in 2004,

but there was no written agreement until 2006.     Petitioners have

not presented any documentary proof to establish they had a

binding annual lease agreement before 2006.

     We find that petitioners’ lease agreements with Circle T and

C & A were for an indefinite period.     Petitioners fail the first

prong of the section 179(d)(5)(B) exception because we cannot

find that the term of any of the leases is less than 50 percent

of the class life of the property.     We need not consider the

second prong of section 179(d)(5)(B).     Accordingly, petitioners

may not deduct the cost bases of the farm-related property under

section 179.

Accuracy-Related Penalties Under Section 6662(a)

     We next address the accuracy-related penalties respondent

determined in the deficiency notice.     Petitioners ask that we not
                               - 10 -

impose the penalties because they had a tax professional prepare

the return for each year at issue.      Petitioners have not

established, however, that their reliance on their return

preparer was reasonable or in good faith.      Petitioners failed to

submit any evidence showing the return preparer’s experience or

qualifications and failed to show that they provided all the

necessary and accurate information to the return preparer.     We

cannot simply accept petitioners’ bald assertion that they relied

upon the return preparer as a defense against the accuracy-

related penalties.    See Peacock v. Commissioner, T.C. Memo. 2002-

122.    Accordingly, we sustain respondent’s determination that

petitioners are liable for the accuracy-related penalties under

section 6662(a) for each year at issue.

       We have considered all remaining arguments the parties made

and, to the extent not addressed, we conclude they are

irrelevant, moot, or meritless.

       To reflect the foregoing,


                                            Decision will be entered

                                     for respondent.
