                Case: 12-10636         Date Filed: 11/14/2012       Page: 1 of 12

                                                                         [DO NOT PUBLISH]

                   IN THE UNITED STATES COURT OF APPEALS

                              FOR THE ELEVENTH CIRCUIT
                               ________________________

                                       No. 12-10636
                                   Non-Argument Calendar
                                 ________________________

                                      Agency No. 29806-07




WILLIAM HARNETT,
lNANCY HARNETT,

llllllllllllllllllllllllllllllllllllllllPetitioners - Appellants,

versus

COMMISSIONER OF IRS,

llllllllllllllllllllllllllllllllllllllllRespondent - Appellee.

                                ________________________

                           Petition for Review of a Decision of the
                                        U.S.Tax Court
                                ________________________

                                      (November 14, 2012)

Before CARNES, BARKETT and MARTIN, Circuit Judges.

PER CURIAM:
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      William and Nancy Harnett, husband and wife, appeal a Tax Court

judgment that found them liable for an income tax deficiency of $234,610 for the

2003 tax year, $207,595 for the 2004 tax year, and $197,331 for the 2005 tax year.

The deficiency resulted from the Internal Revenue Commissioner’s

recharacterization of losses related to real estate rental activities from nonpassive

activity losses to passive activity losses. Section 469 of the Internal Revenue

Code limits the ability of taxpayers to deduct passive activity losses. I.R.C. §

469(a).

      While rental activity is typically considered a passive activity, id.

§ 469(c)(2), it is not passive if the taxpayer is involved in “real property business”

as defined by I.R.C. § 469(c)(7)(B). Id. § 469(c)(7)(A). A taxpayer is deemed to

be involved in “real property business,” if he “perform[ed] more than 750 hours of

services during the taxable year in real property trades or businesses in which [he]

materially participates.” I.R.C. § 469(c)(7)(B)(ii). Here, the Tax Court determined

that the Harnetts “failed to establish that for any year at issue petitioner meets the

750 hour requirement.” The court therefore “sustain[ed] [the Commissioner’s]

determination that the losses at issue are attributable to per se passive activities

and are subject to the section 469 limitations.”

      The Harnetts make several challenges to the Tax Court’s determination.


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First, they argue that the Tax Court erred in finding that Mr. Harnett was not in a

real property trade or business as defined by I.R.C. § 469(c)(7)(B). Second, they

argue that the Tax Court erred by not shifting the burden of proof to the

Commissioner after the Harnetts made an initial showing that Mr. Harnett “was

involved in a real estate trade or business.” Third, they argue that the Tax Court

committed reversible error by not admitting into evidence a “Narrative Summary”

prepared by Mr. Harnett. We address each in turn.

                                          I.

      To begin, the Tax Court held that the Harnetts failed to prove that their

rental real estate losses were nonpassive activity losses, and therefore deductible,

because they did not prove Mr. Harnett “perform[ed] more than 750 hours of

services during [each] taxable year in real property trades or businesses in which

[he] materially participat[ed].” I.R.C. § 469(c)(7)(B)(ii). The Harnetts challenge

this conclusion.

      In the Tax Court, the taxpayer “has the burden of proving by a

preponderance of the evidence that the Commissioner’s determination is

erroneous.” Estate of Whitt v. Comm’r, 751 F.2d 1548, 1556 (11th Cir. 1985).

“When the Tax Court approves a deficiency determination, its findings of fact will

not be set aside unless they are clearly erroneous.” Id. We review the Tax Court’s


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legal determinations de novo. Bone v. Comm’r, 324 F.3d 1289, 1293 (11th Cir.

2003).

      The Tax Court properly determined that the Harnetts had to prove that Mr.

Harnett “perform[ed] more than 750 hours of service” during each of the audit

years “in real property trades or businesses” in which Mr. Harnett “materially

participat[ed]” in order to claim the rental activity losses as nonpassive activity

losses. I.R.C. §§ 469(c)(2), (7). This is an explicit requirement in the Internal

Revenue Code and applies to all types of taxpayers, whether they are suspected of

investing in a tax shelter or not. See generally I.R.C. § 469. A taxpayer must

satisfy this requirement in addition to demonstrating that “more than one-half of

the personal services [he] performed in trades or businesses” during the audit years

was “performed in real property trades or businesses in which the taxpayer

materially participate[d].” Id. § 469(c)(7)(B)(i).

      As part of their challenge to the Tax Court’s analysis of the 750-hour

requirement, the Harnetts argue that the Tax Court misunderstood them when it

determined that they had “waived any argument that [Mr. Harnett] materially

participated” with respect to the properties at Kim Brett Drive, Laurel Lane, Ocean

Drive, and adjacent to Batts Neck Plantation and therefore did not count “any

hours that [Mr. Harnett] spent with respect to th[ese] propert[ies] . . . toward the


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750-hour requirement.” If this was an error, it was harmless. The hours claimed

each year for the properties at Kim Brett Drive, Laurel Lane, and Batts Neck were

minimal.1 Also, Mr. Harnett claimed that he worked substantially more hours on

the condominiums at Ocean Drive, however the Tax Court explained that even if

those hours did count towards the 750-hour requirement, the court was not

convinced that Mr. Harnett had actually spent much time on those properties.

Specifically, the court stated that the documents submitted “contain[ed] no

evidence that improvements were made to these units during the years at issue”

and called into question Mr. Harnett’s claim that he “spent very much time

personally tending to the marketing and sale of these properties.”

       The Harnetts also argue that the Tax Court ignored some of the evidence

they presented. But, much of the evidence the Harnetts claim that the Tax Court

ignored was more relevant to the “more than one-half of . . . personal services”

requirement than the 750-hour requirement. For example, the Harnetts argue that

the Tax Court ignored Mr. Huffman’s testimony that “Mr. Harnett spent only a day

or two per month [working] at the bank, and the rest of the time on his personal


       1
         Mr. Harnett claimed 38.5 hours, 5.5 hours, and 1 hour of work at Kim Brett Drive for
years 2003, 2004, and 2005, respectively. He claimed 11 hours, 4.5 hours, and 1 hour of work at
Laurel Lane for years 2003, 2004, and 2005, respectively. He claimed 10.5 hours, 7 hours, and
14 hours of work on the properties abutting Batts Neck Plantation for years 2003, 2004, and
2005, respectively.

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real estate deals.” This testimony would be very helpful for determining whether

Mr. Harnett worked more at Washington Savings Bank or on the properties he

owned. It is not particularly useful, however, for determining how many hours

Mr. Harnett spent working on his properties.

      Other evidence that the Harnetts claim the Tax Court ignored demonstrated

that Mr. Harnett spent some time working on these properties, but would not have

necessarily proved that Mr. Harnett satisfied the 750-hour requirement. For

example, one of the lawyers the Harnetts claim the Tax Court ignored testified that

Mr. Harnett spent, at most, 60-80 hours in one year working on legal issues related

to one of the properties. As before, this testimony supports Mr. Harnett’s assertion

that he spent hours working with lawyers dealing with one of his properties, but it

does not prove that Mr. Harnett reached the 750-hour threshold.

      Ultimately, the Tax Court’s determination rests on its decision that the

primary evidence the Harnetts relied on to prove that Mr. Harnett met the 750-

hour requirement, Mr. Harnetts testimony, was not convincing. The Tax Court

had significant credibility concerns about the number of hours Mr. Harnett

claimed to have spent on each property each year. “It was for the Tax Court to

determine the credibility that was to be afforded the testimony of [Mr. Harnett]

and the verity that was to be afforded his records.” Stein v. Comm’r, 322 F.2d 78,


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82 (5th Cir. 1963).2 Such “[c]redibility determinations are typically the province

of the fact finder because the fact finder personally observes the testimony and is

thus in a better position than a reviewing court to assess the credibility of

witnesses.” United States v. Ramirez-Chilel, 289 F.3d 744, 749 (11th Cir. 2002).

       “If testimony . . . stretch[es] the credulity of the Court it can decline to

believe it if the taxpayer’s credibility is already before the Court.” Anderson v.

Comm’r, 250 F.2d 242, 247–48 (11th Cir. 1957). A taxpayer’s credibility can be

before the court if, for example, parts of his testimony are not supported by the

documentary evidence. See id. Portions of Mr. Harnett’s testimony reconstructing

the hours he spent participating in his real estate activities were contradicted or

unsupported by the evidence. For example, the Tax Court discounted the hours

claimed for Batts Neck Plantation because Mr. Harnett attributed those hours to

“personally . . . renovating the barn” and doing other work on the property, while

contractors who worked on the property testified that they “never saw [Mr.

Harnett] working on the property.” Also, the Tax Court pointed out that Mr.

Harnett “testified in 2005 he tore down a stone wall” at one of his properties,

while an invoice showed that “the wall was not repaired during the years at issue”


       2
          In Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981) (en banc), we adopted as
binding precedent all decisions of the former Fifth Circuit handed down before October 1, 1981.
Id. at 1209.

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and, in any event, it was not Mr. Harnett who actually tore down the wall.

      The Tax Court did not clearly err in determining that the Harnetts did not

prove, by a preponderance of the evidence, that Mr. Harnett “perform[ed] more

than 750 hours of services” during 2003, 2004, and 2005 “in real property trades

or businesses in which the taxpayer materially participate[d].” See I.R.C. §

469(c)(7)(B)(ii).

                                         II.

      The Harnetts also argue that the Tax Court erred by not shifting the burden

of proof to the Commissioner. Section 7491 of the Internal Revenue Code does

allow the burden of proof on factual matters to shift from the taxpayer to the

Commissioner. I.R.C. § 7491(a)(1). However, the burden may shift only if the

“taxpayer introduces credible evidence with respect to any factual issue relevant to

ascertaining the liability of the taxpayer;” the taxpayer has complied with the

substantiation and record maintenance requirements; and the taxpayer “has

cooperated with reasonable requests by the Secretary for witnesses, information,

documents, meetings, and interviews.” Id. § 7491(a)(2). The Tax Court’s factual

determinations are reviewed for clear error. Piggly Wiggly Southern, Inc. v.

Comm’r, 803 F.2d 1572, 1576 (11th Cir. 1986).

      The Tax Court did not shift the burden to the Commissioner because it


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determined that the Harnetts “failed to present credible evidence sufficient to

establish that [Mr. Harnett] meets the 750-hour requirement.” Specifically, the

Tax Court found that the evidence presented was not credible because it was

“vague, exaggerated, and unsupported or contradicted.”

      The Tax Court did not clearly err in making this determination. Evidence is

not credible under I.R.C. § 7491(a)(2) if “the court is not convinced that it is

worthy of belief.” Higbee v. Comm’r, 116 T.C. 438, 442 (Tax. Ct. 2001)

(quotation marks omitted). In addition, “the court is not bound to accept

testimony at face value even when it is incontroverted if it is improbable,

unreasonable, or questionable.” Comm’r v. Smith, 285 F.2d 91, 96 (5th Cir.

1950). The Tax Court was not convinced that Mr. Harnett’s testimony regarding

the hours he worked on each property each audit year was worthy of belief, and

viewed the testimony as questionable. Thus, it was permissible for the Tax Court

to find that the Harnetts had not presented credible evidence regarding the 750-

hour requirement and as a result, decline to shift the burden of proof to the

Commissioner.

                                         III.

      The Harnetts next argue that the Tax Court erred by not admitting into

evidence two separate documents: a narrative summary, marked as Exhibit 29-P,


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and a grid detailing the number of hours Mr. Harnett spent on each property each

month, marked as Exhibit 22-P. We review the Tax Court’s evidentiary rulings

for abuse of discretion. See Pollard v. Comm’n, 786 F.2d 1063, 1067 (11th Cir.

1986); cf. United States v. Brown, 415 F.3d 1257, 1264–65 (11th Cir. 2005).

Even if an evidentiary ruling was an abuse of discretion, it will not result in

reversal if the error was harmless. See Pollard, 786 F.2d at 1067; cf. United States

v. Bradley, 644 F.3d 1213, 1270 (11th Cir. 2011). “An [evidentiary] error is

harmless unless there is a reasonable likelihood that [it] affected the defendant’s

substantial rights.” Bradley, 644 F.3d at 1270 (alteration in original) (quotation

marks omitted).

      Turning first to the narrative summary, the Harnetts’ counsel specifically

stated that they were not seeking to have that document put into evidence. We

cannot say that the Tax Court abused its discretion by refusing to admit a

document into evidence that was never offered.

      The Harnetts attempted to enter the grid into evidence, but the Tax Court

did not admit it because it did not “provide[] any additional probative value.” The

only information a reader can learn from the grid, Exhibit 22-P, is the list of

properties; an estimated number of hours Mr. Harnett worked on each property

each day during the audit years; and estimated totals. Mr. Harnett came up with


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the estimates he put in the grid by looking through his records and

“reconstruct[ing] as best [he] could [his] participation in each property.” He did

this reconstruction in 2008 to help the IRS “understand [his] enormous project.”

      Mr. Harnett was permitted to testify about how he came up with the number

of hours listed in the grid and he was allowed to use the grid to refresh his

recollection and answer how many “hours that [he] . . . had reconstructed for the

work that [he] did on [a] particular property.” For each property, Mr. Harnett

testified to the total estimated hours he spent working on the property for each of

the audit years.

      Being that the numbers on the grid only represented Mr. Harnett’s

reconstruction of the hours he worked and that he was allowed to rely on the grid

to testify about the information it contained, the Tax Court did not abuse its

discretion by refusing to admit the grid into evidence. See United States v. Wood,

943 F.2d 1048, 1053 (9th Cir. 1991) (explaining that “charts or summaries of

testimony or documents already admitted into evidence are merely pedagogical

devices” that “should be used only as a testimonial aid, and should not be admitted

into evidence”).

                                         IV.

      For these reasons we affirm the judgments of the Tax Court.


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AFFIRMED




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