                               T.C. Memo. 2013-182



                         UNITED STATES TAX COURT



          BEN BARTLETT AND TAMMY R. BARTLETT, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 19031-11.                        Filed August 8, 2013.



        Charles Robert Brown and D. Loren Washburn, for petitioners.

        David Wayne Sorensen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


        KERRIGAN, Judge: Respondent determined the following deficiencies and

penalties with respect to petitioners’ Federal income tax for tax years 2006 and

2007:
                                        -2-


                                                           Penalty
                      [*2] Year       Deficiency         sec. 6662(a)
                        2006           $39,510             $7,902
                        2007            51,076             10,215

      Unless otherwise indicated, 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. All monetary amounts are rounded to

the nearest dollar.

      The issues for consideration are (1) whether the passive activity loss rules of

section 469 limit the loss deductions petitioners claimed for 2006 and 2007 with

respect to petitioner husband’s bull breeding activity and (2) whether petitioners

are liable for accuracy-related penalties under section 6662(a).

                                  FINDINGS OF FACT

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

facts and the attached exhibits are incorporated herein by this reference.

Petitioners resided in Wyoming when they filed the petition.

      Petitioner husband was raised on a farm in Texas. When he was a child, his

chores included taking care of farm animals. Petitioner husband went to rodeos
                                       -3-

[*3] when he was young, and he rode bulls and other animals in some small

rodeos while in high school and college.

      Petitioner husband earned a bachelor’s degree in agriculture with a focus in

horticulture. While in college he helped manage the university agriculture farm.

His responsibilities on the agriculture farm included hauling hay, feeding

livestock, and prepping the livestock for shows, as well as managing the

greenhouse and the arboretum. Petitioner husband also spent time with his older

brother, who held advanced degrees in animal science husbandry and worked on

embryo transfer in cattle. Petitioner husband learned about the mechanics of and

the theory behind embryo transfer from his brother.

      In 1988 petitioner husband started a design and landscape business in Texas

called Growin’ Green (Growin’ Green Texas), which became successful. In 2000

petitioner husband sold Growin’ Green Texas, and petitioners moved to Jackson,

Wyoming. Petitioner husband then started Growin’ Green Co., a sole

proprietorship, in Jackson, Wyoming, which provides landscape services and

design as well as snow removal. Since 2000 Growin’ Green Co. has become very

successful. In tax years 2006 and 2007 Growin’ Green Co. had gross receipts of

over $1 million and over $3 million, respectively. Petitioner husband received
                                        -4-

[*4] business income from Growin’ Green Co. of over $400,000 in tax year 2006

and over $1 million in tax year 2007.

      In 2005 petitioner husband started a bull breeding operation, which

petitioners called Rainbow Ranch. Petitioners acquired a 1,941-acre ranch near

Burley, Idaho, and purchased 40 or 50 calves from a breeder specializing in rodeo-

quality cows and bulls. Rainbow Ranch is approximately 220 miles from Jackson,

Wyoming.

      When petitioners acquired the ranch, there were no buildings on the land,

but the property was fenced to contain livestock. When petitioner husband was on

the ranch, he would sleep in his truck, a nearby motel, or a doublewide trailer

parked on the ranch.

      In tax years 2006 and 2007 petitioner husband employed three of his

Growin’ Green Co. workers to stay on the ranch during the winter months, from

approximately November to March. These ranch hands worked 40 hours per week

on Rainbow Ranch. Petitioner also made a business arrangement with Cameron

Tuckett that allowed Mr. Tuckett to graze his horses on Rainbow Ranch in

exchange for providing services pertaining to the stock on Rainbow Ranch.

Mr. Tuckett lived near Rainbow Ranch and operated a farm and livestock

operation.
                                         -5-

[*5] In evidence for the tax years at issue are (1) credit card statements for a

credit card that petitioner husband used for Rainbow Ranch and (2) two schedules,

one for each tax year at issue, of the hours petitioner husband claims he worked on

the ranch. Petitioner husband created the schedules of hours worked several years

after the tax years at issue.

      Petitioner husband did not maintain a contemporaneous log, a diary, notes,

or other records of the work he performed day to day relating to Rainbow Ranch--

whether performed in Wyoming or at the ranch in Idaho.

      Petitioners’ 2006 joint Federal income tax return was prepared on their

behalf by a certified public accountant. Petitioners’ 2007 joint Federal income tax

return was prepared on their behalf by a second certified public accountant. On

the Schedules F, Profit or Loss From Farming, for both Federal income tax returns

petitioners stated that they materially participated in the operation of a bull

breeding activity. Petitioners claimed loss deductions for the bull breeding

activity of $105,515 for tax year 2006 and $134,763 for tax year 2007.

      The notice of deficiency disallowed the loss deductions claimed related to

the bull breeding activity and determined the $39,510 and $51,076 deficiencies in

petitioners’ 2006 and 2007 Federal income tax, respectively, and section 6662

accuracy-related penalties.
                                        -6-

[*6]                                 OPINION

I.     Section 469 Passive Activity Losses

       Generally, a taxpayer bears the burden of proving the Commissioner’s

determinations in a notice of deficiency are erroneous. Rule 142(a)(1); Welch v.

Helvering, 290 U.S. 111, 115 (1933). Pursuant to section 7491(a)(1) the taxpayer

may shift the burden of proof to the Commissioner if the taxpayer complies with

the relevant substantiation requirements in the Internal Revenue Code, maintains

all required records, and cooperates with the Commissioner with respect to

witnesses, information, documents, meetings, and interviews. Sec. 7491(a)(2)(A)

and (B). The taxpayer bears the burden of proving compliance with the conditions

of section 7491(a)(2)(A) and (B). See, e.g., Winslow v. Commissioner, 139 T.C.

270, 271 n.2 (2012); Hill v. Commissioner, T.C. Memo. 2010-200, aff’d per

curiam, 436 Fed. Appx. 410 (5th Cir. 2011).

       Petitioners contend that they have met this burden because (1) respondent

did not allege that petitioners failed to cooperate with respondent and (2)

petitioners claim that they introduced credible evidence. However, there were

discrepancies and inconsistencies in their evidence. Petitioners have failed to

persuasively argue that the burden of proof shifts to respondent. The burden of

proof remains with petitioners.
                                        -7-

[*7] Respondent contends that petitioners’ losses related to their bull breeding

activity should be disallowed because petitioners did not materially participate in

the bull breeding activity.

      Section 469(a) disallows the passive activity loss of an individual taxpayer.

The term “passive activity loss” means the amount, if any, by which the aggregate

losses from all passive activities for the taxable year exceed the aggregate income

from all passive activities for such year. Sec. 469(d)(1); see also Dirico v.

Commissioner, 139 T.C. 396, 402 (2012). A passive activity is a trade or business

in which a taxpayer does not materially participate. Sec. 469(c)(1). A taxpayer

materially participates in an activity when he or she is involved on a regular,

continuous, and substantial basis. Sec. 469(h)(1). Participation generally means

all work done in connection with an activity by an individual who owns an interest

in the activity. Sec. 1.469-5(f), Income Tax Regs.

      A taxpayer establishes material participation by satisfying any one of seven

tests provided in the regulations. Sec. 1.469-5T(a), Temporary Income Tax Regs.,

53 Fed. Reg. 5725-5726 (Feb. 25, 1988); see also Lum v. Commissioner, T.C.

Memo. 2012-103. Petitioners assert that the following three tests are relevant to

this case:
                                         -8-

      [*8] (1) The individual participates in the activity for more than 500
      hours during such year;

            *          *         *         *          *         *         *

             (3) The individual participates in the activity for more than 100
      hours during the taxable year, and such individual’s participation in
      the activity for the taxable year is not less than the participation in the
      activity of any other individual (including individuals who are not
      owners of interests in the activity) for such year; [or]

            *          *         *         *          *         *         *

            (7) Based on all of the facts and circumstances * * * , the
      individual participates in the activity on a regular, continuous, and
      substantial basis during such year.

Sec. 1.469-5T(a)(1), (3), (7), Temporary Income Tax Regs., supra.1 To satisfy the

facts and circumstances test under section 1.469-5T(a)(7), Temporary Income Tax

Regs., supra, a taxpayer must participate in an activity for more than 100 hours




      1
         Respondent contends that petitioners are precluded from arguing that they
meet the requirements of the 100-hour test and the facts and circumstances test
because, respondent claims, petitioners first discussed these issues in their
amended pretrial memorandum. We disagree.
        Respondent raised both the 100-hour test and the facts and circumstances
test in the notice of deficiency, writing under “Explanation of Adjustments”:
“You have not met any of the seven tests for material participation as outlined
under Treasury Regulation 1.469-5T(a).” Petitioners also raised both tests in their
petition, writing: “The taxpayer meets at least one of the material participation
tests as outlined in Treasury Regulation 1.469-5T(a).”
        Accordingly, petitioners’ arguments regarding the 100-hour test and the
facts and circumstances test are properly before us.
                                        -9-

[*9] during the taxable year. Sec. 1.469-5T(b)(2)(iii), Temporary Income Tax

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).

      A taxpayer can prove participation by any reasonable means. Sec. 1.469-

5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).

Reasonable means “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.” Id. While the regulations permit some

flexibility with respect to the evidence required to prove material 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; Estate of Stangeland v. Commissioner,

T.C. Memo. 2010-185.

      Petitioner husband testified that he spent a total of more than 1,000 hours on

the bull breeding activity during the tax years at issue. There is no indication in

the record that petitioner husband engaged in any recreational activities while he

was on the ranch. Likewise, there is no indication that petitioner wife traveled

with petitioner husband to the ranch or was otherwise involved in Rainbow Ranch.

During the years at issue she earned wages from other sources.
                                        - 10 -

[*10] With respect to tax year 2006 petitioner husband testified that he worked on

the ranch repairing fences; cross-fencing the land; building corrals, shelters, and

solar wells; installing “bucking shoots” for training young bulls to buck; and

improving the range land by reseeding, cutting sagebrush, planting wheat crops for

feed, and planting a more desirable bud-style grass. He also testified that he

traveled to South Dakota to pick up a particular bull and then drove that bull from

South Dakota to Rainbow Ranch.

      With respect to tax year 2007 petitioner husband testified that he helped his

cows during calving season. Petitioner husband described calving season as

“intense”; he recalled being very involved in the calving process. He further

testified that he started training the young bulls that year, sorting them, developing

their bucking skills, and training them to buck properly.

      For each tax year at issue petitioner husband estimated that he spent 7 to 10

hours per week researching the bull breeding business and studying live auctions

online. He also testified that he spent time managing the bull breeding activity

from Wyoming, deciding what items to purchase, from which bloodlines to breed,

and where to build the corrals, among other things. He further testified that he

made several emergency trips to Rainbow Ranch.
                                       - 11 -

[*11] Petitioners admit that they did not keep any records regarding petitioner

husband’s work on Rainbow Ranch or his research. Petitioners, however,

provided two schedules that allegedly detail the numbers of hours petitioner

husband spent on the bull breeding activity for each tax year. Petitioner husband

testified that he created these schedules in 2009 when petitioners’ returns were

audited. He used his credit card statements to determine his work schedule during

the tax years at issue. Petitioner husband first determined which days he made

purchases in or around Burley, Idaho. Then he tried to recall what he was

purchasing on those days and what task he was doing on Rainbow Ranch. Finally,

he assigned a number of hours to each task. Petitioner husband testified that the

schedules do not reflect all of the work he did for Rainbow Ranch; rather, he

included only up to 500 hours of work each year.

      At trial Mr. Tuckett on behalf of petitioners testified that he had an

arrangement with petitioner husband: Mr. Tuckett could graze his livestock on

Rainbow Ranch, and in exchange he would help petitioner husband with the

ranch. As part of this agreement, when Mr. Tuckett checked on his livestock on

Rainbow Ranch--which he did daily--he would also check on petitioner husband’s

livestock. Mr. Tuckett further testified that even though he helped petitioner
                                           - 12 -

[*12] husband with tasks around the ranch, he was not paid to work for petitioner

husband.

      Mr. Tuckett recalled seeing petitioner husband at the ranch, but petitioner

husband usually had workers with him when he was there. Petitioner husband

estimated that the three ranch hands worked 40 hours per week while they stayed

on the ranch. Petitioner husband testified that he supervised the ranch hands while

he was in Wyoming.

      Mr. Tuckett did not estimate how many hours he saw petitioner husband on

the ranch during the tax years at issue.

      Petitioners’ son also testified for petitioners. In particular, petitioners’ son

recalled researching the bull breeding activity with his father, determining which

bloodlines to use and studying the auctions online. Petitioners’ son testified that

he accompanied his father on the trip to South Dakota in 2006. Petitioners’ son

did not estimate how many hours he saw petitioner husband working on the bull

breeding activity during the tax years at issue.

      Kerry Friedrich, a longtime employee at Growin’ Green Co., testified for

petitioners. Mr. Friedrich testified that petitioner husband was the hardest worker

at Growin’ Green Co., keeping the most hours and doing whatever was necessary

to finish a job. Mr. Friedrich remembered that petitioner husband was at Rainbow
                                       - 13 -

[*13] Ranch “a couple times a month” during Growin’ Green Co.’s busy season

and “more often” than that during Growin’ Green Co.’s off-season. Mr. Friedrich,

however, could not provide any exact dates when petitioner husband was away,

nor did he provide a more definite estimate of how often petitioner husband was at

Rainbow Ranch.

      Although petitioners provide a credible narrative summary of petitioner

husband’s participation, they maintained no contemporaneous records or

documentation of his participation such as appointment books, calendars, or logs.

Contemporaneous daily time reports, logs, or similar documents are not required if

other reasonable means of establishing a taxpayer’s participation exist. Sec.

1.469-5T(f)(4), Temporary Income Tax Regs., supra. Petitioners claim that their

schedules of hours worked reasonably establish petitioner husband’s participation.

We disagree.

      The credit card statements provide no information regarding how many

hours petitioner husband spent on a given day on the bull breeding activity.

Therefore, the hours petitioner husband claims he worked are merely

“guesstimates”. Moreover, petitioners’ schedules are riddled with contradictions.

On several occasions the credit card statements place petitioner husband in

Wyoming or Utah when the schedules of hours claim he was working in Burley,
                                        - 14 -

[*14] Idaho. Also, on at least one occasion petitioner husband claimed he spent

28 hours on the bull breeding activity during a 24-hour period.

      Our analysis of the time petitioner husband spent in tax years 2006 and

2007 working on matters relating to Rainbow Ranch is made difficult by the lack

of any contemporaneous records or other records and documentation regarding

what he did specifically day to day and how much time he spent on matters

relating to the bull breeding activity. In this case the lack of records and

documentation is not cured by estimates made years after the fact in writing or by

testimony. See, e.g., Iversen v. Commissioner, T.C. Memo. 2012-19; Fowler v.

Commissioner, T.C. Memo. 2002-223; Goshorn v. Commissioner, T.C. Memo.

1993-578.

      Petitioner husband, Mr. Tuckett, petitioners’ son, and Kerry Friedrich were

credible witnesses. We do not doubt that petitioner husband spent time on

Rainbow Ranch activities while in Wyoming. We also acknowledge that

petitioner husband participated in and/or assisted with the bull breeding operation,

ranch maintenance, and improvements while in Idaho.

      The weight of the evidence before us, however, does not establish that

during each of the tax years at issue (1) petitioner husband spent 500 hours on the
                                        - 15 -

[*15] bull breeding activity;2 or (2) petitioner husband worked more than Mr.

Tuckett, who was at the ranch every day, or the ranch hands, who worked on the

ranch 40 hours per week for approximately four months, regardless of whether

petitioner husband worked more than 100 hours on the bull breeding activity. See

Iversen v. Commissioner, T.C. Memo. 2012-19. Petitioners have failed to meet

the criteria of the 500-hour or 100-hour tests.

      The weight of the evidence before us also fails to establish that petitioner

husband worked on the bull breeding activity in a regular, continuous, and

substantial manner. During the tax years at issue petitioner husband ran Growin’

Green Co., a highly successful, full-time business over 200 miles from Rainbow

Ranch. He was actively involved with and in charge of Growin’ Green Co. The

evidence shows that petitioner husband was at the ranch approximately 58 days in

tax year 2006 and approximately 35 days in tax year 2007. Petitioner husband’s

sporadic trips to Rainbow Ranch coupled with his intense work ethic




      2
        Petitioners contend that petitioner husband’s driving back and forth
between Wyoming and Idaho should count towards the 500 hours required by sec.
1.469-5T(a)(1), Temporary Income Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25,
1988). We do not discuss this issue because even if we include petitioner
husband’s driving time in the 500-hour calculation, there is not enough evidence
to support petitioner husband’s claim that he spent 500 hours on the bull breeding
activity.
                                       - 16 -

[*16] with respect to Growin’ Green Co. do not suggest that he worked on the bull

breeding activity in a regular or continuous manner.

      Petitioners, however, claim that petitioner husband spent 7 to 10 hours per

week researching for Rainbow Ranch while also managing the ranch from

Wyoming. If petitioner husband were researching, running, supervising,

managing, and involved with all significant activities of Rainbow Ranch, as

petitioners seem to claim, we would expect petitioners to have offered into

evidence extensive research notes, files, to-do lists, home and mobile phone

records, business plans, project descriptions, instructions to employees, and the

like, documenting and establishing petitioner husband’s active involvement in the

regular, continuous, and substantial management and day-to-day activities of the

bull breeding activity. That documentary evidence is absent.

      Even if petitioners had provided documentary evidence regarding petitioner

husband’s management activities, we would not take into account those

management activities under the facts and circumstances test. A taxpayer’s

management activities are not taken into account under the facts and

circumstances test (1) if another person also receives compensation for

management services relating to the activity or (2) if another person spends more

time on management services relating to the activity than the taxpayer.
                                         - 17 -

[*17] Sec. 1.469-5T(b)(2)(ii)(A) and (B), Temporary Income Tax Regs., supra; cf.

sec. 1.469-5T(f)(2)(ii)(A) and (B), Temporary Income Tax Regs., 53 Fed. Reg.

5727 (Feb. 25, 1988) (stating that an individual’s investor activities, including

studying and reviewing financial statements or reports on operations as well as

monitoring the finances or operations of the activity in a nonmangerial capacity,

do not qualify as participation in an activity unless the individual is directly

involved in the day-to-day management of the activity).

      On petitioners’ 2006 Federal income tax return petitioners included $16,750

of management fees in their calculation of Schedule F expenses. On petitioners’

2007 Federal income tax return petitioners included $13,509 of management fees

and “outside service” in their Schedule F calculation of expenses. Petitioner

husband testified that these fees were paid to Mr. Tuckett. Although Mr. Tuckett

claims that he was never paid by petitioner husband and petitioner husband claims

that the payments made to Mr. Tuckett were merely reimbursements, petitioner

husband wrote a letter to the Internal Revenue Service during his audit stating that

the bull breeding activity incurred “management cost throughout the year”. The

record therefore contains substantial inconsistency on the question whether

petitioner paid Mr. Tuckett for management services.
                                        - 18 -

[*18] Petitioner husband did not engage in the bull breeding activity in a regular,

continuous, and substantial manner. On this record we conclude that petitioners

have failed to meet the criteria of the facts and circumstances test, regardless of

whether petitioner husband worked more than 100 hours on Rainbow Ranch.

      Petitioners did not materially participate in the bull breeding activity as

required under section 469 and the related regulations. Accordingly, we sustain

respondent’s determination regarding petitioners’ bull breeding activity.

II.   Section 6662(a) Accuracy-Related Penalty

      Respondent determined that petitioners are liable for accuracy-related

penalties pursuant to section 6662(a) for tax years 2006 and 2007. Section

6662(a) adds to the tax required to be shown on the taxpayer’s return 20% of any

underpayment attributable to, among other things, any substantial understatement

of income tax within the meaning of section 6662(b)(2). The phrase “substantial

understatement of income tax” means an understatement that exceeds the greater

of $5,000 or 10% of the income tax required to be shown on the tax return for the

taxable year. Sec. 6662(d)(1)(A).

      Under section 7491(c) the Commissioner bears the burden of production

regarding the taxpayer’s liability for any penalty. See also Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). Once the Commissioner has met
                                        - 19 -

[*19] this burden, the taxpayer must provide persuasive evidence that the

Commissioner’s determination is incorrect. See Rule 142(a); Higbee v.

Commissioner, 116 T.C. at 447.

      Respondent determined that petitioners should have reported income tax

liabilities of $145,628 and $311,160 on their 2006 and 2007 Federal income tax

returns, respectively. Respondent also determined that petitioners understated

their income tax by $39,510 for tax year 2006 and by $51,076 for tax year 2007,

both of which exceed 10% of the income tax petitioners should have reported on

their 2006 and 2007 Federal income tax returns. Respondent has shown that

petitioners substantially understated their income tax liabilities for tax years 2006

and 2007.

      Petitioners therefore are liable for the accuracy-related penalties unless they

can show they had reasonable cause for and acted in good faith regarding part of

each of the underpayments. See sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax

Regs. For purposes of section 6664(c) a taxpayer may establish reasonable cause

and good faith by showing reliance on professional advice. Sec. 1.6664-4(b)(1),

Income Tax Regs. A taxpayer relies reasonably on professional advice if he or she

proves the following by a preponderance of the evidence: (1) the adviser was a

competent professional who had sufficient expertise to justify reliance, (2) the
                                        - 20 -

[*20] taxpayer provided necessary and accurate information to the adviser, and (3)

the taxpayer actually relied in good faith on the adviser’s judgment. See

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299

F.3d 221 (3d Cir. 2002); see also Rule 142(a); Welch v. Helvering, 290 U.S. at

115.

       Petitioners failed to provide any evidence about the information they

provided to their tax return preparers, both of whom were certified public

accountants, regarding Rainbow Ranch. Moreover, neither tax return preparer

testified at trial. Petitioners have not shown that they had reasonable cause or

acted in good faith.

       Accordingly, petitioners are liable for the accuracy-related penalties under

section 6662(a). Any contentions we have not addressed are irrelevant, moot, or

meritless.

       To reflect the foregoing,


                                                          Decision will be entered

                                                 for respondent.
