                         T.C. Memo. 2010-200



                       UNITED STATES TAX COURT



    CHERYL ELIZABETH HILL AND DON EDWARD HILL, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16394-07L.              Filed September 13, 2010.



     Cheryl Elizabeth Hill and Don Edward Hill, pro sese.

     Derek B. Matta, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     DEAN, Special Trial Judge:    The petition in this case was

filed in response to a Notice of Determination Concerning

Collection Action(s) Under Section 6320 and/or 6330 (notice of

determination).    Respondent later issued a supplemental notice of

determination.    The issue for decision is whether petitioners’
                                 - 2 -

tax liability is properly reported on their 2004 Federal income

tax return.

                           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.    When petitioners filed

their petition, they resided in Texas.

     Petitioners timely filed their 2004 Form 1040, U.S.

Individual Income Tax Return, reporting tax due of $56,320 after

consideration of withholdings.    Petitioners failed to pay the tax

reported to be due on their 2004 return.

     Upon receipt of petitioners’ 2004 return respondent assessed

the reported tax due and issued to petitioners a notice of

Federal tax lien filing.

     Petitioners timely requested a hearing pursuant to section

6320.   Respondent issued his notice of determination denying

petitioners’ request for relief.

     Petitioners later submitted an amended Federal income tax

return for 2004 claiming:    (1) Losses for Cheryl Elizabeth Hill’s

(petitioner) “Real Estate Investor” business on Schedule C,

Profit or Loss From Business; and (2) a $10,000 exception to the

10-percent additional tax on an early retirement distribution
                                - 3 -

pursuant to section 72(t) as first-time home buyers.1   On the

amended return, after consideration of prior withholdings

petitioners reported tax due of $15,384.

      After consideration of the 2004 amended return respondent

issued a supplemental notice of determination to petitioners

denying in full their claims on the amended return.

      During 2004 petitioner worked approximately 187 days as a

librarian at a local elementary school.    She spent time after

school and on weekends looking for and researching rental real

estate properties.

I.   Home Purchases

      In 2003 petitioner purchased a home in Georgia, and

petitioners, both of whom were retired at the time, intended to

move into that home.   Circumstances changed in 2004, however, and

petitioners instead decided to offer the home for rent.

      Later in 2004 petitioner purchased a second home that was a

manufactured home.    She originally purchased the home for herself

and her husband but thereafter decided to offer this home for

rent as well.   She encountered considerable difficulty, however,

finding a suitable community for the manufactured home.     The

first location proved unsatisfactory, and the second location was

unable to support her fully electrical manufactured home.


      1
      Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code, as amended, and Rule references
are to the Tax Court Rules of Practice and Procedure.
                               - 4 -

      Because of the inability to find a satisfactory manufactured

home community, petitioner decided to purchase a tract of land

for the home.   Petitioner first purchased a 3-acre plot of land

in Brazoria County, Texas, before realizing that she would be

unable to place her home on the land because the home failed to

comply with the county’s wind restriction requirements.   She

purchased a second tract of land, an 11-acre plot, and was able

to place her home on the land without any (apparent)

complication.   She transported her manufactured home four times

in 2004 before finding property suitable for her home.

      Petitioner was unable to secure renters for the Georgia home

and the manufactured home in 2004; consequently, she did not earn

income from renting property during 2004.

II.   Retirement Account Withdrawals

      In 2004 petitioners withdrew money from retirement accounts

to fund various expenditures, including the purchase of a first

home.   Petitioners realized that when an early distribution from

a retirement account is used to purchase a home by a first-time

home buyer, $10,000 of the distribution is excepted from the 10-

percent additional tax on early retirement account distributions.

Accordingly, on their amended return petitioners claimed that a

portion of a $65,000 distribution from Brazos Valley Credit Union

qualified for the $10,000 exception.   Respondent determined that
                               - 5 -

petitioners had already been granted the $10,000 exception for

Franklin Templeton Bank & Trust distributions in 2004.

                              OPINION

I.   Evidentiary Matters

      In general, the Court conducts trials in accordance with the

rules of evidence for trials without a jury in the U.S. District

Court for the District of Columbia, and accordingly, follows the

Federal Rules of Evidence.   Sec. 7453; Rule 143(a); Clough v.

Commissioner, 119 T.C. 183, 188 (2002).

      Respondent objects to several documents petitioners

proffered into evidence.

      A.   Narrative Logs

      Petitioner proffered narrative logs reflective of her rental

real estate activities throughout 2004.    Respondent alleges that

the logs constitute inadmissible hearsay.

      Hearsay is a statement, “other than one made by the

declarant while testifying at the trial or hearing, offered in

evidence to prove the truth of the matter asserted.”    See Fed. R.

Evid. 801(c).

      Petitioner’s narrative logs are reconstructive accounts she

drafted after respondent initiated the lien action.    These

narrative logs constitute inadmissible hearsay unless some

exception to the hearsay rule applies.    Petitioner has not

demonstrated that an exception to hearsay exists under which the
                                  - 6 -

Court may admit the narrative logs; therefore, the narrative logs

will be excluded.   See Fed. R. Evid. 803.

     B.   Real Estate Lien Note

     Respondent objects to petitioner’s proffer of a real estate

lien note on the basis of authenticity.2

     Rule 901(a) of the Federal Rules of Evidence provides that

“The requirement of authentication or identification as a

condition precedent to admissibility is satisfied by evidence

sufficient to support a finding that the matter in question is

what its proponent claims.”   Rule 901(b) of the Federal Rules of

Evidence sets forth a nonexclusive list of “examples of

authentication or identification conforming with the requirements

of [Rule 901]”, none of which are relevant here.

     The real estate lien note comprises five pages but appears

to consist of two separate incomplete documents.   When questioned

regarding the inconsistency of the documents, petitioner

explained that she just gave respondent what she had and that she

had “no idea what that is.”   The real estate lien note is

incomplete and, because petitioner was unable to identify the

documents or explain why the note appeared to consist of two

separate incomplete documents, respondent’s objection will be

sustained.


     2
      Respondent further alleged that this document violates the
best evidence rule, but the Court need not consider this
argument.
                                  - 7 -

      C.     Rate and Payment Schedule

      Respondent objects to the admission into evidence of

petitioner’s mortgage rate and payment schedule on the basis of

relevancy.3

      Relevant evidence means evidence having any tendency to make

the existence of any fact that is of consequence to the

determination of the action more probable or less probable than

it would be without the evidence.        Fed. R. Evid. 401.

      Petitioner seeks to introduce the rate and payment schedule,

which she accessed in 2007, to demonstrate that she obtained a

mortgage in 2004 for her 11-acre tract of land.        She attempted to

demonstrate that although she accessed the document in 2007, the

rate and payment schedule shows that she obtained a mortgage in

2004.      The line to which petitioner directs the Court, however,

is blackened out and is therefore illegible.        This document does

not contain legible data relevant to the 2004 tax year and is

irrelevant for purposes of determining petitioner’s 2004 tax

liability.      See id.

II.   Burden of Proof

      Section 7491(a)(1) provides that, subject to certain

limitations, where a taxpayer introduces credible evidence with

respect to a factual issue relevant to ascertaining the


      3
      Respondent also objected to the admission of the document
into evidence on the basis of hearsay, authenticity, and the best
evidence rule.
                                - 8 -

taxpayer’s tax liability, the burden of proof shifts to the

Commissioner with respect to that issue.     Credible evidence is

evidence the Court would find sufficient upon which to base a

decision on the issue in favor of the taxpayer if no contrary

evidence were submitted.    Ruckriegel v. Commissioner, T.C. Memo.

2006-78.

       Section 7491(a)(1) applies only 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.,

Ruckriegel v. Commissioner, supra.      Petitioners neither propose

facts to support their compliance with the conditions of section

7491(a)(2)(A) and (B) nor persuasively argue that respondent

bears the burden of proof on any issue because of section

7491(a)(1).    We therefore conclude that section 7491(a)(1) does

not apply.

III.    De Novo Review of Underlying Tax Liability

       Under section 6320(a) the Secretary is required to notify

the taxpayer in writing of the filing of a Federal tax lien and

inform the taxpayer of his right to a hearing.     Section 6330(a)

similarly provides that no levy may be made on a taxpayer’s
                               - 9 -

property or right to property unless the Secretary notifies the

taxpayer in writing of his right to a hearing before the levy is

made.   If the taxpayer requests a hearing under either section

6320 or 6330, a hearing shall be held before an impartial officer

or employee of the Internal Revenue Service Office of Appeals.

Secs. 6320(b)(1), (3), 6330(b)(1), (3).   At the hearing a

taxpayer may raise any relevant issue, including appropriate

spousal defenses, challenges to the appropriateness of the

collection action, and collection alternatives.   Sec.

6330(c)(2)(A).   A taxpayer is precluded from contesting the

existence or amount of the underlying tax liability unless the

taxpayer did not receive a notice of deficiency for the tax in

question or did not otherwise have an opportunity to dispute the

tax liability.   Sec. 6330(c)(2)(B); see also Sego v.

Commissioner, 114 T.C. 604, 609 (2000).   Where the validity of

the underlying tax liability is at issue in a collection review

proceeding, the Court will review the matter de novo.    Goza v.

Commissioner, 114 T.C. 176, 181-182 (2000).

     Petitioners were entitled to challenge their underlying

liability in the hearing, see, e.g., Montgomery v. Commissioner,

122 T.C. 1 (2004); therefore, the Court considers de novo the

merits of petitioners’ challenges.
                                 - 10 -

     The deductibility of the losses from petitioner’s rental

properties on Schedule C depends on whether she qualifies as a

real estate professional under section 469(c)(7).

     Taxpayers are allowed deductions for certain business and

investment expenses under sections 162 and 212; however, section

469(a) generally disallows for the taxable year any passive

activity loss.   A passive activity loss is defined as the excess

of the aggregate losses from all passive activities for the

taxable year over the aggregate income from all passive

activities for that year.    Sec. 469(d)(1).   A passive activity is

any trade or business in which the taxpayer does not materially

participate.   Sec. 469(c)(1).    Rental activity is treated as a

per se passive activity regardless of whether the taxpayer

materially participates.    Sec. 469(c)(2), (4).

     Under section 469(c)(7)(B), the rental activities of a

taxpayer in the real property business (real estate professional)

are not per se passive activities under section 469(c)(2) but are

treated as a trade or business subject to the material

participation requirements of section 469(c).      Sec. 1.469-

9(e)(1), Income Tax Regs.

     Under section 469(c)(7)(B), a taxpayer qualifies as a real

estate professional and is not engaged in a passive activity

under section 469(c)(2) if:

          (i) more than one-half of the personal services
     performed in trades or businesses by the taxpayer during
                               - 11 -

     such taxable year are performed in real property trades or
     businesses in which the taxpayer materially participates,
     and

          (ii) such taxpayer performs more than 750 hours of
     services during the taxable year in real property trades or
     businesses in which the taxpayer materially participates.

Unless the taxpayer elects to aggregate his interests, each of

the taxpayer’s interests in real estate is treated as a separate

activity.4   Sec. 469(c)(7)(A).

     In the case of a joint return, the same spouse must satisfy

each requirement.    Sec. 469(c)(7)(B).   Thus, if either spouse

qualifies as a real estate professional, the rental activities of

the real estate professional are not a per se passive activity

under section 469(c)(2).    Instead, the real estate professional’s

rental activities would be treated as a passive activity under

section 469(c)(1) unless the taxpayer materially participated in

the activity.   Material participation is defined as involvement

in the operations of the activity that is regular, continuous,

and substantial.    Sec. 469(h)(1).

     With respect to the evidence that may be used to establish

hours of participation, section 1.469-5T(f)(4), Temporary Income

Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988), provides:

     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


     4
      Petitioner did not elect to aggregate her rental real
estate interests.
                              - 12 -

     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.

     Petitioner’s rental real estate activity consisted of

research on and development of two rental properties, a home

purchased in 2003 and a home purchased in 2004, neither of which

was originally planned as a rental property.   Petitioner worked

approximately 7.5 hours per day for 187 days, a total of 1,402.5

hours, as a school librarian in 2004.   During those 187 working

days, she alleged, she devoted an additional 6 hours of her time

researching and developing her rental real estate activity.    She

further asserts that on each vacation day, each Saturday and

Sunday, and each holiday, she devoted 8 hours to her rental real

estate activity.   She estimated working a total of 2,840 hours on

her rental real estate activity during 2004.   On the basis of

petitioner’s estimates, she worked an average of over 11 hours a

day throughout 2004.   Her estimate may have been bolstered by her

assumption that there are “72 weekends in a year”.

     Petitioner claimed that she spent numerous hours each day

researching real estate property and development.    Despite her

alleged extensive research, as discussed supra, petitioner

encountered significant difficulty finding an appropriate

location for her manufactured home.    In addition, she presented
                               - 13 -

little evidence as to the activities she devoted to her Georgia

home in 2004.

       The methods petitioner used to approximate the time that she

spent performing rental services during 2004 are not reasonable

within the meaning of section 1.469-5T(f)(4), Temporary Income

Tax Regs., supra.    Petitioner’s estimates are uncorroborated and

do not reliably reflect the hours that she devoted to her rental

real estate activity.    Petitioner assigned hours to activities

years later, in preparation for trial, that were based solely on

her judgment as to how much time the activities must have taken

her.    This Court has previously noted that, while the regulations

are somewhat ambiguous concerning the records to be maintained by

taxpayers, they do not allow a postevent “ballpark guesstimate”.

Carlstedt v. Commissioner, T.C. Memo. 1997-331; Speer v.

Commissioner, T.C. Memo. 1996-323; Goshorn v. Commissioner, T.C.

Memo. 1993-578.

       The following factors further diminish the credibility and

accuracy of petitioner’s claim:    (1) The number of hours claimed

appears excessive in relation to the tasks described, given the

amount of time she worked as a librarian throughout the year; and

(2) the Georgia property and the manufactured home were vacant

during 2004.

       Furthermore, the Court is not convinced that the hours

petitioner claimed she spent on her rental real estate activity
                              - 14 -

accounted for more than one-half of the total hours of personal

services she performed in a trade or business in 2004.    She

therefore does not qualify as a real estate professional pursuant

to section 469(c)(7), and her rental activities during 2004 were

passive activities pursuant to section 469(c)(2).5   Consequently,

petitioner’s passive activity losses for 2004 are limited by

section 469.

     A taxpayer who “actively participated” in a rental real

estate activity may deduct a maximum loss of $25,000 per year

related to the activity.   Sec. 469(i)(1) and (2).   This exception

is fully phased out, however, when adjusted gross income equals

or exceeds $150,000.   Sec. 469(i)(3)(A).   Petitioners reported

adjusted gross income of $312,981 for 2004; consequently, they

are not entitled to deduct any of the losses associated with

petitioner’s rental real estate activity for the 2004 tax year.

     Petitioner alleged that even if she is unable to deduct her

rental real estate activity losses under section 469, she should

be entitled to deduct the costs of her rental real estate

activity under sections 212, 162 and/or 195.6



     5
      The Court need not decide whether she materially
participated in her rental real estate activity. See sec.
469(c)(4).
     6
      Sec. 469 limits the deductions that would otherwise be
permitted under secs. 162 and 212. Because petitioner’s passive
activity deduction is limited pursuant to sec. 469, petitioner
may not deduct her expenses pursuant to secs. 162 and 212.
                              - 15 -

      Petitioner’s argument that she is entitled to a deduction

pursuant to section 195 is misplaced.   Section 195 provides that

no deduction shall be allowed for startup expenditures.

Therefore, even if she incurred startup costs associated with a

business, she would not be entitled to a deduction pursuant to

section 195.

IV.   Penalty for Early Withdrawal From Pension

      Section 72(t)(1) generally imposes a 10-percent additional

tax on early distributions from “a qualified retirement plan (as

defined in section 4974(c)),” unless the distributions come

within one of several statutory exceptions.

      With respect to the distribution at issue, the parties do

not dispute that petitioners’ accounts were qualified employee

retirement plans and that petitioner did not “roll over” her

distributions pursuant to section 408(d)(3).      Therefore, in order

for petitioner to prevail, she must show that the distributions

fall under one of the exceptions under section 72(t)(2).

      With respect to section 72(t), this Court has repeatedly

held that it is bound by the list of statutory exceptions

enumerated in section 72(t)(2).   See, e.g., Arnold v.

Commissioner, 111 T.C. 250, 255-256 (1998); Schoof v.

Commissioner, 110 T.C. 1, 11 (1998); Clark v. Commissioner, 101

T.C. 215, 224-225 (1993); Swihart v. Commissioner, T.C. Memo.

1998-407; Pulliam v. Commissioner, T.C. Memo. 1996-354; Roundy v.
                              - 16 -

Commissioner, T.C. Memo. 1995-298, affd. 122 F.3d 835 (9th Cir.

1997).

      As relevant herein, section 72(t)(2)(F) exempts

distributions from the early withdrawal additional tax to the

extent such distributions are qualified first-time home buyer

distributions.   See sec. 72(t)(2)(F), (8).   The maximum amount of

a distribution that may be treated as a qualified first-time home

buyer distribution is $10,000.   Sec. 72(t)(8)(B).   Any amount of

a distribution that petitioners received in excess of $10,000

remains subject to the 10-percent additional tax required by

section 72(t).   Id.

      Respondent alleges that petitioners were already granted the

$10,000 exception and petitioners presented no argument or

evidence demonstrating that they had not already received the

$10,000 exception as first-time home buyers.   Accordingly,

petitioners are not entitled to an additional $10,000 exception.

V.   Interest Abatement7

      Section 6404(e)(1) provides in pertinent part that the

Secretary may abate the assessment of interest on:   (1) Any




      7
      Petitioners also requested an abatement of penalties, but
the record does not show what penalties, if any, were assessed
against them. Accordingly, the Court is unable to determine
whether they are entitled to an abatement of penalties.
                              - 17 -

deficiency attributable to any error or delay by an officer or

employee of the IRS in performing a ministerial or managerial

act;8 or (2) any payment of any tax described in section 6212(a)

to the extent that any error or delay in such payment is

attributable to such officer or employee being erroneous or

dilatory in performing a ministerial or managerial act.

     A ministerial act is a procedural or mechanical act that

does not involve the exercise of judgment or discretion by the

Commissioner.   Sec. 301.6404-2(b)(2), Proced. & Admin. Regs.

Section 6404(e) provides a taxpayer relief only if no significant

aspect of the error or delay can be attributed to the taxpayer

and only after the Commissioner has contacted the taxpayer in

writing about the deficiency or payment in question.   H. Rept.

99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844 (“This

provision does not therefore permit the abatement of interest for

the period of time between the date the taxpayer files a return

and the date the IRS commences an audit, regardless of the length

of that time period.”).

     A managerial act is an administrative act that occurs during

the processing of a taxpayer’s case involving the temporary or



     8
      Petitioners do not have a deficiency but rather an
underpayment of tax. See secs. 6211, 6404(e)(1)(A). Therefore,
petitioners’ interest abatement claim will be determined under
sec. 6404(e)(1)(B). See secs. 6211, 6212(a).
                               - 18 -

permanent loss of records or the exercise of judgment or

discretion relating to management of personnel.   Sec. 301.6404-

2(b)(1), Proced. & Admin. Regs.

     Petitioners allege that respondent’s refusal to accept their

2004 amended return was without justification and a denial of due

process.   Even though the Commissioner has administratively

permitted their use, the filing of an amended return is not a

matter of right, as there is no statutory provision expressly

authorizing one to be filed.   Badaracco v. Commissioner, 464 U.S.

386, 393 (1984).   Acceptance of an amended return has repeatedly

been held to be a matter which is within the discretion of the

Commissioner.   Colvin v. Commissioner, T.C. Memo. 2004-67, affd.

122 Fed. Appx. 788 (5th Cir. 2005).

     Furthermore, petitioners have failed to identify a

ministerial or managerial delay by an IRS employee that caused

them to forgo making payments on their income tax liability.

They self-reported their income tax liability and chose to forgo

making payments to pursue alternative avenues of relief.

Accordingly, the Court is unable to conclude that any delay in

payment on petitioners’ account was not due in significant part

to their own act of nonpayment.   See sec. 6404(e)(1)(B).

Petitioners’ request for an abatement of interest is denied.

     As petitioners made no allegation in the petition that

respondent abused his discretion in filing the disputed tax lien,
                             - 19 -

that the proposed method of collection is inappropriate, or that

there is any spousal defense, the Court holds for respondent.

     To reflect the foregoing,


                                        Decision will be entered

                                   for respondent.
