I recently blogged about credibility. Litigation is About Persuasion Which Requires Credibility (Federal Tax Procedure Blog 4/12/24; 4/23/24), here. The Tax Court yesterday issued an opinion, Schwarz v. Commissioner, T.C. Memo. 2024-55, TC Dkt 12347-20 at Doc 190, here and GS here, in which Senior Judge Goeke offers lessons on the same subject. Those lessons appear in about 17 pages of the 117 page opinion. I’ll discuss the pages, but first offer an introduction to the case via the Court summary or syllabus at the beginning. See Supreme Court Opinion Syllabus as Persuasive Authority? (Federal Tax Procedure Blog 2/8/21), here):
Ps have a history of conducting real estate activities in South Texas, mostly involving ranch land. Through entities they controlled, Ps bought 15,070 acres of land in Zapata County in 2005 with the intent to improve and sell it. Ps later decided to conduct ecotourism operations consisting of hunting, fishing, and events on a portion of the land.
In the years at issue, 2015–17, ecotourism in Zapata County was conducted by TI, a partnership owned by Ps. TI leased the Zapata County land from entities controlled by Ps. TI also conducted farming and construction operations on the Zapata County land and other properties owned by Ps, related entities, and third parties.
TI filed Schedule F, Profit or Loss From Farming, with its return for each year 2005–20. TI reported income and expenses for both ecotourism and farming/construction operations on Schedule F. TI reported Schedule F gross income totaling over $14 million for years 2005–20. However, large expenses resulted in TI’s reporting a Schedule F net loss for each year. These net losses total over $15 million for years 2005–20. TI’s Schedule F losses flowed through to Ps, who used them to offset significant taxable income.
R issued Ps a notice of deficiency for years 2015–17. R determined that TI’s Schedule F activity was not engaged in for profit pursuant to I.R.C. § 183. Multiple adjustments flowed from this determination, including the disallowance of deductions for TI’s Schedule F losses. R also determined that a 20% accuracy-related penalty applies for each year at issue.
Ps filed a Petition challenging R’s determinations. Ps contend that TI’s Schedule F activity was engaged in for profit and that it and the real estate activities that Ps and related entities conducted are a single activity. Ps also contend they have a reasonable cause defense to penalties.
Held: TI’s Schedule F activity and the real estate activities are separate activities.
Held, further, TI’s Schedule F activity was not engaged in with the intent to make a profit.
Held, further, accuracy-related penalties are not applicable.