T.C. Summary Opinion 2009-160
UNITED STATES TAX COURT
FRANCIS J. AND ANDREA P. BOGUS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14809-07S. Filed October 19, 2009.
Francis J. Bogus, pro se.
Charles Maurer, Jr., for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case. Unless otherwise indicated, subsequent
section references are to the Internal Revenue Code in effect for
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the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
On their joint Federal income tax returns for 2003 and 2004
petitioners reported on Schedule C, Profit or Loss From Business,
gross receipts of $44,383 and $31,027, respectively, and total
expenses of $121,981 and $116,319, respectively, resulting in
losses for 2003 and 2004 of $77,598 and $85,292, respectively.
In the notice of deficiency respondent disallowed losses in
excess of gross receipts as passive losses in both years.
Respondent determined a deficiency in petitioners’ Federal income
taxes of $14,342 for 2003 and $16,577 for 2004. The sole issue
for decision is whether the passive loss rules of section 469
preclude petitioners from deducting losses incurred from their
dog racing activity.
Background
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
Massachusetts when the petition was filed.
During 2003 and 2004 Francis J. Bogus (petitioner) was
employed by Verizon as a network technician and typically worked
4 or 5 days per week from 7:30 a.m. to 4:30 p.m. Petitioner
worked approximately 40 years for Verizon and was retired at the
time of trial.
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Petitioner developed an interest in greyhounds approximately
25 years ago. Petitioner was introduced to greyhounds by a
friend who also lived in Massachusetts. His friend imported
greyhounds from Ireland for resale. Petitioner initially
purchased two trained greyhounds from his friend. Petitioner
then bred these dogs and contracted with professionals to race
them at a dog track in Rhode Island. By 2003 petitioner owned
approximately 164 greyhounds, worth an estimated $300,000, all
registered with the National Greyhound Association. Petitioner
owned greyhound puppies in Oklahoma and Florida and full-grown
greyhounds at approximately 10 different racetracks in multiple
States.
From birth to 12 months of age the greyhound puppies were in
the care of farmers who raised them. Petitioner personally
visited a farm in Florida to check on his puppies on only one
occasion and then only because he was taking his children to
nearby Disney World. Petitioner maintained contact with the
farmers by telephone.
From 12 to 16 months of age the greyhounds were in the care
of trainers who boarded them and trained them to race. The
trainers would call petitioner to report how the dogs were
progressing. Petitioner would then determine whether to race a
dog and where the dog should be raced.
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From 16 months to 5 years of age petitioner’s greyhounds
raced at one or more tracks. Petitioner contracted with
individuals at a number of dog tracks to race his dogs. During
the years that a dog was being raced the dog would be cared for
by the individual who was racing the dog. Each greyhound would
be assigned a grade, depending on how well it raced. The best
grade was AA. When one of petitioner’s dogs won a race,
petitioner would receive money, the amount of which was
determined by the grade of the dog and the track where the dog
raced. Some race tracks paid better than others. At 5 years of
age the greyhounds would be put up for adoption as pets.
Petitioner contracted with professionals to raise, breed,
board, train, ship, and race his dogs. In addition to handling
contract arrangements, petitioner performed some additional
functions. Petitioner went to dog tracks 3 or 4 nights a week
for 2 or 3 hours to watch his dogs race live and monitor them
for injuries. Most of the time petitioner went to Wonderland
Greyhound Park in Revere, Massachusetts, which is about a
5-minute drive from petitioner’s residence. From there
petitioner could also watch his dogs race at tracks all over the
country by simulcast.
Petitioner purportedly spent 1 hour per day on bookkeeping
and administration and 2 or 3 hours a week talking to contractors
by telephone. Additionally, when one of petitioner’s female
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greyhounds would go into heat, he would be notified by telephone
and then would select an appropriate stud from an official
breeding publication. Petitioner purportedly spent 3 to 5 hours
per month reading professional publications and 5 to 10 minutes
per telephone call related to breeding. The record is silent as
to how many of these phone calls took place. Petitioner did not
keep an appointment book, calendar, or diary that would
constitute a narrative summary of his participation in any facet
of his activity.
Petitioner did not breed, raise, board, train, ship, or race
his dogs personally. Virtually all of the required services were
performed by other individuals under contract. Further,
petitioner did not own any of the facilities where the services
were performed. At trial petitioner presented phone bills
showing hundreds of telephone calls to out-of-State locations.
Also, petitioner offered into evidence numerous invoices from
service providers as well as earnings statements from numerous
dog tracks.
Discussion
In general, the Commissioner’s determination set forth in a
notice of deficiency is presumed correct, and the taxpayer bears
the burden of showing that the determination is in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under
section 7491(a) the burden may shift to the Commissioner
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regarding factual matters if the taxpayer produces credible
evidence and meets the other requirements of the section.
Petitioner does not argue that he satisfied the elements for a
burden shift, but even if he did advance this argument,
petitioner did not produce sufficient evidence to support a
burden shift. Accordingly, the burden remains on petitioner to
disprove respondent’s determinations for 2003 and 2004.
The passive loss rules of section 469 place limitations on
the deduction of losses relating to passive activities; namely,
from activities in which a taxpayer does not materially
participate. Sec. 469(a)(1) and (2), (c)(1), (d)(1). As a
general rule, a taxpayer will be regarded as not materially
participating in an activity if the taxpayer is not involved in
the operation of the activity on a basis which is regular,
continuous, and substantial. See sec. 469(h)(1); sec. 1.469-
5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25,
1988).
The temporary regulations under section 469 contain seven
tests, the qualification under any one of which will result in a
taxpayer’s being treated as materially participating in the
activity. Sec. 1.469-5T(a), Temporary Income Tax Regs., supra.
Of the seven tests, petitioner presented evidence and made
general arguments that are applicable only to the tests found in
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section 1.469-5T(a)(1) and (7), Temporary Income Tax Regs.,
supra, which provide that a taxpayer shall be treated as
materially participating in an activity if he participates in the
activity for more than 500 hours during such year, or if, on the
basis of all the facts and circumstances, the taxpayer
participates in the activity on a regular, continuous, and
substantial basis during the taxable year.
A taxpayer may establish the extent of his or her
participation in a particular activity by any reasonable means
and has the burden of proving material participation in the
activity. Rule 142(a); sec. 1.469-5T(f)(4), Temporary Income Tax
Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988). The method of proof,
set out in section 1.469-5T(f)(4), Temporary Income Tax Regs.,
supra, is quite lenient, letting taxpayers prove their time spent
by “any reasonable means.” Reasonable means are not limited to
“Contemporaneous daily time reports, logs, or similar documents”
but include “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.; see Mowafi v.
Commissioner, T.C. Memo. 2001-111. But despite its apparent
leniency, this section of the regulations does not require us to
believe a “ballpark guesstimate” of the time spent on different
activities. Lee v. Commissioner, T.C. Memo. 2006-193; Bailey v.
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Commissioner, T.C. Memo. 2001-296; Carlstedt v. Commissioner,
T.C. Memo. 1997-331; Speer v. Commissioner, T.C. Memo. 1996-323;
Goshorn v. Commissioner, T.C. Memo. 1993-578.
Petitioner alleges that he materially participated in his
dog racing activity by: (1) Going to dog tracks and watching his
dogs race while monitoring them for injuries for a minimum of 312
and a maximum of 624 hours per year; (2) performing bookkeeping
and administrative functions for 365 hours per year; (3) talking
to contractors on the telephone for a minimum of 104 and a
maximum of 156 hours per year; and (4) spending a minimum of 36
and a maximum of 60 hours per year reading breeding publications
such as those published by the Massachusetts Greyhound
Association. Therefore, in total, petitioner alleges that he
participated in this activity for a minimum of 817 and a maximum
of 1,205 hours per year.
Petitioner attempts to come within the provisions of section
1.469-5T(f)(4), Temporary Income Tax Regs., supra, by relying on
his own testimony and exhibits such as invoices for services
rendered by the National Greyhound Association and other service
providers, earnings reports from numerous dog tracks, and
telephone bills. Petitioner’s vague time estimates and
supporting documentation do not constitute a “narrative summary”
of petitioner’s participation in this activity. Further,
petitioner failed to call any witnesses who could corroborate his
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testimony regarding the number of hours he estimated he spent
participating in the activity.
As previously noted, petitioner did not keep a diary,
appointment book, calendar, or any other similar type of record
of his participation in the activity. We are left with
petitioner’s self-serving testimony and exhibits that, when
viewed in the most favorable light, fail to prove that petitioner
materially participated in this activity and, when viewed in the
least favorable light, support respondent’s position that this is
a passive activity. “The Court is not bound to accept the
unverified, undocumented testimony of taxpayers, and we decline
to do so in the instant case.” Carlstedt v. Commissioner, supra
(citing Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd.
per curiam 540 F.2d 821 (5th Cir. 1976)).
We believe that petitioner was regularly involved in his
activity for profit but, unfortunately, was unable to demonstrate
and corroborate his material and substantial participation.
Petitioner could have maintained a calendar, appointment book,
diary, or other record of his participation in the activity to
enable him to meet his burden of proof. Lastly, we believe that
having been engaged in greyhound dog racing for over 25 years,
petitioner has found trustworthy and experienced individuals to
breed, raise, board, train, and race his greyhounds. It would
follow that this would require less material participation by
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petitioner than if he were just starting the activity and
learning how to operate the business. Therefore, on the basis of
the entire record, we hold that petitioner has not met his burden
of proving that he has materially and substantially participated
in the activity in question, and respondent’s determinations are
sustained.
To reflect the foregoing,
Decision will be entered
for respondent.