The opinion
T.C. Memo. 2012-19
UNITED STATES TAX COURT
ALFRED A. AND BRENDA C. IVERSEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5300-10. Filed January 18, 2012.
Thomas Edward Brever, for petitioners.
John P. Healy, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined deficiencies in
petitioners’ 2005 and 2006 joint Federal income taxes of $103,848
and $70,356, respectively, and accuracy-related penalties under
section 6662.1
1
All section references are to the Internal Revenue Code in
(continued...)
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The issues for decision are whether petitioners’
involvement in a Colorado cattle ranch constituted a passive
activity under section 469 and, if so, whether the accuracy-
related penalties should be sustained.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time of filing the petition, petitioners resided in
Minnesota.
Petitioner Alfred Iversen (Mr. Iversen), as a teenager,
spent summers on his grandparents’ 400-acre farm and ranch near
Thief River Falls, Minnesota.
Mr. Iversen served in the U.S. Navy on antisubmarine warfare
planes. After military service, he earned his master’s degree in
mechanical engineering from the University of Minnesota.
In 1979 Mr. Iversen founded PMT Corp. (PMT), which over the
years has become a large and successful manufacturer and
worldwide seller of surgical and medical equipment. PMT sells
its medical equipment throughout the United States and in more
than 30 foreign countries. PMT is a Minnesota corporation.
Petitioners own a controlling interest in the stock of PMT.
1
(...continued)
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
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In both 2005 and 2006, as president of PMT Mr. Iversen
worked more than 40 hours a week, and he received from PMT a
total of approximately $6 million in salary and other income.
In 1998 petitioners formed Stirrup Ranch, LLC (Stirrup
Ranch), as a limited liability company through which they
purchased a 14,000-acre cattle and horse ranch (ranch) in Fremont
County, Colorado, near Canon City, Colorado. Petitioners owned
100 percent of Stirrup Ranch.
The ranch is in the Colorado Rockies at an altitude of
approximately 9,000 feet. The primary activity conducted by
Stirrup Ranch is the commercial raising and selling of Black
Angus and Hereford cattle. In addition to owning the ranch,
Stirrup Ranch leases another 28,000 acres from the Bureau of Land
Management. The total of the owned and leased acreage on which
Stirrup Ranch grazes its cattle consists of 42,000 acres.
During 2005 and 2006 Stirrup Ranch owned approximately 300
head of cattle and 30 horses.
The main ranch house on the Stirrup Ranch property is a
20,000-square-foot lodge with a log exterior and wraparound
decks. The house has a large great room with vaulted ceilings, a
floor to ceiling fireplace, and leather couches and chairs. The
house also includes meeting rooms, office space, a conference
room, a recreation room, and a number of bedrooms and bathrooms.
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In 2005 and 2006 Stirrup Ranch employed full time on its
property in Colorado two individuals--a ranch manager and a ranch
hand. Over the course of 2005 and 2006 Stirrup Ranch employed
three different ranch managers. Seasonally, Stirrup Ranch
employed onsite at the ranch additional ranch hands. The Stirrup
Ranch ranch manager lives on the ranch property in a house
separate from the lodge.
A job description for the onsite Stirrup Ranch ranch
manager, written by one of the ranch managers (and which the
parties stipulate is a “description of the ranch manager’s
general duties during 2005 and 2006”) states as follows:
The ranch manager is responsible for all ranching
operations on the 42,000 total acres of the Stirrup
Ranch. This includes but is not limited to 5 major
categories: livestock management; natural resource
management; maintenance and improvement projects;
employee and subcontractor supervision; and working
with government agencies (BLM, State Land board and US
Forest Service) on our leased lands.
A few of the ranch goals that [the ranch manager is]
continually working toward are: maximizing hay meadow
production; water development; and increasing stocking
rate. Besides the year-round Stirrup Ranch head of
cattle [the ranch manager] also custom graze[s] other
peoples’ cattle to increase seasonal pasture
utilization and cash flow. [The ranch manager’s]
responsibilities require * * * at least 60 hrs/week.
During 2005 and 2006 petitioners spent almost all of their
time in Minnesota--Mr. Iversen performing his executive
responsibilities as president of PMT.
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While in Minnesota Mr. Iversen also would make and receive
telephone calls and send and receive emails and faxes relating to
Stirrup Ranch matters. In evidence for 2005 are telephone
records which indicate that Mr. Iversen made telephone calls
lasting a total of 3.75 hours to locations in Colorado using
PMT’s telephones. No telephone records were offered into
evidence relating to 2006, and no telephone records were offered
into evidence relating to petitioners’ home and mobile phones for
either 2005 or 2006.
In evidence for 2005 are four emails or faxes relating to
Stirrup Ranch sent to Mr. Iversen from employees working at the
ranch in Colorado. For 2006 there are in evidence three emails
or faxes to Mr. Iversen relating to Stirrup Ranch sent from
employees working at the ranch in Colorado.
During 2005 and 2006 the onsite Stirrup Ranch ranch manager
did not have general check signing authority for Stirrup Ranch;
rather, Mr. Iversen retained for himself Stirrup Ranch check
signing authority. Occasionally, Mr. Iversen would grant a power
of attorney authorizing the ranch manager to sign Stirrup Ranch
checks. The canceled checks of Stirrup Ranch that are in
evidence for 2005 indicate that many of the checks signed by Mr.
Iversen were routine salary checks for the ranch manager and the
ranch hand. For 2006 no record of Stirrup Ranch checks is in
evidence.
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During 2005 and 2006, on each occasion when he traveled from
Minnesota to Colorado to visit the ranch, Mr. Iversen did so on a
private NetJets airplane paid for by PMT.2 These flights
originated from the Minneapolis-St. Paul airport and terminated
at the Pueblo, Colorado, airport.
According to a NetJets airplane flight tracking record in
evidence, during 2005 Mr. Iversen made 11 trips to the ranch, and
(not counting outbound travel days from Minneapolis to Pueblo,
Colorado, because of his late arrival) he spent a total of 23
days onsite in Colorado at the ranch. On 19 of those days one or
more of petitioners’ children accompanied Mr. Iversen to the
ranch on the NetJets airplane.
According to a handwritten list petitioners prepared for
trial, during 2006 Mr. Iversen made 11 trips to the ranch and
spent 19 days onsite at the ranch (again not counting outbound
travel days).3 The evidence does not indicate who traveled with
Mr. Iversen to the ranch in 2006.
2
In August 2006 on one trip to the ranch petitioners drove a
truck.
3
For 2006 no airplane flight tracking record regarding Mr.
Iversen’s airplane trips to the ranch was provided to respondent,
and none was offered into evidence. However, the handwritten
list of Mr. Iversen’s 2006 flights to the ranch was prepared by
petitioners and conditionally admitted into evidence. After
trial petitioners apparently provided to respondent a flight
record of Mr. Iversen’s flights to the ranch in 2006. Respondent
points to a number of minor discrepancies between the handwritten
list and the 2006 flight record provided after trial and objects
to admission of the handwritten list on grounds of hearsay and
lack of foundation. The discrepancies appear to be minor, and we
overrule respondent’s objection to Exhibit 13.
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Occasionally in 2005 and 2006 Mr. Iversen hosted at the
ranch PMT employees, sales representatives, clients, and
potential clients. The PMT guests at the ranch would have
meetings relating to PMT business, and they would hunt elk and
other wildlife. The guests would stay overnight in the ranch
lodge.
Mr. Iversen would participate in the PMT meetings conducted
at the ranch, and he occasionally would hunt on the ranch with
PMT employees, other guests, and family members.
While at the ranch, Mr. Iversen also would assist the ranch
manager and ranch hand with various ranch chores-–mending fences;
rounding up cattle; branding, inoculating, and castrating cattle;
and cleaning the barn.
Documents in evidence relating to Stirrup Ranch’s leases of
Federal grazing land designate Mr. Iversen as “permittee/
licensee” and the onsite Stirrup Ranch ranch manager as “ranch
manager”.
For her part, while at the ranch in 2005 and 2006 Mrs.
Iversen participated in some activities relating to the family,
the cattle, and the horses.
While visiting the ranch in 2005 and 2006, other Iversen
family members occasionally would assist with ranch chores.
Neither Mr. Iversen nor Mrs. Iversen maintained a log, a
diary, notes, or other record of the work they performed on a
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day-to-day basis relating to Stirrup Ranch--whether performed
onsite at the ranch in Colorado or in Minnesota.
In 2005 and 2006 neither petitioner received any salary or
wages for work relating to Stirrup Ranch.
Petitioners’ 2005 and 2006 joint Federal income tax returns
were prepared and filed on their behalf by Martin Nergaard, who
is an attorney, a certified public accountant, the director of a
regional accounting firm, and a former Internal Revenue Service
employee. Mr. Nergaard concluded that under the passive loss
rules of section 469 Mr. Iversen in 2005 and 2006 materially
participated in the activities of Stirrup Ranch, and Mr. Nergaard
prepared petitioners’ 2005 and 2006 joint Federal income tax
returns accordingly, claiming loss deductions for Stirrup Ranch
of $288,066 for 2005 and $197,077 for 2006.
On audit respondent concluded that Mr. Iversen did not
materially participate in the activities of Stirrup Ranch,
disallowed the loss deductions claimed relating to Stirrup Ranch,
and determined the $103,848 and $70,356 deficiencies in
petitioners’ respective 2005 and 2006 Federal income taxes and
the section 6662 accuracy-related penalties.
OPINION
For purposes of the limitation under section 469 on losses
from passive activities, material participation is defined as
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involvement in an activity on a regular, continuous, and
substantial basis. Sec. 469(h)(1)(A)-(C).
Activity performed in an individual’s capacity as an
investor does not qualify as participation in an activity, unless
the individual is directly involved in the day-to-day management
of the activity. Sec. 1.469-5T(f)(2)(ii)(A) and (B), Temporary
Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). Investor-
related activities not qualifying as material participation
include: (1) Studying and reviewing financial statements or
reports on operations; (2) preparing or compiling summaries or
analysis of the finances or operations of the activity for the
individual’s own use; and (3) monitoring the finances or
operations of the activity in a nonmanagerial capacity. Id.
Participation in an activity may be shown by any reasonable
means, including calendars, appointment books, or narrative
summaries identifying work performed and the approximate number
of hours spent performing the work. Sec. 1.469-5T(f)(4),
Temporary Income Tax Regs., supra.
Contemporaneous daily time reports, logs, or similar
documents are not required if other reasonable means exist of
establishing a taxpayer’s participation. Id.
Under the 500-hour test of subparagraph (1) and under the
facts and circumstances test of subparagraph (7) of section
1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb.
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25, 1988), petitioners contend that in 2005 and 2006 they
materially participated in the management and activities of
Stirrup Ranch on a regular, continuous, and substantial basis.4
Respondent emphasizes that under section 1.469-
5T(b)(2)(ii)(A) and (B), Temporary Income Tax Regs., 53 Fed. Reg.
5726 (Feb. 25, 1988), a taxpayer’s management activities under
the facts and circumstances test shall not be taken into account
if another person also receives compensation for management
services relating to the activity or if another person performs
more management services (by time) relating to the activity than
the taxpayer.
Petitioners claim that in spite of the fact that a ranch
manager was employed onsite at the ranch, Mr. Iversen was the
real day-to-day ranch manager and he made essentially all of the
significant decisions relating to the operation, activities, and
management of Stirrup Ranch.
Petitioners claim that when he was at the ranch Mr. Iversen
worked from dawn to dusk on Stirrup Ranch matters and that when
he was in Minnesota (in order to keep up on the details of all
4
Petitioners acknowledge that they do not meet the tests
relating to regular, continuous, and substantial participation
set forth in subpars. (2) and (3) of sec. 1.469-5T(a), Temporary
Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), and no
evidence indicates that petitioners meet the tests set forth in
subpars. (4), (5), and (6) of sec. 1.469-5T(a), Temporary Income
Tax Regs., supra.
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significant aspects of Stirrup Ranch and make practically all
decisions relating to the operation, activities, and management
of Stirrup Ranch) Mr. Iversen spent 2 to 3 hours a day on
telephone calls, emails, and fax communications with the onsite
Stirrup Ranch ranch manager.
Petitioners claim that in each of 2005 and 2006, whether at
the ranch in Colorado or from petitioners’ home in Minnesota, Mr.
Iversen spent a total of at least 400 hours working on matters
relating to Stirrup Ranch, Mrs. Iversen spent at least another
100 to 150 hours working on matters relating to the horses at the
ranch, and that they together meet the 500-hour test of section
1.469-5T(a)(1), Temporary Income Tax Regs., supra.5
Mr. Iversen describes his involvement with Stirrup Ranch
activities as follows:
[The onsite Stirrup Ranch ranch manager and ranch hand]
do nothing without telling me, and they cannot buy
anything, negotiate anything, kill anything, shoot
anything, and I lay down the rules as far as what
they’re supposed to do.
Our analysis of the time and activity petitioners spent in
2005 and 2006 working on matters relating to Stirrup Ranch is
made difficult by the lack of meaningful contemporaneous or other
5
Under subpar. (3) of sec. 1.469-5T(f), Temporary Income Tax
Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), Mrs. Iversen’s
participation in the activities of Stirrup Ranch count under both
the 500-hour and the facts and circumstances tests of sec. 1.469-
5T(a)(1) and (7), Temporary Income Tax Regs., 53 Fed. Reg. 5725,
5726 (Feb. 25, 1988).
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records and documentation regarding specifically what petitioners
did on a day-to-day basis and how much time they spent on matters
relating to Stirrup Ranch. In this case, the lack of records and
documentation are not cured by estimates made years after the
fact in writing or by testimony. See Goshorn v. Commissioner,
T.C. Memo. 1993-578.
Petitioners acknowledge that some portion of their time
while at the ranch in Colorado (when PMT employees and clients
and petitioners’ family were present) was spent on activities
relating to PMT and the family, not on Stirrup Ranch’s cattle and
horse activities.
While he was in Minnesota Mr. Iversen clearly was busy with
his responsibilities as president of PMT, and the documented
record in this case is particularly thin as to how much time Mr.
Iversen spent on Stirrup Ranch matters--whether in Minnesota or
Colorado.
The fact that the airplane flights from Minnesota to the
ranch were paid for by PMT indicates to us that Mr. Iversen’s
time spent at the ranch often and primarily related to the
affairs of PMT, not to the management and activities of Stirrup
Ranch.
The airplane logs in evidence for 2005 indicate that during
4 months of 2005, Mr. Iversen made no trips to the ranch and that
he was at the ranch for 1 day in each of April, June, September,
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and October 2005. According to the airplane flight logs, on each
trip to Stirrup Ranch in 2005 on which Mr. Iversen stayed at the
ranch more than 1 day, an Iversen family member went along.
The evidence does not indicate those occasions when Mr.
Iversen was at the ranch without PMT employees and/or clients
also being present.
Telephone records that are in evidence do not support
petitioners’ claim that Mr. Iversen spent frequent and numerous
hours on the phone while in Minnesota talking to the Stirrup
Ranch ranch manager in Colorado about Stirrup Ranch activities or
any other subject.
If, in spite of the fact that there was an onsite Stirrup
Ranch ranch manager, Mr. Iversen was running, supervising,
managing, and involved with all significant activities of Stirrup
Ranch, as petitioners seem to claim, we would expect petitioners
to have offered into evidence extensive files, to-do lists, home
and mobile phone records, business plans, project descriptions,
instructions to employees, etc., documenting and establishing Mr.
Iversen’s active involvement in the regular, continuous, and
substantial management and day-to-day activities of Stirrup
Ranch. That documentary evidence is absent.
We do not doubt that while in Minnesota Mr. Iversen spent
time on Stirrup Ranch activities--talking on the telephone to the
ranch manager, reading articles on cattle ranching, receiving
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bills and correspondence, and writing checks in payment of ranch
bills. Also, we acknowledge that while in Colorado at the ranch
Mr. Iversen participated and assisted with the cattle operation,
ranch maintenance, and improvements.
However, the weight of the evidence before us does not
establish that during 2005 and 2006 petitioners spent anywhere
near 500 hours on Stirrup Ranch activities, that petitioners
engaged in regular, continuous, and substantial activities
relating to Stirrup Ranch, or that petitioners materially
participated in the activities of Stirrup Ranch as required under
section 469 and the related regulations.
Further, a significant portion of the time Mr. Iversen spent
on Stirrup Ranch activities appears to have been more in the
capacity of an investor not involved in the day-to-day activities
and which therefore would not count under the facts and
circumstances test. See sec. 1.469-5T(f)(2)(ii)(B), Temporary
Income Tax Regs., supra. The presence at the ranch of a full-
time paid ranch manager for most of 2005 and 2006 disqualifies
much of Mr. Iversen’s time working on Stirrup Ranch activities
from counting under the facts and circumstances test.
We sustain respondent’s deficiency determinations herein for
both 2005 and 2006.
With regard to the section 6662(a) accuracy-related
penalties for 2005 and 2006 that respondent determined, we are
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persuaded that petitioners had good faith and reasonable cause in
claiming the losses that we disallow.
Petitioners credibly testified that they believed the
claimed losses qualified under the active participation rules of
section 469. Petitioners’ testimony was supported by the
testimony of their accountant.
Petitioners’ accountant should have known better,
particularly if the accountant was shown no more evidence and
documentation than was shown to us. Regardless of the
incorrectness of their accountant’s advice, we conclude that
petitioners reasonably and in good faith relied on their
accountant in claiming the losses disallowed. We reject
respondent’s determination of the section 6662(a) accuracy-
related penalties.
Decision will be entered
under Rule 155.