United States Tax Court

United States Tax Court

T.C. Memo. 2022-49

MICHAEL J. ROGERSON,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 5848-20.

Filed May 12, 2022.

—————

Between 2005 and 2013, P was the president and

100% owner of S1, an S corporation engaged (directly or

through wholly owned entities) in manufacturing aircraft

parts and components (aerospace business). S1 and its

wholly owned entities had multiple product lines, some of

which involved digital products and some of which involved

analog products.

In 2014, P began reorganizing the aerospace

business to separate the digital products, analog products,

and corporate functions. Following the reorganization, P

owned the business directly through three S corporations:

S1 (digital products), S2 (analog products), and S3

(corporate functions), each of which filed its own tax

return.

In addition to the aerospace business, P owned two

yachts that he intended to charter. However, P did not

charter the yachts during the years at issue.

Each year, from at least 2005 to 2013, S1 filed Form

1120S, U.S. Income Tax Return for an S Corporation,

reflecting all the results of the aerospace business that it

and its wholly owned entities conducted. For these years,

S1’s returns did not separate out the various activities of

Served 05/12/22

2

[*2]

the aerospace business for purposes of the rules under

I.R.C. § 469.

On his personal income tax returns for 2005 to 2013,

P reported his involvement in S1’s overall aerospace

business as nonpassive for purposes of I.R.C. § 469. But on

his 2014, 2015, and 2016 tax returns, P reported his

involvement in S2 as passive and his involvement in the

remaining portion of the aerospace business (in S1 for 2014

and in S1 and S3 for 2015 and 2016) as nonpassive. He

also reported his involvement in his yacht activities as

nonpassive for 2014, 2015, and 2016.

R issued a notice of deficiency for tax years 2014,

2015, and 2016, determining among other things that P

materially participated in S2 and therefore was required to

treat income from S2 as nonpassive for the years at issue.

The notice further determined that P’s yacht activities

were passive rental activities and that P was liable for

accuracy-related penalties under I.R.C. § 6662(a).

P challenges R’s notice, arguing among other things

that (1) P did not materially participate in S2 during the

years at issue, (2) R’s reliance on the test for material

participation set out in Temp. Treas. Reg. § 1.469-5T(a)(5)

is a new matter not pleaded by R, (3) Temp. Treas. Reg.

§ 1.469-5T(a)(5) is procedurally and substantively invalid,

(4) P’s yacht activities qualify as nonpassive based on the

rental exceptions of Temp. Treas. Reg. § 1.469-1T(e)(3)(ii),

and (5) the accuracy-related penalties should not apply

because P had reasonable cause and acted in good faith

with respect to any underpayment.

Held: Under Temp. Treas. Reg. § 1.469-5T(a)(5) and

Treas. Reg. § 1.469-5(j)(1), P materially participated in S2

during 2014, 2015, and 2016 because he materially

participated in S1’s overall business of manufacturing

aircraft parts and components for at least five of the ten

immediately preceding years.

Held, further, P’s contention that R’s reliance on

Temp. Treas. Reg. § 1.469-5T(a)(5) is a new matter not

pleaded by R is rejected.

3

[*3]

Held, further, P’s arguments regarding the

substantive validity of Temp. Treas. Reg. § 1.469-5T(a)(5)

fail because the regulation is not contrary to I.R.C. § 469.

Held, further, we need not address P’s argument

that Temp. Treas. Reg. § 1.469-5T(a)(5) is procedurally

invalid because, even assuming for the sake of argument

that P’s argument is correct, P would not prevail under the

text of I.R.C. § 469.

Held, further, P’s yacht activities are rental

activities that do not qualify for the exceptions described in

Temp. Treas. Reg. § 1.469-1T(e)(3)(ii).

Held, further, the accuracy-related penalties under

I.R.C. § 6662(a) do not apply because P had reasonable

cause and acted in good faith with respect to his

underpayments of tax.

—————

Steven R. Mather, for petitioner.

Monica D. Polo and Samuel M. Warren, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

TORO, Judge: This deficiency case calls on us to apply the

passive activity loss rules of section 469. 1 Enacted by Congress as part

of the Tax Reform Act of 1986, Pub. L. No. 99-514, § 501(a), 100 Stat.

2085, 2233, the rules limit a taxpayer’s use of losses generated by

passive activities to offset unrelated income generated by nonpassive

activities.

Petitioner Michael Rogerson is a successful entrepreneur.

A patent holder and certified commercial pilot, Mr. Rogerson has owned

and led an eponymous group of companies in the aerospace industry

1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, all

regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in

effect at all relevant times, and all Rule references are to the Tax Court Rules of

Practice and Procedure. We round all monetary amounts to the nearest dollar.

4

[*4] since the late 1970s. Also a sailing and boating enthusiast, during

the tax years 2014, 2015, and 2016, Mr. Rogerson owned two yachts that

he intended to charter.

The issues for our decision relate to the federal income tax

consequences of Mr. Rogerson’s participation in these two endeavors.

Specifically, we must decide three questions: (1) whether, for the tax

years 2014, 2015, and 2016, Mr. Rogerson materially participated in

certain of his aerospace activities, with the result that income from those

activities must be treated as nonpassive (we conclude he did);

(2) whether Mr. Rogerson’s yacht activities during the same years were

per se passive as rental activities (we conclude they were); and

(3) whether Mr. Rogerson is liable for accuracy-related penalties on the

underpayments of tax resulting from our first two holdings (we conclude

he is not).

As we explain in greater detail below, in light of the answers to

the first two questions, Mr. Rogerson may not offset losses resulting

from his passive yacht activities against income from his nonpassive

aerospace activities. He is not liable for the accuracy-related penalties

the Commissioner determined, however, because Mr. Rogerson had

reasonable cause and relied in good faith on his certified public

accountant in connection with the preparation of the returns at issue.

FINDINGS OF FACT

The parties have filed First and Second Stipulations of Fact, both

with attached exhibits, and a Stipulation of Settled Issues, all of which

are incorporated by this reference. Trial of this case was held remotely

on May 5 and 6, 2021. Mr. Rogerson resided in Nevada when he filed

his petition.

I.

Aerospace Activities

A.

Establishment of the Rogerson Companies

In the late 1970s, Mr. Rogerson had a summer job in the

aerospace industry. When an acquaintance called to ask for help finding

a new part, Mr. Rogerson decided that he would build the part himself.

He engaged an engineer to design the part and a manufacturer to build

it, and soon established his first company: Rogerson Aircraft Controls,

Inc. The company manufactured electromechanical products and

eventually changed its name to Rogerson Aircraft Corporation (RAC),

which still operates today.

5

[*5] Over the next 40 years, Mr. Rogerson grew his business by

acquiring and developing new product lines, all of which were held

directly or indirectly by RAC. Business operations were located in

California, in Irvine and Pasadena. Mr. Rogerson served as the chief

executive officer of RAC and its subsidiaries at all times, personally held

patents used in certain product lines, and obtained his commercial

pilot’s license to better understand the industry. By the end of 2013, the

Rogerson companies included the following units, which Mr. Rogerson

referred to as “brands”:

Name of Unit

Product Line

Location of

Operations

Product Type

Owned Since

at Least 2005?

Rogerson

Aircraft

Controls

(Controls)

Controls

systems

Irvine

Analog

Yes

Rogerson

Aircraft

Systems

(Systems)

Lavatory

systems

Irvine

Analog

Yes

Rogerson ATS

Auxiliary fuel

systems

Irvine

Analog

Yes

Kratos

Pressure

Products

(Pressure)

Pressure

gauges

Irvine

Analog

Yes

Kratos

Instruments

Analog

instruments

Pasadena

Analog

Yes

Rogerson

Kratos

Digital flat

panel displays

Pasadena

Digital

Yes

InTheAirNet

(ITAN)

Passenger

entertainment

systems

Irvine

Digital

Yes

B.

2014 Reorganization

By 2014, Mr. Rogerson was making an effort to separate the

Rogerson companies’ product lines based on whether they included

legacy analog products or contemporary digital products. With the

exception of analog instruments made by Kratos Instruments, the

analog product lines were located together at RAC’s facilities in Irvine.

6

[*6] During 2014, Mr. Rogerson gave further consideration to the

organization of the Rogerson companies. In his view, the digital

products of Rogerson Kratos were different from the analog products

made by Kratos Instruments. Additionally, Mr. Rogerson had spoken

with attorneys about estate planning and thought that “there was really

no way the businesses would keep operating . . . after [his] demise.”

Accordingly, Mr. Rogerson wanted to reorganize the Rogerson

companies.

In 2014, Mr. Rogerson decided that Kratos Instruments’

operations should be moved from Pasadena to Irvine. He further

decided to reorganize the Rogerson companies’ legal structure: While all

product lines had previously been owned directly or indirectly by RAC,

Mr. Rogerson determined that the digital and the analog product lines

would be divided and held (directly or indirectly) by two separate legal

entities, each of which Mr. Rogerson would own directly.

Mr. Rogerson’s plans were implemented in 2014 and 2015. First,

RAC transferred all its interests in the analog product lines (including

interests in legal entities that manufactured analog products) to

Rogerson ATS, a corporation wholly owned by RAC, effective January 1,

2014. 2 RAC then transferred 100% of the stock of Rogerson ATS to

Mr. Rogerson, also effective January 1, 2014. Kratos Instruments’

employees, inventory, and equipment were physically moved from

Pasadena to Irvine during the second half of 2014, and the move was

nearly complete by January 2015. Rogerson ATS changed its name to

Rogerson Aircraft Equipment Group (RAEG), effective November 5,

2014.

Finally, effective January 1, 2015, RAC transferred to

Mr. Rogerson 100% of the stock of Rogerson Corporation (RC), a

management company that provided services to the other Rogerson

companies. 3

After the 2014 reorganization was completed, Mr. Rogerson held

his aerospace business through three corporations: RAC, RAEG, and

RC. RAC (directly or indirectly) owned Rogerson Kratos and ITAN and

was primarily engaged in manufacturing and selling digital products.

2 Rogerson ATS’s own business making auxiliary fuel systems had dwindled to

almost nothing by the time of the transfer, because newer aircraft generally do not

require such systems.

3 RC changed its name to Rogerson Capital in 2016. Additionally, certain steps

of the reorganization not relevant to our analysis have been omitted from the summary

above.

7

[*7] RAEG (directly or indirectly) owned Controls, Systems, Pressure,

and Kratos Instruments and was engaged in manufacturing and selling

analog products. 4 RC employed the executive team and provided

finance, legal, human resources, sales, and other support to RAC and

RAEG.

C.

Management of RAEG

Before and after the 2014 reorganization, the operations of

RAEG’s business units remained generally the same. With the

exception of the physical relocation of Kratos Instruments to Irvine, the

units manufactured the same products in the same locations and sold

those products to the same customers. Indeed, at least some major

customers were unaware of the reorganization as late as 2016. A small

number of employees who declined to move with Kratos Instruments to

Irvine were terminated, but otherwise staffing generally remained the

same. And Mr. Rogerson continued to oversee the business as a whole.

Mr. Rogerson remained the CEO of RAC, RAEG, and RC from the

time of their incorporation through the years at issue. While other

company employees, including a small number of executives, ran the

day-to-day operations of each corporation, Mr. Rogerson was actively

engaged with them all, including RAEG, in particular by monitoring

operations and production, communicating with management on

employment issues, and taking a hands-on approach to sales and

customer relations.

With respect to RAEG specifically, Mr. Rogerson received regular

reports on the company’s results, attended meetings to discuss the

results, and took action when they fell below expectations. 5 He ordered

the Kratos Instruments move from Pasadena to Irvine and oversaw its

progress, including setting the timeline, making decisions with respect

to staffing matters, and deciding on the wording of materials explaining

the move to employees and customers. As one company executive put it

4 The parties stipulated that RAEG reported ITAN’s activity on its tax returns

during the years at issue, but other evidence confirms that ITAN was owned by RAC

rather than RAEG for 2014, 2015, and 2016. We are not obliged to accept a stipulation

between the parties when it is clearly contrary to facts disclosed by the record. CalMaine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989). And, in any event, the

question of ITAN’s ownership is not dispositive to the outcome of this case.

5 On more than one occasion during the years at issue, RAEG executives stated

that Mr. Rogerson’s direct involvement, whether in the form of “ongoing and specific

directives,” “edict[s],” or other directions, would be required to complete an initiative.

8

[*8] when discussing the phrasing of an employee offer letter: “Michael

gets the last word.” Mr. Rogerson directed executives as to which

engineers within the Rogerson companies could work on Kratos

Instruments projects. He approved capital expenditures and provided

input on accounting issues. He also was involved in the refurbishment

of the Irvine facilities to accommodate the Kratos Instruments move.

On employment matters, Mr. Rogerson hired and fired

executives, set department budgets, and weighed in on staffing at all

levels of the company. During the years at issue, he was asked to

approve all bonuses and even an hourly rate increase of $0.50.

Generally, not even the president of RAEG was authorized to increase

salaries or provide bonuses to RAEG employees—those decisions were

made by Mr. Rogerson.

Consistent with his authority over staffing matters, Mr. Rogerson

knew employees by their first names, communicated with them directly,

and weighed in on how and when they should be replaced. When one

employee was out on medical leave, Mr. Rogerson directed that his

replacement should be hired from outside the company rather than

promoted from within, citing “mid management depth” that was “too

thin.” Mr. Rogerson alerted executives when he felt certain employees

were not pulling their weight, noting in one instance that an engineer

“did not carry his own load during the [Kratos Instruments] move” and

that Mr. Rogerson “[did not] see rewarding him by having [another

engineer] doing his job now.”

During this period, Mr. Rogerson was perhaps most extensively

involved in sales and customer relations. On multiple occasions, he

personally met with RAEG customers and potential customers and

participated in customer negotiations. He traveled to visit customers,

including internationally, and also hosted customers at RAEG’s offices. 6

He drafted press releases, received reports on customer visits that he

did not attend, and got personally involved when disputes with

customers arose. More than once, Mr. Rogerson told RAEG executives

that he would resolve a problem by meeting personally with the

customer involved. And customers sometimes reached out directly to

Mr. Rogerson with complaints. His approval was required for any bid

6 At least one trip during the years at issue was to an RAEG customer in

Indonesia.

9

[*9] provided to a customer with an aggregate value over $100,000; in

one month in 2016, that approval was requested at least a dozen times.

As part of his activities, Mr. Rogerson discussed RAEG with

company executives, both in person and on the phone. During the years

at issue, he communicated with RC and RAEG executives regarding

RAEG’s finances, its operations, the Kratos Instruments move, and the

potential sale of the company. The RAEG president and the Rogerson

companies’ chief financial officer, together or separately, spent at least

10 to 15 hours per month with Mr. Rogerson on RAEG financial and

operational matters. Mr. Rogerson also communicated with those

individuals and others via email, including on weekends and holidays.

In short, Mr. Rogerson was an actively engaged CEO throughout

the years at issue. And his level of involvement in RAEG in particular

and in the Rogerson companies more generally during those years was

substantially the same as it was during the years preceding the 2014

reorganization.

II.

Mr. Rogerson’s Yachts

In addition to being interested in aviation, Mr. Rogerson was a

sailing enthusiast from an early age. He eventually developed an

interest in powerboats, and during the years at issue he owned two

yachts—the TOTO and the Falcon Lair—that he intended to make

available for charter.

A.

The TOTO

Mr. Rogerson purchased the TOTO, a 1983 Palmer Johnson 110foot cutter, in or around 1999. 7 In 2014, 2015, and 2016, Mr. Rogerson

kept the TOTO at a marina in Fort Lauderdale, Florida. Insurance

policies that covered the TOTO for the period May 22, 2015, to May 22,

2017, permitted charters for a maximum of 12 weeks each year. 8 The

TOTO was not commercially registered from 2014 to 2016 and was not

available for charter during those years.

7 Mr. Rogerson owned the TOTO through a limited liability company named

Toto, LLC.

8 The policies defined a charter agreement as a “written contract between the

owner of the insured yacht and the charterer in which the insured yacht is rented for

one or more voyages or a fixed period of time.”

10

[*10] The TOTO was managed by a four-person crew, including a

captain, a deckhand, a stewardess, and an individual that would help

with the engine room and serve as a deckhand when needed. Because

the TOTO was not chartered, the crew did not provide services to any

customers during 2014, 2015, and 2016. For at least a portion of those

years, the TOTO was in a shipyard for repairs.

B.

The Falcon Lair

In 2014, Mr. Rogerson purchased the Falcon Lair, a 225-foot

vessel built in 1983. 9 The yacht underwent a major refit during 2014

and early 2015 before being relaunched during the summer of 2015.

During 2014, 2015, and 2016, the Falcon Lair was held at various

marinas in Europe. Insurance policies covering the Falcon Lair for the

periods May 27, 2014, to May 27, 2015, and July 15, 2016, to July 14,

2017, prohibited charters unless approved by the insurer in advance in

writing, or else prohibited charters outright. 10

Like the TOTO, the Falcon Lair was not commercially registered

during 2014, 2015, and 2016, nor was it chartered. Nevertheless,

Mr. Rogerson engaged a management company to manage the Falcon

Lair. The management company was responsible for arranging the

Falcon Lair’s trips from harbor to harbor, including by provisioning the

yacht with fuel and food.

The Falcon Lair initially was operated by a 12-person crew, but

that number dropped to 8 or 9 while the yacht was in the shipyard for

refurbishment. Because the Falcon Lair was not chartered, the crew did

not provide services to any customers during 2014, 2015, and 2016.

When the Falcon Lair was not in the shipyard for repairs or

9 Mr. Rogerson established two limited liability companies to manage and hold

the Falcon Lair: Platinum Marine Ventures, LLC (Platinum), and Sterling Marine

Ventures, LLC (Sterling). Platinum generally paid the Falcon Lair’s operating

expenses, including the costs of crew, fuel, and guests. Sterling held legal title to the

Falcon Lair and paid expenses associated with insurance, depreciation, and freight

fees, among others.

10 One policy, for example, stated that the Falcon Lair’s “use” was “Private

Pleasure and / or Corporate Entertaining” and that the yacht was “Warranted to be

used solely for private pleasure purposes and not to be hired or chartered unless

approved and permission endorsed hereon.” The record does not reflect any such

endorsement.

11

[*11] refurbishment, Mr. Rogerson and his family sometimes used the

yacht for personal trips.

III.

Tax Reporting

A.

Tax Preparation

From 2002 through the years at issue, Mr. Rogerson’s personal

income tax returns and the tax returns of the Rogerson companies were

prepared by Tony Chang, a certified public accountant and tax

professional.

Mr. Chang worked for one major accounting firm from 1994 to

1996 and for a second major accounting firm from 1996 to 2002. He then

opened his own boutique practice with a partner. Mr. Rogerson and his

companies had been clients of the second major accounting firm and

continued to use Mr. Chang and his partner after they opened their

boutique practice.

By 2014, Mr. Chang had been preparing Mr. Rogerson’s personal

income tax returns and the tax returns of the Rogerson companies for at

least 12 years. He was familiar with the various entities in the corporate

structure and the mechanics of the 2014 reorganization. He also was

familiar with Mr. Rogerson’s yacht activities. For each year from 2014

to 2016, Mr. Chang considered the application of the passive loss rules

to Mr. Rogerson’s activities and provided advice to Mr. Rogerson about

how the activities should be reported on his personal income tax returns.

As part of Mr. Chang’s analysis, he collected information from Mr.

Rogerson and other executives at the Rogerson companies, generally by

having informal discussions with those individuals rather than

requesting documentation. For each of the years at issue, Mr. Rogerson

reported his activities consistent with Mr. Chang’s advice.

B.

Aerospace Activities

From at least 2005 to 2013, RAC filed Form 1120S, U.S. Income

Tax Return for an S Corporation, reflecting all the results of

Mr. Rogerson’s aerospace business. For these years, no effort was made

on the RAC returns to separate out the various activities of the Rogerson

companies for purposes of the passive activity loss rules of section 469.

In his personal income tax returns, Mr. Rogerson reported his

involvement in RAC’s combined activity as nonpassive.

12

[*12] Starting in 2014, RAC and RAEG each filed separate Forms

1120S. In his personal income tax returns for 2014, 2015, and 2016,

Mr. Rogerson reported his involvement in RAC as nonpassive and his

involvement in RAEG as passive.

Based on Schedules K-1,

Shareholder’s Share of Income, Deductions, Credits, etc., issued by RAC,

Mr. Rogerson reported a loss of $3,926,922 for 2014, income of $163,814

for 2015, and a loss of $2,855,771 for 2016. For the same years, he

reported income of $7,093,760, $3,238,454, and $4,762,543 based on

Schedules K-1 issued to him by RAEG.

RC filed a separate Form 1120S starting in 2015, and

Mr. Rogerson reported his involvement in RC as nonpassive. For the

taxable years 2015 and 2016, Mr. Rogerson reported ordinary income of

$391,615 and $380,027, respectively, based on Schedules K-1 issued by

RC.

C.

Yacht Activities

In his 2014 personal income tax return, Mr. Rogerson sought to

apply a passive loss carryforward of $3,409,986 related to his pre-2014

TOTO activity to offset the passive income that he reported from

RAEG. 11 For 2014, 2015, and 2016, however, Mr. Rogerson reported his

involvement in both the TOTO and the Falcon Lair as nonpassive. With

respect to the TOTO, Mr. Rogerson claimed losses of $1,110,387,

$583,165, and $818,841 in 2014, 2015, and 2016, respectively. With

respect to the Falcon Lair, he claimed losses of $2,009,554, $4,993,719,

and $5,028,440 during the same years. 12

IV.

Examination and Notice of Deficiency

Revenue Agent Amanda Dougherty conducted an examination of

Mr. Rogerson’s tax returns for 2014, 2015 and 2016. 13 As part of the

examination, Ms. Dougherty considered whether Mr. Rogerson properly

characterized his aerospace and yacht activities as passive and

nonpassive and ultimately determined that he did not.

11 The parties have since stipulated that the correct amount of the carryover is

$3,382,990.

12 The total loss for the tax year 2015 shown above is net of $147,050 of income

related to the Falcon Lair. That income arose from the favorable resolution of a

lawsuit.

13 At the time of the examination, Ms. Dougherty’s name was Amanda Davis.

13

[*13] Near the conclusion of the examination, Ms. Dougherty mailed

Mr. Rogerson a Letter 5153, dated March 20, 2018, with an attached

examination report proposing, among other adjustments, an accuracyrelated penalty under section 6662(a) for each tax year at issue. The

letter was the first written communication sent to Mr. Rogerson

regarding the penalties under section 6662(a) and was mailed before

Ms. Dougherty had secured supervisory approval of the penalty

assertion from her supervisor, Acting Group Manager Mayank Patel.

When Mr. Rogerson failed to respond to the letter, Mr. Patel sent to

Mr. Rogerson a signed “30-day letter” (Letter 950) on April 11, 2018,

which again asserted the penalties under section 6662(a) and offered

Mr. Rogerson the option to appeal. Additionally, on April 5, 2018,

Ms. Dougherty prepared Form 300, Civil Penalty Approval Form.

Mr. Patel signed the Civil Penalty Approval Form on June 25, 2018.

Mr. Rogerson appealed his case to the Internal Revenue Service

Office of Appeals (IRS Appeals), 14 but was unable to reach a resolution

with that office. On March 17, 2020, the Commissioner issued to

Mr. Rogerson a notice of deficiency that recharacterized his activity with

respect to RAEG as nonpassive and with respect to the yachts as

passive. 15 Regarding RAEG, the notice stated, among other things, that

Mr. Rogerson “materially participated in RAEG” and therefore that “the

income should be treated as non-passive income.”

The notice

determined deficiencies in Mr. Rogerson’s federal income tax of

$2,136,552, $1,884,960, and $1,558,158, plus accuracy-related penalties

of $427,310, $376,992, and $311,632, for 2014, 2015, and 2016,

respectively. Mr. Rogerson timely petitioned the Court seeking a

redetermination of the deficiencies and penalties.

14 On July 1, 2019, the Office of Appeals was renamed the Independent Office

of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981, 983

(2019). We will use the name in effect at the times relevant to this case, i.e., the Office

of Appeals.

15 With respect to the yachts, the notice elaborated that “Appeals previously

determined that a similar activity . . . was a valid rental activity despite the extremely

limited rental income generated; therefore, [Revenue Agent Dougherty] in being

consistent with the prior Appeals ruling has allowed the activity to remain but limited

the Passive Losses to the passive income available.”

14

OPINION

[*14]

I.

Burden of Proof

In general, the Commissioner’s determinations set forth in a

notice of deficiency are presumed to be correct, and the taxpayer bears

the burden of showing that those determinations are in error. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). But the

Commissioner bears the burden of proof with respect to any “new

matter” he raises. See Rule 142(a). Where relevant, we discuss burden

of proof in the individual issue sections below. 16

II.

Section 469 Issues

Individual taxpayers may generally deduct, under sections 162

and 212 respectively, ordinary and necessary expenses paid or incurred

in carrying on a trade or business or for the production of income. But

the Code disallows any current deduction for a “passive activity” loss.

I.R.C. § 469(a)(1), (b). A passive activity loss is the amount (if any) by

which the aggregate losses from the taxpayer’s passive activities for a

taxable year exceed the aggregate income from passive activities for that

year. I.R.C. § 469(d)(1). Thus, under the Code, passive losses cannot be

used to offset income from nonpassive activities. See Beecher v.

Commissioner, 481 F.3d 717, 721 (9th Cir. 2007), aff’g Cal Interiors Inc.

v. Commissioner, T.C. Memo. 2004-99. A disallowed passive activity loss

is not lost; rather, it is deferred or suspended and remains available as

a deduction against future passive income. I.R.C. § 469(b).

In light of these rules, a great deal turns on whether an activity

is passive or nonpassive under section 469. We therefore provide a brief

discussion of how one makes that determination and then apply the

relevant principles to Mr. Rogerson’s case.

A.

Passive Activities

A passive activity generally is an activity involving the conduct of

a trade or business in which the taxpayer does not materially

16 Generally speaking, a burden of proof analysis is required only in the rare

instance of an evidentiary tie. See, e.g., Knudsen v. Commissioner, 131 T.C. 185, 189

(2008), supplementing T.C. Memo. 2007-340; see also FRGC Inv., LLC v.

Commissioner, 89 F. App’x 656 (9th Cir. 2004), aff’g T.C. Memo. 2002-276. As we

discuss further below, we resolve this case on the preponderance of the evidence, and

therefore Mr. Rogerson’s arguments regarding the burden of proof are unavailing. See,

e.g., Dagres v. Commissioner, 136 T.C. 263, 279 (2011).

15

[*15] participate. I.R.C. § 469(c)(1). Moreover, subject to certain

exceptions not relevant here, rental activities are passive regardless of

whether the taxpayer materially participates. See I.R.C. § 469(c)(2), (4),

(7).

B.

Material Participation

A taxpayer’s participation in an activity is “material” only if his

involvement in the operations of the activity is regular, continuous, and

substantial. I.R.C. § 469(h)(1). Temporary regulations first issued in

1988 provide seven tests for determining when this standard is satisfied.

See Temp. Treas. Reg. § 1.469-5T(a) (stating that an individual will be

treated as materially participating in an activity “if and only if” one of

the seven tests is satisfied). Because, as explained below, we can resolve

Mr. Rogerson’s case based on one of the regulatory tests (the “five of ten”

test), we do not discuss the remaining ones.

1.

The Five of Ten Test

For purposes of section 469(h)(1), a taxpayer is treated as

materially participating in an activity if he materially participated in

the activity for any five out of the ten years immediately preceding the

taxable year. Temp. Treas. Reg. § 1.469-5T(a)(5). The preamble to the

temporary regulations adopting the test explained its purpose as

follows:

These rules are included because the Service

believes that an activity in which an individual has

materially participated over a long period of time . . . is

likely to represent the individual’s principal livelihood

rather than a passive investment. In particular, the

Service does not believe that withdrawal from a

longstanding active business . . . should convert an

individual’s earnings from the business to passive income.

T.D. 8175, 1988-1 C.B. 191, 203.

By its terms, the five of ten test applies to an activity that is the

same over time. But the regulations also explain how to apply the test

when a taxpayer’s activities change over time. In these circumstances,

final regulations call for a comparison of the taxpayer’s current-year

activities with his preceding-year activities. Specifically, Treasury

Regulation § 1.469-5(j)(1) provides as follows:

16

[*16] For purposes of [the five of ten test], a taxpayer has

materially participated in an activity for a preceding

taxable year if the activity includes significant section 469

activities[17] that are substantially the same as significant

section 469 activities that were included in an activity in

which the taxpayer materially participated (determined

without regard to [the five of ten test]) for the preceding

taxable year.

In other words, if there is substantial similarity between the

current-year activity and activities that the taxpayer materially

participated in during a preceding year, then that preceding year counts

as one year in applying the five of ten test to the current-year activity.

See id. If there is substantial similarity between the current-year

activity and activities that the taxpayer materially participated in for

five of the last ten years, then the five of ten test is satisfied and the

taxpayer is treated as materially participating in the current-year

activity for the current year. See id.; Temp. Treas. Reg. § 1.469-5T(a)(5).

The history of Treasury Regulation § 1.469-5(j)(1) confirms this

interpretation. When temporary regulations first established the five of

ten test in 1988, they did not initially address how the test should apply

to a situation in which an individual’s business activities evolve during

the ten-year period. See T.D. 8175, 1988-1 C.B. at 203; see also T.D.

8253, 1989-1 C.B. 121, 122 (noting the omission). In 1989, however, the

Department of the Treasury (Treasury) and the IRS 18 issued additional

temporary regulations under section 469 (1989 amendments). The 1989

amendments added Temporary Treasury Regulation § 1.469-4T to

define the concept of an “activity” for purposes of section 469. See T.D.

8253, 1989-1 C.B. at 122–23. The definition included the concept of an

“undertaking,” which was the smallest unit that could constitute an

activity. Id at 122.

As relevant here, the 1989 amendments also made certain

changes to Temporary Treasury Regulation § 1.469-5T, including

adding paragraph (j)(1), T.D. 8253, 1989-1 C.B. at 158, the precursor to

Treasury Regulation § 1.469-5(j)(1). The preamble to the 1989

amendments explained the new rule as follows:

17 We explain further below the origin and meaning of the phrase “significant

section 469 activities.”

18 For simplicity, we refer to both Treasury and the IRS as “Treasury.”

17

[*17]

Under § 1.469-4T, the business and rental

operations that constitute an activity may change from

year to year. The existing regulations do not address how

the material participation tests that are based on

participation in prior years will apply in cases in which

such changes occur. Accordingly, this document amends

§ 1.469-5T to provide that, for purposes of the material

participation tests that are based on participation in prior

years, a taxpayer is treated as materially participating in

an activity for a prior taxable year if the activity includes

an undertaking involving substantially the same

operations as an undertaking that was included in an

activity in which the taxpayer materially participated

during such prior taxable year.

T.D. 8253, 1989-1 C.B. at 126. The text of the temporary rule tracked

the preamble’s explanation:

For purposes of [the five of ten test], a taxpayer has

materially participated in an activity for a preceding

taxable year if such activity includes an undertaking that

involves substantially the same business and rental

operations as an undertaking that was included in an

activity in which the taxpayer materially participated . . .

for such preceding taxable year.

Temp. Treas. Reg. § 1.469-5T(j)(1), T.D. 8253, 1989-1 C.B. at 158. Like

the current rule, therefore, the rule issued as part of the 1989

amendments required a comparison of the taxpayer’s current-year

activity to his preceding-year activity. If the activities were sufficiently

similar—i.e., if they included undertakings that involved similar

business operations—and if the taxpayer materially participated in the

preceding-year activity, then the taxpayer would also be treated as

materially participating in the current-year activity during the

preceding year. See id.

By 1992, Treasury determined that the 1989 definition of activity,

including the concept of undertaking, was too complicated and

mechanical and that a more flexible approach was required. See

Limitation on Passive Activity Losses and Credits—Definition of

Activity, 57 Fed. Reg. 20,802, 20,803 (proposed May 15, 1992). As a

result, Treasury issued Proposed Treasury Regulation § 1.469-4, 57 Fed.

Reg. at 20,804, to replace Temporary Treasury Regulation § 1.469-4T.

18

[*18] Simultaneously, Treasury finalized other parts of the 1989

amendments, including the clarification of the five of ten test that

previously appeared at Temporary Treasury Regulation § 1.469-5T(j)(1).

T.D. 8417, 1992-1 C.B. 173, 186. 19 Treasury did not, however, finalize

the original temporary regulations—i.e., rules that were issued in 1988

and not amended in 1989. Those regulations, which include the seven

regulatory tests for determining material participation and certain

related rules, continued in their temporary form. Thus, today, the five

of ten test appears in a temporary regulation, while the rule explaining

how the five of ten test should be applied appears in a final regulation.

When it was finalized in 1992, the rule explaining how the five of

ten test should be applied was modified slightly to its current form,

essentially replacing the concept of an “undertaking” with that of a

“significant section 469 activit[y].” See Treas. Reg. § 1.469-5(j)(1). In

describing the change, Treasury stated:

The final regulations generally adopt the

amendments as originally proposed. They only make

certain minor technical modifications to the amendments,

including changes that conform them to the proposed

regulations under § 1.469-4, relating to the definition of

activity.

T.D. 8417, 1992-1 C.B. at 174.

Thus, the differences between the explanatory rule as originally

proposed at Temporary Treasury Regulation § 1.469-5T(j)(1) and the

final rule at Treasury Regulation § 1.469-5(j)(1) were not intended to be

significant. And while the final rule’s phrasing is somewhat convoluted,

the text and regulatory history leave us with no doubt regarding its

meaning. Specifically, the rule provides that even if a taxpayer’s mix of

activity changes over time, the taxpayer is treated as materially

participating in a current-year activity if that activity substantially

overlaps with activities that the taxpayer materially participated in for

19 Treasury finalized the 1989 amendments to avoid potential disputes about

whether they would expire under section 7805(e)(2), which provides that all temporary

regulations expire three years after the date they are issued. See T.D. 8417, 1992-1

C.B. at 174. Section 7805(e)(2) was enacted in 1988 and applies only to temporary

regulations issued after November 20, 1988. See Technical and Miscellaneous Revenue

Act of 1988, Pub. L. No. 100-647, § 6232, 102 Stat. 3342, 3734. Accordingly, section

7805(e)(2) potentially applied to the 1989 amendments, but not to the original

temporary regulations. See T.D. 8175, 1988-1 C.B. at 233–34.

19

[*19] five of the last ten years. See Treas. Reg. § 1.469-5(j)(1); Temp.

Treas. Reg. §. 1.469-5T(a)(5). As one commentator put it, “any

significant overlap between activities for different tax years causes them

to be treated as the same activity for purposes of the 5-out-of-10-years

test.” Libin Zhang, Passive Loss Rules, 549-3rd Tax Mgmt. (BNA),

at IV.A.5.

2.

Application to Mr. Rogerson and RAEG

In this case, we apply the material participation rules, and the

five of ten test in particular, to determine whether Mr. Rogerson’s

involvement in RAEG was passive or nonpassive during 2014, 2015, and

2016. The Commissioner contends that Mr. Rogerson’s involvement was

nonpassive because Mr. Rogerson has failed to carry his burden to

establish that he did not materially participate in RAEG. Additionally,

the Commissioner argues that Mr. Rogerson satisfies the five of ten test

for material participation. 20 For the reasons described below, we agree

that Mr. Rogerson materially participated in RAEG under the five of ten

test, and therefore that his involvement in the activity must be treated

as nonpassive.

Applying the five of ten test to RAEG for the tax years 2014, 2015,

and 2016 requires us to examine Mr. Rogerson’s pre-2014 involvement

in the activities that ultimately constituted RAEG. See Temp. Treas.

Reg. § 1.469-5T(a)(5). Moreover, given that the organization of

Mr. Rogerson’s activities changed during the relevant years (e.g.,

because of the 2014 reorganization), Treasury Regulation § 1.469-5(j)(1)

informs our analysis.

Turning first to Mr. Rogerson’s tax reporting, we have found at

his request that all the results of his aerospace business, including the

RAEG-related activity, were reported on RAC’s income tax returns from

2005 to 2013. We have further found, again at Mr. Rogerson’s request,

that no effort was made during these years to separate the various

activities of the Rogerson companies for purposes of the passive activity

loss rules. In other words, RAC treated the aerospace business,

including the activities that became part of RAEG, as a single,

undifferentiated activity on its tax returns and when it issued Schedules

K-1 to Mr. Rogerson. Mr. Rogerson reported his involvement in this

20 The Commissioner makes certain other arguments based on the amount of

time Mr. Rogerson spent on RAEG during 2014, 2015, and 2016, but in light of our

analysis under the five of ten test, we need not reach those arguments.

20

[*20] consolidated activity as nonpassive on his personal income tax

returns and similarly did not attempt to separate the activities. Cf.

Treas. Reg. § 1.469-4(d)(5)(i) (providing that a shareholder of an S

corporation may not treat activities grouped together by his corporation

as separate activities). According to his own tax returns, therefore, Mr.

Rogerson maintained that he materially participated in his aerospace

business as a whole from at least 2005 to 2013.

Mr. Rogerson does not seem to dispute that his involvement in

the overall business was nonpassive during those years; indeed, he

maintains that Rogerson Kratos, which also was part of the aerospace

business from 2005 to 2013, required large amounts of his time, and that

he was involved with product development, manufacturing, and sales

for the Rogerson Kratos product lines. Mr. Rogerson continued to report

his activity with respect to Rogerson Kratos (i.e., RAC), as well as RC,

as nonpassive during the years 2014 to 2016. And Mr. Chang,

Mr. Rogerson’s tax return preparer, testified with respect to the

consolidated RAC activity that “it was pretty clear [Mr. Rogerson] was

involved in that business.”

There also is no dispute that, for the years 2005 to 2013, the

product lines that ultimately were combined into RAEG in 2014 were a

significant part of the consolidated RAC activity that Mr. Rogerson

characterized as nonpassive. As described above, for purposes of

applying the five of ten test, a taxpayer is treated as materially

participating in an activity (here, RAEG) during a preceding year if the

activity was included in an activity, or substantially overlaps with an

activity (here, the aerospace business as a whole), in which the taxpayer

materially participated for the preceding year. Treas. Reg. § 1.4695(j)(1).

There can be no question there is substantial overlap between

RAEG’s activities in 2014 and later years and the activities of the overall

aerospace business before 2014. Documentary evidence and the

testimony of multiple witnesses confirms that the products, employees,

and customers of the Rogerson companies were generally the same

before and after the 2014 reorganization. In other words, the business

activities that became part of RAEG were the same before and after the

reorganization, but organized differently. And each of the RAEG

product lines had been part of the RAC consolidated activity since long

before the relevant ten-year period. As Mr. Rogerson states in his

opening brief: “[T]he RAEG Activity that commenced in 2014 is really

the compilation and consolidation of multiple product lines from various

21

[*21] entities that had been conducted on a historical basis.” Pet’r’s

Simultaneous Opening Br. 73.

In light of these facts and the applicable regulations, we conclude

that, in 2014, 2015, and 2016, Mr. Rogerson’s RAEG activity

substantially overlapped with an activity (i.e., the aerospace business as

a whole) that he materially participated in from at least 2005 to 2013.

Under Treasury Regulation § 1.469-5(j)(1), therefore, the five of ten test

has been met for each of 2014, 2015, and 2016, and Mr. Rogerson is

treated as materially participating in RAEG for those years. See also

Temp. Treas. Reg. § 1.469-5T(a)(5) (setting forth the five of ten test).

3.

Mr. Rogerson’s Counterarguments

Mr. Rogerson makes three primary arguments regarding the five

of ten test: (1) the test is a new matter not properly before the Court,

(2) the regulation containing the test is substantively and procedurally

invalid, and (3) even if it does apply, the test does not require that

Mr. Rogerson be treated as materially participating in RAEG. As we

explain below, none of these arguments changes our conclusion.

a.

New Matter

To begin with, Mr. Rogerson argues that the five of ten test is a

new matter not pleaded by the Commissioner. Therefore, Mr. Rogerson

contends, the matter is not properly before the Court or, in the

alternative, the Commissioner bears the burden of proof. 21 See Shea v.

Commissioner, 112 T.C. 183, 191 (1999). This argument borders on

frivolous. 22

21 Mr. Rogerson also contends that the Commissioner bears the burden of proof

with respect to certain other arguments raised by the Commissioner. Because we

resolve this case without reaching those arguments, we need not address

Mr. Rogerson’s further contentions.

22 As one component of the argument, Mr. Rogerson characterizes the five of

ten test as an “estoppel” theory. Pet’r’s Simultaneous Suppl. Br. 8. But Mr. Rogerson’s

characterization demonstrates a misunderstanding of the rule. The five of ten test

does not estop anyone from doing anything. Rather it provides guidance on how the

statutory material participation test applies when either a relevant activity or a

taxpayer’s participation in a relevant activity changes over time. And Treasury

Regulation § 1.469-5(j)(1) provides more specific guidance on the application of the five

of ten test. As Mr. Rogerson notes, it is a “Definitional Reg.” Pet’r’s Simultaneous

Suppl. Br. 2.

22

[*22] The Commissioner is considered to have raised a new matter

when the theory or basis upon which he relies was not stated in the

notice of deficiency and the new theory or basis requires the

presentation of different evidence. Id. at 197. But a new theory that

merely clarifies or develops the original determination is not a new

matter in respect of which the Commissioner bears the burden of proof.

Id. at 191 (citing Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500,

507 (1989)).

The notice of deficiency in this case stated that Mr. Rogerson’s

income from RAEG should be treated as nonpassive because he

“materially participated in RAEG.” Consistent with the notice, the

Pretrial Memoranda of each party reflects an understanding that the

nature of Mr. Rogerson’s participation in RAEG would be addressed at

trial.

As already discussed, the five of ten test is one of the seven

regulatory tests for determining whether a taxpayer materially

participated in an activity. See discussion in Opinion Part II.B.1 above.

Indeed, Mr. Rogerson’s own Pretrial Memorandum explained that the

applicable regulations include “seven tests to determine whether a

taxpayer has materially participated.” 23 Pet’r’s Pretrial Mem. 6. We

therefore have no trouble concluding that the Commissioner’s reliance

on the five of ten test is a clarification or development of his original

determination and not a new matter. See Estate of Abraham v.

Commissioner, 408 F.3d 26, 36 (1st Cir. 2005) (stating there is no

requirement that a notice of deficiency be as detailed as a trial brief),

aff’g T.C. Memo. 2004-39, amended 429 F.3d 294 (1st Cir. 2005); Ax v.

Commissioner, 146 T.C. 153, 170–71 (2016) (construing a notice of

deficiency with “reasonable breadth” to conclude that it encompassed

assertions later made by the Commissioner). 24 Nor do we perceive any

surprise or prejudice to Mr. Rogerson where the Commissioner has

consistently maintained—in his notice of deficiency, Answer, and

23 The Pretrial Memorandum also claimed that only three of the tests were

relevant to this case, not including the five of ten test. But that statement simply

represents Mr. Rogerson’s view of the case and, of course, is not binding on the

Commissioner or the Court.

24 In Ax, we also cited the following statement from Abatti v. Commissioner,

644 F.2d 1385, 1390 (9th Cir. 1981), rev’g T.C. Memo. 1978-392: “[I]f a deficiency notice

is broadly worded and the Commissioner later advances a theory not inconsistent with

that language, the theory does not constitute new matter, and the burden of proof

remains with the taxpayer.” Ax, 146 T.C. at 171 n.18.

23

[*23] Pretrial

Memorandum—that

participated in RAEG.

Mr.

Rogerson

materially

In summary, we conclude the five of ten test is properly before

this Court. And, although we do not decide this issue based on the

burden of proof, the burden with respect to the five of ten test remains

with Mr. Rogerson.

b.

Regulation Validity

Mr. Rogerson also contends, for the first time in his Supplemental

Briefing, that the five of ten test is an invalid rule, both substantively

and procedurally. We address these arguments in turn.

i.

Substantive Validity

Mr. Rogerson argues that the five of ten test is substantively

invalid because it contradicts section 469. Specifically, Mr. Rogerson

contends that material participation exists under the statute only to the

extent that a taxpayer’s involvement in an activity is regular,

continuous, and substantial during the year under consideration, citing

section 469(h). Because the five of ten test analyzes taxpayer

participation in an activity during prior years for purposes of

determining participation in the current year, Mr. Rogerson views the

test as contrary to the statute. We disagree.

Contrary to Mr. Rogerson’s assertion, section 469 does not

mandate the consideration of only present-year activity in determining

material participation. Rather, section 469(h)(1) provides that “[a]

taxpayer shall be treated as materially participating in an activity only

if the taxpayer is involved in the operations of the activity on a basis

which is—(A) regular, (B) continuous, and (C) substantial.” Nothing in

the section addresses the timing of the taxpayer’s involvement. Further,

the statute dictates that “[t]he Secretary shall prescribe such

regulations as may be necessary or appropriate to carry out provisions

of this section, including regulations [that] specify what constitutes . . .

material participation . . . for purposes of this section.” I.R.C. § 469(l)(1).

In other words, the statute is silent on the relevant period for assessing

24

[*24] a taxpayer’s involvement and directs the Secretary to fill in any

gaps via regulation. 25

In light of these provisions, we easily conclude that the five of ten

is not contrary to section 469 and that the authorities Mr. Rogerson cites

are inapplicable. 26

ii.

Procedural Validity

Next, Mr. Rogerson argues that the five of ten test is procedurally

invalid because the temporary regulation in which it appears was

enacted in violation of the notice and comment requirements of the

Administrative Procedure Act (APA). See 5 U.S.C. § 553(b) and (c).

Specifically, Mr. Rogerson observes that the five of ten test appears in

Temporary Treasury Regulation § 1.469-5T, which was issued in 1988

without notice and comment. As described in Opinion Part II.B.1 above,

certain parts of the original package were amended in 1989 and finalized

in 1992, including Treasury Regulation § 1.469-5(j)(1). But the seven

tests for material participation remain in their original temporary form.

Mr. Rogerson’s argument raises an interesting issue that has

been analyzed by judges and legal scholars. See, e.g., Intermountain Ins.

Serv. of Vail, LLC v. Commissioner, 134 T.C. 211, 238–48 (2010)

(Halpern & Holmes, JJ., concurring), supplementing T.C. Memo.

2009-195, rev’d and remanded on other grounds, 650 F.3d 691 (D.C. Cir.

2011), vacated and remanded, 566 U.S. 972 (2012); Eleanor D. Wood,

Note, Rejecting Tax Exceptionalism: Bringing Temporary Treasury

Regulations Back in Line With the APA, 100 Minn. L. Rev. 839 (2015)

25 The provisions Mr. Rogerson cites—section 469(a)(1), (c)(1), and (f)—do not

support a different conclusion. In relevant part, section 469(a)(1) simply states that

passive activity losses are disallowed “for the taxable year,” and section 469(c)(1)

provides that a passive activity is any activity in which a taxpayer does not materially

participate. That section 469 specifies the year in which the loss is disallowed says

nothing about the timeframe for assessing a taxpayer’s participation in an activity.

Nor does the special rule for carryover losses from a former passive activity in section

469(f)—an issue that is irrelevant in the case of a former nonpassive activity—preclude

Treasury from issuing other rules for taxpayers who change their participation levels

over time.

26 The determination that the five of ten test is not contrary to section 469 also

resolves Mr. Rogerson’s argument that the five of ten test is unconstitutional, because

that argument is premised on the existence of a direct conflict between the statute and

the regulation. Additionally, because this conclusion fully addresses Mr. Rogerson’s

arguments, we need not decide on the appropriate standard of review for temporary

Treasury regulations such as those at issue here.

25

[*25] (collecting authorities); cf. Mann Constr., Inc. v. United States, 27

F.4th 1138, 1148 (6th Cir. 2022) (“Because the IRS’s process for issuing

Notice 2007-83 did not satisfy the notice-and-comment procedures for

promulgating legislative rules under the APA, we must set it aside.”).

We need not resolve this issue, however, because it does not change the

result in Mr. Rogerson’s case, as described below.

For purposes of this discussion, we will assume (only for the sake

of analysis) that Mr. Rogerson is correct and that the five of ten test is a

procedurally invalid regulation that cannot be applied here. Because

Mr. Rogerson’s challenge to the regulation is that it was issued without

first being subject to notice and comment, accepting his theory would

mean that other temporary regulations issued as part of the same

package would also be invalid. This would include all seven regulatory

tests for determining material participation and the related rules in

Temporary Treasury Regulation § 1.469-5T.

Assuming solely for the sake of analysis that (as Mr. Rogerson

argues) the seven regulatory tests for material participation would need

to be disregarded, we would be left with the general statutory rule of

section 469(h) to determine whether Mr. Rogerson materially

participated in RAEG during 2014, 2015, and 2016. As noted above,

that provision states as follows: “A taxpayer shall be treated as

materially participating in an activity only if the taxpayer is involved in

the operations of the activity on a basis which is—(A) regular,

(B) continuous, and (C) substantial.” 27 Based on the record before us,

we are convinced that Mr. Rogerson’s involvement in RAEG satisfied

this standard for 2014, 2015, and 2016. 28

27 One of the seven regulatory tests is similar to the statutory rule, but with

some additional limitations related to the number of hours required and the types of

hours that qualify. See Temp. Treas. Reg. § 1.469-5T(a)(7), (b)(2), (f)(2); see also

Mordkin v. Commissioner, T.C. Memo. 1996-187, slip op. at 24, 45–48 (describing

limiting rules). The effect of these rules is to limit a taxpayer’s ability to qualify as

materially participating, which in this case could help Mr. Rogerson. But if one accepts

the premise of Mr. Rogerson’s argument that Temporary Treasury Regulation § 1.4695T(a)(5) is procedurally invalid, then the other portions of the regulation would also

need to be ignored and therefore would not afford him any protection.

28 This conclusion is consistent with Treasury Regulation § 1.469-5(f)(1), which

was finalized in 1992 and states that

any work done by an individual (without regard to the capacity in

which the individual does the work) in connection with an activity in

26

[*26] Mr. Rogerson was a hands-on CEO during the years at issue.

No major decisions could be made without his input, and no detail was

too small for his attention. For example, Mr. Rogerson weighed in on

accounting and financial reporting minutiae, interacted directly with

company employees, and line-edited company documents, such as offer

letters and press releases. Top RAEG executives reached out to him for

permission to undertake routine actions, such as responding to customer

inquiries or providing small bonuses or raises to company employees.

On one occasion, RAEG’s president sought approval from Mr. Rogerson

to offer an employee a raise of $0.50 per hour. On other occasions,

executives confirmed that Mr. Rogerson’s direct involvement, whether

in the form of “ongoing and specific directives,” “edict[s],” or other

directions, would be required to get things done.

Mr. Rogerson’s involvement in sales and customer relations

further belies any assertion that he was not substantially involved in

RAEG’s operations. Mr. Rogerson traveled to meet with RAEG

customers, including on one occasion to Indonesia. He also met with

RAEG customers at RAEG’s offices. Indeed, the record reflects more

than one instance in which Mr. Rogerson told RAEG executives that he

would resolve a problem by meeting personally with the customer

involved. Customers sometimes reached out to Mr. Rogerson directly to

discuss issues, and Mr. Rogerson was involved in multiround

negotiations with customers on pricing and other matters. He also

approved any bid provided to a customer with an aggregate value over

$100,000; in one month in 2016, that approval was requested at least a

dozen times.

In the face of a record demonstrating that he spoke and emailed

with executives regularly on RAEG matters, Mr. Rogerson asserts that

most of these interactions took only minutes of his time. Even assuming

that to be the case, however, Mr. Rogerson’s ability to respond to

detailed inquiries so quickly shows his detailed knowledge of every

aspect of the business. Indeed, many of Mr. Rogerson’s communications

reflect first-hand experience with RAEG’s employees, customers, and

products that extends far beyond what could have been acquired by a

passive investor.

which the individual owns an interest at the time the work is done

shall be treated for purposes of this section as participation of the

individual in the activity.

27

[*27] To summarize, Mr. Rogerson would not prevail even if he were

correct about the procedural validity of the five of ten test, because we

find that he was regularly, continuously, and substantially involved in

the operations of RAEG during 2014, 2015, and 2016 within the

meaning of section 469(h). Accordingly, we need not decide whether the

five of ten test is procedurally valid and turn instead to Mr. Rogerson’s

final argument.

c.

Application of the Five of Ten Test

Mr. Rogerson argues that even if the five of ten test is valid and

potentially applicable here, he should still prevail. Specifically,

Mr. Rogerson asserts that applying the rules defining an “activity” for

purposes of section 469 to the RAEG product lines before and after the

2014 reorganization results in two possible alternatives. First, RAEG

could be viewed as an entirely new activity following the 2014

reorganization, with the result that there are no prior years of

involvement for purposes of applying the five of ten test. Second, if a

comparison of Mr. Rogerson’s involvement in the RAEG activities before

and after 2014 is required despite the 2014 reorganization,

Mr. Rogerson contends that the five of ten test still does not apply

because his involvement in the RAEG product lines was passive even

before 2014. We take these arguments in turn.

i.

New Activity Argument

Treasury Regulation § 1.469-4(c)(1) discusses the concept of an

“activity” for purposes of section 469 and provides as follows: “One or

more trade or business activities or rental activities may be treated as a

single activity if the activities constitute an appropriate economic unit

for the measurement of gain or loss for purposes of section 469.” If a

taxpayer decides based on all the facts and circumstances that multiple

activities constitute a single economic unit and therefore may be treated

as a single activity, the regulations refer to that determination as

“grouping.” See Treas. Reg. § 1.469-4(c)(2).

In support of his first proposed alternative—i.e., that for purposes

of the five of ten test, RAEG did not exist as activity before 2014—

Mr. Rogerson states as follows:

It is clear that the Rogerson companies did not actually

segregate [R]AEG as a separate “activity” before 2014. No

position was taken on any RAC return before 2014

reflecting anything other than a single activity.

28

[*28] [Mr.] Chang clearly believed no such determination was

appropriate because everything related to the Rogerson

companies was reported on a single RAC return.

Pet’r’s Simultaneous Suppl. Br. 25. Accordingly, Mr. Rogerson appears

to contend that before the 2014 reorganization, the aerospace business

as a whole (as reflected on RAC’s returns) was the relevant activity

under the regulations and that RAEG should therefore be treated as a

new activity for 2014, 2015, and 2016. If RAEG was a new activity

starting in 2014, Mr. Rogerson further contends, then the five of ten test

cannot apply, because Mr. Rogerson would have no history of

involvement in the activity.

Mr. Rogerson’s argument is foreclosed by Treasury Regulation

§ 1.469-5(j)(1). As discussed in detail in Opinion Part II.B.1 above, that

rule does not require the taxpayer’s precise activity to have existed in

prior years for purposes of applying the five of ten test. Indeed, the

entire point of the rule is to address situations in which circumstances

change over time. The rule applies as long as the taxpayer’s currentyear activity (here, RAEG) “includes significant section 469 activities”

(here, the RAEG product lines or RAEG as a whole) “that are

substantially the same as significant section 469 activities there were

included in [a preceding-year activity] in which the taxpayer materially

participated” (here, the aerospace business as a whole). In other words,

all that is required is substantial overlap between the current and

preceding-year activities. The record here leaves no doubt that the

activity conducted by RAEG in 2014, 2015, and 2016 overlaps

substantially with the “single activity” reflected on RAC’s prior

returns—i.e., the aerospace business as a whole.

ii.

Passive Activity Argument

Mr. Rogerson’s second alternative—that his involvement in the

RAEG product lines was passive even before 2014—faces a factual

problem. There is no question that before 2014 Mr. Rogerson’s

involvement in the aerospace business as a whole was nonpassive.

Similarly, there is no dispute that Mr. Rogerson reported his

involvement in the aerospace business as a whole, including the

activities that became part of RAEG, as nonpassive. In light of Treasury

Regulation § 1.469-5(j)(1), these facts are sufficient to satisfy the five of

ten test with respect to RAEG in 2014, 2015, and 2016.

29

[*29] In an attempt to escape the implications of his prior reporting,

Mr. Rogerson contends that neither he nor RAC ever made an

affirmative decision to group the RAEG product lines with his other

aerospace activities. According to Mr. Rogerson, RAC’s returns made no

effort to indicate whether they reported “one activity or many activities,

grouped or not.” Pet’r’s Simultaneous Answering Br. 34. The

implication seems to be that, if the product lines that became part of

RAEG were not formally grouped with RAC in prior years, then

Mr. Rogerson’s reporting and activity with respect to RAC as a whole

would be irrelevant in applying the five of ten test to the RAEG product

lines in subsequent years. But Mr. Rogerson is incorrect.

The regulations Mr. Rogerson cites required RAC to perform a

grouping analysis for the years before 2014. See Treas. Reg. § 1.4694(d)(5)(i) (“[A]n S corporation . . . must group its activities under the

rules of this section.”). Mr. Rogerson concedes that, before 2014, RAC

reported the consolidated results of the entire aerospace business

without differentiation. 29 This approach indicates that RAC treated the

aerospace business as a single activity (or as multiple activities grouped

into a single activity) for purposes of section 469. Mr. Rogerson concedes

as much, stating: “No position was taken on any RAC return before 2014

reflecting anything other than a single activity.” Pet’r’s Simultaneous

Suppl. Br. 25. And Mr. Rogerson was not free to distinguish between

his various aerospace activities for purposes of section 469 for any year

in which RAC combined them. See Treas. Reg. § 1.469-4(d)(5)(i)

(providing that a shareholder of an S corporation may not treat

activities grouped together by his corporation as separate activities).

Accordingly, RAC’s treatment of the aerospace business as a single

activity before 2014 required Mr. Rogerson to take the same approach.

He did so and determined that his involvement in the overall business

was active. The five of ten test requires nothing more.

29 Mr. Rogerson cites Hardy v. Commissioner, T.C. Memo. 2017-16, in which

our Court concluded that taxpayers who merely report an S corporation’s activity as

nonpassive do not thereby group that activity with their other nonpassive activity. But

that case considered whether activity reported on a Schedule K-1 had been grouped

with other activity not reported on the Schedule K-1; it did not consider whether

undifferentiated amounts reported on a single Schedule K-1 had been grouped

together. Id. at *15–16. Additionally, Hardy analyzed only the grouping regulations

under Treasury Regulation § 1.469-4 and did not consider the five of ten test.

30

[*30] Having addressed Mr. Rogerson’s involvement with RAEG, we

next turn to the proper characterization under section 469 of

Mr. Rogerson’s yacht activities for 2014, 2015, and 2016.

C.

Rental Rules and the Yacht Activities

1.

Rental Activities

As noted above, rental activities are passive regardless of a

taxpayer’s participation, subject to certain exceptions. See I.R.C.

§ 469(c)(2), (4), (7). 30 A rental activity is “any activity where payments

are principally for the use of tangible property.” I.R.C. § 469(j)(8); see

also Temp. Treas. Reg. § 1.469-1T(e)(3)(i) (stating that an activity is a

rental activity if during the taxable year tangible property held in

connection with the activity is used by customers or held for use by

customers and gross income (or expected gross income) attributable to

the activity represents amounts paid or to be paid principally for the use

of the tangible property).

Neither of Mr. Rogerson’s yachts (the TOTO and the Falcon Lair)

was chartered during 2014, 2015, or 2016, but the parties agree that

Mr. Rogerson intended to charter the yachts. Accordingly, the yachts

were tangible property held for use by customers, and any income from

the yacht activities would have represented amounts paid principally for

the use of the tangible property. The yacht activities therefore were

rental activities unless an exception applies. 31 See I.R.C. § 469(j)(8);

Temp. Treas. Reg. § 1.469-1T(e)(3)(i).

2.

Exceptions to Rental Activity

The regulations provide six exceptions to the definition of “rental

activity,” two of which are relevant to our analysis. Specifically, an

activity involving the use of tangible property is not a rental activity if

for the taxable year—(1) the average period of customer use for the

30 See also, e.g., Kessler v. Commissioner, T.C. Memo. 2003-185; Tarakci v.

Commissioner, T.C. Memo. 2000-358; Frank v. Commissioner, T.C. Memo. 1996-177.

31 The Commissioner argues that, for purposes of analyzing the yacht

activities, the TOTO should be viewed as a separate activity from the Falcon Lair and

that each of the entities through which Mr. Rogerson held and operated the Falcon

Lair (Platinum and Sterling) also should be analyzed separately. By contrast,

Mr. Rogerson argues that all his yacht activities should be treated as a single activity.

Because our conclusion would be the same regardless of how the yacht activities are

grouped, we need not resolve this issue.

31

[*31] property is seven days or less; or (2) the average period of customer

use for such property is 30 days or less, and significant personal services

are provided by or on behalf of the owner of the property in connection

with making the property available for use by customers. Temp. Treas.

Reg. § 1.469-1T(e)(3)(ii)(A) and (B).

For purposes of these rules, a period of customer use is the period

“during which a customer has a continuous or recurring right to use” the

property. Treas. Reg. § 1.469-1(e)(3)(iii)(D). The average period of

customer use is calculated by dividing the aggregate number of days in

all periods of customer use of the property by the number of periods of

customer use. Id. subdiv. (iii)(C). 32 And finally, to determine whether

services are significant personal services, all of the relevant facts and

circumstances are considered, including the frequency with which the

services are provided, the type and amount of labor required to perform

the services, and the value of the services relative to the amount charged

for the use of the property. Temp. Treas. Reg. § 1.469-1T(e)(3)(iv)(A).

Mr. Rogerson claims that his yacht activities qualify for both

exceptions. We disagree.

a.

Seven Days or Less Exception

As to the first exception, Mr. Rogerson has not requested any

findings of fact or provided any evidence to allow us to conclude that his

yacht activities involved charters of seven days or less during the years

at issue or any other year. Mr. Rogerson claims that “[n]either TOTO

nor Falcon Lair was available to be ‘rented’ for weeks at a time” and that

“the Yacht Charter Activity was intended to provide short-term use for

day trips and other short-term excursions.” Pet’r’s Simultaneous

Opening Br. 78. But regardless of these plans, no customers chartered

the yachts during 2014, 2015, or 2016. And unlike the affirmative rule

for defining a rental activity, which considers a taxpayer’s intended or

expected use of property, the exceptions to that rule turn on what

actually happened during the taxable year. Compare Temp. Treas. Reg.

§ 1.469-1T(e)(3)(i) (allowing consideration of potential customer use and

expected income in identifying a rental activity), with id. subdiv. (ii)(A)

and (B) (establishing exceptions based on the “average period of

customer use”), and Treas. Reg. § 1.469-1(e)(3)(iii)(C) and (D)

32 The rules are slightly more nuanced with respect to activities involving

multiple classes of property, but those nuances are irrelevant for purposes of our

analysis. See Treas. Reg. § 1.469-1(e)(3)(iii)(A) and (B).

32

[*32] (calculating the average period of customer use based on actual

customer activity). Without any customer use, it is impossible to

establish (as required by the regulations) the average period of customer

use for the yachts. Accordingly, Mr. Rogerson fails to qualify for the first

exception. 33

b.

30-day Exception

Mr. Rogerson’s argument for the second exception falls short for

the same reason. A claim in Mr. Rogerson’s brief that “[n]o charter

would have been for more than 30 days,” Pet’r’s Simultaneous Opening

Br. 79, is not evidence, and again, the absence of any actual customer

use of the yachts precludes us from determining that the average period

of customer use was 30 days or less. Similarly, the fact that the TOTO

and the Falcon Lair each had crews that conceivably could have

provided services does not establish that significant personal services

were in fact provided to customers. See Temp. Treas. Reg. § 1.4691T(e)(3)(ii). Mr. Rogerson has requested no findings of fact nor produced

any evidence about the kinds of services that crew members could or

would provide to customers. And, more to the point, we know that no

services were provided during the years at issue because the yachts were

not chartered.

Mr. Rogerson has failed to establish that his yacht activities

qualify under the exceptions provided in the temporary regulations. The

activities therefore constituted rental activities and were per se passive

during the years at issue. 34 See I.R.C. § 469(c)(2), (4), (j)(8); Temp. Treas.

Reg. § 1.469-1T(e)(3)(i). 35

33 We express no view as to the outcome of a case in which the evidence

demonstrates that one or more of the exceptions under Temporary Treasury

Regulation § 1.469-1T(e)(3)(ii) had been met in prior years, but not during the years at

issue. This case does not present such a scenario.

Mr. Rogerson’s argument that he materially participated in the yacht

activity would not change this conclusion, because rental activities are considered

passive without regard to the taxpayer’s level of participation. I.R.C. § 469(c)(2), (4).

We therefore need not address it further.

34

35 On January 12, 2021, just over two months before the trial of this case was

scheduled to begin in March, the Commissioner filed a Motion for Leave to File an

Amendment to Answer to further allege under section 183 that Mr. Rogerson did not

engage in his yacht activities with an objective of realizing a profit. Mr. Rogerson

objected on the ground that permitting the amendment would prejudice his

preparation for trial. He further argued that the amendment came too late and

33

[*33] III.

Accuracy-Related Penalties

Lastly we must determine whether the section 6662 penalties the

Commissioner determined in the notice of deficiency properly apply.

The Commissioner bears the burden of production with respect to

an individual taxpayer’s liability for a penalty and is required to present

sufficient evidence showing that the penalty is appropriate. I.R.C.

§ 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). To meet

this burden for a penalty under section 6662(a), the Commissioner must

show that he complied with the procedural requirements of section

6751(b)(1). See I.R.C. § 7491(c); Frost v. Commissioner, 154 T.C. 23, 34

(2020). Once the Commissioner satisfies his burden of production, the

taxpayer bears the burden of proving that the Commissioner’s penalty

determination is incorrect or that the taxpayer has an affirmative

defense such as reasonable cause. See Rule 142(a); Higbee, 116 T.C.

at 446–47.

Because we conclude that Mr. Rogerson had reasonable cause and

relied in good faith on his adviser Mr. Chang in connection with the

preparation of the 2014 to 2016 returns, we conclude that the penalties

do not apply.

A.

Section 6662(a) Penalty

Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20%

of the portion of an underpayment of tax required to be shown on a

taxpayer’s return that is attributable to “[n]egligence or disregard of

essentially was designed to permit the Commissioner a “do-over” after the period for

discovery had already run. After holding a status conference with the parties, the

Court advised them that it intended to deny the Motion. The Court observed that

permitting amendment would not be in the interest of justice in light of the procedural

posture of the case, the timing of the request after the close of discovery, and the

prejudice to Mr. Rogerson in preparing for trial on the existing issues, while at the

same time being required to prepare for trial a different issue that turned on much

different evidence. The Court also noted that the notice of deficiency specifically

highlighted the issue sought to be challenged in the proposed amendment, while

observing that the Commissioner had decided not to raise the issue in light of a prior

resolution by IRS Appeals. The Court also advised the parties that the Motion would

be formally addressed in any opinion issued in the case. Trial of this case was later

postponed from March to May at the parties’ request. Upon further consideration, for

the reasons noted above, we will deny the Commissioner’s Motion. See Waterman v.

Commissioner, 91 T.C. 344, 349–51 (1988) (leave to amend may be denied upon a

showing of prejudice to the petitioner); Law v. Commissioner, 84 T.C. 985, 990 (1985)

(whether leave will be granted is a question falling within the discretion of the Court).

34

[*34] rules or regulations” and/or a “substantial understatement of

income tax.” Negligence includes “any failure to make a reasonable

attempt to comply with the provisions of this title.” I.R.C. § 6662(c). An

understatement of income tax is a “substantial understatement” if it

exceeds the greater of 10% of the tax required to be shown on the return

or $5,000. I.R.C. § 6662(d)(1)(A). The Commissioner here has asserted

section 6662(a) penalties on the basis of both negligence and substantial

understatement.

B.

Reasonable Cause and Good Faith

A taxpayer may avoid a section 6662(a) penalty by showing that

there was reasonable cause for the underpayment and that the taxpayer

acted in good faith. I.R.C. § 6664(c)(1). The determination of whether a

taxpayer acted with reasonable cause and in good faith is made on a

case-by-case basis, taking into account all of the pertinent facts and

circumstances, including the taxpayer’s efforts to assess the proper tax

liability and the taxpayer’s knowledge, experience, and education.

Treas. Reg. § 1.6664-4(b)(1).

Mr. Rogerson contends, among other things, that he had

reasonable cause for the position he took on his tax returns because he

reasonably relied on Mr. Chang’s advice. 36 Reasonable reliance on

professional advice may constitute reasonable cause and good faith if

the taxpayer proves, by a preponderance of the evidence, that (1) the

adviser was a competent professional with sufficient expertise to justify

reliance, (2) the taxpayer provided necessary and accurate information

to the adviser, and (3) the taxpayer actually relied in good faith on the

adviser’s judgment. See Alt. Health Care Advocates v. Commissioner,

151 T.C. 225, 246 (2018); Neonatology Assocs., P.A. v. Commissioner, 115

T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002); see also Charlotte’s

Office Boutique, Inc. v. Commissioner, 425 F.3d 1203, 1212 n.8 (9th Cir.

2005) (quoting the three-pronged test with approval), aff’g T.C. Memo.

2004-43 and 121 T.C. 89 (2003).

36 One of Mr. Rogerson’s alternative arguments is that the penalties were not

timely approved under section 6751(b). The U.S. Court of Appeals for the Ninth Circuit

recently considered this question in the context of an assessable penalty under section

6707A, which, as the Ninth Circuit noted, is not subject to the Code’s deficiency

procedures. See Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th

1066, 1071 (9th Cir. 2022), rev’g and remanding 154 T.C. 68 (2020). In light of our

determination that Mr. Rogerson is not liable for the section 6662(a) penalties, we need

not consider the penalty approval issue.

35

[*35]

1.

Competent Tax Adviser

There is no precise threshold of competence that a tax adviser

must have to justify a taxpayer’s reliance. Rather, our practical test

looks for expertise in the context of the facts of each case. CNT Inv’rs,

LLC v. Commissioner, 144 T.C. 161, 224 (2015); see also 106 Ltd. v.

Commissioner, 136 T.C. 67, 77 (2011) (finding the taxpayer’s longtime

attorney and accounting firm, who “would have appeared competent to

a layman,” and especially so to the taxpayer, had adequate expertise),

aff’d, 684 F.3d 84 (D.C. Cir. 2012); Neonatology Assocs., P.A., 115 T.C.

at 99 (holding that an insurance agent who did not claim to be a tax

professional and had a direct financial interest in the transaction at

issue lacked sufficient expertise to advise on the tax consequences of

complex life insurance transactions).

Applying this practical test, we find that Mr. Chang was a

competent tax adviser with sufficient expertise to justify reliance. Mr.

Chang was a professionally licensed and experienced tax return

preparer with his own practice. He knew Mr. Rogerson’s personal and

business affairs from his long relationship with Mr. Rogerson and his

companies. There is no indication in the record that Mr. Rogerson had

any reason to doubt Mr. Chang’s competence to provide the advice he

sought.

2.

Provision of Information

To meet the second requirement of reasonable reliance, the

taxpayer must provide necessary and accurate information to the

adviser. See Alt. Health Care Advocates, 151 T.C. at 246. Additionally,

the taxpayer cannot “fail[] to disclose a fact that [he] knows, or

reasonably should know, to be relevant to the proper tax treatment of

an item.” Treas. Reg. § 1.6664-4(c)(1)(i). But a taxpayer is not obligated

to share details that a reasonably prudent taxpayer would not know, or

that he neither would know nor reasonably should know are relevant.

CNT Inv’rs, LLC, 144 T.C. at 228.

We conclude that Mr. Rogerson provided Mr. Chang with

necessary and accurate information during their discussions about Mr.

Rogerson’s activities and the positions taken on Mr. Rogerson’s returns.

Mr. Chang was Mr. Rogerson’s long-time adviser and demonstrated his

familiarity with Mr. Rogerson’s affairs at trial. Additionally, Mr. Chang

and Mr. Rogerson both credibly testified that Mr. Rogerson provided Mr.

Chang with information regarding his level of involvement (generally in

36

[*36] the form of hours estimates) in each of his activities each year for

purposes of applying the passive loss rules. 37 And while ultimately we

resolve this case on grounds unrelated to the number of hours Mr.

Rogerson spent on his various activities during the years at issue, we do

not believe that Mr. Rogerson knew or reasonably should have known

that factors other than his hours were relevant to the treatment of his

activities. See id. Mr. Chang, an experienced tax professional, focused

his analysis and advice on Mr. Rogerson’s activity levels, and Mr.

Rogerson had no reason to question that approach. As the Supreme

Court has said,

When an accountant or attorney advises a taxpayer

on a matter of tax law, such as whether a liability exists, it

is reasonable for the taxpayer to rely on that advice. Most

taxpayers are not competent to discern error in the

substantive advice of an accountant or attorney. To require

the taxpayer to challenge the attorney, to seek a “second

opinion,” or to try to monitor counsel on the provisions of

the Code himself would nullify the very purpose of seeking

the advice of a presumed expert in the first place. See

Haywood Lumber [& Mining Co. v. Commissioner, 178 F.2d

769, 771 (2d Cir. 1950), modifying 12 T.C. 735 (1949)].

“Ordinary business care and prudence” do not demand

such actions.

United States v. Boyle, 469 U.S. 241, 251 (1985).

3.

Good Faith Reliance on Advice

The last requirement is that a taxpayer must have actually

received advice and relied upon it in good faith. Neonatology Assocs.,

P.A., 115 T.C. at 99. Advice is “any communication, including the

opinion of a professional tax advisor, setting forth the analysis or

conclusion of a person, other than the taxpayer, provided to (or for the

37 The Commissioner argues that Mr. Rogerson’s failure to keep logs of his

hours was negligent, but the Commissioner’s own regulations state that logs are not

required. See Temp. Treas. Reg. § 1.469-5T(f)(4). Moreover, as the extensive

discussion in Opinion Part II demonstrates, we do not resolve this case on the basis of

hours Mr. Rogerson spent on each activity during the years at issue. We further note

that this Court has found that a taxpayer acted with reasonable cause and good faith

when a deficiency is the result of an issue of first impression and the taxpayer’s

position is reasonably debatable. See Williams v. Commissioner, 123 T.C. 144, 153–54

(2004).

37

[*37] benefit of) the taxpayer and on which the taxpayer relies, directly

or indirectly.” Treas. Reg. § 1.6664-4(c)(2).

Mr. Chang credibly testified at trial that he provided Mr.

Rogerson with advice regarding the proper reporting of his activities

under the passive loss rules for 2014, 2015, and 2016 and that Mr.

Rogerson’s reporting on his personal income tax returns was consistent

with that advice. Mr. Rogerson likewise credibly testified that he

received advice from Mr. Chang regarding the application of the passive

loss rules to his activities and that he followed that advice. We believe

their testimony and conclude that Mr. Rogerson reasonably relied on

Mr. Chang’s advice.

We note that we find credible Mr. Rogerson’s reliance upon Mr.

Chang’s advice in part because Mr. Chang had been preparing Mr.

Rogerson’s individual returns and the Rogerson companies’ returns for

over a decade. See Schwalbach v. Commissioner, 111 T.C. 215, 230–31

(1998) (finding reasonable reliance where taxpayers consulted their

long-time business and tax adviser, he advised them on what he believed

was the correct reporting position, and they followed his advice). And

Mr. Chang demonstrated his knowledge of the returns and the facts

underlying them at trial. That Mr. Rogerson is a well-educated,

sophisticated businessman does not preclude him from relying on Mr.

Chang, his long-term tax adviser, to advise him regarding technical tax

matters and prepare his returns. See Boyle, 469 U.S. at 251.

In light of these considerations, taking into account all of the facts

and circumstances, we hold that Mr. Rogerson is not liable for the

section 6662 accuracy-related penalties.

IV.

Conclusion

For the reasons described above, we conclude that Mr. Rogerson

materially participated in RAEG for the tax years 2014, 2015, and 2016,

with the result that income from that activity must be treated as

nonpassive in each of those years.

We further conclude that

Mr. Rogerson’s yacht activities during the same years were per se

passive as rental activities and therefore that the income associated

with those activities must likewise be passive. Finally, we conclude that

the penalties the Commissioner determined in the notice of deficiency

do not apply.

38

[*38] To reflect the foregoing,

An appropriate order will be issued, and decision will be entered

under Rule 155.