Cunningham v. Commissioner, T.C. Memo. 2009-194 (T.C. 2009).
Question for the Tax Court to Decide
[A]re the taxpayer's losses from horse activities limited by section 469 (known as the passive loss rules). (1).
Facts
[Taxpayer] was employed on the dental faculty at New York University and maintained a private dental practice in Peeksskill, New York. (2).
[On his] joint 2002 Form 1040 . . . [He] claimed losses from five separate horse activities located in California....(2). [T]he partnership returns reporting the losses from the horse activities were prepared by Robert Gruntz. (2).
Arguments
[Taxpayer] asserts in a posttrial memorandum that he was "duped by a charlatan and in essence Robert Gruntz tacitly implied that I should fabricate a log that would show 'material participation' ".
[Taxpayers] assert that the liability would be a financial burden...and "petition the Court to consider reducing the liability, throwing [themselves] at the mercy of the court."
Law
Section 469 generally limits deduction of losses from "passive activities" to income generated by such activities and prohibits deduction of such losses against the taxpayer's other income. To avoid the limitations of section 469, taxpayers must establish that they materially participated in the activities. Sec. 469(h). (3).
See my previous post for a thorough explanation of section 469(h).
Holding
[Taxpayers] have not shown any participation, much less material participation, in the horse activities in issue. They simply signed returns claiming substantial losses without investigation or knowledge of the accuracy of the partnership returns for the horse activities.
Analysis
I think the court was wrong to imply the taxpayers lose here because they did not investigate the accuracy of the partnership returns. The taxpayers failed to show material participation in the activity. The accuracy of the partnership returns reflecting the losses was not at issue here.
The court probably wanted to respond to the taxpayer's "i was a victim" defense. Unfortunately, there are very few "victims" before the Tax Court. Every taxpayer is responsible for their own tax return. Even if you use a very qualified tax professional, the civil penalties against the tax professional for mistakes are minuscule compared to the civil penalties against the taxpayer.
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