T.C. Memo. 2018-196



                        UNITED STATES TAX COURT



  ESTATE OF LYDIA RAMIREZ, DECEASED, ROWENA L. RAMIREZ,
SPECIAL ADMINISTRATOR, Petitioner v. COMMISSIONER OF INTERNAL
                    REVENUE, Respondent



      Docket No. 10052-12.                        Filed November 28, 2018.



      Framta Saechao and Robert L. Goldstein, for petitioner.

      Amy Chang, Gregory Michael Hahn, and Timothy Froehle, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      HOLMES, Judge: Lydia Ramirez owned and operated several businesses,

primarily through S corporations. She also owned many rental properties. The

businesses mostly made money while the rental properties mostly lost it. On her
                                        -2-

[*2] 2008 and 2009 tax returns, Ramirez reported that her businesses produced

passive income, which she offset with her rental properties’ passive losses. After

an audit, the Commissioner reclassified most of Ramirez’s business income as

active. Ramirez’s estate doesn’t challenge this reclassification, but does want to

change the classification of the rental losses to be active as well. But Ramirez

owned several properties and, to make this reclassification work, her estate would

have to show she was a “real estate professional” and aggregate the time that she

put into them. That the Commissioner also determined penalties against her raises

a novel question: When an individual dies after filing her petition but before trial,

who has the burden of producing evidence that the penalties were approved in

writing by a supervisor--the Commissioner or petitioner’s estate?

                                FINDINGS OF FACT

      Ramirez’s late husband was in the real-estate business, and he had always

dealt with the couple’s rental properties. When he died in 2000, however,

Ramirez chose to take over. She was a fast learner and swiftly became a

successful entrepreneur who owned and ran a number of businesses and invested

in several pieces of real estate.

      We’ll start with a sketch of her holdings in 2008 and 2009.
                                          -3-

[*3] I.         Non-Real-Estate Businesses

          Truhealth, Inc. Ramirez was the sole shareholder of Truhealth, Inc.

(Truhealth), an S corporation that ran an assisted-living facility for Alzheimer’s

and dementia patients. Truhealth’s facility is called Golden Haven, and Ramirez

was its administrator. Truhealth paid Ramirez a salary of more than $70,000 in

2008 and over $90,000 in 2009, which she reported as wages on her returns.

Truhealth also had flowthrough business income of more than $250,000 in 2008

and over $100,000 in 2009. Ramirez reported those amounts as passive income on

Schedules E, Supplemental Income and Loss, that she attached to her 2008 and

2009 returns.

          Ranew Corporation. Ramirez also wholly owned Ranew Corporation

(Ranew), an S corporation that operated a convenience store called Sunrise Food

Mart. Ramirez worked for Ranew, and it paid her a salary of about $50,000 in

2008 and around $70,000 in 2009--amounts that she reported as wages on her

returns. Unlike Truhealth, Ranew had flowthrough business losses in both years--

more than a $200,000 loss in 2008 and around a $20,000 loss in 2009. Ramirez

reported Ranew’s flowthrough losses as passive losses on her 2008 and 2009

Schedules E.
                                        -4-

[*4] Other Non-Real-Estate Businesses. Ramirez’s 2008 and 2009 returns show

that she had a few other non-real-estate businesses in those years. She reported

losses for both years on Schedules C, Profit or Loss From Business, for a sole

proprietorship called JCCAN, and a loss for 2008 for a sole proprietorship called

XEDIA. We haven’t learned what XEDIA was; JCCAN was a “biweekly

mortgage payoff company” that Ramirez was loosely involved with.1 Ramirez

also reported sizable active losses from a cherry orchard on Schedules F, Profit or

Loss From Farming, that she attached to her 2008 and 2009 returns.2 Finally, she

reported on her Schedules E a flowthrough loss in 2008 and flowthrough income

in 2009 from a partnership called Lollicup Bay Area LLC. The Commissioner

didn’t make any determinations about that partnership, and we learned nothing

about it at trial.




       1
        The Commissioner disallowed Ramirez’s JCCAN losses under section 183
as losses from an activity not engaged in for profit, and the estate agreed to that
adjustment before trial. (All section references are to the Internal Revenue Code
in effect for the years in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure, unless we say otherwise.)
       2
       Ramirez reported her cherry-orchard farming losses as active losses, but
the Commissioner disallowed some and determined that the remaining amounts
were passive. The estate also agreed to those adjustments before trial.
                                        -5-

[*5] II.      Rental Real Estate

       Ramirez also owned between 11 and 13 commercial and residential rental

properties in 2008 and 2009. We’ll describe her commercial properties first.

       A.     Commercial Properties

       Belding Building. Much of the trial testimony was about the Belding

Building, a 25,000-square-foot commercial office building in downtown Stockton,

California. Ramirez owned the Belding Building through an S corporation called

Ramind Corporation (Ramind) that she reported on her Schedules E for 2008 and

2009. She reported almost a $250,000 flowthrough passive loss from Ramind for

2008 and about a $40,000 flowthrough passive loss from it for 2009. The Belding

Building underwent substantial renovations during most of the 2008 tax year--of

the more than fifty office spaces in the building, only one had a tenant during that

year. Ramirez finished the renovations in 2009, but had only five or six tenants by

year’s end.

       Triad Plaza. Another property that Ramirez renovated in the years at issue

was Triad Plaza--a strip mall with seven units totaling between 1,600 and 1,800

square feet each. There’s nothing in the record about whether Ramirez owned this

property directly or through an entity, and it doesn’t seem to show up on her 2008

and 2009 returns. Ramirez’s daughter testified that Triad Plaza had tenants in
                                        -6-

[*6] 2008 and 2009, but she didn’t say how many. And since we don’t see Triad

Plaza on Ramirez’s tax returns, it’s hard to say how she reported it--though the

parties did stipulate that Ramirez “treat[ed] her gains and losses from real estate on

the Schedule[s] E as passive” for 2008 and 2009.

      Winchester Pavilion. Ramirez’s daughter described Winchester Pavilion as

“a strip mall kind of setup.” There was no evidence about Winchester Pavilion’s

tenants in 2008, but we do find that Ramirez had some because she reported over

$120,000 in gross rents for this property for that year. Ramirez sold Winchester

Pavilion in 2008, but she still reported over $8,000 in expenses for it on her 2009

Schedule E. Ramirez reported all the losses for Winchester Pavilion--including a

loss of over $400,000 for 2008--as passive losses on her returns.

      Golden Haven. Ramirez’s daughter testified that Ramirez also owned the

building that housed Golden Haven--the assisted-living facility--and rented it out,

though she didn’t specify to whom. That’s all we learned about that rental

property at trial, and Ramirez’s returns offer no other clues. We therefore do not

know how much the rent for the property was, whether she reported income or loss

from it, or whether she reported that income or loss as active or passive.
                                        -7-

[*7] B.      Residential Properties

      607 and 609 4th Avenue. Ramirez jointly owned this property with her son.

She didn’t report any gross rental income for it on her 2008 Schedule E, though

she did still tally an almost $3,000 passive loss for that year. The property threw

off some gross rental income in 2009, but the net passive loss that Ramirez

reported for that year was about the same as 2008. Ramirez claimed a

management-fee deduction of almost $4,000 for this property for 2009.

      3749 Turnpike Road. Ramirez received gross rental income for this

property in 2008 and 2009; after deductions, however, she reported net passive

losses for both of those years. As she did for the 607 and 609 4th Avenue

property, Ramirez deducted management fees for this property--the total fees were

less, but she deducted them for both years.

      Tulsa, Oklahoma. Ramirez had at least three residential properties in

Oklahoma.3 She reported gross rental income for her Oklahoma properties on her

2008 and 2009 Schedules E, but, once again, the deductions were so large that she

had net passive losses for both of those years. Consistent with the other

residential properties we’ve discussed, Ramirez deducted management fees for her


      3
       Ramirez’s daughter testified that “[t]here may have been four,” but she
“kn[ew] of three.”
                                        -8-

[*8] Oklahoma properties for 2008 and 2009. Ramirez’s daughter testified:

“[S]he had some properties in Oklahoma, so she obviously couldn’t handle those

by herself. She did have some assistance with that.”

       2813 Glen Sharon Way. This property was vacant in 2008, and Ramirez’s

son lived in it rent-free in 2009. Ramirez still, however, reported an almost

$30,000 passive loss for this property for 2008 and about a $16,000 passive loss

for 2009. And, even though her son lived in the property for free in 2009,

Ramirez took a $600 management-fee deduction for it for that year.

       5443 Centralia Street. Ramirez’s daughter lived in this property rent-free in

2008, but Ramirez still reported a net passive loss of more than $25,000 for it for

that year. This property also produced no gross rental income in 2009, and

Ramirez reported a net passive loss for it of almost $9,000 for that year. It seems

Ramirez didn’t have any tenants for this property in 2009, but she did sign a

“Management Rental Agreement” with Taylor Young Real Estate Investments for

it in that year.

       8025 Shay Circle. Ramirez bought this property in 2008, but it wasn’t

ready to rent until 2009. She reported gross rental income of just under $2,000 for

this property in 2009 and a net passive loss of more than $4,500. Ramirez also

took a management-fee deduction for this property for 2009.
                                         -9-

[*9] In 2008 and 2009 Ramirez reported gobs of passive losses from her

commercial and residential rental properties, several of which she didn’t even rent.

Considering the management fees, the “Management Rental Agreement,” and her

daughter’s testimony, we know, too, that Ramirez had help with these properties.4

       But what exactly was she doing?

III.   Ramirez’s Rental Activities

       Ramirez was a capable entrepreneur, but myriad health conditions were

slowing her down in 2008 and 2009. She was suffering from hypertension,

diabetes, emphysema, subclinical congestive heart failure, and diffuse

microvascular disease. Ramirez had a history of ministrokes, and her daughter--a

physician--credibly testified that her daily routine was hindered by fatigue and a

lack of balance. “[S]he couldn’t walk across this [court]room without getting

winded,” and, “[o]n top of that, * * * she had suffered multiple fractures from

different falls that required either a casting or operative intervention.” Despite

Ramirez’s serious ailments, she spent many hours each day working on her




       4
        Ramirez’s daughter also testified that two different contractors worked on
Ramirez’s properties--Tito Petalio on the residential properties and Chris Ennslin
on the commercial properties. She didn’t say exactly how much work they did or
how much time they spent doing it, but their work doesn’t appear to have been
insignificant.
                                          - 10 -

[*10] businesses and rental properties. We find, however, that important parts of

her daughter’s testimony are not credible.

       Ramirez’s daughter lived in southern California for all of 2008 and at least

half of 2009. Ramirez lived in northern California during that time. Her daughter

testified, though, that she visited her mother about two to three times per month to

help her with work and take her to doctors’ appointments. She also testified that

in 2008 she visited her mother between 25 and 30 times and that her average stay

was one week to a week and a half. The frequency and length of Ramirez’s

daughter’s claimed visits in 2008 seem implausible--totaling somewhere between

175 and 315 days5--especially since she had a medical research job in southern

California at the time. She testified that she wasn’t that busy with her research

job, but we still find it hard to believe that she spent as much time with her mother

in 2008 as she says she d

find it unlikely that Ramirez--a woman in very poor health--was as

active in 2008 and 2009 as her daughter claims she was. Ramirez’s daughter

testified that:




       5
           7 days x 25 visits = 175 days; 10.5 days x 30 visits = 315 days.
                                        - 11 -

[*11] !      Ramirez started her work day at 4 or 5 a.m.;

      !      she worked as the administrator at Golden Haven 3 days a week for
             4-6 hours per day;

      !      she worked for Sunrise Food Mart 1-2 hours per day but not every
             day;

      !      she worked on the Belding Building renovations every day for 4-6
             hours--Ramirez’s daughter claimed that Ramirez did some of this
             work while she was at Golden Haven;

      !      she did work associated with Triad Plaza 3-4 days a week for 1-2
             hours per day; and

      !      she did work associated with her residential rental properties about
             19-25 hours per month.

That’s a demanding schedule, even for someone in good health. The daughter’s

testimony strains credulity, and that’s a problem because her testimony is the only

thing the estate offered to prove Ramirez’s rental activities. The estate didn’t offer

any contemporaneous records (e.g., activity logs), and it failed to offer any

evidence (e.g., calendars, phone records, invoices, receipts) to corroborate her

testimony.6 We therefore find that the estate has failed to prove the number of

hours that Ramirez devoted to any of her rental activities in 2008 and 2009.


      6
        Ramirez apparently prepared activity logs after the Commissioner asked
for them during the audit, but the estate never offered them into evidence. We
therefore don’t have the opportunity to consider even those noncontemporary logs
here.
                                       - 12 -

[*12] IV.     Audit and Trial

      The Commissioner audited Ramirez’s 2008 and 2009 returns, and he

determined that she actively participated in Truhealth and Ranew--the S

corporations that ran the assisted living facility and the convenience store. That

meant that Truhealth’s significant flowthrough income was active, which also

meant that Ramirez couldn’t deduct her passive rental losses against it. The

Commissioner sent Ramirez a notice of deficiency in which he made that

determination and also determined accuracy-related penalties. Ramirez, a

California resident, timely petitioned our Court. After Ramirez died, her daughter

took over the case on behalf of her estate. We tried the case in San Francisco.

The Commissioner introduced no evidence at trial that the IRS employee who

made the initial penalty determination had written approval from his immediate

supervisor.

      We need to decide whether Ramirez’s rental losses were active and whether

she was liable for two section 6662(a) penalties. On the latter issue, we need to

decide whether the Commissioner has the burden of producing evidence that the

penalties were approved in writing by an IRS supervisor. See sec. 7491(c).
                                         - 13 -

[*13]                                 OPINION

I.      Rental Losses: Passive or Active?

        Sections 162(a) and 212(1) allow taxpayers to deduct most of their business

and investment expenses, but section 469 limits those deductions when they arise

from “passive activities.” A “passive activity” is “any activity * * * which

involves the conduct of any trade or business, and * * * in which the taxpayer does

not materially participate.” Sec. 469(c)(1). Real-estate rental activities like

Ramirez’s in 2008 and 2009 are per se passive, sec. 469(c)(2), unless a taxpayer

can prove she is a “real estate professional,” see sec. 469(c)(2), (7). And that is

just what the estate argues Ramirez was in 2008 and 2009, even though her returns

never said so.

        A.    Real Estate Professional

        Ramirez was a real-estate professional in 2008 and 2009--and her rental

activities were then not per se passive in those years--if:

        !     more than half of the personal services she performed each of those
              years were “performed in real property trades or businesses in which
              * * * [she] materially participate[d], and”

        !     she performed “more than 750 hours of services during * * * [each of
              those years] in real property trades or businesses in which * * * [she]
              materially participate[d].”
                                        - 14 -

[*14] Sec. 469(c)(7)(B). The Code defines “real property trade or business” to

include the renting, operation, and leasing of real estate, sec. 469(c)(7)(C); see sec.

1.469-9(b)(2), Income Tax Regs., and “personal services” are just about any type

of work that a person does in connection with her trade or business, sec. 1.469-

9(b)(4), Income Tax Regs. A major exception is for work more typical of an

investor--study and review of financial statements, preparation and analysis of

financial summaries, and the monitoring of finances. See id.; sec. 1.469-

5T(f)(2)(ii)(B), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).

      We have no trouble finding that Ramirez performed some personal services

in 2008 and 2009 in connection with her commercial and residential real-estate

rental business. And real-property rentals were also her only real-property trade or

business in those years--there’s nothing in the record, for example, about her

engaging in the trade or business of property development, construction, or

reconstruction.7 But performance of some personal services in some particular

real-property trade or business is only part of what the estate needs to show. The

rest of its burden is harder to shore up--it must prove the amount of time that

      7
        The Belding Building was substantially renovated during the years at
issue, and Ramirez’s daughter testified that Ramirez spent a lot of time on those
renovations. We find, however, that the renovations were made only to improve
the property, and the estate doesn’t argue that Ramirez was in the trade or
business of construction or reconstruction.
                                           - 15 -

[*15] Ramirez herself spent on this activity, and show that it can add the time she

spent on separate properties to meet the other regulatory requirements for proof of

material participation. We have to ask whether Ramirez materially participated in

her rental activities, performed more than half of her personal services in them,

and spent more than 750 hours doing so. See sec. 469(c)(7)(B); sec. 1.469-9(c)(1),

(3), Income Tax Regs. This is where the foundation of the estate’s case starts to

crack.

         Let’s start with “material participation.” The Code says that “material

participation” means being “involved in the operations of the activity” on a

regular, continuous, and substantial basis, sec. 469(h)(1), and the regulations lay

out seven ways to prove that, see sec. 1.469-9(b)(5), Income Tax Regs; sec. 1.469-

5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988). The

estate hasn’t said which way--if any--Ramirez materially participated in 2008 and

2009, but here are the ones that we think might be supported by the record:

         !     “[t]he individual participates in the activity more than 500 hours
               during such year;”

         !     “[t]he individual’s participation in the activity for the taxable year
               constitutes substantially all of the participation in such activity of all
               individuals (including individuals who are not owners of interests in
               the activity) for such year;”
                                         - 16 -

[*16] !      “[t]he individual participates in the activity for more than 100 hours
             during the taxable year, and such individual’s participation in the
             activity for the taxable year is not less than the participation in the
             activity of any other individual (including individuals who are not
             owners of interests in the activity) for such year;” or

      !      “[b]ased on all of the facts and circumstances * * * , the individual
             participates in the activity on a regular, continuous, and substantial
             basis during such year.”

Sec. 1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25,

1988).8

      The last test seems more flexible than the others, but a taxpayer who reaches

for it still has to have spent over 100 hours on the activity. See 

53 Fed. Reg. 5726. So the amount of time that Ramirez and others spent on her

real property trade or business is what matters here.

      How do we measure this time? The regulations say that “[t]he extent of an

individual’s participation in an activity may be established by any reasonable

means,” and that contemporaneous daily time reports or logs are not necessarily


      8
         There are three other tests, see sec. 1.469-5T(a), Temporary Income Tax
Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988), but they’re not relevant here. Two of
them have to do with a taxpayer’s history of materially participating in an activity,
see 

and (6), 53 Fed. Reg. 5726, and there’s no evidence in the
record about any such history. The other has to do with hours spent on
“significant participation activities”, see 

and that’s a test that we
think Ramirez could satisfy only if we’ve found that she already satisfied one of
the others. That means that test can’t apply here. See 

                                        - 17 -

[*17] required. 

53 Fed. Reg. 5727. We’ve held time and time

again, however, that a retrospective “ballpark guesstimate” isn’t good enough, and

we don’t have to accept unverified, undocumented testimony about how a

taxpayer spent her time. See, e.g., Moss v. Commissioner, 

, 369

(2010); Robison v. Commissioner, T.C. Memo. 2018-88, at *26 (citing Estate of

Stangeland v. Commissioner, T.C. Memo. 2010-185, Shaw v. Commissioner, T.C.

Memo. 2002-35, and Scheiner v. Commissioner, T.C. Memo. 1996-554); Coastal

Heart Med. Grp., Inc. v. Commissioner, T.C. Memo. 2015-84, at *29.

       That’s a problem here for the estate. It offered no documentary evidence to

prove the amount of time Ramirez spent on her rental activities. All we have

instead is the uncorroborated testimony of Ramirez’s daughter and her

“guesstimates” of that time. We found much of her testimony incredible--we don’t

think she spent as much time with Ramirez as she says she did, and we do think

Ramirez’s own failing health would’ve made it difficult for her to devote the hours

to her rental activities that her daughter claims. These evidentiary failures are only

made worse by the fact that Ramirez had two other jobs in 2008 and 2009--at

Golden Haven and Sunrise Food Mart--that had nothing to do with real estate, and

that what evidence we do have suggests that she had quite a bit of help with her

rental activities.
                                        - 18 -

[*18] We’ve already found that the estate failed to prove the number of hours that

Ramirez devoted to her real-property trade or business in 2008 and 2009, see supra

pp. 9-11; we therefore find that Ramirez didn’t meet any of the material-

participation tests that rely on 100 or 500 hour minimums, see sec. 1.469-5T(a)(1),

(3), (7), Temporary Income Tax 

. We also can’t find that Ramirez’s

participation in her real-property trade or business “constitute[d] substantially all

of the participation in such activity of all individuals” in 2008 or 2009, see 

53 Fed. Reg. 5725-5726; Ramirez claimed management-fee

deductions or signed a management agreement for all her residential properties,

and she regularly used two different contractors on her commercial and residential

properties. We therefore hold that Ramirez didn’t satisfy that test for material

participation either.

      Because Ramirez didn’t meet any of the material-participation tests for her

real-property trade or business in 2008 or 2009, she was not a real-estate
                                         - 19 -

[*19] professional in either of those years9 and her rental activities were passive.

See sec. 469(c)(2), (7).

      B.     Failure To Aggregate

      There’s another problem with the estate’s case, though. Even if we found

that Ramirez was a real-estate professional in 2008 and 2009, she didn’t elect

under section 469(c)(7)(A) to treat all her rental properties as a single activity on

her original return for 2008 or 2009 or any previous year. When a taxpayer who

owns more than one rental property doesn’t make this “aggregation election,” the

default rule is to treat each rental property as a separate activity. Sec.

469(c)(7)(A)(ii); see also sec. 1.469-9(e), Income Tax Regs.

      How does one make the aggregation election? The regulations tell a real-

estate professional to file a declaration with the first tax return on which she

wishes to claim the benefit of aggregating her properties. This declaration must

state that she “is a * * * [real estate professional] for the taxable year and is

making the election pursuant to section 469(c)(7)(A).” Sec. 1.469-9(g)(3), Income


      9
        Note that the real-estate-professional test looks only at real-property trades
or businesses in which a taxpayer materially participates. See sec. 469(c)(7)(B).
We hold that Ramirez didn’t materially participate in her real-property trade or
business, so we don’t need to ask whether more than half of her personal services
were performed in that trade or business or whether she spent more than 750 hours
on it. See sec. 469(c)(7)(B).
                                         - 20 -

[*20] Tax Regs. The “election is binding for the taxable year in which it is made

and for all future years in which the taxpayer is a * * * [real estate professional],

even if there are intervening years in which the taxpayer is not a * * * [real estate

professional].” 

The estate stipulated that Ramirez never made the

aggregation election with her 2008 or 2009 return (or any earlier return).

      This election is a formal requirement, and we don’t allow taxpayers to

aggregate their activity spread among multiple rental properties unless it is met.

See Trask v. Commissioner, T.C. Memo. 2010-78, 

, at *4-*5

(no aggregation where taxpayer treated all rental properties as single activity on

original returns but stated intent to elect only during audit); Kosonen v.

Commissioner, T.C. Memo. 2000-107, 

, at *4-*6 (reporting

losses as active and aggregation on return not sufficient statement of intent).

Ramirez hits the wall even harder than these taxpayers. She not only failed to

make the formal election on her original return, but also failed to treat her rental

properties as a single activity and even reported all of them as passive activities.

There’s only one escape hatch for someone stuck in this situation--a late

aggregation election.

      There are two ways to do this. One is to ask the IRS for a letter ruling under

section 301.9100-3, Proced. & Admin. Regs.--a request the Commissioner
                                        - 21 -

[*21] should’ve granted so long as Ramirez proved she acted reasonably and in

good faith, and that the relief wouldn’t prejudice the government’s interests. See

generally Vines v. Commissioner, 

(2006). Ramirez would’ve had to

check many boxes to request a letter ruling, not the least of which is the

requirement to follow the “applicable procedures for requests for a letter ruling”

and pay the “applicable user fee.” See sec. 301.9100-3(e)(5), Proced. & Admin.

Regs.; see also, e.g., Rev. Proc. 2012-1, 2012-1 I.R.B. 1. Ramirez didn’t do any of

that here.

      The other way Ramirez might’ve made a late aggregation election is under

Revenue Procedure 2011-34, 2011-24 I.R.B. 875. That procedure lets some

taxpayers make late elections; its “procedures * * * are in lieu of the letter ruling

procedure.” 

3.02, 2011-24 I.R.B. at 875. It requires a taxpayer to file

an amended return and attach to it an aggregation-election statement that includes

four specific representations necessary to qualify for relief. See 

2011-24 I.R.B. at 875-76. Ramirez had to be able to show that:

      !      she “failed to make an election under § 1.469-9(g) solely because
             * * * [she] failed to timely meet the requirements in § 1.469-9(g);”
                                         - 22 -

[*22] !        she “filed consistently with having made an election under § 1.469-
               9(g) on any return that would have been affected if * * * [she] had
               timely made the election;”10

      !        she “timely filed each return that would have been affected by the
               election if it had been timely made;” and

      !        she “has reasonable cause for [her] failure to meet the requirements in
               § 1.469-9(g).”

2011-24 I.R.B. at 875.

      The estate concedes that Ramirez and it haven’t filed an amended return for

either 2008 or 2009,11 and that it has not filed with the Commissioner any

statement like the one described in the revenue procedure. But it argues, rather

opaquely, that we can still follow Rev. Proc. 

, “as a reasonable

means to retroactively aggregate [Ramirez’s] rental real estate activities as a single

activity for purposes of the passive loss limitation rules and for material


      10
           This one also says:

      [She] must have filed all required federal income tax returns
      consistent with the requested aggregation for all of the years
      including and following the year * * * [she] intends the requested
      aggregation to be effective and no tax returns containing positions
      inconsistent with the requested aggregation may have been filed by or
      with respect to * * * [her] during any of the taxable years.

Rev. Proc. 2011-34, sec. 4.01(2), 2011-24 I.R.B. at 875.
      11
        The estate doesn’t argue that Ramirez or it filed an amended return for
any other year either.
                                         - 23 -

[*23] participation.”12 We have serious doubts about our ability to do that, see

Estate of Shapiro v. Commissioner, 

, 1018 (2d Cir. 1997) (revenue

procedures ordinarily not binding and don’t confer rights upon taxpayers), aff’g

T.C. Memo. 1993-483; see also Capitol Fed. Sav. & Loan Ass’n, 

,

but it doesn’t matter because Ramirez wouldn’t have qualified for relief under

Revenue Procedure 

.

      Only a Timing Problem. While it’s true that Ramirez failed to timely make

the aggregation election with her 2008 and 2009 original returns, we can’t even

say that timing is the only reason for her failure. The estate admits that Ramirez

and it didn’t learn about the aggregation election until the audit--long after either

return was due--and the estate still hadn’t filed an amended return and election

statement at the time it turned in its posttrial briefs. Ramirez also reported all her

rental activities as passive for 2008 and 2009--offsetting large dollops of passive


      12
         The estate also argues that Ramirez told the IRS at her audit that she
intended to make a late aggregation election under Revenue Procedure 

, but it admits no one filed amended returns or election statements. We will
sometimes review for abuse of discretion the Commissioner’s compliance with a
revenue procedure. See, e.g., Capitol Fed. Sav. & Loan Ass’n v. Commissioner,

, 217-19 (1991). The problem here is that Ramirez and then her estate
never took any of the steps required by the revenue procedure to make a late elec-
tion. The Commissioner can’t abuse discretion he hasn’t been asked to exercise.
See, e.g., McCoy Enters., Inc. v. Commissioner, 

, 563 (10th Cir.
1995), aff’g T.C. Memo. 1992-693.
                                        - 24 -

[*24] income--which leads us to conclude that she didn’t want to aggregate her

rental properties and didn’t know about the aggregation election when she filed

her original 2008 and 2009 returns. Either way, her failure to make the election

was not only about timing.

      Election Consistent with Filed Returns. The second requirement is that

Ramirez filed her 2008 and 2009 returns (and any subsequent returns) consistent

with an aggregation election. See Rev. Proc. 2011-34, sec. 4.01(2), 2011-24

I.R.B. at 875. As we’ve said, Ramirez reported all her rental activities as passive

for 2008 and 2009, and the estate didn’t offer any evidence about her reporting

positions in subsequent years. If she’d made the aggregation election, the estate

argues that her rental activities would’ve been active because, when aggregated,

Ramirez materially participated in her rental activities. Those reporting positions

are entirely inconsistent. Ramirez thus did not file her returns consistent with

having made the aggregation election.

      Reasonable Cause. Ramirez also failed to show she had reasonable cause

for failing to make the election in the first place. See 

The estate

points out that Ramirez used a CPA to prepare her 2008 and 2009 returns--and

that she “supplied her paid preparer with all the necessary information to complete

her income tax return and her preparer knew or should have known that the
                                        - 25 -

[*25] election was available to” her. Reasonable reliance on an adviser--such as a

CPA--can be reasonable cause. See Neonatology Assocs., P.A. v. Commissioner,

, 98 (2000), aff’d, 

(3d Cir. 2002). Caselaw points to

three factors to determine whether reliance was reasonable:

       !     the adviser was a competent professional with sufficient expertise to
             justify reliance;

       !     the taxpayer provided necessary and accurate information to the
             adviser; and

       !     the taxpayer actually relied on the adviser’s judgment in good faith.

       Our analysis here is brief. There’s no evidence in the record about the

competence of the CPA who prepared Ramirez’s 2008 and 2009 returns, except

for the fact that he appears to have been a CPA--at least Ramirez’s returns say he

was a CPA. See 

don’t see anything in the record about the quantity or

quality of information that Ramirez gave him, and there’s no proof that he gave

Ramirez any advice on which she relied. See id.; see also Woodsum v.

Commissioner, 

, 592-93 (2011). Indeed, the estate is now taking a

position contrary to the one taken on Ramirez’s returns--that her rental activities

were active instead of passive--so it can’t argue that Ramirez relied on her CPA to

advise her about an election that was irrelevant to the position she took. Ramirez
                                         - 26 -

[*26] doesn’t have reasonable cause for failing to meet the requirements of the

aggregation election.

      This all means that the estate doesn’t satisfy the conditions for a late

election under the revenue procedure, which means we wouldn’t grant it that relief

even if we thought we could. And without aggregation, the estate can’t satisfy the

material-participation requirement for any of its properties. Ramirez’s daughter

testified only to her mom’s spending 19-25 hours per month on the residential

properties and she didn’t even try to allocate those hours among the individual

properties. So, even if Ramirez were a real-estate professional in 2008 and 2009,

and even if she had sufficient evidence to establish the hours that she spent on her

rental activities, we would have to find that Ramirez’s rental activities were

passive in 2008 and 2009.

      Her original returns were right on that point.

II.   Sections 6662(a) and 7491(c)

      A.     Section 6662(a) Penalties

      The Commissioner also argues that the estate owes penalties for 2008 and

2009 because Ramirez’s returns substantially understated the tax due. The Code

tells us that an understatement is substantial if it exceeds the greater of $5,000 or

“10 percent of the tax required to be shown on the return.” Sec. 6662(a), (b)(2),
                                       - 27 -

[*27] (d)(1)(A). The Commissioner has no trouble meeting this because

Ramirez’s understatements for 2008 and 2009 are much more than $5,000 and

10% of the required tax. See sec. 6662(d)(1)(A).

      The estate says it shouldn’t be held liable for the penalties, however,

because Ramirez had reasonable cause and acted in good faith. See sec.

6664(c)(1); sec. 1.6664-4(b)(1), Income Tax Regs. As with its reasonable-cause

argument under Revenue Procedure 

, the estate once again argues

that Ramirez relied on her CPA to prepare her returns and advise her about the

aggregation election. For the same reasons we held that Ramirez didn’t have

reasonable cause under the revenue procedure, see supra pp. 24-25, we hold that

she doesn’t have a reasonable-cause defense to the penalties.

      Lurking beneath this altogether common dispute about penalties, however,

is a Chai ghoul that we had not seen before. See Chai v. Commissioner, 

(2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42.

      B.    Section 7491(c) Burden of Production

      Section 6751 tells us that the Commissioner cannot assess a section 6662

penalty unless it is “personally approved (in writing) by the immediate supervisor

of the individual making such determination.” We now know this provision

means that the Commissioner cannot assert a penalty in a notice of deficiency or
                                        - 28 -

[*28] an amended answer without that approval. See Graev v. Commissioner

(Graev III), 149 T.C. __, __ (slip op. at 14) (Dec. 20, 2017), supplementing and

overruling in part 

(2016). We also know from Wheeler v.

Commissioner, 

, 210-12 (2006), aff’d, 

(10th Cir.

2008), that if there is no evidence in the record of an essential condition for the

imposition of a penalty, the party who had the burden of production loses. See

also Ford v. Commissioner, T.C. Memo. 2018-8, at *6 (true as well when there is

no evidence of compliance with section 6751), aff’d, __ F. App’x __, 

(6th Cir. Nov. 5, 2018).

      This question would be easy if Ramirez had lived--it would be just like Ford

or several other cases we’ve had since Graev III, and we would hold that the

Commissioner’s failure to introduce any evidence that showed he had complied

with section 6751 means that he loses on the penalty issue. What makes this case

novel is that Ramirez died and her estate stepped into her shoes. What does

section 7491(c) say about the burden of production when an estate is the

petitioner?

      The text of that section is superficially clear: It says that the Commissioner

has the burden of production on penalties only “in any court proceeding with

respect to the liability of any individual.” Sec. 7491(c) (emphasis added). We
                                         - 29 -

[*29] have nevertheless suggested that section 7491(c) transfers the burden of

production to the Commissioner in cases where an estate’s liability for tax is at

issue:

               !     Estate of Sanders v. Commissioner, T.C. Memo. 2018-104, at
                     *60 (applying 7491(c) to an individual decedent’s estate and
                     substituting “taxpayer” for “individual”);

               !     Estate of Lin v. Commissioner, T.C. Memo. 2017-77, at *6
                     (applying 7491(c) in a decedent’s redetermination proceeding
                     without explanation and substituting “taxpayer” for
                     “individual”);

               !     Estate of Beyer v. Commissioner, T.C. Memo. 2016-183, at
                     *149 (paraphrasing 7491(c) to place the burden of production
                     with respect to 6651 and 6662 penalties on the Commissioner);

               !     Estate of Dieringer v. Commissioner, 

, 134 (2016)
                     (substituting “taxpayer” for “individual” in applying section
                     7491(c));

               !     Estate of Richmond v. Commissioner, T.C. Memo. 2014-26, at
                     *47 (paraphrasing 7491(c) to place the burden of production
                     with respect to a 6662 penalty on the Commissioner);

               !     Estate of Giovacchini v. Commissioner, T.C. Memo. 2013-27,
                     at *106 (substituting “estate” for “individual” in applying
                     section 7491(c)).

There are undoubtedly others.

         In all these cases, however, the paraphrase made no difference--the

Commissioner met his burden of production if he had to meet it. See, e.g., Estate
                                        - 30 -

[*30] of Sanders, at *60 (“Decedent did not file a Form 1040 with the IRS for tax

year 2002. Therefore, respondent has met his burden of production”); Estate of

Lin, at *6-*7 (“Respondent has discharged his burden of production by providing

sufficient evidence showing that petitioner’s understatement of income tax for

2012 exceeds the greater of 10% of the tax that was required to be shown on the

2012 return or $5,000”).

      Here the distinction will make a difference, and we have before us not a

deficiency in estate tax, but of income tax; some original analysis is due.

      We first looked at section 7491(c) in Higbee v. Commissioner, 

(2001), after Congress enacted the IRS Restructuring and Reform Act of 1998,

Pub. L. No. 105-206, 112 Stat. 685. Higbee dealt with the redetermination of two

married individuals’ tax deficiencies, which included failure-to-file and accuracy-

related penalties. Higbee, 

. While Higbee uses the word

“individual” when paraphrasing section 7491(c), it goes on to cite a chunk of

legislative history that explains the Commissioner’s burden of production with

respect to a penalty against a “taxpayer”. 

From there, Higbee

transitions into a discussion of the difference between “burden of production” and

“burden of proof” and cites section 7491(a)--which uses the word “taxpayer” and

not “individual”--before explaining that “once the Commissioner meets his burden
                                         - 31 -

[*31] of production, the taxpayer must come forward with evidence sufficient to

persuade a Court that the Commissioner’s determination is incorrect.” 

47 (emphasis added). This discussion may have introduced a bit of confusion by

implying “individual” and “taxpayer” are synonymous in section 7491, and

because nearly every later case that applies section 7491(c) cites Higbee at least in

passing.

      We have nevertheless read the text of section 7491(c) more closely in cases

where it matters. In NT, Inc. v. Commissioner, 

, 195 (2006), we held

that a corporation is not an individual under section 7491(c). And in Dynamo

Holdings Ltd. P’ship v. Commissioner, 150 T.C. __, __ (slip op. at 16-17) (May 7,

2018), we analyzed the text of section 7491(c) with greater care to determine if it

shifts the burden of production to the Commissioner when the petitioner is a

TEFRA partnership. This analysis first homed in on the “nature of the

proceeding” before us, and we found that while “[p]artners are treated as the

parties to a partnership-level proceeding, * * * the proceeding itself is conducted

at the partnership level. It is the partnership return that is examined; it is

partnership items that are adjusted; and it is partnership items and the applicability

of penalties that are determined in a partnership-level proceeding.” Id. at __ (slip

op. at 18). Because section 7491(c) focuses on the nature of the proceeding, we
                                        - 32 -

[*32] held that a partnership-level proceeding under TEFRA was not a

“proceeding with respect to the liability of any individual” and thus that the

Commissioner did not bear the burden of production on penalties.

      In our analysis we found especially telling that Congress used the word

“taxpayer” in section 7491(a), but “individual” in section 7491(c).” Id. at __ (slip

op. at 19). But what do we do when the “petitioner” who starts a case as an

individual becomes an estate before trial?

      There is no question that an individual decedent and his estate are legally

distinct for federal tax purposes. The Code distinguishes them. See secs. 1(e)

(setting separate income tax rates for estates and individuals), 68(e) (“This section

[pertaining to individual taxpayers] shall not apply to any estate or trust”), 641(b)

(“The taxable income of an estate or trust shall be computed in the same manner as

in the case of an individual”), 7701(a)(1) (“individual” and “estate” two different

species of genus “person”). The regulations distinguish them. See sec. 1.641(b)-

2(b), Income Tax Regs. (contrasting “estate” of infant, incompetent, or individual

in receivership with estate of deceased person or of a trust). And our caselaw

distinguishes them. See, e.g., Prashker v. Commissioner, 

, 177 (1972)

(decedent and estate are separate legal entities); Frank v. Commissioner, 

, 1072 (1927) (same).
                                         - 33 -

[*33] That general principle doesn’t quite answer the specific question here,

though, because section 7491(c) puts the burden of production on the

Commissioner only “in any court proceeding with respect to the liability of any

individual.” We need to focus, as we did in Dynamo Holdings, on the nature of

the proceeding. Is this case a proceeding with respect to the liability of Ramirez as

an individual or of her estate? We think the answer is that it is a proceeding to

determine the liability of an individual. Even though Ramirez’s additional tax13

liability had not been assessed at the time of her death, it was established and

constituted a debt due the United States while she was still alive. United States v.

Moore, 

(1975) (obligations to United States fixed even when exact

amount not determined); O’Sullivan v. Commissioner, T.C. Memo. 1994-17, 

, at *3 (tax ascertainable when tax period ends and IRS considered

creditor as of close of applicable year). This means that even before her death,

Ramirez was liable as an individual for her 2008 and 2009 income-tax debts.14

      13
           A penalty is treated and assessed as a tax under the Code. Sec. 6665(a).
      14
         Had Ramirez died before the end of 2009, our analysis might be more
complicated, because an individual’s tax liability generally is fixed at the end of a
calendar year. And, while a decedent’s final return is subject to basically the same
rules as an individual’s, see sec. 6012(b)(1) (return of decedent to be filed by
executor in same manner as living individual), it’s not obvious that this liability is
one of the individual decedent or her estate. We’ll wait for a case where it makes
                                                                        (continued...)
                                        - 34 -

[*34] Section 7491(c) says the Secretary has the burden of production in “any

court proceeding with respect to the liability of any individual” for penalties or

additions to tax. “Court proceeding” is defined in section 7430(c)(6) as “any civil

action brought in a court of the United States (including the Tax Court).” Ramirez

petitioned our Court to redetermine liabilities that became fixed at the end of

calendar years 2008 and 2009; her estate continued it, but the proceeding remained

one to redetermine those liabilities. We think the best reading of section 7491(c)

here is that the Commissioner has the burden of production on penalties: This

case was begun by, and concerns the tax liability of only Ramirez in her individual

capacity. It is Ramirez’s original returns that we examine; it is Ramirez’s

individual items of income and loss that we adjust; and it is the penalties the

Commissioner asserts against Ramirez that we redetermine.

      That different focus in this case distinguishes it from the estate-tax cases

where we may have just assumed that section 7491(c) shifted the burden of

production to the Commissioner. Here we redetermine Ramirez’s individual tax

liabilities, and the scope of this proceeding was set when she filed a timely petition

in response to the notice of deficiency. See sec. 6213(a); Guarino v.


      14
         (...continued)
a difference to decide.
                                        - 35 -

[*35] Commissioner, 

, 331 (1976); see also NT, Inc., 

.

So while the Commissioner will presumably make a claim against and collect from

Ramirez’s estate when this case is done, in this proceeding we determine her

liabilities as an individual.

      This means that the Commissioner had the burden of production on the

issue of Ramirez’s liabilities for the penalties he determined. He failed to carry

that burden by failing to show that he complied with section 6751. We therefore

find that her estate does not owe it.

      This is a split result, so


                                                 Decision will be entered under

                                        Rule 155.