Tax Court in Brief | Rogerson v. Commissioner | Passive Income, Rent of Yachts, and Reliance on Competent Tax Counsel

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Tax Litigation:  The Week of May 9th, 2022, through May 13th, 2022

Rogerson v. Commissioner, TC Memo. 2022-49| May 12, 2022 | Toro, J. | Dkt. No. 5848-20

Opinion

Summary:  This deficiency case regards an evaluation of the passive activity loss rules of 26 U.S.C. § 469. Section 469 limits a taxpayer’s use of losses generated by passive activities to offset unrelated income generated by nonpassive activities. Michael Rogerson, the taxpayer, owned patents, and he led, for over 40 years as CEO, a number of companies in the aerospace industry. For the tax years in issue, he also owned two yachts that he intended for chartering and that sustained substantial losses in the tax years in issue. The federal income tax issues regarded section 469 and the consequences of Rogerson’s participation in these endeavors.

In 2014 and 2015, Rogerson reorganized the Rogerson companies into three corporations, referred to here as RAC, RAEG, and RC, each of which engaged in various lines of interrelated business and RC employed the executive team and provided administrative support to RAC and RAEG.  Before and after the 2014 reorganization, the operations of RAEG’s business units remained generally the same. As he was before the reorganization, Rogerson continued to oversee and was very active in all aspects of the operations of the business as a whole, serving as CEO of RAC, RAEG, and RC from the time of their incorporation through the years at issue.

The yachts were called the TOTO and the Falcon Lair. In 2014, 2015, and 2016, Rogerson engaged a crew and contractors to manage, maintain, and repair TOTO, but the yacht was not charted. The Falcon Lair was not commercially registered during 2014, 2015, and 2016, nor was it chartered. But, Rogerson engaged a crew and a management company to manage the Falcon Lair.

In his personal income tax returns for 2014, 2015, and 2016, Rogerson reported his involvement in RAC and RC as nonpassive and his involvement in RAEG as passive. He reported income pursuant to Schedules K-1 issued to him by RAC, RAEG, and RC. Rogerson sought to apply a passive loss carryforward related to his pre-2014 TOTO activity to offset the passive income that he reported from RAEG. For 2014, 2015, and 2016, Rogerson reported his involvement in both the TOTO and the Falcon Lair as nonpassive. With respect to the TOTO and the Falcon Lair, Rogerson substantial claimed losses in 2014, 2015, and 2016.

Rogerson’s returns were examined, and the IRS concluded that Rogerson did not properly characterized his aerospace and yacht activities as passive and nonpassive. The IRS issued to Rogerson a notice of deficiency that recharacterized his activity with respect to RAEG as nonpassive and with respect to the yachts as passive. Regarding RAEG, the notice stated, among other things, that Rogerson “materially participated in RAEG” and therefore that “the income should be treated as non-passive income.” The notice determined deficiencies in Rogerson’s federal income tax of nearly $6,000,000, plus accuracy-related penalties of $1,115,934, for 2014, 2015, and 2016, combined. Rogerson petitioned the Tax Court seeking a redetermination of the deficiencies and penalties.

Key Issue:

Primary Holdings:

Key Points of Law:

Insights: Michael Rogerson appears to be an extraordinary individual and entrepreneur in the aerospace industry. But, his substantial losses associated with the intended passive activity of renting out his tangible property—the yachts, TOTO and the Falcon Lair—could not be used to offset income from Rogerson’s nonpassive activities in his business endeavor. From a penalty-assessment perspective, Roberson was able to stave off $1,115,934 in accuracy-related penalties by showing the Tax Court that he engaged competent tax counsel, provided that tax counsel with all necessary and accurate information relevant to Roberson’s business and yachting endeavors, and relied, in good faith, on that tax counsel’s advice.