That is, when you’re seeking to deduct rental real estate losses, size matters. I mean the size of the non-rental real estate income and the size of the rental real estate losses. Add imperfect contemporaneous (or near-contemporaneous) recordkeeping,  dash in many hours worked at non-rental real estate activities, and you have the perfect mixture for an audit, and an unsuccessful Tax Court litigation.

Now I’ve discussed this many times before, and won’t even try to dig out the blogposts wherein I did so.

But since school’s out today at 400 Second Street, NW, to honor us veterans, I thought I’d venture once more into the cliché.

My colleague Peter Reilly, CPA, over at Forbes.com (he’s in the big leagues), asked me if I had any thoughts about Howard C. Cantor and Patricia M. Allen, 2014 T. C. Sum. Op. 103, filed 11/6/14. And it’s a STJ Lew (The Right Spelling) Carluzzo opinion.

I hadn’t, because when I read it on 11/6/14, it looked like the many-times-told tale of someone deeply immersed in a non-rental real estate activity, who had some rental properties “on the side”, and wanted to deduct depreciation losses against ordinary operating income from the money-maker.

But Mr Reilly had an interesting take, which I’ll mention even though I disagree with it.

Mr. Reilly: “The NAICS code on his Schedule C was 811120, which stands for ‘Automotive, Paint, Interior, and Glass Repair’.

“Would we have had a different outcome or maybe no audit at all, if the code had been 28150 Glass & Glazing Contractors?”

“I don’t think preparers pay much attention to those codes.  Here is an instance where it just might have made a difference.

“Any thoughts?”

I answered that I thought most unregistered preparers probably think that NAICS is a television show about Navy cops-and-robbers. But that’s more than a trifle glib and condescending; it might could be that even registered or enrolled or otherwise Circ 230 preparers might fare no better.

After all, Howard’s returns were prepared by a CPA, and IRS did not assert either Section 6652 negligence or substantial understatement penalties, just a Section 6651(a)(1) late-filing addition to tax. 2014 T. C. Sum. Op 103, at p. 2 and at p. 5.

No, the bottom line is that Howard had north of $45K real estate type losses in each year at issue. And his gross receipts from his glass business were almost or better than $700K in each such year. Worse, he had no records to prove allocation of his hours (admittedly well north of the magic 750 hours) between real estate and non-real estate.

No, Mr Reilly, I think the numbers on Howard’s return that triggered the audit and the litigation weren’t NAICS, but rather dollars received and dollar losses claimed. And no hard numbers on hours spent.