## Facts

- Clarence McDonald Leland, Jr. and Myna Green Leland filed a Tax Court petition challenging deficiencies and accuracy-related penalties for 2009 and 2010.
- Leland bought a 1,276-acre farm in Turkey, Texas, and entered a crop-share arrangement with local farmer Clinton Pigg.
- Under the arrangement, Pigg handled planting and harvesting on roughly 130 irrigated acres, while Leland was responsible for maintaining farm infrastructure.
- Pigg spent minimal time on the farm (about 29–30 hours in 2009 and about 4 hours in 2010).
- Leland performed extensive maintenance and operational work, including maintaining perimeter and interior roads, vegetation control, erosion prevention, fence repair, irrigation and water-line work, equipment repair, and controlling damage from wild hogs.
- Leland traveled long distances to the farm several times each year and stayed in a trailer on the property, which required recurring upkeep and shutdown tasks when he left.
- Leland did not keep contemporaneous time logs but reconstructed his hours using calendars and receipts, estimating 359.9 hours (2009) and 209.5 hours (2010) spent on farm-related activities.
- The IRS applied the passive activity loss rules to limit claimed farm losses and imposed accuracy-related penalties under I.R.C. § 6662(a).

## Issues

1. Whether the farm losses for 2009 and 2010 were limited by the passive activity loss rules of I.R.C. § 469, or whether Leland materially participated in the farming activity.
2. Whether the taxpayers were liable for accuracy-related penalties under I.R.C. § 6662(a) for 2009 and 2010.

## Decision

- The court held that Leland materially participated in the farming activity for 2009 and 2010; the losses were not subject to the § 469 passive loss limitations.
- The court found the reconstructed time records, combined with testimony and supporting evidence, sufficient to prove material participation.
- The court rejected the IRS’s § 6662(a) accuracy-related penalties.

## Legal Principles

- A taxpayer avoids § 469 passive activity loss limitations by proving “material participation” in the activity under the regulatory tests.
- Material participation may be established through credible testimony and corroborating documentation, and contemporaneous time logs are not strictly required.
- In assessing material participation, the court considers the regularity and substance of the taxpayer’s work and may compare the taxpayer’s involvement to that of other participants.
- Accuracy-related penalties under § 6662(a) do not apply where the deficiency determination supporting the penalty is not sustained and the record does not show negligent conduct.

## Conclusion

The Tax Court concluded that Leland’s extensive, hands-on infrastructure and maintenance work constituted material participation in the farming activity despite the absence of contemporaneous time logs, allowing the claimed losses and eliminating the basis for § 6662(a) penalties.


Leland v. Commissioner, T.C. Memo. 2015-240 (2015)