Patrick D. & Patricia A. Montgomery, Petitioner

SEC T.C. Memo. 2013-151 UNITED STATES TAX COURT PATRICK D. MONTGOMERY AND PATRICIA A. MONTGOMERY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 25089-10.

Filed June 17, 2013.

Patrick D. Montgomery and Patricia A. Montgomery, pro sese.

Christopher A. Pavilonis, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MORRISON, Judge: The respondent in this case (the IRS) issued a notice of deficienöy to petitioners'Patrick D. Montgomery and Patricia A. Montgomery.

In the notice the IRS determined a deficiency of $7,174 for tax year 2005, a deficiency of $164,612 for 2006, and an addition to tax under section 6651(a)(1) SERVED Jun 17 2013 .- 2 - .[*2] of $3,836.66 for 20C⁶. Some adjustments in the notice of deficiency have been settled. The issues emaining for decision are:

(1) Did Patricia Montgomery materially participate in UDI Underground, LLC, in 2007?

e hold that she did materially participate.

(2) What are the se tion 1366(d)(1) limits on Patrick and Patricia Montgomerv's hares of losses of Utility Design, Inc., for the tax year 2007? We 1 old that the linnt for Patrick Montgomery is $95,591 and the limit fÃr 15at icia Montgomery is $1,781.

(3) . Are the Mor tgo erys liable for an addition to tax under section 6651(a) 1)? We hold that they are liable.

All section referen;es re to the Internal Revenue Code as in effect in the years at issue, and all Ru:e r fereüces are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

At the time of filing their petifion, and at all other relevant times, the Montgomerysyvere a married couple residing in Florida..

.

Before 2005 the Mont omerys moved from Ohio to Florida to take over the operations of Utility Design, Inc., from Patrick's father. During 2007 Utility Design, Iric., was an S corporation in which both Patrick Montgomery and . Patricia Montgomery were shareholders.

Utility Design, Inc., performed engineering work on telephone-related infrastructure. Because of conflict of-interest rules, it could not perform construction work on the same projects for which it performed engineering work.

Patrick Montgomery decided to form a separate entity to perform construction .

work on telephone-related infrastructure. The new entity, UDI Underground LLC, began operations on April 2, 2007.

For the 2007 taxable year UDI Underground, LLC, was a limited liability corporation that was treated as a partnership for federal income tax purposes. It filed a Form 1065, U.S. Return of Partnership Income. The Form 1065 stated that the members of UDI Undergrbund,-LLC, were:

Name Type of member Ownership interest Zach Durant , .LLC memberimanager .

.

.

10% Patricia Montgomery Other LLC member Ander Roth Charles Roth Cùrry Meadows Properties, LLC Other LLC member Other LLC member Other LLC member 40% 15% 15% 20% Consistent wiih the 30r 1065, the IRS contends that PatriciajMontgomery was a 40% member of UDI nderground³ LLC, and Patrick Montgomery was not a member. The Montgome s' litigation position regarding their respective, membership interests in UDI Underground, LLC, is unclear. .We find that Patricia Montgomery was a 40% rnernber and Patrick Montgomery was not a member. We also find that Zach Durar t w s the member-manager of UDI Underground, LLC, during.2007 Utility Design, Inc , b rrowed the following amounts in 2006 and 2007:

(1) $1 million from SunTrus Bank ón August 25, 20Ò6, (2) $60,000 from Patrick Montgomery on September 6, 20Ö7ç (3) $30,000 from Patrick Montgomery où October 5, 2007, and (4) $15,000 from Patrick Montgomery on November 13, 2007. The Montgomerys pe sonally.guaranteed the $1 million loan from SunTrust Bank.

Patricia Montgomery cted as an office manager for UDI Underground, LLC, in 2007. Patrick Montgomery managed the company's operations and - worked to secure a contract ith AT&T.

The MontgomeryÈ filed their 2006 income-tax return on November 2, 2007.

They requested and received an extension of the time to file, so the return was due on October 15, 2007.

· Patrick Montgomery and-Patricia Montgómery both received Forms W-2, Wage and Tax Statement, from Utility Design, Inc., for the 2007 tax year. They reported the Form W-2ramounts on their joint Form 1040, U.S. Individual Income Tax Return, for 2007. Neither received Forms W-2 from UDI Underground, LLC, for 2007. They did not report receiving salary or wage income from UDI Under'ground, LLC, on their joint federal inco'me-tax return.

Around December 2008 Utility Design, Iñc., defaulted on the $1 milliori loan from SunTrust Bank. The Montgomerys thus became liable for that debt through their personal guarantees of the loan. LThe Montgomerys defaulted on the debt, and in November 2009 a judginent was issued against them:for $425,169.54.

OPINION

A net operating loss for a.tax year is defined as the excess of a taxpayer's · deductions for the year over gross income. Sec; 172(c). A net operating loss for a tax year is carried back to the two tax years preceding the tax-year.. Sec. .

172(b)(1)(A)(i). Net operating loss carrybacks are deductionsifor the preceding two tax years. Sec. 172(a). The Montgomerys claim that they had a joint net operating loss in 2007 and-that the loss is'carried back to 2005 and 2006.

In their.

calculation of their joint net operating loss for 2007 they included:

(1) losses UDI Underground, LLC, incurred in 2007 that were allegedly passed through to Patricia.Montgomery as a 40% member of UDI Underground, LLC, and (2) losses Utility Design, Inc., incurred in 2007 that were allegedly passed through to Patrick Montgomery and Pat icia Montgomery,.who were both shareholders in Utility Design, Inc., The RS challenges the amount of the net operating loss for 2007 on two grounds: (1) thàt Patricia Montgomery did not materially participate in UDI Underground, LLD, uring 2007, and (2) that portions of Patrick and Patricia Montgomery's passtbrough losses froni Utility Design, Inc., are..

e disallowed under section.¹³ 6(d)(1).

The taxpayer generall bears the burden of proof unless the conditions in section 7491(a) are satisfied Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Our holding that Pat icia Montgomery materially participated in UDI Underground, LLC, during .2007, is supported by the preponderance of evidence.

See Martín Ice Cream Cc. v Commissioner, 110 T.C. 189, 210 n.¹⁶ (1998). Thus, it is unnecessary to detennin which party (i.e., the Montgomerys or the IRS) has the burden of proof regardin the factual issues underlying the question of whether Patricia Montgomery materi lly participated in UDI.Underground, LLC, during 2007. ;The Montgomerys ha e.not convinced us that they met the conditions in section 7491(a) with respect to any disputed factual issues underlying the amounts disallowed under section 1366(d)(1). Therefore, the Montgomerys have the burden of proof with réspect to all disputed factual issuès underlying that issue.

1.

.Did Patricia Montgomery materially participate in UDI Underground, LLC, in 2007?

A portion of the Montgomerys' claimed joint net operating loss for 2007 stems from losses UDI Underground, LLC, incurred that were allegedly passed through to Patricia Montgomery as a 40% member of UDI Underground, LLC.

The IRS contends that some or all of her share of these losses is disallowed under section 469(a), which disallows a taxpayer's passive-activity loss for the year. A passive-activity loss is equal to the aggregate income from all the taxpayer's passive activities minus the aggregate losses from all the taxpayer's passive activities. Sec. 469(d)(1).

In the IRS's view, Patricia Montgomery's activities with respect to UDI Underground, LLC, are a passive activity within the meaning of section 469(c)(1). The petitioners contend that Patricia Montgomery's activities with respect to UDI Underground, LLC, are not a passive activity.

A passive activity is defined as any activity.which involves the conduct of any trade or business in which the taxpayer does not materially participate. Sec.

469(c)(1). "Participation" generally means all èòrk done in connectión with an activity by the ta,xpayer. Sec. 1.469-5(f), Income Tax Regs. ^An individual taxpayer's participation in an activity is material if he or she is involved on a regular, continuous, and sub tantial basis. Sec. 469(h).(1). An individual taxpayer is considered to have materially participated in an activity if and only if any one of seven tests set forth in the regulations is met. Sec. 1.469-5T(a), Temporary . Income Tax Regs., 53 Fe i eg. 5 5-57 6 (Feb. 25, 1988); Garnett v.

Commissioner, 132 T.C. 368, 372 n.¹⁰ (2009). We hold that Patricia Montgomery's activities witl respect to UDI Underground, LLC, meet the first and seventh tests, which are:

(1) the individual participates in the activity for more than 500 hours during uch year; and (7) on the basis of all of the facts and circumstances, the individua s participation was regular, continuous, and substantial during such y5ar. Sec. 1.469-5T(a), Temporary Income Tax Regs., supra.² In determining whether any of the seven tests are satisfied, the participation of the individual's spouse is taken into account. Sec. 469(h)(5); see 1.469- S.ince the first and sedenth tests are met, it is unnecessary to consider whether any of the other 5ve tests are met. Furthermore, the Montgomerys do not contend that any of the other five tests are met .

.

2Under the seventh tes , which is worded similarly to tlze statute itself, an individual is treated as materially participating in an activity if "[b]ased on all the , the individual participates in the activity on a facts and circumstances * * regular, continuo'us, and sub tantial basis". Sec. 1.469-5T(a)(7), Temporary Income Tax Regs., 53 Fei Reg. 5726 (Feb. 25, 1988).

5T(f)(3), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).

Therefore, Patrick Montgomery's participation in UDI Underground, LLC, is counted in determining whether Patricia Montgomery materially participated.

Section 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988), sets forth rules for the type of proof to be considered in determining the extent of an individual's participation in an activity. It states:

The extent of an individual's participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means. Reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries.

For 2007 the Montgomerys credibly testified that Patricia Montgomery handled all of the office functions, managed payroll, prepared documents, met with members of the company and attended business meetings. Additionally, Patrick Montgomery credibly testified that Patricia Montgomery worked on company matters daily and discussed the company's business with him daily.

Patrick Montgomery started the company in 2007 and brought in other individuals as investors. He secured a contract with AT&T. He handled various operational aspects of the business including arranging the constructiön work, buying equipment, an hiring and firing employees.

Both Patricia Montgoi ery audcPatrick Montgomery were integral in the process of setting up and establishing UDI Underground, LLC. The comp.any began in April:2007 with no mployees. The Montgomerys hired 250 employees on behalf of UDI Úndergrou d, LLC, by the end of 2007. ,Although the Montgomerys performed son e services for Util ty Design, Inc., during 2007, this older company already had e tablished its business opei·ations. The Montgomerys spent more of their work time on UDI Underground, LLC, than on Utility Design, Inc. They did not hold any j bs outside the two companies. They credibly testified that they worked thdusands of hours for UDI Underground, LLC,-during 2007. We find1that the lVontgomerys participated in.UDI Underground, LEC, for more than 500 hours during 007. On the básis of all the facts and circumstances .

we also find that the Mor tgo erys participated in UDI Underground, LLC, on a regular, continuous, and sub tantial.basis during 2007.

.

The IRS argues thEt the types of proof the Montgomerys presented do not satisfy sectioni l.469-5T( )(4 , Temporary Income Tax Regs., supra. The Montgomerys readily adr:iit that they did not maiutain reports or,logs of their hours. However, under the regulation, "daily time reports, logs, or similar documents are not required if * * * participation may be established by other reasonable means." Id. The Montgomerys provided details of the nature of;the activities they conducted in starting and managing.UDI Underground, LLC.- The tasks they described included founding the company, negotiating contracts with AT&T, hiring 250 employees, and conducting daily business. They credibly testified they worked on the business "day in and day out." They,were credible witnesses and were forthcoming with information about their activities regarding UDI Underground, LLC. We find that the proof the Montgomerys provided meets the requirements of section 1.469-5T(f)(4), Temporary Income Tax Regs., supra.

We hold that Patricia Montgomery materially participated in the activities of UDI Underground, LLC, during 2007.

2..~ What are the section 1366(d)(1) limits on the amounts of losses taken into account with respect to Patrick Montgomery's and Patricia Montgomery's shares of the S Corporation Utility Design, Inc.?

A portion of the Montgomerys' claimed joint net operating loss for 2007 stems from losses Utility Design, Inc., incurred;for its 2007 tax year and that were allegedly passed through to Patrick Montgomery and Patricia Montgomery as shareholders of Utility.Design, Inc.; for their 2007 tax year. The parties dispute the amounts by which the losses are limited by section 1366(d)(1).

Section 1366(a) reÑuirós S corporation shareholders, when calculating their taxable income for the year, to take into account their pro rata share of the S corporation's items of incomþ, loss, deduction, or credit for the S corporation's tax year that ends in the tax yearlof the shareholder. Sec. 1.1366-1(a), Income Tax Regs. However, the S corpo(cid:16)040ation'sloss taken into account by a shareholder cannot exceed the amount calculated under section 1366(d)(1) for the shareholder for the tax year of the cor orätion.

The 2007 tax year of Utility Design, Inc., ended on December 31, 2007.

The 2007 tax year of the VIontgomerys also ended on December 31, 2007.

Therefore, Utility Design, Inc.'s losses for.2007 pass through to the Montgomerys for their 2007 tax year. However, Patrick and Patricia Montgomery each has a section 1366(d)(1) limita ion for the respective losses passed through from Utility Design, Inc.,'s 2007 tax year.

The section 1366(d)(1) limitation is equal to the shareholder's adjusted basis of stock at the end of the corporation's tax year of the loss, plus the shareholder's adjusted basis of any debt of the S corporation to the shareholder at the end of the corporation's year of the loss. Sec. 1366(d)(1)(A) and (B); see secs.

1.1366-2(a)(3), 1.1367-1(d)(1), 1.1367-2(d), Income Tax Regs.

Thus, the section 1366(d)(1) limitation has two components: (1) a stock portion, i.e., the shareholder's adjusted basis of stock of the S corporation at the end of the year of loss, and (2) a debt portion, i.é., the shareholder's adjusted basis of debt of the S corporation to the shareholder at the end of the year of loss. See sec. 1.1366-2(a), Income Tax Regs.

Like the adjusted basis of any property,.the adjusted bases of stock and debt of an S corporation are determined under general rules set forth under section 1011. See sec. 1.1367-1(a)(2), Income Tax Regs. (besides adjustments to basis required by section 1367, other adjustments to basis of stock are determined under other applicable provisions of the Internal Revenue Code).3 The adjusted basis of 3Sec. 1.1367-1(a)(2), Income Tax Regs., discusses adjustments to basis of S corporation stock, not debt. Sec. 1.1367-2, Income Tax Regs., its counterpart for S corporation debt, makes no explicit statement that basis rules from other parts of the Code apply to S corporation debt as sec. 1.1367-1(a)(2), Income Tax Regs., does for stock. However, a leading treatise opines that the general basis rules govern debt of S corporations to their shareholders:

The Code contains many rules that may affect the basis of stock or debt in the hands of a shareholder. to the stock or debt of an S corporation.²⁰ In general, those rules may apply 20Treas. Reg. § 1.1367-1(a)(2) provides that other rules in the Code may affect the basis of an S co'rporation's stock. Treas. Reg. § 1.1367-2 does not make the same statement regarding an S corporation's debt, but the same principle should apply.

(continued...)

property; is equal tc its initial basis supplemented with adjustments. Sec 1011(a). The initial basicof property generally is the co(cid:0)541tof the property. Sec.

1012(a); sec. 1.1012-1(a), In ome Tax Regs. The initial basis of stock generally,is the cost of the stock. Estate f Leavitt v. Commissioner, 90 T.C. 206, 212 (1988), aff'd, 875 F.2d.420 (4th Cir. 1989). The initial basis of debt is the cost of the debt.

to the lender; i.e., the amount of principal advanced by the lender. See Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67, 122 (2011) ("[A] shareholder iri an S corporation has a separat: ta basis iñ loaris theishareholder makes to the S corporation equal to the cmo nt of the loans." (Emphasis added.));.see also Deborah H. Schenk, Federal Taxation of S Corporations, sec. 7.06[3] (2013) (LEXIS) ("The sharehok er' basis in corporate debt ordinarily is the amount of money loaned to the corpora ion.").

In addition to the general rules for determi ing basis (i.e., those found in section 1011), there are spec al iules that require arinual Ädjüstments to thè 3(...continued) °A corporat d bt obligatión should be property" for the purposes of IRC § 1012.

James S. Eustice & Joel D. I untz, Federal Income Taxation of S Corporations, par. 9 02 & n.²⁰, 9.02[1] b] 1.30 (4th ed. 2001).

shareholéler's adjusted basis of stock of an S corporation and to the shareholder's adjusted basis of debt of the S corporation to the shareholder. These rules are found in section 1367(a) and 1367(b)(2), respectively. See also secs.

1.1367-1(a)(1), (b), (c), 1.1367-2, Income Tax Regs. According to regulations, the adjustments are "determined as of the close of the corporation's taxable yeaf, and the adjustments generally are effective as of that date." Sees. 1.1367-1(d)(1) (stock), 1.1367-2(d)(1) (debt), Income Tax Regs. For the purposes of calculating the components of the section 1366(d)(1) limitation for a particular year, only certain of the'special adjustments for the year afe taken into account. These are set forth in section+1366(d)(1). See also sec. 1.1366-2(a)(3)(I) and (ii), Income Tax Regs.

The first comläonent of the section 1366(d)(1) limitation for Utility Design, Inc.'s 2007 year, i.e., the stock component, is equal to:

.

(cid:16)042 the adjusted basis of the stock at the beginning of 2007, (cid:16)042 supplemented by the general basis adjustments during 2007, (cid:16)042 (cid:16)042 and then adjusted by the appropriate special adjustments for 2007.

The second component of the section 1366(d)(1) limitation for Utility Design, Inc.'s 2007 year, i.e., the debt component, is equal to:

(cid:16)042 the adjusted basis of debt at the beginning of 2007 year, (cid:16)042 supplementell by the general basis adjustments during 2007, (cid:16)042 and then adjusted by the appropriate special adjustments for 2007.

In determining the section 1366(d)(1) limitation amounts, we begin with the adjusted bases of stock a d debt at the beginning of Utility Design, Inc.'s 2007 year. The IRS contends th t he adjusted bases of stock and debt were zero for Patrick Montgomery and zero for.Patricia·Montgomery.. The Montgomerys contend that the adjusted bases were $424 for Patrick Montgomery and $200 for Patricia Montgomery. The Montgomerys have adduced no evidence to support ...

their claim that the bases vvere $424 and $200 at the beginning of 2007. .They cite "IRS Work paper #: 504-1.2' to support their claim. They assert in their brief that this workpaper substantia,tes the following propositions: "Patrick Montgomery's basis in his UDI [an abbreviation for Utility Design, Inc.] stock was $800 as of 1- 1-07. If this is allocated between Patrick and Patricia, he would get 53%, or $424, and Patricia would get 25%, þr $200."4 But the workpaper is not in the record.

Therefore, we cannot rely on it. The Montgomerys also claim that their 2007 amended return (and the chedule E, Supplemental Income and Loss, attached to 4The M ntgomery assert that "IRS Work paper #:504-1.2" states that Patrick Montgomery ow ed 53% of the, shares of Utility Design, Inc., and Patricia Montgomery owned 25 of the shares. However, it is unclear why, if Patrick Montgomery's basis alon wÅs $800, the Montgomerys would want to take further steps to allocate that basi between tliem.

it) support their beginning-of-the-year adjusted basis figures of $424 and $200. They do not explain how the return supports their contention, and nothing on the return appears to show either a total basis of $800 in Utility Design, Inc.'s stock on January 1, 2007, or bases of $424 and $200 in Patrick and Patricia Mongtomery's respective shares. Therefore, we hold that the adjusted bases of stock and debt were zero for both Patrick Montgomery and Patricia Montgomery at the beginning of 2007.

We now consider the effect of year-of-loss special adjustments on bases of stock and debt. Neither party contends that any special adjustments for 2007 should be made. We conclude that no special adjustments for 2007 should be made to the adjusted basis of the stock or debt components.

We now consider the effect of general basis adjustments to stock and debt for events occurring in 2007.

In its brief the IRS contends that the general basis adjustments to stock and debt result in an end-of-year limitation for both stock and debt of $95,591. (These adjustments include increases of $105,000 in Patrick Montgomery's limitation amount for loans he made to Utility Design, Inc., in 2007, i.e., the September 26, 2007 loan of $60,000, the October 5, 2007 loan of $30,000, and the November 13, 2007 loan of $15,000.) The Montgomerys do not challenge these general 2007 basis adjustments except that they assert that Patrick Montgomery's adjusted basis in debt of Utility Design, Inc., to him should be increased by $425,169,54 to reflect that in 2009 a judgment was imposed on the Montgomerys as a result of their guarantee of the $1. million loan SunTrust Bank made to Utility Design, I c., in 2006.5 Thus, the only remaining issue to resolve regarding the section 1366(d) limit is to determine the effect of this judgment on, the basis of debt owed by Uti!1ity Design, Inc., to Patrick Montgomery.

When an S corporation shareholder guarantees a loan by a bank to the S corporation, no debt has een created between the S corporation and the shareholder. See Underwood v. Commissioner, 63 T.C. 468, 475-476 (1975), aff'd,.535 F.2d 309, 311- 12 (5th Cir. 1976); Perry v. Commissioner, 47 T.C. 159, 163 (1966), aff'd, 392 F.2d 458 (8th Cir. 1968). However, once the S corporation shareholder pays the banl pursuant to a guarantee, the S corporation becomes indebted to the shareholder. As we held in Underwood v. Commissioner, 63 T.C.

at 476, ''it is the payment by the guarantor of the guaranteed obligation that gives rise to indebtedness on tl:e part of the debtor to the guarantor. The mere fact that the debtor defaults and tl,ereby renders the guarantor liable is not sufficient."

Patrick Montgomery did not make any payments on the SunTrust Bank loan 5The judgment war against both Montgomerys. It is unclear why they contend Patrick Montgoriery's basis in debt should be increased but Patricia Montgomery's basis in debt should not.

during 2007. Therefore his guarantee of the SunTrust Bank loan did not give rise to a debt to him from Utility Design, Inc., during 2007.

In conclusion, we hold that the basis limitation for Patrick Montgomery's share of Utility Design, Inc., was $95,591·for 2007. Patricia Montgomery's limitation was $1,781.

3.

Are the Montgomerys Liable For an Addition to.Tax Under Section 6651(a)(1)?

Section 6651(a)(1) imposes an additioñ to tax of 5% of the "amount required to be shown as tax on * * * [a] return" for failure to file if "the failure is for not more than 1 month". The addition to tax is imposed unless a taxpayer has 6The Montgomerys rely on Gilday v. Commissioner, T.C. Memo. 1982-242, In Gilday, shareholders of an S corporation that 1982 Tax Ct. Memo LEXIS 512. owed a debt to a bank gave the bank a personal note for the amount of the S corporation's debt. The shareholders thus "moved from positions as guarantors of corporate debt to positions as primary obligors." Id., 1982 Tax Ct. Memo LEXIS 512, at *6. Patrick Montgomery did not move to the position as primary obligor in 2007.

In exchange, the bank canceled the debt of the S corporation.

We also note for the sake of completeness that the U.S. Court of Appeals for the Eleventh Circuit, the court to which this case could bé appealed, held in Selfe v. United States, 778 F.2d 769 (11th Cir. 1985), that there is an exception to the rule that guaranteeing a debt of an S corporation is insufficient to increase basis. The Montgomerys do not attempt to rely on Selfe, and the record does not demonstrate that the loan from SunTrust Bank falls within this limited exception. Unlike the Montgomerys, the taxpayer in Selfe had undertaken a loan personally which was then assumed by an S corporation (with the taxpayer guaranteeing the loan). Testimony from a bank officer showed that the bank still "look[ed] [primarily] to the shareholder as the primary obligor." Idk at 774. No such evidence from the lender is in the record before us.

reasonable cause for filing late.

Id. Taxpayers bear the burden of proving "reasonable cause"under section 6651(a). See Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001). The Montgomerys filed their income.tax return on November 2, 2007. They had filed for an extension of the due date; their tax return was due on October 15, 2007. Because the Montgomerys filed their return late and do not claim that they had reasonable cause for doing so, we hold that they are responsible for a 5% addition to tax for the 2006 tax year.

We have considered all of the arguments the parties have made, and to the extent that we have not discussed them, we find them to be irrelevant, moot, or without merit.

To reflect the foregoing, Decision will be entered under Rule 155.