1996 Tax Ct. Memo LEXIS 181">*181 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
CARLUZZO, Special Trial Judge: This case was heard pursuant to section 7443A(b)(3) and Rules 180, 181, and 182. 1 Respondent determined a deficiency in petitioner's Federal income tax in the amount of $ 7,645.75 for the year 1989 and an addition to tax pursuant to section 6651(a)(1) in the amount of $ 1,705.93. In her answer respondent asserted that petitioner is also liable for a penalty in the amount of $ 1,529.15 pursuant to section 6662(a) because either she was negligent under section 6662(b)(1) or she substantially understated her 1989 Federal income tax liability under section 6662(b)(2).
Following concessions, 2 the issues for decision1996 Tax Ct. Memo LEXIS 181">*182 are: (1) Whether petitioner is entitled to deductions in the amount of $ 14,312 claimed on a Schedule C, Profit or Loss from Business, relating to her tutoring and counseling activity; (2) whether petitioner is entitled to miscellaneous deductions in the amount of $ 14,534 claimed on Schedule A, Itemized Deductions; (3) whether petitioner is liable for the addition to tax pursuant to section 6651(a) as determined by respondent; and (4) whether petitioner is liable for the penalty under section 6662(a), due to her negligence or because she substantially understated her Federal income tax within the meaning of section 6662(d).
Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. 1996 Tax Ct. Memo LEXIS 181">*183 At the time the petition was filed, petitioner resided in Washington, D.C.
FINDINGS OF FACT
During 1989, petitioner was employed on a full-time basis as a teacher in the District of Columbia Public School System. Petitioner holds a bachelor of science degree and a master's degree, and is certified to teach biology at the senior high school level. Petitioner is also a registered nurse and during the year in issue was employed on a part-time basis with Medlantic Long Term Care Corp. as a nurse on weekends and holidays.
Beginning in 1979 and continuing at least through 1991, petitioner engaged in a tutoring and counseling activity (the tutoring activity). For the years 1979 through 1991, without data available for years 1981 and 1990, petitioner reported Schedule C gross receipts in the aggregate amount of $ 36,880, and other income on Schedule C in the aggregate amount of $ 6,275, and claimed total deductions of $ 172,868.55 that resulted in a loss for each year, and an aggregate loss in the amount of $ 129,713.55. Petitioner provided her tutoring and counseling services primarily to individuals from low income, impoverished families. Petitioner operated the activity in 1989 in a 1996 Tax Ct. Memo LEXIS 181">*184 similar manner to its operation in prior years. Thus, the general set up of the activity, the number of students tutored, the time she devoted to the activity, and various other policies and practices were similar to prior years. For a more detailed explanation as to how petitioner conducted her tutoring activity, see
Petitioner tutored students for several hours every day after school and also during the summer months and holidays, devoting an average1996 Tax Ct. Memo LEXIS 181">*185 of 33 hours per week to such activity. She charged minimally for her services, allowed customers to pay at their discretion according to their ability to do so, and made little or no effort to collect outstanding account receivables, notwithstanding the substantial losses she incurred repeatedly over several years. Other than the gross receipts reported on Schedule C, petitioner provided little information with respect to the amounts, if any, that she charged or received for her services. She merely indicated that her fees were based upon what she believed the students could pay, whether in cash or other property. To petitioner, the fact that students or their families could or could not pay for her services was secondary to the fact that they needed the assistance that petitioner could provide, and, for that reason, it was not petitioner's practice to turn customers away based on their inability to pay. She did not maintain a separate bank account for depositing whatever payments she did receive. With respect to the expenses claimed, petitioner did not attempt to introduce into evidence any books or records, or source documents, that reflected the nature and amounts of such expenses.
1996 Tax Ct. Memo LEXIS 181">*186 Petitioner reported income and deductions from her tutoring and counseling activity on a Schedule C for every year from 1979 through 1991. As noted above, in each year since 1979 for which there is evidence in the record, petitioner claimed a substantial loss from her activity. The losses incurred from year to year from petitioner's tutoring activity were apparently financed from her other earnings.
In 1989, petitioner reported on Schedule C gross receipts of $ 4,399 and deductions in the amount of $ 14,312, resulting in a $ 9,913 loss. Respondent disallowed the deductions claimed on petitioner's Schedule C for 1989 on the grounds that her activity was not engaged in for profit and that she failed to substantiate any of the deductions claimed.
Petitioner also claimed $ 20,124 in itemized deductions on her Schedule A for the year 1989, including $ 14,534 in miscellaneous deductions attributable to employee business and other expenses. Respondent disallowed the miscellaneous deductions claimed for lack of substantiation.
OPINION
Schedule C Deductions
The Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving1996 Tax Ct. Memo LEXIS 181">*187 that those determinations are erroneous. Rule 142(a);
As in the prior cases, petitioner has taken the position that the expenses relating to her tutoring activity were incurred by her in connection with a trade or business and are deductible pursuant to section 162. Respondent argues that petitioner's tutoring activity does not constitute a trade or business because petitioner did not engage in such activity with the requisite profit objective. Consequently, according to1996 Tax Ct. Memo LEXIS 181">*188 respondent, petitioner cannot rely upon section 162 to support her claimed deductions.
Our consideration of respondent's adjustment with respect to petitioner's Schedule C deductions begins with an examination of whether petitioner conducted her tutoring activity with the intent to make a profit. Absent an intent to make a profit, petitioner's tutoring activity could not be considered a trade or business within the meaning of section 162.
The test for determining whether a taxpayer conducted an activity for profit is whether he or she entered into, or continued, the activity with the actual or honest objective of making a profit.
Whether petitioner engaged in her tutoring activity with the requisite profit objective must be determined on a year-by-year basis from the facts and circumstances of the case.
The following factors, which are nonexclusive, should be considered in the determination of whether an activity is engaged in for profit: (1) The manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his or her advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; 1996 Tax Ct. Memo LEXIS 181">*190 (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation.
Petitioner did not carry on her tutoring activity in a businesslike manner.
The fact that petitioner failed to change her manner of operation in an effort to reverse her history of losses1996 Tax Ct. Memo LEXIS 181">*191 also supports respondent's adjustment. See id. Although a profit objective may exist despite a history of losses unaccompanied by any gains, see, e.g.,
Considering her history of losses, petitioner's practices of neither charging nor collecting fees from customers who were unable or unwilling to pay strongly suggests the absence of the requisite profit objective necessary to support the deductions claimed. 1996 Tax Ct. Memo LEXIS 181">*192 Based upon an examination of all the facts and circumstances, we are unable to conclude that petitioner conducted her tutoring activity with a bona fide, honest, and objective profit motive. Furthermore, she has failed to substantiate any of the claimed deductions. Consequently, we sustain respondent's disallowance of the deductions claimed on petitioner's Schedule C for the year 1989. 4
Schedule A Deductions
Petitioner reported on her Schedule A, Itemized Deductions, deductions for employee business expenses and other miscellaneous deductions in the amount of $ 14,534 for the year 1989. As previously noted, deductions are a matter of legislative grace and petitioner must prove her entitlement to these deductions. Rule 142(a);
Petitioner has failed to substantiate any of the deductions claimed on her Schedule A for the year 1989. Accordingly, we sustain respondent's determination with respect to this issue.
Addition to Tax
Section 6651(a)(1) imposes an addition to tax for failure to timely file a return, unless the taxpayer establishes that the failure to file is due to reasonable cause and not due to willful neglect. The addition to tax equals 5 percent of the tax required to be shown on the return for the first month, with an additional 5 percent for each additional month or fraction of a month during which the failure to file continues, not to exceed a maximum of 25 percent. Sec. 6651(a)(1).
In her brief, petitioner conceded that section 6651(a) applies with respect to the year 1989 and for reasons unexplained only disputes the amount as computed by respondent. Petitioner presented no evidence or argument demonstrating the nature of the alleged computational error. Accordingly, we sustain respondent with respect to this issue.
Accuracy-Related Penalty
In her answer, respondent asserted that the section 6662(a) penalty1996 Tax Ct. Memo LEXIS 181">*194 should be imposed. Respondent argues for the imposition of the penalty due to petitioner's negligence or disregard of rules or regulations within the meaning of section 6662(b)(1) and (c), or because petitioner substantially understated her income tax, within the meaning of section 6662(b)(2) and (d). Negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return. Sec. 6662(c);
Petitioner failed to produce at trial any substantiating evidence with respect to the deductions she claimed on her Schedules A and C. Given her prior experiences1996 Tax Ct. Memo LEXIS 181">*195 in this Court, she was no doubt aware that the production of such evidence was expected and necessary to support her claimed entitlement to the deductions in dispute. We can only conclude that her failure to produce such substantiating evidence results from her failure to have maintained adequate books and records as required by section 6001 and the corresponding regulation. In our view, petitioner's recordkeeping deficiencies constitute at least a careless disregard of the rules or regulations within the meaning of section 6662(b)(1) and (c), which renders her liable for the penalty imposed by section 6662(a), and we so hold.
To reflect the foregoing,
Decision will be entered under Rule 155.
Footnotes
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Respondent conceded that petitioner is not liable for self-employment tax for the year 1989. Petitioner conceded liability for an addition to tax pursuant to sec. 6651(a); however, she disputes the amount as determined by respondent.↩
3. The parties stipulated to the trial transcripts in those prior cases. At trial, the Court advised the parties that such stipulations were being considered an invitation to base findings of fact in this case upon testimony presented in the prior cases. Neither party objected. To petitioner's detriment in this proceeding, there was little if any change to petitioner's methods of operation from one year to the next.↩
4. Our finding with respect to petitioner's profit motive also precludes allowing the disputed Schedule C deductions under sec. 212. Petitioner's failure to substantiate such deductions precludes the allowance of any which might otherwise be permitted by sec. 183.↩