T.C. Memo. 1996-509
UNITED STATES TAX COURT
FREDERICK G. HARRISON, SR. AND ESTATE OF
CATHERINE HARRISON, DECEASED, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26617-93. Filed November 14, 1996.
Dermot F. Kennedy, for petitioners.
James C. Fee, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a $62,125 deficiency
in petitioners' 1989 Federal income tax and a $12,425 accuracy-
related penalty for that year.
- 2 -
The issues for decision are: (1) Whether a gold mining and
treasure salvaging activity1 was not engaged in for profit by
petitioner2 and thus, losses claimed in connection with this
activity were not deductible under section 183;3 (2) if the
activity was engaged in for profit, whether the losses constitute
nondeductible passive activity losses under section 469; (3)
whether a loss from rental property was properly disallowed as a
passive activity loss pursuant to section 469; and (4) whether
petitioners are subject to the accuracy-related penalty under
section 6662 due to an underpayment of tax attributable to
negligence or an intentional disregard of rules or regulations,
or a substantial understatement of income tax. Respondent does
not argue that any of the losses should be disallowed for failure
to substantiate, nor does she argue that petitioner's
expenditures were in effect contributions by petitioner to the
capital of the treasure hunting venture; thus, we will not
consider these issues.
1
It was conceded at trial that all of the gold mining and
treasure salvaging (also referred to as treasure hunting)
operations constituted one activity for purposes of sec. 183 and
sec. 469.
2
All references to “petitioner” in the singular refer to
Frederick G. Harrison.
3
All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
- 3 -
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and attached exhibits are incorporated
herein by this reference. Petitioners, Frederick and Catherine
Harrison, were husband and wife and resided in Marlton, New
Jersey, at the time they filed their petition in the instant
case. On January 16, 1994, Catherine Harrison died, and her
estate was substituted as a petitioner.
During 1989, petitioner Frederick G. Harrison owned and
operated three trucking and solid waste removal businesses in
Pennsylvania and New Jersey. The waste removal business in New
Jersey was a family owned business that petitioner started over
20 years ago. The waste removal business in Pennsylvania was
also a family business run by petitioner and his son. The third
business, consisting of trucking and waste disposal, was operated
by Penn Foundry, Inc. (Penn). Petitioner owned one-third of
Penn. Petitioner's son was also an owner of Penn. The trucking
and waste management businesses were considered by Mr. Harrison
to be his “working companies”, and they were generally
profitable. Mr. Harrison was around 65 years old in 1989.
Prior to 1989, Mr. Harrison owned a one-quarter interest in
a trash transfer station in Philadelphia, Pennsylvania, known as
LaForge, Inc. LaForge was sold in 1988 to a public company for
$4.8 million; Mr. Harrison's share of the proceeds was worth
approximately $1.2 million and was paid in stock.
- 4 -
Petitioners owned a home and a farm in Marlton, New Jersey,
which were situated on 44 acres. Petitioners lived at the farm.
Petitioners also owned a second home in Tucson, Arizona, which
they purchased in 1985. Petitioners owned the New Jersey farm
and residence and the Arizona residence with no outstanding
mortgages on either property. Petitioners purchased another
residential property in Atco, New Jersey, which they bought in
1989 to use as a rental property. They purchased the Atco
property for $80,000 and had a $60,000 mortgage on the property.
Petitioners reported adjusted gross income on their tax
returns for 1987, 1988, and 1989 in the respective amounts of
$56,692, $247,041, and $133,235. Petitioners' adjusted gross
income for 1989, without regard to losses claimed for treasure
hunting and gold mining, would have been $334,764.
Mr. Harrison first developed an interest in gold mining
through a company called Christine Enterprises in 1985.
Christine Enterprises conducted its mining operation in the
Sonora section of Mexico. Christine Enterprises conducted this
gold mining activity with an individual named Thomas Daley. Mr.
Daley was an engineer who had studied mining and geology at
Tucson University. Mr. Harrison sought Mr. Daley's assistance in
an attempt to find gold nuggets by placed mining.4 Mr. Harrison
did not find any gold with Christine Enterprises. In addition to
4
Placed mining is a form of panning for gold flakes and
nuggets in streams and rivers after the winter thaw.
- 5 -
his activities with Christine Enterprises and Thomas Daley, Mr.
Harrison panned for gold from 1985 to 1989 with Alex Saldivar.
Mr. Harrison did not recover any discernible amounts of gold from
his mining activities from 1985 to 1989.
During 1989, petitioners frequently visited Las Vegas,
Nevada. Mr. Harrison first became interested in treasure hunting
during one of his trips to Las Vegas in early 1989. Sometime
during the first quarter of 1989, Mr. Harrison met two gentlemen,
Patrick Payne and Hans Kruse, at the Hilton Hotel in Las Vegas,
Nevada. These individuals introduced Mr. Harrison to the idea of
searching for sunken Spanish galleons. Mr. Harrison had no
experience in treasure hunting prior to that time. Shortly after
this initial meeting in Las Vegas, as part of his investigation,
Mr. Harrison traveled to San Diego, California, to meet other
individuals associated with Patrick Payne. The other individuals
were Jerry James, Larry Haimson, and Glenn Tillman. Jerry James,
Patrick Payne, and Larry Haimson were associated with
International Recoveries, Inc. International Recoveries was
formed to seek treasures.
While in San Diego, petitioner also met with Glenn Tillman.
Glenn Tillman was the operation manager of the various survey
operations conducted by International Recoveries, though he was
not an owner of International Recoveries. Petitioner met with
several of the members of International Recoveries, as well as
Mr. Tillman, and did some investigation or independent research
- 6 -
concerning the backgrounds of these individuals. Petitioner
received Glenn Tillman's resume during his San Diego meeting in
the early part of 1989. Petitioner relied upon this resume in
making his decision to enter into a joint venture to hunt for
gold and treasure with International Recoveries. As part of his
investigation into Mr. Tillman's qualifications and expertise,
petitioner contacted the Mel Fisher organization,5 a prior
employer of Mr. Tillman, in order to verify his expertise. Mr.
Tillman was given a favorable report. Mr. Tillman's
qualifications encouraged petitioner to participate in this
venture.
Mr. Harrison did not see or rely on any information that
showed any prior salvage operations conducted by International
Recoveries or its owners. With respect to the salvage operation
contemplated by International Recoveries, petitioner was shown
papers and reports of its prospective activities. He saw no
financial data about International Recoveries before becoming
involved with that company or its principals. Petitioner entered
5
The Mel Fisher organization was a very successful
treasure hunting group. His group spent millions of dollars
searching for the Atocha, a Spanish galleon. In 1980, Fisher
found the Margarita, another galleon, whose treasure yielded $20
million, which was insignificant compared with the expected yield
of the Atocha. In 1985, Fisher discovered the Atocha. The
treasure that was discovered included nearly 40 tons of silver
bars, over 2,300 natural, uncut gems with some weighing up to 77
karats, gold chains as much as 50 feet long, and other items such
as weapons and personal items. Mr. Tillman was not with this
group at the time of the Atocha discovery.
- 7 -
into a joint venture with International Recoveries, Inc., based
on business plans and maps that were shown to him as well as his
evaluation of the other investors and Mr. Tillman's expertise in
the area.
When assessing potential transactions for his trucking and
waste management businesses, Mr. Harrison generally sought legal
assistance. Mr. Harrison did not seek legal assistance with
respect to his dealings with International Recoveries.
Petitioner went to libraries and read books and other
publications regarding treasure hunting. The materials
petitioner referred to did not discuss the cost of treasure
salvaging or how to make a treasure hunt economically feasible.
Petitioner set no specific budget with respect to his gold
mining and treasure hunting activity. Mr. Harrison was invited
to join International Recoveries in its ongoing exploration for
sunken treasures for an investment of $50,000. For this
investment, petitioner was to share in any recovery. Petitioner
did not agree to the first offer to join International Recoveries
and negotiated a better deal than that originally presented.
During 1989, the International Recoveries group participated
in three primary expeditions with petitioner. The group was
involved in operations off the Florida Keys, off the coast of
Louisiana near the base of the Mississippi River, and on a farm
in Goliad, Texas.
- 8 -
With respect to the Florida venture, Mr. Harrison traveled
to the Florida Keys 1-1/2 to 2 days with members of the
International Recoveries group. Petitioner did not participate
in the group's exploration at sea beyond observing the boats
while they were docked. This operation was in progress when
petitioner decided to invest; petitioner therefore went to
Florida only to observe the operations and speak with the other
members of International Recoveries. No treasure or anything of
value was recovered as part of the Florida venture. After the
unsuccessful Florida operation, petitioner had questions
regarding the profitability of this business. Petitioner decided
to continue with this venture after discussions with Mr. Tillman.
The International Recoveries group next traveled to
Louisiana to search for a sunken galleon called the Palamar.
Petitioner invited Mr. Saldivar to join the venture in its
search. Mr. Saldivar owned an equipment company in Tucson,
Arizona. Petitioner telephoned Mr. Saldivar and asked him to go
along on the Louisiana trip in 1989, and Mr. Saldivar agreed to
join the expedition. Mr. Saldivar was recruited for this trip
because he had the ability to make cages that would protect
divers against sharks and other underwater dangers. These metal
cages containing the divers would be lowered by crane from the
ship. The cost of construction would be paid by petitioner who
agreed to reimburse Mr. Saldivar for any expenses incurred in
this project. Mr. Saldivar also made an air lift. The air lift
- 9 -
worked like a vacuum cleaner to lift materials from the bottom of
the ocean floor onto the deck of the ship. This ship was fully
equipped for salvage operations. It was equipped with cranes,
hydraulic devices, and diving equipment, as well as other heavy
equipment. This ship was obtained from North Sea Underwater
Services, Inc. (North Sea), on the recommendation of Mr. Tillman.
Petitioner negotiated directly with North Sea's president and
attorney in order to procure the ship for the Louisiana
operation.
Petitioner knew little about the Palamar beyond its general
description as a sunken Spanish galleon. The members of
International Recoveries showed petitioner maps showing
approximately 10 to 12 sites where galleons had sunk. Petitioner
read several books and magazine articles dealing with Spanish
galleons.
Petitioner spent only a day and a half on the Louisiana
expedition. He was unexpectedly forced to return to Tucson to
accompany his wife who had become seriously ill. However, during
the expedition, petitioner remained in contact with the group by
calling Mr. Saldivar for progress reports one to three times each
week. Petitioner also frequently contacted the captain of the
ship and Mr. Tillman to determine the progress of the operation.
This salvage operation lasted approximately 1 month. No treasure
or anything of value was recovered during the Louisiana
expedition.
- 10 -
Finally, the International Recoveries group conducted an
operation in Goliad, Texas, in the summer of 1989. Petitioner
visited Goliad twice to plan the operation prior to any work
being commenced. During these planning visits, petitioner
discussed the feasibility of the plan with Mr. Tillman.
Petitioner went to the Goliad courthouse to examine the title of
the property which they wanted to excavate. Subsequently,
petitioner met with the owner of the Goliad property to negotiate
a contract to obtain permission to enter the land for this
operation.
The operation at Goliad took place near the San Antonio
River. The excavation lasted approximately 35 to 40 days.
Petitioner remained in Goliad throughout the operation. During
this time period, petitioner spent 12 hours a night, 3 nights a
week, manning the pumps that were being used. Separating the
exploration site from the San Antonio River was a bank about
20-feet wide. The exploration site was approximately 300-feet
long and 200-feet wide and needed to be excavated to a depth of
about 100 feet. In order to pump water out of the excavation
site, heavy equipment such as cranes and pumps were used. It
took 3 days of running the pumps 24 hours a day to remove all of
the water. Once the water was removed, a backhoe was used to
remove mud from the hole, then the mud was spread out with a
bulldozer to search for artifacts and gold. There were no
recreational activities during the business operations. Nothing
- 11 -
of monetary significance was recovered during the Goliad
expedition. The few coins that were found by the group were kept
by the owner of the land where the dig took place. Petitioner
maintained contemporaneous handwritten notes of the expenditures
made during the Goliad operation.
In order to get the necessary equipment to and from the work
site, petitioner drove a truck round trip, twice, from Tucson,
Arizona, to Goliad, Texas. Each trip took approximately 23-1/2
hours each way.
During the remainder of 1989, petitioner and Mr. Saldivar
went on occasional treasure hunting trips in Arizona.
Petitioner had wages from his working companies in the
amounts of $50,000, $55,000, and $55,000 for 1987, 1988, and 1989
respectively. Even when he was away from home, petitioner stayed
in touch with his businesses every day by telephone.
Petitioners claimed losses totaling $201,529 in connection
with gold mining and treasure hunting in 1989. Of this amount,
$64,877 was claimed on Schedule E in the form of a distributive
share of a loss of a partnership called the Kruse Group. In
fact, the Kruse Group did not exist as a partnership, and the
loss was reported on Schedule E as the result of an error and was
meant to be placed on Schedule C.6
6
Respondent agreed at trial that all of the losses from
(continued...)
- 12 -
OPINION
Was the Activity Engaged in for Profit?
The first issue to be decided is whether petitioner's
treasure hunting activity was an activity engaged in for profit
within the meaning of section 183. This is a factual inquiry
requiring a weighing of the evidence in the record.
Respondent asserts that petitioner's treasure hunting
activity was not engaged in with the objective of making a profit
and that section 183(a) applies. Thus, respondent argues that no
deductions attributable to this activity are allowed, except as
provided in section 183(b). Petitioners contend that petitioner
entered into and carried on the treasure hunting activity with
the requisite profit objective and that, as a result, the
deductions are allowed under section 162 or section 212.
Section 183(a) provides generally that, if an activity is
not engaged in for profit, no deduction attributable to such
activity shall be allowed except as provided in section 183.
Section 183(b) allows deductions in situations not applicable to
the instant case.
Section 183(c) defines an “activity not engaged in for
profit” as “any activity other than one with respect to which
deductions are allowable for the taxable year under section 162
6
(...continued)
this activity should have been reported on Schedule C.
- 13 -
[trade or business] or under paragraph (1) or (2) of section 212
[expenses for the production of income]". For a deduction to be
allowed under section 162 or section 212(1) or (2), taxpayers
must establish that they engaged in the activity with an actual
and honest objective of making an economic profit independent of
tax savings. Antonides v. Commissioner, 91 T.C. 686, 693-694
(1988), affd. 893 F.2d 656 (4th Cir. 1990); Dreicer v.
Commissioner, 78 T.C. 642, 644-645 (1982), affd. without opinion
702 F.2d 1205 (D.C. Cir. 1983). Their expectation of profit need
not have been reasonable; however, they must have entered into
the activity, or continued it, with the objective of making a
profit. Hulter v. Commissioner, 91 T.C. 371, 393 (1988); sec.
1.183-2(a), Income Tax Regs.
The burden is on petitioners to show error in respondent's
determination that the treasure hunting activity was not engaged
in for profit. Rule 142(a). Whether the requisite profit
objective exists is determined by looking to all the surrounding
facts and circumstances. Keanini v. Commissioner, 94 T.C. 41, 46
(1990); sec. 1.183-2(b), Income Tax Regs. Greater weight is
given to objective facts than to a taxpayer's mere statement of
intent. Thomas v. Commissioner, 84 T.C. 1244, 1269 (1985); sec.
1.183-2(a), Income Tax Regs.
Section 1.183-2(b), Income Tax Regs., provides a list of
factors to be considered in the evaluation of a taxpayer's profit
- 14 -
objective: (1) The manner in which the taxpayer carries on the
activity; (2) the expertise of the taxpayer or his advisors; (3)
the time and effort expended in carrying on the activity; (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 from the activity; (7) the amount of occasional
profits, if any, from the activity; (8) the financial status of
the taxpayer; and (9) elements of personal pleasure or
recreation. The number of factors for or against the taxpayer is
not necessarily determinative, but rather all facts and
circumstances must be taken into account, and more weight may be
given to some factors than to others. Cf. Dunn v. Commissioner,
70 T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d Cir. 1980). This
list is nonexclusive, and no single factor or even a majority of
factors necessarily controls. Abramson v. Commissioner, 86 T.C.
360, 371 (1986); sec. 1.183-2(b), Income Tax Regs.
After weighing all of the objective factors coupled with
petitioner's statements of intent, we conclude that petitioner
was engaged in the treasure hunting activity for profit. A
number of factors indicate that petitioner did have the requisite
profit objective.
Respondent places great emphasis on the fact that petitioner
did not keep business records for the treasure hunting
- 15 -
operations. Respondent contends that petitioner did, in
contrast, maintain thorough business records for his other
businesses and that this contrast reveals a lack of a profit
motive in the treasure hunting operations. We agree that
petitioner's recordkeeping left something to be desired; we do
not, however, find that this negates petitioner's profit motive.
The treasure hunting activity was different from petitioner's
other businesses. Different recordkeeping methods are therefore
expected, and lack of recordkeeping is not determinative of
intent. Treasure hunting is not the type of business where
thorough records of gains and losses are necessary to a
successful operation. Cf. Farrell v. Commissioner, T.C. Memo.
1983-542. This type of activity is likely to generate only
expenditures with no income until a find is made at which time
the income will come in one lump sum. Therefore, we find that
petitioner's contemporaneous handwritten lists of expenses were
sufficient records for this type of activity.
More indicative of a profit motive is that petitioner did
not simply accept the first deal presented to him by
International Recoveries. Petitioner testified that the original
offer to join this venture was unsatisfactory and that he
negotiated for a higher percentage of any treasure that might be
recovered in addition to first being reimbursed for his expenses.
If petitioner had no expectation of profit, there would have been
- 16 -
no need for him to negotiate a higher percentage of profits plus
insist on reimbursement of out-of-pocket expenses before
distribution of profits. Petitioner's negotiations indicate a
profit motive. See Gefen v. Commissioner, 87 T.C. 1471, 1498
(1986) (partner negotiating terms of partnership's transactions
to partnership's best advantage was a factor in deciding that
partnership was engaged in activity with the intention of making
a profit).
Petitioner was admittedly not an expert in the gold mining
and treasure hunting business. However, we find that petitioner
did ally himself with experts sufficient to give this venture an
opportunity to be successful. Although there were some
inconsistencies between petitioner's testimony regarding Mr.
Tillman's experience and the summary sheet of Mr. Tillman's
experience, we are convinced that petitioner was aware of Mr.
Tillman's credentials when making his decision to join
International Recoveries in this joint venture. Both petitioner
and Mr. Saldivar credibly testified that Mr. Tillman was in
charge of the operations, and we are convinced that petitioner
reasonably believed that Mr. Tillman was an expert in salvage
operations.
Careful investigation of a potential business to insure the
best chance for profitability strongly indicates an objective to
engage in the activity for profit. Sec. 1.183-2(b)(2), Income
- 17 -
Tax Regs. While a formal market study is not required, a basic
investigation of the factors that would affect profit generally
is. Underwood v. Commissioner, T.C. Memo. 1989-625. Respondent
contends that petitioner did no background investigation to
determine if this venture could be profitable or if any of his
co-venturers had ever been successful in this type of activity.
Petitioner did investigate this venture by meeting with the other
investors, investigating Mr. Tillman's credentials, and reading
books on treasure hunting. It is clear from the record that
petitioner did not enter this activity with the hope that regular
finds of treasure would provide a return of his expenditures plus
a small profit. Instead, petitioner entered this activity with
the belief that if treasure were found the return would be so
great that all of his expenses would be recouped and a
substantial profit would be realized. This belief indicates that
petitioner was engaged in this activity with a profit motive.
Cf. sec. 1.183-2(c) Example (6), Income Tax Regs. (wildcat oil
driller engaged in activity for profit when there is a small
chance to make a large profit). Thus, the fact that petitioner's
co-venturers had not shown a record of profits does not indicate
that they did not expect to find gold or treasure in the future.
The factors that most strongly indicate a profit motive are
the time and effort spent in conducting the gold mining and
treasure hunting as well as the lack of personal enjoyment in
- 18 -
conducting these activities. Petitioner spent a significant
amount of time with the gold mining and treasure hunting
activity. He was not merely an investor who made an occasional
inquiry into the operations; petitioner participated in the daily
operations at the Goliad dig, negotiated contracts, arranged
equipment rentals, and transported equipment. Additionally, many
of the duties performed by petitioner were not activities that
would provide personal pleasure or recreation. For the Goliad
dig, petitioner drove a truck carrying heavy equipment from
Tucson, Arizona, to Goliad, Texas, back and forth twice.
Further, petitioner spent 35 to 40 days working long hours each
night in Goliad in the middle of the summer watching pumping
equipment. Activities of this nature could hardly be called
pleasurable. Petitioner performed a sufficient level of hard,
tedious labor to convince this Court that his primary objective
was to make a profit and that any personal pleasure or recreation
was secondary.
A record of substantial losses over several years may be
indicative of the absence of a profit motive. Golanty v.
Commissioner, 72 T.C. 411, 426 (1979), affd. without opinion 647
F.2d 170 (9th Cir. 1981). Respondent argues that because
petitioner never recovered anything of value from mining and
salvaging, this weighs against a profit motive. We find this
reasoning unpersuasive. If petitioner had engaged in this
- 19 -
activity for a number of years and never recovered anything, then
respondent's argument might be more persuasive. A series of
losses, if not explainable, may be indicative that the activity
is not being engaged in for profit. Sec. 1.183-2(b)(6), Income
Tax Regs. However, in the instant case, petitioner entered into
the gold mining and treasure hunting activity for 1 year and
after not recovering anything of value terminated his
relationship with International Recoveries. Petitioner was not
willing to continue to suffer substantial losses in a venture
that could not be successful; this indicates a profit motive.
Furthermore, while petitioner did have substantial income
and net worth, we do not find that this factor indicates that
this activity was not engaged in for profit. This activity was
not a tax shelter. Cf. Dastgir v. Commissioner, T.C. Memo. 1996-
169. Petitioner was able to use the full amount of the losses to
offset other income; however, this was clearly not the motivating
factor behind this investment. It is unconvincing to argue that
petitioner would spend $1 with the objective of saving a portion
of that dollar on taxes. “As long as tax rates are less than 100
percent, there is no 'benefit' in losing money.” Engdahl v.
Commissioner, 72 T.C. 659, 670 (1979). Petitioner in this case
incurred losses the old fashioned way--he spent money.
After review of the entire record, we conclude that the
treasure hunting activity was not designed to generate tax
- 20 -
benefits nor was it an activity from which petitioner primarily
received significant personal pleasure or recreational benefits.
We find that it was engaged in for profit within the meaning of
section 183.
Passive Loss Limitations
Respondent alternatively argues that even if the activity
were engaged in for profit, the losses should be disallowed
pursuant to the passive activity loss limitations of section 469.
The passive loss rules of section 469 place limitations on the
deduction of losses relating to passive activities; namely, from
activities in which a taxpayer does not materially participate.
Sec. 469(a)(1) and (2), (c)(1), (d)(1).
As a general rule, a taxpayer will be regarded as not
materially participating in an activity if the taxpayer is not
involved in the operation of the activity on a basis which is
regular, continuous, and substantial. Sec. 469(h)(1); sec.
1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb.
25, 1988).
The temporary regulations under section 469 contain seven
tests, the qualification under any one of which will result in a
taxpayer's being treated as materially participating in the
activity. Sec. 1.469-5T(a), Temporary Income Tax Regs., supra.
Of the seven tests, petitioners presented evidence and made
general arguments that are applicable only to the tests found in
- 21 -
section 1.469-5T(a)(1), (7), Temporary Income Tax Regs., supra,
which provide that a taxpayer shall be treated as materially
participating in an activity if he participates in the activity
for more than 500 hours during such year, or if, based on all the
facts and circumstances, the taxpayer participates in the
activity on a regular, continuous, and substantial basis during
the taxable year.
A taxpayer may establish the extent of his or her
participation in a particular activity by any reasonable means.
Sec. 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg.
5727 (Feb. 25, 1988). The taxpayer has the burden of proving
material participation in the activity. Rule 142(a). Petitioner
and Mr. Saldivar credibly testified to petitioner's significant
level of participation in the treasure hunting and gold mining
activity. Petitioner transported heavy equipment twice from
Tucson, Arizona, to Goliad, Texas, round trip, which accounts for
almost 100 hours. He also operated the tractor and manned the
pumps during the night shift throughout the Goliad operation
which accounts for approximately 200 hours of participation.
Additionally, petitioner negotiated contracts for the venture and
purchased equipment to be used in the various operations
conducted by the venture. These miscellaneous activities when
combined account for, at a minimum, the remaining 200 hours.
Although this Court has not always accepted a post-event
- 22 -
narrative of participation, see Speer v. Commissioner, T.C. Memo.
1996-323; Goshorn v. Commissioner, T.C. Memo. 1993-578, we find
petitioner's description of his participation, when combined with
Mr. Saldivar's testimony and the objective evidence in the
record, to be credible, and we therefore conclude that petitioner
did materially participate in this activity by participating for
over 500 hours during the year.7
Rental Loss
Respondent disallowed a loss from petitioners' rental
property of $1,978. Except as otherwise provided by statute or
by Rule of this Court, the burden of proof is on petitioner to
demonstrate that respondent's determination was in error. Rule
142(a). Petitioners have not argued or presented any evidence to
dispute respondent's determination with regard to this amount,
and therefore petitioners are deemed to have abandoned the issue
of whether they are entitled to deduct rental losses of $1,978 in
1989.
Accuracy-Related Penalty
Section 6662 imposes a penalty in an amount equal to 20
percent of any underpayment attributable to, inter alia,
7
Petitioners argue that Mr. Harrison participated in the
treasure hunting and gold mining activity for over 1,200 hours.
While we accept petitioner's testimony regarding what he did at
each of the sites, we did not include all of his activities in
determining that petitioner participated for over 500 hours. For
example, we did not consider petitioner's walks on the beach
during the Florida operation to contribute toward material
participation.
- 23 -
negligence or disregard of rules or regulations. Petitioners
have not presented any explanation for their failure to comply
with the Code and regulations regarding their rental loss. The
burden rests with petitioner to prove that respondent's
determination was in error. Rule 142(a). We therefore sustain
respondent's determination of the accuracy-related penalty with
respect to any underpayment of tax resulting from the
disallowance of petitioners' rental loss. To reflect the
foregoing,
Decision will be entered
under Rule 155.