Rower v. Commissioner

T.C. Memo. 1998-117

UNITED STATES TAX COURT

ARLAN L. ROWER AND SANDRA M. HOWARD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20045-95. Filed March 23, 1998.

Arlan L. Rower, pro se.

Mark A. Weiner, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WRIGHT, Judge: Respondent determined a deficiency of $9,046

in, and an accuracy-related penalty of $1,808 on, petitioners'

Federal income tax for 1993.

The issues for decision are:

(1) Whether petitioners are entitled for 1993 to deduct a

net loss from an activity that they reported in Schedule C of
 - 2 -

their Federal income tax return (return) for that year. We hold

that they are not.

(2) Whether petitioners are entitled for 1993 to deduct a

loss that they sustained on the sale of an automobile. We hold

that they are not.

(3) Whether petitioners are entitled for 1993 to a casualty

loss deduction in the amount of $11,509. We hold that they are

not.

(4) Whether petitioners are liable for 1993 for the

accuracy-related penalty under section 6662(a).1 We hold that

they are.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and attached exhibits are incorporated

herein. Petitioners resided in North Hollywood, California, at

the time they filed the petition in this case. All references to

petitioner in the singular are to Arlan L. Rower.

During 1993, petitioner earned $55,4642 as a jet airplane

mechanic employed by American Airlines, and petitioner Sandra L.

Howard (Ms. Howard) earned $32,611 as a secretary.

1
All section references are to the Internal Revenue Code in
effect for the year at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
2
All dollar amounts are rounded to the nearest dollar.
 - 3 -

Petitioner's Automobile Repair Activity

During 1984, petitioner was certified by the Federal Avia-

tion Administration as qualified to exercise the privileges of

mechanic for airframes and powerplants. On June 30, 1985,

petitioner was certified as competent by the National Institute

for Automotive Service Excellence (NIASE) in the service areas of

"engine repair", "front end", and "brakes". Petitioner allowed

his NIASE certification (1) in the service areas of "front end"

and "brakes" to expire in July 1989 and (2) in the service area

of "engine repair" to expire in July 1990.

Petitioner repaired cars in a garage located at his resi-

dence (automobile repair activity) for an undisclosed number of

years before 1993, the year at issue, as well as during that year

and 1994 and 1995. Prior to 1992, petitioner repaired automo-

biles for Leon Goldberg (Mr. Goldberg), his brother's father-in-

law, but he did not charge Mr. Goldberg for that work. Beginning

in 1992, petitioner informed Mr. Goldberg that he intended to

begin charging him for any automobile repair work that he did for

him at the rate of between $20 and $25 an hour for labor. During

1992 and 1993, petitioner repaired two cars for Mr. Goldberg for

which he billed him for his labor, although Mr. Goldberg usually

purchased any parts that petitioner needed in order to make those

repairs. Petitioner also did repair work during 1992 and 1993 on
 - 4 -

the car of his niece, Crystal Kahn (Ms. Kahn), for which he

charged her.

On February 19, 1988, Ms. Howard purchased a 1985 Ford

Thunderbird automobile (Thunderbird) for $7,250. During 1991,

petitioner purchased a 1985 Ferrari automobile (Ferrari) for

$61,000, which he sold for $45,000 on February 4, 1993. Through-

out the period during which petitioner owned the Ferrari, he made

repairs on it and kept it in good working condition.

Since sometime around 1990 through the time of the trial in

this case, John Grenville-Jones (Mr. Grenville-Jones), who has a

bachelor's degree in engineering and electronics and a master's

degree in electronic engineering, was petitioners' return pre-

parer. Mr. Grenville-Jones prepared, inter alia, petitioners'

1991, 1992, and 1993 returns, as well as an amended return for

1993.

In Schedule C, Profit or Loss from Business (Schedule C), of

petitioners' 1992 return, which was the first Schedule C filed

for petitioner's automobile repair activity, petitioners claimed

that that activity constituted a business. In that schedule,

petitioners reported gross receipts of $3,470, cost of goods sold

of $250, total expenses of $21,460, and a net loss of $18,240.

Included in the $21,460 of total expenses reported in petition-

ers' 1992 Schedule C was depreciation of $2,760 with respect to

petitioner's Ferrari.
 - 5 -

Mr. Grenville-Jones relied on Internal Revenue Service (IRS)

Publication 334, Tax Guide for Small Business (Publication 334),

to prepare petitioners' 1993 Schedule C relating to petitioner's

automobile repair activity. In that schedule, petitioners

reported gross receipts of $2,100, total expenses of $23,358, and

a net loss of $21,258. Included in the $23,358 of total expenses

reported in petitioners' 1993 Schedule C was depreciation of $540

with respect to Ms. Howard's Thunderbird. Petitioners also

attached Form 4797, Sales of Business Property (Form 4797), to

their 1993 return. In that form, petitioners claimed a loss of

$13,010 on petitioner's Ferrari that they calculated by reducing

the loss realized on the sale of that automobile (i.e., $16,000)

by the depreciation that petitioners claimed with respect to it

in their 1992 Schedule C and that they claim was allowable for

January 1993. Petitioners reported that $13,010 loss as a long-

term capital loss in their 1993 Schedule D, Capital Gains and

Losses (1993 Schedule D). Petitioners did not report any other

capital gains or losses in their 1993 Schedule D. Because of the

$3,000 limitation imposed by section 1211(b) for each taxable

year on the amount of net capital loss by which an individual may

reduce income, petitioners reduced the income reported in their

1993 return by $3,000 of the claimed long-term capital loss

reported in their 1993 Schedule D.
 - 6 -

During 1996, Mr. Grenville-Jones prepared for petitioners an

amended return for 1993 (1993 amended return) that they submitted

to the IRS on November 27, 1996. In Schedule C of that amended

return relating to petitioner's automobile repair activity (1993

amended Schedule C), petitioners reported gross receipts of

$2,100, total expenses of $14,730, and a net loss of $12,630.

The total expenses claimed in the 1993 amended Schedule C con-

sisted of the following items:

Expense Amount

Advertising $280
Car and Truck Expenses 2,160
Depreciation 3,455
Interest 2,269
Other Interest 645
Legal and Professional Services 192
Office Expense 105
Repairs and Maintenance 60
Supplies 2,366
Travel 910
Meals and Entertainment 362
Utilities 423
Other Expenses3 1,505

Petitioners also attached a Form 4797 to their 1993 amended

return, which was identical to the Form 4797 that they attached

to their 1993 return and in which they claimed a $13,010 loss

from the sale of petitioner's Ferrari. Petitioners asserted in

3
Included within the "Other Expenses" category in petitioners'
1993 amended Schedule C were the following claimed expenses:
"telephone" of $980; "postage" of $63; "dry cleaning" of $29;
"publications" of $181; "bank charges" of $150; and "membership
prof associations" of $100.
 - 7 -

an attachment to their 1993 amended return that the $13,010 loss

that they were claiming in that Form 4797 was reported on line

15, Other gains or (losses), of their 1993 return, rather than in

their 1993 Schedule D, as reported in their original 1993 return.

For 1994 and 1995, petitioners reported petitioner's automo-

bile repair activity as a partnership and claimed losses from

that partnership in the amounts of $13,013 and $6,161, respec-

tively.

Petitioners' Claimed Casualty Loss

During 1994, petitioners received $3,067 from the Federal

Emergency Management Agency stemming from a claim due to an

earthquake that occurred during 1994 (Northridge earthquake). At

the time of that earthquake, petitioners were not covered by

insurance for earthquake damage.

During March 1994, petitioners received two estimates of the

cost of repairs to their house, one from Steven Berkus Construc-

tion for $15,900 (Berkus estimate) and one from Ernesto Laurel

(Mr. Laurel) for $16,300 (Laurel estimate). Each of those

estimates indicated that it was for repairs due to earthquake

damage. During 1994, petitioners purchased $561 worth of sup-

plies and hardware, and they paid Mr. Laurel $655.

Although the Northridge earthquake occurred during 1994,

pursuant to section 165(i)(1), petitioners claimed a casualty

loss deduction of $11,371 in Form 4684, Casualties and Thefts
 - 8 -

(Form 4684), of their 1993 return. In calculating that deduc-

tion, petitioners (1) totaled claimed casualty losses of (a)

$15,560 attributable to "Quake damage to single family home" and

(b) $2,420 attributable to "Broken water pipes", "water damage to

living room", and "Broken plates glass wall crystal TV's, VCR,

radio", (2) reduced that total by $100, as required by section

165(h)(1), and (3) reduced that figure by 10 percent of the

adjusted gross income that they reported in their 1993 return, as

required by section 165(h)(2). Petitioners reported their

claimed $11,371 casualty loss deduction in Schedule A, Itemized

Deductions (Schedule A), of their 1993 return.

Petitioners claimed a casualty loss deduction of $11,509 in

Form 4684 and Schedule A of their 1993 amended return. Petition-

ers calculated that deduction in the same manner in which they

calculated the casualty loss deduction that they claimed in their

1993 original return. However, the amount of the casualty loss

deduction attributable to the Northridge earthquake that peti-

tioners claimed in their 1993 amended return was greater than the

amount of the deduction attributable to that earthquake that they

claimed in their original return for 1993 because the adjusted

gross income that they reported in their 1993 amended return was

less than the amount of gross income reported in their original

return for that year.
 - 9 -

Notice of Deficiency

On August 21, 1995, prior to the date on which petitioners

submitted their 1993 amended return to the IRS, respondent issued

a notice of deficiency (notice) to petitioners for their taxable

year 1993. Respondent determined in the notice that petitioners

are entitled to an amount of Schedule C expenses that equals the

amount of gross receipts (i.e., $2,100) that petitioners reported

in that schedule and that they are not entitled to the balance of

those expenses (i.e., $21,258). The bases for respondent's

determination in the notice with respect to the expenses peti-

tioners claimed in their 1993 Schedule C were that (1) peti-

tioners have not shown that those expenses were paid or incurred

during 1993, (2) petitioners have not demonstrated that those

expenses are ordinary and necessary to petitioner's automobile

repair activity during that year, and (3) petitioner was not

engaged during 1993 in his automobile repair activity for profit.

Respondent further determined in the notice that petitioners

are not entitled to the $3,000 capital loss attributable to the

sale of petitioner's Ferrari that petitioners claimed in their

1993 Schedule D.

In addition, respondent determined in the notice that

petitioners are not entitled to the $11,371 casualty loss deduc-

tion that petitioners claimed in their 1993 Schedule A.
 - 10 -

Respondent also determined in the notice that petitioners

are liable for 1993 for the accuracy-related penalty under

section 6662(a).

OPINION

Petitioners bear the burden of proving that respondent's

determinations in the notice are erroneous. Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are

a matter of legislative grace, and the taxpayer has the burden of

showing his or her entitlement to any deduction claimed.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

Petitioner's Automobile Repair Activity

Petitioners' Claimed Schedule C Expenses

Petitioners argue that they are entitled to deduct the

$12,630 net loss that they claimed in their 1993 amended Schedule

C. Respondent counters that petitioners are not entitled to

deduct a net loss with respect to petitioner's automobile repair

activity because, inter alia, petitioner was not engaged in his

automobile repair activity for profit.

Before turning to the arguments of the parties, we shall

address petitioners' contention that respondent has the burden of

proof with respect to petitioner's profit objective under section

183. Although not altogether clear, we construe their argument

to be based on section 183(d). As pertinent here, section 183(d)
 - 11 -

generally creates a presumption that a taxpayer is engaged in an

activity for profit if the gross income that such taxpayer

derives from that activity exceeds the deductions of that tax-

payer that are attributable to that activity for 3 out of 5

consecutive taxable years. However, section 183(d) does not

apply to petitioners because there is no evidence in the record

to show that petitioner's automobile repair activity ever satis-

fied that provision.4

We turn now to petitioners' argument that petitioner engaged

in his automobile repair activity with the requisite profit

objective under section 183 and that therefore petitioners

are entitled to deduct the Schedule C loss that they are claiming

for 1993. Section 183 allows only specified deductions unless an

activity is engaged in for profit. Section 183(c) defines an

4
We note that sec. 12.9(a) and (b), Temporary Income Tax Regs.,
39 Fed. Reg. 9947 (Mar. 15, 1974), generally permits a taxpayer
to elect to postpone a determination by respondent with respect
to whether the presumption described in sec. 183(d) applies to an
activity of such taxpayer until after the first 5 taxable years
during which that taxpayer is engaged in any such activity. Such
an election generally must be made within the first 3 years after
the due date of such taxpayer's return, without regard to
extensions, but not later than 60 days after such taxpayer
receives written notice from a District Director that that
district director proposes to disallow deductions attributable to
an activity. Sec. 12.9(c), Temporary Income Tax Regs., 39 Fed.
Reg. 9948 (Mar. 15, 1974). Petitioners appear to have prepared
such an election, but they have failed to show that they filed it
with respondent. Indeed, they admit that Mr. Grenville-Jones
retained that election in his files.
 - 12 -

activity not engaged in for profit as an activity other than one

with respect to which deductions are allowable under section 162

or under paragraphs (1) or (2) of section 212. An activity

engaged in for profit is one in which the taxpayer has an actual

and honest objective of making a profit, Dreicer v. Commissioner,

78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205

(D.C. Cir. 1983), although that profit expectation need not be

reasonable, Taube v. Commissioner, 88 T.C. 464, 478-479 (1987);

sec. 1.183-2(a), Income Tax Regs.

The determination of a taxpayer's profit objective requires

a consideration of all the surrounding facts and circumstances.

Finoli v. Commissioner, 86 T.C. 697, 722 (1986); sec. 1.183-2(b),

Income Tax Regs. Although the purpose of the inquiry is to

ascertain the taxpayer's subjective intent, greater weight is

given to objective facts than to self-serving statements of

intent. Beck v. Commissioner, 85 T.C. 557, 570 (1985); sec.

1.183-2(a), Income Tax Regs.

In conducting the profit objective analysis, courts have

relied on a nonexclusive list of nine factors enumerated in the

regulations under section 183. See Independent Elec. Supply,

Inc. v. Commissioner, 781 F.2d 724, 727 (9th Cir. 1986), affg.

Lahr v. Commissioner, T.C. Memo. 1984-472; Elliott v. Commis-

sioner, 90 T.C. 960, 970-971 (1988), affd. without published
 - 13 -

opinion 899 F.2d 18 (9th Cir. 1990). No single factor is deter-

minative of the issue, however. Sec. 1.183-2(b), Income Tax

Regs. The nine factors set forth under section 1.183-2(b),

Income Tax Regs., are: (1) The manner in which the taxpayer

carries 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; (4) the expectation that the assets

used in the activity may appreciate in value; (5) the success of

the taxpayer in carrying on other similar or dissimilar activi-

ties; (6) the taxpayer's history of income or losses with respect

to the activity; (7) the amount of occasional profits, if any,

that are earned; (8) the financial status of the taxpayer; and

(9) the elements of personal pleasure or recreation involved in

the activity.

We take this opportunity to note that petitioner did not

testify at the trial in this case. We presume that if he had

testified truthfully, his testimony would not have been favorable

to petitioners' position herein. See McKay v. Commissioner, 886

F.2d 1237 (9th Cir. 1989), affg. 89 T.C. 1063 (1987); Cohen v.

Commissioner, 9 T.C. 1156, 1162 (1947), affd. 176 F.2d 394 (10th

Cir. 1949); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.

1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). Indeed,

petitioners stated on brief that "petitioner did not go to the
 - 14 -

stand--as he was scared of committing perjury--and being exposed

as a blatant liar."

With respect to whether petitioner had the requisite profit

objective under section 183 for his automobile repair activity,

petitioners offered, inter alia, the following evidence: (1) The

testimony of Ms. Kahn, who is related to petitioner; (2) the

testimony of Mr. Goldberg, who has a family relationship with

petitioner; (3) a receipt book that reflected cash that petition-

ers received during 1993 (1993 receipt book); (4) computer-

generated lists of petitioners' alleged receipts, assets and

asset values, gasoline expenses, and supplies for 1992 (1992

computer lists) and their alleged assets and asset values for

1993 (1993 computer list) that were copied from a document

entitled "original business ledger"; and (5) a log that appears

to reflect miles traveled on certain trips in petitioner's

Ferrari during 1992 and in Ms. Howard's Thunderbird during 1993

that are alleged to be business trips (automobile log).

Mr. Goldberg and Ms. Kahn each testified that during 1993

petitioner charged them for repairs that he made to their respec-

tive automobiles. However, their testimony does not establish,

and there is no other evidence in the record to show, whether the

amount that petitioner charged them was enough to allow peti-

tioner to earn a profit from the automobile repair work that he
 - 15 -

did for them. Indeed, Ms. Kahn could not recall how much peti-

tioner charged her for automobile repairs. Consequently, we

shall not rely on Mr. Goldberg's or Ms. Kahn's testimony to

establish that petitioner engaged in his automobile repair

activity for profit within the meaning of section 183.

With respect to the 1993 receipt book, the 1992 and 1993

computer lists, and the automobile log, petitioner failed to

testify about those documents, and there is no other evidence in

the record to show when those documents were prepared and whether

those documents are complete and accurate. Accordingly, on the

instant record, we shall not rely on any of those documents in

determining whether petitioner was engaged in his automobile

repair activity for profit within the meaning of section 183.

Nor is there any evidence in the record with respect to how

many hours petitioner devoted to his automobile repair activity.

Based on the salary of $55,464 that petitioner earned during 1993

from American Airlines, it appears that he worked full time for

that company. It seems to us that petitioner could not have

spent a significant amount of time on his automobile repair

activity during 1993 if he was employed full time by American

Airlines during that year.

In further support of petitioners' argument that petitioner

had the requisite profit objective under section 183 with respect
 - 16 -

to petitioner's automobile repair activity, petitioners contend

that there was a "profit trend" with respect to that activity.

Although not altogether clear, it appears that petitioners base

that contention on the premise that the amount of the losses that

petitioners claimed for 1992, 1993, 1994, and 1995 decreased from

year to year. We note initially that the respective losses that

petitioners claimed for 1994 and 1995 represented petitioner's

allocable share of certain partnership losses, which presumably

were less than the total losses for that partnership. More

importantly, we reject petitioners' contention that the losses

which they claimed for the years 1992, 1993, 1994, and 1995

establish a "profit trend" for petitioner's automobile repair

activity.

Based on our review of the entire record before us, we find

that petitioners have failed to demonstrate that petitioner was

engaged in his automobile repair activity with an actual and

honest objective of making a profit. The objective facts estab-

lished by that record indicate that most of the factors enumer-

ated in the regulations under section 183 favor respondent. We

further find based on the present record that petitioners have

failed to prove that the expenses that they claimed in their 1993

Schedule C and their 1993 amended Schedule C (1) were paid or

incurred during 1993 and/or (2) were ordinary and necessary to
 - 17 -

petitioner's automobile repair activity during that year.

Accordingly, we sustain respondent's determination in the notice

that for 1993 petitioners are not entitled to deduct the net loss

that they claimed in their 1993 Schedule C with respect to

petitioner's automobile repair activity, and we reject petition-

ers' contention that they are entitled to deduct the net loss

that they claimed in their 1993 amended Schedule C.5

Petitioners' Claimed Section 1231 Loss

Petitioners contend that they are entitled to an ordinary

loss deduction under section 1231 for 1993 for the loss that they

realized on the sale of petitioner's Ferrari. Respondent con-

tends that petitioners are not entitled to that deduction because

they have failed to show that they used that automobile in

connection with a trade or business.

Pursuant to section 1231(a)(1), if the section 1231 gain

exceeds the section 1231 loss, that gain and loss are treated as

long-term capital gain and loss, respectively. Pursuant to

section 1231(a)(2), if the section 1231 loss exceeds the section

5
Petitioners offered into evidence a document entitled "Profit
Intent Test - The Nine Factors". In that document, petitioners
allege certain facts relating to petitioner and his automobile
repair activity that are not established by the record in this
case. We have not relied on that self-serving document as
evidence in support of any of the facts that are alleged in that
document and that are not otherwise supported by the record in
this case.
 - 18 -

1231 gain, that loss and gain are treated as ordinary loss and

gain, respectively. As pertinent here, the terms "section 1231

gain" and "section 1231 loss" are defined to include any gain and

loss, respectively, that is recognized on the sale or exchange of

property used in a trade or business. Sec. 1231(a)(3). As

relevant here, section 1231(b)(1) generally defines the term

"property used in the trade or business" to include property used

in the trade or business of a character that is subject to the

allowance for depreciation under section 167 and that is held for

more than one year. As pertinent here, section 167(a) permits a

depreciation deduction for property that is used in a trade or

business.

We have found that petitioners have failed to establish that

during 1993 petitioner engaged in his automobile repair activity

with the requisite profit objective under section 183. On the

record before us, we find that petitioners have failed to show

that petitioner's Ferrari was used in a trade or business. We

sustain respondent's determination in the notice that for 1993

petitioners are not entitled to a $3,000 capital loss deduction

for the loss that they realized on the sale of petitioner's

Ferrari,6 and we reject petitioners' contention that they are

6
Mr. Grenville-Jones testified that Ferrari automobiles
generally appreciate in value, particularly where the owner keeps
(continued...)
 - 19 -

entitled for that year to an ordinary loss deduction of $13,010

under section 1231 with respect to that sale.

Petitioner's Claimed Casualty Loss Deduction

Petitioners contend that, pursuant to section 165(a) and

(i)(1),7 they are entitled for 1993 to a casualty loss deduction

of $11,509, which is the amount they claimed in their 1993

amended return. Although respondent concedes that petitioners

had a casualty loss of $1,2168 within the meaning of section

165(c)(3), respondent contends that petitioners are not entitled

to deduct that loss because of the limitation in section 165(h).9

6
(...continued)
that automobile in good working condition, as petitioner did.
Petitioners appear to make the same contention on brief. We are
unwilling to rely on Mr. Grenville-Jones' testimony, or
petitioners' contention on brief, for petitioners as establishing
that petitioner intended to acquire and/or hold petitioner's
Ferrari for profit.
7
Sec. 165(i) permits a taxpayer to take a deduction for a loss
attributable to a disaster occurring in an area that is
determined by the President of the United States to warrant
assistance by the Federal Government under the Disaster Relief
and Emergency Assistance Amendments of 1988 for the taxable year
immediately preceding the taxable year in which the disaster
occurred.
8
The $1,216 casualty loss which respondent concedes petitioners
incurred for 1993 consists of $561 worth of supplies and hardware
that petitioners purchased during 1994 and $655 that petitioners
paid to Mr. Laurel during that year.
9
Sec. 165(h) limits the amount of a deduction for a casualty
loss attributable to property that is not used in a trade or
business or for the production of income (personal casualty
(continued...)
 - 20 -

Under section 165(a) and (c)(3), an individual is permitted

a deduction for a loss that arises from fire, storm, shipwreck,

or other casualty, or from theft. As pertinent here, the deduct-

ible amount of a loss attributable to any such casualty generally

is equal to the fair market value of the damaged property before

the casualty reduced by the fair market value of the property

after the casualty, sec. 1.165-7(b)(1)(i), Income Tax Regs., and

those fair market values are generally to be determined by

competent appraisal, sec. 1.165-7(a)(1)(i), Income Tax Regs. The

cost of repairs to the property that is damaged as a result of a

casualty is acceptable as evidence of the loss in the value of

the property if the taxpayer shows: (a) The repairs are necessary

to restore the property to its condition immediately before the

casualty; (b) the amount spent for such repairs is not excessive;

(c) the repairs do not care for more than the damage suffered;

and (d) the value of the property after the repairs does not as a

result of the repairs exceed the value of the property immedi-

9
(...continued)
loss). As pertinent here, sec. 165(h)(1) permits a deduction
only to the extent that a personal casualty loss exceeds $100,
and sec. 165(h)(2) permits a deduction for such a loss only to
the extent that it exceeds 10 percent of the adjusted gross
income of the taxpayer claiming the personal casualty loss. In
the instant case, the $1,216 casualty loss that respondent
concedes petitioners incurred, reduced by $100, does not exceed
10 percent of the adjusted gross income that petitioners reported
in their 1993 return or their 1993 amended return.
 - 21 -

ately before the casualty. Sec. 1.165-7(a)(2)(ii), Income Tax

Regs.

In order to substantiate their claimed casualty loss deduc-

tion for damage to their house from the 1994 Northridge earth-

quake, petitioners rely on the Berkus estimate and the Laurel

estimate. Petitioners contend that the Berkus estimate, which

was for $15,900, shows the decrease in fair market value to

petitioners' house as a result of the 1994 Northridge earthquake.

We disagree. This Court has held that section 1.165-7(a)(2)(ii),

Income Tax Regs., "contemplates actual repairs and expenditures,

not just estimates", Farber v. Commissioner, 57 T.C. 714, 719

(1972), and that the use of estimates as evidence of the amount

of a casualty loss is unacceptable. Id.; see Lamphere v. Commis-

sioner, 70 T.C. 391, 396 (1978). Consequently, we shall not rely

on the Berkus estimate or the Laurel estimate as establishing the

decrease, if any, in the fair market value of petitioners' house

as a result of the 1994 Northridge earthquake.

In order to provide further support for petitioners' claimed

casualty loss deduction, petitioners offered (1) a receipt from

Circuit City Stores, dated April 22, 1995, for the purchase of a

television and (2) another receipt from Circuit City Stores,

dated July 1, 1995, for the purchase of a television base, a

video cassette recorder, and a television. Petitioners contend
 - 22 -

that those receipts represent the replacement value of certain of

their personal property that was destroyed as a result of the

1994 Northridge earthquake. However, there is no evidence in the

record showing that two televisions, a television base, and a

video cassette recorder were destroyed in the 1994 Northridge

earthquake or that the purchases represented by the receipts from

Circuit City Stores constituted replacement of such alleged

destroyed property. On the instant record, we find that peti-

tioners have failed to establish that the 1994 Northridge earth-

quake destroyed two televisions, a television base, and a video

cassette recorder.

Based on the entire record before us, we find that petition-

ers have failed to show that they are entitled for 1993 to a

casualty loss deduction. Consequently, we sustain respondent's

determination disallowing the casualty loss deduction that

petitioners claimed in their 1993 return, and we reject petition-

ers' contention that they are entitled to the casualty loss

deduction that they claimed in their 1993 amended return.

Section 6662(a)

Respondent determined that petitioners are liable for 1993

for the accuracy-related penalty under section 6662(a) because

the underpayment of income tax for that year was attributable to

negligence. Petitioners contend that they have demonstrated that
 - 23 -

they "took great care in keeping records" and that they have

shown that all of the deductions that respondent disallowed in

the notice are "legal, justified, and proven." In addition, Mr.

Grenville-Jones, who signed petitioners' 1993 return as tax

preparer, testified at trial, and it appears that petitioners may

be contending that they did not act negligently in filing that

return because they relied on Mr. Grenville-Jones.

The accuracy-related penalty is equal to 20 percent of the

portion of an underpayment to which section 6662 applies. Sec.

6662(a). Section 6662(b)(1) provides that section 6662 applies

to any underpayment attributable to negligence or disregard of

rules or regulations.

Negligence is defined as a lack of due care or failure to do

what a reasonable and prudent person would do under similar

circumstances. Allen v. Commissioner, 925 F.2d 348, 353 (9th

Cir. 1991), affg. 92 T.C. 1 (1989). Under certain circumstances,

a taxpayer may avoid the accuracy-related penalty for negligence

by showing that he or she reasonably relied on the advice of a

competent professional. Sec. 1.6664-4(b)(1), Income Tax Regs.;

see sec. 6664(c); Freytag v. Commissioner, 89 T.C. 849, 888

(1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868

(1991). However, a taxpayer bears the responsibility for any

negligent errors of his or her professional adviser. See Ameri-
 - 24 -

can Properties, Inc. v. Commissioner, 28 T.C. 1100, 1116-1117

(1957), affd. per curiam 262 F.2d 150 (9th Cir. 1958). Reliance

on a professional adviser, standing alone, is not an absolute

defense to negligence; it is only one factor to be considered.

Freytag v. Commissioner, supra at 888. In order for reliance on

a professional adviser to excuse a taxpayer from the accuracy-

related penalty for negligence, the taxpayer must establish that

the professional adviser on whom he or she relied had the exper-

tise and knowledge of the relevant facts to provide informed

advice on the subject matter. See id.

Contrary to petitioners' contention that they have shown

that they "took great care in keeping records", we have found

that there is no evidence in the record to establish (1) when any

documents that are part of the record and that are, or purport to

be, petitioners' records were prepared and (2) whether any such

documents are complete and accurate. With respect to petition-

ers' contention that they have shown that all of the deductions

that respondent disallowed in the notice are "legal, justified,

and proven", we have found that they have not established that

they are entitled to those deductions.

With respect to any contention by petitioners that they

should not be liable under section 6662(a) because they relied on

Mr. Grenville-Jones, who prepared their 1993 return (as well as
 - 25 -

their 1993 amended return), Mr. Grenville-Jones testified that

petitioners provided him with, inter alia, (1) certain documenta-

tion with respect to the alleged business use of petitioner's

Ferrari; (2) the 1993 receipt book; (3) a ledger that contained a

list of the equipment that petitioner claimed to have used in his

automobile repair activity and the estimated values of that

equipment; (4) certain receipts; (5) three estimates related to

the 1994 Northridge earthquake; and (6) a list of property that

petitioners alleged was damaged in the 1994 earthquake. We note

initially that although Mr. Grenville-Jones testified about

certain documents that petitioners provided to him, not all of

those documents are in the record. With respect to those docu-

ments about which Mr. Grenville-Jones testified and which are in

the record, petitioners did not testify, and we do not know, when

those documents were prepared or whether they are complete and

accurate. We have found that petitioners have not established

through those documents that they are entitled to the deductions

that they claim.

It is also significant to any contention by petitioners that

they are not liable under section 6662(a) because they relied on

Mr. Grenville-Jones that Mr. Grenville-Jones testified that he

has a bachelor's degree in engineering and electronics and a

master's degree in electronic engineering. In addition, although
 - 26 -

we do not accept the changes in petitioners' 1993 amended return,

by submitting that amended return, petitioners and Mr. Grenville-

Jones concede that petitioners' original return for that year is

in error. We are unable to find on the instant record that Mr.

Grenville-Jones had the expertise10 and knowledge of the relevant

10
To illustrate Mr. Grenville-Jones' lack of expertise with
respect to the preparation of petitioners' 1993 return, Mr.
Grenville-Jones testified that he interpreted Publication 334,
which he used to prepare petitioners' 1993 Schedule C, to mean
that "you have a 2 years from 5 test, which means for 2 years you
can run a loss and you can presume that loss to be a valid
deduction unchallenged by the IRS, unless IRS shows it is not
valid, which means, if they challenge that profit motivation,
they have the burden of proof to challenge on the second year
while you're not making a profit." He further stated: "So I
refer to the IRS publication [334], and it's the second year of
operation, therefore, that tells me he [petitioner] can file with
certainty he will not be challenged at audit." However,
Publication 334 states the following:

Presumption of Profit

An activity is presumed carried on for profit if it
produced a profit in at least 3 of the last 5 tax years
including the current year. * * * You have a profit
when the gross income from an activity is more than the
deductions for it.

* * * * * * *

If your business or investment activity passes
this 3- * * * years-of-profit test, presume it is
carried on for profit. * * * You can take all your
business deductions from the activity, even for the
years that you have a loss. You can rely on this
presumption in every case, unless the IRS shows it is
not valid.

Publication 334 does not state, as Mr. Grenville-Jones testified,
(continued...)
 - 27 -

facts to provide informed advice with respect to petitioners'

1993 return and 1993 amended return. See Freytag v. Commis-

sioner, 89 T.C. at 888.

Based on the record before us, we find that petitioners have

failed to satisfy their burden of proving that they did not act

negligently with respect to their underpayment for 1993. Accord-

ingly, we sustain respondent's determination for that year

imposing the accuracy-related penalty under section 6662(a).

To reflect the foregoing,

Decision will be entered

for respondent.

10
(...continued)
that a taxpayer can have a loss for 2 years and presume that a
deduction for that loss is valid. Publication 334 is based on
sec. 183(d), which, as pertinent here, makes it clear that a
presumption with respect to a taxpayer's profit objective in
conducting an activity arises only if for three out of five
consecutive taxable years the gross income that such taxpayer
derives from that activity exceeds that taxpayer's deductions
attributable to that activity.