T.C. Memo. 2001-200
UNITED STATES TAX COURT
TONY L. ZIDAR AND KATHLEEN I. ZIDAR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11484-99. Filed August 1, 2001.
Jonathan V. Goodman, for petitioners.
Michael J. Calabrese, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Respondent determined a $53,435 deficiency
in petitioners’ 1992 Federal income tax and a $10,687 addition to
tax under section 6662(a).1
1
All section references are to the Internal Revenue Code as
in effect for the taxable year in issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
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The issues for decision are: (1) Whether petitioners
underreported their capital gains from the redemption of certain
corporate stock; (2) whether Tony L. Zidar conducted his stock
car activity with the intent to make a profit; and (3) whether
petitioners are subject to the section 6662(a) accuracy-related
penalty.2
FINDINGS OF FACT
The parties have stipulated some of the facts, which we
incorporate herein by this reference.
Petitioners
Throughout the year in issue, petitioners were married to
one another. In 1993 they separated, and in 1994 they divorced.
When they petitioned the Court, petitioners resided in Wisconsin.
Concrete Raising Corporation
In the early 1970's, Tony L. Zidar (Tony) started a business
known as Concrete Raising Associates (CRA). CRA’s business
2
In their petition and at trial, petitioners contended that
Kathleen I. Zidar (Kathleen) had not been served with the notice
of deficiency. Although respondent addressed the issue in his
opening brief, petitioners have not mentioned the issue either in
their opening brief or in their reply brief, and we consider them
to have abandoned this contention. See Bradley v. Commissioner,
100 T.C. 367, 370 (1993). In any event, the contention is
without merit, as the record shows that respondent mailed the
notice of deficiency to Kathleen’s last known address, that
Kathleen received actual notice, and that she timely filed a
petition with the Court. Cf. Mulvania v. Commissioner, 81 T.C.
65 (1983); Freiling v. Commissioner, 81 T.C. 42 (1983); Judge v.
Commissioner, T.C. Memo. 1984-527.
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involved “mudjacking”, which Tony describes as “lifting concrete
back to its original position”.
About 1972, Tony’s brother, Robert Zidar (Robert), became
Tony’s partner, and they incorporated CRA as Concrete Raising
Corp. (CRC). Tony and Robert each owned an equal number of CRC
shares. The accounting firm of Conley, McDonald & Sprague
performed bookkeeping, record maintenance, and other accounting
services for CRC.
Tony and Robert also entered into several commercial real
estate joint ventures (the joint ventures), which generally
involved purchasing and renovating buildings for lease to
tenants. Tony and Robert financed these joint ventures partly by
using CRC’s financial clout to obtain loans.
CRC made advances to Tony and Robert for, among other
things, airplane tickets, furniture, personal expenses, and
expenses associated with the joint ventures. All shareholder
advances were required to be repaid, and CRC maintained
shareholder accounts for both Tony and Robert. An employee from
Conley, McDonald & Sprague regularly visited CRC to review and
record all shareholder advances in the appropriate accounts. CRC
issued Tony and Robert monthly, quarterly, and annual statements
showing the balances on their respective shareholder accounts.
As of October 1992, Tony’s outstanding balance on his CRC
shareholder account was $116,831.
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Tony and Robert had a stormy business relationship, giving
rise to numerous lawsuits between them. In 1986, litigation
arose between Tony and Robert over one share of CRC stock owned
by their mother.3 They eventually settled this dispute by
agreeing to split their mother’s share of stock equally. As part
of the settlement, Tony agreed to allow Robert, upon
notification, to buy at net book value Tony’s shares in CRC and
his interests in the joint ventures, or else to allow Robert to
cause CRC to redeem Tony’s shares.
On December 31, 1991, Robert sought to exercise his right to
buy out Tony’s interests in the joint ventures and to cause CRC
to redeem Tony’s shares. Litigation ensued between Tony and
Robert over, among other things, the value of Tony’s CRC shares.
After much legal wrangling, Tony and Robert agreed to hire an
independent accounting firm, Kolb Lauwasser, to calculate the
value of the shares. Based on its review, Kolb Lauwasser valued
Tony’s CRC shares at approximately $166,000.
In October 1992, Tony and Robert settled the lawsuit over
the joint venture buyout and stock redemption. Pursuant to the
settlement, Tony agreed to relinquish his interests in both CRC
and the joint ventures. In consideration of the CRC stock, Tony
3
Because Tony Zidar and Robert Zidar were equal
shareholders in Concrete Raising Corp. (CRC), ownership by either
Tony or Robert of the one share of CRC stock held by their mother
would give the owner a controlling interest in CRC.
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received $50,000 and forgiveness of his $116,831 indebtedness to
CRC.4
For 1992, CRC issued Tony a Form 1099-MISC, Miscellaneous
Income (the Form 1099), reporting a $166,831 payment.
Petitioners claim not to have received a copy of the Form 1099.
Tony’s Stock Car Activity
In the late 1960's, Tony became involved in automobile
racing, first by working on pit crews and later by participating
in stock car racing as a hobby. In the early 1980’s, he and
Robert purchased an automobile racetrack located in the city of
Oregon, Wisconsin, and ran it for a couple of years.
In 1991, Tony remortgaged his house for $50,000 to finance
construction of a stock car for asphalt automobile racing. His
goal was to have a stock car ready for racing in the American
Speed Association’s (ASA’s) 1992 racing season. During 1992,
Tony had a stock car (the stock car) built to ASA standards,
hiring an Illinois contractor to build a body for the Oldsmobile
chassis and a Wisconsin contractor to install the parts.
4
On their 1992 Federal income tax return, petitioners
reported a sale price of $800,000 for the joint ventures.
Petitioners reported the transaction as an installment sale,
showing that in 1992 they received $699,925 of the total $800,000
sale price and that they had realized $73,894 of capital gains in
1992 under the installment method. Respondent has raised no
issue regarding petitioners’ income tax reporting of Tony’s sale
of his interests in the joint ventures.
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Over 6 to 8 months in 1992, while the stock car was being
built, Tony spent approximately 100 to 300 hours on his stock car
activity. During the same period, he worked full-time for CRC,
never missing a day of work. In 1992, construction of the stock
car was completed. Tony garaged the car at his house. Although
he spoke with some potential drivers, none signed a contract to
drive the stock car for him.
To make a profit from his stock car activity, Tony needed to
obtain large sponsors. He could not rely on prize winnings to
make a profit, because drivers take a significant portion of any
prize winnings. In 1992, Tony was able to obtain no more than
$5,571 in sponsorships. After other sponsorships failed to
materialize, Tony decided to sell the stock car, without ever
having raced it. Tony advertised the stock car for sale in trade
magazines.
Hoping that a good showing in a race would make the stock
car more attractive to a purchaser, in the fall of 1992 Tony
entered it in a race at a Madison, North Carolina, speedway.
While the stock car was being driven around the speedway between
qualifying runs for the race, it collided with another race car
and was destroyed. Tony’s stock car was uninsured, and he did
not replace it.
Petitioners spent over $100,000 on the stock car activity.
Tony had no business plan for his stock car activity, nor did he
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speak with any consultants about how to operate a profitable
stock car business.
Petitioners’ Federal Income Tax Return
On their 1992 joint Federal income tax return, petitioners
reported a sale price of $159,100 for Tony’s CRC shares, basis in
the shares of $109,100, and net capital gain of $50,000. With
regard to Tony’s stock car activity, petitioners claimed on their
Schedule C, Profit or Loss From Business (Sole Proprietorship),
$5,571 in gross income and $71,692 in expenses, resulting in a
net loss of $66,121.5 Petitioners also reported wage income of
$51,931 from CRC.
John P. Hayes, Esq. (Hayes), prepared petitioners’ 1992
Federal income tax return.6 Either Tony or one of his agents
provided Hayes all the information that he used to prepare
petitioners’ tax return.
Respondent’s Examination and Determinations
While auditing petitioners’ 1992 Federal income tax return,
respondent’s agent contacted CRC’s accountants, Conley, McDonald
& Sprague, and requested supporting documentation for the
5
In 1991, which was the first year that petitioners treated
Tony’s stock car activity as a trade or business for Federal
income tax purposes, petitioners reported gross income from this
activity of $6,430 and losses of $57,135.
6
Although John P. Hayes, Esq., prepared petitioners’ 1992
Federal income tax return, he did not sign the return as the
“preparer”.
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$166,831 reported on the Form 1099 as income paid by CRC to Tony.
Conley, McDonald & Sprague provided the agent with summary sheets
(created by Conley, McDonald & Sprague from CRC’s records)
describing the manner in which the income reported on the Form
1099 was calculated. On the basis of this investigation,
respondent determined that, consistent with the information
reported on the Form 1099, CRC had redeemed Tony’s shares for
$166,831, representing a cash payment of $50,000 plus discharge
of all Tony’s obligations to CRC, totaling $116,831. Moreover,
respondent determined that petitioners had failed to substantiate
any basis in the CRC stock. Consequently, in the notice of
deficiency, respondent determined that petitioners must recognize
$166,831 of capital gain from Tony’s disposition of his CRC
shares and accordingly increased petitioners’ taxable income by
$116,831 ($166,831 less the $50,000 capital gain that petitioners
reported on their 1992 return).
In addition, respondent determined that Tony did not engage
in his stock car activity for profit. Respondent limited
petitioners’ claimed deductions from this activity to $5,571,
which was the gross income that petitioners reported therefrom.
OPINION
A. Capital Gain From Stock Redemption
The parties disagree as to whether petitioners recognized
$50,000 in capital gains from CRC’s redemption of Tony’s stock,
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as petitioners reported on their 1992 Federal income tax return,
or $166,831, as respondent determined in the notice of
deficiency. Resolution of this issue depends upon (1) the amount
petitioners realized from the stock redemption and (2) the amount
of petitioners’ basis, if any, in the stock. Cf. sec. 1001(a).
In their petition, petitioners make no reference to
respondent’s disallowance of petitioners’ claimed $109,100 basis
in the CRC shares, nor have petitioners addressed this
determination at trial or on brief. Petitioners have offered no
evidence to substantiate any basis in the CRC shares.
Consequently, we conclude that petitioners have conceded that
they had no basis in the CRC shares, and we confine our
consideration to the amount petitioners realized from the stock
redemption.
Respondent contends that, as reflected on the Form 1099,
CRC paid Tony $166,831 for his redeemed stock. At trial and on
brief, petitioners argue that the Form 1099 was erroneous and
that CRC paid Tony only $50,000 cash for his redeemed stock. In
making this argument, petitioners seem oblivious to the fact that
on their 1992 Federal income tax return, they reported the sale
price of the CRC stock as $159,100.
Relying on Portillo v. Commissioner, 932 F.2d 1128 (5th Cir.
1991), affg. in part and revg. in part T.C. Memo. 1990-68,
petitioners contend that respondent’s determination they received
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$166,831 for the stock redemption was based solely on the Form
1099 issued by CRC and therefore is entitled to no presumption of
correctness. Petitioners’ argument is without merit. This is
not a case where respondent determined a deficiency based solely
on an employer’s Form 1099. Rather, respondent’s agent
investigated the information that CRC reported on the Form 1099
and determined the extent to which it was supported by CRC’s
books and records, as summarized by CRC’s accountants. This
investigation provided a rational foundation for respondent’s
determination that petitioners received $166,831 for the
redemption of Tony’s CRC stock. The burden remains on
petitioners to rebut the presumption of correctness of
respondent’s determination. See Rule 142(a); Pittman v.
Commissioner, 100 F.3d 1308, 1316 (7th Cir. 1996), affg. T.C.
Memo. 1995-243.
In contending that Tony received only $50,000 cash for the
CRC stock redemption, petitioners maintain that CRC discharged no
indebtedness of Tony’s because Tony owed CRC nothing. Petitioners
contend that Tony received no advances from CRC and that Robert
altered CRC’s books to reflect Tony’s alleged corporate debt.
The evidence does not support petitioners’ contention, which, as
previously discussed, seems inconsistent with their reporting on
their 1992 Federal income tax return a $159,100 sale price for
the CRC stock. A former employee of Conley, McDonald & Sprague
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testified that she visited CRC once or twice a week, reviewed
CRC’s records, and recorded any shareholder advances taken by
Tony or Robert. Respondent placed in evidence summary sheets
prepared by Conley, McDonald & Sprague, which reflect the amounts
Tony owed on his shareholder account. These sheets indicate that
when Tony’s CRC shares were redeemed, Tony owed CRC $116,831.
Other than Tony’s bald insinuation of impropriety in CRC’s
record keeping, petitioners have given us no reason to doubt the
validity of Conley, McDonald & Sprague’s summary sheets. We
found Tony’s testimony to be vague, uncorroborated, and
conclusory in certain material respects. Under these
circumstances, we are not required to, and we do not, accept
Tony’s testimony. See Lerch v. Commissioner, 877 F.2d 624, 631-
632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986).
In sum, the evidence establishes that petitioners realized
$166,831 from Tony’s disposition of his CRC stock. Petitioners
have failed to establish any basis in the stock. Accordingly, we
conclude that they had a $166,831 capital gain from the stock
redemption, and we sustain respondent’s determination that
petitioners underreported their capital gains by $116,831.
B. Tony’s Stock Car Activity
Under section 183(b)(2), if an individual engages in an
activity not for profit, deductions relating thereto are
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allowable only to the extent gross income derived from the
activity exceeds deductions that would be allowable under section
183(b)(1) without regard to whether the activity constitutes a
for-profit activity. See Allen v. Commissioner, 72 T.C. 28, 32-
33 (1979).
The taxpayer bears the burden of establishing that his or
her activities were engaged in for profit. Rule 142(a). To
carry this burden, the taxpayer must show that he or she had a
“good faith expectation of profit”. Burger v. Commissioner, 809
F.2d 355, 358 (7th Cir. 1987), affg. T.C. Memo. 1985-523; see
Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without
opinion 702 F.2d 1205 (D.C. Cir. 1983). The taxpayer’s
expectation, however, need not be reasonable. Burger v.
Commissioner, supra; Golanty v. Commissioner, 72 T.C. 411, 425
(1979), affd. without published opinion 647 F.2d 170 (9th Cir.
1981); sec. 1.183-2(a), Income Tax Regs. Whether the taxpayer
has the requisite profit motive is a question of fact, to be
resolved on the basis of all relevant circumstances, with greater
weight being given to objective factors than to mere statements
of intent. Dreicer v. Commissioner, supra; Golanty v.
Commissioner, supra at 426.
The regulations under section 183 provide a nonexclusive
list of factors to be considered in determining whether an
activity is engaged in for profit. The factors include: (1) The
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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 the taxpayer expended in carrying on the activity;
(4) the expectation that assets used in the activity may
appreciate in value; (5) the taxpayer’s success in carrying on
other activities; (6) the taxpayer’s history of income or loss
with respect to the activity; (7) the amount of occasional
profits, if any, which are earned; (8) the taxpayer’s financial
status; and (9) whether elements of personal pleasure or
recreation are involved. Sec. 1.183-2(b), Income Tax Regs; see
Golanty v. Commissioner, supra.
As discussed below, on the basis of all the evidence in the
record, we conclude that Tony had no good faith expectation of
making a profit from the stock car activity.
1. Manner of Carrying on Activity
Tony kept no regular books and records of his stock car
activity. He had no business plan and made no predictions of
income or expenses. He carried no insurance on his stock car.
The record does not establish whether he had resources available
to repair or replace the stock car.
To turn a profit on his stock car activity, Tony needed
substantial funds from sponsors, since a significant share of any
prize winnings would go to the driver. Tony hoped to secure
large sponsorships. His testimony indicates that because he
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rubbed shoulders with corporate executives at the race track, he
thought he would be able to convince them to provide him
sponsorships. We are unpersuaded, however, that this was
anything more than a false hope. Large sponsorships never
materialized.
We conclude that this factor weighs heavily against
petitioners.7
2. Expertise of Taxpayer or Advisers
In analyzing profit motive, a distinction must be drawn
between expertise in the mechanics of an activity and expertise
in the business, economic, and scientific practices relating to
its conduct. See Burger v. Commissioner, supra at 359; cf. sec.
1.183-2(b)(2), Income Tax Regs. Although Tony had a longstanding
interest in car racing, read car-racing magazines, owned a
racetrack with Robert for a while, and had contacts with some
mechanics and drivers, the record does not establish that Tony
had any expertise in the economics or business of owning and
racing a stock car. There is no evidence that he studied
accepted business practices of stock car racers or consulted with
economic experts in the field.
This factor favors respondent.
7
On reply brief, petitioners concede that “Tony is weak
regarding this factor * * * Petitioners would admit that this
factor weighs against them.”
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3. Time and Effort Expended in Activity
Time and effort expended in carrying on an activity may be
indicative of profit motive, particularly in the absence of
substantial personal or recreational elements associated with the
activity. Sec. 1.183-2(b)(3), Income Tax Regs. During 1992,
Tony devoted 100 to 300 hours to his stock car activity. We
believe that this time expended is less indicative of a profit
motive than of Tony’s love of stock car racing.
A taxpayer’s withdrawal from another occupation to devote
most of his energies to the activity may evidence a profit
motive. Id. Tony testified that he reported to work at CRC
every day while conducting his stock car activity.
This factor favors respondent.
4. Expectation That Assets May Appreciate in Value
On reply brief, petitioners concede that they did not expect
Tony’s stock car to appreciate in value.
5. Taxpayer’s Success in Other Activities
If the taxpayer has engaged in similar activities in the
past and converted them from unprofitable to profitable
enterprises, this circumstance may indicate that the activity in
question was entered into for profit, even though it is presently
unprofitable. Sec. 1.183-2(b)(5), Income Tax Regs. Although
Tony had been involved with automobile racing since 1968, the
evidence does not indicate that his previous involvement was for
profit or profitable. Although Tony and Robert once owned a
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racetrack, the evidence does not show whether this was a
successful enterprise or explain why Tony quit it after a short
while.
We conclude that this factor is neutral.
6. History of Income or Losses From Activity
Tony never raced the stock car (apart from the ill-fated
qualifying round), received no cash prizes, and obtained only
minimal sponsorships. Petitioners spent, however, more than
$100,000 on the stock car. Given that Tony was unable to obtain
the sponsorships necessary to make the activity profitable, we
see no possibility that Tony could recoup his expenditures.
This factor favors respondent.
7. Amount of Occasional Profits Earned, if Any
The amount and frequency of occasional profits earned from
the activity may be indicative of a profit objective. Sec.
1.183-2(b)(7), Income Tax Regs. Apart from nominal sponsorships,
Tony’s stock car activity generated no positive cashflows, much
less profits. The “opportunity to earn a substantial ultimate
profit in a highly speculative venture is ordinarily sufficient
to indicate that the activity is engaged in for profit even
though losses or only occasional small profits are actually
generated.” Id. Although Tony’s activity was a “highly
speculative venture”, we are unpersuaded that he ever had an
opportunity to earn a substantial ultimate profit. Although Tony
presumably wanted to win races, “a desire to win prize money is
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not the equivalent of the actual and honest objective of earning
a profit.” Riddle v. Commissioner, T.C. Memo. 1994-133.
Moreover, Tony could not earn a substantial profit without
securing large sponsors, which he failed to do.
This factor favors respondent.
8. Taxpayer’s Financial Status
Substantial income from sources other than the activity may
indicate the lack of a profit motive, particularly if (1) losses
from the activity generate substantial tax benefits, and (2)
personal or recreational elements are involved. Sec. 1.183-
2(b)(8), Income Tax Regs.
Tony had substantial income from CRC and his commercial real
estate ventures. In 1992, Tony received $50,000 in cash
consideration of his interests in CRC and reported receiving
$699,925 from the sale of the joint ventures, as well as wage
income of $51,931 from CRC. As previously discussed, there were
strong personal and recreational elements to Tony’s stock car
activity.
This factor favors respondent.
9. Elements of Personal Pleasure
Elements of personal pleasure or recreation may signal the
absence of a profit motive. Sec. 1.183-2(b)(9), Income Tax Regs.
The evidence clearly shows that Tony enjoyed and obtained
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pleasure from his stock car activity. This factor favors
respondent.
Petitioners place great reliance on the case of Mills v.
United States, 699 F. Supp. 1245 (N.D. Ohio 1988), which held
that a taxpayer’s motorcycle racing activity qualified as a trade
or business. Unlike the taxpayer in Mills, however, Tony had no
separate bank account for his stock car activity, retained no
business and financial adviser to aid him in his racing
activities, participated in no special exhibitions to attract
financial sponsorship of large companies, and never actually
raced his vehicle (except in the ill-fated qualifying round).
On the basis of all the evidence, we conclude that
petitioners have failed to demonstrate that Tony entered into the
stock car activity with a good faith expectation of making a
profit. Accordingly, we sustain respondent’s determination on
this issue.
C. Accuracy-Related Penalty Pursuant to Section 6662(a)
Respondent determined that petitioners are liable for the
accuracy-related penalty under section 6662. Section 6662(a)
imposes a 20-percent penalty on any portion of an underpayment
that is attributable to, among other things, negligence or
disregard of the rules or regulations or any substantial
understatement of income tax. Negligence is the lack of due care
or failure to do what a reasonable and ordinarily prudent person
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would do under the same circumstances. Neely v. Commissioner, 85
T.C. 934 (1985).
No penalty shall be imposed under section 6662(a) with
respect to any portion of an underpayment if it is shown that
there was reasonable cause and that the taxpayer acted in good
faith. Sec. 6664(c). Whether a taxpayer acted with good faith
depends upon the facts and circumstances of each case. Sec.
1.6664-4(b)(1), Income Tax Regs. Reliance on the advice of a
professional tax adviser or return preparer constitutes
reasonable cause and is in good faith if the taxpayer
establishes, among other things, that the taxpayer provided the
adviser or return preparer with the necessary and accurate
information. Neonatology Associates P.A. v. Commissioner, 115
T.C. 43, 99 (2000). If the taxpayer fails to provide the adviser
or return preparer with the information necessary for preparing
the return, the taxpayer may be liable for the penalty. Johnson
v. Commissioner, 74 T.C. 89, 97 (1980), affd. 673 F.2d 262 (9th
Cir. 1982).
We have found that petitioners underreported their capital
gain on the redemption of Tony’s CRC stock by $116,831. They
have offered no explanation for the $159,100 sale price reported
on their 1992 Federal income tax return–-an amount less than the
$166,831 that CRC reported on the Form 1099–-or the $109,100
basis they claimed for the CRC stock. Petitioners claimed net
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losses of $66,121 from a stock car activity that from all
indications was predominantly for Tony’s pleasure and recreation.
Petitioners contend that no penalty should apply because
they relied upon Hayes to draft their 1992 Federal income tax
return. Petitioners failed to prove that they provided Hayes
with complete information for preparing their 1992 return.
In a letter to Tony dated March 7, 1994, Hayes noted that
all information used to prepare the return came from either Tony
or one of Tony’s agents. Although Tony received monthly,
quarterly, and annual statements reflecting the balance on his
CRC shareholder account, there is no evidence that petitioners
shared the information contained in these statements with Hayes.
In his March 7, 1994, letter, Hayes also stated that the
reported loss relating to Tony’s stock car activity “is large and
will probably be subject to audit. It was reported on your
return upon your assurance that the racing venture was entered
into with the purpose of obtaining a profit”. From this
disclaimer, it appears that Hayes was relying on petitioners’
judgment, rather than the other way around.
Petitioners have not established that they acted in good
faith and had reasonable cause in understating their capital
gains from the CRC stock redemption or in claiming the losses
relating to the stock car activity. We sustain respondent’s
determination on this issue.
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To reflect the foregoing,
Decision will be entered
for respondent.