BROWN v. COMMISSIONER

T.C. Summary Opinion 2001-184

UNITED STATES TAX COURT

HUGH T. BROWN, JR., AND KRISTI L. BROWN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 225-01S. Filed December 12, 2001.

Kelly Abreu, for petitioners.

James J. Posedel, for respondent.

WOLFE, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the years in issue. The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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Respondent determined deficiencies of $2,509 and $2,085 in

petitioners’ Federal income taxes for 1996 and 1997,

respectively. The issues for decision are: (1) Whether

petitioners’ gold mining activity was an activity engaged in for

profit during 1996 and 1997 within the meaning of section 183,

and (2) whether petitioners are entitled to deductions claimed on

Schedules C, Profit or Loss From Business, for expenditures

relating to their gold mining activity during 1996 and 1997.

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

The stipulations of facts and the attached exhibits are

incorporated herein by this reference. Petitioners resided in

Redlands, California, when the petition was filed.

Background

During the years in issue, Hugh T. Brown, Jr. (petitioner),

worked as a civilian employee for the U.S. Army Corps of

Engineers. His wife, petitioner Kristi L. Brown (Mrs. Brown),

was not employed outside the home during this time and listed her

occupation as “student” on joint Federal income tax returns for

the years in issue. Petitioners’ three children were,

respectively, 16, 20, and 21 years of age at the time of trial

(September 13, 2001).

Petitioner’s education after high school consisted of 2

years of junior college courses. Petitioner served 4 years in

the U.S. Army, and he was discharged in 1971. Between 1971 and
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1987, petitioner worked as a field engineer for three different

mining companies and frequently worked in underground tunnels and

shafts. In 1988, petitioner started his own business, K.L. Brown

Construction (Brown Construction), which provided general field

engineering services to the mining industry, and also installed

street utilities. During its 4-year existence, Brown

Construction employed as many as 25 people at a time. Most of

Brown Construction’s clients were general prime contractors

engaged in industrial mining of sand, gravel, and limestone

through both above-ground surface mining and underground tunnel

mining shafts.

In the early 1990s, petitioner became interested in gold

mining. His previous mining experience did not involve gold.

Through his research about the gold mining industry, petitioner

learned that many gold mining operations were discontinued during

World War II because of the war effort and remained abandoned

after the war. Many of these mines were located in the deserts

of southern California. Petitioner researched the production

rates of some of the abandoned mines. He concluded that with the

modern technology now available and the higher price of gold

since removal of the artificial $32 per ounce price ceiling, by

minimizing labor costs, a small enterprise might be able to

operate some of the abandoned prewar mines profitably.
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In 1994, petitioner, who lived with his family in West

Virginia, accepted a job in California with his current employer,

the U.S. Army Corps of Engineers. Petitioner accepted the job in

part because of its proximity to many of the abandoned gold mines

that he had learned about in his research. Petitioner hoped that

his gold mining would eventually become so successful that he

would not have to depend on an employer. He moved with his

family to California in 1994, and he began mining for gold in

1995.

Petitioner devoted a substantial amount of time to his gold

mining activity. Each week during the years in issue he worked

four 10-hour days for the U.S. Army Corp of Engineers and devoted

the remaining 3 days of the week to gold mining. Typically, on

Thursday evening he would pack his equipment into his truck and

travel that night to a mining site in the desert as much as 150

miles from his home. Petitioner then would spend the next 3 days

mining for gold during the day and camping by himself at the

mining site at night. He returned home on Sunday afternoons.

Generally, no one from his family accompanied him on these trips.

Because his mining activity frequently led him to remote

locations inaccessible by road, petitioner devised and

constructed equipment small enough to permit him to transport it

on foot for considerable distances. It was lightweight portable

equipment that was a miniaturized version of more mainstream
 - 5 -

equipment. The machinery was operated by a small motorcycle

battery and could be collapsed and put into a backpack. It cost

petitioner about $1,000 to purchase the parts and peripheral

devices.

Petitioners’ revenue from gold mining activity during the

years in issue came from two sources: (1) The sale of the gold

itself at various trade shows that petitioner attended once or

twice each year, and (2) the fees petitioner charged to people

who occasionally accompanied him on guided tours on his weekend

mining expeditions. Each source produced about half the total

revenue of the gold mining activity during the years in issue.

In 1997, petitioner discontinued conducting guided tours of

abandoned mines because of the inherent danger of gold mining and

his potential liability if someone were to be injured. From that

point on, in petitioner’s words, he “zeroed in * * * on the

mining and prospecting venture.”

Petitioners filed joint Federal income tax returns for the

years in issue. With each tax return, they attached a Schedule C

for their gold mining activity, which they called Brown

Enterprises. On the Schedules C, they reported the following:

Income 1996 1997
Gross receipts $350 $525
Less: cost of goods sold 124 125
Gross income 226 400

Expenses
Advertising $143 $260
Car and truck expenses 3,574 5,011
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Depreciation and sec. 179 3,901 2,422
Interest 317 -0-
Legal and professional services 500 100
Office expense 591 893
Repairs and maintenance 565 177
Supplies 1,940 1,230
Travel -0- 220
Meals and entertainment [50%] 604 424
Utilities 788 1,024
Other expenses1 2,296 2,515
2
Total expenses 15,219 14,276

Total net losses (14,993) (213,876)
1
The “Other expenses” claimed for 1996 were:

Cont. ed., books, and journals $692
Dues and subscriptions 72
Licenses and permits 145
Promotional items 487
Telephone 737
Uniforms and laundry 163

The “Other expenses” claimed for 1997 were:

Dues and publications $285
Miscellaneous 50
Parking 22
Postage, etc. 445
Printing 66
Tools 560
Sales and marketing 665
Promotional efforts 422
2
Petitioners actually reported total expenses of
$14,296 and total net losses of $13,896, and the slight
mathematical errors have been corrected.

Respondent concedes that petitioners incurred and paid all

of the expenses listed on their Schedules C for Brown Enterprises

during the years in issue.

Respondent disallowed the Schedule C losses on the ground

that petitioners did not establish that their mining activity
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constituted a bona fide business venture entered into for profit

under section 183 and also because respondent did not concede

that the undisputed expenditures were deductible business

expenses.

Discussion

Section 183(a) provides that if an activity engaged in by an

individual is not engaged in for profit, no deduction

attributable to such activity shall be allowed, except as

provided in section 183(b). In the case of an activity not

engaged in for profit, section 183(b)(1) allows a deduction for

expenses that are otherwise deductible without regard to whether

the activity is engaged in for profit. Section 183(b)(2) allows

a deduction for expenses that would be deductible only if the

activity were engaged in for profit, but only to the extent that

the total gross income derived from the activity exceeds the

deductions allowed by section 183(b)(1).

An “activity not engaged in for profit” is any activity for

which deductions are not allowable under section 162 or under

paragraph (1) or (2) of section 212. Sec. 183(c). The profit

motive required by section 183 is the same as the profit motive

required by sections 162 and 212. See Antonides v. Commissioner,

893 F.2d 656, 659 (4th Cir. 1990), affg. 91 T.C. 686 (1988); sec.

1.183-2(a), Income Tax Regs.
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To deduct expenses of an activity under either section 162

or 212 (and thus avoid the limitations of section 183) a taxpayer

must show that he or she engaged in or carried on the activity

with an actual and honest objective of making a profit.

Antonides v. Commissioner, supra; Ronnen v. Commissioner, 90 T.C.

74, 91 (1988); Fuchs v. Commissioner, 83 T.C. 79, 97-98 (1984);

Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without

opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income

Tax Regs. Although a reasonable expectation of profit is not

required, the taxpayer’s profit objective must be bona fide.

Hulter v. Commissioner, 91 T.C. 371, 393 (1988); Beck v.

Commissioner, 85 T.C. 557, 569 (1985); sec. 1.183-2(a), Income

Tax Regs. Whether a taxpayer has a bona fide profit objective is

a question of fact to be resolved from all the surrounding facts

and circumstances. Golanty v. Commissioner, 72 T.C. 411, 426

(1979), affd. without published opinion 647 F.2d 170 (9th Cir.

1981); 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), affd. 792 F.2d

1256 (4th Cir. 1986); sec. 1.183-2(a), Income Tax Regs.

Section 1.183-2(b), Income Tax Regs., sets forth a

nonexclusive list of factors which should normally be taken into

account in determining whether the taxpayer has the requisite

profit objective. The factors are: (1) The manner in which the
 - 9 -

taxpayer carries on the activity; (2) the expertise of the

taxpayer or his 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 activities; (6) the taxpayer’s history of income or

losses with respect to the activity; (7) the amount of occasional

profits, if any, which are earned; (8) the financial status of

the taxpayer; and (9) elements of personal pleasure or

recreation.

No single factor, nor the existence of even a majority of

the factors, is controlling, but rather it is an evaluation of

all the facts and circumstances in the case, taken as a whole,

which is determinative. Keanini v. Commissioner, 94 T.C. 41, 47

(1990); sec. 1.183-2(b), Income Tax Regs. These factors are not

all applicable or appropriate for every case. Abramson v.

Commissioner, 86 T.C. 360, 371 (1986). In making our evaluation

of the foregoing factors, we may consider evidence from years

subsequent to the years in issue “to the extent it may create

inferences regarding the existence of a profit motive in the

earlier years.” Hillman v. Commissioner, T.C. Memo. 1999-255

(citing Hoyle v. Commissioner, T.C. Memo. 1994-592 and Smith v.

Commissioner, T.C. Memo. 1993-140).
 - 10 -

Petitioner argues that he had an actual and honest objective

to realize a profit from his mining activity during the years at

issue, so his deductions with respect to his mining activity

should not be limited by section 183. Respondent contends that

an analysis of the relevant objective factors reveals that

petitioner lacked a bona fide objective to make a profit.

Applying the Factors

1. The Manner in Which Petitioner Conducted the Activity

The fact that a taxpayer carries on the activity in a

businesslike manner and maintains complete and accurate books and

records may indicate that the activity is engaged in for profit.

Sec. 1.183-2(b)(1), Income Tax Regs. Generally, if the activity

in question is carried on in a manner substantially similar to

other activities of the same nature that are profitable, a profit

motive may be indicated. See Sullivan v. Commissioner, T.C.

Memo. 1998-367, affd. without published opinion 202 F.3d 264 (5th

Cir. 1999); sec. 1.183-2(b)(1), Income Tax Regs. Gold mining and

other similar speculative activities are different from most

other business activities because they generally produce no

significant income until a find is made, and then the income is

earned in one lump sum. In Harrison v. Commissioner, T.C. Memo.

1996-509, we found that a taxpayer’s contemporaneous handwritten

lists of expenses were sufficient records for his gold mining and
 - 11 -

treasure salvaging activity for purposes of section 183.1 There,

after noting that the taxpayer’s record keeping “left something

to be desired”, we said:

The treasure hunting activity was different from
petitioner’s other businesses. Different record
keeping methods are therefore expected, and lack of
record keeping 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. * * * [Id.]

Here, as in the Harrison case, petitioner kept no formal set

of books and records for his gold mining and prospecting

activity. He did not maintain a general ledger or a spreadsheet.

No financial statements ever were prepared, except a balance

sheet prepared for petitioner’s meeting with an IRS Appeals

officer. Petitioner did have a business plan, but it was written

in December 2000, long after the years in issue. Petitioner did

not maintain a separate bank account for his gold mining

activity.

Petitioner’s record keeping consisted of the maintenance of

separate folders for his expenses. As he incurred each expense,

he put the receipt in the appropriate folder.

1
The Court treated the taxpayer’s gold mining and treasure
salvaging operations as one activity for purposes of sec. 183.
 - 12 -

The nonbusinesslike manner in which petitioner carried on

his business would normally weigh against him in the

determination of whether he had a bona fide profit objective.

However, as in the Harrison case, because of the speculative

nature of petitioner’s business, we view the manner in which he

carried on his business as a neutral factor.

2. The Expertise of Petitioner or His Advisers

Preparation for the activity by extensive study of its

accepted business, economic, and scientific practices or

consultation with people who are expert in these practices may

indicate a profit objective where the taxpayer carries on the

activity in accordance with such practices. Sec. 1.183-2(b)(2),

Income Tax Regs.

Before he started his gold mining activity, petitioner had

more than 20 years of work experience in the mining and quarrying

industry. Although petitioner had never mined specifically for

gold, he had considerable knowledge of the mining process in

general. In the early 1990s, petitioner began reading

prospecting books and became interested in gold mining.

Petitioner researched the history of abandoned gold mines in

California, analyzing their production rates at the time they

were abandoned. Petitioner sought advice from local dealers of

gold mining equipment. He also built his own lightweight
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portable mining device that allowed him to travel long distances

on foot to remote mining locations in the desert.

Petitioner relied on both his own expertise about mining in

general and his research concerning gold mining specifically.

Petitioner did not seek professional advice on the business and

economic aspects of gold mining. We view his failure to seek

such professional advice before commencing his gold mining

activity as counterbalancing his significant experience in mining

in general. We, therefore, conclude that this factor is neutral.

3. Petitioner’s Time and Effort Devoted to the Activity

The fact that a taxpayer devotes much of his personal time

and effort to carrying on an activity may indicate an intention

to derive a profit, particularly if the activity does not have

substantial personal or recreational aspects. See Daley v.

Commissioner, T.C. Memo. 1996-259; sec. 1.183-2(b)(3), Income Tax

Regs. A taxpayer’s withdrawal from another occupation to devote

most of his energies to the activity may be evidence that the

activity was engaged in for profit. Sec. 1.183-2(b)(3), Income

Tax Regs.

Both parties agree that petitioner devoted a significant

amount of time and effort to his gold mining activity. During

the years in issue, petitioner compressed a 40-hour workweek

schedule into 4 days. Because of this arrangement of his

employment, he was able to spend 3 consecutive days each week
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mining for gold. Almost every weekend during the years in issue,

petitioner would leave his home on Thursday evening and drive up

to 150 miles into the desert area of southern California to mine

for gold.

This factor favors petitioners’ position.

4. The Expectation That Assets Used in the Activity
May Appreciate in Value

The term “profit” encompasses revenue from operations and

appreciation in the value of assets, such as land. Sec. 1.183-

2(b)(4), Income Tax Regs. Petitioner did not own any gold-

bearing land or any mining claims, and his equipment could only

depreciate. Some equipment such as ropes and other climbing

apparatus required frequent replacement for safety reasons. In

the absence of any property with substantial appreciation

potential, we do not consider this factor significant.

5. Petitioner’s Success in Other Entrepreneurial Activities

The fact that a taxpayer has engaged in similar activities

in the past and converted them from unprofitable to profitable

enterprises may indicate that the taxpayer is engaged in the

present activity for a profit, even though the activity is

presently unprofitable. Sec. 1.183-2(b)(5), Income Tax Regs.

After being employed as a field engineer by several

companies over a 17-year period, petitioner started his own

business, Brown Construction, in 1988. Brown Construction

provided general field engineering services to the mining
 - 15 -

industry and also installed street utilities. In 1991,

petitioner terminated Brown Construction and obtained employment

as a field engineer at another company. Petitioner attributed

the short life of his business to the weak economy of the early

1990s. In 1995, petitioner started a second activity, Brown

Enterprises, the gold mining activity at issue.

Petitioner’s unsuccessful business experience is not

particularly helpful to us in determining whether petitioner

engaged in gold mining for profit. The two activities were

fundamentally different. Brown Construction provided consulting

services to the mining industry and the installation of utilities

in streets, employing at any given time up to 25 people. Brown

Enterprises, on the other hand, had no employees; its entire

operation consisted of petitioner’s prospecting for gold in the

desert. We conclude that this factor is neutral or slightly

negative for petitioners, since petitioner’s sole venture in

business for himself, although very different from the gold

mining activity, was not a success.

6. Petitioners’ History of Income or Loss From the
Activity

A series of losses during the initial or startup stage of an

activity may not necessarily be an indication that the activity

is not engaged in for profit. However, where losses continue to

be sustained beyond the period which customarily is necessary to

bring the operation to profitable status, such continued losses,
 - 16 -

if not explainable as due to customary business risks or

reverses, may indicate that the activity is not being engaged in

for profit. Sec. 1.183-2(b)(6), Income Tax Regs. Under section

1.183-2(b)(6), Income Tax Regs., there is less concern over

losses in the initial stages of an activity. A greater concern

arises when unexplained losses have continued for an extended

period. See Allen v. Commissioner, 72 T.C. 28, 34 (1979).

Here, petitioners’ losses from their gold mining activity

steadily decreased each year until 2000, when petitioners

reported their first profit from Brown Enterprises. The

profit/loss history of Brown Enterprises is summarized as

follows:

Year Profit/(Loss)
1995 ($20,339)
1996 (14,993)
1997 (13,896)
1998 (5,056)
1999 (2,681)
2000 203

The only tax returns of petitioners that were submitted into the

record were for 1996 and 1997, and detailed financial information

about other years is not available on this record. Consequently,

the cause of petitioners’ diminishing losses, whether it be

increased revenue or cost-cutting measures, or both, is unclear.

Regardless of the cause, petitioners’ progress from substantial

losses to modest profitability is significant.

This factor favors petitioners.
 - 17 -

7. The Amount of Occasional Profits Generated by the
Activity

The amount of profits earned in relation to the amount of

losses incurred, the amount of the investment, and the value of

the assets in use may indicate a profit objective. Sec. 1.183-

2(b)(7), Income Tax Regs. An 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.

In this case, petitioners’ losses from Brown Enterprises in

comparison with its revenues during the years in issue are

substantial. For 1996 and 1997, petitioners reported total

expenses of $15,219 and $14,276, respectively, and gross income

of $226 and $400, respectively.

We have recognized in prior cases that a gold mining

enterprise is speculative and may take years to realize a profit,

but that it also presents an opportunity to earn substantial

profits. See Tinnell v. Commissioner, T.C. Memo. 2001-106. The

record in this case shows that petitioner entered upon his mining

activity with the hope that by operating on a very small scale he

could minimize expenses and achieve modest profitability. He

also anticipated that if he found any significant amount of gold,

he would file a claim and sell it to a mining company for

development. Petitioner entered this activity with the belief
 - 18 -

that if a significant amount of gold were found, the return would

be so great that any past accumulated expenses would be recouped

and a substantial profit would be realized. See sec. 1.183-2(a),

Income Tax Regs. (“it may be found that an investor in a wildcat

oil well who incurs very substantial expenditures is in the

venture for profit even though the expectation of a profit might

be considered unreasonable.”)

The possibility of a speculative profit becomes less

speculative when a taxpayer shows he actually realized a profit

in years subsequent to those at issue. See Hillman v.

Commissioner, T.C. Memo. 1999-255; Hoyle v. Commissioner, T.C.

Memo. 1994-592. Here, petitioner’s efforts to bring his gold

mining activity to profitability were succeeding; his net losses

from Brown Enterprises decreased each year until 2000, when he

reported a small profit. His uninterrupted path to profitability

supports the conclusion that he had a bona fide profit objective

during the years in issue.

8. Petitioners’ Financial Status

The fact that the taxpayer does not have substantial income

or capital from sources other than the activity in question may

indicate that the activity is engaged in for profit. Sec. 1.183-

2(b)(8), Income Tax Regs. Substantial income from sources other

than the activity (particularly if the losses from the activity

generate substantial tax benefits) may indicate a lack of profit
 - 19 -

objective, especially if there are personal or recreational

elements involved.

The Browns are not wealthy people. During the years in

issue, petitioner reported wages of $34,689 and $42,811,

respectively, while Mrs. Brown did not work for compensation.

Their only source of income was petitioner’s wages. Although

petitioners were able to offset the full amount of the losses

from their gold mining activity against Mr. Brown’s wages, the

resulting tax benefits to petitioners were not very substantial.

This activity was not a tax shelter. This factor favors

petitioners.

9. Elements of Personal Pleasure or Recreation

The presence of personal or recreational elements in

carrying on an activity may indicate that the activity is not

engaged in for profit. On the other hand, a profit objective may

be indicated where an activity lacks any appeal other than

profit. Sec. 1.183-2(b)(9), Income Tax Regs.

At trial, no significant testimony or evidence was presented

about any personal pleasure or recreational aspects of gold

mining that petitioner may have enjoyed. Nearly every week

during the years in issue, petitioner sacrificed his entire

weekend with his family to travel alone into the deserts of

southern California to mine for gold. Family members rarely

accompanied him. Also, the risks of injury petitioner faced on
 - 20 -

his mining expeditions were substantial. In a recent

consideration of mining for gold and precious metals in the

southwestern United States, this Court found that such gold

mining is “an extremely laborious activity that requires

substantial time, energy, and financial support. Mining also

entails numerous health risks, including heat prostration in the

summer months, silicosis, and cyanide poisoning.” Tinnell v.

Commissioner, supra. In light of the hardships and serious

dangers involved, we are convinced that any personal pleasure or

recreational aspects that petitioner might have enjoyed while

mining for gold were secondary. Moreover, some component of

personal pleasure does not negate a bona fide profit objective.

“[A] business will not be turned into a hobby merely because the

owner finds it pleasurable; suffering has never been made a

prerequisite to deductibility. ‘Success in business is largely

obtained by pleasurable interest therein.’” Jackson v.

Commissioner, 59 T.C. 312, 317 (1972) (quoting Wilson v. Eisner,

282 F. 38, 42 (2d Cir. 1922)); see also sec. 1.183-2(b)(9),

Income Tax Regs. This factor favors petitioners’ position.

Conclusion

In this case we are satisfied that, despite the substantial

losses over an extended period, during the years in issue

petitioners had a bona fide profit objective. This conclusion is

far from unique. See Engdahl v. Commissioner, 72 T.C. 659 (1979)
 - 21 -

(net losses in 12 of 12 years); Allen v. Commissioner, 72 T.C. 28

(1979) (net losses in 12 of 12 years); Hoyle v. Commissioner,

T.C. Memo. 1994-592 (net losses in 16 of 16 years). Gold mining,

especially, is an activity in which sustained losses are not

unusual. See Tinnell v. Commissioner, supra (finding the

requisite profit objective in gold mining activity although the

taxpayer had no income from mining during the first 9 years of

the activity and losses in 11 of the subsequent 11 years). Here

petitioner has made a major commitment of his time, energy, and

resources in hopes of locating a valuable mining claim on

property that was mined and abandoned long ago. He goes

prospecting in the inhospitable desert of southern California 3

days out of 7, month after month, and leaves his family behind.

To be able to do this he works 10-hour days, 4 days each week.

He has studied mining, in which he already had a background, and

has devised lightweight equipment that enables him to venture

beyond where vehicles can go. Periodically he peddles gold

nuggets at fairs. Petitioner seeks, and in our judgment

sincerely hopes to find and establish, a claim that is rich

enough to sell to a mining company for exploitation. He seeks

royalties from such exploitation.

We would not voluntarily endure the privations petitioner

endures or spend our time and resources as he has. We doubt that

his business plan is reasonable. But on this record and after
 - 22 -

listening to petitioner’s testimony, we are convinced that he had

an actual and honest objective of making a profit from his gold

mining activity. The evidence in this case simply does not

support any other conclusion. We hold that petitioners’ gold

mining activity during the years in issue was an activity engaged

in for profit within the meaning of section 183.

The parties have stipulated that petitioners actually

expended the amounts claimed as deductions on Schedules C of

their 1996 and 1997 tax returns. Respondent disputes whether the

amounts in question were expended for the claimed purposes.

Petitioner testified that he expended the funds in the amounts

and for the purposes listed on the tax returns. Respondent

cross-examined him without noticeable success. We consider

petitioner’s testimony on this subject credible. The deductions

claimed are reasonable. We sustain petitioners on this issue of

substantiation.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

for petitioners.