T.C. Memo. 2002-310
UNITED STATES TAX COURT
JOYCE E. HASTINGS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6565-99. Filed December 23, 2002.
R determined a deficiency for P’s 1993 taxable
year. Using the bank deposits method, R reconstructed
P’s taxable income for 1993 and determined that P had
unreported income from her sole proprietorship.
P operated a horse activity in 1993. Over a
number of years, P incurred substantial losses in such
activity. In no year did the activity make a profit.
P deducted losses sustained in the horse activity. R
disallowed these deductions on the ground that the
horse activity was not engaged in for profit within the
meaning of sec. 183, I.R.C.
Held: P had unreported taxable income from her
sole proprietorship.
Held, further, based on all the facts and
circumstances, the horse activity was an activity not
engaged in for profit within the meaning of sec. 183,
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I.R.C., and P is not entitled to deduct the losses
therefrom.
Held, further, allowing for concessions, R’s
deficiency determination is upheld.
Held, further, P is liable for the sec.
6651(a)(1), I.R.C., addition to tax for failure timely
to file her 1993 income tax return.
Held, further, P is liable for the sec. 6662(a),
I.R.C., accuracy-related penalty.
Joyce E. Hastings, pro se.
Michael S. Hensley, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
NIMS, Judge: Respondent determined a Federal income tax
deficiency for petitioner’s 1993 taxable year of $22,053.
Respondent also determined an addition to tax of $5,485 pursuant
to section 6651(a)(1) and an accuracy-related penalty of $4,411
pursuant to section 6662(a).
After concessions, the issues remaining for decision are:
(1) Whether petitioner had unreported income from her sole
proprietorship, Joyce Hastings, Attorney at Law, as determined by
respondent, for the 1993 taxable year;
(2) whether petitioner's horse activity constituted an
activity not engaged in for profit within the meaning of section
183, for the 1993 taxable year;
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(3) whether petitioner is liable for the section 6651(a)(1)
addition to tax for failure timely to file an income tax return
for 1993; and
(4) whether petitioner is liable for the section 6662(a)
accuracy-related penalty for 1993.
Additional adjustments to petitioner's self-employment taxes
and deduction for self-employment taxes are computational in
nature and will be resolved by our holdings on the foregoing
issues.
Unless otherwise indicated, all section references are to
sections of 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.
FINDINGS OF FACT
I. General Background
Some of the facts have been stipulated and are so found.
The stipulations of the parties, with accompanying exhibits, are
incorporated herein by this reference. At trial, the parties
stipulated that, to the extent relevant, the facts contained in
Hastings v. Commissioner, T.C. Memo. 1999-167, may be
incorporated by reference in this proceeding. Where relevant,
the findings of fact in Hastings are incorporated herein by this
reference. At the time the petition was filed in this case,
petitioner resided in Julian, California.
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Petitioner did not timely file Form 1040, U.S. Individual
Income Tax Return, for taxable year 1993. Petitioner requested
an extension of time to file her 1993 Federal income tax return
and paid $300 therewith. Respondent extended the filing date for
petitioner's 1993 Federal income tax return from April 15, 1994
until August 15, 1994. On February 16, 1996, petitioner filed
her 1993 Federal income tax return. On December 17, 1997, the
IRS began its examination of petitioner's 1993 taxable year.
II. Unreported Income
During 1993, petitioner was an attorney, practicing as Joyce
Hastings, Attorney at Law. During 1993, petitioner deposited
amounts totaling $107,883.48 in her general business account.
The Schedule C, Profit or Loss From Business, attached to
petitioner’s 1993 Form 1040 reflected gross receipts of $55,442
from Joyce Hastings, Attorney at Law.
In the notice of deficiency, respondent determined that
petitioner failed to report $52,592 in gross receipts from her
law practice. Respondent subsequently conceded that deposits
totaling $6,100 were nontaxable transfers and that deposits
totaling $1,980 were pension and annuity income that petitioner
reported on her 1993 return. Respondent’s revised determination
is that petitioner had unreported taxable income of $44,361.48.
This amount is the result of subtracting petitioner’s reported
law practice gross receipts ($55,442) and the amount conceded by
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respondent ($8,080) from the total of petitioner’s deposits into
her general business account ($107,883.48).
III. Horse Activity
Petitioner has been involved with horses since she was 5
years old. She is familiar with training, breeding, and showing
horses.
In 1985, petitioner began to join saddlebred horse
associations and became more involved in horse-related activity.
From 1988 to 1996, petitioner belonged to 11 different
organizations related to her horse activity. Petitioner
maintained a library of books and video tapes concerning training
and breeding of horses and related subjects. From 1986 to 1989,
petitioner visited farriers and horse farms to determine ways to
generate income from horse activity. Based on advice she
received, petitioner decided to purchase and/or breed a stud
horse to generate revenue. Petitioner intended to show the
stallions, and any other horses of the same bloodline, as a means
of advertisement. Petitioner concluded that more income could be
generated from selling a stallion’s stud services than could be
generated from showing horses. Petitioner did not prepare any
profit projections prior to commencing her horse activity.
In 1989, petitioner began her horse activity by hiring a
well-qualified horse expert to acquire a horse on petitioner’s
behalf. The horse so acquired was Misty, a yearling saddlebred.
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In 1991, petitioner purchased Rey, a registered palomino. In
1993, petitioner purchased a broodmare, Jolly Berry, for $8,000;
another broodmare, Fairy Dust, for $3,800; a third broodmare,
Trigger Happy, for $2,200; and a yearling gelding, Defy, for
$1,100. Petitioner made efforts to advertise her horses at
shows, in magazines, and within various associations.
Petitioner maintained separate records for each horse. The
records for each horse contained information regarding pedigree,
pictures and information about the sire and dam, medical history,
pictures of the horse, breeding information, medical information,
insurance information, and training records. Petitioner also
maintained numerous horse activity files. These files contained
information and documents, including: Forms, horses for sale,
health tips, boarding and training information, equipment
information, horse-related articles, and association membership.
For the years 1989 through 1995, petitioner reported income
and expenses and claimed losses from her horse activity as
follows:
Year Income Expenses Losses
1989 -0- $7,025 $7,025
1990 $305 12,838 12,533
1991 -0- 12,994 12,994
1992 447 19,667 19,220
1993 10,402 21,531 11,129
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1994 -0- 26,876 26,876
1995 -0- 31,322 31,322
Totals $11,154 $132,253 $121,099
In 1993, petitioner received $9,774 for pasturing horses
owned by a third party and $627.50 from a horse show.
Petitioner did not maintain a separate bank account for her
horse activity. Petitioner marked an “H” on each check written
for a horse expenditure. Invoices or bills underlying each check
expenditure were kept separately for each horse and accumulated
and maintained on a monthly basis.
Petitioner maintains a trailer on the Julian, California,
property that serves as her residence when she is tending the
horses there.
OPINION
I. Unreported Income
The income of a sole proprietorship must be included in
calculating the income and tax liabilities of the individual
owning the business. Sec. 61(a)(2). The net profit or loss of
such a business is generally computed on Schedule C, Profit or
Loss From Business.
Taxpayers are required to maintain records sufficient to
establish the existence and amount of all items reported on the
tax return, including both income and deductions therefrom. Sec.
6001; sec. 1.6001-1(a), Income Tax Regs. In the absence of books
and records adequate to determine a taxpayer's proper tax
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liability, the Commissioner is authorized to reconstruct income
by any reasonable method which will clearly reflect income. Sec.
446(b); Commissioner v. Hansen, 360 U.S. 446, 467 (1959); Palmer
v. IRS, 116 F.3d 1309, 1312 (9th Cir. 1997); Petzoldt v.
Commissioner, 92 T.C. 661, 686-687 (1989).
As a general rule, in court proceedings arising in
connection with examinations commenced before July 23, 1998, the
Commissioner's deficiency determination is presumed correct, and
the taxpayer bears the burden of proof in such cases. Sec.
7491(a)(2); Omnibus Consolidated and Emergency Supplemental
Appropriations Act of 1999, Pub. L. 105-277, sec. 4002(b), 112
Stat. 2681-906; Rule 142(a). As previously stated, the
examination in this case began on December 17, 1997.
The Court of Appeals for the Ninth Circuit, to which appeal
in the instant case would normally lie, has indicated that before
the presumption of correctness will attach in an unreported
income case, the determination must be supported by at least a
minimal factual predicate or foundation of substantive evidence
linking the taxpayer to income-generating activity or to the
receipt of funds. Palmer v. IRS, supra at 1312; Rapp v.
Commissioner, 774 F.2d 932, 935 (9th Cir. 1985); see also
Petzoldt v. Commissioner, supra at 687-689.
Here, the record clearly links petitioner to an
income-generating activity. During 1993, petitioner was an
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attorney with an active law practice. On the Schedule C attached
to petitioner’s 1993 Form 1040, petitioner reported gross
receipts of $55,442 from her law practice. Petitioner's law
practice is an income-generating activity. Additionally, the
record clearly links petitioner to the receipt of funds.
Petitioner deposited amounts totaling $107,883.48 in her general
business account during 1993. Petitioner does not dispute
receiving these funds. Accordingly, respondent’s reconstruction
of petitioner’s income, to the extent it reveals unreported
income, is supported by the requisite factual predicate for
placing the burden to show otherwise upon petitioner.
Respondent reconstructed petitioner's 1993 income using the
bank deposits method. The use of the bank deposits method for
computing unreported income has long been sanctioned by the
courts. Clayton v. Commissioner, 102 T.C. 632, 645 (1994); DiLeo
v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d
Cir. 1992). Underlying this method is the principle that bank
deposits constitute prima facie evidence of income. Clayton v.
Commissioner, supra at 645; DiLeo v. Commissioner, supra at 868;
Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
A bank deposits analysis must generally encompass a totaling
of bank deposits, an elimination from such total of any amounts
derived from duplicative transfers or nontaxable sources of which
the Commissioner has knowledge, and a further reduction of the
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adjusted total by any deductible or offsetting expenditures of
which the Commissioner is aware. Clayton v. Commissioner, supra
at 645-646; DiLeo v. Commissioner, supra at 868. Using this
method, respondent initially determined that petitioner failed to
report $52,592 in gross receipts from her law practice. After
concessions, respondent’s revised determination is that
petitioner failed to report $44,361.48 in gross receipts from her
law practice. As previously indicated, the burden rests on
petitioner to show error in respondent's determination.
Petitioner does not challenge respondent’s approach or
methodology in reconstructing her income by means of the bank
deposits method. Petitioner does not dispute that she received
additional funds in the amounts determined by respondent.
Rather, petitioner contends that funds underlying the disputed
deposits totaling $44,361.48 were from a nontaxable source.
Petitioner claims that she received money throughout 1993 as
loans, transfers, and/or inheritance from her mother. Petitioner
claims that she recorded deposits made into her general business
account in a handwritten deposit ledger. Petitioner claims that
she recorded the date of the deposit, the deposit number, the
source of the funds deposited, and the amount of the deposit in
said deposit ledger at or near the time she made each deposit.
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Petitioner testified that deposits to her general business
account consisted solely of money received as fees from her law
practice and money received from her mother. Petitioner also
testified that, when she deposited money that she received from
her mother, she recorded the source of funds as a “loan from me
or a loan from my mother.” On brief, petitioner explained that
she used the term “loan” in her deposit ledger to “describe money
that did not originate as earnings” but rather “belonged to her
mother”.
Petitioner provided copies of canceled checks for amounts
totaling $6,100. These checks show that petitioner deposited
into her general business account amounts totaling $6,100 drawn
from her mother’s account. Based on these canceled checks,
respondent conceded that an amount totaling $6,100 constituted
nontaxable transfers into petitioner’s account. Other than
canceled checks for the amount conceded by respondent, petitioner
offered no credible evidence of loans, transfers, or inheritance
from her mother. We do not accept petitioner's self-serving
testimony and handwritten ledger with respect to additional
loans, transfers, or inheritance without corroborative evidence.
Petitioner failed to overcome the presumption of correctness of
respondent's determination of unreported taxable income.
Allowing for concessions made by respondent, we uphold
respondent's determination of unreported taxable income.
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II. Horse Activity
A. Statutory Framework
Section 183(a) provides the following general rule: “In the
case of an activity engaged in by an individual * * *, if such
activity is not engaged in for profit, no deduction attributable
to such activity shall be allowed under this chapter except as
provided in this section.” Section 183(b)(1) then goes on to
prescribe that, if an activity is not engaged in for profit, a
taxpayer may take those deductions which would be allowable
without regard to profit motive. Furthermore, if an activity is
not engaged in for profit, section 183(b)(2) permits the taxpayer
to claim those deductions which would be allowable “if such
activity were engaged in for profit, but only to the extent that
the gross income derived from such activity for the taxable year
exceeds the deductions allowable by reason of paragraph (1).” In
other words, because deductions for expenses related to an
activity not engaged in for profit are generally limited to the
amount of gross income from such activity, the practical effect
of section 183 is to preclude a taxpayer from deducting losses
incurred in such activity.
An “activity not engaged in for profit” is defined in
section 183(c) as “any activity other than one with respect to
which deductions are allowable for the taxable year under section
162 [trade or business expenses] or under paragraph (1) or (2) of
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section 212 [expenses incurred in the production of income].”
See also sec. 1.183-2(a), Income Tax Regs. Deductions are
allowable under these sections only if a taxpayer’s “primary
purpose and intention in engaging in the activity is to make a
profit.” Golanty v. Commissioner, 72 T.C. 411, 425 (1979), affd.
without published opinion 647 F.2d 170 (9th Cir. 1981). The
taxpayer’s expectation of a profit need not be reasonable, but
the taxpayer must possess an “‘actual and honest objective of
making a profit.’” Keanini v. Commissioner, 94 T.C. 41, 46
(1990)(quoting Dreicer v. Commissioner, 78 T.C. 642, 644-645
(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983)).
Conversely, no deductions are allowable under section 162 or 212
for “activities which are carried on primarily as a sport, hobby,
or for recreation.” Sec. 1.183-2(a), Income Tax Regs.
The taxpayer bears the burden of establishing the requisite
profit objective. Rule 142(a); Keanini v. Commissioner, supra at
46; Golanty v. Commissioner, supra at 426. Whether the requisite
profit objective exists is determined by considering all the
surrounding facts and circumstances. Keanini v. Commissioner,
supra at 46; sec. 1.183-2(b), Income Tax Regs. Greater weight is
accorded to objective facts and circumstances than to the
taxpayer’s mere statement of intent. Sec. 1.183-2(a), Income Tax
Regs.
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A nonexclusive list of factors set forth in section 1.183-
2(b), Income Tax Regs., guides section 183 analysis by indicating
relevant facts and circumstances for consideration: (1) Manner
in which the 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) expectation that
assets used in 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.
B. Application of the Statutory Framework
1. Manner in which the taxpayer carries on the
activity.
Petitioner claims to have drafted a business plan in 1993.
As evidence of this business plan, petitioner submitted a
business plan from a later year with the date “1993” handwritten
on the cover sheet. Petitioner testified that she deleted
portions of the submitted plan identifying two horses that did
not exist in 1993. She testified that the submitted plan, from
the beginning up to the identification of the horses, was exactly
what was written in 1993. Upon evaluation of the submitted plan,
it is clear that petitioner’s testimony that the same language
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present in the submitted plan was also present in 1993 is false.
Even the beginning sections of the submitted business plan
contain language that could not have been present in 1993. For
example, on page three in a section entitled “SUMMARY OF
SADDLEBRED INDUSTRY”, the submitted business plan references the
lineage of petitioner’s horse “Princess”. Princess was not born
until 1994. The Court is not convinced that any portion of this
submitted business plan was drafted before or during 1993. It is
therefore doubtful that petitioner had any business plan in 1993.
Other than her claim to have drafted a business plan,
petitioner does not claim to have made any changes during 1993
from the manner in which she maintained books and records for the
years at issue in Hastings v. Commissioner, T.C. Memo. 1999-167,
where we held that petitioner’s horse activity was not engaged in
for profit.
Petitioner’s attempts to improve profitability through
changes in operating methods and techniques can only be termed
minimal. While attempting to enter into a deal to breed one of
her horses with Andalusians, petitioner pastured Andalusians
owned by a third party, thus producing gross receipts of $9,774.
Compared to petitioner’s reported gross receipts of only $752
from horse activity for the years 1989 to 1992, these pasturing
receipts were substantial. Despite this potential for income,
petitioner declined to continue pasturing horses after the
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attempted breeding deal did not materialize as planned. As in
prior years, petitioner made no attempt to cut her overhead or
losses by ridding herself of unproductive horses or limiting her
acquisitions to horses that furthered a profit-making objective.
Rather, in 1993, petitioner purchased three broodmares and a
gelding even though these horses could not produce stud fees.
Based on the above considerations, petitioner did not
operate her horse activity in a businesslike manner in 1993.
This factor fails to indicate a profit objective.
2. The expertise of the taxpayer or his advisers.
In considering this factor, the focus is upon expertise and
preparation with regard to the economic aspects of the particular
activity, and failure to possess or obtain expertise in this area
will not be excused by study of other aspects of the activity or
by general business acumen. See, e.g., Golanty v. Commissioner,
72 T.C. at 432.
Petitioner is bereft of the requisite economic expertise.
Although petitioner consulted experts on how to generate income
from horse activities before she began her horse activity, she
does not claim to have consulted with any economic or financial
experts during her operations, even when faced with mounting
losses. This factor does not indicate a profit objective.
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3. The time and effort expended by the taxpayer in
carrying on the activity.
Respondent argues that petitioner could not have devoted
enough time and effort to the horse activity to make it
profitable in 1993. As support for this claim, respondent relies
on the facts that petitioner maintained her law practice in
Huntington Beach, California, during the entire 1993 taxable year
and that the driving distance from petitioner’s home in
Huntington Beach, California, to the location of her horse
activity in Julian, California, is approximately 120 miles. From
these facts, respondent argues that petitioner would only have
been able to devote any substantial time and effort to her horse
activity on an occasional weekend or holiday. Petitioner claims,
however, to have spent a significant amount of time conducting
her horse activity in 1993. She claims that until June 1993, she
spent 4 days per week conducting horse activity in Julian,
California. Petitioner also claims that, starting at the end of
June 1993, she spent 6 days per week conducting horse activity in
Julian, California. Petitioner also testified that she purchased
a trailer in 1993, presumably to serve as her residence while
conducting horse activity in Julian, California. Petitioner also
claims that she began to scale back her law practice during 1993
due to her age, the health of her mother, and the increase in her
horse activity. Petitioner offered no corroborating evidence to
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support any of these claims. The time she claims to have spent
conducting her horse activity is not inconsistent with the amount
of time one might expect from someone conducting a horse activity
as a hobby during the process of retirement. This factor is
neutral in the determination of whether petitioner had a profit
objective.
4. Expectation that assets used in activity may
appreciate in value.
Petitioner provided no evidence as to the value of her
horses in 1993 nor any evidence showing that her horses were
expected to appreciate in value. Petitioner claimed that Defy,
the gelding she purchased in 1993, would have been worth
approximately $20,000 if he had “hit”. Petitioner introduced no
evidence to support this assertion. Petitioner eventually sold
Defy for his acquisition price. Defy did not appreciate in
value, and petitioner did not recoup any money she spent for his
upkeep. This factor does not support petitioner’s claim of
profit objective.
5. The success of the taxpayer in carrying on other
similar or dissimilar activities.
Petitioner is an attorney, with an active and profitable law
practice, Joyce Hastings, Attorney at Law. Petitioner’s law
practice is not similar to her horse activity. Petitioner’s
experiences in law practice simply do not translate meaningfully
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into her horse activity. This factor is neutral as to whether
petitioner had the requisite profit objective in conducting her
horse activity.
6. The taxpayer’s history of income or losses with
respect to the activity.
Petitioner’s horse activity did not generate a profit during
any of the years from the inception of her horse activity through
the year in issue. We have previously held that the startup
phase of an American saddlebred horse breeding activity is 5 to
10 years. Engdahl v. Commissioner, 72 T.C. 659, 669 (1979). The
year in issue falls within this startup phase. Petitioner
reported increasing losses from 1989 to 1995. During that
period, 1993 was the only year in which petitioner’s losses
declined from the previous year. This decline was the result of
petitioner’s earning pasturing income of $9,774 and horse show
income of $627.50. Without the pasturing income, petitioner’s
losses would have increased in 1993 from the previous year, as
was the general pattern for petitioner’s horse activity. From
1989 to 1995, petitioner reported losses in excess of $100,000.
In spite of these losses, petitioner never considered abandoning
the activity. Petitioner has not demonstrated that future horse
activity income will be sufficient to generate an overall profit
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for her horse activity. Since petitioner’s horse activity was in
the startup phase for the year in issue, this factor is neutral
as to whether petitioner had a profit objective.
7. The amount of occasional profits, if any, which are
earned.
As indicated above, petitioner has earned no profits from
her horse activity, so this factor does not support a profit
objective.
8. The financial status of the taxpayer.
Petitioner used the losses from the horse activity to reduce
her taxable income by offsetting income from her law practice.
Petitioner claims to have been in the process of reducing the
size of her law practice during 1993. Due to her underreporting
of income from the law practice, as discussed above, it is
unclear whether petitioner actually reduced the size of her law
practice in 1993. Petitioner reported income from her law
practice that was almost completely offset by losses claimed from
the horse activity. This factor does not indicate a profit
objective.
9. Elements of personal pleasure or recreation.
Petitioner derived substantial personal pleasure from her
horse activity. We have no doubt that petitioner worked hard in
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the horse activity. Even a hobby, however, can require
considerable work. With regard to a profit objective, this
factor is neutral.
In summary, the circumstances of this case, when considered
within the framework of the nine factors above, indicate that
petitioner did not possess the requisite intent to profit from
her horse activity. Petitioner therefore is subject to the
restrictions set forth in section 183 and improperly deducted
losses from her horse activity.
III. Section 6651(a)(1) Addition to Tax
Respondent determined that petitioner is liable for an
addition to tax under section 6651(a)(1) for failure timely to
file her 1993 Federal income tax return. Section 6651(a)(1)
provides for an addition to tax of 5 percent of the tax required
to be shown on the return for each month or fraction thereof for
which there is a failure to file, the aggregate not to exceed 25
percent. In order to avoid the imposition of the addition to
tax, the taxpayer bears the burden of proving that the failure
did not result from willful neglect and that the failure was due
to reasonable cause. Sec. 6651(a)(1); United States v. Boyle,
469 U.S. 241, 245 (1985).
Respondent extended the due date for petitioner’s 1993
Federal income tax return from April 15 to August 15, 1994.
Petitioner filed her 1993 income tax return on February 16, 1996.
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Petitioner has not offered any explanation for her delinquency.
Petitioner has engaged in a lengthy and consistent pattern of
failing timely to file income tax returns. See Hastings v.
Commissioner, T.C. Memo. 1999-167. We therefore hold that
petitioner is liable for the section 6651(a)(1) addition to tax
for the 1993 taxable year.
IV. Section 6662(a) Accuracy-Related Penalty
Respondent determined that petitioner is liable for the
accuracy-related penalty under section 6662(a) for 1993.
Subsection (a) of section 6662 imposes a penalty in an amount
equal to 20 percent of the portion of any underpayment of tax
attributable to causes specified in subsection (b). Subsection
(b) of section 6662 then provides that among the causes
justifying imposition of the penalty are: (1) Negligence or
disregard of rules or regulations and (2) any substantial
understatement of tax.
“Negligence” is “any failure to make a reasonable attempt to
comply with the provisions of this title”, and “disregard” is
“any careless, reckless, or intentional disregard.” Sec.
6662(c). An understatement is equal to the excess of the amount
of tax required to be shown on the return less the amount of tax
shown on the return. Sec. 6662(d)(2)(A). In the case of an
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individual, an understatement is substantial if it exceeds the
greater of 10 percent of the tax required to be shown on the
return or $5,000. Sec. 6662(d)(1)(A).
An understatement is reduced to the extent attributable to
an item: (1) For which there existed substantial authority for
the taxpayer’s treatment thereof, or (2) with respect to which
relevant facts were adequately disclosed in the return or in a
statement attached thereto and there existed a reasonable basis
for the taxpayer’s treatment of the item. Sec. 6662(d)(2)(B).
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment if it is shown that there
was reasonable cause for such portion of the underpayment and
that the taxpayer acted in good faith with respect to such
portion. Sec. 6664(c)(1); Jelle v. Commissioner, 116 T.C. 63, 72
(2001). In general, the determination of whether a taxpayer
acted with reasonable cause and in good faith depends upon the
pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income
Tax Regs. The crucial factor is the extent of the taxpayer's
effort to assess the proper tax liability. Id.
Petitioner bears the burden of proving that respondent's
determination is erroneous. Rule 142(a); Jelle v. Commissioner,
supra at 72.
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Petitioner has offered no explanation or argument on this
issue. Petitioner has engaged in a lengthy and consistent
pattern of underreporting income and of claiming deductions for
losses sustained in an activity not engaged in for profit. See
Hastings v. Commissioner, supra. We therefore hold that
petitioner is liable for the section 6662(a) accuracy-related
penalty for the 1993 taxable year.
To reflect the foregoing and respondent’s concessions,
Decision will be entered
under Rule 155.