PERRY v. COMMISSIONER

T.C. Summary Opinion 2003-68

UNITED STATES TAX COURT

JAMES A. AND CORLIS L. PERRY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4321-01S. Filed June 5, 2003.

James A. Perry, pro se.

Emile L. Hebert III, for respondent.

PAJAK, 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, section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure. The decision to be

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

should not be cited as authority.
 - 2 -

Respondent determined a deficiency of $7,608 and an

accuracy-related penalty of $1,548 in petitioners’ 1998 Federal

income tax. After concessions by both parties, this Court must

decide: (1) Whether petitioner James A. Perry (petitioner) was

engaged in an activity as a tutor for profit; (2) whether

petitioner was engaged in an activity as an editor for profit;

and (3) whether petitioners are liable for the accuracy-related

penalty under section 6662(a).

Some of the facts in this case have been stipulated and are

so found. Petitioners resided in New Orleans, Louisiana, at the

time they filed their petition.

Petitioners timely filed their joint 1998 Federal income tax

return. Attached to the 1998 return were Forms W-2, Wage and Tax

Statement, issued to petitioner. One Form W-2 issued to

petitioner from Black Collegiate Services, Inc. (Collegiate

Services), reported “wages, tips, other compensation” of $30,532

and Federal income tax withheld of $1,575. Another Form W-2

issued to petitioner from Southern Baptist Convention William

Carey College (Carey College) reported “wages, tips, other

compensation” of $4,200 and Federal income tax withheld of $17

(all amounts are rounded). Both of the amounts reported as wages

on these Forms W-2 issued to petitioner were reported as gross

receipts on the Schedules C, Profit or Loss From Business,

discussed below.
 - 3 -

On one Schedule C, petitioner was listed as the alleged

“Notary and Text Editor” (editor Schedule C). On this Schedule

C, petitioner reported gross receipts of $30,532 and claimed

total deductions, as follows:

Car and truck 4,000
Depreciation 2,000
Mortgage interest 500
Legal and professional services 50
Office 1,200
Repairs and maintenance 1,400
Supplies 250
Taxes and licenses 27
Travel 390
Utilities 200
Total deductions: $10,017

The $30,532 of gross receipts reported on this Schedule C

consisted solely of the amount of wages reported on the Form W-2

issued by Collegiate Services.

On another Schedule C, petitioner was listed as an “Adjunct

Faculty Tutor” (tutor Schedule C). On this Schedule C,

petitioner reported gross receipts of $4,200 and claimed

depreciation and supplies expense deductions of $500 and $700,

respectively. The $4,200 of gross receipts reported on this

Schedule C consisted solely of the amount of wages reported on

the Form W-2 issued by Carey College.

Respondent disregarded petitioner’s activities as not

engaged in for profit and disallowed the claimed Schedule C

deductions. Although there are several legal theories under

which petitioner’s deductions could be questioned, the Court has
 - 4 -

addressed the issue as couched by respondent and decided it on

that basis.

Section 162(a) allows deductions for ordinary and necessary

expenses paid or incurred in carrying on a trade or business.

Generally, no deduction is allowed for personal, living, or

family expenses. Sec. 262.

Section 183(a) disallows any deduction attributable to

activities not engaged in for profit except as provided under

section 183(b). Section 183(b)(1) allows those deductions which

otherwise are allowable regardless of profit objective. Section

183(b)(2) allows those deductions which would be allowable if the

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

gross income attributable to the activity exceeds the deductions

permitted by section 183(b)(1). Section 183(c) defines “activity

not engaged in for profit” as “any activity other than one with

respect to which deductions are allowable for the taxable year

under section 162 or under paragraph (1) or (2) of section 212.”

The basic standard for determining whether an expense is

deductible under sections 162 and 212 (and thus not subject to

the limitations of section 183) is the following: 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. Ronnen

v. Commissioner, 90 T.C. 74, 91 (1988); Dreicer v. Commissioner,

78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205
 - 5 -

(D.C. Cir. 1983). While a taxpayer need not have a reasonable

expectation of profit, the facts and circumstances must

demonstrate that he or she entered into the activity, or

continued the activity, with the actual and honest objective of

making a profit. Taube v. Commissioner, 88 T.C. 464, 478 (1987);

Dreicer v. Commissioner, supra at 645. The taxpayer’s objective

to make a profit must be analyzed by looking at all the

surrounding facts. Dreicer v. Commissioner, supra at 645. These

facts are given greater weight than the taxpayer’s mere statement

of intent. Id.

The regulations provide a nonexclusive list of relevant

factors which should be considered in determining whether the

taxpayer has the requisite profit objective. The factors are:

(1) The manner in which the taxpayer carries on the activity; (2)

the expertise of the taxpayer or 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) any elements indicating

personal pleasure or recreation. Sec. 1.183-2(b), Income Tax

Regs. These factors are not applicable or appropriate in every

case. Abramson v. Commissioner, 86 T.C. 360, 371 (1986). The
 - 6 -

facts and circumstances of the case in issue remain the primary

test. Id.

In determining whether petitioner was engaged as a tutor and

as an editor with the requisite intent to make a profit, all of

the facts and circumstances of his situation must be taken into

account. Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd.

without published opinion 647 F.2d 170 (9th Cir. 1981); sec.

1.183-2(a) and (b), Income Tax Regs. No single factor is

controlling, nor is the existence of a majority of factors

favoring or disfavoring a profit objective necessarily

controlling. Hendricks v. Commissioner, 32 F.3d 94, 98 (4th Cir.
1994), affg. T.C. Memo. 1993-396; sec. 1.183-2(b), Income Tax

Regs.

Petitioner generally bears the burden of proof with respect

to this determination. Rule 142(a); Golanty v. Commissioner,

supra at 426; McCarthy v. Commissioner, T.C. Memo. 2000-135.

Petitioner does not argue the applicability of section 7491(a),

and the record reflects that section 7491(a) does not apply.

Petitioner contends that he was engaged for profit as both a

tutor and an editor.

Petitioner’s deductions with respect to each of the alleged

activities consisted of unsubstantiated and unwarranted

deductions and personal expenses. For example, petitioner used

the Schedules C to claim inflated deductions for expenses, such

as mortgage interest on petitioners’ personal residence.
 - 7 -

Petitioner actually paid $3,399 in interest on his home mortgage.

On Schedule A, petitioner admittedly claimed a deduction of

$4,902 for home mortgage interest. On the editor Schedule C,

petitioner admittedly deducted another $500 for home mortgage

interest. These unwarranted deductions amount to a deduction for

home mortgage interest of $2,003 more than petitioner was

entitled to deduct. Petitioner also deducted car and truck

expenses of $4,000 on the editor Schedule C which related to

three personal vehicles used by petitioner to commute to his job

with Collegiate Services. In addition, petitioner deducted a

payment to repair one of his personal automobiles. Thus,

petitioner’s use of the Schedules C allowed him to claim

deductions for many nondeductible personal expenses and greater

deductions than were otherwise allowable.

With respect to petitioner’s purported Schedule C

activities, petitioner has not proved that he was engaged in

either activity with a profit objective. Petitioner did not

carry on either activity in a businesslike fashion. With respect

to both activities, petitioner had no books, records, or business

plans. Petitioner’s gross income for his tutor Schedule C and

his editor Schedule C consisted solely of wages he received in

his capacity as an employee of Collegiate Services and Carey

College, respectively. Petitioner had no gross receipts with

respect to either activity. Petitioner deducted personal

expenses nondeductible under section 262 on his Schedules C.

Petitioner claimed unwarranted deductions for home mortgage
 - 8 -

interest. Upon a review of the facts in the record, we conclude

that petitioner did not engage in activities as a tutor and as an

editor with an actual and honest objective of making a profit.

We hold that under section 183 petitioner is not entitled to the

claimed Schedules C deductions in issue and we sustain

respondent’s determinations.

Section 6662(a) 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 provides that among the causes justifying imposition of the

penalty is any substantial understatement of tax. An

understatement is equal to the excess of the amount of tax

required to be shown on the return over the amount of tax shown

on the return. Sec. 6662(d)(2)(A). In the case of an

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
 - 9 -

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). 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.

Respondent has met his burden of production and petitioners bear

the burden of proving that the reasonable cause exception is

applicable. Sec. 7491(c); Rule 142(a); Higbee v. Commissioner,

116 T.C. 438, 446-447 (2001); Jelle v. Commissioner, 116 T.C. 63,

72 (2001).

Petitioners have offered no discussion or argument with

respect to this issue. Based on the facts before us, we conclude

that petitioners had no reasonable cause for treating the alleged

tutor activity and the alleged editor activity as activities

engaged in for a profit. Petitioner claimed unwarranted

deductions. Accordingly, we sustain respondent’s determination

that petitioners are liable for the accuracy-related penalty

under section 6662(a).
 - 10 -

To the extent that we have not addressed any of the parties’

arguments, we have considered them and conclude they are

irrelevant or without merit.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.