T.C. Summary Opinion 2007-56
UNITED STATES TAX COURT
MICHAEL D. AND SUZAN L. STORER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16243-05S. Filed April 12, 2007.
Michael D. and Suzan L. Storer, pro sese.
Edward L. Walter, for respondent.
GOLDBERG, 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. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case. Unless otherwise indicated, subsequent
section references are to the Internal Revenue Code in
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effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
Respondent determined deficiencies in and penalties to
petitioners’ Federal income taxes as follows:
Penalty
Year Deficiency Sec. 6662(a)
2000 $4,487 $898
2001 $2,832 $567
The issues for decision are whether petitioners’ photography
activity constituted an activity not engaged in for profit within
the meaning of section 183 during the years at issue and whether
petitioners are liable for the accuracy-related penalties
provided by section 6662 for the years at issue.
Background
The stipulation of facts and the attached exhibits are
incorporated herein by reference. At the time the petition was
filed, petitioners resided in Miamisburg, Ohio.
During the years in issue, petitioners were both employed in
full-time jobs. Petitioner-husband (Mr. Storer) worked as a
repairman for General Motors, Inc., and petitioner-wife (Mrs.
Storer) worked as a receptionist and bookkeeper for Harding ESE,
Inc. Petitioners earned total wages of $92,639 and $96,191,
respectively, during the years in issue.
Mr. Storer developed an affinity for photography as a young
person. However, he first started habitually taking and
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developing his own photographs sometime in the early 1990s on his
physician’s advice that he take up a hobby to help him cope with
periodic episodes of depression. At that time, Mr. Storer, who
holds a high school diploma, was working in the repair shop at
General Motors.
Mr. Storer purchased many books on photography and film
developing, as well as photography magazines, some film cameras,
and film developing equipment. Mr. Storer had not taken any
instruction in photography prior to and including the taxable
years at issue. Mr. Storer did not have his skills as a
photographer or the quality of his photographs analyzed or
critiqued, or have his work juried, prior to or during the years
at issue.
While he continued to take and develop his own pictures, Mr.
Storer became interested in photographic restoration, and he
purchased the equipment and supplies necessary to restore old
photographs. Sometime in the early 1990s, Mr. Storer first
offered photographic restoration services to family members,
friends, and co-workers. Around this time, he decided to try
selling some framed landscape photographs he had taken and
developed from earlier trips to landmarks such as Yosemite
National Park. Around this time, petitioners set up a makeshift
photography studio and darkroom in the basement of their home.
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Starting in the early 1990s, Mrs. Storer assisted her
husband with his photographic pursuits by recording his expenses
in journals. With an educational background in accounting from
the local community college, Mrs. Storer recorded these expenses
using the cash basis method of accounting. Mrs. Storer has also
prepared State tax documents, including sales tax reports.
In 1993, petitioners engaged a management consultant to
assist them in preparing a 5-year projection for turning their
photography activity into a business. The management consultant
provided petitioners with a series of flexible budgets and
projections spanning through 2002. The management company based
its projections on the assumption that by the year 2000,
petitioners would have $21,200 in gross sales, and that by 2002,
petitioners would have $21,500 in gross sales.
Prior to 1993, Mr. Storer had purchased a large amount of
“analog” photography and darkroom equipment for the studio and
darkroom in the basement of petitioners’ home. Between 1993 and
2002, petitioners began to replace their “analog” equipment with
new digital cameras, printers, scanners, and the supplies for
printing digital photographs; namely, paper and ink cartridges.
Petitioners completely dismantled their basement studio and
darkroom in the early 2000s. Upon dismantling their basement
studio, petitioners set up a “digital darkroom” consisting of a
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large table, desk, computer, and bureau in a spare room adjacent
to their bedroom.
From 1998 through the years in issue, Mr. Storer suffered a
series of health setbacks requiring him to take off substantial
time from his job at General Motors.
Petitioners maintained neither a separate bank account for
their photography activities nor a separate phone line for
customers. Although petitioners had purchased a separate
insurance policy for their cameras and developing equipment in
the early 1990s, they combined this policy into their homeowners’
insurance in 1999.
In 2001, petitioners made 14 sales transactions. These
sales were made to friends and Mr. Storer’s co-workers at General
Motors.1 The nature of petitioners’ sales in 2002 is unknown.
In preparation for trial, petitioner prepared a portfolio of
photography brochures, listing prices, and packages. None of the
materials contained in the portfolio were created in or used as
marketing during the years in issue. This portfolio included
examples of the types of landscape photographs that Mr. Storer
had taken from such places as Yosemite National Park, North
Dakota, Washington, Puerto Vallarta, Aruba, and San Juan. The
1
Petitioners provided a summary of their 2001 invoices.
This 3-page summary lists 7 of the 14 buyers by first name only
as: “Jim; Hall; Steve; Al @ GM; Gary @ GM; ‘Lady’ @ GM; Bob @
GM.”
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portfolio also included wedding photographs and photographs of
individuals and pets, some of which are dated from the late 1970s
and early 1980s, and none of which were taken during the taxable
years in issue. Petitioners attached a business card to the
portfolio which reads: “Michael Storer Photographs, 1150 E.
Lindsey Ave., Miamisburg, Ohio 45342, Photo Restorations & More.”
The address and phone number listed on petitioners’ card are
those of their personal residence.
Beginning with their 1993 Federal income tax return,
petitioners included the photography activity on Schedules C,
Profit or Loss From Business, of their returns.
Petitioners reported gross receipts and claimed losses from
a 7-year period of the photography activity from 1996 through
2002, while maintaining full-time employment, as follows:
Year Gross Receipts Total Expenses Profit or/(Loss)
1996 $1,060 $14,402 ($13,342)
1997 316 13,375 (13,059)
1998 435 20,439 (20,004)
1999 1,366 15,027 (13,661)
2000 1,474 21,421 (19,947)
2001 855 16,050 (15,195)
2002 1,575 9,586 (8,011)
Totals $7,081 $110,300 ($103,219)
For the years in issue, petitioners claimed the following
deductions on their Schedules C:
Item 2000 2001
Advertising $153 $98
Car and truck 112 202
Depreciation 13,350 8,215
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Legal and 265 285
professional
Office2 0 0
Rent or lease 0 0
Repairs and 0 0
maintenance
Supplies 1,039 1,383
Taxes and 0 0
licenses
Travel 0 0
Utilities 0 25
Other 154 103
Expenses for business 6,348 5,739
use of home
Total expenses $21,421 $16,050
In the notice of deficiency, respondent disallowed
petitioners’ claimed Schedule C deductions for expenses on the
ground that petitioners were not engaged in a trade or business
activity for profit. However, respondent allowed as additional
itemized deductions real estate taxes and mortgage interest
included in the computation of expenses of business use of home.
In addition, respondent allowed Schedule C expenses to the extent
of income reported from the activity.
Discussion
The parties disagree as to whether petitioners engaged in
their Schedule C activity with an objective of making a profit
within the meaning of section 183. Section 183(a) disallows
2
On their Schedules A, Itemized Deductions, petitioners
claimed that 44 percent of their home was used as office space.
They did not, however, upon request, allow respondent’s agent
into their home to survey this space, claiming that such a visit
would be “unnecessary and unwise.”
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deductions attributable to an activity not engaged in for profit.
Section 183(b) provides two exceptions to this general rule. The
first, provided by section 183(b)(1), permits deductions that
otherwise would be allowable without regard to whether the
activity is engaged in for profit; the second, provided by
section 183(b)(2), permits deductions that would be allowable if
the activity were engaged in for profit to the extent that the
gross income from the activity exceeds the deductions allowable
pursuant to section 183(b)(1). Section 183(c) defines an
“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.” In general, the Commissioner’s determination set
forth in the notice of deficiency is presumed correct. Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). In
certain circumstances the burden of proof shifts to respondent.
Sec. 7491(a)(1). Petitioners do not contend that section 7491 is
applicable in this case, nor did they establish that the burden
of proof should shift to respondent.
Petitioners bear the burden of establishing that their
photographic activity was engaged in for profit during the
taxable years at issue. Rule 142(a). In satisfying this burden,
taxpayers must show that they had an actual and honest objective
of making a profit from the activity. Dreicer v. Commissioner,
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78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205
(D.C. Cir. 1983). The taxpayers’ expectation, however, need not
be a reasonable one. Id. at 644-645; 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
there is present the requisite intention of engaging in an
activity with the objective of making a profit is a question of
fact that is to be resolved upon a consideration of all relevant
circumstances, with the greatest weight being given to the facts
rather than the taxpayers’ expression of their intent. Dreicer
v. Commissioner, supra at 645; Golanty v. Commissioner, supra at
426; sec. 1.183-2(a) and (b), Income Tax Regs. Therefore,
irrespective of how ardently petitioners have stressed that they
always intended to make a profit from their photography activity,
whether or not their activity rose to a level that satisfies
their burden rests upon a consideration of all of the relevant
factors concerning their activity during the taxable years at
issue.
Section 1.183-2(b), Income Tax Regs., sets forth the
following nonexclusive list of the relevant facts that we will
now consider: (1) The manner is which the taxpayers carry on the
activity; (2) the expertise of the taxpayers or their advisers;
(3) the time and effort expended by the taxpayers in carrying on
the activity; (4) the expectation that the assets used in the
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activity may appreciate in value; (5) the success of the
taxpayers in carrying on similar or dissimilar activities; (6)
the taxpayers’ history of income or loss with respect to the
activity; (7) the amount of occasional profits; (8) the financial
status of the taxpayers; and (9) whether elements of pleasure or
recreation are involved. Golanty v. Commissioner, supra at 426;
sec. 1.183-2(b), Income Tax Regs.
Based on our consideration of these factors and in the light
of the copious record in this case, we conclude that petitioners
have not demonstrated that their photographic activity was
carried on with an actual and honest objective of making a profit
in the taxable years at issue. In reaching our conclusion, we
view the following elements as being most persuasive:
Manner in Which the Taxpayers Carried On the Activity
We believe that the manner in which petitioners carried on
their photography activity does not support a finding that it was
engaged in for profit. In 2001, petitioners only made 14 sales
and of these, at least one-half were made to buyers identified on
petitioners’ records by first name only. Several other entries
were identified by only the buyer’s first name plus the words “at
GM.”
Petitioners testified that the 14 sales in 2001 were not
reflective of their manner of operations because they “actually
solicited to hundreds of potential customers” at various craft
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and art shows during the years at issue. We note, however, that
in a detailed calendar for 2001, which was submitted as an
exhibit and on which petitioners testified that they recorded all
of the time spent on training, marketing, and sales, there is not
one entry of any craft or arts show. There are also no entries
showing preparation for any craft or arts shows.
Although petitioners reported sales of $855 in 2001, there
is no evidence that petitioners actually made any sales in 2001
or to whom these sales were made.
Petitioners did not use a separate bank account or telephone
number for their activity, and the insurance held on all of their
photography equipment was incorporated into their homeowner’s
policy.
Mr. Storer testified that, as one example of the “highly
professional nature in which he carried on his business,” he only
used business cards printed by a commercial printer rather than
the type printed on an ink-jet printer “with those little
perforations on the sides.” Upon examination of the two business
cards provided by petitioners with their exhibits, however, it is
clear that the cards have both the visible dot-matrix quality
akin to those printed on an ink-jet printer as well as perforated
edges.
Although petitioners kept very extensive and detailed
records of their expenses, we believe that these records were
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maintained solely for the purpose of substantiating their
considerable losses and not as a means for tracking costs so as
to reduce business-related expenses. The extensiveness of the
records would be more meaningful if these records illustrated
that petitioners were tracking expenses while, at the same time,
making a bona fide effort to grow their photography enterprise.
These records primarily show us that petitioners were adept at
acquiring the latest digital photography technology and supplies.
What is conspicuously missing, however, is a same level of
extensive detail showing expenses and activities specifically
geared at growing the business. For example, petitioners spent
thousands of dollars on digital cameras and supplies, yet
believed that it was unnecessary to spend more than $250 (which
included a $95 ad placed in the back of the local high school
yearbook) on the basic staples of marketing a business such as
advertisements, a listing in the yellow pages, or brochures.
Although petitioners submitted an extensive portfolio of flyers
as an exhibit, they admitted that the portfolio was not created
until shortly before time of trial. Petitioners continually cite
activities such as additional sales made in storefronts, which
purportedly occurred in 2003 and 2004. Not only did petitioners
not provide any evidence of these activities, but these years are
not in issue. The Court is concerned only with petitioners’
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activities in 2000 and 2001, and not with what petitioners have
or have not done in subsequent years.
Time and Effort Expended by the Taxpayers
The numbers of hours spent cultivating his activity, as
testified to by Mr. Storer, is not only dubious but, if accurate,
is grossly inverse to the sales resulting from his efforts. Mr.
Storer claimed that he spent nearly 1,200 hours working on his
activity in 2001, in addition to his full-time position at
General Motors. If this claim was accurate, Mr. Storer would
have had to spend an average of more than 3 hours a day,3 every
day, on his photography, in addition to his full-time work,
commuting to and from his workplace, and eating and sleeping. As
evidence of his daily activities, Mr. Storer submitted as an
exhibit a pocket calendar for 2001 in which he purportedly
handwrote the time he spent on his photography activity each day.
Our examination of this calendar has led us to conclude that
petitioners’ claims as to the time spent on the activity are not
accurate.
First, we believe neither that the calendar was made
contemporaneous to the dates as recorded nor that it was an
accurate accounting of petitioners’ time. For support of this
conclusion, we look to several instances where the calendar
contains entries for dates that simply do not exist.
3
(1,200/365 = 3.29 hours)
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Specifically, the first week of September (beginning with
Saturday, September 1st), has entries starting on Tuesday of that
week (which would have actually been Tuesday, August 28th). The
entry for “Wednesday” of this ‘added’ week reads: “In Focus Bk -
3 hrs.” To reconcile the possibility that this “added” day was
not the same as the corresponding last Wednesday in August, we
turned to the entry for Wednesday, August 28th which reads:
“Exposure Bk - 4 hrs.” We further note additional “added” days
and entries to the first week of the November calendar page that
do not correspond to the actual days and entries recorded on the
October calendar.4 Because there is more than one instance of
these “added” days, we do not believe that the calendar is an
accurate and truthful account of the time spent by petitioners in
cultivation of a business.
Mr. Storer stressed that he did not take any vacation, and
that “for religious reasons” observed neither any religious nor
Federal holidays, which allowed him those days to work on his
photography. Mr. Storer testified that he “used [all holidays]
to market his business, process orders, and make sales.” The
2001 calendar, however, shows no activity recorded on April 15
4
On the November calendar page petitioners “inserted” 2
days at the beginning of the month, a Tuesday and a Wednesday,
that did not actually exist. Again, the entries recorded on
these “added” days also do not correspond with the entries listed
for the last 2 days of October.
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(Easter), May 28 (Memorial Day), September 3 (Labor Day), or
November 22 (Thanksgiving Day).
Our examination of the entire year’s worth of daily entries,
moreover, shows that almost 80 percent of Mr. Storer’s time was
spent either reading the monthly installments of a limited number
of photography magazines5 and books or shopping at retail stores.
Finally, were we to believe that the entries accurately
reflect the time petitioners spent cultivating photography into a
viable business, the time spent is grossly inverse to the actual
sales made in the years at issue.
The Taxpayers’ History of Losses and Financial Status
First, since 1996, petitioners’ claimed Schedule C business
losses have exceeded $13,000 in each year, while their gross
receipts from that same time never exceeded $1,600. Petitioners
have never earned a profit.
Petitioners cite our decision in Churchman v. Commissioner,
68 T.C. 696, 701 (1977), to support their contention that the
years of losses which preceded the years in issue should not
dictate our determination of whether their activity in 2000 and
2001 was conducted with the objective of making a profit. As
further support, petitioners argue that their losses were offset
5
For example, in January 2001, petitioner spent 14 hours
reading “Shutterbug” magazine, 8 hours reading “Outdoor
Photography” magazine, and 8 hours shopping at Circuit City and
CompUSA.
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in the years in issue because they sold a considerable portion of
their “analog” equipment while upgrading to newer, digital
technology. Petitioners claim that their losses are further
justified by the difficult economic conditions which plagued
large “analog” photography businesses, such as Eastman-Kodak, as
more consumers switched from “analog” to digital photography.
We do not find credence in petitioners’ arguments. First,
petitioners do not claim to be engaged in the business of selling
photography equipment but, rather, taking photographs. Second,
although we acknowledge the phenomenal growth in digital
photography throughout the past decade, petitioners were not in
the business of developing other people’s photographs.
Petitioners purported to be professional photographers. The
effect of the digital photography boom on businesses such as
Eastman-Kodak resulted from consumers’ choosing to develop their
photographs at home rather than use traditional film developing
services. It did not affect the demand for quality professional
photography services for the very types of portraiture and event
coverage which petitioners claimed was their focus; namely,
weddings, corporate prints, and senior portraits. Similarly, the
boom in home developing did not affect the specialized services
that are often the hallmark of professional photographers, such
as portrait sittings, albums, restorations, DVDs, and videos.
Again, while the phenomenon of digital photography has made home
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developing more accessible to amateur consumers, this newfound
ability for recreational “photogs” to take and develop their own
pictures has not changed the demand for quality, professional
photography. If anything, the availability of high-quality
digital cameras has made the consumer more astute regarding both
resolution and composition aesthetic when selecting a
professional photographer. To this end, had petitioners invested
more resources into education and training or sought professional
evaluation of their skills, we would be more convinced that their
activity was engaged in with the objective of making a profit.
Petitioners argue that the income they earned in their
respective full-time jobs in 2000 and 2001 is irrelevant because
petitioners could not use their wages to pay for any of their
photography-related expenses but instead, used credit and gifts
from friends and family. Petitioners claim that their wages were
almost completely exhausted by their household bills, mortgage,
and taxes. With expenses totaling $23,000 in the years in issue,
we are doubtful that petitioners did not apply any of their wages
to this amount. Moreover, we note that, if petitioners indeed
incurred debt of $23,000, the fact that they only took in $2,000
in sales supports our conclusion that petitioners’ activity in
these 2 years was not engaged in with the objective of making a
profit.
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Elements of Recreation
In sum, we believe that petitioners engaged in their
photography activity for the principal purpose of providing Mr.
Storer with the opportunity to take up a pleasurable hobby to
reduce his stress and anxiety. It is evident from the
photographs showing the areas in their home used for this
activity that petitioners took great care and expense in setting
up a pleasant and well-stocked workspace. Photography, however,
is highly subjective, and in great part, the success of a
photography business is dependent on both the skill and talent of
the photographer and the marketing and reputation cultivated
therefrom. We are perhaps ultimately persuaded by petitioners’
decision to forgo any formal training or education in photography
in lieu of reading photography and trade magazines, and picture
books featuring works by famed landscape photographer Ansel
Adams. While it is beyond our purview to comment on Mr. Storer’s
ability or potential, we think it unlikely, barring an
extraordinary talent, to become Ansel Adams through self-study.
Moreover, we believe that Mr. Storer, through educating himself
primarily with trade magazines that feature the most current
technologies, was compelled to purchase and, ultimately,
gratified by his acquisition of extremely expensive equipment.
Finally, we note that at the end of petitioners’ presentation
prepared for the Court, Mr. Storer lamented that he had to
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“perform many, menial chores” and “has had to do many forms of
marketing including cold calls that can be unpleasant at times.”
While petitioners claim that they should not be required to
suffer as “a prerequisite to deductibility,” we cannot help
wondering how petitioners engaged in their activity with a profit
objective if they were opposed to performing the tasks essential
to business success; namely, marketing and sales calls.
Finally, although we concede that on its face, petitioners’
photography activity did have some of the characteristics of a
business, we find these characteristics insufficient to
demonstrate that their activity was carried on for profit.
Therefore, on the basis of all of the evidence in the
record, we conclude and hold that petitioners did not conduct
their photography-related activity in either 2000 or 2001 with a
profit objective within the meaning of section 183. Accordingly,
petitioners are not entitled to the deductions claimed on their
Schedules C for the years in issue.
Section 6662(a) Penalty
Respondent determined that petitioners are liable for the
accuracy-related penalty provided by section 6662(a) for each
year in issue. Section 6662(a) imposes a 20-percent penalty on
the portion of an underpayment of tax that is attributable to,
inter alia, negligence or disregard of rules or regulations. The
term “negligence” includes any failure to make a reasonable
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attempt to comply with the provision of the Internal Revenue
Code, including failure to exercise due care or failure to do
what a reasonable person would do in the circumstances. Sec.
6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. The term
“disregard” includes any careless, reckless, or intentional
disregard of the Code or the temporary or final regulations
issued pursuant to the Code. Sec. 6662(c); sec. 1.6662-3(b)(2),
Income Tax Regs.
Section 7491(c) places on the Commissioner the burden of
producing evidence showing that it is appropriate to impose any
penalty or addition to tax. Once the Commissioner meets that
burden, as in the instant case, the taxpayer must produce
evidence sufficient to show that the Commissioner’s determination
is incorrect. Higbee v. Commissioner, 116 T.C. 438, 447 (2001).
Petitoners have not produced evidence sufficient to prove that
respondent’s determination in this case was incorrect.
The accuracy-related penalty does not apply to any portion
of an underpayment with respect to which it is shown that there
was a reasonable cause and that the taxpayer acted in good faith.
Sec. 6664(c)(1). The decision as to whether the taxpayers acted
with reasonable cause and in good faith depends upon all
pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income
Tax Regs. Generally, the most important factor is the extent of
the taxpayers’ efforts to assess the proper tax liability. Id.
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Petitioners contend that they believed in good
faith that the expenses they claimed were allowable. Good
faith on the part of taxpayers, however, does not always negate
negligence. Taxpayers are required to take reasonable steps to
determine the law and to comply with it. Niedringhaus v.
Commissioner, 99 T.C. 202, 222 (1992). In this case,
petitioners have not shown that their claimed deductions for
expenses were made with any significant regard to whether they
were personal in nature, and the record supports the inference
that petitioners’ photography activity was used to deduct
personal expenses. For the foregoing reasons, moreover, we do
not consider Mr. Storer to have acted reasonably with respect to
the deduction of those expenses claimed for his photography
activity. Based on our consideration of the entire record, we
sustain respondent’s determinations with respect to the accuracy-
related penalties for negligence for the years in issue.
To reflect the foregoing,
Decision will be entered
for respondent.