TABLE 6
	AGI before
	Schedule C	Schedule C	Schedule C
Year	loss	gross receipts	gross income
1985	$ 48,679	$ 890	($ 937)
1986	45,271	1,675	(213)
1987	58,255	333	(1,987)
1988	165,311	1,592	1,123
1989	80,365	409	(1,793)
1990 ^--	--	--
1991	69,055	698	375
1992	66,534	883	690
1993	70,768	238	(306)
1994	72,191	20	15
1995	77,196	-0-	-0-
1996	77,937	60	60

[table 6 continued]

	Schedule C	Schedule C	Adjusted
Year	expenses ^{1999 Tax Ct. Memo LEXIS 60">*75}	loss 1	gross income
1985	$ 3,506	($ 4,443)	$ 44,236
1986	3,016	(3,229)	42,042
1987	4,757	(6,745)	51,510
1988	6,900	(5,778)	159,533
1989	6,805	(8,598)	71,767
1990 2	--	--	--
1991	12,138	(11,876)	57,179
1992	15,638	(15,039)	51,495
1993	18,171	(18,570)	52,198
1994	23,862	(23,942)	48,249
1995	28,302	(28,401)	48,795
1996	27,332	^77,937

[27] Petitioner owned an avocado farm. Table 7 shows the gross income and total expenses that petitioner reported on his Schedules F and the amount of farm income or (loss) that petitioner reported on the first page of his Forms 1040.

TABLE 7
Schedule F
Year	Gross income	Total expenses	Form 1040
1985	-0-	$ 3,749.19	-0-
1986	-0-	1,532.54	-0-
1987	-0-	914.81	($ 914.81)
1988	$ 113.00	1,638.28	(1,525.28)
1989	-0-	5,796.57	-0-
1991	-0-	2,108.88	-0-
1992	-0-	4,002.43	-0-
1993	-0-	956.89	-0-
1994	-0-	3,577.59	-0-
1995	-0-	4,438.50	-0-
1996	N/A	N/A	-0-

[28] Petitioner prepared his own tax returns for each of the years in issue and for the prior years. Petitioner's 1996 tax return was prepared by a paid tax return preparer.

* * * * *

Petitioner did 1999 Tax Ct. Memo LEXIS 60">*76 not engage in his videotape activity for profit.

[29] Petitioner was negligent with respect to his tax treatment of his videotape activity; the entire deficiency for each year in issue was due to this negligence.

OPINION

I. SEC. 183 -- ACTIVITY NOT ENGAGED IN FOR PROFIT

[30] Both parties base their cases on their respective analyses of a list of factors often considered in so-called "hobby loss" cases. Each party concludes that substantially all the factors point to a conclusion favoring that side.

[31] In general we agree with respondent's analyses; we also agree with respondent's conclusion.

[32] In the context of the instant case, the effect of section 183 1999 Tax Ct. Memo LEXIS 60">*77 1999 Tax Ct. Memo LEXIS 60">*78 is that petitioner's disputed deductions are allowable but only if his videotape activity was engaged in for profit.

[33] Whether an activity is engaged in for profit is determined under section 162 and section 212 (except insofar as section 183(d) creates a presumption that the activity is engaged in for profit). See sec. 183(c). Whether an activity is engaged in for profit turns on whether the taxpayer has an actual and honest objective of making a profit. Dreicer v. Commissioner, 78 T.C. 642">78 T.C. 642, 78 T.C. 642">645 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983); Engdahl v. Commissioner, 72 T.C. 659">72 T.C. 659, 72 T.C. 659">666 (1979); Golanty v. Commissioner, 72 T.C. 411">72 T.C. 411, 72 T.C. 411">425-426 (1979), affd. without published opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981). Petitioner's objective is a question of fact to be determined from all the facts and circumstances. Polakof v. Commissioner, 820 F.2d 321">820 F.2d 321, 820 F.2d 321">324 (9th Cir. 1987), affg. T.C. Memo 1985-197; Allen v. Commissioner, 72 T.C. 28">72 T.C. 28, 72 T.C. 28">34 (1979); 1999 Tax Ct. Memo LEXIS 60">*79 Dunn v. Commissioner, 70 T.C. 715">70 T.C. 715, 70 T.C. 715">720 (1978), affd. without published opinion 607 F.2d 995">607 F.2d 995 (2d Cir. 1979), affd. on another issue 615 F.2d 578">615 F.2d 578 (2d Cir. 1980). Mere statements of intent are not determinative. Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724">781 F.2d 724, 781 F.2d 724">726 (9th Cir. 1986), affg. Lahr v. Commissioner, T.C. Memo 1984-472; Engdahl v. Commissioner, 72 T.C. 659">72 T.C. 666; Churchman v. Commissioner, 68 T.C. 696">68 T.C. 696, 68 T.C. 696">701 (1977). The burden of proof is on petitioner. Rule 142(a); Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724">781 F.2d at 727; Golanty v. Commissioner, 72 T.C. 411">72 T.C. 426; Boyer v. Commissioner, 69 T.C. 521">69 T.C. 521, 69 T.C. 521">537 (1977).

[34] In general, for these purposes the "profit" that must be sought is taxable income, Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724">781 F.2d at 726; Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471, 78 T.C. 471">501 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984), or economic profit independent of tax savings. Antonides v. Commissioner, 91 T.C. 686">91 T.C. 686, 91 T.C. 686">694 (1988), affd. 893 F.2d 656">893 F.2d 656, 893 F.2d 656">659 (4th Cir. 1990).

[35] Section 1.183-2(b)(1) through (9), Income Tax Regs., sets out the following factors (principally derived from case law, see Benz v. Commissioner, 63 T.C. 375">63 T.C. 375, 63 T.C. 375">382-383 (1974)), 1999 Tax Ct. Memo LEXIS 60">*80 to be taken into account in determining a profit objective, or lack of one: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or the taxpayer's advisers; (3) the time and effort spent by the taxpayer in carrying on the activity; (4) the expectation that 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 loss 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 one factor is conclusive, and we do not reach our decision herein by merely counting how many of the nine enumerated factors support each party's position. Carter v. Commissioner, 645 F.2d 784">645 F.2d 784, 645 F.2d 784">787 (9th Cir. 1981), affg. T.C. Memo 1978-202; Dunn v. Commissioner, 70 T.C. 715">70 T.C. 720. We consider these factors seriatim.

(1) MANNER OF CARRYING ON THE ACTIVITY

[36] The parties have stipulated the accuracy of petitioner's Schedule C for each year in issue. Supra note 2. Also, respondent did not determine, and does not assert, that 1999 Tax Ct. Memo LEXIS 60">*81 petitioner omitted to report any receipts from his videotape activity. From the foregoing, we conclude that petitioner's books and records, though sparse and relatively informal, were adequate for a trade or business.

[37] By the end of 1992, petitioner was faced with a record of fluctuating gross receipts which were trending somewhat downward, and losses which were more-or-less consistently increasing. Supra table 6. He had spent about $ 80,000 on equipment. His reported losses from his videotape activity, including straight-line depreciation, aggregated about $ 55,000, plus whatever he reported on his 1990 tax return. Supra table 6, note 2. His reaction to this state of affairs was to buy another $ 75,000 of equipment and spend most of the next 3 years learning how to use the new equipment. His gross receipts plummeted; his losses increased even more. Supra tables 5 and 6.

[38] The parties have stipulated that petitioner did not have a written business plan, forecasting income, expenses, and net profit or loss, during the years in issue, and had not prepared any such written business plan before starting his videotape activity. When asked about. this at trial, petitioner responded 1999 Tax Ct. Memo LEXIS 60">*82 as follows:

Q [Ms. DeCaro] Why did you not prepare a business

plan?

A [Petitioner] Well, I have my business plan in my head and

that's one of my businesses that I was doing when I was actually

consulting was preparing business plans, and it seemed like a

silly waste of paper to put it down in black and white.

Petitioner did not present us with an oral description of the business plan that was in his head.

[39] Petitioner noted at trial that his father had continued to operate his own business until dying at age 92. When questioned on cross-examination, petitioner did not give any indication as to how long he thought it would take for him to earn enough income from his videotape activity to recoup the $ 155,000 or so that he had spent on equipment.

[40] The parties have stipulated that petitioner did not spend any money on advertising from 1993 through 1995; he relied solely on "word-of-mouth". Petitioner's Schedules C also show that he did not spend any money on advertising from 1985 through 1989, 1991, 1992, and 1996. (The record does not include the information for 1990.) We understand that many a successful small business relies on word-of- mouth to increase its patronage 1999 Tax Ct. Memo LEXIS 60">*83 or maintain patronage at a satisfactory level. However, as supra tables 2 through 6 show, petitioner's patronage remained at meager and unprofitable levels throughout the period for which we have evidence in the record. Petitioner did not advertise or, so far as we can tell from the record, take any other steps to try to move his videotape activity into the profit column. Indeed, petitioner testified that he already had as much work as he could handle. The only facet of his activities that showed significant changes are the fairly steady increases in expenses and losses. Supra table 6.

[41] On the whole, although petitioner's books and records were sufficient, the rest of his videotape activity does not appear to have been carried on in a businesslike manner.

(2) EXPERTISE OF TAXPAYER OR ADVISERS

[42] Petitioner's background in electronics and communications is impressive. Petitioner also has a master's degree in business. Petitioner consulted reference books such as The Technique of Film Editing and The Technique of The Film Cutting Room, instruction manuals for the video and audio equipment, and numerous other magazines and publications. Petitioner has had extensive managerial experience 1999 Tax Ct. Memo LEXIS 60">*84 covering numerous positions including running his own engineering consulting firm and commanding a destroyer during World War II.

[43] This factor favors petitioner.

(3) TIME AND EFFORT SPENT IN THE ACTIVITY

[44] Petitioner testified that, on average, he spent about 50 to 60 hours per week on his videotape activities. On brief, petitioner claims only about 30 hours per week. In either event, it is evident that petitioner spent substantial time and effort on his videotape activities, making this a factor pointing toward a profit objective.

(4) EXPECTATION THAT ASSETS MAY APPRECIATE IN VALUE

[45] A taxpayer's "bona fide expectation" that assets used in a questioned activity will appreciate in value is a factor pointing toward a conclusion that the taxpayer engaged in the questioned activity for profit. Engdahl v. Commissioner, 72 T.C. 659">72 T.C. 668-669; Allen v. Commissioner, 72 T.C. 28">72 T.C. 36.

[46] The parties have stipulated that "'petitioner had incurred $ 155,553 of costs for video equipment by the end of 1995, of which $ 74,977 was incurred from 1993-1995." On brief petitioner concedes that this equipment "will not increase in value".

[47] This factor favors respondent.

(5) TAXPAYER'S SUCCESS IN 1999 Tax Ct. Memo LEXIS 60">*85 OTHER ACTIVITIES

[48] Petitioner had a long and successful military career. Petitioner then worked for large electronics companies. He then worked for an engineering consulting firm which he had founded. The record does not indicate how successful petitioner was in his civilian jobs. We cannot tell from the record that any of petitioner's jobs were sufficiently similar to his videotape activity so that his degree of success in those jobs would be helpful in predicting success in his videotape activity.

(6) HISTORY OF INCOME OR LOSSES FROM THE ACTIVITY

[49] Petitioner's videotape activity produced a loss for every year since the activity's inception. 108 T.C. 147">As supra table 6 shows, the losses trended upward with only minor fluctuations. By the end of the last year in issue, petitioner was already past 80 years old, with no indication that he would give up his videotape activity and no indication that he would make any major change in the way he conducted his videotape activity.

[50] 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, by the time of the years in issue, petitioner's videotape 1999 Tax Ct. Memo LEXIS 60">*86 activity was no longer in its initial or startup stage. Although the parties' stipulation "that the expenses on petitioner's Schedule C for 1993 to 1995 do not represent startup cost" was evidently directed primarily to respondent's alternative contention (since abandoned) under section 195, we are entitled to take it into account in evaluating petitioner's history of losses from his videotape activity.

[51] Nowhere in the record do we find a coherent explanation of any plan by petitioner to produce a profit from his videotape activity in either the short run or the long run.

[52] This factor favors respondent.

(7) AMOUNT OF OCCASIONAL PROFITS EARNED

[53] There were not any occasional profits from petitioner's videotape activity. Indeed, as supra table 6 shows, as often as not there was not even gross income from petitioner's videotape activity. The fluctuations in gross income were minor, compared to the steady progression of increasing Schedule C expenses.

[54] This factor favors respondent.

(8) TAXPAYER'S FINANCIAL STATUS

[55] Before petitioner's wife's death, petitioner's videotape activity losses were generally around 10 percent of his adjusted gross income before the losses. After petitioner's 1999 Tax Ct. Memo LEXIS 60">*87 wife's death, the loss percentages increased, but a new pattern emerged -- the losses from petitioner's videotape activities left him with about $ 50,000 adjusted gross income each year. If petitioner would have deducted his 1996 Schedule C loss, that would have produced a 1996 adjusted gross income of $ 50,665. Supra table 6.

[56] On brief, petitioner contends that "the mere fact that a taxpayer has a substantial income from other sources does not foreclose a profit motive." We agree. This is but an illustration of the proposition that no one factor is conclusive.

[57] The record does not show that petitioner needed profits, or even gross income, from his videotape activity. His other income apparently was substantial enough, even after the videotape losses, to maintain his life style. The record does not include any indication that petitioner feared that any of his major income sources was going to "dry up" and that he thought it prudent to engage in his videotape activity to develop a replacement source of income. Compare the instant case with Nickerson v. Commissioner, 700 F.2d 402">700 F.2d 402, 700 F.2d 402">403, 700 F.2d 402">406 (7th Cir. 1983), revg. T.C. Memo 1981-321.

[58] This factor favors respondent.

(9) ELEMENTS 1999 Tax Ct. Memo LEXIS 60">*88 OF PERSONAL PLEASURE

[59] Petitioner took great pains to provide high quality videotapes. His methods were not slapdash. He preserved his, his family's, his classmates', his shipmates', and his friends' memories. He preserved history. He enjoyed what he did. As we have noted, "a business will not be turned into a hobby merely because the owner finds it pleasurable". Jackson v. Commissioner, 59 T.C. 312">59 T.C. 312, 59 T.C. 312">317 (1972). Thus, petitioner's enjoyment of his work should not be a factor in respondent's favor. By the same token, it is not a factor in petitioner's favor.

CONCLUSIONS

[60] From 1985 through the end of 1992, just before the years in issue, (1) petitioner had incurred about $ 80,000 of costs for video equipment, (2) petitioner had lost increasing amounts of money for each of the 8 years since he embarked on his videotape activity, and (3) petitioner was approaching age 80. During the 3 years in issue, (1) petitioner incurred about $ 75,000 more of costs for video equipment, (2) petitioner's videotape sales totaled $ 438, of which he had collected only $ 258 by the time of the trial, and (3) petitioner lost another $ 70,000 on his videotape activity. Petitioner's age ordinarily would 1999 Tax Ct. Memo LEXIS 60">*89 not be relevant to our determination. However, petitioner's substantial capital investment at that age makes it more important that petitioner be able to show that he really intended to earn enough to (1) recoup his capital investment and also (2) earn a profit on that capital investment.

[61] Petitioner seemed to be unable to articulate any plan, or even any moderately clear vision, for profitability of his videotape activity.

[62] We conclude, and we have found, on the basis of the preponderance of the evidence, that petitioner did not engage in his videotape activity for profit.

[63] We hold for respondent on this issue.

II. SECTION 6662 -- NEGLIGENCE

[64] Respondent determined that petitioner is liable for a 20- percent negligence addition to tax on the entire underpayment for each year in issue.

[65] Respondent contends that petitioner "failed to act reasonably in claiming increasingly larger expenses and losses on Schedule C from 1993-1995." Respondent relies on Sacks v. Commissioner, T.C. Memo 1994-217, affd. 82 F.3d 918">82 F.3d 918 (9th Cir. 1996).

[66] Petitioner maintains that he had reasonable cause for his actions -- in particular that he was following advice from one of respondent's employees 1999 Tax Ct. Memo LEXIS 60">*90 and from respondent's Schedule C instructions. Petitioner also maintains that he acted in good faith, as is shown by the disclosures on his tax returns. Petitioner relies on Osteen v. Commissioner, 62 F.3d 356">62 F.3d 356 (11th Cir. 1995), affg. in part and revg. in part T.C. Memo 1993-519.

[67] Neither side suggests, even by way of a fallback position, that one part of the underpayment may be due to negligence and the other part not due to negligence.

[68] We agree with respondent's conclusion.

[69] Section 6662^{1999 Tax Ct. Memo LEXIS 60">*91} imposes an accuracy-related penalty of 20 percent of any portion of an underpayment that is attributable to the taxpayer's negligence. Subsecs. (a) and (b)(1) of sec. 6662. For purposes of the instant case, "underpayment" is the same as "deficiency". Compare sec. 6664(a) with sec. 6211(a).

[70] Broadly speaking, for purposes of this provision, negligence is lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances to determine that person's income tax liability. ASAT, Inc. v. Commissioner, 108 T.C. 147">108 T.C. 147, 108 T.C. 147">175 (1997); Cluck v. Commissioner, 105 T.C. 324">105 T.C. 324, 105 T.C. 324">339 (1995). 1999 Tax Ct. Memo LEXIS 60">*92 Reasonable and good faith reliance by a taxpayer on an accountant or attorney may be sufficient to avoid the addition to tax for negligence. See United States v. Boyle, 469 U.S. 241">469 U.S. 241, 469 U.S. 241">251, 83 L. Ed. 2d 622">83 L. Ed. 2d 622, 105 S. Ct. 687">105 S. Ct. 687 (1985). Petitioner has the burden of proving error in respondent's determination that these additions to tax should be imposed against him. Little v. Commissioner, 106 F.3d 1445">106 F.3d 1445, 106 F.3d 1445">1449-1450 (9th Cir. 1997), affg. T.C. Memo 1993-281; Korshin v. Commissioner, 91 F.3d 670">91 F.3d 670, 91 F.3d 670">671 (4th Cir. 1996), affg. T.C. Memo 1995-46; ASAT, Inc. v. Commissioner, 108 T.C. 147">108 T.C. 175.

[71] Petitioner was in the witness box for about 2-1/2 hours. On the basis of our observation, as well as the record in the instant case, we conclude that petitioner is an articulate and able man of integrity. He makes up his mind on the basis of the information he has. If he feels the need for additional information, or advice, or instruction, then he seeks it. If he feels that no further information, advice, or instruction is needed, then he does not seek it. He does what he believes to be appropriate and does not do what he believes to be superfluous, regardless of the views of others.

[72] Thus, petitioner does 1999 Tax Ct. Memo LEXIS 60">*93 not bother with written business plans. This would make less difference if petitioner had business plans in his head. But petitioner was unable to articulate any plans that he had as to how his videotape activity was going to -- or that he hoped would -- produce a profit.

[73] Petitioner did not offer any explanation of why he treated his avocado-raising losses, shown on the Schedule F for each tax return, differently from the way he treated his Schedule C videotape activity, deducting the latter losses but ordinarily not deducting the former losses. Supra table 7.

[74] It appears that, at some undetermined time in the early 1980's, some unidentified IRS employee suggested that petitioner use Schedule C in connection with some activity that may have been a precursor of petitioner's videotape activity.

[75] Petitioner's reliance on the advice assertedly given to him by an IRS employee a decade or so earlier is not exculpatory because the record does not show what information petitioner gave to the IRS employee and exactly what advice the IRS employee gave to petitioner. Compare, e.g., Howard v. Commissioner, 931 F.2d 578">931 F.2d 578, 931 F.2d 578">582 (9th Cir. 1991), affg. T.C. Memo 1988-531, with Weis v. Commissioner, 94 T.C. 473">94 T.C. 473, 94 T.C. 473">486-488 (1990). 1999 Tax Ct. Memo LEXIS 60">*94 From the sparse information in the record, we conclude that, regardless of what an IRS employee may have mentioned to petitioner in the early 1980's, by the time of the years in issue petitioner should have sought advice from experts who could evaluate the implications of a decade of increasing losses in petitioner's videotape activity. In light of the increasing magnitude of petitioner's loss deductions, a reasonable and ordinarily prudent person would have sought such advice. Petitioner failed to make a reasonable attempt to comply with the provisions of sections 183, 162, and 212, and the decade-old advice by the IRS employee is not reasonable cause for petitioner's failure.

[76] Petitioner's reliance on Osteen v. Commissioner, 62 F.3d 356">62 F.3d 356 (11th Cir. 1995), is misplaced. Osteen dealt with whether the taxpayers therein had "substantial authority" for their tax treatment of an item, within the meaning of former section 6661(b)(2)(B)(i). Osteen v. Commissioner, 62 F.3d 356">62 F.3d at 359. That provision appears now as section 6662(d)(2)(B)(i), a qualification in the application of the substantial understatement addition to tax under section 6662. The substantial authority language does not appear 1999 Tax Ct. Memo LEXIS 60">*95 in section 6662(c) (relating to the definition of "negligence"), nor does it appear in section 6664(c)(1) (relating to the reasonable cause exception). For an example of the differences between a negligence analysis and a substantial-understatement analysis see 106 F.3d 1445">Little v. Commissioner, 106 F.3d at 1449-1451, 1451-1453. Osteen does not affect our analysis in the instant case.

[77] For completeness, we note that respondent's reliance on Sacks v. Commissioner, T.C. Memo 1994-217, also is misplaced. In Sacks, the taxpayers invested in a tax shelter, the prospectus for which projected that in the first 3 years of the investment the taxpayers would be able to deduct 350 percent of their cash outlay. The prospectus prominently displayed the fact that the investment had significant tax risks and could well be challenged by the Internal Revenue Service. We held the taxpayers were liable for the negligence additions to tax, and the Court of Appeals affirmed. Sacks v. Commissioner, 82 F.3d 918">82 F.3d 918 (9th Cir. 1996), affg. T.C. Memo 1994-217. There is no indication in the record in the instant case that petitioner's deductions exceeded his actual cash outlays or that petitioner engaged in his videotape 1999 Tax Ct. Memo LEXIS 60">*96 activity for any substantial tax reduction purpose.

[78] We have held, supra, that petitioner did not engage in his videotape activity for profit.

[79] By the time of the years in issue, a reasonable and ordinarily prudent person would have sought competent advice on the deductibility of the expenses of this videotape activity. Petitioner failed to make a reasonable attempt to do so. We conclude, and we have found, on the basis of the preponderance of the evidence, that petitioner was negligent and that the entire deficiency for each of the years in issue was due to this negligence.

[80] We hold for respondent on this issue.

[81] Decision will be entered for respondent.

Footnotes

1. Unless indicated otherwise, all section and chapter references are to sections and chapters of the Internal Revenue Code of 1986 as in effect for the years in issue.↩
2. The parties have stipulated that (1) petitioner paid or incurred all the expenses reported on his Schedule C for each of the years in issue, (2) these expenses are not "start-up expenditures" within the meaning of sec. 195, and (3) if the Court holds that petitioner's videotape activity constituted a trade or business, then all these expenses are deductible.↩
3. So stipulated. Evidently petitioner's expenses are not recorded in the form of books but presumably are in the form of records, which are sufficiently complete and accurate so as to enable the parties to stipulate the correctness of all the expense amounts reported on petitioner's Schedule C for each year in issue. Supra note 2.
2. The parties were unable to obtain information regarding 1990. However, they stipulated that petitioner's videotape activity ↩
1. For 1991 through 1995, the amounts stipulated by the parties as petitioner's Schedule C EXPENSES do not include expenses for business use of petitioner's home, but the amounts stipulated by the parties as petitioner's Schedule C LOSSES do take account of expenses for business use of petitioner's home. The expenses for business use of the home for 1991 through 1995 range from a high of $ 113.46 (1991) to a low of $ 91.53 (1992).
3. Although petitioner reported the $ 27,272 loss on Schedule C for 1996, he did not carry this loss over to his Form 1040.↩
4. Sec. 183 provides, in pertinent part, as follows:
SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT.
(a) 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 [i.e., chapter 1, relating to normal taxes and surtaxes] except as provided in this section.
(b) Deductions Allowable. -- In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed --
(1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and
(2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only 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).
(c) Activity Not Engaged in for Profit Defined. -- For purposes of this section, the term "activity not engaged in for profit" means 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.
Sec. 162 provides, in pertinent part, as follows:
SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *
Sec. 212provides, in pertinent part, as follows:
SEC. 212. EXPENSES FOR PRODUCTION OF INCOME.
In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year --
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income↩
5. Sec. 6662 provides, in pertinent part, as follows:
   SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY.
   (a) Imposition of Penalty. -- If this section applies to any
portion of an underpayment of tax required to be shown on a return,
there shall be added to the tax an amount equal to 20 percent of the
portion of the underpayment to which this section applies.
   (b) Portion of Underpayment to Which Section Applies.--This
section shall apply to the portion of any underpayment which is
attributable to 1 or more of the following:
     (1) Negligence or disregard of rules or regulations.
                * * *
   (c) Negligence. -- For purposes of this section, the term
"negligence" includes any failure to make a reasonable attempt to
comply with the provisions of this title, [title 26, the Internal
Revenue Code] and the term "disregard" includes any careless,
reckless, or intentional disregard.
   Sec. 6664 provides, in pertinent part, as follows:
   SEC. 6664. DEFINITIONS AND SPECIAL RULES.
               * * * * * *
   (c) Reasonable Cause Exception. --
     (1) In general. -- No penalty shall be imposed under this
   part with respect to any portion of an underpayment if it is
   shown that there was a reasonable cause for such portion and
   that the taxpayer acted in good faith with respect to such
   portion.↩