DocketNumber: No. 1853-02S
Citation Numbers: 2003 T.C. Summary Opinion 124, 2003 Tax Ct. Summary LEXIS 125
Judges: "Armen, Robert N."
Filed Date: 9/4/2003
Status: Non-Precedential
Modified Date: 4/18/2021
2003 Tax Ct. Summary LEXIS 125">*125 PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
ARMEN, Special Trial Judge: This case was heard pursuant to the provisions of
1996 $ 2003 Tax Ct. Summary LEXIS 125">*126 15,457 $ 3,091.40
1997 9,377 1,875.40
1998 4,100 ---
[3] After concessions by the parties,2003 Tax Ct. Summary LEXIS 125">*127 (1) Whether petitioner is entitled to Schedule C, Profit or Loss From Business, deductions for the taxable years at issue in excess of the amounts allowed by respondent in the notice of deficiency. We hold that she is not.
(2) Whether petitioner's horse breeding activity was an activity engaged in for profit within the meaning of
(3) Whether petitioner received unreported income during 1996 and 1997. Subject to respondent's concessions and adjustments, we hold that she did.
(4) Whether petitioner is entitled to a dependency exemption for Carl Collins for 1998. We hold that she is not.
(5) Whether petitioner is liable for accuracy-related penalties under
Adjustments relating to petitioner's itemized deductions for the taxable years at issue, self-employment taxes for 1996 and 1997, the earned income credit for 1996 and 1997, and the child tax credit for 1998 are purely perfunctory matters, the resolution of which is dependent on our disposition of the issues above.
Background
Some of the facts have been stipulated, and2003 Tax Ct. Summary LEXIS 125">*128 they are so found. Petitioner resided in Ocala, Florida, at the time that her petition was filed with the Court.
During the taxable years at issue, petitioner was employed on a full-time basis as a paralegal. Petitioner received wages from employment in the amounts of $ 43,454, $ 46,277, and $ 42,443 during 1996, 1997, and 1998, respectively.2003 Tax Ct. Summary LEXIS 125">*129 size and is located on Lake Kerr. The Anchor Inn has six rental units and a boat ramp. Each rental unit has one bedroom and one bath.
The majority of petitioner's rentals were from February to May each year. Rentals were generally short-term, typically for the day or weekend. Petitioner rented each unit for approximately $ 30 to $ 35 per night. Guests were not charged for use of the Anchor Inn's boat ramp. Petitioner requested a minimal cash fee from nonguests for use of the boat ramp.
In or around 1993, petitioner purchased the land and two houses adjacent to the Anchor Inn from her mother. During the taxable years at issue, petitioner and her mother resided separately in the two houses.
During the years at issue, petitioner operated a horse breeding activity. Petitioner had been raised around, and was familiar with, horses.
Prior to starting the horse breeding activity, petitioner consulted horse trainers and breeders about the nature of horse breeding. Petitioner's objective was to enter horses in "cutting" competitions and then later breed the horses.2003 Tax Ct. Summary LEXIS 125">*130 In or around 1995, petitioner purchased her first horse. Later, petitioner purchased a second horse for use in the horse breeding activity. Petitioner hired a professional trainer for the horses. The horses were originally stabled and trained in Georgia, about 265 miles from petitioner's Florida residence. Petitioner and her children would visit the stable approximately three weekends each month.
Petitioner did not prepare a written business plan with respect to her horse breeding activity. Petitioner's records consisted solely of canceled checks and a few receipts.
Petitioner filed a Form 1040, U.S. Individual Income Tax Return, for each of the taxable years at issue, and reported her wages from her employment as a paralegal. On her return for each of the taxable years at issue, petitioner identified Carl as either "child" or "son" and claimed a dependency exemption for him.
Petitioner reported income and expenses from the Anchor Inn on her Federal income tax returns for 1996 through 1998 on Schedules C as follows:
Gross Total Total
Year Income Reported2003 Tax Ct. Summary LEXIS 125">*131 Expenses Claimed Losses Claimed
____ _______________ ________________ ______________
1996 $ 6,136 $ 37,215 $ 31,079
1997 6,045 27,821 21,776
1998 8,586 17,822 9,236
[17] Petitioner reported income and expenses from the horse breeding activity on her Federal income tax returns for 1996 through 1998 on Schedules F, Profit or Loss From Farming, as follows:
Gross Total Total
Year Income Reported Expenses Claimed Losses Claimed
____ _______________ ________________ ______________
1996 $ 1,901 $ 11,037 $ 9,136
1997 1,576 25,109 23,533
1998 2,300 14,997 12,697
D. The Notice of Deficiency
In the notice of deficiency, respondent determined that with respect to2003 Tax Ct. Summary LEXIS 125">*132 the Anchor Inn, petitioner had not substantiated Schedule C expenses for 1996, 1997, and 1998, in excess of $ 25,305, $ 25,023, and $ 15,490, respectively. Respondent also determined that petitioner's horse breeding activity was not an activity engaged in for profit within the meaning of
Discussion
In general, the determinations of the Commissioner in a notice of deficiency are presumed correct, and the burden is on the taxpayer to show that the determinations are incorrect. See
Second, a taxpayer bears the burden of proving that the taxpayer is entitled to any deduction claimed.
Third, a taxpayer is required to maintain records sufficient to substantiate deductions2003 Tax Ct. Summary LEXIS 125">*135 claimed by the taxpayer on his or her return. Sec. 6001;
Fourth, the fact that a taxpayer reports a deduction on the taxpayer's income tax return is not sufficient to substantiate the deduction claimed on the return.
At trial, petitioner did not introduce any documentary evidence to support that she is entitled to deductions with respect to the Anchor Inn in excess of the amounts allowed by2003 Tax Ct. Summary LEXIS 125">*136 respondent. Likewise, petitioner did not offer testimony at trial in support of any of those deductions.
Under certain circumstances, the Court may estimate the amount of a deductible expense and allow the deduction to that extent. See
Under
The existence of the requisite profit objective is a question of fact that must be decided on the basis of the entire record. See
The regulations set forth a nonexhaustive list of factors that may be considered in deciding whether a profit objective exists. These factors are: (1) The 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) 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. See
No single factor, nor even the existence of a majority of factors favoring or disfavoring the existence of a profit objective, is controlling. 2003 Tax Ct. Summary LEXIS 125">*139 See id . Rather, the relevant facts and circumstances of the case are determinative. See
Based on all of the facts and circumstances in the present case, we hold that petitioner has failed to prove that she engaged in the horse breeding activity for profit within the meaning of
We do not analyze in depth all nine of the factors enumerated in the regulation but rather focus on some of the more important ones that inform our decision.
The fact that a taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records may indicate a profit objective.
A taxpayer's expertise, research, and study of an activity, as well as his or her consultation with experts, may be indicative of a profit objective.
Petitioner also sought general advice from other breeders and trainers. However, there is no evidence that petitioner reviewed the records of other breeding operations or sought specific advice as to how to make her operation profitable. Petitioner did not point to any evidence that demonstrated how she planned to reduce her losses and ultimately earn a profit sufficient to recoup past losses. See
The devotion of a great deal of personal time and effort by the taxpayer in carrying on an activity may indicate that it is engaged in for profit, particularly if there are no substantial personal or recreational elements associated with such activity.
The fact that a taxpayer was able to convert an unprofitable enterprise to a profitable one in the past may indicate that he or she is engaged2003 Tax Ct. Summary LEXIS 125">*142 in the present activity for profit, even though the activity is presently unprofitable.
A substantial profit, though only occasional, would generally indicate that an activity is engaged in for profit.
The fact that the taxpayer has substantial income from sources other than the activity in question, particularly if the losses from the activity generate substantial tax benefits, may indicate that the activity is not engaged in for profit . Sec. 1.183- 2(b)(8), Income Tax Regs. During the taxable years 1996, 1997, and 1998, petitioner reported wage income of $ 43,454, $ 46,277, and $ 42,443, respectively. During the same years, petitioner reported Schedule F losses from the horse breeding2003 Tax Ct. Summary LEXIS 125">*143 activity of $ 9,136, $ 23,533, and $ 12,697, respectively. Petitioner used these losses to reduce her gross income by approximately 21 percent for 1996, 51 percent for 1997, and 30 percent for 1998. These reductions led to substantial tax savings for petitioner.
Considering all the facts and circumstances, we find that petitioner's horse breeding activity was not engaged in for profit within the meaning of
As previously noted, taxpayers are required to maintain records sufficient to show whether they are liable for Federal income taxes. Sec. 6001;
The bank deposits and cash expenditures method is recognized as a reasonable method of reconstructing income. See
The income reconstruction need not be exact, so long as it is reasonable and substantially correct.
Respondent's bank deposits and cash expenditures analysis reflects that petitioner had unreported income during 1996 and 1997. The bank deposit analysis was performed by first totaling all of the deposits2003 Tax Ct. Summary LEXIS 125">*145 made to petitioner's bank account. Respondent then reduced the total amount of deposits by known nontaxable sources 2003 Tax Ct. Summary LEXIS 125">*146 income in the amounts of $ 8,856 in 1996 and $ 23,767 in 1997.
Although petitioner identified Carl as her son on her 1998 return, she is not related to him by blood or marriage, nor did she adopt him. Carl did not live with petitioner during all, nor even the majority, of 1998. Accordingly, we sustain respondent's determination that petitioner is not entitled to claim a dependency exemption for Carl for 1998.
E.
The last issue for decision is whether petitioner is liable for accuracy-related penalties pursuant to
Tax is not understated to the extent that the treatment of the item related thereto is based on substantial authority or is adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the tax treatment of such item by the taxpayer.
Petitioner makes no argument with regard to substantial authority or adequate disclosure, and we think that no such argument can be persuasively made. Based on the record before us, we also conclude that petitioner failed to establish that there was reasonable cause for any portion of the understatements in this case or that she acted with the requisite good faith. Accordingly, we hold that petitioner is liable for accuracy-related penalties for 1996 and 1997 to the extent that the
Reviewed and adopted as the report of the Small Tax Case Division.
To reflect our2003 Tax Ct. Summary LEXIS 125">*149 disposition of the disputed issues, as well as the parties' concessions,
Decision will be entered under
1. Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Respondent concedes that petitioner incurred a capital loss on the sale of a truck in 1998 in the amount of $ 1,009 as claimed by her on Form 4797, Sales of Business Property.
Respondent also concedes the amount realized by petitioner in 1998 on the sale of a house that she built for sale. Respondent further concedes that petitioner incurred a long-term capital loss in 1998 with respect to the sale of this house but in an amount ($ 13,910) less than that claimed by petitioner on her 1998 return ($ 38,000). However, because of the $ 3,000 limitation on capital losses in sec. 1211(b), we need not decide the exact amount of the loss because it will have no tax effect in 1998, the latest of the taxable years in issue. See sec. 1212(b) regarding capital loss carryovers.
Petitioner concedes that she received unreported interest income in the amounts of $ 941, $ 32, and $ 1 during 1996, 1997, and 1998, respectively, and that she is entitled to a mortgage interest deduction for 1998 in the amount of $ 4,909.↩
3. All amounts are rounded to the nearest dollar.↩
4. "Cutting" was described by petitioner as training a horse to "cut" one cow from a herd of cattle.↩
5. Respondent allowed petitioner deductions on Schedules A, Itemized Deductions, for interest and taxes without regard to income from the horse breeding activity. Respondent allowed petitioner miscellaneous itemized deductions on Schedules A for the remaining expenses related to the horse breeding activity. Respondent reclassified petitioner's Schedules F gross income as other income.↩
6. At trial, respondent asserted that petitioner's deposits for 1997 were erroneously understated in the notice of deficiency and should be increased by $ 15,137. However, due to respondent's concession of additional nontaxable sources in 1997, respondent does not seek an increased deficiency.↩
7. Sec. 7491 does not apply in this case to shift the burden of proof to respondent because petitioner neither alleged that sec. 7491 was applicable nor established that she fully complied with the requirements of sec. 7491(a)(2) with respect to any of the issues before the Court.↩
8. Nontaxable sources included, for example, transfers from other accounts and loan proceeds.↩
9. Respondent has satisfied his burden of production under sec. 7491(c) with respect to the accuracy-related penalty under
Halle v. Commissioner , 7 T.C. 245 ( 1946 )
Trowbridge v. Commissioner , 30 T.C. 879 ( 1958 )
Halle v. Commissioner of Internal Revenue , 175 F.2d 500 ( 1949 )
Thomas C. Burger and Marian E. Burger v. Commissioner of ... , 809 F.2d 355 ( 1987 )
Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 )
Schroeder v. Commissioner , 40 T.C. 30 ( 1963 )
New Colonial Ice Co. v. Helvering , 54 S. Ct. 788 ( 1934 )
Bruce K. Price, as Administrator of the Estate of A. M. ... , 335 F.2d 671 ( 1964 )
Robert Woodrow Trowbridge v. Commissioner of Internal ... , 268 F.2d 208 ( 1959 )
Deputy, Administratrix v. Du Pont , 60 S. Ct. 363 ( 1940 )
Westbrook v. Commissioner , 68 F.3d 868 ( 1995 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Indopco, Inc. v. Commissioner , 112 S. Ct. 1039 ( 1992 )
Parks v. Commissioner , 94 T.C. 654 ( 1990 )
The United States of America v. John J. Doyle , 234 F.2d 788 ( 1956 )
Estate of Mary Mason, Deceased, Herbert L. Harris, ... , 566 F.2d 2 ( 1977 )