T.C. Mem o. 2 01 5- 23 4

UNITED STAT ES TAX COURT

VICTOR M. KANTCHEV AND D ANIELA A. KANTCHEV, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 23 36 1- 13
. Fi le d Dec em be r 3, 2 01 5. Vict or M. Kan tc he v andDani el a A. Kant ch ev , pro ses e. Cat he rin e S. Ty so n, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION CHIECHI, J ud ge : Re sp on de ntde te rm in edde fic ie nc ie s i n, an ad di ti on un de r se ct io n 6 65 1( a)(1 ) to , andaccu racy-rela te d p en al ti es un de r se ct io n 6 66 2( a) 1
on pe ti ti on ers ’ Fed eral in co m e ta x (t ax ) as fol lo ws:
All sec ti on refe ren ces are t o t he Int ern al Rev enue Co de (Co de ) in effe ctfor 1 th e y ears at i ss ue . All R

ul e ref eren ces are t o the Tax C ou rt Rul es of P ract ic e an d Pro cedur e.- 2 -

[* 2] Year Defi ci en cy Add it io n t o Tax Und er Sec. 6 65 1( a)(1 ) Accu racy-Rel at ed Pen al ty Und er Se c. 66 62 (a) 20 08 $9 ,36 0 $6 1.9 5 $1 ,87 2 20 09 3,0 10
--- 60 2 20 10 2,9 50
--- 59 0 The is su es rem ai ni ng forde ci si on are: (1 ) Didpe ti ti on er Vi ct orM. Kan tc he v e ng ag e in a cert ai n p ho to gr ap hy act iv ity du rin g e ach of t he y ears 20 08 , 20 09 , and20 10 with the ob jecti ve of
m ak in g apro fitwithi n t he m ean in g o f se ct io n 1 83 ? W e h ol d t ha t h e d idno t. (2 ) Is pe ti ti on er Vi ct orM. Kan tc he v e nt it le d t o c ert ai n l os se s tha t p et it io ne rs cl ai m edforth ei r ta xabl e y ear 2 00 8? W e h ol d t ha t h e is no t. (3 ) Is pe ti ti on er Vi ct orM. Kan tc he v l iabl e fo r hi s t ax ab le y ear 2 00 8 fo r an ad di ti on to tax un de r se ct io n 6 65 1( a)(1 )? W e h ol d t ha t h e is
. (4 ) Is pe ti ti on er Vi ct orM. Kan tc he v l iabl e fo r eac h o f hi s t ax ab le y ears 20 08 , 20 09 , and20 10 forth e acc ur acy-rela te d p en al ty und er s ect io n 6 66 2( a)? W e ho ldth athe is so li ab le for(a) h is tax ab le y ear 2 00 8 t o t he ex te ntst at edbe lo w and (b ) eac h o f hi s t ax ab le y ears 20 09 an d 2 01 0.- 3 -

[* 3] FINDINGS OF FACT Pet it io ne r Vic to r M. Kan tc he v (M r. Kan tc he v) an d re sp on de ntst ip ul at ed
so m e o f th e fac ts , andth os e fac ts are s o fo un d. 2 At the ti m e p et it io ne rs fil edth e p et it io n, the y res id edinCap e Gir ard eau , Mi ss ou ri. Dur in g 1 99 0, M r. Kan tc he v i m m ig rat edto th e Uni te d S ta te s fr om Bu lg ari a. Whi le res id in g i n B ul garia , Mr. Kan tc he v re cei ve d am as te r’s de gr ee i n v id eo pr oduc ti on an d t el ev is io n jo urna li sm an d wo rk edas aph ot ojo urna li st . Afte r m ov in g t o t he Uni te d S ta te s, M r. Kan tc he v b eg anop erat in g a n or ga ni zat io n c al le d the Ins ti tu te forSci en ti fic an d C ul tu ral Exch an ge . That in st itut e’s act iv it ie s i nv ol ve d b rin gi ng pe op le to th e Uni te d S ta te s fo r bu si ne ss se m in ars th atMr. Kan tc he v o rg an iz edforit
. Dur in g e ach of the y ears 20 08 , 20 09 , and20 10 , th e ta xabl e y ears at i ss ue , Mr. Kan tc he v d ev ot edm os t o f hi s t im e to , andwas p reo ccupi edwith, ce rta in act iv it ie s re la ti ng to th e p ro du ct io n o f a d oc um en ta ry ti tl ed“ Fi re Lil y ” fo r a fi lm
co m pa ny kn own as Vi ct ory

Fil m Pro du ct io ns , Inc . (Vict ory Fil m), anS co rPet it io ne r Dan ie laA. Kant ch ev (Ms . Kant ch ev ) di d n otsi gn th e st ip ul at io n 2 of fact s b etweenres po nd en t an d M r. Kan tc he v a nddi d n otap pe ar atth e tr ia l i n th is cas e. Res po nd en t fi le d am ot io n t o d is m is s fo r la ck of p ro se cu ti onas t o h er. W e sh al l g ran t tha t m ot io n a ndsh al l en te r a d eci si on with re sp ectto Ms . Kant ch ev th atis th e sa m e as th e d eci si on th atwe sh al l en te r wit h re sp ectto Mr. Kan tc he v.- 4 -

[* 4] po rat io n, tha t h e who ll y own ed . Vict ory

Fil m ’s pro du ct io n o f “ Fi re Lil y ” d id
no t re su ltina pr of

itforth atco m

pa ny. St art in g s om et im e b efo re 2 00 4 a ndco nt inui ng th ro ug ho uteachof t he y ears 20 08 , 20 09 , and20 10 an d t he reaf te r, Mr. Kan tc he v s pe ntso m e o f hi s t im e d oi ng wha t h e en

joy s, n am el y , tak in g p ho to gr ap hs with ano nd ig it al cam era, p ro ces si ng th e fi lm to crea te ne ga ti ve s, s can ni ng th e n eg at iv es with ahi gh -res ol ut io n s can ne r to crea te di gi ta l i m ag es , m od ifyin g t he di gi ta l i m ag es with c om pu te r so ftwa re, an d pr in ti ng th e m od ifi eddi gi ta l i m ag es on di ffer en t m ed iu m s. Si nc e atlea st20 08 , th e fi rs t t ax ab le y ear a t i ss ue , Mr. Kan tc he v’s p ho to gr ap hy acti vi ty has in cl ud ed pr in ti ng ph ot og rap hs on no t o nl y pape r bu t al so can va s an d m et al . (W e sh al l re fer
co ll ect iv el y

to all of t he ph ot og rap hy-rela te d a ct iv it ie s tha t M r. Kan tc he v und erto okst art in g s om et im e b efo re 2 00 4 a ndco nt in ui ng th ro ug ho uteach of the y ears 20 08 , 20 09 , and20 10 an d t he reaf te r as a ph ot og rap hy acti vi ty.) Mr. Kant ch ev ’s ph ot og rap hy acti vi ty, whi chwas i ns pi redby the lan ds cap e p ho to gr ap he r Ans el Ada m s, fo cu se d o n p an or am ic lan ds cap e as th e subjec t o f th e p ho to gr ap hs th athe to ok
. Dur in g ape rio d t ha t i s n otest ab li sh edby the reco rdbu t tha t i nc lu de d 2 00 8, 20 09 , and20 10 , Mr. Kan tc he v t oo k anu m be r of tri ps (Am eri can W es t trip s) to cert ai n n at io na l p ark s i n t he Am eri can W es t t o p ho to gr ap h c ert ai n s ub jects of- 5 -

[* 5] pa rti cu la r in te res t t o h im . Tho se subjec ts in cl ud edlan ds cap es of t he Am eri
can W es t. Mr . Kant ch ev to okat l eas t o ne of h is Am eri can W es t trip s dur in g e ach of th e y ears 20 08 , 20 09 , and20 10
. Dur in g e ach of the y ears 20 08 , 20 09 , and20 10 , Mr. Kan tc he v d idno t h av e a wri tt enbu si ne ss pl anforhi s p ho to gr ap hy acti vi ty. Duri ng each of t he y ears 20 06 th ro ug h 2 00 9, M r. Kan tc he v d idno t h av e an y gro ss rece ip ts , anddu rin g 20 10 he ha d g ro ss rece ip ts to ta li ng $1 ,99 5, fr om hi s p ho to gr ap hy acti vi ty. Dur in g e ach of the y ears 20 06 th ro ug h 2 01 0, M r. Kan tc he v m ad e certa in
ex pe nd itur es rel at in g t o h is ph ot og rap hy acti vi ty. Duri ng at l eas t 2 00 8 and20 09 , Mr. Kan tc he v u se d p et it io ne rs ’ ba nkacco un t an d c ert ai n c red itcard s i ss ue d i n pe ti ti on ers ’ nam es to pa y forth os e ex pe nd itur es . In20 13 , Mr. Kan tc he v c om pi le d c ert ai n o f hi s p ho to gr ap hs ina larg e ha rdbo un d b oo k (l arg e b oo k) . (W e sh al l re fer t o t he co ll ect io n o f ph ot og rap hs in th e la rg e b oo k a s t he Am eri can W es t co ll ect io n.) In 20 13 , Mr. Kan tc he v a ls o co m pi le d c ert ai n o f hi s p ho to gr ap hs fro m th e Am eri can W es t co ll ect io n i n a sm al le r ha rd

bo un d b oo k (s m al l b oo k) . There aft er, ata ti m e n otest ab li sh edby the
reco rd , Mr. Kan tc he v a tt em pt edto sel l al l o f th e la rg e b oo ks an d a ll of t he sm al l- 6 -

[* 6] bo ok s tha t h e h adco m pi le d. He was s uc ces sf

ul insel li ng so m e o f eac h t y pe 3 of bo ok
. 4 At the ti m e o f th e tr ia l i n thi s ca se , Mr. Kan tc he v’s s on , Alex an de r V. Kan tc he v (Al ex an de r), who ha d aba ch el or ’s deg ree i n e co no m ic s an d i nt ern ati on al bu si ne ss an d was pu rs ui ng a m as te r’s de gr ee i n b us in es s ad m in is tra ti on sp eci al iz in g i n fi na nc e m an ag em en t, was he lp in g M r. Kan tc he v m ark etcert ai n o f th e p ro du ct s t ha t M r. Kan tc he v h adpro du cedinhi s p ho to gr ap hy acti vi ty (Mr. Kan tc he v’s p ho to gr ap hy-act iv it y pro du ct s) , su chas t he lar ge bo okan d t he sm al l bo okan d c ert ai n o f Mr. Kan tc he v’s p ho to gr ap hs pri nt edon m et al an d o n c an va s. At t im es no t es tabl is he d b y th e rec or d, Al ex an de r he lp edMr. Kan tc he v m ark et Mr. Kan tc he v’s p ho to gr ap hy-act iv it y pro du ct s wh il e h e was ab ro adon cert ai n sc ho ol tri ps . Dur in g e ach of the y ears 20 08 , 20 09 , and20 10 , Ms . Kant ch ev work edas a reg is te rednu rs e fo r whi chsh e rec ei ve d wag es . Duri ng at l eas t s om e o f th os e

The reco rddo es no t es tabl is h h ow m an y lar ge bo ok s an d h ow m any sm al l 3 bo ok s M r. Kan tc he v h adco m pi le d a s o f th e ti m e o f th e tr ia l i n t hi s ca se . The re i s n o re li ab le ev id en ce i n the reco rdest ab li sh in g h ow m an y of t he 4 la rg e b oo ks an d h ow m an y of t he sm al l b oo ks Mr. Kan tc he v was su cces sf ul in se ll in g a s o f th e ti m e o f th e tr ia l i n t hi s ca se .- 7 -

[* 7] y ears , Ms . Kant ch ev was e ng ag edincert ai n a ct iv it ie s re la ti ng to ps y ch ot he rap y (ps y ch othe rap y

act iv ity ). Dur in g e ach of the y ears 20 08 , 20 09 , and20 10 , pet it io ne rs rece iv edcert ai n ren t fr om th e le as in g o f certa inres id en ti al pro pe rty. Pet it io ne rs fil edFo rm

10 40 , U.S. Ind iv idua l In co m e Tax Return (r eturn) , for th ei r ta xabl e y ear 2 00 5 (2 00 5 re tu rn ). In the ir 2 00 5 re tu rn , pet it io ne rs sh owe d wag es of $ 54 ,95 9 a ndcla im eda bu si ne ss lo ss of $ 8,3 44 fro m Sch edul e C, Pro fit
orLos s Fr om

Bu si ne ss (Sch edul e C). 5 Pet it io ne rs fil eda return fo r th ei r ta xabl e y ear 2 00 6 (2 00 6 re turn ). In t he ir 20 06 return, p et it io ne rs sh owe d wag es of $ 53 ,73 2 a ndcla im eda bu si ne ss lo ss of $3 ,44 9 fr om

Sch edul e C. 6 Vict ory Fil m fil edFo rm

11 20 S, U.S. Inc om e Tax Return fo r anS Co rp or ati on(S co rp or at io n re tu rn ), fo r it s t ax ab le y ear 2 00 7 (2 00 7 S co rp or at io n re tu rn ) th atIva n S to il ov (Mr. St oi lo v) , a return p rep arer , hadpre pa red . In i ts 20 07

Pet it io ne rs ’ 20 05 return t ha t i s i n t he reco rdco nt ai ns two Sch edul es C, bo th 5 of whi chhave no t b een co m pl et edex cep t fo r sh owi ng “ Vict orM. Kan tc he v” an d “ Dan ie laA. Kant ch ev ”, res pe ct iv el y , as p ro pr ie to rs . Pet it io ne rs ’ 20 06 return t ha t i s i n t he reco rdco nt ai ns two Sch edul es C, bo th 6 of whi chhave no t b een co m pl et edex cep t fo r sh owi ng “ Vict orM. Kan tc he v” an d “ Dan ie laA. Kant ch ev ”, res pe ct iv el y , as p ro pr ie to rs .- 8 -

[* 8] S co rp or at io n re tu rn , Vict ory Fil m sh owe d n o t ot al in co m e an d c la im ed $9 5,7 02 of d educ ti on s an d alo ss (20 07 lo ss ) in th e sa m e am ou nt . Pet it io ne rs fil eda return fo r th ei r ta xabl e y ear 2 00 7 (2 00 7 re turn ) th atMr. St oi lo v h adpre pa red . In the ir 2 00 7 re tu rn , pet it io ne rs sh owe d wag es of $ 54 ,97 2 rel at in g t o M s. Kan tc he v’s wo rkas areg is te rednu rs e. Pet it io ne rs in cl ud ed Sch edul e C fo r Mr. Kan tc he v’s p ho to gr ap hy acti vi ty (20 07 ph ot og rap hy Sche du le C) as pa rt o f th ei r 20 07 return. Inth e 2 00 7 p ho to gr ap hy Sche du le C, pe ti ti on ers sh owe d n o g ro ss rece ip ts an d n o g ro ss in co m e an d c la im edto ta l ex pe ns es of $1 ,77 3 a nda lo ss inth e sa m e am ou nt . Peti ti on ers als o i nc lu de d S ch edul e C fo r Ms . Kant ch ev ’s ps y ch othe rap y act iv it y (20 07 ps y ch ot he rap y

Sch edul e C) as pa rt of th ei r 20 07 return. In th e 2 00 7 p sycho th erap y Sch edul e C, p et it io ne rs sh owe d
no gro ss rece ip ts an d n o g ro ss in co m e an d c la im edto ta l ex pe ns es of $ 3,7 92 an d a lo ss inth e sa m e am ou nt . Peti ti on ers in cl ud edSch edul e E, Sup pl em en ta l In co m e an d Lo ss (20 07 Sch edul e E), as pa rt o f th ei r 20 07 return. Inth e 2 00 7 S ch edul e E, pe ti ti on ers sh owe d re nt s re cei ve d o f $1 ,67 7 a ndcla im edto ta l ex pe ns es of $ 6,9 52
an d alo ss of $ 5,2 75 fro m th e le as in g o f certa in res id en ti al pro pe rty. In th e 2 00 7 Sch edul e E, pet it io ne rs als o c la im eda fl owt hr ou ghlo ss (20 07 flo wth ro ug h l os s) of $9 5,7 02 att rib ut ab le to Vict ory Fil m ’s cla im ed20 07 lo ss . Peti ti on ers were- 9 -

[* 9] un ab le to us e al l o f pe ti ti on ers ’ cl ai m ed20 07 flo wth ro ug h l os s fo r th ei r ta xabl e y ear 2 00 7. Vict ory Fil m fil edanS co rp or at io n re tu rnforit s t ax ab le y ear 2 00 8 (2 00 8 S
co rp or at io n re tu rn ) th atMr. St oi lo v h adpre pa red . In i ts 20 08 S co rp or at io n return, Vi ct ory

Fil m sh owe d n o t ot al in co m e an d c la im ed$9 ,55 0 o f de du ct io ns an d alo ss (20 08 lo ss ) in th e sa m e am ou nt . On M ay 9, 2 00 9, p et it io ne rs fil eda return fo r th ei r ta xabl e y ear 2 00 8 (2 00 8 return) th atMr. St oi lo v h adpre pa red . In the ir 2 00 8 re tu rn , pet it io ne rs sh owe d wag es of $ 81 ,82 9 re la ti ng to Ms . Kant ch ev ’s workas areg is te rednu rs e. Pet it io ners in cl ud edSch edul e A, Ite miz edDedu ct io ns (20 08 Sch edul e A), as pa rt o f th ei r 20 08 return. In th e 2 00 8 S ch edul e A, pet it io ne rs cla im eda lo ss carry ov er o f $5 0,5 65 (20 07 lo ss carry ov er t o 2 00 8) , whi chwas t he un us edpo rti on of the 20 07 flo wth ro ug h l os s. Pet it io ne rs in cl ud edSch edul e C fo r Mr. Kan tc he v’s p ho to gr aph y act iv it y (20 08 ph ot og rap hy Sche du le C) as pa rt o f th ei r 20 08 return. Inth e 20 08 ph ot og rap hy Sche du le C, pe ti ti on ers sh owe d n o g ro ss rece ip ts an d n o g ro ss in co m e an d c la im edto ta l ex pe ns es of $ 3,2 24 an d alo ss inth e sa m e am ou nt . Pet it io ne rs als o i nc lu de d S ch edul e C fo r Ms . Kant ch ev ’s ps y ch othe rap y act iv it y (2 00 8 p sycho th erap y

Sch edul e C) as pa rt o f th ei r 20 08 return. In th e 2 00 8 ps y ch ot he rap y

Sch edul e C, p et it io ne rs sh owe d g ro ss rece ip ts of $ 21 ,89 7 a ndgro ss- 10 -

[* 10 ] in co m e in th e sa m e am ou ntan d c la im edto ta l ex pe ns es of $ 11 ,82 5 a nda pr of itof $ 10 ,07 2 (2 00 8 p sycho th erap y Sch edul e C p ro fit ). Pet it io ne rs in cl ud ed Sch edul e E (20 08 Sch edul e E) as pa rt o f th ei r 20 08 return. In th e 2 00 8 S ch edul e E, pet it io ne rs sh owe d re nt s re cei ve d o f $2 ,22 4 a ndcla im edto ta l ex pe ns es of $4 ,28 4 a nda lo ss of $ 2,0 60 fro m th e le as in g o f certa in res id en ti al pro pe rty. In th e 20 08 Sch edul e E, pet it io ne rs als o c la im eda fl owt hr ou gh lo ss (20 08 flo wth ro ug h lo ss ) of $9 ,55 0 a tt rib ut ab le to Vict ory Fil m ’s cla im ed20 08 lo ss . Pet it io ne rs fil eda return fo r th ei r ta xabl e y ear 2 00 9 (2 00 9 re turn ) th atMr. St oi lo v h adpre pa red . In the ir 2 00 9 re tu rn , pet it io ne rs sh owe d wag es of $ 10 4,4 98 rel at in g t o M s. Kan tc he v’s wo rkas areg is te rednu rs e. Pet it io ne rs in cl ud ed Sch edul e C fo r Mr. Kan tc he v’s p ho to gr ap hy acti vi ty (20 09 ph ot og rap hy Sche du le C) as pa rt o f th ei r 20 09 return. Inth e 2 00 9 p ho to gr ap hy Sche du le C, pe ti ti on ers sh owe d n o g ro ss rece ip ts an d n o g ro ss in co m e an d c la im edto ta l ex pe ns es of $1 2,5 43 an d alo ss inth e sa m e am ou nt . Peti ti on ers in cl ud edSch edul e E (20 09 Sch edul e E) as pa rt o f th ei r 20 09 return. In th e 2 00 9 S ch edul e E, pet it io ne rs sh owe d re nt s re cei ve d o f $2 ,59 1 a ndcla im edto ta l ex pe ns es of $ 4,8 30 an d alo ss of $2 ,23 9 fr om

th e le as in g o f certa in res id en ti al pro pe rty. Pet it io ne rs fil eda return fo r th ei r ta xabl e y ear 2 01 0 (2 01 0 re turn ) th atMr. St oi lo v h adpre pa red . In the ir 2 01 0 re tu rn , pet it io ne rs sh owe d wag es of $ 11 2,5 22- 11 -

[* 11 ] rel at in g t o M s. Kan tc he v’s wo rkas areg is te rednu rs e. Pet it io ne rs in cl ud ed Sch edul e C fo r Mr. Kan tc he v’s p ho to gr ap hy acti vi ty (20 10 ph ot og rap hy Sche du le C) as pa rt o f th ei r 20 10 return. Inth e 2 01 0 p ho to gr ap hy Sche du le C, pe ti ti on ers sh owe d g ro ss rece ip ts an d g ro ss in co m e o f $3 ,50 0 an d c la im edto ta l ex pe ns es of 7 $1 2,7 05 an d alo ss of $ 9,2 05 . Peti ti on ers in cl ud edSch edul e E (20 10 Sch edul e E)
as pa rt o f th ei r 20 10 return. In th e 2 01 0 S ch edul e E, pet it io ne rs sh owe d re nt s rece iv edof $ 3,0 14 an d c la im edto ta l ex pe ns es of $ 2,3 75 an d aga in of $ 63 9 (2 01 0
ren ta l ac ti vi ty gai n) fro m th e le as in g o f cert ai n re si de nt ia l p ro pe rty. On J un e 2 4, 2 00 9, the Int ern al Rev enue Serv ic e (IR S) i ss ue d KS/ MO-2 00 9- 45 , “ Mi ss ou ri S ev ere S to rm s an d F lo od in g Vi ct im s M ay Qual ify for IR S Dis as te r Rel ie f” (IR S d is as te r rel ie f no ti ce). Th atno ti ce s ta te d i n p ert in en t p artth at“ th e IRS i s p os tp on in g u nt il Ju ly 7, 20 09 , cert ai n d ead li ne s fo r ta xp ay ers who res id e o r ha ve a bu si ne ss inth e d is as te r are a. The p os tp on em en t ap pl ie s t o re tu rnfil in g, t ax pa ym en t an d c ert ai n o th er t im e-s en si ti ve act s o th erwi se du e b etweenMay 8, 20 09 , an d J ul y 7, 2 00 9.” The IR S d is as te r rel ie f no ti ce s ta te d i n p ert in en t p art : Und er s ect io n 7 50 8A, the IRS g iv es affe ct edtax pa y ers un ti l M ay 8, 20 09 , [si c] to fi le m os t t ax returns (in cl ud in g i nd iv idua l, co rp or at e, an d e st at e an d t ru stin co m e ta x re tu rn s; pa rtn ers hi p re tu rn s, S co rp orat io n re tu rn s, an d t ru streturns ; es ta te , gi ft, a ndge ne rat io nOf th e $ 3,5 00 of g ro ss rece ip ts th atpe ti ti on ers sh owe d i n t he 20 10 7 ph ot og rap hy Sche du le C, $1 ,50 5 was rece iv edin20 11
.- 12 -

[* 12 ] sk ip pi ng tra ns fer t ax returns ; an d e m pl oym en t an d c ert ai n e xc is e ta x returns ), orto m ak e ta x p aym en ts , in cl ud in g e st im at edtax pa ym en ts , th atha ve eit he r anori gi na l o r ex te nd eddu e d at e o ccurri ng on or a fte r May 8, 20 09 , andon or b efo re J ul y 7, 2 00 9. The IRS d is as te r rel ie f no ti ce s ho wedpe ti ti on ers ’ areaof r es id en ce, Cape Gira rd eau , as o ne of t he Fed eral di sa st er are as th atqu al ifi edfor th e rel ie f sp eci fie d in th atno ti ce. Res po nd en t i ss ue d ano ti ce o f de fic ie nc y (no ti ce) t o p et it io ne rs forth ei r ta xabl e y ears 20 08 , 20 09 , and20 10 . In tha t n ot ic e, res po nd en t d et erm in ed , in te r al ia , to di sa ll ow the res pe ct iv e ex pe ns es an d t he res pe ct iv e lo ss es th atpe ti ti on ers ha d c la im edinth e 2 00 8 p ho to gr ap hy Sche du le C, th e 2 00 9 p ho to gr ap hy Sche du le C, an d t he 20 10 ph ot og rap hy Sche du le C. Res po nd en t al so de te rm in edinth at no ti ce t o d is al lo w pet it io ne rs ’ cl ai m ed20 07 lo ss carry ov er t o 2 00 8 a ndth ei r cl ai m ed20 08 flo wth ro ug h l os s. Re sp on de ntals o d et erm in edinth e n ot ic e th at pe ti ti on ers are l iabl e fo r th ei r ta xabl e y ear 2 00 8 fo r anad di ti on to tax un de r se ct io n 6 65 1( a)(1 ) an d t ha t the y are l iabl e fo r eac h o f th ei r ta xabl e y ears 20 08 , 20 09 , and20 10 forth e acc ur acy-rela te d p en al ty und er s ect io n 6 66 2( a).- 13 -

[* 13 ] OPINION Mr. Kan tc he v b ears th e b ur de n o f es tabl is hi ng th atth e d et erm in at io ns inth e no ti ce tha t re m ai n a t i ss ue are erro ne ou s. See Ru le 14 2( a); W el chv. Hel ve rin g, 8 29 0 U.S. 1 11 , 11 5 (1 93 3) . Dedu ct io ns are a m atte r of leg is la ti ve gra ce, an d M r. Kan tc he v m

us t p ro ve hi s en ti tl em en t t o a ny deduc ti on s cl ai m ed . See INDOPCO, In c. v. Co m

m is si on er, 5 03 U.S. 79 , 84 (19 92 ). The C od e an d t he reg ul at io ns th ereu nd er re qu ire d M r. Kan tc he v t o m ai nt ai n re co rd s s uf fic ie ntto est ab li sh th e am ou ntof a ny deduc ti oncla im ed . See s ec. 6 00 1; sec . 1.6 00 1- 1( a), In co m e Tax Reg s. Befo re turni ng to th e is su es th atrem ai n fo r de ci si on , we sh al l ev al ua te th e te st im on y of M r. Kan tc he v o n wh ic h h e rel ie s i n s up po rt o f hi s p os it io ns with
res pe ctto th os e is su es , th e te st im on y of M r. Sto il ov on whi chMr. Kan tc he v re li es in supp ort o f certa in of t ho se is su es , andth e te st im on y of Al ex an de r on whi chMr. Kan tc he v re li es insupp ort o f on e o f th os e is su es . W e fo un d t he tes ti m on y

of M r. Kan tc he v t o b e in cert ai n m at eri al res pe ct s un co rro bo rat ed , gen eral , sel f-s erv in g, v ag ue , andco nc lu so ry . W e sh al l n otrel y on
Thro ug ho uthi s o pe ni ng bri ef, Mr . Kant ch ev adva nc es an d re li es on 8 nu m ero us factua l co nt en ti on s t ha t ar e n otsupp orte d b y th e rec or d e st ab li sh edat th e tr ia l i n t hi s ca se . W e sh al l n otrel y onth os e co nt en ti on s i n re so lv in g t he is su es pr es en te d.- 14 -

[* 14 ] th e te st im on y

of M r. Kan tc he v t o e st ab li sh hi s re sp ect iv e p os it io ns with
res pe ctto th e is su es pre se nt ed . See, e.g ., Tok ars ki v. Co m m is si on er, 8 7 T.C. 7 4, 77 (19 86 ). W e fo un d t he tes ti m on y

of M r. Sto il ov to be incert ai n m at eri al res pe ct s un co rro bo rat ed , gen eral , andva gu e. W e sh al l n otrel y on th e te st im on y

of M r. St oi lo v t o e st ab li sh Mr. Kan tc he v’s re sp ect iv e p os it io ns with re sp ectto th e is su es pr es en te d abo utwhi chMr. St oi lo v t es ti fie d. Se e, e.g ., id
. W e fo un d t he tes ti m on y

of Al ex an de r to be incert ai n m at eri al res pe ct s un co rro bo rat ed , gen eral , vag ue , con cl us ory an d s erv in g t he in te res ts of M r. Kan tc he v, h is fathe r. W e sh al l n otrel y on th e te st im on y

of Al ex an de r to est ab li sh 9 Mr. Kan tc he v’s p os it io n wi th res pe ctto th e is su e p res en te d abo utwhi chAlex an de r te st ifi ed . See, e.g ., id
. Sect io n 1 83 Sect io n 1 83 (a) g en eral ly lim it s the am ou ntof e xp en se s tha t a t ax pa y er m ay de du ctwith re sp ectto anact iv ity “ no t en ga ge d i n fo r pr of it ” to th e d educ ti on s pr ov id edinsec ti on 18 3( b) . Sect io n 1 83 (b )(1 ) pr ov id es th atde du ct io ns th atwou ld be all owabl e wit ho utreg ardto whet he r su chact iv it y is en ga ge d i n fo r pr of

itare t o
Mr. Kan tc he v s eem edto wantus to tre atAlex an de r as anex pe rt i n 9 m ark et in g. We dec li ne to do so . See Ru le 14 3( g)
.- 15 -

[* 15 ] be all owe d. Se ct io n 1 83 (b )(2 ) fu rth er p ro vi de s tha t d educ ti on s wh ic h wo ul d be all owabl e o nl y

if s uc h a ct iv it y

is en ga ge d i n fo r pr of

itare t o b e al lo wed , bu t on ly to the ex te ntth atth e g ro ss in co m e d eri ve d fr om su chact iv it y

forth e ta xabl e y ear e xc eed s t he de du ct io ns all owabl e und er s ect io n 1 83 (b )(1 ). An ac ti vi ty is “ no t en ga ge d i n fo r pr of

it ” if itis anact iv it y

ot he r th anon e wit h re sp ectto whi ch de du ct io ns are al lo wab le forth e ta xabl e y ear u nd er s ect io n 1 62 or s ect io n 2 12 (1 )
or(2) . Sec. 1 83 (c). Inde te rm in in g wh ethe r anact iv it y is en ga ge d i n fo r pr of

itfor pu rp os es of
se ct io n 1 83 , th e ta xp ay er m us t s ho w th athe or s he en ga ge d i n t he act iv ity with a n actua l an d h on es t o bjec ti ve of m ak in g apro fit . E.g., Keati ng v. Co m m is si on er, 54 4 F .3d90 0, 9 05 (8t h C ir. 2 00 9) , aff’g T.C. Mem o. 2 00 7- 30 9; Hul te r v. C omm is
si on er, 9 1 T.C. 3 71 , 39 2 (1 98 8) ; Dre ic er v . Comm is si on er, 7 8 T.C. 6 42 , 64 5 (1 98 2) , aff’d wit ho utpubl is he d o pi ni on , 70 2 F .2d12 05 (D.C. Cir . 19 83 ). Alth ou gh th e ta xp ay er’s ex pe ct at io n o f a p ro fitne edno t b e rea so nabl e, he or s he
m us t h av e a g oo d- fai th ob

jecti ve of m ak in g apro fit . E.g., Keati ng v. Co m m is
si on er, 5 44 F.3dat 9 05 ; Dre ic er v . Comm is si on er, 7 8 T.C. at64 5; Dun n v . Co m m is si on er, 7 0 T.C. 7 15 , 72 0 (1 97 8) , aff’d o n a no th er i ss ue , 61 5 F .2d57 8 (2 d Ci r. 19 80 ); s ec. 1 .18 3- 2( a), In co m e Tax Reg s. Th e ta xp ay er b ears th e b ur de n o f pr ov in g t he requi si te in te nt . E.g., Gol an ty v. Commis si on er, 7 2 T.C. 4 11 , 42 6- 16 -

[* 16 ] (19 79 ), aff’d wi th ou t p ub li sh edop in io n, 6 47 F.2d17 0 (9 th Cir . 19 81 ); Jo hn so n v . Comm is si on er, 5 9 T.C. 7 91 , 81 4 (1 97 3) , aff’d, 4 95 F.2d10 79 (6t h C ir. 19 74 ); s ee Drei cer v . Comm is si on er, 7 8 T.C. at64 6. Whe th er a t ax pay er en ga ge d i n a n a ct iv it y with t he requi si te pro fitob jecti ve is de te rm in edfro m

all th e fac ts an d c irc um st an ces . E.g., Hul te r v. C omm is si on er, 91 T.C. at 3 93 ; Taube v. Co m m is si on er, 8 8 T.C. 4 64 , 48 0 (1 98 7) ; Go la nty v. Co m m is si on er, 7 2 T.C. at42 6; sec . 1.1 83 -2 (a) a nd(b) , Inc om e Tax Reg s. Mo re weig htis gi ve n t o o bjec ti ve fact s tha n t o t he tax pa y er’s m ere s ta te m en t o f hi s o r he r in te nt . E.g., Dreic er v . Comm is si on er, 7 8 T.C. at64 5; sec . 1.1 83 -2 (a), In co m e Tax Reg s. Sect io n 1 .18 3- 2( b) , Inc om e Tax Reg s., l is ts th e fo ll owi ng fact or s tha t sh ou ldno rm al ly be ta ke n i nt o a cco un t i n d et erm in in g wh ethe r anact iv it y is
en ga ge d i n fo r pr of

it : (1 ) th e m an ne r in whi chth e ta xp ay er ca rri edon th e act iv it y , (2 ) th e ex pe rti se of t he tax pa y er o r hi s ad vi so rs , (3) th e ti m e an d e ffo rt e xp en de d by the tax pa y er i n c arrying on th e act iv ity , (4) th e ex pe ct at io n t ha t as se ts us edin th e act iv it y

m ay ap pr eci at e in va lu e, (5 ) th e su cces s o f th e ta xp ay er i n c arrying on ot he r si m il ar o r di ss im il ar ac ti vi ti es , (6) th e ta xp ay er’s h is to ry of i nc om e o r lo ss with re sp ectto th e act iv it y , (7) th e am ou ntof o ccas io na l p ro fit , if an y , whi chis
earn ed , (8) th e fi na nc ia l s ta tu s o f th e ta xp ay er, an d (9 ) th e ex te ntto whi chele
-- 17 -

[* 17 ] m en ts of p ers on al pl eas ur e o r recr eat io n are i nv ol ve d. Th e li stof f act or s i n th e reg ul at io ns is no t ex cl us iv e, an d o th er fa ct or s m ay be co ns id eredinde te rm in
in g wh ethe r anact iv it y

is en ga ge d i n fo r pr of

it . No si ng le fact oris di sp os it iv e. E.g., Gol an ty v. Comm is si on er, 7 2 T.C. at42 6; sec . 1.1 83 -2 (b ), In co m e Tax Reg s. The de te rm in at io n o f a p ro fitob jecti ve do es no t d ep en d o n c ou nt in g t he nu m be r of fact or s tha t s up po rt e achpa rty’ s p os it io n. E.g., Du nnv. Co m m is si on er, 7 0 T.C. 71 5; sec . 1.1 83 -2 (b ) In co m e Tax Reg s. We con si de r no w th e fac to rs inth e reg ul at io ns . Man ne r in whi chMr. Kan tc he v c arri edon hi s p ho to gr ap hy acti vi ty Dur in g e ach of the y ears 20 08 , 20 09 , and20 10 , Mr. Kan tc he v d idno t h av e a wri tt enbu si ne ss pl anforhi s p ho to gr ap hy acti vi ty. Mo reo ve r, th e rec or d i s de vo idof a ny evi de nc e th atMr. Kan tc he v m ai nt ai ne d a ny bo ok s o r rec or ds rel at in g t o h is ph ot og rap hy acti vi ty. Mr. Kan tc he v’s fa il ur e to have a bu si ne ss pl anan d t o m ai nt ai n b oo ks or r eco rd s re la ti ng to hi s p ho to gr ap hy acti vi ty ind icat es th athe di d n otco nduc t tha t ac ti vi ty in a b us in es sl ik e m anne r. Dur in g a t l eas t 2 00 8 a nd20 09 , Mr. Kan tc he v u se d p et it io ne rs ’ ba nkacco un t
an d c ert ai n c red itcard s i ss ue d i n p et it io ne rs ’ na m es to pa y ex pe ns es rel at in g t o Mr. Kan tc he v’s p ho to gr ap hy acti vi ty. Mr. Kan tc he v’s u se of t ha t b an k a cco un t
an d t ho se cred itcard s t o p ay ex pe ns es rel at in g t o M r. Kan tc he v’s p ho to gr ap hy- 18 -

[* 18 ] act iv it y

in di cat es th atMr. Kan tc he v d idno t co nduc t tha t p ho to gr ap hy act iv ity ina bu si ne ss li ke m anne r. On the in st an t re co rd , we fin d tha t fa ct or(1) insec ti on1.1 83 -2 (b ), In co m e Tax Reg s., d oe s n otsupp ort M r. Kan tc he v’s p os it io n t ha t h e en ga ge d i n h is ph ot og rap hy acti vi ty w it h a n a ctua l an d h on es t o bjec ti ve of m ak in g apro fit
. Exp ert is e o f Mr. Kan tc he v o r hi s ad vi so rs Dur in g 1 99 0, M r. Kan tc he v i m m ig rat edto th e Uni te d S ta te s fr om Bu lg ari a. Whi le res id in g i n B ul garia , Mr. Kan tc he v re cei ve d am as te r’s de gr ee i n v id eo pr oduc ti on an d t el ev is io n jo urna li sm an d wo rk edas aph ot ojo urna li st . Mr. Kan tc he v’s wo rkinBu lg ari a as a ph ot ojo urna li stan d h is ph ot og rap hy act iv ity inth e Uni te d S ta te s d o n otest ab li sh th atMr. Kan tc he v h as ex pe rti se in
so un d “bu si ne ss * * * [a nd ] eco no m ic * * * p ract ic es ” o f th e p ho to gr ap hy bu si ne ss orth atev enif h e h adth atexpe rti se , he u se d i t wh enco nduc ti ng hi s p ho to gr ap hy act iv ity . See s ec. 1 .18 3- 2( b) (2 ), In co m e Tax Reg s. Th atMr. Kan tc he v m ay be a ve ry go odph ot og rap he r do es no t m ean th athe co nduc te d h is ph ot og rap hy acti vi ty us in g s ou nd“bu si ne ss * * * [a nd ] eco no m ic * * * p ract ic es ” o f th e p ho to gr ap hy bu si ne ss . Mo reo ve r, th e rec or d d oe s n otest ab li sh th atMr. Kan tc he v re cei ve d o r rel ie d
on th e ad vi ce o f anexpe rt i n t he fie ldof p ho to gr ap hy. See s ec. 1 .18 3- 2( b) ,- 19 -

[* 19 ] Inc om e Tax Reg s. Alt ho ug h Al ex an de r, who as o f th e ti m e o f th e tr ia l i n th is cas e h ada ba ch el or ’s deg ree i n e co no m ic s an d i nt ern at io na l b us in es s an d was pu rs ui ng a m as te r’s de gr ee i n b us in es s ad m in is tra ti on sp eci al iz in g i n fi na nc e m an ag em en t, was he lp in g M r. Kan tc he v m ark etMr. Kan tc he v’s p ho to gr ap hyact iv ity pro du ct s, the reco rddo es no t es tabl is h t ha t Al ex an de r ha d a ny prac ti cal
ex pe rti se inco nduc ti ng an y bu si ne ss , letalo ne a ph ot og rap hy bu si ne ss . On the in st an t re co rd , we fin d tha t fa ct or(2) insec ti on1.1 83 -2 (b ), In co m e Tax Reg s., d oe s n otsupp ort M r. Kan tc he v’s p os it io n t ha t h e en ga ge d i n h is ph ot og rap hy acti vi ty w it h a n a ctua l an d h on es t o bjec ti ve of m ak in g apro fit
. Tim e an d e ffo rt e xp en de d b y Mr. Kan tc he v Dur in g e ach of the y ears 20 08 , 20 09 , and20 10 , Mr. Kan tc he v d ev ot edm os t of hi s t im e to , andwas p reo ccupi edwith, ce rta in act iv it ie s re la ti ng to th e p ro du cti onof “ Fi re Lil y ” fo r Vic to ry Fil m . Alth ou gh we ha ve fou ndth atMr. Kan tc he v sp en t s om e o f hi s t im e dur in g e ach of t he y ears 20 08 , 20 09 , and20 10 on hi s ph ot og rap hy acti vi ty, whi chhe en joy ed , th e rec or d e st ab li sh es th atth atti m e p al ed in co m pa ris on with t he ti m e th athe sp en t dur in g e ach of t ho se y ears on th e pr oduc ti on of “ Fi re Lil y ”. W e b el ie ve th atth e ti m e th atMr. Kan tc he v s pe nton hi s ph ot og rap hy acti vi ty dur in g e ach of t he y ears 20 08 , 20 09 , and20 10 is co ns is te nt- 20 -

[* 20 ] with h is en

joym en t o f ph ot og rap hy, as op po se d t o t he op erat io n o f a p ho to grap hy bu si ne ss . On the in st an t re co rd , we fin d tha t fa ct or(3) insec ti on1.1 83 -2 (b ), In co m e Tax Reg s., d oe s n otsupp ort M r. Kan tc he v’s p os it io n t ha t h e en ga ge d i n h is ph ot og rap hy acti vi ty w it h a n a ctua l an d h on es t o bjec ti ve of m ak in g apro fit
. Exp ect at io n t ha t the ass et s u se d i n t he act iv it y m ay ap pr eci at e inva lu e Mr. Kan tc he v h as no t es tabl is he d t hr ou gh hi s t es ti m on y , andth e rec or d d oe s no t o th erwi se est ab li sh , whatsp eci fic ass et s M r. Kan tc he v u se d i n h is ph ot og rap hy act iv ity . Evenif t he reco rdha d e st ab li sh edwhatth os e as se ts were, the reco rd do es no t es tabl is h t he res pe ct iv e co st s o r va lu es or t he ex pe ct edap pr eci at io n, i f
an y , of a ny suc h a ss et s. On the in st an t re co rd , we fin d tha t fa ct or(4) insec ti on1.1 83 -2 (b ), In co m e Tax Reg s., d oe s n otsupp ort M r. Kan tc he v’s p os it io n t ha t h e en ga ge d i n h is ph ot og rap hy acti vi ty w it h a n a ctua l an d h on es t o bjec ti ve of m ak in g apro fit
. Su cces s o f Mr. Kan tc he v i n c arrying on ot he r si m il ar o r di ss im il ar ac ti vi ti es Inad di ti on to hi s p ho to gr ap hy acti vi ty, th e rec or d e st ab li sh es th atMr. Kan tc he v h as be enen ga ge d i n o nl y two act iv it ie s s in ce i m

m ig rat in g t o t he Uni te d St at es . After m ov in g t o t he Uni te d S ta te s, M r. Kan tc he v b eg anop erat in g a n or ga ni zat io n c al le d the Ins ti tu te forSci en ti fic an d C ul tu ral Exch an ge . That- 21 -

[* 21 ] in st itut e’s act iv it ie s i nv ol ve d b rin gi ng pe op le to th e Uni te d S ta te s fo r bu si ne ss seminar s t ha t M r. Kan tc he v o rg an iz edforit . The rec or d d oe s n ot es tabl is h wh ethe r Mr. Kan tc he v was su cces sf ul incarry in g o n the act iv it ie s tha t h e un de rto okforth e In st itut e fo r Sci en ti fic an d C ul tu ral Exch an ge . Dur in g a t l eas t ea chof t he y ears 20 08 , 20 09 , and20 10 , Mr. Kan tc he v en ga ge d i n c ert ai n a ct iv it ie s re la ti ng to th e p ro du ct io n o f “ Fi re Lil y ” fo r Vic to ry Fi lm . W e h av e fo un d tha t Vi ct ory Fil m ’s pro du ct io n o f “ Fi re Lil y ” d idno t re su lt in a pr of itforth atco m

pany. On the in st an t re co rd , we fin d tha t fa ct or(5) insec ti on1.1 83 -2 (b ), In co m e Tax Reg s., d oe s n otsupp ort M r. Kan tc he v’s p os it io n t ha t h e en ga ge d i n h is ph ot og rap hy acti vi ty w it h a n a ctua l an d h on es t o bjec ti ve of m ak in g apro fit
. Mr. Kan tc he v’s h is to ry

of i nc om e o r lo ss with re sp ect to th e act iv it y

an d a m ou ntof o ccas io na l p ro fit , if an y 1 0 Exc ep t fo r Mr. Kan tc he v’s t ax ab le y ear 2 01 0, M r. Kan tc he v d idno t h av e an y gro ss rece ip ts fro m

hi s p ho to gr ap hy acti vi ty dur in g a ny of h is tax ab le y ears 20 05 th ro ug h 2 01 0. Du rin g h is tax ab le y ear 2 01 0, M r. Kan tc he v re cei ve d $ 1,9 95

W e co ns id er t og ethe r th e two fact or s i n the he ad in g. 1 0- 22 -

[* 22 ] ingro ss rece ip ts fro m th atact iv ity . Mo reo ve r, fo r eac h o f hi s t ax ab le y ears

1 1 20 05 th ro ug h 2 01 0, M r. Kan tc he v c la im eda lo ss rel at in g t o h is ph ot og rap hy act iv ity . Mr. Kan tc he v a ss ert s t ha t the reas onhe di d n otha ve sal es or p ro fit s fr om hi s p ho to gr ap hy acti vi ty dur in g e ach of h is tax ab le y ears 20 08 , 20 09 , and20 10
was th atth os e y ears “ were the wors t p os si bl e y ears forth e artm ark et ”. Acco rd in g to Mr. Kan tc he v, “ [t]he m ark etco nt ract edso m uc h t ha t i t was alm os t i m po ss ib le to sel l an yth in g, an y

art .” Howev er, Mr . Kant ch ev ackno wled ge d dur in g h is te st im on y th athe sp en t m os t o f hi s t im e dur in g e achof t he y ears 20 08 , 20 09 , and 20 10 on act iv it ie s re la ti ng to Vict ory Fil m ’s pro du ct io n o f “ Fi re Lil y ”, no t o n h is ph ot og rap hy acti vi ty, an d t ha t h is sp en di ng so m uc h t im e o n a ct iv it ie s fo r Vic to ry Fi lm co nt rib ut edto hi s n otha vi ng m ad e a p ro fitfro m hi s p ho to gr ap hy acti vi ty for
an y of t ho se y ears . Mr. Kan tc he v a ndres po nd en t s ti pu la te d t ha t M r. Kan tc he v’s p ho to gr ap hy act iv ity di d n otres ul t i n apro fitforan y of M r. Kan tc he v’s t ax ab le y ears 20 05 th ro ug h 2 01 0. Mr . Kant ch evass ert edat t ria l tha t h is ph ot og rap hy acti vi ty resu lt ed in a pr of itforth e ta xabl e y ears aft er the las t t ax ab le y ear a t i ss ue th atha d e nd edas of th e ti m e o f th e tr ia l (i .e., 20 11 , 20 12 , and20 13 ). Thatis to say, Mr. Kant ch ev See s up ra n ot e 7 . 1 1- 23 -

[* 23 ] cla im s t ha t tha t ac ti vi ty resu lt edina pr of itforeachof h is tax ab le y ears 20 11 , 20 12 , and20 13 . Howev er, h e fai le d t o p ro vi de an y ev id en ce co rro bo rat in g th attes ti m on y . On the in st an t re co rd , we fin d tha t fa ct or s (6 ) an d (7 ) in sec ti on 1.1 83 -2 (b ), In co m e Tax Reg s., d o n otsupp ort M r. Kan tc he v’s p os it io n t ha t h e en ga ge d i n h is ph ot og rap hy acti vi ty w it h a n a ctua l an d h on es t o bjec ti ve of m ak in g apro fit
. Fi na nc ia l s ta tu s Pet it io ne rs sh owe d the wage s tha t M s. Kan tc he v re cei ve d fo r he r work a s a reg is te rednu rs e in th ei r return fo r eac h o f th ei r ta xabl e y ears 20 08 th ro ug h 2 01 0. Pet it io ne rs sh owe d the 20 08 ps y ch ot he rap y Sch edul e C p ro fitof M s. Kan tc he v i n th ei r 20 08 return. Al l o f th e wag e in co m e th atpe ti ti on ers sh owe d i n e ach of t he ir 20 08 return, 2 00 9 re tu rn , and20 10 return was att rib ut ab le to Ms . Kant ch ev . All of th e p ro fitth atpe ti ti on ers sh owe d i n t he ir 2 00 8 re tu rnwas a tt rib ut ab le to Ms . Kan tc he v’s 2 00 8 p sycho th erap y Sch edul e C. The lo ss th atpe ti ti on ers cla im edin th e 2 00 8 p ho to gr ap hy Sche du le C of fs etby app ro xi m at el y

4 p erce ntth e to ta l
am ou ntof t he wage s o f Ms . Kant ch ev th atpe ti ti on ers rep orte d i n t he ir 2 00 8 re tu rn an d t he 20 08 ps y ch ot he rap y Sch edul e C p ro fitof M s. Kan tc he v. Th e lo ss th at pe ti ti on ers cla im edinth e 2 00 9 p ho to gr ap hy Sche du le C of fs etby app ro xi m at el y 12 pe rcen t the wage s o f Ms . Kant ch ev th atpe ti ti on ers rep orte d i n t he ir 2 00 9- 24 -

[* 24 ] return. Th e lo ss th atpe ti ti on ers cla im edinth e 2 01 0 p ho to gr ap hy Sche du le C o ffs etby app ro xi m at el y 8 p erce ntth e to ta l o f th e wag es of M s. Kan tc he v t ha t pe ti ti on ers rep orte d i n t he ir 2 01 0 re tu rnan d p et it io ne rs ’ 20 10 ren ta l ac ti vi ty gai n sh own inth e 2 01 0 S ch edul e E. On the reco rdbe fo re u s, we fi ndth atfact or(8) insec ti on 1.1 83 -2 (b ), In co m e Tax Reg s., d oe s n otsupp ort M r. Kan tc he v’s p os it io n t ha t h e en ga ge d i n hi s p ho to gr ap hy acti vi ty w it h a n a ctua l an d h on es t o bjec ti ve of m ak in g apro fit
. Ext en t t o wh ic h e le m en ts of p ers on al pl eas ur e o r rec reat io n a re i nv ol ve d St art in g s om et im e b efo re 2 00 4 a ndco nt inui ng th ro ug ho uteachof t he y ears 20 08 , 20 09 , and20 10 an d t he reaf te r, Mr. Kan tc he v e ng ag edinhi s p ho to gr ap hy act iv ity . Mr. Kan tc he v a ckno wled ge d, an d we h av e fo un d a s a f act , th athe en

joy s ph ot og rap hy andtak in g p ho to gr ap hs of p an or am ic lan ds cap es . On the in st an t re co rd , we fin d tha t fa ct or(9) insec ti on1.1 83 -2 (b ), In co m e Tax Reg s., d oe s n otsupp ort M r. Kan tc he v’s p os it io n t ha t h e en ga ge d i n h is ph ot og rap hy acti vi ty w it h a n a ctua l an d h on es t o bjec ti ve of m ak in g apro fit
. The reco rddo es no t es tabl is h a ny oth er fa ct or s tha t s up po rt M r. Kan tc he v’s po si ti onth athe en ga ge d i n h is ph ot og rap hy acti vi ty w it h a n a ctua l an d h on es t ob jecti ve of m ak in g apro fit
.- 25 -

[* 25 ] Bas edup onou r ex am in at io n o f th e en ti re re co rdbe fo re u s, we fi ndth atMr. Kan tc he v h as fai le d t o m eethi s b ur de n o f es tabl is hi ng th athe en ga ge d i n h is ph ot og rap hy acti vi ty w it h t he ob jecti ve of m ak in g apro fitwithi n t he m ean in g o f
se ct io n 1 83
. Pet it io ne rs ’ cl ai m ed20 07 lo ss carry ov er to 20 08 an d c la im ed20 08 flo wth ro ug h l os s Vict ory Fil m , an S co rp or at io n t ha t M r. Kan tc he v wh ol ly owne d, cl ai m eda lo ss init s 2 00 7 S co rp or at io n re tu rn . As a res ul t, p et it io ne rs cla im edVict ory Fi lm ’s cla im ed20 07 lo ss as aso -cal le d fl owt hr ou gh lo ss fro m anS co rp or at io n i n th ei r 20 07 return. Pe ti ti on ers were u nabl e to us e al l o f th ei r cl ai m ed20 07 flo wth ro ug h l os s fo r th ei r ta xabl e y ear 2 00 7. Co ns eque nt ly, pe ti ti on ers cla im edth e un us edpo rti on of t ha t cl ai m edflo wth ro ug h l os s as a carry ov er l os s i n t he ir 2 00 8 return. Vi ct ory

Fil m als o c la im eda lo ss init s 2 00 8 S co rp or at io n re tu rn . As a
res ul t, p et it io ne rs cla im edVict ory Fil m ’s cla im ed20 08 lo ss as aflo wth ro ug h l os s in th ei r 20 08 return. It i s re sp on de nt ’s po si ti onth atpe ti ti on ers are n oten ti tl edto th e cl ai m ed 20 07 carry ov er l os s t o 2 00 8 a ndth e cl ai m ed20 08 flo wth ro ug h l os s b ecau se Vict ory Fil m di d n otm ak e anele ct io n und er s ect io n 1 81 (a)( 1) forit s t ax ab le y ear- 26 -

[* 26 ] 20 07 to tre atcert ai n c os ts of p ro du ci ng “ Fi re Lil y ” as ex pe ns es th atare n ot ch arg eab le to cap it al acco un t an d t ha t ar e d educ ti bl e. Sect io n 1 81 (a)( 1) all ows a ta xp ay er t o e le ctto “ tre atth e co stof a ny qu al ifi ed fil m or t el ev is io n p ro du ct io n a s an ex pe ns e whi chis no t ch arg eab le to cap it al
acco un t.” If

a ta xp ay er m ak es anele ct io n u nd er s ect io n 1 81 (a)( 1) , th e ta xp ay er i s en ti tl edto de du ctan y

su chco st . A tax pa y er m

us t m ak e anele ct io n u nd er s ect io n 1 81 (a)( 1) “ in su chm an ne r as pre sc rib edby the Secr et ary an d b y th e due da te (in cl ud in g e xt en si on s) forfil in g th e ta xp ay er’s return o f ta x u nd er thi s ch ap te r fo r th e ta xabl e y ear i n wh ic h c os ts of th e p ro du ct io n a re fi rs t i nc urred .” Sec. 1 81 (c)( 1) . In o rd er fo r th e el ect io n t o b e effe ct iv e, “ th e ta xp ay er m us t at ta cha st at em en t t o t he return s ta ti ng th atth e ta xp ay er i s m ak in g a n e le ct io n u nd er s ect io n 1 81 ”. Sec. 1 .18 1- 2T(c )(1 ), Tem po rary Inco m e Tax Reg s., 7 2 F ed . Reg . 61 61 -6 16 2 (F eb . 9, 2 00 7)
. Mr. Kan tc he v a ckno wled ge s tha t a s ta te m en t m ak in g a n e le ct io n u nd er se ct io n 1 81 (a)( 1) “was no t fi le d t ech ni cal ly” with Vict ory Fil m ’s 20 07 S co rp or ati onreturn. As we un de rs ta ndhi s p os it io n, M r. Kan tc he v d oe s n otdi sp ut e th at Vict ory Fil m di d n otatt ach a st at em en t t o i ts 20 07 S co rp or at io n re tu rninwhi chit in di cat edth atitwas m ak in g a n e le ct io n u nd er s ect io n 1 81 (a)( 1) , as re qu ire d b y se ct io n 1 81 (c)( 1) an d s ect io n 1 .18 1- 2T(c )(1 ), Tem po rary Inco m e Tax Reg s., s up ra.- 27 -

[* 27 ] Mr. Kan tc he v m ai nt ai ns th atVict ory Fil m no ne th el es s i s en ti tl edforeach of it s t ax ab le y ears 20 07 an d 2 00 8 t o t reatcert ai n c os ts of p ro du ci ng a cert ai n fi lm (fi lm pro du ct io n c os ts ) as ex pe ns es th atare n otch arg eab le to cap it al acco un t an d th atare d educ ti bl e. Insupp ort o f hi s p os it io n, M r. Kan tc he v a rg ue s tha t al th ou gh a st at em en t
m ak in g an e le ct io n u nd er s ect io n 1 81 (a)( 1) “ was no t fi le d t ech ni cal ly” with Vict ory Fil m ’s 20 07 S co rp or at io n re tu rn , Vict ory Fil m ’s deduc ti on of c ert ai n fi lm pr oduc ti on co st s i n i ts 20 07 S co rp or at io n re tu rnno ne th el es s s at is fie s the ele ct io n requi rem en t u nd er s ect io n 1 81 (a)( 1) . In ad va nc in g t ha t ar gu m en t, Mr . Kant ch ev rel ie s o n c ert ai n l eg is la ti ve hi st ory of s ect io n 1 81 . Accor di ng to Mr. Kan tc he v,

“ [t]he leg is la ti ve hi st ory

* * * s ta te s tha t: ‘ de du ct in g qua li fy in g c os ts on th e ap pr op ria te tax return s ha ll co ns ti tu te a va li d e le ct io n’”. W e rejectMr. Kan tc he v’s ar gu m en t tha t the leg is la ti ve hi st ory of s ect io n 18 1 s ho ws tha t Co ng res s i nt en de d t o a ll ow a t ax pa y er t o m ak e anele ct io n u nd er se ct io n 1 81 (a)( 1) by deduc ti ng th e ex pe ns es forqu al ifyin g fi lm pro du ct io n c os ts in th e ta xp ay er’s return fo r th e y ear i n wh ic h t ho se co st s ar e in cu rred . In quo ti ng cert ai n l eg is la ti ve hi st ory of s ect io n 1 81 insupp ort o f hi s ar gu m en t, Mr . Kant ch ev in te nt io na ll y

or u ni nt en ti on al ly om it s p artof t he sen te nc e th athe qu ot es . The
en ti re s en te nc e in th atleg is la ti ve hi st ory fro m whi chMr. Kan tc he v quo te s o nl y an- 28 -

[* 28 ] ex cerp t s ta te s: “ The Co m m it te e in te nd s tha t, i n t he ab se nc e o f sp eci fic gu id an ce b y

th e Sec ret ary, de du ct in g qua li fy in g c os ts on th e ap pr op ria te tax return sh al l co ns ti tu te a va li d e le ct io n.” H.R. Con f. Rep t. No . 10 8- 75 5, at37 2 n .20 0 (2 00 4) , 20 04 U.S.C.C.A.N. 13 41 , 14 43 . The t em po rary regu la ti on s u nd er s ect io n 18 1 p ro vi de sp eci fic gu id an ce o n h ow a t ax pa y er i s re qu ire d t o m ak e anele ct io n un de r th atsec ti on . Thatgu id an ce re qu ire d Vi ct ory Fil m to att acha st at em en t t o it s 2 00 7 re tu rninwhi chitin di cat edth atitwas m ak in g a n e le ct io n u nd er s ect io n 18 1. Se e se c. 1.1 81 -2 T(c)(1 ), Tem po rary Inco m e Tax Reg s., s up ra. Mr. Kan tc he v a ls o p ur

po rts to rel y

on th e so -cal le d s ub st an ti al co m pl ia nc e do ctrin e in furth er s up po rt o f hi s p os it io n t ha t Vi ct ory Fil m is en ti tl edforeach of it s t ax ab le y ears 20 07 an d 2 00 8 t o t reatfil m pro du ct io n c os ts as e xp en se s tha t ar e no t ch arg eab le to cap it al acco un t an d t ha t ar e d educ ti bl e, ev enth ou gh Vict ory Fi lm di d n otatt acha st at em en t t o i ts 20 07 S co rp or at io n re tu rninwhi chitin di
cat edth atitwas m ak in g a n e le ct io n u nd er s ect io n 1 81 (a)( 1) . Thatis be cau se , Mr. Kan tc he v m ai nt ai ns , we “ m ay ap pl y th e subs ta nt ia l co m

pl ia nc e d oc tri ne * * * t o ex cu se th e p et it io ne r fro m st ric t co m

pl ia nc e wit h p ro cedur al reg ul at ory requi rem en ts if t he pe ti ti on er s ub st an ti al ly com pl ie d b y ful fil li ng th e es se nt ia l s ta tu to ry pu rp os e.” Alt ho ug h M r. Kan tc he v re fers to th e Fed eral tax law d oc tri ne of- 29 -

[* 29 ] subs ta nt ia l co m

pl ia nc e, he do es no t ap pe ar t o u nd ers ta ndth atdo ctrin e. 1 2 In st ead , Mr. Kan tc he v app ears to be arg ui ng th at , as l on g a s Vi ct ory Fil m ful fil le d th e in te ntof C on gr es s i n e na ct in g s ect io n 1 81 , Vict ory Fil m ’s fai lu re t o s at is fy

th e el ect io n re qu ire m en t tha t s ect io n 1 81 (a)( 1) im po se s d oe s n otco ntro l wh ethe r Vict ory Fil m ’s “pr oduc ti on qu al ifi es for* * * the be ne fit s o f th is ele ct io n”
. Altho ug h h is arg um en t i s n oten ti rel y cle ar, i t ap pe ars th atMr. Kan tc he v i s arg ui ng th atVict ory

Fil m sh ou ldbe en ti tl edto tre atit s fi lm pro du ct io ns co st s as ex pe ns es th atare n otch arg eab le to cap it al acco un t an d t ha t ar e d educ ti bl e b ecau se Co ng res s i nt en de d s ect io n 1 81 to ap pl y to th e types of f

il m pro du ct io n c os ts th at Vict ory Fil m in curreddurin g 2 00 7 a s wel l as 20 08
. On the reco rdbe fo re u s, we re ject M r. Kan tc he v’s ar gu m en t. Tha t ar gu m en t ig no res th e requi rem en t tha t s ect io n 1 81 ex pl ic it ly im po se s; na m el y , inord er t o de du ctcert ai n qua li fy in g fi lm pro du ct io n c os ts , a tax pa y er m us t m ak e anele ct io n to tre atth os e co st s as ex pe ns es th atare n otch arg eab le to cap it al acco un t “ in su ch
m an ne r as pre sc rib edby the Secr et ary an d b y th e due da te (in cl ud in g e xt en si on s) InSam ue li v. Co m

mis si on er, 1 32 T.C. 33 6, 3 45 (20 09 ), we su m m ari zed 1 2 th e subs ta nt ia l co m

pl ia nc e d oc tri ne as f

ol lo ws: “ The subs ta nt ia l co m pl ia nc e do ctrin e is a na rro w equ it ab le do ctrin e th atco urts m ay ap pl y to av oi d h ard sh ip whe re a p arty

est ab li sh es th atth e p arty in te nd edto co m

pl y with apro vi si on , di d ev erythi ng reas on ab ly pos si bl e to co m pl y with t he pro vi si on , bu t d idno t co m pl y with t he pro vi si onbe cau se of afai lu re t o m eetth e p ro vi si on ’s sp eci fic requi rem en ts .”- 30 -

[* 30 ] forfil in g t he tax pa y er’s return o f ta x u nd er thi s ch ap te r fo r th e ta xabl e y ear in whi chco st s o f th e p ro du ct io n a re fi rs t i nc urred .” Sec. 1 81 (c)( 1)
. On the reco rdbe fo re u s, we fi ndth atVict ory Fil m di d n otm ak e anele ct io n un de r se ct io n 1 81 (a)( 1) forit s t ax ab le y ear 2 00 7 t o t reatcert ai n fi lm pro du ct io n co st s as ex pe ns es th atare n otch arg eab le to cap it al acco un t an d t ha t ar e d educ ti bl e. Bas edup onou r ex am in at io n o f th e en ti re re co rdbe fo re u s, we fi ndth atMr. Kan tc he v i s n oten ti tl edfor hi s t ax ab le y ear 2 00 8 t o t he 20 07 lo ss carry ov er t o 20 08 an d t o t he 20 08 flo wth ro ug h l os s. Sect io ns 66 51 (a)( 1) an d 6 66 2( a) Res po nd en t b ears th e b ur de n o f pr oduc ti on with re sp ectto th e ad di ti on to ta x u nd er s ect io n 6 65 1( a)(1 ) an d t he accu racy-rela te d p en al ti es un de r se ct io n 66 62 (a) t ha t re sp on de ntde te rm in edinth e n ot ic e. See s ec. 7 49 1( c); Hig be e v . Co m m is si on er, 1 16 T.C. 43 8, 4 46 -4 47 (20 01 ). To s at is fy res po nd en t’s b ur de n o f pr oduc ti on , res po nd en t m us t co m e fo rwardwith “ su ffi ci en t ev id en ce i nd ic at in g th atitis ap pr op ria te to im po se ” th e p en al ti es . Hig be e v . Comm is si on er, 1 16 T.C. at44 6. Al th ou gh res po nd en t b ears th e b ur de n o f pr oduc ti on with re sp ectto th e ad di ti on to tax un de r se ct io n 6 65 1( a)(1 ) an d the pe na lt y un de r se ct io n 6 66 2( a),
res po nd en t “ ne edno t i nt ro du ce ev id en ce re ga rd in g re as on ab le cau se * * * o r- 31 -

[* 31 ] si m il ar p ro vi si on s. * * * [T] he tax pa y er b ears th e b ur de n o f pr oo f wit h reg ardto th os e is su es .” Id
. Sect io n 6 65 1( a) Sect io n 6 65 1( a)(1 ) im

po se s an ad di ti on to tax forfai lure t o fi le ti m el y a ta x return. Th e ad di ti on to tax forfai lu re t o fi le un de r se ct io n 6 65 1( a)(1 ) do es no t ap pl y if t he fai lu re t o fi le ti m el y is du e to reas on ab le cau se , andno t due to wil lfu l
ne gl ect . See s ec. 6 65 1( a)(1 ). Pet it io ne rs ’ 20 08 return was du e wit ho utex te ns io ns onApri l 1 5, 2 00 9. Se e se c. 60 72 (a). Pet it io ne rs di d n otfil e th ei r 20 08 return u nt il May 9, 20 09
. On the reco rdbe fo re u s, we fi ndth atres po nd en t h as carr ie d re sp on de nt ’s bu rd enof p ro du ct io n u nd er s ect io n 7 49 1( c) wi th res pe ctto th e ad di ti onto tax un de r se ct io n 6 65 1( a)(1 ) th atres po nd en t d et erm in edforMr. Kan tc he v’s t ax ab le y ear 2 00 8. It i s M r. Kan tc he v’s p os it io n t ha t p et it io ne rs ’ fai lu re t o fi le ti m el y a ta x return was du e to reas on ab le cau se , andno t due to wil lfu l n eg le ct . In s up po rt o f th atpo si ti on , Mr. Kan tc he v a dv an ces anarg um en t (I RS d is as te r rel ie f no ti ce arg um en t) t ha t the IRS i n e ffec t ex te nd edth e due da te forfil in g p et it io ne rs ’ ta x return fo r th ei r ta xabl e y ear 2 00 8 i n t he IRS d is as te r rel ie f no ti ce. Tha t n ot ic e st at edinpe rti ne ntpa rt: “ [T]he IRS is po stpo ni ng un ti l Jul y 7, 2 00 9, ce rta in- 32 -

[* 32 ] de ad li ne s fo r ta xp ay ers who res id e o r ha ve a bu si ne ss inth e d is as te r are a. The po stpo ne m en t ap pl ie s t o re tu rnfil in g, t ax pa ym en t an d c ert ai n o th er t im ese ns it iv e act s o th erwi se du e b etweenMay 8, 20 09 , andJu ly 7, 20 09 .” Altho ug h M r. Kan tc he v’s IR S d is as te r rel ie f no ti ce ar gu m en t i s d iff ic ul t t o fo ll ow b ecau se itis il lo gi cal an d d oe s n otm ak e se ns e, ou r un de rs ta nd in g o f th at 1 3 arg um en t i s as fol lo ws. Mr. Kan tc he v m ai nt ai ns th atpe ti ti on ers res id edinth e di sa st er ar ea s pe ci fie d i n t he IRS d is as te r rel ie f no ti ce an d t ha t p et it io ne rs ’ 20 08 return was no t due un ti l Oct ob er 1 5, 2 00 9, b ecau se th ey ha d re qu es te d a n aut om at ic ex te ns io n o f ti m e unt il th atda te withi n wh ic h t o fi le th ei r ta x re tu rnforth ei r ta xabl e y ear 2 00 8. Co ns eque nt ly, acco rd in g t o M r. Kan tc he v, the fil in g d at e fo r th attax return fe ll be twee n M ay 8 an d J ul y

7, 2 00 9. As a res ul t, Mr . Kant ch ev as se rts th atun de r th e rel ie f pr ov id edinth e IRS di sa st er re li ef n ot ic e th e d at e b y whi chpe ti ti on ers were re qu ire d t o fi le th ei r ta x re tu rnforth ei r ta xabl e y ear 2 00 8
was ex te nd edun ti l J ul y

7, 2 00 9. Be cau se pe ti ti on ers fil edth atreturn o n M ay 9, 20 09 , Mr. Kan tc he v a ss ert s t ha t i t was ti m el y fil ed
.

If p et it io ne rs ha d i n fa ctreque st edanau to m at ic ex te ns io n o f ti m e unt il 1 3 Octo be r 15 , 20 09 , withi n wh ic h t o fi le th ei r ta x re tu rnforth ei r ta xabl e y ear 2 00 8, as Mr. Kan tc he v a ss ert s, i t wo ul d m ak e n o s en se , anditwou ldbe un ne ces sa ry , for hi m to rel y on th e IRS di sa st er re li ef n ot ic e.- 33 -

[* 33 ] Altho ug h M r. Kan tc he v t es ti fie d t ha t p et it io ne rs ha d re qu es te d a n aut om at ic
ex te ns io n o f ti m e wit hi n wh ic h t o fi le th ei r ta x re tu rnforth ei r ta xabl e y ear 2 00 8, th attes ti m on y

is no t co rro bo rat edby any rel iabl e ev id en ce i n the reco rd
. On the 1 4
reco rdbe fo re u s, we fi ndth atMr. Kan tc he v h as fai le d t o c arry his bu rd enof
es tabl is hi ng th atpe ti ti on ers reque st edsu chanex te ns io n o f ti m e. On tha t re co rd , we fu rth er fi ndth atth e IRS di sa st er re li ef n ot ic e is no t ap pl ic ab le to pe ti ti on ers ’ ta x re turnforth ei r ta xabl e y ear 2 00 8 a nddi d n otex te ndth e fi li ng da te forth at return t o J ul y

7, 2 00 9. Onth e rec or d b efo re u s, we fi ndth atMr. Kan tc he v h as fai le d t o c arry his bu rd enof e st ab li sh in g t ha t h is fai lu re t o fi le ti m el y hi s 2 00 8 return was du e to reas on ab le cau se , andno t due to wil lfu l n eg le ct . Bas edup onou r ex am in at io n o f th e en ti re re co rdbe fo re u s, we fi ndth atMr. Kan tc he v h as fai le d t o c arry his bu rd enof e st ab li sh in g t ha t h e is no t l iabl e fo r hi s ta xabl e y ear 2 00 8 fo r th e ad di ti on to tax un de r se ct io n 6 65 1( a)(1 ). Sect io n 6 66 2( a) Sect io n 6 66 2( a) i m

po se s an accu racy-rela te d p en al ty of 20 pe rcen t o f th e un de rp aym en t t o wh ic h s ect io n 6 66 2 app li es . Sect io n 6 66 2 app li es to th e p orti on of an y un de rp aym en t wh ic h i s at tri bu tabl e to , in te r al ia , (1) ne gl ig en ce o r di sr eMr. St oi lo v, p et it io ne rs ’ return p rep arer , di d n otreca ll whet he r he infact 1 4 reque st edon pe ti ti on ers ’ be ha lf an aut om at ic ex te ns io n o f th e ti m e wit hi n wh ic h pe ti ti on ers were re qu ire d t o fi le th ei r ta x re tu rnforth ei r ta xabl e y ear 2 00 8.- 34 -

[* 34 ] ga rdof rul es or r eg ul at io ns , sec . 66 62 (b )(1 ), or(2) a subs ta nt ia l u nd ers ta te m en t o f ta x, s ec. 6 66 2( b) (2 ). The term “ ne gl ig en ce” i n s ect io n 6 66 2( b) (1 ) in cl ud es an y fai lu re t o m ak e a reas on ab le att em

ptto co m pl y with t he Co de . Sec. 6 66 2( c). Neg li ge nc e h as als o be ende fin edas afai lu re t o d o wh ata reas on ab le pe rs on wou lddo un de r th e ci rcu m st an ces . Leuh sl er v . Comm is si on er, 9 63 F.2d90 7, 9 10 (6t h C ir. 1 99 2) , aff’g T.C. Me m o. 1 99 1- 17 9; Ant on id es v. Co m m is si on er, 9 1 T.C. 6 86 , 69 9 (1 98 8) , aff’d, 8 93 F.2d65 6 (4 th Cir . 19 90 ). The t erm “ ne gl ig en ce” a ls o i nc lu de s an y fai lu re b y

th e ta xp ay er t o k eep ad equa te bo ok s an d re co rd s o r to subs ta nt ia te it em s p ro pe rly. Sec. 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. Th e te rm “ di sr eg ard ” in cl ud es an y

care le ss , reck le ss , or i nt en ti on al di sr eg ard . Sec. 6 66 2( c). Fo r pu rp os es of s ect io n 6 66 2( b) (2 ) anun de rs ta te m en t i s equa l t o t he ex ces s of th e am ou ntof t ax requi redto be sh own inth e ta x re turnov er the am ou ntof t ax sh own inth e return. Se c. 66 62 (d )(2 )(A). An u nd ers ta te m en t i s s ub st an ti al inth e cas e o f anin di vi du al if t he am ou ntof t he un de rs ta te m en t fo r th e ta xabl e y ear ex ceed s the gre at er o f 10 pe rcen t o f th e ta x re qu ire d t o b e sh owninth e ta x re tu rn fo r th aty ear o r $5 ,00 0. Se c. 66 62 (d )(1 )(A). The accu racy-rela te d p en al ty und er s ect io n 6 66 2( a) d oe s n otap pl y to an y po rti onof a n u nd erp aym en t i f itis sh own th atth ere was reas on ab le cau se for , and- 35 -

[* 35 ] th atth e ta xp ay er ac te d i n g oo d fa it h wi th res pe ctto , su chpo rti on . Sec. 66 64 (c)( 1) . The d et erm in at io n o f whe th er the tax pa y er ac te d wi th reas on ab le
cau se an d i n g oo d fa it h d ep en ds on all th e p ert in en t fa ct s an d c irc um st an ces , in cl ud in g t he tax pa y er’s eff orts to ass es s the tax pay er’s p ro pe r ta x l iabi li ty, th e kn owl ed ge an d e xp eri en ce o f th e ta xp ay er, an d t he rel ia nc e o n t he advi ce o f a pr of es si on al , su chas a n a cco un ta nt . Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Mr. Kan tc he v d oe s n otdi sp ut e th athe is li ab le for th e acc ur acy-rela te d pe na lty for each of h is tax ab le y ears 20 08 , 20 09 , and20 10 with re sp ectto th e po rti onof t he un de rp aym en t fo r eac h o f th os e y ears th atis attrib ut ab le to th e lo ss th atpe ti ti on ers cla im edineach of t he 20 08 ph ot og rap hy Sche du le C, th e 2 00 9 ph ot og rap hy Sche du le C, an d t he 20 10 ph ot og rap hy Sche du le C. He di sp ut es on ly th e acc ur acy-rela te d p en al ty for h is tax ab le y ear 2 00 8 wi th res pe ctto th e p orti on of th e und erp aym en t fo r th aty ear t ha t i s at tri bu tabl e to th e 2 00 7 l os s ca rry ov er t o 20 08 an d t he 20 08 flo wth ro ug h l os s tha t p et it io ne rs cla im edinth e 2 00 8 S ch edul e A andth e 2 00 8 S ch edul e E, res pe ct iv el y . The rea so n h e ad vanc es fordi sp ut in g th atpe na lt y

is th athe rel ie d o n M r. Sto il ov , th e p rep arerof p et it io ne rs ’ 20 08 return.Res po nd en t ad va nc es no arg um en t o n b rie f as to why we sh ou ldim po se on Mr. Kan tc he v t he accu racy-rela te d p en al ty for h is tax ab le y ear 2 00 8 wi thres pe ct- 36 -

[* 36 ] to th e p orti on of t he un de rp aym en t fo r th aty ear t ha t i s at tri bu tabl e to th e 20 07 lo ss carry ov er t o 2 00 8 a ndth e 2 00 8 fl owt hr ou gh lo ss th atpe ti ti on ers cl ai m edinth e 2 00 8 S ch edul e A an d t he 20 08 Sch edul e E, res pe ct iv el y . Res po n- 1 5 de ntarg ue s o nl y

th atpe ti ti on ers ’ cl ai m

of alo ss ineach of t he 20 08 ph ot og rap hy Sch edul e C, th e 2 00 9 p ho to gr ap hy Sche du le C, an d the 20 10 ph ot og rap hy Sche dul e C was att rib ut ab le to ne gl ig en ce. W e co nc lu de th atMr. Kan tc he v’s fa il ur e to di sp ut e th athe sh ou ldno t b e li ab le foreach of h is tax ab le y ears 20 08 , 20 09 , and20 10 forth e acc ur acy-rela te d pe na lty with re sp ectto th e p orti on of t he un de rp aym en t fo r eac h o f th os e y ears th atis att rib ut ab le to th e lo ss th atpe ti ti on ers cla im edineach of the 20 08 ph ot og rap hy Sche du le C, th e 2 00 9 p ho to gr ap hy Sche du le C, an d t he 20 10 ph ot og rap hy Sch edul e C i s an ab an do nm en t b y hi m of tha t i ss ue . Evenif we h adno t s o co nc lu de d, we n on ethe le ss wou ldfin d o n t he reco rdbe fo re u s tha t s in ce M r. Res po nd en t m erel y

ass ert s o n b rie f: “ The de fic ie nc y for20 08 is 1 5 $9 ,36 0.0 0, wh ic h e xc eed s $ 5,0 00 .” It i s n otcle ar wh atres po nd en t h adinm in d i n m ak in g tha t as se rti on . If res po nd en t i nt en de d t o m ak e th e p oi ntth atth ere i s a subs ta nt ia l u nd ers ta te m en t o f ta x wi th in th e m ean in g o f se c. 66 62 (d )(1 )(A) fo r Mr. Kan tc he v’s t ax ab le y ear 2 00 8 a ndth atres po nd en t h as th eref or e sa ti sf ie d res po nd en t’s b ur de n o f pr oduc ti on un de r se c. 74 91 (c) wi th res pe ctto th e accu racy-rela te d p en al ty for Mr . Kant ch ev ’s tax ab le y ear 2 00 8, we ag ree. Th atis be cau se we have he ldforres po nd en t o n t he two is su es pre se nt edto us un de r se cs . 18 3 a nd18 1, an d M r. Kan tc he v d idno t d is pu te at t ria l an y ot he r de te rm in at io n i n th e n ot ic e th atga ve ris e to th e d efi ci en cy th atres po nd en t d et erm in edforhi s ta xabl e y ear 2 00 8.- 37 -

[* 37 ] Kant ch ev be ga n h is ph ot og rap hy acti vi ty he h as no t und ert ak ento do with
res pe ctto th atact iv it y

whata reas on ab le pe rs on , who ha s anactua l an d h on es t ob jecti ve of m ak in g apro fitfro m th atact iv it y , wou ldhave do ne . On tha t re co rd , 1 6
we wou ldfurth er fi ndth atMr. Kan tc he v h as fai le d t o c arry his bu rd enof s ho win g th athe act edwith re as on ab le cau se an d i n g oo d fa it h t o a ss es s wh ethe r pe ti ti on ers sh ou ldcla im

for each of t he ir t ax ab le y ears 20 08 , 20 09 , and20 10 hi s p ho to gr ap hy act iv ity as a n a ct iv ity

inSch edul e C wit h re sp ectto whi chhe ha d the ob jecti ve of
m ak in g apro fitwithi n t he m ean in g o f se ct io n 1 83 . See s ec. 6 66 4( c)(1 ); s ec. 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. W e co nc lu de th atres po nd en t’s fa il ur e to adva nc e anarg um en t o n b rie f as to why w e sh ou ldim

po se on Mr. Kan tc he v t he accu racy-rela te d p en al ty for h is ta xabl e y ear 2 00 8 wi th res pe ctto th e p orti onof t he un de rp aym en t fo r th aty ear th atis att rib ut ab le to th e 2 00 7 l os s ca rry ov er t o 2 00 8 a ndth e 2 00 8 fl owt hr ou gh lo ss th atpe ti ti on ers cla im edinth e 2 00 8 S ch edul e A an d t he 20 08 Sch edul e E,
res pe ct iv el y , is anab an do nm en t b y res po nd en t o f th e res pe ct iv e d et erm in at io ns
Fo r ex am pl e, th e rec or d i s d ev oi d o f an y ev id en ce tha t M r. Kan tc he v 1 6 m ai nt ai ne d a ny bo ok s o r rec or ds rel at in g t o h is ph ot og rap hy acti vi ty. Fo r pu rp os es of s ec. 6 66 2, the term “ ne gl ig en ce” i nc lu de s an y fai lu re b y

th e ta xp ay er to ke ep ad equa te bo ok s an d re co rd s. Sec . 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. On th e rec or d b efo re u s, we fi ndth atres po nd en t h as carr ie d re sp on de nt ’s bu rd enof pr oduc ti on un de r se c. 74 91 (c).- 38 -

[* 38 ] th atres po nd en t m ad e in th e n ot ic e to th ateffe ct . Evenif we h adno t s o co nc lu de d, we n on ethe le ss wou ldfin d o n t he reco rdbe fo re u s tha t the re was reas on ab le cau se for , andth atMr. Kan tc he v a ct edingo odfai thwith re sp ectto , th e p orti on of t he un de rp aym en t fo r Mr. Kan tc he v’s t ax ab le y ear 2 00 8 t ha t i s at tri bu tabl e to th e cl ai m ed20 07 lo ss carryov er t o 2 00 8 a ndth e cl ai m ed20 08 flo wth ro ug h l os s. See sec . 66 64 (c)( 1) ; s ec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Bas edup onou r ex am in at io n o f th e en ti re re co rdbe fo re u s, we fi ndth atMr. Kan tc he v h as carr ie d h is bu rd enof e st ab li sh in g t ha t h e is no t l iabl e fo r hi s t ax ab le y ear 2 00 8 fo r th e acc ur acy-rela te d p en al ty und er s ect io n 6 66 2( a) wi th res pe ctto th e p orti on of t he un de rp aym en t fo r th aty ear t ha t i s at tri bu tabl e to th e 2 00 7 l os s carry ov er t o 2 00 8 a ndth e 2 00 8 fl owt hr ou gh lo ss . On th atreco rd , we furth er fi nd th atMr. Kan tc he v h as fai le d t o c arry his bu rd enof e st ab li sh in g tha t h e is no t l iabl e fo r hi s t ax ab le y ear 2 00 8 fo r th e acc ur acy-rela te d p en al ty und er s ect io n 6 66 2( a) with re sp ectto th e p orti on of t he un de rp aym en t fo r th aty ear t ha t i s at tri bu tabl e to th e lo ss th atpe ti ti on ers cla im edinth e 2 00 8 p ho to gr ap hy Sche du le C. On the
reco rdbe fo re u s, we fu rth er fi ndth atMr. Kan tc he v h as fai le d t o c arry his bu rd en of est ab li sh in g t ha t h e is no t l iabl e fo r eac h o f hi s t ax ab le y ears 20 09 an d 2 01 0 fo r th e acc ur acy-rela te d p en al ty und er s ect io n 6 66 2( a).- 39 -

[* 39 ] W e h av e co ns id eredall of t he pa rti es ’ res pe ct iv e co nt en ti on s an d a rg um en ts th atare n otdi sc us se d h erei n, an d we f in d t he m to be witho utm eri t, i rrel ev an t,
an d/ orm oo t. To re fle ctth e fo reg oi ng , An o rd er g ran ti ng res po nd en t’s
m ot io n t o d is m is s fo r la ckof p ro se cu ti on as to pe ti ti on er Dan ie laA. Kant ch evan d de ci si on un de r Ru le 15 5 wi ll be en te red
.