T.C. M em o . 2 0 1 9 -1 9

UNITED STATES TAX COURT

CARLOS LANGSTON AND PAM ELA LANGSTON, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 4 2 7 0-1 7. Fi l edM arch 2 1 , 2 01 9
.

Dav i dJ . Lo o b y , fo r p et i ti o n ers . W i l l i am F. Cas t o r an dH. El i zab et h H. Do wn s , fo r res p o n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION NEGA, Jud g e: Res p o n d en td et erm in edd efi ci en ci es i n p et i ti o n ers ’ Fed eral i n co m e t ax an d i m

p o s edaccu racy -rel at edp en al t i es u nd er s ect i o n 6 6 6 2 (a) 1 as fo l l o w s :

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de (Co d e) i n effect fo r t h e t ax ab l e y ears ati s s u e, an dal l Ru le referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. Al l m o net ary am ou n t s are ro u n dedt o t h e n eares td o l l ar.- 2
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Year Defi ci en cy Pen al ty s ec. 6 6 62 (a) 2 0 1 2 $ 7 9,2 2 7 $ 1 5,8 4 4 2 0 1 3 2 2 6,0 7 0 4 5 ,0 5 0 Aft er co n ces si o ns , 2 th e i s s u es rem ai n i n g fo r d eci s i o n are: (1 ) wh et h er p et i t i o n ers are en t i t l ed t o d ep reci at i on d edu ct i o n s fo r t h e 2 0 0 6 M eri d i an5 8 0 y ach t (M eri d ian 5 8 0 ) an d2 0 1 1 Key s t o n e Rap t o r (Rap to r RV) t h ey cl ai m edt o u se i n th ei r t rad e o r b u s i nes s, (2 ) wh et h er p et i t io n ers co n vert edth ei r h o m e fro m p ers o n al
u s e t o i n co m e-p ro du ci n g u s e, an d(3 ) wh et h er p et i t i o n ers are l i ab l e fo r accu racy rel at ed p en al t i es u n der s ect i o n 6 6 6 2 (a). FINDINGS OF FACT So m e o f t h e fact s are s t i p u l at edan dare s o fo u nd . Th e s t i p u l at io n o f fact s
an d th e at t ach edex h i b i t s are i n co rp o rat edh erei n b y th is referen ce. Pet i t i o n ers
res i dedi n Ok l ah o m a wh en th e p et it i o n was t i m el y fi l ed
. I. Pet i t i o ners ’ Back g ro un d s Carl os Lan g st o n h o l d s a b ach el o r’ s d eg ree i n b u s i n es s ad m i n i s trat i o n an da
m as t er’ s d eg ree i n p et ro l eu m en g i n eeri ng fro m

th e Un i vers i ty

o f Tu l s a. Si n ce [* 2 ]

2 Bo th p art i es co n ced e v ari o us am ou n t s rel at i n g t o d edu ct i o n s cl ai m edo n Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i nes s , an dSch edu l e E, Supp l em en t al In co m e an d Lo s s .- 3
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[* 3 ] g radu at io n i n 1 9 9 0 M r. Lan g s t o n h as b een s el f-em p l o y edi n th e o i l an dg as i n du s try . Pam el a Lan g s t o n h o l d s a b ach el o r’ s d eg ree i n acco u n t i n g an da ju ri s d o ct o r fro m

th e Un iv ers i ty

o f Tu l s a. Fro m

g radu at i o n i n 1 9 9 7 t o 2 0 0 5 M s . Lan gs t on wo rk ed fo r a m id -s i ze l aw fi rm i n Tu ls a wh ere s h e b ecam e a p artn er i n 2 0 0 2 . Wh i l e atth e l aw fi rm , M s . Lan g st o n was th e n am edat t o rn ey o n atl eas ttwo t ax l aw cas es . II. Po rt Carl os M r. Lan gs t on ’ s p aren t s, an dth en h i s m o th er al o ne, o wn edan do p erat edPo rt Carl o s M ari n a (Po rtCarl o s ) i n Ket ch u m , Ok l ah o m a, fro m th e 1 9 5 0 s u n t i l Au g u s t 2 6 , 2 0 1 1 , wh en M r. Lan g s t o n ’ s m o th er s o l d Po rtCarl os t o p et it i on ers . Po rt Carl o s ’ p ri m ary

l o cat i o n co n s i s t s o f 1 0 0 co vered d o cks l ip s an dm u l t i p l e s tru ctu res wh i le i t s s eco nd ary

l o cat i o n , M as th ead M ari n a, i s 1 5 m i n ut es fro m th e p ri m ary l o cat io n . M as th eadM ari n a i s a s ai l b o at co ve wi th 5 0 u n co v eredb o at s li ps . OnSep t em

b er 7 , 2 01 1 , p et i t i on ers fo rm edPo rtCarl o s as a d o m es t i c l i m i t ed l i ab i l i ty co m

p an y . OnJ u l y 6 , 2 0 1 1 , M r. Lan g s to n p urch as edth e M eri d i an 5 8 0 fo r $ 2 4 5 ,9 2 0 . OnAp ri l 1 4 , 2 0 1 1 , M r. Lan g s t o n p u rch as ed the Rap t o r RV fo r $ 6 9 ,0 9 2
.- 4
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[* 4 ] III. 7 5t h Pl ace Pro p erty Pet i t i o ners p u rch as edth e 7 5 th Pl ace p ro pert y i n 1 9 9 7 an d l i v edi n t h ath o m e
u n t i l 2 0 0 5 . InM ay

2 0 0 1 p et i t i o n ers s o u g h tt o refi n an ce th e 7 5t h Pl ace p ro p ert y fo r t h e p u rp o s e o f ren o v at i o n s an ds ub s equ en t l y o n M ay 1 5 , 2 00 1 , h adthe 7 5 th Pl ace p ro p ert y

ap p rai s edata fai r m ark etv al u e o f $ 2 9 0 ,0 00
. In J an uary2 0 0 5 p et i t i o n ers m o v edo u to f t h e 7 5 th Pl ace p ro pert y t o th e Vi n tag e o n Yal e Ap art m en t s (Yal e Ap art m en t). Becau s e o f th e s i ze o f t he Yal e Ap art m en t , p et i t i o n ers co ul dn o tacco m m o d at e al l o f th ei r fu rn i tu re an d p ers o n al i t em s . Ori gi n al ly , o n l y

o n e g arag e was av ai l ab l e atth e Yal e Ap art m en t , an dth us p et i t i o n ers ren t ed ad d i ti on al u n i t s ata s t o rag e faci l i ty a m il e away . As g arag es b ecam e av ai l ab l e, p et i t i o n ers m o vedth ei r fu rn i tu re an dp ers o n al i t em s t o th e Yal e Ap art m en tg arag es fo r co nv en i en ce as th ey n eed edt o tran s fer i t em s t o an d fro m
s t orag e fo r u s e. 3 Wh en p et i t io n ers en d edth ei r l eas e t h ey h ada t o t al o f fo ur g arag es . Pet i t i o ners l i v edatth e Yal e Ap art m en t u n t i l J u n e 2 0 0 8 wh enth ey p u rch as eda t h i rdp ro p ert y i n wh i ch th ey

l i v e cu rren t l y . Th e ren o v at i o n s t o th e 7 5 th Pl ace p ro p ert y

were co m

p l et edi n 2 0 1 0
.

3 Th e g arag es d i dn o th ou s e an y v eh i cl es an dwere s o l el y u s edfo r s t o rag e.- 5
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[* 5 ] In 2 0 1 1 p et i t i o n ers were i n fo rm ed b y th ei r i n s u ran ce ag en tth at th ei r h o m eo wn ers i n s uran ce co v erag e wo u l db e t erm i n at edi f t h e 7 5 th Pl ace p ro p ert y
rem ai n edv acan t . As a res u l t p et i t i o n ers m ark et edth e h o m e b y wo rd o f m o u th as a
ren t al p ro p ert y . InJ u l y

2 0 1 1 p et i t i o n ers ren t ed the 7 5 th Pl ace p ro p ert y t o a frat ern i ty b ro th er o f M r. Lan gs t o n ’ s fo r $ 50 0 a m o n th
. 4 In J u n e 2 0 12 p et i ti o n ers l i s t edth e 7 5 th Pl ace p ro p ert y fo r $ 5 6 3,8 5 0 an d
s ub s equ en t l y

s o l d th e h o m e i n Feb ru ary 2 0 1 3 fo r $ 54 0 ,0 0 0. IV. Tax Retu rn s an dNo t i ce o f Defi ci en cy Pet i t i o ners t i m el y

fi l edth ei r retu rn s fo r t ax y ears 2 01 2 an d2 01 3 . Th o s e t ax retu rn s were p rep aredb y Kat h y Bu rch , wh o i s a cert i fi ed p ub l i c acco u n t an tan dan at t o rn ey . 5 Fo r t ax y ear 2 0 1 2 p et i t i on ers cl ai m edSch edu l e C d ep reci at i o n d edu ct i o n s
o n th e M eri d i an 5 8 0 an dth e Rap t or RV o f $ 1 39 ,9 9 6 an d$ 3 0 ,7 0 9 , res p ect i v el y . M s . Bu rch d i dn o trecei v e an y d o cu m en t at i o n fro m p et i t io n ers reg ard i n g th e

4 Th e fai r m ark etren twas ap p ro x i m at el y $ 2 ,5 0 0 t o $ 2 ,8 0 0 . Pet it i on ers cred i b l y t es t ifi edth atth e ren t am o u n twas reach edb ecau s e t h e ren t er wo ul db e i n th e h o m e o n l y fi v e d ay s p er m on th an d th at$ 5 0 0 was th e p ro rat edam o u n t .

5 M s . Bu rch h o l d s a b ach el o r’ s d eg ree i n acco u nt i n g fro m Eas tCen tral Un i vers it y . Sh e al s o h ol d s a m as t er’ s d eg ree i n t ax at i o n an d a ju ri s d o ct o r d eg ree fro m th e Un iv ers i ty

o f Tu l s a.- 6
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[* 6 ] co n tri b ut i o n o f t h e as s et s t o Po rtCarl o s , n or d i ds h e recei v e an y d o cu m en t at i o n s ub s t an t iat i n g th ei r b u s i n es s u s e. Fo r t ax y ear 2 0 1 3 p et i t i on ers cl ai m edSch edu l e C d ep reci at i o n d edu ct i o n s fo r t h e M eri d i an5 8 0 an dth e Rap t o r RV o f $ 3 6 ,4 2 1 an d$ 1 0 ,2 3 4 , res p ect i v el y . At t ach edt o p et i ti o n ers ’ 2 0 13 retu rn was a Fo rm 4 7 97 , Sal es o f Bu s i n es s Pro p ert y . In th at fo rm th ey

cl ai m eda l o ss d educt i o n o f $ 43 6 , 6 3 3 rel at i n g t o th e s al e o f t h e 7 5 th Pl ace Pro p erty . M s . Bu rch rep o rt ed th atth e 7 5 th Pl ace p ro p ert y was acq u i red
o n J u l y 1 , 2 0 1 1 , an d u s eda co s tb as i s o f $ 1 ,0 2 7 , 4 15 i n s t eado f t h e fai r m ark et
v al u e o f t h e h o m e t o cal cu l at e t h e l o s s . 6 M s . Bu rch b el i ev ed th atth e fai r m ark et
v al u e o f t h e h o m e was “ a l i t t le b i tb el o w” t h e s al e p ri ce o f $ 5 4 0 ,0 0 0
. In Sep tem

b er 2 01 4 a rev en u e ag en t(RA) fro m th e In t ern al Rev enu e Serv i ce b eg anan ex am i n at i o n o f p et i t i o n ers ’ cl ai m edd edu ct i o ns an dFo rm 4 7 97 l o s s . Du ri n g the RA’ s ex am i n at i o n sh e t o u red , wi th th e m an ag er, al l o f Po rt Carl o s , i n cl u d i n g th e M eri d i an 5 8 0 an dth e Rap t o r RV. Wh i l e o nb o ardth e M eri d i an 5 8 0
s h e s aw n u m ero u s p ers o n al i t em s th atg av e t he i m p res s i o n i t was n o tu s edas a b o ats al es o ffi ce. 7 Th ere were n o p l acard s , b an n ers , o r o th er i d en t i fy i n g s i g n ag e

6 M r. Bu rch reach edth i s n u m b er b y ad di ng t o the o ri g i n al p u rch as e p ri ce t he co s to f al l th e i m

p ro v em en t s t o th e h o m e an d th e ex pen s es o f t h e s al e. 7 Th e RA cred i b l y t es t i fi edt o s eei ng DVDs , s wi m s ui t s , t o wel s , cu rl i n g i ro n s, (co n ti n u ed ...)- 7
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[* 7 ] i n d i cat i n g th at th e M eri d i an 5 8 0 was th e b oats al es o ffi ce, an dp et i ti o n ers d i d
n o tk eep d ocu m en t at io n , reco rd s , o r l o g s o f b oats al es act i v i ty o ccu rri n g o nb o ard th e M eri di an 5 8 0. Du ri n g th e RA’ s t o u r o f t h e Rap t o r RV s h e o b s erv ed a s u i t cas e, cl o th i n g , an d a p o to n t h e s to v e, ag ai n i n d i cat i n g i twas n o tu s edas a b o ats al es
o ffi ce. OnDecem

b er 1 , 2 0 16 , p et i ti o ners were i s s u eda n o t ice o f d efi ci en cy fo r t ax y ears 2 0 1 2 an d2 0 1 3 . Th e RA d en i edth e d ep reci at i o n d edu ct i o n s fo r t he M eri d i an5 8 0 an dth e Rap t o r RV fo r n o tb ei ng o rd i naryan dn eces s ary an dd en i ed th e l o s s d edu ct i o n o n th e s al e o f t h e 7 5 th Pl ace p ro p ert y b ecau s e i twas th ei r p ri m ary res i d en ce. OPINION I. Bu rd en o f Pro o f Th e Co m m is s i o n er’ s d et erm i n at i o n s i n a n o t i ce o f d efi ci en cy are g en eral l y p res u m edco rrect , an dth e t ax p ay er b ears th e b urd en o f p ro v i n g t h o se d et erm i n at i o n s erro n eo u s . Ru l e 1 4 2 (a); W el ch v . Hel veri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). Dedu ct i o n s are a m at t er o f l eg i s l at i v e g race. Dep u ty v . du Po n t , 3 0 8 U.S. 4 8 8 , 4 9 3 (1 9 4 0). Tax p ay ers m u s tco m p l y wi th s p eci fi c req u i rem en t s fo r an y

7 (...co n t in u ed ) t o o th b ru s h es , t o ot hp as t e, s o ap , an dv ari o u s o th er h y g i en e i t em s.- 8
-

[* 8 ] d educt i o n s cl ai m ed . See INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2); New Co l o n i al Ice Co . v . Hel v eri n g, 2 9 2 U.S. 4 3 5 , 4 4 0 (1 93 4 ). In o rd er t o s h i ftth e b u rd en o f p ro of t o th e Co m m is si o n er, th e t ax p ay er m u s t , i n t er al i a, i n tro du ce cred i bl e ev i d en ce wi th res pect t o the i ss u es an d h av e co m p l i ed wi th al l s ubs t an ti at i o n an d reco rdk eep i ng req u i rem en t s i m po s edb y th e Co d e. Sec. 7 4 91 (a)(1 ) an d(2 ). Cred i b l e ev i d en ce i s thatwh i ch th e Co u rtwo ul dfi n d
s u ffi ci en tup o n wh ich t o b as e i t s d eci s i on i f n o co n traryev i d en ce were s ubm i t t ed
. Hi g bee v . Co m

m i ss i o n er, 1 1 6 T.C. 4 3 8 , 4 4 2 (2 0 0 1 ). A t ax p ay er wh o p ro vi d es
o n l y s el f-s erv i n g t es t i m o n y an di n co n cl u s i v e d o cu m en t at i on d o es n o tp ro v i d e cred i b l e ev i d en ce. See i d
. at 4 4 5 -4 4 6
. Pet i t i o ners p ro v i d edn o cred i b l e ev i d en ce wi th res p ect t o th e i s s u es an dp ro v i d edo n l y s el f-s erv i n g t es ti m o n y . Th e Co m m is s i o n er g en eral ly

b ears th e b u rd en o f p ro du ct i o n wi th res p ectt o
an y accu racy -rel at ed p en al t i es u n d er s ect io n 6 66 2 . See s ec. 7 4 91 ; Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 6. On ce t h e b urd en o f p ro du ct io n i s m et , the t ax p ay er b ears th e b u rd en o f p ro o f, i n cl u di n g th e b u rd eno f p ro v i n g reas o n ab l e
cau s e fo r h i s o r h er u n d erp aym en to f Fed eral i n co m e t ax . See Ru l e 1 4 2(a); Hi g bee
v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 6 -4 4 7
.- 9
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[* 9 ] II. Sect io n 1 6 7 Sect io n 1 6 7 (a) al l o ws as a d ep reci at io n d edu ct i o n a reas o n ab le al l o wan ce fo r t h e “ ex h au s t i o n , wear an dt ear” o f p ro p erty u s ed i n a t rad e o r b u si n es s . Sect i o n 2 7 4 (a)(1 )(A) d i sal lo w s d edu ct io n s i nv o l v i n g en t ert ai nm en t , am u s em en t , o r recreat i o n al act i v it i es u n l es s th e t ax p ay er es t ab l i s h es thatth e i t em was d i rect l y rel at ed t o o r as s o ci at edwi th th e act i v e co ndu ct o f t h e t ax p ay er’ s trad e o r b u s i n es s . Sect i o n 2 7 4 (a)(1 )(B) d i s al l o ws d educt i o ns i n cu rredwi th res p ectt o a faci l i ty u s ed i n co n nect i o n wi th s u ch en t ert ai n m en tact i v i t i es . A y ach ti s an en tert ai n m en t faci li ty wi th i n t h e m ean i n g o f s ect io n 2 7 4(a)(1 )(B) i f i ti s u s eddu ri n g t h e t ax ab l e y ear fo r, o r i n co n n ect i o n wi th , en t ert ai n m en t . Becn el v . Co m m i s s i o n er, T.C. M em o. 2 0 1 8 -1 2 0 ; s ec. 1 .2 7 4-2 (e)(2 )(i ), In co m e Tax Reg s . Sect io n 2 7 4 (d ) d i s al l o ws d edu ct i o ns , i n cl u d i n g d ep reci at i o n , fo r cert ai n

“ l i s t edp ro p ert y ” as d efi n edu n der s ect io n 2 80 F(d )(4 ) u n l es s th e t ax p ay er s at i s fi es th e s tri cts ub s t an t i at i on req u irem en t s o f t h i s s ect i o n . Li s t edp ro pert y i n cl ud es p ro p erty u s edfo r t ran s p o rt at i o n an dp ro pert y o f a ty p e g en eral ly

u s edfo r p u rp o s es
o f en t ert ai n m en t, recreat i on , o r am u s em en t . Secs . 2 7 4 (d )(4 ), 2 8 0 F(d )(4 )(A)(i i )
an d (i i i). RVs g en eral ly

are i n cl u d edas “ l i s t ed p ro p ert y ” u n d er s ect i o n 2 8 0 F(d )(4 ). See J ack s o n v . Co m m i s s i on er, T.C. M em o . 2 0 1 4 -1 60
.- 1 0 -

[* 1 0 ] Th e s tri cts ub st an t i at i o n ru l e requ i res th e t ax p ay er t o m ai n t ai n reco rd s , o r
o th er d o cu m en t ary

ev i d en ce co rro b o rat i ng h i s o wns t at em en t , ad equ at e t o es t ab l i s h th e b u s i n es s p u rp o se, t h e am o u n to f each ex pen d i tu re, t h e am o u n to f each b u s i n es s u se, t h e t o t al u s e o f t h e l i s t edp ro pert y , an dth e d at es o f t he
ex p en d i tu res an du ses . See s ec. 1 .2 7 4 -5 T(b )(6 ), Tem po raryIn co m e Tax Reg s ., 5 0 Fed
. Reg . 4 6 0 1 6 (No v . 6 , 1 9 85 ). To m eetthe ad equat e reco rd s req ui rem en t s , a t ax p ay er m

u s t m ai n t ai n an acco u n tb o o k, a l o g, o r o th er d o cu m en t ary ev i d en ce wh i ch , i n co m

b i nat i o n , i s s u ffi ci en tt o es t ab l i s h each el em en to f an ex p en d i tu re o r
u s e. Id . p ara. (c)(2 ), 5 0 Fed . Reg . 4 6 0 1 7 . If a t ax pay er d o es n o t s at i s fy th e ad equat e reco rd s req u i rem en t s wi th res p ectt o o n e o r m o re el em en t s , h e m ay
s ub s t an t i at e t h os e el em en ts wi th h is o r h er o wnd et ai leds t at em en tan dwi th o th er
co rro b o rat iv e ev i den ce. Id . s ub p ara. (3 )(i ), 5 0 Fed . Reg . 4 6 0 2 0
. A. M eri di an 5 80 Pet i t i o ners t es ti fi edth at th e M eri d i an 5 8 0 was u s eds o l el y fo r b u s i n es s p u rp os es , o p erat i n g as a b o ats al es o ffi ce atPo rtCarl o s. Ho w ev er, t h ere was n o t es t i m o ny fro m an y o n e o th er t h an th e p et i t i on ers an dth ei r g en eral m an ag er t o
s up p ortth ei r cl ai m s . Pet i ti on ers d i dn o tp ro duce an y d o cu m en t at i o n , reco rd s , o r l o g s o f an y

b u s i n es s act i v it y

t ak i n g p l ace o nb o ardth e M eri di an 5 8 0 o u t s i d e o f t es t i m o ny fro m p et it i o n ers an dth ei r m an ag er. Fu rt h er, t h e M eri d i an 5 8 0 h adn o- 1 1 -

[* 1 1 ] s i g n o r o th er i n d i cat i o n i twas b ei n g u s edas a b oats al es o ffi ce. Th u s , th e Co u rtd o es n otfi n dth i s t es t i m o n y cred i b l e. Th e Co u rtfi n d s th e t es t i m o n y o f t h e RA cred ib l e. Th e RA t es t i fi edth ato n h er v i s i tt o Po rtCarl o s th e y ach twas l it t eredwi th i t em s i n d i cat iv e o f p ers o n al u s e. W i th o u tm ore, p et i t i o n ers ’ s el f-s erv in g t es t i m o n y d o es n otm eet th e s tri ct
s ub s t an t i at i o n req u irem en t s o f s ect i o n 2 7 4 (d ). Acco rd i n gl y , we s u s t ai n
res p o n d en t’ s d et erm i n at i o n wi th res p ectt o th i s i s s u e. See W eek en dW arri o r Trai lers , In c. v . Co m

m i s s i o n er, T.C. M em o . 2 0 11 -1 0 5 (h o l d i n g thatg en eral t es t i m o ny reg ard in g a p l an e an da b o atwas i n s u ffi ci en tt o m eetth e s ubs t an t i at i o n req u i rem en t s o f s ect i o n 2 7 4 (d )). B. Rap t o r RV Pet i t i o ners t es ti fi edth at th e Rap t or RV was u s eds o l el y fo r b u s i n es s p u rp os es . Pet i t i o ners t es t ifi ed th atth e n eedfo r t h e Rap t o r RV was due t o M as th eadM ari n a’ s d i s t an ce fro m Po rtCarl o s . Pet i t io n ers al s o t es t i fi edth atwh il e p ark ed atM as th eadM ari na, t h e Rap t o r RV s erv edas a b o ats al es o ffi ce an d d o ub l edas a p lace fo r n ig h t t i m e s ecu ri ty t o u s e du ri n g th ei r s h i ft . Fu rt h er, p et i t i o n ers t es t i fi edt o co n tri bu t i n g th e Rap t o r RV t o Po rtCarl o s . Ag ai n , th ere
was n o t es t i m o n y fro m

an y on e o th er t h an p et i t i o n ers an dth ei r g en eral m an ag er t o
s up p ortth ei r cl ai m s .- 1 2 -

[* 1 2 ] As wi th th e M eri d i an 5 8 0 , p et i ti o ners p ro du cedn o reco rd s o r d o cu m en t at i o n s ub s t an t iat i n g th ei r u s e o f t he Rap t o r RV as a b o ats al es o ffi ce o r
n i g h t t i m e b reakro o m fo r s ecu ri ty . Th e Co u rtfi n d s th e t es t i m o n y o f p et i t i o n ers
an d th ei r g en eral m an ag er n o tcred i b l e an dth e t es ti m o ny o f t h e RA cred i b l e i n th at
s h e o bs erv edp ers o n al i t em s i n th e Rap t o r RV. Ag ai n , wi th o utm o re, p et i t i o n ers ’
s el f-s erv i n g t es t i m o n y d o es n o tm eetth e s tri cts ub s t an t iat i o n req u i rem en t s o f
s ect i on 2 4 7 (d ). Acco rd in gl y , we s u s t ai n res p o n d en t ’ s d et erm i nat i o n wi th res p ect t o thi s i s s u e. III. Sect io n 1 6 5 Sect io n 1 6 5 (a) al l o ws a d edu ct i o n fo r an y l o s s s u s t ai n eddu ri n g the t ax ab l e y ear t h ati s n o tco m

p en s at edfo r b y

i n s u ran ce o r o th erwi se. Ho wev er, fo r l o s s es
n o tari si n g fro m

a b u s i n es s , cas u al ty , o r t h eft , s ect i o n 1 65 (c)(2 ) l i m i t s th e d educt i o n i n th e cas e o f an i n d i v i du al t o l o s s es i n cu rredi n an y tran s act i o n en t ered i n t o fo r p ro fi t. A l o s s s u s t ai n ed o n th e s al e o f res i d en t i al p ro pert y p u rch as edo r co n s tru ct ed b y th e t ax p ay er fo r u s e as h i s o r h er p ers o n al res i d en ce an ds o u s ed b y h i m o r h er
up t o th e t i m e o f s al e i s n o td edu ct ib l e. Sec. 1 .1 65 -9 (a), In co m e Tax Reg s . If p ro p erty i s co n v ert edt o i n co m e-p ro du ci ng p u rp o ses b efo re s al e an d i s u s edfo r
s u ch pu rp o s es atthe t i m e o f i t s s al e, a l os s o n t h e s al e i s al l owedas a d educt i o n .- 1 3 -

[* 1 3 ] Sec. 1 .1 6 5 -9 (b )(1 ), In co m e Tax Reg s . Ind et erm i n i n g wh et h er p ro pert y was
co n vert edfro m

p ers o n al u s e t o i n co m e-p ro du ci n g u s e, t h e Co u rt co n s i d ers : (1 ) h o w l o n g a t ax p ay er u sed th e p ro p ert y as a p ers o n al res i d en ce; (2 ) wh et h er t h e i n d i v i du al p erm an en tl y

ab an d on edal l fu rth er p ers o n al u s e o f t he p ro pert y ; (3 ) wh et h er t h e ch aract er o f the p ro p ert y was recreat i o n al ; (4 ) wh et h er t h e p ro p erty was o ffered fo r ren t ; an d(5 ) wh et h er an dwh en th e p ro p ert y was o ffered fo r s al e, wi th o ffers o f s al e s o o n aft er ab an d on m en ts u g g es t i n g th at the p ro p ert y
m ay n o t h av e b een co n v ert edt o i n co m e-p ro du ci ng p u rp o ses . Gran tv . Co m m i s s i o n er, 8 4 T.C. 8 09 , 8 2 5 (1 9 8 5 ), aff’ d wi th o u t p ub l is h edo pi n i o n , 8 0 0 F.2 d2 6 0 (4 th Ci r. 1 9 8 6); Red i sch v . Co m m i s si o n er, T.C. M em o . 2 0 1 5 -9 5 . No o n e fact or i s d et erm i n at i v e, an dwe co n s i d er al l o f t h e fact s an dci rcu m s t an ces . Sau nd ers v . Co m

m i s si o ner, T.C. M em o . 2 0 0 2-1 4 3 , aff’ d, 7 5 F. Ap p ’ x 4 94 (6 th Ci r. 2 0 03 ). Pet i t i o ners l i v edatth e 7 5 t h Pl ace p ro pert y fo r ei g h t y ears u n t i l m o v i n g o u t . Wh i l e p et i t i o n ers ’ m ot i v es are u n cl ear as t o wh ether t h ey i n ten d ed t o m o v e b ackt o th e 7 5 th Pl ace p ro p ert y

o r wh et h er t h e ren o v at io n s h adb eco m e a n earl y d ecad el o n g h ob b y , th e Co u rtfi n d s thatth e m ov e t o th e Yal e Ap art m en twas n o t
m o ti v at edb y

p et i t i o n ers ’ t es ti fi edd es i re t o ren o v at e an d s el l th e h o m e as an i n co m e-p ro du ci n g as s et . Pet i t i o n ers d i dn o tm ark etth e h o m e fo r s al e u n t il 2 0 1 2 ,- 1 4 -

[* 1 4 ] s ev en y ears aft er m ov i n g o u tan dtwo y ears aft er ren o v at i o n s were co m p l et e. Nei th er d i dth ey

s eeko r p urs u e o th er way s o f g en erat i n g i n co m e fro m th e h o m e
u n t i l 2 0 1 2 . Inad di t i o n th ey d i dn o ts eekt o d et erm i n e th e m ark etv al u e o f t h e h o m e t h ro u g h ap p rai sal s, recei v i n g o n l y a rep l acem en tco s tap p rai s al fo r i n s u ran ce p u rp os es aft er refi n an ci n g i n 2 0 0 1 . Thu s , the Co u rtd o es n o tfi n dth e l en g th o f t i m e b et ween p et i ti o n ers ’ m o v e t o th e Yal e Ap art m en tan dthe d at e o f s al e an i n d i cat i o n o f i n co m e-p ro du ci n g p u rp o ses . As fo r t h e ren t al o f t h e 7 5 th Pl ace p ro p ert y , p et i t i o n ers t es ti fi edt o “ nev er”
wan ti n g t o ren to u tth e h o m e. Th ei r o n l y reas o n fo r ren t i ng i to u twas t o s at i s fy th ei r i n s u ran ce co m

p an y t o k eep th e h o m e i n su red . Ev en th en , p et i ti o n ers d i dn o t
m ark etth e h o m e p ub l i cl y an d ev en tu al l y

ren t edi to u t fo r l es s th an fai r m ark et
v al u e t o M r. Lan g s t o n ’ s frat ern i ty b ro th er. M r. Lan g st o n ’ s t es t i m o n y th atth e
reas on fo r n o tm ark et i ng th e h o m e p ub l i cl y was an i n creas ed ri s ko f v an d al i s m i s
n o tcred i b l e. W e fi ndth atth e reas o n fo r ren t i n g th e 7 5 th Pl ace p ro p ert y b el o w
m ark etv al u e was s ol el y i n s u ran ce d ri ven an d wi th o u tp ro fi tm o t i v e. Th e Co u rtd o es n o tfi n dth atth e 7 5 th Pl ace p ro p ert y was co n v ert edfo r i n co m e-p ro du ci n g p u rp o ses . Acco rd i n g l y , we s u s t ai n res p o n d en t ’ s d et erm i n at i o n wi th res p ect t o th i s i s s ue.- 1 5 -

[* 1 5 ] IV. Sect io n 6 6 6 2 (a) Pen al t i es fo r Tax Years 2 0 1 2 an d2 0 1 3 Th e Co m m is s i o n er b ears th e b u rd en o f p ro du ct i o n wi th res p ectt o p et i t i o n ers ’ l i ab i l i ty

fo r p en al t ies an dm

u s tp ro du ce s u ffi ci en tev i d en ce i nd i cat i n g th ati ti s ap p ro p ri at e t o i m p os e t h em . See s ec. 7 4 9 1 (c); Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 46 . As p arto f t hatb u rd en , wi th res p ect t o cert ai n p en al t i es , the Co m m i s s i o n er m

u s tal s o s h o w th ath e co m p li edwi th th e wri t t en ap p ro v al req u i rem en to f s ect i o n 6 7 51 (b )(1 ). Graev v . Co m m is s i o n er, 1 49 T.C. 4 8 5, 4 9 3 (2 0 1 7), s up p l em en t i n g an do verru l i n g i n p art 1 47 T.C. 4 6 0 (2 0 1 6 ). Sect io n 6 6 6 2 (a) an d(b )(1 ) an d(2 ) i m p o s es an accu racy -rel at edp en al ty o n
an y p o rt i on o f an u n derp aym en to f t ax th ati s at tri b u t ab l e t o the t ax p ay er’ s

“ [n ] eg li g en ce o r d i s reg ardo f ru l es o r reg u l at i o ns ” o r “ s ub s t an t ial u n d ers t at em en t
o f i n co m e t ax ”. Neg li gen ce i n cl u d es “ an y fai l u re b y

th e t ax pay er t o k eep ad equ at e b o o k s an dreco rd s o r t o s ub s t an t i at e i t em s p ro p erl y .” Sec. 1 .6 6 6 2-3 (b ), In co m e Tax Reg s . An u n d ers t at em en to f i n co m e t ax i s s ub s t an t i al i f t h e am o u n t o f th e
u n d ers t at em en tfo r t h e t ax ab l e y ear ex ceed s th e g reat er o f 1 0 % o f t h e t ax req u i red t o b e s h own o n th e ret u rn o r $ 5 ,0 0 0 . Sec. 6 6 6 2 (d )(1 )(A). Onth e reco rdb efo re u s , we fi n dth at i f t h e Ru le 1 5 5 co m p u tat i o n s co n fi rm
s ub s t an t i al u n ders t at em en t s o f i n co m e t ax fo r t h e y ears ati s s ue, t h en res p o n d en t- 1 6 -

[* 1 6 ] h as m eth is b u rd en o f p ro du ct i o n . 8 On ce t h e Co m m i ss i o n er m eet s h i s b u rd en , th e b u rd en o f p ro o f i s o n th e t ax p ay er t o p ro ve t h at the ap p li cat i o n o f t h e p en al ty i s i n ap p ro p ri at e. See Hi g b ee v . Co m m i ss i o n er, 1 1 6 T.C. at4 4 6 -4 4 7
. Pet i t io n ers arg ue t h atth e accu racy -rel at edp en al t ies are i n ap pro p ri at e as they act ed wi th reas o n ab l e cau s e an di n g o o dfai th i n rel y i n g o n the t ax ad v i ce o f M s . Bu rch
. Th e accu racy -rel at edp en al ty wi ll n o tap pl y

t o an y p o rt i o n o f t he
u n d erp aym en t fo r wh i ch a t ax p ay er es t ab l i s h es thath e o r s h e h adreas o nab l e cau s e
an d act edi n g o od fai th . Sec. 6 6 6 4 (c)(1 ). Th e d et erm i n at i o n o f wh et h er a t ax p ay er act edwi th reas o n ab l e cau s e an di n g o o dfai th i s m ad e o n a cas e-b y -cas e b as i s , t ak i n g i n t o acco u n t al l th e p ert i n en tfact s an dci rcu m s t an ces , i n cl u d i n g h i s o r h er effo rt s t o as s es s the p ro p er t ax l i ab i l i ty , th e kn o wl ed g e an dex p eri en ce o f t h e t ax p ay er, an dth e ex t en t t o wh ich h e o r s h e rel i edo n th e ad v i ce o f a t ax p ro fes s i on al . See s ec. 1
. 6 6 6 4-4 (b )(1 ), In co m e Tax Reg s . A t ax p ay er m ay

b e fo u n d t o h av e act edwi th reas o n ab l e cau s e wh en h e o r
s h e ex erci s es o rd i n ary

b u s i nes s care an dp ru d en ce wi th res p ect t o a d i sp u tedt ax i t em . Neo n at o l o g y

As s o cs ., P.A. v . Co m

m is s i o n er, 1 1 5 T.C. 4 3 , 9 8 (2 00 0 ), aff’ d ,

8 W e n ot e thatth e reco rdco n t ai n s ev i den ce, i n th e fo rm o f a ci v il p en al ty ap p ro v al fo rm , thatres p o n d en tco m p l i edwi th t h e req u i rem en t s o f s ec. 6 7 5 1 (b )(1 ). See Graev v . Co m

m i ss i o n er, 1 4 9 T.C. 4 8 5 , 4 93 (2 0 1 7 ), s upp l em en t in g an d o v erru l i ng i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ).- 1 7 -

[* 1 7 ] 2 9 9 F.3 d2 21 (3 dCi r. 2 00 2 ). Rel i an ce o n the ad v i ce o f an i n d ep en d en t , co m p et en tp ro fes s i o n al as t o th e t ax treat m en to f an i t em m ay m eetth is req u i rem en t . See s ec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . A t ax p ay er act s i n g o o d fai th wh en h e o r s h e act s upo n h o n es tb el i ef an dwi th i n t en tt o p erfo rm al l l awfu l
o b l i g at i o ns . See Ru t t er v . Co m m i s s i o n er, T.C. M em o . 2 0 17 -1 7 4 , at* 4 5. A t ax p ay er al l eg i ng reas o n ab l e, g o o d -fai th rel i an ce o n th e ad v i ce o f an i n d ep en den t , co m

p et en tp ro fes s i o n al m

u stp ro v e th at(1 ) th e ad v i s er was a
co m p et en tp ro fes s i o n al wh o h ads u ffi ci en tex p ert i s e t o ju st i fy rel ian ce, (2 ) t h e t ax p ay er p ro v i d edn eces s ary an daccu rat e i n fo rm at i o n t o th e ad v is er, an d (3 ) t h e t ax p ay er act u al l y

rel i edi n g o o dfai th o n th e ad vi s er’ s ju d g m en t . Neo n at o l og y As s ocs , P.A. v . Co m

m i s s io ner, 1 15 T.C. at9 9 . A t ax p ay er’ s u n co n d i ti o n al rel i an ce o n an o th erwi s e qu al i fi edp ro fes s i o nal d o es n o tb y i t s el f co n s ti tut e
reas on ab l e cau s e an dg o o d fai th fo r p urp o s es o f s ect i o n 6 6 64 (c)(1 ). See St o u g h v . Co m m i s s i o n er, 1 4 4 T.C. 3 0 6 , 3 2 3 (2 0 1 5). A t ax p ay er as s ert i n g reas o n ab l e rel i an ce m

us ts h o wth atth e ad v i ce o f a qu al i fi edad vi s er t o o ki n to acco u n tal l fact s
an d ci rcu m s t an ces an dwas n o tb as edo n u n reas o n ab l e fact u al o r l eg al
as s u m pt i o n s . Sec. 1 .6 6 6 4 -4 (c)(1 ), In co m e Tax Reg s . M s . Bu rch i s a qu al i fi edp ro fes s i o n al an d p et i t i o n ers are wel l -educat ed , s o p h is t i cat edi nd i v i du al s . Sp eci fi cal l y , M s. Lan g s t o n h as an u n d erg raduat e d eg ree- 1 8 -

[* 1 8 ] i n acco u n t i n g an d was th e n am edat t o rn ey , th o ug h s h e t es t i fi edt o n o t
rem em b eri n g , o n atl eas ttwo t ax l aw cas es wh i l e M r. Lan g s t o n h as o p erat edan o i l
an d g as b u si n es s s i n ce 1 9 90
. M s . Bu rch t es t i fi edth ats h e rel i edo n o ral an d i m p l i ed i n fo rm at i o n fro m p et i t i o n ers wi th o u td o cu m en t at i o n . Pet i t i o n ers h av e fai l ed t o p ro v e t h ey p ro v i d ed
accu rat e an dcred ib l e i n fo rm at i o n t o M s . Bu rch , an dth erefo re t h ey can no t av ai l th em s el v es o f a g o o dfai th an dreas o n ab l e cau s e p en al ty d efen s e. Fu rt her, t h e Co u rtfi n d s th at b ecau s e p et i ti o n ers kn ew t h ey h adn otp ro v id edn eces s ary an d
accu rat e i n fo rm at i o n t o M s . Bu rch , th ei r rel i an ce up o n h er was u n reas o n ab l e an d
n o ti n g o o dfai th
. W e h av e co n s id eredal l th e o th er arg u m en ts m ad e b y th e p art i es , an dt o th e
ex t en tn o td i s cu ss edab o v e, fi n dth o s e arg u m en t s t o b e i rrel ev an t , m o o t , o r wi th o u t
m eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.