T.C. M em o . 2 0 1 7 -1 5 8

UNITED STATES TAX COURT

L OSANTIVILLE COUNTRY CLUB, Pet i t io n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 6 1 0 5-1 5. Fi l edAu gu s t 1 4 , 2 0 1 7
. Terry Seren a, fo r p et i t i o n er. Ro b inW i l l i am s Den ick , Cas ey A. Lo th am er, an dLo u i s H. Hi l l, fo r res p o n d en t.

M EM ORANDUM OPINION FOLEY, Ju d g e: Th e i s s u es fo r d eci s i o n rel at i n g t o 2 0 1 0 , 2 0 1 1 , an d 2 0 1 2 (y ears i ni s s u e) are wh et h er p et i t i o n er’ s i n v es tm en ti n co m e i s u n rel at edb u si n es s t ax ab l e i n co m e an dwh et h er p et i t i o n er i s l i ab l e fo r s ect i o n6 6 6 2 (a) accu racy --2
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[* 2 ] rel at edp en al t i es . 1 Th e p art i es s ub m i tt edth i s cas e fu l l y s t i pu l at edp u rs u an t t o Ru l e 1 2 2
. Back gro u n d Pet i t i o ner i s a s ect i o n5 0 1 (c)(7 ) s o ci al cl ub i n co rp o rat edi n Oh i o . It s faci li t i es i n cl u de an 1 8 -h o l e g o l f co u rs e, a s wi m m i n g p o o l , t en n i s co u rt s , d i n i n g faci li t i es , m eet in g an drecep t i o nro o m s , an das s o ci at edg ro u nd s m ai n t ai n edfo r th e b en efi to f m em

b ers an dg ues ts . M em

b ers p ay fo r th e u s e o f p et i t i on er’ s faci l i t i es th ro u g h du es , as s es s m en t s , fo o dm i n i m um s , an dm i scel l an eo u s fees
. 2 No n m em b ers p ay s u rch arg es t o u s e p et i t i o n er’ s faci l it i es . Fo r ev ery y ear s i n ce i t was fo u n dedi n2 00 2 , p et i ti o n er h as fi leda Fo rm 9 9 0 -T, Ex em

p tOrg an i zat i o nBu s i nes s In co m e Tax Retu rn . Oni t s Fo rm s 9 9 0 -T p et i t i on er rep o rt ed g ro s s recei p t s, d irectex p en s es (i
. e., co s t s o f g o o ds s o l d ),
an d i n di rect ex p en s es (i
. e., s al ari es an dwag es , em pl o y ee b en efi t s , rep ai rs , d ep reci at i o n , g ro u n ds m ai n t en an ce, s up pl ies , an d g en eral an dad m i n i s trat i v e ex p en s es ) rel at i n g t o i t s n on m em b er s al es act i v i t i es . Atal l rel ev an tt i m es ,

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o nreferen ces are t o th e In t ern al Rev enu e Co de rel at i ng t o th e y ears i ni ss u e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.

2 Pu rs u an tt o s ec. 5 0 1 (c)(7 ), p aym en t s p et i t io n er recei v edfro m i t s m em b ers are ex em p tfro m t ax .-3
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[* 3 ] p et i t i o n er co m

p u t edth e i n d i rect ex p en s es rel at i n g t o i t s n o n m em b er s al es
u s i n g th e g ro ss -t o -g ro ss al lo cat i o nm et h o d . Purs u an tt o th e g ro s s -t o -g ro s s al l o cat i o nm et h od , p et i t i o n er u s edth e rat i o o f n o n m em b er s al es t o t o tal s al es t o d et erm i n e wh atp o rt i o no f i n d irectex p en s es was at tri b u tab l e t o n o n m em b er s al es . Fo r 2 01 0 , 2 0 1 1 , an d2 0 1 2 p et i ti o n er’ s n etl o s s es rel at i n g t o n o n m em b er s al es were $ 1 1 2 ,3 6 5 , $ 93 ,5 24 , an d$ 9 9 ,5 2 2 , res pect iv el y . Inad d i t i on t o n o n m em ber s al es i n co m e, p et i t i o n er rep o rt edo ni t s 2 0 1 0 , 2 0 1 1 , an d2 0 1 2 Fo rm s 9 90 -T i n v es tm en t i n co m e (i .e., i n t eres tan dd i v id en d s ) o f $ 3 0 ,7 2 3 , $ 7 ,2 7 4 , an d$ 7 ,3 4 0 , res p ect i v el y . Pet i t i o ner fi l edi ts Fo rm s 9 9 0-T rel at i n g t o 2 0 1 0 , 2 0 1 1 , an d2 0 12 o n Oct o b er 2 4 , 2 0 1 1 , Ju l y

9 , 2 0 1 2 , an dJu ne 2 7 , 2 01 3 , res p ect i v el y . Pet it i on er fi l ed , o nJu l y 8 , 2 0 1 3 , anam en d ed 2 0 1 0 Fo rm 9 9 0 -T. Oni t s am en d ed2 0 1 0 Fo rm 9 9 0 -T
an d i t s o ri g i n al 2 0 1 1 an d2 01 2 Fo rm s 9 9 0 -T p et it i o n er o ffs eti t s i n v es tm en t i n co m e wi th l o s s es at tri b u t ab l e t o i t s n o n m em b er s al es an d rep o rt edth at i td i dn o t h av e un rel at edb u s in es s t ax ab le i n co m e (UBTI). Pet i t io n er’ s acco u n tan t s p rep ared th e afo rem en t i o nedfo rm s . Inp rep ari n g an dfi l i n g th es e fo rm s , p et i ti o n er an di t s acco u n t an t s were aware t hat , p u rs u an tt o Po rt l an d Go l f Cl ub v . Co m m is si o n er, 4 9 7 U.S. 1 5 4 (1 99 0 ), l os s es fro m n o n m em ber s al es m ay

o ffs eti n v es tm en ti n co m e o n l y i f th e s al es were en t eredi nt o fo r p ro fi t .-4
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[* 4 ] Ina n o t ice o f d efi ci en cy i s s u edo nFeb ru ary 6 , 2 0 1 5 , res p o n d en td et erm i n ed p et i t i o n er’ s n o nm em

b er s al es act i v i t i es were n o t en t eredi n to fo r p ro fi t , th es e s al es co u ldn o to ffs et p et i t io n er’ s i n v es tm en ti n co m e, an dp et i ti o ner’ s i n v es tm en t i n co m e was un rel at edb u s in es s t ax ab l e i n co m e. Res p o n d en td et erm in ed d efi ci en ci es o f $ 4 ,4 5 8, $ 9 4 1 , an d$ 9 4 1 rel at i n g t o 2 0 1 0 , 2 0 11 , an d 2 0 1 2 , res p ect i vel y , an dd et erm i n ed s ect i o n 6 66 2 p en al t i es o f $ 8 9 2 , $ 1 8 8 , an d$ 1 8 8 rel at i n g t o 2 0 1 0 , 2 0 1 1 , an d2 0 1 2 , res p ect i v el y . Pet i t i o n er, wh o s e p ri n ci p al p l ace o f b u si n es s was Oh i o , t i m el y fi l eda p et i t i on wi th th e Co u rt o nM arch 4 , 2 0 1 5
. Di s cu ss i o n Pu rs uan tt o s ect i o n s 5 1 1 (a)(1 ) an d 5 1 2 (a)(1 ), t ax -ex em pto rg an i zat i o n s m

u s t p ay Fed eral i n co m e t ax o nth ei r UBTI. Fo r m o s tex em p to rg an izat i o n s , UBTI i s l i m i ted t o i n co m e d eri v ed fro m an y un rel at edtrad e o r b u s i n es s . See s ec. 5 1 2 (a)(1 ). UBTI rel at i n g t o s ect i o n5 0 1 (c)(7 ) o rg an i zat i o n s i n cl u d es i n v es tm en t i n co m e. See s ec. 5 12 (a)(3 ); Po rt l an d Go lf Cl ub v . Co m m is s i o n er, 4 97 U.S. at1 6 1
. Ex p en s es i n ex ces s o f u n rel at edb u s i n es s i n co m e are d educt i b l e o nl y t o th e ex t en t th atth e s ect i o n5 0 1 (c)(7 ) o rg an i zat i o ni n t en d edt o p ro fi tfro m i ts un rel at ed b u s i n es s act i v i t i es . See s ec. 1 62 ; Co m m i s s io n er v . Gro et zi ng er, 4 8 0 U.S. 2 3 , 3 5 (1 9 8 7). Thu s , p et i t i o n er m ay o ffs eti n v es tm en t i n co m e wi thl o s ses i n cu rredi n s al es t o n o n m em

b ers o n l y i f i t s n o n m em

b er s al es were m o t i vat edb y ani n t en tt o-5
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[* 5 ] p ro fi t . See Po rt l an dGo l f Cl ub v . Co m m i ss i o n er, 4 9 7 U.S. at1 6 3 -1 6 4
. 3 To p ro v e i t s i n t en tt o p ro fi t , p et i t i o n er m u stes t ab l i s h th ati t s g ro s s recei p ts fro m
n o n m em ber s al es ex ceed edth e d i rectan d i n d irectco s t s rel at in g t o th es e s al es . See i d . at1 6 6 . Purs u an t to th e g ro s s -t o -g ro ss m et h o d, p et i t io n er s u st ai n edl o s ses rel at i n g t o n o n m em

b er s al es du ri n g th e y ears i ni ss u e. W e rejectp et i t i o n er’ s co n t en t i o nthati t s i n t en tt o p ro fi t m ay b e es t ab l i s h ed b y th e fact o rs s etfo rthi n s ect i o n1 .1 8 3 -2 (b ), In co m e Tax Reg s . Sect io n1 83 an d th e reg u l at i o n s th ereu n d er are n o tap p l i cab l e t o s ect i o n5 0 1 (c)(7 ) o rg an i zat i o n s . See s ec. 1 8 3 ; s ec. 1 .1 8 3 -1 (a) In co m e Tax Reg s . Becau se p et i t io n er d i d n o ti n t en d t o p ro fi tfro m

i t s n o n m em

ber s al es , i tm ay

n o to ffs eti t s i nv es tm en ti n co m e wi th l o s s es rel at i n g t o th es e s al es . Res p o n d en td et erm i n edan des t ab l i s h edth atp et i t i o n er i s l i ab l e fo r s ect i o n 6 6 6 2 (a) an d (b )(1 ) accu racy -rel at edp en al ti es fo r n eg l i g en ce rel at i n g t o 2 0 1 0 , 2 0 1 1 , an d2 0 1 2 . Pet i t io n er fai l edt o ex erci s e du e care i nth e p rep arat i o n o f i t s retu rn s . See s ecs . 6 6 6 2 , 7 4 91 (c); Hi g b ee v . Co m m is si o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 (2 0 0 1); s ec. 1 .6 6 62 -3 (b )(1 ), In co m e Tax Reg s . Pet i t i o n er’ s 2 01 0 , 2 0 1 1, an d2 0 1 2

3 Pet i t i on er h as th e b urd en o f p ro o f rel at i n g t o an i ss u e u n l es s i ti n tro du ces cred i b l e ev i d en ce wi thres p ect t o th ati s s u e. See s ec. 7 4 9 1(a). Ou r co n cl u si o n s, h o wev er, are b as edo n a p rep o n d eran ce o f th e ev i d en ce, an d th u s the al lo cat i o no f th e b u rd en o f p ro o f i s i m m at eri al . See M art i nIce CreamCo . v . Co m m i s si o n er, 1 1 0 T.C. 1 8 9 , 2 1 0 n .1 6 (1 9 9 8).-6
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[* 6 ] retu rn s were p rep aredb y p ro fes s i o n al s . Th ere i s n o ev i d en ce, h o wev er, th at th e p rep arers h ad s uffi ci en t ex p ert is e t o ju s t i fy rel i an ce, t hatp et i t i o n er p ro vi d ed th em wi th n eces s ary

an daccu rat e i n fo rm at i o n , o r th atp et it i on er rel i edi n g o o d fai th on th e p rep arers ’ ju d g m en t . See s ec. 6 6 6 4(c)(1 ); Neo n at o l o g y As s ocs ., P.A.
v . Co m m i s s i o n er, 1 1 5 T.C. 4 3, 9 9 (2 0 0 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 d Ci r. 2 0 0 2 ); s ec. 1 .6 66 4 -4 (b )(1 ), In co m e Tax Reg s . To th e co n trary , p et i t i o n er s t ip u l at edth ati tan d i t s acco u n t an t s were aware o f th e Po rt l an d Go l f Cl ub , p reced en t . Thu s p et i t i o n er’ s retu rn s were n otp rep ared i ng o o dfai th an dp et i t i o ner d i dn o th av e reas on ab l e cau s e fo r th e u n d erp aym en t s . See s ec. 6 6 64 (c)(1 ). Acco rd i ng 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 nrel at i n g t o th e s ect io n6 66 2 (a) p en al t i es . Co n ten ti o ns we h av e n o t ad dres sedare i rrel ev an t , m o o t , o r m eri t l es s . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t ered fo r res p o n den t .