T.C. Sum m ary Opi ni on 20 16 -1 0

UNITED STAT ES TAX COURT
JOHN H. FISHER AND LISA M. FISHER, Pe ti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 24 48 0- 11 S. Fi le d M arch 8, 2 01 6.

Jo hn H. Fis he r an d Li saM. Fi sh er, p ro ses e. Lua nn e S. DiM au ro , forres po nd en t.

SUMM ARY OPINION CARLUZZO, Spec ia l Tri al Ju dg e: Thi s ca se was h eardpu rs ua ntto th e pr ov is io ns of s ect io n 7 46 3 o f th e In te rn al Rev enue Co de in effe ctwhen th e pe ti ti on was fi le d. Pur su an t t o s ect io n 7 46 3( b) , th e d eci si onto be en te redis no t 1
Unl es s o th erwi se in di cat ed , subs eque ntsec ti onrefe ren ces are t o the 1 (co nt in ue d...)- 2 -

rev ie wab le by any

ot he r co urt, an d thi s o pi ni on sh al l n otbe tre at edas p rece de nt fo r an y ot he r cas e. Ina no ti ce o f de fic ie nc y

da te d J ul y

28 , 20 11 (no ti ce), re sp on de nt de te rm in edde fic ie nc ie s i n, an d p en al ti es with re sp ectto , pet it io ne rs ’ Fed eral in co m e ta x fo r 20 06 , 20 07 , and20 08
. Afte r co nc es si on s, the is su es forde ci si on foreachy ear a re wh ethe r pe ti ti on ers : (1 ) are en ti tl edto a tr ad e o r bu si ne ss expe ns e d educ ti on for“ wag es to
m in orch il dr en ”; (2) are en ti tl edto va rio us tra de or b us in es s ex pe ns e d educ ti on s fo r am ou nt s ex pe nd edin co nn ect io n wi th Lis a M. Fi sh er’s (p et it io ne r) b oo k writ in g a ct iv it y ; an d (3 ) are li ab le fora se ct io n 6 66 2( a) ac cu racy-rela te d p en al ty. Bac kg ro un d So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Atth e ti m e th e pe ti ti on was fi le d, p et it io ne rs res id edinNew York
. At al l t im es rel ev an t h ere, p et it io ne rs were at to rn ey s p ract ic in g i n New York- -p et it io ne r as a so le pro pr ie to r, an d M r. Fis he r as a pa rtn er i n a n Al ba ny, New York , law fi rm . Mr. Fi sh er i s al so th e au th orof a t l eas t two b oo ks rel at in g t o th e p ract ic e o f la w. (...co nt inue d) 1 In te rn al Rev enue Co de of 1 98 6, as am en de d, i n e ffec t fo r th e y ears inis su e. Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e.- 3 -

Pet it io ne rs ha ve th ree c hi ld ren , all of wh om were u nd er n in e y ears ol d a s o f th e cl os e o f 20 08 . Peti ti on ers m ai nt ai ne d asec ti on 52 9 qua li fie d tui ti on pro gr am acco un t (s ect io n 5 29 acco un t) f oreach of t he ir c hi ld ren . Pet it io ne r’s Law Pract ic e Dur in g t he y ears in is su e p et it io ne r’s la w off ic e was in ren te d s pa ce i n Kin gs to n, New Yo rk . Duri ng 20 06 an d fo r a p artof 2 00 7 s he als o s erv edas a pa rt- ti m e la w cle rkto a New Yorkjud ge . Dur in g s umm er s ch oo l re ces se s p et it io ne r of te n b ro ug hthe r ch il dr enin to he r of fic e, us ua ll y

forap pr ox im at el y

two ho ur s a d ay , two or thr ee d ay s a we ek
. Sh e d idth is be cau se at t im es othe r fam il y m em be rs were n otav ai labl e to care for th e ch il dr enan d a ls o b ecau se , acco rd in g t o p et it io ne r, “ da y care was co st -p ro hi bi ti ve for* * * [p et it io ne rs ], an d s o * * * [sh e] hadth e ch il dr enwork in g fo r * * * [h er] inth e o ffi ce i ns te ad .” Pet it io ne rs als o b el ie ve d t ha t al lo win g t he ir ch il dr ento workin pe ti ti on er’s o ffi ce wo ul d h el p t o t each th e ch il dr enab ou t the
va lu e o f m on ey

an d d ev el op a he al th y

worketh ic
. Whi le at p et it io ne r’s of

fic e th e ch il dr enpro vi de d v ari ou s s erv ic es to he r in
co nn ect io n wi th he r pr act ic e. Fo r ex am pl e, th e ch il dr ensh red de d was te , m ai le d th in gs , ans weredtel ep ho ne s, p ho to co pi eddo cu m en ts , gre et edcli en ts , andesc orte d cl ie nt s t o t he off

ic e li br ary orot he r wai ti ng area s i n t he off ic e co m pl ex . The- 4 -

ch il dr enals o h el pe d p et it io ne r m ov e fi le s fr om a fl oo de d b as em en t i n 2 00 6; th ey he lp edhe r rem ov e fi le s d am ag edin a ba th ro om flo odin 20 07 , andth ey

he lp edto
m ov e p et it io ne r’s of

fic e to a di ffer en t o ffi ce i n t he same bu il di ng in 20 08
. Pet it io ne r di d n otis su e a Fo rm W -2 , W ag e an d Tax Sta te m en t, t o a ny of h er ch il dr enforan y

y ear i n i ss ue ; n o p ayro ll reco rd s re ga rd in g t he ir e m pl oym en t wer e ke pt , no r were any Fede ral tax withh ol di ng pa ym en ts m ad e fro m an y am ou nt s t ha t
m ig htha ve be enpa idto any of t he m . Pet it io ne r’s Bo okWrit in g Act iv it y Dur in g 2 00 6 i n c on ne ct io n wi th he r la w pra ct ic e an d a t the reque stof a cl ie nt , pet it io ne r tr av el edto th e Cze ch Rep ub li c fo r anex te nd edpe rio d. Be cau se Mr. Fi sh er co ul d n ottak e ti m e away from hi s emplo ym en t t o t en d t o t he ch il dr en , pe ti ti on er t oo k t he m

with h er o n t he tri p. Sh e was co nc ern edab ou t en te rta in in g th e ch il dr endu rin g t he lo ng car ri de s s he an ti ci pa te d t ak in g dur in g t he tri p and
cam e up wi th th e id ea o f writ in g abo okab ou t the co un try tha t wo ul d b e in fo rm at iv e an d h ol d t he ch il dr en ’s in te res t o r, as sh e te st ifi ed , “ ke ep th em bu sy”, whi le tra ve li ng by car. She ha d n o p rev io us ex pe rie nc e wri ti ng or p ub li sh in g bo ok s. Itlat er o ccu rredto he r th atot he r pa ren ts tra ve li ng with c hi ld ren m ig htbe in te res te d i n t rav el bo ok s cr eat edforch il dr en , andsh e d eci de d t o wri te a se rie s o f- 5 -

ch il dr en ’s tra ve l b oo ks each di rect edto a di ffer en t d es ti na ti on inth e Uni te d S ta te s orels ewh ere. Dur in g t he y ears in is su e p et it io ne r tr av el edwith p et it io ne rs ’ th ree c hi ld ren to Dis ne y W or ldin Orland o, Fl or id a, an d s ev eral cit ie s i n Eu ro pe . Accor di ng to pe ti ti on er, the pu rp os e o f eac h t rip was t o c on du ctres earc h fo r a y et -to -b e wri tt en ch il dr en ’s tra ve l b oo k. Be fo re trav el in g t o aparti cu la r de st in at io n p et it io ne r typic al ly w ou ldco m

pl et e a ro ug h d raftof ach il dr en ’s tra ve l b oo k. Sh e an d t he ch il dr enus edth e ro ug h d raftto to urth e are a, an d p et it io ne r wou ldreco rdan y he lp fu l h in ts or o th er i nf

orm at io n s he th ou gh t s ho ul d b e in cl ud edin th e fi na l
ve rs io n o f th e ch il dr en ’s tra ve l b oo k t ha t s he pl an ne d t o c om pl et e atso m e fu tu re da te . In 2 00 6, 2 00 7, an d 2 00 8 p et it io ne r de vo te d app ro xi m at el y 2, 1 0, an d 2 0 ho ur s a we ek , res pe ct iv el y , to he r bo okwrit in g a ct iv it y . So m et im e in 20 07 pe ti ti on er co ns ul te d wi thon e o f he r cl ie nt s, Gab rie ll e Euv in o, a p ub li sh edau th or , who ga ve he r advi ce wi th res pe ctto writ in g a nd/o r publ is hi ng bo ok s. Ms . Euv in o h as writ te n a t l eas t thr ee p ub li sh edbo ok s, ea ch rel at edinon e way

or a no th er t o the Ita li anlan gu ag e. Fro m 20 07 th ro ug h 2 00 8 p et it io ne r an d M s. Eu vi no sp ok e reg ul arl y ab ou t pe ti ti on er’s p la ns reg ard in g p ub li sh in g c hi ld ren ’s tra ve l b oo ks . Ms. Eu vi no in tro du cedpe ti ti on er t o abo okdi st rib ut or , who su gg es te d tha t p et it io ne r hi re a- 6 -

gr ap hi c d es ig ne r. She di d s o a t s om e p oi ntno t d is cl os edin th e rec or d. Dur in g t he y ears in is su e p et it io ne r al so co ns ul te d wi th Rh at iya Hill , a fri en d wh o worke d i n the ch il dr en ’s bo okde pa rtment o f th e Harp erCo ll in s p ub li sh in g co m pa ny. Ms . Hil l re co m

m en de d t ha t p et it io ne r hi re an ag en t, b utsh e h adno t do ne so as o f th e cl os e o f 20 08
. Pet it io ne r ul ti m at el y

co m pl et edat l eas t fo ur“pr ot oty pe ” tr av el bo ok s al th ou gh sh e can no t re m em be r th e o rd er i n wh ic h s he wrot e th em ot he r th anth at th e tr av el bo okforRo m e was fir st . 2 To the ex te ntth atany

of t he pro to types were co m pl et eddu rin g t he y ears in is su e, pe ti ti on er d idno t s ub m itan y of t he m forpubl ic at io n. Du rin g 2 00 8 s he so ld

“ so m e o f th e b oo ks ” b y

“ wor d- of -m ou th ” in res po ns e to sp eci fic reque st s fr om fri en ds an d/ or

cli en ts pl an ni ng to tra ve l wi th th ei r ch il dr ento va rio us lo cat io ns . Pet it io ne r pl an ne d t o h ire anag en t b y th e en d o f 20 09 , bu t as of t he clo se of th aty ear h adno t yet do ne so . Peti ti on er d idno t s ub m itan y pro po sa ls to an y publ is hi ng co m

pa ny du rin g a ny of th e y ears inis su e. To the ex te ntth atsh e d id du rin g 2 00 9, n on e were a ccep te d. By the clo se of t ha t year sh e h adde ci de d t o
It m ig htbe th atth e o nl y

ex is ti ng ve rs io ns of t he se “pr ot ot y pe s” are n ow 2 pa rt o f th e ev id en ti ary reco rdin th is cas e. If s o, an d i f pe ti ti on ers wantth os e it em s returne d, t he n app li cat io n fo r th e return o f th e ex hi bi ts m ay be m ad e p ur su an t t o Ru le 14 3( e)(2 ).- 7 -

se lf- publ is h h er b oo ks us in g a n In te rn etW eb si te ; h owe ve r, itis un cl ear wh ethe r
an y of h er b oo ks were ev er s ol d t hr ou gh th e Web si te . Pet it io ne rs ’ Fed eral Inc om e Tax Returns Fo r eac h year in is su e p et it io ne rs ’ ti m el y fil edjoi ntFed eral in co m e ta x return was pre paredby a certi fie d p ub li c acc ou nt an t (r eturn p rep arer ). As rel ev an t he re, eac h re tu rnin cl ud es two Sch edul es C, Pro fitor Lo ss Fro m Bu si ne ss , on e rel at in g t o p et it io ne r’s la w pra ct ic e an d t he othe r to pe ti ti on er’s b oo k wri ti ng act iv ity . Am on g o th er i te m s an d a s re le va nthe re, o n t he 20 06 , 20 07 , and20 08 Sch edul es C rel at in g t o p et it io ne r’s la w pra ct ic e, pe ti ti on ers : (1 ) rep orte d g ro ss in co m e o f $5 ,50 0, $ 10 ,95 3, an d $ 12 ,27 3, re sp ect iv el y ; (2 ) de du ct ed“ wag es to
m in orch il dr en ” o f $1 0,4 35 , $1 0,3 13 , and$8 ,02 2, re sp ect iv el y ; an d, (3 ) ta ki ng in to
acco un t o th er d educ ti on s n othe re i n d is pu te , rep orte d n etlo ss es of $ 39 ,07 3, $3 6,6 96 , and$2 9,2 20 , res pe ct iv el y . The n etlo ss es sh own on th e Sch edul es C are ta ke n i nt o a cco un t i n t he co m pu ta ti onof t he ad

jus te d g ro ss in co m es rep orte d o n pe ti ti on ers ’ 20 06 , 20 07 , and20 08 returns . Pet it io ne rs rep orte d i nc om e an d e xp en se s o n t he Sch edul es C rel at in g t o pe ti ti on er’s b oo k wri ti ng act iv ity , as fo ll ows :- 8 - Item 20 06 200 7 200 8 Inc om e: Gros s re cei pt s o r sa le s -0- -0- $4 79 Gros s i nc om e -0- -0- 47 9 Exp en se s: Depre ci at io n a ndsec . 17 9 $2 ,20 0 -0 - -0- Legal an d p ro fes si on al 150 -0- 750 Office -0- -0- 29 6 Ren t o r le as e o f ve hi cl es , m ach in ery, an d e qu ip m en t 1,3 34 $2 ,81 9 2,0 14 Sup pl ie s -0- 62 5 -0
- Meal s an d e nt ert ai nm en t 2,9 13 2,4 94 1,3 71 Oth er 15 ,30 0 26 ,03 3 16 ,20 5

1 Tot al 21 ,89 7 31 ,97 1 20 ,63 6 Net p ro fit(lo ss ) (21 ,89 7) (31 ,97 1) (20 ,15 7)

“ Oth er ex pe ns es ” rep orte d o n t he Sch edul es C fo r 20 06 , 20 07 , and 1 20 08 in cl ud e lo dg in g, ai rfar e, an d e nt ran ce fe es . The se ne t l os se s ar e al so tak enin to acco un t i n t he ad jus te d g ro ss in co m e rep orte d
on pe ti ti on ers ’ 20 06 , 20 07 , and20 08 returns . Not ic e o f Defi ci en cy Inth e n ot ic e res po nd en t: (1) di sa ll owe d a ll of t he de du ct io ns forwage s t o
m in orch il dr encla im edon th e 2 00 6, 2 00 7, an d 2 00 8 S ch edul es C rel at in g t o pe ti ti on er’s l aw pr act ic e; (2) di sa ll owe d a ll of t he de du ct io ns cla im edon th e 2 00 6
an d 2 00 7 S ch edul es C rel at in g t o p et it io ne r’s bo okwrit in g a ct iv it y ; (3 ) di sa ll owe d al l b ut$4 79 of t he de du ct io ns cla im edonth e 2 00 8 S ch edul e C rel at in g t o- 9 -

pe ti ti on er’s b oo k wri ti ng act iv ity ; an d (4 ) im po se d asec ti on 66 62 (a)
accu racy-rela te d p en al ty for eac h year in is su e o n s ev eral gro un ds , in cl ud in g

“ ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns ” an d “ subs ta nt ia l u nd ers ta te m en t of in co m e ta x” . Oth er ad

jus tm en ts m ad e in th e n ot ic e n eedno t b e d is cu ss edas t he ad jus tm en ts are co m

pu ta ti on al or h av e n o c on se qu en ce t o t he de fic ie nc ie s h ere i n di sp ut e. Dis cu ss io n As we h av e o bs erv edin co un tl es s o pi ni on s, d educ ti on s ar e a m at te r of le gi sl at iv e g race , andth e ta xp ay er b ears th e b ur de n o f pr oo f to est ab li sh
en ti tl em en t t o a ny clai m edde du ct io n. Rul e 1 42 (a); INDOPCO, In c. v. 3 Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ); Ne w Col on ia l Ic e Co . v. Hel ve rin g, 2 92 U.S. 43 5, 4 40 (19 34 ). Thi s b ur de n re qu ire s t he tax pa y er t o s ub st an ti at e ex pe ns es fo r de du ct io ns cla im edby keep in g a ndpro du ci ng ad equa te reco rd s tha t en ab le th e Co m m is si on er t o d et erm in e th e ta xp ay er’s co rrec t t ax li ab il it y . Sec. 6 00 1; Hrad es ky v. Co m

m is si on er, 6 5 T.C. 8 7, 8 9- 90 (19 75 ), aff’d p er cu ria m , 54 0 F .2d 82 1 (5 thCir . 19 76 ); M en eg uz zo v. Co m m is si on er, 4 3 T.C. 8 24 , 83 1- 83 2 (1 96 5)
. A tax pay er cl ai m in g ade du ct io n o n aFed eral in co m e ta x re turnm us t d em on st rat e
Pet it io ne rs do no t cl ai m

an d t he reco rddo es no t s ho w th atth e p ro vi si on s o f 3 se c. 74 91 (a) a re ap pl ic ab le , andwe pr oc eedas t ho ug h t he y are n ot .- 10 -

th atth e d educ ti on is all owabl e p ur su an t t o s om e st atut ory pro vi si on an d m

us t fu rth er s ub st an ti at e th atth e ex pe ns e to whi ch th e d educ ti on rel at es ha s b een pa id
orin cu rred . See s ec. 6 00 1; Hrad es ky v. Co m m is si on er, 6 5 T.C. at89 -9 0; sec . 1.6 00 1- 1( a), In co m e Tax Reg s. As a g en eral rul e, if

a ta xp ay er p ro vi de s s uf

fic ie ntev id en ce tha t the ta xp ay er h as in cu rredanex pe ns e co nt em pl at edby sect io n 1 62 (a), b utth e ta xp ay er is un ab le to ad equa te ly sub st an ti at e th e am ou ntof e xp en se , th enth e Co urt m ay es ti m at e th e am ou ntof s uc h e xp en se an d a ll ow t he sec ti on16 2( a) d educ ti on to th atex te nt . Coh anv. Co m m is si on er, 3 9 F .2d54 0, 5 43 -5 44 (2dCir . 19 30 ). Howev er, i n o rd er fo r th e Co urt t o e st im at e th e am ou ntof a n e xp en se , th ere m us t be so m e b as is up on whi chanest im at e m ay be m ad e. Vani cekv. Co m m is si on er, 85 T.C. 73 1, 7 42 -7 43 (19 85 ). Oth erwi se , any all owa nc e wou ldam ou ntto
un gu id edlar ge ss e. W il li am s v . Uni te d S ta te s, 2 45 F.2d55 9, 5 60 (5t h C ir. 1 95 7)
. The types of d educ ti on s h ere i n d is pu te are al lo wab le , if atall , un de r se ct io n 16 2( a). Tha t s ect io n g en eral ly allo ws a d educ ti on forord in ary an d n eces sa ry ex pe ns es pa idor i nc urreddu rin g t he tax ab le y ear i n c arrying on an y tra de or bu si ne ss . The d et erm in at io n o f whe th er anex pe nd itur e sa ti sf ie s t he requi rem en ts fo r de du ct ib il it y

un de r se ct io n 1 62 is a qu es ti on of f act . See Co m

m is si on er v .- 11 -

Hein in ge r, 32 0 U.S. 4 67 , 47 5 (1 94 3) . On th e o th er h an d, s ect io n 2 62 (a) g en eral ly di sa ll ows a de du ct io n fo r pe rs on al , li vi ng , or fa m il y ex pe ns es . W it h t he se fun da m en ta l p rin ci pl es inm in d, we turn o ur att en ti onto th e de du ct io ns he re i n d is pu te . Pet it io ne rs cla im

a de du ct io n fo r wag es to m in orch il dr enon th e Sch edul e C rel at in g t o p et it io ne r’s la w pra ct ic e fo r eac h year in is su e. Acco rd in g t o pe ti ti on ers , th e ch il dr enpro vi de d v ari ou s s erv ic es to pe ti ti on er i n c on ne ct io n wi th he r la w pra ct ic e, an d p et it io ne rs sh ou ldbe en ti tl edto a de du ct io n fo r th e co m pe ns at io n t he ch il dr enwere p ai d fo r do in g s o. Acco rd in g t o re sp on de nt , pe ti ti on ers ha ve no t es tabl is he d t ha t the wage s wer e actua ll y pa idor t ha t an y pa ym en t tha t was m ad e was a pa ym en t fo r anord in ary an d n eces sa ry bu si ne ss ex pe ns e. As n ot ed , sec ti on 16 2( a) al lo ws as a de du ct io n a ll th e o rd in ary an d
ne ces sa ry ex pe ns es pa idor i nc urreddu rin g t he tax ab le y ear i n c arrying on an y tra de or b us in es s, i nc lu di ng co m pe ns at io n fo r pe rs on al servi ces actua ll y ren de red
. Co m pe ns at io n i s d educ ti bl e o nl y if i t i s (1 ) rea so nabl e in am ou nt , (2) ba se d o n se rv ic es actua ll y

ren de red , and(3) pa idor i nc urred . Elle r v. C omm is si on er, 7 7 T.C. 93 4, 9 62 (19 81 ).- 12 -

If an am ou ntde du ct edas wa ge s i nv ol ve s a f am il ia l re la ti on sh ip , th enth e Co urt (n otto m en ti onth e In te rn al Rev enue Serv ic e) cl os el y scrut in iz es th e tra ns act io n t o d et erm in e whe th er the re i s a b on a fi de em pl oyer-em

pl oyee rel at io ns hi p a ndwhet he r orno t p aym en ts were m ad e fo r se rv ic es actua ll y pe rfo rm edforth e b us in es s. See Denm anv. Co m m is si on er, 4 8 T.C. 4 39 , 45 0 (1 96 7) . This is pa rti cu la rly tru e whe n t he de du ct io n i s at tri bu tabl e to pa ym en ts fro m a pa ren t t o t he pa ren t’s ch il d. A n orm al supp os it io n wh enpa ym en ts are
m ad e to de pe nd en t ch il dr enor wh enit em s ar e p ur ch as edby a pare ntforde pe nd en t ch il dr enis th atth e m on ey or i te m s ar e in th e n atur e o f supp ort an d n on de du ct ib le
. See s ec. 2 62 ; Ho lt z v . Comm is si on er, T.C. Mem o. 1 98 2- 43 6. Onth e o th er h an d, pa ym en ts m ad e to m in orch il dr enby a relat edpa rty for s erv ic es ren de redin
co nn ect io n wi th th e p ay or ’s tra de or b us in es s m ig htve ry well qu al ify for de du ct io n. Se e Den m anv. Co m m is si on er, 4 8 T.C. at44 8- 45 1. As with m an y is su es we se e, al l o f th e fac ts an d c irc um st an ces su rro un di ng th e p aym en ts m us t b e co ns id ered
. Keep in g i n m in d t he requi rem en t tha t an y de du ct io n fo r co m

pe ns at io n m

us t be reas on ab le , we firs t n ot e th atwe can no t t el l fr om whatha s b eenpre se nt edho w
m uc h was pa idto each of p et it io ne rs ’ ch il dr en . Nor ca n we t el l h ow m any ho ur s each work edor wh atth e h ou rly rate o f pa y mig htha ve be en . W it ho utreco rd s- 13 -

sh owi ng th es e d et ai ls , we can no t t el l wh ethe r th e am ou nt s d educ te d wer e

“ reas on ab le ”, es pe ci al ly whe n t he ag es of t he ch il dr enare t ak enin to acco un t. Fu rth erm or e, acc or di ng to pe ti ti on er, p aym en ts to he r ch il dr enforservi ces ren de redto he r la w pra ct ic e were m ad e in pa rt b y co nt rib ut io ns in to th ei r se ct io n 52 9 a cco un ts an d i n p artin cas h s o t ha t the ch il dr enco ul d p ur ch as e “bo ok s, thi ng s th ey ne ed ed , cha ch ki es [si c], sou ve ni rs , th in gs of t ha t n atur e”. Acco rd in g t o M r. Fi sh er, p aym en ts to hi s ch il dr enforservi ces ren de redto pe ti ti on er’s l aw pr act ic e were m ad e so le ly by

co ntrib ut io ns to th ei r se ct io n 5 29 acco un ts alt ho ug h h e te st ifi edth aton ly porti on s o f th e co ntrib ut io ns were re po rte d a s wag es . Accor di ng to pe ti ti on ers ’ return p rep arer , th e d educ ti on s wer e n otco m pu te d wi th refe ren ce t o th e ch il dr en s’ sec ti on 52 9 a cco un t co nt rib ut io ns . As n ot ed , pet it io ne r di d n otis su e a Fo rm W -2 to an y

of h er ch il dr enfor

an y y ear i n i ss ue , no r di d s he m ai nt ai n p ayro ll reco rd s wi th res pe ctto any pa ym en ts th atm ig htha ve be enm ad e. Furth erm or e, attri al pe ti ti on ers di d n otpre se ntan y do cu m en ta ry

ev id en ce, s uc h a s b an k a cco un t s ta te m en ts , can cel edch eck s, o r reco rd s fo r th ei r ch il dr en s’ sec ti on 52 9 a cco un ts , th atsupp ort the de du ct io ns . All th in gs co ns id ered , we fin d t ha t p et it io ne rs have fai le d t o e st ab li sh th ei r en ti tl em en t t o t he de du ct io ns forwage s t o m in or ch il dr enas c la im edon th e 2 00 6, 20 07 , and20 08 Sch edul es C rel at in g t o p et it io ne r’s la w pra ct ic e. W e are sat is fie d,- 14 -

ho wev er, tha t ea ch of p et it io ne rs ’ ch il dr enpe rfo rm edservi ces in co nn ect io n wi th pe ti ti on er’s l aw pr act ic e dur in g e ach y ear i n i ss ue an d e ach was c om pe ns at edfor do in g s o. Tak in g i nt o a cco un t the ir a ge s, g en eral iz edde sc rip ti on s o f th ei r du ti es , ge ne ral iz edst at em en ts as t o t he ti m e eac h s pe ntin th e o ffi ce, an d t he lac k o f
reco rd s, we fi ndth atpe ti ti on ers are en ti tl edto a $2 50 de du ct io n fo r wag es pa idto each ch il d fo r eac h year. See Co ha n v . Comm is si on er, 3 9 F .2dat 5 43 -5 44 ; Van ic ekv. Co m

m is si on er, 8 5 T.C. at74 2- 74 3. Acco rd in g t o p et it io ne rs , pet it io ne r’s bo okwrit in g a ct iv ity fit s wi th in th e de fin it io n o f a trad e o r bu si ne ss withi n t he m ean in g o f se ct io n 1 62 (a) fo r eac h year in is su e. Ther efo re, acc or di ng to pe ti ti on ers , th e ex pe ns es pe ti ti on er p ai d o r in cu rredin carry in g o n t hi s ac ti vi ty sho ul d b e al lo wedas d educ ti on s. Alt ho ug h t he y

co ul d n otsubs ta nt ia te th e ex pe ns es un de rlyin g the de du ct io ns forwage s t o p et it io ne rs ’ ch il dr en , app aren tl y pe ti ti on ers were ab le to
subs ta nt ia te th ei r bo okwrit in g a ct iv it y ex pe ns es to res po nd en t’s s at is fact io n. Acco rd in g t o t he no ti ce, h owe ve r, pe ti ti on ers are n oten ti tl edto de du ct io ns for th es e ex pe ns es be cau se th e act iv it y “ do es no t m eetth e g ui de li ne s o f carry in g o n a tra de or b us in es s wi th in th e m ean in g o f * * * s ect io n 1 62 (a)” . Argu m en ts pr es en te d i n re sp on de nt ’s pre tri al m em or an du m lea d u s t o b el ie ve th atth e

“ gu id el in es ” ref

eren cedin th e n ot ic e are fou nd , at l eas t i n p art , insec ti on 1.1 83
-- 15 -

2( b) , Inc om e Tax Reg s. Th os e g ui de li ne s, m or e co m m on ly referre d t o a s

“ fact or s” , are ap pl ie d t o d et erm in e whe th er a t axpa y er co nduc ts anact iv it y with an

“ actua l an d h on es t” pro fitob jecti ve , or apro fitm ot iv e. See Dre ic er v . Co m m is si on er, 7 8 T.C. 6 42 , 64 4- 64 5 (1 98 2) , aff’d wit ho utpubl is he d o pi ni on , 70 2 F.2 d 1 20 5 (D.C . Cir . 19 83 ). Exp en se s p ai d b y a ta xp ay er i n c on ne ct io n wi th an act iv ity no t co nduc te d b y

th e ta xp ay er wi th anactua l an d h on es t p ro fitob jecti ve are n otall owabl e u nd er s ect io n 1 62 bu t m ig htbe all owabl e u nd er s om e o th er pr ov is io n o f th e In te rn al Rev enue Co de . See, e.g ., sec . 18 3. Inco ns id eri ng whet he r a t ax pa y er’s act iv it y co ns ti tu te s a t rad e o r bu si ne ss wit hi n t he m ean in g o f se ct io n 1 62 (a), we ex am in e n oton ly the tax pay er’s p ro fit
m ot iv e, bu t al so whethe r th e b us in es s was co nduc te d wi th co nt in ui ty and reg ul ari ty andas am ean s o f earni ng a li vi ng . See Co m m is si on er v . Groe tz in ge r, 48 0 U.S. 2 3, 3 5 (1 98 7) . Mor e fu nd am en ta ll y , bef or e a s ect io n 1 62 (a) d educ ti on is al lo wab le , th e b us in es s m us t h av e actua ll y

co m m en ced . See Ri ch m on d Tel ev is io n Co rp . v. Un it edSta te s, 3 45 F.2d90 1, 9 07 (4t h C ir. 1 96 5) , vac at edan d re m an de d
on ot he r gr ou nd s, 3 82 U.S. 68 (19 65 ). Sep arat e an d apa rt f

ro m th e hur dl es pe ti ti on ers face in sat is fy in g t he tes ts
se t fo rth in Groe tz in ge r an d the ab ov e-re fere nc edreg ul at io n, af te r co ns id eri ng th ei r ev id en ce we ar e le ft wi thth e fi rm co nv ic ti on th atif p et it io ne r’s bo okwrit in g- 16 -

act iv ity ev er m atur edin to a tr ad e o r bu si ne ss withi n t he m ean in g o f se ct io n 1 62 (a), itdi d n otdo so be fo re the clo se of 2 00 8. The id ea t o wri te ch il dr en ’s tra ve l b oo ks di d n otoc cur to pe ti ti on er u nt il 20 06 an d t he n o nl y

be cau se of abu si ne ss tri p re la te d t o h er p ract ic e o f la w. For th e res t o f th aty ear a ndth ro ug ho ut20 07 an d 2 00 8, p et it io ne r’s act iv it ie s ar e b es t de sc rib edas p la nn in g a nd/o r res earc h i n c on ne ct io n wi th th e b us in es s s he ha d i n
m in d. As of t he clo se of 2 00 8, p et it io ne r ha d n oty ethi redanag en t, s he ha d n ot y etco m pl et eda fi na l v ers io n o f an y bo ok , sh e h adno t yet subm it te d a ny pro po sa l to an y publ is hi ng co m

pany, andsh e h adno t yet ha d a ny pro du ct s t o o fferforsal e to th e g en eral publ ic
. Und er the cir cu m st an ces , we dec li ne to rul e o n wh ethe r pe ti ti on er co nduc te d h er b oo k wri ti ng act iv it y with t he requi si te pro fitm ot iv e as res po nd en t
wou ldha ve us do . Ins te ad , ass um in g wi th ou t fi nd in g t ha t s he di d, we fi ndth atas of th e cl os e o f 20 08 , to th e ex te ntth atpe ti ti on er’s b oo k wri ti ng act iv it y ev er be cam e anact iv e tr ad e o r bu si ne ss , itha d n otdo ne so as o f th e cl os e o f 20 08
. 4 As n ot ed , pet it io ne r so ldso m e b oo ks durin g 2 00 8 i n re sp on se to sp eci fic 4 reque st s fr om

fri en ds or c li en ts forth e b oo ks . W e al so no te th atres po nd en t al lo wedde du ct io ns in 20 08 to th e ex te ntof t he in co m e fro m th atact iv it y . See s ec. 18 3( b) . Dedu ct io ns all owabl e u nd er tha t s ect io n p res um e th atth e act iv it y was n ot co nduc te d fo r pr of

it , a po in t tha t we d ecl in e to rul e upo n. Nev erthe le ss , gi ve n t he sm al l am ou ntin vo lv ed , we are n otin cl in edto di sturb re sp on de nt ’s all owa nc e in (co nt in ue d...)- 17 -

Tha t b ei ng so , pet it io ne rs are n oten ti tl edto th e d educ ti on s cl ai m edon th e Sch edul es C fo r pe ti ti on er’s b oo k wri ti ng act iv it y . Sect io n 6 66 2( a) i m

po se s a p en al ty of 20 % of t he po rti on of a n un de rp aym en t o f ta x a tt rib ut ab le to th e ta xp ay er’s n eg li ge nc e, di sr eg ardof r ul es or reg ul at io ns , or s ub st an ti al un de rs ta te m en t o f in co m e ta x. Se c. 66 62 (a) a nd(b) (1 )
an d (2 ). “

Neg li ge nc e” i nc lu de s an y fai lure t o m ak e a rea so nabl e at te m ptto 5
co m pl y with t he pro vi si on s o f th e Co de , in cl ud in g any fail ur e to ke ep 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. See sec . 66 62 (c); sec . 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. A “ subs ta nt ia l und ers ta te m en t” in cl ud es an un de rs ta te m en t o f in co m e ta x t ha t ex ceed s t he gre at er o f 10 % of t he tax requi red to be sh ownon th e return o r $5 ,00 0. Se e se c. 66 62 (d )(1 )(A); sec . 1.6 66 2- 4( b) , In co m e Tax Reg s. 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 im po si ti on of th e p en al ty here i n d is pu te , see sec . 74 91 (c), an d t ha t b ur de n h as be ensat is fie d fo r each y ear i n i ss ue be cau se th e u nd ers ta te m en t o f in co m e ta x, wh ic h e qu al s the
(...co nt inue d) 4 th atreg ard
. Inth is cas e, th e d efi ci en ci es , un de rp aym en ts of t ax , andun de rs ta te m en ts of 5 in co m e ta x a re al l co m

pu te d i n t he same m an ne r. See s ecs . 62 11 , 66 62 (d )(2 ), 66 64 (a).- 18 -

de fic ie nc y , exc eed s $ 5,0 00 for each y ear i n i ss ue , see sec s. 6 21 1, 6 66 2( d) (2 ), 66 64 (a). Fu rth erm or e, wit h re sp ectto th e p orti on s o f th e u nd erp aym en ts at tri bu tabl e to th e d is al lo wedam ou nt s o f th e d educ ti on s fo r wag es to th ei r ch il dr en , we fin d t ha t p et it io ne rs were n eg li ge ntwithi n t he m ean in g o f se ct io n 66 62 (b )(1 ) be cau se th ey

fai le d t o k eep ad equa te bo ok s an d re co rd s re ga rd in g th os e ex pe ns es . See s ec. 1 .66 62 -3 (b )(1 ), In co m e Tax Reg s. Tha t b ei ng so , itis pe ti ti on ers ’ bu rd ento est ab li sh th atth e im po si ti on of t he pe na lty is no t ap pr op ria te . See Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 47 (2 00 1) ; s ee al so Ru le 14 2( a); W el ch v. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Sect io n 6 66 4( c)(1 ) pr ov id es anex cep ti onto th e im po si ti onof t he
accu racy-rela te d p en al ty if th e ta xp ay er es tabl is he s t ha t the re was reas on ab le cau se fo r, an d t he tax pa y er ac te d i n g oo d fa it h wi th res pe ctto , th e u nd erp aym en t. Sec
. 1.6 66 4- 4( a), In co m e Tax Reg s. Th e d et erm in at io n o f whe th er the tax pa y er ac te d wit h re as on ab le cau se an d i n g oo d fa it h i s m ad e o n acas e-b y -cas e b as is , tak in g in to acco un t the pe rti ne ntfact s an d c irc um st an ces . Id. p ara. (b )(1 ). Und er ce rta in ci rcu m st an ces , a tax pa y er’s rel ia nc e upo n p ro fes si on al advi ce m ay est ab li sh th e ta xp ay er’s “ reas on ab le cau se ” an d “ go odfai th ” wit h re sp ectto anun de rp aym en t of tax if t he tax pa y er es tabl is he s t ha t (1 ) th e p ro fes si on al was p ro vi de d wi th
co m pl et e an d a ccu rat e in fo rm at io n, (2 ) anin co rrec t re tu rnwas ares ul t o f th e- 19 -

pr ep arer ’s m is ta ke s, an d (3 ) th e ta xp ay er d em on st rat es go odfai th rel ia nc e o n a co m pe te ntpro fes si on al . See Est at e o f Gol dm anv. Co m m is si on er, 1 12 T.C. 31 7, 32 4 (1 99 9) , aff’d wit ho utpubl is he d o pi ni on sub n om . Sch ut te r v. C omm is si on er, 24 2 F .3d39 0 (1 0th C ir. 2 00 0) ; s ee al so Neon at ol og y Ass oc s., P.A. v. Co m m is si on er, 1 15 T.C. 43 , 99 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2)
. Acco rd in g t o p et it io ne rs , th e p en al ti es are n otap pl ic ab le be cau se th ey rel ie d upo n th ei r return p rep arerwith re sp ectto th e d educ ti on s h ere i n d is pu te . W e ag ree wi th pe ti ti on ers , at l eas t wi th res pe ctto th e und erp aym en ts of t ax at tri bu tabl e to th e d educ ti on s cl ai m edon th e Sch edul es C rel at in g t o p et it io ne r’s bo okwrit in g a ct iv it y . Peti ti on ers ap pa ren tl y ke ptreco rd s s uf

fic ie ntto subs ta nt ia te th e d educ ti on s fo r th e v ari ou s ex pe ns es sh own on th e Sch edul es C, an d t he ir return p rep arerread il y

adm it te d a t tria l tha t h e ad vi se d p et it io ne rs th atth ey were en ti tl edto de du ctth os e ex pe ns es . Giv enth e sa m e se t o f ci rcu m st an ces , reas on ab le min ds co ul d d iff er o ve r whe n atax pa y er’s trad e o r bu si ne ss co m m en ces or wh ethe r a t ax pa y er co nduc ts anact iv ity with t he pro fitm ot iv e ne ces sa ry to all ow t he act iv it y

to be tre at edas atra de or b us in es s wi th in th e
m ean in g o f se ct io n 1 62 (a). Pet it io ne rs are n otli ab le for a se ct io n 6 66 2( a) p en al ty wit h re sp ectto th e p orti on of t he un de rp aym en t o f ta x a tt rib ut ab le to th e- 20 -

di sa ll owa nc e o f th e d educ ti on s fo r pe ti ti on er’s b oo k wri ti ng act iv ity foran y of t he y ears in is su e. The same is n ottru e wit h re sp ectto th e p orti on s o f th e u nd erp aym en ts of ta x a tt rib ut ab le to th e n ow d is al lo wedpo rti on s o f th e d educ ti on s fo r wag es for pe ti ti on ers ’ ch il dr en . Taki ng in to acco un t the ag es of t he ch il dr en , th e rea so ns th e ch il dr enwere wi th pe ti ti on er athe r of fic e, th e am ou ntof t im e th ey sp en t i n pe ti ti on er’s o ffi ce, the lac k o f subs ta nt ia ti ng reco rd s t o s up po rt t he pa ym en ts , and th e am ou nt s o f th e cl ai m edde du ct io ns , we fin d tha t p et it io ne rs ’ de ci si on , alb ei t wit h t he co nc urren ce o f th ei r return p rep arer , to cla im th os e d educ ti on s re nd ers th em li ab le forth e se ct io n 6 66 2( a) ac curacy-rela te d p en al ty on t he po rti on s o f th e un de rp aym en ts of t ax attrib ut ab le to th e p orti on s o f th os e d educ ti on s t ha t ex ceed th e am ou nt s h ere a ll owe d. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red
un de r Ru le 15 5.