# PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.T.C. Summ ary Opi ni on 20 14 -6

UNITED STAT ES TAX COURT

ALBERT CHEN AND NAI-FEN CHEN, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 12 98 2- 12 S. Fil edJan ua ry 14 , 20 14 .
Ro na ldJay Coh en , forpe ti ti on ers . Pet er N. Sch arff

, forres po nd en t.

SUMM ARY OPINION DEAN, Speci al Trial Ju dg e: Thi s ca se was h eardpu rs uantto th e p ro vi si on s of sec ti on 74 63 of t he Int ern al Rev enue Co de ineffe ctwhen th e p et it io n was 1

Unl es s o th erwi se in di cat ed , all subs eque ntsec ti on refe ren ces are t o t he 1 In te rn al Rev enue Co de (Co de ) in effe ctforth e y ear i n i ss ue , andall 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.- 2 -

fil ed . Purs ua ntto sec ti on 74 63 (b ), th e d eci si on to be en te redis no t re vi ewab le by an y ot he r co urt, an d t hi s o pi ni on sh al l n otbe tre at edas p rece de ntforan y ot he r cas e. Res po nd en t d et erm in eda de fic ie nc y of $ 8,0 93 inpe ti ti on ers ’ 20 09 Fed eral in co m e ta x a nda se ct io n 6 66 2( a) ac cu racy-rela te d p en al ty of $1 ,61 8.6 0. Th e is su es forde ci si on are wh ethe r pe ti ti on ers : (1 ) are en ti tl edto a de du ct io n fo r ex pe ns es on Sch edul e C, Pro fitor Lo ss Fro m Bu si ne ss ; (2 ) are en ti tl edto an ab an do nm en t l os s d educ ti on ; an d (3 ) are l iabl e fo r a s ect io n 6 66 2( a) ac cu racyrel at edpe na lty . 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. Th e st ip ul at io n o f fact s an d t he ex hi bi ts rece iv edinev id en ce ar e in co rp or at edhe rei n b y refe ren ce. Pet it io ne rs res id edinNew Yorkwhen th e p et it io n was fil ed . Alb ertCh en(pe ti ti on er h us ba nd ) is a ret ire d c iv il en gi ne er. Dur in g h is em pl oym en t as a ci vi l en gi ne er h e d es ig ne d a ndco ns tru ct edpo wer p la ntstru ctur es atPaci fic Gas & Elec tri c. He ha s o ve r 30 y ears of e xp eri en ce i n d es ig n a nd co ns tru ct io n s up erv is io n. Al th ou gh pe ti ti on er i s re ti red , in20 09 he pe rfo rm ed work fo r se ve ral co m

pa ni es on a co ntractba si s.- 3 -

Nai- FenCh en(pe ti ti on er wi fe) i s a r et ire d re gi st erednu rs e. Sh e ret ire d aro un d 2 00 3. Sh e en te redth e rea l es ta te bu si ne ss inor a ro un d 2 00 7 a ndlat er be cam e a l ic en se d re al est at e ag en t. In20 09 pe ti ti on er wi fe re cei ve d n on em pl oyee co m pe ns at io n o f $8 00 fro m

Kell er Will ia m s R eal ty anda co m m is si on fro m W ei ch ertReal to rs of $ 86 9.5 0. Inor a ro un d 1 98 0 p et it io ne rs pu rch as edan88 .81 -acr e p arce l o f la ndinth e to wn o f Green vi ll e, New York(to wn) . Peti ti on ers curren tl y res id e in a si ng le fam il y res id en ce o n t ha t p ro pe rty. In or aro un d 2 00 3 p et it io ne rs de ci de d t o de ve lo p a ndsubd iv id e th e p ro pe rty with a pl anto sel l i nd iv idua l re si de nt ia l l ot s. Pet it io ne rs pre pareda bu si ne ss pl anun de r whi chth e la ndwou ldbe subd iv id ed in to 15 -2 0 l ot s an d aon e-fa m il y ho m e wou ldbe bu il t o n e ach lo t. Ov er the ne xt se ve ral y ears pe ti ti on ers hi redlan d- us e p ro fes si on al s wh o p ro vi de d t op og rap hi cal
m ap pi ng , lan d s urve y in g, s ub di vi si on de si gn , so il tes ti ng , andot he r rel at ed se rv ic es inpre pa rat io n fo r subm it ti ng a pl anto th e to wn p la nn in g b oa rd(bo ard ) fo r subd iv is io n app ro va l. Pet it io ne rs en te redin to anag reem en t wi th on e o f th e la ndus e p ro fes si on al co m pa ni es , MJ S Eng in eeri ng , PC (MJ S), to ass is t wi th pl an ni ng for

th e subd iv is io n o f th e p ro pe rty anddra fti ng th e subd iv is io n p la ns for subm is si on to th e b oa rd .- 4 -

Thro ug h M JS , pet it io ne rs subm it te d the ir f irs t s ub di vi si onpl anto th e b oa rd in 20 05 an d e nc lo se d t he requi redesc ro w paym en t. MJ S subm it te d s ev eral rev is edap pl ic at io ns ov er the ne xtsev eral y ears , in cl ud in g 2 00 6, 2 00 7, 2 00 8, an d 20 09 . Over t ha t s am e ti m e p eri odpe ti ti on ers m ad e ad di ti on al esc ro w paym en ts to th e b oa rdas r eque st ed . In l at e 2 00 9 t he bo ardgrant edpre li m in ary ap pr ov al for th e subd iv is io n p la ns . In Dec em be r 20 09 pe ti ti on ers subm itte d a n a dd it io na l es cro w paym en t t o t he bo ard . In Fe brua ry 20 10 MJ S subm itte d t o t he bo arda well lo cat io n p la n a ndin di cat edth atMJ S wou ldsubm itanap pl ic at io n t o t he he al th de pa rtment f

ora rev ie w of the pro po se d s ep ti c syst em s an d wel ls . The rec or d do es no t i nd ic at e th atMJ S p erfo rm edan y furth er ac ti vi ty on b eh al f of pe ti ti on ers in pu rs ui t o f th e subd iv is io n p la ns forth e p ro pe rty. Thro ug ho utth e te rm

of p et it io ne rs ’ co nt ractwith M JS , MJ S subm it te d t o pe ti ti on ers it em iz edbi ll in g s ta te m en ts forth ei r se rv ic es an d t he am ou ntbi ll edfor th os e se rv ic es . The i te m iz edst at em en ts co nc ernpri m ari ly sub di vi si on pl an ni ng act iv it ie s i nc lu di ng workpe rfo rm edby MJS i n draft in g t he subd iv is io n ap pl ic at io n. Fo r 20 09 pe ti ti on ers cla im edSch edul e C ex pe ns e d educ ti on s re la ti ng to le ga l an d p ro fes si on al servi ces in cu rredby the hi rin g o f landus e p ro fes si on al s an d fo r am ou nt s p ai d i n e sc ro w to th e b oa rdforth ei r “ Lan d Dev el op in g and- 5 -

Subd iv is io n” act iv ity . Peti ti on ers als o c la im edde du ct io ns forcar an d t ru ck ex pe ns es , m eal an d e nt ert ai nm en t ex pe ns es , dep reci at io n e xp en se s, an d h om e of fic e an d a dv ert is in g e xp en se s re la te d t o the lan d d ev el op m en t p ro ject. Res po nd en t i ss ue d p et it io ne rs a no ti ce o f de fic ie nc y da te d Ap ril 5, 2 01 2, di sa ll owi ng th e cl ai m edSch edul e C ex pe ns e d educ ti on s, d et erm in in g tha t pe ti ti on ers were n oten ga ge d i n atra de or b us in es s wi th res pe ctto th e de ve lo pm en t o f th e p ro pe rty andth atth ei r ex pe ns es were capi ta l ex pe nd itur es with re sp ectto th e p ro pe rty. Dis cu ss io n Gen eral ly, th e Co m

m is si on er’s d et erm in at io ns are p res um edco rrec t, an d t he ta xp ay er b ears th e b ur de n o f pr ov in g t ha t tho se de te rm in at io ns are erro ne ou s. Ru le 14 2( a); see INDOPCO, In c. v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ); Welc h v. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Add it io na ll y , deduc ti on s ar e st ric tl y a m at te r of leg is la ti ve gra ce, an d t ax pa y ers m us t s at is fy

th e sp eci fic requi rem en ts for an y de du ct io n c la im edforth e ta xabl e y ear. INDOPCO, In c. v. Co m m is si on er, 50 3 U.S. at84 ; New Co lo ni al Ice Co . v. Hel ve rin g, 2 92 U.S. 43 5, 4 40 (19 34 ). In so m e cas es th e b ur de n o f pr oo f with re sp ectto rel ev an t fa ctua l i ss ue s m ay sh iftto th e Co m m is si on er u nd er s ect io n 7 49 1( a). Bec au se th e Co urt d eci de s thi s ca se witho utreg ardto th e b ur de n o f pr oo f, se ct io n 7 49 1 i s i napp li cab le .- 6 -

Trad e o r Bu si ne ss Exp en se s 2 Sect io n 1 62 (a) p ro vi de s tha t “ [t]he re s ha ll be all owe d a s a d educ ti on all th e or di na ry 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 carry in g o n a ny trad e o r bu si ne ss ”. Sect io n 1 62 do es no t, h owe ve r, pe rm itcurren t de du ct io ns forst artup or p reo pe ni ng ex pe ns es in cu rredby tax pa y ers be fo re be gi nn in g b us in es s o pe rat io ns . Sec. 1 95 (a); Jo hn se n v . Commis si on er, 7 94 F.2d 11 57 , 11 60 (6t h C ir. 1 98 6) , rev ’g 83 T.C. 10 3 (1 98 4) . “ [T]o be en ga ge d i n atra de orbu si ne ss , th e ta xp ay er m us t b e in vo lv edinth e act iv ity with c on ti nu ity

an d reg ul ari ty and* * * the tax pa y er’s p rimary pu rp os e fo r en ga gi ng inth e act iv ity m us t b e fo r in co m e o r pr of it .” Co m m is si on er v . Groe tz in ge r, 48 0 U.S. 2 3, 3 5 (1 98 7) . W ith re ga rdto th e o wne rs hi p a ndpo te nt ia l d ev el op m en t o f rea l p ro pe rty, it is ne ces sa ry

to de te rm in e whe th er the own ers hi p a ndde ve lo pm en t o f th e p ro pe rty ris es to th e le ve l o f a trad e o r bu si ne ss , whi chrequi res anex am in at io n o f th e fac ts on a cas e-b y -cas e b as is . See Hig gi ns v. Co m m is si on er, 3 12 U.S. 21 2, 2 17 (19 41 ). Whe re p os tp ur ch as e act iv it ie s re la te d t o d ev el op m en t ar e o nl y inth ei r To the ex te ntpe ti ti on er wi fe was en ga ge d i n atra de or b us in es s as a real 2 es ta te pro fes si on al , pet it io ne rs di d n ot : (1 ) sh ow wh ic h e xp en se s re la te d t o t he real est at e b us in es s; (2) sh ow wh ethe r su chexpe ns es were o rd in ary an d n eces sa ry ex pe ns es of t he real est at e b us in es s; or ( 3) subs ta nt ia te th e ex pe ns es as r equi redby th e Co de .- 7 -

“ ex pl or at ory

or f orm at iv e st ag es ”, th enth os e act iv it ie s d o n otris e to th e le ve l o f a tra de or b us in es s. Ch ris ti anv. Co m m is si on er, T.C. Mem o. 1 99 5- 12 . Res po nd en t, re lying on Po la ki s v . Comm is si on er, 9 1 T.C. 6 60 , 66 9 (1 98 8) , an d C hr is ti an , all eg es th atpe ti ti on ers were n oten ga ge d i n atra de or b us in es s be cau se pe ti ti on ers di d n othave an y pri or ex pe rie nc e wit h re al est at e de ve lo pm en t, the pro pe rty rem ai ne d u nd ev el op edas o f th e ti m e o f tr ia l, p et it io ne rs di d n otsel l an y

of t he pl ot s, an d p et it io ne rs ha ve no t d em on st rat eda pr of itfro m th ei r act iv ity . InPo la ki s, the tax pa y er, a v as cu la r su rg eo n, p ur ch as edap pr ox im at el y 40 acre s o f un de ve lo pe d l an d. Atth e ti m e o f pu rch as e th e la ndwas z on edas ag ric ul tu ral pro pe rty andth e m in im um pa rcel si ze was 10 acre s. Co ns is te ntwith th e zo ni ng of t he pro pe rty, the tax pa y er u se d o r le as edth e la ndfor farm in g a nd ot he r ag ric ul tu ral act iv it ie s. Th e ta xp ay er l at er i nv es ti ga te d wh ethe r th e p ro pe rty co ul d i n fa ctbe de ve lo pe d. Inth is pu rs ui t, h e in fo rm al ly con ta ct edth ree in di vi du al s re ga rd in g d ev el op m en t, fi na nc in g, an d c on tra ctwork . He di d n oten te r in to an y co nt ractua l re lati on sh ip with t he se in di vi du al s. Th e co nt ract orco nt act ed se ve ral m em

be rs on th e p lann in g c omm is si on , ob ta in eda co py of anap pl ic ab le en vi ro nm en ta l i m

pa ctrep ort, an d i nv es ti ga te d t he tec hn ic al requi rem en ts forth e de ve lo pm en t o f th e p ro pe rty. T he tax pa y er h im se lf d idno t i nv es ti ga te th e- 8 -

requi rem en ts forde ve lo pi ng th e p ro pe rty andm ai nt ai ne d n o b oo ks or r eco rd s o f th es e in ve st ig at iv e act iv it ie s. Whenanis su e aro se reg ard in g asewe r trun k l in e ex te ns io n, s ev eral lan do wne rs , in cl ud in g t he tax pa y er, h ire d alo bb y is t t o p ro m ot e th ei r ge ne ral in te res t re ga rd in g t he ex te ns io n o f a s ewer trunkli ne servi ce t o t he pr op erty . The l ob byistatt en de d c ity co un ci l m eet in gs bu t d idno t s pe ci fic al ly lo bb y forth e ex te ns io n o f th e se wer trunkli ne to th e p ro pe rty. T hi s C ou rt f ou nd th atth e ta xp ay er was no t i n t he bu si ne ss of d ev el op in g re al est at e atth e ti m e h e pu rch as edth e p ro pe rty andth athi s p os tp ur ch as e act iv it ie s n ev er ro se to th e le ve l of en ga gi ng ina tr ad e o r bu si ne ss so as t o tran sm ut e th e p ro pe rty int o abu si ne ss ve ntur e. InCh ris ti an , th e ta xp ay er, wh o h aden ga ge d i n s ev eral real est at e tra ns act io ns be fo re p ur ch as in g apro pe rty, butha d n oten ga ge d i n the tra de or bu si ne ss of d ev el op in g areal est at e subd iv is io n, s ou gh t i nv es to rs forth e p ro pe rty with t he po ss ib il ity

of s ub di vi di ng it . The t ax pay er o bt ai ne d a dv ic e reg ard in g t he requi rem en ts forsubd iv id in g t he pro pe rty bu t d idno t s ub m itany of t he pr el im in ary pl an s t o t he co un ty or st artth e fo rm al subd iv is io n p ro ces s. Th e ta xp ay er s ho wedth e p ro pe rty to p ot en ti al in ve st or s an d o th er i nd iv idua ls an d co ns ul te d wi th sev eral real est at e d ev el op ers ab ou t ways to de ve lo p t he pro pe rty, bu t n o p rel im in ary pl atwas s ub m it te d, n o fi na l p la t was pre pa red , andno lo ts were- 9 -

st ak edou t. The pro pe rty rem ai ne d i n t he same un de ve lo pe d c on di ti on as wh enit was purch as ed . The Co urt fo un d t ha t al th ou ghth e ta xp ay er co ns ul te d wi threal es ta te de ve lo pe rs , dev ot edco ns id erab le ti m e an d e ffo rt i n p la nn in g t o d ev el op th e pr op erty , andatt em

pt edto att ractpo te nt ia l i nv es to rs an d c ap it al , th e ta xp ay er ne ve r fo ll owe d t hr ou gh on pl an s t o d ev el op th e p ro pe rty int o ru ral res id en ti al ho m es it es . The t ax pa y er m erel y ha d p la ns fora po te nt ia l b us in es s wh ic h n ev er m at eri al iz ed . The Co urt fo un d i t s ig ni fic an t tha t the tax pa y er m ad e n o s al es be cau se th ere wer e si m

pl y no lo ts to sel l. Pet it io ne rs all eg e th atth ey were en ga ge d i n the bu si ne ss of d ev el op in g a nd se ll in g t he pro pe rty bu t t es ti fie d t ha t the y ha ve no t s ol d a ny lot s an d n o fi na l subd iv is io n p la ns were ev er s ub m itte d. Pe ti ti on er hus ba ndtes ti fie d t ha t s al es act iv it ie s wer e sc he du le d t o b eg in in20 10 ; b utin20 09 th ere wer e n o m ark et in g effo rts to so li ci t co nt ract s, n orwere the re an y off ers fro m pro sp ect iv e b uyers. Pet it io ne rs ex pe nd edti m e, en erg y , andm on ey to ward s the pl an ni ng an d de ve lo pm en t o f th ei r pr op erty . Howev er, i t ap pe ars th atfro m 20 03 th ro ug h 2 00 9
m os t, i f no t al l, o f th e d ev el op m en t was de vo te d t o p la nn in g a ndno t t o t he sal e an d a ctua l s ub di vi si on of t he pro pe rty. Peti ti on ers ke ptan d p ro vi de d re co rd s; ho wev er, the ir d ev el op m en t ac ti vi ti es were s ti ll inth e p lann in g a ndexpl or at ory ph as e an d d idno t ri se to th e le ve l o f a trad e o r bu si ne ss . There fo re an y- 10 -

ex pe nd itur es rel at in g t o the pro pe rty were no t cu rren tl y de du ct ib le in20 09 , un le ss th e d ev el op m en t p ro

ject was co m

pl et el y ab an do ne d i n t ha t year. See s ec. 1 95 ; s ee al so Ric hm on d Tel ev is io n C or p. v . Uni te d S ta te s, 3 45 F.2d90 1, 9 07 (4t h C ir. 19 65 ), va cat edan d re m an de d o n o th er i ss ue s, 3 82 U.S. 68 (19 65 ). Aba nd on m en t Sect io n 1 65 (a) a ll ows as ade du ct io n a ny los s s us ta in eddu rin g t he tax ab le y ear a ndno t co m

pe ns at edforby ins ur an ce o r ot he rwis e. Inth e cas e o f an in di vi du al , th e d educ ti on is all owabl e fo r lo ss es in cu rredinan y tra ns act io n en te redin to for

pro fit . Sec. 1 65 (c)( 2) ; Ewin g v . Commis si on er, 9 1 T.C. 3 96 , 41 6- 41 7 (1 98 8) , aff’d wit ho utpubl is he d o pi ni on , 94 0 F .2d15 34 (9t h C ir. 1 99 1) . Pet it io ne rs ’ pr of

itm ot iv e is no t atis su e. Whe re a t ax pay er ab an do ns a tr an sa ct io n e nt eredin to forpro fitbe cau se pr op erty us edinth e tr an sa ct io n h as su dd en ly beco m e u se le ss , cert ai n e xp en di tu res in cu rredinth e y ear o f ab an do nm en t the reb y be co m e imm ed ia te ly deduc ti bl e as an ab an do nm en t l os s fo r th e y ear wh ensu chlo ss es were ac tu al ly sus ta in ed . Che vy Ch as e Lan d C o. v . Comm is si on er, 7 2 T.C. 4 81 , 48 8 (1 97 9) ; s ec. 1 .16 5- 2( a), In co m e Tax Reg s. Ab an do nm en t o f anass etin vo lv es actua l i nt en t o n t he pa rt o f th e o wne r to ab an do n i t co up le d wi th anaffi rm at iv e actto carry ou t tha t i nt en ti on . Uni te d S tate s v . S.S. Whi te Dent al Mfg . Co., 2 74 U.S. 39 8 (1 92 7) .- 11 -

W ith re ga rdto tan gi bl e p ro pe rty, a fin di ng of aba nd on m en t re qu ire s tha t the ta xp ay er s at is fy

th ree e le m en ts : (1 ) th atth e p ro pe rty be p erm an en tl y di sc ard ed fro m us e in th e ta xp ay er’s b us in es s, (2 ) th atitno lo ng er b e u se fu l i n t he tax pa y er’s bu si ne ss , and(3) th atit s u se fu ln es s i n t he tax pa y er’s b us in es s s ud de nl y te rm in at ed . La Portv. Co m m is si on er, 6 71 F.2d10 28 (7t h C ir. 1 98 2) , aff’g T.C. Mem o. 1 98 0- 35 5; Bo st on Mo la ss es Co . v. Co m m is si on er, 1 55 F.2d45 , 47 (1s t Ci r. 19 46 ) (i nt erp ret in g apri orve rs io n o f th e reg ul at io ns ), aff’g a M em or an du m Opi ni on of t hi s C ou rt; sec . 1.1 65 -2 (a), In co m e Tax Reg s. Th e Co urt o f App eal s fo r th e Sec on d C irc ui t h as st at edth atab an do nm en t i s m eton ly in the ev en t o f a pe rm an en t ab an do nm en t o r pe rm an en t d ev ot io n o f th e p ro pe rty to arad ic al ly di ffer en t u se . Hy gr ad e Fo odPro ds . Cor p. v . Comm is si on er, 1 44 F.2d11 5 (2 d C ir. 19 44 ). Sub st an ce an d n otm ere f orm go ve rn s i n d et erm in in g ade du ct ib le lo ss . FRGC In v., LLC v . Comm is si on er, T.C. Mem o. 2 00 2- 27 6, af f’d, 89 Fed . App x. 65 6 (9 thCir . 20 04 ); s ec. 1 .16 5- 1( b) , Inc om e Tax Reg s. Res po nd en t al le ge s tha t p et it io ne rs are n oten ti tl edto anab an do nm en t l os s de du ct io n, as th ey

ha ve no t d em on st rat edth atth ey co m pl et el y ab an do ne d de ve lo pm en t p la ns for

th e la ndin20 09 . In s up po rt, re sp on de ntass ert s tha t pe ti ti on ers co nt in ue to ownth e p ro pe rty, the y have no t d em on st rat edth atth e- 12 -

pr op erty is us el es s, n orha ve th ey de m on st rat edth atth ey

wou ldno t co nt in ue th ei r effo rts to de ve lo p t he pro pe rty in t he futur e. Pet it io ne rs tes ti fie d t ha t the y ha d c om pl et el y ab an do ne d t he de ve lo pm en t pr ojec t i n 2 00 9 b ecau se of asev ere d ecl in e in th e h ou si ng m ark etan d ach an ge in th e wet la ndlaws . Peti ti on er h us ba ndtes ti fie d tha t a n ew de li ne at io n i n t he wetl an d l aws ch an gi ng th e si ze o f th e b uf fer area r es ul te d i n ade crea se inth e am ou ntof a crea ge th atco ul d b e d ev el op ed . Con se qu en tl y , acco rd in g t o pe ti ti on ers , th e who le bu si ne ss an d d ev el op m en t p la n fo r th e p ro pe rty andth e pl acement o f th e lo ts wou ldne edto ch an ge an d p et it io ne rs wou ldin cu r ad di ti on al co st s an d e xp en se s as a res ul t o f th e ch an ge . Altho ug h p et it io ne rs tes ti fie d t ha t a c ha ng e in th e wet la ndlaws requi red th em to ab an do n t he ir d ev el op m en t p ro ject a s the n fo rm

ul at ed , th ey

fai le d t o de m on st rat e th atth e ch an ge inth e la ws af fect edth ei r de ve lo pm en t ef fo rts ina way whi chwou ldrequi re a co m pl et e ab an do nm en t o f th e d ev el op m en t p ro ject. Pet it io ne rs ’ te st im on y

in di cat es th atth e ch an ge see m edm erel y to m od ify pe ti ti on ers ’ pl an s fo r th e d ev el op m en t o f th e p ro pe rty. In ad di ti on , des pi te th e ch an ge inth e wet la ndlaws , MJ S co nt in ue d, n ear t he en d o f 20 09 , to see k app ro va l fo r pr el im in ary subd iv is io n p la ns . In Dec em be r 20 09 pe ti ti on ers subm itte d a n ad di ti on al esc ro w paym en t t o t he bo ard . In Fe brua ry 20 10 MJ S subm it te d t o t he- 13 -

bo arda well lo cat io n p la n a ndin di cat edth atMJ S wou ldsubm itanap pl ic at io n t o th e h eal th de partment f

ora rev ie w of the pro po se d s ep ti c syst em s an d wel ls . In ad di ti on , alt ho ug h t he pa rti es st ip ul at edas t o t he ho us in g m ark etinth e y ear a t is su e, pe ti ti on ers adm it te d, i n c orres po nd en ce wi th th e In te rn al Rev enue Serv ic e in 20 11 , th atth ey

wou ldrev iv e eff

orts to de ve lo p t he lan d i n t he ev en t o f an eco no m ic reco ve ry . Altho ug h p et it io ne rs m ay ha ve si nc e ab an do ne d t he pro ject i n ay ear fo ll owi ng 20 09 , pet it io ne rs ha ve no t d em on st rat edth atth ey co m pl et el y ab an do ne d th e d ev el op m en t p ro

ject i n the y ear a t i ss ue . Con se qu en tl y , pet it io ne rs are n ot en ti tl edto anab an do nm en t l os s d educ ti on for20 09 . Accu racy-Rel at edPen al ty Res po nd en t d et erm in edth atpe ti ti on ers are l iabl e fo r anaccu racy-rela te d pe na lty un de r se ct io n 6 66 2( a). Sec ti on 66 62 (a) and(b) (1 ) im po se s a 2 0% p en al ty on th e p orti on of a n u nd erp aym en t at tri bu tabl e to any on e o f va rio us fact or s, in cl ud in g n eg li ge nc e o r di sr eg ardof rul es or r eg ul at io ns . “ Neg li ge nc e” i nc lu de s an y fai lu re t o m ak e a rea so nabl e at te m ptto co m pl y with t he pro vi si on s o f th e Co de , in cl ud in g a ny 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. Un de r- 14 -

se ct io n 7 49 1( c), res po nd en t h as th e b ur de n o f pr oduc ti on with re sp ectto th e accu racy-rela te d p en al ty. See Hi gb ee v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). Res po nd en t h as m ethi s b ur de n. Sect io n 6 66 4( c)(1 ) pr ov id es anex cep ti onto th e se ct io n 6 66 2( a) p en al ty if it is sh own th atth ere was reas on ab le cau se for an y po rti on of t he un de rp aym en t an d th e ta xp ay er ac te d i n g oo d fa ith. Th e d et erm in at io n o f whe th er a t ax pa y er ac te d with re as on ab le cau se an d i n g oo d fa ith i s m ad e o n acas e-b y -cas e b as is , tak in g in to acco un t al l the pe rti ne ntfact s an d c irc um st an ces . Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Th e m os t i m po rta ntfact oris th e ex te ntof t he tax pa y er’s eff ort to ass es s h is pro pe r ta x l iabi li ty. Id. Ci rcum st an ces th atm ay in di cat e rea so nabl e cau se an d g oo d fa ith i nc lu de anho ne stm is un de rs ta nd in g o f fac t o r la w th atis reas on ab le invi ew of

th e ta xp ay er’s ex pe rie nc e, kn owl ed ge , andeduc at io n. Id . Pet it io ne rs m ai nt ai ne d re co rd s o f th ei r ex pe ns es ; h owe ve r, th ey were n ot en ga ge d i n a n a ct iv e tr ad e o r bu si ne ss inth e y ear at i ss ue an d fa il edto pre se ntan y te st im on y or i nf orm at io n a s t o wh y

th ey sh ou ldno t b e subjec t t o t he accu racyrel at edpe na lty . There fo re, the Co urt s us ta in s re sp on de nt ’s det erm in at io n.- 15 -

W e h av e co ns id eredall of t he pa rti es ’ arg um en ts , and , to th e ex te ntno t ad dr es se d h erei n, we co nc lu de th atth ey are m oo t, i rrel ev an t, o r witho utm eri t. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red fo r res po nd en t.