TAX COURT OPINION

Case: Samir & Randa Bannout
Docket Number: 27174-09
Judge: Colvin
Opinion Type: bench
Filed: 12/20/2010
Pages: 6

UNITED STATES TAX COURT WASHINGTON, DC 20217 CLC SAMIR & RANDA BANNOUT, Petitioners, v. ) Docket No. 27174-09 COMMISSIONER OF INTERNAL REVENUE, Respondent. O R D E R Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of transcript of proceedings of L. Kroupa at Los Angeles, California on December 2, 2010, containing her oral fact and opinion. findings of the pages of the the above case before Judge Diane In accordance with the oral findings of fact and opinion, decision will be entered for petitioners. (Signed) Diane L. Kroupa Judge Dated: Washington, D.C. December 20, 2010 SERVED Dec 21 2010 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Judge Diane L. Kroupa December 2, 2010 Samir & Randa Bannout Docket Number 27174-09 THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THESE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This bench opinion is made pursuant to the authority granted in section 7459(b) and Rule 152. All section references are to the Internal Revenue Code for the year 2007, which year shall be referred to as the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Petitioners appeared pro se, and Linette Angelastro appeared on behalf of respondent. FINDINGS OF FACT AND OPINION Petitioners resided in California at the time they filed the petition in this case. Petitioner wife is a party because they filed a joint Federal income tax return for 2007. All relevant facts relate to petitioner husband who shall be referred to as petitioner individually. Petitioner is a former Mr. Olympia, and he Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 uses his body builder status to sell supplements, autographed merchandise and other fitness products. Petitioner agreed to allow Joe Weider, a fitness magazine mogul, to use his image in Mr. Weider's magazines such as Muscle magazine, Fitness magazine and Flex magazine, and Mr. Weider in turn agreed to publish petitioner's advertisements in these magazines. Petitioner did not give Mr. Weider authority to use his picture for commercial use or to promote Mr. Weider's products. Instead, petitioner's picture was to be used to promote only petitioner's fitness or health products. Petitioner began developing an exercise machine called the Body Blaster shortly after entering the agreement with Mr. Weider. Petitioner borrowed over $100,000 from his sister to finance the design of the Body Blaster. Petitioner incurred various expenses in developing the Body Blaster, including trademark and patent applications, travel expenses, automobile expenses, office expenses and telephone expenses. Petitioner subsequently requested that Mr. Weider publish full color advertisements in his fitness magazines to promote the Body Blaster, per their agreement. Mr. Weider refused. Petitioner filed a suit against Mr. Weider, which was settled for a $400,000 payment to Heritage Reporting Corporation (202) 628-4888 I | 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 petitioner. Petitioner received approximately $210,000 of net proceeds after attorney fees. Petitioner used most of the proceeds to repay his sister's loan. Petitioners hired Fred Batsh, a tax return preparer, to prepare a joint Federal tax return for 2007. Petitioner told the preparer all the details regarding the Body Blaster, including the expenses he incurred for the Body Blaster and the settlement he received for the Body Blaster from Mr. Weider. Petitioners provided the preparer with all requested information and documentation needed to prepare the return. Mr. Batsh reported the $210,000 in settlement proceeds on Schedule C and claimed ordinary business expense deductions for costs petitioner incurred in developing the Body Blaster. Respondent contends that the amounts received and deducted are not related to a business and therefore should have been reported on the first page of petitioners' joint Federal income tax return rather than on Schedule C. Respondent moved under Rule 41 that the pleadings conform to the evidence. Petitioners assert that the income and expenses were related to petitioner's Body Blaster business. Courts have long recognized the importance Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 of the fact finder in determining whether a taxpayer's activities are buàiness related. This Court has the primary function of finding the facts in tax disputes, weighing the evidence, and choosing from among conflicting factual inferences and conclusions those which it considers most reasonable. Commissioner v. Scottish Amer. Inv. Co., 323 U.S. 119 (1944). Peti-tioner testified as to the business nature of the income and deducted expenses and how such expenses were related to the promotion of the Body Blaster. Here, we find petitioner's testimony credible and that such income and expenses were indeed business related. The Body Blaster was going to be petitioners.' sole source of income. It was a business, not a hobby. Petitioner did everything he could to make it provide an income source for him and his family rather than a financial disaster. We find convincing the true business purpose of the Body Blaster. We therefore do not sustain respondent's determinations in either the statutory notice or Rule 41 motion. We similarly find that petitioners unconditionally relied upon their tax preparer who was provided all the necessary information. Petitioners are therefore not liable for the section 6662(a) accuracy-related penalty. Heritage Reporting Corporation (202) 628-4888 2 3 4 5 6 7 8 9 io 11 12 13 14 is 16 17 18 19 20 21 22 23 24 2s To reflect the foregoing, a decision will be entered for petitioners. THIS CONCLUDES THE COURT' S ØRAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 3:40 p.m.,. the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888