TAX COURT OPINION

Case: Andrew J. & Eileen M. Centauro
Docket Number: 14954-09S
Judge: Colvin
Opinion Type: bench
Filed: 07/23/2010
Pages: 8

I UNITED STATES TAX COURT WASHINGTON, D .C . 2021 7 ANDREW J . AND EILEEN M . CENTAURO, Petitioners, v . Docket No . 14954-09 S COMMISSIONER OF INTERNAL REVENUE , Respondent . O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial of the above case before Special Trial Judge Lewis R . .Carluzzo at Boston, Massachusetts, on June 16, 2010, containing his oral findings of fact and opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, a decision will be entered for petitioners . (Signed) Lewis R. Carluzzo Special Trial Judg e Dated : Washington, D .C . July 23, 2010 SERVED JUL 2 3 2010 4 1 Bench Opinion by Special Trial Judge Lewis R . Carluzzo 2 Centauro v . Commissioner Docket No . 14954-09S 3 June 16, 201 0 4 THE COURT : The Court has decided to render 5 oral findings of fact and opinion in this case, an d 6 the following represents the Court's oral findings of 7 fact and opinion . 8 This proceeding for the redetermination of 9 deficiencies is a small tax case subject to the 10 provisions of section 7463 of the Internal Revenu e 11 Code of 1986, as amended, and Rules 170 through 175 of 12 the Tax Court Rules of Practice and Procedure . 13 This bench opinion is made pursuant to the 14 authority granted by section 7459(b) of the Internal 15 Revenue Code of 1986, as amended, and Rule 152 of the 16 Tax Court Rules of Practice and Procedure . Unles s 17 otherwise noted, subsequent section reference s 18 contained in this bench opinion are to sections of the 19 Internal Revenue Code of 1986, as amended, in effect 20 for 2005 and 2006 . 21 James J . Lumbardi appeared on behalf of 22 petitioners . Derek W . Kelley appeared on behalf of 23 respondent . 24 In a notice of deficiency dated May 8, 2009, 25 respondent determined deficiencies in petitioner's Heritage Reporting Corporatio n (202) 628-4888 r'~ 5 1 2005 and 2006 Federal income taxes in the amounts of 2 $769 and $11,867, respectively . These "deficiencies" 3 consist entirely of the imposition of a sectio n 4 6662(a) accuracy-related penalty on the underpayment 5 of tax required to have been shown on petitioner' s 6 self-prepared, timely filed joint Federal income tax 7 return for each of those years . See sec . 6665(a) . 8 For each year, the issue for decision is 9 whether petitioners are liable for that penalty . 10 Some of the .facts have been stipulated and 11 are so found . At the time the petition was filed, 12 petitioners resided in Massachusetts . References to 13 petitioner are to Andrew J . Centauro . 14 Petitioner holds and MBA degree, and dating 15 as far back as 2002 (the earliest year for which any 16 evidence has been placed in the record), he has been 17 employed in executive positions by various employers . 18 In late 2005 or early 2006, his employment a s 19 president of a division of Zinio Systems wa s 20 terminated . Some point later in 2006 he was employed 21 as the CFO of Newforma, Inc . 22 For years prior to the years in issu e 23 petitioner had some experience with, or was in one 24 manner or another exposed to commercial fishin g 25 enterprises . Starting in 2002, and continuing at Heritage Reporting Corporatio n (202) 628-4888 6 1 least through the years in issue, petitioners included 2 at least one Schedule C, Profit or Loss From Business, 3 with each of their joint Federal income tax return s 4 filed for those years (the Schedule C or Schedules C) . 5 According to each Schedule C, petitioners treated a 6 fishing activity conducted by petitioner as a 7 business . The income and deductions attributable to 8 that fishing activity are shown on each Schedule C . 9 For each year, expenses deducted on the Schedule C 10 exceeded the income reported . For the years in issue, 11 and presumably for other years as well, the resultant 12 loss shown on the Schedule C was used to offse t 13 petitioners' income from other sources . In 2006, due 14 to the purchase of a new fishing boat, the loss shown 15 on the Schedule C was significantly larger than losses 16 shown on the Schedules C for prior years .. 17 Petitioners' returns for 2005 and 2006 were 18 examined by respondent . The loss shown on the 19 Schedule C for each year was disallowed . Respondent 20 apparently took the position that petitioner's fishing 21 activity was not a "trade or business" within th e 22 meaning of section 162(a) because petitioner did not 23 engage in that fishing activity with the primar y 24 purpose and intent to make a profit . See sec . 183 ; 25 Golanty v . Commissioner , 72 T .C . 411 (1979) . Heritage Reporting Corporatio n (202) 628-4888 7 1 Petitioners agreed with, or conceded, respondent' s 2 disallowances of the losses shown on the Schedules C 3 (petitioners' concession or concessions), and th e 4 resultant deficiencies were assessed (and apparently 5 paid) in due course . See sec, 6213(d) . 6 Whether the loss shown on the Schedule C for 7 each year is properly attributable to a trade o r 8 business, or otherwise deductible is not before us - 9 petitioners' concessions have effectively removed that 10 question from our consideration . We are called upon 11 only to decide whether their decisions to trea t 12 petitioner's fishing activity as a trade or business 13 and to deduct the losses from that activity constitute 14 "negligence or disregard of rules or regulations " 15 within the meaning of section 6662 . See sec . 16 6662(b)(1) and (c) . Because the parties are both well 17 represented, we see little point in including a 18 general discussion regarding the mechanica l 19 application of a section 6662(a) penalty . Suffice it 20 to note that the burden of producing evidence t o 21 support a finding of negligence or disregard of rules 22 or regulations that supports the imposition of th e 23 section 6662(a) penalty for each year in issue in this 24 case rests with respondent . See sec . 7491(c) . 25 According to respondent, petitioners' Heritage Reporting Corporation (202) 628-4888 8 1 concession for each year, in effect, and for the most 2 part, in and of itself, satisfies that burden . 3 According to respondent, petitioners' concessions 4 demonstrate that they knew, or at least petitione r 5 knew, at the time the returns were prepared that the 6 losses shown on the Schedules C were not properl y 7 deductible . Given petitioner's educational background 8 and employment history, we are confident tha t 9 petitioners' concessions were informed rather tha n 10 whimsical . Nevertheless, we do not share respondent's 11 view with respect to the significance of thos e 12 concessions . 13 At trial petitioner testified that their 14 concession for each years reflects not the merits of 15 the disallowances, but rather petitioners' desire to 16 achieve "closure" with respect to the examination of 17 their 2005 and 2006 returns . This is the onl y 18 evidence on the point in the record . Although listed 19 as a witness in respondent's pretrial memorandum, the 20 revenue agent who conducted the examination was no t 21 called as a witness at trial . We can only assume that 22 if the revenue agent were called to testify, th e 23 revenue agent's testimony would be consistent with 24 petitioner's description of the examination process . 25 Diminishing the significance of petitioners ' Heritage Reporting Corporation (202) 628-4888 9 1 concessions, leaves little other evidence on which to 2 support a finding of negligence . We are not sure what 3 inferences should be drawn from the evidence regarding 4 petitioner's extended history of losses fro m 5 petitioner's fishing activity . Such evidence is 6 routinely taken into account when considering a 7 taxpayer's profit objective in connection with a n 8 activity that generates expenses and/or a loss claimed 9 to be deductible by the taxpayer, see Treas . Reg . 10 1 .183-2(b)(6) and (7), Income Tax Regs ., but here we 11 focus not on petitioner's profit objective fo r 12 purposes of the allowance (or disallowance) o f 13 deductions under section 162(a) or section 183, but 14 rather our focus is on the imposition of a sectio n 15 6662(a) penalty upon the ground of negligence . For a 16 recent case demonstrating the points, see Lowe v . 17 Commissioner , T .C . Memo . 2010-129 . 18 Nothing in the record suggests that the 19 history of losses for years prior to the years in 20 issue did, or should have put petitioners on notice 21 that petitioner's fishing activity should not hav e 22 been treated as a trade or business for Federal income 23 tax purposes with respect to either year in issue . To 24 the contrary, at trial petitioner testified that i n 25 his experiences losses are common in the early years Heritage Reporting Corporatio n (202) 628-4888 1 0 1 of a business, and his testimony in that regard i s 2 entirely consistent with language in the above-cited 3 regulation that states "a series of losses during the 4 initial or start-up stage of an activity may no t 5 necessarily be an indication that the activity is not 6 engaged in for profit ." Sec . 1 .163-2(b)(6), Incom e 7 Tax Regs . 8 To the extent that any inferences drawn from 9 the evidence introduced at trial suggests tha t 10 petitioners should be held liable for a sectio n 11 6662(a) penalty for either year in issue, we find that 12 such inferences are outweighed, even if ever s o 13 slightly, by petitioner's testimony on the points . 14 That being so we find that petitioners are not liable 15 for a section 6662(a) penalty for either year i n 16 issue . Respondent's determinations to the contrary 17 are rejected . 18 To reflect the foregoing, decision will be 19 entered for petitioners . 20 This concludes the Court's oral findings of 21 fact and opinion in this case . 22 (Whereupon, at 9 :47 a .m ., the bench opinion 23 in the above-entitled matter was concluded . ) 24 25 Heritage Reporting Corporation (202) 628-4888