t c memo united_states tax_court charles a greene and christine j greene petitioners v commissioner of internal revenue respondent docket no filed date michael j wenig and m robin davis for petitioners ross a rowley for respondent memorandum findings_of_fact and opinion dean special_trial_judge this case was heard pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 in two separate notices of deficiency respondent determined additions to petitioners' federal income taxes for the years 1all section references are to the internal_revenue_code in effect for the taxable years in issue all rule references are to the tax_court rules_of_practice and procedure and under sec_6653 in the amounts of dollar_figure and dollar_figure respectively respondent also determined for both years additions to taxes under sec_6653 in the amounts of percent of the interest due on the portion of the underpayments of taxes attributable to negligence certain issues raised in this case by petitioners' motion to restrain collection and respondent's motion to dismiss for lack of jurisdiction and to strike the claims relating to the deficiency attributable to partnership items and increased interest pursuant to sec_6621 were decided by the court in greene v commissioner tcmemo_1995_105 greene i by an amendment to petition petitioners attempted to put at issue the period of limitations for the deficiencies being assessed the court found that the affected items deficiency notices here involved were mailed to petitioners within year of the date of entry of decision in the partnership level proceedings in docket no see sec d the court also found that petitioners were not entitled to direct notice of the partnership level proceedings and that any reliance on 102_tc_683 is misplaced on brief petitioners state that they believe that the court has already ruled on the statute_of_limitations issue in greene i we agree and we decline to revisit the issue see eg 49_f3d_735 d c cir 22_f3d_1283 3d cir 900_f2d_601 2d cir the issues remaining for decision are whether any part of an underpayment of income taxes for or is due to negligence or intentional disregard of rules or regulations and if so whether the portion of the underpayment due to negligence is eliminated or reduced by petitioners' filing of an amended_return reporting and paying additional income_tax for the taxable_year some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference at the time the petition in this case was filed petitioners were residing in high point north carolina findings_of_fact during the years and charles a greene petitioner was a limited_partner in a partnership known as mid continent drilling associates ii mid continent or the partnership the additions to tax in this case relate to petitioner’s investment in mid continent petitioners' work and business history petitioner christine greene is a high school guidance counselor petitioner has a high school diploma and no formal education in finance accounting investing or in business planning he has no specialized knowledge of the oil_and_gas industry petitioner does however have a long work history in the business world petitioner joined the military before graduating from high school and obtained his ged while serving in the air force after leaving the air force petitioner worked as a salesman for advanced tire and auto for about 2½ years petitioner worked for pilot life_insurance co as a debit sales person then in the collection department of dunn bradstreet for years and for years with the kay-lynn furniture co kay-lynn while employed at kay-lynn in or around the year petitioner met mr irv corman2 corman an experienced certified_public_accountant petitioner wanted to start his own furniture manufacturing business and left employment with kay-lynn in petitioner sought corman's advice on how to start the business with very limited finances petitioner also sought advice from other people in the furniture industry people who were in the business of retailing furniture people who were in the manufacturing end of furniture manufacturing 2mr corman died on date classic gallery petitioner called his business classic gallery and the corporation elected to file federal_income_tax returns for the business as an s_corporation after the second or third year of operations the business began generating enough income to allow petitioner to draw a salary before petitioner's average income was below dollar_figure after the company's profits blossomed generating for petitioner a very substantial six- figure income in wages and dividends over the years corman became petitioner's friend associate and chief adviser corman came to be retained on a monthly basis to provide accounting advice and services to classic gallery as petitioner's furniture manufacturing business prospered corman began to suggest to petitioner how his earnings from the corporation might be invested although corman presented various investment possibilities to petitioner he was not separately compensated as an investment counselor petitioner discussed the investment proposals with corman reviewed materials that corman presented and evaluated them a number of different ways although petitioner relied on corman to tell him if something was a good investment he did not just blindly accept corman's recommendations petitioner rejected some investments presented to him by corman partnership investments one of the investments corman recommended was in geovest petitioner understood that the geovest investments were oil_and_gas partnerships reported on petitioners' and federal_income_tax returns prepared by corman were partnership losses from investments in geovest drilling fund ltd 1981-a and geovest drilling fund ltd 1981-b geovest in the middle of corman recommended to petitioner a second investment in an oil_and_gas partnership the mid continent partnership corman told petitioner that he had a client william r fields fields who had fallen on hard times and was unable to meet his cash investment obligation to the partnership fields had invested in the partnership in he was required to make the third of three yearly dollar_figure cash capital contributions in corman told petitioner that this was an opportunity for him to get into the partnership at a reduced investment amount corman said that the mid continent investment was similar to geovest had potential for return and looked like it would be a good investment 3petitioners also reported partnership income of dollar_figure each from the green lindsay co for and in partnership income of dollar_figure each from the green whiteside co and a partnership loss of dollar_figure from hofel sic associates of h pt the record contains no other description of these particular investments petitioner's evaluation of mid continent petitioner discussed with corman the tax benefits he might receive from mid continent and as a result he expected some flow-throughs of losses and investment tax_credits petitioner read some paperwork about mid continent that included various forms and reports at the time of his investment petitioner received and reviewed a document that bore the title terra drill he reviewed a partnership prospectus for mid continent and he produced at trial a document the first page of which is numbered and is entitled summary of partnership_agreement the second through eleventh and final pages of the document are numbered b9 through b18 and discuss solely tax aspects of the partnership petitioner also received a subscription agreement for mid continent that he reviewed at the time he purchased his interest from fields paragraph k at page of the four-page subscription agreement provides in part i understand that no state or federal governmental authority has made any finding or determination relating to the fairness for public investment of the units in the partnership and that no state or federal governmental authority has recommended or endorsed or will recommend or endorse these units petitioner was aware that corman did not have a vast knowledge of oil_and_gas matters and that corman's advice on the mid continent partnership was based solely on his reading of the prospectus through corman petitioner knew other individuals who were investors in mid continent before investing in the partnership in petitioner discussed with other investors the nature of their involvement with mid continent petitioner looked into the activities of the partnership in and by reading accounting reports on the basis of the discussions with other investors and the recommendations of corman petitioner considered the purchase of fields' interest in the partnership to be reasonable the deal with fields when fields invested in the mid continent partnership in he agreed to make an initial cash payment of dollar_figure and to make subsequent dollar_figure cash payments in each of the years and fields also agreed to become liable on a dollar_figure obligation to mitchell petroleum technology corp mitchell that was to become due years later on date during petitioner's negotiation with fields over the purchase of his mid continent partnership_interest it was agreed from the beginning that petitioner would pay the last dollar_figure cash capital_contribution but the negotiation focused on what the amount of the investment was that we were to receive in terms of the value of the balance of the due--the amount that was still due on fields' obligation to mitchell they discussed whether fields would retain more than or less than percent of the obligation to mitchell on or about date petitioner and fields came to terms memorialized in an assignment of interest document petitioner purchased fields' interest in mid continent by paying the final dollar_figure capital call plus dollar_figure interest and by assuming half of the dollar_figure obligation to mitchell preparation of the and returns corman subsequently prepared petitioners' federal_income_tax return petitioners claimed an ordinary_loss of dollar_figure and an investment_credit of dollar_figure reflecting their share of mid continent losses and credits based upon the schedule_k-1 provided to them by the partnership corman also prepared petitioners' return on which they claimed a mid continent partnership loss of dollar_figure the record does not reflect that petitioner made any further inquiry about or investigation into the operations of mid continent even after he received notification in that the partnership was suing its accountants eventually in early 4in addition petitioners reported partnership losses from hotel associates of high point and geovest b as well as partnership gains from geovest a and greene whiteside co 5in addition petitioners reported partnership gains from greene whiteside co and geovest a and partnership losses from geovest b hotel associates of high point market street associates elm street associates i and ambassador real_estate investors l p petitioner became aware that the internal_revenue_service irs was disallowing deductions related to the partnership corman suggested that petitioner confer with a tax attorney which he did on the basis of his discussions with his attorney petitioner developed an understanding that other taxpayers in his locale who had invested in mid continent were settling their controversies with the irs he understood that if they agreed to forgo their partnership deductions the irs would allow mid continent partners to deduct their cash investment such as the dollar_figure payment he had made the partnership examination and petitioners' amended_return on date respondent mailed petitioner a notice of the beginning of an examination of mid continent’s partnership return on or about date petitioners filed an amended income_tax return for the amended_return along with a notice of inconsistent treatment or amended_return on form_8082 petitioners amended their return by reducing the dollar_figure partnership loss with respect to mid continent by dollar_figure and by eliminating an investment_tax_credit in the amount of dollar_figure petitioners remitted a total of dollar_figure with the amended_return designating dollar_figure as tax and dollar_figure as interest petitioners’ reporting position as set forth in the amended_return and attached form_8082 was based on their understanding of settlements purportedly entered into between respondent and other mid continent partners for taxable years and the record in this case includes the transcript of account that respondent maintained for petitioners’ taxable_year the transcript of account indicates that the payment of tax and interest that was remitted by petitioners with their amended_return was posted to petitioners’ account on date later on date respondent assessed dollar_figure as an advance_payment of an examination deficiency and dollar_figure as a designated payment of interest there is no evidence in the record that petitioners filed an amended_return for tax_year partnership litigation and petitioners' tax assessments in october of the court filed its opinion in webb v commissioner tcmemo_1990_556 remanded on a jurisdictional issue 17_f3d_398 9th cir holding that the activities of the partnership in and were not engaged in for profit and that the underpayments of taxes resulting from the deductions losses and credits claimed with respect to the partnership were attributable to negligence and to tax-motivated transactions in date respondent proposed a settlement for taxable years and regarding petitioner’s investment in mid continent petitioners rejected the proposed settlement on the basis of the view that their tax_liability was properly reported on the amended_return on date respondent mailed separate notices of final_partnership_administrative_adjustment fpaa’s to mid continent’s tax_matters_partner tmp for the taxable years and respondent did not mail a copy of either of the fpaa’s to petitioners a timely petition_for_readjustment which was assigned docket no was filed by partners other than the tmp on date a decision was entered by this court in the partnership proceeding the decision served to sustain respondent’s disallowance of the losses claimed by mid continent on its partnership returns for and no appeal was taken and this court’s decision became final on date sec_7481 sec_7483 on date respondent made an assessment against petitioners relating to the taxable_year for additional income_tax in the amount of dollar_figure and for unpaid interest in the amount of dollar_figure computed at the increased rate established under sec_6621 the tax assessed in the amount of dollar_figure was based on the disallowance of the remaining dollar_figure partnership loss that petitioners had not eliminated on the amended_return the assessment reflected a total_tax liability for in respect of partnership items relating to mid continent of dollar_figure less the dollar_figure that petitioners had previously designated as tax and remitted with their amended_return on date and date respondent mailed notices of deficiency to petitioners in which there were determined additions to tax for negligence under sec_6653 and for the taxable years and respectively the additions to tax are affected items in that they are based on tax owing by petitioners as a result of adjustments to partnership items appearing on mid continent’s partnership returns for and opinion petitioners argue that they are not subject_to the additions to tax for negligence because the internal_revenue_code should not punish negligent investing only negligence in reporting tax obligations they unsophisticated investors relied in good_faith upon the advice of a competent independent professional on an investment activity known to be risky and if they are found to have been negligent the payment of tax with the amended_return for eliminates or reduces the year underpayment_of_tax for purposes of the sec_6653 and additions to tax respondent's determinations contained in the notice_of_deficiency are presumed correct and petitioners bear the burden of proving otherwise rule a 290_us_111 therefore petitioners have the burden of proving that they were not negligent in this case see 33_f3d_426 4th cir affg in part and vacating in part tcmemo_1993_124 64_tc_651 affd 566_f2d_2 6th cir sec_6653 imposes an addition_to_tax if any part of any underpayment_of_tax is due to negligence or intentional disregard of rules or regulations sec_6653 imposes an addition_to_tax in an amount equal to percent of the interest due on the portion of the underpayment attributable to negligence definition of negligence under sec_6653 negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances 85_tc_934 thus to avoid imposition of the addition_to_tax petitioners must show that their actions in connection with the deductions and credits from mid continent on their and federal_income_tax returns were reasonable in light of their experience and the nature of the investment see 60_tc_728 lucas v commissioner tcmemo_1995_341 petitioners citing 66_f3d_729 5th cir affg in part and revg in part tcmemo_1994_ caution the court to distinguish carefully between negligence in making the underlying investment and the negligence reached by sec_6653 we find the correct standard to be announced in the section itself if any part of an underpayment_of_tax is due to negligence it is subject_to the additions to tax provided by sec_6653 see 82_f3d_918 9th cir negligence in claiming a tax deduction depends upon both the legitimacy of the underlying investment and due care in claiming the deduction affg tcmemo_1994_217 novinger v commissioner tcmemo_1991_289 rogers v commissioner tcmemo_1990_619 description of the underlying investment the exact nature of the underlying partnership investment in this case is not clear directly from the record some partnership documents were introduced into evidence and the parties stipulated that the partnership possessed the rights to a device called the terra-drill which we discuss below but no prospectus or offering memorandum was produced few facts on the exact nature of the investment were stipulated and no witnesses save for petitioner testified at trial a fair reading however of the stipulation of facts and the briefs of the parties shows that they agree that the underlying facts of the partnership operations are as discussed in webb v commissioner tcmemo_1990_556 in webb v commissioner supra we found that the mid continent promotion offered limited_partnership interests for sale by a confidential placement memorandum dated date the partnership had an individual and a corporate general_partner a related_entity tround international inc tround was a company principally owned by david dardick who was attempting to develop a high speed oil_and_gas drill the terra-drill in november of tround and mitchell entered into an agreement granting to mitchell for years the right to use lease and 6for example the parties have stipulated that in webb v commissioner tcmemo_1990_556 the court found that the activities of mid continent had no profit_motive in and and that underpayments of tax related to partnership deductions losses and credits were attributable to tax-motivated transactions in their brief petitioners request a finding of fact that in webb v commissioner supra the court found that the partnership was a sham and in a separate action docket no the court subsequently disallowed all of the items relating to the partnership's and tax years in a partnership-level tefra proceeding it would be in any event petitioners' burden to prove the context in which their deductions and credits were taken rule a 290_us_111 58_tc_757 sell terra-drills in return for an advance license fee of dollar_figure mitchell thereafter sublicensed its rights to the terra-drill to nine different partnerships including mid continent the aggregate sublicense fee of the six partnerships involved in webb was dollar_figure million pursuant to its sublicense agreement with mitchell dated date mid continent was obligated to pay annual license fees of dollar_figure million in the first fiscal years commencing date and the mid continent offering memorandum set forth significant warnings regarding the risk of the investment it also indicated that the anticipated tax losses to be incurred by each investor in the first years would be dollar_figure for each dollar_figure cash investment the offering memorandum stated that the partnership was formed to exploit the terra-drill conduct exploratory_drilling in the overthrust belt in utah and develop a drilling program in oklahoma and tennessee since a functional terra-drill was never developed no orders were ever taken by the limited_partnership for the terra-drill no drilling was ever conducted by the partnership on leases in the utah overthrust belt the partnership never developed a drilling program for oil_and_gas in oklahoma and tennessee petitioners' arguments petitioners raise a plethora of arguments against their liability for the negligence addition_to_tax among the arguments raised are that petitioners a were unsophisticated investors with no formal training or work experience in investments b relied on their accountant corman in making the investment c having obtained the approval of their accountant should not be required to conduct a costly independent investigation of the investment d determined that the investment in oil_and_gas was by its nature risky profit-motivated and small with a potentially high rate of return and did not offer tax benefits that were too good to be true whether a taxpayer had a subjective profit_motive is not dispositive in determining that he acted negligently klieger v commissioner tcmemo_1992_734 under some circumstances however a taxpayer may avoid liability for the additions to tax for negligence under sec_6653 if reasonable reliance on a competent professional adviser is shown 414_f2d_749 4th cir affg tcmemo_1968_98 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 such reliance is not an absolute defense to negligence but is merely a factor to be considered freytag v commissioner supra for reliance on professional advice to excuse a taxpayer from the negligence additions to tax the taxpayer must show that the professional adviser had the expertise and knowledge of the pertinent facts to provide informed advice on the subject matter leonhart v commissioner supra freytag v commissioner supra stone v commissioner tcmemo_1996_230 reimann v commissioner tcmemo_1996_84 reliance on a professional adviser can be inadequate when the taxpayer and his adviser knew nothing about the nontax business aspects of the venture 85_tc_557 80_tc_914 in order for reliance on professional advice to excuse a taxpayer from the negligence additions to tax the reliance must be reasonable in good_faith and based upon full disclosure 118_f3d_184 4th cir affg tcmemo_1996_167 freytag v commissioner supra pincite by the time petitioners purchased their interest in mid continent in their tax returns show that they had acquired interests in several partnerships petitioner had built from nothing a furniture manufacturing business that was capable of providing his family with an income of over dollar_figure in and more than dollar_figure in both and although not highly educated in a formal sense petitioner is articulate and intelligent and has a history of financial success in the founding and management of his own business we would hesitate to call him an unsophisticated investor petitioner however attempted at trial to demonstrate to the court his lack of sophistication he testified both on direct and cross-examination that because the partnership was assigned a tax_shelter number by the irs he thought the irs had approved the shelter he never asked corman if this were true testifying that he believed it as a matter of trust yet petitioner identified a mid continent subscription agreement that he introduced into evidence he testified that he reviewed the agreement before deciding to invest in mid continent a paragraph in the agreement cautions the reader that no federal governmental authority has made any finding or determination relating to the fairness for public investment in the partnership and that there has been and will be no federal recommendation or endorsement of the partnership petitioner testified that he invested in the partnership relying on the advice of corman and other partnership investors it appears from the record that corman was paid to perform accounting services for classic gallery not to give investment advice to petitioners petitioner's testimony was also rather vague as to just what specific investment advice corman gave him about the partnership other than that it was a good investment see eg 982_f2d_163 6th cir affg tcmemo_1991_449 petitioner's evidence further fails to show that corman had any expertise in the nontax business aspects of mid continent or that he conferred with experts in the field when questioned as to why he thought corman was qualified to give oil_and_gas investment advice petitioner testified that corman served on committees and various programs for different parties for investment purposes such as b'nai brith in greensboro a couple of corporations fabric corporations in greensboro and a couple furniture companies in high point petitioner admitted that corman's only knowledge about the oil_and_gas industry came from reading partnership investment prospectuses petitioners cite 469_us_241 for the proposition that taxpayers are entitled to rely on expert accountants and attorneys for substantive tax_advice what petitioners are attempting to do however is to justify relying on the alleged advice of an accountant about an oil_and_gas investment a matter in which he had no expertise we recall petitioner's testimony that when he started his furniture manufacturing business he did not rely solely on the advice of his friend corman who by petitioner's own description had extensive accounting experience in the furniture business petitioner in addition sought advice from those familiar with the retail and manufacturing sides of the furniture industry with whom he could discuss his new venture petitioner was well aware of what was required for a businesslike approach in order to make an informed investment any investment advice that corman provided to petitioner about mid continent was based solely on corman's reading of the prospectus and his experience in other than oil_and_gas ventures but to accurately report the mid continent deductions and credits for and required verifying facts outside and independent of the documents presented to corman petitioners have not shown that it was corman's responsibility to verify those facts see 43_f3d_788 2d cir affg tcmemo_1993_621 78_tc_623 petitioners cannot avoid the negligence additions to tax merely because a tax adviser has read the prospectus and advised that it is feasible from a tax perspective assuming the facts presented are true rogers v commissioner tcmemo_1990_619 accord novinger v commissioner tcmemo_1991_289 petitioner argues that there was nothing about the investment that put him on notice that second-guessing his accountant's advice was necessary the tax losses generated by the investment were not too good to be true he argues but for dollar_figure petitioner a high tax_bracket taxpayer purchased for alone dollar_figure in tax losses this represents better than a 4-to-1 writeoff enough to have put petitioner on notice that the investment scheme was primarily for a tax purpose zfass v commissioner f 3d pincite 731_f2d_230 4th cir affg 80_tc_972 see 39_f3d_402 2d cir mid continent offering memorandum promised improbable tax advantages affg tcmemo_1993_480 it was a small investment testified petitioner that did not warrant an expensive investigation and besides he argues the problems that caused the partnership to fail were technical in nature while the investment may have been small to petitioner we disagree that a costly investigation was required to reveal the true nature of the partnership petitioner was not an original investor in mid continent upon its creation in unlike fields from whom he obtained his partnership_interest in petitioner had the benefit of years of operations to observe petitioner did not have to rely merely on the representations of the partnership petitioner testified that he spoke to other mid continent investors in before buying fields' interest the only information they 7in their brief petitioners state that they received a tax_benefit of dollar_figure over two years and fields could have given him was that the partnership was suffering large losses as apparently had been planned petitioner testified that his investment focus was on finding an oil well it would have taken only modest effort to determine likely from the partnership itself that mid continent had not followed through on any of the three stated profit seeking activities in after years of operations the partnership had not drilled for oil_and_gas in the overthrust belt there was no drilling by the partnership in oklahoma and tennessee and there was still no operational terra-drill in existence years after commencement of the license payments for the drill the nonexistence of the drill is hardly a technical matter the terra-drill license payments to mitchell financed in large part by long-term notes were largely responsible for the partnership losses that were passed through to the partners we have considered the other arguments raised by petitioners and we find them to be without merit we find that petitioners 8instead of conducting drilling the partnership substituted partial working interests in other than the original proposed sites the sites evidently had poor production potential 9the technical problems to which petitioners allude are substantial engineering problems that must first be overcome before an operational terra-drill can successfully be designed because of the technical problems there was no drill the partnership failed because from the start there was no drill and none was ever developed did not reasonably rely in good_faith on the advice of a competent expert in reporting their deductions and credits from mid continent on their and federal_income_tax returns for each return petitioners failed to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances the effect of petitioners' amended_return for in december of several months after learning that the mid continent partnership return for would be examined by respondent petitioners filed an amended joint individual federal_income_tax return for tax_year petitioners argue that when deciding the issue of negligence for the entire record including the amended_return must be considered according to petitioners since they reported and paid additional tax there is no negligent underpayment_of_tax for it is vitiated by the amended_return if the court nevertheless determines that the negligence additions to tax apply they argue that as to the sec_6653 addition of percent of the interest due on the portion of the underpayment that is attributable to negligence all of the underpayment was paid with the amended_return in any deficiency that remained petitioners argue relates to their deduction of out-of pocket-expenses and not to any negligence on their part therefore they argue that the sec_6653 addition should be computed based only on the interest accruing on the underpayment that existed between the filing of the original return and the filing of the amended_return in sec_6653 provides that if any part of any underpayment_of_tax is due to negligence there shall be added to the tax an amount equal to percent of the underpayment under sec_6653 in addition to the above amount there shall be added to the tax an amount equal to percent of the interest due with respect to the portion of the underpayment that is due to negligence for purposes of sec_6653 the term underpayment is defined in sec_6653 for income_tax as a deficiency as defined in sec_6211 except that for this purpose the tax shown on a return referred to in sec_6211 shall be taken into account only if such return was filed on or before the last day prescribed for the filing of such return determined with regard to any extension of time for such filing therefore for purposes of determining the existence and amount of any underpayment_of_tax for purposes of the negligence additions of sec_6653 and the additional tax shown on petitioners' amended_return for cannot be considereddollar_figure 92_tc_899 emmons v 10the last date prescribed for filing petitioners' federal_income_tax return for was date sec_6672 sec_6012 commissioner 92_tc_342 affd 898_f2d_50 5th cir deel v commissioner tcmemo_1990_545 conclusion we find that petitioners are liable for the sec_6653 and additions to tax for the years and as determined by respondent decision will be entered for respondent


department of the treasury internal_revenue_service te_ge eo examinations commerce street mc dal dallas tx tax_exempt_and_government_entities_division date number release date legend org - organization name xx - date address - address org address taxpayer_identification_number person to contact identification_number contact telephone number certified mail - return receipt requested dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code our favorable determination_letter to you dated september 20xx is hereby revoked and you are no longer exempt under sec_501 of the code effective september 20xx the revocation of your exempt status was made for the following reason s you are not operating exclusively for any charitable purpose educational purpose or any other exempt_purpose our examination reveals that you are not engaged primarily in activities which accomplish charitable educational or other exempt purposes as required by sec_1_501_c_3_-1 your activities including your financial transactions more than insubstantially furthered non-exempt purposes moreover you failed to establish that you were not operated for the benefit of private interest of your founder and sole officer as required for continued recognition of exemption pursuant to sec_1_501_c_3_-1 your income inured to the benefit of private shareholders and individuals contributions to your organization are no longer deductible under sec_170 after september 20xx you are required to file form_1120 u s_corporation income_tax return these returns should be filed with the appropriate service_center for tax years ended december 20xx december 20xx december 20xx and for all years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments these courts at the following addresses by referring to the enclosed publication you may write to you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at lf you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely nanette m downing director eo examinations enclosure publication department of the treasury internal_revenue_service irs tax_exempt_and_government_entities_division date date taxpayer_identification_number golden gate ave m sec_7401 san francisco ca rr ress form tax_year s ended person to contact id number contact numbers manager's name id number manager's contact number response due_date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren't an organization described in sec_501 after we issue the final revocation letter well announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don't respond to this proposal within calendar days from the date of this letter we’ll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also may file a protest with the letter rev catalog number 34809f irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn’t a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely nanette m downing director eo examinations enclosures report of examination form_6018 publication publication letter rev catalog number 34809f schedule number or exhibit form 886-a explanations of items rev date tax identification_number year period ended name of taxpayer org ein 20xx 20kx 20xx legend org organization name state ra ein -- ein xx - date city - city state - country - country co-1 through co-11 - through companies website - website founder - founder ra-1 - is org an organization exempt from tax under sec_501 of the internal_revenue_code issue facts org org was incorporated in the state of state on september 20xx org received recognition as an organization exempt under internal_revenue_code sec_501 and sec_170 on september 20xx effective september 20xx on february 20xx the service issued letter and form_4564 to the organization along with publication your rights as a taxpayer the form asked the organization for information about its activities including all books_and_records of its assets liabilities receipts and disbursements some information was provided on april 20xx the date of the examination the organization provided co-1 statements co-2 wire transfers and photographs of individuals distributing bread in country with the exception of one invoice for insurance for a fundraising event purportedly held on 20xx org did not provide contemporaneous receipts or similar substantiation for its expenditures founder founder and sole officer of org stated that he does not keep org receipts and that he ‘threw them away’ activities founder stated that he created org to help the less fortunate and hungry and that its goal is to open up a food bank one day org is advertised on the website website and accepts co-1 donations org also advertises on co-3 co-4 and co-s founder stated that org’s conducted the following activities in 20xx - 20xx - - a ramadan fundraiser in 20xx donated books and christmas toys at co-6 20xx wire transferred money to family in country to distribute bread on the streets to the hungry founder stated that this activity has been discontinued because people are being poisoned by the taliban distributed sandwiches in the streets of city schedule number or exhibit form 886-a explanations of items rev date tax identification_number year period ended name of taxpayer org ein 20xx 21120xx 20xx - conducted a hunger walk fundraiser in july or august 20xx at co-7 founder stated that no one showed up for this event and that he used close to dollar_figure of personal funds to pay for the event expenses included event flyers food paintball arena martial arts school x gym musicians etc - - donated books and pens to the co-8 20xx organized clothing drives for donation to the co-9 founder stated that org had a co-10 account but closed this account in 20xx due to errant hotel charges dollar_figure at an event in city state org did not provide the bank statements for 20xx org has a founder’s co-1 account which it shares with founder’s and his younger brother’s personal finances younger brother owns an entertainment business that conducts festivals called co-11 revenue and expenditures org receives co-1 donations and money from donation cans in stores around city state founder stated the co-1 account is shared between himself and org co-1 statements from 20xx through 20xx report the following revenues consisting of purported donations and personal income from founder and his younger brother’s business 20xx 20xx 20xx total less personal org ‘donations’ dollar_figure dollar_figure co-11’s receipts totaled dollar_figure and dollar_figure in 20xx and 20xx respectively on july 20xx founder stated that these funds were from the festival conducted by founder’s brother org let co-11 use its pay pal account and the funds were paid back to founder’s brother ror bb6-a name of taxpayer explanations of items tax identification_number year period ended schedule number or exhibit org ein 20xx 20xx 20xx expenditures co-1 sent less personal org payments co-2 total org 20xx 20xx 20xx dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure on july 20xx the revenue_agent asked org if it had located any records that it tossed out for the 20xx year and to provide receipts invoices and similar documentation supporting all organizational_expenditures and how they served an exempt_purpose for years 20xx 20xx on july 20xx founder stated that he has nothing org provided names and phone numbers of individuals for the service to contact as references org provided email correspondence from donees for the current_year 20xx founder has family in country and wire transfers co-2 the money to family members which is used to purchase bread and distribute to poor children in the streets of country on april 20xx org provided pictures of individuals distributing bread to children in country the photographs’ source was from founder’s relative ra-1 ra-1 provided the photos in various emails in 20xx 20xx along with brief statements about the distribution on july 20xx founder stated that the bread distribution and photography is no longer a permitted due to security concerns in country during the form_1023 application process org did not inform the service that it would be sending money overseas to family members org stated that it would conduct an extensive grant selection process and exercise expenditure_responsibility with respect to foreign grants the service asked questions with respect to its operations in country on august 20xx the service asked to local school for pen pencils notebooks bags for 20xx year clothing collection drive for 20xx schedule number or exhibit explanations of items tax identification_number year period ended form 886-a rev date name of taxpayer org ein 20xx 20xx 20xx a are contributions paid only to organizations exempt under c if not please explain the criteria that will be used to maintain expenditure_responsibility how will you ensure that the grants paid will be used for exempt purposes under sec_501 on august 20xx org stated contributions gifts and grants are not paid only to organizations exempt under c organizations requesting assistance must submit a proposal detailing what items are needed how the items are to be used financial information on the organization and a description of the organizations and its activities prior to choosing which organizations will receive assistance the buildings we will meet with the organization leaders sic at this meeting we will request a tour of their facilities and a list of organization leaders personnel and volunteers to check against the ofac list our criteria for choosing organizations is demonstration of need through the description and financials submitted in the proposal best proposed use of the items funds and ability to help the most individuals possible each organization will be required to send annual periodic and or final distribution reports the type of report will depend upon the type of distribution i e cash or items such as food clothing or school supplies we will also conduct periodical site inspections when deemed necessary by the board all grantees be they new or renewal must go through the same process this is to ensure preferential treatment is not given to renewal grantees and to ensure all organizations continue to meet our criteria and irs standards and regulations practices b what specific the organization put in place to ensure that grants to foreign recipients are not diverted for non exempt purposes and overseas activities are in furtherance of its exempt purposes and safeguards has will or i what kind of due diligence investigation is done in advance of grant making org response organizations requesting assistance must submit a proposal detailing what items are needed how the items are to be used financial information on the organization and a description of the organizations and its activities schedule number or exhibit form 886-a explanations of items rev date tax identification_number year period ended name of taxpayer org ein 20xx 20xx 20xx prior to choosing which organizations will receive assistance the buildings at this meeting we will we will meet with the organization leaders of organization leaders request a tour personnel and volunteers to check against the ofac list our criteria for choosing organizations is demonstration of need through the description of the and items funds and ability to help the most individuals possible the proposal best proposed use financials submitted in facilities of their and a list ii what provisions are used by grant agreements to ensure grants are used for their intended purpose the grant proposal will specify our responsibilities and those of the grantee obligate the grantee to use the grant funds only for the purposes for which the grant was made provide periodic written reports concerning the use of the grant funds require a final written report and an accounting of how grant funds were used and acknowledge our authority to withhold be and or recover grant funds in case such funds are misused or appear to law sec_501 of the internal_revenue_code provides for exemption from taxation for organizations organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur athletic competition or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations states that an organization will be regarded as ‘operated exclusively’ for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the income_tax regulations states that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals for the definition of the words private_shareholder_or_individual see paragraph c of sec_1_501_a_-1 sec_1 c -1 d ii of the income_tax regulations states that an organization is not organized or operated exclusively for one or more of the purposes specified unless it serves a public rather than schedule number or exhibit form 886-a explanations of items rev date tax identification_number year period ended name of taxpayer org ein 20kx 21120kx 20kx a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_6033-2 of the income_tax regulations provides that every organization which is exempt from tax whether or not it is required to file an annual information_return shall submit such additional information as may be required by the internal_revenue_service for the purpose in inquiring into its exempt status and administering the provisions of subchapter_f sec_501 and following chapter of subtitle a of the code rev_rul an organization previously held exempt from federal_income_tax was requested to produce a financial statement as of the end of the year and a statement of its operations during such year however its records were so incomplete that it was unable to furnish such statements sec_6033 of the internal_revenue_code of provides that every organization except as provided therein exempt from taxation under sec_501 of the code shall file an annual return stating specifically the items of gross_income receipts and disbursements and shall keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary_of_the_treasury or_his_delegate may from time to time prescribe held failure or inability to file the required information_return or otherwise to comply with the provision of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of an exempt status revrul_56_304 organizations privately established and funded as charitable foundations which are organized and actively operated to carry on one or more of the purposes specified in sec_501 of the internal_revenue_code of and which otherwise meet the requirements for exemption from federal_income_tax are not precluded from making distributions of their funds to individuals provided such distributions are made on a true charitable basis in furtherance of the purposes for which they are organized however organizations of this character which make such distributions should maintain adequate_records and case histories to show the name and address of each recipient of aid the amount distributed to each the purpose for which the aid was given the manner in which the recipient was selected and the relationship if any between the recipient and members officers or trustees of the organization a grantor or substantial_contributor to the organization or a member_of_the_family of either and a corporation controlled by a grantor or substantial_contributor in order that any or all distributions made to individuals can be substantiated upon request by the internal_revenue_service government's position schedule number or exhibit form 886-a explanations of items rev date tax identification_number year period ended name of taxpayer org ein 20xx 20kx 20kx org is not operating exclusively for charitable purposes under c you do not meet the operational_test described in sec_1_501_c_3_-1 because you have your assets are not used exclusively for exempt purposes org’s co-1 account its primary asset is commingled with founder’s personal finances founder uses the co-1 account for both personal and organizational matters in 20xx and in 20xx of org’s co-1 account revenues were generated by and destined to a different entity owned by founder’s brother in 20xx and 20xx and of org’s co- expenditures were founder’s personal org allows its asset to be used by its founder for non exempt personal purposes such use constitutes inurement and org fails the operational_test under sec_1_501_c_3_-1 which states an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose the internal_revenue_service asked the foundation to provide specific information about its actual activities during the years ending december 20xx 20xx and 20xx other than emails and photos of bread distributions the organization did not show how its expenditures furthered an exempt activity the service asked the organization to provide all books_and_records of its assets liabilities receipts and disbursements org did not provide any receipts invoices or any other contemporaneous substantiation for its expenditures org tossed out its receipts org failed to disclose its activities during the application process it did not reveal to the service that it founder org stated that it would would be making overseas payments to relatives of its founder maintain expenditure_responsibility by requiring organizations to submit detailed proposals on how the funds are to be used financial information on the organization and a description of the organizations and its activities org stated that it will meet with officers of these potential grantee organizations the criteria for selecting grant recipients will then be based on need org stated that each recipient organization will be required to send annual periodic and final written distribution reports and accounting of how grant funds were used that it will conduct periodical site inspections when deemed necessary by the board all grantees be they new or renewal must go through the same process org failed to exercise expenditure_responsibility over the funds wired to country instead of providing annual periodic or final distribution reports from the grantee organizations to the service org provided photographs taken by relatives of founder such photographs do not satisfy the expenditure_responsibility requirements org promised it would exercise nor do they to prove these wire transfers served a charitable_class org does not maintain minutes and has no record of any grant selection process in place as promised in its application process an exempt_organization must respond to internal_revenue_service inquiries to establish that it is entitled to tax exempt status in this case the taxpayer had failed to establish that it was engaged in exempt commingling occurred before the application process form b86-a explanations of items rev date tax identification_number year period ended name of taxpayer schedule number or exhibit org activities that its expenditures were for the purpose of exempt_activities or that its assets did not inure to private shareholders or individuals ein 20xx 21120kx 20xx taxpayer's position the organization has not submitted its position conclusion exemption under code sec_501 for org should be revoked effective january 20xx the organization is required to file form_1120 for all opened years


t c memo united_states tax_court william l weller petitioner v commissioner of internal revenue respondent docket no filed date william l weller pro_se patsy a clarke for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies in petitioner’s federal income taxes and penalties as follows year deficiency penalty sec_6662 dollar_figure big_number big_number dollar_figure dollar_figure dollar_figure the issues for decision are whether petitioner engaged in his glider plane-related activities during the years in issue with the objective of making a profit within the meaning of sec_183 whether petitioner is entitled to deductions for unreimbursed employee_expenses that he claimed for and whether petitioner is liable for accuracy-related_penalties under sec_6662 all section references are to the internal_revenue_code for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner resided in the state of washington at the time the petition was filed in petitioner was laid off from the boeing co boeing subsequently he believed there was an opportunity in the pacific northwest to offer high-performance glider training he received his training in high-performance gliders in arizona and learned that others seeking this training had also traveled away from the pacific northwest to arizona california and florida petitioner is licensed by the federal aviation administration faa as a certified flight instructor airplane certified flight instructor instruments and certified flight instructor glider petitioner performed flight instruction for the boeing employees soaring club on date petitioner formed northwest eagle soaring l l c northwest in washington northwest provides private glider flight instruction and glider plane rides petitioner did not prepare a business plan for northwest during the years in issue northwest had no employees in late petitioner used money he inherited to complete his purchase of a dg-1000 high-performance glider plane for dollar_figure and he placed it in service on date northwest conducts its activities primarily on weekends from march through november glider flights are restricted to times of good visibility for business promotion northwest maintains a web site distributes marketing flyers to locations such as airports and aviation-related businesses and advertises in a flying publication petitioner maintained flight logs for the glider activities as required by the faa the glider flight hours logged were and dollar_figure for and respectively the faa regulations c f_r sec_91 b in effect for the years in issue required an aircraft to receive an additional annual inspection if it carried persons for hire or for flight instruction beyond hours in petitioner focused his time on the northwest activities and did not have other employment on his federal_income_tax return petitioner reported wages of dollar_figure and a loss of dollar_figure from his northwest activities in date petitioner started working full time for harbour homes inc petitioner reported wages of dollar_figure on his form_1040 u s individual_income_tax_return and claimed unreimbursed employee business_expenses of dollar_figure on schedule a itemized_deductions on a schedule c profit or loss from business prepared for northwest petitioner reported gross_receipts of dollar_figure and total expenses of dollar_figure that included a deduction for depreciation of dollar_figure for the glider this depreciation deduction was calculated on form_4562 depreciation and amortization including information on listed_property using a cost_basis of dollar_figure a 7-year recovery_period the 200-percent declining balance method and the mid-quarter convention petitioner reported no tax due for petitioner continued working full time for harbour homes inc until date when he began a full-time job with boeing as an engine build-up mechanic on his form_1040 petitioner reported wages of dollar_figure and claimed unreimbursed employee business_expenses of dollar_figure on schedule a on the northwest schedule c petitioner reported gross_receipts of dollar_figure and total expenses of dollar_figure that included a depreciation deduction of dollar_figure petitioner reported no tax due for in petitioner worked full time for boeing on his form_1040 petitioner reported wages of dollar_figure and claimed unreimbursed employee_expenses of dollar_figure on the northwest schedule c petitioner reported gross_receipts of dollar_figure and total expenses of dollar_figure that included a depreciation deduction of dollar_figure petitioner did not carry insurance on the glider in reducing his reported expenses by approximately dollar_figure as compared to and when he carried insurance petitioner did not claim the northwest loss on his form_1040 because of an issue he attributed to the computer_software he used to prepare his tax_return petitioner reported tax due of dollar_figure for the irs audited petitioner’s and income_tax returns and determined that the northwest activities during the years in issue did not satisfy the objective of making a profit within the meaning of sec_183 accordingly the examiner determined that for each of those years petitioner was not entitled to deduct the claimed northwest schedule c expenses except to the extent of schedule c gross_receipts that petitioner’s northwest schedule c gross_receipts should be reported as other income on his form_1040 and the schedule c expenses should be reported as other miscellaneous expenses on schedule a and petitioner’s unreimbursed employee business_expenses should be disallowed and reported as schedule a expenses these determinations by the examiner were included in the notice_of_deficiency sent to petitioner on date opinion under sec_183 if an activity is not engaged in for profit then no deduction attributable to that activity is allowed except to the extent provided by sec_183 in pertinent part sec_183 allows those deductions that would have been allowable had the activity been engaged in for profit only to the extent of gross_income derived from the activity reduced by deductions attributable to the activity that are allowable without regard to whether the activity was engaged in for profit sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 an activity is engaged in for profit if the taxpayer’s predominant primary or principal objective in engaging in the activity was to realize an economic profit independent of tax savings 4_f3d_709 9th cir affg tcmemo_1991_212 the expectation of making a profit need not be reasonable 85_tc_557 78_tc_642 affd without published opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs the proper focus of the test is the taxpayer’s subjective intent however objective indicia may be used to establish that intent 864_f2d_93 9th cir affg 88_tc_1086 see also wolf v commissioner supra pincite 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 greater weight is given to objective facts than to a taxpayer’s self-serving statement of intent see 116_tc_198 sec_1_183-2 and b income_tax regs sec_1_183-2 income_tax regs provides a nonexclusive list of relevant factors to be weighed when considering whether a taxpayer is engaged in an activity for profit the relevant factors are the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other activities for profit the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any that are earned from the activity the financial status of the taxpayer and whether elements of personal pleasure or recreation are involved in the activity none of these factors is controlling in and of itself and a decision as to a taxpayer’s intent is not governed by a numerical preponderance of the factors indep elec supply inc v commissioner supra pincite 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs a final_determination is made only after considering all facts and circumstances indep elec supply inc v commissioner supra pincite golanty v commissioner supra pincite respondent determined that petitioner did not engage in the glider activities with an intent to derive a profit and therefore disallowed the schedule c loss deductions petitioner counters that he did engage in the glider activities with an intent to realize a profit we address the nine nonexclusive factors in sec_1_183-2 income_tax regs in determining petitioner’s intent objectively carrying on the activity in a businesslike manner and maintaining complete and accurate books_and_records may indicate a profit objective sec_1_183-2 income_tax regs businesslike conduct is characterized by careful and thorough investigation of the profitability of a proposed venture monitoring of a venture in progress and attention to problems that arise over time see 90_tc_74 88_tc_464 petitioner did not maintain thorough books_and_records for his glider activities beyond his flight logs but the absence of accurate books_and_records does not conclusively establish the lack of a profit objective see de boer v commissioner tcmemo_1996_174 the purpose of maintaining books_and_records is more than to memorialize for tax purposes the existence of the subject transactions it is to facilitate a means of periodically determining profitability and analyzing expenses such that proper cost saving measures might be implemented in a timely and efficient manner golanty v commissioner supra pincite burger v commissioner tcmemo_1985_523 affd 809_f2d_355 7th cir petitioner did not prepare budgets income statements balance sheets forecasts or other financial statements however petitioner did review northwest’s expenses and elected to discontinue carrying insurance for the glider in to reduce expenses petitioner also purposely did not exceed hours of glider flight time to avoid the additional costly glider inspection each year petitioner held himself out as a glider instructor and actively promoted northwest through various marketing efforts primarily northwest’s web site to secure clients for glider rides and or for instruction although petitioner could and should have kept better business records for northwest what efforts he did undertake to make a financial success of his glider activities tend to show a profit objective a taxpayer’s extensive study of the accepted business and economic practices of an activity as well as the taxpayer’s consultation with experts may indicate a profit objective sec_1_183-2 income_tax regs petitioner secured the appropriate licenses and training to satisfy the faa requirements to operate as a glider flight instructor additionally he provided flight instruction at the boeing employees soaring club however petitioner did not provide information that he had consulted with accountants lawyers or business advisers about the economic aspects of his activities this factor is neutral the fact that a taxpayer devotes much personal time and effort to carrying on an activity may indicate a profit objective particularly where the activity does not involve substantial personal or recreational aspects sec_1 b income_tax regs petitioner started the northwest glider activities after he lost his full-time job with boeing and continued the activities part time after resuming full-time employment during the years in issue petitioner generally devoted all of his weekends to the glider activities respondent emphasizes that petitioner worked full time for harbour homes and then boeing during the years in issue suggesting that petitioner’s glider activities could not rise to the level of a trade_or_business because he also had a full-time job but petitioner’s having full-time employment does not preclude the possibility that his glider activities constituted a separate trade_or_business we have recognized that a taxpayer may engage in more than one trade_or_business at any one time see 74_tc_525 affd without published opinion 681_f2d_805 3d cir christine v commissioner tcmemo_2010_144 a taxpayer’s expectation that assets used in an activity will appreciate in value to create an overall profit may indicate a profit objective as to that activity golanty v commissioner supra pincite sec_1_183-2 income_tax regs northwest’s only asset during the years in issue was the glider there is nothing in the record regarding the value of the glider during the years in issue to demonstrate appreciation thus nothing shows petitioner’s expectation as to whether appreciation of the glider would bring about an overall profit see sec_1_183-2 income_tax regs a taxpayer’s success in carrying on other similar or dissimilar activities is a factor that may show a profit objective see sec_1_183-2 income_tax regs petitioner offered no evidence regarding success in carrying on comparable activities petitioner contends that he conducted a successful part-time business venture in kitchen and bathroom remodeling a dissimilar activity however he did not supply information regarding the operations or financial aspects of this business a profit objective is strongly indicated where the taxpayer has experienced a series of profitable years sec_1 b income_tax regs a series of losses during the startup_period of an activity is not necessarily an indication that the activity is not engaged in for profit bearing in mind however that the objective must be to realize a profit on the entire operation--future net_earnings and also enough earnings to recoup losses that have been incurred in intervening years 45_tc_261 affd 379_f2d_252 2d cir petitioner reported losses on his tax_return for northwest for and for the years in issue petitioner contends that the losses reported were paper losses because they were primarily a result of depreciating the glider using a 7-year recovery_period he asserts that if depreciation is not included in the northwest expenses that northwest had profits of dollar_figure and dollar_figure in and respectively and a loss of dollar_figure in depreciation however is a reflection of the apportioned use of an asset over a period of more than year and cannot be ignored in a true profit analysis best v commissioner tcmemo_1990_20 see also peacock v commissioner tcmemo_2002_122 petitioner’s first full year of the glider operations was in the glider activities were reasonably within the startup_period during the years in issue we treat this factor as neutral while substantial income from sources other than the activity may indicate that the activity is not engaged in for profit a taxpayer’s lack of substantial income from sources other than the activity tends to indicate that an activity is engaged in for profit sec_1_183-2 income_tax regs the legislative_history of the tax reform act of publaw_91_ 83_stat_487 discloses a particular concern about wealthy individuals attempting to generate paper losses for the purpose of sheltering unrelated income see h rept 1969_3_cb_200 we have no such concerns with respect to petitioner a taxpayer’s enjoyment of an activity does not demonstrate a lack of profit objective if the activity is in fact conducted for profit as shown by other factors see 59_tc_312 sec_1_183-2 income_tax regs a business will not be turned into a hobby merely because the owner finds it pleasurable suffering has never been made a prerequisite to deductibility jackson v commissioner supra pincite it is not contested that petitioner’s glider flight hours logged during the years in issue were attributable to paying customers with a few solo flights taken for faa license requirements moreover petitioner worked in the aviation field until he was laid off from boeing in and started working full time for that company again in petitioner’s enjoyment of flying does not change the result of whether he is in the trade_or_business of providing glider flights and instruction these nonexclusive factors and the facts and circumstances of this case lead us to conclude that petitioner engaged in the glider activities with the primary purpose and intent of realizing an economic profit independent of tax savings during the years in issue unreimbursed employee business_expenses sec_162 generally allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business the term trade_or_business as used in sec_162 includes the trade_or_business of being an employee 54_tc_374 the determination of whether an expenditure satisfies the requirements for deductibility under sec_162 is a question of fact 320_us_467 to deduct unreimbursed employee_expenses a taxpayer must not have received reimbursement and must not have had the right to obtain reimbursement from his or her employer 788_f2d_1406 9th cir affg tcmemo_1984_533 petitioner concedes that he is not entitled to the unreimbursed employee_business_expense deductions that he claimed for and petitioner has not provided sufficient evidence regarding the expenses claimed for or whether he received reimbursement or had the right to obtain reimbursement from his employer thus petitioner is not entitled to the deduction claimed for unreimbursed employee business_expenses for sec_6662 accuracy-related_penalties respondent determined that petitioner is liable for sec_6662 accuracy-related_penalties for the years in issue pursuant to sec_6662 and b and a taxpayer may be liable for a penalty of percent of the portion of an underpayment_of_tax attributable to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax a substantial_understatement exists if the understatement exceeds the greater of percent of the tax required to be shown on the return for a taxable_year or dollar_figure see sec_6662 under sec_7491 the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties see 116_tc_438 however once the commissioner has met the burden of production the burden_of_proof remains with the taxpayer including the burden of proving that the penalties are inappropriate because of reasonable_cause or substantial_authority see rule a higbee v commissioner supra pincite respondent has not come forward with sufficient evidence to indicate that petitioner was negligent see sec_6662 and b respondent determined the amounts of tax required to be shown on petitioner’s and tax returns to be dollar_figure dollar_figure and dollar_figure respectively petitioner reported total_tax due of zero for and and dollar_figure for we do not sustain respondent’s disallowance of the expense deductions claimed for northwest on the basis of respondent’s determination that northwest was not engaged in for profit however petitioner conceded that the claimed unreimbursed employee_business_expense deductions for and were improper and we concluded that he is not entitled to those claimed for if the rule calculation for any year shows that a substantial_understatement_of_income_tax exists under sec_6662 petitioner is liable for the sec_6662 accuracy-related_penalty for that year petitioner has not argued that the penalties are inappropriate because of reasonable_cause or substantial_authority see sec_6664 higbee v commissioner supra pincite we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule