t c memo united_states tax_court vashon c and beverly c jackson petitioners v commissioner of internal revenue respondent docket no filed date vashon c jackson pro_se william henck for respondent memorandum opinion dinan special_trial_judge this case was heard pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in continued - - respondent determined deficiencies in petitioners' federal income taxes for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively and accuracy-related_penalties pursuant to sec_6662 in the amounts of dollar_figure dollar_figure and dollar_figure respectively the issues for decision are the amount of rents received by petitioners during the taxable years in issue whether petitioners are entitled to any deductions with respect to the rented property whether petitioners are entitled to any deductions for unreimbursed employee business_expenses whether petitioners are entitled to charitable_contribution deductions in excess of the amounts allowed by respondent and whether petitioners are liable for the sec_6662 a accuracy-related_penalties some of the facts have been stipulated and are so found the stipulations of fact and attached exhibits are incorporated herein by this reference petitioners resided in chesapeake virginia on the date the petition was filed in this case petitioner husband worked as an auditor for the army corps of engineers during the taxable years in issue petitioner wife worked as a schoolteacher during the taxable years in issue petitioners reside pincite hollins court in chesapeake virginia t continued issue all rule references are to the tax_court rules_of_practice and procedure - - petitioners purchased the residence of petitioner wife's parents mr and mrs charity and her maternal grandmother the charitys in this residence is located pincite hollins court the charitys continued to use hollins court as their residence after the sale and paid petitioners rent for such use the first issue for decision is the amount of rents received by petitioners during the taxable years in issue on schedules e attached to their and returns petitioners reported rents received from hollins court in the amount of dollar_figure per year this amount is equal to the fair rental value appraisal of hollins court obtained by petitioner in from hagle realty a local real_estate agency in the statutory_notice_of_deficiency respondent determined that petitioners received rents from hollins court during and in the amounts of dollar_figure dollar_figure and dollar_figure respectively sec_61 includes in gross_income all income from whatever source derived including but not limited to rents see sec_61 petitioner husband testified that the charitys paid dollar_figure per month as rent during the taxable years in issue he further testified that petitioners reported their rents received on their tax returns as dollar_figure per year dollar_figure per month on the advice of one of respondent's revenue agents in order to satisfy q4e- the fair rental requirement of sec_280a respondent's counsel stated at trial that the rents received determined in the statutory_notice_of_deficiency were based on bank records and statements from the charitys the record does not include any such evidence and respondent's counsel's statement alone does not have any probative value based on petitioner husband's testimony and the lack of any evidence which supports respondent's determinations of the rents received we find that the charitys paid dollar_figure per month during the taxable years in issue for their use of hollins court we hold that petitioners received rents in the amount of dollar_figure during and the second issue for decision is whether petitioners are entitled to any deductions with respect to hollins court petitioners claimed rental expenses for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively in the statutory_notice_of_deficiency respondent limited the deductible amounts of petitioners' substantiated expenses to the rents which he determined they had received on the ground that the rental arrangement with their relatives was not at fair_market_value respondent also determined that petitioners only substantiated dollar_figure dollar_figure and dollar_figure respectively of the expenses claimed on their and returns - - sec_212 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income sec_262 provides that no deduction shall be allowed for personal living or family_expenses sec_280a generally provides that no deduction shall be allowed with respect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence congress enacted sec_280a in the tax reform act of publaw_94_455 90_stat_1520 as its response to the concern that the rental of property used as a residence afforded the taxpayer unwarranted opportunities to obtain deductions for expenses of a personal nature 77_tc_104 affd 694_f2d_556 9th cir for purposes of sec_280a a taxpayer uses a dwelling_unit as a residence during the taxable_year if he uses it for personal purposes for a number of days which exceeds the greater of days or percent of the number of days during such year that it is rented at a fair rental see sec_280a as pertinent in this case a taxpayer is deemed to have used a dwelling_unit for personal purposes on any day that it is used for personal purposes by any member of the taxpayer's family unless the family_member rents the dwelling_unit at a fair rental for use as -- - his principal_residence see sec_280a a and a kotowicz v commissioner tcmemo_1991_563 since the charitys paid only dollar_figure per month for their use of hollins court as their principal_residence and its fair rental value was at least dollar_figure per month based on eagle realty's estimate their personal_use of hollins court is treated as petitioners' personal_use for every day of the taxable years in issue thus under sec_280a hollins court was used by petitioners as a residence during the taxable years in issue see dinsmore v commissioner tcmemo_1994_ affd in part and remanded in part without published opinion 78_f3d_592 9th cir accordingly sec_280a is generally applicable to the amounts in issue sec_280a does not however apply to any item which is attributable to the rental of the dwelling_unit as determined under sec_280a see sec_280a sec_280a provides that where an individual uses a dwelling_unit for personal purposes for any day during the taxable_year the amount deductible with respect to the expenses attributable to the rental of the dwelling_unit for the taxable_year shall not exceed an amount which bears the same relationship to such expenses as the number of days during each year that the unit is rented at a fair rental bears to the total number of days during such year that such unit is used - pursuant to sec_280a a petitioners are deemed to have used hollins court for personal purposes during the taxable years in issue since hollins court was not rented at a fair rental for any day of the taxable years in issue none of the claimed deductions are allowable under sec_280a and e by reason of being attributable to its rental see colbert v commissioner tcmemo_1992_30 gilchrist v commissioner tcmemo_1983_288 the only expenses which are deductible by petitioners with respect to hollins court are those expenses which are deductible without regard to whether it was rented see sec_280a and e based on the record we find that petitioners paid the following amounts with respect to hollins court year interest taxes dollar_figure dollar_figure big_number big_number big_number it appears that respondent erroneously determined that all of the substantiated expenses were deductible under sec_280a and e and relied only on the sec_280a gross_income limitation we do not reach sec_280a where as in this case none of the disputed amounts in the first instance meet the sec_280a and e conditions for deductibility see sec_280a bolton v commissioner supra pincite these amounts consist of the interest and taxes determined by respondent in the statutory_notice_of_deficiency to have been substantiated we find that petitioners have failed to substantiate the other interest claimed by them and disallowed by respondent which they claim was paid on a promissory note secured_by a second deed_of_trust on hollins court - - we hold that petitioners are entitled to additional schedule a itemized_deductions for the foregoing amounts of interest and taxes paid on hollins court under sec_163 and sec_164 respectively see infra note the third issue for decision is whether petitioners are entitled to deductions for unreimbursed employee business_expenses on schedules a and form sec_2106 attached to their and returns petitioners claimed unreimbursed employee business_expenses before the sec_67 limitations as follows vashon c jackson dollar_figure dollar_figure dollar_figure beverly c jackson big_number big_number big_number big_number big_number big_number in the statutory_notice_of_deficiency respondent disallowed any deductions for the claimed expenses sec_162 allows a deduction for the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business including the trade_or_business of being an employee 326_us_465 if an employee's ordinary and necessary business_expenses exceed the amounts received from his employer as advances or reimbursements the employee is entitled to a deduction for such excess if adequately substantiated see sec - b income_tax regs sec_1_274-5t f temporary income_tax regs fed reg date sec_274 provides that no deduction is allowable under sec_162 for any traveling expenses including meals_and_lodging while away from home or with respect to any listed_property defined in sec_280f to include passenger automobiles unless the taxpayer complies with strict substantiation rules see sec_274 in particular the taxpayer must substantiate the amount time place and business_purpose of the expenses by adequate_records or by sufficient evidence corroborating his own statement see sec_274 sec_1_274-5t c temporary income_tax regs fed reg date petitioners admit that some of their employee business_expenses were reimbursed by their respective employers they contend however that some of their employee business_expenses were not reimbursed and therefore are deductible petitioners argue that petitioner husband was reimbursed for_the_use_of his automobile at mileage rates which were less than the standard mileage rates established by respondent for the taxable years in issue they contend that the differences in ‘ the standard mileage rates for an employee's use of his own passenger_vehicle for business purposes during continued - the rates are deductible as unreimbursed employee business_expenses petitioner husband's travel vouchers show that he was generally reimbursed at the rate of cents per mile in and early and at the rate of cents per mile in late and and on limited occasions pincite cents per mile it is not clear from the travel vouchers or petitioner husband's testimony as to why or for which miles he was reimbursed at a lesser rate of cents per mile based on the travel vouchers and petitioner husband's testimony we find that petitioners have substantiated the number of miles which they claimed petitioner husband used his automobile in connection with his employment as an auditor see sec_1_274-5t temporary income_tax regs fed reg date after accounting for the differences between the standard mileage rates and the rates at which he was generally reimbursed we find that petitioners have established that petitioner husband's allowable expenses for_the_use_of his car during and exceeded his advances and reimbursements for such use by dollar_figure dollar_figure and dollar_figure respectively continued and were cents cents and cents respectively see revproc_89_66 sec_4 1989_2_cb_792 revproc_90_59 sec_4 1990_2_cb_644 revproc_91_67 sec_5 1991_2_cb_887 petitioners also argue that petitioner wife was not reimbursed for certain expenses which she paid in connection with her employment as a schoolteacher petitioner wife did not testify at trial petitioners submitted some records of her claimed vehicle and travel_expenses for which are not helpful because they do not indicate whether or not the listed expenses were reimbursed they submitted no records of her expenses for or after reviewing the record we find that petitioner husband's testimony with respect to petitioner wife's claimed expenses and the little written evidence in the record does not satisfy the substantiation requirements of sec_274 we hold that petitioner husband's unreimbursed expenses for_the_use_of his automobile in the course of his employment as an auditor are deductible as miscellaneous_itemized_deductions to the extent the total of such expenses and petitioners' other allowed miscellaneous_itemized_deductions for the taxable years in issue exceed the sec_67 limitation for such years the fourth issue for decision is whether petitioners are entitled to charitable_contribution deductions in excess of the amounts allowed by respondent petitioners claimed and respondent disallowed in the statutory_notice_of_deficiency deductions for charitable_contributions as follows claimed dollar_figure dollar_figure dollar_figure disallowed big_number big_number big_number allowed big_number big_number big_number sec_170 allows a taxpayer to deduct a charitable_contribution only if verified under regulations prescribed by the secretary sec_170 the regulations provide specific record-keeping requirements see sec_1_170a-13 income_tax regs the written evidence submitted by petitioners with respect to their claimed charitable_contribution deductions establishes only a cash gift in the amount of dollar_figure anda donation of six tennis lessons to the williams school located in norfolk virginia petitioners did not submit any other receipts or canceled checks by which the amounts claimed on their returns may be verified respondent allowed petitioners charitable_contribution deductions in excess of dollar_figure for each of the taxable years in issue we find that petitioners have failed to substantiate charitable_contributions in excess of the allowed amounts accordingly we hold that petitioners are not entitled to charitable_contribution deductions in excess of the amounts allowed by respondent the fifth issue for decision is whether petitioners are liable for the sec_6662 accuracy-related_penalties - - respondent determined that petitioners are liable for the accuracy-related_penalty imposed by sec_6662 for their underpayments of taxes for and that are attributable to their disallowed charitable_contribution deductions and that such underpayments were due to negligence or disregard of rules or regulations sec_6662 imposes a 20-percent penalty on the portion of an underpayment attributable to any one of various factors one of which is negligence or disregard of rules or regulations see sec_6662 negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax_return see sec_6662 sec_1_6662-3 income_tax regs it also includes any failure to keep adeguate books_and_records or to substantiate items properly see sec_1_6662-3 income_tax regs disregard includes any careless reckless or intentional disregard of rules or regulations see sec_6662 sec_1_6662-3 income_tax regs sec_6664 however provides that the sec_6662 penalty shall not apply to any portion of an underpayment if it is shown that there was reasonable_cause for the taxpayer's position with respect to that portion of the underpayment and that the taxpayer acted in good_faith with respect to that portion the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case- by-case basis taking into account all the pertinent facts and circumstances see sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer's effort to assess his proper tax_liability for the year see id based on the record we find that petitioners have not proved that their underpayments attributable to the disallowed charitable_contribution deductions were due to reasonable_cause or that they acted in good_faith we hold that petitioners are liable for the sec_6662 accuracy-related_penalties as determined by respondent to reflect the foregoing decision will be entered under rule we lack jurisdiction over any increased deficiencies which may result from our holdings on the issues in this case because respondent has not asserted any claim for increased deficiencies see sec_6214


t c memo united_states tax_court joseph d and mi jung park et al ' petitioners v commissioner of internal revenue respondent docket nos filed date f wallace pope jr charles a samarkos and michael g little for petitioners william r mccants for respondent ' cases of the following petitioners are consolidated herewith john n park docket no and david s and deborah park docket no -- - memorandum findings_of_fact and opinion foley judge by notices dated june and respondent determined deficiencies additions to tax and penalties relating to petitioners’ federal_income_tax as follows joseph d and mi jung park docket no additions to tax_year deficiency sec_6651 a sec_6662 dollar_figure dollar_figure dollar_figure big_number big_number big_number john n park docket no additions to tax_year deficiency sec_6651 a sec_6662 a dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number david s and deborah park docket no additions to tax_year deficiency sec_6651 a sec_6662 a dollar_figure dollar_figure dollar_figure big_number --- big_number big_number --- big_number the issues for decision are whether petitioners underreported income during the years in issue and are liable for sec_6651 additions to tax and sec_6662 a accuracy-related_penalties all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure - - findings_of_fact petitioners resided in florida at the time they filed their petitions the reverend yoon sik park had three sons john joseph and david all of whom were born in korea during the years in issue joseph and david park were married to mi jung and deborah park respectively petitioners immigrated to maryland and became naturalized u s citizens in the 1980s petitioners led by the eldest brother john moved to florida and attempted to establish themselves as businessmen using funds given to them by their mother john bought two strip malls at all times relevant reverend park has been the senior pastor of the pyung kang church in korea which had big_number members after hearing several of reverend park’s sermons in mr kaharudin latief and mr ferry tandiono became christians mr latief and mr tandiono were two wealthy indonesian businessmen mr latief has extensive business holdings and is heir to an immense family fortune worth hundreds of millions of dollars from to the latief family owned the exclusive license in indonesia to operate casinos the lottery and greyhound racing as a young adult mr latief’s lifestyle revolved around exotic sports cars perpetual partying and international jet-setting he would often accompany his father - on trips to las vegas nevada where it was not uncommon for them to spend in excess of dollar_figure million ina few days mr latief’s father gave him dollar_figure million when he graduated from college anda hotel in perth australia upon the birth of mr latief’s first son despite this extravagant lifestyle mr latief believed that prior to his conversion to christianity his life was aimless similarly mr tandiono believed that prior to his conversion to christianity his priorities concerning family work and religion were misplaced because reverend park led them to christianity mr latief and mr tandiono felt indebted to him since their conversion they have each become elders in reverend park’s congregation and have donated substantial funds to help establish several other churches in when john told reverend park that he was having difficulties establishing a successful business reverend park told him to meet with mr latief similarly in when david park wanted to establish his own businesses reverend park told him to contact mr tandiono between and mr latief and mr tandiono transferred via traveler’s checks and wire transfers over dollar_figure million to petitioners petitioners used these funds to establish at least businesses all of which failed during the years in issue petitioners’ family and friends in korea also gave them smaller amounts for various personal uses e g marriage childbirth etc - while petitioners felt a moral obligation to repay these funds neither mr latief nor mr tandiono ever asked for or expected repayment or any interest in petitioners’ businesses john park met with mr latief on numerous occasions during the years in issue during those meetings mr latief informed john that he did not expect repayment mr latief was insulted and angry when john insisted on paying him back with interest and told john this was not a business transaction similarly when david park met with mr tandiono mr tandiono did not want repayment because he intended only to help david in addition mr tandiono believed it was inappropriate to require repayment from someone experiencing financial difficulties and that god would bless him for helping someone in need respondent was suspicious of the inconsistencies between petitioners’ lifestyles and their reported income and believed petitioners were skimming money from several of their cash- intensive businesses or from a presbyterian church they established initially petitioners lied to respondent about the source of their funds saying they had received the funds from their father respondent was not satisfied with this response petitioners eventually informed respondent that mr latief and mr tandiono provided them with the funds respondent’s criminal_investigation_division found no evidence of skimming and could not disprove that mr latief or mr tandiono was the source of - - petitioners’ funds respondent believed however that the funds came from a taxable source respondent reconstructed petitioners’ incomes using the cash_expenditures_method and determined unreported income relating to the years in issue of dollar_figure for john park dollar_figure for joseph and mi jung park and dollar_figure for david and deborah park respondent also determined that john park had dollar_figure of unreported income from concert promotion activities and that all petitioners were liable for sec_6651 additions to tax for failure to timely file and sec_6662 accuracy-related_penalties opinion gross_income includes all income from whatever source derived sec_61 respondent’s determination is generally presumed correct and petitioners have the burden_of_proof 290_us_111 petitioners contend that respondent’s determinations relating to unreported income are arbitrary and not entitled toa presumption of correctness we disagree connecting petitioners to the funds that form the basis of the deficiency is sufficient to give petitioners the burden of proving the determination erroneous 87_tc_609 affd sec_7491 is not applicable to this case without published opinion 827_f2d_774 11th cir petitioners deposited millions of dollars in their bank accounts while reporting losses from cash-intensive businesses we conclude that respondent’s deficiency determination was not arbitrary accordingly the presumption of correctness applies petitioners however have established that the funds attributed to petitioners by respondent’s income reconstruction were from nontaxable sources petitioners and their witnesses particularly mr tandiono and mr latief adequately explained the sources nature and amounts of the transfers to petitioners the funds transferred from mr tandiono and mr latief to petitioners were gifts see 363_us_278 mr tandiono’s and mr latief’s disinterested generosity was inspired by their gratitude towards petitioners’ father reverend park who led mr tandiono and mr latief to christianity family members also sent funds to petitioners as gifts respondent failed to present any rebuttal evidence and chose instead to rely solely on the contention that petitioners their witnesses and their explanations were not credible to the contrary petitioners’ testimony and that of their witnesses was credible we conclude that there is no deficiency in income_tax nor sec_6662 penalty relating to this issue --- - sec_6651 imposes an addition_to_tax for failure_to_file a required return on the date prescribed unless it is shown that such failure is due to reasonable_cause and not willful neglect petitioners have not shown that such failure_to_file by the prescribed date was due to reasonable_cause and not willful neglect accordingly petitioners are liable for the sec_6651 addition_to_tax john park however did not contest respondent’s determinations relating to a dollar_figure income understatement from a concert promotion business thus the deficiency and sec_6662 penalty concerning this issue are sustained welch v helvering supra pincite to reflect the foregoing decisions will be entered under rule


t c summary opinion united_states tax_court carlos sada jr and amanda sada petitioners v commissioner of internal revenue respondent docket no 11362-08s filed date carlos sada jr and amanda sada pro sese brooke s laurie for respondent dawson judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and 1unless otherwise indicated references to sections other than sec_7463 are to the internal_revenue_code code in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure this opinion shall not be treated as precedent for any other case respondent determined the following deficiencies in petitioners’ federal income taxes and accuracy-related_penalties under sec_6662 for and year deficiency dollar_figure big_number big_number accuracy-related_penalty sec_6662 dollar_figure dollar_figure dollar_figure respondent filed an amended answer asserting that petitioners are liable for an increased deficiency in income_tax of dollar_figure a dollar_figure increase and an increased penalty under sec_6662 of dollar_figure a dollar_figure increase for and an increased deficiency in income_tax of dollar_figure a dollar_figure increase and an increased penalty under sec_6662 of dollar_figure a dollar_figure increase for after concessions by the parties the issues to be decided are 2the parties agree that subject_to the limitations in sec_221 petitioners are allowed deductions for a student_loan interest payments of dollar_figure in dollar_figure in and dollar_figure in and b tuition and fees expenses of dollar_figure in petitioners omitted dollar_figure of interest_income from texas state bank on their return and petitioners have substantiated charitable_contributions of dollar_figure in dollar_figure in and dollar_figure in whether petitioners are entitled to deductions claimed on schedules c profit or loss from business sole_proprietorship of their and federal_income_tax returns whether petitioners had gross_receipts from a trade_or_business as reported on schedules c of their and returns whether depreciation petitioners claimed on their return is subject_to sec_1245 recapture in whether petitioners are liable for self-employment taxes on the gross_receipts reported on schedules c of their and returns and on gain realized on the sale of sec_1245 property in if any whether petitioners are entitled to deduct under sec_213 medical_expenses of dollar_figure for and whether petitioners are liable for accuracy-related_penalties under sec_6662 for the years at issue background some of the facts have been stipulated the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners are married individuals who filed joint federal_income_tax returns for and petitioners resided in texas when their petition was filed they have two children who were age sec_12 and at the time of trial petitioner amanda sada mrs sada is a teacher and was employed as such during the years at issue petitioner carlos sada mr sada has a bachelor of science degree he has been selling cars for or years during the years at issue he worked as a new car sales manager at boggus ford as such he was entitled to purchase under the ford d plan one or two new cars each year at dollar_figure over the invoice cost plus tax title and license during the years at issue mr sada purchased new vehicles from boggus ford kept them for about a year and then traded them in on the purchase of newer vehicles the trade-in allowances he received for the old vehicles were less than the balances owed on the loans obtained to purchase the old vehicles he obtained sufficient financing on the purchase of the new vehicles to pay off the balance owed on the old vehicles over the amount of the trade-in allowance mr sada and his wife used the vehicles for commuting and other personal daily activities but they kept a for sale sign on each vehicle from the time of purchase until mr sada traded it in on a new one although mr sada’s employment with boggus ford generally did not involve selling used cars he negotiated the selling_price of the vehicles he traded in petitioners reported the purchases and sales of the vehicles as mr sada’s business activity on schedules c of their and federal_income_tax returns mr sada owned two toyota sequoias--a desert-colored sequoia which he had purchased for dollar_figure in date at which time it had an odometer reading of miles the desert sequoia and another the second sequoia for which the record does not disclose the date of purchase purchase_price color or odometer reading at time of purchase he also owned a isuzu trooper which he had purchased used for dollar_figure to dollar_figure in in he sold the trooper in a cash transaction for dollar_figure making a profit of dollar_figure on date mr sada traded in the desert sequoia for a gold ford expedition which he purchased for dollar_figure he received a dollar_figure allowance for the desert sequoia and financed the balance of the purchase_price the desert sequoia had an odometer reading of big_number miles and a 3mr sada asserts that he owned only one toyota sequoia in respondent’s brief respondent agrees that petitioners did not own the second sequoia however motor_vehicle purchase orders from boggus ford dated date and date indicate that carlos sada traded in a toyota sequoia serial number ending on the gold ford expedition that he acknowledges he purchased in and he traded in a toyota sequoia serial number ending on a white ford expedition that he acknowledges he purchased in mr sada also stipulated that he traded in the second sequoia on the white expedition respondent’s concession is clearly contrary to the stipulation and to the facts that we have found are established by the record and we shall disregard it see 93_tc_181 payoff amount of dollar_figure at the time of the trade-in at the time of the purchase the gold expedition had an odometer reading of miles mr sada purchased two vehicles in in date mr sada traded in the second sequoia for a white expedition he purchased the white expedition for dollar_figure he received a dollar_figure allowance from the trade-in of the second sequoia towards the purchase_price and financed the balance the second sequoia had an odometer reading of big_number miles and a payoff amount of dollar_figure at the time of the trade-in the white expedition had an odometer reading of miles at the time of purchase in date mr sada traded in the gold expedition on a gray expedition he purchased the gray expedition for dollar_figure he received a dollar_figure allowance from the trade-in of the gold expedition towards the purchase_price and financed the balance the gold expedition had an odometer reading of big_number miles and a payoff amount of dollar_figure at the time of the trade-in the gray expedition had an odometer reading of miles at the time of purchase and big_number miles on date mr sada purchased two vehicles in date he purchased a white ford fusion for dollar_figure he paid dollar_figure down and financed the balance he also traded in the white expedition on a black ford f-250 which he purchased for dollar_figure he received a dollar_figure allowance from the trade-in of the white expedition and financed the balance at the time of trade-in the white expedition had an odometer reading of big_number miles and a payoff amount of dollar_figure petitioners reported income on their and returns as follows dollar_figure wages salaries tips etc interest business income schedule c big_number big_number big_number big_number big_number big_number total income big_number big_number big_number adjustments adjusted_gross_income big_number big_number big_number big_number dollar_figure dollar_figure -- dollar_figure big_number petitioners filed an amended_return for reducing their adjusted_gross_income to dollar_figure for a dollar_figure overstatement of wages petitioners reported gross_receipts expenses and net losses on the purchases and sales of the vehicles on schedules c of their and federal_income_tax returns as follows income gross_receipts cost_of_goods_sold gross_profit expenses advertising car truck expenses dollar_figure dollar_figure big_number big_number big_number -- big_number big_number dollar_figure dollar_figure -- -- big_number big_number -- -- -- big_number depreciation insurance legal professional services office expense rent equipment repairs maintenance supplies meals entertainment cell phone internet roadrunner computer total expenses big_number big_number big_number big_number big_number big_number -- big_number big_number big_number big_number -- big_number -- -- -- -- big_number big_number -- -- big_number big_number big_number big_number big_number -- -- -- big_number big_number big_number net profit loss big_number big_number big_number big_number mr sada did not include the dollar_figure he received on the sale of the isuzu trooper in the gross_receipts for mr sada reported the vehicles as 3-year_property on form sec_4562 depreciation and amortization including information on listed_property attached to his joint returns for through the depreciation petitioners claimed for included a special depreciation allowance of dollar_figure and general depreciation of dollar_figure for property placed_in_service in the depreciation petitioners claimed for included a special depreciation allowance of dollar_figure and general depreciation of dollar_figure for property placed_in_service in and macrs depreciation of dollar_figure for assets place in service before the depreciation petitioners claimed for included a special depreciation allowance of dollar_figure and general depreciation of dollar_figure for property placed_in_service in and macr sec_4 depreciation of dollar_figure for property placed_in_service before the depreciation petitioners claimed for included a special depreciation allowance of dollar_figure and general depreciation of dollar_figure for property placed_in_service in and macrs depreciation of dollar_figure for property placed_in_service before on their and returns petitioners claimed the following deductions on schedule a itemized_deductions schedule a medical dental1 taxes interest gifts to charity total deductions -- dollar_figure big_number big_number big_number -- dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number big_number 1total medical_expenses dollar_figure for over percent of adjusted_gross_income dollar_figure for in addition to the itemized_deductions claimed on schedules a petitioners claimed deductions for student_loan interest of dollar_figure for and dollar_figure for educator expenses of dollar_figure each year tuition and fees of dollar_figure for and domestic_production activities of dollar_figure for petitioners also claimed child tax_credits of dollar_figure for and and dollar_figure for 4macrs refers to the modified accelerated_cost_recovery_system generally macrs is used to depreciate any tangible_property placed_in_service after on date respondent mailed to petitioners a statutory_notice_of_deficiency for and disallowing their deductions for business_expenses claimed on schedules c and increasing their taxable_income by dollar_figure for dollar_figure for and dollar_figure for as a result of the disallowance of the deductions for the business_expenses respondent determined that mr sada was subject_to self- employment_taxes of dollar_figure for dollar_figure for and dollar_figure for on the gross_receipts reported on the schedules c and was entitled to a deduction each year for one-half of the self- employment_tax respondent also disallowed petitioners’ itemized_deductions claimed on schedules a for medical_expenses of dollar_figure claimed for and charitable_contributions of dollar_figure dollar_figure and dollar_figure claimed respectively for and the disallowance of those itemized_deductions increased petitioners’ taxable_income by dollar_figure for dollar_figure for and dollar_figure for the adjustments to petitioners’ total income caused the following computational adjustments the tuition_and_fees_deduction for the student_loan_interest_deduction for the child tax_credits for and and the education credits for and were disallowed in full and the child_tax_credit for was reduced to dollar_figure additionally respondent determined that petitioners were not liable for the alternative_minimum_tax reported for discussion i income loss from activity of buying and selling vehicles mr sada contends that he purchased the vehicles during the years at issue with the purpose of selling them at a profit and properly reported the activity on schedules c of his tax returns for the years at issue he therefore argues that the expenses claimed on the schedules c are deductible to the contrary respondent asserts that mr sada has not established that the expenses were incurred_in_a_trade_or_business within the meaning of sec_162 or for the production_of_income within the meaning of sec_212 respondent asserts that the expenses are personal expenses deductions for which are disallowed by sec_262 a claimed schedule c expenses taxpayers generally may deduct expenses that are ordinary and necessary in carrying_on_a_trade_or_business sec_162 taxpayers also generally may deduct expenses that are ordinary and necessary for the production_or_collection_of_income or the management_conservation_or_maintenance_of_property_held_for_the_production_of_income sec_212 and further while business_expenses and expenses related to income-producing property are currently deductible a taxpayer is not entitled to deduct a capital_expenditure ie an amount_paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate sec_263 but may be allowed a depreciation deduction if the property is used in a trade_or_business or is held_for_the_production_of_income sec_167 see 503_us_79 personal_living_and_family_expenses on the other hand generally may not be deducted to any extent unless otherwise expressly allowed in the code eg state and local real_property_taxes are deductible pursuant to sec_164 sec_262 the prohibitions of sec_262 regarding deductibility of personal expenses take precedence over the allowance provisions of sec_162 and sec_212 418_us_1 66_tc_515 affd 591_f2d_1273 9th cir as stated by the supreme court in 480_us_23 not every income-producing and profit-making endeavor constitutes a trade_or_business t o be engaged in a trade_or_business the taxpayer must be involved in the activity with continuity and regularity and the taxpayer’s primary purpose for engaging in the activity must be for income or profit sec_1_263_a_-2 income_tax regs generally provides the cost of acquisition of property having a useful_life substantially beyond the taxable_year is a capital_expenditure in order to be deductible vehicle expenses must be incurred in the pursuit of a trade_or_business sec_162 expenses_incurred in commuting from a residence to a business or in the course of other personal_use are nondeductible personal expenses sec_262 59_tc_456 similarly automobile depreciation is permitted as a deduction only if and to the extent that the automobile is used in the pursuit of a trade_or_business or for the production_of_income sec_167 the ownership and maintenance of the property must relate primarily to a business or profit-making endeavor rather than a personal purpose 55_tc_94 48_tc_358 if the acquisition and maintenance of property such as an automobile are primarily profit motivated and personal_use is distinctly secondary and incidental deductions for maintenance_expenses and depreciation will be permitted if acquisition and maintenance are motivated primarily by personal considerations deductions are disallowed and if substantial business and personal motives exist allocation becomes necessary 275_f2d_578 7th cir affg tcmemo_1958_104 intl artists ltd v commissioner supra pincite deihl v commissioner tcmemo_2005_287 mann v commissioner tcmemo_1981_684 if allocation is necessary the deduction for allocable business use in such cases is computed by reference to the ratio of time or space devoted to business as compared with total use intl artists ltd v commissioner supra pincite over the years courts have considered a variety of factors in determining the taxpayer’s primary purpose for holding property including the taxpayer’s purpose in acquiring the property and the duration of his ownership the purpose for which the property was subsequently held the taxpayer’s everyday business and the relationship of income from the property to total income the frequency continuity and substantiality of the sales the extent to which the taxpayer used advertising promotion or other activities to increase sales and the time and effort the taxpayer habitually devoted to the sales 417_f2d_905 5th cir 89_tc_467 raymond v commissioner tcmemo_2001_96 neal t baker enters inc v commissioner tcmemo_1998_302 nadeau v commissioner tcmemo_1996_427 tollis v commissioner tcmemo_1993_63 affd without published opinion 46_f3d_1132 6th cir although these factors may aid the finder of fact in determining on the entire record the taxpayer’s primary purpose for holding property they have no independent significance and individual comment on each factor is not necessary or required cottle v commissioner supra pincite see also 615_f2d_171 5th cir hay v commissioner tcmemo_1992_409 mr sada asserts that he purchased the vehicles intending to make a profit by selling them at the manufacturer’s suggested retail price over his employee bargain_purchase price as an experienced new car salesman mr sada had reason to know that a new car purchaser most often can negotiate a price that is less than the manufacturer’s suggested retail price indeed it is not unusual for new car dealers to advertise a promotional price below the manufacturer’s suggested retail price moreover the new vehicles became used once mr sada drove them off the car lot mr sada merely placed for sale signs on the vehicles and did not use any other advertising promotion or other activities to increase sales he made no effort toward and devoted no time to the sales other than driving the vehicles for commuting and other personal purposes mr sada held the vehicles for more than a year and he and mrs sada used the vehicles solely for personal purposes he traded in the used vehicles on new ones and did not sell them to end users the frequency continuity and substantiality of the sales are consistent with usual consumer ownership and do not show a profit-making motive although mr sada may have hoped to make profits on the sales of his vehicles that is not sufficient to convert inherently_personal expenses into deductible business_expenses 36_tc_852 affd 309_f2d_143 5th cir see also finney v commissioner tcmemo_1980_23 because the automobile was used percent of the time for personal reasons any business deductions with respect to that automobile taken on the taxpayers’ joint_return for the taxable years in issue were properly denied under sec_262 we note that had we found that mr sada was in the trade_or_business of selling the vehicles or held them for the production_of_income sec_274 and sec_280f provide further limitations with potential bearing on business-related deductions claimed under sec_162 or sec_167 pursuant to sec_274 no deduction or credit is allowed with respect to any listed_property within the meaning of sec_280f unless the taxpayer substantiates by adequate_records or sufficient evidence corroborating the taxpayer’s own statement the amount of the expense the time and place of the use of the property and the business_purpose of the expense sec_274 vaksman v commissioner 6the purchase of a personal vehicle is analogous to the purchase of a residence although people who buy residential property generally are interested in making a later profitable sale the purchase or construction of a personal_residence generally is not considered a transaction entered into for profit a loss sustained on the sale of residential property purchased or constructed by the taxpayer for use as his personal_residence and so used by him up to the time of the sale is not deductible under sec_165 sec_1_165-9 income_tax regs tcmemo_2001_165 affd 54_fedappx_592 5th cir sec_280f limits the allowable_amount of depreciation for listed_property to a multiple equal to the percentage of actual business use a j concrete pumping inc v commissioner tcmemo_2001_42 sec_1_280f-2t temporary income_tax regs fed reg date pursuant to sec_280f and ii passenger automobiles and any other_property used as a means of transportation are listed_property subject_to the strict substantiation requirements of sec_274 cellular telephones are also listed_property subject_to the strict substantiation requirements of sec_274 mr sada failed to submit any documentation to establish the business use of his cellular telephone similarly mr sada has failed to provide any evidence of a business_purpose for all other expenses claimed on schedules c of petitioners’ income_tax returns for the years at issue accordingly we hold that petitioners are not entitled to deduct any of the expenses claimed on schedules c for those years because mr sada was not in the business of selling cars as a sole_proprietor and did not hold the vehicles for the production_of_income b gross_receipts reported on schedules c respondent disallowed all the expenses claimed on the schedules c but did not make any adjustments to the gross_receipts we have held that mr sada was not in the trade_or_business of selling the vehicles and did not hold the vehicles for the production_of_income consequently mr sada did not have schedule c gross_receipts from his purchase and sale of the vehicles therefore the gross_receipts should be eliminated from the computations of petitioners’ taxes for the years at issue c gain_or_loss on sales of vehicle sec_1 desert sequoia in the amended answer respondent asserts that petitioners must recapture the depreciation on vehicles claimed on schedule c in in the year of the sale of the vehicle ie gain on the sale of the vehicles attributable to depreciation_deductions they claimed on their return is taxable as ordinary_income in the year_of_sale respondent has the burden of proving any new_matter pleaded in the amended answer see rule a canal corp v commissioner t c slip op pincite respondent was uncertain whether the depreciation claimed on petitioners’ return should be recaptured in when the desert sequoia was traded in or when the second sequoia was traded in therefore in the amended answer respondent asserted the full amount of the recapture in each tax_year and motor_vehicle purchase orders from boggus ford dated date and date indicate that mr sada traded in the desert sequoia serial number ending on the gold expedition which he acknowledges he purchased in and he traded in another toyota sequoia with a different serial number ending on the white expedition which he acknowledges he purchased in however mr sada denied owning a sequoia other than the desert sequoia he testified that the depreciation deduction claimed on the return was for the desert sequoia and we so find respondent’s position on brief is that in mr sada is required to recapture as ordinary_income dollar_figure of the depreciation deducted in for the desert sequoia and he is not required to recapture any of the depreciation_deductions in although mr sada was not in the trade_or_business of selling the vehicles and did not hold the vehicles for the production_of_income petitioners must report on their returns for the years at issue any gains mr sada realized on sales of the vehicles when he traded them in for new ones sec_1001 provides that gain from the sale_or_other_disposition of property equals the excess of the amount_realized from the sale over the adjusted_basis in the property sold the amount of gain realized is the excess of the amount_realized over the taxpayer’s adjusted_basis in the property and the amount of loss realized is the excess of the adjusted_basis over the amount_realized sec_1001 for purposes of computing gain_or_loss the amount_realized is defined by sec_1001 as the sum of any money received plus the fair_market_value of the property received furthermore the amount_realized generally includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition 331_us_1 sec_1_1001-2 income_tax regs while the amount_realized by the seller includes the amount of any debt secured_by the property that is assumed by the purchaser settlement charges to the seller used to pay off an existing loan do not increase the amount_realized on the sale of property see kurata v commissioner tcmemo_1997_252 in such an instance the seller has paid the debt there is no cancellation or forgiveness of the indebtedness here boggus ford did not assume the outstanding loans on the old vehicles mr sada effectively paid off the outstanding balances with the trade-in allowances and the new financing for the purchase of the new vehicles the amount_realized by mr sada on the trade-in of the desert toyota was the dollar_figure trade-in allowance he received generally the adjusted_basis of property equals its original cost increased by expenditures properly chargeable to capital_account and decreased by the greater of amounts allowed_or_allowable as depreciation_deductions sec_1011 sec_1012 sec_1016 and thus if the taxpayer claimed depreciation_deductions and the internal_revenue_service did not audit the return or otherwise disallow the deductions the full amounts of depreciation_deductions claimed by the taxpayer decrease the basis in the property even if the deductions were not properly allowable sec_1016 sec_1_1016-3 b income_tax regs mr sada purchased the desert sequoia for dollar_figure in date on form_4562 of his return he reported that it was placed_in_service in and he deducted dollar_figure on schedule c petitioners’ return was not audited and mr sada was allowed a deduction for the depreciation claimed for the desert sequoia on the return thus his basis in the desert sequoia was reduced to dollar_figure dollar_figure - dollar_figure in mr sada received a dollar_figure trade-in allowance towards the purchase_price of the gold expedition thus he realized dollar_figure of gain on the disposition of the desert sequoia in respondent asserts that pursuant to sec_1245 mr sada is required to recognize the dollar_figure gain as ordinary_income in sec_1245 provides for the recapture_of_depreciation as ordinary_income upon the disposition of sec_1245 property as relevant here sec_1245 property includes personal_property which is or has been property of a character subject_to the allowance for depreciation provided in sec_167 sec_167 provides the following general_rule there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear including a reasonable allowance for obsolescence -- of property_used_in_the_trade_or_business or of property_held_for_the_production_of_income we have held that mr sada did not use the vehicles for which he claimed depreciation including the desert sequoia in a trade_or_business or for the production_of_income consequently the desert sequoia is not sec_1245 property nonetheless respondent argues that petitioners must recognize the recapture_income because they treated the desert sequoia as sec_1245 property by claiming depreciation_deductions for it on their return and the period of limitations for has expired so that respondent cannot adjust petitioners’ return by disallowing the improperly claimed depreciation for that year in support of that position respondent cites 854_f2d_755 5th cir affg 87_tc_1087 which applies the duty_of_consistency the duty_of_consistency applies when the taxpayer made a representation or reported an item for federal_income_tax purposes in one year the commissioner acquiesced in or relied on that representation or report for that year and the taxpayer attempts to change that representation or report in a subsequent year after the period of limitations has expired with respect to the year of the representation or report and the change is detrimental to the commissioner 103_tc_525 affd 100_f3d_778 10th cir see also herrington v commissioner supra pincite when these requirements are met the commissioner may treat the previous representation by the taxpayer as true although in fact it is not herrington v commissioner supra pincite the duty_of_consistency is an affirmative defense raised by respondent and respondent has the burden of showing that it applies see rule a respondent did not raise the duty_of_consistency as an affirmative defense in the amended answer but merely alluded to it in respondent’s opening brief by citing herrington moreover as discussed below respondent has not shown that the third requirement has been met and thus has not met his burden of establishing that the duty_of_consistency applies on form_4562 of petitioners’ return mr sada reported that depreciable_property was placed_in_service in and he claimed a depreciation deduction of dollar_figure on schedule c thus the first requirement is met the commissioner acquiesces or relies on a representation of the taxpayer when the taxpayer files a return that contains an inadequately disclosed item and the commissioner accepts that return and allows the period of limitations to expire without an audit of that return herrington v commissioner supra pincite petitioners’ return was not audited and mr sada was allowed a deduction for the depreciation claimed for the desert sequoia on the return thus the second requirement is also met however mr sada never took an inconsistent_position with respect to his activity of buying and selling the vehicles petitioners’ return claimed depreciation for property placed_in_service before when respondent audited petitioners’ return respondent disallowed that depreciation deduction the return put respondent on notice that mr sada likely claimed depreciation for that property on his return respondent has not established that the period of limitations for assessing additional tax for had expired when the audit of petitioners’ return was completed because respondent did not raise the duty_of_consistency as an affirmative defense in the amended answer and has not met the burden of establishing that the duty_of_consistency applies in this case we hold that mr sada is not subject_to the recapture provisions of sec_1245 mr sada purchased the desert sequoia in date and disposed of it in date the gain he realized is taxable in as long-term_capital_gain and not as ordinary_income see sec_1222 other vehicles the record establishes that the trade-in allowances mr sada received for all of the vehicles was less than the amounts he paid for them mr sada has not been allowed the depreciation_deductions he claimed on the vehicles except for the depreciation_deductions he claimed for the desert sequoia on petitioners’ return consequently mr sada realized losses on the other vehicles when he traded them in sec_165 generally allows a deduction for any loss sustained during the taxable_year that is not compensated by insurance or otherwise however in the case of an individual sec_165 limits deductible losses that are not incurred either in a trade_or_business or a transaction entered into for profit to losses arising from fire storm shipwreck or other_casualty or from theft a loss sustained on the sale of a vehicle used exclusively for personal_use is not deductible pursuant to sec_165 and petitioners may not deduct mr sada’s losses on the vehicles ii self-employment taxes respondent determined that mr sada was liable for self- employment_tax on the gross_receipts he reported on the schedule c for each year at issue and allowed petitioners a deduction for half of those taxes we have held that those gross_receipts are not included in mr sada’s income consequently he is not subject_to self-employment taxes on the gross_receipts reported on the schedules c for the years at issue iii medical_expenses respondent disallowed petitioners deduction for medical_expenses of dollar_figure claimed on schedule a of their return sec_213 allows a deduction for expenses paid during the taxable_year for medical_care that are not_compensated_for_by_insurance_or_otherwise and to the extent that such expenses exceed percent of adjusted_gross_income for petitioners reported total medical_expenses of dollar_figure and adjusted_gross_income of dollar_figure their adjusted_gross_income for is increased by dollar_figure to dollar_figure for the disallowed net_loss claimed on schedule c for that year consequently if petitioners had substantiated the amount of medical_expenses they paid in they could have deducted only medical_expenses in excess of dollar_figure at trial mr sada produced receipts and statements regarding medical services provided to him and his family during the years at issue he provided explanations of benefits from mutual of omaha for and most of and from american administrative group for the end of and all of the explanations of benefits indicate that the medical insurance was provided through mrs sada’s employment the mutual of omaha explanations of benefits show that mrs sada and the rest of the sada family were also covered by another insurance carrier and show the amount of the claim paid_by coinsurance the explanations of benefits from american administrative group did not show the amount_paid by coinsurance mr sada did not provide the court with the other carrier’s explanation of benefits of the two dozen receipts for all but two were for dollar_figure or less one receipt was for dollar_figure a receipt dated date from a surgeon indicates that mrs sada paid a dollar_figure cash deposit for surgery on date her insurance company’s explanation of benefits shows a claim totaling dollar_figure for services provided by that surgeon to mrs sada on date the explanation states that the claim was being denied because it was filed late petitioners did not provide an explanation of benefits from the coinsurance or a statement of mrs sada’s account from the surgeon although mr sada produced the receipt for the cash deposit for the surgery as well as receipts for smaller amounts that he or mrs sada paid in cash for medical services on other dates he did not provide a receipt from the surgeon or a canceled check showing that petitioners had in fact paid any or all of the dollar_figure he did not provide any evidence of cash withdrawals used to pay the bill and the bank records mr sada produced did not show any cash withdrawals large enough to pay the bill accordingly we hold that petitioners have failed to substantiate that they paid medical_expenses in excess of percent of their adjusted_gross_income for iv accuracy-related_penalties initially the commissioner has the burden of production with respect to any penalty addition_to_tax or additional_amount sec_7491 the commissioner satisfies this burden of production by coming forward with sufficient evidence that indicates it is appropriate to impose the penalty see 116_tc_438 once the commissioner satisfies this burden of production the taxpayer must persuade the court that the commissioner’s determination is in error by supplying sufficient evidence of an exception id respondent determined an accuracy-related_penalty against petitioners under sec_6662 for each of the years at issue sec_6662 and b imposes a penalty in an amount equal to percent of the portion of the underpayment attributable to negligence or disregard of rules or regulations negligence includes any failure by the taxpayer to make a reasonable attempt to comply with the provisions of the internal_revenue_code to keep adequate books_and_records or to substantiate items properly see c sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard sec_6662 disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule_or_regulation sec_1_6662-3 income_tax regs a taxpayer is not liable for the penalty if he shows that he had reasonable_cause for the underpayment and that he acted in good_faith sec_6664 respondent has established that there is an underpayment_of_tax for each of the years at issue attributable to unsubstantiated itemized_deductions claimed on schedules a and net losses claimed on schedules c for mr sada’s purchases and sales of vehicles that petitioners used solely for personal purposes petitioners failed to maintain and produce adequate_records to substantiate the deductions they claimed on the schedules a and c the records they produced were incomplete and thus misleading the law is clear that deductions for vehicles used solely for personal purposes are not allowed accordingly respondent has met the burden of production with respect to the accuracy-related_penalty for each year at issue sec_6664 provides that the sec_6662 penalty shall not apply to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and the taxpayer acted in good_faith whether a taxpayer acted with reasonable_cause and in good_faith is determined on a case-by-case basis taking into account all relevant facts and circumstances including the taxpayer’s experience knowledge and education sec_1_6664-4 income_tax regs generally the most important fact is the taxpayer’s effort to assess the proper liability id reliance on a tax professional may demonstrate that the taxpayer had reasonable_cause and acted in good_faith where the taxpayer establishes that the adviser was a competent professional with sufficient expertise to justify the taxpayer’s reliance the taxpayer provided the adviser with necessary and accurate information and the taxpayer actually relied in good_faith on the adviser’s judgment 133_tc_112 115_tc_457 113_tc_135 petitioners have not established that their reliance on their return preparer was reasonable or in good_faith first petitioners presented no evidence with respect to their return preparer’s experience or qualifications petitioners’ return preparer attended the trial but did not testify mr sada stated that the return preparer was neither an accountant nor an enrolled_agent second petitioners did not establish that they provided necessary and accurate information to the return preparer particularly regarding the purchases and sales of the vehicles petitioners presented no evidence regarding what if anything mr sada discussed with the return preparer finally petitioners did not establish that they actually relied in good_faith on the return preparer’s judgment mr sada hired him because he came highly recommended mr sada initially testified that his return preparer had been recommended to him by more than a thousand people but later reduced the number to a couple dozen people however mr sada knew nothing of the preparer’s qualifications except that he has a license to be in business as a tax preparer and has prepared thousands of income_tax returns for people mr sada did not investigate whether his return preparer was a certified_public_accountant mr sada did not establish that his return preparer was a competent professional with sufficient expertise to justify his reliance on him petitioners did not seek professional advice from an accountant or an attorney they have not shown that they acted with reasonable_cause or made a good_faith effort to properly report their taxes for the years at issue accordingly we hold that petitioners are liable for the accuracy-related_penalties under sec_6662 for and we have considered all arguments made and to the extent not mentioned we conclude they are moot irrelevant or without merit to reflect the foregoing and the concessions of the parties decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date contact person date date identification_number telephone number uniform issue list employer_identification_number dear this is in response to your request for a ruling that certain proposed contractual agreements you have with charitable_remainder trusts the trusts will not generate unrelated_business_taxable_income to you under sec_512 you are exempt under sec_501 as an organization described in sec_501 and have been classified as an educational_organization under sec_509 and sec_170 you are the trustee of trusts and as trustee you are the legal owner of the trusts’ assets you do not assess a trustee’s fee or any other fee for the administrative services you provide to the trusts in addition you have a sole charitable_remainder interest in of of the trusts as a result of the relationship with the trusts as both trustee and beneficiary you have a substantial interest in the value of each trust moreover the donors to the trusts have funded the trusts with the intention that you benefit substantially from the remainder value of the trusts and that the trusts’ assets will be managed to achieve the greatest possible return on investment your endowment is invested in a diversified manner with investments in nontraditional assets such as private equity real_estate and natural_resources and other marketable alternatives as well as more standard asset classes including u s and international stocks and bonds real_estate_assets and certain other alternative investments are undertaken primarily through partnership structures much of the income earned by the endowment consists of passive_income including dividends interest and long and short-term_capital_gains but some income is debt-financed or otherwise is treated as unrelated_business_taxable_income i you propose to create a contractual obligation pursuant to which you would issue a contract right to each of the trusts for a proportionate share or unit of your endowment the value of the units would equal the value of the endowment units held by your various restricted and unrestricted funds the contract right would entitle the trusts to receive periodic_payments based on the number of units owned the trusts would thereby be able to receive an investment return equal to that of the endowment you determine a distribution rate on the endowment each year based in part on the endowment’s investment performance you calculate the market_value of each endowment unit on a monthly basis the market_value of each endowment unit initially equals the total value of the endowment investments divided by the number of outstanding units and is subsequently adjusted in accordance with the market_value of the endowment each fund is entitled to an amount equal to the distribution rate multiplied by the number of units it holds you seek to enable the trusts to invest in the endowment in a manner identical to your restricted and unrestricted funds a_trust would acquire a unit in the endowment which would give it a contractual right against you but no interest whatsoever in the underlying investment_assets of the endowment the contract between the trusts and you would provide that the price of the units would equal their value at the time of acquisition the units would have the same value that you use for internal accounting purposes you will not charge a fee for internal management costs of the trusts’ assets although you may recover your actual costs of management of the endowment as a charge against total return the contract would provide that each trust would receive payments on the units held by it based on the distribution rate you establish for the endowment with payouts made monthly a_trust could choose either to reinvest part of the payout or redeem additional units depending on its cash requirements the trusts will treat payouts as ordinary_income regardless of the character of the underlying income of the endowment whether capital_gain ordinary_income or return_of_capital and regardless of whether the payout is made entirely by distributions of income or in part by redemptions of units the trusts will treat redemptions of units over and above receipt of the distribution amount as generating long or short-term_capital_gain or loss depending on the holding_period of the redeemed units under the contract a_trust would not have any ownership_interest in the underlying assets of the endowment or any contract rights with respect to the other trusts the trusts would have no power or right of any kind to control direct supervise recommend or review your business activities operations or decisions with respect to the endowment except the right to review the payout computations they would not have the right to veto or opt_out of any of the underlying endowment investments the contract would provide that with respect to the issuance of units you are neither a partner nor an agent of the trusts the trusts would never be liable for any cost expense or payment incurred by you or for which you are liable or responsible relating to the endowment or the underlying endowment assets and you would indemnify and hold the trusts harmless from and against any liability arising out of any_action or inaction by you with respect to the endowment or the underlying endowment assets you have requested the following ruling the issuance of units by you to the trusts the making or receipt of payments with respect to the units and the holding and redemption of the units will not generate unrelated_business_taxable_income to you section dollar_figure of revproc_2011_4 provides that the service will not issue letter rulings pertaining to unrelated_business_income_tax issues arising when charitable_lead_trust assets are invested with charitable organizations thus the word trusts as used in this letter refers only to your charitable_remainder trusts and the ruling issued by this letter relates only to the participation by your charitable_remainder trusts in your endowment law r c sec_511 in part imposes a tax on the unrelated business taxabie income of organizations described in sec_501 ilr c sec_512 defines the term unrelated business taxable income’ as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in sec_512 sec_512 sets forth so-called modifications which are excluded from the computation of unrelated_business_taxable_income these modifications include dividends interest royalties rent from real_property and gain from the sale of property r c sec_513 defines the term unrelated trade or business’ as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_purpose or function sec_513 provides that the term trade or business’ includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 is includible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 provides that for purposes of r c sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 provides that in determining whether trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of sec_512 regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued for example specific business activities of an exempt_organization will ordinarily be deemed to be regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of non-exempt organizations sec_1_513-1 provides that in general gross_income derives from unrelated_trade_or_business within the meaning of r c sec_513 if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question -- the activities that is of producing or distributing the goods or performing the services involved -- and the accomplishment of the organization's exempt purposes sec_1_513-1 provides that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes and is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved revrul_69_528 1969_2_cb_127 describes an organization that was formed to provide investment services on a fee basis exclusively to organizations exempt under sec_501 it receives funds from the participating exempt_organizations invests in common stocks reinvests income and realized appreciation and upon request liquidates a participant's interest and distributes the proceeds to the participant the rev_rul states that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit if the services were regularly provided by one tax-exempt_organization for other tax-exempt organizations such activity would constitute unrelated_trade_or_business the rev_rul holds that the organization is not exempt under r c sec_501 as noted previously organizations described in sec_501 are subject_to tax on their unrelated_business_income under sec_511 subject_to the unrelated_business_income_tax three requirements must be met the income must be from a trade_or_business the trade_or_business must be regularly carried on and the conduct of the trade_or_business must not be substantially related to the organization's exempt_purpose or function see sec_1_513-1 in order for such an organization's income to be analysis you propose to enter into a contractual relationship with certain trusts that are charitable_remainder trusts in which you have an interest as a beneficiary and serve as trustee of the trusts under such a contractual relationship each trust would receive payments on the units held by it based on the distribution rate you establish for your endowment with payouts made monthly each trust would acquire units from your endowment which would give the trusts a contractual right against you but no interest whatsoever in the underlying investment_assets of the endowment the contract between the trusts and you would provide that the price of the units would equal their value at the time of acquisition the units would have the same value that you use for internal accounting purposes consequently a_trust could choose either to reinvest part of the payout or redeem a portion of the units depending on its cash requirements thus under the contractual relationship with you the trusts would have a right to the payout declared by you plus the right to redeem the units at the value that you use for internal accounting purposes generally an organization that otherwise qualifies for recognition of exemption under sec_501 and provides investment services on a regular basis for a fee to other exempt or nonexempt organizations would be engaged in an unrelated_trade_or_business under sec_513 see revrul_69_528 supra such an activity would constitute a trade_or_business under sec_513 and sec_1_513-1 and would be regularly carried on under sec_512 and sec_1_513-1 thus if you charged a fee for investment management services provided to organizations unrelated to you or generated income from the management of the funds invested by such organizations these activities could result in unrelated_business_taxable_income under sec_512 here however you are not charging a fee for services and not otherwise receiving income from the services provided to the trusts thus under these circumstances you will not receive unrelated_business_taxable_income under sec_512 the fact that you will engage in the investment activity largely for your own benefit as the remainder beneficiary limits the scope of the service provided to others and distinguishes it from a commercial venture in view of the foregoing we rule as follows the issuance of units from you to the trusts the making or receipt of payments with respect to the units and the holding and redemption of the units will not generate unrelated_business_taxable_income to you this ruling is based on the assumption that you will not charge any fee for managing the investment of the trusts in your endowment and that you will not assess a trustee's fee with respect to the administration of the trusts you may contract with third party management firms that charge a fee and receive reimbursement of expenses for management services provided to your endowment these fees and expenses may be charged against the aggregate return of the endowment and be reflected indirectly in the payout to the trusts and others participating in the endowment this ruling is based on the understanding that there will be no material changes in the facts upon which it is based we express no opinion as to the tax consequences of the proposed transaction under any other section of the code pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives a copy of this letter should be kept in your permanent records this ruling is directed only to the organization that requested it that it may not be used or cited by others as precedent r c sec_6110 provides if there are any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely manager exempt_organizations technical group enclosure notice cc