t c memo united_states tax_court raymond f kling and barbara k kling petitioners v commissioner of internal revenue respondent docket no filed date james a amodio and stephen l kadish for petitioners herbert w linder for respondent memorandum findings_of_fact and opinion parr judge respondent determined deficiencies in petitioners’ and federal income and self-employment taxes and accuracy-related_penalties as follows accuracy-related_penalty year deficiency sec_6662 a dollar_figure dollar_figure dollar_figure big_number ‘respondent determined a deficiency of dollar_figure in federal_income_tax and dollar_figure in self-employment_tax respondent determined a deficiency of dollar_figure in federal_income_tax dollar_figure in self-employment_tax and an earned_income_credit recapture of dollar_figure the issues for decision are whether petitioners had unreported net_income from a sports memorabilia activity in the amounts of dollar_figure in and dollar_figure in whether petitioners are liable for self-employment_tax on the net_income from the sports memorabilia activity whether petitioners are liable for the accuracy-related_penalties under sec_6662 and whether petitioner barbara kling is eligible for relief under sec_6015 with respect to any understatement_of_tax attributable to the sports memorabilia activity findings_of_fact a background some of the facts have been stipulated and are so found the stipulation of facts the supplemental stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners raymond f kling raymond and barbara k kling barbara resided in cleveland ohio when their petition was - - filed petitioners have been married to each other for more than years and have four adult children although petitioners had saved some money for their children's education all the children have paid for their own undergraduate and postgraduate schooling petitioners purchased their house over years ago for dollar_figure at the time of the trial in this case the house had a value of approximately dollar_figure and was subject_to a dollar_figure mortgage for many years petitioners maintained a joint bank account in both their names at the national city bank the account had the same address as their residence and the monthly bank statements were sent to that address they closed the national city bank account in date and did not maintain a personal checking account for the remainder of and all of eventually barbara opened an account in her own name at the time of the trial in this case raymond did not own any other real_property did not own any stocks or bonds and did not have a pension_plan or ira raymond has collected baseball cards since he also collects stamps coins guns sports memorabilia typewriters ’ movie posters autographs and pictures every year he takes big_number to big_number photographs of the cleveland indians at spring training he has more than a million cleveland browns programs ‘raymond has collected over old typewriters manufactured from the turn of the century to the 1950's the average cost of a typewriter is dollar_figure he has given away three typewriters but has never sold a typewriter q4e- and cleveland indians programs ’ raymond goes to flea markets five or six times a week he attends baseball card shows once or twice a month raymond does not have a booth to sell cards at the shows but he trades buys and sells cards at the shows over the years raymond created a cash hoard primarily from periodic sales of his memorabilia for about years raymond has stored most of the items he has collected in part of an old building the warehouse although raymond displayed some of his sports cards and collectibles in the front part of the warehouse most of the items were in disorganized piles the warehouse is known as ohio hobby dealers supply raymond pays dollar_figure per month rent for the warehouse in addition to the warehouse the building also houses a gym a travel agency amission and a print shop raymond also stores some of his memorabilia in an old church building that he rents from st vladimir's he began renting with a 3-year option to purchase from st vladimir's in or he paid from dollar_figure to dollar_figure per month for rent and dollar_figure for the option to purchase at the end of the 3-year option period raymond did not purchase the building and forfeited the dollar_figure raymond did not deduct on his income_tax returns the rent paid for any site where the items he has collected were stored raymond used to clean out cleveland stadium after every game he would collect all of the unused scorecards and programs - - from to raymond owned a one-third interest ina corporation that owned four video stores in the stores closed because they could not compete with larger video stores such as blockbuster except for his sports memorabilia activity raymond was not otherwise employed from until in barbara attended college full time paying for her schooling with student loans she began working as a teacher in date in order to supplement their income to cover living_expenses incurred from through petitioners refinanced their house maximized their credit card balances and used money they had saved for their children's educations although some of petitioners' personal expenses were paid out of the national city bank account raymond paid most of petitioners' living_expenses with cash in raymond made a dollar_figure profit from an autograph session with jim brown raymond bought and sold sports memorabilia sports memorabilia supplies and other collectibles during and raymond did not maintain any books_or_records including inventory records regarding the sales and purchases of these items in raymond traded baseball cards for an automobile worth dollar_figure in raymond paid dollar_figure for a motor home and then sold the motor home a few months later for the same amount b david j morova raymond and david j morova morova are friends who met through their dealings in sports memorabilia raymond helped morova start a small retail business called davey's cards comics and collectibles davey's cards raymond and morova initially intended to operate the store as a partnership raymond helped morova obtain a vendor's permit and tax id number stocked the store with hobby supplies and provided the store with a few video games morova put in his comic book and card collections the store opened in late date sometime thereafter raymond and morova agreed that the store would be morova's alone during the first year of operation davey's cards was the only store in the area morova was able to pay the bills and build up his stock after the first year at least four additional stores opened within miles of davey's cards about the same time card packs became more expensive as a result the business slowly died raymond and morova agreed that all income from the operation of davey's cards belonged to morova and morova reported the income on his federal_income_tax returns c ameritrust account during and raymond and morova had signature_authority over an ameritrust checking account titled davys dba ohio hobby dealers supply the ameritrust account bank statements for the ameritrust account were mailed to davey's cards morova then delivered the statements to raymond's warehouse raymond was the only person who wrote checks drawn on the ameritrust account morova did not sign any checks on the ameritrust account morova did use the ameritrust account to receive money for credit card sales made by davey's cards raymond gave morova supplies in exchange for the amounts deposited into the ameritrust account from credit card sales at davey's cards except for those supplies received from raymond morova did not use the account to pay any expenses from his retail store d buyers group raymond and a group of dealers formed a buying group to purchase supplies and merchandise in bulk the buyers group raymond would solicit orders from the other members place the order with a distributor and pick up the order he usually collected the money from the members of the group as they picked up their portion of the supplies --- - raymond rented space in a building in hartville ohio some members of the buying group would pick up their supplies at the hartville site because it was closer than the warehouse one of raymond's friends john lauderdale bought and sold cards at the hartville site and took care of the pickups at that site ohio coin is a wholesale_distributor of baseball cards coin supplies and related products in the collectible industry ohio coin sells to small distributors dealers and to a lesser degree the public ohio coin's prices are percent cheaper than other suppliers in the state customers receive an additional percent discount if they pick up a skid of product to get the 3-percent discount customers of ohio coin such as raymond's buyers group combine orders and then distribute the product among themselves the round trip from ohio coin to cleveland was approximately miles in instead of spending a whole day to pick up orders from ohio coin raymond purchased a van for lewis miller an employee of ohio coin the van was titled in mr miller's name and mr miller was the owner of the van mr miller used the van to pick up and deliver the items raymond's group purchased from ohio coin raymond purchased the van from cumba motors for dollar_figure a check in the amount of dollar_figure drawn on the ameritrust account was made payable to cumba motors the balance a skid is approximately by feet and two skids will fill a van - of the purchase_price was made with cash the vehicle experienced a transmission problem and raymond paid dollar_figure to custom trans inc for the repair in about june or date raymond purchased products from ohio coin he arranged to pay for the products over time and gave ohio coin a series of to checks for dollar_figure each to be negotiated on a monthly basis beginning in date the checks did not clear the bank ohio coin accepted most of the products back for about one-half the price ohio coin sold approximately dollar_figure of screw-downs to raymond for dollar_figure each the deal for which raymond bought the screw-downs fell through and ohio coin bought the product back for approximately dollar_figure each eb carl dietz and megacards carl dietz dietz owns a sports memorabilia shop called sports of sorts raymond lent dietz money to purchase photographs as of date dietz owed raymond dollar_figure for amounts raymond had lent him during the summer of raymond and dietz attended a national convention in anaheim california raymond helped dietz sell a photograph to megacards for dollar_figure raymond received dollar_figure from the sale - raymond sold certain photographs to megacards for the aggregate amount of dollar_figure during the photographs were owned by mr dietz and a friend of his al gouley raymond had lent mr dietz money to purchase the photographs when megacards purchased the photographs it paid the purchase_price by a dollar_figure wire transfer on date to the ameritrust account and by a dollar_figure check made payable to raymond and deposited into the ameritrust account raymond returned dollar_figure of the purchase_price to either steve juskewycz or megacards raymond also paid mr dietz dollar_figure raymond made a commission on the sale ff frank's wholesale in date raymond sold memorabilia known as baseball gross-outs and awesome all-stars for dollar_figure to frank's wholesale owned by frank sustar sustar sustar gave raymond dollar_figure in cash and the cash was put in a paper bag on date barbara deposited the cash into petitioners' national city bank account at raymond's request raymond also deposited checks from frank's wholesale totaling dollar_figure into the ameritrust and national city bank accounts steve juskewycz was the owner or president of megacards g sales from raymond's private collection james amodio james amodio purchased sports memorabilia and other collectibles from raymond during the years at issue two checks signed by james amodio made payable to raymond in the amounts of dollar_figure and dollar_figure were deposited into the ameritrust account on date and date respectively john cadier in raymond sold a baseball card to john cadier for dollar_figure the purchase_price was deposited into the ameritrust account robert koehler in raymond sold baseball photos to robert koehler for s400 the purchase_price was deposited into the ameritrust account thomas jurcak in raymond sold a baseball to thomas jurcak for dollar_figure the dollar_figure was deposited into the ameritrust account h petitioners and federal_income_tax returns petitioners filed their joint federal_income_tax returns for the taxable years and on their return petitioners reported total income of dollar_figure on schedule d capital_gains_and_losses of the return petitioners reported gain from two sales of photos they reported dollar_figure -- gain from a date sale of a photo with zero basis for dollar_figure and a date sale of photos acquired on date with zero basis for dollar_figure on their return petitioners reported total income of dollar_figure they reported dollar_figure of form 1099-misc income from topps co dollar_figure from barbara's form_w-2 income from teaching and dollar_figure of interest_income i reconstruction_of_income an internal revenue_agent of the internal_revenue_service audited petitioners' and returns the agent reconstructed petitioners' income using the bank_deposits method income a ameritrust account in gross deposits of dollar_figure were deposited into the ameritrust account of that amount dollar_figure was attributable to sales paid_by credit card at davey's cards in exchange for which morova received dollar_figure of supplies from raymond additionally there were dollar_figure in miscellaneous bank charges lease payments on the credit card machine used by davey's card and charges for deposited items returned for insufficient funds checks written and paid on the ameritrust account for which respondent allowed a deduction for purchases made during were as follows payee amount lawrence machine dollar_figure midwest sport cards dollar_figure sport design products dollar_figure tuff stuff dollar_figure ohio coin dollar_figure edgewater book dollar_figure matthew zechman co dollar_figure matthew zechman dollar_figure good deal dollar_figure river city traders dollar_figure cj's extra inning dollar_figure ultra media corp dollar_figure unique vinyl dollar_figure extra base sports dollar_figure b o wholesale dollar_figure f a f c dollar_figure baseline dollar_figure b b sports cards dollar_figure chris' cards dollar_figure john lauderdale dollar_figure ron shedlock dollar_figure beckett dollar_figure myron swirynsky dollar_figure ameritrust dollar_figure don gries dollar_figure steve levine dollar_figure david morova dollar_figure tom dyschuk dollar_figure eric lawrence dollar_figure joey ebacobacci dollar_figure jim stepanik dollar_figure stefan juskewycz co dollar_figure cash’ dollar_figure cash dollar_figure cash‘ dollar_figure cash dollar_figure ‘ ohio coin indicated on memo section of check two checks payable to cash were negotiated by franks wholesale check negotiated by dave morova check negotiated by richard cook check negotiated by john lauderdale respondent allowed deductions as rent expenses paid during for checks written and paid on the ameritrust account as follows payee bxpense amount st vladimirs rent dollar_figure edith rosch rent big_number respondent did not allow any deductions for the following additional_amounts paid from the ameritrust account in payee amount debra bradley dollar_figure raymond dollar_figure bob kelly dollar_figure ray duffy dollar_figure fred pachasa dollar_figure o u p a dollar_figure jim mitchell dollar_figure maintenance engineering ltd dollar_figure anna fox dollar_figure dan eberhardt dollar_figure james brznack dollar_figure jennifer kling dollar_figure wade carsel dollar_figure carl dietz dollar_figure cash’ dollar_figure cash dollar_figure cash’ dollar_figure john pepera dollar_figure thomas j bowers dollar_figure cash’ dollar_figure ‘ohio union of patrolman's association commons indicated on memo section of check sam's club indicated on memo desert storm indicated on memo b national city bank account from date until the account was closed in date gross deposits of dollar_figure were deposited into the national - - city bank account of that amount dollar_figure was transferred by check from the ameritrust account and dollar_figure represents amount received as gifts in the following amounts were paid from the national city bank account for petitioners' personal expenses payee amount c p p a dollar_figure student travel service dollar_figure west american insurance co dollar_figure rast ohio gas dollar_figure old brooklyn youth league dollar_figure tom ballog dollar_figure trinity high school dollar_figure college-level exam program dollar_figure oriental trading co dollar_figure lake erie girl scout council dollar_figure internal_revenue_service dollar_figure treasure of state of ohio dollar_figure central collection agency dollar_figure college scholarship service dollar_figure our lady of good counsel dollar_figure cleveland public power dollar_figure ‘cleveland patrolmen's association checks written and paid on the national city bank account for which respondent allowed a deduction for purchases made during were as follows payee amount m zechman midwest sports cards jim beckett lawrence machine big_number ron shedlock big_number ohio coin big_number gateway cards beckett big_number -- - the following additional_amounts were paid from the national city bank account in payee amount bob kelly dollar_figure jim wilson dollar_figure first card dollar_figure manufacturers hanover dollar_figure evelyn johanson dollar_figure wholesale club dollar_figure sam's club dollar_figure cash dollar_figure during miscellaneous bank charges and returned check fees of dollar_figure were debited charged against the national city bank account c irs determination for the internal revenue_agent determined raymond's gross_income from the sale of sports memorabilia and supplies for as follows ameritrust deposits dollar_figure less misc expenses big_number national city bank_deposits big_number less misc expenses total big_number the agent further determined that petitioners' income should be increased by dollar_figure computed as follows gross_receipts dollar_figure purchases big_number rent big_number self-employment_tax adjustment big_number total big_number a ameritrust star bank account during the first months of gross deposits of dollar_figure were deposited into the ameritrust account miscellaneous bank charges and deposited items returned for insufficient funds totaling dollar_figure were charged to the ameritrust account in during a total of dollar_figure attributable to credit card purchases from davey's cards was directly deposited into the ameritrust account morova received dollar_figure of merchandise from raymond in exchange for the deposits from the credit card sales sometime in date ameritrust was acquired by star bank and the ameritrust account became the star bank account in the latter part of gross deposits of dollar_figure were deposited into the star bank account respondent allowed a deduction for purchases for checks written and paid on the ameritrust star bank account during as follows payee amount ohio coin’ dollar_figure ohio coin dollar_figure ron shedlock’ dollar_figure megacards dollar_figure master printing co dollar_figure pro sport dollar_figure lawrence machine dollar_figure unique vinyl dollar_figure premier sportscards dollar_figure -- - of the amount_paid to ohio coin checks totaling dollar_figure were dishonored and should not be included in purchases paid in of the amount_paid to ron shedlock checks totaling dollar_figure were dishonored and should not be included in the purchases paid in respondent allowed a deduction for rental expenses for checks written and paid on the ameritrust star bank account during as follows payee bxpense amount st vladimirs rent dollar_figure edith rosch rent big_number the following additional_amounts were paid from the ameritrust star bank account in payee amount barbara kling dollar_figure ccpl john banville custom tran inc ’ eric lawrence big_number bill clay big_number raymond big_number cash big_number john houlihan big_number david houlihan big_number ‘cuyahoga county public library repair of vehicle raymond purchased from cumba motors in because of insufficient funds checks written or presented for payment after date on the ameritrust star bank account were not honored miscellaneous bank charges and returned check fees of dollar_figure were debited charged against the star bank account during b irs determination for the internal revenue_agent determined petitioners gross_income from raymond's sale of sports memorabilia and supplies for as follows ameritrust deposits dollar_figure less misc expenses big_number star bank_deposits big_number total big_number the agent did not reduce the gross_income to reflect the dollar_figure miscellaneous expenses from the star bank account the agent determined that petitioners' income should be increased by dollar_figure computed as follows gross_receipts dollar_figure purchases big_number rent big_number self-employment_tax adjustment big_number total big_number of the dollar_figure allowed for purchases checks totaling dollar_figure were dishonored due to insufficient funds j barbara kling barbara knew that raymond bought and sold sports memorabilia during the years at issue that he stored the memorabilia at the warehouse and at st vladimir's and that he maintained the ameritrust and star bank accounts - - opinion issue l whether petitioners had unreported net_income from a sports memorabilia activity in the amounts of dollar_figure in and dollar_figure in gross_income includes income derived from business see sec_61 gross_income is construed broadly to include all accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 30_f3d_1077 9th cir every person subject_to income_tax is required to keep books_and_records that establish the amount of gross_income and deductions shown by that person on his or her income_tax return see sec_6001 sec_1 6001-l1 a income_tax regs when a taxpayer fails to keep adequate_records the commissioner is authorized to determine the existence and amount of the taxpayer's income by any method that clearly reflects income see sec_446 348_us_121 695_f2d_145 5th cir 394_f2d_366 5th cir affg t ccc memo the reconstruction_of_income need only be reasonable in light of all surrounding facts and circumstances see 116_f3d_1309 9th cir 54_tc_1530 40_tc_30 --- - the commissioner has latitude in determining which method of reconstruction to apply when taxpayers fail to maintain adequate_records see 92_tc_661 once the commissioner has reconstructed a taxpayer's income the burden is on the taxpayer to demonstrate that the commissioner's determination is excessive see mallette bros constr co v united_states supra giddio v commissioner supra pincite the records maintained by petitioners are insufficient to permit an accurate computation of their income_tax_liability for the years in issue respondent reconstructed petitioners income using the bank_deposits method the bank_deposits method is an accepted method of income reconstruction when a taxpayer has inadeguate books_and_records and large_bank deposits see 96_tc_858 affd 959_f2d_16 2d cir 94_tc_654 70_tc_1057 64_tc_651 affd 566_f2d_2 6th cir in a bank_deposits reconstruction of the taxpayer’s income the commissioner’s agents review and analyze the taxpayer’s bank records for the years in issue bank_deposits are prima facie evidence of income see 102_tc_632 absent some explanation a taxpayer’s bank_deposits -- - represent taxable_income the total of all deposits is determined by the commissioner for each year in question to arrive at the taxpayer’s gross_income an adjustment is then made to eliminate deposits that reflect nonincome items such as gifts loans and transfers between the taxpayer’s various bank accounts the commissioner will also make a further adjustment for the taxpayer’s ascertainable business_expenses deductions and exemptions see 241_f2d_225 9th cir where respondent has employed the bank_deposits method in his determination of the deficiencies the burden_of_proof rests with petitioners to show that such determination is erroneous see rule a estate of mason v commissioner supra pincite 54_tc_1121 respondent need not prove a likely source for the unreported income see estate of mason v commissioner supra nor is he required to prove that all deposits constitute taxable_income see 46_tc_821 the taxpayer has the burden of proving that the bank_deposits came from a nontaxable source see rule a clayton v commissioner supra estate of mason v commissioner supra sproul v commissioner tcmemo_1995_207 additionally the taxpayer bears the burden_of_proof in substantiating claimed deductions see patton v commissioner f 2d 5th - - cir affg tcmemo_1985_148 c a white trucking co v 601_f2d_867 5th cir affg tcmemo_1977_6 therefore petitioners were required to substantiate claimed deductions for cost_of_goods_sold in excess of the amount respondent allowed see eg manning v commissioner tcmemo_1995_408 wright v commissioner tcmemo_1993_27 danner v commissioner tcmemo_1992_385 chagra v commissioner tcmemo_1991_366 affd without opinion 990_f2d_1250 2d cir a petitioners' initial arguments petitioners argue that raymond did not make any profit from his activity they assert that the members of the buyers group paid the same amount for the supplies that raymond had paid to acquire the goods respondent's agent confirmed that raymond sold the goods to the buyers group at cost petitioners argue that since raymond did not make a profit from the buyers group activity there was no income omitted on their returns the flaw with petitioners' argument however is that raymond used the checking accounts for other transactions besides the buyers group purchasing activity for example although the transaction with dietz and megacards was unrelated to the bulk buying for the buyers group raymond deposited the payment from megacards into and paid dietz from the ameritrust account it is also apparent to the court that raymond used the -- - accounts for transactions related to his private collection raymond attended flea markets five or six times a week and baseball card shows once or twice a month he traded bought and sold cards at the shows because he often used the money from sales to purchase other items raymond erroneously believed that he did not have taxable_income from this activity thus petitioners did not report any income from sales related to raymond's private collection petitioners next argue that they had no taxable_income because applying factors set forth under sec_183 raymond did not engage in the activity for profit petitioners misinterpret sec_183 for although that section limits the amount a taxpayer may deduct from an activity if that activity is not engaged in for profit there is nothing in sec_183 that excludes from income profits earned from such activity b reduction of gross_receipts for cash hoard respondent determined that petitioners had gross_receipts from raymond's sports memorabilia activity including the bulk purchasing activity for the buyers group totaling dollar_figure in and dollar_figure in petitioners assert that respondent should have reduced the amount each year to reflect money from a cash hoard that raymond deposited into the ameritrust account over the years raymond created a cash hoard primarily from periodic sales of his memorabilia he claims the cash hoard was - - as follows from to year-end net increase year balance decrease dollar_figure dollar_figure 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 big_number big_number big_number big_number big_number big_number big_number -q- big_number ‘tn raymond sold a coin collection although we have found that raymond in fact had a cash hoard we need not decide for present purposes the amount of the hoard because the amount of omitted income should not be reduced by the amount of the hoard in reconstructing petitioners' income respondent did not include the amount of cash expenditures made by petitioners during the years at issue furthermore except for specific cash deposits that raymond made into the ameritrust account to cover bounced checks discussed below there is no evidence that deposits into the bank accounts were made from the cash hoard therefore we find that the income determined by respondent should not be reduced to reflect a diminution in any cash hoard that raymond might have had - - c reduction of gross_receipts for loans on several occasions raymond deposited his own cash into the ameritrust account to cover checks written on the account that had been dishonored because the account had insufficient funds to cover the amount of the checks he claims that those cash deposits were in effect loans to the buyers group and that certain checks payable to cash or to himself from the ameritrust account were repayments of those loans raymond claims that the following cash deposits represent loans he made to the buyers group and the checks payable to himself or cash represent the repayment of the loans loan date cash deposit repayment payee dollar_figure --- big_number --- big_number --- big_number --- big_number --- --- dollar_figure cash --- big_number cash big_number --- big_number --- big_number --- -- big_number raymond --- big_number cash --- big_number cash --- cash --- big_number cash -- big_number cash total big_number big_number the bank records show that shortly before each of the above cash deposits was made a fee had been charged for one or more o7 - checks dishonored because of insufficient funds those records also show that at the time the checks at issue were written to cash or raymond for repayment the account had ample funds we find it is more_likely_than_not that the cash deposits were loans that raymond made to the buyers group to cover checks that had been dishonored for insufficient funds and the checks payable to cash and to raymond represent repayment of those loans therefore we find that the gross_receipts for should be reduced by dollar_figure d adjustments for deposits and checks related to houlihan roth transaction petitioners also claim that in raymond was involved in a transaction between his friend john houlihan john john's brother dave houlihan dave jeff roth jeff and jeff's girlfriend debra bradley debra petitioners claim that as a result of that transaction the gross_receipts for should be reduced by dollar_figure or in the alternative the cost_of_goods_sold should be increased by that amount john owns two shops in the boston area petitioners claim that cash deposited into the ameritrust account belonged to john totaling dollar_figure and dave totaling dollar_figure and the checks written to debra totaling dollar_figure john totaling dollar_figure and dave totaling dollar_figure are part of the same transaction as follows - - deposits withdrawals date amount source amount payee dollar_figure john -- john -- --- dollar_figure debra --- big_number debra -- big_number debra -- big_number debra -- big_number debra john -- big_number john -- -- big_number debra a715 john -- big_number john -- big_number john -- john -- john -- john - john -- big_number john -- --- big_number debra john --- big_number john -- big_number john -- big_number dave --- --- big_number john --- big_number john --- big_number john --- big_number john --- big_number john --- big_number john -- big_number dave -- big_number dave -- big_number dave --- big_number john --- big_number john --- big_number john -- big_number dave raymond explains the deposits and withdrawals as follows john and dave wanted to purchase a type of card called uncut sheets from jeff roth john and dave gave raymond cash raymond deposited the cash into the ameritrust account and raymond sent - a series of checks totaling dollar_figure to debra for john and dave's orders raymond also ordered some of the sheets and paid for the purchase by wire transfer jeff however did not send the sheets that john dave and raymond had ordered it took raymond several months to get the money back raymond received cash and some merchandise from jeff as raymond received the money from jeff he deposited the cash into his ameritrust account and then he sent the money to john and dave raymond sold some of the merchandise he received from roth for dollar_figure and sent a check to john for dollar_figure although petitioners' pretrial memorandum indicates that they would call john to testify as a witness petitioners failed to bring a single witness to corroborate raymond's story thus petitioners failed to carry their burden of proving that these funds represent items that should not be included in their income be adjustments for purchases cost_of_goods_sold or expenses respondent allowed petitioners a deduction of dollar_figure in and dollar_figure in for purchases or cost_of_goods_sold respondent also allowed a deduction for rental expense of dollar_figure in and dollar_figure in petitioners claim that the deductions for purchases and expenses should be increased for additional_amounts -- - respondent did not explain the basis or standard used to determine whether a given item would be included in the purchases for which a deduction was allowed in or the agent did not attempt to account for beginning and ending year inventories it appears to the court however that the agent having confirmed that the goods acquired for the buyers group were distributed to the members at cost allowed a deduction for items identified as purchases made for the buyers group consistent with that determination we shall allow a deduction for purchases made for the buyers group additionally we shall allow a deduction for payments unrelated to the buyers group but attributable to sales or transactions completed during the taxable_year at issue klein news klein news is a distributor of magazines in raymond agreed to provide metal racks to hold plastic pages sleeves and hard plastic for sports cards for klein news klein news agreed to purchase between dollar_figure and dollar_figure worth of merchandise per month on date raymond wrote a check in the amount of dollar_figure made payable to ohio coin for payment of merchandise bought from ohio coin related to the deal with klein news in raymond sold merchandise to klein news for dollar_figure the payment for which was deposited into the ameritrust account on date - - respondent did not allow a deduction in for the cost of the merchandise purchased from ohio coin since the merchandise was sold in as part of the klein news arrangement the cost_of_goods_sold for should be increased by dollar_figure additional checks written in on the ameritrust and national city bank accounts petitioners claim that the deductions for purchases and expenses should be increased for the following amounts paid from the ameritrust and national city bank accounts in as follows ameritrust account payee amount raymond dollar_figure bob kelly dollar_figure ray duffy dollar_figure fred pachasa dollar_figure o u p a dollar_figure jim mitchell dollar_figure maintenance engineering ltd dollar_figure anna fox dollar_figure dan eberhardt dollar_figure james brznack dollar_figure jennifer kling dollar_figure wade carsel dollar_figure carl dietz dollar_figure cash dollar_figure cash dollar_figure cash dollar_figure john pepera dollar_figure thomas j bowers dollar_figure cash dollar_figure ‘ohio union of patrolman's association - - national city bank account payee amount bob kelly dollar_figure jim wilson dollar_figure evelyn johanson dollar_figure wholesale club dollar_figure sam's club dollar_figure cash dollar_figure the following discussion relates to the items listed above that were withdrawn from the ameritrust and national city bank accounts in a raymond a check dated date written on the ameritrust account is made payable to raymond in the amount of dollar_figure k j sales is written on the memo section of the check the record also shows that a check from e j sales made payable to raymond was deposited into the ameritrust account on date petitioners assert that cost_of_goods_sold in should be increased to reflect the purchase of the goods for e j sales raymond explains the check as follows e j sales is a company that sells wholesale e j sales asked raymond to purchase some merchandise for the company in california and delivered a check in the amount of dollar_figure made payable to raymond raymond knew the california company would not accept a third party check therefore he deposited the check from e j sales into the ameritrust account and wrote a check to himself in the same amount to pay for the merchandise - - petitioners did not produce a receipt for any goods purchased for e j sales additionally the check written on the ameritrust account made payable to raymond was endorsed only by raymond and not by any other party petitioners failed to bring a single witness to corroborate raymond's story in failing to do so petitioners failed to carry their burden of proving that these funds represent items that should be included in the cost_of_goods_sold for petitioners claim that the remaining three checks written to raymond dollar_figure written on date dollar_figure written on date and dollar_figure written on date were to distribute profits from the sale of the pictures the gain from which raymond reported on his return on schedule d of their return petitioners reported gain from two sales of photos they reported a dollar_figure gain from a date sale of a photo with zero basis and a dollar_figure gain from a date sale of photos acquired on date with zero basis the checks made payable to raymond do not coincide with the sales of the photographs reported on the return furthermore we have examined the bank records for the periods around the time of the sales there is no evidence that dollar_figure was deposited into the account on or around date or that dollar_figure was deposited into the account around date petitioners have not established that the - - income as determined by respondent for should be reduced by the amounts of these checks b bob kelly bob kelly is a small card dealer the dollar_figure check paid to mr kelly was for the purchase of cards we find that the purchase of the dollar_figure of cards was more_likely_than_not a purchase for raymond's private collection rather than a bulk purchase for the buyers group petitioners have not shown that the cards purchased were sold during or therefore petitioners' income is not reduced by dollar_figure cc ray duffy ray duffy is an autograph promoter the dollar_figure check paid to mr duffy was for the purchase of autographed pictures we find that the purchase of the autographed pictures more_likely_than_not was a purchase for raymond's private collection rather than a bulk purchase for the buyers group petitioners have not shown that the autographed pictures purchased from mr duffy were sold and that the proceeds from that sale were deposited into their accounts during or therefore petitioners' income for or is not reduced by dollar_figure d o u p a raymond claims that the dollar_figure check written to the ohio union of patrolman's association was for an advertisement placed in the police association's yearly fund raiser book for davey's cards -- petitioners did not provide a copy of the ad and did not ask morova to substantiate the expense petitioners failed to provide any evidence to corroborate that the dollar_figure check was for an advertisement therefore petitioners’ income is not reduced by dollar_figure e jim mitchell jim mitchell operates ontario hobby dealers supply the dollar_figure check paid to mr mitchell was for the purchase of close- outs we find that the purchase of dollar_figure worth of close-outs more_likely_than_not was a purchase for the buyers group therefore the cost_of_goods_sold for should be increased by dollar_figure f anna fox raymond claims that the dollar_figure check written to anna fox was for a purchase of a baseball signed by babe ruth lou gehrig ty cobb and colonel jacobs for davey's cards he further claims that the ball was stolen and morova did not pay raymond for the ball although morova testified at trial he was never questioned about the baseball petitioners have failed to substantiate that the cost_of_goods_sold should be increased for the dollar_figure paid to anna fox q dan eberhardt dan eberhardt is a dealer the dollar_figure check paid to mr eberhardt was for the purchase of a wax case we find that the s240 purchase of a wax case more_likely_than_not was a purchase for raymond's private collection rather than a bulk purchase for the buyers group petitioners have not shown that the wax case purchased was sold during or therefore the cost_of_goods_sold is not increased by the cost of the cards h jennifer kling's star wars collection a check in the amount of dollar_figure written on the ameritrust account was made payable to petitioners' daughter jennifer kling raymond claims that jennifer collected star wars cards when she was in grade school and high school and in she sold the collection to one of morova's customers he further claims that the purchase_price of dollar_figure was deposited into the ameritrust account raymond then wrote a check dated date from that account payable to jennifer in the amount of originally baseball cards came as a premium with bubble gum wrapped ina little wax pack like wax paper around the card that were heat sealed eventually the baseball cards became so popular that the bubble gum wrap became the premium with the purchase of the baseball cards and finally the bubble gum was eliminated although the packs are now polypacks collectors still refer to them as wax today baseball cards generally are marketed in one of three ways--wax cellos and rack packs a wax pack is the smallest generally containing to cards a rack pack generally consists of wax packs and a cello pack would be a larger pack containing times as many cards and selling for dollar_figure to dollar_figure -- - dollar_figure jennifer did not testify at trial in this case although barbara testified she did not address the sale of jennifer's collection or even confirm that jennifer ever had such a collection petitioners did not ask morova about the sale when he testified at trial petitioners have not established that the check to jennifer was a distribution of proceeds from the sale of her collection or that the dollar_figure payment is otherwise deductible in wade carsel wade carsel is a dealer whose company is named box man petitioners have not provided any evidence regarding the dollar_figure check paid to mr carsel therefore petitioners' income is not reduced by dollar_figure carl dietz the dollar_figure check paid to dietz is the money from the megacards deal that raymond distributed to dietz the sale was made in and the proceeds from the sale were deposited into the ameritrust account therefore petitioners' income for will be reduced by dollar_figure k cash dave cirino cirino is a dealer who bought large wax boxes sorted out the stars and then sold the commons the checks payable to cash in the amounts of dollar_figure and dollar_figure are for commons ‘the term commons refers to baseball card that feature a player who is not considered a star - - purchased from cirino we find that the dollar_figure purchase of the commons more_likely_than_not was a bulk purchase for the buyers group rather than for raymond's private collection therefore the purchases for is increased by dollar_figure we cannot say however that the dollar_figure purchase of the commons was more_likely_than_not a purchase for the buyers group rather than for raymond's private collection petitioners have not shown that the commons purchased for dollar_figure from cirino were sold and the proceeds from that sale were deposited into their accounts during or therefore petitioners have not established that they are entitled to deduct the dollar_figure in either or john pepera john pepera pepera is a district manager for a newspaper called the cleveland plain dealer the dollar_figure check paid to pepera was for the purchase of a large number of newspapers for a special event relating to sports we find that the purchase of the newspapers more_likely_than_not was a purchase for raymond's private collection rather than a bulk purchase for the buyers group petitioners have not shown that the newspapers were sold and that the proceeds were deposited into their accounts during or therefore the income for neither year is reduced by the cost of the newspapers m thomas j bowers the dollar_figure check written to thomas j bowers is for desert storm sets we find that the purchase of dollar_figure worth of desert storm sets more_likely_than_not was a bulk purchase for the buyers group rather than for raymond's private collection therefore the deduction for purchases for is increased by dollar_figure n bob kelly bob kelly was paid dollar_figure for wax we find that the dollar_figure purchase of wax more_likely_than_not was a purchase for raymond's private collection rather than a bulk purchase for the buyers group petitioners have not shown that the wax was sold during or therefore the cost_of_goods_sold is not increased by the cost of the cards o jim wilson jim wilson owns or works for a vending machine company raymond purchased a dollar_figure used video football game from mr wilson for morova's store morova never paid raymond for the game raymond and morova initially intended to operate the store as a partnership to which raymond agreed to contribute video games the purchase of the game was not related to the bulk purchases for the buyers group petitioners have failed to show that the cost of the video game is deductible in or p evelyn johanson evelyn johanson is the wife of a former security guard who worked at cleveland stadium raymond wrote a check for dollar_figure to mrs johanson for her husband's collection of autographed baseballs raymond claims that he purchased the baseballs for dietz that the baseballs went to dietz's store sports of sorts and that raymond was repaid the dollar_figure when they settled the megacards deal raymond did not call dietz or mrs johanson as a witness and there is no other evidence to establish that the check was for the purchase of baseballs or that the baseballs went to dietz therefore petitioners have failed to establish that the dollar_figure is deductible in or q wholesale club sam's club wholesale club later became sam's club distributed baseball cards wholesale club was able to obtain newly issued baseball card sec_2 to weeks before the tobacco and candy distributors raymond claims that the dollar_figure check payable to wholesale club the dollar_figure check payable to sam's club and the dollar_figure check payable to cash with sam's club written on the memo portion of the check were for cases of new baseball cards some of the checks in the record indicate the purpose of the check eg some checks have commons written on the memo section of the check unlike those checks there is nothing noted on the checks written to wholesale club or to sam's club al - that indicates that the money was used to purchase baseball cards petitioners have not established that it is more_likely_than_not that these checks were used to purchase baseball cards for the buyers group rather than for their personal living_expenses therefore petitioners have failed to establish that they are entitled to a deduction for the payments r cash barbara signed and endorsed a check drawn on the national city bank account dated date payable to cash in the amount of dollar_figure she then gave the cash to raymond raymond claims the dollar_figure was used to purchase cards from a company that would only accept cash because the buyers group had bounced some checks there is no notation on the check or any other evidence in the record to indicate its purpose petitioners have not established that it is more_likely_than_not that cash was used to purchase supplies for the buyers group rather than for their personal living_expenses therefore petitioners have failed to establish that they are entitled to a deduction for the dollar_figure unigue vinyl transaction unigue vinyl makes binders on date raymond wire transferred dollar_figure from the national city bank account to unique vinyl's bank account for purchases made during the bank charged a fee of dollar_figure for the wire transfer also during a dollar_figure check made payable to unigue vinyl was written and paid - on the ameritrust account respondent allowed a deduction for purchases in for the dollar_figure check and the dollar_figure wire transfer raymond claims that on date he transferred by wire dollar_figure to unique vinyl from the ameritrust account to pay for binders for the buyers group although the bank records show that a check in the amount of dollar_figure was paid on date petitioners did not provide any evidence establishing that unigue vinyl was the payee of the check or that the payment was a wire transfer to unique vinyl petitioners did not provide a receipt invoice or otherwise establish that the payment represents a deductible expense charge on ameritrust account jim beckett publishes the beckett price guides for baseball cards basketball cards hockey cards and nonsport cards he publishes an annual guide that sells for dollar_figure and monthly updates that sell for dollar_figure raymond purchased large quantities of the price guides respondent allowed a deduction in for checks made payable to beckett or the buyers group totaling dollar_figure two of the checks one dated date and the other dated date were each in the amount of dollar_figure on date the ameritrust account was charged dollar_figure respondent did not allow a deduction for the dollar_figure charge petitioners claim that the - account was charged dollar_figure for another check to beckett that had not been honored the first time it was presented to the bank we find it more_likely_than_not that the payment was to beckett for the purchase of price guides for the buyers group respondent allowed petitioners a deduction for similar purchases made later in the year we see no reasonable distinction between the earlier and later purchases therefore the deduction for purchases in should be increased by dollar_figure amounts paid in and for mr miller's van petitioners also assert that they are entitled to deduct in the dollar_figure purchase_price of the van raymond purchased for mr miller he purchased the van for mr miller so that mr miller could pick up and deliver the items raymond's group purchased from ohio coin the van was titled in mr miller's name and mr miller was the owner of the vehicle the vehicle experienced a transmission problem and raymond paid dollar_figure to custom trans inc for the repair he purchased the van for mr miller and paid for the repair of the transmission in payment of mr miller's services those services were related to the buyers group therefore petitioners may deduct the dollar_figure in and dollar_figure in -- -- additional checks written in on the ameritrust star bank account petitioners claim that the deductions for purchases and expenses should be increased for the following amounts paid from the ameritrust star bank account in payee amount barbara kling dollar_figure ccpl john banville eric lawrence big_number bill clay big_number raymond big_number cash big_number ‘cuyahoga county public library repair of vehicle raymond purchased from cumba motors in the following discussion relates to the items listed above that were withdrawn from the ameritrust and national city bank accounts in a barbara the dollar_figure check written to barbara was to repay her mother for a dollar_figure loan that she made to raymond petitioners argue that their income should be reduced to reflect the loan petitioners however have failed to show that the dollar_figure barbara's mother lent them was deposited into either the ameritrust or national city account there is no evidence that the dollar_figure was included in respondent's determination of gross_receipts petitioners have failed to establish that the gross_receipts - - should be reduced by the dollar_figure additionally petitioners are not entitled to a deduction for repayment of the loan b c c p l the dollar_figure check to ccpl was for a shelving unit purchased at an auction by the cuyahoga county public library for morova's store the purchase was not part of the bulk buying for the buyers group petitioners have failed to establish that the cost of the shelving unit is otherwise deductible in c john banville john banville works for the national football league the dollar_figure check payable to john banville is for the purchase of footballs and commemorative footballs from the super bowl we find that the purchase of the footballs more_likely_than_not was a purchase for raymond's private collection rather than a bulk purchase for the buyers group petitioners have not shown that the footballs were sold and that the proceeds were deposited into their accounts during or therefore petitioner's income for either year is not reduced by the cost of the footballs d bric lawrence eric lawrence owns lawrence machines a company that makes plastic sheets respondent included other_payments to lawrence machines in the amount of purchases we find that the dollar_figure check written to eric lawrence more_likely_than_not was a - purchase for the buyers group therefore the cost_of_goods_sold for should be increased by dollar_figure e bill clay bill clay owned clay's collectibles and manufactured baseball card boxes we find that the dollar_figure check written to bill clay more_likely_than_not was a purchase for the buyers group therefore the cost_of_goods_sold for should be increased by dollar_figure f raymond the dollar_figure check to raymond was a portion of his dollar_figure profit from a picture deal that he reported on petitioner's return since the dollar_figure was reported on the return petitioners’ omitted income is reduced by dollar_figure gq cash three checks totaling dollar_figure were made payable to cash one check in the amount of dollar_figure indicates that it was for jim mitchell of ontario hobby dealers supply of canada another check in the amount of dollar_figure indicates that it was for ohio coin respondent allowed deductions for other checks written to those payees we find that these checks more_likely_than_not were purchases for the buyers group therefore the cost_of_goods_sold for should be increased by dollar_figure the third check in the amount of dollar_figure was for the purchase of pinball machines for morova's store the purchase was not a7 - part of the bulk purchasing for the buyers group petitioners have failed to establish that the cost of the pinball machine is deductible in dishonored checks of the dollar_figure respondent allowed for purchases in checks totaling dollar_figure were dishonored due to insufficient funds petitioners concede that in computing the amount of income for the amount of purchases allowed by respondent for should be reduced by dollar_figure star account miscellaneous expenses respondent reduced gross_receipts for and for all miscellaneous charges made against the ameritrust account respondent did not reduce the gross_income to reflect the dollar_figure miscellaneous expenses from the star bank account star bank is the successor to ameritrust the star bank account is the same account as the ameritrust account we see no reason why the charges should be treated differently we find therefore the gross_receipts for should be reduced by dollar_figure ff conclusion rounding the amounts above to the nearest dollar we find that petitioners are entitled to deduct additional purchases of dollar_figure in and dollar_figure in computed as follows additional purchases item amount klein news dollar_figure jim mitchell big_number carl dietz big_number cash cirino big_number bowers big_number charge beckett miller van big_number total big_number miller van lawrence big_number clay big_number raymond big_number cash mitchell big_number cash ohio coin big_number total big_number we find that without regard to any adjustment for self- employment_tax petitioners omitted dollar_figure from their income in and dollar_figure in computed as follows gross_receipts notice_of_deficiency dollar_figure less loans big_number total big_number purchases notice_of_deficiency dollar_figure additional big_number total big_number omitted income gross_receipts dollar_figure purchases rent big_number total big_number gross_receipts notice_of_deficiency dollar_figure star bank miscellaneous total big_number purchases notice_of_deficiency big_number additional big_number dishonored checks big_number total big_number omitted income gross_receipts big_number purchases big_number rent big_number total big_number issue whether petitioners are liable for self-employment_tax on the net_income from the sports memorabilia activity sec_1401 imposes a tax on a taxpayer's self-employment_income self-employment_income includes the net_earnings_from_self-employment derived by an individual during the taxable_year see sec_1402 net_earnings_from_self-employment means the gross_income derived by an individual from any trade_or_business carried on by the individual less allowable deductions attributable to the trade_or_business plus certain items not relevant here see sec_1402 with certain exceptions not here applicable the term trade_or_business for purposes of the self-employment_tax generally has the same meaning as used for purposes of sec_162 sec_1402 thus to be engaged ina trade_or_business within the meaning of sec_1402 an individual must be involved in an activity with continuity and regularity and the primary purpose for engaging in the activity must be for income and profit see 480_us_23 raymond spent most of his time and effort during the years at issue on the buyers group activity he had no intent to profit from that activity as indicated by the fact that he distributed the products to the members of the group at cost raymond collected sports memorabilia hoping the items would eventually appreciate in value he sold only a few items from his massive collection and retained much more than he sold in relation to his buying of memorabilia his selling was sporadic he continued to amass items for his collection including hundreds of manual typewriters and tens of thousands of cleveland indian programs without any plan to turn over items at any date in the foreseeable future and without any consideration of the cost effectiveness of paying rent to store the items after careful consideration of all the facts and circumstances we find that raymond's memorabilia activity does not rise to the level of a trade_or_business see sloan v commissioner tcmemo_1988_294 affd without published opinion 806_f2d_547 4th cir accordingly raymond did not have net_earnings_from_self-employment during and and he is not liable for self-employment_tax for those years issue whether petitioners are liable for the accuracy-related_penalty under sec_6662 a sec_6662 and b impose accuracy-related_penalties equal to percent of the portion of an underpayment that is - attributable to negligence or disregard of rules or regulations negligence is a lack of due care or a failure to do what a reasonable person would do under the circumstances l963_f2d_907 6th cir affg tcmemo_1991_179 negligence also includes any failure to make a reasonable attempt to comply with the provisions of the code exercise reasonable care in return preparation keep proper books_and_records to properly substantiate items or have a reasonable basis for a position taken see sec_6662 sec_1 b income_tax regs in determining whether petitioners were negligent in the preparation of their returns we take into account their business experience see glenn v commissioner tcmemo_1995_399 affd 103_f3d_129 6th cir an exception to imposition of the negligence_penalty is provided if it is shown that there was a reasonable_cause for the understatement and the taxpayer acted in good_faith petitioners bear the burden of proving that they are not liable for the penalty under sec_6662 see 58_tc_757 petitioners’ primarily argue that because raymond never believed he was involved in a trade_or_business they are not liable for the accuracy-related_penalty to the contrary raymond did know that he bought sold and traded sports - memorabilia during the years at issue he made several sales of baseball cards during and the gains from which were not reported on petitioners' returns the fact that he may have used the proceeds to purchase other cards or memorabilia does not exclude the gain from petitioners’ income in the year of the sale petitioners have offered no reasonable explanation for their failure to report all the income from raymond's sports memorabilia activity therefore petitioners are liable for the accuracy-related_penalty under sec_6662 issue whether petitioner barbara kling is eligible for relief under sec_6015 with respect to any understatement_of_tax attributable to the sports memorabilia activity in the petition barbara alleged that she was entitled to relief pursuant to sec_6013 prior to the trial in this case congress enacted sec_6015 and simultaneously repealed sec_6013 ’ sec_6015 provides three avenues of relief from joint_and_several_liability sec_6015 which is similar to former sec_6013 allows a spouse to escape completely joint_and_several_liability sec_6015 b and c allow a spouse to elect limited_liability through relief from a portion of the understatement or deficiency and sec_6015 confers upon the secretary discretion to grant ‘ sec_6015 generally applies to any liability for tax arising after date and any liability for tax arising on or before date that remains unpaid as of such date see h conf rept pincite 1998_3_cb_747 - - equitable relief in situations where relief is unavailable under sec_6015 or c the parties have treated barbara's claim pursuant to sec_6013 as an election pursuant to sec_6015 and and a request for equitable relief pursuant to sec_6015 that respondent denied see 114_tc_354 114_tc_333 butler v commissioner t1 c we consider first whether barbara is entitled to relief under sec_6015 sec_6015 provides in general --under procedures prescribed by the secretary if-- a a joint_return has been made for a taxable_year b on such return there is an understatement_of_tax attributable to erroneous items of one individual filing the joint_return c the other individual filing the joint_return establishes that in signing the return he or she did not know and had no reason to know that there was such understatement d taking into account all the facts and circumstances it is inequitable to hold the other individual liable for the deficiency in tax for such taxable_year attributable to such understatement and be the other individual elects in such form as the secretary may prescribe the benefits of this subsection not later than the date which i sec_2 years after the date the secretary has begun collection activities with respect to the - - individual making the election then the other individual shall be relieved of liability for tax including interest penalties and other_amounts for such taxable_year to the extent such liability is attributable to such understatement the requirements of sec_6015 are stated in the conjunctive that is a taxpayer must satisfy all of the requirements of subparagraphs a through e to be entitled to relief under sec_6015 there is no dispute in the instant case that barbara satisfies the requirements of subparagraphs a b and ee respondent however contends that barbara knew or had reason to know of the understatement and therefore fails to satisfy subparagraph c respondent further contends that it would not be inequitable to hold barbara liable for the deficiency and therefore she fails to satisfy subparagraph d when the substantial_understatement of tax_liability is attributable to an omission_of_income from the joint_return the spouse's knowledge or reason to know of the underlying transaction which produced the omitted income is sufficient to preclude relief under sec_6015 see 115_tc_183 in the cheshire case the taxpayer knew of the entire amount of retirement distributions and interest earned even though she did not know they were taxable although barbara knew that raymond bought sold and traded - -- sports memorabilia she had no actual knowledge nor reason to know that the activity produced omitted income in deciding whether a spouse has reason to know of an understatement we recognize several factors that are relevant to our analysis including the level of education of the spouse seeking relief the spouse's involvement in the family's business and financial affairs the presence of expenditures that appear lavish or unusual when compared to the family's past levels of income standard of income and spending patterns and the other spouses's evasiveness and deceit concerning the couple's finances see butler v commissioner supra as to the first factor level of education barbara earned a college degree in teaching although barbara knew about raymond's sports memorabilia activity she was a full-time_student and generally was not involved in the activity as to the second factor involvement in the family's finances the record does not clearly show who was responsible for maintaining the family checkbook both barbara and raymond wrote some checks on the national city bank account to pay the household bills both had access to the national city bank statements mailed to petitioners' residence barbara however did not have access to the ameritrust account statements that were delivered to morova'ta store and then taken by morova to the warehouse -- - as to the third factor unusual or lavish expenditures the record demonstrates that the family did not enjoy a high standard of living during the years at issue indeed the cash they had accumulated was consumed barbara paid for her college tuition with a student_loan and maximized her credit card she and raymond lived in the same house for more than years they bought only inexpensive used cars they refinanced their house and their children paid for their own educations most of raymond's income was applied toward acquiring collectibles only a small portion was spent for the benefit of the family there is no evidence in the record indicating any expenditures out of the ordinary when compared to petitioners' spending habits in prior years as to the fourth factor there is no evidence that raymond ever attempted to hide any of his income or assets from barbara barbara was aware that raymond was depositing substantial amounts of money into their personal checking account she knew of her husband's sports memorabilia activities and that he often dealt in cash during the years in issue barbara however had no knowledge or reason to know that his net_income from those activities during those years exceeded the amounts reported on the returns we reject the importance that respondent places on barbara's access to the national city bank account checks written on that - - account and the ameritrust account were frequently dishonored due to insufficient funds this would have caused a reasonable person to believe that raymond's activities were losing money it is unlikely that an examination of the statements would have alerted barbara that any income was omitted although we recognize that there may have been a disparity between the family's total expenditures and their reported income for the years and this does not necessarily indicate that barbara should have known of the omitted income the record clearly shows that the omitted funds were used primarily to purchase raymond's memorabilia the relatively small amount used to help support the family was spent primarily for groceries house payments bills and other minor living_expenses moreover petitioners borrowed against their credit cards to pay the expenses these expenditures were in the nature of ordinary support and would not normally give a spouse reason to know of omitted income see 57_tc_680 there is no evidence of any lavish or extraordinary expenditures which would have put barbara on notice of unreported income cf 72_tc_356 mysse v commissioner supra we conclude from our examination of the evidence presented that there was no reason for barbara to have known that there was income from raymond's sports memorabilia activity that was not - -- reported on petitioners’ and tax returns therefore she satisfies the reguirement of sec_6015 c ce cheshire v commissioner t c pincite charlton v commissioner t c pincite we must next decide whether barbara satisfies sec_6015 d sec_6015 d requires a determination of whether taking into account all other facts and circumstances it is inequitable to hold barbara liable for the tax a determination under this provision of the statute is essentially factual the term inequitable as defined in sec_1 b income_tax regs is as follows whether it is inequitable to hold a person liable for the deficiency in tax is to be determined on the basis of all the facts and circumstances in making such a determination a factor to be considered is whether the person seeking relief significantly benefited directly or indirectly from the items omitted from gross_income however normal support is not a significant benefit for purposes of this determination other factors which may also be taken into account if the situation warrants include the fact that the person seeking relief has been deserted by his spouse or the fact that he has been divorced or separated from such spouse in the instant case raymond used the money from his sports memorabilia activity primarily to purchase more collectibles he did use some of the money for groceries bills and other items of ordinary support for the family the use of omitted income for ordinary support of the family does not constitute a --- - significant benefit for purposes of sec_6015 d see mysse v commissioner supra pincite see also sec_1 b income_tax regs additionally barbara's joint property right in the national city account does not constitute a significant benefit see 496_f2d_431 10th cir barbara actually withdrew only amounts for items constituting ordinary support barbara did not significantly benefit from the omitted income see butler v commissioner t c pincite barbara paid for her college tuition with a student_loan and maximized her credit card she and raymond lived in the same house for more than years they bought only inexpensive used cars they refinanced their house and their children paid for their own educations barbara's lifestyle did not change on account of the receipt of the omitted income there were no unusual transfers of property to barbara during either the years at issue if anything raymond's activity may have worked to barbara's detriment taking into account all the facts and circumstances we find it would be inequitable to hold barbara liable for the deficiency in tax see dakil v united_states supra mysse v commissioner supra therefore we find that barbara qualifies for relief under sec_6015 with respect to the understatement_of_tax - - including penalty and interest attributable to raymond's sports memorabilia activity for taxable years and to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service washington d c apr number release date uilc cc tege eoeg et1 - cor-103627-01 memorandum for from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - cor-103627-01 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business became a rail carrier employer under the railroad retirement act and the railroad unemployment insurance act effective date we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that became a rail carrier employer under the railroad_retirement_tax_act effective date please take the appropriate action regarding this business will e mcleod cc


internal_revenue_service p o box cincinnati oh release number release date date date department of the treasury employer_identification_number contact person - id number contact telephone number legend uil x geographic region y name of program z county w dollar_figureamount of grant dear we have considered your request for advance approval of your grant-making program under sec_4945 of the internal_revenue_code dated date our records indicate that you were recognized as exempt from federal_income_tax under sec_501 of the code and that you are classified as a private_foundation as defined in sec_509 you indicate that you will operate a grant-making program called y y was established to strengthen the capacities of participants help broaden their vision and open new networks that can ultimately provide the necessary relationships to enable participants to be more effective in their work in local communities the skills and capacities that your program aims to develop in participants include i building self-knowledge individual empowerment and self esteem ii fostering critical analysis problem-solving and project management capacities iii developing skills in communication negotiation consensus and partnership building and conflict and change management iv developing community engagement and purpose-driven networking and v building awareness to indigenous cultures and rural community development best practices your program’s objective is to impart these skills in participants through a combination of facilitated discussions and sessions these sessions will allow participants to cover different approaches to improving living conditions in poor rural areas exchange points of view with experts and local leaders based on their own experiences and partake in team-building activities where participants h b become team-minded and learn how to form teams back in their own organizations and communities you are launching your program in z the program may be replicated in other countries where you make grants overall your program’s sessions will take place over a period of up to months more specifically your program structure will include e e approximately eight sessions each occurring in different locations within the country originally z where the program takes place each session will last on average four days including time spent travelling primarily to rural locations in each session time is divided into facilitated discussions of the time field visits for peer learning on best practices of the time dialogues with experts and leaders from different sectors of the time and team-building activities of the time one or two international trips each lasting approximately to days including travel time these trips will also include discussion sessions field visits and classes the participants’ time on these trips will be divided roughly along the categories mentioned in the previous paragraph you plan to enter into a contractual relationship with a third party consulting firm to design implement and mange the program the consultant will coordinate all aspects of the leaning modules to include securing speakers arranging travel arranging locations for the program session etc your program each year is expected to include about to participants for each country involved in your program with z being the first country involved the number of participants may vary year to year and will increase for example if countries in addition to z are involved in your program in the future your program will cover the travel costs of participants to attend your program sessions and trips described above estimates are at about dollar_figurew per participant at current rates no stipend or other additional compensation is planned to be paid to participants under your program your program is open to all individuals who meet the basic eligibility requirements the potential applicant pool is diverse and open-ended for each country involved in your program beginning with z your objective is to attract as broad a group of applicants as possible who meet your program criteria while recognizing that many of the targeted regions in a particular country are rural and small your program candidates are expected to be evaluated against the following criteria e e they should be young and or developing leaders between and years of age they should be from the social public and private sectors and capable of effecting change in the community e e e they should currently be engaged and have plans to continue working in community development or other community work in rural areas preferably with native populations they should be in a leadership position with an organization serving the community or the potential to be in such a position in the near future they should preferably be living or working in the micro-regions where you make your grants these areas are typically among the poorest regions in z and other countries where you make grants your program aims to identify candidates through a nomination process where public and private organizations including for example non-profit organizations academic institutions companies and government units can present the candidacy of qualified individuals who will have institutional support during and following your program the call for nominations for candidates will be distributed widely among your network of grantees and associated organizations your program will also be publicized on your web-site and throughout local philanthropic sector networks and also in local newspapers within the specific geographic areas in which you work the application will involve submission of the following documents and information e e e e a nomination letter completed by an institution with which the candidate is affiliated the letter should express why the institution supports the candidate’s application the benefit your program will bring to the candidate and the expected impact on the institution's work and the community that your program will have the institution should also confirm that the candidate has the flexibility to participate in your program sessions acandidate resume including general data age gender etc education and professional affiliations acandidate essay explaining his her interest and motivations qualifications and commitment and a-second essay explaining where the candidate expects to be in years and how the candidate expects to be contributing to the community in the future family members of individuals serving on the selection committee or of persons otherwise involved in the selection process will not be eligible to participate in your program relatives of your officers directors and substantial contributors also are not eligible your program will be open to individuals of all races ethnic origins colors genders and religions you hope the program will attract a solid presence of participants from indigenous native origins due to their connection to the work you do in impoverished communities and because indigenous native communities have been traditionally disadvantaged a team of consultants familiar with your work in the x region will prescreen all the nominations to ensure there is a match with the publicly-described criteria this team will then present a group of candidates currently estimated to be about to candidates for z to a program selection committee for further review you currently anticipate that the selection committee will consist of your program supervisor two of your staff members two representatives from your previous leadership programs in x region and two leadership development experts with a proven track record in selection processes the selection committee members will be required to disclose any affiliations with potential program candidates a committee member cannot participate in the selection process if he or she serves as an employee or board member of a sponsoring_organization that is nominating candidates for the program selection committee members are expected to review the submitted written materials and interview each candidate with the committee breaking into smaller groups to conduct interviews after the interviews the entire selection committee will meet compare data and make the final selection the selection committee will evaluate candidates based on the following criteria e prospective statement essay explaining where the candidate sees himself herself in years and how the candidate expects to contribute to the community - personal statement two-page essay explaining his her interest motivations qualifications and commitment - letters of recommendation - interview - e candidates will be reimbursed for travel_expenses to participate in the selection process for the program you do not plan to pay the individual grants to the program participants or their sponsoring organizations once a candidate has been chosen to participate in the program the third party consultant will pay all the travel_expenses directly to the hotel airlines and other service providers no stipend or other compensation will be paid to the participants the third party consultant will submit invoices and documentation to you in support of reimbursement you will track the participation and progress of each participant throughout the program's duration as follows e e e ensuring attendance of each participant at the sessions an on the trips requiring that each participant write his her own development goals for the program at the beginning and also write two essays one in the middle and one at the end of the program on how those goals are progressing and tracking each participant’s performance one year after the program's completion this will likely be done by a discussion between the participant and your program supervisor or a staff member n u your program supervisor will oversee the participation and progress of participants throughout the program’s duration each participant will also have the opportunity to select a mentor for guidance and consultation during your program mentors are expected to be individuals who have participated in one of your former leadership programs participants are expected to participate in all the sessions for a showing of justifiable cause eg a personal or family emergency or a community emergency they will be allowed to miss a maximum of sessions or of the total program days if they miss any session without justifiable cause they will be dismissed from the program along with the interim final reports essays and discussions with the program supervisor and your staff participants will be asked to prepare a 5-year work plan to be discussed with the full program group in the last session of the program it is hoped that this work plan will serve as a guidepost for each participant's future work in the community in the event that a participant drops out or is dismissed from the program all payments for or on behalf of the participant will promptly cease neither the participant nor his her sponsoring_organization will be asked to reimburse you for any money paid on behalf of the participant if you ever discover a misuse of program award funds you would actively pursue the return of those funds and would immediately withhold all future payments until the matter is satisfactorily resolved since the program is for one year and it is your intent to select new fellows each year participants will not be allowed to renew or extend their fellowship you indicated that you will check program participants and all organizations receiving payments under the program against the ofac list and will otherwise follow the guidelines on checking foreign organizations and individuals in accordance with the treasury_department guidelines you agree to maintain records that include the following i ii information used to evaluate the qualification of potential grantees identification of the grantees including any relationship of any grantee to the private_foundation iii the amount and purpose of each grant and iv all grantee reports and other follow-up data obtained in administering the private foundation’s grant program sec_4945 and b of the code impose certain excise_taxes on taxable_expenditures made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of subsection g sec_4945 of the code provides that sec_4945 shall not apply to individual grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance if it is demonstrated that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 the grant constitutes a prize or award which is subject_to the provisions of sec_74 if the recipient of such prize or award is selected from the general_public or the purpose of the grant is to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee sec_53_4945-4 of the regulations provides that to secure approval a private_foundation must demonstrate that i ii its grant procedure includes an objective and nondiscriminatory selection process such procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance and iii the foundation plans to obtain reports to determine whether the grantees performed activities that the grants are intended to finance based on the information submitted and assuming your award programs will be conducted as proposed with a view to provide objectivity and nondiscrimination in making the awards we have determined that your procedures for granting the awards comply with the requirements contained in sec_4945 of the code and that awards granted in accordance with such procedures will not constitute taxable_expenditures within the meaning of sec_4945 this determination is conditioned on the understanding that there will be no material_change in the facts upon which it is based it is further conditioned on the premise that no grants will be awarded to foundation managers or members of the selection committee or for a purpose that is inconsistent with the purpose described in sec_170 of the code the approval of your award program procedures herein constitutes a one-time approval of your system standards and procedures designed to result in awards which meet the requirements of sec_4945 of the code this determination only covers the grant programs described above thus approval shall apply to subsequent award programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request we have not considered whether grants made under your procedures are excludable from the gross_income of recipients under sec_117 of the code any funds you distribute to individuals must be made on a true charitable basis in furtherance of the purposes for which you are organized therefore you should maintain adequate_records and case histories so that any or all award distributions can be substantiated upon request by the internal_revenue_service this determination is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as a precedent you must report any future changes in your grant making procedures please keep a copy of this letter in your permanent records we have sent a copy of this letter to your representative as indicated in your power_of_attorney if you have any questions please contact the person whose name and telephone number are shown above sincerely yours lois g lerner director exempt_organizations enclosures notice a copy of the redacted letter