t c memo united_states tax_court thomas b drummond petitioner v commissioner of internal revenue respondent docket no filed date william f krebs and mark e kellogg for petitioner susan t mosley for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined the following deficiencies in additions to and accuracy-related_penalties on petitioner's federal_income_tax year deficiency dollar_figure dollar_figure dollar_figure additions to tax sec_6651 accuracy-related_penalties sec_6662 dollar_figure dollar_figure -- dollar_figure dollar_figure dollar_figure all section references are to the internal_revenue_code code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure the issues remaining for decision are was the drawing that petitioner sold during property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business within the meaning of sec_1221 we hold that it was not and we further hold that the gain that petitioner realized from the sale of that drawing is long-term_capital_gain did petitioner engage in his horse activity during and and his cattle activity during and with the objective of making a profit within the meaning of sec_183 we hold that he did not is petitioner liable for and for the addition_to_tax under sec_6651 we hold that he is not for and that he is for to the extent stated herein is petitioner liable for and for the accuracy-related_penalty under sec_6662 we hold that he is to the extent stated herein the parties agree that the court's holding on the character- ization of petitioner's gain from that sale will be dispositive of the remaining issues presented under sec_404 and sec_4972 findings of fact3 some of the facts have been stipulated and are so found petitioner resided in the plains virginia at the time the petition was filed during all relevant periods petitioner who holds a bache- lor's degree in philosophy a master's degree in clinical psy- chology and a ph d degree in psychology practiced as a psy- chologist and his income from that practice provided his support throughout the years at issue petitioner devoted an average of hours a week to his psychology practice from the late 1970's through sometime in petitioner served as a director of several mental health clinics that are part of the prince george’s county maryland health system from sometime in through petitioner practiced as a psychologist at the saint luke institute a private psychiatric hospital in suitland maryland from through peti- tioner provided psychological testing and counseling services under the name psychological testing services from through petitioner provided psychological services at the new life at the conclusion of the trial herein the court ordered the parties to file simultaneous opening and answering briefs both of petitioner's briefs failed to comply with rule e for example petitioner's opening brief did not contain proposed findings_of_fact as required by that rule however his answer- ing brief contained what amounted to proposed findings_of_fact to which respondent did not have the opportunity to object conse- quently we did not use the proposed findings_of_fact contained in petitioner's answering brief as an aid in finding the facts in this case center new life center a residential center for psychiatric patients which he and another psychologist founded in date the drawing in question during the 1970's petitioner who at all relevant times has had an interest in and enjoyed art purchased at least six draw- ings through auctions galleries or private sales including one entitled three feminine heads drawing in question that he purchased during the early 1970's for dollar_figure from a gallery in washington d c and that had been attributed to the artist michelangelo anselmi anselmi when petitioner acquired those drawings he did not intend to sell them drawings of the type that petitioner purchased had often been used by their respective artists as models for their own paintings sculptures and or frescos petitioner conducted research throughout the 1970's and into the 1980's on the drawings that he had acquired during the 1970's as a result of that research petitioner concluded that certain drawings of the type that he had purchased either were not attributed to particular artists or were attributed as was subsequently determined was the case with the drawing in ques- for example petitioner asked certain experts at the national gallery of art in washington d c national gallery to ascer- tain whether the drawings that he had acquired were structurally sound that is to say whether they were on acid-producing paper which would eventually deteriorate there are inconsistencies in the record as to when petitioner undertook such research tion to the wrong artists and that art museum curators knowl- edgeable about both museum and privately-owned art collections were qualified to determine the artists of such drawings around the early 1980's based on a visual comparison of the drawing in question with drawings properly attributed to anselmi petitioner became convinced that anselmi had not sketched that drawing the curator of italian drawings at the national gallery curator of italian drawings became interested in the drawing in question that curator advised petitioner that she was fairly certain that the drawing in question was attributable to a follower of correggio who worked as did correggio in parma italy during the 16th century petitioner lent that drawing to the national gallery and the curator of italian drawings con- ducted research on it and attributed it to a follower of correggio named franco parmagianino parmagianino for some undisclosed period of time after the drawing in question was attributed to parmagianino the curator of italian drawings caused the drawing in question to receive international exposure by having it displayed in art exhibits at the national gallery and in parma italy during that period that drawing also received international exposure through newspaper articles about it in the united_states and italy and photographs of it in museum art catalogues during or christie's auction house in new york city christie's advised petitioner that the drawing in question could be sold at auction for approximately dollar_figure and expressed an interest in auctioning it on his behalf at or about the same time the curator of italian drawings informed petitioner that the national gallery was interested in purchasing that drawing petitioner advised her that christie's could sell the drawing in question at auction for dollar_figure and that he would be willing to sell it to the national gallery for an amount exceed- ing dollar_figure thereafter petitioner received a letter from the national gallery offering to purchase the drawing in question for dollar_figure in date petitioner sold it to that museum for that amount during all relevant periods petitioner did not own or acquire any drawings other than the drawing in question that were either unattributed or misattributed and for which proper attribution was obtained during the 1970's petitioner did not attempt to sell any of the drawings that he had acquired during those years during the period through petitioner did not sell any artwork or collectible other than the drawing in question after the sale of the drawing in question petitioner did not use the proceeds from its sale to purchase other drawings for purposes of attribution and sale petitioner's simplified_employee_pension during petitioner informed his tax preparer thomas a at some time prior to petitioner attempted to sell the drawing in question through christie's however upon being advised by christie's that that drawing had a value of dollar_figure petitioner decided not to auction it at that time mcveigh jr mr mcveigh about the sale of the drawing in question and inquired about establishing some type of retirement_plan mr mcveigh advised petitioner to consult with earl schoenborn about establishing a retirement_plan the three of them met and discussed the amount of the contribution that petitioner could make to a retirement_plan for after taking into account the approximate amount of petitioner's income and expenses during from various sources including the new life center and the sale of the drawing in question sometime thereafter petitioner chose to consult with another individual about establishing a retirement_plan peti- tioner established a simplified_employee_pension sep for to which he contributed dollar_figure petitioner's contributions to the sep for and were dollar_figure and dollar_figure respectively petitioner's horse activity and cattle activity petitioner's horse activity during the early 1970's petitioner who has at all relevant times enjoyed equestrian activities owned a horse took riding lessons and learned how to train a horse to perform at an unspecified level in dressage and to do low-level jumps provided that the horse had received some training in jumping in date petitioner who did not have any formal training as a horse breeder or a horse trainer purchased for approximately dollar_figure a five-year old thoroughbred gelding named moonshadow moonshadow that had received some training in riding and jumping as a result of having been used in fox hunting and that had been exhibited in certain horse shows when he acquired moonshadow petitioner believed that it was a willing jumper he planned to train moonshadow in dressage jumping and or cross- country riding although he was aware that such activities would expose that as well as any other horse to a significant risk of injury although petitioner expected to spend around two years in training a horse such as moonshadow he was aware that the training period could vary depending inter alia on the level of training that it had received prior to the time he purchased it and the type of training that he chose to provide to it peti- tioner hoped to be able to sell moonshadow after it was trained during the period through sometime in petitioner spent about two-and-a-half to three hours a day or about to hours a week in riding exercising and caring for moonshadow petitioner spent that time during the mornings when he was not providing services as a psychologist at no time did petitioner investigate or project the price at which he would have to sell moonshadow in order to realize a profit from such a sale nor did he contemplate or inquire about the risks associated with owning a gelding such as moonshadow if it were to become lame ie not only could it not continue its training in or be used for any of the activities that peti- tioner had in mind when he acquired moonshadow it also could not be used for breeding in fact petitioner did not become aware of those risks until moonshadow became lame sometime during approximately months after petitioner had acquired it petitioner had physical examinations x-rays and blood work performed on moonshadow however the cause of moonshadow's lameness was not determined although petitioner provided moonshadow with bed rest and took certain measures to alleviate the horse's pain he was unable to rehabilitate it around petitioner donated moonshadow to the virginia polytechnic insti- tute vpi although petitioner became aware of the risks associated with owning a gelding after his experience with moonshadow during he nonetheless decided to purchase another gelding because geldings were considered to be the most valuable show horses consequently sometime during after moonshadow became lame petitioner purchased for approximately dollar_figure another gelding a five-year old named gator gator that already had had some minimal training sometime during or after the spring of petitioner retained the services of a horse trainer who worked with gator on suppling exercises on the flat lead changes and consistency in the show ring at unspecified times after the purchase of gator petitioner entered it in certain horse shows not for the nominal prize money but for the recognition that it might gain that would make it attractive to potential buyers gator however exhibited certain difficulties that will prevent it from ever becoming a show horse of great value after his experience with moonshadow during petitioner concluded that if he were to purchase either a mare or a stallion and that horse were to become lame or otherwise to lack athletic ability it could still be used for breeding purposes sometime during after moonshadow became lame petitioner purchased for approximately dollar_figure to dollar_figure a proven broodmare a four- year old thoroughbred named jill jill that had had no training except for training in accepting a rider thereafter around petitioner rode jill concluded that it did not possess the characteristics necessary for a show horse or a competitive horse which he did not realize when he purchased jill and decided to use it only for breeding purposes around petitioner bred jill to an internationally acclaimed dressage trakehner stallion even though he knew that a crossbreeding of a thoroughbred and a trakehner would probably require that any male offspring be gelded during the crossbreeding of jill produced a colt named zack zack that was gelded within nine months thereafter around when zack was a year old it was trained to accept a lightweight rider around when zack was a three- year old it was trained to accept a rider of normal weight and any horse that petitioner acquired through the breeding of a mare such as jill would not be ready for serious training until the age of two at which time it could support a rider could not perform and compete as a show horse until the age of three and could not become a show horse of great value until at least the age of six was trained to jump by a professional trainer that petitioner hired sometime thereafter zack developed pedalostitis a foot disease that prevented it from performing athletic activities around petitioner donated zack to vpi during petitioner met sue attisani lyman ms lyman a horse trainer and breeder since and bred jill to ms lyman's stallion for a stud fee of approximately dollar_figure that breeding produced a filly named lily lily around during when petitioner started to provide lily with some undis- closed type of training he discovered that it had fractured its shoulder and hip and could not be trained as an athlete at that time and he therefore abandoned any attempt to train lily at that time as of the time of the trial herein petitioner planned to breed lily in the spring of and to sell it as a broodmare around petitioner again bred jill to ms lyman's stallion for a stud fee of between dollar_figure and dollar_figure that breeding produced a filly named bunny bunny during petitioner entered bunny in a horse show as a six-week old with its dam jill where it performed favorably in a horse show as a yearling where it was the winner in a particular class and in an international horse show for young prospective show horses where it was the champion for yearling fillies at some undisclosed time during petitioner entered into a contract to sell bunny for dollar_figure that was conditioned on the purchaser's ability to raise the necessary funds because of the purchaser's inability to do so the sale was not consummated although during the fall of petitioner saddled bunny and allowed it to be ridden he did not intend to provide other training for it until it was three years old in date petitioner purchased another broodmare that had a filly in the spring of in the spring of petitioner and ms lyman jointly purchased a three-year old untrained gelding named ziggy ziggy for dollar_figure a price that was substantially below its fair_market_value sold it about a month later for dollar_figure and split a substantial profit after accounting for their minimal expenses eg boarding training and veterinarian fees of between dollar_figure and dollar_figure prior to or petitioner boarded his horses at facilities owned by others and incurred total average expenses for each such horse of about dollar_figure a month around or petitioner began boarding the horses that he then owned in the barn and paddocks located on real_property nlc land that he had acquired near middleburg virginia and that the new life center was using as a residential facility for patients at some unspecified time during the period through petitioner asked ms lyman to give him riding lessons and to advise him on how to market his young horses starting in the spring of petitioner asked ms lyman from time to time to train some of his horses including gator at no time did petitioner retain the services of anyone to appraise the fair_market_value of his horses petitioner did not project during the years at issue or at any other time the future income expenses or profits that he expected would be generated by his horse activity petitioner’s cattle activity sometime during petitioner who did not have any formal training as a cattle breeder purchased for dollar_figure a herd of cattle consisting of a bull and four cows cows with calf during or and each year thereafter the cows produced calves petitioner kept the bull cows and calves cattle on the nlc land during the winter months the cattle consumed approximately five bales of hay that cost about dollar_figure to dollar_figure a bale and during the remainder of the year they consumed the grass on the nlc land petitioner kept the calves produced by his cows for six to seven months until they weighed around pounds at which time he sold them for approximately dollar_figure each petitioner did not project during or at any other time the future income expenses or profits that he expected would be generated by his cattle activity petitioner’s books_and_records relating to his horse activity and his cattle activity during the years at issue petitioner did not maintain a separate bank account for either his horse activity or his cattle activity during those years petitioner retained invoices receipts and canceled checks relating to the expenses that were incurred in those activities however he did not maintain books_or_records such as ledgers and registers to memorialize the various transactions relating to those activities or to maintain a historical record of those activities eg the dates on which horses were purchased foals and calves were born and calves were sold the specific nature of any training that the horses that he owned received and the specific periods during which any such training was provided petitioner's tax returns for the years through petitioner who has a limited knowledge of the federal_income_tax laws and who has not had any formal training in accounting or tax matters retained the services of mr mcveigh a tax_return_preparer since about to prepare his individual federal_income_tax returns returns petitioner relied on mr mcveigh to prepare requests to extend the time within which to file his returns for and those invoices receipts and canceled checks are not part of the record in this case mr mcveigh completed and filed on petitioner's behalf forms application_for automatic_extension of time to file u s individual_income_tax_return application_for automatic_extension for those years that were dated date and date respectively signed by petitioner and requested a four-month extension of time until date and date respectively within which to file his returns for those years line of each of those applications required petitioner to make a reasonable estimate based on the informa- tion available of his tax_liability for the year for which he was seeking an extension in arriving at the respective esti- mated tax_liabilities for and that mr mcveigh showed on line of petitioner's applications for automatic_extension for those years mr mcveigh believed it reasonable and so advised petitioner that given petitioner's situation those estimates be based on the tax_liability shown in petitioner's return for the year immediately preceding the year for which each such application was being filed provided that petitioner paid each of those estimated_tax liabilities by the time he filed each such application since the tax_liabilities shown in peti- tioner's and returns were dollar_figure and dollar_figure respec- tively mr mcveigh entered on line of petitioner's applica- tions for automatic_extension for and estimated_tax liabilities of dollar_figure and dollar_figure respectively those respective applications also indicated that for estimated_tax payments of dollar_figure were made by petitioner and that for dollar_figure of tax was withheld from petitioner and dollar_figure of tax was paid with his application_for automatic_extension petitioner filed returns for and that were dated date and date respectively were re- ceived by the internal_revenue_service service on date and date respectively and showed total_tax liabilities of dollar_figure and dollar_figure respectively petitioner took account of the following items to arrive at the adjusted_gross_income of dollar_figure dollar_figure and dollar_figure shown in his respective returns for and wages salaries etc taxable interest dividends tax refunds schedules c net profit from art sales loss from commodities and other investments dollar_figure big_number big_number -- big_number -- dollar_figure dollar_figure -- big_number -- -- -- loss for and net profit for from the new life center big_number big_number -- all dollar amounts are rounded to the nearest dollar in schedule c of his return relating to art sales peti- tioner reported dollar_figure as gross_receipts or sales dollar_figure as cost_of_goods_sold and or operations and dollar_figure as net profit with respect to the sale of the drawing in question petitioner concedes that he sold that drawing for dollar_figure purchased it for dollar_figure and realized a gain of dollar_figure from its sale net profit from psychological testing services schedule d capital_gain schedule e loss for and income for schedule f loss deduction for one-half of self-employment_tax deduction for sep contribution big_number big_number big_number big_number -- big_number big_number -- big_number big_number big_number big_number -- big_number big_number with respect to the dollar_figure net profit that petitioner reported in schedule c of his return relating to art sales petitioner informed mr mcveigh that he sold the drawing in question during at a gain mr mcveigh advised petitioner that an important factor in characterizing that gain as self- employment income was whether petitioner continued to purchase and sell drawings in the future petitioner informed mr mcveigh that he intended to do so based on the information that peti- tioner provided to mr mcveigh mr mcveigh concluded that the gain from the sale of the drawing in question constituted self- employment income and not long-term_capital_gain and that it should be reported in a schedule c of petitioner's return relating to art sales with respect to the automobile expense deductions claimed in schedules c of petitioner’s returns for the years at issue relating to psychological testing services petitioner gave mr although petitioner's return erroneously showed that deduction as a deduction for self-employed health insurance the parties agree that that deduction was for petitioner's sep contribution mcveigh information about the expenses relating to the business use of his automobile eg the type of vehicle that he used for business purposes the percentage of business use of that vehi- cle and the miles traveled with that vehicle for business purposes mr mcveigh advised petitioner that he could claim as an expense for the business use of his automobile either a standard_mileage_deduction or a deduction for depreciation and certain actual expenses eg gasoline however in preparing schedules c of petitioner's returns for the years at issue relating to psychological testing services mr mcveigh erroneously claimed both a standard_mileage_deduction and a deduction for depreciation and certain actual automobile ex- penses as follows year depreciation expense mileage11 expense sec_12 standard other dollar_figure big_number big_number dollar_figure big_number -- dollar_figure respondent determined in the notice_of_deficiency notice and petitioner concedes that petitioner is not entitled to reduce his income from psychological testing services for the the standard mileage deductions claimed in schedules c of petitioner's returns for and relating to psycho- logical testing services were shown as deductions for car and truck expenses the deductions for certain other automobile expenses that were claimed in schedules c of petitioner's returns for and relating to psychological testing services were shown as deductions for insurance and interest_expenses years at issue by the following automobile expenses disallowed automobile expenses claimed in schedules c of his returns for those years all claimed depreciation expenses for those years and other expenses of dollar_figure claimed for peti- tioner was not aware of the errors relating to the disallowed automobile expenses that appeared in his returns for the years at issue and could not have detected them by reviewing those re- turns based on what petitioner told mr mcveigh about his horse activity and his cattle activity including that he intended to buy train and sell horses and that he had incurred certain expenses for various stables and training centers that mr mcveigh believed to be reputable mr mcveigh concurred in petitioner's conclusion and he and petitioner jointly decided that the gross_income expenses and loss from petitioner's horse activity during and the aggregate income expenses and losses from his horse activity and cattle activity during and should be reported in schedules f of petitioner's returns for those years and that any loss from those activities could be used to reduce petitioner's income from other sources that was reported in those returns schedule f of petitioner's return for each of the years and during which petitioner was engaged only in his horse activity and not his cattle activity reflected the following income expenses and loss from that horse activity year income expenses -- -- dollar_figure big_number loss dollar_figure big_number schedule f of petitioner's return for each of the years through during which he was involved in both his horse activity and his cattle activity did not show separately the income and expenses attributable to each such activity instead those schedules reflected the following aggregate income ex- penses and losses from both of those activities aggregate aggregate aggregate year income expenses losses -- dollar_figure big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number all of the income that petitioner reported in schedules f of his and returns and dollar_figure of the income that he reported in schedule f of his return were attributable to his cattle activity and represented income that he received during each of those years from the sale of calves during petitioner incurred expenses of dollar_figure in connection with his the aggregate income reported in schedule f of petitioner's return included an unexplained income item of dollar_figure that petitioner reported as other income the aggregate expenses reported in schedule f of petitioner's return included an unexplained interest_expense of dollar_figure cattle activitydollar_figure with respect to the dollar_figure contribution that petitioner made to the sep for petitioner informed mr mcveigh in date that he had established a retirement_plan to which he timely contributed dollar_figure and related the conversations that he had had with the individual who had assisted him in establishing that plan mr mcveigh advised petitioner that the deductible amount of that contribution was limited to a percentage not to exceed percent of petitioner's self-employment_income and that that percentage varied depending on the nature of the retirement_plan based on the information that petitioner gave mr mcveigh about inter alia the retirement_plan that he had established and the sale of the drawing in question mr mcveigh advised petitioner that he was entitled to deduct for his dollar_figure contribution to that plan to the extent of percent of his self-employment_income for that yeardollar_figure mr mcveigh further advised petitioner that in calculating his self-employment_income for for purposes of determining the deductible portion of his dollar_figure retirement_plan contribution he should take into account only the schedules c of his return that the record does not disclose the expenses that petitioner incurred during the years and in connec- tion with his cattle activity at trial the parties agreed that any deduction to which petitioner may be entitled for each of the years and for contributions that he made to the sep for each of those years is limited by sec_404 to percent and not percent of his self-employment_income for each such year showed net profits viz dollar_figure net profit from art sales and dollar_figure net profit from psychological testing services and not the schedules c that showed losses viz dollar_figure loss from commodities and other investments and dollar_figure loss from new life center consequently petitioner deducted in his return the entire dollar_figure that he contributed to the sep that deduc- tion exceeded by dollar_figure percent of the aggregate amount viz dollar_figure of the results shown in the various schedules c of that return that petitioner reported as his business income business income on page line of that return with respect to the dollar_figure contribution that petitioner made to the sep for petitioner deducted dollar_figure in his return for that year that deduction equaled percent of the aggregate amount viz dollar_figure of the results shown in the various schedules c of that return that petitioner reported as his business income for with respect to the dollar_figure contribution that petitioner made to the sep for petitioner deducted that entire amount in his return for that year that deduction equaled dollar_figure percent of the amount viz dollar_figure shown in schedule c of that return that petitioner reported as his business income for at the time that mr mcveigh prepared petitioner's returns for the years at issue mr mcveigh did not know of any adverse tax consequences that might result if petitioner's retirement_plan contribution for each such year exceeded the amount allow- able as a deduction excess_contribution mr mcveigh advised petitioner that he could make excess_contributions with the only consequence being that he could not deduct them after mr mcveigh prepared petitioner's return for each of the years at issue he provided petitioner with a copy of each such return and pointed out to him the amount of tax that each such return showed as due petitioner did not review any of those returns and was merely interested in knowing the amount of tax due so that he could write a check for that amount opinion petitioner bears the burden of proving that respondent's determinations in the notice are erroneous rule a 290_us_111 petitioner attempted to satisfy his burden_of_proof in this case through his own testimony and that of mr mcveigh and ms lyman we found the testimony of mr mcveigh and ms lyman to be credible we found petitioner's testimony to be general vague conclusory and or questionable in certain material respects under the circumstances presented here we are not required to and we generally do not rely on petitioner's testimony to sustain his burden of establishing error in respondent's determi- nations see 877_f2d_624 7th cir affg tcmemo_1987_295 440_f2d_688 9th cir affg per curiam tcmemo_1969_159 87_tc_74 gain from the sale of the drawing in question the parties agree that petitioner purchased the drawing in question during the 1970's for dollar_figure sold it during for dollar_figure and realized a gain of dollar_figure from that sale the dispute here is whether that gain should be characterized as ordinary_income as petitioner contends or as long-term_capital_gain as respondent contends the parties agree that if the court were to determine that that gain is long-term_capital_gain petitioner would not be entitled to deduct any amount for his contribution to the sep for and that he would be liable for the excise_tax imposed by sec_4972 as determined by respondentdollar_figure the parties further agree that the resolution of the dispute over the character of the gain from the sale of the drawing in question depends on whether that drawing is property held by petitioner primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business within the meaning of sec_1221 if it is the gain at issue is ordinary_income and not capital_gain the purpose of sec_1221 is to differentiate between the 'profits and losses arising from the everyday operation of a business' and 'the realization of appreciation in value petitioner does not dispute that if the court were to determine that that gain is ordinary_income he would nonetheless be liable for the excise_tax imposed by sec_4972 but in a lesser amount than that determined by respondent see supra note accrued over a substantial period of time' 383_us_569 quoting 350_us_46 and 364_us_130 as used in sec_1221 the word primarily means of first importance or principally malat v riddell supra pincite the question whether property is property described in sec_1221 is a factual inquiry pasqualini v commis- sioner 103_tc_1 in resolving that question the courts have examined various factors including the following the purpose for which the property was acquired the purpose for which it was held the frequency continuity and substantiality of sales the duration of ownership the use of the proceeds from the sale of the property the business_of_the_taxpayer and the time and effort that the taxpayer devoted to sales activities relating to the asset in question by developing or improving that asset soliciting customers or advertising see 867_f2d_199 4th cir affg an oral opinion of this court 417_f2d_905 5th cir 504_f2d_1388 54_tc_1278 32_tc_618 no single factor or combination thereof is necessarily control- ling graves v commissioner supra pincite the foregoing factors have varying degrees of relevancy depending on the facts of a particular case and all factors may not be relevant in a particular case 78_tc_234 objective factors carry more weight than the tax- payer's subjective statement of his or her intent 97_tc_308 affd without published opinion 21_f3d_427 6th cir based on our review of the entire record before us and in particular the following facts we find that petitioner has failed to establish that he held the drawing in question primar- ily for sale to customers in the ordinary_course_of_his_trade_or_business within the meaning of sec_1221 when peti- tioner acquired the drawing in question during the early 1970's he did not intend to sell it petitioner conducted research throughout the 1970's and into the 1980's on the drawings that he had acquired during the 1970's during the 1970's petitioner did not attempt to sell any of the drawings that he had acquired during those years petitioner did not sell any artwork or collectible other than the drawing in question during the period through petitioner purchased the drawing petitioner relies on 216_f2d_638 9th cir to support his contention that notwithstanding the absence of any sales of drawings by petitioner other than the drawing in question he held the drawing in question primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business we find that case to be distinguishable and petitioner's reliance on it to be mis- placed in the stockton harbor indus co case the court of continued in question during the early 1970's and had it attributed to the correct artist around the early 1980's but did not sell it until date petitioner did not use the proceeds from the sale of the drawing in question to purchase other drawings for purposes of attribution and sale and petitioner engaged in a psychology practice during all relevant periods the income from which provided his support during those periods to support his position under sec_1221 petitioner contends that during the 1970's his research on the drawings that he had acquired and his attempts to attribute them to the correct artists were sporadic during or he changed his intention with respect to certain drawings that he had acquired during the 1970's including the drawing in ques- tion and decided to have those drawings attributed to the correct artists and sold at a profit during the 1980's his research on those drawings and his attempts to enlist the inter- est of curators for purposes of attributing those drawings to the correct artists became systematic during after the continued appeals for the ninth circuit found that the taxpayer held certain condemned real_estate primarily_for_sale_to_customers in the ordinary course of its trade_or_business id pincite in contrast to the instant case the record in the stockton harbor indus co case established inter alia that the taxpayer was a corporation organized for the purpose of dealing in real_estate it acquired the real_estate in question for the purpose of developing it as an industrial site it advertised and attempted to sell that real_estate and it sold various parcels of that real_estate prior to its condemna- tion id pincite sale of the drawing in question he abandoned his art activities because a there was a serious crash in the art market as a result of an economic recession during that year and b he was having difficulty in enlisting the interest of curators for purposes of attributing certain of his drawings to the correct artistsdollar_figure at trial petitioner presented only his own testimony to support the foregoing allegations we are unwilling to rely on that testimony to establish those contentionsdollar_figure for example it strains credulity that as soon as petitioner sold in date the drawing in question which was the only drawing art- work or collectible that the record shows he ever sold the art market coincidentally and suddenly crashed thereby materially petitioner further contends that his position that the drawing in question is property described in sec_1221 is supported by the following facts certain experts checked the physical stability of the drawing in question it was determined that anselmi had not sketched that drawing the curator of italian drawings attributed that drawing to parmagianino and the drawing in question received international exposure through art exhibits newspapers and art catalogues we are not persuaded by the foregoing facts on which petitioner relies and the other facts that we have found relating to the sale of the drawing in question that that drawing is property described in sec_1221 and not a capital_asset we note that even if we had found certain of those conten- tions as facts they would not necessarily persuade us that the drawing in question was property described in sec_1221 for example assuming arguendo that during or petitioner had changed his intention with respect to certain drawings that he had acquired during the 1970's including the drawing in question and decided to have those drawings attributed to the correct artists and sold at a profit that would not necessarily indicate that he held those drawings primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business and not for investment see 57_tc_546 contributing to petitioner's decision to abandon his alleged business activities involving the sale of artwork on the instant record we sustain respondent's determination that the gain that petitioner realized from the sale of the drawing in question is long-term_capital_gain petitioner's horse activity and cattle activity section 183--in general sec_183 generally limits the amount of expenses that a taxpayer may deduct with respect to an activity_not_engaged_in_for_profit to the deductions provided in sec_183 sec_183 provides that deductions that would be allow- able without regard to whether such activity is engaged in for profit are to be allowed sec_183 further provides that deductions which would be allowable only if such activity is engaged in for profit are to be allowed but only to the extent that the gross_income derived from such activity for the taxable_year exceeds the deductions allowable under sec_183 an activity is not engaged in for profit if it is an activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or sec_212 or sec_183 in determining whether an activity is engaged in for profit the taxpayer must show that he or she engaged in the activity with an actual and honest objective of making a profit e g 91_tc_371 78_tc_642 affd without opinion 702_f2d_1205 d c cir although the taxpayer's expecta- tion of a profit need not be reasonable he or she must have a good_faith objective of making a profit e g dreicer v commissioner supra pincite 70_tc_715 affd on another issue 615_f2d_578 2d cir sec_1_183-2 income_tax regs petitioners bear the burden of proving the requisite intent e g 72_tc_411 affd without published opinion 647_f2d_170 9th cir 59_tc_791 affd 495_f2d_1079 6th cir whether a taxpayer is engaged in an activity with the requisite profit objective is determined from all the facts and circumstances e g hulter v commissioner supra pincite 88_tc_464 golanty v commissioner supra pincite sec_1_183-2 and b income_tax regs more weight is given to objective facts than to the taxpayer's mere statement of his or her intent e g dreicer v commissioner supra pincite sec_1_183-2 income_tax regs the regulations promulgated under sec_183 list the following nine factors that should normally be taken into account in determining whether an activity is engaged in for profit the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreci- ate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or loss with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and the extent to which elements of personal pleasure or recreation are involved sec_1_183-2 income_tax regs the list of factors in the regula- tions is not exclusive and other factors may be considered in determining whether an activity is engaged in for profit no single factor is dispositive e g golanty v commissioner supra pincite sec_1_183-2 income_tax regs the determina- tion of a profit objective does not depend on counting the number of factors that support each party's position e g dunn v commissioner supra pincite sec_1_183-2 income_tax regs petitioner contends that during and he was engaged in his horse activity for profit within the meaning of sec_183 during and he was engaged in his cattle activity for profit within the meaning of sec_183 and during and his horse activity and his cattle activity constituted one activity for purposes of that section respondent disagrees with each of petitioner's contentions we turn first to whether during and petitioner's horse activity and cattle activity constituted one activity or two separate activities for purposes of sec_183 sec_1_183-1 income_tax regs provides that in determining whether several undertakings of a taxpayer constitute one activ- ity or two or more separate activities for purposes of sec_183 we must consider all of the facts and circumstances includ- ing the degree of organizational and economic interrela- tionship of the undertakings the business_purpose if any that is served by carrying on the undertakings separately or together and the similarity of the two undertakings petitioner argues that during and his horse activity and his cattle activity constituted a single activity for purposes of sec_183 because he planned to expand his herd of cattle and to use that cattle to help manage the pasture for his horses on the record before us we reject petitioner's argument except for petitioner's self-serving testimony on which we are unwilling to rely there is no evidence in the record to support petitioner's assertion that during or he planned to expand his herd of cattle and use them for pasture management or that he thereafter took any measures to implement that alleged plan in fact petitioner did not even keep the cattle and the horses on the same land during and they were not kept on the same land until sometime around or on the record before us we find that petitioner has failed to establish that during and his horse activity and his cattle activity constituted one activity for purposes of section dollar_figure we shall therefore treat each such activity as a separate activity for those purposes petitioner's horse activity at all relevant times petitioner has enjoyed equestrian activities during the early 1970's he owned a horse took riding lessons and learned how to train a horse to perform at an unspecified level in dressage and to do low-level jumps provided that the horse had received some training in jumping during petitioner who did not have any formal training as a horse trainer or horse breeder acquired moon- shadow a horse that had had some training in riding and jumping he planned to train moonshadow in dressage jumping and or cross-country riding--activities that petitioner knew would expose that and any other horse to a significant risk of injury petitioner hoped to be able to sell moonshadow after it was trained however the record does not establish that during the years at issue petitioner had or attempted to acquire the expertise that he needed to carry out the training that he testified he envisioned for moonshadow and the other horses that he acquired or that he consulted with others who had such even assuming arguendo that we had found that during and petitioner's horse activity and his cattle activity constituted one activity for purposes of sec_183 on the record before us we would nonetheless find that petitioner has failed to establish that he was engaged in that activity during those years with the requisite profit_motive within the meaning of sec_183 expertisedollar_figure petitioner spent time in riding exercising and or caring for moonshadow from date when he acquired it until sometime during when it became lame during that period petitioner spent about to hours a week in riding exercising and caring for moonshadow during the mornings when he was not provid- ing services as a psychologistdollar_figure although the record estab- lishes that during petitioner purchased jill24 and gator25 and rode jill and that around jill had a colt named zack it petitioner claims that during the years at issue he hired experts to train his horses however the record does not identify such experts their qualifications or the specific training that they allegedly provided to petitioner's horses during those years what the record does show is that it was not until after the years at issue that petitioner asked ms lyman from time to time to train some of his horses and that it was at some undisclosed time during the period through that petitioner asked her to advise him how to market them petitioner suggested in his testimony that during the period from date until moonshadow became lame in he worked with moonshadow in the ring in an effort to teach it to move laterally and backwards we found petitioner's testimony in this regard to be general and vague for example he did not specify the extent of or the time he spent on any such exercises for moonshadow when petitioner acquired jill sometime during after moonshadow became lame he did not realize that it did not possess the characteristics necessary for a show horse or a competitive horse from which we infer that he may not have properly investigated the potential of that horse before he purchased it petitioner purchased gator a five-year old gelding during however ms lyman did not begin to train any of peti- tioner's horses until the spring of although ms lyman provided some training to gator it is not clear from the record whether that training occurred in the spring of or thereaf- ter shows nothing else about what if anything petitioner did with or for jill and gator during and moonshadow jill gator and zack during petitioner did not during the years at issue or at any other time project the future income expenses or profits that he expected would be generated by his horse activity nor did he contemplate or inquire about the risks associated with owning moonshadow if it were to become lame ie not only could it not continue its training in or be used for any of the activities that petitioner had in mind when he acquired moonshadow it also could not be used for breeding since it was a gelding during the years at issue although petitioner retained invoices receipts and canceled checks relating to the expenses that were incurred in his horse activity he did not maintain a separate bank account for that activity or books_or_records such as ledgers and registers to memorialize the various transactions relating thereto or to maintain a historical record of that activity eg the dates on which horses were purchased and foals were born the specific nature of any training that the horses that he owned received and the specific periods during which any such training was provided in short petitioner failed to show that during the years at issue he maintained complete and accurate books_and_records that were consistent with a profit_motive or that he carried on his horse activity in a businesslike manner in schedules f of his returns for and petitioner reported no income and losses of dollar_figure and dollar_figure respec- tively from his horse activity in schedules f of his returns for and petitioner reported aggregate income of dollar_figure and dollar_figure respectively from both his horse and cattle activities and aggregate losses of dollar_figure and dollar_figure respectively from both of those activitiesdollar_figure the aggregate losses that petitioner reported in schedules f of his returns for and from those activities were dollar_figure and dollar_figure respectively the aggregate loss from those activities that he reported in schedule f of his return decreased from the prior year to dollar_figure presumably because of an unexplained dollar_figure income item and an unexplained dollar_figure interest_expense item for that year petitioner had sufficient income during the years at issue from various sources so as to enable him to maintain a comfort- able standard of living notwithstanding the losses from his horse activity that he was able to use to reduce his tax liabil- although petitioner did not show separately the respective income expenses and losses associated with his horse activity and his cattle activity for through the record herein otherwise establishes that the income reflected in schedules f of petitioner's returns for through was solely from his cattle activity except for an unexplained dollar_figure income item for and that petitioner had expenses relating to his cattle activity during in the amount of dollar_figure moreover based on the characterization of certain expenses that petitioner claimed in schedules f of his and returns it appears that at least dollar_figure dollar_figure dollar_figure and dollar_figure respectively of the aggregate expenses claimed therein related to his horse activity ity for those yearsdollar_figure petitioner claims that he expected the horses that he acquired to appreciate in value after he trained them in support of that claim petitioner points to the fact that during petitioner and ms lyman sold ziggy for dollar_figure one month after they acquired it for dollar_figure we do not take issue with the proposition that a particular horse depending on its breed training and other facts and circumstances may appreciate in valuedollar_figure however the record contains no reliable evidence of the appreciation if any in the value of the horses that peti- tioner acquired during the years at issue or thereafter peti- tioner did not at any time retain the services of anyone to appraise the fair_market_value of his horses the only evidence in the record relating to the value of petitioner's horses is petitioner's own testimony as to the value of zack and bunny and ms lyman's testimony as to the value of gator and bunnydollar_figure with in his returns for and petitioner reported taxable_income excluding the losses from his horse activity and his cattle activity of dollar_figure dollar_figure and dollar_figure respec- tively and the parties agree that taxable_income for those years excluding such losses should be increased by dollar_figure dollar_figure and dollar_figure respectively on the record before us we find that ziggy did not materi- ally appreciate in value if it appreciated at all during the period in which petitioner and ms lyman owned that horse until they sold it one month later that is because when they pur- chased ziggy they paid a price ie dollar_figure that was substan- tially below its fair_market_value ms lyman testified that as of the time of the trial gator had a value of about dollar_figure and bunny was expected to have a continued respect to petitioner's testimony although as the owner of the horses he was qualified to testify as to their value we are not required to and we do not accept his self-serving testimony on that point see 13_tc_373 with respect to ms lyman's testimony about the value of peti- tioner's horses ms lyman was not qualified as an expert witness in this case and thus was not qualified to opine on the value of petitioner's horses even assuming arguendo that petitioner did in fact expect the horses that he acquired to appreciate in value he failed to establish that he intended in good_faith that any expected appreciation in the value of those horses when realized would together with any other income from his horse activity exceed the expenses from that activity petitioner further claims that the losses that he sustained during the years through are attributable to moon- shadow's becoming lame during and lily's sustaining injuries and zack's developing a foot disease around losses sus- tained because of unforeseen or fortuitous circumstances beyond the control of the taxpayer are generally not to be considered a sec_29 continued value of about dollar_figure to dollar_figure in the spring of and about dollar_figure in petitioner disagreed with ms lyman's testimony about the value of bunny in when he testified that as of the time of the trial he expected bunny to have a value of between dollar_figure and dollar_figure in petitioner also testified that as of the trial zack a young horse with minimal training had a value of between dollar_figure and dollar_figure a factor indicating that the activity was not engaged in for profit 748_f2d_890 4th cir sec_1_183-2 income_tax regs we note initially that when petitioner decided to acquire moonshadow in he was aware that the activities of dressage jumping and or cross-country riding would expose that and any other horse to a significant risk of injury thus any losses sustained as a result of injuries to his horses should not have been unforeseen by petitioner as for petitioner's contention that moonshadow's lameness during was responsible for the losses that he reported for the years at issue and thereafter petitioner claims that he was about to offer moonshadow for sale at the time it became lame and that it had a value of about dollar_figure at that time the record does not contain any reliable evidence showing the value of moonshadow at the time it became lame the attempts if any that petitioner made or planned to make to sell moonshadow or the profit that would have been generated from such a sale taking into account the price that petitioner paid for moonshadow in and the expenses that he incurred from then until when moonshadow became lamedollar_figure with respect to petitioner's claims about the injuries to lilly and zack's foot disease that occurred around we fail it is also noteworthy that although moonshadow became lame in petitioner kept that horse and continued to incur expenses with respect to it until he donated it to vpi around to see how those physical problems affected the profitability of petitioner's horse activity for any of the preceding years including the years at issue we have considered and reject all of petitioner's other claims and contentions with respect to his horse activity based on our review of the entire record before us we find that petitioner has failed to establish that during the years at issue his horse activity was an activity engaged in for profit within the meaning of sec_183 accordingly we sustain respondent's determinations that the deductions that petitioner claimed for and relating to his horse activity are limited by sec_183 and b petitioner's cattle activity during petitioner who did not have any formal train- ing as a cattle breeder purchased for dollar_figure a herd of cattle consisting of a bull and four cows with calf the cows produced calves during or and each year thereafter petitioner kept his cattle on the nlc land during the winter months they consumed approximately five bales of hay that cost about dollar_figure to dollar_figure a bale and during the remainder of the year they consumed the grass on the nlc land petitioner kept the calves produced by his cows for six to seven months until they weighed around pounds at which time he sold them for approximately dollar_figure each during petitioner received dollar_figure from the sale of the calves and incurred expenses in that same amount in connection with his cattle activity during and peti- tioner received dollar_figure dollar_figure and dollar_figure respectively from the sale of the calves but the record does not disclose the expenses that he incurred during those years in connection with his cattle activitydollar_figure petitioner did not project during or at any other time the future income expenses or profits that he expected would be generated by his cattle activity although during and petitioner retained invoices receipts and canceled checks relating to the expenses_incurred in his cattle activity he did not maintain a separate bank account for that activity or books_or_records such as ledgers and registers to memorialize the various transactions relating thereto or to maintain a historical record of that activity eg the dates on which calves were born and sold to support his contention that he was engaged in his cattle activity during and with a profit_motive petitioner relies on his receipt of income from the sale of calves during through in amounts ranging from dollar_figure to dollar_figure receipt of income is not necessarily indicative of a profit petitioner testified that he incurred virtually no expenses in connection with his cattle activity other than annual ex- penses of approximately dollar_figure to dollar_figure for winter feed for the cattle we are unwilling to rely on that testimony it is inconsistent with his oral stipulation at trial that during he incurred expenses relating to his cattle activity of dollar_figure petitioner concedes that he did not expect his cattle to appreciate in value motive in contrast realizing a profit would be indicative of such a motive however on the record before us we find that petitioner did not realize a profit from his cattle activity for or on that record we are unable to determine whether he realized a profit from that activity for and based on our review of the entire record before us we find that petitioner has failed to establish that during and his cattle activity was an activity engaged in for profit within the meaning of sec_183 accordingly we sustain respondent's determinations that the deductions that petitioner claimed for and relating to his cattle activity are limited by sec_183 and b additions to tax and accuracy-related_penalties sec_6651 respondent determined that petitioner is liable for each of the years and for the addition_to_tax under sec_6651 because he failed to file timely his return for each such year for purposes of sec_6651 the determination of the prescribed date for filing a return must be made by reference to any extension of the time for filing the return the addition_to_tax under sec_6651 does not apply if it is shown that the failure_to_file was due to reasonable_cause and not willful neglect in order to prove reasonable_cause the taxpayer must show that despite the exercise of ordinary busi- ness care and prudence he or she was nevertheless unable to file the return within the prescribed time 469_us_241 sec_301_6651-1 proced admin regs for and petitioner filed applications for auto- matic extension that were dated date and date respectively and that requested a four-month extension of time until date and date respectively within which to file his returns for those years the parties agree that petitioner also filed a second request application_for additional extension of time that was dated date in order to extend the period within which to file his return to date petitioner contends that the addition_to_tax under sec_6651 should not be imposed for either or because he relied on mr mcveigh to prepare the applications for auto- matic extension for those years respondent disagrees we have found as facts that petitioner relied on mr mcveigh to prepare requests to extend the time within which to file his returns for and line of each of those requests required petitioner to make a reasonable estimate based on the information available of his tax_liability for the year for which he was seeking an extension in arriving at the respective estimated_tax liabilities for and that mr mcveigh showed on line of petitioner's applications for automatic_extension for those years mr mcveigh believed it reasonable and so advised petitioner that given petitioner's situation those estimates be based on the tax_liability shown in peti- tioner's return for the year immediately preceding the year for which each such application was being filed provided that petitioner paid each of those estimated_tax liabilities by the time he filed each such application since the tax_liabilities shown in petitioner's and returns were dollar_figure and dollar_figure respectively mr mcveigh entered on line of peti- tioner's applications for automatic_extension for and estimated_tax liabilities of dollar_figure and dollar_figure respectively those respective applications also indicated that for estimated_tax payments of dollar_figure were made by petitioner and that for dollar_figure of tax was withheld from petitioner and dollar_figure of tax was paid with his application_for automatic_extension when an accountant advises a taxpayer on a matter of tax law in circumstances such as these it is reasonable for the taxpayer to rely on that advice see united_states v boyle supra pincite on the record before us we find that petitioner's reliance on mr mcveigh's advice with respect to the preparation of his applications for automatic_extension of time for and was reasonable and in good_faith and constituted reasonable_cause within the meaning of sec_6651 accordingly we reject respondent's determinations under sec_6651 for and with one exception for that exception for relates to the facts that petitioner's return for that year was dated date and was received by the service on date yet the parties agree that the application_for additional extension of time was filed in order to extend the time within which to file his return to date on the record before us we sustain respondent's determination under sec_6651 for only to the extent that peti- tioner filed his return after date sec_6662 respondent determined that petitioner is liable for the years at issue for the accuracy-related_penalty under sec_6662 because a portion of the underpayment_of_tax for each of those years was due to negligence disregard of rules and regula- tions or a substantial_understatement_of_income_tax sec_6662 imposes an addition_to_tax equal to percent of the underpayment_of_tax attributable to inter alia negligence or disregard of rules or regulations and any substantial_understatement_of_income_tax sec_6662 and for purposes of sec_6662 the term negligence includes any failure to make a reasonable attempt to comply with the code and disregard includes any careless reckless or intentional disregard sec_6662 negligence has also been defined as a lack of due care or failure to do what a reasonable person would do under the circumstances 963_f2d_907 6th cir affg tcmemo_1991_179 91_tc_686 affd 893_f2d_656 4th cir with respect to individuals an understatement_of_tax is substantial if it exceeds the greater of percent of the tax required to be shown in the return or dollar_figure sec_6662 an understatement_of_tax is equal to the amount of tax required to be shown in the return less the amount shown therein sec_6662 the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith sec_6664 the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends upon the pertinent facts and circumstances including the tax- payer's efforts to assess his or her proper tax_liability the knowledge and experience of the taxpayer and reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs petitioner contends that he is not liable for any of the years at issue for the accuracy-related_penalty under sec_6662 because he relied on the advice of his accountant mr mcveigh for the preparation of his returns for those yearsdollar_figure respondent disagrees a taxpayer generally cannot avoid the duty_of filing an accurate return by placing that responsibility on an agent petitioner does not rely on sec_6662 in order to reduce the underpayment for each of the years at issue that respondent determined is attributable to a substantial_understatement_of_income_tax 63_tc_149 a taxpayer bears the responsibility for any negligent errors of his or her accountant 28_tc_1100 affd per curiam 262_f2d_150 9th cir however a taxpayer may avoid the accuracy-related_penalty under sec_6662 for negligence or substantial understate- ment by showing that his reliance on the advice of a profes- sional such as an accountant was reasonable and in good_faith sec_1_6664-4 income_tax regs in the case of claimed reliance on the accountant who prepared the taxpayer's return the taxpayer must establish that correct information was provided to the accountant and that the item incorrectly claimed or reported in the return was the result of the accountant's error see 70_tc_158 a taxpayer's reliance on the advice of an accountant is not reason- able or in good_faith where a cursory review of a taxpayer's return would reveal an omission_from_income 88_tc_654 we note initially that with respect to the items that respondent contends were due to negligence disregard of the rules or regulations or a substantial_understatement_of_income_tax the record contains evidence only as to the items specifi- cally identified and discussed below the record does not contain any evidence as to the remainder of those items remain- ing items on all of which petitioner bears the burden_of_proof nor does it show what information petitioner may have provided to mr mcveigh or what advice mr mcveigh may have given peti- tioner regarding those remaining items accordingly we find that petitioner has failed to establish that any reliance by him on mr mcveigh with respect to the remaining items was reasonable and in good_faith consequently we sustain respondent's de- terminations imposing on petitioner the accuracy-related_penalty on the portion of the underpayment for each of the years at issue that is attributable to those items negligence or disregard of the rules or regulations petitioner's underreporting of the gain from the sale of the drawing in question in schedule c of his return relating to art sales petitioner reported a gain of dollar_figure from the sale of the drawing in question the parties agree that petitioner realized a gain of dollar_figure from the sale of that drawing although not determined in the notice respondent contends on brief that petitioner's underreporting of the gain from the sale of the drawing in question was due to negligence or disregard of rules and regulations this issue constitutes a new_matter on which respondent bears the burden_of_proof rule a 80_tc_34 affd in part and vacated in part 756_f2d_1430 9th cir the record does not establish what petitioner told mr mcveigh about the sales_price of the drawing in question the purchase_price of that drawing and the gain realized from its sale however assuming arguendo that petitioner had told mr mcveigh that he sold the drawing in question for dollar_figure that he had purchased it for dollar_figure and that he realized a gain of dollar_figure from its sale and that mr mcveigh erroneously reported gross_receipts of dollar_figure from the sale of the drawing in question a cost_of_goods_sold of dollar_figure for that drawing and a gain of dollar_figure from its sale petitioner was nonetheless negligent in underreporting the gain from that sale in his return petitioner had an obligation to review that return before filing it see metra chem corp v commissioner supra pincite petitioner however did not review it he was merely interested in knowing the amount of tax due so that he could write a check for that amount if petitioner had reviewed schedule c of his return relating to art sales he would have known that the gain from the sale of the drawing in question was underreported see id pincite on the record before us we find that any reliance by petitioner on mr mcveigh was not reasonable or in good_faith insofar as it relates to the underreporting of the gain from the sale of the drawing in question viz dollar_figure instead of dollar_figure consequently we find that petitioner is liable for the accuracy-related_penalty on the portion of the underpayment for that is attributable to that underreported gain petitioner's claimed disallowed automobile expenses we have found that petitioner was not aware of the errors relating to the disallowed automobile expenses that mr mcveigh made in schedules c of petitioner's and returns relating to psychological testing services and that he could not have detected them by reviewing those returns on the record before us we find that petitioner's reliance on mr mcveigh with respect to the claimed disallowed automobile expenses in petitioner's returns for the years at issue was reasonable and in good_faith consequently we reject respon- dent's determinations imposing the accuracy-related_penalty on the portion of the underpayment for each such year that is attributable to those disallowed expenses substantial_understatement_of_income_tax petitioner's claimed deductions of losses from his horse activity and his cattle activity we have found that based on what petitioner told mr mcveigh about his horse activity and his cattle activity includ- ing that he intended to buy train and sell horse sec_34 and that he had incurred certain expenses for various stables and training centers that mr mcveigh believed to be reputable mr mcveigh concurred in petitioner's conclusion and he and petitioner jointly decided that the gross_income expenses and loss from we note that this finding is based on mr mcveigh's testimony as to what petitioner told him about his intention with respect to his horse activity petitioner's horse activity during and the aggregate income expenses and losses from his horse activity and cattle activity during and should be reported in schedules f of peti- tioner's returns for those years and that any loss from those activities could be used to reduce petitioner's income from other sources that was reported in each such return with respect to petitioner's horse activity the record does not establish whether petitioner fully disclosed to mr mcveigh when he pre- pared petitioner's returns for the years at issue all the perti- nent facts that would bear on the question whether petitioner carried on that activity with the requisite profit_motive within the meaning of sec_183 eg facts relating to the manner in which petitioner carried on those activities the extent of time or effort that he devoted to those activities whether he had the expertise necessary to train his horses whether he consulted with experts about training his horses and whether he expected his horses to appreciate in value with respect to petitioner's cattle activity the record does not establish whether petitioner informed mr mcveigh of any of the pertinent facts relating to that activity on the record before us we find that petitioner has failed to establish that any reliance by him on mr mcveigh with respect to the claimed deductions in petitioner's returns for the years at issue of the losses from his horse activity and cattle activ- ity was reasonable or in good_faith consequently we sustain respondent's determinations imposing the accuracy-related_penalty on the portion of the underpayment for each such year that is attributable to such deductions petitioner's claimed deductions of sep contributions for each of the years and petitioner underpaid his income_tax as a result of the deductions that he claimed viz dollar_figure and dollar_figure respectively and that respondent disallowed with respect to his sep contribution for each such yeardollar_figure for the underpayment of income_tax attributable to petitioner's disallowed sep deduction resulted from the following errors including the gain from the sale of the drawing in question in schedule c of petitioner's return and thus including that gain in petitioner's self-employment_income calculat- ing petitioner's self-employment_income by aggregating the results of only those schedules c of petitioner's return that showed net profits and not those that showed losses and claiming a deduction for petitioner's contribution to the sep we note that because respondent made determinations in the notice that increased petitioner's self-employment_income for respondent determined that petitioner is entitled to a sep deduction for that year in an amount in excess of the sep de- duction claimed in petitioner's return if the dollar_figure net profit from the sale of the drawing in question had not been reported in schedule c of petitioner's return relating to art sales that return would have reflected an aggregate loss of dollar_figure from petitioner's various schedules c and based on that return petitioner would not have been enti- tled to a deduction for any portion of the dollar_figure contribution that he made to the sep for that year equal to percent 25-percent limit rather than percent 15-percent limit of his self-employment incomedollar_figure for the underpayment of income_tax attributable to petitioner's disallowed sep deduction resulted from erroneously using the percent limit rather than the 15-percent limit erroneous inclusion of the gain from the sale of the drawing in question in petitioner's self-employment_income for based on the information that petitioner provided to mr mcveigh mr mcveigh concluded that the gain from the sale of the drawing in question constituted self-employment_income and not long-term_capital_gain and that it should be reported in sched- ule c of petitioner's return relating to art sales we have found that petitioner informed mr mcveigh that he sold the drawing in question during at a gain and that he intended to continue to purchase and sell drawings in the futuredollar_figure we do not know what else petitioner told mr mcveigh about the sale of that drawing we have found that petitioner did not sell any drawings artwork or collectibles after he sold the drawing in question in date and petitioner testified that after that sale he had no intention of continuing to sell drawings see supra note petitioner contradicted mr mcveigh's testimony when he testified that after the sale of the drawing in question he did not tell mr mcveigh that he intended to continue to sell draw- ings we believe and accept mr mcveigh's testimony on this point and not petitioner's on the record before us we find that petitioner has failed to establish that any reliance on mr mcveigh with respect to the erroneous treatment of the gain from the sale of the drawing in question as self-employment_income was reasonable or in good_faith consequently we sustain respondent's determination imposing the accuracy-related_penalty on the portion of the underpayment for that is attributable to that treatment erroneous calculation of petitioner's self-employment_income for the parties agree that if the court were to sustain respondent's determination that the gain from the sale of the drawing in question constitutes long-term_capital_gain that gain should not have been included in petitioner's self-employment_income for for purposes of calculating the deductible portion if any of petitioner's sep contribution however even assuming arguendo that contrary to our finding the gain from the sale of the drawing in question were ordinary_income and not capital_gain and that contrary to the agreement of the parties the use of the 25-percent limit were proper the amount of the deduction that petitioner claimed in his return for the sep contribution nonetheless exceeded percent of his self-employment_income for that year that is because in calculating petitioner's self-employment for mr mcveigh failed to aggregate the results shown in all sched- ules c of his return and instead aggregated the results of only those schedules c showing net profits on the record before us we find that petitioner's reliance on mr mcveigh with respect to the erroneous calculation of petitioner's self-employment_income for ie not aggregating all schedules c of petitioner's return was reasonable and in good_faith consequently we reject respon- dent's determination imposing the accuracy-related_penalty on the portion of the underpayment for that year that is attributable to that errordollar_figure erroneous use of the 25-percent limit for and we have found that mr mcveigh advised petitioner to use the 25-percent limit rather than the 15-percent limit except for petitioner's informing mr mcveigh in date that he had established a retirement_plan to which he timely contributed dollar_figure and relating to him the conversations that he had had with the individual who had assisted him in establishing that plan the record does not show what petitioner told mr mcveigh about the contributions that he made to a retirement_plan for and specifically we do not know whether petitioner advised mr mcveigh that the retirement_plan that he had estab- lished was a simplified_employee_pension on the record before us we find that petitioner has failed mr mcveigh's error resulted in petitioner's claiming a deduction that exceeded by dollar_figure percent of the aggregate results shown in the schedules c of his return to show that any reliance on mr mcveigh with respect to the erroneous use of the 25-percent limit rather than the 15-percent limit in computing the deductions relating to his sep contribu- tions for and was reasonable or in good_faith conse- quently we sustain respondent's determinations imposing the accuracy-related_penalty on the portion of the underpayment for each such year that is attributable to that error petitioner's failure to pay excise_tax on excess_contributions to the sep respondent determined that petitioner is liable for each of the years at issue for the accuracy-related_penalty under sec_6662 on the underpayment of excise_tax attributable to peti- tioner's excess_contribution to the sep for each such year on the ground that each such underpayment is attributable to a substan- tial understatement of income_tax within the meaning of sec_6662 respondent's determinations are wrong the under- payment of excise_tax for each of the years at issue is not attributable to a substantial_understatement_of_income_tax for each such year within the meaning of sec_6662 and d see sec_6662 d a sec_1_6662-4 sec_1_6664-2 income_tax regs consequently we reject respondent's determina- tions imposing the accuracy-related_penalty on the underpayments of excise_tax for the years at issue to reflect the foregoing and the concessions of the parties decision will be entered under rule


internal_revenue_service number release date index number ------------------------- ---------------------- ------------------------------- -------------------------------------------- -------------------------------------- -------------------------------------------- - - department of the treasury washington dc person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg eo1 plr-108151-10 date june employer ------------------------------------------------- ---------------------------------------------------------------------------------- ----------------------------------------------------------- plan trust board year year year year ------------------------------------------------------------- --------------------------------------------------------------------- --------------------------- ------- ------- ------- ------- law ------------------------------------------------------------------------ ----------------------------------------------------------- entity county state ------------------- ------------------------------------- ------------- plr-108151-10 ---------------------------------------------------- dear -------------- this letter responds to a letter from your authorized representative dated date as well as subsequent correspondence submitted on behalf of the employer requesting rulings that the trust’s income is excludable from gross_income under sec_115 of the internal_revenue_code issue and that the trust is not required to file an annual income_tax return issue the employer represents the following facts facts employer is a public_retirement_system created in year by vote of the citizens of the county in accordance with the law its function is to administer retirement benefits for the employees of the county and other public agencies within the state employer is managed by the board the majority of which is composed of the county treasurer and members appointed by the county board_of supervisors and the balance of which is elected by current and retired members of the employer prior to year the employer operated as a department of the county with its executive management staff investment staff and certain supervisory personnel management working as employees of the county in year however the board passed a resolution adopting recently enacted state code provisions making the employer an entity as such the employer now is a political_subdivision of the state employing management directly as of year while continuing to perform the same function as before all of the employer’s administrative staff other than the management continue to be employed by the county in year the employer established the plan to provide certain of its employees as well as their spouses dependents and domestic partners beneficiaries with reimbursement for qualified_medical_expenses after retirement the trust to fund the plan was established the same year the employer contribute sec_2 of each participant’s earned incentive plan award contributions are mandatory and continue until the participant’s separation_from_service at which time the employer contributes of the current value of each participant’s unused accumulated sick leave employees have no elections as to plan participation or contribution levels contributions are allocated to separate participant accounts plr-108151-10 ---------------------------------------------------- a participant must terminate employment with the employer to receive benefits which consists of reimbursements for qualified_medical_expenses under sec_213 to be made from the participant’s account the maximum benefit equals the participant’s account balance upon the death of the participant his beneficiaries are entitled to benefits under the plan any balance in the account after the death of the retiree and of all beneficiaries is forfeited the plan_administrator is the employer or a person selected by the employer the employer may amend the plan document at any time subject_to ensuring that trust assets are used for the exclusive benefit of participants and beneficiaries and for reasonable administrative expenses on plan termination any assets remaining after all plan liabilities are satisfied will revert to the employer the trustee of the trust is the employer’s executive director and chief investment officer trust distributions are made only as directed by the administrator the trustee determines investments and he may engage investment advisors the trustee maintains accounts and reports all transactions to the employer the trustee receives no compensation beyond his pay as an employee the employer can replace the trustee at any time with 30-day written notice it can amend the trust agreement at any time and at any time terminate the trust the employer represents that the trust provision allowing for retroactive amendments will be deleted upon termination after all benefits owed and all expenses have been paid any assets remaining revert to the employer the plan and the trust provide for reimbursement of qualified_medical_expenses incurred by inter alia a participant’s domestic partner under the plan the value of any benefits to be provided to a nondependent domestic partner will be included in the participant’s income as the benefits are earned rather than when paid to the extent required by the code law and analysis issue sec_115 provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from plr-108151-10 ---------------------------------------------------- gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of a public_utility or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign properly to conduct in addition pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation that is subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year in revrul_90_74 1990_2_cb_34 the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health was excludable from gross_income under sec_115 in revrul_90_74 private interests neither materially participated in the organization nor benefited more than incidentally from the organization the trust was established and is maintained by the employer to provide various health benefits under the plan to its retired employees and their beneficiaries providing such benefits to former public employees constitutes the performance of an essential_governmental_function within the meaning of sec_115 see revrul_90_75 and revrul_77_261 the provision of health benefits to participating retirees and their beneficiaries satisfies the obligation of the employer under the plan to provide those benefits thus the income of the trust accrues to the benefit of the employer which is an agency of the state no private interests participate in or benefit from the operation of the trust other than as providers of goods and services any amounts remaining in the trust after all health benefits plus reasonable fees and expenses have been paid shall be returned to the employer the benefit to retired employees is incidental to the public benefit see revrul_90_74 law analysis issue sec_301_7701-1 of the procedure and administration regulations provides in part that the classification of organizations that are recognized as separate entities is determined under sec_301_7701-2 through -4 unless a provision of the code provides for special treatment of that organization plr-108151-10 ---------------------------------------------------- sec_301_7701-4 of the regulations provides in general that an arrangement will be treated as a_trust under the code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and therefore are not associates in a joint enterprise for the conduct of business for profit the employer contributes money to the trust to pay health benefits for certain retired employees of employer and their beneficiaries the trustee is charged with protecting and conserving the trust’s assets for trust beneficiaries who cannot share in the discharge of this responsibility and therefore are not associates in a joint enterprise for the conduct of a business for profit assuming that the trust is recognized as a separate_entity under sec_301_7701-1 we conclude that the trust is an ordinary_trust under sec_301_7701-4 sec_6012 provides that every trust having taxable_income for the tax_year or having gross_income of dollar_figure or more for that year regardless of the amount of taxable_income must file a return with respect to income taxes under subtitle a conclusion based solely on the facts and representations submitted by the employer and as of the date the proposed amendment to the trust agreement is adopted we conclude that the income of the trust is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for purposes of sec_115 consequently we rule that the trust’s income is excludable from gross_income under sec_115 assuming that it is a separate_entity under sec_301_7701-1 we conclude that the trust is classified as an ordinary_trust under sec_301_7701-4 sec_6012 does not require a_trust without taxable_income to make a return of income when gross_income is less than dollar_figure because the trust’s income is excludable from gross_income under sec_115 we rule that the trust is not required by sec_6012 to file an annual income_tax return except for the specific rulings above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding the federal tax consequences of contributions to or payments from the plan including whether contributions to the plan are excludable from the gross_income of employees former plr-108151-10 ---------------------------------------------------- employees retirees spouses or dependents under sec_106 and whether payments from the plan including reimbursements of medical_expenses are excludable from the gross_income of employees former employees retirees spouses or dependents under sec_104 or sec_105 under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent sincerely sylvia hunt assistant chief exempt_organizations branch office of division counsel associate chief_counsel tax exempt government entities enclosures copy for sec_6110 purposes