                  T.C. Summary Opinion 2001-146



                     UNITED STATES TAX COURT



     CLAUDE D. MAYO, SR. AND LESSIE M. MAYO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 14686-99S.              Filed September 20, 2001.


     Claude D. Mayo Sr. and Lessie M. Mayo, pro se.

     Dustin M. Starbuck, for respondent.


     POWELL, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.1    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.




1
     Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the years in
issue, and Rule references are to the Tax Court Rules of Practice
and Procedure.
                               - 2 -


     Respondent determined deficiencies in petitioners’ 1995 and

1996 Federal income taxes of $5,940 and $5,354, respectively.

Respondent also determined that petitioners are liable for

negligence penalties under section 6662(a) for 1995 and 1996 of

$1,188 and $1,070.80, respectively.

     The issues are whether petitioners are (1) entitled to

deduct losses on Schedule C, Profit or Loss From Business, for

the years in issue arising from a used-car activity of petitioner

Claude D. Mayo, Sr. (petitioner); (2) entitled to deduct greater

medical and mortgage interest expenses than the amounts allowed

by respondent; and (3) liable for the negligence penalties under

section 6662(a) for 1995 and 1996.     At the time the petition was

filed petitioners resided in Moneta, Virginia.

     The relevant facts may be summarized as follows.     During

1995 and 1996 petitioners reported income from interest,

dividends, pensions, and wages of $61,929 and $60,589,2

respectively.   Petitioners deducted losses of $24,554 in 1995 and

$24,729 in 1996 from the used-car activity (Mayo’s Auto Sales).

Petitioners’ Schedule C for the years in issue showed the

following:




2
     The 1996 income also includes gambling income and capital
gains.
                                - 3 -
                                  1995                     1996

Gross Income                    $10,530               $11,580
Less:
     Insurance        $2,320                    $2,520
     Interest          6,311                     5,893
     Legal expenses      130                       140
     Office expenses     291                       -0-
     Repairs           6,450                       230
     Supplies         16,310                       -0-
     Taxes & licenses    470                       -0-
     Utilities         2,802                       -0-
     Car & Truck         -0-                     4,464
     Wages               -0-                       568
                                              1
     Other expenses      -0-                    22,494

Total expenses                  35,084                    36,309

Loss                           $24,554                   $24,729
       1
      Other expenses consisted of cleaning supplies ($147), tags
and licenses ($360), auto parts ($3,657), State inspection
($150), car purchases ($15,420), rental uniforms ($780), and
office and car phone ($1,980).

       Mayo’s Auto Sales began operations in 1989 or 1990, and has

never operated at a profit.    For the taxable years 1993 and 1994,

petitioners reported losses of $14,225 and $16,021, respectively,

from this activity.    The records of the Virginia Department of

Motor Vehicles show that petitioners sold four automobiles during

the period of January 1, 1995 through December 31, 1996.          Two of

those vehicles were sold to petitioners’ relatives.

       Upon examination of both years respondent disallowed the

deductions claimed on Schedule C with respect to Mayo’s Auto

Sales on the ground that the activity was not engaged in for

profit.    With respect to Schedule A, Itemized Deductions,

deductions for 1995, respondent disallowed $2,663 of the $6,764
                                - 4 -
claimed for mortgage interest for lack of substantiation.   With

respect to the 1996 Schedule A deductions, respondent disallowed

$6,817 of the $7,879 claimed for medical expenses for lack of

substantiation.    Respondent also determined that petitioners are

liable for penalties under section 6662(a) for the years in

issue.

                             Discussion

1.   Mayo’s Auto Sales

      Section 162(a) allows a deduction for ordinary and necessary

expenses paid or incurred in carrying on a trade or business.

Generally, under section 183(a) and (b) an individual is not

allowed deductions attributable to an activity “not engaged in

for profit” except to the extent of gross income generated by the

activity.   Section 183(c) defines an activity “not engaged in for

profit” as any activity other than one for which deductions are

“allowable * * * under section 162 or under paragraph (1) or (2)

of section 212.”   Essentially the test for determining whether an

activity is engaged in for profit is whether the taxpayer engages

in the activity with the primary objective of making a profit.

See Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir. 1990),

affg. 91 T.C. 686 (1988).   Although the expectation need not be

reasonable, the expectation must be bona fide.   See Hulter v.

Commissioner, 91 T.C. 371, 393 (1988).    Furthermore, in resolving

the question, greater weight is given to the objective facts than
                               - 5 -
to the taxpayer’s statement of intentions.     See Thomas v.

Commissioner, 84 T.C. 1244, 1269 (1985), affd. 792 F.2d 1256 (4th

Cir. 1986).

     Section 1.183-2(b), Income Tax Regs., contains a

nonexclusive list of factors to be used in determining whether an

activity is engaged in for profit.     These factors are:   (1) The

manner in which the taxpayer carries on the activity; (2) the

expertise of the taxpayer or his advisers; (3) the time and

effort expended by the taxpayer in carrying on the activity; (4)

the expectation that assets used in the activity may appreciate

in value; (5) the success of the taxpayer in carrying on similar

or dissimilar activities; (6) the history of income or losses

with respect to the activity; (7) the amount of occasional

profit, if any; (8) the financial status of the taxpayer; and (9)

any elements of personal pleasure or recreation.     No single

factor, nor simple numerical majority of factors, is controlling.

See Cannon v. Commissioner, 949 F.2d 345, 350 (10th Cir. 1991),

affg. T.C. Memo. 1990-148.

     Petitioners presented no evidence concerning many of the

factors contained in the regulations.     While petitioner claims

that he maintained books and records, he did not produce any

records at trial.   He could not explain the $16,310 deduction

claimed for supplies in 1995, and he could not explain the

components of the $22,494 deduction for other expenses in 1996.
                                - 6 -
While people may not normally associate trading in used cars as a

recreation, we do recognize that some people do get a certain

pleasure from repairing cars.

     But, what concerns us more is the history of losses.    While

a person may start out with a bona fide expectation of profit,

even if it is unreasonable, there is a time when, in light of the

recurring losses, the bona fides of that expectation must cease.

See Filios v. Commissioner, 224 F.3d 16 (1st Cir. 2000), affg.

T.C. Memo. 1999-92.    This is particularly pertinent here where

petitioner could not estimate when the activity might become

profitable.    Moreover, there is nothing in the record to

reasonably suggest that the activity, as petitioner operated it

during the years in issue, had been, or would ever be,

profitable.

     We are also concerned that there is no evidence that

petitioner, despite losses of more than $79,000 from 1993 to

1996, ever sought expert advice concerning the profitability of

the venture.    In the same vein there is no evidence that

petitioner altered his method of doing business to cut the stream

of losses.    The bottom line is that, whatever this activity was,

it was not operated for profit.

     There is one aspect of respondent’s determinations with

regard to Mayo’s Auto Sales that we think was erroneous.
                                - 7 -
It appears to us that the computation of tax in the notice of

deficiency incorrectly adds the Schedule C gross receipts to the

total adjustments for both years.    Respondent disallowed the

total Schedule C expenses for both years and then added the

Schedule C gross income to petitioners’ taxable income and

subtracted the same amounts as miscellaneous deductions on

Schedule A.    The taxable income for 1995 and 1996 appears to be

overstated by $10,530 and $11,580, respectively.    This can be

corrected in the Rule 155 computation.

2.   Medical and Mortgage Interest Expenses

      With regard to the disallowance of the deduction for medical

expenses for 1996, petitioners have the burden of establishing

that respondent’s determination is erroneous.    Rule 142(a).

Section 7491 does not affect the burden of proof where the

taxpayer has not substantiated deductions.     Higbee v.

Commissioner, 116 T.C. 438, 440-441 (2001).     The deduction was

disallowed because petitioners had not substantiated the

expenditure.    Petitioners presented no evidence from which the

Court could conclude that respondent’s determination was

erroneous, and we affirm that determination.

      The determination with respect to the 1995 mortgage interest

is different.    Petitioners claimed deductions of $6,764 for 1995

and $7,883 for 1996.    Petitioners apparently substantiated the

1996 amount, but could substantiate only $4,101 of the 1995
                                - 8 -
deduction.   Petitioner testified that petitioners had paid the

amount deducted.    Considering the substantiation of the 1996

deduction and petitioner’s testimony, we believe that it is

highly likely that petitioners incurred and paid the amount

claimed for 1995.    We hold for petitioners on this issue.

3.   Negligence

      Section 6662(a) imposes a penalty with respect “to any

portion of an underpayment of tax required to be shown on a

return” in an amount “equal to 20 percent of the portion of the

underpayment to which this section applies.”      Section 6662

applies, inter alia, to underpayments attributable to negligence

or disregard of rules or regulations.    See sec. 6662(b)(1).

“Negligence” includes any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code, and

“disregard” includes any careless, reckless, or intentional

disregard.   Sec. 6662(c).   Also, “‘Negligence is a lack of due

care or the failure to do what a reasonable and ordinarily

prudent person would do under the circumstances.’”      Freytag v.

Commissioner, 89 T.C. 849, 887 (1987) (quoting Marcello v.

Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. on this

issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299), affd. 904 F.2d

1011 (5th Cir. 1990), affd. on other grounds 501 U.S. 868 (1991).

The question then is whether petitioners’ conduct meets the

reasonably prudent person standard.     See id.
                               - 9 -
     Petitioner is a lineman for the power company, and his wife

is a brusher with a furniture company.     They are not

sophisticated with respect to financial matters.     Petitioners’

returns were prepared by a professional tax return preparer.     We

have recognized that reliance on the advice of a professional is

a factor to be considered in determining whether a taxpayer uses

reasonable care.   See id. at 888.   Moreover, while we conclude

that the Schedule C losses are not deductible because the

activity was not entered into for profit, there are factors that

may be viewed as being favorable to petitioners.     Accordingly, we

do not sustain the section 6662(a) penalties.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                            Decision will be entered

                                       under Rule 155.
