                         T.C. Summary Opinion 2015-48



                        UNITED STATES TAX COURT



                  JOSHUA W. PINGEL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13225-12S.                        Filed August 10, 2015.


      Joshua W. Pingel, pro se.

      Laurie B. Downs, for respondent.



                             SUMMARY OPINION


      PARIS, Judge: This case was heard pursuant to the provisions of section

7463 of the Internal Revenue Code in effect when the petition was filed.1




      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                         -2-

Pursuant to section 7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent for any other case.

      Respondent determined a deficiency of $7,147 in petitioner’s Federal

income tax and a section 6662 accuracy-related penalty of $1,429.40 for 2008.

      The issues for decision are whether petitioner: (1) was engaged in the

activity of “travel guide writer” for profit during 2008 and (2) is liable for a

section 6662 accuracy-related penalty.

                                     Background

      Some of the facts have been stipulated and are so found. The stipulated

facts and facts drawn from stipulated exhibits are incorporated herein by this

reference. Petitioner resided in Colorado when he filed his petition.2

      For 10 days in 2007 petitioner vacationed in Australia. While on vacation,

he decided to pursue travel as a career. In December 2007 petitioner began laying

the groundwork for what he hoped would be an exciting and profitable career as a

travel guide writer by organizing Virgin Backpacking, LLC (LLC), as a Colorado

LLC and obtaining an employer identification number for the LLC from the

Internal Revenue Service (IRS). Petitioner originally set up the LLC to be taxed


      2
      Petitioner’s trial was held at the Milwaukee, Wisconsin, trial session
because he had moved to Wisconsin before trial.
                                         -3-

as a partnership with the business purpose of Internet sales, but he later amended

the LLC to a sole proprietorship. Petitioner never transferred or contributed any

assets to the LLC. As of the time of trial the LLC was not current with its filings

with the State of Colorado.

      Petitioner’s plan was to be a part of the online travel market by writing a

blog3 about his international travels. Petitioner had some backpacking experience

and planned to use his knowledge to write about the niche of international,

lightweight backpacking.4 Petitioner organized the LLC to sell camping gear

through affiliate sales5 and the books petitioner planned to write about his travels.

To earn income through affiliate sales, petitioner had to fill out forms for the

desired product manufacturers to be allowed to provide links on his Web site to



      3
        “Blog” is a truncation of the expression “Web log”, which is a regularly
updated Web site or Web page written in an informal or conversational style and
typically run by an individual or small group. Oxford Dictionary,
http://www.oxforddictionaries.com/us/definition/american_english/blog (last
visited June 22, 2015).
      4
      At trial petitioner defined “lightweight backpacking” as traveling with a
backpack weighing no more than 12 pounds.
      5
        “Affiliate sales” is a marketing arrangement by which an online retailer
pays a commission to an external Web site for traffic or sales generated from its
referrals. Oxford Dictionary,
http://www.oxforddictionaries.com/us/definition/america_english/affilated-
marketing (last visited June 22, 2015).
                                         -4-

the manufacturers’ Web sites. Petitioner provided no links to manufacturer Web

sites on his Web site that would allow for affiliate sales.

I.    Petitioner’s Travels

      In early 2008 petitioner left his position as a “senior client relationship

manager” at Computershare. He took a distribution of $43,891 from his Fidelity

Investments section 401(k) account to finance his travels.

      In June 2008 petitioner’s adventure began. Over the next 5-1/2 months,

petitioner made his way across the continents of Europe and Africa and even

made a foray into the Middle East.

      Throughout his journey petitioner updated his blog with anecdotes and

pictures from his travels. While petitioner included details about some of the sites

he saw, places he stayed, and food he ate, many of his explanations do not give

enough details for a reader to find the specific site, lodgings, or restaurant

described. For example in petitioner’s Paris blog entry he states: “[W]e hit up

The [sic] BEST ice cream in Europe. * * * there are a couple of places that serve it

and pricing is much higher at one (the ‘tourist’ one as Jeff put it) than at the other

one. We walked past the tourist one, which had a huge crowd and walked down

the street about half a block to the other one.” Petitioner does not give any more

details about where in Paris the best ice cream in Europe can be found.
                                         -5-

      Petitioner did keep copies of all his receipts, flight confirmations, lodging

confirmations, tour confirmations, rail passes, shuttle confirmations, bank

statements, tour vouchers, credit card statements, and other miscellaneous receipts

from the trip.

II.   Petitioner’s Books

      Petitioner realized as he traveled, and even more so after he returned to the

United States, that the market was already saturated with international

backpacking blogs and that his plan for generating income through affiliate sales

from his blog would not be profitable. Petitioner then shifted his focus to writing

books about his travels and the insights he gained while traveling.

      Petitioner has written three books since returning from his travels. The first

book centers on petitioner’s time in Africa and his journey from Cape Town,

South Africa, to Nairobi, Kenya. Petitioner’s plan was to sell this book for the

price of $14.99 per book. There is no evidence in the record as to how petitioner

arrived at this price. He has revised the book over the years and stated its purpose

is to be informative about places to visit, stay, and eat, along with his personal

thoughts and experiences.
                                           -6-

        Petitioner’s second book is entitled Road to the World: A 19 Day Q&A to

Get You on Track for Personal and Professional Success.6 Petitioner began

writing this book in 2011. Although petitioner wrote about his travels that

“[m]any lessons were learned and now he is sharing some of those lessons with

you in this book”, he referenced his travels in only 1 of the 19 chapters of the

book.

        As of the date of trial, petitioner’s third book was still in production. It is a

book of his Africa photos that include inspirational sayings with each photo.

Petitioner paid an independent self-publishing Web site $26 to publish a test copy

of this book.

        As of the date of trial, none of the books had been published or were subject

to publisher commitments to publish, nor could petitioner estimate when the books

would be published. Petitioner planned to self-publish his books, not to obtain a

publishing contract. Outside of speaking with family, friends, co-workers, and

other travelers, petitioner did not know what the potential demand for or interest in




        6
       Petitioner wrote his second book under the pen name Rayland Crowder,
which is a combination of the first and last names, respectively, of the two main
characters on the television show “Justified”. Petitioner did not research whether
there were any copyright limitations on using the characters’ names.
                                        -7-

these books would be. As of the date of trial, petitioner had not earned any

income from his books.

III.   Back in the USA

       In early 2009, in addition to his efforts to develop his writing and marketing

after his trip, petitioner contacted a former client and obtained employment in

Texas to finance petitioner’s product development courses and provide for basic

necessities. During this time petitioner was not able to update his blog or publish

his books because he was working in excess of 14 hours a day. Petitioner held this

job until March 31, 2011.

       To increase his knowledge and understanding of the world of travel writing,

petitioner began corresponding with a travel blog expert in 2010. Petitioner

enrolled in this expert’s travel writing courses, and he enrolled in other specialized

courses in the areas of marketing, product creation, and sales generation over the

next few years.

       In 2010 petitioner accidentally deleted his blog while making revisions. As

of the date of trial, petitioner’s blog had not been reposted, and he had received no

income from his blog.

       Petitioner timely filed his 2008 Federal income tax return (return). He listed

“world travel guide” as his principal business on the Schedule C, Profit or Loss
                                        -8-

From Business, attached to the return. On the Schedule C, petitioner did not

report any business gross receipts or gross income. He claimed total expenses of

and reported a net business loss of $39,138. As part of his net business loss,

petitioner claimed deductions for travel expenses of $19,347, deductible meals and

entertainment expenses of $6,314, and other expenses of $5,431.

      Petitioner reported wages of $29,299, taxable interest of $52, ordinary

dividends of $3, and a pensions and annuities distribution of $43,891, for total

income of $73,190 for 2008. Petitioner reduced his total income to $34,107 by

reporting a Schedule C business loss of $39,138.

      Respondent issued petitioner a notice of deficiency for 2008 dated March

13, 2012, wherein he disallowed in full petitioner’s deductions for travel,

deductible meals and entertainment, and other expenses and determined a

deficiency of $7,147 and a section 6662 accuracy-related penalty of $1,429.40.7

Respondent’s determination for all of the disallowed expenses was that petitioner

had not “established that you incurred, or if incurred, paid this amount during the

taxable year for ordinary and necessary business purposes”.




      7
        Respondent also reduced the amount of petitioner’s deduction for student
loan interest. That determination was computational and will be not discussed
further.
                                         -9-

IV.   Procedural History of Petitioner’s Case

      On May 24, 2012, petitioner timely filed a petition with the Court.

Petitioner states in his petition that “[t]he IRS determined that I did not have a

business; rather a hobby. My Sch C was truly a business and not a hobby.”

Petitioner goes on to aver that he: (1) “acted in a business like [sic] manner”, (2)

had “a profit motive”, and (3) did “not have profitable years yet because I have not

completed the trail guide book.” Petitioner also states: “There is not a pleasure

motive as backpacking is extremely difficult work.”

      Respondent’s answer denies that he questioned whether petitioner’s activity

was a business or a hobby and reiterates that his determination was that

petitioner’s deductions were disallowed because they were not “incurred and paid

for ordinary and necessary business purposes.” Respondent also denies that

petitioner had the intent to operate a business and that petitioner had a profit

motive.

      Respondent then changed course in his pretrial memorandum. The only

issues listed for trial in the pretrial memorandum are whether petitioner: (1) was

engaged in an activity for profit under section 183 and (2) was liable for an

accuracy-related penalty under section 6662. Petitioner did not file a pretrial

memorandum.
                                          - 10 -

      Respondent did not file an amended or supplemental answer to assert an

increased deficiency under his new theory that petitioner was not engaged in an

activity for profit under section 183.8

                                      Discussion

      Generally, the Commissioner’s determination of a deficiency is presumed

correct, and the taxpayer bears the burden of proving it incorrect. See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are

a matter of legislative grace, and the taxpayer bears the burden of proving his

entitlement to any deductions claimed. INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

I.    Burden of Proof

      Under section 7491(a) the burden of proof may shift to the Commissioner if

the taxpayer produces credible evidence with respect to any relevant factual issue

and meets other requirements.

      Additionally, respondent bears the burden of proof for any new matter that

departs from the determination in the notice of deficiency. See Rule 142(a);

      8
        Respondent allowed petitioner’s 2008 Schedule C deductions for
depreciation expenses of $5,128; legal and professional expenses of $550; office
expenses of $1,728; and supply expenses of $640 for the same activity. Under
respondent’s new theory, his determination should have been that all of
petitioner’s deductions should be disallowed.
                                        - 11 -

Dagres v. Commissioner, 136 T.C. 263, 277-278 (2011); see also Papineau v.

Commissioner, 28 T.C. 54, 57 (1957). New matter includes a new theory that

“‘alters the original deficiency or requires the presentation of different evidence.’”

Dagres v. Commissioner, 136 T.C. at 278 (quoting Wayne Bolt & Nut Co. v.

Commissioner, 93 T.C. 500, 507 (1989)); Estate of Falese v. Commissioner, 58

T.C. 895, 898-899 (1972); Papineau v. Commissioner, 28 T.C. at 57; Tauber v.

Commissioner, 24 T.C. 179, 185 (1955).

      The Court need not determine which party bears the burden of proof

because the case will be decided on the preponderance of the evidence. See

Knudsen v. Commissioner, 131 T.C. 185 (2008), supplementing T.C. Memo.

2007-340; Cyman v. Commissioner, T.C. Memo. 2009-144.
                                        - 12 -

II.   Section 1839

      A.     General Law

      Generally, the Internal Revenue Code allows deductions for ordinary and

necessary expenses incurred in conducting a trade or business or for the

production of income. Secs. 162(a), 212(1). To determine whether and to what

extent section 183 and the regulations thereunder apply, the activity of the

taxpayer must be ascertained. Sec. 1.183-1(d), Income Tax Regs. Under section

183, if an activity is not engaged in for profit, then no deduction attributable to

that activity is allowed except as provided for in section 183(b). The phrase

“activity not engaged in for profit” means any activity other than one with respect

to which deductions are allowed for the taxable year under section 162 or under

paragraph (1) or (2) of section 212. Sec. 183(c). “Profit” for purposes of section

183(a) means economic profit, independent of tax savings. See Antonides v.




      9
         Generally, the Court’s concerns surrounding new theories are surprise or
prejudice to either party. Both parties were aware that sec. 183 would be the main
issue at trial, and all of the exhibits referenced at trial were joint exhibits. See
Bhattacharyya v. Commissioner, T.C. Memo. 2007-19, 2007 WL 247821, at *6
(both parties relied on the same exhibits at trial and the taxpayer was aware before
trial of new issues the Commissioner planned to raise). When the Court asked
petitioner whether the issues set forth in respondent’s pretrial memorandum were
the issues for trial, he responded in the affirmative.
                                         - 13 -

Commissioner, 91 T.C. 686, 694 (1988), aff’d, 893 F.2d 656 (4th Cir. 1990);

Hulter v. Commissioner, 91 T.C. 371, 393 (1988).

      The standard to decide whether a taxpayer is carrying on a trade or business

so that his expenses are deductible under section 162 is to examine whether the

taxpayer’s primary purpose and intention in engaging in the activity is to make a

profit. Dreicer v. Commissioner, 78 T.C. 642, 643 (1982), aff’d without published

opinion, 702 F.2d 1205 (D.C. Cir. 1983). The taxpayer’s expectation of profit

need not be a reasonable one, but merely bona fide. Id.; sec. 1.183-2(a), Income

Tax Regs. Whether a taxpayer expects to realize a profit is a question of fact and

is resolved by examining all of the facts and circumstances of the case. Dreicer v.

Commissioner, 78 T.C. at 643-644; sec. 1.183-2(a), Income Tax Regs.

      The Court examines the facts and circumstances of the case using the

relevant factors in section 1.183-2(b), Income Tax Regs. Dreicer v.

Commissioner, 78 T.C. at 644. Such factors include: (1) the manner in which the

taxpayer carries on the activity, (2) the expertise of the taxpayer or his advisors,

(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 other similar or dissimilar activities, (6) the

taxpayer’s history of income or losses with respect to the activity, (7) the amount
                                         - 14 -

of occasional profits, if any, which are earned, (8) the financial status of the

taxpayer, and (9) whether elements of personal pleasure or recreation are involved.

Sec. 1.183-2(b), Income Tax Regs. No one factor is determinative. Id. Simple

numerical majority will not indicate a lack of profit motive or vice versa, and the

Court may accord certain factors greater weight than others. Id.; see also Golanty

v. Commissioner, 72 T.C. 411, 426 (1979), aff’d without published opinion, 647

F.2d 170 (9th Cir. 1981); Allen v. Commissioner, 72 T.C. 28, 34 (1979). Each of

these factors will be analyzed in turn, and the Court will give greater weight to the

objective factors listed above. See Keanini v. Commissioner, 94 T.C. 41, 46

(1990); Dreicer v. Commissioner, 78 T.C. at 645; see also sec. 1.183-2(a), Income

Tax Regs.

      B.     Petitioner’s Pursuits as an International Travel Guide Writer

      Petitioner listed world travel guide10 (activity) as his principal business on

the Schedule C attached to the return. The Court will apply the section 183 factors

to all the facts and circumstances surrounding the activity.




      10
        Although petitioner does not use the term “writer” on the Schedule C as
his profession, it is evident from the documents entered into evidence and
petitioner’s testimony that his intended profession was that of a travel guide writer
and not merely a travel guide.
                                        - 15 -

             1.     Manner in Which the Activity Is Conducted

      Whether petitioner carried on the activity in a businesslike manner and

maintained complete and accurate books and records may indicate whether he

engaged in the activity for profit. See sec. 1.183-2(b)(1), Income Tax Regs.

Carrying on the activity in a manner substantially similar to that of other similar

activities that are profitable and changing operating methods or adopting new

techniques or abandoning unprofitable methods in a manner consistent with an

intent to improve profitability may also indicate a profit motive. Id.

      Before beginning his travels, petitioner formed the LLC to implement the

activity. Petitioner obtained an employer identification number for the LLC, but

he did not identify the LLC on the Schedule C attached to the return. Furthermore,

as of the date of trial, he had not contributed or transferred any assets to the LLC,

and the LLC’s filings were not current with the State of Colorado.

      Petitioner did not maintain any books or records for the activity. He had no

written business plan and no estimate as to when his Web site would be

operational, when his books would be published, or when he would begin to earn

income from the activity. Although petitioner documented and retained receipts

for his travel-related expenses, merely maintaining receipts is not enough to

indicate a profit motive. See Golanty v. Commissioner, 72 T.C. at 430; Rowden v.
                                         - 16 -

Commissioner, T.C. Memo. 2009-41, 2009 WL 415601, at *5. There must be

additional evidence showing petitioner used the receipts to “evaluate the

profitability of his operations,” and without more, such evidence is not persuasive

of his profit motive. See Rowden v. Commissioner, 2009 WL 415601, at *5.

There is no such evidence here.

      Furthermore, petitioner did not investigate the activity before embarking on

his trip. Petitioner incurred over $39,000 in expenses before doing any research

into the activity’s profitability. This is an indication that the activity was not

engaged in for profit. See McCarthy v. Commissioner, T.C. Memo. 2000-197,

2000 WL 863151, at *4; see also Burger v. Commissioner, T.C. Memo. 1985-523,

1985 WL 15145, at *5 (taxpayers who “undertook the activity with no concept of

what their ultimate costs might be, how they might operate at the greatest cost

efficiency, how much revenues they could expect, or what risks could impair the

generation of revenues” did not “operate in a businesslike manner”), aff’d, 809

F.2d 355 (7th Cir. 1987). It was not until well into petitioner’s travels and upon

his return that petitioner investigated and determined the level of competition and

degree of difficulty involved in the activity. Additionally, petitioner admitted his

approach to the activity was ad hoc; he testified to using a “ready, fire, aim”

method of learning from his mistakes along the way.
                                         - 17 -

      The Court finds that the activity was not carried on in a businesslike manner

or operated in a manner similar to that of other similar activities, or that petitioner

made changes to his operation methods or adopted any new techniques in the year

in issue. As such, this factor weighs against petitioner in determining whether the

activity was engaged in for profit.

             2.     Expertise of Petitioner or His Advisors

      This factor concerns petitioner’s preparation for the activity by “extensive

study of its accepted business, economic, and scientific practices, or consultation

with those who are expert therein” to indicate his profit motive. See sec. 1.183-

2(b)(2), Income Tax Regs. Where such preparation was undertaken or experts

consulted, but the taxpayer did “not carry on the activity in accordance with such

practices,” then lack of profit motive may be indicated, unless the taxpayer was

“attempting to develop new or superior techniques which may result in profits

from the activity.” Id.

      Petitioner sought out and obtained expert advice regarding the activity.

Petitioner contacted noted experts in the activity; additionally, he contacted

experts regarding the creation, development, and marketing of products embodied

in courses he has taken. While these actions are to petitioner’s credit, he did not

perform them until after his trip when he determined the marketplace to be highly
                                        - 18 -

competitive and already developed and in years beyond the year in issue.

Petitioner failed to perform basic due diligence before embarking on his proposed

course of action. See Westerbrook v. Commissioner, T.C. Memo. 1993-634, 1993

WL 540784, at *7 (“a taxpayer need not make a formal market study” but “should

undertake a basic investigation of the factors that would affect profit”), aff’d, 68

F.3d 868 (5th Cir. 1995). Given the timeframe in which petitioner sought expert

advice, the Court finds this factor weighs against petitioner’s having a profit

motive in 2008.

             3.     Time and Effort Expended

      Extensive time and effort devoted to an activity, “particularly if the activity

does not have substantial personal or recreational aspects, may indicate an

intention to derive a profit.” Sec. 1.183-2(b)(3), Income Tax Regs. Furthermore,

withdrawal from another occupation to devote time and energy towards the

activity may be evidence of a profit motive. Id. The fact that a taxpayer devoted

“a limited amount of time to an activity does not necessarily indicate a lack of

profit motive where the taxpayer employs competent and qualified persons to

carry on such activity.” Id.

      The record reflects that petitioner devoted his time and effort to the activity

in 2008 through his traveling and blog posts. Additionally, petitioner left his job
                                        - 19 -

in 2008 to have more time to pursue the activity. Although petitioner has devoted

some degree of time to researching, drafting, revising, and educating himself in

the finer points of blogging, marketing, and sales, most, if not all, of these tasks

were undertaken in years not in issue here.

      Petitioner admitted that since 2008 he has not done much writing.

Petitioner testified that the employment he obtained upon his return to the States

did keep him from writing for the next couple of years. “[T]here must be some

conscientious intent and effort to engage in and continue in the writing field for

the purpose of producing income and a livelihood in order to have writing qualify

as a trade or business”. Wright v. Commissioner, 31 T.C. 1264, 1267 (1959),

aff’d, 274 F.2d 883 (6th Cir. 1960).11 While petitioner did travel and write in

2008, he did no more writing for the next two years. “Carrying on a business * * *

implies an occupational undertaking to which one habitually devotes time,

attention, or effort with substantial regularity.” Fahs v. Crawford, 161 F.2d 315,

317 (5th Cir. 1947). This factor weighs against petitioner.




      11
        The Court understands petitioner’s argument that Wright is outdated law
because of technological advancements in the publishing world. While the
publishing world has advanced since 1959, Wright is still good law and pertinent
to the Court’s discussion.
                                        - 20 -

             4.    Expectation That Assets Used in Activity May Appreciate in
                   Value

      For the purposes of a section 183 analysis, “[t]he term ‘profit’ encompasses

appreciation in the value of assets * * * used in the activity.” Sec. 1.183-2(b)(4),

Income Tax Regs. A taxpayer may realize an overall profit when appreciation in

the value of assets combined with any income from the activity will exceed

expenses of operation. Id.

      Petitioner claimed a depreciation deduction of over $5,000 for assets not

listed on the Schedule C. Petitioner credibly testified that the depreciation

deduction was for his computer and photography equipment. These assets will not

appreciate in value.

      The only other assets referred to in the record are petitioner’s original work

product--the blog and books he wrote. Petitioner’s blog was accidentally deleted

in 2010 and as of the time of trial had yet to be reposted. Although petitioner

testified about potential prices for two of the books, he has not sold any books.

There is not sufficient evidence in the record to decide whether petitioner expected

these assets to appreciate. Accordingly, the Court cannot conclude that this factor

supports a finding of profit motive. See Shah v. Commissioner, T.C. Memo.

2015-31, at *11.
                                         - 21 -

             5.     The Success of the Taxpayer in Carrying On Other Similar or
                    Dissimilar Activities

      “The fact that the taxpayer has engaged in similar activities in the past and

converted them from unprofitable to profitable enterprises may indicate that he is

engaged in the present activity for profit, even though the activity is presently

unprofitable.” Sec. 1.183-2(b)(5), Income Tax Regs. Petitioner credibly testified

that this was the first time he had engaged in an activity of this nature and that he

was a novice entrepreneur. Therefore, this factor is neutral.

             6.     The Taxpayer’s History of Income and Losses With Respect to
                    the Activity


      If a taxpayer has engaged in an activity for multiple years, “a series of losses

during the initial or start-up stage of an activity may not necessarily be an

indication that the activity is not engaged in for profit.” Id. subpara. (6).

Continued sustained losses beyond the initial or startup period required to bring

the activity to profitability, if not explainable as “due to customary business risks

or reverses” may be indicative of the lack of profit motive. Id. However, “[a]

series of years in which net income was realized would * * * be strong evidence

that the activity is engaged in for profit.” Id.
                                         - 22 -

      Petitioner began the activity in 2008, the year in issue. Petitioner claimed a

business loss of $39,139 for 2008. It is not uncommon to incur losses in the first

year of an activity. There is no evidence in the record, however, that future profits

will cover the startup losses. See Golanty v. Commissioner, 72 T.C. at 426-427.

This factor weighs against petitioner.

             7.     The Amount of Occasional Profits, if Any, Which Are Earned

      This factor concerns the amount of profits in relation to the losses incurred,

investments made in the activity, and assets used in the activity. Sec. 1.183-

2(b)(7), Income Tax Regs. The activity had no profits in 2008.

      Petitioner testified that aside from attending some courses and seminars

about the activity in the following years, he was not involved to the extent he had

wished because of other work obligations.12 Furthermore, the income-generating

aspects of petitioner’s activity--his blog and books--were not operational,

published, or available for sale at the time of trial, and petitioner could not



      12
        Petitioner filed Schedules C with his 2009 and 2010 Federal income tax
returns. Petitioner listed his profession as “consulting travel guide” on both
Schedules C. Petitioner reported gross receipts or sales of $49,146 for 2009 and
none for 2010. A business loss was reported for each year. Petitioner testified
that he had not sold any copies of his books and had no affiliated sales from his
blog. It is not clear from the record what activity generated the gross receipts or
sales reported for 2009.
                                         - 23 -

estimate when said items would be operational or available for sale. With no

estimation of or plan for profits, petitioner incurred tens of thousands of dollars of

expenses. “The magnitude of the activity’s losses in comparison with its revenues

is an indication that petitioner did not have a profit motive with respect to the

activity.” Miller v. Commissioner, T.C. Memo. 1998-463, 1998 WL 906689, at *6

(citing Smith v. Commissioner, T.C. Memo. 1997-503, and Burger v.

Commissioner, T.C. Memo. 1985-523). Consequently, this factor weighs against

petitioner.

              8.    The Financial Status of the Taxpayer

      “The fact that the taxpayer does not have substantial income or capital from

sources other than the activity may indicate that an activity is engaged in for

profit.” Sec. 1.183-2(b)(8), Income Tax Regs. Substantial income from sources

other than the activity (particularly if the losses from the activity generate

substantial tax benefits) may indicate that the activity was not engaged in for profit

especially if there were personal or recreational elements involved. Id.

      In 2008 petitioner terminated his employment to pursue the activity and

took a sizable distribution from his section 401(k) retirement account to finance

his travels. Petitioner credibly testified that he was required to obtain other
                                        - 24 -

employment when he returned from traveling to provide for basic necessities

because the activity was not immediately profitable.

      Petitioner did have some wage income, taxable interest, ordinary dividends,

and a taxable section 401(k) distribution in 2008. The record is silent as to

whether petitioner had income from any other sources, but petitioner did realize

the tax benefits of the deductions generated from the activity to shelter his wage

income, taxable interest, ordinary dividends, and section 401(k) distribution in

2008. This fact, coupled with the fact that there were elements of personal

pleasure and recreation in the activity as discussed below, tips the balance of this

factor against petitioner.

             9.     Elements of Personal Pleasure or Recreation

      The presence of personal motives in carrying on an activity may indicate the

activity was not engaged in for profit, particularly where there are recreational or

personal elements involved. Sec. 1.183-2(b)(9), Income Tax Regs. Where there

are no elements of personal recreation, the inference is strong that there was a

profit motive. Id. But “[a]n activity will not be treated as not engaged in for profit

merely because the taxpayer has purposes or motivations other than solely to make

a profit.” Id. The fact that the taxpayer enjoyed the activity and derived personal
                                        - 25 -

pleasure from engaging in it is not sufficient alone to cause the activity to be

classified as not engaged in for profit. Id.

      Petitioner did derive substantial personal pleasure and recreation from the

activity and readily admitted he enjoyed traveling, regardless of any hardships

suffered during his travels. In fact it was while traveling on vacation that

petitioner decided to attempt to make a career out of the activity. This factor, in

combination with the other factors reviewed by the Court, weighs against

petitioner.

      C.      Conclusion

      After review of the factors and all of the facts and circumstances

surrounding the activity, the Court finds that petitioner was not engaged in the

activity for profit in 2008.13

      Although from his pretrial memorandum forward in this case respondent has

asserted that petitioner’s activity was not engaged in for profit under section 183,

no amended answer was filed asserting an increase in the deficiency. Because


      13
        The Court understands that 2008 was the first year petitioner engaged in
the activity. While the Court finds that petitioner was not engaged in the activity
for profit in 2008, this finding does not mean that the activity is forever doomed to
be merely a hobby. See Feistman v. Commissioner, T.C. Memo. 1982-306, aff’d
without published opinion, 718 F.2d 1110 (9th Cir. 1983).
                                        - 26 -

respondent has failed to follow the necessary procedural requirements to assert an

increase in the deficiency, his determination is limited to the deficiency in the

notice of deficiency dated March 13, 2012.

III.   Accuracy-Related Penalty

       Section 6662(a) and (b)(1) and (2) authorizes a 20% penalty on the portion

of an underpayment of income tax attributable to: (1) negligence or disregard of

rules or regulations or (2) a substantial understatement of income tax. Under

section 7491(c), the Commissioner bears the burden of production with regard to

penalties. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the

Commissioner has met the burden of production, the taxpayer has the burden of

proving that the penalties are inappropriate because of reasonable cause or

substantial authority. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-

447; Hall v. Commissioner, 729 F.2d 632, 635 (9th Cir. 1984), aff’g T.C. Memo.

1982-337.

       There is a “substantial understatement” of income tax for any year if the

amount of the understatement for the taxable year exceeds the greater of 10% of

the tax required to be shown on the tax return or $5,000. Sec. 6662(d)(1)(A);

Higbee v. Commissioner, 116 T.C. at 448.
                                        - 27 -

      Here, the understatement of income tax is $7,147, which is greater than

$5,000, which in turn is greater than 10% of the tax required to be shown on the

return. Thus, the understatement is substantial for purposes of the section 6662(a)

accuracy-related penalty. The Court concludes that respondent met his burden of

production in showing that petitioner substantially understated his Federal income

tax for 2008.

      Pursuant to section 6664(c)(1), no penalty shall be imposed under section

6662 with regard to any portion of an underpayment if it can be shown that there

was reasonable cause for such portion and that the taxpayer acted in good faith

with respect to such portion. Whether a taxpayer acted with reasonable cause and

in good faith is decided on a case-by-case basis, taking into account all pertinent

facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the

most important factor is the extent of the taxpayer’s effort to assess his proper tax

liability. Id.; see also Remy v. Commissioner, T.C. Memo. 1997-72.

      Petitioner did not address the accuracy-related penalty at trial or in his

opening brief. In his answering/reply brief, petitioner devotes one paragraph to

the accuracy-related penalty, merely reiterating that the activity was an active trade

or business. No evidence was presented to explain petitioner’s efforts to ascertain

his correct tax liability for 2008 beyond his belief that the activity in which he was
                                       - 28 -

engaged was a trade or business. Petitioner did not present any reasonable cause

or good faith arguments.

      Petitioner has not met his burden of proving that he acted in good faith and

with reasonable cause, and the Court sustains the section 6662(a) accuracy-related

penalty for a substantial understatement of income tax.14

      To reflect the foregoing,



                                                      Decision will be entered

                                                for respondent.15




      14
        The notice of deficiency states that the sec. 6662 penalty was attributable
to one of the following: (1) negligence or disregard of rules or regulations; (2)
substantial understatement of income tax; or (3) substantial valuation misstatement
(overstatement). Because the Court finds that there was a substantial
understatement of income tax, a discussion of whether petitioner was negligent is
not warranted. A substantial valuation misstatement is not applicable here.
      15
        The Court finds that respondent is limited to his original determination in
the notice of deficiency dated March 13, 2012. See supra p. 25-26.
