                  T.C. Summary Opinion 2007-151



                      UNITED STATES TAX COURT



                DARRYL F. ROYSTER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21199-04S.              Filed August 30, 2007.


     Darryl F. Royster, pro se.

     Kathleen Schlenzig and Angela Friedman (specially

recognized), for respondent.



     GOLDBERG, 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.   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.   Unless otherwise indicated, subsequent

section references are to the Internal Revenue Code in effect for
                               - 2 -

the years in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     Respondent determined deficiencies of $5,995, $5,060, and

$6,089 in petitioner’s Federal income taxes, and accuracy-related

penalties under section 6662(a) of $1,199, $1,012, and $1,217.80

for taxable years 2000, 2001, and 2002, respectively.   The issues

for decision are:   (1) Whether, for the taxable years in issue,

an activity conducted by petitioner known as Royster Basketball

School constituted an activity engaged in for profit within the

meaning of section 183(a); (2) whether petitioner is entitled to

deduct expenses relating to Royster Basketball School during the

years in issue under either the foregoing section or, in the

alternative, section 183(b)(1) and (2); and (3) whether

petitioner is liable for the accuracy-related penalty under

section 6662(a) for negligence or disregard of the rules or

regulations for each of the years at issue.1




     1
       Two adjustments in the notice of deficiency were not
addressed at trial and are, therefore, deemed conceded. One of
these adjustments relates to whether petitioner is liable for
self-employment tax stemming from his work as a basketball
referee during the years at issue, and as listed on the Schedules
C, Profit or Loss From Business, he attached to his returns for
2000, 2001, and 2002. Respondent determined that petitioner is
liable for self-employment tax on that income with a
corresponding deduction for one-half of that tax. The second
adjustment that is also deemed conceded relates to unreported
income in the amount of $875 received in 2000.
                                 - 3 -

                             Background

     Some of the facts have been stipulated by the parties and so

found.   The stipulation of facts and attached exhibits are

incorporated herein by this reference.    At the time the petition

was filed in this case, petitioner resided in Chicago, Illinois.

     During the years in issue, petitioner was employed full time

by the Internal Revenue Service (IRS) as a computer equipment

analyst/information technology specialist.

     Petitioner has played basketball since adolescence, and

played on the basketball team at McMurray College in

Jacksonville, Illinois.    After college, petitioner shifted his

interest from playing basketball to being a basketball referee.

Petitioner has been a high school basketball referee for the past

33 years and has attended referee training programs sponsored by

the National Basketball Association (NBA), as well as the

National Collegiate Athletic Association (NCAA).

     During the taxable years in issue, petitioner refereed high

school basketball games.    Petitioner filed Schedules C, reporting

income and business expenses pertaining to this activity for each

of the taxable years at issue.

     In 1998, petitioner parlayed his involvement with high

school basketball by establishing a traveling men’s basketball

team and skills school known as Royster Basketball School (RBS).

Petitioner’s dual purpose in establishing this team was to
                               - 4 -

provide talented, high school-aged basketball players in the

Chicago area with an opportunity to participate in a series of

tournaments around the country that provide players with exposure

to collegiate and professional talent scouts, and through the

success of his players, to establish and enhance his personal

reputation as a basketball coach and talent scout to the point

where he would receive a job offer from one of the major athletic

apparel and shoe companies.

     Petitioner wished to model RBS after a number of similar

basketball schools currently operating around the country.   These

programs are mostly run by former professional basketball players

as nonprofit entities.   Due to their own celebrity, as well as

that of their players, some school directors have received

lucrative job offers from major athletic shoe and clothing

companies to serve as “advisory talent consultants”.   In this

role, the team directors are responsible for spotting talented

players early in their careers so that the athletic companies

would be able to enter into lucrative endorsement deals with the

players after their school careers are over.   It is not unusual

for these consultants to garner salaries in the six-figure range.

     Petitioner recruited players for his team through word-of-

mouth, his own observations as a referee for high school

basketball games, and advertisements for tryouts placed in local

newspapers.   Petitioner would hold tryouts for RBS each March in
                               - 5 -

conjunction with the end of the high school basketball season.

Petitioner would have many more players turn out for the tryouts

than he had spots for on the RBS team.    Once selected for RBS,

players were required to pay $300.     This fee was for gym rentals,

coaching, and costs associated with the various basketball

tournaments that RBS participated in.

     RBS held weekly practices at rented gyms and recreational

centers and schools near petitioner’s home.    During the summer

and fall months, RBS would participate in a series of basketball

clinics and tournaments, including a series of tournaments

sponsored by the Amateur Athletic Union (AAU).    These tournaments

were held in Illinois, Minnesota, Ohio, Kentucky, Indiana,

Louisiana, and Florida.

     Petitioner maintained a checking account for RBS at Mid-

America Bank in Western Springs, Illinois.    At a meeting with an

IRS employee held on November 25, 2005, when specifically asked

whether he had a business plan, petitioner replied that he did

not have a business plan for RBS.    On May 25, 2006, however,

during a conference with respondent in preparation for trial,

petitioner presented respondent with a three-page document

entitled, “Business Plan for RBS”.

     At some time prior to 2000, the first taxable year in issue,

petitioner started a business known as Dynamic Motivational

Resources (DMR).   DMR was a motivational speaking enterprise
                                  - 6 -

directed towards improving the lives of young basketball players

in urban Chicago.   Aside from a Schedule C for DMR, which was

attached as part of the stipulated exhibits, the record is devoid

of any other mention of this activity.      Petitioner did not file a

Schedule C with respect to DMR in either 2001 or 2002.

     For taxable years 2000, 2001, and 2002, petitioner filed

Schedules C for RBS as follows:

                          2000               2001          2002

Income                  $3,000             $3,850        $2,450
Business Expenses
  Advertising               44               400             -
  Bad debts                 -                275             -
  Insurance                350                -              -
  Vehicle rental           840                -           1,725
  Property rental        1,365                -              -
  Car and truck             -              1,466          3,078
  Office expenses           -                 -             500
  Utilities              1,154             1,556          3,916
  Taxes and licenses        -                 -             200
  Travel, meals
   and entertainment        -               4,390            -
  Supplies                  -                 200         2,425
  Other                 19,536             13,605        13,150

Total expenses          23,289             21,892        24,994
Net profit or (loss)   (20,289)           (18,042)      (22,544)

     In the notice of deficiency mailed to petitioner, respondent

disallowed all of the business expenses claimed by petitioner on

the Schedules C for RBS in 2000, 2001, and 2002, because

petitioner had neither established that any of the amounts

constituted an ordinary and necessary business expense nor

provided any documentation to substantiate the claimed expenses.

Respondent also recharacterized the amounts of income as listed
                                - 7 -

on petitioner’s Schedules C for RBS for each of the taxable years

in issue on the grounds that the income was received from

petitioner’s employer (IRS) as reimbursement for employee

business expenses.

     As part of the examination, the IRS agent sent petitioner

letters on October 3, 2003, November 21, 2003, January 9, 2004,

January 30, 2004, and February 19, 2004, requesting documentary

evidence supporting his claimed business expenses.     Further,

during meetings with petitioner held on November 21, 2005, May 8,

2006, and May 25, 2006, respondent requested supporting

documentation for the business expenses reported on the Schedules

C.   Finally, on May 31, 2006, petitioner provided respondent with

copies of canceled checks, invoices, receipts, and newspaper

articles.   Copies of these submissions are included in the

stipulated exhibits received at trial.

     Petitioner’s home was burglarized on or about September 11,

2005.   Petitioner informed respondent thereafter that files,

records, and information pertaining to RBS stored on petitioner’s

computer were taken in the robbery.     The police investigation

report, included as part of the stipulated exhibits, lists as the

only property taken in the robbery a computer and all of the RBS-

related receipts.    The report also concludes that there was no

forced entry into petitioner’s home.
                                 - 8 -

     Petitioner seeks a redetermination of deficiencies in this

case on the grounds that he was engaged in a trade or business

with respect to RBS within the meaning of section 183 during the

taxable years in issue, and that he possesses the necessary

documentation to substantiate the disallowed business expenses.

Petitioner does not raise as issues either the self-employment

tax, the unreported income that respondent included in the

determination for taxable year 2000, or the recharacterized

income as reported on his Schedules C for RBS.2

                           Discussion

     Generally, the taxpayer bears the burden of proving the

Commissioner’s determinations incorrect.      Rule 142(a)(1); Welch

v. Helvering, 290 U.S. 111, 115 (1933).      Tax deductions are a

matter of legislative grace with the taxpayer bearing the burden

of proving entitlement to the deductions claimed.      Rule

142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

     Under section 7491(a), this burden of proof may shift to the

Commissioner in certain situations.      Petitioner contends that

section 7491(a) requires respondent to bear the burden of proof.

We need not decide this issue, however, because our analysis in




     2
       There is nothing in the   record to support respondent’s
determination recharacterizing   the gross income reported on
Schedules C for RBS during the   years at issue as reimbursement
for expenses from petitioner’s   employer, IRS. The Court is at a
loss as to why this adjustment   was made.
                                 - 9 -

this case is based on the record before the Court and not on

which party bears the burden of proof.

Petitioner’s Basketball Team Activity (RBS)

     The first issue for decision is whether RBS was an activity

petitioner engaged in for profit within the meaning of section

183 during the years in issue.

     Section 183(a) provides that if an individual engages in an

activity but does not engage in that activity for profit, “no

deduction attributable to such activity shall be allowed under

this chapter except as provided in this section.”   In the case of

an activity not engaged in for profit, section 183(b)(1) allows

deductions which are otherwise allowable without regard to

whether the activity is engaged in for profit.   Section 183(b)(2)

allows deductions that would be allowable if the activity were

engaged in for profit, but only to the extent of gross income

received from the activity.   Section 183 defines an “activity not

engaged in for profit” as “any activity other than one with

respect to which deductions are allowable for the taxable year

under section 162 or under paragraph (1) or (2) of section 212.”

     Section 162 allows a taxpayer to deduct ordinary and

necessary expenses of carrying on the taxpayer’s trade or

business.   Paragraphs (1) and (2) of section 212 allow the

taxpayer to deduct expenses incurred in connection with an

activity engaged in for the production or collection of income,
                                - 10 -

or for the management, conservation, or maintenance of property

held for the production of income.

     Factors to be considered in determining whether an activity

is engaged in for profit include:    (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 other similar or

dissimilar activities, (6) the taxpayer’s history of income or

losses with respect to the activity, (7) the amount of occasional

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

the taxpayer, and (9) the elements of personal pleasure or

recreation.   Golanty v. Commissioner, 72 T.C. 411, 426 (1979),

affd. without published opinion 647 F.2d 170 (9th Cir. 1981);

sec. 1.183-2(b), Income Tax Regs.    No single factor or group of

factors is determinative.     Golanty v. Commissioner, supra at 426.

A final determination is made only after a consideration of all

of the relevant facts and circumstances.

     With respect to the taxpayer’s expectation of making a

profit, this expectation need not be reasonable.    Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

F.2d 1205 (D.C. Cir. 1983).    However, greater weight is given to

objective facts rather than to a taxpayer’s self-serving
                              - 11 -

statement of intent.   Thomas v. Commissioner, 84 T.C. 1244, 1269

(1985), affd. 792 F.2d 1256 (4th Cir. 1986).

     Respondent determined that petitioner did not engage in his

basketball team activity (RBS) with an “actual and honest profit

objective”, and therefore disallowed the Schedule C business

expenses for the years at issue.   Dreicer v. Commissioner, supra

at 645.   Petitioner contends that he engaged in RBS with a profit

objective and therefore, is entitled to deduct from his gross

income the reported business expenses resulting in losses

relating to that activity.   We now address the nine factors

provided in section 1.183-2(b), Income Tax Regs., in making our

determination.

Manner in Which Petitioner Carried On RBS

     To determine whether a taxpayer carried on an activity in a

business like manner, the following may be considered:    (1)

Whether the taxpayer maintained complete and accurate books and

records; (2) whether taxpayer’s conduct is substantially similar

to that of other profitable activities; and (3) whether taxpayer

made changes to improve the activity’s profitability.    Sec.

1.183-2(b)1), Income Tax Regs.

     Petitioner introduced little evidence showing that he kept

track of his expenses during the year.   The record in this case

is devoid of any evidence that petitioner used monthly or yearly

business statements to gauge his profitability or to make
                               - 12 -

business decisions.    Petitioner suggests that he would have been

able to produce these records if not for the burglary of his

apartment that occurred in September of 2005.   We note, however,

that the burglary occurred 23 months after respondent’s first of

five total requests to petitioner to produce these records, and

that petitioner’s only attempts to recreate any records were to

obtain photocopies from his bank of checks written on the RBS

account during the years in issue, a partial list of players from

2001, two hotel receipts from 2000, and a copy of a gym rental

for 2000.   While the checks provided are all written on the RBS

account, it is unclear whether or not some of the checks were

drafted to pay for RBS-related expenses.

     Petitioner also presented a copy of an American Express

statement from 2000.   The American Express statement shows that

the account was held by both petitioner and his ex-wife.    The

statement was not accompanied by any detailed description of the

charges made on the account, or the pertinence of the charges

made to RBS.

     The record is devoid of any evidence that petitioner

maintained records for RBS or that he used business statements to

gauge his profitability or to make business decisions.

Moreover, we are not convinced that petitioner would have been

able to produce such records, even had the burglary not occurred

to his apartment.
                               - 13 -

     When the taxpayer conducts an activity in a manner

substantially similar to that of other activities of the same

manner which are profitable, a profit motive may be indicated.

Engdahl v. Commissioner, 72 T.C. 659, 666-667 (1979); sec. 1.183-

2(b)(1), Income Tax Regs.    Petitioner presented no evidence about

how other basketball teams/skills schools are operated.    He did

credibly testify, however, that directors of teams like RBS had

won lucrative job offers from major athletic shoe and clothing

companies.

     Generally, when considering whether the taxpayer’s conduct

is similar to that of other profitable activities of the same

nature, the relevant factors for consideration include

advertising, maintaining a separate bank account, developing a

written business plan, and having a plausible strategy for

earning a profit.    See Morley v. Commissioner, T.C. Memo. 1998-

312; Butler v. Commissioner, T.C. Memo. 1997-408.

     Petitioner spent a total of $444 on advertising in the years

in issue, plus word-of-mouth advertising at local basketball

games.    In addition, petitioner attached several newspaper

articles as exhibits which mention RBS.    The Court has recognized

that both word-of-mouth and newspapers can constitute

advertising.    Petitioner testified that word-of-mouth and news

stories were, in fact, the best ways that he could promote his

school.
                              - 14 -

     Petitioner maintained a separate bank account under the name

Royster Basketball School.   It is unclear, however, from the

canceled checks provided by petitioner, whether the account was

used entirely and solely for the purpose of operating RBS.     As an

example, there are copious checks written to “cash”, as well as

for bank card and cell phone accounts.   Most of the memorandum

lines on these checks are blank.   Moreover, the record is devoid

of any evidence that there were any deposits made to the account

during the years in issue.   Based on our review of the canceled

checks provided, we find that petitioner did not maintain the

checking account in question in a businesslike manner.

     Although petitioner provided respondent with a document

entitled, “Business Plan for RBS” on May 25, 2006, shortly before

the trial of this case, we believe that petitioner did not have a

business plan prior to or during the years in issue.   We base

this conclusion on the fact that when specifically asked whether

he had then or ever had a business plan for RBS during an

informal meeting with respondent in November of 2005, petitioner

admitted that he did not then, or ever, have such a plan.

     Finally, although petitioner continually asserts that

basketball is “a business” and that RBS was his way of

participating in the business, petitioner does not profess that

he was in the business of operating a profitable basketball

school.   In fact, petitioner colorfully and frankly testified
                              - 15 -

that his intention in starting and operating RBS was to gain fame

for himself and the players so that he would get a lucrative job

offer and that his players would receive college scholarships and

offers to join professional teams.     Petitioner admitted that

although the players were required to pay $300 to participate on

the team, he often did not collect this fee from his players.

Petitioner cannot point to any evidence that can establish that

he intended to derive a profit short of his goal to parlay the

success of one of his players into a lucrative talent-scouting

job for himself with an athletic apparel conglomerate.

     In sum, petitioner has introduced little evidence to show

that he operated RBS in a manner similar to other profitable

basketball schools.   Although petitioner has shown his efforts to

advertise and maintain a bank account, we are unconvinced that

the bank account at issue was used solely for RBS.     Finally, we

conclude that petitioner had no intention of operating RBS during

the years in issue with the intention of making a profit, as he

actually ran the school with highly optimistic and speculative

hopes that he would enroll a player in his school who would bring

him such fame that a job offer for himself would surely follow.

     Finally, when a taxpayer changes operating methods, or

abandons unprofitable methods in a manner consistent with an

intent to improve profitability, a profit motive may be

indicated.   Sec. 1.183-2(b)(1), Income Tax Regs.
                              - 16 -

     Petitioner presented no evidence to show either that he

changed his methods over the years in issue to improve

profitability or that he took steps to reduce costs in order to

make a profit.   In fact, we note that petitioner testified that

he needed to increase the team’s exposure through participating

in a number of large tournaments taking place in other States.

Participating in these tournaments required expensive travel and

lodging costs, and petitioner did not present any evidence to

show that he attempted to either reduce these expenses or

increase the fees required for players in order to improve the

school’s profitability.   Even though petitioner testified that he

knew that he would have to offer “scholarships” to certain

players in order to increase the chances of having stellar talent

on the RBS team, he did not provide any evidence showing that he

considered raising fees for other players that could afford the

costs.   Based on the above, we conclude that this factor weighs

in favor of respondent.

Expertise of Petitioner

     Preparation for an activity by extensive study of its

accepted business, economic, and scientific practices, or

consultation with those who are expert therein, may indicate a

profit objective.   Engdahl v. Commissioner, supra at 668; sec.

1.183-2(b)(2), Income Tax Regs.   Efforts to gain experience and a
                               - 17 -

willingness to follow expert advice may also indicate a profit

objective.   Dworshak v. Commissioner, T.C. Memo. 2004-249.

     Petitioner has been involved with basketball since he was a

teenager.    Petitioner knows of one person that has been hired by

an athletic apparel company after running a youth basketball

school.   In addition, one of petitioner’s best friends, a former

professional basketball player, works as a talent scout for an

athletic shoe company and teaches basketball skills.   While

petitioner clearly possesses a personal knowledge about the

business of basketball, his knowledge does not extend to the

economics of running a basketball school.

     Petitioner testified that he has neither business experience

nor experience in coaching youth basketball.   Petitioner

testified that he began his school only after seeing his friend,

a former professional basketball player, garner a highly paid

position with an athletic shoe company after sponsoring a youth

basketball team.

     Based on the record, we conclude that although petitioner

does have a notable background in basketball–-both as a player

and as a referee–-he was not an expert in running a basketball

school, and he did not seek out expert advice regarding the

economic realities of running such an endeavor.   The fact that

petitioner’s inspiration for starting his basketball school was

his friend who was a former professional basketball player
                             - 18 -

illustrates that his personal goal was not a realistic one.    We

conclude that had he sought out advice on whether he could

realistically start and parlay a profitable youth basketball

school in Chicago into a lucrative job offer for himself, he

would not have endeavored to make RBS a business.3   In sum, our

conclusion with respect to this factor weighs in favor of

respondent.

Time and Effort Petitioner Expended in Carrying On the Activity

     The fact that the taxpayer devotes much of his personal time

and effort to carrying on an activity may indicate an intention

to derive a profit, particularly if the activity does not have

substantial personal or recreational aspects.   Golanty v.

Commissioner, 72 T.C. at 426; sec. 1.183-2(b)(3), Income Tax

Regs.

     Petitioner testified that he spent approximately 2 hours

conducting weekly practice from May through July of each of the

years in issue, and approximately 5 hours each of those weeks on

administrative tasks related to RBS.   In addition, petitioner

would spend upwards of 12 hours a day on the days that the RBS

team would participate in tournaments.

     Petitioner testified that he took pleasure in watching his

players and in the reputation he was building as a youth


     3
       We note that, in 2004, petitioner applied for, and
received, sec. 501(c)(3) status to operate RBS as a charitable
entity.
                               - 19 -

basketball coach.    Petitioner was clear that although he wanted

to expose his players to talent scouts, his personal goal was to

establish and enhance his reputation as a talent scout himself so

that he would receive a job offer from an athletic shoe or

apparel company.    We are convinced that petitioner spent a

considerable amount of his personal time on RBS from May through

July in each of the years in issue.     Nevertheless, because RBS

was formed and operated--in great part--for petitioner’s personal

objectives, we conclude this factor in favor of respondent’s

position.

Expectation That Assets Used in Activity May Appreciate

     The expectation that assets used in the activity will

appreciate in value sufficiently to lead to an overall profit

when netted against losses may indicate a profit objective.

Engdahl v. Commissioner, supra at 668-669.     Neither petitioner

nor respondent argues that there are any assets involved with

RBS, including the value of its reputation, which is significant

enough to offset petitioner’s losses.     Therefore, we view this

factor as neutral to our conclusion.

Success of Petitioner in Carrying On Similar Activities

     The fact that the taxpayer had engaged in similar activities

in the past and converted them to profitable enterprises may

indicate that he engaged in the present activity for profit.

Lundquist v. Commissioner, T.C. Memo. 1999-83, affd. without
                                - 20 -

published opinion 211 F.3d 600 (11th Cir. 2000); sec. 1.183-

2(b)(5), Income Tax Regs.    Although petitioner has a long history

of playing basketball and working as a game referee, he had not

previously engaged in operating a basketball team.    Accordingly,

we view this factor as neutral.

History of Income or Losses With Respect to the Activity

     A series of losses during the initial or startup stage of an

activity may not necessarily be an indication that the activity

is not engaged in for profit.     Losses that extend beyond the

customary startup stage may indicate that the activity is not

engaged in for profit.   Engdahl v. Commissioner, supra at 669;

sec. 1.183-2(b)(6), Income Tax Regs.

     From 1998 through 2002, petitioner reported Schedule C

losses totaling $106,562.    Petitioner has never reported a

profit for RBS.   Petitioner argues that the history of RBS losses

prior to and during the taxable years at issue does not indicate

that he lacked a profit objective because his activity was in its

startup phase.

     Petitioner operated RBS for 2 years prior to 2000, the first

taxable year at issue.   Petitioner reported losses on his

Schedules C for 1998 and 1999 of $16,000 and $20,000.

Petitioner’s losses thereafter either remained steady or

increased in all of the years in issue.    Petitioner has never

reported a profit for RBS.   While petitioner is correct in his
                                - 21 -

presumption that he should generally be afforded a startup period

wherein losses are expected, petitioner also testified that he

knew when starting his school that he would not be able to cover

his operating costs with tuition.     Further, he realized his

continuing operation of RBS would require that he would have to

personally expend a large amount of money as an investment to

achieve his potential objective of being offered a high-paying

job with an athletic shoe or apparel company.     Given the history

of RBS losses in this case, combined with petitioner’s hopeful

dream of a lucrative job, this factor weighs heavily in favor of

respondent.

The Amount of Occasional Profits, If Any

     The amount of profits in relation to the amount of losses

incurred may provide a useful criterion in evaluating whether the

taxpayer engaged in an activity for profit.     Sec. 1.183-2(b)(7),

Income Tax Regs.

     Petitioner has not generated a profit for RBS in any of the

years in issue, or in any years prior or subsequent to the years

in issue.     Accordingly, this factor weighs in favor of

respondent.

Financial Status of Taxpayer

     Substantial income from sources other than the activity may

indicate that the taxpayer is not engaged in the activity for

profit, particularly if the losses generate substantial tax
                              - 22 -

benefits.   Engdahl v. Commissioner, supra at 669-670; sec. 1.183-

2(b)(8), Income Tax Regs.

     Petitioner works as a computer specialist for the IRS.

During the years in issue, petitioner received wage income from

his work with the IRS averaging $65,000 annually.   In addition,

during the years in issue, petitioner reported average income

from his work as a high school basketball referee of $3,000.

     Petitioner claimed business losses averaging $23,000 per

year against his wages and income from refereeing during the

years at issue, thus enabling petitioner to receive a

considerable after-tax benefit in the form of a refund.       We find

that petitioner’s considerable income from his employment with

the IRS, as well as his income from work as a game referee,

weighs in favor of respondent.

Elements of Personal Pleasure or Recreation

     The elements of personal or recreational motive in

conducting an activity may indicate that the taxpayer is not

conducting the activity for profit.    Sec. 1.183-2(b)(9), Income

Tax Regs.   The fact, however, that the taxpayer derives personal

pleasure from engaging in the activity does not show that the

taxpayer lacks a profit objective if the activity is, in fact,

conducted for profit as evidenced by other factors.     Id.

     The record in this case is replete with statements that

petitioner not only gained great pleasure in the reputation that
                               - 23 -

he was building in RBS, but that he hoped to parlay his

reputation as the director/coach of a basketball skills school

into a “six-figure salary with Nike or Adidas.”   This goal,

however, by itself, does not negate the presence of any profit

objective.    We do conclude, however, that petitioner’s statements

to this effect illustrate that his intention to make a profit was

not one for RBS, per se, but for himself in the form of a

lucrative contract with a shoe company to work as their talent

scout.   While we recognize that petitioner did derive some

personal pleasure in operating RBS, this factor, by itself, does

not negate a lack of profit objective.   Accordingly, we view this

factor as neutral.

     In summary, petitioner repeatedly testified that he did not

intend to derive a profit from RBS, per se, but had high hopes

that the success of his school would parlay into a personal

opportunity for himself to work for a major athletic shoe or

apparel company.   With startling candor, petitioner testified

that he did not take steps to make RBS profitable, as many of his

students could not afford the $300 enrollment fee.   While we are

sympathetic to the accommodations petitioner made to the young

players who played for RBS, we cannot look askance at

petitioner’s admissions and the lack of any business plans or

budget projection aimed at making RBS into a profitable

enterprise.   Moreover, RBS never made a profit, and the record is
                              - 24 -

devoid of any evidence that petitioner took steps to operate RBS

in a businesslike manner.

     For the foregoing reasons, we find that petitioner’s

basketball school activity was not engaged in for profit within

the meaning of section 183.   Therefore, respondent’s

determination that petitioner may not deduct losses from that

activity is sustained.4

Deductibility of Expenses

     Since we have sustained respondent’s determination that

petitioner did not engage in his basketball school activity for

profit within the meaning of section 183, we now turn our

analysis as to what deductions, if any, petitioner may be

permitted to take in accordance with section 183(b)(1) and (2).

Section 183(b)(1) allows deductions which are otherwise allowable

without regard to whether the activity is engaged in for profit;

e.g., State and local taxes and interest.   Section 183(b)(2)

allows deductions that would be allowable if the activity were



     4
       Irrespective of our decision to sustain respondent’s
determination with respect to petitioner’s basketball school
activity, we disagree with respondent’s recharacterization of the
income as listed on petitioner’s Schedules C for RBS for each of
the taxable years in issue on the grounds that the income was
received from petitioner’s employer as reimbursement for employee
business expenses. Upon our review of the record, including the
Forms W-2, Wage and Tax Statement, from petitioner’s employer for
the years in issue, we fail to find that petitioner received any
income as reimbursement for business expenses. Accordingly, a
decision to be entered under Rule 155 will reflect the foregoing.
                               - 25 -

engaged in for profit, but only to the extent of gross income

received from the activity.

     In the notice of deficiency, respondent, in part, disallowed

petitioner’s claimed business expense deductions for RBS on the

grounds that he had failed to adequately substantiate the claimed

deductions, despite repeated requests made to petitioner for such

records.   Petitioner asks the Court to excuse his inability to

fully produce his records with respect to his basketball school

activity on the grounds that most of these records were stolen in

a burglary of his apartment.   Petitioner requested at trial that

the Court allow deductions for his basketball school-related

expenses on the basis of his testimony and the records that he

was able to produce at trial under the rule in Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).

     Section 274(d) supersedes the rule in Cohan, and requires

strict substantiation of expenses for travel, meals and

entertainment, and with respect to any passenger automobile,

computer, cellular phone, and property generally used for

entertainment.   A taxpayer is required, under section 274(d), to

substantiate these types of expenses by adequate records or by

sufficient evidence corroborating the taxpayer’s own statement

establishing the amount, time, place, and business purpose of the

expense.
                                - 26 -

     Petitioner argues that he should be allowed to deduct

certain expenses to which section 274(d) applies because the

records he produced at trial satisfy the substantiation

requirements of section 1.274-5T(c)(5), Temporary Income Tax

Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985), which allow a taxpayer

to reconstruct reasonably his business expenses when original

documents are lost or destroyed through no fault of the taxpayer.

     Respondent argues that petitioner failed to present credible

evidence to substantiate that he incurred business expenses and

that petitioner has not provided the Court with a sufficient

basis on which to make a Cohan estimation.    Respondent also

argues that petitioner has not met the heightened substantiation

requirements imposed by section 274(d) for those deductions to

which section 274(d) applies.

     At trial, petitioner produced the following: photocopies of

checks drafted on the RBS account for 2000, 2001, and 2002; a

copy of a rental receipt for Western Springs Rec Center for 2001;

an itemized hotel receipt dated May 28, 2000, in the amount of

$1,654.86; itemized hotel receipts dated July 31, 2002, in the

aggregate amount of $2,215.18; an itemized American Express bill;

and, an itemized cellular phone bill.

     Upon review of the canceled checks provided by petitioner,

it is impossible to determine whether the checks were written for

petitioner’s personal expenses.    We find petitioner’s testimony
                                  - 27 -

credible, however, that the checks written to the AAU and the

Western Springs Rec Center were for RBS-related expenses incurred

with basketball school sessions and tournament entry fees that

occurred contemporaneous to their payment.      Specifically, and for

purposes of our decision, the record includes checks drafted to

the AAU and the Western Springs Rec Center in the following

amounts:

                           2000              2001          2002

Checks drafted to:
     AAU                  $642             $2,664          $400
     Western Springs
       Rec Center          521                380           200

            Total        1,163              3,044           600

     As to the remainder of the canceled checks, we find

petitioner’s testimony and the receipt provided for Western

Springs Rec Center credible to substantiate only the foregoing

expenses.

     The hotel receipts provided correspond to petitioner’s

credible testimony regarding tournaments that RBS entered in

2000, and therefore, we hold that petitioner has satisfied the

heightened substantiation requirements under section 274(d) with

respect only to these expenses--$3,870.04 for taxable year 2000.

     As to the remaining items, the American Express statement,

and an itemized cellular phone bill, neither the credit card

statement nor the phone bill rises to the substantiation standard

required.    The American Express statement is for an account held
                              - 28 -

jointly by petitioner and his ex-wife, and petitioner offers no

explanation for the charges listed.    The cellular phone bill is a

statement of accounts for some months in 2001 and 2002, and it is

for petitioner’s business phone.   The account lists petitioner’s

employer, the IRS, as the account holder.   Petitioner offered no

evidence either that he was personally accountable for paying

this bill or that any of the charges made on the account were

related to RBS.

     Based on the foregoing, we hold that petitioner is entitled

to deduct expenses in accordance with section 183(b)(2) of the

following: $3,000 for 2000;5 $3,044 for 2001; and $600 for 2002.

Accuracy-Related Penalty Under Section 6662

     Respondent determined that petitioner is liable for an

accuracy-related penalty under section 6662(a) for each of the

taxable years in issue.   Section 6662 imposes a penalty in the

amount of 20 percent of the portion of the underpayment to which

the section applies.   As relevant to this case, the penalty

applies to any portion of the underpayment that is attributable

to any substantial understatement of income tax.   Sec.

6662(b)(2).   There is a “substantial understatement of income

tax” if the amount of the understatement exceeds the greater of




     5
       Sec. 183(b)(2) limits the amount that may be deducted to
gross income of the activity.
                                - 29 -

10 percent of the tax required to be shown on the tax return or

$5,000.   Sec. 6662(d)(1).

     Section 7491(c) requires the Commissioner to carry the

burden of production with regard to penalties.     Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).     Once the burden of

production is met, the taxpayer must come forward with sufficient

evidence that the penalty does not apply.     Id. at 447.

Respondent has satisfied his burden by showing that petitioner’s

understatements of tax, which exceeded $5,000, were substantial.

     The accuracy-related penalty is not imposed with respect to

any portion of the underpayment if the taxpayer can establish

that he acted with reasonable cause and in good faith.      Sec.

6664(c)(1).   The decision as to whether the taxpayer acted with

reasonable cause and in good faith depends upon all pertinent

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

Circumstances indicating that a taxpayer acted with reasonable

cause and in good faith include “an honest misunderstanding of

fact or law that is reasonable in light of all of the facts and

circumstances, including the experience, knowledge and education

of the taxpayer.”   Id.

     Although petitioner did not raise the issue of reasonable

cause or good faith in the petition, per se, he did raise as an

issue that his belief that he was entitled to deduct expenses for
                                - 30 -

RBS was later justified by a statement made to him by an IRS

Appeals Officer who agreed that RBS was, in fact, a business.

     Reliance upon the advice of an expert tax preparer may

demonstrate that a taxpayer acted with reasonable cause and good

faith in the context of section 6662(a).    Freytag v.

Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th

Cir. 1990), affd. 501 U.S. 868 (1991); see sec. 1.6664-4(c)(1),

Income Tax Regs.    Petitioner, however, did not seek the advice of

any such expert prior to the filing of the returns for the years

in issue, despite the fact that he was employed during these

years by the IRS.    Petitioner did not testify that he honestly

believed that he could claim the expenses related to RBS in the

years at issue.    Moreover, petitioner failed to produce any

books, records, or other work papers in response to respondent’s

six requests for information.    Based on these facts, we conclude

that petitioner did not act with reasonable cause and in good

faith.   Accordingly, we hold that petitioner is liable for the

accuracy-related penalties under section 6662(a).

     In reaching our holdings, we have considered all arguments

and contentions made by the parties, and to the extent not

mentioned, we conclude that they are moot, irrelevant, or without

merit.
                             - 31 -

     To reflect the foregoing,


                                     A decision will be entered

                                 under Rule 155.6




     6
       We note, however, if our decision results in an increase
in the amount of petitioner’s deficiency or accuracy-related
penalty for any year at issue, since respondent did not ask for
an increased deficiency in his pleadings, he is limited to the
amounts set forth in the notice of deficiency.
