                                T.C. Memo. 2014-237



                          UNITED STATES TAX COURT



          WILLIAM D. EVANS AND CAROLINE F. EVANS, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28012-11.                            Filed November 20, 2014.



      Tim Alan Tarter, for petitioners.

      Kimberly Clark, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      VASQUEZ, Judge: Respondent determined deficiencies of $55,326 and

$42,243 and section 6662(a) accuracy-related penalties of $11,065 and $8,449 in

petitioners’ Federal income tax for 2006 and 2007, respectively.1 After


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                         (continued...)
                                          -2-

[*2] concessions,2 the issues for decision are: (1) whether expenses that were

related to petitioners’ son’s motocross racing activity and deducted by their

construction business were ordinary and necessary for their business for purposes

of section 162; (2) if so, whether the expenses were reasonable; (3) whether

petitioners may deduct section 179 expenses for a motorhome acquired for use in

the motocross racing activity; and (4) whether petitioners are liable for section

6662(a) accuracy-related penalties.

                                FINDINGS OF FACT

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

facts and the attached exhibits are incorporated herein by this reference.

Petitioners resided in Idaho at the time they filed the petition.




      1
       (...continued)
Revenue Code in effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. All monetary amounts have been
rounded to the nearest dollar.
      2
         Petitioners concede that the motocross racing activity is not directly
related to their construction business. Additionally, respondent argues that
petitioners reported income from the motocross racing activity on line 1, Gross
receipts or sales, of their 2006 and 2007 Schedules C, Profit or Loss From
Business, when they should have reported the income on line 6, Other income.
Petitioners did not address this argument at trial or on brief and are deemed to
have conceded this issue. See Mendes v. Commissioner, 121 T.C. 308, 312-313
(2003).
                                        -3-

[*3] I. Dave Evans Construction

      Dave Evans Construction (DEC) is a general contractor based in Boise,

Idaho. DEC is licensed to operate in Idaho and is not licensed to operate in any

other State. DEC develops land and constructs residential homes and commercial

buildings in the Boise area. DEC had gross revenues of over $16.2 million in

2006 and over $16.7 million in 2007.

      For the first half of 2006 petitioners operated DEC as a sole proprietorship.

Beginning in mid-2006 petitioners operated their construction business as an S

corporation under the name Dave Evans Construction, LLC.3

II.   Motocross Racing Activity

      Motocross racing is a motorsport in which competitors race motorcycles at

high speeds on dirt courses containing jumps and obstacles. The sport is

physically demanding, and injuries are common. To be successful, riders must

keep themselves and their motorcycles in top condition.

      Boise, Idaho, along with the surrounding Treasure Valley region, is a major

center for motocross racing and other off-road racing sports. There are several

racecourses and motorcycle clubs within just a few miles of Boise. A local race


      3
        We refer to Dave Evans Construction and Dave Evans Construction, LLC,
interchangeably as DEC throughout the remainder of this opinion.
                                         -4-

[*4] can easily attract 1,000 riders. Two local motocross businesses, Carl’s Cycle

Sales and Western Power Sports, have grown to become major suppliers of off-

road racing equipment across the country.

      Motocross racing is especially popular within the local construction

industry. Many members of Boise’s construction industry ride at the local races or

have children who ride, and Mr. Evans is no exception. Petitioners’ three sons and

two daughters all race motorcycles, at least on occasion, and one of their sons, Ben

Evans (Ben), had the natural talent and drive to race at a professional level.

      A.      Ben’s Racing Background

      Ben was born in 1990. He first started motocross racing when he was six

years old and quickly demonstrated that he had a special talent. While his siblings

competed only in local races, at the age of seven Ben competed in a nationally

televised race at the Seattle Kingdome. As a teenager he competed on the national

amateur circuit and in 2007 won the Amateur Motocross National Championship

458 Pro Sport class at the Loretta Lynn4 Motocross Ranch (Loretta Lynn) in

Nashville, Tennessee. The Loretta Lynn title is the premiere title in the national

amateur racing circuit. Every year 25,000 entrants compete to qualify to race at

Loretta Lynn, but only 40 actually make it to the championship. A racer who

      4
          The event is named after the country singer of the same name.
                                         -5-

[*5] places in the top five finishers of the Pro-Sport class at Loretta Lynn qualifies

for a license to compete on the professional circuit. In other words, placing in the

top five at Loretta Lynn is a prerequisite for becoming a professional motocross

racer. Following his 2007 win at Loretta Lynn, Ben began racing on the

professional circuit.

      Motocross racing is an expensive sport, but petitioners were supportive of

their children’s interest in racing. Petitioners personally paid for the motorcycles

their children rode, parts, travel, and race entry fees. In 2005, however, Ben’s

racing career started to take off. He competed in nationally televised races and

was featured in various motocross magazines, including Amateur MX Magazine

and Racer X Magazine. Sponsors, including American Honda, Carl’s Cycle Sales,

Western Power Sports, and Step One Graphics, started “coming out of the

woodwork” to support him. At this point Mr. Evans realized that his son’s talent

and “star power” might help to boost DEC’s business. He consulted with his

certified professional accountant (C.P.A.), Bill Anderson, who advised him that

supporting Ben’s motocross racing could be a valid promotional activity for DEC.

DEC subsequently became one of Ben’s sponsors.
                                        -6-

[*6] B.       DEC’s Promotional Expenses

        In 2006 and 2007 DEC had motocross-racing-related expenses (excluding

depreciation and section 179 expenses) totaling at least $86,619 and $74,579,

respectively. These expenses consisted mostly of payments for motorcycles, parts,

equipment, racing fees, membership fees, fuel, and food. DEC also received

income totaling $19,940 and $23,500 in 2006 and 2007, respectively, stemming

from the motocross racing activity.5 The 2006 income primarily comprised

proceeds from the sale of certain motorcycles, and the 2007 income primarily

comprised motorcycles and parts received from Honda as part of a sponsorship

deal.

        Apart from sponsoring Ben’s motocross racing, DEC engaged in only

limited promotional activities. DEC’s other advertising expenses totaled $4,571 in

2006 and $1,388 in 2007 and comprised payments for signs and radio and

newspaper advertising.

        DEC stopped paying for Ben’s motocross-racing-related expenses after he

began racing on the professional circuit.


        5
         Of these amounts petitioners reported $12,149 and $14,000 on line 1,
Gross receipts or sales, of their 2006 and 2007 Schedules C, respectively.
Petitioners are deemed to have conceded that this income should have been
reported on line 6, Other income. See supra note 2.
                                         -7-

[*7]         1.    Motocross Assets

       During the years in issue DEC purchased three capital assets for the

motocross racing activity: a 2006 Jayco motorhome (motorhome), a 26-foot

Mirage trailer (Mirage trailer), and a utility trailer. The motorhome was placed

into service in 2006, and the two trailers were placed into service in 2007.

       During the years in issue Ben usually traveled to races with one or two

adults (usually a hired mechanic, one of his older brothers, and/or his father), who

acted as his mechanics. Ben also needed an adult to sign a waiver before each

race, because he was a minor during most of the relevant period. They drove the

motorhome to and from each of Ben’s races during the years in issue and used it to

carry equipment. The rear section of the motorhome was used as a garage where

Ben and his mechanic could make repairs and had space for two or three

motorcycles. The motorhome had been modified so that its entire rear wall could

fold down at the push of a button, creating a ramp for rolling the motorcycles on

and off. Throughout 2006 and into 2007, the motorhome was used to haul the

motorcycles to and from Ben’s races.

       The motorhome also had room to sleep up to three people. Ben slept in the

motorhome when he was away from home for races along with whoever traveled

with him.
                                         -8-

[*8] In 2007 Ben received five motorcycles from American Honda as part of the

aforementioned sponsorship deal. Having these motorcycles allowed Ben to

compete in multiple classes at every race. However, because the motorhome was

not large enough to carry all five motorcycles, DEC purchased the Mirage trailer

for that purpose. After DEC purchased the Mirage trailer, Ben and his team

continued to use the motorhome to drive to the races and hitched the Mirage trailer

to the back.

      When Ben was competing at a race, the Mirage trailer was typically parked

in the pit area next to the racecourse. Spectators were allowed to enter this pit area

to see the various riders, their motorcycles, and the racers’ trailers. They would

often ask for autographs, and Ben would give out posters containing his picture

and logos of his sponsors, including DEC. Ben would often hand out these posters

to fans he met back in Boise, as well. Some of Ben’s sponsors had logos

displayed on the sides of the Mirage trailer, and DEC had a large logo prominently

displayed. Sponsors’ logos were also placed on Ben’s motorcycles, and DEC had

logos on the motorcycles’ air boxes.

               2.   Promotional Benefits From Motocross Racing

      Boise’s construction industry was particularly competitive during the years

in issue, but sponsoring Ben helped give DEC an advantage over its competitors.
                                         -9-

[*9] Throughout Boise, Ben was well known as a motocross racer. Because many

of DEC’s jobs came through word of mouth, its relationship with the local

community played an important role in driving business. DEC’s association with

Ben thus played an important role in boosting DEC’s exposure and goodwill

within the community.

       In addition to improving DEC’s community relations and attracting more

clients, Ben’s celebrity status also helped DEC attract investors, such as Carl’s

Cycle Sales, for its projects. DEC’s connection to Ben also helped it secure a

major source of financing: Len Williams, the president of Home Federal Bank,

first met Mr. Evans at a motocross race when he asked for Ben’s autograph; his

bank is now DEC’s largest construction lender. DEC’s connection to Ben also

helped it to strengthen its relationships with local subcontractors, thus giving it an

advantage over its competitors in securing the best local subcontractors for its

projects and occasionally getting discounted rates.

III.   Tax Return Preparation

       On or around September 17, 2007, DEC filed Form 1120S, U.S. Income Tax

Return for an S Corporation, for 2006. The Form 1120S for 2006 states that the

effective date of DEC’s S election was July 1, 2006. DEC claimed deductions for

expenses relating to the motocross racing activity that were incurred between
                                       -10-

[*10] July 1 and December 31, 2006. Around the same time, petitioners filed

Form 1040, U.S. Individual Income Tax Return, for 2006. Petitioners claimed

deductions for expenses relating to the motocross racing activity incurred between

January 1 and June 30, 2006, on Schedule C. Deductions claimed for expenses

incurred during the remainder of the year flowed through to petitioners on

Schedule E, Supplemental Income and Loss. Petitioners reported a total tax of

$511,853 on their 2006 tax return.

      On or around September 15, 2008, DEC filed its Form 1120S for 2007.

DEC claimed a deduction for expenses relating to the motocross racing activity for

the year. On or around September 19, 2008, petitioners filed their Form 1040 for

2007. Petitioners reported a total tax of $583,168 on their 2007 tax return. The

amounts of petitioners’ and DEC’s claimed deductions for the years in issue, as

well as the amounts they claimed as deductions under section 179, are listed in the

table below:
                                         -11-

       [*11]                                           Sec. 179 deduction
                                   Motocross
        Year       Taxpayer        deduction           Asset          Amount
        2006       Petitioners       $44,995      Motorhome1           $66,783
        2006       DEC                41,624             ---                ---
        2007       DEC                74,579      Motorhome2           3
                                                                           20,186
                                                  Mirage trailer           11,704
                                                  Utility trailer           8,413
               1
                DEC purchased a 50% interest in the motorhome in 2006.
       Zach Evans Construction (ZEC), a company owned by one of Mr.
       Evans’ sons, purchased the other 50%.
              2
                In 2007 DEC spent $26,295 to acquire ZEC’s 50% interest
       in the motorhome.
              3
                DEC also claimed a depreciation deduction of $6,109 for
       the remaining value of the ownership interest acquired from ZEC.

      For reasons unexplained in the record, petitioners and DEC claimed the

motocross racing activity expenses (excluding section 179 deductions, which were

listed separately on the returns) as part of their cost of goods sold on each of their

returns. Petitioners’ returns contain no indications that the amounts claimed for

cost of goods sold include the motocross racing activity expenditures. On its

Forms 1120 DEC reported the motocross racing activity expenses as part of the

amounts on line 5, Other costs, of Schedule A, Cost of Goods Sold. Each of

DEC’s returns also included a statement indicating that line 5 included amounts
                                        -12-

[*12] for “Promotional” costs. Those promotional costs correspond to the

motocross racing activity expenses.

      DEC’s and petitioners’ 2006 and 2007 returns were prepared by petitioners’

C.P.A., Mr. Anderson.6 Mr. Anderson worked with Dyan Chacon, a C.P.A. who

performs financial analysis for DEC as an independent contractor, to prepare the

returns. Ms. Chacon provided Mr. Anderson with financial documents and

answered questions that arose during the preparation of the returns.

                                      OPINION

I.    Burden of Proof

      As a general rule, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer bears the burden of proving that

those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933). There are exceptions to this rule. Section 7491(a) shifts the

burden of proof to the Commissioner as to any factual issue relevant to a

taxpayer’s liability for tax if the taxpayer meets certain conditions. Higbee v.

Commissioner, 116 T.C. 438, 440-441 (2001). With one exception,7 this case is


      6
          Mr. Anderson passed away in 2009.
      7
       Petitioners argue that they have introduced credible evidence that all the
expenses at issue were properly deducted as advertising costs and the burden of
                                                                      (continued...)
                                        -13-

[*13] decided on the preponderance of the evidence and is not affected by the

burden of proof or section 7491(a).

II.   Ordinary and Necessary Business Expenses

      A.     Background

      Taxpayers are allowed a deduction for ordinary and necessary expenses paid

or incurred in carrying on a trade or business. Sec. 162(a). Whether an

expenditure is ordinary and necessary is generally a question of fact.

Commissioner v. Heininger, 320 U.S. 467, 475 (1943). Generally, for an

expenditure to be an ordinary and necessary business expense, the taxpayer must

show a bona fide business purpose for the expenditure; there must be a proximate

relationship between the expenditure and the business of the taxpayer. Challenge

Mfg. Co. v. Commissioner, 37 T.C. 650 (1962); Henry v. Commissioner,

36 T.C. 879 (1961); sec. 1.162-1(a), Income Tax Regs. To be “necessary” within

the meaning of section 162, an expense needs to be “appropriate and helpful” to

the taxpayer’s business. Welch v. Helvering, 290 U.S. at 113. The requirement

that an expense be “ordinary” connotes that “the transaction which gives rise to it

      7
         (...continued)
proof has shifted. However, with respect to the utility trailer, petitioners have
failed to introduce any evidence specifying its use in or relation to the motocross
racing activity. We find that the burden of proof regarding this issue has not
shifted to respondent.
                                       -14-

[*14] must be of common or frequent occurrence in the type of business

involved.” Deputy v. du Pont, 308 U.S. 488, 495 (1940) (citing Welch v.

Helvering, 290 U.S. at 114).

      Even if an expense is ordinary and necessary, it is deductible under section

162 only to the extent it is reasonable in amount. United States v. Haskel Eng’g &

Supply Co., 380 F.2d 786, 788-789 (9th Cir. 1967); Gill v. Commissioner, T.C.

Memo. 1994-92, aff’d without published opinion, 76 F.3d 378 (6th Cir. 1996);

Brallier v. Commissioner, T.C. Memo. 1986-42. The element of reasonableness is

inherent in the phrase “ordinary and necessary” in section 162. Haskel Eng’g &

Supply Co., 380 F.2d at 788-789.

      B.    Whether the Motocross Racing Activity Expenses Were Ordinary and
            Necessary

      We have previously found proximate relationships to exist between various

car racing activities undertaken for promotional purposes and businesses engaged

in construction, Boomershine v. Commissioner, T.C. Memo. 1987-384, 1987 Tax

Ct. Memo LEXIS 382; the buying and selling of aircraft, Ciaravella v.

Commissioner, T.C. Memo. 1998-31, 1998 WL 24217; and the serving of pizza,

Brallier v. Commissioner, T.C. Memo. 1986-42.
                                         -15-

[*15] Petitioners argue that, similar to the businesses in the above cases, DEC’s

construction business had a proximate relationship with the motocross racing

activity. Respondent argues that no proximate relationship exists and the above

cases are distinguishable because: (1) the motocross racing activity expenses were

actually personal expenses; (2) DEC operated in Boise whereas most of Ben’s

races took place outside of that area; and (3) petitioners have not shown that the

motocross racing activity brought in new customers. We agree with petitioners.

             1.    The Motocross Racing Activity Expenses Were Not Personal
                   Expenses

      Respondent does not dispute that motocross racing is a popular and high-

profile sport within the Boise area and especially within the local construction

industry. Motocross racing’s local popularity, coupled with Ben’s success in the

sport during the years in issue, earned him a certain celebrity status. By

sponsoring Ben and having its logos placed prominently on the Mirage trailer,

Ben’s motorcycles, and promotional posters, DEC was able to capitalize on this

celebrity status, which naturally led to increased exposure for DEC amongst

potential clients, investors, and subcontractors.

      Nevertheless, respondent argues that petitioners had DEC sponsor Ben’s

motocross racing for personal reasons. The facts, however, do not support
                                         -16-

[*16] respondent’s position. As respondent states: “Petitioners have raised five

children, all of which [sic] ride motorcycles.” Petitioners supported all of their

children in their motorcycle racing pursuits but deducted expenses only for Ben’s

activity because he was the only one of their children to attain a level of fame in

motocross racing that held promotional value to DEC. Petitioners made the

decision, after consulting with their C.P.A., to treat Ben’s racing activity as a form

of promotion for DEC’s business because they reasonably calculated that it would

be beneficial to DEC. And DEC was not the only company to take advantage of

Ben’s promotional value: Ben had a number of other corporate sponsors including

Western Power Sports, Carl’s Cycle Sales, American Honda, and Step One

Graphics. Nor are we concerned, as is respondent, that petitioners stopped paying

motocross racing activity expenses after Ben became a professional in 2007. By

that point Ben’s career had gained sufficient momentum that he could achieve the

kind of success that would generate publicity for DEC without its direct financial

support.

             2.    Races Outside of Boise Benefited DEC

      Respondent argues that the motocross racing activity’s promotional value

was virtually nonexistent because most of Ben’s races took place outside of the

Boise area whereas DEC performs work only in Idaho. We disagree. We have
                                         -17-

[*17] previously held that a taxpayer could deduct expenses for racing activities

conducted outside the area where the taxpayer did business. See Brallier v.

Commissioner, T.C. Memo. 1986-42.

      Moreover, Ben’s increasing national stature--fueled by his participation in

races on the national circuit--served to improve his fame and name recognition

locally. Many of DEC’s customers and business partners were fans of motocross

racing, and petitioners have established that its association with a rising star in

motocross racing helped DEC generally to gain new business connections and to

strengthen existing ones. Petitioners have also established that these connections

helped DEC’s business in more specific ways. For example Home Federal Bank is

now DEC’s largest source of commercial funds, Carl’s Cycle Sales has invested in

several of DEC’s projects, and at least one subcontractor has given DEC

discounted rates for its services.

      Respondent argues, however, that most of the benefits DEC garnered from

the motocross racing activity came in the form of connections to vendors,

subcontractors, and banks--rather than customers--and the facts of this case are

therefore distinguishable from those in our prior cases. We disagree. First, we

find that petitioners’ witnesses have credibly testified that sponsoring Ben’s

motocross racing activity did help DEC to attract business. But even if many of
                                         -18-

[*18] the benefits DEC received came in the form of deals with subcontractors as

opposed to purchases by more customers, we are nonetheless convinced that the

development of those business relationships with members of the construction

industry had a positive effect on DEC’s bottom line. Accordingly, we find that the

motocross racing activity expenses, with one exception,8 were ordinary and

necessary.

      C.     Whether the Motocross Racing Activity Expenses Were Reasonable

      Because we find that the motocross racing activity expenses were ordinary

and necessary, we must now determine whether they were reasonable in amount.

We have previously determined the extent to which advertising expenses are

reasonable by comparing the amount expended for the activity in question with the

amount of benefit reasonably expected to be derived. Ciaravella v. Commissioner,

1998 WL 24217, at *7; see also Sanitary Farms Dairy, Inc. v. Commissioner, 25

T.C. 463, 467 (1955).




      8
         Respondent argues, on brief, that petitioners failed to introduce any
evidence regarding how the utility trailer was used in the motocross racing
activity. There is no evidence in the record regarding the use of the utility trailer,
and petitioners did not offer a response to this argument in their reply brief.
Accordingly, we find that petitioners are not entitled to deduct as advertising
expenses any expenses related to the utility trailer.
                                       -19-

[*19] Petitioners argue that the motocross racing activity expenses, which

constituted less than 1% of DEC’s gross receipts in each year, were reasonable.

Respondent argues that petitioners have not provided any information regarding

the average amount spent on advertising by entities in similar businesses and that

petitioners’ motocross racing activity expenditures were unreasonable in the light

of DEC’s other advertising expenses, which were only $4,571 in 2006 and $1,388

in 2007. Respondent also argues that, as a general rule, expenses should not be

considered reasonable simply because they equal a small percentage of a

company’s gross receipts.

      Respondent is correct that petitioners have not presented any evidence

regarding the average advertising budgets of similar entities. Nor have petitioners

presented evidence of the value of the promotional benefits DEC gained from

Ben’s racing activities. On the other hand, we are convinced, on the basis of the

evidence before us, that DEC derived significant benefits from the motocross

racing activity. Accordingly, we resolve the issue of reasonableness using the

principles established in Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

      When taxpayers establish that they have incurred deductible expenses but

are unable to substantiate the exact amounts, we can estimate the deductible

amount in some circumstances, but only if the taxpayers present sufficient
                                        -20-

[*20] evidence to establish a rational basis for making the estimate. See, e.g., id.

at 543-544; Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). In

estimating the amount allowable, we bear heavily against taxpayers whose

inexactitude is of their own making. See Cohan v. Commissioner, 39 F.2d at 544.

      Although Cohan is a case of substantiation, we, as well as other courts, have

extended the Cohan principle to cases where all the expenses have been

substantiated. See Ellis Banking Corp. v. Commissioner, 688 F.2d 1376, 1383

(11th Cir. 1982), aff’g in part, remanding in part on this issue T.C. Memo.

1981-123; Ciaravella v. Commissioner, 1998 WL 24217, at *8. For example, in

Boomershine we considered whether a company’s car racing expenditures were

reasonable. Similar to the evidence in the present case, the record before us in

Boomershine “contain[ed] no information as to the average amount spent on

advertisement by entities engaged in similar trades or businesses”. Boomershine

v. Commissioner, 1987 Tax Ct. Memo LEXIS 382, at *9 & n.10. We determined

that advertising expenditures of roughly 4%-5% of the company’s gross receipts

for each year were reasonable. Id.

      We took a similar approach in Lang Chevrolet Co. v. Commissioner, T.C.

Memo. 1967-212, 1967 Tax Ct. Memo LEXIS 50. In Lang Chevrolet, an

automobile dealership reported racing expenses as a form of advertising during the
                                         -21-

[*21] two years in issue. Id., 1967 Tax Ct. Memo LEXIS 50, at *7. We found that

the dealership’s combined advertising expenses, including those for racing,

constituted 0.7% of the total gross sales during one year and 1% of the total gross

sales for the other year. “[We did] not consider the amounts expended on racing

to be out of proportion when compared to the extent of radio and newspaper

coverage derived.” Id. at *13.

      Petitioners’ racing promotion expenses are comparable to those in Lang

Chevrolet: The expenses constituted approximately 0.9% of DEC’s gross

revenues in 2006 and 0.7% in 2007. We do agree with respondent, however, that

expenses are not reasonable simply because they are small relative to a company’s

gross receipts. Nevertheless, in the light of the significant tangible and intangible

benefits DEC obtained from the motocross racing activity, we estimate that the

amounts DEC spent on the motocross racing activity during the years in issue were

reasonable. Accordingly, petitioners are entitled to deduct all expenses related to

the motocross racing activity reported for the years in issue, with the exception of

those expenses related to the utility trailer. See supra note 8.

      D.     Section 179 Expense for the Motorhome

      Respondent also challenges petitioners’ expense deductions for the

motorhome under section 179, arguing that it was used primarily for lodging.
                                         -22-

[*22] Petitioners argue that the motorhome was used primarily to transport Ben

and his motorcycles to races and that they are entitled to the section 179 expense

deductions. We agree with petitioners.

      Section 179(a) generally allows a taxpayer to elect to treat the cost of

section 179 property as a current expense in the year the property is placed in

service, within certain dollar limitations. If the property is used for both business

and other purposes, then the portion of the property’s cost that is attributable to the

business use is eligible for expensing under section 179 but only if more than 50%

of the property’s use is for business purposes. See sec. 1.179-1(d), Income Tax

Regs.; see also Whalley v. Commissioner, T.C. Memo. 1996-533. Section 179

property is defined under subsection (d)(1), which excludes property described in

section 50(b) from the definition. Sec. 179(d)(1) (flush language). Section 50(b)

property includes “property which is used predominantly to furnish lodging or in

connection with the furnishing of lodging.” Sec. 50(b)(2). Such property,

therefore, cannot be expensed under section 179. See secs. 50(b)(2), 179(d)(1).

      Respondent’s argument focuses on two facts: (1) Ben and his traveling

companions slept on mattresses in the back of the motorhome and (2) DEC

incurred almost no lodging expenses in connection with the motocross racing

activity. Respondent downplays the fact that the motorhome was Ben’s primary
                                        -23-

[*23] means of transporting himself and his motorcycles to races until DEC

purchased the Mirage trailer. We also note that, unlike most motorhomes,

petitioners’ motorhome had a rear wall that folded down at the push of a button to

make a ramp that Ben used to roll motorcycles up into the motorhome for transport

and repairs. We find that the motorhome was not used predominantly for lodging.

Accordingly, petitioners were entitled to deduct its cost under section 179.

III.   Accuracy-Related Penalties

       Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer may be liable for

a penalty of 20% on the portion of an underpayment of tax due to: (1) negligence

or disregard of rules or regulations or (2) a substantial understatement of income

tax. “Negligence” is defined as any failure to make a reasonable attempt to

comply with the provisions of the Code; this includes a failure to keep adequate

books and records or to substantiate items properly. Sec. 6662(c); sec. 1.6662-

3(b)(1), Income Tax Regs. Negligence has also been defined as the failure to

exercise due care or the failure to do what a reasonable person would do under the

circumstances. See Allen v. Commissioner, 92 T.C. 1, 12 (1989), aff’d, 925 F.2d

348, 353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947 (1985).

“Disregard” means any careless, reckless, or intentional disregard. Sec. 6662(c).
                                        -24-

[*24] The Commissioner bears the initial burden of production. Sec. 7491(c). If

the Commissioner satisfies his burden, the taxpayer then bears the ultimate burden

of persuasion. Higbee v. Commissioner, 116 T.C. at 446-447. The accuracy-

related penalty is not imposed with respect to any portion of the underpayment as

to which the taxpayer shows that he or she acted with reasonable cause and in

good faith. Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 448.

      Petitioners have prevailed on all issues in this case except with regard to the

utility trailer and the conceded issues. As to those remaining issues, we find that

respondent has met his burden of production.

      Petitioners argue that they acted with reasonable cause and in good faith by

relying on their C.P.A., Mr. Anderson. Reliance upon the advice of a tax

professional may establish reasonable cause and good faith for the purpose of

avoiding liability for the section 6662(a) penalty. See United States v. Boyle, 469

U.S. 241, 250 (1985). Whether reasonable cause exists when a taxpayer has relied

on a tax professional to prepare a return must be determined on the basis of all of

the facts and circumstances. See Neonatology Assocs., P.A. v. Commissioner, 115

T.C. 43, 98 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). The taxpayer claiming

reliance on a tax professional must prove by a preponderance of evidence that he

or she satisfies each prong of the following test: “(1) [t]he adviser was a
                                         -25-

[*25] competent professional who had sufficient expertise to justify reliance, (2)

the taxpayer provided necessary and accurate information to the adviser, and (3)

the taxpayer actually relied in good faith on the adviser's judgment.” Id. at 99.

      Mr. Anderson was a C.P.A. Ms. Chacon, also a C.P.A., testified that she

provided all documents and information necessary for Mr. Anderson to prepare

petitioners’ and DEC’s tax returns. We find that, as to the utility trailer and the

conceded issues, petitioners reasonably relied in good faith on Mr. Anderson’s

judgment. Accordingly, petitioners are not liable for any accuracy-related

penalties.

      In reaching our holdings herein, we have considered all arguments made,

and, to the extent not mentioned above, we conclude they are moot, irrelevant, or

without merit.

     To reflect the foregoing,


                                                     Decision will be entered

                                                under Rule 155.
