                       T.C. Memo. 2005-69



                     UNITED STATES TAX COURT



     BILL J. MALONE, JR. AND SARAH J. MALONE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9350-03.                Filed April 4, 2005.



     Bill J. Malone, Jr., pro se.

     Daniel N. Price, for respondent.


                       MEMORANDUM OPINION

     CARLUZZO, Special Trial Judge:     Respondent determined

deficiencies of $2,153 and $7,491 and section 6662(a) accuracy-

related penalties of $431 and $1,498, with respect to

petitioners’ 1999 and 2000 Federal income taxes, respectively.1




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

     For each year in issue, the issues for decision are:

(1) Whether petitioners are entitled to deductions claimed on

a Schedule C, Profit or Loss From Business; and (2) whether

petitioners are liable for an accuracy-related penalty under

section 6662(a).

Background

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

the time the petition was filed, petitioners resided in Austin,

Texas.   References to petitioner are to Bill Malone.

     Petitioners were married in 1983.   They have eight children:

H, R, N, B, Dn, M, Db, and J2 (collectively, the Malone

children).

     Petitioner is and was at all relevant times a practicing

attorney, with offices in Austin, Texas.   During the years in

issue, he devoted an average of 35 hours per week to his law

practice and, in addition, was employed as a law professor at Oak

Brook College of Law.   Sarah Malone has a degree in education.

In the stipulation of facts she is described as a “homemaker”.

During the years in issue she “home schooled” the Malone

children.

     Petitioners and their children are musically inclined and,

as amply demonstrated by the record, are quite talented in that



     2
        Full names of petitioners’ minor children are omitted in
the interest of privacy.
                                 - 3 -

regard.    Petitioner, who plays guitar, banjo, trumpet, piano, and

other instruments, gave guitar lessons while attending college.

In 1999 he was diagnosed with a medical condition that has since

restricted his ability to take full advantage of his musical

talents.    Prior to the years in issue, Mrs. Malone taught basic

music theory to elementary school students.

      Music instruction is a material component of the Malone

children’s home school curriculum.       With the exception of

the youngest child, all of the Malone children take musical

instrument lessons.    Each child that does take lessons plays a

variety of instruments, including the piano and the violin.

     H and R, the eldest of the Malone children, started taking

music lessons at an early age.    H plays the piano, violin, viola,

and harp.    R plays the piano, violin, and flute.     H and R are

skilled musicians and both have performed in public events.       In

1996, at around age 12, H began to teach R to play the piano and

soon offered her services as a piano teacher to others.       Shortly

thereafter, R began to teach violin.

     Malone Music, an unincorporated activity, was started in or

around 1996, about the time that H and R began providing music

lessons.    Malone Music engages in several activities.     It

sponsors Melody Makers, a “music camp” conducted in the summer

months during school recess.    It also promotes an ensemble whose

musicians consist of members of the Malone family.       The ensemble
                               - 4 -

entertained, usually on a no fee basis, at local hospitals,

senior citizen facilities, etc.   Malone Music’s primary activity,

however, involves providing music lessons to students drawn

usually from the ranks of the Malone children’s friends,

neighbors, or classmates.   H and R are Malone Music’s only music

instructors, and together they provide all of the musical

instrument lessons.   On a more limited basis, Malone Music also

offers instructions in music theory taught by B.   H primarily

teaches piano and harp; R primarily teaches violin.    H and R also

conduct the Melody Makers summer music camp.   According to

petitioner, a “fair description of the teaching services”

typically offered by Malone Music includes piano lessons offered

by H and/or violin lessons provided by R.   Substantially all, if

not all, of the music lessons provided by H and R through Malone

Music take place in designated rooms in petitioners’ residence.

     In 1998, H became seriously ill and was unable to devote

significant time to Malone Music until mid-1999.   According to

petitioner, H’s medical problems restricted Malone Music’s

potential “to take off faster and further”.

     Susan Groves (Ms. Groves) is a piano teacher.    As of the

date of trial, she had been giving lessons for almost 20 years.

She taught piano to several of the Malone children over the

years, but, prior to the trial in this case, she had never heard

of the name “Malone Music”.   Ms. Groves spoke to petitioners and
                               - 5 -

H “about H’s business from time to time,” but she did not provide

advice to H or other members of the Malone family as to business

or financial matters related to Malone Music.   Nor did

petitioners or any member of the Malone family involved with

Malone Music seek professional advice or assistance regarding how

the activity should be operated.

     Students secure the services of Malone Music in accordance

with written materials that explain, among other things, the

nature of the services offered, lesson schedules, fee schedules,

payment plans and arrangements, as well as what H and R expect

from their students.   A checking account in the names of H, R,

and petitioner was established for Malone Music (Malone Music

checking account).   Fees generated by the services offered by

Malone Music are generally due to be paid on a monthly basis.3

Students are required to “make checks payable to [the] instructor

personally.”   Cash payments received from the students are paid

directly to H and R.   Typically, payments received by H and R are

deposited in the Malone Music checking account.

     Initially, the expenses of Malone Music were paid by

petitioner usually with checks drawn on his personal checking

account.   After the Malone Music checking account was opened, the

expenses for Malone Music were paid from that account.    If there


     3
        H and R also provide free music lessons to their
siblings, and they barter for their services with those students
who cannot otherwise afford to pay their fees in cash.
                                - 6 -

were insufficient funds in the Malone Music checking account,

petitioner would provide the needed funds, subject to

reimbursement from the Malone Music checking account if and when

funds became available.    Petitioner viewed these advances as

small, short-term loans to Malone Music.

     Malone Music does not advertise its services in any

established publication.    From time to time, H and/or R create

and distribute leaflets and brochures for specific events or

classes offered by Malone Music in which they are identified as

the music leaders or “professors”.      In an attempt to attract

students, R, with the assistance of N, created a Web site for

Malone Music.   That Web site lists H and R as the only “contact

individuals” for Malone Music, and further identifies them as the

activity’s only instructors.

     Petitioner assisted H and R with Malone Music for

approximately two-plus hours each week during the years in issue.

During those years, Mrs. Malone devoted approximately 8 hours per

week to helping out with Malone Music.      Neither petitioner nor

Mrs. Malone provided any music lessons to anyone through Malone

Music.   Petitioner describes petitioners’ involvement in Malone

Music as “primarily administrative”.      Generally, petitioner

assisted with paying any necessary expenses and purchasing

musical instruments.   At the outset of Malone Music, Mrs. Malone

would “from time to time” monitor the music instruction, but her
                               - 7 -

involvement, “in the big picture”, was generally “fairly rare”.

Petitioners did not keep any records with respect to the time

they devoted to Malone Music during the years in issue.

     Progress reports and payment records for the students of

Malone Music were maintained by H and R.   Certain aspects of

Malone Music’s financial activities were recorded using a

commercial computer software program (the program) that was also

used for petitioners’ personal finances.   With respect to Malone

Music, the program was used to record information rather than to

generate financial statements or other analytical reports.

     Petitioners pay for music lessons and purchase musical

instruments for the Malone children.   The quantity and the

quality of the musical instruments purchased by petitioner depend

on the financial performance of petitioner’s law practice.    When

petitioner’s law practice is profitable, petitioner looks for

“good quality instruments” to purchase.    As of the date of trial,

the musical instruments purchased by petitioner include:    Two

Steinway pianos, an upright piano, eight violins, a viola, a

harp, a trumpet, three guitars, and two banjos.   The musical

instruments are used by all of the Malone children in their music

lessons and practice, as well as by H and R in their capacities

as Malone Music instructors.
                                - 8 -

       On a Schedule C, Profit or Loss From Business, included with

each of petitioners’ joint Federal income returns for 1997

through 2001, petitioners reported income and expenses from

Malone Music as follows:

                 Gross                Total             Total
Year        Income Reported     Expenses Claimed    Losses Claimed

1997             $550                $27,898           $27,348
1998            1,777                 28,074            26,297
1999            1,917                  8,553             6,636
2000            2,559                 23,123            20,564
2001            5,758                 26,060            20,302

       The gross income from Malone Music reported on the Schedules

C for the years in issue is primarily attributable to services

provided by H and R.4   The deductions claimed on the Schedules C

for the years in issue consist almost entirely of amounts paid

for music lessons for the Malone children and the cost of musical

instruments.5

       In the notice of deficiency for each year in issue,

respondent disallowed all of the deductions claimed on the

Schedule C and imposed a section 6662(a) accuracy-related

penalty.    Other adjustments made in the notice of deficiency are

computational and need not be addressed.


       4
        A small amount of Malone Music’s income for each year in
issue is attributable to services provided by B.
       5
        For example, the only deduction claimed on the 1999
Schedule C ($8,553) is for “music instruction” expenses of the
Malone children. In 1998, petitioner spent $11,560 for two
violins. The cost of those violins is claimed as a deduction on
the Schedule C included with petitioners’ 2000 return.
                               - 9 -

Discussion

     In general, there is “allowed as a deduction all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”.   Sec.

162(a).6   It is axiomatic that expenses “allowed as a deduction”

under section 162 are expenses paid or incurred in carrying on

the trade or business of the taxpayer who claims entitlement to

those deductions.

     In this case, petitioners claim that Malone Music is

petitioner’s trade or business, and their Federal income tax

return for each year in issue (as well as other years not before

the Court) reflects this claim as income and deductions

attributable to Malone Music are included on a Schedule C

included with each of those returns.   In addition to other

grounds advanced for disallowing the deductions claimed on those

Schedules C, respondent takes the position that Malone Music, if

a trade or business, is not petitioner’s trade or business, but

the trade or business of one or more of the Malone children.7

Resolving the dispute between the parties on this point requires


     6
        Petitioners rely exclusively upon sec. 162 in support of
the deductions here under consideration.
     7
        In his answer, respondent alleges that “Malone Music is
not an activity engaged in by petitioners”, but rather by H and
R. In his opening statement respondent’s counsel noted that
Malone Music “wasn’t even petitioners”, but “conducted by” one or
more of the Malone children.
                              - 10 -

that we place ownership of an activity or business conducted

through an unincorporated association.   This is no easy task as

none of the many indicia of ownership are determinative.

Nevertheless, for the following reasons, we agree with

respondent.

     Although we make no finding on the point, for convenience we

proceed as though during each year in issue Malone Music

constituted a trade or business within the meaning of section 162

and turn our attention to which individual or individuals were

“carrying on” that trade or business during those years.    In so

doing we note that the services offered by Malone Music are best

described as labor-intensive and examine:    (1) Ownership of the

assets used in the business; (2) what individuals provided the

necessary labor; and (3) how Malone Music was held out to, and/or

perceived by the general public.

     Beginning with the last criterion, the Assumed Name Records

Certificate of Ownership for Unincorporated Business or

Profession, filed March 12, 1998, with the Clerk of Travis

County, Texas, describes Malone Music as a “proprietorship” owned

by petitioner.   To that extent, petitioner publicly holds himself

out as the owner of the business, subject to whatever benefits

and burdens that might flow as a result.    Nevertheless,

petitioner is nowhere named in any of the written promotional

materials published by Malone Music.   Rather those materials
                                - 11 -

repeatedly refer to H and R in various capacities.    The absence

of any reference to petitioner in documents generated by Malone

Music is in contrast to a reference to petitioner as the

“director” of “Malone Academy”, a name apparently used to

describe the Malone children’s home schooling program.

Furthermore, to the extent that the testimony of one witness is

representative of public impressions, the music teacher who

taught some of the Malone children referred to Malone Music as

“H’s business”.   The promotional materials published by Malone

Music and the impression of the Malone children’s music teacher

support a finding that the business was not carried on by

petitioner, but rather by one or more of the Malone children.

     We next examine the status of the ownership of assets used

in the business and note that the ownership of some of those

assets is not entirely clear.    The business premises, that is,

certain rooms in the family residence designated for such use,

are apparently owned by petitioner or petitioners.    Some of the

musical instruments used in the business, no doubt, are also

owned by petitioner or petitioners, but it is not clear whether

some of those instruments, although purchased by petitioner or

petitioners, were gifted to one or another of the Malone

children.   A business checking account was opened at some point,

but control over that account says little about the ownership of

the business as petitioner, H, and R are all signatories to the
                               - 12 -

account.    To the extent that the ownership of assets used in

connection with the carrying on of a trade or business is, in

general, indicative of ownership, the record in this case, simply

put, provides no useful guidance on the point.

     Lastly, we consider which individuals provided labor in

connection with the business and the extent of that labor.     In

this regard we note that Malone Music had no employees during the

years in issue.    As we view the matter, although not

determinative in a general sense, in a labor-intensive business

with no employees, there is strong suggestion that the

individuals performing the labor own the business.    In this case

the record overwhelmingly demonstrates that the business was

carried on through the labor of H, R, and other of the Malone

children.    This is true not only with respect to the services and

programs offered by Malone Music, but with respect to internal

activities as well, such as planning and record keeping.

Petitioner describes his labor contribution to the business as

“administrative”.    We view it more in the nature of parental.

The fact that one or more of the Malone children, rather than

petitioner or petitioners, supplied the necessary labor to carry

on the business during the years in issue, strongly supports a

finding that the business belonged to one or more of the

children, not to petitioner.
                              - 13 -

     Taking into account the three factors listed above, we find

that Malone Music, if a trade or business within the meaning of

section 162(a), was not, during the years in issue, petitioner’s

trade or business, but the trade or business of one or more of

the Malone children.8   It follows that the items of income9 and

deductions attributable to Malone Music are not properly

includable on petitioners’ return for either year in issue and we

so hold.10

     For each year in issue, respondent imposed a section 6662(a)

accuracy-related penalty upon the ground that the underpayment of

tax required to be shown on petitioners’ return for each year is

due to negligence or disregard of rules or regulations.    Sec.


     8
        Obviously, we have no jurisdiction in this proceeding
with respect to any of the Malone children for any year and make
no findings regarding the Federal income tax liabilities of any
of them.
     9
        The issues presented and positions of the parties in this
case focus our attention on disallowed deductions. Nevertheless,
with respect to the income reported on the Schedules C, we note
that our conclusion is entirely consistent with Lucas v. Earl,
281 U.S. 111 (1930) (income is taxed to the person who earned
it). Our conclusion is further consistent with sec. 73, which
provides, in general, that amounts received in respect of
services rendered by a child are includable in the child’s gross
income and not in the gross income of the child’s parents, even
though such amounts are not received by the child, sec. 73(a),
and expenditures paid by the parent or the child attributable to
amounts which are includable in the gross income of the child are
generally treated as paid or incurred by the child, sec. 73(b).
     10
        Our holding in this regard makes it unnecessary to
address respondent’s other grounds for the disallowance of the
deductions claimed on the Schedules C.
                               - 14 -

6662(a) and (b)(1).   Negligence is defined to include any failure

to make a reasonable attempt to comply with the provisions of the

Internal Revenue Code.   Sec. 6662(c).     It is further defined as

the failure to do what a reasonable person with ordinary prudence

would do under the same or similar circumstances.      Neely v.

Commissioner, 85 T.C. 934, 947 (1985).      Disregard is defined to

include any careless, reckless, or intentional disregard.       Sec.

6662(c).   An accuracy-related penalty will not be imposed with

respect to any portion of an underpayment as to which the

taxpayer acted with reasonable cause and in good faith.      Sec.

6664(c)(1).   Whether the taxpayer acted with reasonable cause and

in good faith depends on the pertinent facts and circumstances.

Sec. 1.6664-4(b)(1), Income Tax Regs.      Generally, an important

factor is the extent of the taxpayer’s effort to properly assess

the tax liability.    Circumstances that may indicate reasonable

cause and good faith include and an honest misunderstanding of

fact or law that is reasonable in light of the taxpayer’s

experience, knowledge, and education.      Id.

     Petitioners’ return for each year in issue was prepared by

petitioner, a practicing attorney.      Nothing in the record

suggests that petitioner sought professional guidance or advice

in connection with the preparation of petitioners’ returns.

Petitioner’s profession is relevant in deciding whether

petitioners are liable for a penalty under section 6662(a),
                              - 15 -

Pelton & Gunther v. Commissioner, T.C. Memo. 1999-339; Estate of

Holland v. Commissioner, T.C. Memo. 1997-302, but as best can be

determined from the record, petitioner’s professional experiences

relate to matters other than Federal income taxation.

     We noted from the outset that placing ownership of a

business conducted through an unincorporated association was not

easy, and we expect that reasonable minds could differ as to the

foregoing analysis and conclusion on the point.   We are not

persuaded that petitioners did not have sufficient reasonable

cause to avoid the imposition of the penalty for each year, and

we so find.   Accordingly, petitioners are not liable for a

section 6662(a) penalty for either year in issue.

     To reflect the foregoing,



                                              Decision will be

                                         entered under Rule 155.
