                  T.C. Summary Opinion 2009-174



                       UNITED STATES TAX COURT



  JOHN ANTHONY LEONE AND MARY L. SPENCER-LEONE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1221-08S.               Filed November 24, 2009.



     John Anthony Leone and Mary L. Spencer-Leone, pro sese.

     Ashley P. Vaughan, for respondent.



     VASQUEZ, Judge:    This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

effect when the petition was filed.   Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,


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

and this opinion shall not be treated as precedent for any other

case.

     Respondent determined deficiencies in petitioners John Leone

(Mr. Leone) and Mary Spencer-Leone’s (Mrs. Leone) Federal income

taxes and accuracy-related penalties as follows:

                                          Penalty
     Year            Deficiency         Sec. 6662(a)

     2004             $5,675             $1,135.00
     2005             14,252              2,850.40
     2006              4,625                925.00

     Afer concessions, the issues for decision are:2   (1) Whether

petitioners’ drag racing activity was an activity engaged in for

profit under section 183(a); (2) whether capital gain from the

sale of rental property should have been reported on petitioners’

2005 Federal income tax return; and (3) whether petitioners are

liable for the accuracy-related penalty under section 6662(a).

                           Background

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

The stipulation of facts, the supplemental stipulation of facts,

and the attached exhibits are incorporated herein by this


     2
        The notice of deficiency disallowed all expenses relating
to the drag racing activity. In respondent’s pretrial
memorandum, respondent conceded the expenses related to the drag
racing activity up to the amount of income from the activity.

     The notice of deficiency contains adjustments to itemized
deductions (changes to the medical expenses and miscellaneous
deductions) for 2004 to 2006. These are computational
adjustments and are affected by the outcome of the issues to be
decided; we do not separately address them.
                               - 3 -

reference.   At the time petitioners filed the petition, they

resided in Texas.

Racing Activities

     During the years in issue petitioners were involved in a

drag racing activity.   In each of the years petitioners were

full-time employees of the U.S. Postal Service.    Mr. Leone was 53

at the time of trial and has been interested in car racing since

he was a teenager.   With a self-proclaimed “natural attraction to

fast cars”, Mr. Leone was “captivated” by the races he watched on

television while growing up.   Mrs. Leone’s interest in drag

racing emerged in 2002 when she started dating Mr. Leone.

     Although Mr. Leone was unsure of whether he began his drag

racing activity at the end of 2002 or the beginning of 2003, he

first reported this activity on his Schedule C, Profit or Loss

From Business, under the name “First Strike Racing Team” (First

Strike) on his individual 2002 Federal income tax return and

described the activity as “racing”.    For years 2003 to 2006

petitioners filed joint returns with the same business name and

Schedule C activity description.   Petitioners reported the

following income, expenses, and net losses from the drag racing

activity for 2002 to 2006:
                                  - 4 -

     Year          Gross Income           Expenses     Gain (Loss)

     2002             $200                $17,915       ($17,715)
     2003            1,285                 20,220        (18,935)
     2004              708                 21,706        (20,998)
     2005            4,570                 25,912        (21,342)
     2006            7,700                 25,719        (18,019)
       Total        14,463                111,472        (97,009)

Petitioners reported they were entitled to refunds on their 2004,

2005, and 2006 joint income tax returns.3       Respondent disputes

the drag racing activity expenses exceeding income generated from

the activity for years 2004, 2005, and 2006.

     Petitioners’ business plan for First Strike centered on

winning as many “grassroots” level races as possible to offset

their expenses while gaining enough acclaim and exposure to

attract large sponsors.   When deciding to enter a race,

petitioners would weigh the purse size and their chances of

winning against their total expenses.       Petitioners did not have a

written business plan and did not solicit any professional

business advice.

     Petitioners’ racing activity generated income from: (1) cash

prizes for winning or place finishing in races;4 and (2) gift

certificates from local auto parts stores for petitioners’

displaying one of their race cars in front of the store.

Petitioners’ cash prizes for drag racing activities from 2004

     3
        Petitioners reported they were entitled to the following
refunds: $6,099 for 2004, $6,901 for 2005, and $5,631 for 2006.
     4
        Different cash prize amounts are awarded depending on
whether one wins or places in a race, with the prize amount being
larger the higher one finishes.
                                - 5 -

through 2006 is as follows:

     •     2004:   one place finish;

     •     2005:   three place finishes; and

     •     2006:   one or two wins, one or two place finishes.

Petitioners received an undisclosed amount of gift certificates

from local auto parts stores in 2005 and 2006.     Additionally, in

2006 petitioners received $4,600 from the sale of a broken

engine.5

     Petitioners claimed the following deductions on their

Schedules C for 2004, 2005, and 2006:

                                2004       2005       2006

Advertising                     $819      $1,129     $1,370
Car and truck expenses         5,457       3,934      4,895
Commissions and fees             720       1,600      1,510
Depreciation                  10,610       2,880      1,728
Office expenses                  200       2,800      1,940
Lease of business property     1,416       1,514      1,561
Supplies                         324       8,733      9,200
Taxes and licenses               –-          200        240
Travel expenses                1,200         --         --
Other expenses                   960       3,122      3,275

     Petitioners did not establish a budget for expenses, keep

financial books or records, or maintain a separate bank account

for First Strike.




     5
        Mr. Leone testified he routinely broke at least two
engines a year but that he “had enough spare parts on hand to
piece [an engine] together to keep [racing]”.
                                 - 6 -

     Petitioners had two race cars:      a 2000 Chevy Dragster6 and a

1969 Chevelle.    They also owned a 2004 Cross Country.7

Petitioners initially referred to their race cars as “dragsters”

but later clarified that the Chevelle was just a “regular race

car” they used in drag races.8

     Petitioners placed their Chevelle into service in January

2004.    They reported 100 percent business use and a basis of

$18,000 and claimed depreciation deductions for 2004, 2005, and

2006.    Petitioners acquired the Chevy Dragster for $23,000 in

2001 and sold it for $19,000 in 2003.      Mr. Leone built one of his

cars with the aid of a local speed shop for around $22,000.      Upon

quitting the activity in late 2006 or 2007, he sold the car for

around $10,000.    Mr. Leone did not specify which car he built or

to whom he sold it.    No record of this alleged sale was

presented.




     6
        Mr. Leone described the Chevy Dragster as a 32-foot
“long-rail” with a backside engine and topside spoiler.
     7
        Petitioners never mentioned the Cross Country during
their testimony; however, it is listed as an asset on their 2005
and 2006 returns. The 2005 and 2006 returns show they placed the
Cross Country into service in December of 2004, listed no basis,
and used the standard mileage rate deduction for the Cross
Country in 2005 and 2006, claiming 9,100 business miles in 2005
and 11,000 business miles in 2006. It is unclear from the record
whether the Cross Country is a race car.
     8
        Petitioners used the term “dragster” when discussing
their cars.
                                - 7 -

     During the years in issue Mr. Leone spent approximately 10

to 25 hours per week on the drag racing activity, Mrs. Leone

spent approximately 10 hours per week on the drag racing

activity, and occasionally friends helped with the drag racing

activity.    Petitioners worked on the drag racing activity either

at the storage area where they kept the drag racing cars or at

their home.    During the years in issue petitioners did not keep a

time log or calendar of these hours.

     Petitioners were the only drivers for First Strike.    When

Mrs. Leone would race, Mr. Leone would “de-tune” the race car and

restrict its maximum speed.

     Petitioners participated in approximately 10 races per year.

Some of the races had a cash prize of $8,000 to $10,000.    The

largest prize petitioners received from any particular race was

$1,500.    The races were sponsored by the International Hot Rod

Association and took place in different cities around the

southwestern United States.    Petitioners did not provide records

of race participation despite having stated they possessed such

records.

     Petitioners did not conduct a written cost analysis for any

of the races in which they participated.    Petitioners did not

provide any documents or records to show what changes, if any, to

improve profitability were made.
                               - 8 -

     Petitioners discontinued their drag racing activity in 2007.

Although they enjoyed the sport, the losses were too great.

Petitioners liquidated the assets from their drag racing

activity.

Sale of Rental Home

     In 1992 Mr. Leone purchased a property in El Paso, Texas.

He used it as his primary residence until 2002.    During June 2002

Mr. Leone converted it into a rental property.    In December of

2003 he agreed to sell it to a coworker for $54,000.    Title

complications delayed the closing of the sale, and petitioners

did not receive the funds from the sale of the home until July

2005.

     Petitioners included the expected proceeds from the sale of

the home on their 2003 return and reported that the sale had

closed on December 15, 2003.   Petitioners reported they had

received $54,000 for the house and sustained an $11,237 ordinary

loss on the sale of the property.9

     Petitioners did not receive the proceeds from the sale of

the home until 2005.   Petitioners received $51,640.97 for the

home.


     9
        On their 2003 Form 4797, Sales of Business Property, part
I, Sales or Exchanges of Property Used in a Trade or Business and
Involuntary Conversions From Other Than Casualty or Theft--Most
Property Held More Than 1 Year, petitioners reported their rental
property had a basis of $69,000, they had deducted depreciation
of $3,763, and they sold the home for $54,000.
                               - 9 -

      Petitioners reported $54,000 as the selling price on their

2003 return because it was the initially agreed-upon price.

Petitioners reported $69,000 as the basis because it was the

value assigned to the rental property by the El Paso County tax

assessor.   Subsequently, the parties stipulated that petitioners

had a $20,400 initial basis in the property.

      Petitioners subtracted $3,763 of depreciation from their

basis to calculate the $11,237 ordinary loss reported on their

2003 joint tax return.   Petitioners claimed rental home

depreciation deductions on their tax returns for 2002 and 2003

totaling $5,471; Mr. Leone deducted $2,016 of depreciation for

2002 on his individual tax return, and the Leones deducted $3,455

of depreciation for 2003 on their joint tax return.   No

explanation was given for the disparity in the depreciation

amounts.

                            Discussion

I.   Activity Not Engaged In for Profit

      Section 183(a) provides generally that, if an activity is

not engaged in for profit, no deduction attributable to such

activity shall be allowed except as provided in section 183(b).

Section 183(c) 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.”
                               - 10 -

     The Court of Appeals for the Fifth Circuit, to which an

appeal in this case would lie but for section 7463(b), has held

that for a deduction to be allowed under section 162 or 212(1) or

(2), a taxpayer must establish that he engaged in the activity

with the primary purpose and intent of realizing an economic

profit independent of tax savings.      Westbrook v. Commissioner, 68

F.3d 868, 875 (5th Cir. 1995), affg. T.C. Memo. 1993-634.

     The expectation of profit need not have been reasonable;

however, the taxpayer must have entered into the activity, or

continued it, with the objective of making a profit.     Hulter v.

Commissioner, 91 T.C. 371, 393 (1988); sec. 1.183-2(a), Income

Tax Regs.    Whether the requisite profit objective exists is

determined by looking at all the surrounding facts and

circumstances.    Keanini v. Commissioner, 94 T.C. 41, 46 (1990);

sec. 1.183-2(b), Income Tax Regs.    Greater weight is given to

objective facts than to a taxpayer’s mere statement of intent.

Thomas v. Commissioner, 84 T.C. 1244, 1269 (1985), affd. 792 F.2d

1256 (4th Cir. 1986); sec. 1.183-2(a), Income Tax Regs.

Petitioners bear the burden of proof.10     See Rule 142(a).

     Section 1.183-2(b), Income Tax Regs., provides a list of

factors to be considered in the evaluation of a taxpayer’s profit

objective:   (1) The manner in which the taxpayer carries on the

     10
        Petitioners have neither claimed nor shown that they
satisfied the requirements of sec. 7491(a) to shift the burden of
proof to respondent with regard to any factual issue.
                              - 11 -

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, from the

activity; (8) the financial status of the taxpayer; and (9)

elements of personal pleasure or recreation.    This list is

nonexclusive, and the number of factors for or against the

taxpayer is not necessarily determinative.    Rather, all facts

and circumstances must be taken into account, and more weight may

be given to some factors than to others.     Id.; cf. Dunn v.

Commissioner, 70 T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d

Cir. 1980).

     Petitioners assert the losses from their drag racing

activity in 2004, 2005, and 2006 are deductible because they

engaged in the activity for profit.    Respondent asserts

petitioners’ drag racing activity in 2004, 2005, and 2006 was not

engaged in for profit.   After considering the factors in section

1.183-2(b), Income Tax Regs., we agree with respondent and

conclude petitioners’ drag racing activity in 2004, 2005, and

2006 was not engaged in for profit and, accordingly, petitioners

are not entitled to deduct losses incurred in such activity.
                               - 12 -

     A.   Manner in Which the Activity Is Conducted

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

carrying on an activity in a businesslike manner may be

indicative of a profit objective.   The regulation further

identifies three practices consistent with businesslike

operations: (1) Maintaining complete and accurate books and

records; (2) conducting the activity in a manner substantially

similar to that of profitable businesses of the same nature; and

(3) changing operational methods and techniques to improve

profitability.   See id.   The Tax Court has found establishing a

business plan to be a fourth practice evidencing businesslike

operations.   See Sanders v. Commissioner, T.C. Memo. 1999-208.

     Petitioners did not maintain any financial books or ledgers

for their racing activity and had no records of the races in

which they raced.   In addition, petitioners did not keep a budget

of their expenses or record how much income they received or from

where it was generated.    This lack of elementary business

practices indicates a lack of profit objective.   See Snoddy v.

Commissioner, T.C. Memo. 1991-251 (stating that “we think a

serious business operation would have kept records to show races

petitioner entered, and what his winnings were in each race”);

Woods v. Commissioner, T.C. Memo. 1985-233 (finding that a

taxpayer who did not maintain a formal general ledger, accounts

receivable ledger, accounts payable ledger, or asset ledgers in
                              - 13 -

stock racing activity did not operate in a businesslike manner);

Whitener v. Commissioner, T.C. Memo. 1979-415 (finding that a

taxpayer who kept no business books or records did not conduct

his stock car racing activity in a businesslike manner).

     Petitioners’ alleged efforts to improve profitability by

changing their methods and techniques of conducting their drag

racing activity is not substantiated by the record.   Mr. Leone

testified that he received advice from fellow racers on various

racing issues and as a result he and his wife were more frugal in

advertising First Strike.   However, no evidence was presented to

show what changes were made or when they were implemented.

Further, petitioners’ tax returns reveal their advertising

expenses steadily increased each year from 2004 to 2006.    Cf.

Dwyer v. Commissioner, T.C. Memo. 1991-123 (finding indication of

profit objective for taxpayer’s financing son’s auto racing

career where taxpayer changed operating methods, tried new

approaches, and discontinued methods that did not work).

     Petitioners testified that they intended to make First

Strike a profitable business by winning races as often as

possible in hopes of attracting a large sponsor.   Petitioners did

not present a written business plan.   A lack of a formal written

business plan is not determinative of a lack of profit objective.

See Sanders v. Commissioner, supra.    Nevertheless, some
                                  - 14 -

indication of a plan for success (i.e., profitability) should be

given.    Id.

     Given the substantial costs associated with operating

petitioners’ drag racing team, more than petitioners’ vague and

wishful representation that they would be profitable by winning

often is needed to conclude petitioners had a plan to make a

profit.    See id.; Spear v. Commissioner, T.C. Memo. 1994-354

(finding unpersuasive a business plan for racing activity that

consisted solely of the taxpayer’s claiming it would take 10

years before the activity would become profitable).        This factor

weighs against finding petitioners’ drag racing activity was

engaged in for profit.

     B.    Expertise

     A taxpayer’s expertise, research, and study of an activity,

as well as his consultation with experts, may be indicative of a

profit intent.      Sec. 1.183-2(b)(2), Income Tax Regs.   Taxpayers

should not only familiarize themselves with the undertaking, but

should also consult or employ an expert, if needed, for advice on

how to make the operation profitable.       Burger v. Commissioner,

809 F.2d 355, 359 (7th Cir. 1987), affg. T.C. Memo. 1985-523.

Courts have made clear that the focus is upon expertise and

preparation with regard to the economic aspects of the particular

business.       Wesinger v. Commissioner, T.C. Memo. 1999-372 (citing
                              - 15 -

Golanty v. Commissioner, 72 T.C. 411, 432 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981)).

     Petitioners had no experience managing a drag racing team.

Despite incurring significant losses and rarely winning or

placing, petitioners never solicited the aid of any professional

business advisers.   Petitioners did receive advice from fellow

drag racers, but no evidence was presented to suggest these drag

racers were experts or had experience with the business side of

racing.   This factor weighs against finding petitioners’ drag

racing activity was engaged in for profit.

     C.   Time and Effort Expended

     The fact that a taxpayer spends much time and effort in

conducting an activity may indicate that he or she has a profit

objective, particularly if the activity does not have substantial

personal or recreational aspects.    Sec. 1.183-2(b)(3), Income Tax

Regs.

     During the years in issue petitioners were both employed

full time by the U.S. Postal Service.   Petitioners devoted their

time after work hours and on weekends to First Strike.

Petitioners did not maintain a professional crew, received

sporadic help from friends, and were the only drivers for First

Strike.   The activity primarily consisted of Mr. Leone’s working

on the cars, petitioners’ driving to races, and the races

themselves.   Although the record does indicate petitioners spent
                               - 16 -

time (outside of their full-time postal employment) on their drag

racing activity, this does little to support petitioners’ claim

that it was a serious activity engaged in for profit.    See Snoddy

v. Commissioner, T.C. Memo. 1991-251 (finding lack of support for

a profit motive in a car racing activity when the taxpayer was a

full-time manager at an auto parts store, mainly worked on the

car after hours and on weekends, enlisted volunteers to help with

working on the car and serve in the “pit”, and had an independent

driver).    Further, it is clear this activity had substantial

recreational aspects for Mr. Leone.     This factor weighs against

finding petitioners’ drag racing activity was engaged in for

profit.

     D.    The Expectation That Assets May Appreciate in Value

     A taxpayer may intend, despite the lack of profit from

current operations, that an overall profit will result when

appreciation in the value of assets used in the activity is

realized.    Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),

affd. 379 F.2d 252 (2d Cir. 1967); sec. 1.183-2(b)(4), Income Tax

Regs.

     Petitioners routinely broke at least two drag racing car

engines per year, a fact that seems inconsistent with their claim

that the drag racing cars would appreciate in value.     Petitioners

sustained a loss when they sold the Chevy Dragster in 2003.

Petitioners presented no evidence regarding the appreciation of
                              - 17 -

their remaining assets.   This factor weighs against finding

petitioners’ drag racing activity was engaged in for profit.

     E.   Success in Similar or Dissimilar Activities

     If a taxpayer has previously engaged in similar activities

and made them profitable, this success may show that the taxpayer

has a profit objective, even though the activity is presently

unprofitable.   Sec. 1.183-2(b)(5), Income Tax Regs.    Success in

unrelated activities may also be indicative of a profit objective

in the challenged activity.   See Daugherty v. Commissioner, T.C.

Memo. 1983-188 (finding that a taxpayer who started and

maintained a profitable screws product company had reason to

believe he would be successful in a farming activity).

Conversely, a lack of such experience does not necessarily

indicate the activity was not engaged in with the objective of

making a profit.   Arwood v. Commissioner, T.C. Memo. 1993-352.

Petitioners had no previous experience in any other businesses.

This factor is neutral.

     F.   History of Income or Loss and Potential
          for Profitability

     A record of substantial losses over several years may be

indicative of the absence of a profit objective.    See Golanty v.

Commissioner, supra.   The amount of profits in relation to the

amount of losses incurred, and in relation to the amount of the

taxpayer’s investment and the value of the assets used in the

activity, may provide useful criteria in determining the
                                - 18 -

taxpayer’s intent.    Sec. 1.183-2(b)(7), Income Tax Regs.     An

occasional small profit from an activity generating large losses,

or from an activity in which the taxpayer has made a large

investment, would not generally be determinative that the

activity is engaged in for profit.       Id.

     Petitioners suffered an uninterrupted history of losses from

their drag racing activity from 2002 through 2006 and never

turned a profit.     Petitioners invested $111,472 in their drag

racing venture yet earned only $14,463 and sustained a net loss

of $97,009.

     Furthermore, it does not appear petitioners would have had

the ability to recoup their losses or make a profit.

Petitioners have not produced any evidence to suggest they were

close to securing a large sponsor.       In petitioners’ case the

potential for profitability through winning races alone seems

implausible.   Petitioners participated in about 10 races a year,

with some purses in the range of $8,000 to $10,000.       However,

petitioners’ winnings suggest they were limited to winning small

races with small purses.     See Dwyer v. Commissioner, T.C. Memo.

1991-123 (finding a profit objective for a taxpayer involved in a

stock car racing activity where, inter alia, the taxpayer could

conceivably recoup past losses and turn a profit because purses

averaged hundreds of thousands of dollars).       This factor weighs
                                - 19 -

against finding petitioners’ drag racing activity was engaged in

for profit.

     G.   Financial Status

     Substantial income from sources other than the activity in

question, particularly if the activity’s losses generate

substantial tax benefits, may indicate that the activity is not

engaged in for profit.   See sec. 1.183-2(b)(8), Income Tax Regs.

     Petitioners’ annual combined income was approximately

$100,000 from their employment as U.S. postal workers.

Petitioners derived substantial tax benefits from deducting the

losses associated with their Schedule C activity.   First Strike’s

losses offset roughly one-fifth of petitioners’ income and

resulted in petitioners claiming refunds for each year.    This

factor weighs against finding petitioners’ drag racing activity

was engaged in for profit.

     H.   Elements of Personal Pleasure

     The absence of personal pleasure or recreation relating to

the activity in question may indicate the presence of a profit

objective, but the mere fact that a taxpayer derives personal

pleasure from a particular activity does not, per se, demonstrate

a lack of a profit objective.    See Rinehart v. Commissioner, T.C.

Memo. 1998-205; sec. 1.183-2(b)(9), Income Tax Regs.   However,

should the likelihood of profit be small compared to the

possibility for gratification, the latter possibility may be the
                                - 20 -

primary motivation for the activity.      Filios v. Commissioner,

T.C. Memo. 1999-92 (citing White v. Commissioner, 23 T.C. 90, 94

(1954), affd. per curiam 227 F.2d 779 (6th Cir. 1955)), affd. 224

F.3d 16 (1st Cir. 2000).

     Petitioners readily admitted they enjoyed racing.     Despite

petitioners’ substantial losses and small chance to turn a

profit, petitioners continued to race.     Petitioners spent their

time repairing the drag racing cars and driving to various cities

to participate in drag races.    We have previously stated that

automobile racing is often engaged in for amusement and as a

hobby, and that this tends to militate against a finding that the

activity was engaged in for profit.      Whitener v. Commissioner,

T.C. Memo. 1979-415 (citing McLean v. Commissioner, 285 F.2d 756

(4th Cir. 1961), affg. per curiam T.C. Memo. 1960-128).

Petitioners’ approach to their drag racing activity suggests they

viewed drag racing as a recreational getaway rather than a

profit-earning activity.   This factor weighs against finding

petitioners’ drag racing activity was engaged in for profit.

     I.   Conclusion

     Petitioners did not conduct their drag racing activity in a

businesslike manner.   They had an extended, uninterrupted period

of substantial losses and had no practical possibility of

recouping their losses and turning a profit.     Furthermore, there

was a substantial recreational aspect to petitioners’ drag racing
                                - 21 -

activity.   Accordingly, we hold that petitioners’ drag racing

activity was not engaged in for profit during 2004, 2005, and

2006, and section 183(b)(2) prohibits any deduction of expenses

greater than the gross income derived from the activity.

II.   Sale of Rental Property

      Section 61(a) defines gross income to include all income

from whatever source derived, and section 61(a)(3) specifically

provides that gross income includes gains derived from dealings

in property.   Section 1001(a) provides that the gain from the

sale of property shall be the excess of the amount realized

therefrom over the taxpayer’s adjusted basis in the property.

Section 1001(b) defines the amount realized from the sale or

other disposition of property as the sum of any money plus the

fair market value of the property received.   See also sec.

1.1001-1(a), Income Tax Regs.    Petitioners sold their rental home

in 2005 for gross proceeds of $51,640.97.   Accordingly,

petitioners realized $51,640.97 for the sale of their rental home

in 2005.

      Section 1012 provides that a property’s adjusted basis shall

be the cost of such property, and cost is defined as the amount

paid for the property in cash or other property.   Sec. 1.1012-

1(a), Income Tax Regs.   In addition, section 1016(a)(2) provides

that the basis should be adjusted for depreciation deductions.

Mr. Leone paid $20,400 in 1992 for his rental home and deducted
                                  - 22 -

$5,47111 of depreciation for 2002 and 2003.      In 2003 petitioners

had an adjusted basis of $14,929.

       When petitioners received $51,640.97 in 2005 for the sale of

their rental property, they recognized a gain of $36,711.97.        See

sec. 1001(c).       Because this was a sale of qualified section 1231

property and petitioners had no other section 1231 property

dispositions, the gain is taxed at 2005 capital gain rates.12

See sec. 1231(a)(1), (b); sec. 1.1231-1(a), (c), Income Tax Regs.

III.    Accuracy-Related Penalty

       Respondent determined that petitioners are liable for

accuracy-related penalties under section 6662 for 2004, 2005, and

2006.       Respondent argues that petitioners are liable for the

section 6662 accuracy-related penalty attributable to one or more

of the following:       (1) Negligence or disregard of rules or

regulations; (2) substantial understatement of income tax; and



       11
        For 2002 Mr. Leone deducted depreciation of $2,016, and
for 2003 petitioners deducted depreciation of $3,455.
       12
        On brief respondent argued that the tax benefit rule
dictates that petitioners’ 2005 income should be increased by
$11,237 (the amount of the ordinary loss deducted on the sale of
the property in 2003). We consider the tax benefit rule to be a
new matter because it would require the presentation of different
evidence from the evidence required to tax petitioners on the
gain resulting from the sale of their house in 2005. The tax
benefit rule and 2003 were not referenced in the statutory notice
of deficiency, and respondent never amended his answer. We find
that this issue is not before the Court. See Foil v.
Commissioner, 92 T.C. 376, 418 (1989), affd. per curiam 920 F.2d
1196 (5th Cir. 1990); Markwardt v. Commissioner, 64 T.C. 989, 997
(1975).
                                - 23 -

(3) substantial valuation misstatement (overstatement).    See sec.

6662(b).    Respondent has not alleged a substantial valuation

misstatement for 2004, 2005, or 2006.

       Section 7491(c) provides that the Commissioner bears the

burden of production with respect to the liability of any

individual for additions to tax and penalties.    The

Commissioner’s burden of production under section 7491(c) is to

produce evidence that it is appropriate to impose the relevant

penalty, addition to tax, or additional amount.    Swain v.

Commissioner, 118 T.C. 358, 363 (2002); see also Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).    If a taxpayer files a

petition alleging some error in the determination of an addition

to tax or a penalty, the taxpayer’s challenge will succeed unless

the Commissioner produces evidence that the addition to tax or

the penalty is appropriate.     Swain v. Commissioner, supra at 363-

365.    The Commissioner, however, does not have the obligation to

introduce evidence regarding reasonable cause or substantial

authority.    Higbee v. Commissioner, supra at 446-447.

       Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of the underpayment of tax attributable to

one or more of the items set forth in section 6662(b), including

negligence or disregard of rules or regulations and substantial

understatement of income tax.    “Negligence” includes any failure

to make a reasonable attempt to comply with the provisions of the
                                - 24 -

internal revenue laws and is the failure to exercise due care or

the failure to do what a reasonable and prudent person would do

under the circumstances.    Sec. 6662(c); Neely v. Commissioner, 85

T.C. 943, 947 (1985); sec. 1.6662-3(b)(1), Income Tax Regs.

“Disregard” includes any careless, reckless, or intentional

disregard of rules or regulations.       Sec. 6662(c); sec. 1.6662-

3(b)(2), Income Tax Regs.   An “understatement” of income tax is

the difference between the amount of tax required to be shown on

the return and the amount of tax actually shown on the return.

Sec. 6662(d)(2)(A).   A “substantial understatement” exists if the

understatement exceeds the greater of (1) 10 percent of the tax

required to be shown on the return for a taxable year, or (2)

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

     The section 6662(a) accuracy-related penalty does not apply

with respect to any portion of an underpayment if it is shown

that there was reasonable cause for such portion and that the

taxpayer acted in good faith with respect to such portion.       Sec.

6664(c)(1).   The determination of whether a 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.

The most important factor is the extent of the taxpayer’s effort

to assess his or her proper tax liability.       Id.

     Petitioners do not contest the penalties relating to their

drag racing activity.   Accordingly, we sustain the section 6662
                               - 25 -

penalties with regard to petitioners’ drag racing activity for

2004, 2005, and 2006.   See sec. 7491(c).

     However, petitioners contend that they are not liable for

the portion of the accuracy-related penalty for 2005 related to

the sale of their rental home.   They claim they already paid tax

for 2003 relating to the sale of their rental home13 and were

simply following the advice of their tax adviser.

     Petitioners’ failure to report the gain from the sale of

their rental home in 2005 was negligent.     See sec. 6662(c); sec.

1.6662-3(b)(1) and (2), Income Tax Regs.

     Petitioners claim their understatement was reasonable and in

good faith because they relied upon the advice of their tax

return preparer, Ms. Barton, when reporting the sale of their

rental home for 2003.   Reliance on a return preparer may relieve

a taxpayer from the addition to tax for negligence where the

taxpayer’s reliance is reasonable.      Freytag v. Commissioner, 89

T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd.

501 U.S. 868 (1991).    A taxpayer, however, is not relieved from

liability for the addition to tax for negligence merely by

shifting the responsibility to a tax professional.      Enoch v.

Commissioner, 57 T.C. 781, 802 (1972).      Reliance on an expert is

not an absolute defense but is a factor to be considered.


     13
        On their income tax return for 2003, petitioners
reported a loss from the sale of the rental property and received
a tax benefit.
                               - 26 -

Freytag v. Commissioner, supra at 888.    A taxpayer’s reliance

must be in good faith and demonstrably reasonable.    Ewing v.

Commissioner, 91 T.C. 396, 423 (1988), affd. without published

opinion 940 F.2d 1534 (9th Cir. 1991); Freytag v. Commissioner,

supra at 888-889.    In such a case, a taxpayer will be entitled to

rely upon an expert’s advice, even if the advice should prove to

be erroneous.    Jackson v. Commissioner, 86 T.C. 492, 539 (1986),

affd. on other issues 864 F.2d 1521 (10th Cir. 1989); Brown v.

Commissioner, 47 T.C. 399, 410 (1967), affd. per curiam 398 F.2d

832 (6th Cir. 1968).

       The ultimate responsibility for a correct return lies with

the taxpayer, who must furnish the necessary information to the

agent who prepared the return.    Enoch v. Commissioner, supra at

802.    In other words, reliance upon expert advice will not

exculpate a taxpayer who supplies the return preparer with

incomplete or inaccurate information.    Lester Lumber Co. v.

Commissioner, 14 T.C. 255, 263 (1950).

       Petitioners stated they informed Ms. Barton that the sale

did not close until 2005 but did not think they provided her with

the closing papers.    Accordingly, petitioners have not

established that they acted in good faith or had reasonable cause

in failing to report capital gain from the sale of their rental

home.    See Green v. Commissioner, 507 F.3d 857, 872 (5th Cir.

2007) (upholding imposition of section 6662 penalty even though
                             - 27 -

taxpayer consulted a professional because “there was no evidence

as to what * * * [the taxpayer] told the preparer, what the

preparer told * * * [the taxpayer], and whether or not * * * [the

taxpayer’s] reliance on any advice from the preparer was

reasonable.”), affg. T.C. Memo. 2005-250.   Given this lack of

evidence, we sustain respondent’s determination of the section

6662(a) penalty.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.
