                         T.C. Summary Opinion 2012-24


                         UNITED STATES TAX COURT



        MARK A. RYBERG AND MARTHA M. RYBERG, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12120-10S.                         Filed March 12, 2012.



      Claudia M. Revermann, for petitioners.

      Christina L. Cook, for respondent.



                              SUMMARY OPINION


      ARMEN, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the petition
                                           -2-

was filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable

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

case.

        Respondent determined a deficiency in petitioners’ joint Federal income tax

for 2006 of $4,562 and an accuracy-related penalty of $912.2 The issues for

decision are: (1) Whether petitioners engaged in their drag racing and horse

breeding activities with the profit objective contemplated by section 183; (2)

whether petitioners substantiated their expenses claimed with regard to those

activities; and (3) whether petitioners are liable for the accuracy-related penalty

under section 6662(a).

                                       Background

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

incorporate by reference the parties’ stipulation of facts and accompanying exhibits.

Petitioners, Mark and Martha Ryberg, resided in the State of Minnesota when the

petition was filed. In 2006 petitioners operated a joint horse breeding activity, and

Mr. Ryberg engaged in a drag racing activity.

        1
         Unless otherwise indicated, all subsequent section references are to the
Internal Revenue Code in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
        2
            All numbers are rounded to the nearest dollar.
                                         -3-

I. Horse Activity

      Petitioners’ horse activity generally involved breeding and selling horses on a

40-acre farm they owned that primarily consisted of open pasture, private turnouts

for horses, a large barn with horse stalls, and petitioners’ residence. Petitioners

have claimed losses in their horse breeding activity from 1998 to 2006. At all

relevant times, Mrs. Ryberg worked 40 hours per week as a buyer and manager at

Mimbach Fleet Supply, a supply store that sells products such as horse and

livestock equipment. She also has 10 years of experience as a certified horse judge.

Mrs. Ryberg stepped down as a horse judge when petitioners began their horse

breeding activity so that she could devote her weekends to horse breeding.

      Sometime before the start of operations in the horse breeding activity, Mrs.

Ryberg conducted extensive research with respect to horse bloodlines and color

genetics, paying particular attention to a dilution gene associated with a

“champagne” horse color. Petitioners learned that the horse market exhibited

greater demand for certain horse colors, such as the champagne color, and they

planned to isolate the champagne dilution gene in their breeds to capitalize on that

demand. In addition, petitioners believed that their stallions had very high stud

prospects. Petitioners’ Tennessee Walker stallion in particular exhibited a high stud
                                          -4-

prospect as there were no other stallion breeds of that kind within a 100-mile radius

of petitioners’ ranch.

      During the initial planning phase, petitioners visited other breeding operations

to determine what would differentiate their services from the services offered by

their competitors. In addition, petitioners attended horse sales and auctions to

analyze the horse market and to determine which horses were in high demand.

Moreover, petitioners researched different avenues of marketing the services they

planned to provide.

      In 1999 Mrs. Ryberg began taking classes offered by the University of

Minnesota, completing courses in pasture renovation, feedlot permits, and manure

management. In addition, she completed a law school course on horse breeding

contracts. Mrs. Ryberg later applied what she had learned, drafting custom

breeding contracts to use in petitioners’ horse breeding activity. Furthermore, she

studied the pricing system used by other stallion owners and received training

regarding how to determine and track feeding costs associated with different stages

of horse breeding (gestation, lactation, etc.).

      After their initial planning phase, petitioners began their joint horse breeding

activity in earnest, operating under the name “Rybergs Roadside Ranch”.

Petitioners’ business plan was to (1) breed horses to create marketable offspring,
                                         -5-

concentrating on a gene that produced a particular high-valued horse color, and (2)

provide stud services using their stallions. Petitioners individually owned horses

before beginning their horse breeding activity but sold those horses that did not fit

within their business plan. In terms of infrastructure, petitioners constructed a large

amount of fencing, numerous private turnouts, and an extensive network of electrical

and water utilities on their ranch.

      Petitioners’ chores consisted of feeding, watering, and grooming the horses,

cleaning stalls, hauling hay, and purchasing feed. On some occasions, Mr. Ryberg

would spend the entire weekend spreading manure for compost. Petitioners also

trained, cared for, and guided their horses through the breeding process. They spent

their mornings and evenings during the week tending to the horse breeding activity,

and Mrs. Ryberg worked on the farm every weekend accompanied by Mr. Ryberg

when he was not engaged in his drag racing activity. Petitioners used a 1993

Chevrolet truck to haul supplies, transport horses, and perform other work

associated with their horse breeding activity.

      Every year, petitioners maintained a business ledger with a monthly account

of their revenue and expenses. Petitioners used a separate charge account at

Mimbach Fleet Supply solely for their horse breeding activity and analyzed their

account statements every month. Petitioners also maintained books to track each
                                          -6-

horse’s performance, including registration certificates, dental records, gestation

tables, offspring records, show records, and breeding contracts. Using a

spreadsheet, petitioners also tracked the breeding status of their clients’ mares and

the fees paid for each breeding. Petitioners’ formal breeding contracts, printed with

the “Rybergs Roadside Ranch” logo, outlined the breeding process, petitioners’ live

foal guarantee, and what was expected from petitioners and the client. Petitioners

advertised their services in local stores, on the Internet, at saddle clubs, and at breed

shows. They also publicized their breeds in horse registries where prospective

clients could view information on each of petitioners’ horses. Furthermore,

petitioners entered into breeding consignments and broadened the marketability of

their breeds by training select horses in cattle roping.

      Unfortunately for petitioners, their horse breeding activity experienced a

series of setbacks shortly after its inception. Sometime after petitioners began

operations, many of their horses were infected with the West Nile virus. The illness

increased veterinarian’s fees and required petitioners to allocate additional time and

physical labor to care for the sick horses.

      In October 2001 Mr. Ryberg injured his back in an automobile accident on a

public highway (2001 injury). Consequently, petitioners were forced to hire
                                          -7-

workers to assist them on the ranch as Mr. Ryberg had trouble performing some of

his normal tasks, such as throwing hay bales and tending to the foals.

      In 2002 the horse breeding industry began to experience a significant

downturn because of low demand for horses. Aggravating already depressed

industry conditions, Federal regulations were promulgated that increased the cost of

sending horses to slaughter. This increased the supply of unwanted horses that

resulted in a reduced base price for all horses.

      In response to these setbacks and depressed market conditions, petitioners

attempted to cut costs and explored new methods of operation. Using the feed cost

management training she received, Mrs. Ryberg reduced feed costs incurred by the

horse breeding activity. To lower veterinarian’s costs, petitioners began vaccinating

the horses themselves. In addition, petitioners stopped showing their horses in

expensive local saddle clubs, opting instead to focus on larger breed shows that

provided better marketing exposure. They also switched to a more cost-effective

method of controlling flies by using fly parasites rather than expensive sprays and

chemicals. Furthermore, petitioners began buying their horse bedding supplies from

bulk distributors. Moreover, petitioners consulted with other owners of breeding

and boarding operations regarding the potential profitability of adding boarding
                                            -8-

services to their business plan. Petitioners learned, however, that focusing on

boarding would greatly increase their already substantial expenses while adding

little to their revenue, and therefore they continued to concentrate on horse breeding

and stud services. In that regard, petitioners began working with a veterinarian to

explore a method of equine artificial insemination. Petitioners ultimately abandoned

this technique, however, when Mrs. Ryberg became ill.

      In 2005 Mrs. Ryberg was diagnosed with cancer. Despite her diagnosis,

petitioners remained hopeful that, after weathering the initial difficult years of

losses, their investment and cost-cutting measures would enable them to experience

a profitable year in 2006. Unfortunately for petitioners, they incurred substantial

losses in 2006 totaling $22,270.

      Petitioners attached a Schedule F, Profit or Loss From Farming, to their 2006

joint Federal income tax return (2006 tax return) for their horse breeding activity

and reported gross farm income of $4,850 and farm expenses as follows:

                                       Schedule F

          Expenses                 Amount            Expenses              Amount
      Car and truck                $1,985         Taxes                     1,040
      Depreciation                  7,917         Veterinary, etc.            875
      Feed                          4,390         Bedding                     500
      Freight and trucking            206         Farm tax prep               100
      Mortgage interest             9,220         Farrier                     572
      Repairs and maintenance          90         Professional dues           158
                                                  Truck trailer license        67
        Total                                                              27,120
                                         -9-

      In light of their 2006 losses, petitioners determined that the horse breeding

activity would not become profitable and terminated operations in 2007. Petitioners

experienced several years of uninterrupted losses, never earning a profit in their

horse breeding activity.

II. Racing Activity

      Mr. Ryberg began drag racing in 1990 and has engaged in his drag racing

activity for over 20 years. His race car, a 1968 Chevrolet Rally Sport Camaro, was

purchased for $6,500 and is highly modified for racing. Mr. Ryberg saved his

receipts in envelopes and tracked his drag racing expenses using a spreadsheet.

Over the years, he sought advice from other drivers, racing mechanics, and

technicians to improve his drag racing performance. He also subscribed to National

Dragster magazine and is a member of the National Hot Rod Association. He

reviewed trade magazines for information such as deals on car parts, track altitudes,

and the standings of his competitors but did not consult with advisers regarding the

business aspects of drag racing.

      The drag racing season runs from April to late October. Mr. Ryberg works

40 hours per week as a spray painter for Hoffman Engineering Corp. He engages in

drag racing on select weekends and spends some of his spare time during the week

searching for sponsors. Mr. Ryberg provides his sponsors with a document of
                                            - 10 -

accomplishments from the prior year and a description of his goals for the coming

year. He also drafts a rudimentary contract for his sponsors when a sponsorship

agreement is reached. He uses a 1999 Chevrolet truck and a trailer to haul his race

car to drag racing events. Mr. Ryberg places sponsorship stickers on his car and

trailer as advertising.

       Because of the lingering effects from his 2001 injury, Mr. Ryberg took time

off from drag racing beginning in October 2001 and did not return until May 2002.

Despite his 2001 injury, Mr. Ryberg experienced his best racing year in 2004 when

he won the championship in his division. Even in his best racing year, however, Mr.

Ryberg was still unable to earn a profit.

       In 2006 Mr. Ryberg attempted to minimize costs by only entering races that

had larger car counts and thus paid out larger purses for winning. Unfortunately for

Mr. Ryberg, racing less also decreased his driving performance. Consequently,

although Mr. Ryberg reported gross racing income of $3,125 in 2006, only $750 of

that amount was attributable to race winnings (the remaining amount was

attributable to sponsorships, etc). Petitioners attached a Schedule C, Profit or Loss

From Business, to their 2006 tax return reporting a net loss of $6,076 and claiming

the following expense deductions:
                                          - 11 -
                                      Schedule C

            Expense              Amount                Expense             Amount
       Car and truck             $2,488            Memberships               110
       Depreciation               3,433            Racing fuel               519
       Repairs and maintenance    1,329            Safety attire             229
       Entry fees                 1,017            Truck trailer license      76
        Total                                                              9,201

      In 2007 Mr. Ryberg ceased reporting his drag racing activity as a business,

but continued to engage in the activity as a hobby thereafter. In 20 years of drag

racing, Mr. Ryberg has never earned a profit, instead reporting a long history of

uninterrupted losses.

                                     Discussion

      In general, the determinations of the Commissioner in a notice of deficiency

are presumed correct, and the burden is on the taxpayer to show that the

determinations are erroneous. See Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions

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

taxpayer is entitled to any deduction claimed. Deputy v. du Pont, 308 U.S. 488, 493

(1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).3


      3
         Sec. 7491 does not apply in this case to shift the burden of proof to
respondent because petitioners neither alleged that sec. 7491 was applicable nor
established that they fully complied with the requirements of sec. 7491(a)(2) with
                                                                         (continued...)
                                         - 12 -

I. Profit Objective

      Section 183 precludes deductions for activities not engaged in for profit

except to the extent of the gross income derived from such activities. Sec. 183(a)

and (b)(2). For a taxpayer’s expenses to be deductible under section 162, Trade or

Business Expenses, or section 212, Expenses for Production of Income, and not

subject to the limitations of section 183, a taxpayer must show that he or she

engaged in the activity with the objective of making a profit. Hulter v.

Commissioner, 91 T.C. 371, 392 (1988); Dreicer v. Commissioner, 78 T.C. 642,

645 (1982), aff’d without opinion, 702 F.2d 1205 (D.C. Cir. 1983); Hastings v.

Commissioner, T.C. Memo. 2002-310. Although a reasonable expectation of a

profit is not required, the taxpayer’s profit objective must be actual and honest.

Dreicer v. Commissioner, 78 T.C. at 645; sec. 1.183-2(a), Income Tax Regs.

      The existence of an actual and honest profit objective is a question of fact that

must be decided on the basis of the entire record. See Benz v. Commissioner, 63

T.C. 375, 382 (1974). In resolving this factual question, greater weight is accorded

objective facts than a taxpayer’s statement of intent. See Westbrook v.




      3
       (...continued)
respect to any of the issues before the Court.
                                         - 13 -

Commissioner, 68 F.3d 868, 875-876 (5th Cir. 1995), aff’g T.C. Memo. 1993-634;

sec. 1.183-2(a), Income Tax Regs.

      The regulations under section 183 provide a nonexhaustive list of nine factors

that may be considered in deciding whether a profit objective exists. Sec. 1.183-

2(b), Income Tax Regs. No single factor, nor even the existence of a majority of

factors favoring or disfavoring an actual and honest profit objective, is controlling.

See id. Rather, the relevant facts and circumstances of each case are determinative.

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

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

      On the basis of all the facts and circumstances in the present case, we hold

that petitioners have met their burden of proof as to their horse breeding activity but

have failed to prove that Mr. Ryberg engaged in his racing activity for profit within

the meaning of section 183. We do not analyze in depth all nine of the factors

enumerated in the regulations but rather focus on some of the more important ones

that inform our decision.

      A. Horse Activity

      The fact that a taxpayer carries on the activity in a businesslike manner and

maintains complete and accurate books and records may indicate a profit objective.
                                        - 14 -

Sec. 1.183-2(b)(1), Income Tax Regs. Petitioners generally carried on their horse

breeding activity in a businesslike manner, conducting market research before

startup, educating themselves on the business and economic aspects of the activity,

drafting formal breeding contracts, and extensively advertising and publicizing their

services. Furthermore, petitioners kept accurate books and records on a monthly

basis and maintained a separate charge account for their horse breeding activity.

Petitioners’ books and records enabled them to make informed business decisions

such as successfully cutting overall feed costs. See Burger v. Commissioner, 809

F.2d 355 (7th Cir. 1987) (holding that a taxpayer need not maintain a sophisticated

cost accounting system but should keep records that enable the taxpayer to make

informed business decisions), aff’g T.C. Memo. 1985-523. Petitioners’ business

plan, although not written, was concretely established by the evidence. See Phillips

v. Commissioner, T.C. Memo. 1997-128 (holding that a business plan need not be

written but may be established by evidence of a taxpayer’s actions). Moreover,

petitioners sold the horses they already owned that did not fit with their business

plan, an indication that they viewed their horses as business assets rather than

domestic pets kept for recreational purposes.
                                         - 15 -

      A change of operating methods, adoption of new techniques, or abandonment

of unprofitable methods in a manner consistent with an intent to improve

profitability may also indicate a profit objective. Sec. 1.183-2(b)(1), Income Tax

Regs. To control expenses petitioners successfully cut feed costs, began

vaccinating their horses themselves, and switched to a more cost-effective method

of controlling flies. Petitioners also started entering into breeding consignments and

broadening the marketability of select horses by adapting and training them in cattle

roping. In addition, petitioners shifted their advertising focus from expensive local

saddle clubs to larger breed shows to provide broader and more cost-effective

market exposure. Furthermore, petitioners shifted to buying from bulk distributors

to cut costs associated with bedding supplies. Although their plan was not fully

implemented because of Mrs. Ryberg’s illness, petitioners worked with one of their

veterinarians to explore equine artificial insemination as an alternative horse

breeding technique. Moreover, petitioners consulted with other business owners

regarding the profitability of adding horse boarding to the services petitioners

offered. Finally, petitioners abandoned horse breeding operations in 2007 when

they determined that they could not turn a profit.
                                         - 16 -

      A taxpayer’s expertise, research, and study of an activity, as well as his or her

consultation with experts may be indicative of a profit objective. Sec. 1.183-

2(b)(2), Income Tax Regs. Petitioners individually owned horses before starting

their horse breeding activity and went to great lengths to refine their expertise in

horse breeding. Mrs. Ryberg, in particular, developed extensive expertise in many

areas, including horse bloodlines, horse genetics, pasture renovation, feedlot

permits, manure management, and all aspects of the horse breeding process.

Petitioners regularly consulted with an expert farrier and at least two veterinarians

throughout the course of their horse breeding activity.

      More importantly, however, petitioners researched and studied the business

and economic aspects of horse breeding. Petitioners researched various methods of

marketing the services they planned to provide. They also visited other stallion

farms to determine what would differentiate their stud services from the stud

services offered by their competitors. In addition, petitioners attended horse sales

and auctions to determine what specific types of horses were in high demand.

Furthermore, Mrs. Ryberg completed a law school course on breeding contracts and

subsequently began drafting custom breeding contracts for horse breeding clients.

She also learned the pricing system for stud services used by other stallion owners
                                        - 17 -

and received training regarding how to accurately determine and track feeding costs

at different stages of the breeding process. Mrs. Ryberg later applied the

knowledge and training she obtained to successfully reduce feed costs associated

with petitioners’ horse breeding activity. Finally, petitioners consulted with other

owners of breeding and boarding operations regarding the potential profitability of

adding boarding services to their business plan.

      A taxpayer’s devotion of a great deal of personal time and effort to carrying

on an activity may indicate a profit objective. Sec. 1.183-2(b)(3), Income Tax Regs.

Petitioners were not casual horse owners. They did not ride their horses for

pleasure. Instead, petitioners performed all the daily physical labor associated with

caring for, training, and guiding the horses through the breeding process. They

invested much time and effort in refining their expertise with respect to horse

breeding, and they completed all of the exhausting work of delivering foals, cleaning

horse stalls, spreading manure for compost, and transporting feed. Mrs. Ryberg

even resigned from being a horse judge so that she could devote more time to

performing these labor-intensive tasks. Petitioners worked with the horses morning

and night during the work week. Mrs. Ryberg also devoted every weekend to the

horse breeding activity, accompanied by Mr. Ryberg whenever he was not engaged
                                         - 18 -

in his drag racing activity. Finally, respondent conceded at trial that petitioners

spent substantial time engaging in their horse breeding activity.

      A taxpayer’s history of income or losses with respect to the activity can

indicate whether a profit objective was present. Sec. 1.183-2(b)(6), Income Tax

Regs. A series of losses during the initial or startup phase of an activity, however,

does not necessarily indicate the absence of an actual and honest profit objective.

Id. On the basis of the record, we find that petitioners’ losses were incurred in what

we conclude to be the startup phase of their horse breeding activity. See Engdahl v.

Commissioner, 72 T.C. 659, 669 (1979) (recognizing that the startup phase of a

horse breeding activity could last as long as ten years); see also Blackwell v.

Commissioner, T.C. Memo. 2011-188.

      In addition, losses sustained because of unforeseen circumstances beyond the

taxpayer’s control do not indicate that the taxpayer lacked a bona fide profit

objective. Sec. 1.183-2(b)(6), Income Tax Regs. Petitioners’ losses can also be

explained by numerous events that occurred outside their control, including Mr.

Ryberg’s back injury, an onset of the West Nile virus that infected petitioners’

horses, a downturn in the horse breeding industry, and Mrs. Ryberg’s illness. Thus,

on the record before us, we do not view petitioners’ history of losses as an
                                         - 19 -

indication that they lacked an actual and honest profit objective. In contrast, the fact

that petitioners shut down their horse breeding activity once they determined that it

would not be profitable strongly indicates that they had an actual and honest profit

objective. See Dwyer v. Commissioner, T.C. Memo. 1991-123.

      Considering all the facts and circumstances, we find that petitioners’ horse

breeding activity was engaged in for profit within the meaning of section 183.

      B. Racing Activity

      Although some factors may suggest that Mr. Ryberg carried on his racing

activity in a businesslike manner, we are unable to conclude, on the basis of the

record before us, that he engaged in the drag racing activity with the profit objective

contemplated by section 183. Admittedly, Mr. Ryberg obtained a few sponsors to

help defray costs, saved receipts related to the drag racing activity in envelopes, and

allegedly tracked his expenses using a spreadsheet. He also attempted to minimize

losses in 2006 by entering fewer races. However, the sparse documentary evidence

Mr. Ryberg was able to provide with regard to the drag racing activity tends to belie

his contention that he maintained complete business records and operated his drag

racing activity in a businesslike manner. Mr. Ryberg did not provide a copy of the

spreadsheet or any other document he allegedly used to track his 2006 expenses.
                                         - 20 -

He also did not provide any books or records to document his 2006 race winnings or

sponsorship money. Mr. Ryberg’s inability to provide these documents at trial

weighs heavily against a finding that he operated his drag racing activity in a

businesslike manner.

      Moreover, much of the evidence suggests that Mr. Ryberg did not engage in

drag racing with a profit objective. Over the years Mr. Ryberg sought the advice of

other drivers and racing mechanics to improve his drag racing performance. A

desire to improve racing performance does not necessarily indicate, however, that

he ever engaged in drag racing with a profit objective. Instead, we focus our

attention on Mr. Ryberg’s expertise, and that of his advisers, as it relates to the

business aspects of the activity in question. See Wesinger v. Commissioner, T.C.

Memo. 1999-372 (citing Golanty v. Commissioner, 72 T.C. at 432). Mr. Ryberg is

employed full time as a spray painter. No evidence suggests that he studied or has

particular expertise in the business, financial, or economic aspects of drag racing.

Furthermore, no evidence indicates that he sought advice regarding how to make his

activity a profitable business.

      Despite 20 years of drag racing, Mr. Ryberg has never earned a profit.

Instead he has incurred uninterrupted losses over a very extended period of time.
                                         - 21 -

No evidence suggests that 20 years constituted the startup phase for Mr. Ryberg’s

drag racing activity. His 2001 injury does not explain the losses Mr. Ryberg has

incurred since 1990. Moreover, despite his 2001 injury, Mr. Ryberg experienced

his best racing season in 2004 yet still failed to earn a profit. In Mr. Ryberg’s case,

the potential to become profitable through winning races alone seems implausible

given the substantial amount of expenses he incurred each year and the relatively

small purses paid out by the races in which he participated.

      Finally, it is clear that Mr. Ryberg derives personal pleasure from drag racing

and participates in races as a form of recreation. Indeed, even after petitioners

ceased reporting the racing activity as a for-profit business in 2007, Mr. Ryberg

continued to engage in the drag racing activity as a hobby.

       Petitioners have failed to meet their burden of proof with respect to Mr.

Ryberg’s racing activity and, as a result, we are unable to conclude that Mr. Ryberg

engaged in drag racing with the profit objective contemplated by section 183.

Consequently, petitioners are entitled to deduct expenses associated with such

activity only to the extent of Mr. Ryberg’s gross receipts from the activity and in

accordance with the remainder of this opinion.
                                        - 22 -

II. Substantiation

      A taxpayer is required to maintain records sufficient to substantiate

deductions claimed by the taxpayer on his or her return. See generally sec. 6001;

sec. 1.6001-1(a), (e), Income Tax Regs.4 As a general rule, if, in the absence of

required records, a taxpayer provides sufficient evidence that the taxpayer has

incurred a deductible expense, but the taxpayer is unable to adequately substantiate

the amount of the deduction to which he or she is otherwise entitled, the Court may

estimate the amount of such expense and allow the deduction to that extent. Cohan

v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). In order for the Court to

estimate the amount of an expense, however, we must have some basis upon which

an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).




      4
            Sec. 6001 provides that “[e]very person liable for any tax imposed by this
title, or for the collection thereof, shall keep such records * * * and comply with
such rules and regulations as the Secretary may from time to time prescribe.”
        Sec. 1.6001-1(a), Income Tax Regs., provides that “any person subject to tax
* * * shall keep such permanent books of account or records * * * as are sufficient
to establish the amount of * * * deductions”.
        Sec. 1.6001-1(e), Income Tax Regs., provides that “[t]he books or records
required by this section shall be kept at all times available for inspection by
authorized internal revenue officers or employees, and shall be retained so long as
the contents thereof may become material in the administration of any internal
revenue law.”
                                        - 23 -

Without such a basis, any allowance would amount to unguided largesse. Williams

v. United States, 245 F.2d 559, 560 (5th Cir. 1957).

      Notwithstanding the foregoing, in the case of certain expenses, section 274(d)

expressly overrides the Cohan doctrine. Sanford v. Commissioner, 50 T.C. 823,

827 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Specifically,

and as pertinent herein, section 274(d) provides that no deduction is allowable with

respect to listed property, such as passenger automobiles, unless the deduction is

substantiated in accordance with the strict substantiation requirements of section

274(d) and the regulations promulgated thereunder.5 Thus, under section 274(d), no

automobile-related deduction, including depreciation, is allowable on the basis of

any approximation or the unsupported testimony of the taxpayer. Yecheskel v.

Commissioner, T.C. Memo. 1997-89, aff’d without published opinion, 173 F.3d 427

(4th Cir. 1999); see, e.g., Murata v. Commissioner, T.C. Memo. 1996-321; Golden

v. Commissioner, T.C. Memo. 1993-602.




      5
        Included in the definition of listed property in sec. 280F(d)(4) is any
passenger automobile or other property used as a means of transportation.
                                         - 24 -

      In the instant case, the documentary evidence regarding petitioners’

deductions is limited. On the basis of the record, however, we are convinced that

petitioners are entitled to some deductions.

      A. Horse Activity

      Insofar as petitioners’ horse breeding activity is concerned, they have

provided sufficient evidence to substantiate, and are therefore entitled to deduct, the

following amounts of expenses: $4,390 for feed, $90 for repairs and maintenance,

$875 for veterinarian’s fees and breeding expenses, $500 for bedding, $572 for

farrier expenses, and $158 for professional dues.

      Although petitioners may have incurred and paid additional expenses beyond

those just enumerated, they have provided us with no basis upon which an estimate

may be made.6 Therefore, we must deny the remainder of petitioners’ claimed

deductions. See Vanicek v. Commissioner, 85 T.C. at 743.

      Furthermore, petitioners’ 1993 Chevrolet truck used in the horse breeding

activity is a passenger automobile that falls within the definition of listed property


      6
         The record is silent with regard to the following expenses claimed on
petitioners’ Schedule F: (1) Mortgage interest, (2) taxes, (3) farm tax preparation,
and (4) truck trailer license. Although Mrs. Ryberg mentioned expenses possibly
related to freight and trucking, petitioners provided us with no basis to estimate an
amount they may have paid or incurred in 2006 for these expenses.
                                         - 25 -

under section 280F(d)(4) and (5). Therefore, petitioners’ mileage and depreciation

deductions for this vehicle are subject to the strict substantiation requirements of

section 274(d). Petitioners provided no document that qualifies as an adequate

record within the meaning of section 274(d) and no other corroborative evidence

sufficient to satisfy the requirements of that section. Although petitioners submitted

a handwritten note of a purported odometer reading at the beginning of 2006 and a

purported odometer reading at the end of 2006 for the truck, such document alone

does not satisfy the strict substantiation requirements of section 274(d). Moreover,

petitioners provided no documents sufficient to substantiate the depreciation

deduction they claimed for the truck. Consequently, although we may find

petitioners’ testimony to be credible, we have no choice but to hold that the mileage

and depreciation deductions claimed by petitioners for the 1993 Chevrolet truck are

denied in full.

       B. Racing Activity

       Insofar as Mr. Ryberg’s racing activity is concerned, petitioners have

provided sufficient evidence to substantiate expenses that equal, if not exceed, Mr.

Ryberg’s gross income from the drag racing activity in 2006. Thus, we conclude
                                        - 26 -

that petitioners are entitled to deduct $3,125 in expenses related to Mr. Ryberg’s

racing activity. See sec. 183(b).

III. Penalty

        Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the amount of

any underpayment attributable to negligence or disregard of rules or regulations.

The term “negligence” includes any failure to make a reasonable attempt to comply

with tax laws, and “disregard” includes any careless, reckless, or intentional

disregard of rules or regulations. Sec. 6662(c). Negligence also includes any failure

to keep adequate books and records or to substantiate items properly. Sec. 1.6662-

3(b)(1), Income Tax Regs.

        Section 6664(c)(1) provides an exception to the imposition of the accuracy-

related penalty if the taxpayer establishes that there was reasonable cause for, and

the taxpayer acted in good faith with respect to, the underpayment. Sec. 1.6664-

4(a), Income Tax Regs. The determination of whether the taxpayer acted with

reasonable cause and in good faith is made on a case-by-case basis, taking into

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

Regs.
                                         - 27 -

      With respect to a taxpayer’s liability for any penalty, section 7491(c) places

on the Commissioner the burden of production, thereby requiring the Commissioner

to come forward with sufficient evidence indicating that it is appropriate to impose

the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the

Commissioner meets his burden of production, the taxpayer must come forward

with persuasive evidence that the Commissioner’s determination is incorrect. See

id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S. at 115.

      Respondent has proven, and has therefore discharged his burden of

production under section 7491(c), that petitioners failed to keep adequate records

and properly substantiate most of their claimed expenses. See sec. 1.6662-3(b)(1),

Income Tax Regs.

      Petitioners have not met their burden of persuasion with respect to reasonable

cause and good faith. At trial, petitioners had little to say about this issue other than

to state that they consulted a tax return preparer. Petitioners did not call their tax

return preparer as a witness at trial and did not provide any further evidence to

support a finding of reasonable cause. See Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d 513 (10th Cir. 1947).

Thus, on the record before us, we are unable to conclude that petitioners acted with
                                        - 28 -

reasonable cause and in good faith within the meaning of section 6664(c)(1).

Accordingly, petitioners are liable for the accuracy-related penalty under section

6662(a).

                                     Conclusion

      We have considered all of the arguments advanced by the parties, and, to the

extent not addressed herein, we conclude that they are irrelevant, moot, or meritless.

      To reflect the foregoing,


                                                       Decision will be entered

                                                 under Rule 155.
