                  T.C. Summary Opinion 2006-163



                     UNITED STATES TAX COURT



         CARLOS H. AND MARIA C. GONZALEZ, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8709-04S.                Filed October 10, 2006.



     Michael Stearns, for petitioners.

     Gordon P. Sanz, for respondent.




     COUVILLION, Special Trial Judge:    This case was heard

pursuant to section 7463 in effect when the petition was filed.1

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

and this opinion should not be cited as authority.



     1
      Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the years at
issue.
                              - 2 -

     Respondent determined deficiencies in petitioners’ Federal

income taxes for 2000 and 2001 in the amounts of $11,620 and

$12,348, respectively, and accuracy-related penalties under

section 6662(a) for those years in the amounts of $2,324 and

$2,470, respectively.

     The issues for decision are:   (1) Whether petitioners were

engaged in an export activity during the years at issue, and, if

so, whether such activity was an activity not engaged in for

profit under section 183; (2) whether petitioners are entitled to

deductions for expenses relating to that activity under section

162(a); and (3) whether petitioners are liable for the section

6662(a) accuracy-related penalties.2

     Some of the facts were stipulated.   Those facts, with the

exhibits annexed thereto, are so found and made part hereof.

Petitioners resided at Katy, Texas, at the time the petition was

filed.

     Carlos H. Gonzalez (petitioner) is a senior petroleum

engineer for Conoco, Inc. (Conoco), a major oil company in


     2
      Under sec. 7491(a), where a taxpayer introduces credible
evidence with respect to any factual issue relevant to
ascertaining the liability of the taxpayer, the burden of proof
shifts to the Commissioner. Petitioners have not produced
credible evidence with respect to the principal issue, nor have
petitioners, under sec. 7491(a)(2)(B), maintained records
required with regard to substantiating their claimed expenses;
therefore, the burden of proof does not shift to respondent.
However, as to the penalties, the burden of production is on
respondent. Sec. 7491(c). The Court’s holding in this case is
based upon due regard to the requirements of sec. 7491.
                                 - 3 -

Houston, Texas.    Petitioner has a bachelor of science degree in

petroleum engineering and has been an employee of Conoco for over

27 years.    Maria C. Gonzalez, petitioner’s spouse, was also

employed during the years at issue, earning wage and salary

income of $5,560 and $18,166, respectively, for the 2 years at

issue.

     Petitioners are natives of Colombia, South America.      Both

are U.S. citizens.    Petitioners have maintained contacts with

their families and friends in Colombia.

     For the years 2000 and 2001, petitioners included with their

Federal income tax returns Schedules C, Profit or Loss From

Business, related to an activity called Special Supply Co., with

the business purpose described as the “Export of Industrial

Supplies”.    The income and expenses of the activity for the year

2000 were reported as follows:


     Income                                             -0-
     Expenses:
       Advertising               $     899
       Car & truck expenses        12,245
       Legal & professional            649
       Office expenses                 373
       Travel                        4,348
                                  1
       Other expenses               22,978
          Total expenses         $41,492
     Loss                                            ($41,492)
                              - 4 -
     1
      Consisted of:
       Communications          $ 4,544
       Dues & subscriptions        335
       Colombia office          15,091
       Contract labor            2,700
       Education                   308
        Total                  $22,978


     For the year 2001, petitioners reported the following income

and expenses related to that activity on Schedule C of their

income tax return:


     Income                                              $ 3,000
     Expenses:
       Advertising             $ 3,223
       Car & truck expenses      13,721
       Depreciation                1,669
       Legal & professional          649
       Office expenses             1,098
       Travel                      1,336
                                1
       Other expenses             25,529
          Total expenses       $47,225
     Loss                                               ($44,225)
     1
      Consisted of:
       Communications          $ 2,897
       Bank charges                130
       Dues & subscriptions        335
       Colombia office          18,708
       Tolls                       386
       Freight                      73
       Contract labor            3,000
        Total                  $25,529


     In the notice of deficiency, respondent disallowed the

Schedule C deductions claimed for both years.   At trial,

petitioners conceded that the $3,000 reported gross income for

2001 was not related to the purported activity and was paid to
                               - 5 -

petitioner for consultation services.3   As stated in the notice

of deficiency, the expenses were disallowed for the reason that

“it has not been established that the expenses were incurred and

paid”, and, additionally, “it has not been established that the

activity described in Schedule C for the taxable years 2000 and

2001 constitutes a bona fide trade or business venture entered

into for profit.”

     The purpose of the purported activity, as described by

petitioners, was to sell oil field equipment from the United

States to oil and gas exploration companies in Colombia, South

America.   Petitioners began reporting this activity on their

Federal income tax return for 1994.    They claimed losses from

this activity as follows:4




     3
      Under sec. 183(b)(2), if an activity is not engaged in for
profit, deductions for expenses are allowable only to the extent
of the gross income derived from such activity. Since
petitioners conceded that the $3,000 in income was not related to
the activity, none of the expenses is allowable as deductions to
the extent of that reported income.
     4
      The record does not show whether petitioners reported any
gain or loss from this activity for the years 1994, 1995, and
1996. In the stipulation, petitioners agreed that their claimed
losses for 2000 should be reduced from $41,492 to $32,646, and
the 2001 loss should be reduced from $44,225 to $36,240. With
these concessions, the total claimed losses would be $199,110
instead of the $215,941 shown above.
                                - 6 -

           1997                 $ 24,785
           1998                   44,752
           1999                   41,020
           2000                   41,492 (year at issue)
           2001                   44,225 (year at issue)
           2002                   19,667 (not before the Court)
             Total losses       $215,941


     The profits or losses for the years prior to 1997 were not

presented at trial.    It appears that the years 2000 and 2001 are

the only years in which this activity has been called into

question by the IRS.    Petitioners acknowledged at trial that they

are no longer reporting income and expenses with respect to this

activity on their Federal income tax returns.

     Petitioners’ brief focuses exclusively on the argument that

the losses they incurred for the 2 years at issue came from an

activity engaged in for profit, and that, under section 183, they

are entitled to deductions for the expenses incurred for the 2

years in question.    Respondent, however, focuses the issue as

follows:


          Petitioners’ opening brief suffers from one serious
     logical fallacy. The basic premise of the brief is that Mr.
     and Mrs. Gonzalez operated an oil field equipment
     exportation business during the years 2000 and 2001.
     Petitioners then attempt to explain how its operation
     comported with the factors the Court looks to to determine
     whether it was an activity entered into for profit.
     Respondent asserts that this approach ignores a much more
     basic question; was there actually an activity.

          Petitioners claim that they operated their business in
     the United States, and they also maintained a presence in
     Colombia. Respondent asserts that there is no evidence that
     there was ever a business. Petitioners reported losses from
                               - 7 -

     this alleged business on their returns for 2000 and 2001.
     The mere reporting of this activity does not prove its
     existence. Other than their testimony, and a series of
     documents generated by them, there is no evidence in the
     record to establish that there even was an activity.
     Petitioners presented no checks, receipts, or any other
     third party documents to prove they conducted a business.
     They claimed to have an office in Colombia, but again, they
     only presented computer generated accounting records to
     support the existence of their Colombia operation. Further,
     there was no evidence presented regarding the source of the
     capital necessary to operate in Colombia, or how it was
     transmitted to that location. They presented no checks,
     wire transfers, or other physical evidence to establish
     funding. Petitioners conceded a portion of their claimed
     Colombia “office” expense when respondent determined that
     the location of the alleged office was an apartment
     building. Thus, before the Court begins examining the
     various factors associated with activities entered into for
     profit, the Court must first determine if there was in fact
     any activity to judge. Respondent asserts that it is
     altogether inconceivable that petitioners would be without a
     single third party record if they in fact operated a
     business in two separate countries.


     Section 183(a) provides in general that, in the case of an

activity engaged in by an individual, if such activity is not

engaged in for profit, no deduction is allowable except for

deductions that are otherwise allowable without regard to whether

the activity is engaged in for profit, and/or to the extent of

the gross income from the activity.

     Section 183, therefore, presupposes the existence of an

activity.   As noted above, in the notice of deficiency,

respondent disallowed the claimed deductions on the ground it had

not been established that the expenses were incurred and paid.

As pointed out by respondent on brief, no statements, bills,
                                 - 8 -

receipts, or checks evidencing the conduct of any activity in

Colombia were offered into evidence by petitioners.       Moreover,

there was no income derived from any Colombian activity for the 2

years in question.   No evidence was offered, for example, of

correspondence from potential customers or other sources that

would relate to the purported activity.

     On this record, the Court holds that there was no activity

conducted by petitioners for the 2 years at issue; consequently,

it follows that there are no expenses allowable as deductions

from that nonexistent activity.    The Court, therefore, need not

address whether the activity was not engaged in for profit

because there was no activity.

     Respondent determined that petitioners are liable for

penalties under section 6662(a) for negligence or disregard of

rules or regulations.   In pertinent part, section 6662 imposes an

accuracy-related penalty equal to 20 percent of the portion of an

underpayment of tax that is attributable to negligence or

disregard of rules or regulations.       Sec. 6662(a), (c).   Section

6662(c) defines “negligence” as including any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code and defines “disregard” as including any careless,

reckless, or intentional disregard.       However, under section

6664(c), the penalty under section 6662(a) shall not be imposed

with respect to any portion of the underpayment if it is shown
                                - 9 -

that there was reasonable cause for the underpayment, and the

taxpayer acted in good faith.

     Even though the burden of production is on the Commissioner

under section 7491(c) as to penalties, that does not mean that

the burden of proof shifts to the Commissioner.      Where the

Commissioner introduces sufficient evidence to show that the

taxpayer is liable for the penalty, the taxpayer has the burden

of proving that he is not liable for the penalty.       Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001).      The Court is

satisfied that respondent has met the burden of production in

this case.    Petitioners claimed deductions for a nonexistent

activity.    The actions of petitioners, as described above,

represented a blatant attempt to circumvent the Internal Revenue

Code, which, unfortunately, they were able to get away with for

several prior years.    Petitioners have no reasonable cause for

the underpayments for the 2 years at issue in this case in which

their nonexistent activity was brought to light.      The accuracy-

related penalties are sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                        Decision will be entered

                                for respondent.
