                        T.C. Memo. 2004-177



                      UNITED STATES TAX COURT



                 MEDIAWORKS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1466-03.              Filed July 28, 2004.



     Michael J. Schiff and Mark D. Pastor,1 for petitioner.

     Jonathan H. Sloat, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioner petitioned the Court to redetermine

respondent’s determinations as to its taxable years ended



     1
       Mark D. Pastor (Pastor) represented petitioner in this
proceeding from the time of the petition until Mar. 22, 2004, the
date on which the Court granted Pastor’s motion to withdraw from
the case. Michael J. Schiff entered his appearance in this
proceeding on Apr. 1, 2004.
                                - 2 -

August 31, 1998 and 1999.    Respondent determined that petitioner

is liable for deficiencies of $65,772 and $53,459, respectively.

Respondent determined that petitioner is liable for section

6662(a) accuracy-related penalties of $13,154.40 and $10,691.80,

respectively.

     Following the parties’ concessions, we decide first whether

petitioner may deduct expenses (disputed deductions) related to

its yacht.    We hold it may not.   We decide second whether

petitioner is liable for the accuracy-related penalties

determined by respondent.    We hold it is.   Unless otherwise

indicated, section references are to the applicable versions of

the Internal Revenue Code.    Rule references are to the Tax Court

Rules of Practice and Procedure.

                          FINDINGS OF FACT2

     Some facts were stipulated and are so found.     The

stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.     Petitioner is a C

corporation that was incorporated in 1991 under the laws of

California.    Its principal activity is the production of films,


     2
       The Court directed each party to file an opening brief and
a reply brief, the latter limited to making any objection to the
opposing party’s proposed findings of fact. Petitioner has not
filed a reply brief. We conclude that petitioner has conceded
respondent’s proposed findings as correct, except to the extent
that its opening brief contains proposed findings inconsistent
therewith. Peacock v. Commissioner, T.C. Memo. 2002-122; Morgan
v. Commissioner, T.C. Memo. 2000-231, affd. 23 Fed. Appx. 813
(9th Cir. 2001).
                                - 3 -

specifically, creative advertisements.    Its principal place of

business was in Studio City, California, when its petition was

filed.    For Federal income tax purposes, it uses the cash

receipts and disbursements method of accounting and a taxable

year that ends on August 31.

     After 1996, William Michael Roach (Roach) was petitioner’s

sole shareholder, director, and officer.    Roach is a lawyer by

schooling and a filmmaker by profession.    He is an avid and

experienced sailor who during the subject years loved to race

yachts.    He was during those years a member of the California

Yacht Club in Marina Del Rey, California (yacht club).

     Throughout petitioner’s existence, Roach has used petitioner

and its resources to advance his personal enjoyment of sailing

and his initiation into the sport of sailboat racing.    On or

about August 17, 1992, petitioner purchased a 30-foot Catalina

sailboat (Catalina) for approximately $29,067.    Petitioner’s

board resolved as to the Catalina that “It is in the best

interest of the Corporation [petitioner] to purchase a Catalina

30 to be used for a general business office, staff and client

meetings, and corporate entertainment for a purchase price of

approximately $29,067".    On September 18, 1996, petitioner

purchased a 35.5-foot Beneteau sailboat (Beneteau) at a cost of

$67,000.    Petitioner’s board resolved as to the Beneteau that “It

is in the best interest of the Corporation to purchase a Beneteau
                               - 4 -

35.5 to be used for a general business office, staff and client

meetings, and corporate entertainment for a purchase price of

approximately $67,000".   On or about August 29, 1997, petitioner

purchased the sailboat at issue, a 42-foot Centurion yacht

(Centurion), for $155,000.3   Petitioner’s board resolved as to

the Centurion that “It is in the best interest of the Corporation

to purchase a 1985 Centurion 42 by Wauquiez to be used for a

general business office, staff and client meetings, and corporate

entertainment for a purchase price of approximately $155,000".

At the time of the last resolution, petitioner was headquartered

in two or three suites of offices in Burbank, California.     Those

suites included at least one production studio and at least eight

editing rooms.

     Before petitioner purchased the Centurion, Roach had done

little sailboat racing.   Roach considered the purchase of the

Centurion to be an opportunity for him to compete in performance

racing.   The Centurion is a very high class, powerful sailboat

that was built in 1985 and is considered to be a prestigious and

luxurious yacht that is one of the fastest yachts of great

international class.   From an operation point of view, the

Centurion was designed for pure sailing joy and has a helm that


     3
       Petitioner disposed of the Catalina before purchasing the
Centurion, and it sold the Beneteau 4 days after it purchased the
Centurion. In addition to these three boats, Roach, either
personally or through petitioner, purchased three other
sailboats.
                                - 5 -

challenges and entertains the most demanding helmsman.   From a

structural point of view, the Centurion features, among other

things, a double-berth stateroom, two or three cabins, two toilet

compartments, a galley with a stove, oven, refrigerator, and

handpainted tiles, and a spacious diningroom with a bar, a dining

table, and comfortable seating around the dining table for at

least eight individuals.   The Centurion also has on board a

built-in compact disk player and speakers, a TV/VCR, and a video

camera.

     Roach moors the Centurion in a slip that petitioner rents at

the yacht club, and he races the Centurion competitively.   In

April 1998, Roach captained the Centurion in the 51st annual

overnight race from Newport, California, to Ensenada, Mexico

(Ensenada race).   Each individual in Roach’s 6-man crew for the

Ensenada race was an experienced and avid sailor, and none of

these individuals was paid for his services on board the

Centurion during the race.   Generally, at any given time during

the Ensenada race, three or four of the individuals on board the

Centurion actually sailed the Centurion while the others had no

assigned duties and were free to sleep, read, fish, or do

whatever else they wanted.   In February 1999, Roach captained the

Centurion in the 15th biennial 8-day yacht race from Marina Del

Ray, California, to Puerto Vallarta, Mexico (Puerto Vallarta

race).    Roach listed himself in the Puerto Vallarta race as the
                               - 6 -

Centurion’s owner, and each individual in Roach’s 6-man crew for

this race was an experienced and avid sailor who received no pay

for his services on board the Centurion during the race.    Before

the Puerto Vallarta race, Roach and his crew trained for the race

by taking the Centurion out on test runs.   Roach and his crew

slept on board the Centurion during both the Ensenada and Puerto

Vallarta races, and they wined and dined together on board the

Centurion (at least for lunch) during the Puerto Vallarta race.

At least some of the individuals on board the Centurion also

fished during the Puerto Vallarta race.   Roach or one of his crew

members, a fellow filmmaker, videotaped the events happening on

board the Centurion during both races, and Roach queried whether

he could someday include that segment for a commercial purpose.4

     During each of the subject years, Roach also regularly raced

the Centurion in the “Beer Can” races which the yacht club held

weekly on the Wednesdays in and around the summer months.   These

races generally lasted approximately 1 hour and were held at

sunset in the spirit of camaraderie and good-natured, friendly

competition.   Winners of the races received trophies as prizes,

and the races were always followed by a dinner/party at the yacht




     4
       In addition to the Ensenada and Puerto Vallarta races,
which both lasted more than 1 day, Roach also planned to race the
Centurion later in 1999 in a multiday race from San Francisco to
Hawaii.
                                - 7 -

club that was held for and attended by Roach and the races’ other

participants.

     Roach sailed in the beer can races with a total crew of 6 to

10 men and/or women, and none of these individuals was

compensated for his or her services on board the Centurion during

these races.    Roach’s crew members for the beer can races varied

from week to week and consisted mainly of friends and whoever

else happened to show up at the yacht club for the races.    (One

of Roach’s regular crew members at these races was his personal

insurance agent.)   The commonality of all of Roach’s crew members

generally was that they enjoyed sailing.   Roach considered the

beer can races to be the perfect venue for entertaining clients

and prospective clients, and, on some occasions, he invited

clients or prospective clients of petitioner on board the

Centurion during the beer can races to allow them to experience

the joy of sailing.   Roach sometimes videotaped the happenings on

board the Centurion during the beer can races.

     During the subject years, Roach also sailed the Centurion

sometimes on weekends.   During each of those years, individuals

on board the Centurion took photographs, drank wine and beer, ate

cheese, and discussed personal matters.

     On its Federal income tax returns for the subject years,

petitioner claimed the disputed deductions of $159,134 and

$135,834, respectively, as to the Centurion.   These underlying
                               - 8 -

expenses, none of which were identified on the returns as related

to a boat, included depreciation, interest on a loan, slip

expenses, and expenses for maintenance and repair.    Respondent

disallowed all of the disputed deductions determining that the

Centurion was an entertainment facility and that the claimed

expenses were nondeductible under sections 162 and 274.    Neither

petitioner nor Roach maintained a contemporaneous guest log (log)

for the Centurion.   During respondent’s audit of the subject

returns, Roach prepared a log for the Centurion, and he submitted

that log to the Internal Revenue Service in support of his claim

that petitioner used the Centurion entirely for business.    The

log identified individuals who were purportedly on board the

Centurion during the subject years but who in fact were not.      The

log also did not reference the Ensenada or Puerto Vallarta races.

During the discovery portion of this proceeding, Roach was

evasive as to whether any individuals fished or slept on board

the Centurion during the subject years.

     Harold Jung (Jung) is a certified public accountant who for

approximately 2 decades has been the accountant for Roach’s many

business companies and the preparer of Roach’s individual income

tax returns.   Jung prepared petitioner’s financial statements and

Federal income tax returns for the subject years.    Roach told

Jung that Roach kept a log as to the Centurion and that

petitioner used the Centurion 100 percent for business.    Jung
                                 - 9 -

prepared the subject returns relying upon that information.

Roach did not tell Jung that, during the subject years, the

Centurion sailed in the Ensenada, Puerto Vallarta, and beer can

races, that individuals slept on the Centurion, and that

individuals fished on board the Centurion; Jung believed

otherwise as to each of these matters.    Jung also was not told

about the individuals who were on board the Centurion during the

relevant years.   Roach told Jung that the Centurion was used by

petitioner as a conference/meeting room for its staff and as a

place to write, and Roach led Jung to believe that Roach simply

met individuals on board the Centurion while it was moored at the

yacht club.   Roach also led Jung to believe that meals were not

eaten on board the Centurion.

      Roach signed under penalties of perjury 1998 and 1999

property tax statements for the Centurion, and he submitted those

statements to the Office of Assessor for the County of Los

Angeles.   Roach reported on the 1998 property tax statement that

the Centurion’s use was “recreation”.     Roach reported on the 1999

property tax statement that the Centurion’s use was “pleasure”.

                                OPINION

1.   Court’s Perception of Petitioner’s Witness Roach

      Petitioner’s primary witness at trial was Roach.   On the

basis of our view of Roach when he testified, as well as on the

basis of our consideration of his testimony in the light of the
                                - 10 -

record as a whole, we did not find Roach to be credible.      Under

the circumstances, we are not required to, and we do not, rely on

Roach’s testimony to support petitioner’s positions herein.

Ruark v. Commissioner, 449 F.2d 311, 312 (9th Cir. 1971), affg.

per curiam T.C. Memo. 1969-48; Clark v. Commissioner, 266 F.2d

698, 708-709 (9th Cir. 1959), affg. in part and remanding T.C.

Memo. 1957-129; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

2.    Disputed Deductions

       Section 162(a) allows the deduction of “all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business”.      Under that section, a cash

basis taxpayer such as petitioner may deduct an expenditure if it

is:    (1) An expense, (2) an ordinary expense, (3) a necessary

expense, (4) paid during the taxable year, and (5) made to carry

on a trade or business.     Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352-353 (1971); Lychuk v.

Commissioner, 116 T.C. 374, 386 (2001).

       Respondent determined that sections 162 and 274 do not

entitle petitioner to deduct its expenses related to the

Centurion.    In order to prevail, petitioner must prove that

determination wrong.5   Rule 142(a)(1); Welch v. Helvering,


       5
       Sec. 7491(a) was added to the Code by the Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3001(c), 112 Stat. 727, effective for court proceedings
arising from examinations commencing after July 22, 1998.
                                                   (continued...)
                              - 11 -

290 U.S. 111, 115 (1933).   Petitioner also bears the burden of

proving its entitlement to any deduction claimed.   INDOPCO, Inc.

v. Commissioner, 503 U.S. 79 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435 (1934).

     Petitioner argues that the evidence establishes that it used

the Centurion entirely for business and that it did not use the

Centurion at all for the purpose of entertainment, amusement, or

recreation.   Petitioner asserts that the Centurion was a business

facility with offices on board and that it also used the

Centurion to film sailboat races and experiment with a digital

camera for the production of documentaries.   We disagree with

petitioner’s assertions as to its use of the Centurion.    On the

basis of the record before us, we are convinced that petitioner’s

use of the Centurion had little, if any, relationship to its

business but was primarily (if not solely) for the personal

enjoyment, entertainment, amusement, and/or recreation of Roach,

an avid sailor and racer of yachts.6   We conclude that the


     5
      (...continued)
Sec. 7491(a)(1) provides that the burden of proof shifts to the
Commissioner in specified circumstances. Petitioner makes no
argument that sec. 7491(a)(1) applies to this case, and we
conclude that it does not. See, e.g., sec. 7491(a)(2) (sec.
7491(a)(1) applies with respect to an issue only if the taxpayer
meets certain requirements).
     6
       While Roach testified that the Centurion was purchased to
film documentaries on yacht racing, Roach’s longtime accountant,
Jung, made no mention of such a purpose during his testimony.
Nor did the minutes of petitioner’s board meetings make any
                                                   (continued...)
                               - 12 -

expenses related to the Centurion were not “ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business” of petitioner’s within the

meaning of section 162(a) and, accordingly, that none of

petitioner’s expenses related to the Centurion are deductible by

it under section 162(a).    Cirelli v. Commissioner, 82 T.C. 335,

349-350 (1984); Am. Props., Inc. v. Commissioner, 28 T.C. 1100

(1957), affd. per curiam 262 F.2d 150 (9th Cir. 1958); see also

Carter v. Commissioner, T.C. Memo. 1978-202, affd. 645 F.2d 784

(9th Cir. 1981).

     Even if petitioner did meet the requirements of section

162(a) as to those expenses, it would still not prevail.     Under

section 274(a)(1)(B),7 deductions which otherwise would be


     6
      (...continued)
mention of the filming of documentaries; the minutes stated that
the Centurion was “to be used for a general business office,
staff and client meetings, and corporate entertainment”.
(Emphasis added.) Petitioner’s petition to this Court also makes
no mention of the filming of documentaries; it alleges as to this
issue that “Expenses incurred by Petitioner during income tax
years ended August 31, 1998 and August 31, 1999 in connection
with maintaining an office at its principal place of business on
* * * [the Centurion] are fully deductible under Code Section
162(a) for each of said income tax years.” Petitioner made this
allegation pursuant to Rule 34(b)(4) and (5), which requires that
every petition to this Court contain “Clear and concise
assignments of each and every error which the petitioner alleges
to have been committed by the Commissioner in the determination
of the deficiency * * * [and] Clear and concise lettered
statements of the facts on which the petitioner bases the
assignments of error”.
     7
         Section 274(a)(1) provides in pertinent part:
                                                     (continued...)
                             - 13 -

allowable for expenses paid with respect to a “facility” are not

allowed when the facility is used in connection with an activity

which is of a type generally considered to constitute

entertainment, amusement, or recreation.   Catalano v.

Commissioner, 240 F.3d 842, 845 (9th Cir. 2001), affg. T.C. Memo.

1998-447; Gordon v. Commissioner, T.C. Memo. 1992-449; Stan

Frisbie, Inc. v. Commissioner, T.C. Memo. 1990-419.     In this

context, the term “facility” “‘includes any item of real or

personal property which is owned, rented, or used by a taxpayer

in conjunction or connection with an entertainment activity’”.

Ireland v. Commissioner, 89 T.C. 978, 981 (1987) (quoting H.

Conf. Rept. 95-1800, at 249 (1978), 1978-3 C.B. (Vol. 1) 521,

583); see also sec. 1.274-2(e)(2)(i), Income Tax Regs.    The

Centurion is a yacht which, in turn, is a “facility” within the




     7
      (...continued)
     SEC. 274(a). Entertainment, Amusement, or Recreation.--

          (1) In general.--No deduction otherwise allowable
     under this chapter shall be allowed for any item–-

               (A) Activity.--With respect to an
          activity which is of a type generally
          considered to constitute entertainment,
          amusement, or recreation, unless the taxpayer
          establishes that the item was directly
          related to * * * the active conduct of the
          taxpayer’s trade or business, or

               (B) Facility.--With respect to a
          facility used in connection with an activity
          referred to in subparagraph (A).
                              - 14 -

applicable meaning of that term.8   Catalano v. Commissioner,

supra at 845; Stan Frisbie, Inc. v. Commissioner, supra; sec.

1.274-2(e)(2)(i), Income Tax Regs.; see also H. Conf. Rept.

95-1800, supra at 249, 1978-3 C.B. (Vol. 1) at 583 (for purposes

of section 274(a)(1)(B), the term “facilities” “[includes]

yachts, hunting lodges, fishing camps, swimming pools, tennis

courts, and bowling alleys * * * [and] may include airplanes,

automobiles, hotel suites, apartments, and houses (such as beach

cottages and ski lodges) located in recreational areas”).

     The slightest use of a facility in connection with an

activity which is of a type generally considered to constitute

entertainment, amusement, or recreation operates under the text

of section 274(a)(1)(B) to disallow any deduction as to that

facility.   See Ireland v. Commissioner, supra at 983; Harrigan

Lumber Co. v. Commissioner, 88 T.C. 1562, 1564-65 (1987), affd.

without published opinion 851 F.2d 362 (11th Cir. 1988); Catalano

v. Commissioner, T.C. Memo. 1998-447, affd. 240 F.3d 842 (9th

Cir. 2001); see also H. Conf. Rept. 95-1800, supra at 249, 1978-3

C.B. (Vol. 1) at 583.   Whether an activity is of such a type is




     8
       Although Roach testified that in 1991 some associations
stopped calling a sailboat a “yacht” and that the Centurion is
therefore not actually a “yacht”, we apply the meaning of that
term as it is commonly understood to include “any of various
recreational watercraft * * * [such as] a sailboat used for
racing”. Merriam-Webster’s Collegiate Dictionary 1370 (10th ed.
1999).
                                - 15 -

measured objectively.   As the Treasury Department’s regulations

under section 274 state as to the matter of entertainment:

     An objective test shall be used to determine whether an
     activity is of a type generally considered to
     constitute entertainment. Thus, if an activity is
     generally considered to be entertainment, it will
     constitute entertainment for purposes of this section
     and section 274(a) regardless of whether the
     expenditure can also be described otherwise, and even
     though the expenditure relates to the taxpayer alone.
     This objective test precludes arguments such as that
     “entertainment” means only entertainment of others or
     that an expenditure for entertainment should be
     characterized as an expenditure for advertising or
     public relations. * * * [Sec. 1.274-2(b)(1)(ii),
     Income Tax Regs.]

We see no reason why this same sort of objective test should not

also apply to the other two matters of amusement and recreation.

     Here, the Centurion was used by Roach, in the name of

petitioner, in connection with an activity, sailing, which is of

a type that we would consider to constitute entertainment,

amusement, and/or recreation.    In addition to the fact that

petitioner’s board acknowledged in its minutes that sailing was a

form of corporate entertainment and that Roach admitted in the

property tax statements that sailing the Centurion was a form of

“recreation” and “pleasure”, the builders of the Centurion

designed it specifically with an eye towards high class

entertainment, amusement, and recreation.    Roach also actually

used the Centurion for entertainment, amusement, and/or

recreation.   Roach raced the Centurion, slept upon it, wined and

dined upon it, and hosted upon it personal invitees who sometimes
                                 - 16 -

relaxed, fished, took pictures, or conversed on matters of a

personal nature.    Roach also participated regularly in the beer

can races, events which were held in the spirit of camaraderie

and which, Roach stated, were the perfect venue for entertaining

clients and prospective clients.     The fact that the Centurion was

used in connection with an activity of a type generally

considered to constitute entertainment, amusement, and/or

recreation is seen further from the testimony of Roach himself.

He testified:

          Q   Mr. Roach, how long have you been sailing?

          A Since approximately -- I think probably in 1975
     was the first time I was ever on a sailboat.

          Q   So you enjoy sailing?

          A   Without a doubt.

          Q   What do you like about sailing?

                *     *    *     *    *    *    *

          A I think really the bottom line reason I like
     sailing is simply because if I am on the water in the
     act of sailing -- not doing anything else, but sailing
     -- for me, whatever was bothering me back on shore
     drops away. I’ve ridden motorcycles for 30 years.
     It’s the same experience. There are some things that I
     hope for each of us that gives us some release and
     sense of simply being in the moment and leaving the
     baggage, whatever it may be, of our daily lives behind
     for this particular moment.

     We sustain respondent’s disallowance of the disputed

deductions.
                                - 17 -

3.   Accuracy-Related Penalties

      Respondent also determined that petitioner is liable for

accuracy-related penalties under section 6662(a).      In relevant

part, section 6662(a) and (b) imposes an accuracy-related penalty

if any portion of an underpayment is attributable to negligence

or disregard of rules or regulations.      Negligence includes any

failure to make a reasonable attempt to comply with the

provisions of the internal revenue laws, any failure to exercise

ordinary and reasonable care in the preparation of a tax return,

and any failure to keep adequate books and records.      Sec.

1.6662-3(b)(1), Income Tax Regs.    Negligence has also been

defined as a lack of due care or a failure to do what a

reasonable and prudent person would do under similar

circumstances.     Allen v. Commissioner, 925 F.2d 348, 353 (9th

Cir. 1991), affg. 92 T.C. 1 (1989).      The term “disregard”

includes any careless, reckless, or intentional disregard of

rules or regulations.    Sec. 1.6662-3(b)(2), Income Tax Regs.

      Respondent bears the burden of production under section

7491(c) and must come forward with sufficient evidence indicating

that it is appropriate to impose an accuracy-related penalty.

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

respondent has met this burden, the taxpayer must come forward

with persuasive evidence that the accuracy-related penalty does

not apply.   Id.   The taxpayer may establish, for example, that
                                - 18 -

part or all of the accuracy-related penalty is inapplicable

because it is attributable to an understatement for which the

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

6664(c)(1).   Whether a taxpayer acted as such is a factual

determination, sec. 1.6664-4(b)(1), Income Tax Regs., for which

the taxpayer’s effort to assess the proper tax liability is a

very important consideration.

     Here, we conclude that respondent has met his burden of

production.   Petitioner’s deductions of the expenses related to

the Centurion were an unreasonable application of the internal

revenue laws, e.g., the disputed deductions were contrary to the

plain text of section 274(a)(1)(B) and to guidance as that text’s

interpretation that was published well before the first year in

issue.   See Catalano v. Commissioner, 240 F.3d at 845.

Petitioner also failed to keep adequate books and records in

support of those deductions, e.g., petitioner failed to maintain

adequate records documenting the individuals who were on board

the Centurion during the subject years.   Petitioner, through

Roach, also showed a lack of due care in the preparation of the

subject returns, e.g., Roach did not give Jung all of the

information required to report the disputed deductions correctly

and gave to Jung misinformation as to those deductions.

     Petitioner argues that it may escape the accuracy-related

penalties in that, it claims, it relied reasonably upon Jung to
                               - 19 -

prepare its Federal income tax returns correctly.    We disagree

with petitioner’s assertion that it relied reasonably upon Jung

to prepare its tax returns correctly.    While it is true that the

reliance on the advice of a professional as to the tax treatment

of an item may sometimes be enough to escape the imposition of a

section 6662(a) accuracy-related penalty, see United States v.

Boyle, 469 U.S. 241 (1985); sec. 1.6664-4(b), Income Tax Regs.,

the mere fact that a taxpayer such as petitioner claims to have

relied upon a professional is not enough to fall within this

defense.    A taxpayer such as petitioner seeking to avail itself

of this defense must prove by a preponderance of evidence:

(1) The professional was a competent tax adviser who had

sufficient expertise to justify reliance; (2) the taxpayer

provided necessary and accurate information to the adviser; and

(3) the taxpayer actually relied in good faith on the adviser’s

judgment.    Neonatology Associates, P.A. v. Commissioner, 115 T.C.

43, 99 (2000), affd. 299 F.3d 221 (3d Cir. 2002); see also

Catalano v. Commissioner, 240 F.3d at 845 (the reasonable

reliance defense requires that the taxpayer establish the

professional qualifications of a purported expert and the nature

of the advice that was purportedly given).

       On the basis of the credible evidence in the record, we are

unable to conclude that any of these three requirements has been

met.    First, the mere fact that Jung is a certified public
                              - 20 -

accountant does not necessarily make him a competent tax adviser.

While petitioner at trial focused his examination of Jung’s

qualifications on establishing that he is in fact a certified

public accountant, petitioner made a feeble attempt to ferret out

the professional qualifications of Jung as to tax matters.     We do

know from Jung’s testimony, however, that he admittedly has an

incomplete understanding of section 274 and its application to

this case.

     Second, the record establishes that petitioner did not give

Jung all of the available information that he needed to report

the disputed deductions correctly and that Roach actually gave

Jung misinformation on the Centurion that affected his reporting

of those deductions.   As to the latter, Jung testified, his

understanding of section 274(a)(1)(B) was that it applied only to

boats that were out for long periods of time or that had people

sleeping on board and that it did not apply to stationary boats

which were simply used as a conference room or meeting place,

such as he believed was the case as to petitioner’s use of the

Centurion.

     Third, the record establishes that Roach, as an officer of

petitioner, did not in good faith rely upon his stated belief

that Jung would prepare the subject returns correctly.   Roach, a

lawyer, obviously knew that Jung would have needed, but did not

have, all relevant available information on the Centurion in
                              - 21 -

order to prepare complete and accurate tax returns for petitioner

and that Jung would be unable to prepare complete and accurate

returns given the information with which he was furnished.

     Nor do we believe that Roach, as an officer of petitioner,

reasonably relied on his stated belief that a prior audit of the

disputed deductions did not result in a disallowance of them.

First, from a factual point of view, we are unable to find on the

basis of the credible evidence in the record that respondent in a

prior year actually passed upon the application of sections

162(a) and 274(a)(1)(B) to expenses similar to those underlying

the disputed deductions.   According to Jung, Roach’s 1993

individual income tax return was the only prior return that was

audited, and respondent determined during this audit that 20

percent of the sailboat use at issue there was personal in

nature.   We know nothing about the facts underlying that

determination or the facts underlying the earlier boat

(presumably, the Catalina).   We do know, however, that the facts

underlying the earlier boat’s usage are different from the facts

at hand in that Roach only began to race sailboats earnestly in

1993.   We also know that petitioner has not explained why, in

examining Roach’s personal income tax return, respondent would

have passed on an application of section 274(a)(1)(B).   In a case

such as this involving a corporation and its sole shareholder,

that section serves to disallow the deduction taken for the
                               - 22 -

facility by the corporation as the owner.    Moreover, from a legal

standpoint, even if respondent had passed upon the application of

sections 162(a) and 274(a)(1)(B) to expenses similar to those at

hand, the fact that respondent has previously examined a deducted

expense in one year, and not disallowed it, does not mean that

the expense is a proper deduction in another year.     Fleischli v.

Commissioner, 123 T.C.     ,     (2004).    While the failure to

disallow a prior deduction may in certain cases give a taxpayer

reasonable cause for later claiming a similar deduction, such is

not the case where, as here, the record fails to establish that

the facts underlying the earlier deduction are similar to the

facts underlying the later deduction.

     We sustain respondent’s determination as to the accuracy-

related penalties.



     All of the parties’ arguments have been considered, and

those arguments not discussed herein have been found to be

without merit.   To reflect concessions,

                                           Decision will be entered

                                    under Rule 155.
