                        T.C. Memo. 2005-265



                      UNITED STATES TAX COURT



    MICHAEL PAUL REMLER AND PAULINE M. VELEZ, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21868-03.            Filed November 17, 2005.


     Michael Paul Remler and Pauline M. Velez, pro sese.

     Anthony J. Kim, Aaron Stonecash, and Paul R. Zamolo, for

     respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge: Respondent determined deficiencies in

petitioners’ Federal income tax of $8,546 and $4,750 for 1999 and

2000, respectively.   Respondent also determined a section 6662(a)
                                   - 2 -

penalty for 2000.1      After concessions,2 the issues for decision

are:       (1) Whether petitioners’ special education activity was

engaged in for profit during 1999 and 2000 (years in issue), and

(2) whether petitioners are liable for an accuracy-related

penalty under section 6662(a) for 2000.

                             FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.       At the time they filed

the petition, petitioners resided in Berkeley, California.

       Michael Paul Remler (Dr. Remler) and Pauline M. Velez (Dr.

Velez) (collectively referred to as petitioners) are husband and

wife.       During the years in issue, petitioners were employed full

time by the Department of Veterans Affairs.       Dr. Remler is a

neurologist and previously served as the child neurologist for



       1
        Unless otherwise noted, all section references are to the
Internal Revenue Code, as amended, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
       2
        Petitioners conceded they were liable for increases to
taxable income of: (1) $8,920 and $10,903 for 1999 and 2000,
respectively, resulting from disallowed deductions for real
estate losses; (2) $11,570 and $24,639 for 1999 and 2000,
respectively, resulting from disallowed deductions claimed in
connection with petitioner Velez’s Schedule C surgery activity;
(3) $1,118 for 1999 resulting from a disallowed Keogh deduction;
and (4) $3,249 for 2000 attributable to a State income tax
refund. The parties signed a Form 870, Waiver of Restrictions on
Assessment and Collection of Deficiency in Tax, regarding the
settled issues, and petitioners paid the additional tax liability
in full prior to trial.
                                - 3 -

the Autism Diagnostic and Teaching Program (TEACCH) at the

University of North Carolina.   Dr. Velez is a surgeon, and during

the years in issue, she also ran a surgery practice.

     Petitioners’ son, GJR3, was born on April 13, 1994.    GJR was

diagnosed with autism in 1995, and his condition was classified

as moderately severe in 1997.   From February 1997 to August 1998,

GJR was enrolled in a behavioral intervention program with the

Behavioral Intervention Associates (BIA).   BIA provided

diagnostic and supervisory services to aid petitioners in

educating GJR at home.   Petitioners also received training in

special education methods from the Autism Institute of America

(AIA).

     From the spring of 1997 through November 2000, GJR was

enrolled in different special education programs in the Berkeley

Unified School District (BUSD).   Petitioners became progressively

dissatisfied with the school-based programs.   In coordination

with BUSD, petitioners developed an integrated afterschool

program to supplement the school-based programs.

     By November 2000, petitioners decided that GJR’s needs could

no longer be met in the school-based programs.   GJR was pulled

from all school-based programs and was educated at home in what




     3
        We shall refer to petitioners’ son using only his
initials.
                                 - 4 -

petitioners call a “microschool”.4       BUSD agreed to reimburse

petitioners for GJR’s special education expenses up to $44,000

per year in exchange for petitioners’ releasing BUSD from any

liability for failing to provide GJR with a “free and appropriate

public education” (FAPE).

     Petitioners did not spend much time teaching GJR in either

the afterschool program or the microschool.       Instead, petitioners

hired several people who were interested in being teachers,

trained them using methods petitioners had developed or learned

through BIA and AIA, and had them teach GJR.       Claudia Alexander

(Ms. Alexander) was one of GJR’s teachers from June 1998 through

the years in issue.

     Petitioners had two sources of funding for the afterschool

program and the microschool, Regional Center and BUSD.       Regional

Center, a California State organization that provides funding for

qualifying families for special education needs, paid petitioners

directly for a limited number of hours petitioners spent on GJR’s

education.   From June 1998 through November 2000, petitioners

received indirect funding from BUSD channeled through Ms.

Alexander.   BUSD paid Ms. Alexander, who would then sign her

paychecks over to petitioners.    Petitioners would use the

paychecks and additional funds to pay Ms. Alexander and the other


     4
        For purposes of clarity, the Court will use petitioners’
terminology of afterschool program and microschool when referring
to petitioners’ home-schooling activities.
                                - 5 -

teachers at an agreed-upon hourly wage.      Beginning in November

2000, petitioners received direct reimbursement from BUSD, as

described above.   GJR’s education expenses exceeded funding for

both years in issue, and petitioners paid out-of-pocket for the

remainder.

     GJR was the only student in petitioners’ afterschool program

and microschool.   Petitioners did not advertise or otherwise seek

additional students.   Petitioners did not apply for or receive

any grants during the years in issue.      Petitioners did not

maintain a separate bank account for, or have any separate

business assets dedicated to, the afterschool program or the

microschool.

     Petitioners timely filed joint Federal income tax returns

for the years in issue.   Attached to each return was a Schedule

C, Profit or Loss From Business, for petitioners’ “special

education” activity.   Petitioners deducted Schedule C losses with

respect to the special education activity of $24,417 and $12,351,

and reported adjusted gross income of $229,665 and $229,219 for

1999 and 2000, respectively.

     On November 6, 2003, respondent sent petitioners a notice of

deficiency for the years in issue.      Respondent determined that

petitioners’ special education activity was not a bona fide

business activity entered into for profit and disallowed the

claimed deductions.    Respondent also determined that petitioners
                                 - 6 -

were liable for an accuracy-related penalty of $42 under section

6662(a) for 2000 based on petitioners’ omission of a State income

tax refund from their return.    In response to the notice of

deficiency, petitioners filed their petition with this Court on

December 24, 2003.

                                OPINION

A.   Petitioners’ Special Education Activity

     The first issue is whether petitioners’ special education

activity was an activity engaged in for profit during the years

in issue.   Section 183(a) provides that if an individual engages

in an activity, and “if such activity is not engaged in for

profit, no deduction attributable to such activity shall be

allowed under this chapter except as provided in this section.”5

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.”

     Section 162 allows the taxpayer to deduct expenses of

carrying on a taxpayer’s trade or business if those expenses are



     5
        Sec. 183(b)(1) provides that deductions which would be
allowable without regard to whether such activity is engaged in
for profit shall be allowed. Sec. 183(b)(2) provides that
deductions which would be allowable only if such activity is
engaged in for profit shall be allowed “but only to the extent
that the gross income derived from such activity for the taxable
year exceeds the deductions allowable by reason of paragraph
(1).” Neither subsection is at issue in the instant case.
                              - 7 -

ordinary and necessary to the conduct of the trade or business.

Paragraphs (1) and (2) of section 212 allow the taxpayer to

deduct expenses incurred in connection with an activity engaged

in for the production or collection of income, or for the

management, conservation, or maintenance of property held for the

production of income.

     A taxpayer must show that he engaged in an activity with an

actual and honest objective of making a profit in order to deduct

expenses of the activity under either section 162 or 212.

Antonides v. Commissioner, 91 T.C. 686, 693 (1988), affd. 893

F.2d 656 (4th Cir. 1990); Beck v. Commissioner, 85 T.C. 557, 569

(1985); Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd.

without opinion 702 F.2d 1205 (D.C. Cir. 1983); Golanty v.

Commissioner, 72 T.C. 411, 425 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981).   While the expectation of

making a profit need not be reasonable, the facts and

circumstances must indicate that the taxpayer entered into the

activity, or continued it, with the objective of making a profit.

Antonides v. Commissioner, supra at 694; Beck v. Commissioner,

supra, Dreicer v. Commissioner, supra; Golanty v. Commissioner,

supra at 425-426.

     The question of whether a taxpayer engages in an activity

with the intention of making a profit is one of fact to be

resolved on the basis of all the surrounding facts and
                                  - 8 -

circumstances.    Antonides v. Commissioner, supra; Golanty v.

Commissioner, supra; Jasionowski v. Commissioner, 66 T.C. 312,

321 (1979).    Greater weight is given to objective facts than to a

taxpayer’s mere statement of intent.      Antonides v. Commissioner,

supra; Thomas v. Commissioner, 84 T.C. 1244, 1269 (1985), affd.

792 F.2d 1256 (4th Cir. 1986).     Petitioners bear the burden of

proving the requisite intention.     Rule 142(a).   The parties do

not argue that the burden shifts to respondent under section

7491(a).

     Section 1.183-2(b), Income Tax Regs., sets forth a

nonexclusive list of relevant factors which should normally be

considered in determining whether an activity is engaged in for

profit.    The factors include:   (1) The manner in which the

taxpayer carries on the 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 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, which are earned, (8) the financial status of the taxpayer,

and (9) the elements of personal pleasure or recreation.      Sec.

1.183-2(b), Income Tax Regs; Antonides v. Commissioner, supra at

694 n.4; Golanty v. Commissioner, supra at 426.      No single factor
                                 - 9 -

or group of factors is determinative.    Sec. 1.183-2(b), Income

Tax Regs.; Golanty v. Commissioner, supra; Dunn v. Commissioner,

70 T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d Cir. 1980).

     Petitioners contend that they entered into the special

education activity with the expectation of making a profit.

Respondent contends that petitioners did not have the requisite

profit motive.    To make our determination, we address the nine

factors found in section 1.183-2(b), Income Tax Regs.

     1.     Manner in Which Petitioners Carried On the Special

            Education Activity

     The fact that the taxpayer carries on the activity in a

businesslike manner and maintains complete and accurate books and

records may indicate that the activity is engaged in for profit.

Sec. 1.183-2(b)(1), Income Tax Regs.; Elliot v. Commissioner, 90

T.C. 960, 972 (1988); Engdahl v. Commissioner, 72 T.C. 659, 666

(1979).    Petitioners introduced evidence of checks issued to

teachers and testified that they were required to provide expense

reports in order to receive funding from BUSD and Regional

Center.    Respondent concedes that petitioners kept adequate

records.

     When the taxpayer conducts the activity in a manner

substantially similar to other activities of the same nature

which are profitable, a profit motive may be indicated.    Sec.

1.183-2(b)(1), Income Tax Regs.; Engdahl v. Commissioner, supra.
                              - 10 -

Relevant indicators include advertising, maintaining a separate

business bank account, the development of a written business

plan, and having a plausible strategy for earning a profit.    See

Morley v. Commissioner, T.C. Memo. 1998-312; Butler v.

Commissioner, 1997-408; De Mendoza v. Commissioner, T.C. Memo.

1994-314; Ellis v. Commissioner, T.C. Memo. 1984-50.

     GJR was the only student in petitioners’ afterschool program

and microschool.   Petitioners did not advertise or otherwise seek

additional students.   Petitioners did not maintain a separate

bank account and did not have a written business plan.   In

addition, petitioners testified that they expected to make a

profit.   However, BUSD reimbursed petitioners only for special

education expenses and Regional Center paid petitioners only for

a limited number of hours worked.   Petitioners testified that

they could get additional funding through grants, but they did

not apply for or receive any grants during the years in issue.

Because their current funding was limited and petitioners did not

seek additional funding, we find that petitioners did not have a

plausible strategy for earning a profit.

     The fact that petitioners did not advertise, maintain a

separate bank account, have a written business plan, or have a

plausible strategy for earning a profit, outweighs any positive

inference made from petitioners’ adequate records.   We find that

petitioners did not operate the special education activity in a
                                - 11 -

businesslike manner.   These facts weigh in favor of respondent.

     2.   Expertise of Petitioners or Their Advisers

     Preparation for the activity by extensive study of its

accepted business, economic, and scientific practices, or

consultation with those who are expert therein, may indicate a

profit motive.   Sec. 1.183-2(b)(2), Income Tax Regs.; Engdahl v.

Commissioner, supra at 668; Lundquist v. Commissioner, T.C. Memo.

1999-83, affd. 211 F.3d 600 (11th Cir. 2000).   Efforts to gain

experience and a willingness to follow expert advice may indicate

a profit motive.   Dworshak v. Commissioner, T.C. Memo. 2004-249;

Lundquist v. Commissioner, supra.

     Dr. Remler served as the child neurologist for TEACCH at the

University of North Carolina.    Petitioners also received guidance

and training in special education methods from BIA and AIA.

While petitioners had no experience running a school, we find

that Dr. Remler had expertise in dealing with child autism, and

petitioners made efforts to gain experience in special education.

These facts weigh in favor of petitioners.

     3.   Time and Effort Expended by Petitioners in Carrying

          on the Activity

     The fact that the taxpayer devotes much of his personal time

and effort to carrying on an activity may indicate an intention

to derive a profit, particularly if the activity does not have

substantial personal or recreational aspects.   Sec. 1.183-
                                - 12 -

2(b)(3), Income Tax Regs.; Lundquist v. Commissioner, supra; De

Mendoza v. Commissioner, supra.     Petitioners both worked full

time for the Department of Veterans Affairs.     Dr. Velez also ran

a surgery practice.     Petitioners testified that Dr. Velez spent 6

to 8 hours per week, and Dr. Remler spent only 1 to 2 hours per

week.     In addition, the activity has a substantial personal

aspect--petitioners devoted this time to GJR, their son.     We find

that petitioners did not devote a significant amount of time to

the special education activity.     These facts weigh in favor of

respondent.

     4.      Expectation That Assets Used in Activity May Appreciate

             in Value

     The expectation that assets used in the activity will

appreciate in value sufficiently to lead to an overall profit

when netted against losses may indicate a profit motive.     Sec.

1.183-2(b)(4), Income Tax Regs.; Engdahl v. Commissioner, supra

at 668-669; De Mendoza v. Commissioner, supra.     Petitioners had

no assets devoted to the special education activity.     This fact

is neutral.

     5.      Success of Petitioners in Carrying on Other Similar

             or Dissimilar Activities

     The fact that the taxpayer has engaged in similar activities

in the past and converted them to profitable enterprises may

indicate that he engaged in the present activity for profit.
                                - 13 -

Sec. 1.183-2(b)(5), Income Tax Regs.; Lundquist v. Commissioner,

supra; De Mendoza v. Commissioner, supra.     Petitioners testified

that Dr. Remler has a history of receiving grants in medicine and

Dr. Velez runs a successful surgery practice.    We find that

petitioners’ successes in the medical world do not necessarily

translate into successfully running their special education

activity.    See Hastings v. Commissioner, T.C. Memo. 2002-310.

These facts are neutral.

     6.     Petitioners’ History of Income or Losses With Respect

            to the Activity

     A series of losses during the initial or startup stage of an

activity may not necessarily be an indication that the activity

is not engaged in for profit.    Sec. 1.183-2(b)(6), Income Tax

Regs.; Engdahl v. Commissioner, 72 T.C. at 669; Dworshak v.

Commissioner, supra; De Mendoza v. Commissioner, supra.

Petitioners had losses from their special education activity

during the years in issue.    However, these losses were during the

initial or startup stage of the activity.    This fact is neutral.

     7.     The Amount of Occasional Profits, If Any, Which Are

            Earned

     The amount of profits in relation to the amount of losses

incurred may provide a useful criterion in evaluating whether the

taxpayer engaged in the activity for profit.    Sec. 1.183-2(b)(7),

Income Tax Regs.     Petitioners did not earn any profits during the
                               - 14 -

years in issue.    This fact weighs in favor of respondent.

However, because petitioners’ special education activity was in

the startup stage, we do not give this factor much weight.    See

Vitale v. Commissioner, T.C. Memo. 1999-131, affd. 217 F.3d 843

(4th Cir. 2000).

     8.     The Financial Status of Petitioners

     Substantial income from sources other than the activity may

indicate that the taxpayer is not engaged in the activity for

profit, particularly if the losses generate substantial tax

benefits.    Sec. 1.183-2(b)(8), Income Tax Regs.; Hastings v.

Commissioner, supra; Lundquist v. Commissioner, supra.

Petitioners reported adjusted gross income of $229,665 and

$229,219 in 1999 and 2000, respectively.    Petitioners deducted

the losses at issue from their taxable income, thus generating

substantial tax benefits.    These facts weigh in favor of

respondent.

     9.     Elements of Personal Pleasure or Recreation

     The presence of personal or recreational motives in

conducting an activity may indicate that the taxpayer is not

conducting the activity for profit.     Sec. 1.183-2(b)(9), Income

Tax Regs.; Hastings v. Commissioner, supra; Lundquist v.

Commissioner, supra.    However, the fact that the taxpayer derives

personal pleasure from engaging in the activity does not show

that the taxpayer lacks a profit objective if the activity is, in
                              - 15 -

fact, conducted for profit as evidenced by other factors.    Sec.

1.183-2(b)(9), Income Tax Regs.

     While petitioners testified that they hoped to make a

profit, petitioners also testified that the purpose of their

special education activity was to provide GJR, their son, with an

education that met his needs as an autistic child.   Taking into

consideration the factors discussed above, we find that

petitioners’ predominate motive for undertaking the special

education activity was personal.   These facts weigh in favor of

respondent.

     In summary, the only factor indicating a profit motive is

petitioners’ expertise in dissimilar activities.   This factor is

heavily outweighed by the manner in which petitioners conducted

the activity, the time and effort they expended, the lack of

occasional profits, petitioners’ financial status, and their

personal motive.   We hold that petitioners did not engage in the

special education activity for profit during the years in issue

within the meaning of section 183.

B.   Section 6662(a) Accuracy-Related Penalty

     The second issue is whether petitioners are liable for an

accuracy-related penalty.   Respondent determined that petitioners

were liable for a penalty of $42 under section 6662(a) for 2000

based on petitioners’ omission of their State income tax refund

from their return for 2000.
                                - 16 -

     Section 6662(a) imposes an accuracy-related penalty of 20

percent of the underpayment of tax attributable to negligence or

disregard of rules or regulations.       Sec. 6662(a) and (b)(1).

Negligence is defined as “any failure to make a reasonable

attempt to comply with the provisions of this title”.       Sec.

6662(c).     However, no penalty will be imposed if the taxpayer had

reasonable cause for the underpayment of tax and the taxpayer

acted in good faith.     Sec. 6664(c); sec. 1.6662-3(a), Income Tax

Regs.

     The Commissioner bears the burden of production with respect

to penalties.     Sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001).     However, the taxpayer must show that he had

reasonable cause and acted in good faith.       See Rule 142(a).

        The parties stipulated that petitioners received, but did

not report, a State income tax refund of $3,249 in 2000.       We find

that respondent has met his burden of production.       Petitioners

have presented no evidence that their omission of the State

income tax refund from their 2000 return was the result of

reasonable cause.     Accordingly, we hold that petitioners are

liable for the accuracy-related penalty pursuant to section

6662(a).

        In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.
                        - 17 -

To reflect the forgoing and the concessions of the parties,



                                   Decision will be entered

                              under Rule 155.
