                  T.C. Summary Opinion 2010-120



                      UNITED STATES TAX COURT



     MICHAEL PAQUIN AND KATHY THOMAS-PAQUIN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25886-08S.              Filed August 19, 2010.



     Michael Paquin and Kathy Thomas-Paquin, pro sese.

     Wesley J. Wong, for respondent.



     MARVEL, Judge:   This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

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

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



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

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

case.

        Respondent determined deficiencies in petitioners’ Federal

income taxes of $11,2052 and $8,367 and accuracy-related

penalties under section 6662(a) of $2,241 and $1,673 for 2005 and

2006, respectively.        After concessions,3 the issues for decision

are:        (1) Whether petitioners’ motocross racing activity was an

“activity not engaged in for profit” in 2005 and 2006 within the

meaning of section 183, and (2) whether petitioners are liable

for the section 6662(a) accuracy-related penalties for 2005 and

2006.

                                 Background

        Some of the facts have been stipulated.     The stipulation of

facts is incorporated herein by this reference.        Petitioners

Michael Paquin (Mr. Paquin) and Kathy Thomas-Paquin (Mrs. Thomas-

Paquin) are married individuals who filed joint Federal income

tax returns for 2005 and 2006.        Petitioners resided in Nevada

when they filed their petition.




        2
      All monetary figures have been rounded to the nearest
dollar.
        3
      Respondent concedes that the expenses claimed on
petitioners’ 2005 and 2006 Schedules C, Profit or Loss From
Business, were actually incurred and were related to petitioners’
motocross racing activity. The remaining adjustments are
computational in nature.
                                 - 3 -

     Mr. Paquin was employed full time in 2005 and 2006 as a

project superintendent for Q&D Construction, and he worked, on

average, more than 40 hours per week.    Mrs. Thomas-Paquin was

employed full time in 2005 and 2006 as an operations manager for

United Rentals, and she worked 40 hours per week, with occasional

overtime.    Petitioners reported wage income of $173,782 and

$178,261 for 2005 and 2006, respectively.

     Mr. Paquin is an avid fan of motocross motorcycle racing.

In 2004 Mr. Paquin became interested in starting a motocross

racing business, and he discussed the idea with Mrs. Thomas-

Paquin.    Although neither petitioner had any experience in

motocross racing or the business of motocross racing, petitioners

agreed to give the idea a try.    Petitioners did not intend to

personally compete in motocross races but instead planned to

sponsor other riders--including Mr. Paquin’s son, MP.4

Petitioners’ decision to sponsor MP was not based on MP’s skill

at motocross racing or even his interest in the sport.     Indeed,

MP initially was reluctant to compete.

     Mr. Paquin also identified more experienced riders, who were

unrelated to petitioners, and invited them to join his racing

team.     Mr. Paquin did not hold formal tryouts or auditions.



     4
      It is the policy of the Court not to identify minor
children. Accordingly, we shall refer to Mr. Paquin’s son as MP.
See Rule 27(a)(3). MP is Mr. Paquin’s son from a previous
marriage.
                                - 4 -

Instead, he approached riders who performed well at motocross

events he attended and who had, in his words, “the right

attitude”.

     In addition to MP, petitioners sponsored two riders in 2005

and 2006:    Tony Merrell (Mr. Merrell) and Dee Wade (Mr. Wade),

both of whom were 20 years old in 2005.    Mr. Merrell and Mr. Wade

were friendly with MP, but they were not close friends because of

the age difference.    Petitioners briefly sponsored a third rider,

CZ,5 but stopped sponsoring him when they concluded he did not

have the skill or dedication to succeed at motocross.

     Petitioners made the following oral agreement with each of

the unrelated riders6 they sponsored:   Petitioners would pay the

riders’ race entry fees, maintain their motorcycles, and

transport them to and from motocross events in exchange for 75

percent of the riders’ winnings at the amateur level.7   Mr.

Paquin told the riders that he expected to recover his investment

in them if and when the riders became professionals, but



     5
      It is not clear from the record whether CZ is a minor child
or an adult. Out of caution, we shall refer to him by his
initials.
     6
      It is not clear whether the same terms applied to MP.
     7
      As amateurs, the riders’ winnings were limited to racing
equipment and gift certificates, some of which were redeemable
for cash. When a rider received racing equipment (or a gift
certificate that was redeemable for racing equipment) petitioners
did not attempt to divide the equipment but instead allowed the
rider to keep it.
                                - 5 -

petitioners did not reach an agreement with any of the riders

concerning petitioners’ share of the riders’ earnings as

professionals.

     Motocross races are conducted at the amateur and

professional levels.    All riders must begin as amateurs and may

improve their amateur classification8 by competing and excelling

in motocross races.    To compete at the professional level, a

rider must be at least 16 years old, must have attained the

highest amateur class, and must have accumulated a certain number

of additional “points” on the basis of the rider’s performance in

motocross events.

     Amateur riders may earn trophies and gift certificates, some

of which are redeemable for cash, but amateur riders are

generally ineligible for cash awards.9   To be eligible for cash

prizes a rider generally must compete at the professional level.




     8
      Motocross racing organizations generally classify amateur
riders on the basis of their skill and experience. For example,
in 2005 and 2006 the American Motorcyclist Association (AMA)
classified amateur riders as A (the highest class), B (the class
below A), or C (the class below B), while the Sierra Motocross
Racing Association (SMRA), at least in 2009, classified riders as
beginner, junior, or intermediate. The SMRA’s 2005 and 2006
rulebooks are not in the record.
     9
      The 2005 and 2006 AMA rulebooks define amateur riders as
“riders not competing for cash awards” but state, inconsistently,
that class A amateur riders may compete for money (or
certificates that may be exchanged for money) up to a total purse
of $3,000. The record reflects that petitioners’ riders rarely,
if ever, competed for cash prizes in 2005 and 2006.
                               - 6 -

The AMA rulebooks for 2005 and 2006 provide that the minimum

purse for a motocross “Pro Am” event shall be $3,000.10

     It is virtually impossible for an amateur rider to make a

profit at motocross--indeed, petitioners admit that even if their

riders had won every race they entered in 2005 and 2006,

petitioners still would have lost money on the activity.     A

professional rider, however, can earn a profit through a

combination of cash prizes and corporate sponsorships.     All of

the riders on petitioners’ team were amateurs in 2005 and 2006,

and no rider was close to achieving professional status.11

     Petitioners observed few business formalities in the

motocross racing activity.   Petitioners did not prepare a written

business plan, did not create a separate entity for the activity,

did not investigate whether they needed a business license, and

did not open a separate checking account (petitioners paid

motocross racing expenses from their personal accounts).

Petitioners maintained some records of their motocross-related


     10
      The recommended payout structure for 10 riders calls for
the first-place rider to take 28 percent of the purse, the
second-place rider, 22 percent, the third-place rider, 15
percent, and so on, with as many as 16 riders sharing in the
purse for a particular race. Professional motocross riders can
also earn money for themselves and their teams by attracting
corporate sponsors.
     11
      At the end of 2006, MP was not yet 16 years old, Mr.
Merrell was about halfway through the process of becoming a
professional, and Mr. Wade was slightly more than halfway through
the process of becoming a professional. Petitioners had only a
rough idea of how close any rider was to becoming a professional.
                                - 7 -

activities and expenses, but the records are incomplete.   For

example, petitioners deducted $715 for race entry fees in 2006,

but Mr. Paquin testified that the actual entry fees were much

greater than $715.    Petitioners also failed to keep track of how

much money they spent on gas to drive to and from motocross races

in 2006.

     Mr. Paquin estimated that he spent, on average, 15-20 hours

per week on the motocross racing activity during the years at

issue.   Mr. Paquin pursued the activity in his spare time while

continuing to work full time at Q&D Construction throughout 2005

and 2006.   Mrs. Thomas-Paquin’s role in the activity was more

limited.    Although she sometimes attended motocross practices and

races, her primary role was to maintain the activity’s books and

records.    It is not clear how much time Mrs. Thomas-Paquin, who

was employed full time during 2005 and 2006, devoted to the

motocross activity.

     Petitioners reported the following income and deducted the

following expenses with respect to the motocross racing activity

on their 2005 and 2006 Schedules C, Profit or Loss From Business:
                              - 8 -

                                                2005        2006
Income
  Gross receipts or sales1                     $1,025         $650

Expenses
  Advertising                                    $150         $65
  Car and truck expenses                       10,034       5,068
  Contract labor                                  500         300
  Depreciation and sec. 179 expense             6,306       2,903
  Insurance (other than health)                   575         622
  Interest                                      1,415       1,156
  Office expenses                                 200          90
  Repairs and maintenance                       1,540       2,350
  Supplies                                      3,288       4,500
  Travel                                          650       1,280
  Deductible meals                                  0         255
  Other expenses2                               9,419       6,995
    Total expenses                              34,077      25,584

  Net profit or (loss)                        (33,052)     (24,934)
     1
      Petitioners’ Schedule C income in 2005 and 2006 is
attributable to gift certificates awarded on the basis of the
riders’ performance in motocross races.
     2
      Petitioners’ other expenses included $990 and $715 for
entry fees, $2,682 and $1,875 for fuel, $650 and $500 for phone
expenses, $2,947 and $2,005 for small equipment, and $2,150 and
$1,900 for safety clothing, in 2005 and 2006, respectively.

     Petitioners’ 2005 and 2006 Federal income tax returns were

prepared by a professional tax return preparer (return preparer).

Petitioners have used the same return preparer since 2003.12

Mrs. Thomas-Paquin provided receipts for the return preparer to

use in preparing petitioners’ 2005 and 2006 Schedules C.    Before

signing petitioners’ 2005 return, Mrs. Thomas-Paquin called the




     12
      The record does not establish whether the return preparer
was a certified public accountant.
                               - 9 -

return preparer to ask questions.   Mr. Paquin signed the 2005 and

2006 returns without carefully reviewing them.

     As of the date of trial petitioners continued to sponsor

MP’s motocross racing activities but were no longer sponsoring

any other riders.   Petitioners stopped sponsoring Mr. Merrell and

Mr. Wade in 2008 because the riders apparently lost interest in

motocross racing.   None of petitioners’ riders, including MP, had

achieved professional status as of the date of trial.

     On July 24, 2008, respondent issued a notice of deficiency

that treated petitioners’ income from the motocross racing

activity in 2005 and 2006 as other income, disallowed the net

operating losses claimed with respect to the motocross racing

activity, and imposed an accuracy-related penalty under section

6662(a) for each of the years 2005 and 2006.   Petitioners timely

filed a petition in this Court.

                            Discussion

I.   Burden of Proof

     Generally, the Commissioner’s determination of a deficiency

is presumed correct, and the taxpayer bears the burden of proving

the determination is erroneous.   Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).   If, however, the taxpayer presents

credible evidence with respect to any factual issue relevant to

determining the taxpayer’s liability, section 7491(a)(1) shifts

the burden of proof to the Commissioner, but only if the taxpayer
                               - 10 -

has complied with the requirements of the Internal Revenue Code

to substantiate items, has maintained all required records, and

has complied with all reasonable requests by the Commissioner for

witnesses, documents, information, and meetings.   Sec.

7491(a)(2).    Petitioners do not contend that section 7491(a)(1)

applies, and the record does not permit us to conclude that

petitioners have satisfied the requirements of section

7491(a)(2).    Accordingly, petitioners bear the burden of proving

they were entitled to deduct the net operating losses from their

motocross racing activity for 2005 and 2006.

II.   Petitioners’ Motocross Activity

      Respondent contends that the losses from petitioners’

motocross racing for 2005 and 2006 are not deductible because the

activity was “not engaged in for profit” within the meaning of

section 183.    Section 183(a) disallows deductions attributable to

an activity not engaged in for profit, except as provided in

section 183(b).    Section 183(b) allows (1) deductions that would

be allowable without regard to whether or not such activity is

engaged in for profit, sec. 183(b)(1), and (2) a deduction equal

to the amount of the deduction that would be allowable if the

activity were engaged in for profit, but only to the extent that

the gross income from the activity for the taxable year exceeds

the deductions allowable under section 183(b)(1), sec. 183(b)(2).
                               - 11 -

See also, e.g., Antonides v. Commissioner, 91 T.C. 686, 693

(1988), affd. 893 F.2d 656 (4th Cir. 1990).

     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(a) allows a

taxpayer to deduct all ordinary and necessary business expenses

paid or incurred during the taxable year in carrying on a trade

or business.   Section 212(1) and (2) allows a taxpayer to deduct

all ordinary and necessary expenses paid or incurred during the

taxable year for the production or collection of income, or for

the management, conservation, or maintenance of property held for

the production of income.

     The U.S. Court of Appeals for the Ninth Circuit has held

that an activity is engaged in for profit if the taxpayer’s

“predominant, primary or principal” objective in engaging in the

activity is to realize an economic profit independent of tax

savings.13   Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir.

1993), affg. T.C. Memo. 1991-212.   Whether a taxpayer is engaged



     13
      Although this case was tried as a small tax case subject
to sec. 7463(b) and is not appealable, this Court generally
applies the law of the circuit to which an appeal would normally
lie if the case were appealable. Cf. Golsen v. Commissioner, 54
T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971). But for
the provisions of sec. 7463(b), the decision in this case would
be appealable to the U.S. Court of Appeals for the Ninth Circuit.
See sec. 7482(b)(1)(A).
                              - 12 -

in an activity for the primary purpose of making a profit is a

question of fact.   Golanty v. Commissioner, 72 T.C. 411, 426

(1979), affd. without published opinion 647 F.2d 170 (9th Cir.

1981); see also Synnestvedt v. Commissioner, T.C. Memo. 1987-31

(motocross racing activity involving taxpayers’ son was an

activity not engaged in for profit within the meaning of section

183).   The taxpayer’s objective of making a profit need not be

reasonable but must be actual and honest.   Dreicer v.

Commissioner, 78 T.C. 642, 644-645 (1982), affd. without

published opinion 702 F.2d 1205 (D.C. Cir. 1983); Golanty v.

Commissioner, supra at 425-426; sec. 1.183-2(a), Income Tax Regs.

In determining whether a taxpayer had a bona fide profit

objective, greater weight is given to objective facts than to the

taxpayer’s statement of intent.   Dreicer v. Commissioner, supra

at 645; sec. 1.183-2(a), Income Tax Regs.

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

nonexclusive list of factors that should normally be considered

in determining whether a taxpayer has the required profit

objective with respect to an activity:   (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 the activity may appreciate in value, (5) the

success of the taxpayer in carrying on other similar or
                              - 13 -

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) elements of personal pleasure or

recreation.

     No single factor is determinative, and the determination

should not be made solely because the number of factors

indicating a lack of profit objective exceeds the number of

factors indicating a profit objective, or vice versa.     Golanty v.

Commissioner, supra at 426; sec. 1.183-2(b), Income Tax Regs.

Rather, all facts and circumstances with respect to the activity

must be taken into account.   Sec. 1.183-2(b), Income Tax Regs.

All nine factors do not necessarily apply in every case.     Green

v. Commissioner, T.C. Memo. 1989-436; see also Akelis v.

Commissioner, T.C. Memo. 1989-182.

     A.   Manner in Which the Taxpayer Carries On the Activity

     The fact that a taxpayer conducts an activity in a

businesslike manner and maintains complete and accurate books and

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

1.183-2(b)(1), Income Tax Regs.; see Stephens v. Commissioner,

T.C. Memo. 1990-376 (taxpayer operated his horse breeding

activity in a businesslike manner where he entered into formal

written contracts with stallion owners); but see Synnestvedt v.

Commissioner, supra (taxpayers’ use of a separate checking
                               - 14 -

account to pay their son’s motocross racing expenses was

insufficient to establish a businesslike manner of operation).

Similarly, a change in operating methods or abandonment of

unprofitable methods may indicate that the taxpayer has the

requisite profit objective.    Sec. 1.183-2(b)(1), Income Tax Regs.

     Petitioners did not carry on the motocross racing activity

in a businesslike manner.    Petitioners did not prepare a written

business plan, did not create a separate legal entity, did not

investigate whether they needed a business license, did not open

a separate checking account, and did not maintain complete and

accurate books and records.    Moreover, petitioners did not

carefully evaluate their riders’ skills before inviting them to

join the team--indeed, one of the riders was Mr. Paquin’s son,

who petitioners admit had no particular skill in motocross

racing.   Most troubling of all, petitioners never reached

agreements with the unrelated riders regarding petitioners’ share

of any income the riders might earn as professionals.       Absent

such an agreement, it is difficult to imagine how petitioners

could have ever earned a profit from the motocross racing

activity.    This factor strongly favors respondent.

     B.     The Expertise of the Taxpayer or His Advisers

     Preparation for an activity by extensive study of its

accepted business, economic, and scientific practices, or

consultation with experts in such practices, may indicate the
                                - 15 -

activity is engaged in for profit.       Sec. 1.183-2(b)(2), Income

Tax Regs.    In analyzing this factor, a distinction must be drawn

between expertise in the mechanics of an activity and expertise

in the business practices of the activity.       Zidar v.

Commissioner, T.C. Memo. 2001-200 (citing Burger v. Commissioner,

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

In Zidar v. Commissioner, supra, we held that a taxpayer’s stock

car racing activity was an activity not engaged in for profit

where the taxpayer had a longstanding interest in stock car

racing but no expertise in the economics or business of owning a

stock car.    The facts of this case are analogous:    Mr. Paquin had

a longstanding interest in motocross racing, but there is no

evidence that petitioners studied or understood the accepted

business practices of motocross racing or consulted experts in

the field.    Petitioners’ lack of knowledge and expertise was

evident from their testimony:    Petitioners were uncertain how an

amateur motocross rider becomes a professional and had only a

general idea how close any of their riders were to achieving

professional status.    This factor strongly favors respondent.

     C.     The Time and Effort Expended by the Taxpayer in
            Carrying On the Activity

     The time and effort devoted to an activity may indicate that

the activity is engaged in for profit, particularly where the

activity does not have a substantial personal or recreational

aspect.     Sec. 1.183-2(b)(3), Income Tax Regs.; see also Sousa v.
                               - 16 -

Commissioner, T.C. Memo. 1989-581 (amount of time spent on a

fishing and boating activity not necessarily indicative of profit

objective where taxpayer derived great personal pleasure from the

activity).    A taxpayer’s withdrawal from another occupation to

devote most of his time to the activity may also indicate that

the activity is engaged in for profit.      Sec. 1.183-2(b)(3),

Income Tax Regs.    Although Mr. Paquin devoted a substantial

amount of his spare time to the motocross racing activity in 2005

and 2006, the record reflects that Mr. Paquin derived a great

deal of personal pleasure from the activity.      Accordingly, the

amount of time Mr. Paquin spent on the activity is not

necessarily indicative of a profit objective.      This factor is

neutral.

     D.    Expectation That Assets Used in Activity May Appreciate
           in Value

     Petitioners concede that they had no expectation that any of

the assets used in the motocross racing activity would appreciate

in value.14   This factor does not apply.




     14
      In at least two prior cases we have considered whether a
motocross racing activity was an activity not engaged in for
profit within the meaning of sec. 183. See McCarthy v.
Commissioner, T.C. Memo. 1997-436, vacated and remanded without
published opinion 164 F.3d 618 (2d Cir. 1998); Synnestvedt v.
Commissioner, T.C. Memo. 1987-31. We did not discuss in either
case whether the taxpayer expected the assets used in the
business to appreciate in value.
                              - 17 -

     E.   The Success of the Taxpayer in Carrying On Other
          Similar or Dissimilar Activities

     Even if an activity is presently unprofitable, the fact that

the taxpayer has previously converted a similar activity from

unprofitable to profitable status may indicate the activity is

engaged in for profit.   Helmick v. Commissioner, T.C. Memo. 2009-

220; sec. 1.183-2(b)(5), Income Tax Regs.   On the other hand, the

taxpayer’s lack of prior experience does not necessarily indicate

that the activity was not engaged in for profit.    Pirnia v.

Commissioner, T.C. Memo. 1989-627 (citing sec. 1.183-2(b)(5),

Income Tax Regs.).   Petitioners had no prior experience in

motocross racing or the business of motocross racing before

engaging in the activity.   This factor does not apply.

     F.   The Taxpayer’s History of Income or Losses With Respect
          to the Activity

     A taxpayer’s history of income or loss with respect to an

activity may indicate the presence or absence of a profit

objective.   Sec. 1.183-2(b)(6), Income Tax Regs.; see also

Golanty v. Commissioner, 72 T.C. at 426.    A series of losses

during the startup phase of an activity does not necessarily

indicate the activity is not engaged in for profit.   Sec. 1.183-

2(b)(6), Income Tax Regs.   But where losses continue to be

sustained beyond the customary startup period, that may be an

indication the activity is not engaged in for profit.     Id.
                              - 18 -

     Petitioners reported net losses from the motocross racing

activity of $33,052 and $24,934 in 2005 and 2006, respectively,

and have never earned a profit from the activity.    Petitioners

suggest, however, that the activity was still in its startup

phase during the years at issue and imply that the limited

history of losses should not count against them.

     Petitioners presented no evidence regarding the customary

startup period in the motocross racing industry.    Moreover,

petitioners continued to sponsor Mr. Merrell and Mr. Wade until

2008 (when Mr. Merrell and Mr. Wade stopped racing for personal

reasons) and continued to sponsor MP as of the trial date.15

Petitioners’ continued investment in the motocross racing

activity despite substantial losses suggests the activity was not

carried on for profit.   This factor favors respondent.

     G.   The Amount of Occasional Profits, If Any, Which Are
          Earned

     The amount of occasional profits, if any, in relation to the

amount of losses and in relation to the taxpayer’s investment may

indicate the presence or absence of a profit objective.    Sec.

1.183-2(b)(7), Income Tax Regs.; see also Harston v.

Commissioner, T.C. Memo. 1990-538, affd. without published

opinion 936 F.2d 570 (5th Cir. 1991).   An opportunity to earn a

substantial profit in a speculative venture is ordinarily


     15
      The record does not establish whether petitioners
continued to deduct motocross racing expenses after 2006.
                                - 19 -

sufficient to demonstrate that the activity is engaged in for

profit.   Sec. 1.183-2(b)(7), Income Tax Regs.

     Petitioners’ motocross racing activity generated negligible

gross income--$1,025 in 2005 and $650 in 2006--relative to the

expenses incurred.    Petitioners testified that they hoped to

recover their investment and earn a substantial ultimate profit

when their riders became professionals.    However, petitioners had

no agreements with their riders concerning petitioners’ share of

any prize or sponsorship money the riders might one day earn as

professionals.   Absent such an agreement, petitioners’ likelihood

of earning a profit from the activity was not merely speculative

but nonexistent.    This factor favors respondent.

     H.    The Financial Status of the Taxpayer

     The fact that the taxpayer has substantial income from

sources other than the activity may indicate the activity is not

engaged in for profit (particularly if losses from the activity

generate tax benefits).    Sec. 1.183-2(b)(8), Income Tax Regs.

Conversely, the fact that the taxpayer does not have substantial

income from other sources may indicate the activity is engaged in

for profit.   Id.    Petitioners earned wage income of $173,782 and

$178,261 in 2005 and 2006, respectively.    By deducting the losses

associated with motocross racing, petitioners were effectively

able to shelter $33,052 and $24,934 of their income from tax in

2005 and 2006, respectively.    This factor favors respondent.
                                - 20 -

     I.    Elements of Personal Pleasure or Recreation

     Personal motives for carrying on an activity may indicate

the activity is not engaged in for profit, especially where there

are recreational or personal elements involved.     Sec. 1.183-

2(b)(9), Income Tax Regs.     However, the mere fact that the

taxpayer derives personal pleasure from an activity does not

establish that the activity is not engaged in for profit if the

activity is, in fact, engaged in for profit as evidenced by other

factors.   Id.   Petitioners--particularly Mr. Paquin--derived

significant personal pleasure and recreation from the motocross

racing activity.     None of the other factors discussed above

indicate that petitioners’ motocross racing activity was, in

fact, engaged in for profit.     This factor strongly favors

respondent.

     J.    Summary

     Of the nine factors listed in section 1.183-2(b), Income Tax

Regs., six support the conclusion that petitioners’ motocross

racing activity was an activity not engaged in for profit in 2005

and 2006, one is neutral, and two are not applicable.

Accordingly, we sustain respondent’s determination that

petitioners’ motocross racing activity was an activity not

engaged in for profit within the meaning of section 183.
                                - 21 -

III. Accuracy-Related Penalty

     Section 6662(a) imposes a 20-percent penalty on any portion

of an underpayment of tax required to be shown on a return.    The

penalty applies to any portion of an underpayment that is

attributable to, inter alia, negligence or disregard of rules or

regulations, sec. 6662(b)(1), or any substantial understatement

of income tax, sec. 6662(b)(2).    For purposes of section 6662,

negligence includes any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code, and

disregard includes any careless, reckless, or intentional

disregard.   Sec. 6662(c).   Section 1.6662-3(b)(1), Income Tax

Regs., provides that negligence includes any failure to exercise

ordinary and reasonable care in the preparation of a tax return

but does not include a return position that has a reasonable

basis.   Reasonable basis is a relatively high standard that is

not satisfied by a return position that is merely arguable.    Sec.

1.6662-3(b)(3), Income Tax Regs.    For a taxpayer other than a C

corporation, a substantial understatement is any understatement

that exceeds 10 percent of the tax required to be shown on the

return for the taxable year, or $5,000, whichever is greater.

Sec. 6662(d)(1).

     The Commissioner has the burden of production in any court

proceeding with respect to any penalty or addition to tax.    Sec.

7491(c).   To meet his burden, the Commissioner must come forward
                              - 22 -

with sufficient evidence that it is appropriate to impose the

penalty or addition to tax but is not required to produce

evidence relating to reasonable cause or other defenses.16

Wheeler v. Commissioner, 127 T.C. 200, 206 (2006), affd. 521 F.3d

1289 (10th Cir. 2008); Swain v. Commissioner, 118 T.C. 358, 363

(2002); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).    Once

the Commissioner has satisfied his burden of production, the

taxpayer bears the burden of proving that the Commissioner’s

determination to impose the penalty or addition to tax is

incorrect.   Higbee v. Commissioner, supra at 447.

     Respondent satisfied his burden of production under section

7491(c) by showing that the understatements of tax for 2005 and

2006 exceeded the greater of 10 percent of the amount required to

be shown on petitioners’ returns or $5,000.   Thus, petitioners

must prove that the Commissioner’s determination to impose the


     16
      The Commissioner’s obligation under sec. 7491(c) is
conditioned on the taxpayer assigning error to such penalty or
addition to tax. Wheeler v. Commissioner, 127 T.C. 200, 206-207
(2006), affd. 521 F.3d 1289 (10th Cir. 2008); Swain v.
Commissioner, 118 T.C. 358, 364-365 (2002). If the taxpayer
fails to assign error to the penalty or addition to tax, the
taxpayer is deemed to have conceded the issue under Rule
34(b)(4).

     Respondent contends that petitioners conceded the sec.
6662(a) penalties because they did not assign error to the
penalties in their petition. We disagree. Although petitioners
failed to assign error to the sec. 6662(a) penalties in their
petition, they raised the issue at trial by offering testimony
regarding the preparation of their 2005 and 2006 Federal income
tax returns, and respondent did not object. We therefore
conclude the issue was tried by consent of the parties and is
properly before the Court. See Rule 41(b).
                              - 23 -

section 6662(a) penalties is inappropriate.   Petitioners contend

that the penalties are inappropriate because they had reasonable

cause for the understatements and acted in good faith.

Specifically, petitioners argue that they relied on their return

preparer to prepare their 2005 and 2006 Federal income tax

returns.

     Section 6664(c) provides that the section 6662(a) penalty

shall not apply to any portion of an underpayment if it is shown

that there was reasonable cause for such portion and the taxpayer

acted in good faith.   Whether a taxpayer acted with reasonable

cause and in good faith is determined on a case-by-case basis,

taking into account all relevant facts and circumstances,

including the taxpayer’s experience, knowledge, and education.

Sec. 1.6664-4(b)(1), Income Tax Regs.   Generally, the most

important fact is the taxpayer’s effort to assess the proper

liability.   Id.

     Reliance on a tax professional may demonstrate that the

taxpayer had reasonable cause and acted in good faith where the

taxpayer establishes that:   (1) The adviser was a competent

professional with sufficient expertise to justify the taxpayer’s

reliance, (2) the taxpayer provided the adviser with necessary

and accurate information, and (3) the taxpayer actually relied in

good faith on the adviser’s judgment.   3K Inv. Partners v.

Commissioner, 133 T.C. 112, 117 (2009); DeCleene v. Commissioner,
                              - 24 -

115 T.C. 457, 477 (2000); Sklar, Greenstein & Scheer, P.C. v.

Commissioner, 113 T.C. 135, 144-145 (1999).

     Petitioners have not established that their reliance on

their return preparer was reasonable or in good faith.    First,

petitioners presented no evidence with respect to their return

preparer’s experience or qualifications.    Mrs. Thomas-Paquin

testified that she was uncertain of the return preparer’s

qualifications or whether the return preparer was a certified

public accountant.   Second, petitioners have not established that

they provided necessary and accurate information to the return

preparer.   Mrs. Thomas-Paquin testified that she discussed the

motocross racing activity with the return preparer and provided

her with all of the receipts from the business.    When she was

asked specifically what she discussed with the return preparer,

however, Mrs. Thomas-Paquin testified, inconsistently, that it

was Mr. Paquin who spoke with the return preparer.    Petitioners

presented no evidence regarding what, if anything, Mr. Paquin

discussed with the return preparer.    Finally, petitioners have

not established that they actually relied in good faith on the

return preparer’s judgment.   On the contrary, Mrs. Thomas-Paquin

testified inconsistently with respect to her conversations with

the return preparer, and Mr. Paquin testified that he simply

signed the 2005 and 2006 returns without carefully reviewing

them.   We therefore sustain respondent’s determination that
                              - 25 -

petitioners are liable for the section 6662(a) penalties for 2005

and 2006.

IV.   Conclusion

      On the basis of the foregoing, we conclude that petitioners’

motocross racing activity was an activity not engaged in for

profit in 2005 and 2006 within the meaning of section 183 and

that petitioners were not entitled to deduct expenses associated

with the activity (except to the extent of their gross income

from motocross racing in 2005 and 2006).   We further conclude

that petitioners are liable for the section 6662(a) accuracy-

related penalties.   Because it does not appear that respondent,

in computing the 2005 and 2006 deficiencies, allowed petitioners

to deduct expenses associated with the activity to the extent of

the gross income derived from the activity, as provided by

section 183(b), a Rule 155 computation is necessary.

      We have considered the parties’ remaining arguments and, to

the extent not discussed above, conclude those arguments are

irrelevant, moot, or without merit.17




      17
      Petitioners argued in their petition and at trial that the
auditor who reviewed their case made various substantive and
procedural errors. We need not address this argument, however,
because it is well established that a trial in the Tax Court is a
proceeding de novo and our determination must be based on the
merits of the case and not on any previous record developed at
the administrative level. Greenberg’s Express, Inc. v.
Commissioner, 62 T.C. 324, 328 (1974).
                        - 26 -

To reflect the foregoing,


                            Decision will be entered under

                        Rule 155.
