                                  T.C. Memo. 2016-127


                            UNITED STATES TAX COURT



                 RICHARD BREWSTER MAIN, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20609-14.                             Filed July 5, 2016.



      Richard Brewster Main, pro se.

      Nicholas R. Rosado, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      FOLEY, Judge: After concessions, the issues for decision are whether

petitioner is entitled to various deductions relating to his patent business and

automobile activity, liable for a section 6662(a) accuracy-related penalty, and

liable for a section 6651(a)(1) failure to timely file addition to tax.1


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                         -2-

[*2]                           FINDINGS OF FACT

       During 2009 (year in issue) petitioner, an attorney, engaged in a patent

business and an automobile activity. Petitioner’s patent business, which

experienced a downturn during the year in issue, involved creating prototypes,

inventing electronics, and filing patent applications. His automobile activity

related to 1955 and 1956 Plymouth cars (Plymouths).

       Prior to 2003 petitioner determined that he could successfully buy, restore,

and sell Plymouths. He advertised online, in print publications, and at live events

and traveled throughout the western United States to acquire bargain-priced

Plymouths. His inventory, at its peak, reached 40 cars, which he stored in a large

two-story barn on his ranch in Livermore, California.

       Plymouths were less popular than other 1950s vintage cars, and replacement

parts were difficult to find. As a result, petitioner sold some of the unrestorable

automobiles and their related parts. He also contracted with a retired jewelry

maker and a rubber manufacturer to produce and supply unavailable parts. These

parts were used to renovate the cars in his inventory or sold to other Plymouth

restorers. Petitioner discovered, however, that the cost of producing these parts

       1
      (...continued)
Revenue Code relating to the year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                         -3-

[*3] exceeded the related sales revenue and ceased contracting for their

production.

      In 2003 petitioner’s ranch was sold in a foreclosure proceeding, and

petitioner leased the barn from the ranch’s buyer until 2008, when he realized that

he had underestimated the time required to fully restore the cars in his Plymouth

inventory. He then sold off some of the Plymouths and transferred the remaining

inventory to a storage facility, for which he paid $900 during the year in issue.

During that year petitioner resided at a house in Elk Grove, California, which had

an attached three-car garage; paid Tuff Shed, Inc., $27,900 to build a separate

garage; and paid $739, $229, $216, and $865 relating to a gantry crane, welding

equipment, a wireless router, and a camcorder, respectively. After the

construction of the separate garage (i.e., during April of the year in issue),

petitioner moved the Plymouths from storage to the separate garage and conducted

his automobile activity from that location.

      On January 26, 2012, petitioner filed his 2009 Form 1040, U.S. Individual

Income Tax Return, on which he reported zero taxable income, a zero income tax

liability, a $3,049 self-employment tax liability, and an $899 amount owed. After

an examination of the return, respondent, in a notice of deficiency issued on

August 21, 2014, disallowed deductions relating to petitioner’s automobile
                                         -4-

[*4] activity on the grounds that petitioner lacked the requisite profit objective and

had failed to substantiate the expenses underlying his deductions; disallowed

various deductions relating to petitioner’s patent business on the grounds that

petitioner had failed to substantiate the expenses underlying his deductions; and

determined a $27,208 deficiency, a $6,802 section 6651(a)(1) addition to tax, and

a $5,442 section 6662(a) accuracy-related penalty. On September 2, 2014,

petitioner, while residing in California, timely filed a petition with the Court.

                                      OPINION

      Section 183(b) limits the deductions relating to an activity not engaged in

for profit. Petitioner bears the burden of proving that his primary objective,

relating to his automobile activity, was to make a profit. See Wolf v.

Commissioner, 4 F.3d 709, 713 (9th Cir. 1993) (holding that profit must be the

predominant, primary, or principal objective), aff’g T.C. Memo. 1991-212; Skeen

v. Commissioner, 864 F.2d 93, 94 (9th Cir. 1989), aff’g Patin v. Commissioner, 88

T.C. 1086 (1987). Petitioner has established, by a preponderance of the evidence,

that his primary objective was to make a profit.2


      2
        Sec. 1.183-2(b), Income Tax Regs., sets forth a nonexclusive list of nine
factors to guide courts in analyzing a taxpayer’s profit objective. See Elliott v.
Commissioner, 90 T.C. 960 (1988), aff’d without published opinion, 899 F.2d 18
(9th Cir. 1990).
                                         -5-

[*5]   Petitioner undoubtedly enjoyed working with Plymouths. See sec.

1.183-2(b)(9), Income Tax Regs. Although his manner of carrying on this activity

was unsophisticated, it was businesslike. See id. subpara. (1). He had experience

operating a business and expertise relating to Plymouths; advertised online, in

print, and at live events; traveled outside California to acquire cars at bargain

prices; contracted with third parties to manufacture parts for him to resell and use

in restorations; and abandoned unprofitable aspects of his automobile activity (i.e.,

he downsized his inventory and stopped contracting for manufactured parts). See

id. subparas. (1), (2), (5). Furthermore, he devoted considerable time to, and

handled all material aspects of, his automobile activity. See id. subpara. (3).

Lastly, petitioner’s patent business was undergoing a downturn during the year in

issue, and petitioner, a prudent businessman, would not have squandered his hard-

earned money on an expensive hobby. See id. subpara. (8). In short, petitioner’s

automobile activity was a business, and his primary objective was to make a profit.

       Petitioner contends that he is entitled to deductions on Schedule C, Profit or

Loss From Business, relating to his automobile and patent businesses.3 Section

       3
       Pursuant to sec. 7491(a), petitioner has the burden of proof unless he
introduces credible evidence relating to an issue that would shift the burden to
respondent. See Rule 142(a). Our conclusions, however, are based on a
preponderance of the evidence, and thus the allocation of the burden of proof is
                                                                        (continued...)
                                        -6-

[*6] 162(a) allows as a deduction all the ordinary and necessary expenses paid or

incurred in carrying on a trade or business. Petitioner is, pursuant to section 167,

entitled to depreciation deductions relating to the garage, gantry crane, and

welding equipment and has established the cost, useful life, and previously

allowable deductions relating to these items.4 See Cluck v. Commissioner, 105

T.C. 324, 337 (1995). Pursuant to section 280F, his camcorder and wireless

router, however, were listed property because we are convinced that his camcorder

was not used exclusively in connection with his primary business and that both

items were not used exclusively at his regular business establishment. See sec.


      3
       (...continued)
immaterial. See Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 210 n.16
(1998).
      4
        The garage has a $27,900 cost basis and a 39-year recovery period and was
placed in service during April of the year in issue (i.e., petitioner had no
previously allowable depreciation deductions). See sec. 168(c). The gantry crane
and welding equipment have $739 and $229 cost bases, respectively, and 12-year
useful lives and were placed in service during the year in issue (i.e., petitioner had
no previously allowable depreciation deductions relating to these items). See secs.
168(i)(1) (stating that class lives are determined pursuant to sec. 167(m) and as if
the taxpayer has made the election pursuant to that subsection), 167(m) (before
repeal in 1990) (stating the Secretary may prescribe class lives); sec. 1.167(a)-
11(b)(4)(ii), Income Tax Regs. (stating that asset guideline classes, asset guideline
periods, and asset depreciation ranges will be established, supplemented, and
revised in the Internal Revenue Bulletin); Rev. Proc. 87-56, 1987-2 C.B. 674, 681-
682 (establishing the class lives of automobile manufacturing equipment); Rev.
Proc. 88-22, 1988-1 C.B. 785, 787 (revising the description of automobile
manufacturing equipment).
                                        -7-

[*7] 1.280F-6(b)(3), (5), Income Tax Regs. Petitioner did not meet the requisite

substantiation requirements and thus is not entitled to depreciation deductions

relating to these items. See secs. 162, 274(d); Boyd v. Commissioner, 122 T.C.

305, 320 (2004); Shea v. Commissioner, 112 T.C. 183, 186-187 (1999); sec.

1.274-5, Income Tax Regs.; sec. 1.274-5T, Temporary Income Tax Regs., 50 Fed.

Reg. 46014 (Nov. 6, 1985). He established, however, that he incurred, and is

entitled to deduct, a $900 storage expense relating to his Plymouths but did not

substantiate the remainder of the expenses at issue and is not entitled to deductions

relating to them. See secs. 162, 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-

90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a),

Income Tax Regs.

      Petitioner’s underpayment of tax relates to unsubstantiated deductions, and

thus, he is liable for a section 6662(a) accuracy-related penalty for negligence.5

See sec. 6662(b)(1), (c); sec. 1.6662-3(b)(1), Income Tax Regs. Petitioner has

neither contended nor established reasonable cause for his underpayment.6 See


      5
      Respondent bears, and has met, his burden of production relating to the sec.
6662(a) and (b)(1) accuracy-related penalty. See sec. 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446 (2001).
      6
       Petitioner’s understatement of income tax relating to the year in issue will
be determined pursuant to Rule 155. If the understatement exceeds both 10% of
                                                                       (continued...)
                                          -8-

[*8] sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. 438, 446 (2001). He is

also liable for a section 6651(a)(1) addition to tax for failure to timely file a

return.7 See United States v. Boyle, 469 U.S. 241, 245 (1985). Even if

established, his contention (i.e., that he did not timely file his return because he

was not aware of his tax liability) does not constitute reasonable cause. See

Henningsen v. Commissioner, 26 T.C. 528, 536 (1956), aff’d, 243 F.2d 954 (4th

Cir. 1957).

      Contentions we have not addressed are irrelevant, moot, or meritless.

      To reflect the foregoing,


                                                      Decision will be entered

                                                under Rule 155.




      6
        (...continued)
the tax required to be shown on the return and $5,000, it will be substantial, and
petitioner will be liable alternatively for a sec. 6662(a) and (b)(2) accuracy-related
penalty. See sec. 6662(d)(1)(A).
      7
       Respondent bears, and has met, the burden of production relating to the
sec. 6651(a)(1) addition to tax. See sec. 7491(c); Higbee v. Commissioner, 116
at 446. Petitioner bears the burden of proof relating to reasonable cause. See
Higbee v. Commissioner, 116 T.C. at 446.
