                              T.C. Memo. 2015-234



                         UNITED STATES TAX COURT



   VICTOR M. KANTCHEV AND DANIELA A. KANTCHEV, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23361-13.                         Filed December 3, 2015.


      Victor M. Kantchev and Daniela A. Kantchev, pro sese.

      Catherine S. Tyson, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      CHIECHI, Judge: Respondent determined deficiencies in, an addition

under section 6651(a)(1)1 to, and accuracy-related penalties under section 6662(a)

on petitioners’ Federal income tax (tax) as follows:


      1
       All section references are to the Internal Revenue Code (Code) in effect for
the years at issue. All Rule references are to the Tax Court Rules of Practice and
Procedure.
                                          -2-

 [*2]                                     Addition to           Accuracy-Related
                                           Tax Under                Penalty
        Year          Deficiency         Sec. 6651(a)(1)        Under Sec. 6662(a)
        2008            $9,360               $61.95                   $1,872
        2009             3,010                   ---                      602
        2010             2,950                   ---                      590

        The issues remaining for decision are:

        (1) Did petitioner Victor M. Kantchev engage in a certain photography

activity during each of the years 2008, 2009, and 2010 with the objective of

making a profit within the meaning of section 183? We hold that he did not.

        (2) Is petitioner Victor M. Kantchev entitled to certain losses that petitioners

claimed for their taxable year 2008? We hold that he is not.

        (3) Is petitioner Victor M. Kantchev liable for his taxable year 2008 for an

addition to tax under section 6651(a)(1)? We hold that he is.

        (4) Is petitioner Victor M. Kantchev liable for each of his taxable years

2008, 2009, and 2010 for the accuracy-related penalty under section 6662(a)? We

hold that he is so liable for (a) his taxable year 2008 to the extent stated below and

(b) each of his taxable years 2009 and 2010.
                                         -3-

[*3]                           FINDINGS OF FACT

       Petitioner Victor M. Kantchev (Mr. Kantchev) and respondent stipulated

some of the facts, and those facts are so found.2

       At the time petitioners filed the petition, they resided in Cape Girardeau,

Missouri.

       During 1990, Mr. Kantchev immigrated to the United States from Bulgaria.

While residing in Bulgaria, Mr. Kantchev received a master’s degree in video

production and television journalism and worked as a photojournalist.

       After moving to the United States, Mr. Kantchev began operating an

organization called the Institute for Scientific and Cultural Exchange. That

institute’s activities involved bringing people to the United States for business

seminars that Mr. Kantchev organized for it.

       During each of the years 2008, 2009, and 2010, the taxable years at issue,

Mr. Kantchev devoted most of his time to, and was preoccupied with, certain

activities relating to the production of a documentary titled “Fire Lily” for a film

company known as Victory Film Productions, Inc. (Victory Film), an S cor-

       2
         Petitioner Daniela A. Kantchev (Ms. Kantchev) did not sign the stipulation
of facts between respondent and Mr. Kantchev and did not appear at the trial in
this case. Respondent filed a motion to dismiss for lack of prosecution as to her.
We shall grant that motion and shall enter a decision with respect to Ms. Kantchev
that is the same as the decision that we shall enter with respect to Mr. Kantchev.
                                           -4-

[*4] poration, that he wholly owned. Victory Film’s production of “Fire Lily” did

not result in a profit for that company.

        Starting sometime before 2004 and continuing throughout each of the years

2008, 2009, and 2010 and thereafter, Mr. Kantchev spent some of his time doing

what he enjoys, namely, taking photographs with a nondigital camera, processing

the film to create negatives, scanning the negatives with a high-resolution scanner

to create digital images, modifying the digital images with computer software, and

printing the modified digital images on different mediums. Since at least 2008,

the first taxable year at issue, Mr. Kantchev’s photography activity has included

printing photographs on not only paper but also canvas and metal. (We shall refer

collectively to all of the photography-related activities that Mr. Kantchev under-

took starting sometime before 2004 and continuing throughout each of the years

2008, 2009, and 2010 and thereafter as a photography activity.) Mr. Kantchev’s

photography activity, which was inspired by the landscape photographer Ansel

Adams, focused on panoramic landscape as the subject of the photographs that he

took.

        During a period that is not established by the record but that included 2008,

2009, and 2010, Mr. Kantchev took a number of trips (American West trips) to

certain national parks in the American West to photograph certain subjects of
                                        -5-

[*5] particular interest to him. Those subjects included landscapes of the Ameri-

can West. Mr. Kantchev took at least one of his American West trips during each

of the years 2008, 2009, and 2010.

      During each of the years 2008, 2009, and 2010, Mr. Kantchev did not have

a written business plan for his photography activity. During each of the years

2006 through 2009, Mr. Kantchev did not have any gross receipts, and during

2010 he had gross receipts totaling $1,995, from his photography activity.

      During each of the years 2006 through 2010, Mr. Kantchev made certain

expenditures relating to his photography activity. During at least 2008 and 2009,

Mr. Kantchev used petitioners’ bank account and certain credit cards issued in

petitioners’ names to pay for those expenditures.

      In 2013, Mr. Kantchev compiled certain of his photographs in a large

hardbound book (large book). (We shall refer to the collection of photographs in

the large book as the American West collection.) In 2013, Mr. Kantchev also

compiled certain of his photographs from the American West collection in a

smaller hardbound book (small book). Thereafter, at a time not established by the

record, Mr. Kantchev attempted to sell all of the large books and all of the small
                                       -6-

[*6] books that he had compiled.3 He was successful in selling some of each type

of book.4

      At the time of the trial in this case, Mr. Kantchev’s son, Alexander V.

Kantchev (Alexander), who had a bachelor’s degree in economics and interna-

tional business and was pursuing a master’s degree in business administration

specializing in finance management, was helping Mr. Kantchev market certain of

the products that Mr. Kantchev had produced in his photography activity (Mr.

Kantchev’s photography-activity products), such as the large book and the small

book and certain of Mr. Kantchev’s photographs printed on metal and on canvas.

At times not established by the record, Alexander helped Mr. Kantchev market

Mr. Kantchev’s photography-activity products while he was abroad on certain

school trips.

      During each of the years 2008, 2009, and 2010, Ms. Kantchev worked as a

registered nurse for which she received wages. During at least some of those




      3
      The record does not establish how many large books and how many small
books Mr. Kantchev had compiled as of the time of the trial in this case.
      4
        There is no reliable evidence in the record establishing how many of the
large books and how many of the small books Mr. Kantchev was successful in
selling as of the time of the trial in this case.
                                         -7-

[*7] years, Ms. Kantchev was engaged in certain activities relating to psychother-

apy (psychotherapy activity).

      During each of the years 2008, 2009, and 2010, petitioners received certain

rent from the leasing of certain residential property.

      Petitioners filed Form 1040, U.S. Individual Income Tax Return (return), for

their taxable year 2005 (2005 return). In their 2005 return, petitioners showed

wages of $54,959 and claimed a business loss of $8,344 from Schedule C, Profit

or Loss From Business (Schedule C).5

      Petitioners filed a return for their taxable year 2006 (2006 return). In their

2006 return, petitioners showed wages of $53,732 and claimed a business loss of

$3,449 from Schedule C.6

      Victory Film filed Form 1120S, U.S. Income Tax Return for an S Corpora-

tion (S corporation return), for its taxable year 2007 (2007 S corporation return)

that Ivan Stoilov (Mr. Stoilov), a return preparer, had prepared. In its 2007




      5
       Petitioners’ 2005 return that is in the record contains two Schedules C, both
of which have not been completed except for showing “Victor M. Kantchev” and
“Daniela A. Kantchev”, respectively, as proprietors.
      6
       Petitioners’ 2006 return that is in the record contains two Schedules C, both
of which have not been completed except for showing “Victor M. Kantchev” and
“Daniela A. Kantchev”, respectively, as proprietors.
                                        -8-

[*8] S corporation return, Victory Film showed no total income and claimed

$95,702 of deductions and a loss (2007 loss) in the same amount.

      Petitioners filed a return for their taxable year 2007 (2007 return) that Mr.

Stoilov had prepared. In their 2007 return, petitioners showed wages of $54,972

relating to Ms. Kantchev’s work as a registered nurse. Petitioners included

Schedule C for Mr. Kantchev’s photography activity (2007 photography Schedule

C) as part of their 2007 return. In the 2007 photography Schedule C, petitioners

showed no gross receipts and no gross income and claimed total expenses of

$1,773 and a loss in the same amount. Petitioners also included Schedule C for

Ms. Kantchev’s psychotherapy activity (2007 psychotherapy Schedule C) as part

of their 2007 return. In the 2007 psychotherapy Schedule C, petitioners showed

no gross receipts and no gross income and claimed total expenses of $3,792 and a

loss in the same amount. Petitioners included Schedule E, Supplemental Income

and Loss (2007 Schedule E), as part of their 2007 return. In the 2007 Schedule E,

petitioners showed rents received of $1,677 and claimed total expenses of $6,952

and a loss of $5,275 from the leasing of certain residential property. In the 2007

Schedule E, petitioners also claimed a flowthrough loss (2007 flowthrough loss)

of $95,702 attributable to Victory Film’s claimed 2007 loss. Petitioners were
                                        -9-

[*9] unable to use all of petitioners’ claimed 2007 flowthrough loss for their

taxable year 2007.

      Victory Film filed an S corporation return for its taxable year 2008 (2008 S

corporation return) that Mr. Stoilov had prepared. In its 2008 S corporation

return, Victory Film showed no total income and claimed $9,550 of deductions

and a loss (2008 loss) in the same amount.

      On May 9, 2009, petitioners filed a return for their taxable year 2008 (2008

return) that Mr. Stoilov had prepared. In their 2008 return, petitioners showed

wages of $81,829 relating to Ms. Kantchev’s work as a registered nurse. Petition-

ers included Schedule A, Itemized Deductions (2008 Schedule A), as part of their

2008 return. In the 2008 Schedule A, petitioners claimed a loss carryover of

$50,565 (2007 loss carryover to 2008), which was the unused portion of the 2007

flowthrough loss. Petitioners included Schedule C for Mr. Kantchev’s photogra-

phy activity (2008 photography Schedule C) as part of their 2008 return. In the

2008 photography Schedule C, petitioners showed no gross receipts and no gross

income and claimed total expenses of $3,224 and a loss in the same amount.

Petitioners also included Schedule C for Ms. Kantchev’s psychotherapy activity

(2008 psychotherapy Schedule C) as part of their 2008 return. In the 2008

psychotherapy Schedule C, petitioners showed gross receipts of $21,897 and gross
                                       - 10 -

[*10] income in the same amount and claimed total expenses of $11,825 and a

profit of $10,072 (2008 psychotherapy Schedule C profit). Petitioners included

Schedule E (2008 Schedule E) as part of their 2008 return. In the 2008 Schedule

E, petitioners showed rents received of $2,224 and claimed total expenses of

$4,284 and a loss of $2,060 from the leasing of certain residential property. In the

2008 Schedule E, petitioners also claimed a flowthrough loss (2008 flowthrough

loss) of $9,550 attributable to Victory Film’s claimed 2008 loss.

      Petitioners filed a return for their taxable year 2009 (2009 return) that Mr.

Stoilov had prepared. In their 2009 return, petitioners showed wages of $104,498

relating to Ms. Kantchev’s work as a registered nurse. Petitioners included

Schedule C for Mr. Kantchev’s photography activity (2009 photography Schedule

C) as part of their 2009 return. In the 2009 photography Schedule C, petitioners

showed no gross receipts and no gross income and claimed total expenses of

$12,543 and a loss in the same amount. Petitioners included Schedule E (2009

Schedule E) as part of their 2009 return. In the 2009 Schedule E, petitioners

showed rents received of $2,591 and claimed total expenses of $4,830 and a loss

of $2,239 from the leasing of certain residential property.

      Petitioners filed a return for their taxable year 2010 (2010 return) that Mr.

Stoilov had prepared. In their 2010 return, petitioners showed wages of $112,522
                                        - 11 -

[*11] relating to Ms. Kantchev’s work as a registered nurse. Petitioners included

Schedule C for Mr. Kantchev’s photography activity (2010 photography Schedule

C) as part of their 2010 return. In the 2010 photography Schedule C, petitioners

showed gross receipts and gross income of $3,5007 and claimed total expenses of

$12,705 and a loss of $9,205. Petitioners included Schedule E (2010 Schedule E)

as part of their 2010 return. In the 2010 Schedule E, petitioners showed rents

received of $3,014 and claimed total expenses of $2,375 and a gain of $639 (2010

rental activity gain) from the leasing of certain residential property.

      On June 24, 2009, the Internal Revenue Service (IRS) issued KS/MO-2009-

45, “Missouri Severe Storms and Flooding Victims May Qualify for IRS Disaster

Relief” (IRS disaster relief notice). That notice stated in pertinent part that “the

IRS is postponing until July 7, 2009, certain deadlines for taxpayers who reside or

have a business in the disaster area. The postponement applies to return filing, tax

payment and certain other time-sensitive acts otherwise due between May 8, 2009,

and July 7, 2009.” The IRS disaster relief notice stated in pertinent part:

      Under section 7508A, the IRS gives affected taxpayers until May 8,
      2009, [sic] to file most tax returns (including individual, corporate,
      and estate and trust income tax returns; partnership returns, S corpo-
      ration returns, and trust returns; estate, gift, and generation-

      7
      Of the $3,500 of gross receipts that petitioners showed in the 2010
photography Schedule C, $1,505 was received in 2011.
                                        - 12 -

[*12] skipping transfer tax returns; and employment and certain excise tax
      returns), or to make tax payments, including estimated tax payments,
      that have either an original or extended due date occurring on or after
      May 8, 2009, and on or before July 7, 2009.

The IRS disaster relief notice showed petitioners’ area of residence, Cape

Girardeau, as one of the Federal disaster areas that qualified for the relief specified

in that notice.

      Respondent issued a notice of deficiency (notice) to petitioners for their

taxable years 2008, 2009, and 2010. In that notice, respondent determined, inter

alia, to disallow the respective expenses and the respective losses that petitioners

had claimed in the 2008 photography Schedule C, the 2009 photography Schedule

C, and the 2010 photography Schedule C. Respondent also determined in that

notice to disallow petitioners’ claimed 2007 loss carryover to 2008 and their

claimed 2008 flowthrough loss. Respondent also determined in the notice that

petitioners are liable for their taxable year 2008 for an addition to tax under

section 6651(a)(1) and that they are liable for each of their taxable years 2008,

2009, and 2010 for the accuracy-related penalty under section 6662(a).
                                         - 13 -

[*13]                                 OPINION

        Mr. Kantchev bears the burden of establishing that the determinations in the

notice that remain at issue are erroneous.8 See Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace, and Mr.

Kantchev must prove his entitlement to any deductions claimed. See INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992). The Code and the regulations

thereunder required Mr. Kantchev to maintain records sufficient to establish the

amount of any deduction claimed. See sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.

        Before turning to the issues that remain for decision, we shall evaluate the

testimony of Mr. Kantchev on which he relies in support of his positions with

respect to those issues, the testimony of Mr. Stoilov on which Mr. Kantchev relies

in support of certain of those issues, and the testimony of Alexander on which Mr.

Kantchev relies in support of one of those issues.

        We found the testimony of Mr. Kantchev to be in certain material respects

uncorroborated, general, self-serving, vague, and conclusory. We shall not rely on


        8
        Throughout his opening brief, Mr. Kantchev advances and relies on
numerous factual contentions that are not supported by the record established at
the trial in this case. We shall not rely on those contentions in resolving the issues
presented.
                                       - 14 -

[*14] the testimony of Mr. Kantchev to establish his respective positions with

respect to the issues presented. See, e.g., Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).

       We found the testimony of Mr. Stoilov to be in certain material respects

uncorroborated, general, and vague. We shall not rely on the testimony of Mr.

Stoilov to establish Mr. Kantchev’s respective positions with respect to the issues

presented about which Mr. Stoilov testified. See, e.g., id.

       We found the testimony of Alexander to be in certain material respects

uncorroborated, general, vague, conclusory and serving the interests of Mr.

Kantchev, his father.9 We shall not rely on the testimony of Alexander to establish

Mr. Kantchev’s position with respect to the issue presented about which Alexan-

der testified. See, e.g., id.

Section 183

       Section 183(a) generally limits the amount of expenses that a taxpayer may

deduct with respect to an activity “not engaged in for profit” to the deductions

provided in section 183(b). Section 183(b)(1) provides that deductions that would

be allowable without regard to whether such activity is engaged in for profit are to


       9
      Mr. Kantchev seemed to want us to treat Alexander as an expert in
marketing. We decline to do so. See Rule 143(g).
                                        - 15 -

[*15] be allowed. Section 183(b)(2) further provides that deductions which would

be allowable only if such activity is engaged in for profit are to be allowed, but

only to the extent that the gross income derived from such activity for the taxable

year exceeds the deductions allowable under section 183(b)(1). An activity is “not

engaged in for profit” if it is an activity other than one with respect to which

deductions are allowable for the taxable year under section 162 or section 212(1)

or (2). Sec. 183(c).

      In determining whether an activity is engaged in for profit for purposes of

section 183, the taxpayer must show that he or she engaged in the activity with an

actual and honest objective of making a profit. E.g., Keating v. Commissioner,

544 F.3d 900, 905 (8th Cir. 2009), aff’g T.C. Memo. 2007-309; Hulter v. Commis-

sioner, 91 T.C. 371, 392 (1988); Dreicer v. Commissioner, 78 T.C. 642, 645

(1982), aff’d without published opinion, 702 F.2d 1205 (D.C. Cir. 1983). Al-

though the taxpayer’s expectation of a profit need not be reasonable, he or she

must have a good-faith objective of making a profit. E.g., Keating v. Commis-

sioner, 544 F.3d at 905; Dreicer v. Commissioner, 78 T.C. at 645; Dunn v.

Commissioner, 70 T.C. 715, 720 (1978), aff’d on another issue, 615 F.2d 578 (2d

Cir. 1980); sec. 1.183-2(a), Income Tax Regs. The taxpayer bears the burden of

proving the requisite intent. E.g., Golanty v. Commissioner, 72 T.C. 411, 426
                                        - 16 -

[*16] (1979), aff’d without published opinion, 647 F.2d 170 (9th Cir. 1981);

Johnson v. Commissioner, 59 T.C. 791, 814 (1973), aff’d, 495 F.2d 1079 (6th Cir.

1974); see Dreicer v. Commissioner, 78 T.C. at 646.

      Whether a taxpayer engaged in an activity with the requisite profit objective

is determined from all the facts and circumstances. E.g., Hulter v. Commissioner,

91 T.C. at 393; Taube v. Commissioner, 88 T.C. 464, 480 (1987); Golanty v.

Commissioner, 72 T.C. at 426; sec. 1.183-2(a) and (b), Income Tax Regs. More

weight is given to objective facts than to the taxpayer’s mere statement of his or

her intent. E.g., Dreicer v. Commissioner, 78 T.C. at 645; sec. 1.183-2(a), Income

Tax Regs.

      Section 1.183-2(b), Income Tax Regs., lists the following factors that

should normally be taken into account in determining whether an activity is

engaged in for profit: (1) the manner in which the taxpayer carried on the activity,

(2) the expertise of the taxpayer or his advisors, (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 dissimilar activities, (6) the taxpayer’s history of income or loss

with respect to the activity, (7) the amount of occasional profit, if any, which is

earned, (8) the financial status of the taxpayer, and (9) the extent to which ele-
                                        - 17 -

[*17] ments of personal pleasure or recreation are involved. The list of factors in

the regulations is not exclusive, and other factors may be considered in determin-

ing whether an activity is engaged in for profit. No single factor is dispositive.

E.g., Golanty v. Commissioner, 72 T.C. at 426; sec. 1.183-2(b), Income Tax Regs.

The determination of a profit objective does not depend on counting the number of

factors that support each party’s position. E.g., Dunn v. Commissioner, 70 T.C.

715; sec. 1.183-2(b) Income Tax Regs. We consider now the factors in the

regulations.

      Manner in which Mr. Kantchev carried on his photography activity

      During each of the years 2008, 2009, and 2010, Mr. Kantchev did not have

a written business plan for his photography activity. Moreover, the record is

devoid of any evidence that Mr. Kantchev maintained any books or records

relating to his photography activity. Mr. Kantchev’s failure to have a business

plan and to maintain books or records relating to his photography activity indi-

cates that he did not conduct that activity in a businesslike manner.

      During at least 2008 and 2009, Mr. Kantchev used petitioners’ bank account

and certain credit cards issued in petitioners’ names to pay expenses relating to

Mr. Kantchev’s photography activity. Mr. Kantchev’s use of that bank account

and those credit cards to pay expenses relating to Mr. Kantchev’s photography
                                       - 18 -

[*18] activity indicates that Mr. Kantchev did not conduct that photography

activity in a businesslike manner.

      On the instant record, we find that factor (1) in section 1.183-2(b), Income

Tax Regs., does not support Mr. Kantchev’s position that he engaged in his

photography activity with an actual and honest objective of making a profit.

      Expertise of Mr. Kantchev or his advisors

      During 1990, Mr. Kantchev immigrated to the United States from Bulgaria.

While residing in Bulgaria, Mr. Kantchev received a master’s degree in video

production and television journalism and worked as a photojournalist.

      Mr. Kantchev’s work in Bulgaria as a photojournalist and his photography

activity in the United States do not establish that Mr. Kantchev has expertise in

sound “business * * * [and] economic * * * practices” of the photography business

or that even if he had that expertise, he used it when conducting his photography

activity. See sec. 1.183-2(b)(2), Income Tax Regs. That Mr. Kantchev may be a

very good photographer does not mean that he conducted his photography activity

using sound “business * * * [and] economic * * * practices” of the photography

business.

      Moreover, the record does not establish that Mr. Kantchev received or relied

on the advice of an expert in the field of photography. See sec. 1.183-2(b),
                                        - 19 -

[*19] Income Tax Regs. Although Alexander, who as of the time of the trial in

this case had a bachelor’s degree in economics and international business and was

pursuing a master’s degree in business administration specializing in finance

management, was helping Mr. Kantchev market Mr. Kantchev’s photography-

activity products, the record does not establish that Alexander had any practical

expertise in conducting any business, let alone a photography business.

      On the instant record, we find that factor (2) in section 1.183-2(b), Income

Tax Regs., does not support Mr. Kantchev’s position that he engaged in his

photography activity with an actual and honest objective of making a profit.

      Time and effort expended by Mr. Kantchev

      During each of the years 2008, 2009, and 2010, Mr. Kantchev devoted most

of his time to, and was preoccupied with, certain activities relating to the produc-

tion of “Fire Lily” for Victory Film. Although we have found that Mr. Kantchev

spent some of his time during each of the years 2008, 2009, and 2010 on his

photography activity, which he enjoyed, the record establishes that that time paled

in comparison with the time that he spent during each of those years on the

production of “Fire Lily”. We believe that the time that Mr. Kantchev spent on his

photography activity during each of the years 2008, 2009, and 2010 is consistent
                                        - 20 -

[*20] with his enjoyment of photography, as opposed to the operation of a photog-

raphy business.

      On the instant record, we find that factor (3) in section 1.183-2(b), Income

Tax Regs., does not support Mr. Kantchev’s position that he engaged in his

photography activity with an actual and honest objective of making a profit.

      Expectation that the assets used in the activity may appreciate in value

      Mr. Kantchev has not established through his testimony, and the record does

not otherwise establish, what specific assets Mr. Kantchev used in his photography

activity. Even if the record had established what those assets were, the record

does not establish the respective costs or values or the expected appreciation, if

any, of any such assets.

      On the instant record, we find that factor (4) in section 1.183-2(b), Income

Tax Regs., does not support Mr. Kantchev’s position that he engaged in his

photography activity with an actual and honest objective of making a profit.

      Success of Mr. Kantchev in carrying on other similar or dissimilar activities

      In addition to his photography activity, the record establishes that Mr.

Kantchev has been engaged in only two activities since immigrating to the United

States. After moving to the United States, Mr. Kantchev began operating an

organization called the Institute for Scientific and Cultural Exchange. That
                                         - 21 -

[*21] institute’s activities involved bringing people to the United States for

business seminars that Mr. Kantchev organized for it. The record does not

establish whether Mr. Kantchev was successful in carrying on the activities that he

undertook for the Institute for Scientific and Cultural Exchange.

      During at least each of the years 2008, 2009, and 2010, Mr. Kantchev

engaged in certain activities relating to the production of “Fire Lily” for Victory

Film. We have found that Victory Film’s production of “Fire Lily” did not result

in a profit for that company.

      On the instant record, we find that factor (5) in section 1.183-2(b), Income

Tax Regs., does not support Mr. Kantchev’s position that he engaged in his

photography activity with an actual and honest objective of making a profit.

      Mr. Kantchev’s history of income or loss with respect
      to the activity and amount of occasional profit, if any10

      Except for Mr. Kantchev’s taxable year 2010, Mr. Kantchev did not have

any gross receipts from his photography activity during any of his taxable years

2005 through 2010. During his taxable year 2010, Mr. Kantchev received $1,995




      10
           We consider together the two factors in the heading.
                                         - 22 -

[*22] in gross receipts from that activity.11 Moreover, for each of his taxable years

2005 through 2010, Mr. Kantchev claimed a loss relating to his photography

activity.

       Mr. Kantchev asserts that the reason he did not have sales or profits from

his photography activity during each of his taxable years 2008, 2009, and 2010

was that those years “were the worst possible years for the art market”. According

to Mr. Kantchev, “[t]he market contracted so much that it was almost impossible

to sell anything, any art.” However, Mr. Kantchev acknowledged during his

testimony that he spent most of his time during each of the years 2008, 2009, and

2010 on activities relating to Victory Film’s production of “Fire Lily”, not on his

photography activity, and that his spending so much time on activities for Victory

Film contributed to his not having made a profit from his photography activity for

any of those years.

       Mr. Kantchev and respondent stipulated that Mr. Kantchev’s photography

activity did not result in a profit for any of Mr. Kantchev’s taxable years 2005

through 2010. Mr. Kantchev asserted at trial that his photography activity resulted

in a profit for the taxable years after the last taxable year at issue that had ended as

of the time of the trial (i.e., 2011, 2012, and 2013). That is to say, Mr. Kantchev

       11
            See supra note 7.
                                         - 23 -

[*23] claims that that activity resulted in a profit for each of his taxable years

2011, 2012, and 2013. However, he failed to provide any evidence corroborating

that testimony.

      On the instant record, we find that factors (6) and (7) in section 1.183-2(b),

Income Tax Regs., do not support Mr. Kantchev’s position that he engaged in his

photography activity with an actual and honest objective of making a profit.

      Financial status

      Petitioners showed the wages that Ms. Kantchev received for her work as a

registered nurse in their return for each of their taxable years 2008 through 2010.

Petitioners showed the 2008 psychotherapy Schedule C profit of Ms. Kantchev in

their 2008 return. All of the wage income that petitioners showed in each of their

2008 return, 2009 return, and 2010 return was attributable to Ms. Kantchev. All

of the profit that petitioners showed in their 2008 return was attributable to Ms.

Kantchev’s 2008 psychotherapy Schedule C. The loss that petitioners claimed in

the 2008 photography Schedule C offset by approximately 4 percent the total

amount of the wages of Ms. Kantchev that petitioners reported in their 2008 return

and the 2008 psychotherapy Schedule C profit of Ms. Kantchev. The loss that

petitioners claimed in the 2009 photography Schedule C offset by approximately

12 percent the wages of Ms. Kantchev that petitioners reported in their 2009
                                        - 24 -

[*24] return. The loss that petitioners claimed in the 2010 photography Schedule

C offset by approximately 8 percent the total of the wages of Ms. Kantchev that

petitioners reported in their 2010 return and petitioners’ 2010 rental activity gain

shown in the 2010 Schedule E.

      On the record before us, we find that factor (8) in section 1.183-2(b),

Income Tax Regs., does not support Mr. Kantchev’s position that he engaged in

his photography activity with an actual and honest objective of making a profit.

      Extent to which elements of personal pleasure or recreation are involved

      Starting sometime before 2004 and continuing throughout each of the years

2008, 2009, and 2010 and thereafter, Mr. Kantchev engaged in his photography

activity. Mr. Kantchev acknowledged, and we have found as a fact, that he enjoys

photography and taking photographs of panoramic landscapes.

      On the instant record, we find that factor (9) in section 1.183-2(b), Income

Tax Regs., does not support Mr. Kantchev’s position that he engaged in his

photography activity with an actual and honest objective of making a profit.

      The record does not establish any other factors that support Mr. Kantchev’s

position that he engaged in his photography activity with an actual and honest

objective of making a profit.
                                        - 25 -

[*25] Based upon our examination of the entire record before us, we find that Mr.

Kantchev has failed to meet his burden of establishing that he engaged in his

photography activity with the objective of making a profit within the meaning of

section 183.

Petitioners’ claimed 2007 loss carryover
to 2008 and claimed 2008 flowthrough loss

      Victory Film, an S corporation that Mr. Kantchev wholly owned, claimed a

loss in its 2007 S corporation return. As a result, petitioners claimed Victory

Film’s claimed 2007 loss as a so-called flowthrough loss from an S corporation in

their 2007 return. Petitioners were unable to use all of their claimed 2007 flow-

through loss for their taxable year 2007. Consequently, petitioners claimed the

unused portion of that claimed flowthrough loss as a carryover loss in their 2008

return. Victory Film also claimed a loss in its 2008 S corporation return. As a

result, petitioners claimed Victory Film’s claimed 2008 loss as a flowthrough loss

in their 2008 return.

      It is respondent’s position that petitioners are not entitled to the claimed

2007 carryover loss to 2008 and the claimed 2008 flowthrough loss because

Victory Film did not make an election under section 181(a)(1) for its taxable year
                                         - 26 -

[*26] 2007 to treat certain costs of producing “Fire Lily” as expenses that are not

chargeable to capital account and that are deductible.

      Section 181(a)(1) allows a taxpayer to elect to “treat the cost of any qualified

film or television production as an expense which is not chargeable to capital

account.” If a taxpayer makes an election under section 181(a)(1), the taxpayer is

entitled to deduct any such cost.

      A taxpayer must make an election under section 181(a)(1) “in such manner

as prescribed by the Secretary and by the due date (including extensions) for filing

the taxpayer’s return of tax under this chapter for the taxable year in which costs of

the production are first incurred.” Sec. 181(c)(1). In order for the election to be

effective, “the taxpayer must attach a statement to the return stating that the

taxpayer is making an election under section 181”. Sec. 1.181-2T(c)(1), Tempo-

rary Income Tax Regs., 72 Fed. Reg. 6161-6162 (Feb. 9, 2007).

      Mr. Kantchev acknowledges that a statement making an election under

section 181(a)(1) “was not filed technically” with Victory Film’s 2007 S corpora-

tion return. As we understand his position, Mr. Kantchev does not dispute that

Victory Film did not attach a statement to its 2007 S corporation return in which it

indicated that it was making an election under section 181(a)(1), as required by

section 181(c)(1) and section 1.181-2T(c)(1), Temporary Income Tax Regs., supra.
                                         - 27 -

[*27] Mr. Kantchev maintains that Victory Film nonetheless is entitled for each of

its taxable years 2007 and 2008 to treat certain costs of producing a certain film

(film production costs) as expenses that are not chargeable to capital account and

that are deductible.

      In support of his position, Mr. Kantchev argues that although a statement

making an election under section 181(a)(1) “was not filed technically” with

Victory Film’s 2007 S corporation return, Victory Film’s deduction of certain film

production costs in its 2007 S corporation return nonetheless satisfies the election

requirement under section 181(a)(1). In advancing that argument, Mr. Kantchev

relies on certain legislative history of section 181. According to Mr. Kantchev,

“[t]he legislative history * * * states that: ‘deducting qualifying costs on the

appropriate tax return shall constitute a valid election’”.

      We reject Mr. Kantchev’s argument that the legislative history of section

181 shows that Congress intended to allow a taxpayer to make an election under

section 181(a)(1) by deducting the expenses for qualifying film production costs in

the taxpayer’s return for the year in which those costs are incurred. In quoting

certain legislative history of section 181 in support of his argument, Mr. Kantchev

intentionally or unintentionally omits part of the sentence that he quotes. The

entire sentence in that legislative history from which Mr. Kantchev quotes only an
                                        - 28 -

[*28] excerpt states: “The Committee intends that, in the absence of specific

guidance by the Secretary, deducting qualifying costs on the appropriate tax return

shall constitute a valid election.” H.R. Conf. Rept. No. 108-755, at 372 n.200

(2004), 2004 U.S.C.C.A.N. 1341, 1443. The temporary regulations under section

181 provide specific guidance on how a taxpayer is required to make an election

under that section. That guidance required Victory Film to attach a statement to

its 2007 return in which it indicated that it was making an election under section

181. See sec. 1.181-2T(c)(1), Temporary Income Tax Regs., supra.

      Mr. Kantchev also purports to rely on the so-called substantial compliance

doctrine in further support of his position that Victory Film is entitled for each of

its taxable years 2007 and 2008 to treat film production costs as expenses that are

not chargeable to capital account and that are deductible, even though Victory

Film did not attach a statement to its 2007 S corporation return in which it indi-

cated that it was making an election under section 181(a)(1). That is because, Mr.

Kantchev maintains, we “may apply the substantial compliance doctrine * * * to

excuse the petitioner from strict compliance with procedural regulatory require-

ments if the petitioner substantially complied by fulfilling the essential statutory

purpose.” Although Mr. Kantchev refers to the Federal tax law doctrine of
                                        - 29 -

[*29] substantial compliance, he does not appear to understand that doctrine.12

Instead, Mr. Kantchev appears to be arguing that, as long as Victory Film fulfilled

the intent of Congress in enacting section 181, Victory Film’s failure to satisfy the

election requirement that section 181(a)(1) imposes does not control whether

Victory Film’s “production qualifies for * * * the benefits of this election”.

Although his argument is not entirely clear, it appears that Mr. Kantchev is

arguing that Victory Film should be entitled to treat its film productions costs as

expenses that are not chargeable to capital account and that are deductible because

Congress intended section 181 to apply to the types of film production costs that

Victory Film incurred during 2007 as well as 2008.

      On the record before us, we reject Mr. Kantchev’s argument. That argument

ignores the requirement that section 181 explicitly imposes; namely, in order to

deduct certain qualifying film production costs, a taxpayer must make an election

to treat those costs as expenses that are not chargeable to capital account “in such

manner as prescribed by the Secretary and by the due date (including extensions)

      12
        In Samueli v. Commissioner, 132 T.C. 336, 345 (2009), we summarized
the substantial compliance doctrine as follows: “The substantial compliance
doctrine is a narrow equitable doctrine that courts may apply to avoid hardship
where a party establishes that the party intended to comply with a provision, did
everything reasonably possible to comply with the provision, but did not comply
with the provision because of a failure to meet the provision’s specific require-
ments.”
                                        - 30 -

[*30] for filing the taxpayer’s return of tax under this chapter for the taxable year

in which costs of the production are first incurred.” Sec. 181(c)(1).

      On the record before us, we find that Victory Film did not make an election

under section 181(a)(1) for its taxable year 2007 to treat certain film production

costs as expenses that are not chargeable to capital account and that are deductible.

      Based upon our examination of the entire record before us, we find that Mr.

Kantchev is not entitled for his taxable year 2008 to the 2007 loss carryover to

2008 and to the 2008 flowthrough loss.

Sections 6651(a)(1) and 6662(a)

      Respondent bears the burden of production with respect to the addition to

tax under section 6651(a)(1) and the accuracy-related penalties under section

6662(a) that respondent determined in the notice. See sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). To satisfy respondent’s burden of

production, respondent must come forward with “sufficient evidence indicating

that it is appropriate to impose” the penalties. Higbee v. Commissioner, 116 T.C.

at 446. Although respondent bears the burden of production with respect to the

addition to tax under section 6651(a)(1) and the penalty under section 6662(a),

respondent “need not introduce evidence regarding reasonable cause * * * or
                                         - 31 -

[*31] similar provisions. * * * [T]he taxpayer bears the burden of proof with

regard to those issues.” Id.

      Section 6651(a)

      Section 6651(a)(1) imposes an addition to tax for failure to file timely a tax

return. The addition to tax for failure to file under section 6651(a)(1) does not

apply if the failure to file timely is due to reasonable cause, and not due to willful

neglect. See sec. 6651(a)(1).

      Petitioners’ 2008 return was due without extensions on April 15, 2009. See

sec. 6072(a). Petitioners did not file their 2008 return until May 9, 2009.

      On the record before us, we find that respondent has carried respondent’s

burden of production under section 7491(c) with respect to the addition to tax

under section 6651(a)(1) that respondent determined for Mr. Kantchev’s taxable

year 2008.

      It is Mr. Kantchev’s position that petitioners’ failure to file timely a tax

return was due to reasonable cause, and not due to willful neglect. In support of

that position, Mr. Kantchev advances an argument (IRS disaster relief notice

argument) that the IRS in effect extended the due date for filing petitioners’ tax

return for their taxable year 2008 in the IRS disaster relief notice. That notice

stated in pertinent part: “[T]he IRS is postponing until July 7, 2009, certain
                                        - 32 -

[*32] deadlines for taxpayers who reside or have a business in the disaster area.

The postponement applies to return filing, tax payment and certain other time-

sensitive acts otherwise due between May 8, 2009, and July 7, 2009.”

      Although Mr. Kantchev’s IRS disaster relief notice argument is difficult to

follow because it is illogical and does not make sense,13 our understanding of that

argument is as follows. Mr. Kantchev maintains that petitioners resided in the

disaster area specified in the IRS disaster relief notice and that petitioners’ 2008

return was not due until October 15, 2009, because they had requested an auto-

matic extension of time until that date within which to file their tax return for their

taxable year 2008. Consequently, according to Mr. Kantchev, the filing date for

that tax return fell between May 8 and July 7, 2009. As a result, Mr. Kantchev

asserts that under the relief provided in the IRS disaster relief notice the date by

which petitioners were required to file their tax return for their taxable year 2008

was extended until July 7, 2009. Because petitioners filed that return on May 9,

2009, Mr. Kantchev asserts that it was timely filed.




      13
        If petitioners had in fact requested an automatic extension of time until
October 15, 2009, within which to file their tax return for their taxable year 2008,
as Mr. Kantchev asserts, it would make no sense, and it would be unnecessary, for
him to rely on the IRS disaster relief notice.
                                         - 33 -

[*33] Although Mr. Kantchev testified that petitioners had requested an automatic

extension of time within which to file their tax return for their taxable year 2008,

that testimony is not corroborated by any reliable evidence in the record.14 On the

record before us, we find that Mr. Kantchev has failed to carry his burden of

establishing that petitioners requested such an extension of time. On that record,

we further find that the IRS disaster relief notice is not applicable to petitioners’

tax return for their taxable year 2008 and did not extend the filing date for that

return to July 7, 2009. On the record before us, we find that Mr. Kantchev has

failed to carry his burden of establishing that his failure to file timely his 2008

return was due to reasonable cause, and not due to willful neglect.

      Based upon our examination of the entire record before us, we find that Mr.

Kantchev has failed to carry his burden of establishing that he is not liable for his

taxable year 2008 for the addition to tax under section 6651(a)(1).

      Section 6662(a)

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

underpayment to which section 6662 applies. Section 6662 applies to the portion

of any underpayment which is attributable to, inter alia, (1) negligence or disre-

      14
        Mr. Stoilov, petitioners’ return preparer, did not recall whether he in fact
requested on petitioners’ behalf an automatic extension of the time within which
petitioners were required to file their tax return for their taxable year 2008.
                                        - 34 -

[*34] gard of rules or regulations, sec. 6662(b)(1), or (2) a substantial understate-

ment of tax, sec. 6662(b)(2).

      The term “negligence” in section 6662(b)(1) includes any failure to make a

reasonable attempt to comply with the Code. Sec. 6662(c). Negligence has also

been defined as a failure to do what a reasonable person would do under the

circumstances. Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),

aff’g T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C. 686, 699

(1988), aff’d, 893 F.2d 656 (4th Cir. 1990). The term “negligence” also includes

any failure by the taxpayer to keep adequate books and records or to substantiate

items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. The term “disregard”

includes any careless, reckless, or intentional disregard. Sec. 6662(c).

      For purposes of section 6662(b)(2) an understatement is equal to the excess

of the amount of tax required to be shown in the tax return over the amount of tax

shown in the return. Sec. 6662(d)(2)(A). An understatement is substantial in the

case of an individual if the amount of the understatement for the taxable year

exceeds the greater of 10 percent of the tax required to be shown in the tax return

for that year or $5,000. Sec. 6662(d)(1)(A).

      The accuracy-related penalty under section 6662(a) does not apply to any

portion of an underpayment if it is shown that there was reasonable cause for, and
                                        - 35 -

[*35] that the taxpayer acted in good faith with respect to, such portion. Sec.

6664(c)(1). The determination of whether the taxpayer acted with reasonable

cause and in good faith depends on all the pertinent facts and circumstances,

including the taxpayer’s efforts to assess the taxpayer’s proper tax liability, the

knowledge and experience of the taxpayer, and the reliance on the advice of a

professional, such as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.

      Mr. Kantchev does not dispute that he is liable for the accuracy-related

penalty for each of his taxable years 2008, 2009, and 2010 with respect to the

portion of the underpayment for each of those years that is attributable to the loss

that petitioners claimed in each of the 2008 photography Schedule C, the 2009

photography Schedule C, and the 2010 photography Schedule C. He disputes only

the accuracy-related penalty for his taxable year 2008 with respect to the portion

of the underpayment for that year that is attributable to the 2007 loss carryover to

2008 and the 2008 flowthrough loss that petitioners claimed in the 2008 Schedule

A and the 2008 Schedule E, respectively. The reason he advances for disputing

that penalty is that he relied on Mr. Stoilov, the preparer of petitioners’ 2008

return.

      Respondent advances no argument on brief as to why we should impose on

Mr. Kantchev the accuracy-related penalty for his taxable year 2008 with respect
                                        - 36 -

[*36] to the portion of the underpayment for that year that is attributable to the

2007 loss carryover to 2008 and the 2008 flowthrough loss that petitioners

claimed in the 2008 Schedule A and the 2008 Schedule E, respectively.15 Respon-

dent argues only that petitioners’ claim of a loss in each of the 2008 photography

Schedule C, the 2009 photography Schedule C, and the 2010 photography Sched-

ule C was attributable to negligence.

      We conclude that Mr. Kantchev’s failure to dispute that he should not be

liable for each of his taxable years 2008, 2009, and 2010 for the accuracy-related

penalty with respect to the portion of the underpayment for each of those years

that is attributable to the loss that petitioners claimed in each of the 2008 photog-

raphy Schedule C, the 2009 photography Schedule C, and the 2010 photography

Schedule C is an abandonment by him of that issue. Even if we had not so

concluded, we nonetheless would find on the record before us that since Mr.

      15
        Respondent merely asserts on brief: “The deficiency for 2008 is
$9,360.00, which exceeds $5,000.” It is not clear what respondent had in mind in
making that assertion. If respondent intended to make the point that there is a
substantial understatement of tax within the meaning of sec. 6662(d)(1)(A) for Mr.
Kantchev’s taxable year 2008 and that respondent has therefore satisfied
respondent’s burden of production under sec. 7491(c) with respect to the
accuracy-related penalty for Mr. Kantchev’s taxable year 2008, we agree. That is
because we have held for respondent on the two issues presented to us under secs.
183 and 181, and Mr. Kantchev did not dispute at trial any other determination in
the notice that gave rise to the deficiency that respondent determined for his
taxable year 2008.
                                       - 37 -

[*37] Kantchev began his photography activity he has not undertaken to do with

respect to that activity what a reasonable person, who has an actual and honest

objective of making a profit from that activity, would have done.16 On that record,

we would further find that Mr. Kantchev has failed to carry his burden of showing

that he acted with reasonable cause and in good faith to assess whether petitioners

should claim for each of their taxable years 2008, 2009, and 2010 his photography

activity as an activity in Schedule C with respect to which he had the objective of

making a profit within the meaning of section 183. See sec. 6664(c)(1); sec.

1.6664-4(b)(1), Income Tax Regs.

      We conclude that respondent’s failure to advance an argument on brief as to

why we should impose on Mr. Kantchev the accuracy-related penalty for his

taxable year 2008 with respect to the portion of the underpayment for that year

that is attributable to the 2007 loss carryover to 2008 and the 2008 flowthrough

loss that petitioners claimed in the 2008 Schedule A and the 2008 Schedule E,

respectively, is an abandonment by respondent of the respective determinations


      16
        For example, the record is devoid of any evidence that Mr. Kantchev
maintained any books or records relating to his photography activity. For
purposes of sec. 6662, the term “negligence” includes any failure by the taxpayer
to keep adequate books and records. Sec. 1.6662-3(b)(1), Income Tax Regs. On
the record before us, we find that respondent has carried respondent’s burden of
production under sec. 7491(c).
                                        - 38 -

[*38] that respondent made in the notice to that effect. Even if we had not so

concluded, we nonetheless would find on the record before us that there was

reasonable cause for, and that Mr. Kantchev acted in good faith with respect to,

the portion of the underpayment for Mr. Kantchev’s taxable year 2008 that is

attributable to the claimed 2007 loss carryover to 2008 and the claimed 2008

flowthrough loss. See sec. 6664(c)(1); sec. 1.6664-4(b)(1), Income Tax Regs.

      Based upon our examination of the entire record before us, we find that Mr.

Kantchev has carried his burden of establishing that he is not liable for his taxable

year 2008 for the accuracy-related penalty under section 6662(a) with respect to

the portion of the underpayment for that year that is attributable to the 2007 loss

carryover to 2008 and the 2008 flowthrough loss. On that record, we further find

that Mr. Kantchev has failed to carry his burden of establishing that he is not liable

for his taxable year 2008 for the accuracy-related penalty under section 6662(a)

with respect to the portion of the underpayment for that year that is attributable to

the loss that petitioners claimed in the 2008 photography Schedule C. On the

record before us, we further find that Mr. Kantchev has failed to carry his burden

of establishing that he is not liable for each of his taxable years 2009 and 2010 for

the accuracy-related penalty under section 6662(a).
                                       - 39 -

[*39] We have considered all of the parties’ respective contentions and arguments

that are not discussed herein, and we find them to be without merit, irrelevant,

and/or moot.

      To reflect the foregoing,


                                                An order granting respondent’s

                                       motion to dismiss for lack of prosecution

                                       as to petitioner Daniela A. Kantchev and

                                       decision under Rule 155 will be entered.
