                   T.C. Summary Opinion 2009-93



                      UNITED STATES TAX COURT



         CHARLES L. AND DEBORAH J. BEASLEY, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15470-07S.               Filed June 10, 2009.



     Gerald C. Baker, for petitioners.

     Roger W. Bracken, for respondent.



     PANUTHOS, Chief Special Trial Judge:    This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect when the petition was filed.1   Pursuant to

section 7463(b), the decision to be entered is not reviewable by



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

any other court, and this opinion shall not be treated as

precedent for any other case.

     Respondent determined Federal income tax deficiencies and

accuracy-related penalties as follows:

                                                Penalties
             Year        Deficiency           Sec. 6662(a)

             2003          $17,589             $3,517.80
             2004            9,608              1,921.60
             2005            5,570              1,114.00


     The issues for decision are:    (1) Whether petitioners’

charter fishing activity was not engaged in for profit; and (2)

whether petitioners are liable for the accuracy-related

penalties.

                           Background

     Some of the facts have been stipulated, and we incorporate

the stipulation and accompanying exhibits by this reference.

Petitioners were married and living in Maryland during the years

at issue and at the time they filed the petition.

     During the years at issue Charles Beasley (petitioner) was

employed full time as an estimator and project manager for a

heating, ventilating, and air conditioning installer.      Mrs.

Beasley was employed full time as a Washington Metropolitan Area

Transit Authority police officer.    Petitioner completed high

school, as well as 5 years of trade school.    Mrs. Beasley also

completed high school.
                                - 3 -

     Petitioner is a self-described “waterman”, having spent much

of his life on the water fishing and boating.     Petitioner first

obtained his U.S. Coast Guard master license in 1995 and had it

renewed periodically.    Petitioner obtained his Maryland

commercial fishing license in 1996.     Sometime before 2003

petitioners contemplated starting a charter fishing business to

supplement their income.    Before 2003 petitioners did not have

any experience owning or operating a small business or a charter

fishing business.   During the years at issue petitioner

maintained several related licenses, including his Coast Guard

master license, a Maryland charter boat license, a Chesapeake Bay

fishing license, and a Maryland guide license.

     Between 2001 and early 2003 petitioners searched extensively

for a used boat suitable for charter fishing operations in and

around Chesapeake Bay.    During this time petitioner informally

surveyed charter boat captains regarding boat selection.

     On January 30, 2003, petitioner wrote a business plan which

indicated that he did not expect to make a profit initially but

hoped to reach profitability within 3 years.     He predicted the

fuel cost of each trip to be $50.    Petitioner inquired about the

fees set by other charter captains and set his charter fees

slightly below the prices reported to him.     Petitioner did not

seek any other advice while preparing his business plan.
                               - 4 -

     Petitioners ordered a custom boat on February 3, 2003, at a

contract price of $127,055.   This price was later reduced to

$122,435 to offset the cost of radar and depth-finding equipment

petitioners purchased and installed themselves.    The contract

anticipated delivery on September 1, 2003, but petitioners did

not receive the boat until November 3, 2003.   After a

modification to the propeller, petitioners deemed the boat

suitable for charter fishing operations on November 15, 2003.

The fishing season ended on November 30, 2003.    As a result of

the late delivery, petitioners canceled the charters they had

booked for October and November.   Petitioners did not receive any

income from the charter fishing activity in 2003.

     In 2004 petitioners made 21 paid fishing trips and at least

6 unpaid trips.   Petitioners’ gross receipts from their charter

fishing activity in 2004 was $8,630.   Petitioners did not pay for

any advertising for their charter fishing activity in 2004.

     In 2005 petitioners made 20 paid fishing trips and 1 or more

unpaid trips.   In an attempt to increase profitability,

petitioners took their boat to Virginia Beach, Virginia, in late

2005 to operate winter charters.

     Petitioners opened a bank account with SunTrust bank in

2003.   The name on the account was “Charles L. Beasley, AKA

Deborah J Charters.”   Petitioners deposited some of the receipts

from their charter fishing activity into their personal account
                                - 5 -

and deposited some of their wages, as well as other moneys, into

the SunTrust account.

       Petitioners booked fewer charters each year than their

business plan required for profitability.    The number of charter

fishing boats operating in petitioners’ area increased from about

50 in 2003 to about 150 in 2008.

       Petitioners did not keep any financial accounting records

for their charter fishing activity, and they did not consult an

accountant for advice on the financial operation of that

activity.    Petitioners’ evidence of income from charter fishing

is limited to a handwritten list of dates, amounts, and names.

Although they retained fuel and supply invoices as well as credit

card receipts for income tax preparation purposes, they did not

use their records to evaluate profitability.

       Petitioner believed that the charter boat might appreciate

in value; however, he had no expectation that the value of the

boat would increase enough to offset the losses incurred during

the initial years of the charter fishing activity.    Petitioners

believe that the charter fishing activity did not reduce their

capacity to perform the duties of their regular employment.     A

full-day fishing trip required each petitioner to work a 13-hour

day.
                                - 6 -

     Petitioners had their returns for each of the years at issue

prepared by Tax Consultants of North America.    Petitioners’ Forms

1040, U.S. Individual Income Tax Return, reported the following:

                                   2003         2004       2005

  Combined wages                 $128,290    $113,272     $93,162
  Itemized deductions              27,318      27,953      27,767
  Exemption amount                  9,150       9,300       9,600

  Schedule C Charter Activity

  Receipts                          -0-          8,630     9,490
  Expenses
    Depreciation                   73,800      19,680      11,808
    Supplies                       12,308      13,879      11,514
    Other expenses                 12,031      12,567      10,138
    Interest on loan                2,946       9,800       9,799
  Profit (loss)                  (101,085)    (47,296)    (33,769)

  Taxable Income
  and Overpayment

  Taxable income                     -0-        33,179    28,475
  Tax                                -0-         4,261     3,541
  Withholding                      14,706       11,518     8,957
  Overpayment (refund)            (14,706)      (7,257)   (5,416)


     Respondent issued a notice of deficiency on April 18, 2007.

Respondent disallowed petitioners’ expense deductions claimed on,

Schedule C, Profit or Loss From Business, in excess of their

Schedule C income, and determined deficiencies for 2003, 2004,

and 2005.   Additionally, respondent determined a section 6662

accuracy-related penalty for each year.
                              - 7 -

                           Discussion

     In general, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears

the burden of proving that these determinations are in error.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Pursuant to section 7491(a), the burden of proof as to factual

matters shifts to the Commissioner under certain circumstances.

Petitioners have alleged that section 7491(a) applies but have

not established compliance with its requirements.   Petitioners

therefore bear the burden of proof.

I.   Whether Petitioners’ Charter Fishing Activity Was Not
     Engaged in for Profit

     Respondent contends that petitioners’ deductions from their

charter fishing activity are subject to the limitations of

section 183 because the activity was not a trade or business.     If

a taxpayer is not engaged in a trade or business under section

162, he generally may deduct the expenses related to an activity

“not engaged in for profit” only to the extent of the gross

income derived from the activity for the taxable year.   Sec.

183(a) and (b)(2).

     Section 162(a) provides that a taxpayer who is carrying on a

“trade or business” may deduct ordinary and necessary expenses

incurred in connection with the operation of the business.    To be

engaged in a trade or business within the meaning of section 162,

“the taxpayer’s primary purpose for engaging in the activity must
                               - 8 -

be for income or profit.”   Commissioner v. Groetzinger, 480 U.S.

23, 35 (1987).   Profit means economic profit, independent of tax

savings.   Surloff v. Commissioner, 81 T.C. 210, 233 (1983).

     A taxpayer seeking to deduct trade or business expenses

under section 162 must establish that the underlying activity was

engaged in with an actual and honest profit objective.    Dreicer

v. Commissioner, 78 T.C. 642, 645 (1982), affd. without published

opinion 702 F.2d 1205 (D.C. Cir. 1983).   The taxpayer must have

entered into the activity, or continued the activity, with the

actual, honest, and bona fide objective of making a profit.

Filios v. Commissioner, 224 F.3d 16, 23 (1st Cir. 2000), affg.

T.C. Memo. 1999-92; Dreicer v. Commissioner, supra at 644-645;

sec. 1.183-2(a), Income Tax Regs.   Objective indicia may be

considered to establish the taxpayer’s true intent.   Dreicer v.

Commissioner, supra at 644-645.

     Because petitioners do not meet the statutory presumption of

profit,2 we consider whether they engaged in the charter fishing

activity for profit.   We consider all the facts and circumstances

in determining whether a taxpayer entered into the activity for

profit, placing greater weight upon objective facts than the

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



     2
       Sec. 183(d) generally provides that a taxpayer who engages
in an activity that earns a profit in 3 of 5 consecutive years
may be entitled to an electable presumption of a profit motive in
the other 2 years.
                               - 9 -

at 645.   The following nine nonexclusive factors are relevant in

determining whether the taxpayer engaged in the activity for

profit:   (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 dissimilar activities; (6) the

taxpayer’s history of income or losses with respect to the

activity; (7) the amount of occasional profits, if any, which are

earned; (8) the financial status of the taxpayer; and (9) the

elements of personal pleasure or recreation.   Sec. 1.183-2(b),

Income Tax Regs.

     1.   Manner in Which the Taxpayer Carries On the Activity

     The fact that the taxpayer carries on the activity in a

businesslike manner may indicate that the activity is engaged in

for profit.   Elliott v. Commissioner, 90 T.C. 960, 972 (1988),

affd. without published opinion 899 F.2d 18 (9th Cir. 1990);

Engdahl v. Commissioner, 72 T.C. 659, 666 (1979); sec. 1.183-

2(b)(1), Income Tax Regs.   Relevant indicators include

maintaining complete and accurate books and records, obtaining a

business license, maintaining a separate business bank account,

developing a written business plan, having a plausible strategy

for earning a profit, and attempting changes in order to improve
                              - 10 -

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

Holowinski v. Commissioner, T.C. Memo. 1997-168; Ellis v.

Commissioner, T.C. Memo. 1984-50; sec. 1.183-2(b)(1), Income Tax

Regs.

     Petitioners did not keep a journal or a book of accounts for

their charter fishing activity.   Petitioners instead retained

numerous credit card receipts and fuel and supply invoices that

reflect some of the expenses incurred with respect to that

activity.   Petitioners also produced a list of amounts and dates

that generally reflect their charter fishing income.   We are not

convinced that petitioners’ recordkeeping represented anything

other than an effort to substantiate expenses claimed on their

returns.3

     For a taxpayer’s books and records to reflect a businesslike

activity, the taxpayer’s books and records must provide a method

for measuring profits, controlling expenses, and evaluating the

overall performance of the operation.   Golanty v. Commissioner,

72 T.C. 411, 430 (1979), affd. without published opinion 647 F.2d

170 (9th Cir. 1981).   Petitioners did not present any evidence



     3
       We note that the acceptable level of detail required of
books and records can vary according to the type of venture.
While rudimentary bookkeeping could have been acceptable for an
activity such as charter fishing, petitioners’ records do not
begin to rise to that level. Furthermore, while substantiating
expenses is necessary for any taxpayer, it is not sufficient to
satisfy the books of account requirement of sec. 1.183-2(b)(1),
Income Tax Regs.
                              - 11 -

that they prepared and maintained records to evaluate the

profitability of their operations.4    Petitioners’ failure to keep

contemporaneous accounting records undermines their asserted

profit objective.

     Petitioner did obtain the licenses required to run a sole

proprietorship charter fishing business for profit in Maryland.

These licenses, however, appear to be necessary for any charter

fishing activity to take place, and are not necessarily

indicative of an actual profit motive.    We also note that

petitioner obtained his Coast Guard master license and commercial

fishing license several years before petitioners began any

charter fishing activity.   Petitioner’s licenses do not support,

nor undercut, the asserted profit objective.

     While petitioners maintained a separate bank account

designated for the charter fishing activity, they commingled

charter fishing and personal funds.5   Such commingling does not

support a finding that petitioners conducted the activity in a

businesslike manner that would demonstrate a profit objective.

See Ballich v. Commissioner, T.C. Memo. 1978-497.



     4
       To the contrary, petitioner testified on cross-examination
that he was surprised at trial to learn just how unprofitable his
business was during the years at issue.
     5
       New ventures often require capital infusions, which might
explain deposits of personal funds into a business bank account
but would not explain deposits of business funds into a personal
account.
                              - 12 -

     Petitioners introduced a signed and dated business plan.

While the existence of a plan supports the asserted profit

objective, it cannot alone prove such an objective.

     Petitioners made changes to their charter fishing activity

at the end of 2005 and added winter charters from Virginia Beach,

Virginia.   Petitioners’ decision to expand their charter fishing

season supports their asserted profit objective.6

     On balance, this factor supports respondent’s determination.

     2.   Expertise of the Taxpayers or Their Advisers

     Preparation for the activity by extensive study of its

accepted business and economic practices or consultation with

experts may indicate that the taxpayer has a profit objective

where the taxpayer carries on the activity in accordance with

those practices.   Sec. 1.183-2(b)(2), Income Tax Regs.

     Before petitioners began their charter fishing activity,

petitioner called other charter operators in the area to

determine their pricing structure in order to establish

competitive rates.   Petitioner’s calls extracted little

information regarding business practices or the likelihood of




     6
       We note however, that while this change in business
practice may have provided additional income, it did not result
in a profit. Petitioners’ 2006 and 2007 Schedules C include
marked increases in receipts, but they still report substantial
losses.
                               - 13 -

success in the charter fishing business.7     Petitioners failed to

establish that they acquired any expertise or took reasonable

steps to acquire such expertise in the accepted business or

accounting practices required to run a profitable business.

     Petitioners relied on their knowledge of recreational

fishing to make their charter fishing activity profitable,

apparently not recognizing that they would also have to control

expenses relative to income.   The lack of consultation with small

business experts undercuts petitioners’ claim that they engaged

in the charter fishing activity with a profit objective.

     This factor supports respondent’s determination.

     3.   Time and Effort Expended

     The fact that a taxpayer devotes much of his personal time

and effort to carrying on the activity may indicate an intent to

profit, particularly if the activity does not have substantial

personal or recreational elements.      Sec. 1.183-2(b)(3), Income

Tax Regs.

     During the years at issue petitioners each maintained full-

time employment that was not related to their charter fishing

activity.   Petitioners testified that a standard 8-hour charter

fishing trip often required 13 hours of work from each

petitioner.   Nevertheless, as we discuss in greater detail below,


     7
       Petitioner testified that charter captains are, by and
large, a tight-lipped group, particularly when speaking to a
potential competitor about business practices.
                                 - 14 -

charter fishing has substantial personal or recreational aspects

for petitioners.    Id.    The time petitioners spent working on the

charter fishing activity is also consistent with their use of the

boat for recreation.      See Warden v. Commissioner, T.C. Memo.

1995-176 (finding that the time taxpayers spent cleaning and

maintaining their yacht was consistent with the use of the yacht

for recreation), affd. without published opinion 111 F.3d 139

(9th Cir. 1997).

     This factor is neutral.

     4.     Expectation That Assets Used in the Activity May
            Appreciate in Value

     A taxpayer’s expectation that assets such as land and other

tangible property used in an activity may appreciate in value and

generate an overall profit may indicate that the taxpayer has a

profit objective as to that activity.     Sec. 1.183-2(b)(4), Income

Tax Regs.    An overall profit is present if net earnings and

appreciation are sufficient to recoup losses sustained in prior

years.    Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), affd.

379 F.2d 252 (2d Cir. 1967).

     Petitioners acknowledge that they had no expectation that

the value of the boat would increase so much that it would offset

the losses incurred during the first 3 years of their charter

fishing activity.

     This factor does not support petitioners’ asserted profit

objective.
                               - 15 -

     5. Success of Taxpayer in Carrying On Other Similar or
        Dissimilar Activities

     The fact that the taxpayer has engaged in similar activities

in the past and converted them from unprofitable to profitable

enterprises may indicate that he is engaged in the present

activity for profit, even though the activity is presently

unprofitable.    Sec. 1.183-2(b)(5), Income Tax Regs.

     Though petitioners attempt to connect their prior work

experience and their charter fishing activity, we do not find any

evidence that petitioners’ estimating and law enforcement

experience would indicate that they could transform an

unprofitable charter fishing enterprise into a profitable one.

      This factor does not support petitioners’ asserted profit

objective.

     6.   History of Income or Losses

     A series of losses during the initial stage of an activity

is not necessarily an indication that the activity is not engaged

in for profit.    Sec. 1.183-2(b)(6), Income Tax Regs.   However,

continued losses which cannot be explained may indicate that the

activity is not engaged in for profit.    Id.

     Petitioners did not earn charter fishing receipts in excess

of their expenses during any of the tax years at issue.

Petitioners claimed losses of $101,085 for 2003, $47,296 for

2004, and $33,769 for 2005.    Petitioners had no clients and no
                               - 16 -

trips in 2003, 14 clients and 21 trips in 2004, and 15 clients

and 20 trips in 2005.

     Although petitioners have offered explanations for continued

losses, such as a slow economy and rising fuel costs, their

reasons do not rise to the level necessary to offset the size of

their losses for every year of their charter fishing activity.

Further, petitioner’s testimony regarding the tripling of the

number of charter fishing operations in his area does not support

his contention of a weak charter fishing market.   We conclude

that this factor does not support petitioners’ asserted profit

objective.

     7.   Amount of Occasional Profits

     An opportunity to earn a substantial profit in a highly

speculative venture is ordinarily sufficient to indicate that the

activity is engaged in for profit even though losses or only

occasional small profits are actually generated.   Sec. 1.183-

2(b)(7), Income Tax Regs.

     Petitioners’ charter fishing activity is not a highly

speculative venture, such as oil prospecting.   See sec. 1.183-

2(a), Income Tax Regs.   Further, there is no indication that a

windfall profit may ever be generated by this particular

activity.    Therefore, this factor does not support petitioners’

asserted profit objective.
                              - 17 -

     8.   Taxpayer’s Financial Status

     The fact that the taxpayer does not have substantial income

from sources other than the activity may indicate that the

activity is engaged in for profit.     Sec. 1.183-2(b)(8), Income

Tax Regs.   Substantial income from other sources may indicate the

lack of a profit objective, however, particularly if there are

personal or recreational elements in the activity.     Id.

      Petitioners’ wage income for each of the 3 years at issue

is substantial; petitioners reported combined wages of $128,290

in 2003, $113,272 in 2004, and $93,162 in 2005.     Because of their

Schedule C losses, petitioners realized significant tax savings

for each year at issue.   Considering the personal and

recreational elements involved in petitioners’ charter fishing

activity, as we discuss below, this factor undercuts petitioners’

claim that they engaged in the activity with an intent to profit

without regard for tax savings.   See Surloff v. Commissioner, 81

T.C. at 233; sec. 1.183-2(b)(8), Income Tax Regs.

     This factor supports respondent’s determination.

     9.   Elements of Personal Pleasure

     The presence of personal motives in carrying on an activity

may indicate that the activity is not engaged in for profit,

particularly where there are recreational or personal elements

involved.   Sec. 1.183-2(b)(9), Income Tax Regs.    However, the

fact that the taxpayer derives personal pleasure from engaging in
                               - 18 -

the activity, alone, is insufficient to foreclose for-profit

treatment.   Id.

      Mr. Beasley has been an avid waterman all his life.   Fishing

can be a decidedly recreational activity, and there is no

evidence that petitioners do not derive personal pleasure from

the activity.    The personal pleasure or recreation that

petitioners derive from the charter fishing activity, while not

preclusive of a profit motive, also does not support petitioners’

assertion that they engaged in the activity primarily for profit.

See id.

II.   Summary of Factors

      Having considered the above factors and recognizing that no

one factor is controlling, we conclude that even though

petitioners may have entered into the charter fishing activity

hoping for eventual profitability, the facts presented do not

support a finding that, during the years at issue, petitioners

engaged in their charter fishing activity with a profit objective

as defined by section 1.183-2(b), Income Tax Regs.    Accordingly,

we hold that respondent correctly applied section 183 by allowing

expense deductions only to the extent of petitioners’ income from

charter fishing.

III. Penalties

      By virtue of section 7491(c), the Commissioner has the

burden of production with respect to the accuracy-related
                                   - 19 -

penalty.    To meet this burden, he must produce sufficient

evidence indicating that it is appropriate to impose the penalty.

See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).          Once the

Commissioner meets this burden of production, a taxpayer must

come forward with persuasive evidence that the Commissioner’s

determination is incorrect.        Rule 142(a); see Higbee v.

Commissioner, supra.

     Respondent determined accuracy-related penalties under

section 6662, which provides for a penalty equal to 20 percent of

an underpayment if the underpayment is due to a substantial

understatement of income tax.       Sec. 6662(a) and (b)(2).    Section

6662(d)(1)(A) defines a substantial understatement of income tax

as an understatement that exceeds the greater of:       (i) 10-percent

of the tax required to be shown on the return for the taxable

year; or (ii) $5,000.      For each year at issue petitioners’ return

contained an understatement of income tax that meets the section

6662(d)(1)(A) definition, as follows:

                    Tax Required
           Year      to be Shown   Tax Shown   Understatement

           2003        $17,589         -0-        $17,589
           2004         13,869       $4,261         9,608
           2005          9,111       3,541          5,570


     A taxpayer may avoid the application of an accuracy-related

penalty by proving that he acted with reasonable cause and in

good faith.       See sec. 6664(c)(1); see also Higbee v.
                                - 20 -

Commissioner, supra at 446-447; sec. 1.6664-4(a), Income Tax

Regs.   We analyze whether a taxpayer acted with reasonable cause

and good faith by examining the relevant facts and circumstances

and, most importantly, the extent to which the taxpayer attempted

to assess his proper tax liability.      See Neely v. Commissioner,

85 T.C. 934, 947 (1985); Stubblefield v. Commissioner, T.C. Memo.

1996-537; sec 1.6664-4(b)(1), Income Tax Regs.     In order for the

reasonable cause exception to apply, the taxpayer must prove that

he exercised ordinary business care and prudence as to the

disputed item.    See Neonatology Associates, P.A. v. Commissioner,

115 T.C. 43, 98 (2000), affd. 299 F.3d 221 (3d Cir. 2002).

     Reliance upon the advice of a tax professional may establish

reasonable cause and good faith for the purpose of avoiding

liability for the section 6662(a) penalty.     See United States v.

Boyle, 469 U.S. 241, 250 (1985).    Reliance on a tax professional

is not an “absolute defense” but merely “a factor to be

considered.”     Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

As a general rule, a taxpayer cannot shift the responsibility of

filing an accurate return to a return preparer.      Metra Chem Corp.

v. Commissioner, 88 T.C. 654, 662 (1987).     However, we have held

that under certain circumstances the taxpayer may avoid the

imposition of a penalty if there was good faith reliance by the

taxpayer on the advice of a competent adviser.      Jackson v.
                              - 21 -

Commissioner, 86 T.C. 492, 539-540 (1986), affd. 864 F.2d 1521

(10th Cir. 1989).   Whether reasonable cause exists when a

taxpayer has relied on a tax professional to prepare a return

must be determined on the basis of all of the facts and

circumstances.   See Neonatology Associates, P.A. v. Commissioner,

supra at 98.   The taxpayer claiming good faith reliance on a

competent adviser must demonstrate that:    “(1) The adviser was a

competent professional who had sufficient expertise to justify

reliance, (2) the taxpayer provided necessary and accurate

information to the adviser, and (3) the taxpayer actually relied

in good faith on the adviser’s judgment.”    Id. at 99.   Reliance

on a return preparer is not reasonable where even a cursory

review of the return would reveal inaccurate entries.     See Pratt

v. Commissioner, T.C. Memo. 2002-279.

     For the years at issue petitioners had their Federal tax

returns prepared by a professional preparer.   There is no

evidence that petitioners’ preparer was not competent or that

petitioners were not justified in relying on the preparer’s

expertise in preparing tax returns for individuals and sole

proprietors.   It does not appear from the record that petitioners

were anything other than forthright with their preparer.

Petitioners were not educated in accounting or tax return

preparation.   Petitioners apparently relied on the preparer’s

judgment to complete and enter amounts on proper schedules on the
                              - 22 -

returns.   It appears that petitioners provided accurate

information to their preparer for completion of their returns.

     This is not a situation of omission of gross receipts or

exaggeration of expenses, but rather the proper reporting of

income and expenses governed by the Code, the regulations, and

the interpretation of the Code by myriad cases.     On the basis of

the entire record and considering the demeanor and candor of

petitioners, we are satisfied that petitioners acted in good

faith in operating their charter fishing activity and in

reporting the income and expenses therefrom.     The Court finds

that petitioners’ reliance on their preparer was reasonable.

      We therefore do not sustain respondent’s determination that

petitioners are liable for the accuracy-related penalties

pursuant to section 6662.

     To reflect our disposition of the issues,


                                         Decision will be entered

                                    for respondent with respect to

                                    the deficiencies and for

                                    petitioners with respect to

                                    the penalties.
