                            T.C. Memo. 1995-473



                          UNITED STATES TAX COURT



       GENERAL K. HILLIARD AND IDA M. HILLIARD, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 4929-93.                   Filed October 3, 1995.



       Jeffrey A. Berchenko, for petitioners.

       James P. Thurston and Bryce A. Kranzthor, for respondent.



                            MEMORANDUM OPINION

       GERBER, Judge:     Respondent determined deficiencies in

petitioners' Federal income tax and additions to tax for the

taxable years 1986, 1987, and 1988 as follows:

                                     Additions to Tax
                           Sec.        Sec.           Sec.     Sec.
Year       Deficiency   6653(a)(1) 6653(a)(1)(A) 6653(a)(1)(B) 6661
                                                      1
1986       $38,390         --         $1,920                  $9,598
                                                      1
1987        37,345         --          1,867                   9,336
1988         8,097        $405          --            --       2,024
       1
       50 percent of the interest with respect to the portions of
the underpayments which are attributable to negligence.
     After concessions1 by the parties, the issues remaining for

our consideration are:   (1) Whether petitioners are entitled to

deduct losses from charter activities of two boats, which were

passed through to petitioners from their wholly owned S

corporation, "Island Ventures, Inc."; (2) whether petitioners are

entitled to deduct losses attributable to the rental of

residential property located in the Lake Tahoe area (the Tahoe

property); (3) whether petitioners are entitled to deduct

automobile expenses attributable to Mrs. Hilliard's self-

employment activity in an amount greater than that allowed by

respondent and, if not, whether petitioners are liable for

additional self-employment tax; (4) whether petitioners are

entitled to deduct mortgage interest in an amount greater than

that allowed by respondent; (5) whether petitioners are liable

for additions to tax for negligence; and (6) whether petitioners

are liable for additions to tax for substantial understatement of

their tax liability.

     The question of whether petitioners are entitled to deduct



     1
       Petitioners conceded that: (1) Respondent's $11,992
investment tax credit recapture adjustment for 1987 is correct;
(2) respondent's adjustments regarding the Tahoe property in
items d, e, and i in the Adjustment to Income (Supplemental
Schedule) in the notice of deficiency are correct if the Court
should find that the Tahoe rental activity was not for profit
under sec. 183, I.R.C., and if the activity was for profit, then
the loss limitations of sec. 280A(e), I.R.C., would apply; (3)
they are not entitled to an interest deduction for $7,153 of
points claimed for 1987; (4) $2,625 of interest claimed for 1987
with respect to the Tahoe property is not allowable; (5) $1,385
of the investment interest claimed for 1988 is not allowable; and
(6) $460 of personal interest claimed for 1987 is not allowable.
the losses from boat chartering and residential rental activities

concerns whether those endeavors were "not engaged in for profit"

within the meaning of section 183.2   For simplicity and clarity,

we set forth the background facts and legal principles applying

generally to the boating and residential rental activities.

Thereafter, combined findings of fact and legal discussion are

presented in separate sections for each issue.


I. Background3

     Petitioners, at all relevant times, were married, filed

joint income tax returns, and resided in Orinda, California.

Petitioners are medical doctors:   Mrs. Hilliard is a psychiatrist

and Mr. Hilliard is a cardiologist.   They practice medicine on a

full-time basis.

     Mr. Hilliard has been involved in sailing as a hobby since

1966, and he purchased a small sailboat in 1970 and a fixed-keel

boat in 1975 or 1976 for his personal use.

     On their 1986, 1987, and 1988 joint tax returns, petitioners

jointly reported wages and net income from the practice of

medicine in amounts ranging from approximately $166,000 to

$230,000 per year.   Against the income reported, petitioners

claimed losses attributable to boating and residential rental

activities.   Petitioners reported boat chartering income and


     2
       Section references are to the Internal Revenue Code in
effect for the years in issue. Rule references are to this
Court's Rules of Practice and Procedure.
     3
       The parties' stipulations of facts and exhibits are
incorporated by this reference.
expenses for the years 1984 through 1988 as follows:

                   1984      1985      1986     1987    1988

Income             none     $1,250    $2,900    none    none
Expenses
  Repairs                   8,534      2,380   $4,029
  Insurance,
   taxes, fees              20,810    15,387    5,500   $939
  Interest                  17,333    20,366   10,520
  Depreciation    $28,482   47,851    47,260   39,875
Claimed Loss       28,482   93,278    82,493   59,924      939

Petitioners also claimed losses from rental activity in the

amounts of $19,068, $18,794, $19,649, $19,347, and $16,107 for

the years 1984, 1985, 1986, 1987, and 1988, respectively.


II.   General Legal Principles

      As a general rule, the Commissioner's determinations are

afforded a presumption of correctness, and the taxpayer bears the

burden of proving that those determinations are erroneous.       Rule

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

deductions are a matter of legislative grace, and the taxpayer

bears the burden of proving that he is entitled to claimed

deductions.   Rule 142(a); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934); Welch v. Helvering, supra.   This includes

the burden of substantiating the amount and purpose of the item

claimed.   Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd.

per curiam 540 F.2d 821 (5th Cir. 1976).

      In determining whether petitioners are entitled to deduct

losses from their boat chartering and residential rental

activities, we must decide whether these activities were engaged

in for profit within the meaning of section 183.   Section 183(a)
provides generally that, if an activity is not engaged in for

profit, no deduction attributable to such activity shall be

allowed except as provided in that section.   Section 183(b)(1)

provides that deductions that are allowable without regard to

whether the activity is engaged in for profit (e.g., real

property taxes) shall be allowed, and section 183(b)(2) provides

that deductions that would be allowable only if the activity were

engaged in for profit shall be allowed, "but only to the extent

that the gross income derived from such activity for the taxable

year exceeds the deductions allowable by reason of" section

183(b)(1).

     Section 183(c) defines an "activity not engaged in for

profit" as "any activity other than one with respect to which

deductions are allowable for the taxable year under section 162

or under paragraph (1) or (2) of section 212".4   For a deduction

to be allowed under section 162 or section 212(1) or (2),

petitioners must establish that they engaged in the activity with

the actual and honest objective of making an economic profit,

independent of tax savings.   Antonides v. Commissioner, 91 T.C.

686, 693-694 (1988), affd. 893 F.2d 656 (4th Cir. 1990); Dreicer

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



     4
       Under sec. 162, deductions are allowable for the expenses
of carrying on an activity that constitutes a trade or business
if those expenses are ordinary and necessary to the conduct of
the trade or business. Sec. 212 permits the deduction of
expenses incurred in connection with an activity engaged in for
the production or collection of income, or for the management,
conservation, or maintenance of property held for the production
of income.
opinion 702 F.2d 1205 (D.C. Cir. 1983).    Their expectation of

profit need not have been reasonable; however, they must have

entered into the activity, or continued it, with the objective of

making a profit.     Hulter v. Commissioner, 91 T.C. 371, 393

(1988); sec. 1.183-2(a), Income Tax Regs.

     The burden is on petitioners to show error in respondent's

determination that the boat chartering and/or the residential

rental activities were not engaged in for profit.    Rule 142(a);

Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981); Boyer v.

Commissioner, 69 T.C. 521, 537 (1977); Benz v. Commissioner, 63

T.C. 375 (1974).    Whether the requisite profit objective exists

is determined by looking at all the surrounding facts and

circumstances.     Keanini v. Commissioner, 94 T.C. 41, 46 (1990);

sec. 1.183-2(b), Income Tax Regs.    Greater weight is given to

objective facts than to a taxpayer's mere statement of his

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

792 F.2d 1256 (4th Cir. 1986); Beck v. Commissioner, 85 T.C. 557,

570 (1985); sec. 1.183-2(a), Income Tax Regs.

     Section 1.183-2(b), Income Tax Regs., provides a list of

factors to be considered in the evaluation of a taxpayer's profit

objective:   (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 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 from the activity; (7) the amount of

occasional profits, if any, from the activity; (8) the financial

status of the taxpayer; and (9) elements of personal pleasure or

recreation.       This list is nonexclusive, and no single factor or

even a majority of factors necessarily controls.        Abramson v.

Commissioner, 86 T.C. 360, 371 (1986); sec. 1.183-2(b), Income

Tax Regs.


III.       Boat Charter Activities

       The boat charter activities were operated by Island

Ventures, Inc., petitioners' S corporation.       The claimed losses

were passed through the S corporation to petitioners and claimed

on their joint Federal income tax returns.5       Losses attributable

to the sailboat charter activity were claimed only for the 1986

year because the sailboat was not offered for charter in later

years, even though it continued to be owned by petitioners.

Losses attributable to the fishing boat charter activity were

claimed for 1986 and 1987.        For 1988, petitioners claimed legal

fees incurred in connection with the fishing boat.

       A.     Sailboat Activity

       In 1979, Mr. Hilliard purchased a Columbia 32-foot sailboat

(sailboat) for approximately $65,000. The sailboat was placed

with Captain George's charter service in the San Francisco Bay


       5
       If we hold that     either of the boat charter activities was
engaged in for profit,     then we must decide whether the losses
from that activity are     subject to the S corporation loss
limitation rules under     sec. 1366(d)(1).
area.   The sailboat was infrequently chartered, and it was not

maintained.   Berth fees paid directly to Captain George's were

not forwarded to the harbor master.    After 1 year, Mr. Hilliard

moved the boat to a marina in Richmond, California, and,

thereafter, petitioners attempted to charter the sailboat

themselves.   Mr. Hilliard had no prior experience in sailboat

chartering.   Petitioners posted notices on bulletin boards in the

hospitals where they worked, placed a sign on the boat, and

otherwise relied on word of mouth to advertise their sailboat for

charter.    The sailboat, while located at the Richmond marina, was

seldom chartered.    Petitioners received little income, and it was

substantially less than their claimed expenses.    Petitioners

ceased sailboat charter activity during 1987, but they retained

the sailboat for personal use.   During the time petitioners were

attempting to charter the sailboat, they personally used the boat

about once a month during the summer.    The boat was not used

during the winter.

     (1) Manner in which the taxpayer carries on the activity.

Attempts to publicize or advertise the chartering activities were

not significant.    Petitioners did not prepare a written business

plan prior to the sailboat purchase.    No separate books and

records or separate bank accounts were maintained regarding the

sailboat.

     (2) The expertise of the taxpayer or his advisers.     Although

Mr. Hilliard was an experienced sailor and sailed the boat during

the summer, he had no experience with chartering.    Petitioners
did not seek out the assistance of their accountant or any other

assistance in connection with their sailboat charter activity.

     (3) Time and effort expended by the taxpayer in carrying on

the activity.   Petitioners, both of whom were full-time medical

doctors, spent little time with the chartering business.    The

extent of their efforts included merely placing the sailboat in a

marina and attempting to solicit charter activity by placing

notices on bulletin boards at the hospitals where they worked.

     (4) Expectation that assets used in the activity may

appreciate in value.   Mr. Hilliard expected to benefit from

gaining equity in the boat by making monthly mortgage payments

derived from boat charter revenues.    Mr. Hilliard was aware that

his sailboat was not likely to appreciate in value.    Although,

for several years, the sailboat generated relatively large

amounts of expenses and little or no income, petitioners did not

make any meaningful changes to their approach, other than to move

the boat to another marina.    Petitioners were content to claim

the deductions and have the boat available for their use during

the summer boating season.

     (5) The success of the taxpayer in carrying on other similar

or dissimilar activities.     Petitioners' attempt to charter the

sailboat was their first attempt at chartering.    They offered no

other evidence of their success in other types of chartering

businesses prior to that date.

     (6) The taxpayer's history of income and loss with respect

to the activity, and (7) the amount of occasional profits, if
any, that are earned.    A record of substantial losses over many

years and the unlikelihood of achieving a profitable operation

may be important factors bearing on the taxpayer's intention.

Cannon v. Commissioner, 949 F.2d 345, 352 (10th Cir. 1991), affg.

T.C. Memo. 1990-148; Golanty v. Commissioner, 72 T.C. at 426-427.

Petitioners' chartering activities generated substantial losses

over a period of about 8 years, which petitioners used to offset

taxable income from other sources.

     (8) The financial status of the taxpayer.    During the period

petitioners owned and attempted to charter the sailboat, they

received substantial income from their full-time medical

practices.    Petitioners' income from the practice of medicine

provided the base from which chartering activities losses were

deducted, providing tax benefits.

     (9) The presence of elements of personal pleasure or

recreation.   Mr. Hilliard has sailed as a hobby since 1966.

Petitioners used the sailboat personally about one weekend a

month during the summer.

     Essentially, petitioners sought to deduct the cost of the

operation of their sailboat, which they had available for their

personal use.    Their approach was not businesslike, and little

effort was invested in their attempt to charter the boat.    We

note that the year after the fishing boat was purchased and

started the generation of substantial deductions (by way of

depreciation and credits), petitioners ceased any attempt to

charter the sailboat or to claim any operating expenses.
     Accordingly, we hold that the attempt to charter the

sailboat was an activity "not engaged in for profit" within the

meaning of section 183.    Hence, it is not necessary to discuss

the section 1366(d)(1) loss requirements regarding S

corporations.

     B.    Fishing Boat Activity

         In 1985, Mr. Hilliard became aware of a boat investment

opportunity through his accountant, Nathaniel Brazil.    Mr.

Brazil, who was married to Mr. Hilliard's cousin, was also a

friend and has been petitioners' accountant since 1968.    Pursuant

to Mr. Brazil's proposal, petitioners were to purchase a boat and

place it in a charter activity in Florida using Inter Island

Charters, Inc.

     Petitioners did not do any independent investigation and

relied on Mr. Brazil for investigation of the fishing boat

investment.    There is no indication that Mr. Brazil traveled to

Florida to investigate the fishing boat.    On Mr. Brazil's advice,

petitioners agreed to a $199,894 purchase price for a new 1985

Sport Strike Fisherman boat named "My Toy" (fishing boat) during

March or April 1985; the boat was to be docked in Fort

Lauderdale, Florida.    Mr. Hilliard did not know whether Mr.

Brazil had any experience concerning investments in boat

chartering.

     Early in March 1985, Mr. Hilliard executed a purchase order

for a fishing boat that he had not seen prior to making the

order.    Mr. Brazil had arranged for petitioners to meet with the
sellers and with representatives of Inter Island Charters.    At

the end of March 1985, petitioners traveled to Florida for a

weekend and arranged for purchase of the fishing boat.

Petitioners were not provided with a choice of boats from the

seller's inventory.

     Prior to purchasing the boat, Mr. Hilliard was furnished

with a prospectus-type generic analysis of a boat investment

prepared by Robert Jarkow (Jarkow), a certified public

accountant.   The report summarized projected cash-flow and net

after-tax benefits to be derived from the purchase and charter of

a "luxury sailing vessel."   The analysis, based on various

assumptions regarding tax bracket, investment amount, and rental

revenues, contained the projections that there would be tax

losses for the first 5 years, and that investment tax credits and

depreciation would generate substantial tax benefits with nominal

amounts of cash expenditure.   For example, Jarkow's analysis

reflected that an $11,200 initial investment would produce a

$51,000 tax loss in the first year.   A review of the financial

and tax analysis in Jarkow's "prospectus" shows that tax benefits

would exceed out-of-pocket expenditures irrespective of whether

the boat was actually chartered.   Petitioners did not review in

detail the profit projections for a "luxury sailing vessel"

prepared by Jarkow.

     After viewing the fishing boat, petitioners completed the

purchase by signing several previously prepared documents,

including documents establishing petitioners' wholly owned S
corporation, Island Ventures, Inc., a North Carolina corporation,

as owner of the boat, the bill of sale, a note and security

agreement, and other financial disclosure forms required by law.

Mr. Hilliard's prior boat experience made him aware that boats

generally do not appreciate in value.

     The fishing boat was purchased by petitioners jointly with

Island Charters Corp., set up by petitioners to be the corporate

owner of the boat.    Island Charters Corp. was utilized to avoid

Florida sales taxes of $10,000 on the fishing boat purchase.

     Two months after payment and prior to delivery of the

fishing boat, petitioners discovered that Inter Island Charters

ceased business and that payments were not being made to the bank

on the promissory note.    Mr. Hilliard traveled to Florida and

arranged with Mr. and Mrs. Winters to handle the charter

activities.    Mrs. Winters had been an employee of Inter Island

Charters.    The arrangements were made with the Winterses at a

time when Mr. Hilliard was aware that Inter Island Charters had

gone out of business and Mr. Hilliard had been interviewed by the

Federal Bureau of Investigation concerning Inter Island Charters

and its employees.    Mr. Hilliard did not ask the Winterses why

Inter Island Charters failed.

     The Winterses controlled the fishing boat and rented it just

one time during the period 1985 through most of 1987.    The

Winterses allowed the fishing boat to fall into a state of

disrepair.    Around that time, Mr. Hilliard received a call from

Mr. Quartiano, a Florida shark fisherman, who advised him that
petitioners' boat was not being properly serviced and that Mr.

Quartiano would be willing to take over charter operations.

During September 1987, petitioners ceased making payments to the

bank on the promissory note.   Prior to finalizing any arrangement

with Mr. Quartiano, during November 1987, the financing bank

brought a Complaint in Admiralty against petitioners and their

North Carolina corporation in Federal court to foreclose on a

"United States First Preferred Ship Mortgage and Marine Security

Agreement", and the fishing boat was seized by U.S. marshals

pursuant to a court order.   The fishing boat was sold under a

court order on June 24, 1988, for $50,000.   Petitioners claimed

depreciation and expenses connected with the fishing boat through

1987.   For 1988, the $939 claimed represented legal fees in

connection with the lawsuit and foreclosure of the fishing boat.

     Other than one short ride, there was no personal use of the

fishing boat by the petitioners.   Petitioners believed that the

revenues from chartering the fishing boat would be sufficient to

cover the mortgage payments on the boat.   Petitioners received

monthly charter summaries revealing that the boat had been

chartered very little.

     (1) Manner in which the taxpayer carries on the activity.

The fishing boat activity was operated through petitioners' S

corporation, and petitioners relied on their accountant and

independent charter contractors.   Although several entities were

interposed between the fishing boat and petitioners, ultimately

as owners, it was, in effect, their charter business.   In this
regard, petitioners showed little interest in the charter

activity, the keeping of books for the activity, or the manner in

which the Winterses controlled the boat or conducted the charter

activity.

     (2) Expertise of the taxpayer or his advisers.

Mr. Hilliard, although an experienced sailor, had no experience

with chartering a fishing boat.    Petitioners had several years of

experience attempting to charter the sailboat.    These efforts

resulted in repeated and relatively large losses.    Despite these

experiences, petitioners relied on their accountant, Mr. Brazil.

It was not shown that Mr. Brazil had experience with fishing boat

chartering.    Petitioners did not seek the expertise of any third

party, and, after the original charter company failed,

petitioners allowed employees of the failed company to continue

in their role as charterer.    They allowed the Winterses to

control the boat and arrange charters, even though there were

suspicious circumstances surrounding their former employer.      We

find it curious that Mr. Hilliard, when he had made arrangements

with the Winterses, did not inquire about the reason or the

circumstances behind the failure of the original charter company.

     (3) Time and effort expended by the taxpayer in carrying on

the activity.    Petitioners were engaged in the full-time practice

of medicine.    They spent little time with their fishing boat

chartering business.    They did not carefully read the analytical

materials provided or investigate the circumstances of the

investment in the fishing boat.    Instead, petitioners relied
solely on their accountant, a friend and part of their extended

family.

     Following in that pattern, petitioners traveled to Florida

to purchase the fishing boat and again when the charter company

failed.   Other than those two trips, petitioners were oblivious

to the fishing boat activity.   After 2 years without supervision

of the Winterses, petitioners found out from a third party that

their fishing boat was in poor condition and was not being

properly managed.   Shortly thereafter, petitioners discontinued

mortgage payments, and the boat was seized.

     (4) Expectation that assets used in the activity may

appreciate in value.   Mr. Hilliard was of the view that boats

normally do not appreciate in value.   The circumstances here

reflect that petitioners focused primarily on the tax benefits

(deductions) and the sheltering of their medical practice income.

In this regard, there is some indication in the materials

concerning the foreclosure of the maritime mortgage that

petitioners may have overpaid for the fishing boat.   In that

regard, the purchase price was nearly $200,000, and the fishing

boat was sold less than 3 years later, without much intervening

use, for $50,000.

     (5) The success of the taxpayer in carrying on other similar

or dissimilar activities.   Petitioners had several years of

experience attempting to charter the sailboat.   Those efforts

resulted in repeated and relatively large losses.   Despite those

experiences, petitioners relied on their accountant, Mr. Brazil.
Petitioners' attempt to charter My Toy was their first attempt at

chartering a fishing boat.   Disregarding their negative

experience with the sailboat, they sought out no independent

expertise in the fishing boat chartering business.   We also note

that petitioners had experienced losses with respect to the Tahoe

property.   See discussion infra.

     (6) The taxpayer's history of income and loss with respect

to the activity, and (7) the amount of occasional profits, if

any, that are earned.   A record of substantial losses over many

years and the unlikelihood of achieving a profitable operation

are important factors bearing on the taxpayer's intention.

Cannon v. Commissioner, 949 F.2d 345, 352 (10th Cir. 1991), affg.

T.C. Memo. 1990-148; Golanty v. Commissioner, 72 T.C. at 426-427.

Petitioners' chartering activities generated substantial losses,

mostly attributable to depreciation, from 1985 through 1987.

Petitioners used these losses to offset taxable income from other

sources.

     (8) The financial status of the taxpayer.   During the period

petitioners owned and attempted to charter the fishing boat, they

received ample income from their full-time medical practice.

Because of the relatively large amount of income from their

medical practices, petitioners attempted to obtain tax benefits

by claiming the losses generated by the chartering activities.

     (9) The presence of elements of personal pleasure or

recreation.   Unlike the sailboat, petitioners did not have any

interest in or use of the fishing boat.
      Petitioners failed to conduct any meaningful investigations

of the fishing boat venture, and they relied on their accountant.

That reliance is not reasonable under circumstances where the

accountant has not been shown to have had any expertise.

Petitioners had loss experiences with the chartering of their

sailboat, and they did not attempt to determine if the same

problems could occur with chartering the fishing boat.   Their

lack of action and lack of interest regarding the operation of

the fishing boat charter reflect that their motivation was

primarily tax benefits.   Further inquiry might have given

petitioners insight into the likelihood of many of the problems

that they encountered.    See Thomas v. Commissioner, 84 T.C. 1244,

1278 (1985), affd. 792 F.2d 1256 (4th Cir. 1986).

      Based on the entire record, we are not convinced that

petitioners' primary objective was to make a profit.   See Snyder

v. United States, 674 F.2d 1359, 1362-1364 (10th Cir. 1982).

Petitioners did not have an actual and honest objective of making

an economic profit independent of tax savings.   We hold that

petitioners' fishing boat chartering activity was not engaged in

for profit within the meaning of section 183(c).


IV.   Tahoe Rental Activity6

      Petitioners acquired a residence in Tahoe by paying $11,000

in mortgage payment arrears and by accepting responsibility for



      6
       If we find that petitioners' residential rental activity
was engaged in for profit, then petitioners concede that the loss
limitation rules under sec. 280A(e) apply.
the $95,000 mortgage balance.   The residence was located in a

popular winter vacation area.   No business analysis or plan was

prepared by petitioners, who did not have any experience in the

rental property business.   Petitioners did not consult with their

accountant in connection with the purchase or operation of their

Tahoe property.   Petitioners, on their joint income tax returns

for 1983 through 1988, claimed losses ranging from a low of

$16,107 to a high of $21,385, with an average of $19,066

attributable to their Tahoe residential property.   Those losses

resulted from the excess of claimed deductions for maintenance,

interest, taxes, and depreciation over rental receipts.    The

annual rental receipts for the period ranged from a low of $300

to a high of $1,238, with an average of $711.

     Petitioners did not place the Tahoe property with a real

estate agent for rental purposes or consult with their accountant

in connection with their investment in the Tahoe property.

Petitioners did not keep separate records for the Tahoe property,

and their only attempts to advertise its rental availability were

to post flyers at the hospitals where they practiced medicine.

Petitioners, on occasion, spent winter weekends at the Tahoe

property.   They did not use the property off-season (e.g., during

the summer).

     (1) Manner in which the taxpayer carries on the activity.

Attempts to publicize the rental property were insignificant.

Petitioners did not prepare a written business plan prior to

their purchase of the Tahoe property.   No separate books and
records or bank accounts were maintained.   No action was taken in

later years to address the lack of rental in earlier years.

     (2) The expertise of the taxpayer or his advisers.

Petitioners were not shown to have had experience or to rely on

others with expertise regarding their Tahoe rental activity.

     (3) Time and effort expended by the taxpayer in carrying on

the activity.   Petitioners practice medicine on a full-time

basis.   They spent little time with the rental activity, other

than by Mr. Hilliard's making some repairs during petitioners'

occasional trips to the property.

     (4) Expectation that assets used in the activity may

appreciate in value.    Mr. Hilliard purchased the property in

connection with a foreclosure and sold the property for a gain.

No analysis was conducted with respect to the potential for

profit from the rental of the property or with respect to the

potential for gain from any appreciation of the Tahoe property.

     (5) The success of the taxpayer in carrying on other similar

or dissimilar activities.    Petitioners experienced losses from

their Tahoe rental activity for several years prior to the years

in question, and, in addition, they had experienced losses

regarding the sailboat chartering activities.

     (6) The taxpayer's history of income and loss with respect

to the activity, and (7) the amount of occasional profits, if

any, that are earned.    A record of substantial losses over many

years, coupled with little potential for profit are important

factors bearing on the taxpayer's intention.    Cannon v.
Commissioner, 949 F.2d at 352; Golanty v. Commissioner, 72 T.C.

at 426-427.    Petitioners generated substantial losses from their

rental activity, mostly from depreciation, and were able to

shelter their medical income with the losses.

      (8) The financial status of the taxpayer.     Because of

petitioners' income from their medical practices, they obtained

significant tax benefit from the rental activity losses.

      (9) The presence of elements of personal pleasure or

recreation.    Mr. Hilliard went to the property occasionally to do

repairs; however, petitioners used the property for personal

trips and recreational purposes.

      We hold that petitioners' Tahoe rental activity was not

engaged in for profit within the meaning of section 183(c).



V.   Automobile Expenses

      During the years in issue, petitioners owned four

automobiles.   Mrs. Hilliard drove the Mercedes, which was used to

commute to work, to drive between different work locations, and

for personal errands.      Her offices were in Oakland, California,

for all of the years in issue and in San Ramon, California, for 3

months during 1986.   The commute from Mrs. Hilliard's residence

to her office was 8 to 9 miles, and the distance between the San

Ramon and Oakland offices was 15 miles.     Mrs. Hilliard made early

morning rounds in two hospitals:     one which was about 3 miles

from her Oakland office, and the other was less than 1 mile from

her Oakland office.   The majority of her patients were at the
hospital that was closer to her office.      For the 3 months during

1986 when Mrs. Hilliard maintained two offices, she would drive 1

day each week from Oakland to San Ramon and then home.

      Petitioners claimed 85 percent business use of

Mrs. Hilliard's automobile, and respondent, in the notice of

deficiency, determined 17 percent business use.      At trial,

Mrs. Hilliard estimated about 50 to 60 percent business use.

      Section 274(d)(4) (which is effective for taxable years

beginning on or after January 1, 1986, the beginning of the first

year in issue) requires substantiation by adequate records or

evidence, in addition to mere testimony, to be entitled to travel

expenses.      Petitioners offered no records or other evidence of

the business use of Mrs. Hilliard's automobile other than her

testimony, which was expressed in terms of an estimate.

Petitioners have not met the section 274(d) requirements

necessary to show entitlement to transportation deductions in

excess of the amounts allowed by respondent.      Rule 142(a).7


VI.   Mortgage Interest

          Petitioners, for 1988, claimed $85,151 of mortgage

interest.      Respondent's agent was shown substantiation for

$83,216 of mortgage interest.      Petitioners, for 1987, claimed

$33,629 of mortgage interest, and respondent determined that all



      7
       Our determination of Mrs. Hilliard's automobile use
results in an adjustment to her self-employment income, which in
turn increases her self-employment tax liability. This
adjustment is automatic (purely mathematical) and requires no
further discussion.
but $614 was substantiated by petitioners.    In the notice of

deficiency, respondent determined that petitioners overstated

their mortgage interest deductions for 1987 and 1988 by $614 and

$8,315, respectively.    On brief, respondent conceded a portion of

the mortgage interest deduction for 1988, and $1,935 remains in

controversy for 1988.    Petitioners failed to present any evidence

substantiating the disallowed mortgage interest of $614 for 1987

or the $1,935 remaining in dispute for 1988.    Accordingly,

petitioners are not entitled to deductions for mortgage interest

for 1987 and 1988 in excess of the amounts determined by or

agreed to by respondent.


VII. Negligence

     Negligence includes a lack of due care or a failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances.   Neely v. Commissioner, 85 T.C. 934, 947

(1985).   Petitioners bear the burden of proving that respondent's

determination of negligence is erroneous.    Rule 142(a); Bixby v.

Commissioner, 58 T.C. 757, 791-792 (1972).

     A taxpayer can avoid liability for the addition to tax for

negligence if the taxpayer can show that he reasonably relied on

the advice of a competent and experienced accountant or attorney

to prepare his return.     Weis v. Commissioner, 94 T.C. 473, 487

(1990); Conlorez Corp. v. Commissioner, 51 T.C. 467, 475 (1968).

The taxpayer must show that all necessary information was

supplied to the return preparer and that the error on the return

resulted from the preparer's mistake.     Pessin v. Commissioner, 59
T.C. 473, 489 (1972); Enoch v. Commissioner, 57 T.C. 781, 803

(1972); see Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173

(1978).

     Petitioners claimed to have relied solely on their

accountant.   Such reliance, to mitigate negligence, must be

reasonable.   Petitioners are college- and medical school-educated

individuals who pursued rental and charter activities with the

sole or primary purpose of off-setting ordinary income from their

professional activities.   They paid little attention to

information provided by the promoter, and they did not make

business plans or seek professional advice regarding their rental

and charter activities.    Petitioners' accountant was not shown to

have expertise in the boat charter business, nor did petitioners

show that their reliance on him was reasonable under the

circumstances.   After making the investment in the fishing boat,

petitioners paid little or no attention to the major asset of

their activity, a boat with a value approaching $200,000.    All

that mattered to them were the deductions.

     With respect to their sailboat and Tahoe property, those

assets were available for petitioners' personal use and no

meaningful efforts were made to seek a profit or to improve the

circumstances after repeated losses and lack of rental income

were experienced.   Petitioners' claim of reliance upon their

accountant or return preparer does not entitle them to avoid the

imposition of an addition to tax for their negligence.

     Accordingly, we find that petitioners are liable for an
addition to tax for negligence under section 6653(a) for each of

the taxable years in issue.


VIII.   Substantial Understatement

     Section 6661(a) imposes an addition to tax equal to 25

percent of the amount attributable to a substantial

understatement.   An understatement is substantial if it exceeds

the greater of 10 percent of the tax required to be shown on the

return or $5,000.   Sec. 6661(b)(1).

        If an item is not attributable to a tax shelter, then any

understatement may be reduced by amounts represented by items for

which a taxpayer had substantial authority or which were

adequately disclosed in the return or in a statement attached

thereto.   Sec. 6661(b)(2)(B)(i) and (ii).

     Although the legal standards for evaluating section 183

cases are well-developed, petitioners have not argued or shown

that there was substantial authority for their tax treatment of

any of the items of income or expense that were adjusted by

respondent or that any of the adjusted items were adequately

disclosed on the returns for the period in controversy.

Accordingly, to the extent that petitioners' understatement, for

any taxable period under consideration, is substantial within the

meaning of section 6661, petitioners are liable for the addition

to tax for a substantial understatement under section 6661.

     To reflect the foregoing and to reflect concessions and

agreements of the parties,

                                       Decision will be entered under

                               Rule 155.
