ZIDAR v. COMMISSIONER

T.C. Memo. 2001-200

UNITED STATES TAX COURT

TONY L. ZIDAR AND KATHLEEN I. ZIDAR, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11484-99. Filed August 1, 2001.

Jonathan V. Goodman, for petitioners.

Michael J. Calabrese, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

THORNTON, Judge: Respondent determined a $53,435 deficiency

in petitioners’ 1992 Federal income tax and a $10,687 addition to

tax under section 6662(a).1

1

All section references are to the Internal Revenue Code as

in effect for the taxable year in issue. All Rule references are

to the Tax Court Rules of Practice and Procedure.

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The issues for decision are: (1) Whether petitioners

underreported their capital gains from the redemption of certain

corporate stock; (2) whether Tony L. Zidar conducted his stock

car activity with the intent to make a profit; and (3) whether

petitioners are subject to the section 6662(a) accuracy-related

penalty.2

FINDINGS OF FACT

The parties have stipulated some of the facts, which we

incorporate herein by this reference.

Petitioners

Throughout the year in issue, petitioners were married to

one another. In 1993 they separated, and in 1994 they divorced.

When they petitioned the Court, petitioners resided in Wisconsin.

Concrete Raising Corporation

In the early 1970's, Tony L. Zidar (Tony) started a business

known as Concrete Raising Associates (CRA). CRA’s business

2

In their petition and at trial, petitioners contended that

Kathleen I. Zidar (Kathleen) had not been served with the notice

of deficiency. Although respondent addressed the issue in his

opening brief, petitioners have not mentioned the issue either in

their opening brief or in their reply brief, and we consider them

to have abandoned this contention. See Bradley v. Commissioner,

100 T.C. 367, 370 (1993). In any event, the contention is

without merit, as the record shows that respondent mailed the

notice of deficiency to Kathleen’s last known address, that

Kathleen received actual notice, and that she timely filed a

petition with the Court. Cf. Mulvania v. Commissioner, 81 T.C.

65 (1983); Freiling v. Commissioner, 81 T.C. 42 (1983); Judge v.

Commissioner, T.C. Memo. 1984-527.

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involved “mudjacking”, which Tony describes as “lifting concrete

back to its original position”.

About 1972, Tony’s brother, Robert Zidar (Robert), became

Tony’s partner, and they incorporated CRA as Concrete Raising

Corp. (CRC). Tony and Robert each owned an equal number of CRC

shares. The accounting firm of Conley, McDonald & Sprague

performed bookkeeping, record maintenance, and other accounting

services for CRC.

Tony and Robert also entered into several commercial real

estate joint ventures (the joint ventures), which generally

involved purchasing and renovating buildings for lease to

tenants. Tony and Robert financed these joint ventures partly by

using CRC’s financial clout to obtain loans.

CRC made advances to Tony and Robert for, among other

things, airplane tickets, furniture, personal expenses, and

expenses associated with the joint ventures. All shareholder

advances were required to be repaid, and CRC maintained

shareholder accounts for both Tony and Robert. An employee from

Conley, McDonald & Sprague regularly visited CRC to review and

record all shareholder advances in the appropriate accounts. CRC

issued Tony and Robert monthly, quarterly, and annual statements

showing the balances on their respective shareholder accounts.

As of October 1992, Tony’s outstanding balance on his CRC

shareholder account was $116,831.

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Tony and Robert had a stormy business relationship, giving

rise to numerous lawsuits between them. In 1986, litigation

arose between Tony and Robert over one share of CRC stock owned

by their mother.3 They eventually settled this dispute by

agreeing to split their mother’s share of stock equally. As part

of the settlement, Tony agreed to allow Robert, upon

notification, to buy at net book value Tony’s shares in CRC and

his interests in the joint ventures, or else to allow Robert to

cause CRC to redeem Tony’s shares.

On December 31, 1991, Robert sought to exercise his right to

buy out Tony’s interests in the joint ventures and to cause CRC

to redeem Tony’s shares. Litigation ensued between Tony and

Robert over, among other things, the value of Tony’s CRC shares.

After much legal wrangling, Tony and Robert agreed to hire an

independent accounting firm, Kolb Lauwasser, to calculate the

value of the shares. Based on its review, Kolb Lauwasser valued

Tony’s CRC shares at approximately $166,000.

In October 1992, Tony and Robert settled the lawsuit over

the joint venture buyout and stock redemption. Pursuant to the

settlement, Tony agreed to relinquish his interests in both CRC

and the joint ventures. In consideration of the CRC stock, Tony

3

Because Tony Zidar and Robert Zidar were equal

shareholders in Concrete Raising Corp. (CRC), ownership by either

Tony or Robert of the one share of CRC stock held by their mother

would give the owner a controlling interest in CRC.

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received $50,000 and forgiveness of his $116,831 indebtedness to

CRC.4

For 1992, CRC issued Tony a Form 1099-MISC, Miscellaneous

Income (the Form 1099), reporting a $166,831 payment.

Petitioners claim not to have received a copy of the Form 1099.

Tony’s Stock Car Activity

In the late 1960's, Tony became involved in automobile

racing, first by working on pit crews and later by participating

in stock car racing as a hobby. In the early 1980’s, he and

Robert purchased an automobile racetrack located in the city of

Oregon, Wisconsin, and ran it for a couple of years.

In 1991, Tony remortgaged his house for $50,000 to finance

construction of a stock car for asphalt automobile racing. His

goal was to have a stock car ready for racing in the American

Speed Association’s (ASA’s) 1992 racing season. During 1992,

Tony had a stock car (the stock car) built to ASA standards,

hiring an Illinois contractor to build a body for the Oldsmobile

chassis and a Wisconsin contractor to install the parts.

4

On their 1992 Federal income tax return, petitioners

reported a sale price of $800,000 for the joint ventures.

Petitioners reported the transaction as an installment sale,

showing that in 1992 they received $699,925 of the total $800,000

sale price and that they had realized $73,894 of capital gains in

1992 under the installment method. Respondent has raised no

issue regarding petitioners’ income tax reporting of Tony’s sale

of his interests in the joint ventures.

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Over 6 to 8 months in 1992, while the stock car was being

built, Tony spent approximately 100 to 300 hours on his stock car

activity. During the same period, he worked full-time for CRC,

never missing a day of work. In 1992, construction of the stock

car was completed. Tony garaged the car at his house. Although

he spoke with some potential drivers, none signed a contract to

drive the stock car for him.

To make a profit from his stock car activity, Tony needed to

obtain large sponsors. He could not rely on prize winnings to

make a profit, because drivers take a significant portion of any

prize winnings. In 1992, Tony was able to obtain no more than

$5,571 in sponsorships. After other sponsorships failed to

materialize, Tony decided to sell the stock car, without ever

having raced it. Tony advertised the stock car for sale in trade

magazines.

Hoping that a good showing in a race would make the stock

car more attractive to a purchaser, in the fall of 1992 Tony

entered it in a race at a Madison, North Carolina, speedway.

While the stock car was being driven around the speedway between

qualifying runs for the race, it collided with another race car

and was destroyed. Tony’s stock car was uninsured, and he did

not replace it.

Petitioners spent over $100,000 on the stock car activity.

Tony had no business plan for his stock car activity, nor did he

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speak with any consultants about how to operate a profitable

stock car business.

Petitioners’ Federal Income Tax Return

On their 1992 joint Federal income tax return, petitioners

reported a sale price of $159,100 for Tony’s CRC shares, basis in

the shares of $109,100, and net capital gain of $50,000. With

regard to Tony’s stock car activity, petitioners claimed on their

Schedule C, Profit or Loss From Business (Sole Proprietorship),

$5,571 in gross income and $71,692 in expenses, resulting in a

net loss of $66,121.5 Petitioners also reported wage income of

$51,931 from CRC.

John P. Hayes, Esq. (Hayes), prepared petitioners’ 1992

Federal income tax return.6 Either Tony or one of his agents

provided Hayes all the information that he used to prepare

petitioners’ tax return.

Respondent’s Examination and Determinations

While auditing petitioners’ 1992 Federal income tax return,

respondent’s agent contacted CRC’s accountants, Conley, McDonald

& Sprague, and requested supporting documentation for the

5

In 1991, which was the first year that petitioners treated

Tony’s stock car activity as a trade or business for Federal

income tax purposes, petitioners reported gross income from this

activity of $6,430 and losses of $57,135.

6

Although John P. Hayes, Esq., prepared petitioners’ 1992

Federal income tax return, he did not sign the return as the

“preparer”.

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$166,831 reported on the Form 1099 as income paid by CRC to Tony.

Conley, McDonald & Sprague provided the agent with summary sheets

(created by Conley, McDonald & Sprague from CRC’s records)

describing the manner in which the income reported on the Form

1099 was calculated. On the basis of this investigation,

respondent determined that, consistent with the information

reported on the Form 1099, CRC had redeemed Tony’s shares for

$166,831, representing a cash payment of $50,000 plus discharge

of all Tony’s obligations to CRC, totaling $116,831. Moreover,

respondent determined that petitioners had failed to substantiate

any basis in the CRC stock. Consequently, in the notice of

deficiency, respondent determined that petitioners must recognize

$166,831 of capital gain from Tony’s disposition of his CRC

shares and accordingly increased petitioners’ taxable income by

$116,831 ($166,831 less the $50,000 capital gain that petitioners

reported on their 1992 return).

In addition, respondent determined that Tony did not engage

in his stock car activity for profit. Respondent limited

petitioners’ claimed deductions from this activity to $5,571,

which was the gross income that petitioners reported therefrom.

OPINION

A. Capital Gain From Stock Redemption

The parties disagree as to whether petitioners recognized

$50,000 in capital gains from CRC’s redemption of Tony’s stock,

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as petitioners reported on their 1992 Federal income tax return,

or $166,831, as respondent determined in the notice of

deficiency. Resolution of this issue depends upon (1) the amount

petitioners realized from the stock redemption and (2) the amount

of petitioners’ basis, if any, in the stock. Cf. sec. 1001(a).

In their petition, petitioners make no reference to

respondent’s disallowance of petitioners’ claimed $109,100 basis

in the CRC shares, nor have petitioners addressed this

determination at trial or on brief. Petitioners have offered no

evidence to substantiate any basis in the CRC shares.

Consequently, we conclude that petitioners have conceded that

they had no basis in the CRC shares, and we confine our

consideration to the amount petitioners realized from the stock

redemption.

Respondent contends that, as reflected on the Form 1099,

CRC paid Tony $166,831 for his redeemed stock. At trial and on

brief, petitioners argue that the Form 1099 was erroneous and

that CRC paid Tony only $50,000 cash for his redeemed stock. In

making this argument, petitioners seem oblivious to the fact that

on their 1992 Federal income tax return, they reported the sale

price of the CRC stock as $159,100.

Relying on Portillo v. Commissioner, 932 F.2d 1128 (5th Cir.

1991), affg. in part and revg. in part T.C. Memo. 1990-68,

petitioners contend that respondent’s determination they received

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$166,831 for the stock redemption was based solely on the Form

1099 issued by CRC and therefore is entitled to no presumption of

correctness. Petitioners’ argument is without merit. This is

not a case where respondent determined a deficiency based solely

on an employer’s Form 1099. Rather, respondent’s agent

investigated the information that CRC reported on the Form 1099

and determined the extent to which it was supported by CRC’s

books and records, as summarized by CRC’s accountants. This

investigation provided a rational foundation for respondent’s

determination that petitioners received $166,831 for the

redemption of Tony’s CRC stock. The burden remains on

petitioners to rebut the presumption of correctness of

respondent’s determination. See Rule 142(a); Pittman v.

Commissioner, 100 F.3d 1308, 1316 (7th Cir. 1996), affg. T.C.

Memo. 1995-243.

In contending that Tony received only $50,000 cash for the

CRC stock redemption, petitioners maintain that CRC discharged no

indebtedness of Tony’s because Tony owed CRC nothing. Petitioners

contend that Tony received no advances from CRC and that Robert

altered CRC’s books to reflect Tony’s alleged corporate debt.

The evidence does not support petitioners’ contention, which, as

previously discussed, seems inconsistent with their reporting on

their 1992 Federal income tax return a $159,100 sale price for

the CRC stock. A former employee of Conley, McDonald & Sprague

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testified that she visited CRC once or twice a week, reviewed

CRC’s records, and recorded any shareholder advances taken by

Tony or Robert. Respondent placed in evidence summary sheets

prepared by Conley, McDonald & Sprague, which reflect the amounts

Tony owed on his shareholder account. These sheets indicate that

when Tony’s CRC shares were redeemed, Tony owed CRC $116,831.

Other than Tony’s bald insinuation of impropriety in CRC’s

record keeping, petitioners have given us no reason to doubt the

validity of Conley, McDonald & Sprague’s summary sheets. We

found Tony’s testimony to be vague, uncorroborated, and

conclusory in certain material respects. Under these

circumstances, we are not required to, and we do not, accept

Tony’s testimony. See Lerch v. Commissioner, 877 F.2d 624, 631-

632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986).

In sum, the evidence establishes that petitioners realized

$166,831 from Tony’s disposition of his CRC stock. Petitioners

have failed to establish any basis in the stock. Accordingly, we

conclude that they had a $166,831 capital gain from the stock

redemption, and we sustain respondent’s determination that

petitioners underreported their capital gains by $116,831.

B. Tony’s Stock Car Activity

Under section 183(b)(2), if an individual engages in an

activity not for profit, deductions relating thereto are

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allowable only to the extent gross income derived from the

activity exceeds deductions that would be allowable under section

183(b)(1) without regard to whether the activity constitutes a

for-profit activity. See Allen v. Commissioner, 72 T.C. 28, 32-

33 (1979).

The taxpayer bears the burden of establishing that his or

her activities were engaged in for profit. Rule 142(a). To

carry this burden, the taxpayer must show that he or she had a

“good faith expectation of profit”. Burger v. Commissioner, 809

F.2d 355, 358 (7th Cir. 1987), affg. T.C. Memo. 1985-523; see

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

opinion 702 F.2d 1205 (D.C. Cir. 1983). The taxpayer’s

expectation, however, need not be reasonable. Burger v.

Commissioner, supra; Golanty v. Commissioner, 72 T.C. 411, 425

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

1981); sec. 1.183-2(a), Income Tax Regs. Whether the taxpayer

has the requisite profit motive is a question of fact, to be

resolved on the basis of all relevant circumstances, with greater

weight being given to objective factors than to mere statements

of intent. Dreicer v. Commissioner, supra; Golanty v.

Commissioner, supra at 426.

The regulations under section 183 provide a nonexclusive

list of factors to be considered in determining whether an

activity is engaged in for profit. The factors include: (1) The

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manner in which the taxpayer carries on the activity; (2) the

expertise of the taxpayer or his or her advisers; (3) the time

and effort the taxpayer expended in carrying on the activity;

(4) the expectation that assets used in the activity may

appreciate in value; (5) the taxpayer’s success in carrying on

other activities; (6) the taxpayer’s history of income or loss

with respect to the activity; (7) the amount of occasional

profits, if any, which are earned; (8) the taxpayer’s financial

status; and (9) whether elements of personal pleasure or

recreation are involved. Sec. 1.183-2(b), Income Tax Regs; see

Golanty v. Commissioner, supra.

As discussed below, on the basis of all the evidence in the

record, we conclude that Tony had no good faith expectation of

making a profit from the stock car activity.

1. Manner of Carrying on Activity

Tony kept no regular books and records of his stock car

activity. He had no business plan and made no predictions of

income or expenses. He carried no insurance on his stock car.

The record does not establish whether he had resources available

to repair or replace the stock car.

To turn a profit on his stock car activity, Tony needed

substantial funds from sponsors, since a significant share of any

prize winnings would go to the driver. Tony hoped to secure

large sponsorships. His testimony indicates that because he

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rubbed shoulders with corporate executives at the race track, he

thought he would be able to convince them to provide him

sponsorships. We are unpersuaded, however, that this was

anything more than a false hope. Large sponsorships never

materialized.

We conclude that this factor weighs heavily against

petitioners.7

2. Expertise of Taxpayer or Advisers

In analyzing profit motive, a distinction must be drawn

between expertise in the mechanics of an activity and expertise

in the business, economic, and scientific practices relating to

its conduct. See Burger v. Commissioner, supra at 359; cf. sec.

1.183-2(b)(2), Income Tax Regs. Although Tony had a longstanding

interest in car racing, read car-racing magazines, owned a

racetrack with Robert for a while, and had contacts with some

mechanics and drivers, the record does not establish that Tony

had any expertise in the economics or business of owning and

racing a stock car. There is no evidence that he studied

accepted business practices of stock car racers or consulted with

economic experts in the field.

This factor favors respondent.

7

On reply brief, petitioners concede that “Tony is weak

regarding this factor * * * Petitioners would admit that this

factor weighs against them.”

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3. Time and Effort Expended in Activity

Time and effort expended in carrying on an activity may be

indicative of profit motive, particularly in the absence of

substantial personal or recreational elements associated with the

activity. Sec. 1.183-2(b)(3), Income Tax Regs. During 1992,

Tony devoted 100 to 300 hours to his stock car activity. We

believe that this time expended is less indicative of a profit

motive than of Tony’s love of stock car racing.

A taxpayer’s withdrawal from another occupation to devote

most of his energies to the activity may evidence a profit

motive. Id. Tony testified that he reported to work at CRC

every day while conducting his stock car activity.

This factor favors respondent.

4. Expectation That Assets May Appreciate in Value

On reply brief, petitioners concede that they did not expect

Tony’s stock car to appreciate in value.

5. Taxpayer’s Success in Other Activities

If the taxpayer has engaged in similar activities in the

past and converted them from unprofitable to profitable

enterprises, this circumstance may indicate that the activity in

question was entered into for profit, even though it is presently

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

Tony had been involved with automobile racing since 1968, the

evidence does not indicate that his previous involvement was for

profit or profitable. Although Tony and Robert once owned a

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racetrack, the evidence does not show whether this was a

successful enterprise or explain why Tony quit it after a short

while.

We conclude that this factor is neutral.

6. History of Income or Losses From Activity

Tony never raced the stock car (apart from the ill-fated

qualifying round), received no cash prizes, and obtained only

minimal sponsorships. Petitioners spent, however, more than

$100,000 on the stock car. Given that Tony was unable to obtain

the sponsorships necessary to make the activity profitable, we

see no possibility that Tony could recoup his expenditures.

This factor favors respondent.

7. Amount of Occasional Profits Earned, if Any

The amount and frequency of occasional profits earned from

the activity may be indicative of a profit objective. Sec.

1.183-2(b)(7), Income Tax Regs. Apart from nominal sponsorships,

Tony’s stock car activity generated no positive cashflows, much

less profits. The “opportunity to earn a substantial ultimate

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.” Id. Although Tony’s activity was a “highly

speculative venture”, we are unpersuaded that he ever had an

opportunity to earn a substantial ultimate profit. Although Tony

presumably wanted to win races, “a desire to win prize money is

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not the equivalent of the actual and honest objective of earning

a profit.” Riddle v. Commissioner, T.C. Memo. 1994-133.

Moreover, Tony could not earn a substantial profit without

securing large sponsors, which he failed to do.

This factor favors respondent.

8. Taxpayer’s Financial Status

Substantial income from sources other than the activity may

indicate the lack of a profit motive, particularly if (1) losses

from the activity generate substantial tax benefits, and (2)

personal or recreational elements are involved. Sec. 1.183-

2(b)(8), Income Tax Regs.

Tony had substantial income from CRC and his commercial real

estate ventures. In 1992, Tony received $50,000 in cash

consideration of his interests in CRC and reported receiving

$699,925 from the sale of the joint ventures, as well as wage

income of $51,931 from CRC. As previously discussed, there were

strong personal and recreational elements to Tony’s stock car

activity.

This factor favors respondent.

9. Elements of Personal Pleasure

Elements of personal pleasure or recreation may signal the

absence of a profit motive. Sec. 1.183-2(b)(9), Income Tax Regs.

The evidence clearly shows that Tony enjoyed and obtained

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pleasure from his stock car activity. This factor favors

respondent.

Petitioners place great reliance on the case of Mills v.

United States, 699 F. Supp. 1245 (N.D. Ohio 1988), which held

that a taxpayer’s motorcycle racing activity qualified as a trade

or business. Unlike the taxpayer in Mills, however, Tony had no

separate bank account for his stock car activity, retained no

business and financial adviser to aid him in his racing

activities, participated in no special exhibitions to attract

financial sponsorship of large companies, and never actually

raced his vehicle (except in the ill-fated qualifying round).

On the basis of all the evidence, we conclude that

petitioners have failed to demonstrate that Tony entered into the

stock car activity with a good faith expectation of making a

profit. Accordingly, we sustain respondent’s determination on

this issue.

C. Accuracy-Related Penalty Pursuant to Section 6662(a)

Respondent determined that petitioners are liable for the

accuracy-related penalty under section 6662. Section 6662(a)

imposes a 20-percent penalty on any portion of an underpayment

that is attributable to, among other things, negligence or

disregard of the rules or regulations or any substantial

understatement of income tax. Negligence is the lack of due care

or failure to do what a reasonable and ordinarily prudent person

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would do under the same circumstances. Neely v. Commissioner, 85

T.C. 934 (1985).

No penalty shall be imposed under section 6662(a) with

respect to any portion of an underpayment if it is shown that

there was reasonable cause and that the taxpayer acted in good

faith. Sec. 6664(c). Whether a taxpayer acted with good faith

depends upon the facts and circumstances of each case. Sec.

1.6664-4(b)(1), Income Tax Regs. Reliance on the advice of a

professional tax adviser or return preparer constitutes

reasonable cause and is in good faith if the taxpayer

establishes, among other things, that the taxpayer provided the

adviser or return preparer with the necessary and accurate

information. Neonatology Associates P.A. v. Commissioner, 115

T.C. 43, 99 (2000). If the taxpayer fails to provide the adviser

or return preparer with the information necessary for preparing

the return, the taxpayer may be liable for the penalty. Johnson

v. Commissioner, 74 T.C. 89, 97 (1980), affd. 673 F.2d 262 (9th

Cir. 1982).

We have found that petitioners underreported their capital

gain on the redemption of Tony’s CRC stock by $116,831. They

have offered no explanation for the $159,100 sale price reported

on their 1992 Federal income tax return–-an amount less than the

$166,831 that CRC reported on the Form 1099–-or the $109,100

basis they claimed for the CRC stock. Petitioners claimed net

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losses of $66,121 from a stock car activity that from all

indications was predominantly for Tony’s pleasure and recreation.

Petitioners contend that no penalty should apply because

they relied upon Hayes to draft their 1992 Federal income tax

return. Petitioners failed to prove that they provided Hayes

with complete information for preparing their 1992 return.

In a letter to Tony dated March 7, 1994, Hayes noted that

all information used to prepare the return came from either Tony

or one of Tony’s agents. Although Tony received monthly,

quarterly, and annual statements reflecting the balance on his

CRC shareholder account, there is no evidence that petitioners

shared the information contained in these statements with Hayes.

In his March 7, 1994, letter, Hayes also stated that the

reported loss relating to Tony’s stock car activity “is large and

will probably be subject to audit. It was reported on your

return upon your assurance that the racing venture was entered

into with the purpose of obtaining a profit”. From this

disclaimer, it appears that Hayes was relying on petitioners’

judgment, rather than the other way around.

Petitioners have not established that they acted in good

faith and had reasonable cause in understating their capital

gains from the CRC stock redemption or in claiming the losses

relating to the stock car activity. We sustain respondent’s

determination on this issue.

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To reflect the foregoing,

Decision will be entered

for respondent.