T .C . Summary Opinion

T .C . Summary Opinion

UNITED STATES TAX

CHARLES L . AND DEBORAH J . BEASL E

COMMISSIONER OF INTERNAL REV E

Docket No . 15470-07S .

PANUTHOS,

Chief Special Trial Judge :

pursuant to the provisions of section 74

Revenue Code in effect when the petitio n

1 Unless otherwise indicated, all se ti on references are,t .o

the Internal Revenue Code in effect for t e years in issue, ands

all Rule references are to the Tax Court ules of Practice and'.'"

I

Procedure

sw

4

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

precedent for any other case .

Respondent determined Federal income tax deficiencies an d

accuracy- related penalties as follows :

Year

2003

2004

2005

$17,589

9,608

5,570

The issues for decision are :

$

11

charter

Penalties

Sec . 6662(a )

Deficiency

$3,517 .8 0

1,921 .6 0

1,114 .0 0

(1) Whether petitioners '

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

j„whether petitioners are liable for the accuracy-relate d

ik

,penalties .

Backgroun d

Some of the facts have been stipulated, and we incorporat e

the stipulation and accompanying exhibits by this reference .

Petitioners were married and living in Maryland during the year s

at issue and at the time they filed the petition .

During the years at issue Charles Beasley (petitioner) wa s

,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 Are a

.'Transit .Authority police officer . Petitioner completed hig h

school,fas well as 5 years of trade school . Mrs . Beasley als o

completed high school .

rman", having spent muc h

ing . Petitioner fir s t

obtained his U .S . Coast Guard master lic nse in 1995 and had il t

renewed periodically . Petitioner obtain

commercial fishing license in 1996 . Som

petitioners contemplated starting a char er fishing business ' do

supplement their income . Before 2003 pe

itioners did not have l

any experience owning or operating a sma

fishing business . During the years at i

maintained several related licenses, inc

master license, a Maryland charter boat

y

fishing license, and a Maryland guide license .

Between 2001 and early 2003 petitioners searched extensivel y

for a used boat . suitable for charter fishling operations in and ;

surveyed charter boat captains regarding oat .selection .

On January 30, 2003, petitioner wrot a business plan whic h

indicated that he did not expect to make profit initially but

hoped to reach profitability within 3 yea s . He predicted the,,

fuel cost of each trip to be $50 . Petiti ner inquired about thI e

fees set by other charter captains and se~ his charter fee s

slightly below the prices reported to him

seek any other advice while preparing his business plan .

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

a

~1~contract price of $127,055 . This price was later reduced't o

'1

'~~$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 di d

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

I~jmodification to the propeller, petitioners deemed the boa t

'11 suitable for charter fishing operations on November 15, . 2003 .

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

,II, the late delivery, petitioners canceled the charters they ha d

il~

1 booked for October and November . Petitioners did not receive any

III income from the charter fishing activity in 2003 .

In 2004 petitioners made 21 paid fishing trips and at leas t

6 unpaid trips . Petitioners' gross receipts from their charte r

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 receipt s

from their charter fishing activity into their personal account

__5 and deposited some of their wages, as ~ell as other moneys,'nt o

the SunTrust account .

Petitioners booked fewer charters each year

than thei r

business plan required for profitabili y . The number of charter

fishing boats operating in petitioners' area increased from abou t

50 in 2003 to about 150 in 2008 .

Petitioners did not keep any finan ial accounting records

for their charter fishing activity, and they did not consult .lla n

accountant for advice on the financial ~peration of tha t

activity . Petitioners' evidence of inc me from charter fishing

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

Although they retained fuel and supply invoices as well as cr{edit

card receipts for income tax preparation purposes, they'did'ni'o t

use their records to evaluate profitability .

Petitioner believed that the charter boat might appreciate

ri l

in value'; however, he had no expectatior that the value of the

J

boat would increase enough to offset th losses incurred durin

g

jl

the initial years of the charter fishin activity . Petitioners

1

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

~;I

day .

l

Petitioners had their returns for each of the years'!'at issu e

prepared by Tax Consultants of .North America .

Petitioners' Form s

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

Combined wages

Itemized deductions

Exemption amount

2003

2004

200 5

$128,290

27,318

9,150

$113,272

27,953

9,300

$93,16 2

-0-

8,630

9,49 0

73,800

19,680

11,80 8

12,308

12,031

13,879

12,567

•11,51 4

2,946

(101,085)

9,800

(47,296)

10,13 8

9,79 9

(33,769 )

-0-014,706

(14,706)

33,179

4,261

11,518

(7,257)

28,47 5

3,54 1

8,95 7

(5,416 )

27,76 7

9,60 0

Schedule C Charter Activit y

Receipts

Expense s

Depreciation

Supplies .

Other expenses

Interest on loan

Profit (loss)

NE

Taxable Incom e

. and Overpaymen t

'I!

1

Taxable, income

Tax

Withholding

Overpayment (refund)

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 thei r

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

and 2005 . Additionally, respondent determined a section 666 2

accuracy-related penalty for each year .

- 7 Discussio n

II

In general, the Commissioner's determinations set forthlin a

notice of deficiency are presumed corrEct, and the taxpayer !bear s

the burden of proving that these determinations are in error1 I

Rule 142(a) ;

Welch v .

Helvering ,

290 U .JS . 111, 115 (1933) .

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

matters shifts to the Commissioner under certain circumstances .

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

not established compliance with its req irements . Petitioner s

therefore bear the burden of proof .

I . Whether Petitioners' Charter

Engaged in for Profi t

FishiacrActivity Was Not

Respondent contends that petitions s' deductions from thei r

.1

charter fishing activity are subject to the limitations. of

1

section 183 because the activity was no a ,trade or business . '

If

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

162, he generally may deduct the expens s related to an activ{ {ity

l

k

'Anot engaged in for profit" only to the extent of the gros s

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

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

Section 162(a) provides that a tax ayer who is carrying n a

"trade or business" may deduct ordinary and necessary expense s

incurred in connection with the operatic n of the business . To be

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

"the taxpayer's primary purpose for eng ging in the activity must

8 _

b' e for income or profit ."

Co mm issioner v . Groetzinger ,

480 U .S .

if

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 wa s

ngaged in with an actual and honest profit objective . Dreice r

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

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

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

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

,

1

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

Commissioner ,

Dreicer v .

supra at 644-645 .

I 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 circumstance s

in determining whether a taxpayer entered into the activity fo r

profit, placing greater weight upon objective facts than th e

taxpayer's statements of intent .

Dreicer v . Commissioner ,

supr a

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 nonexclusi e factors are relevant i n

determining whether the taxpayer enga g d in the activity for (

profit : (1) The manner in which the t xpayer carries on the ;

activity ; (2) the expertise of the tax ayer or his advisers ;~j(3 )

the time and effort expended by the t o payer in carrying on i'I h e

activity ; (4) the expectation that as s is used in the activity

may appreciate .in value ; (5) the succe s of the taxpayer i n

carrying on other similar or dissimila

activities ; (6) th e

taxpayer's history of income or losses wit h respect to th e

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

earned ; (8) the financial status of the

taxpayer ; and (9) th e

elements of personal pleasure or recrea tion . Sec .'1 .183-2(b) ,

Income Tax Regs .

1 .

I

Manner in Which the Taxpayer C arries On the Activit y

The fact that the taxpayer carries

on the activity in ''a I

businesslike manner may indicate that t he activity is engaged in

for profit .

Elliott v . Commissioner , 9 0 T .C . 960, 972 (1988),

affd . without published opinion 899 F .2

18 (9th Cir . 1990) ; 1

Engdahl v . Commissioner , 72 T .C . 659, 6 6 (1979) ; sec . 1 .18 3

2(b)(1), Income Tax Regs . Relevant in d licators include

it

maintaining complete and accurate books and records, obtaining

business license, maintaining a separa t

a

business bank account ,

developing a written business plan, hay ~ng a plausible strategy

for earning a profit, and attempting ch inges 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 fo r

their charter fishing activity . Petitioners instead retained

!'numerous credit card receipts and fuel and supply . invoices tha t

reflect some of the expenses incurred with respect to tha t

activity . Petitioners also produced a list of amounts and date s

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 businesslik e

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

for measuring profits, controlling expenses, and evaluating the

it

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 evidenc e

.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 substantiatin g

"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 .' Petitioners' failure to'fkeep

contemporaneous accounting records .und rmines their asserted

profit objective .

Petitioner-did obtain the license required to run a sole

proprietorship charter fishing busines for profit in Maryland .

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

fishing activity to take place, and ar not necessaril y

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 sep rate bank accoun t

designated for the charter fishing activity, they commingled!

charter fishing and . personal funds .' Such commingling does not

support a finding that petitioners cond cted the activity'inla

businesslike manner that would demonstr to a profit objective .

See Ballich v . Commissioner , T .C . Memo .11978-497 .

' 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 .

s New ventures often require capital infusions, which might

explain deposits of personal funds into a business bank account

but would not explain deposits of busin ss funds into a personal

account .

it

T

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

t 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'!it s

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 ,

i 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 o f

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 includ e

•'marked increases in receipts, but they still report substantial

!!'losses .

- 13 success in the charter fishing busines

.7 Petitioners failed to

establish that they acquired any exper ise or took reasonabl e

steps to acquire such expertise in the accepted business or :1

accounting practices required to run a profitable business .

Petitioners . relied on their knowl dge of recreational

il l

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 1small

business experts undercuts petitioners' claim that they engage d

in the charter fishing activity with a profit objective .

is

This factor supports respondent's determination .

3.

Time and Effort Expende d

The fact that a taxpayer devotes uch of his personal time

a

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

profit, particularly if the activity does not have substantia

l

III

personal or recreational elements . Sec . 1 .183-2(b)(3), Income

Tax Regs .

During the years at issue petitioners each maintained fulltime 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 discus in greater detail below ,

Petitioner testified that charte captains are, by andI

large, a tight-lipped group, particular 1y 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 th e

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

1!995-176 (finding that the time taxpayers

II

spent cleaning'and

maintaining their yacht was consistent with the use of the yach t

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 Valu e

A taxpayer's expectation that assets such as land and othe r

r

tangible property used in an activity may appreciate in value an d

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 pro.fit 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 tha t

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

II

the losses incurred during the first 3 years of their charte r

fishing activity .

This factor does not support petitioners '

objective .

!I

asserted profi t

Y

- 15 5 . Success of Taxpayer in Carr in On Other Similar

Dissimilar Activities

or!!

j

f

The fact that the taxpayer has engaged in similar activities

in the past and converted them from unprofitable to profitabl e

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 wor k

r

experience and their charter fishing a tivity, we do not find an y

evidence that petitioners' estimating nd law enforcemen t

experience would indicate that they co ld transform an

unprofitable charter fishing enterpriSE into a profitable one .

This factor does not support petitioners' asserted profi t

objective .

6.

History of Income or Losse s

A series of losses during the init ial stage of an activity

is not necessarily an indication that t he activity is not engage d

r

in for profit . Sec .

1 .183-2(b)(6),

In ome Tax Regs . However ,

continued losses which . cannot be explai ned may indicate that~lth e

activity is not engaged in for profit .

Id .

Petitioners did not earn charter f ishing receipts in exces s

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

Petitioners claimed losses of $101,085 for 2003,

$47,296 fo r

2004, and $33,769 for 2005 . Petitioner s had no clients and no

.1

p

- 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, thei r

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

1

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 suppor t

his contention of a weak charter fishing market . We conclude

that this factor does not support petitioners' asserted ; profit

objective .

7.

Amount of Occasional Profit s

An opportunity to earn a substantial . profit in a highl y

speculative venture . is ordinarily sufficient to indicate that th e

(I, activity is engaged in for profit even though losses or only

poccasional 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 .1832(a), Income Tax Regs . Further, there is no indication that a

windfall profit may ever be generated by this particula r

1'activity . . Therefore, this factor does not support petitioners '

asserted profit objective .

I

17 8.

Taxpayer ' s Financial Status

The fact that the taxpayer does

n

from sources other than the activity m y indicate that the

activity is engaged i n for profit . Se

Tax Regs .

1 .183 -2(b)(8), Incom e

Substantial income from ot h r sources may indicate th e

lack of a profit objective, however ,

personal or recreational elements in t

Petitioners' wage income for eac

is substantial ; petitioners reported c o

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

Schedule C losses, petitioners realized

for each year at issue . Considering t h

recreational elements involved in petit

I

g

activity, as we discuss below, this fac or undercuts petitioners'

claim that they engaged in the activit y with an intent to profit

without regard for tax savings . Se e

T .C . at 233 ; sec . 1 .183-2(b)(8), Income

This factor supports respondent's

9.

Elements of Personal Pleasure

The presence .of personal motivesh i

may indicate that the activity is not e

particularly where there are recreation

involved . Sec . 1 .183-2(b)(9), Income .T

fact that the taxpayer derives personal

loff v . Co mm issioner , 81

I

- 18 i

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

~Itreatment .

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 fro m

the activity . The personal pleasure or recreation tha t

!!,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 .

rSee id .

II .

Summary of Factor s

Having considered the above factors and recognizing that no

one factor is controlling, we conclude that even thoug h

'petitioners may have entered into the charter fishing activit y

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 profitliuobjectiv e

,,as defined by section 1 .183-2(b), Income Tax Regs . Accordingly ,

we hold that respondent correctly applied section 183 by allowin g

expense deductions only to the extent of petitioners' income fro m

'charter fishing .

III .

Penaltie s

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 .sufficien t

evidence indicating that it is appropriate to impose the penalty .

I

See Higbee v . Commissioner , 116 T .C . 4381, 446 (2001) . Once th e

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 unde r

section 6662, which provides for a penalty equal to 20 percen t

an underpayment if the underpayment is dlue to a substantial

'i

understatement of income tax . Sec . 66621(a) and (b)(2) . Sectio n

6662(d)(1)(A) defines a\substantial understatement of income ta x

as an understatement that exceeds the gr

of the tax required to be shown on the r

.year ; or (ii) $5,000 . For each year at

contained an understatement of income to

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

Tax Require d

Year to be Shown Tax Shown j Understatemen t

2003 $17,589 -02004 13,869 $4,261

2005 9,111 3,541

$17,589

9,608

5,57 0

A taxpayer may avoid the applicati o

penalty by proving that he acted with re sonable cause and i

good faith .

See sec . 6664(c)(1) ; see al o Higbee v .

S

- 20 Commissioner ,

supra at 446-447 ; sec . 1 .6664-4(a), Income Ta x

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

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

85 T .C .

934, 947 (1985) ;

Stubblefield v . Commissioner , . T .C . Memo .

1 1 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 avoidin g

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

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

is not an "absolute defense" but merely "a factor to be

1!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 th e

I imposition of a penalty if there . was good faith reliance by th e

ltaxpayer on the advice of a competent adviser .

Jackson v .

21 Commissioner , 86 T .C . 492, 539-540 (1986), affd . 864 F .2d 152 1

I

(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 Associa es P .A . v . Co mm issioner ,

supra at 98 . The taxpayer claiming good faith reliance on

,1

a

competent adviser must demonstrate thatl : "(1) The adviser was a

competent professional who had sufficie t expertise to justify

reliance, (2) the taxpayer provided nec ssary and accurate

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

in good faith on the adviser's judgment "

Id .

at 99 . Relianc e

on a return preparer is not reasonable -here even a cursory

review of the return would reveal inacc4rate .entries . See Prat t

v . Commissioner

T .C . Memo 2002-27 9

1

For the years at issue petitioners had their Federal tax !

returns prepared by a professional prep rer . There is no

evidence that petitioners' preparer was not competent or that'i

petitioners were not justified in relying

on the •preparer' s

I

expertise in preparing tax returns for individuals and sol e

proprietors . It does not .appear from the record that petitioner s

1 .

were anything other than forthright with their preparer .

Petitioners were not educated in account'ng or tax return

preparation .

Petitioners apparently

relied on the preparer's l .

judgment to complete and enter amounts ox proper schedules on :the

~`

-

22

-

returns . It appears that petitioners provided . accurat e

.; information to their preparer for completion of their returns .

This . is not a situation of omission of gross receipts o r

exaggeration of expenses, but rather the proper reporting of

1

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

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

,,,the entire record and considering the demeanor and candor o f

petitioners, we are satisfied that petitioners acted in good

.i .

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 penaltie s

pursuant to section 6662 .

To, reflect our disposition of the issues ,

Decision will be entered

for respondent with respect to

the deficiencies and fo r

petitioners with respect to

the penalties .