                      T.C. Memo. 2011-158



                     UNITED STATES TAX COURT



                 RONALD L. FAUST, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9231-09.                Filed July 6, 2011.



     Ronald L. Faust, pro se.1

     Christina L. Lewerenz, for respondent.




     1
      Henry Stoever, an attorney who is not a member of the Tax
Court bar, was initially recognized by the Court as Ronald
Faust’s representative under Rule 24(a)(4) of the Tax Court Rules
of Practice and Procedure. Stoever represented Ronald Faust at
the calendar call. Shortly before trial, Stoever and Ronald
Faust asked that Stoever’s appearance be withdrawn, and the Court
ordered the appearance withdrawn.
                                     -2-

                  MEMORANDUM FINDINGS OF FACT AND OPINION


     MORRISON, Judge:       The petitioner, Ronald L. Faust, and his

wife, Toni B. Faust, filed joint income-tax returns for 2005 and

2006.       The Internal Revenue Service (the IRS)2 issued a statutory

notice of deficiency to the Fausts on January 26, 2009,

determining the following income-tax deficiencies and accuracy-

related penalties:

                                             Penalty
                  Year     Deficiency       Sec. 6662
                  2005        $649           $129.80
                  2006       1,385            227.00

Seeking a redetermination, Ronald Faust filed a Tax Court

petition.       The petition was not signed by his wife, and therefore

she is not a party to this case.        After a concession,3 three

issues remain for decision:

        •      Are the deductions claimed as the business expenses of

               MacLeisure Creations allowable?

        •      Are the deductions claimed as the employee business

               expenses of Ronald Faust’s wife allowable?




     2
      We use the term “IRS” to refer to both the Internal Revenue
Service and to the Commissioner of Internal Revenue, who is the
head of the IRS and is the respondent in this case.
     3
      Faust concedes that his wife’s taxable pension income was
$13,096.86, not $13 as reported on the 2006 tax return.
                                -3-

     •    Is Faust liable for the penalty imposed by section

          6662(a) on inaccurate tax returns?4

                         FINDINGS OF FACT

     Reverend Ronald Faust resided in Missouri at the time he

filed his petition with the Tax Court.     The case was tried in

Kansas City, Missouri.   The parties stipulated some of the facts;

these stipulations are adopted as factual findings.

     Faust is a retired minister.     After his retirement, he

supposedly created a new enterprise called MacLeisure Creations.

The word “MacLeisure” is a combination of Ronald Faust’s previous

name, “Mac Keyes”, and the phrase “leisure ministry”.5

     In Faust’s view, MacLeisure Creations encompassed virtually

all his activities.   Consistent with this view, Faust claimed

business deductions on his 2005 and 2006 joint tax returns for

the costs of, among other things:

     •    writing books that he distributed to his friends and

          family for free;

     •    buying groceries;

     •    buying books and magazines;

     •    going on ski trips with friends;

     •    buying boating equipment;


     4
      All references to sections are to the Internal Revenue Code
of 1986, as in effect during the tax years 2005 and 2006.
     5
      Faust had used “Mac Keyes” as his full name.
                                  -4-

     •    repairing his washing machine;

     •    repairing and maintaining his house;

     •    dining with his wife;

     •    buying clothes for his son;

     •    attending comedy shows;

     •    paying utility and telephone bills;

     •    attending art exhibits with his daughter, who is an

          artist.

     During the 2005 and 2006 years Faust’s wife was employed by

the Montessori Center Inc., Curves for Women, Casa de los Ninos,

Inc., and Rondamar Enterprises, Inc.6

     On their 2005 Form 1040, U.S. Individual Income Tax Return,

the Fausts reported gross receipts of $235 from Ronald Faust’s

supposed enterprise, “MacLeisure Creations”. The Fausts reported

that the enterprise had business expenses of $20,771, with a

resulting business loss of $20,536.     The return also claimed that

Faust’s wife had employee business expenses of $6,157.

     On their 2006 income-tax return the Fausts claimed that

MacLeisure Creations earned $210 in gross receipts, expended

$36,509, and had a business loss of $36,299.    The return also

claimed that Faust’s wife had employee business expenses of

$5,821.


     6
      The Forms W-2, Wage and Tax Statement, name the “Montesson
Center, Inc.” as the employer of Faust’s wife. This appears to
be a typographical error.
                                -5-

     In its notice of deficiency, the IRS disallowed the

deductions for business expenses claimed for MacLeisure Creations

and instead allowed the Fausts itemized deductions up to the

amount of the gross income reported for MacLeisure Creations

(i.e., $235 for 2005 and $210 for 2006).    The IRS also disallowed

the deductions for employee business expenses of Faust’s wife.

                              OPINION

     Faust bears the burden of proving that the determinations in

the notice of deficiency are erroneous.    See Rule 142(a)(1), Tax

Court Rules of Practice and Procedure.    Faust does not assert

that the burden of proof shifts to the IRS under section 7491(a).

On the record before us, we conclude that the burden of proof

does not shift to the IRS under that section.

1.   Are the Business Expenses Claimed for MacLeisure Creations
     Deductible?

     The IRS’s notice of deficiency made adjustments that were

premised on the theory that the activities of MacLeisure

Creations were not engaged in for profit within the meaning of

section 183.   This theory was thoroughly vindicated at the trial.

Section 1.183-2(a) of the Income Tax Regulations contains a

nonexhaustive list of nine factors to consider in determining

whether an activity is conducted for profit.    Considering these

nine factors, we believe that MacLeisure Creations was not

conducted for profit:
                                  -6-

     •    “Manner in which the taxpayer carries on the activity.”

          Faust kept no separate bank accounts or books for

          MacLeisure Creations.    He did not systematically

          analyze or monitor the profitability of the activities.

          Although Faust had a document entitled “Business

          Plan:”, the existence of this document does not evince

          a desire to make a profit.    At trial Faust admitted

          that he drafted the document for tax purposes and that

          he really did not intend to earn a profit.7

     •    “The expertise of the taxpayer or his advisors.”

          There is no evidence that Faust had expertise in

          operating the activities for profit, or that he sought

          advice or guidance on how to make the activities

          profitable.

     •    “The time and effort expended by the taxpayer in

          carrying on the activity.”    Faust testified that he

          spent all his time on the activities of MacLeisure

          Creations.    Although the amount of time expended on an

          activity may indicate that the activity was intended to

          earn a profit, the amount of time that Faust spent on

          the activities of MacLeisure Creations is merely the




     7
      We do not consider whether this admission alone is
dispositive of the conducted-for-profit inquiry.
                            -7-

    result of his expansive definition of the supposed

    enterprise.

•   “Expectation that assets used in activity may

    appreciate in value.”     There is no evidence that any of

    the assets used in the activities were expected to

    increase in value.

•   “The success of the taxpayer in carrying on other

    similar or dissimilar activities.”     Although Faust is

    an ordained minister and earned a living at one time as

    a paid employee of a church, there is no evidence that

    he ever profitably carried on the activities in

    question independent of an established church.

•   “The taxpayer’s history of income or losses with

    respect to the activity.”     The Fausts reported that

    MacLeisure Creations had large net losses eight years

    in a row.   Evaluated as a business, the supposed

    activities of MacLeisure Creations have been a

    financial disaster.

•   “The amount of occasional profits, if any, which are

    earned.”    Faust never earned a profit from the

    MacLeisure Creations activities.

•   “The financial status of the taxpayer.”     The Fausts

    relied on other income to subsidize the activities.
                                  -8-

     •      “Elements of personal pleasure or recreation.”   Faust

            derived personal enjoyment from the activities he

            conducted under the guise of MacLeisure Creations.

     The activities of MacLeisure Creations were not conducted

for profit.    The expenses are therefore not deductible, except,

as the IRS concedes, to the extent of the gross income from the

activities.    See sec. 183(b)(2).   The IRS also argues that the

deductions must be disallowed because the expenses are not

substantiated, but we need not address this additional argument.

2.   Are the Employee Business Expenses of Faust’s Wife
     Allowable?

     An employee is entitled to a deduction for the ordinary and

necessary expenses paid in performing services for his or her

employer.    See sec. 162(a).   However, no deduction is allowed for

personal, living, or family expenses.     See sec. 262(a).

     Faust failed to demonstrate that any of the expenses claimed

on the returns as employee business expenses were related in any

way to his wife’s employment.    Therefore, the deductions are not

allowable.

3.   Is Faust Liable for the Section 6662(a) Accuracy-Related
     Penalty?

     Section 6662(a) and (b)(1) imposes a 20 percent accuracy-

related penalty on any portion of the underpayment of tax

required to be shown on a return if the portion is attributable

to negligence or disregard of rules or regulations.     The term
                                -9-

“negligence” includes any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code.   Sec.

6662(c).   The penalty is not imposed when the taxpayer can show

that the underpayment was due to reasonable cause and good faith.

Sec. 6664(c).

     The IRS bears the burden of producing evidence that it is

appropriate to impose the accuracy-related penalties for the tax

years 2005 and 2006.   See sec. 7491(c) (“the Secretary shall have

the burden of production in any court proceeding with respect to

the liability of any individual for any penalty, addition to tax,

or additional amount imposed by this title”).   The taxpayer has

the burden of proof.   See Higbee v. Commissioner, 116 T.C. 438,

446-447 (2001) (“Congress’ use of the phrase ‘burden of

production’ and not the more general phrase ‘burden of proof’

* * * indicates to us that Congress did not desire that the

burden of proof be placed on the Commissioner with regard to

penalties.”).   The IRS has presented sufficient evidence that the

contested deductions were reported on the returns as the result

of negligence in regard to the federal income tax laws.

Furthermore, Faust has not persuaded us that the reporting was

not the result of negligence.

     The taxpayer has the burden of proving reasonable cause and

good faith regarding an underpayment.   See Higbee v.

Commissioner, supra at 446 (“the Commissioner need not introduce
                                 -10-

evidence regarding reasonable cause, substantial authority, or

similar provisions”; “the taxpayer bears the burden of proof with

regard to those issues”).   We are not persuaded that the Fausts

had reasonable cause for the underpayments or that they acted in

good faith in preparing their tax returns in the erroneous manner

in which they did.   Consequently, the accuracy-related penalty is

imposed upon the underpayments of tax attributable to the

challenged tax treatment.

     To reflect the foregoing,


                                             Decision will be entered

                                        for respondent.
