MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined deficiencies in petitioners' Federal income tax of $ 8,546 and $ 4,750 for 1999 and 2000, respectively. Respondent also determined a
2005 Tax Ct. Memo LEXIS 268">*269 FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time they filed the petition, petitioners resided in Berkeley, California.
Michael Paul Remler (Dr. Remler) and Pauline M. Velez (Dr. Velez) (collectively referred to as petitioners) are husband and wife. During the years in issue, petitioners were employed full time by the Department of Veterans Affairs. Dr. Remler is a neurologist and previously served as the child neurologist for the Autism Diagnostic and Teaching Program (TEACCH) at the University of North Carolina. Dr. Velez is a surgeon, and during the years in issue, she also ran a surgery practice.
Petitioners' son, GJR, was born on April 13, 1994. 3 GJR was diagnosed with autism in 1995, and his condition was classified as moderately severe in 1997. From February 1997 to August 1998, GJR was enrolled in a behavioral intervention program with the Behavioral Intervention Associates (BIA). BIA provided diagnostic and supervisory services to aid petitioners in educating GJR at home. Petitioners also received training in special education methods from2005 Tax Ct. Memo LEXIS 268">*270 the Autism Institute of America (AIA).
From the spring of 1997 through November 2000, GJR was enrolled in different special education programs in the Berkeley Unified School District (BUSD). Petitioners became progressively dissatisfied with the school-based programs. In coordination with BUSD, petitioners developed an integrated afterschool program to supplement the school-based programs.
By November 2000, petitioners decided that GJR's needs could no longer be met in the school-based programs. GJR was pulled from all school-based programs and was educated at home in what petitioners call a "microschool". 4 BUSD agreed to reimburse petitioners for GJR's special education expenses up to $ 44,000 per year in exchange for petitioners' releasing BUSD from any liability for failing to provide GJR with a "free and appropriate public education" (FAPE).
2005 Tax Ct. Memo LEXIS 268">*271 Petitioners did not spend much time teaching GJR in either the afterschool program or the microschool. Instead, petitioners hired several people who were interested in being teachers, trained them using methods petitioners had developed or learned through BIA and AIA, and had them teach GJR. Claudia Alexander (Ms. Alexander) was one of GJR's teachers from June 1998 through the years in issue.
Petitioners had two sources of funding for the afterschool program and the microschool, Regional Center and BUSD. Regional Center, a California State organization that provides funding for qualifying families for special education needs, paid petitioners directly for a limited number of hours petitioners spent on GJR's education. From June 1998 through November 2000, petitioners received indirect funding from BUSD channeled through Ms. Alexander. BUSD paid Ms. Alexander, who would then sign her paychecks over to petitioners. Petitioners would use the paychecks and additional funds to pay Ms. Alexander and the other teachers at an agreed-upon hourly wage. Beginning in November 2000, petitioners received direct reimbursement from BUSD, as described above. GJR's education expenses exceeded funding2005 Tax Ct. Memo LEXIS 268">*272 for both years in issue, and petitioners paid out-of-pocket for the remainder.
GJR was the only student in petitioners' afterschool program and microschool. Petitioners did not advertise or otherwise seek additional students. Petitioners did not apply for or receive any grants during the years in issue. Petitioners did not maintain a separate bank account for, or have any separate business assets dedicated to, the afterschool program or the microschool.
Petitioners timely filed joint Federal income tax returns for the years in issue. Attached to each return was a Schedule C, Profit or Loss From Business, for petitioners' "special education" activity. Petitioners deducted Schedule C losses with respect to the special education activity of $ 24,417 and $ 12,351, and reported adjusted gross income of $ 229,665 and $ 229,219 for 1999 and 2000, respectively.
On November 6, 2003, respondent sent petitioners a notice of deficiency for the years in issue. Respondent determined that petitioners' special education activity was not a bona fide business activity entered into for profit and disallowed the claimed deductions. Respondent also determined that petitioners were liable for an accuracy-related2005 Tax Ct. Memo LEXIS 268">*273 penalty of $ 42 under
OPINION
The first issue is whether petitioners' special education activity was an activity engaged in for profit during the years in issue.
2005 Tax Ct. Memo LEXIS 268">*274
A taxpayer must show that he engaged in an activity with an actual and honest objective of making a profit in order to deduct expenses of the activity under either
The question of whether a taxpayer engages in an activity with the intention of making a profit is one of fact to be resolved on the basis of all the surrounding facts and circumstances.
Petitioners contend that they entered into the special education activity with the expectation of making a profit. Respondent2005 Tax Ct. Memo LEXIS 268">*277 contends that petitioners did not have the requisite profit motive. To make our determination, we address the nine factors found in
Education Activity
The fact that the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records may indicate that the activity is engaged in for profit.
When the taxpayer conducts the activity in a manner substantially similar to other activities of the same nature which are profitable, a profit motive may be indicated.
GJR was the only student in petitioners' afterschool program and microschool. Petitioners did not advertise or otherwise seek additional students. Petitioners did not maintain a separate bank account and did not have a written business plan. In addition, petitioners testified that they expected to make a profit. However, BUSD reimbursed petitioners only for special education expenses and Regional Center paid petitioners only for a limited number of hours worked. Petitioners testified that they could get additional funding through grants, but they did not apply for or receive any grants during the years in issue. Because their current funding was limited and petitioners did not seek additional funding, we find that petitioners did not have a plausible strategy for earning a profit.
The fact that petitioners did2005 Tax Ct. Memo LEXIS 268">*279 not advertise, maintain a separate bank account, have a written business plan, or have a plausible strategy for earning a profit, outweighs any positive inference made from petitioners' adequate records. We find that petitioners did not operate the special education activity in a businesslike manner. These facts weigh in favor of respondent.
2. Expertise of Petitioners or Their Advisers
Preparation for the activity by extensive study of its accepted business, economic, and scientific practices, or consultation with those who are expert therein, may indicate a profit motive.
Dr. Remler served as the child neurologist for TEACCH at the University of North Carolina. Petitioners also received guidance and training in special education methods from2005 Tax Ct. Memo LEXIS 268">*280 BIA and AIA. While petitioners had no experience running a school, we find that Dr. Remler had expertise in dealing with child autism, and petitioners made efforts to gain experience in special education. These facts weigh in favor of petitioners.
3. Time and Effort Expended by Petitioners in Carrying on the
Activity
The fact that the taxpayer devotes much of his personal time and effort to carrying on an activity may indicate an intention to derive a profit, particularly if the activity does not have substantial personal or recreational aspects.
4. Expectation That Assets Used in Activity May Appreciate in
Value
The expectation that assets used in the activity will appreciate in value sufficiently to lead to an overall profit when netted against losses may indicate a profit motive.
5. Success of Petitioners in Carrying on Other Similar or
Dissimilar Activities
The fact that the taxpayer has engaged in similar activities in the past and converted them to profitable enterprises may indicate that he engaged in the present activity for profit.
6. Petitioners' History of Income or Losses With Respect to
the Activity
A series of losses during the initial or startup stage of an activity may not necessarily be an indication that the activity is not engaged in for profit.
7. The Amount of Occasional Profits, If Any, Which Are
Earned
The amount of profits in relation to the amount of losses incurred may provide a useful criterion in evaluating whether the taxpayer engaged in the activity for profit.
8. The Financial Status of Petitioners
Substantial income from sources other than the activity may indicate that the taxpayer is not engaged in the activity for profit, particularly if the losses generate substantial tax benefits.
9. Elements of Personal Pleasure or Recreation
The presence of personal or recreational motives in conducting an activity may indicate that the taxpayer is not conducting the activity for profit.
While petitioners testified that they hoped to make a profit, petitioners also testified that the purpose of their special education activity was to provide GJR, their son, with an education that met his needs as an autistic child. Taking into consideration the factors discussed above, we find that petitioners' predominate motive for undertaking the special education activity was personal. These facts weigh in favor of respondent.
In summary, the only factor indicating a profit motive is petitioners' expertise in dissimilar activities. This factor is heavily outweighed by the manner in which petitioners conducted the activity, the time and effort they expended, the lack of occasional profits, petitioners' financial status, and their personal motive. We hold that petitioners did not engage in the special education activity for profit during the years in issue within the meaning2005 Tax Ct. Memo LEXIS 268">*285 of
B.
The second issue is whether petitioners are liable for an accuracy-related penalty. Respondent determined that petitioners were liable for a penalty of $ 42 under
The Commissioner bears the burden of production with respect to penalties.
The parties stipulated that petitioners received, but did not report, a2005 Tax Ct. Memo LEXIS 268">*286 State income tax refund of $ 3,249 in 2000. We find that respondent has met his burden of production. Petitioners have presented no evidence that their omission of the State income tax refund from their 2000 return was the result of reasonable cause. Accordingly, we hold that petitioners are liable for the accuracy-related penalty pursuant to
In reaching our holdings, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
To reflect the forgoing and the concessions of the parties,
Decision will be entered under
1. Unless otherwise noted, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Petitioners conceded they were liable for increases to taxable income of: (1) $ 8,920 and $ 10,903 for 1999 and 2000, respectively, resulting from disallowed deductions for real estate losses; (2) $ 11,570 and $ 24,639 for 1999 and 2000, respectively, resulting from disallowed deductions claimed in connection with petitioner Velez's Schedule C surgery activity; (3) $ 1,118 for 1999 resulting from a disallowed Keogh deduction; and (4) $ 3,249 for 2000 attributable to a State income tax refund. The parties signed a Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax, regarding the settled issues, and petitioners paid the additional tax liability in full prior to trial.↩
3. We shall refer to petitioners' son using only his initials.↩
4. For purposes of clarity, the Court will use petitioners' terminology of afterschool program and microschool when referring to petitioners' home-schooling activities.↩
5.