T.C. Memo. 2001-179



                      UNITED STATES TAX COURT



         JESSE EMMIT AND MARJORIE A. RUPERT, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11995-99.                       Filed July 19, 2001.



     Joseph Onwuteaka, for petitioners.

     Elaine H. Warren, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Respondent determined a $19,136 deficiency

and an accuracy-related penalty under section 6662(a)1 of $3,629

in petitioners’ 1996 Federal income tax.   After agreements of the

parties, the issues presented for our consideration are:      (1)


     1
       All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                               - 2 -

Whether petitioners are entitled to deduct certain legal expenses

paid in connection with their daughter’s domestic relations

proceedings; (2) whether petitioners are entitled to claim

depreciation deductions with respect to a rental residence and,

if so, the amount of depreciation to which they are entitled; and

(3) whether petitioners are liable for a section 6662(a) penalty

with respect to the legal expense issue.

I.   Legal and Professional Fee Deduction

                         FINDINGS OF FACT2

      At all pertinent times, petitioners were married and resided

in League City, Texas.   Jesse Emmit Rupert (petitioner) retired

from his position as a drilling manager for Atlantic Richfield

Indonesia, Inc. (Atlantic Richfield), on February 1, 1987.    Since

his retirement, petitioner has been involved in investing and did

a limited amount of engineering consulting during 1991.

      In 1992, petitioners’ daughter Michelle Ann Steele

(Michelle) became involved in a divorce proceeding against her

then husband, Tad Edward Wilkinson (Tad).    When the proceeding

was instituted, Michelle and Tad had a daughter, Ashley, who was

about 2 years old.   During the period 1992 through 1995,



      2
       Because of the discrete nature of the facts and legal
discussion for each issue, the findings of fact and legal
discussion for each issue are separately set forth. The fact
finding is being segregated for convenience only, and all
findings are applicable throughout the opinion. The parties’
stipulation of facts is incorporated by this reference.
                               - 3 -

petitioner studied domestic relations law because he thought that

Michelle was being “cheated”, and he encouraged her to discharge

her attorney.   In 1995 a divorce was granted, and Michelle

received primary custody of Ashley.    Thereafter, by means of a

legal proceeding, Tad sought primary custody of Ashley.    In order

to defend against Tad’s action, petitioner withdrew $30,000 from

his retirement account to pay part of the legal and professional

fees.

     On April 20, 1996, petitioner and his daughter, Michelle,

entered into a written agreement under which petitioner agreed to

pay legal, medical, and other expenses incurred in connection

with Michelle’s claims against Tad in exchange for which Michelle

agreed to pay petitioner 30 percent of any residual recovery

received from Tad.   The residual was payable only after payment

of Michelle’s and petitioner’s expenses.    At that time Michelle

was indigent and without representation.    On April 26, 1996,

after consultation with Attorney Daniel Murphy, petitioners,

through Attorney Murphy, intervened in the custody litigation

between Michelle and Tad.   By intervening, petitioners sought

custody of their granddaughter Ashley.    During October 1996,

Attorney Murphy also began representing Michelle in the custody

proceeding.   During 1996 petitioner incurred $39,274 for legal

expenses including $26,691 in professional fees, $8,550 for

travel, and $4,033 in office expenses.
                                - 4 -

     During October 1996, custody of Ashley was granted to Tad,

who was living in Saudi Arabia.   Petitioner’s only recovery under

the agreement with Michelle was $1,920 recovered in 1999.    As of

the time of trial in this tax case, the divorce proceeding was

still pending and, by its terms, the written agreement between

petitioner and Michelle had terminated.    Petitioners claimed the

$39,274 as “Legal and professional services” on a Schedule C,

Profit or Loss From Business, for “Rupert’s Engineers”, the

principal business activity of which was shown as “consulting”.

No income from consulting was reported for 1996 and none had been

reported since 1991, when $7,710 was reported.    Petitioners’

source of income since 1991 has been Social Security payments,

retirement accounts, and investments.    Since execution of the

agreement with Michelle, petitioner has devoted more than half of

his time to Michelle’s domestic relations problems.

                               OPINION

     Ordinary and necessary expenses paid or incurred in carrying

on a trade or business are deductible under section 162.

Conversely, personal, living, or family expenses are not

allowable.   Sec. 262.   The origin and character of the claim in

litigation is determinative of whether litigation expenses are

personal or deductible.    United States v. Gilmore, 

(1963).   In particular we look to whether the claim arose in

connection with a profit-seeking activity.    Id. at 48.
                               - 5 -

     Petitioners claimed $39,274 of legal, professional, and

related expenses in connection with their daughter’s divorce and

custody litigation.   We note that some portion of the claimed

expenses related to petitioners’ attempt to gain custody of their

grandchild.   Petitioner argues that he was engaged in a full-time

consulting business during the years under consideration and that

his involvement in Michelle’s divorce and custody proceedings was

part of that endeavor.   Respondent has countered that, as a

preliminary matter, petitioner’s consulting activity did not rise

to the level of being a trade or business.   Even if petitioner’s

consulting activity was a trade or business, respondent argues

that the expenses paid in connection with Michelle’s domestic

relations litigation are not directly connected with or

proximately related to petitioner’s consulting activity.

Finally, respondent argues that the origin and very nature of

petitioners’ involvement in their daughter’s domestic relations

activity are personal.   We agree with respondent that the

expenses in question are not deductible.3

     Petitioner retired from his position as a drilling manager

for Atlantic Richfield during 1987 and after that time was paid

on one occasion during 1991 for consulting in connection with his



     3
       We need not decide whether sec. 7491(a) affects the
placement of the burden of proof here, because we resolve the
issues on the basis of a preponderance of the evidence in the
record.
                                 - 6 -

preretirement expertise.    Other than the $7,710 consulting fee

earned during 1991, petitioner had no active income-producing

consulting engagements.    See Commissioner v. Groetzinger, 

 (1987).

     Even if we were to find that petitioner’s consulting

activity reached the level of being a trade or business or other

profit-seeking activity, we are unconvinced that petitioners’

involvement in their daughter’s domestic relations difficulties

was an integral part of petitioner’s consulting activity.

Although petitioner studied domestic relations law and related

matters, he is not a lawyer and not entitled to represent the

interests of another.     In that regard, there was no potential for

profit from “investing” in a divorce or child custody proceeding.

Petitioners’ assistance to their daughter is commendable, but it

is in origin and character a personal matter.

     Petitioner spent a great deal of effort in researching

domestic relations law and assisting his daughter, but that alone

does not make his activity one that is profit seeking.    We also

note that petitioner entered into an agreement with his daughter.

Under that agreement, petitioner would be reimbursed for his

expenditures pro rata, using the ratio of his expenditures to his

daughter’s.   Once their expenditures were reimbursed, then

petitioner was to receive 30 percent and his daughter 70 percent

of any recovery that exceeded the cost of the domestic relations
                                 - 7 -

proceedings.   Although petitioner personally calculated potential

for recovery, he did not possess the background and expertise to

lend credibility to such projections.    There has been no showing

that there was any potential for a recovery that exceeded the

expenditures on behalf of the litigant; i.e., that Michelle would

be entitled to alimony and or some form of damages that exceeded

the amount of expenditures that Michelle and petitioner incurred

in the proceedings.   Even though there was a written agreement,

in substance, petitioner was merely being a good parent and

assisting his daughter in her time of need.    In addition,

petitioners were personally seeking custody of their

granddaughter.   On this record, we are unable to elevate this

arrangement to a profit-seeking activity.

      Accordingly, we hold that petitioners are not entitled to

deduct the $39,274 expended in connection with their daughter’s

domestic relations litigation.

II.   Depreciation

                         FINDINGS OF FACT

      On July 11, 1982, petitioner purchased a 1982 model, 28-foot

mobile home for $36,000, and it was placed on a long-term leased

lot on Lake Cherokee in Henderson County, Texas.    Petitioners

permanently affixed the home to the realty by removing the wheels

and axles, placing it on foundation blocks, and securing it with

steel straps attached to ground anchors.    Petitioners added
                                - 8 -

certain other improvements in and around the home, including a

12- by 24-foot deck, a concrete perimeter, a storage area,

electrical wiring, a water system, a boathouse, a deck, and an

electric lift.    The cost of the improvements was $3,000.

     Because petitioners were stationed overseas until 1986, they

used the home only occasionally for vacations during their

infrequent visits to the United States.    Petitioner had a heart

attack during 1986, and there was no further vacation use after

1985.    When petitioner retired, petitioners purchased a residence

in League City, Texas.    On their 1991 through 1996 tax returns,

petitioners reported the home as a rental property and reflected

income and deductions on Schedules E, Supplemental Income and

Loss.    For each year depreciation approximating $3,9004 was

claimed on the Schedule E in connection with the home.       Gross

rents were reflected for 1991, 1993, and 1994 in the amounts of

$1,782, $4,200, and $350, respectively, and no rents were

reported for the years 1995 through 1998.    The property was first

rented in 1991 when its value was $39,000.

                               OPINION

     Respondent determined that petitioners were not entitled to

$3,900 of depreciation on the home for 1996.    Petitioners’

Schedule E for 1996 reflected a $7,305 loss from rental of the


     4
       For reasons which are not explained in the record,
petitioners claimed $3,900 in some years and $3,910 in others.
For the 1996 tax year, however, petitioners claimed $3,900.
                                - 9 -

home.    That loss comprised the $3,900 claim for depreciation and

$3,405 of other expenses, including utilities, land rent, etc.

In his answer to the petition, respondent alleged “that, if the

mobile home is held for the production of income, the property

should be depreciated as 27.5-year class residential real

property under MACRS [modified accelerated cost recovery system]

rather than as 10-year property under ACRS [accelerated cost

recovery system].”

     The parties stipulated that the acquisition cost of the

rental home was $36,000.   At trial, petitioner’s uncontroverted

and believable testimony reflected that significant improvements

were made to the home, including the removal of wheels and axles,

placing it on foundation blocks, securing it with steel straps

attached to ground anchors, adding a 12- by 24-foot deck, a

concrete perimeter, a storage area, electrical wiring, a water

system, a boathouse, a deck, and an electric lift.   In addition,

petitioner’s uncontroverted testimony was that the improvements

cost $3,100.5   Petitioner, as owner of the property, testified

that the value of the home and the improvements was at least

$39,100 in 1991, the first year it was rented.   See sec.

1.167(g)-1, Income Tax Regs.   Petitioner testified that no



     5
       Although petitioner testified that the cost of the
improvements was $3,100, for 1996 the depreciation claimed was
$3,900, which would indicate $3,000 rather than $3,100 of
improvements. See also supra note 4.
                               - 10 -

depreciation was claimed or allowable before 1991.    No evidence

contradicted petitioner’s testimony.    Accordingly, there is

sufficient and credible evidence in the record to establish that

petitioners’ basis in the rental home was $39,000 as of 1991.

     We find that the property was held for the production of

income during 1996 and that it was placed in service in 1991.

Our findings are supported by petitioner’s uncontroverted

testimony reflecting his intent to rent or sell the property

during 1996 and by the fact that it was rented during prior

years.    Respondent argues that the rentals and income reported

from the property were received from a person related to

petitioners.    That fact, standing alone, does not show that the

rental activity was not bona fide or that no profit was intended.

There has been no evidence of petitioners’ personal use after

1985.    There has been no showing that the rentals were not at

arm’s length or that the amounts received were not based on fair

rental rates.

     Finally, respondent argues that petitioners must use a 27.5-

year life in accord with MACRS.    Respondent admits that

manufactured homes were treated under ACRS as having a 10-year

life.    Sec. 168(h)(3) (before the Tax Reform Act of 1986 (TRA),

Pub. L. 99-514, 110 Stat. 2085).    However, TRA sections 201, 203,

and 211, 100 Stat. 2122-2123, 2143, established a 27.5-year life

under MACRS for this type of property if it was placed in service
                                   - 11 -

after December 31, 1986.        See Hosp. Corp. of Am. v. Commissioner,

, 42 (1997).        Accordingly, the key here is the date

when the property was placed in service.          If it had been placed

in service before 1987, then petitioners would have been able to

elect the 10-year life.6       The property was rented during 1991,

1992, and 1993.        In that regard, petitioner testified that the

property was placed in service in 1991, the first year it was

rented.        On the basis of record, we find that the property was

placed in service in 1991, the first year that it was rented.

Accordingly, the 10-year life cannot apply, and the depreciation

must be based on a 27.5-year life.          We leave the parties to

compute the amount of depreciation allowable for the 1996 tax

year.

III.        Accuracy-Related Penalty

                                  OPINION7

        Respondent determined that petitioners were liable for an

accuracy-related penalty under section 6662 with respect to the

portion of the deficiency that is caused by any underpayment

related to the $39,274 legal and professional fee deduction and


        6
      We note that the returns available in our record date
back only as far as 1991. If petitioners had placed the
property in service before 1987 using a 10-year life, there
would have been no basis left to depreciate as of the 1996
tax year.
        7
       No specific finding is set forth here because the findings
of fact set forth with respect to the legal and professional fees
will suffice.
                              - 12 -

the omission of the $30,000 withdrawal from petitioner’s

retirement account.   Respondent did not apply the accuracy-

related penalty to the $3,900 depreciation adjustment.

Respondent, in his answer, conceded that petitioners are not

liable for the accuracy-related penalty with respect to the

omission from income of the $30,000 withdrawal from petitioner’s

retirement account.

     Section 6662(a) imposes a 20-percent accuracy-related

penalty if any portion of an underpayment is attributable to

negligence or disregard of rules or regulations or any

substantial understatement of tax.     Negligence is a lack of due

care or failure to do what reasonable and prudent persons would

do under the circumstances.   Marcello v. Commissioner, 

, 506 (5th Cir. 1967), affg. in part and remanding in part on

another issue 

 (1964).

     No penalty is imposed if it is shown that the taxpayer had

reasonable cause and acted in good faith.    Sec. 6664(c).   A

taxpayer may be considered to have good faith or to be reasonable

if he relied on his accountant or attorney and that reliance was

reasonable.   See United States v. Boyle, 

, 251

(1985).   Petitioners contend that they relied on attorneys with

respect to their pursuit of their daughter’s domestic relations

litigation, but there is no showing that petitioners relied on

professionals for their reporting position where they claimed the
                               - 13 -

$39,274 as expenses incurred in petitioner’s consulting business.

We note that petitioner prepared his own 1996 Federal income tax

return.

     Under section 7491(c), respondent must carry the “burden of

production” with respect to the question of whether petitioners

are liable for penalties, including the accuracy-related penalty.

See Higbee v. Commissioner, 

___, ___, (2001) (slip op.

at 14).    We have concluded that the burden of production required

of the Commissioner is that he “must come forward with sufficient

evidence indicating that it is appropriate to impose” the

accuracy-related penalty.    Id. at ___ (slip op. at 15).

     There is sufficient evidence in this record to support our

holding that respondent has met the above-described burden.

Petitioners’ very act of veiling their claim of expenses for

their daughter’s domestic relations litigation as part of an

engineering consulting business shows that they acted negligently

and not with good faith.    Petitioners’ reporting position gave

the false impression that the $39,274 was being claimed in a

Schedule C activity that was connected with “Engineering”.    In

addition, petitioners’ attempt to claim what are clearly personal

expenditures as a business item supports the imposition of the

penalty.   Under these circumstances, we find petitioners liable

for the accuracy-related penalty of section    6662(a) with respect

to the portion of the underpayment attributable to their claim of
                             - 14 -

the $39,274 of legal and professional fees.

     To reflect the foregoing and the agreement of the parties,

                                   Decision will be entered

                              under Rule 155.