2015 Tax Ct. Memo LEXIS 241
Tax Ct.2015Background
- Petitioners Victor and Daniela Kantchev challenged IRS adjustments for tax years 2008–2010; Daniela was later dismissed for lack of prosecution.
- Victor (Mr. Kantchev) engaged in panoramic landscape photography as a hobby/side activity and owned an S corporation, Victory Film Productions, that produced a documentary (“Fire Lily”) and reported losses.
- Mr. Kantchev claimed Schedule C losses for his photography activity (2008–2010) and flow-through/carryover losses from Victory Film (2007 carryover to 2008; 2008 flow-through).
- The IRS disallowed the photography Schedule C deductions, the Victory Film flow-through/carryover losses, and assessed an addition to tax for late filing (2008) and accuracy-related penalties under section 6662 for 2008–2010.
- The Tax Court found Mr. Kantchev’s testimony and witnesses unreliable, found he did not engage in photography with an actual profit objective under section 183, found Victory Film failed to make the required section 181 election, sustained the late-filing addition for 2008, and imposed accuracy-related penalties as explained below.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Mr. Kantchev’s photography activity was engaged in for profit (sec. 183) | He pursued sales (books, prints), marketed with son’s help, and expected later profits; market downturns explained earlier losses | Activity lacked businesslike practices, records, or time commitment; mainly personal enjoyment; minimal receipts | Not engaged in for profit — Schedule C losses disallowed under sec. 183 |
| Whether Victory Film could deduct film production costs / allow 2007 carryover and 2008 flow-through loss (sec. 181) | Substantive intent satisfied; legislative history and substantial compliance should validate deduction even without attached election statement | Section 181 and temporary regs required an election statement attached by the due date; no statement was attached | Victory Film did not make the required sec. 181 election; carryover and flow-through losses disallowed |
| Whether 2008 return filing was timely (addition under sec. 6651(a)(1)) | Petitioners relied on IRS disaster-relief notice and asserted they had an extension; argued reasonable cause for late filing | Petitioners filed May 9, 2009 after April 15 due date; no reliable evidence of an extension request or applicable disaster-relief extension | Respondent met burden to produce; petitioner failed to prove reasonable cause or extension — addition under sec. 6651(a)(1) sustained for 2008 |
| Accuracy-related penalty (sec. 6662) for 2008–2010 | Reliance on return preparer for 2008 flow-through/carryover; otherwise contested penalty applicability | Respondent asserted negligence and substantial understatement as to disallowed Schedule C losses | Penalties for 2008–2010 imposed as to the disallowed photography Schedule C losses (petitioner abandoned contest as to Schedule C items); penalty for 2008 portion attributable to flow-through/carryover was not sustained (respondent abandoned or failed to argue it) |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (stating taxpayer bears burden to show deficiency erroneous)
- Keating v. Commissioner, 544 F.3d 900 (8th Cir.) (profit objective under sec. 183 requires actual and honest intent)
- INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (deductions are a matter of legislative grace; taxpayer must prove entitlement)
- Golanty v. Commissioner, 72 T.C. 411 (profit motive burden and evaluation of section 183 factors)
- Higbee v. Commissioner, 116 T.C. 438 (burden of production for penalties under section 7491(c))