A few weeks ago, I blogged a Tax Court decision that an IRS employee failed to establish that her side business was a true business and thus could not deduct expenses from the activity and was subject to an accuracy related penalty.  On Friday, the Tax Court again ruled against the bona-fides of an IRS employee’s side business and sustained an accuracy related penalty.

In Royster v. Commissioner, T.C. Summ. Op. 2007-151 (8/30/07), the taxpayer earned $65,000/year as a full-time computer equipment analyst/information technology specialist with the IRS. The Tax Court treated the employee’s Royster Basketball School ("RBS") as a hobby and disallowed over $60,000 in claimed losses over a three-year period under § 183 and sustained an accuracy related penalty:

[P]etitioner repeatedly testified that he did not intend to derive a profit from RBS, per se, but had high hopes that the success of his school would parlay into a personal opportunity for himself to work for a major athletic shoe or apparel company. With startling candor, petitioner testified that he did not take steps to make RBS profitable, as many of his students could not afford the $300 enrollment fee. While we are sympathetic to the accommodations petitioner made to the young players who played for RBS, we cannot look askance at petitioner’s admissions and the lack of any business plans or budget projection aimed at making RBS into a profitable enterprise. Moreover, RBS never made a profit, and the record is devoid of any evidence that petitioner took steps to operate RBS in a businesslike manner. For the foregoing reasons, we find that petitioner’s basketball school activity was not engaged in for profit within the meaning of § 183. …

Petitioner, however, did not seek the advice of any such expert prior to the filing of the returns for the years in issue, despite the fact that he was employed during these years by the IRS. Petitioner did not testify that he honestly believed that he could claim the expenses related to RBS in the years at issue. Moreover, petitioner failed to produce any books, records, or other work papers in response to respondent’s six requests for information. Based on these facts, we conclude that petitioner did not act with reasonable cause and in good faith. Accordingly, we hold that petitioner is liable for the accuracy-related penalties under § 6662(a).