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Petitioner acknowledged at trial that "I didn't have any success
at all." However, he produced no evidence to show that he
changed the manner in which he operated his activity in order to
make the activity profitable. It is quite evident that
petitioner derived tremendous pleasure from the activity. He had
a great love for horses and fantasized winning the Kentucky
Derby. Despite that fantasy, however, he failed to conduct the
activity with an intent that, at some realistic point, it would
attain a profitable status. Respondent, therefore, is sustained
on this issue.
The next issue is whether petitioner is liable for the
addition to tax under section 6662(a). Section 6662(a) provides
that, if that section is applicable to any portion of an
underpayment in taxes, there shall be added to the tax an amount
equal to 20 percent of the portion of the underpayment to which
section 6662 applies. Under section 6664(c), no penalty shall be
imposed under section 6662(a) with respect to any portion of an
underpayment if it is shown that there was a reasonable cause,
and that the taxpayer acted in good faith with respect to the
underpayment.
Section 6662(b)(1) provides that section 6662 shall apply to
any underpayment attributable to negligence or disregard of rules
or regulations. Negligence is defined as lack of due care or
failure to do what a reasonable and ordinarily prudent person
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