Patrick F. and Arlene Gwon Sheehy - Page 5

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          provides that depreciation allowances under section 167 shall be                   
          considered expenditures under section 174.                                         
                Petitioner paid $165,000  to  acquire  interests  in  the                    
          thoroughbred racehorses.    The  racehorses  are  section  167                     
          depreciable property.  None of the amount was expended on research                 
          costs; accordingly, we hold that no portion of the $165,000 is                     
          deductible as a section 174(a) research and development expense.3                  
          Issue 2.  Section 6662(a) Penalty                                                  
                Section 6662 imposes a penalty equal to 20 percent of the                    
          portion of the underpayment that is attributable to negligence or                  
          disregard of rules or regulations.  Sec. 6662(a) and (b)(1).                       
                "Negligence" includes any failure to make a reasonable attempt               
          to comply with the provisions of the Internal Revenue Code, and                    
          "disregard" includes any careless, reckless, or intentional                        
          disregard.  Sec. 6662(c).  Negligence is defined as the lack of due                
          care or the failure to do what a reasonable and ordinarily prudent                 
          person would do under the circumstances.  Marcello v. Commissioner,                


                3    Petitioners claim that prior to 1991 they deducted the                  
          purchase price of racehorses as research and development expenses                  
          on their Federal income tax returns and that upon audit of their                   
          tax returns, respondent acquiesced in such treatment.  Thus, they                  
          argue, they should be allowed to similarily deduct the purchase                    
          price of the racehorses for the year 1991.  We reject                              
          petitioners' argument based on the established principle that                      
          each tax year is considered separately.  See Harrah's Club v.                      
          United States, 228 Ct. Cl. 650, 661 F.2d 203, 205 (1981).                          
          However, we believe respondent's allowance of a deduction of the                   
          purchase price for petitioner's racehorse interests in prior                       
          years is a factor to be considered with respect to the sec.                        
          6662(a) accuracy-related penalty.                                                  




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