-5-
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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