Michael Paul Remler and Pauline M. Velez - Page 6

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          were liable for an accuracy-related penalty of $42 under section            
          6662(a) for 2000 based on petitioners’ omission of a State income           
          tax refund from their return.  In response to the notice of                 
          deficiency, petitioners filed their petition with this Court on             
          December 24, 2003.                                                          
                                       OPINION                                        
          A.   Petitioners’ Special Education Activity                                
               The first issue is whether petitioners’ special education              
          activity was an activity engaged in for profit during the years             
          in issue.  Section 183(a) provides that if an individual engages            
          in an activity, and “if such activity is not engaged in for                 
          profit, no deduction attributable to such activity shall be                 
          allowed under this chapter except as provided in this section.”5            
          Section 183(c) defines an “activity not engaged in for profit” as           
          “any activity other than one with respect to which deductions are           
          allowable for the taxable year under section 162 or under                   
          paragraph (1) or (2) of section 212.”                                       
               Section 162 allows the taxpayer to deduct expenses of                  
          carrying on a taxpayer’s trade or business if those expenses are            


               5  Sec. 183(b)(1) provides that deductions which would be              
          allowable without regard to whether such activity is engaged in             
          for profit shall be allowed.  Sec. 183(b)(2) provides that                  
          deductions which would be allowable only if such activity is                
          engaged in for profit shall be allowed “but only to the extent              
          that the gross income derived from such activity for the taxable            
          year exceeds the deductions allowable by reason of paragraph                
          (1).”  Neither subsection is at issue in the instant case.                  





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