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The determination of whether a taxpayer acted with
reasonable cause and in good faith is made on a case-
by-case basis, taking into account all pertinent facts
and circumstances. * * * Circumstances that may
indicate reasonable cause and good faith include an
honest misunderstanding of * * * law that is reasonable
in light of all of the facts and circumstances,
including the experience, knowledge, and education of
the taxpayer. * * *
Sec. 1.6664-4(b)(1), Income Tax Regs.
B. Analysis and Conclusion
On brief, respondent alleges that petitioner’s failure “to
maintain and produce adequate records of his alleged business
activities” shows both negligence and intentional disregard of
the section 6001 requirement to keep permanent records to
establish his gross income and deductions. Respondent also
argues that “petitioner has not offered any evidence * * * that
he acted reasonably and in good faith in filing his 1997 tax
return.” Petitioner disagrees.
From his testimony, we infer that, both before and during
the years at issue, petitioner was seeking to use one or more of
his three investment properties in the conduct of a trade or
business. Respondent does not challenge that testimony, and we
have no reason to disbelieve it.8 Petitioner’s error was to
treat the expenses associated with his attempts to establish a
business operation at one or more of his properties (essentially
8 Petitioner’s testimony is consistent with the examining
agent’s determination to treat certain of petitioner’s Schedule C
expenses for 1997 as either deductible (on Schedule A) or
capitalizable expenses associated with “rental property”.
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Last modified: May 25, 2011