Kurt A. Strode v. Commissioner of Internal Revenue

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
KURT A. STRODE,
Petitioner - Appellant,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent - Appellee.
No. 12-73656
Tax Ct. No. 10493-10
MEMORANDUM*
KURT A. STRODE,
Petitioner - Appellant,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent - Appellee.
No. 12-73657
Tax Ct. No. 27274-08
Appeal from a Decision of the
Tax Court
Submitted October 19, 2015**
* This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
** The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
FILED
OCT 23 2015
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

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San Francisco, California
Before: PAEZ, MURGUIA, and HURWITZ, Circuit Judges.
Kurt A. Strode appeals from a Tax Court decision affirming disallowance by
the Internal Revenue Commissioner of business expense deductions related to
Strode’s operation of “Intcom, Inc.,” and the Commissioner’s associated imposition
of an accuracy-related penalty. We affirm.
“[W]e review the tax court’s conclusions of law de novo and its factual
findings for clear error.” Xilinx, Inc. v. Comm’r, 598 F.3d 1191, 1194 (9th Cir.
2010).
1. The Tax Court did not commit clear error in finding that Intcom was
not an activity engaged in for profit pursuant to 26 U.S.C. § 183 and in disallowing
Strode’s 2005 and 2007 business expense deductions. Wolf v. Comm’r, 4 F.3d 709,
712-13 (9th Cir. 1993); see also Keanini v. Comm’r, 94 T.C. 41, 46 (1990) (stating
taxpayer’s “actual and honest objective of making a profit” is a fact to be resolved
and “more weight is accorded to objective facts than to the taxpayer’s mere statement
of intent”) (citation omitted).
2. Strode’s focus on 26 U.S.C. § 183(d) is misplaced. That statute
provides for a presumption that an activity is “engaged in for profit” if certain
historic measures of profitability have been achieved. Intcom was never profitable,
and absence of profits is relevant evidence of whether an activity is “engaged in for

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profit” as required by § 183(a). 26 U.S.C. § 183(a); Treas. Reg. § 1.183-2(a),
(b)(6).
3. Strode’s attacks on the validity of Treasury Regulation § 1.183-2(a) are
unavailing. This court has repeatedly utilized the regulation to determine whether
an activity is “engaged in for profit.” See, e.g., Hill v. Comm’r, 204 F.3d 1214,
1218 (9th Cir. 2000); Wolf, 4 F.3d at 713; Skeen v. Comm’r, 864 F.2d 93, 94 (9th
Cir. 1989); Polakof v. Comm’r, 820 F.2d 321, 324 (9th Cir. 1987); Indep. Elec.
Supply, 781 F.2d 724, 726-29 (9th Cir. 1986); see also Strode v. Comm’r, 109
T.C.M. (CCH) 1599, 2015 WL 3897787, at *3 n.7 (2015) (explaining that factors in
§ 1.183-2(a) are “derived from caselaw” and would be considered “even if the
regulation were invalid (which it is not)”). For the reasons explained by the
Commissioner, his application of § 1.183-2(a) here does not violate the
Administrative Procedure Act, see Strode, 109 T.C.M. (CCH) 1599, 2015 WL
3897787, at *3 n.7, nor does the Regulatory Flexibility Act, 5 U.S.C. §§ 601 to 612,
apply because § 1.183-2(a) was promulgated before that Act became law.
4. Although the 2010 deficiency notice included an incorrect statement
regarding the presumption of profitability set forth in 26 U.S.C. § 183(d), “no
particular form is required for a valid notice of deficiency.” Scar v. Comm’r, 814
F.2d 1363, 1367 (9th Cir. 1987) (citation omitted). The Commissioner is entitled
to explain the reasoning of a notice of deficiency at trial. See Abatti v. Comm’r, 644

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F.2d 1385, 1389-90 (9th Cir. 1981). Moreover, the Commissioner is not precluded
from arguing new theories at trial; a new theory merely shifts the burden of proof to
the Commissioner on that issue. See id. at 1390; see also Tax Ct. R. 142(a)(1).
Because the notice contained a calculation of the deficiency amount, its incorrect
description of why the deductions were impermissible does not impact its validity.
See Scar, 814 F.2d at 1367.
5. Because Strode never actually made an offer of proof regarding his
reliance on his tax preparer, he did not provide “reasonable cause” under 26 U.S.C.
§ 6664(c)(1) to excuse the accuracy-related penalty for tax year 2007 assessed under
26 U.S.C. § 6662(a). Catalano v. Comm’r, 240 F.3d 842, 845 (9th Cir. 2001).
AFFIRMED.

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