                  T.C. Summary Opinion 2006-120



                     UNITED STATES TAX COURT



          THOMAS W. AND PAMELA A. HILL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7307-05S.                Filed July 31, 2006.



     Thomas W. and Pamela A. Hill, pro se.

     Alisha M. Harper, for respondent.




     COUVILLION, Special Trial Judge:    This case was heard

pursuant to section 7463 in effect when the petition was filed.1

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.


     1
      Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

     Respondent determined a deficiency in petitioners’ Federal

income tax of $3,108 for taxable year 2001.     The sole issue for

decision is whether the tournament bass fishing activity of

Thomas W. Hill (petitioner) was an activity not engaged in for

profit within the meaning of section 183.2

     Some of the facts were stipulated and are so found.     The

stipulation of facts and the accompanying exhibits are

incorporated herein by reference.    At the time the petition was

filed, petitioners’ legal residence was Lexington, Kentucky.

     Petitioner began bass fishing for recreation when he was a

child.   In 1977, petitioner was appointed general manager of

School Supply, Inc., a wholesale distributor and retailer of

school and teaching supplies.   He terminated that employment in

1978 and incorporated Fayette School Service, Inc. (Fayette), a

wholesale school supply company that he operated through 1987.

About the time petitioner incorporated Fayette, he began

participating in competitive bass fishing.     His involvement in

that activity continued until 1985, when he and a partner started

127 Sportsman’s Supply, Inc. (Sportsman’s Supply), a retailer of

sporting goods and fishing tackle.      After sustaining losses for 2



     2
      Generally, the burden of proof is on the taxpayer. Rule
142(a)(1). Under sec. 7491(a), the burden of proof shifts to the
Commissioner if the taxpayer introduces credible evidence with
respect to any factual issue relevant to ascertaining the
taxpayer’s liability. The facts of this case do not, in the
Court’s view, shift the burden of proof to respondent.
                                - 3 -

years, that business was terminated in 1987.   That same year,

petitioner changed careers and began working for Grogan’s

Healthcare Supply, Inc. (Grogan’s), a medical products

distribution company.

     Petitioner remained with Grogan’s when he resumed tournament

bass fishing in 1992.   He qualified for the American Scholarship

Championship that year.   Thereafter, petitioner, while continuing

his employment with Grogan’s, participated in bass fishing

tournaments on weekends through the year in issue.   He placed in

several tournaments, qualified for the Red Man All American in

1997, and received some prize money for his efforts.   Petitioner

also started a Web site (thebassschool.com) as a means of

generating income by offering personal guidance to fishermen;

however, this project was abandoned when the site failed to

receive any hits.

     After considering the potential payout associated with

winning a major bass fishing tournament, petitioner decided,

after consulting with his accountant, that he had devoted

sufficient time, effort, and attention in traveling to and

participating in competitive bass fishing that he was engaged in

a trade or business activity.   Beginning in 1997 and continuing

through 2001, the year at issue, petitioner included a Schedule

C, Profit or Loss From Business, with his Federal income tax

return for each year, reporting the income, expenses, and profit
                                  - 4 -

or loss from his tournament bass fishing activity.     His reported

receipts, expenses, and net profit or loss on Schedule C of his

income tax returns for his tournament bass fishing activity from

1997 through 2001 were as follows:


                 Gross Receipts      Expenses    Profit or Loss

     1997            $1,470         $ 7,729        ($ 6,259)
     1998               779           9,571          (8,792)
     1999               871           7,550          (6,679)
     2000             1,117           8,134          (7,017)
     2001               892          11,303         (10,411)


     Petitioner spends 60 to 70 days a year fishing, occasionally

taking time from his employment with Grogan’s to compete in one

of the 10 to 12 fishing tournaments in which he participates

annually.     In an attempt to limit participation to those

tournaments with the biggest prize payouts, petitioner’s efforts

focus on competing in tournaments operated by the Bass Angler’s

Sportsman’s Society (B.A.S.S.) or FLW Outdoors, Inc. (FLW

Outdoors).3    Most tournaments petitioner attends are in the tri-

State area of Ohio, Kentucky, and Tennessee, thus generally

requiring less than 200 miles of travel each way for these annual

tournaments.     Aside from the time spent fishing, petitioner



     3
      With a membership base of more than 500,000 people,
B.A.S.S., a wholly owned subsidiary of ESPN, is the world’s
largest sports fishing organization, sanctioning more than 20,000
tournaments worldwide. FLW Outdoors is the world’s leading
marketer of competitive fishing, and it administers eight
national tournament circuits, including the Wal-Mart FLW Tour.
                               - 5 -

devotes a substantial portion of his spare time to activities

related to tournament bass fishing, such as upkeep of his boat

and tackle; studying bass fishing from available books,

magazines, videos, and television shows; physical conditioning;

and maintaining books and records.

     During the year at issue, petitioner purchased a new fishing

boat for approximately $28,000.   Although petitioner already

owned a fishing boat, the new boat is better equipped for

tournament fishing and handling the various waters a bass

fisherman encounters.   Despite receiving some prize money from

his fishing activity, petitioner’s expenses for each taxable year

from 1997 through 2001 have exceeded his gross receipts,

resulting in an unbroken series of losses.   Prior to 2003,

petitioner did not maintain a separate bank account for his

fishing activity, although he did maintain books and records to

substantiate his income and expenses.   Petitioner has never had a

sponsor or sponsors for his activity, and he has funded the bass

activity solely with the earnings from his employment with

Grogan’s.   At trial, petitioner could not estimate when his

tournament bass fishing would realize a profit.

     In addition to carrying on the bass fishing activity and

their full-time careers, petitioners own three rental properties

and own an interest in Medical Multimedia Group, a partnership.

Those properties realized net losses.
                                - 6 -

     In his position with Grogan’s, petitioner typically works 40

to 45 hours per week, Monday through Friday, as director of sales

operations.    He reported gross income of $59,696.08 on his 2001

joint Federal income tax return from this employment.   Pamela A.

Hill was employed by the Fayette County Clerk’s Office in 2001,

and she had a salary of $31,060.59 as deputy county clerk.    On

Schedule C of petitioners’ income tax return for 2001, they

reported gross receipts of $892, expenses of $11,303, and a net

loss of $10,411 from the tournament bass fishing activity.    In

the notice of deficiency, respondent determined that the bass

fishing activity was not an activity engaged in for profit within

the meaning of section 183.   The $892 reported as gross receipts

from the fishing activity was reclassified as “Other Income”, and

the entirety of the claimed Schedule C expenses of $11,303 was

disallowed.4   Thus, the net adjustment was an increase in

petitioners’ taxable income of $11,303.

     The issue for decision is whether petitioner’s bass fishing

activity was an activity not engaged in for profit under section

183(a).   Section 183(a) generally disallows any deductions


     4
      According to the notice of deficiency:

     The expenses incurred in connection with fishing are
     allowable in the amount of $892.00 in 2001 as miscellaneous
     itemized deductions. Further, miscellaneous itemized
     deductions are only deductible to the extent that they
     exceed two percent of your adjusted gross income. Due to
     the adjustments herein which increase adjusted gross income,
     miscellaneous itemized deductions are not allowable * * *.
                               - 7 -

attributable to activities not engaged in for profit.   Section

183(b)(1), however, provides that deductions that are allowable

without regard to whether the activity is engaged in for profit

shall be allowed.   Section 183(b)(2) further provides that

deductions that would be allowable only if the activity were

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” section

183(b)(1).   Accordingly, $892 of the expenses incurred in

petitioner’s fishing activity should have been allowed as an

offset to the $892 of income received from the activity.

     Section 183(c) defines an “activity not engaged in for

profit” as any activity other than one for which deductions are

allowable under section 162 or under paragraph (1) or (2) of

section 212 for the taxable year.   The standard for determining

whether the expenses of an activity are deductible under either

section 162 or section 212(1) or (2) is whether the taxpayer

engaged in the activity with the “actual and honest objective of

making a profit”.   Ronnen v. Commissioner, 90 T.C. 74, 91 (1988);

Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without

opinion 702 F.2d 1205 (D.C. Cir. 1983).   While a reasonable

expectation of profit is not required, the taxpayer’s profit

objective must be bona fide.   Hulter v. Commissioner, 91 T.C. 371

(1988); sec. 1.183-2(a), Income Tax Regs.   Whether a taxpayer had
                                - 8 -

the requisite profit objective is a question of fact to be

resolved from all relevant facts and circumstances of the case.

Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(b),

Income Tax Regs.    In resolving this factual question, greater

weight is given to the objective facts than the taxpayer’s mere

statement of his intent.    Siegel v. Commissioner, 78 T.C. 659,

699 (1982); sec. 1.183-2(a), Income Tax Regs.

       The determination whether an activity is engaged in for

profit is made by reference to objective standards, taking into

consideration the facts and circumstances of the case.    Sec.

1.183-2(a), Income Tax Regs.    Section 1.183-2(b), Income Tax

Regs., provides a nonexclusive list of nine objective factors to

be considered in ascertaining a taxpayer’s intent.    The factors

are:    (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that the assets used in the

activity may appreciate in value; (5) the success of the taxpayer

in carrying on other similar or dissimilar activities; (6) the

taxpayer’s history of income or losses with respect to the

activity; (7) the amount of occasional profits, if any, which are

earned; (8) the financial status of the taxpayer; and (9) any

elements indicating personal pleasure or recreation.    Not all
                               - 9 -

factors are applicable in every case, and no single factor, nor

even the existence of a majority of factors favoring or

disfavoring the existence of a profit objective, is controlling.

Abramson v. Commissioner, 86 T.C. 360, 371 (1986); sec. 1.183-

2(b), Income Tax Regs.

     The manner in which a taxpayer carries on the activity is

one factor to consider in determining whether a profit objective

exists.   Maintaining complete and accurate books and records,

carrying on the activity in a manner similar to other activities

that are profitable, and changing operating methods to adopt

new techniques or abandon unprofitable methods in a manner

consistent with an intent to improve profitability indicate that

a taxpayer conducted an activity for profit.   See sec. 1.183-

2(b)(1), Income Tax Regs.   Although petitioner did not maintain a

separate checking account for his fishing activity until 2003, he

maintained adequate books and records to determine the income and

expenses associated with his tournament bass fishing.

     In response to respondent’s request for information,

petitioner prepared a Business Overview detailing the aims and

objectives of his bass fishing activity.   The document

articulated the potential revenue that any participant who

competed in and won 12 of the biggest bass fishing tournaments

held by B.A.S.S. and FLW Outdoors might earn; however, the

document did not include a financial projection with respect to
                               - 10 -

petitioner’s activity.   Petitioner claims that sustained

profitability could come from a single win at a major tournament,

but he has not conducted any type of break-even analysis or

attempted to discern how much time and money should be invested

and dedicated to the activity to make it profitable.     There is no

evidence that petitioner changed meaningfully his operating

methods to adopt new techniques or abandoned unprofitable methods

of conducting the activity that might lead to a profitable

result.    Petitioner’s continued losses appear to indicate that a

timeframe for profit is irrelevant.     The Court concludes that

petitioner has merely continued a childhood fishing hobby with a

hope that he may, by chance, derive some profit from tournament

bass fishing.

     Possession of expertise in the activity by either the

taxpayer or his advisers may indicate a profit motive.     Sec.

1.183-2(b)(2), Income Tax Regs.   Petitioner began bass fishing as

a child.   Notwithstanding his lack of winning a major bass

fishing competition, he received prize money for his performance

in a number of bass fishing tournaments, appeared on ESPN, and

published a fishing article.   Additionally, petitioner has

striven to overcome any lack of expertise by consulting with

several successful individuals in the industry about improving

financial returns from the fishing activity.     In his free time,

petitioner regularly watches programs on bass fishing, reads
                             - 11 -

literature in magazines, and accesses articles on the Internet to

improve his performance in bass fishing tournaments.    Aside from

discussions with his accountant about the bass fishing activity,

petitioner has never consulted any financial advisers or persons

outside the bass fishing industry.    His failure to seek objective

advice about the activity is a negative consideration;

nevertheless, his consistent and continued consultation with

successful tournament fishermen coupled with his regular study of

the bass fishing industry is a positive consideration.

     If a taxpayer devotes significant time and effort to an

activity, it may indicate that there is a profit objective.     Sec.

1.183-2(b)(3), Income Tax Regs.   Although petitioner was not

prepared to leave his full-time employment with Grogan’s for an

activity that had no guarantee of success, he consistently

devoted free time and energy to the activity.    Since petitioner

was working 40 to 45 hours per week in his regular job, he was

limited in the time and effort he could spend bass fishing.

During the 26 weeks of the year that he fished, petitioner spent

approximately 40 hours per week on the fishing activity.    His

time was divided among many different functions, including

studying ways to improve his performance in tournaments, physical

conditioning, practice fishing, maintaining his boat and tackle,

and actual tournament competition.    The Court believes that

petitioner devoted significant time and effort to the activity.
                              - 12 -

     None of the assets used in petitioner’s bass fishing

activity are likely to appreciate in value, and, for that matter,

petitioner did not accumulate any assets with the expectation

that they would appreciate in value.   Sec. 1.183-2(b)(4), Income

Tax Regs.

     A taxpayer’s previous success in other entrepreneurial

activities similar or dissimilar to the activity in question may

indicate that a profit objective exists.   Sec. 1.183-2(b)(5),

Income Tax Regs.   Petitioner experienced some financial success

with Fayette, a school supply company that he formed in 1977 and

operated through 1987.   More notable, however, are petitioner’s

entrepreneurial activities associated with the bass fishing

activity at issue.   Petitioner completely terminated Sportsman’s

Supply, a retailer of sporting goods and fishing tackle, when the

entity failed to generate net earnings in its first 2 years of

operation.   Similarly, petitioner created a Web site in the hope

of enhancing profitability yet abandoned this project when the

site did not produce anticipated activity.   Even though

petitioner’s bass fishing activity has never generated net

earnings, he has nevertheless continued the activity since 1997.

Given petitioner’s history of promptly ending unprofitable

business ventures, his unwillingness to cease tournament bass

fishing, an activity that produced losses exclusively, indicates

that the bass fishing activity was not engaged in for profit.
                               - 13 -

     A history of substantial losses indicates that the taxpayer

did not conduct the activity for profit.      Sec. 1.183-2(b)(6),

Income Tax Regs.    Petitioner started filing a Schedule C with his

Federal income tax return for the 1997 tax year with regard to

the bass fishing activity.   The Court cannot ignore the fact that

petitioner realized only nominal gross receipts and never

realized a profit from the activity over the period from 1997 to

2001 and thereafter.   Instead, petitioner’s bass fishing activity

generated an average loss of $7,831.60 each year from 1997 to

2001.   More importantly, petitioner seemed unconcerned about

minimizing his expenses when he stated at trial:      “when you say

what the prize monies are, how much that you can win, versus --

my expenses, I’m not minimizing those, but again they’re

relatively small.   This is * * * not huge numbers here that the

taxpayer’s taking a hit on.”   A taxpayer does not generally enter

into a recreational activity to generate income in excess of

deductions.   Petitioner’s choice to continue sustaining losses

suggests the lack of a profit objective.

     The amount of occasional profits, if any, which are earned

is also considered in the determination of whether an activity is

not engaged in for profit.   Sec. 1.183-2(b)(7), Income Tax Regs.

Although petitioner has had some gross receipts in connection

with the activity, his expenses have always exceeded this income,

resulting in net losses each year.      By participating only in
                                - 14 -

those tournaments sponsored by B.A.S.S. or FLW Outdoors with the

largest prize payouts, petitioner has chosen to limit his

possibilities for income to the most prestigious bass fishing

competitions.   The unfortunate, yet foreseeable, result of this

self-imposed limitation is that petitioner has never earned a

profit from his bass fishing activity, and there is no indication

as to when or whether he will ever attain a profit.

     A taxpayer’s financial status may imply whether an activity

is conducted for profit.   Sec. 1.183-2(b)(8), Income Tax Regs.

Petitioners reported wage income for taxable year 2001 of $90,757

and $518 in interest income.    Substantial income from other

sources might indicate a tax incentive for incurring expenditures

related to a recreational business.      Jackson v. Commissioner, 59

T.C. 312, 317 (1972).   While it is unclear that the tournament

bass fishing activity was conducted to generate tax savings,

petitioners’ income indicates that they possessed sufficient

disposable income to sustain such losses each year from the

activity and realize tax savings therefrom.

     Finally, the presence of personal motives may indicate that

the activity is not engaged in for profit.     Sec. 1.183-2(b)(9),

Income Tax Regs.   Petitioner’s bass fishing activity has allowed

him to devote a substantial portion of his spare time to a hobby

he has loved since childhood.    Further, the activity has

permitted petitioner to test his fishing skills against other
                              - 15 -

tournament fishermen.   Petitioner’s fishing activity is

occasionally demanding and exhausting.   The Court is convinced,

however, that petitioner’s bass fishing was akin to a hobby

enjoyed in his spare time and which, as a bonus, provided him an

opportunity for occasional income and less income tax.

     The Court has considered all other arguments advanced by the

parties, and, to the extent such arguments have not been

specifically addressed, the Court concludes they are without

merit.   Each factor set out in section 1.183-2(b), Income Tax

Regs., was considered; while some of the factors support a profit

objective, other factors discussed outweigh the profit motive.

The Court, therefore, is not convinced that petitioner was

engaged in a trade or business for profit.   Respondent,

therefore, is sustained.   However, as noted earlier, supra note

4, respondent allowed petitioner a miscellaneous itemized

deduction of $892 for expenses incurred in the activity.    As an

itemized deduction, the 2-percent floor of section 67(a) would be

applicable.   Respondent erred in the treatment of the $892 in

this fashion.   Under section 183(b)(2), the $892 is allowable as

an offset to the gross receipts, thus eliminating the 2-percent

limitation.
                            - 16 -

    Reviewed and adopted as the report of the Small Tax Case

Division.



                                      Decision will be entered

                                 under Rule 155.
