                        T.C. Memo. 1996-67



                      UNITED STATES TAX COURT



    ANTHONY RANCIATO AND LUCILLE RANCIATO, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 27159-91.             Filed February 20, 1996.



     William M. Bloss and Jonathan S. Katz, for petitioners.

     John Aletta, for respondent.


                 SUPPLEMENTAL MEMORANDUM OPINION

     LARO, Judge:   The case is before the Court on remand from

the Court of Appeals for the Second Circuit.    The Court of

Appeals questioned our analysis in Ranciato v. Commissioner, T.C.

Memo. 1993-536 (Ranciato I), in which we held that petitioner's

pet store was not an activity entered into for profit during the

     *
       This opinion supplements Ranciato v. Commissioner, T.C.
Memo. 1993-536.
                                - 2 -

years in issue.    According to the Court of Appeals, "Because it

appears that the Tax Court gave undue weight to the sloppy

operation of the business, while failing to consider other

probative factors, we remand for a more complete consideration of

the relevant circumstances."    Ranciato v. Commissioner, 52 F.3d

23, 24 (2d Cir. 1995), vacating and remanding T.C. Memo.

1993-536.    The Court of Appeals referred to four facts, an

analysis of which we did not include in Ranciato I.    The facts

were:   (1) Petitioner was a middle-class wage earner, (2) his

losses were "actual", (3) his store had prior years of profit,

and (4) he had previously moved his store’s location.    Ranciato

v. Commissioner, 52 F.3d at 26-27.

     We have reconsidered the facts of this case, heeding

Ranciato v. Commissioner, 52 F.3d at 23, and are left with a firm

belief that petitioner did not operate his store during the

subject years with the requisite profit intent.    Accordingly, we

adhere to our holding in Ranciato I.

     Section references, unless otherwise stated, are to the

Internal Revenue Code in effect for the taxable years in issue.

Rule references are to the Tax Court Rules of Practice and

Procedure.    We use the term "petitioner" to refer solely to

Anthony Ranciato; Lucille Ranciato is a party mainly because she

filed joint Federal income tax returns with Anthony Ranciato

during the subject years.
                               - 3 -

                            Background

     We incorporate herein the facts in Ranciato I and repeat

only the facts that are necessary for our discussion.

                            Discussion

     Section 183 limits the deductions for an activity not

entered into for profit.   Sec. 183(b).   Whether an individual

engages in an activity for profit depends on whether he or she

"[entertains] an actual and honest, even though unreasonable or

unrealistic, profit objective in engaging in the activity."

Ranciato v. Commissioner, 52 F.3d at 25 (citations omitted).

Whether a taxpayer conducts an activity with the requisite profit

intent rests on the facts of the case.    Golanty v. Commissioner,

72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d

170 (9th Cir. 1981).   More weight is given to the objective facts

than to an individual's subjective expression of his or her

intent.   Sec. 1.183-2(a), Income Tax Regs.   Because respondent

determined that petitioner's pet store was an activity not

engaged in for profit, the burden of proof is on petitioner.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     In deciding whether an activity is engaged in for profit, we

are aided by the following nonexclusive factors:    (1) The manner

in which the taxpayer carries on the activity; (2) the expertise

of the taxpayer or his or her advisor; (3) the time and effort

expended by the taxpayer in carrying on the activity; (4) the
                                - 4 -

expectation that assets used in the activity may appreciate in

value; (5) the success of the taxpayer in carrying on similar or

dissimilar activities; (6) the taxpayer's history of income or

losses in the activity; (7) the amount of occasional profits, if

any, that are earned; (8) the financial status of the taxpayer;

and (9) the elements of personal pleasure or recreation.

Sec. 1.183-2(b), Income Tax Regs.    None of these factors is

dispositive, in and of itself, and a decision does not rest on

the number of factors satisfied.    Golanty v. Commissioner,

supra at 426; sec. 1.183-2(b), Income Tax Regs.     We assess these

factors with the aid of common sense, bearing in mind how the

relevant statutory scheme was meant to apply to the facts at

hand.    Ranciato v. Commissioner, 52 F.3d at 25-26.

     We turn to the nine factors, discussing them one at a time.

We also discuss other considerations that we find to be relevant

in reaching our holding herein.

     1.   Manner in Which the Activity Is Conducted

     We consider the manner in which petitioner conducted his

store.    Sec. 1.183-2(b)(1), Income Tax Regs.   Objective facts

showing that a taxpayer carries on an activity in a businesslike

manner are indicative of a profit intent.

     In several respects petitioner did not conduct his store in

a businesslike fashion.    He was responsible for keeping the

store’s records, but they were haphazard and incomplete.     He kept
                                  - 5 -

no record of the store’s inventory, even though it was a retail

establishment.    He did not know such basic business information

as the store’s gross profit percentage or in what years the store

had earned a profit.      He did not advertise to a significant

extent.    He did move the situs of his store several times, the

last change of location occurring in the early 1980's; however,

we do not find that any of these moves establishes a profit

intent during the subject years.      There is no evidence that

petitioner considered moving his store during any of the years of

consecutive losses following his last move in the early 1980's,

nor that he otherwise altered his operation of the store during

such years in an effort to make it profitable

     This factor supports respondent's determination.

     2.   Expertise of Petitioner

     We consider the expertise of petitioner with respect to his

store.    Sec. 1.183-2(b)(2), Income Tax Regs.    A taxpayer's

expertise, research, and study of an activity, as well as his or

her consultation with experts, may show a profit intent with

respect thereto.    Id.    In preparing for an activity, a taxpayer

need not make a formal market study, but he or she should

undertake a basic investigation of the factors that would affect

the activity’s profitability.      Underwood v. Commissioner,

T.C. Memo. 1989-625; Burger v. Commissioner, T.C. Memo. 1985-523,

affd. 809 F.2d 355 (7th Cir. 1987).
                                - 6 -

     Petitioner did not undertake a basic investigation of the

factors that would affect his store’s profitability.    Petitioner

did not establish that he was an expert in the store’s business,

or that he prepared to enter its business through study of its

practices or by consultation with experts.    Petitioner did not

establish that his mother, who did most of the store’s work, was

motivated by business objectives.

     This factor supports respondent's determination.

     3.   Time and Effort Spent in Conducting the Activity

     We consider the time and effort spent by petitioner in

operating his store.    Sec. 1.183-2(b)(3), Income Tax Regs.    The

fact that a taxpayer devotes much of his or her own time to an

activity may indicate a profit intent, if the activity does not

have a substantial element of recreation.    The failure of a

taxpayer to devote substantial time to an activity may weigh

against a profit motive, unless, for example, the taxpayer

employs capable personnel to conduct the activity in his or her

stead.    Employing capable personnel shows a profit intent.    Id.

     In Ranciato I, we found that the record did not show that

petitioner spent significant time at the store.    On appeal, the

Court of Appeals for the Second Circuit stated that "We think it

relevant in determining * * * [petitioner's] intent * * * that

his mother devoted substantial time to * * * [the store]."
                                 - 7 -

Ranciato v. Commissioner, 52 F.3d at 27 n.6.     Petitioner's mother

generally spent 35 to 40 hours per week at the store.

     We agree with the Court of Appeals that the time spent by a

third party in a taxpayer's activity may be relevant in

determining the taxpayer's intent with respect thereto.    We do

not believe, however, that the instant case is such a case.      We

think that petitioner “employed” his mother at the store to

provide her with a pleasurable pastime in a family project that

was operated without regard for profitability.    Given the fact

that petitioner’s mother operated the store on a full-time basis

for at least 26 years without pay (i.e., from 1962 through 1987),

we can only assume that she reaped personal pleasure from her

full-time efforts.     See Ballich v. Commissioner, T.C. Memo.

1978-497.     We also believe that petitioner derived enjoyment and

satisfaction from the knowledge that his mother was “gainfully

employed” in a valued family project regardless of whether the

store operated at a profit.

     This factor supports respondent's determination.

     4.    Expectation That the Assets Will Appreciate in Value

     We consider the expectation that assets used in petitioner's

store would appreciate in value.    Sec. 1.183-2(b)(4), Income Tax

Regs.     The term "profit" includes the appreciation in the value

of assets used in an activity.     Id.
                                 - 8 -

     Petitioner has not established that he expected his store's

assets to increase in value.   Indeed, the value of the store's

inventory decreased over time.

     This factor supports respondent's determination.

     5.   Taxpayer's Success on Similar or Dissimilar Activities

     We consider petitioner's success on similar or dissimilar

activities.   Sec. 1.183-2(b)(5), Income Tax Regs.   Although an

activity is unprofitable, we may take into account whether the

taxpayer previously converted similar activities from

unprofitable to profitable enterprises.    Id.

     Petitioner was an electrician and a real estate agent.      He

has not established that he experienced any success in a similar

or dissimilar activity.

     This factor supports respondent's determination.

     6.   An Activity's History of Income and/or Losses

     We consider petitioner's history of income and/or losses

with respect to his store.   Sec. 1.183-2(b)(6), Income Tax Regs.

Losses continuing beyond the period customarily required to make

an activity profitable, if not explainable, may indicate that the

activity is not engaged in for profit.    Although a series of

losses at the beginning of an activity does not necessarily mean

that the activity was not entered into for profit, such a string

of losses weighs against a profit intent absent unforeseen or

fortuitous circumstances beyond the taxpayer's control (e.g.,
                                  - 9 -

fire, disease, theft).     A series of years of net income, on the

other hand, is “strong evidence” that an activity is engaged in

for profit.     Id.   Indeed, an activity that is not horse-related

is presumed to be engaged in for profit if the activity is

profitable in at least 2 of 5 consecutive years.     Sec. 183(d).**

Horse-related activities are presumed to be engaged in for profit

when the activity is profitable for at least 2 of 7 consecutive

years.    Id.

     Petitioner claimed net losses of $27,377, $27,795, and

$20,976 from the store on his 1985, 1986, and 1987 Federal income

tax returns, respectively.     These losses offset gross income of

$66,942, $33,488, and $44,221.     Petitioner has not established

that any of these losses was due to unforeseen or fortuitous

circumstances beyond his control.

     The Court of Appeals for the Second Circuit observed that

our Memorandum Opinion in Ranciato I did not discuss the

profitable chapter of the history of petitioner’s store.     In

Ranciato I, we found that the store “showed a profit in its early

years”.    We did not regard this finding, however, as a decisive

factor in petitioner’s favor.     First, we know that petitioner's

store reaped a profit in its "early years", but we do not know

the specific years in which the store had a profit, or the


     **
        This standard was changed to 3 out of 5 years for
taxable years beginning after Dec. 31, 1986.
                                - 10 -

amounts of these profits.   We find petitioner's testimony with

respect thereto, which was the only evidence that petitioner

presented as to the amounts and years of the early years’

profits, to be inconsistent and vague.     For example, petitioner

testified that his store earned approximately $225,000 to

$275,000 in the early 1960's.    He also testified, however, that:

(1) These earnings were gross receipts, rather than net profits,

(2) he did not know the store’s net profit for any of its years,

and (3) with the exception of 1962 through 1965, he did not know

the specific years in which the store earned a profit.

Accordingly, we are unable to conclude that petitioner's store

profited in each of its years from 1962 until 1979, although

petitioner’s testimony established that the store earned a profit

from 1962 through 1965, and his testimony indicates that the

store may have earned a profit in other years prior to 1980.

     In our view, the profits made by the store from 1962 through

1965 have only limited weight in determining whether petitioner

had a profit motive during the subject years, over 20 years

later.   It is clear that the store sustained consistent losses

beginning at least as early as 1980.     Petitioner offered no

evidence at trial, other than his self-serving testimony, to

support his assertion that he anticipated his pattern of losses

would change.   He offered no analysis of when he anticipated the
                               - 11 -

losses would stop, nor of how the store would alter its methods

of operation in order someday to reap a profit.

     Thus, even if we were to assume that petitioner had a profit

objective before the subject years, we would still not be

persuaded that he retained this objective during the subject

years.    In order to escape the grasp of section 183, it is not

enough to have a profit intent before the years in dispute.     The

taxpayer must possess the required intent during the year in

issue.    Sec. 1.183-2(b), Income Tax Regs.; see also Dennis v.

Commissioner, T.C. Memo. 1984-4; Daugherty v. Commissioner,

T.C. Memo. 1983-188.

     This factor supports respondent's determination.

     7.    Amount of Occasional Profits

     We consider the occasional amount of profits, if any, from

the subject activity.    Sec. 1.183-2(b)(7), Income Tax Regs.   For

the reasons stated immediately above, we hold that this factor

favors respondent’s determination.

     8.    Financial Status of Taxpayer

     We consider petitioners' financial status.    Sec.

1.183-2(b)(8), Income Tax Regs.    Substantial income from sources

other than an activity, particularly if the activity's losses

generated substantial tax benefits, may indicate that the

activity is not engaged in for profit.    This is especially true

where there are personal or recreational elements involved.       Id.
                                - 12 -

As observed by the Court of Appeals for the Second Circuit in

Ranciato v. Commissioner, 52 F.3d at 25-26, the legislative

history to section 183 shows a particular concern for “wealthy

individuals” trying to shelter their income with unrelated paper

losses.   The Court of Appeals also observed that petitioner is a

“solid middle-class wage earner” with “actual” losses.    Id.   The

Court of Appeals noted that this Court’s Memorandum Opinion in

Ranciato I did not discuss these factors and that they are

indicative of a profit intent.    Id. at 27.

     We agree with the Court of Appeals for the Second Circuit

that the wealth of an individual is a fact to consider in

determining the applicability of section 183.    We also agree with

the Court of Appeals that another fact to consider is whether an

activity is entered into primarily to create paper losses to

shelter unrelated income.   We do not believe, however, as implied

by petitioner in his brief, that section 183 applies only to

wealthy individuals who engage in financially unprofitable

activities to create “paper” losses that may be offset against

unrelated income.

     Turning to the facts at hand, we find that petitioner

reported significant taxable income during the subject years from

sources other than the store.    His ability to earn this income

let him finance his store, and it allowed him to use the store's

losses to reduce significantly his income tax liability for each
                                - 13 -

year.     Although petitioner was a “middle-class taxpayer” whose

losses were "actual", we are not persuaded that his motive for

operating the store during the years involved here was to make a

profit.     He derived a personal benefit from the store in part

because his mother was able to spend her leisure time there.        If

petitioner were truly profit motivated, we expect that the

store's recurring losses would have persuaded him to change his

business practices.     Instead, petitioner continued to spend more

money and incur additional losses.       Regardless of his income

level, we doubt that he would willingly engage year after year in

this unprofitable activity unless he had a motive other than

profit.     We infer that he kept the store open because he and his

mother received benefits from operating it independent of its

ability to earn a profit.

     9.    Elements of Personal Pleasure

        We consider the personal pleasure derived by petitioner in

conducting his activity.     Sec. 1.183-2(b)(9), Income Tax Regs.

Although the mere fact that a taxpayer derives personal pleasure

from a particular activity does not negate a profit intent with

respect thereto, the presence of personal motives may indicate

that the activity is not engaged in for profit.       This is

especially true where there are recreational or other personal

elements involved.     Id.
                                  - 14 -

     Our review of the record, in conjunction with our

observation of petitioner during his testimony, leads us to

believe that petitioner had personal reasons for operating the

store.    We believe that, in part, he operated his store out of

his love and affection for his mother.      She enjoyed working

there, and she worked there without compensation.      As this Court

has observed with respect to this factor:      "The gratification

derived from an occupation worth doing, possibly beneficial to

others, and probably requiring long hours of arduous labor must

still not be confused with an intention to return a profit."

White v. Commissioner, 23 T.C. 90, 94 (1954), affd. 227 F.2d

779 (6th Cir. 1955).

     This factor supports respondent's determination.

     10.    Other Considerations

     a.    Type of Business

     The Court of Appeals for the Second Circuit questioned

whether a retail business can be an activity not engaged in for

profit under section 183.       Ranciato v. Commissioner, 52 F.3d at

27-28.     We believe it can.   This Court has previously found that

taxpayers did not have the required profit objective with respect

to businesses typically run for profit.      See, e.g., Houston v.

Commissioner, T.C. Memo. 1995-159 (retail gun store); Ypsilantis

v. Commissioner, T.C. Memo. 1992-644 (import/export commodities

business); Hutchinson v. Commissioner, T.C. Memo. 1988-568

(retail cosmetics business).
                                - 15 -

     b.    Petitioner’s Motive for Operating Store

     The Court of Appeals for the Second Circuit questioned

petitioner’s motive for operating his store.    Respondent claims

that petitioner operated his store as a valued family project.

As indicated above, we agree.    Petitioner and his parents started

the store when he was approximately 18 years old.    The store’s

only employees during the relevant years were petitioner, his

wife, his mother, and his two children.    Except for his son,

Dustin, who was paid $1,470 during 1985, none of the other family

members were paid for working at the store.    These facts,

combined with the pleasure that many derive from raising pets,

suggest strongly that the store personally benefited petitioner's

family, thereby motivating him to keep it open despite its

losses.

     11.   Conclusion

     Based on our discussion above, we conclude that petitioner

operated his store without an "actual and honest" objective of

making a profit.***


     ***
        We have also reconsidered whether petitioner is liable
for the additions to tax determined by respondent under secs.
6651(a)(1), 6653(a)(1) and (2), 6653(a)(1)(A) and (B), and 6661,
and whether he is liable for the increased rate of interest under
sec. 6621. In light of the Court of Appeals for the Second
Circuit’s opinion, we conclude that petitioner’s reporting
position with respect to his store was not unreasonable.
Accordingly, we hold that he is not liable for the additions to
tax for negligence under sec. 6653(a)(1) and (2) (for 1985) and
sec. 6653(a)(1)(A) and (B) (for 1986 and 1987). With respect to
the other two additions to tax, and the increased rate of
interest, we adhere to our holdings at T.C. Memo. 1993-536. The
                                                   (continued...)
                             - 16 -

    To reflect the foregoing,

                                       Decision will be

                                  entered in accordance with

                                  respondent's computation under

                                  Rule 155.




    ***
       (...continued)
fact that petitioner was not negligent on his reporting position
does not obviate the increased rate of interest under sec. 6621,
or the delinquency addition under sec. 6651. Although the
Commissioner may waive the applicability of sec. 6661 for
reasonable cause and good faith, see sec. 6661(c), she can only
do so after the taxpayer presents his or her claim to the
Commissioner with sufficient evidentiary support, see, e.g.,
McCoy Enters., Inc. v. Commissioner, 58 F.3d 557 (10th Cir.
1995), affg. on this issue T.C. Memo. 1992-693; see also Brown v.
Commissioner, T.C. Memo. 1992-15. The record does not show that
petitioner ever presented respondent with any type of a claim for
a waiver under sec. 6661(c).
