                   T.C. Summary Opinion 2003-8



                     UNITED STATES TAX COURT



                  JAMES J. HOGAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9886-01S.                Filed February 3, 2003.


     Thomas F. Hewner, for petitioner.

     Jennifer S. McGinty, for respondent.



     PAJAK, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    Unless otherwise

indicated, section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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     Respondent determined deficiencies of $10,929 and $9,778 in

petitioner’s 1996 and 1997 Federal income taxes, respectively.

This Court must decide (1) whether petitioner engaged in a bed

and breakfast activity for profit within the meaning of section

183 and (2) whether petitioner is entitled to head of household

filing status.

     Some of the facts in this case have been stipulated and are

so found.   Petitioner resided in Killbuck, New York, at the time

he filed his petition.

     In 1977, petitioner built a house at 6161 Sullivan Hollow,

Killbuck, New York, 14748 (Sullivan Hollow residence).   The

Sullivan Hollow residence has six bedrooms, three full baths, a

living room, kitchen, dining room, deck, hot tub, and two

satellite television systems.   Petitioner and his then-wife

jointly held title to the Sullivan Hollow residence and lived

there with their four children.   Petitioner and his then-wife

divorced in 1992.   In 1993, petitioner purchased his former

wife’s interest in the Sullivan Hollow residence.

     During the taxable years in issue, petitioner worked full-

time as an elementary school principal.   Petitioner’s job as a

principal required him to work for 11 months annually.

     In 1994, petitioner started what he termed The Camelot Inn

Bed & Breakfast (Camelot Inn) at the Sullivan Hollow residence.

During 1996 and 1997, petitioner and his then-fiancé, Mary Ann
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Hughes (Ms. Hughes), worked at the Camelot Inn.          During the

taxable years in issue, Ms. Hughes worked full-time as a school

psychologist.     Ms. Hughes had a house in Allegany, New York, and

resided in the house with her son.        Petitioner lived in Ms.

Hughes’ Allegany house during the years in issue.

     Petitioner reported income and expenses from the bed and

breakfast activity on his individual Federal tax returns for the

taxable years 1994 through 1997 on Schedules C, Profit or Loss

From Business, as follows:

                   Gross Income     Total Expenses        Total Losses
     Tax Year        Reported          Claimed              Claimed

       1994             $152              $26,284           $26,132
       1995            3,872               38,909            35,037
       1996            2,325               57,457            55,132
       1997            5,254               53,223            47,969

     Additionally, for the taxable years 1996 and 1997 petitioner

reported zero income in each year and claimed losses of $1,384

and $1,065, respectively, on Schedules F, Profit or Loss From

Farming, with respect to beef cattle activity.          Petitioner did

not own any cattle in either 1996 or 1997.          Petitioner also

claimed losses for the taxable years 1994 and 1995 of $3,198 and

$4,040, respectively, with respect to beef cattle activity, on

his Schedules F.     Petitioner also reported income of $185 and

claimed a loss of $824 in 1997 with respect to a woodworking

activity.     The record is otherwise silent about this activity.

     On his 1996 and 1997 Federal tax returns, petitioner claimed
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head of household filing status based on his claim that he

provided a household for his daughter Jamie.   Jamie was born on

April 16, 1977.   During 1996 and 1997, Jamie was a full-time

student at Penn State University.   During these years, Jamie

remained at Penn State University for the summer months as a

participant in the ROTC program.

     Respondent determined that the Camelot Inn was not an

activity engaged in for profit within the meaning of section 183.

For the taxable years 1996 and 1997, respondent disallowed the

deductions for Schedule C expenses claimed by petitioner with

respect to the bed and breakfast activity of $57,457 and $53,223,

respectively.   Respondent allowed petitioner Schedule A

deductions for taxes which had been claimed on his Schedules C of

$1,810 and $4,568 for 1996 and 1997, respectively, plus an

additional deduction in 1996 of $3,545 for State taxes withheld.

Respondent also allowed petitioner Schedule A deductions for

mortgage interest which had been claimed on his Schedules C in

1996 and 1997 of $6,744 and $6,368, respectively.   Respondent

allowed miscellaneous deductions of $958 and $3,880, for 1996 and

1997, respectively, for the remaining expenses deducted on his

Schedules C.    Respondent also determined that petitioner did not

qualify for head of household filing status for the taxable years

in issue.
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     On his Schedules C, petitioner claimed total deductions, as

follows:

                                 1996            1997

     Advertising                $3,324          $2,849
     Car and truck               6,673           5,772
     Depreciation               13,303          13,176
     Insurance                   2,791           1,374
     Interest
       Mortgage                  6,744           6,368
       Other                     3,726           3,442
     Legal and professional
       services                  3,686           4,047
     Office expense                109             396
     Repairs and maintenance     8,720            - 0 -
     Supplies                    - 0 -           2,510
     Taxes and license           1,810           4,568
     Travel/Meals                1,103             917
     Utilities                   3,643           6,008
     Other expenses              1,825           1,796
       Total                   $57,457         $53,223

It appears from an examination of these deductions that many of

them were personal, nondeductible expenses.   Sec. 262.   For

instance, petitioner admitted that he did not use an attorney in

the day-to-day operations of the bed and breakfast.     Petitioner

claimed that there were a “lot of other issues that came up where

my ex-wife was attacking my use of the property as a bed and

breakfast.”   As stated, petitioner had purchased his former

wife’s interest in the property prior to the start of the bed and

breakfast activity.   He deducted part of these legal expenses on

his Schedules C.

     At trial, respondent asserted that “petitioner’s bed and

breakfast activity was a homegrown tax shelter to shelter his W-2
                                 - 6 -

income.”   A review of the record proves this to be an accurate

assessment.   In addition, during 1996 and 1997, petitioner owned

no beef cattle, reported no income from beef cattle, yet claimed

losses of $1,384 and $1,065 from beef cattle on his Schedules F.

For 1997, petitioner claimed $824 additional losses on a second

Schedule C from an alleged wood working activity.    Petitioner’s

use of various schedules on his returns shows that he had learned

to use them as a tax cash cow.

     Section 183(a) disallows any deduction attributable to

activities not engaged in for profit except as provided under

section 183(b).   Section 183(b)(1) allows those deductions which

otherwise are allowable regardless of profit objective.    Section

183(b)(2) allows those deductions which would be allowable if the

activity were engaged in for profit, but only to the extent that

gross income attributable to the activity exceeds the deductions

permitted by section 183(b)(1).    Section 183(c) defines “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.”

     The basic standard for determining whether an expense is

deductible under section 162 and 212 (and thus not subject to the

limitations of section 183) is the following:   a taxpayer must

show that he or she engaged in or carried on the activity with an

actual and honest objective of making a profit.     Ronnen v.
                                 - 7 -

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 taxpayer need not have a reasonable

expectation of profit, the facts and circumstances must

demonstrate that he or she entered into the activity, or

continued the activity, with the actual and honest objective of

making a profit.     Taube v. Commissioner, 88 T.C. 464, 478 (1987);

Dreicer v. Commissioner, supra at 645.     The taxpayer’s objective

to make a profit must be analyzed by looking at all the

surrounding facts.     Dreicer v. Commissioner, supra at 645.   These

facts are given greater weight than the taxpayer’s mere statement

of intent.    Id.

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

nonexclusive list of relevant factors which should be considered

in determining whether the taxpayer has the requisite profit

objective.    The factors are:   (1) The manner in which the

taxpayer carries on the activity; (2) the expertise of the

taxpayer or 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
                               - 8 -

or recreation. Sec. 1.183-2(b), Income Tax Regs.   These factors

are not applicable or appropriate in every case.   Abramson v.

Commissioner, 86 T.C. 360, 371 (1986).   The facts and

circumstances of the case in issue remain the primary test.      Id.

     In determining whether petitioner was engaged in the bed and

breakfast activity with the requisite intent to make a profit,

all of the facts and circumstances of his situation must be taken

into account.   Golanty v. Commissioner, 72 T.C. 411, 426 (1979),

affd. without published opinion 647 F.2d 170 (9th Cir. 1981);

sec. 1.183-2(a) and (b), Income Tax Regs.   No single factor is

controlling, nor is the existence of a majority of factors

favoring or disfavoring a profit objective necessarily

controlling.    Hendricks v. Commissioner, 32 F.3d 94, 98 (4th Cir.
1994), affg. T.C. Memo. 1993-396; sec. 1.183-2(b), Income Tax

Regs.

     Petitioner generally bears the burden of proof with respect

to this determination.   Rule 142(a); Golanty v. Commissioner,

supra at 426; McCarthy v. Commissioner, T.C. Memo. 2000-135.

Petitioner does not argue the applicability of section 7491(a),

and the record does not reflect that section 7491(a) applies.

     We first consider the manner in which the taxpayer carries

on the activity.   The fact that a taxpayer carries on the

activity in a businesslike manner and maintains complete and

accurate books and records may indicate a profit objective.

Engdahl v. Commissioner, 72 T.C. 659, 666 (1979); sec. 1.183-
                                - 9 -

2(b)(1), Income Tax Regs.

       Petitioner maintained a separate bank account for the

Camelot Inn.    Petitioner had some books and records of his

activity.    Petitioner filed a “Business Certificate” with the

Cattaraugus County Clerk to certify that he was doing business as

the Camelot Inn.    While the maintenance of accurate records is

necessary for the purpose of substantiating deductions, record

keeping alone is not enough.

       Petitioner also provided a document titled “The Camelot Inn

Bed and Breakfast Business Plan”.    This is not a business plan.

This is more accurately titled on the second page as a “History

and Description of the Business”.    Petitioner’s so-called

“business plan” established no business goals for the Camelot

Inn.    Petitioner did not keep the type of records which could be

used to increase the profitability of a business.    Petitioner

never prepared budgets or market projections which would outline

strategies for ensuring a profitable business venture and making

informed business decisions on a periodic basis.    Such lack of

information upon which to make educated business decisions tends

to belie a taxpayer's contentions that an activity was pursued

with the primary objective of making a profit.     Dodge v.
Commissioner, T.C. Memo. 1998-89, affd. without published opinion

188 F.3d 507 (6th Cir. 1999).

       Petitioner never ascertained how or when he would make a

profit or how he could change his operating methods to improve
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his profitability.    To begin with, petitioner stated that his

location “was one mile off Route 417 on a side road called

Sullivan Hollow, which pretty much meant that I wasn’t going to

get drive by business.”   Petitioner testified that he “cut back

quite a bit on advertising” and reduced the price charged for the

rooms.    Petitioner’s ads were attractive but did not display his

building, apparently because his bed and breakfast building would

not compare favorably with other bed and breakfast buildings

which were pictured in the other ads he offered into evidence.

We note that none of the changes made by petitioner, in essence

to reduce losses and control costs, had any material effect.

Petitioner continued to incur sizeable losses.    Thus, we find

petitioner did not carry on the activity in a businesslike

manner.   We conclude that this factor is not indicative of the

requisite profit objective.

     We consider the expertise of the taxpayer.     A taxpayer’s

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

consultation with experts, may be indicative of a profit

objective.   Sec. 1.183-2(b)(2), Income Tax Regs.    Prior to

operating the Camelot Inn, petitioner served as a chef in the

United States Army.   Ms. Hughes worked during college as a

housekeeper and receptionist at a motel.    Petitioner belonged to

the Cattaraugus County Tourism Bureau and the National Bed and

Breakfast Association.    However, petitioner testified that he had

no prior experience operating a bed and breakfast.     Prior to

starting the bed and breakfast, petitioner did not consult
                               - 11 -

experts.   Nor did petitioner consult with business experts during

the regular course of operations for the bed and breakfast.      It

appears over the course of the activity that petitioner gained

little expertise regarding the business aspects and profitability

of a bed and breakfast activity.    Petitioner claimed he went into

the bed and breakfast activity to cover his additional expenses

from his divorce, yet he only had losses.    We conclude that this

factor is not indicative of a profit objective.

     We consider the time and effort expended by the taxpayer in

carrying on the activity.    An intent to derive a profit may be

demonstrated by a taxpayer who devotes much of his personal time

and effort to the activity, a taxpayer who withdraws from another

occupation to devote most of his energies to the activity, or a

taxpayer who devotes a limited amount of time but employs

competent and qualified people to carry on the activity.      Sec.

1.183-2(b)(3), Income Tax Regs.

     During the taxable years in issue, petitioner worked full-

time as an elementary school principal.    Petitioner’s official

workday was from 8 a.m. to 4 p.m.    Petitioner would also have

early morning meetings and after-school activities.    Petitioner

stated that his work days as principal varied but that there were

“times I’d feel like I was putting in a 16 hour day.”    During the

1997 taxable year, petitioner also claimed he operated a

woodworking business.    Ms. Hughes was also employed full-time as

a school psychologist.   Petitioner does not contend that any

other individuals were employed by the Camelot Inn.    Most
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important is that petitioner generally participated in the bed

and breakfast activity only when he was not at his full-time job

as a school principal.   On the whole, in addition to petitioner’s

full-time occupation and other business activities, petitioner

expended only minimal time and effort on the bed and breakfast

activity.   We conclude that this factor is not indicative of a

profit objective.

     We consider the taxpayer’s expectation that assets used in

the activity may appreciate in value.   The term “profit”

encompasses appreciation in the value of assets used in the

activity.   Sec. 1.183-2(b)(4), Income Tax Regs.   Accordingly, a

profit objective may be inferred even where there are no

operating profits, so long as the appreciation in value of the

activity’s assets exceeds its operating expenses of the current

year and its accumulated losses from prior years.    Golanty v.

Commissioner, 72 T.C. at 427-428.

     Petitioner argues that he expects the Camelot Inn’s primary

asset, the residence, to appreciate in value.   Petitioner offered

a residential appraisal that the market value of the Sullivan

Hollow residence was $115,000 as of August 31, 1994.   Petitioner

offered no evidence of the market value of the residence as of

the years in issue.   Based on an appraisal, the market value of

the Sullivan House residence as of April 18, 2002, was $260,000.

Petitioner’s accumulated losses from 1994 through 1997 year total

$164,270.   Assuming that the residence appreciated in value each

year from 1994 through 2002, then the accumulated losses of the
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Camelot Inn through 1997 exceeded the residence’s appreciation in

value at that time.    The goal must be to realize a profit in the

entire operation.     Bessenyey v. Commissioner, 45 T.C. 261, 274

(1965), affd. 379 F.2d 252 (2d Cir. 1967).     Petitioner testified

that he purchased the residence from his ex-wife because “First

of all, the land that this house is built on has been in my

family since about 1840.    Second of all, I constructed the home

myself literally with hammer and nails.”     Petitioner did not

purchase the Sullivan Hollow residence for speculative

appreciation.   Consequently, we conclude this factor weighs

against finding a profit objective.

     We consider the taxpayer’s success in carrying on other

similar or dissimilar activities.    We have recognized that a

taxpayer’s success in other business activities may indicate a

profit objective.     Hoyle v. Commissioner, T.C. Memo. 1994-592;
sec. 1.183-2(b)(5), Income Tax Regs.     Petitioner purportedly

conducted several other business activities prior to, and during,

the time he operated the bed and breakfast activity.     During the

years 1994 through 1997, petitioner, who had no cattle, allegedly

was engaged in a beef cattle activity.     With respect to that

activity, petitioner reported losses of $3,198, $4,040, $1,384,

and $1,065, respectively, for those years on his Schedules F.       In

1994, petitioner reported an $8,167 loss with respect to an

asbestos and radon abatement activity.     Petitioner reported a

profit of $1,838 with respect to the asbestos and radon abatement

activity in 1995.     In 1997, petitioner reported an $824 loss with
                                - 14 -

respect to a woodworking activity.       We conclude that the largely

unsuccessful results from petitioner’s other purported activities

do not indicate a profit objective.

     We consider the taxpayer’s history of income or losses with

respect to the activity.   A history of losses over an extended

period of time may indicate the absence of a profit objective.

Allen v. Commissioner, 72 T.C. 28, 35 (1979); sec. 1.183-2(b)(6),

Income Tax Regs.   The magnitude of the activity’s losses in

comparison with its revenues is an indication that the taxpayer

did not have a profit objective.     Dodge v. Commissioner, T.C.
Memo. 1998-89, affd. without published opinion 188 F.3d 507 (6th

Cir. 1999).   In this case, petitioner’s losses in comparison with

his revenues are substantial.    No profits have ever been

generated from petitioner’s bed and breakfast activity, and none

are expected in the near future.    This factor weighs against

finding a profit objective.

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

are earned.   If an activity generates only small, infrequent

profits and typically generates large losses, the taxpayer

conducting the activity may not have a profit objective.        Sec.

1.183-2(b)(7), Income Tax Regs.    In this context, profit means

economic profit, independent of tax savings.       Seaman v.
Commissioner, 84 T.C. 564, 588 (1985).       As we have set forth

above, petitioner has a history of substantial losses.         There is

no indication from the record that petitioner can realistically

expect profitability in the near future.      This factor weighs
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against finding a profit objective.

     We consider the financial status of the taxpayer.

Substantial income from sources other than the activity in

question, particularly if the losses from the activity generate

substantial tax benefits, may indicate that the activity is not

engaged in for profit.     Hillman v. Commissioner, T.C. Memo. 1999-

255; sec. 1.183-2(b)(8), Income Tax Regs.    During the taxable

years 1996 and 1997, petitioner reported unrelated gross income

of $67,414 and $65,295, respectively.    During the same years,

petitioner reported Schedule C losses from the bed and breakfast

activity of $55,132 and $47,969, respectively.    Petitioner used

these losses to reduce his gross income by 82 percent for 1996

and 74 percent for 1997.    These reductions led to substantial tax

savings for petitioner.    Consequently, this factor weighs against

a finding of a profit objective.

     Given due consideration to the record as a whole, we find

that during the taxable years in issue petitioner did not operate
the bed and breakfast activity with an intent to make a profit.

Accordingly, we sustain respondent’s disallowance of petitioner’s

Schedule C deductions.

     We next consider whether petitioner is entitled to head of

household filing status for 1996 and 1997.    Petitioner contends

that he maintained a household for his daughter Jamie during the

taxable years 1996 and 1997.    Respondent determined that

petitioner’s proper filing status for the taxable year at issue
                              - 16 -

is single.

     Section 2(b), in relevant part, defines head of household as

an unmarried taxpayer who maintains as his home a household which

constitutes for more than one-half of such taxable year the

principal place of abode of a person who is an unmarried son or

daughter of the taxpayer.   Sec. 2(b)(1)(A)(i).    The term

“principal place of abode” is synonymous with “home”.      Sec. 1.2-

(2)(c)(1), Income Tax Regs.   A taxpayer shall be considered as

maintaining a household only if he pays more than one-half the

costs of the household.   Sec. 1.2-2(d), Income Tax Regs.     The

costs of maintaining a household include property taxes, mortgage

interest, rent, utility charges, upkeep and repairs, property

insurance, and food consumed on the premises.     Id.

     During the taxable years at issue, Jamie was a full-time

student at Penn State University.    In 1996 and 1997, Jamie

remained at college during the summer months as a participant in

the ROTC program.   Petitioner testified that “for the most part

[Jamie] wasn’t in the area at all.     She was away at college.”

Petitioner, although unmarried during the taxable years in issue,

has not met the requirements to file as head of household.

Petitioner lived in Ms. Hughes’ residence during the years in

issue.   Petitioner testified that he paid weekly child support to

his former wife during the taxable years in issue.      Petitioner

did not offer evidence that he provided more than one-half the

costs of maintaining a household for himself and Jamie.
                               - 17 -

Petitioner did not provide any evidence of the total annual costs

of maintaining a household for himself and Jamie.     Accordingly,

we sustain respondent’s determination with respect to this issue.

     To the extent that we have not addressed any of the parties’

arguments, we have considered them and conclude they are

irrelevant or without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                         Decision will be entered

                                    for respondent.
