                      125 T.C. No. 13



                UNITED STATES TAX COURT



    DENNIS E. AND PAULA W. LOFSTROM, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 4667-03.            Filed November 22, 2005.



     Ps are Mr. Lofstrom (H) and Paula Lofstrom (W-2).
H was previously married to Dorothy Lofstrom (W-1). In
satisfaction of his alimony obligations to W-1, H
transferred his $29,000 interest in a contract for deed
to W-1, along with $4,000 in cash. Ps deducted as
alimony the value of the contract for deed. In
addition, Ps claimed to operate the first floor of
their residence as a bed and breakfast (B&B) and
deducted related expenses. H, a retired doctor, also
claimed to be engaged in the business of writing for
profit and Ps deducted expenses attributable to H’s
writing activities.

     1. Held: A contract for deed is a third-party
debt instrument under sec. 1.71-1T(b), Q&A-5, Temporary
Income Tax Regs., 49 Fed. Reg. 34455 (Aug. 31, 1984).
Ps may not deduct as alimony the value of a contract
for deed transferred to W-1 because it does not
constitute a cash payment. Id.; see secs. 61(a)(8),
71(a), 215(a) and (b).
                                 - 2 -


            2. Held, further, Ps may not deduct expenses for
       a hotel or like establishment because they used the B&B
       for personal purposes for an indeterminate amount of
       time, and they failed to substantiate the expenses.
       Sec. 280A (c)(1), (d)(1), (f)(1)(B), (g).

            3. Held, further, Ps may not deduct writing
       activity expenses where they failed to show that H was
       engaged in the activity of writing for profit. Secs.
       162, 183; sec. 1.183-2(a), Income Tax Regs.



       Steven Z. Kaplan, for petitioners.

       Melissa J. Hedtke, for respondent.



                                OPINION


       KROUPA, Judge:   Respondent determined a $10,552 deficiency

in petitioners’ Federal income tax for 1997 and a $2,198

deficiency for 1998.     After concessions,1 the issues for decision

are:

       1.   Whether petitioners may claim an alimony deduction for

$29,000 in 1997 for the transfer of a contract for deed.     Because

we find the contract for deed does not constitute cash or a cash

equivalent, we hold that they may not.




       1
      Petitioners conceded several deductions, including auto
expenses, legal expenses for Mr. Lofstrom’s divorce, real estate
appraisal expenses, closing costs, flood insurance recovery
costs, tax return preparation fees, land abstract costs,
utilities, travel expenses, and other expenses claimed on
Schedule F, Profit or Loss From Farming, and Schedule C, Profit
or Loss From Business.
                                   - 3 -

        2.    Whether petitioners may deduct $19,158 in 1997 for

expenses incurred in the operation of a bed and breakfast (B&B).

Because we find they used the B&B for personal purposes for an

indeterminate period and failed to substantiate expenses, we hold

that they may not deduct these expenses.

        3.    Whether petitioners may deduct $1,664 in 1997 and $8,413

in 1998 for expenses related to Mr. Lofstrom’s writing

activities.       Because we find they failed to show that

Mr. Lofstrom engaged in the activity of writing for profit, we

hold that they may not deduct these expenses.

                                Background

        The parties submitted the case fully stipulated under Rule

122.2       The stipulation of facts and accompanying exhibits are

incorporated by this reference and are so found.       Petitioners

resided in Overland Park, Kansas, at the time they filed this

petition.

        Trial was first scheduled for June 14, 2004, but was

continued because petitioners were in Africa.       Trial was then

rescheduled for June 6, 2005.       Although petitioners were

represented by counsel, they were not present to testify or be

cross-examined.       We admitted several documents at trial,



        2
      All 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, unless otherwise
indicated.
                                - 4 -

including petitioners’ answers to interrogatories, over

respondent’s objections, but warned petitioners that we would

accord little weight to the documents.    To hold otherwise would

prejudice respondent because he did not have the opportunity to

cross-examine petitioners regarding the authenticity of the

documents or the veracity of petitioners’ answers to

interrogatories.    We stand by that ruling.   The factual

background is therefore based on the stipulation of facts and

exhibits submitted to the Court.

     Petitioner Dr. Dennis Lofstrom (Mr. Lofstrom) leads a very

active life.   For most of his life, Mr. Lofstrom lived and worked

in Minnesota, where he raised a family of 11 children with his

wife, Dorothy Lofstrom (Dorothy).    Mr. Lofstrom later divorced

Dorothy and retired from his full-time medical practice.     Mr.

Lofstrom embarked at age 70 in 1995 upon a medical missionary

trip to Antarctica with his second wife, Paula Lofstrom (Paula).

Petitioners embarked upon another medical missionary trip in 2002

to serve at a hospital in Tanzania, Africa, for 5 years.

     This case concerns three varieties of deductions that

petitioners claimed in 1997 and 1998.    The first relates to

alimony.

Alimony Deduction

     Mr. Lofstrom was ordered to pay Dorothy $1,500 per month in

alimony (or support maintenance payments) pursuant to their
                               - 5 -

divorce decree.   Mr. Lofstrom stopped making payments sometime in

1995 and a year later asked a Minnesota county court to terminate

his alimony obligations because his salary had been substantially

diminished after retirement.   The State court instead found

Mr. Lofstrom in arrears to Dorothy for the time that he failed to

pay alimony and reduced his arrearage to a judgment for $18,000.

The State court did grant Mr. Lofstrom a reduction, however, in

his monthly alimony payments from $1,500 to $1,000.

     Shortly thereafter, Dorothy agreed to relinquish her past

and future claims for alimony against Mr. Lofstrom in exchange

for $4,000 cash and Mr. Lofstrom’s interest in a contract for

deed valued at $29,000.   The contract for deed entitled Dorothy

to principal and interest payments until the principal was fully

paid.3   Payments under the contract for deed were to be made

irrespective of when Dorothy died.

     Petitioners initially deducted as alimony only the $4,000

cash payment on their joint return for 1997.   They later amended

their return for 1997 and deducted the $29,000 value of the

contract for deed.   Respondent granted petitioners the $4,000

deduction but denied the $29,000 deduction.


     3
      The contract for deed was entered into between
Mr. Lofstrom, as trustee of the Dennis Lofstrom Trust, and Mark
Lofstrom, the son of Mr. Lofstrom and Dorothy. The contract for
deed required a $1,408.34 payment upon execution, $4,200 or more
annually at a rate of $350 monthly, and interest at a rate of 7.5
percent per year.
                                - 6 -

Bed and Breakfast and Writing Activity Deductions

     Petitioners also deducted expenses related to a B&B that

they listed as their principal trade or business on Schedule C,

Profit or Loss from Business, for 1997.    Petitioners called the

B&B, “Angel’s Rest Arrowhead Ranch - Fly In Bed And Breakfast”

and listed related gross receipts of $649 and expenses of

$19,158.4   Petitioners allowed Mr. Lofstrom’s daughter and her

family to use the B&B rent-free for an unspecified period of time

that same year.   Petitioners failed to introduce any evidence

that they rented the B&B to anyone else.

     In addition, petitioners deducted expenses for

Mr. Lofstrom’s writing activities in 1997 and 1998.

Specifically, petitioners deducted $1,664 for travel expenses and

writing supplies in 1997 and $8,413 in 1998.

     Respondent mailed petitioners a deficiency notice on

December 20, 2002, disallowing their $29,000 alimony deduction

for 1997, B&B-related deductions for 1997, and writing activity

deductions for 1997 and 1998.   Petitioners timely filed a

petition with the Court.

                            Discussion

     We must decide whether Mr. Lofstrom’s transfer of a contract

for deed constitutes deductible alimony.   We must also decide


     4
      Of this amount, $12,622 is depreciation expenses, which
petitioners concede.
                                - 7 -

whether petitioners may deduct B&B expenses and writing activity

expenses.   We first address who bears the burden of proof.

     Petitioners bear the burden to prove that respondent’s

determination is wrong.   See Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933).   Moreover, deductions are a matter of

legislative grace, and petitioners bear the burden to prove that

they are entitled to the claimed deductions.5   See New Colonial

Ice Co. v. Helvering, 292 U.S. 435 (1934); Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).    In addition, where as here petitioners

failed to testify, we can presume that their testimony would have

been unfavorable.   Wichita Terminal Elevator Co. v. Commissioner,

6 T.C. 1158, 1165 (1946) (citing Walz v. Fidelity-Phoenix Fire

Ins. Co., 10 F.2d 22 (6th Cir. 1926); Equip. Acceptance Corp. v.

Arwood Can Mfg. Co., 117 F.2d 442 (6th Cir. 1941); Bomeisler v.

M. Jacobson Trust, 118 F.2d 261 (1st Cir. 1941); Hann v. Venetian

Blind Corp., 111 F.2d 455 (9th Cir. 1940); Sears, Roebuck & Co.

v. Peterson, 76 F.2d 243 (8th Cir. 1935)), affd. 162 F.2d 513

(10th Cir. 1947).



     5
      Petitioners did not move to shift the burden of proof to
respondent. Sec. 7491(a)(2)(A) and (B). Nor would petitioners
have qualified because they failed to present credible evidence,
substantiate their claimed expenses, or maintain adequate books
and records.
                               - 8 -



A.   Deduction for the Value of the Contract for Deed

     Next, we address whether petitioners are entitled to deduct

as alimony $29,000 for the value of a contract for deed that

Mr. Lofstrom transferred to Dorothy in 1997.    Alimony (or

separate maintenance) payments are deductible from income by the

payor and includable in the income of the payee.    Secs. 61(a)(8),

71(a), 215(a) and (b).   The payments must meet certain

requirements to be deductible, however.    See secs. 71, 215.

     Among those requirements,6 payments must be made in cash or

a cash equivalent.   See sec. 71(b)(1).   A check or money order

that is payable on demand is a cash equivalent.    A debt

instrument that is transferred is not.    Sec. 1.71-1T(b), Q&A-5,

Temporary Income Tax Regs., 49 Fed. Reg. 34455 (Aug. 31, 1984).

     This is the first time that this Court is asked to address

whether the transfer of a third-party debt instrument satisfies

the requirements to qualify as alimony.    Specifically, we address

whether the “contract for deed” that Mr. Lofstrom transferred to




     6
      Other requirements are that the alimony must be received by
a spouse under a divorce or separation instrument, the payments
cannot be designated in the divorce or separation instrument as a
payment for something other than alimony, the payee spouse and
the payor spouse must not be members of the same household at the
time of payment, and the payments must terminate at the death of
the payee spouse. Sec. 71(b)(1)(A)-(D).
                               - 9 -

Dorothy in part satisfaction of Mr. Lofstrom’s accrued and future

alimony obligations to Dorothy qualifies as alimony.7

     A contract for deed is a financing arrangement that allows a

buyer (or vendee) to purchase property by borrowing the money for

the purchase from the seller (or vendor).    In re Butler, 552

N.W.2d 226, 229-230 (Minn. 1996).   Here, Mr. Lofstrom had

transferred property to Mark Lofstrom in return for periodic

payments from Mark Lofstrom until the full principal amount, with

interest, was paid.   The contract for deed represented,

therefore, a debt obligation of Mark Lofstrom to Mr. Lofstrom.

Because the contract for deed transferred to Dorothy is a debt

instrument of a third party, it does not qualify as a cash

payment and is not deductible as alimony.8   See secs. 71(b)(1),

215(a); sec. 1.71-1T(b), Q&A-5, Temporary Income Tax Regs.,




     7
      The Minnesota legislature has sanctioned contracts for deed
because they provide a useful alternative financing mechanism,
which promotes the availability of credit and the transferability
of property. In re Butler, 552 N.W.2d 226, 229-230 (Minn. 1996)
(citing Minn. Stat. sec. 559.205-.216 (1994)).
     8
      Further, once Mr. Lofstrom transferred the contract for
deed to Dorothy, Mark Lofstrom’s liability to make payments under
the contract would not end at Dorothy’s death. We note that
alimony does not include a liability to make payments after the
payee’s death. Sec. 71(b)(1)(D); see also Sugarman v.
Commissioner, T.C. Memo. 1996-410 (payments found in the nature
of a property settlement rather than alimony where payments would
not necessarily have terminated if the taxpayer died before the
end of the payment stream because the taxpayer’s estate would
have had a valid claim for the remainder of the payments).
                                   - 10 -

supra.    Accordingly, we sustain respondent’s determination

disallowing a deduction for the value of the contract for deed.9

B.   Bed And Breakfast Expenses

     We must next determine whether petitioners are entitled to

deduct expenses related to operating a B&B on the first floor of

their home.     Generally, taxpayers are restricted from deducting

expenses of their residences, or more specifically, expenses

related to a “dwelling unit” that taxpayers use as a personal

residence.10    Sec. 280A(d)(1).

     Petitioners admit that they used their dwelling unit, at

least in part, as a personal residence.     Unless an exception

applies, therefore, petitioners may not deduct expenses of their

residence.     Respondent argues, and we agree, that petitioners

failed to substantiate and hence meet their burden to prove that

they operated a portion of their residence as a business.

     Deducting the business portion of a dwelling unit is

restricted.    For example, if personal use of the business portion

of a dwelling unit exceeds the greater of 14 days or 10 percent



     9
      We find no merit in petitioners’ arguments concerning the
doctrines of “constructive receipt” or “origin of claim” to
characterize the transfer of the contract for deed as alimony.
     10
      This general rule does not apply to those expenses that
are deductible regardless of any connection with a trade or
business, such as mortgage interest on the residence under sec.
163, real estate taxes under sec. 164, or casualty losses under
sec. 165. Sec. 280A(b).
                              - 11 -

of the number of days the unit is rented at fair rental value, no

deduction is allowed.   Sec. 280A(a), (d)(1).   Nor may taxpayers

deduct expenses for the portion of a residence not “exclusively”

used for business purposes.   See sec. 280A(c)(1), (f)(1)(B); see

also Langer v. Commissioner, 989 F.2d 294, 295 (8th Cir. 1993)

(affirming this Court’s denial of a home office deduction based

on taxpayer’s failure to show exclusive use); Byers v.

Commissioner, 82 T.C. 919, 925 (1984) (rent-free personal use of

a unit barred a finding that the unit was used exclusively as a

hotel); Grigg v. Commissioner, T.C. Memo. 1991-392, affd. 979

F.2d 383 (5th Cir. 1992).   Personal use includes use by a

taxpayer’s lineal descendants, unless fair rental value is paid.

See sec. 267(c)(4).

     Petitioners admit that Mr. Lofstrom’s daughter (and her

family) used the B&B rent-free for an indefinite period of time

in 1997, which constitutes personal use by petitioners.   See sec.

280A(d)(2) and (3).   Because petitioners have not shown how long

Mr. Lofstrom’s daughter stayed,11 petitioners have failed to meet

their burden that personal use of the B&B did not exceed the

greater of 14 days or 10 percent of the number of days that the

unit was rented at fair rental value.12   See sec. 280A(d)(1),


     11
      Petitioners vaguely assert that she stayed on a “single
occasion.”
     12
      Nor have petitioners carried their burden to prove that
they rented the unit for at least 15 days in 1997. See sec.
280A(g); Stoddard v. Commissioner, T.C. Memo. 2002-31 (rental
                                                   (continued...)
                                - 12 -

(2)(A).   Petitioners have also failed to show that they used the

B&B exclusively for business purposes.

     Further, petitioners did not substantiate the B&B expenses.

They produced no books or records substantiating, among other

things, the amount of rent collected, the number of days that

guests stayed, or the rates that guests paid.   We are left with

little more than petitioners’ Schedule C, on which they listed

marginal gross income for the B&B and substantial expenses.   A

schedule of expenses is not sufficient to meet petitioners’

burden, however.   See Cluck v. Commissioner, 105 T.C. 324, 338

(1995) (summary schedules insufficient to entitle taxpayer to

claimed deductions).   Accordingly, based upon a lack of

substantiation, a general dearth of evidence, and the personal

use of the B&B, petitioners are not entitled to deduct any of the

disputed expenses for any portion of their residence in 1997.     We

therefore sustain respondent’s disallowance of the B&B expenses.

C.   Writing Activity Expense

     Finally, we must determine whether petitioners may deduct

expenses in 1997 and 1998 related to Mr. Lofstrom’s writing

activities.   The evidence includes manuscripts that Mr. Lofstrom

allegedly drafted, including a science fiction novel called “Out

of the Mando Galaxy by Nnak Kamon” and a health and fitness book



     12
      (...continued)
expenses not deductible where taxpayer did not rent residence at
least 15 days and personal use exceeded 14 days).
                               - 13 -

called “A Common Sense Approach to Weight Loss, Nutrition,

Physical Fitness, and Exercise for the Non-Fanatic of All Ages.”

We accord little weight to these submissions, however, because

respondent did not have the opportunity to cross-examine

Mr. Lofstrom at trial.   Respondent argues nonetheless that, even

considering these manuscripts, petitioners have not shown that

Mr. Lofstrom engaged in his writing activities for profit.    We

agree.

     Taxpayers may deduct ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business.   See sec. 162.   To do so, taxpayers must demonstrate

that they were involved in the activity on a continuous and

regular basis and that their purpose for engaging in the activity

was for income or profit.    See Commissioner v. Groetzinger, 480

U.S. 23, 35 (1987); Wittstruck v. Commissioner, 645 F.2d 618, 619

(8th Cir. 1981), affg. T.C. Memo. 1980-62; Jasionowski v.

Commissioner, 66 T.C. 312, 320-322 (1976); Gentile v.

Commissioner, 65 T.C. 1, 4 (1975); sec. 1.183-2(a), Income Tax

Regs.    Whether the required profit objective exists is determined

on the basis of all the facts and circumstances of each case.

See Hirsch v. Commissioner, 315 F.2d 731, 737 (9th Cir. 1963),

affg. T.C. Memo. 1961-256; 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), Income Tax Regs.    While a reasonable
                              - 14 -

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

of making a profit must be bona fide.   See Wittstruck v.

Commissioner, supra at 619; Elliott v. Commissioner, 84 T.C. 227,

236 (1985), affd. without published opinion 782 F.2d 1027 (3d

Cir. 1986).   The Court gives greater weight to objective factors

in making the factual determination than to a taxpayer’s mere

statement of intent.   See Indep. Elec. Supply, Inc. v.

Commissioner, 781 F.2d 724 (9th Cir. 1986), affg. Lahr v.

Commissioner, T.C. Memo. 1984-472; Dreicer v. Commissioner, 78

T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C.

Cir. 1983); sec. 1.183-2(a), Income Tax Regs.

     We consider several factors13 in determining whether

Mr. Lofstrom was engaged in the writing activity for profit,

including the manner in which he carried on the activity, the

time and effort he expended on the activity, the history of

income or loss with respect to the activity, and the amount of


     13
      The Court generally considers nine nonexclusive factors
for determining whether taxpayers engaged in an activity for
profit. Sec. 1.183-2(b), Income Tax Regs. Petitioners here
failed to produce relevant evidence regarding many of the
factors, and we consequently confine our analysis to four of the
nine factors. The nine factors are: (1) The manner in which the
taxpayer carried 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 activities for
profit; (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) elements of personal pleasure or recreation. Id.
                                - 15 -

any profits that he earned.     Sec. 1.183-2(b)(1)-(9), Income Tax

Regs.     The individual facts and circumstances of each case are

the primary test, and no factor or set of factors is necessarily

controlling.     See Hendricks v. Commissioner, 32 F.3d 94, 98 (4th

Cir. 1994), affg. T.C. Memo. 1993-396; Brannen v. Commissioner,

722 F.2d 695, 704 (11th Cir. 1984), affg. 78 T.C. 471 (1982);

Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Allen v.

Commissioner, 72 T.C. 28, 34 (1979); sec. 1.183-2(b), Income Tax

Regs.

     Petitioners failed to identify the amount of time that

Mr. Lofstrom spent writing during the years at issue or whether

he had anything published.14    Nor did petitioners report any

gross or net income on their returns for Mr. Lofstrom’s writing

activities.    Rather, petitioners reported a string of losses, in

the years at issue and in 3 prior years (from 1994 to 1998).

These factors, taken together, indicate that Mr. Lofstrom was not

involved in the writing activity for profit.15    See Zuckerman v.

Commissioner, T.C. Memo. 1984-192 (substantial income from other



     14
      Petitioners claimed, in their answers to interrogatories,
that Mr. Lofstrom writes “many nights and weekends” and once had
“100 copies” of something “distributed free of charge.”
     15
      The only information petitioners offered to prove
Mr. Lofstrom’s profit motive was a day-of-trial deluge of
miscellaneous handwritten notes, correspondence with publishers,
a typewritten “novel”, and hundreds of handwritten notes on
health, fitness, and dieting. We accord little weight to these
documents because Mr. Lofstrom did not testify.
                              - 16 -

sources, losses over a number of years, and tax benefits are

features characteristic of an activity not operated for profit).

Accordingly, we find that petitioners failed to meet their burden

to establish that Mr. Lofstrom engaged in his writing activities

with a bona fide profit objective.

Conclusion

     We sustain respondent’s determinations in the deficiency

notice for 1997 and 1998.   In reaching our holding, we have

considered all arguments made, and, to the extent not mentioned,

we conclude that they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                          Decision will be entered

                                     for respondent.
