                  T.C. Summary Opinion 2003-94



                     UNITED STATES TAX COURT



     RAYMOND J. PAVELKO AND ILENE H. PAVELKO, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13642-01S.             Filed July 21, 2003.



     Raymond J. Pavelko, pro se.

     Blaine C. Holiday, for respondent.



     DINAN, 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.   The decision to be

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

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in
                                - 2 -

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

Tax Court Rules of Practice and Procedure.

     Respondent determined deficiencies in petitioners’ Federal

income taxes of $2,417, $3,469, $4,236, and $3,276, and accuracy-

related penalties of $483.40, $693.80, $847.20, and $655.20 for

the taxable years 1996, 1997, 1998, and 1999.

     The sole issue for decision is whether petitioner husband

(petitioner) engaged in certain activities for profit during each

of the years in issue.1   Respondent concedes the application of

the accuracy-related penalties in this case.

     Some of the facts have been stipulated and are so found.

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.    Petitioners resided in

West Salem, Wisconsin, on the date the petition was filed in this

case.

     Petitioners filed a joint Federal income tax return for each

of the years in issue.    With these returns, petitioners filed

Schedules C, Profit or Loss From Business, for several

activities.   In 1996, petitioners filed a Schedule C which named

petitioner as the proprietor and listed “rental” as the principal

business.   This schedule reflected the following loss:


     1
      Petitioners also argue in their petition that petitioner
was “able to engage in a trade or business”, and that he was not
precluded from doing so by any medical disability. Petitioner’s
physical or mental ability to engage in a trade or business is
not being questioned in this case.
                                    - 3 -
          Gross receipts or sales               $-0-
          Cost of goods sold                     -0-

          Gross profit                           -0-
          Car and truck expense                3,912
          Mortgage interest                    1,712
          Net profit (loss)                   (5,624)

In each of the years in issue, petitioners filed a Schedule C

which named petitioner as the proprietor and listed “mental

health services” or “mental health and other services” as the

principal business.     These schedules reflected the following

losses:

                                    1996      1997        1998      1999

     Gross receipts or sales        $76       $-0-      $1,320      $-0-
     Cost of goods sold              24        -0-         -0-       -0-
     Gross profit                    52        -0-       1,320       -0-

     Advertising                    36           75         272       -0-
     Car and truck expense         -0-        4,530       3,575       -0-
     Depreciation                3,512        7,495       2,907       768
     Insurance                     -0-          391       1,770       -0-
     Legal and professional        -0-        1,385       1,355        62
     Office                        -0-          -0-       1,245       -0-
     Rental                        -0-          -0-       3,210       -0-
     Repairs and maintenance       -0-          -0-       1,113       -0-
     Supplies                    1,214       12,196      10,451       244
     Taxes and licenses            -0-          -0-         932       -0-
     Travel                        -0-          -0-         641       -0-
     Utilities                     -0-          256         -0-       -0-
     Educational expense         5,740          -0-       8,123       -0-
     Net profit (loss)         (10,450)     (26,328)    (34,274)   (1,074)

Finally, in 1999 petitioners filed a Schedule C which named

petitioner as the proprietor and listed “developmental research”

as the principal business.        This Schedule reflected the following

loss:
                                      - 4 -
            Gross receipts or sales              $10
            Cost of goods sold                    -0-
            Gross profit                          10

            Advertising                           275
            Car and truck expense               7,351
            Insurance                           1,925
            Supplies                           14,761
            Taxes and licenses                    100
            Utilities                             502
            Professional dues                     225
            Business use of home                  154
            Net profit (loss)                 (25,283)

In the notice of deficiency, respondent determined that the

activities listed on each of the Schedules C filed in 1996, 1997,

and 1998, and the “developmental research” Schedule C in 1999,

did not “constitute bona fide business ventures entered into for

profit”.2   Respondent accordingly disallowed the deductions

claimed for the expenses on each of these schedules and

recharacterized the gross profits shown thereon as “other

income”.

     Under section 162(a), a taxpayer may deduct the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.         A taxpayer is engaged in a

trade or business if the taxpayer is involved in the activity

with continuity and regularity and with the primary purpose of

making a profit.     Commissioner v. Groetzinger, 480 U.S. 23, 35

(1987).




     2
      The record is not clear why this determination was not made
with respect to the 1999 “mental health and other services”
Schedule C.
                                 - 5 -

     If an activity of a taxpayer is not conducted for profit,

section 183(a) disallows all deductions related thereto, except

as provided by section 183(b).    As relevant here, an activity is

not conducted for profit if it is one with respect to which

deductions are not allowable under section 162(a).    Sec. 183(c).

If an activity of a taxpayer is not conducted for profit, section

183(b) allows the taxpayer to deduct (1) expenses which otherwise

would have been allowable without regard to profit motive, and

(2) certain additional expenses to the extent of the gross income

derived from the activity, less those deductions of the first

type.

     The test to determine whether a taxpayer conducted an

activity for profit is whether he or she engaged in the activity

with an actual and honest objective of earning a profit.     Keanini

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

78 T.C. 642, 644-645 (1982), affd. without opinion 702 F.2d 1205

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

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

profit objective must be bona fide, as determined from a

consideration of all the facts and circumstances.     Keanini v.

Commissioner, supra; Dreicer v. Commissioner, supra at 645;

Golanty v. Commissioner, 72 T.C. 411, 425-426 (1979), affd.

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

v. Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d
                                 - 6 -

Cir. 1967).   More weight is given to objective facts than to the

taxpayer’s statement of his or her intent.     Engdahl v.

Commissioner, 72 T.C. 659, 666 (1979); sec. 1.183-2(a), Income

Tax Regs.

     The regulations under section 183 provide nine nonexclusive

factors to be used in determining whether a taxpayer is

conducting an activity with the intent to make a profit.    Sec.

1.183-2(b), Income Tax Regs.    The factors are: (1) The manner in

which the taxpayer carried on the activity; (2) the expertise of

the taxpayer or his or her 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) elements of personal pleasure or

recreation.   Id.    No single factor controls, other factors may be

considered, and the mere fact that the number of factors

indicating the lack of a profit objective exceeds the number

indicating the presence of a profit objective (or vice versa) is

not conclusive.     Id.

     We first address the 1996 rental activity.    Petitioner

testified that this activity involved the rental of real estate
                                - 7 -

to petitioner wife’s father, who lived on the land and farmed it.

Petitioner further testified that his father-in-law did not pay

rent, instead paying taxes in exchange for the right to occupy

the land.    Petitioner stated that the car and truck expenses

which were listed on the Schedule C for this activity were put

there in error, and that the expenses should have been listed on

the mental health services Schedule C instead.    Petitioners did

not explain the only other expense on this Schedule C, the

mortgage expense, nor did they explain how this activity could

have been operated for a profit when the lessee was not required

to pay rent.    Petitioners produced no evidence supporting a

finding of a profit objective in this activity with respect to

the above-mentioned factors.    We therefore find that petitioners

have not met their burden of proving respondent’s determinations

to be in error, see Rule 142(a),3 and we sustain respondent’s

determination with respect to the rental activity.

     We now turn to the remaining two activities, both of which

are related to the mental health field.    Petitioners’ testimony

and arguments concerning these activities can be summarized as

follows:    During each of the years in issue, petitioner was

involved in an activity in which he sold videotapes related to


     3
      Sec. 7491(a) does not shift the burden of proof to
respondent in this case because petitioners have provided no
credible evidence supporting a profit objective with respect to
the rental activity. Sec. 7491(a)(1).
                                  - 8 -

the mental health field.     The tapes were 23 minutes in length and

were about “living in the community with self-respect”.

Petitioner “sold these both by mail and by going around to

different mental health centers and different shows”.     These

videotapes were “available for $20 plus tax or by mail for $24

total”.    By 1999, petitioner realized that selling the videotapes

was not profitable, so he began a new activity involved in

“developmental research” in the mental health field.     This

activity involved research into the question “What is the

immediate effect of using spiritual sayings and thoughts with

persons who have experienced a recent mental health crisis?”

Petitioner hopes to use the results of this research to open an

office and offer counseling services.

     The following is the application of the section 183 factors

to petitioner’s mental health services and developmental research

activities.

Manner in Which the Taxpayer Carries On the Activity

     A profit objective may be indicated where the taxpayer

operates the activity in a businesslike manner and keeps complete

and accurate books and records.      Sec. 1.183-2(b)(1), Income Tax

Regs.     A change of operating methods in a manner consistent with

an intent to improve profitability may also indicate a profit

objective.     Id.   There is no suggestion that petitioner kept

books and records of any type, or that petitioner otherwise
                               - 9 -

operated the activities in a businesslike manner.    Petitioner did

testify that he abandoned the videotape sales activity after 3 or

more years without success in that activity.    However, for at

least 3 full years--while petitioner had nearly zero sales or

other income from the activities while incurring significant

expenses, as discussed in more detail below--petitioner did not

make any changes in his operation of this activity.    This factor

favors respondent.

Expertise of the Taxpayer or Advisers

     A profit objective may be indicated where the taxpayer

carries on an activity in accordance with practices learned from

extensive study of accepted business and economic practices, or

consultation with experts involved therein.    Sec. 1.183-2(b)(2),

Income Tax Regs.   There is no suggestion that petitioner studied

accepted business practices or consulted with experts, or that

petitioner was already an expert in the field of mental health

services or mental health research.    This factor favors

respondent.

Time and Effort Expended by the Taxpayer

     A profit objective may be indicated where the taxpayer uses

much of his personal time and effort to carry on the activity.

Sec. 1.183-2(b)(3), Income Tax Regs.    Petitioner did not state

the exact number of hours he dedicated to these activities.

However, we nevertheless are convinced that petitioner spent a
                               - 10 -

significant amount of time in pursuit of the activities.     This

factor favors petitioners.

Expectation That Assets May Appreciate in Value

     Despite a lack of profit from current operations, a profit

objective may be indicated where a taxpayer intends to earn an

overall profit with income earned from operations together with

the appreciation in the value of assets used in the activity.

Sec. 1.183-2(b)(4), Income Tax Regs.    This factor is not

applicable to this case.

Taxpayer’s Success in Other Activities

     A profit objective may be indicated where the taxpayer has

in the past undertaken activities and made them profitable

despite initial unprofitability.    Sec. 1.183-2(b)(5), Income Tax

Regs.   Because there is no indication that petitioner was engaged

in prior similar activities, or that he made other activities

profitable, this factor also is not applicable to this case.

History of Income/Losses and Amount of Occasional Profits, If Any

     A profit objective is strongly indicated where the taxpayer

has experienced a series of profitable years.     Sec. 1.183-

2(b)(6), Income Tax Regs.    A series of losses incurred during the

startup stage of an activity does not necessarily indicate the

lack of a profit objective, but it may so indicate if the losses

continue beyond the customary startup period and are not

otherwise explainable as due to customary business risks.       Id.
                               - 11 -

     Even before deducting expenses, petitioner derived no

significant income from either of the mental health-related

activities.   Petitioner reported gross receipts from videotape

sales of $76 in 1996, for a gross profit of $52 after cost of

goods sold of $24.   However, it is unclear how petitioner could

have made this profit.    He testified that he sold videotapes, but

he did not explain whether he made these tapes or purchased them

for resale.   He also testified that they were available for $20

retail or by mail order for $24.   If petitioner purchased and

resold these tapes, it is unclear how his cost of goods sold was

$24 (which would imply only one tape resold at $76).   If

petitioner was a sales agent for the manufacturer, it is unclear

how his gross receipts were $76 (with individual sales of $20 or

$24).   Petitioner later testified that the videotapes were made

available for sale in a catalog in which they sold for $59.95

each, and for which he received payment of $24 each.   This

testimony likewise does not explain petitioner’s gross receipts

and cost of goods sold.

     Petitioner also reported gross receipts of $1,320 in 1998.

However, petitioner testified that he was uncertain of the source

of this income and that he had not experienced a “significant

increase” in his sales of videotapes in 1998.   Finally,

petitioner reported gross receipts of $10 in 1999.   Petitioner

testified that this amount was received as payment for his
                               - 12 -

participation in a research study, an experience which he

believed would in turn help him in conducting his own research.

     In short, we find that petitioner had a de minimis amount of

income in both of the activities during the years in issue.      We

find that petitioner’s claimed expenditures in these activities

over the course of 4 years, totaling over $100,000, objectively

indicates that petitioner did not expect a profit or engage in

the activities with an intent to profit.    These factors strongly

favor respondent.

Financial Status of the Taxpayer

     A profit objective may be indicated where the taxpayer does

not have substantial income from sources other than the activity.

Sec. 1.183-2(b)(8), Income Tax Regs.    During the years in issue,

petitioner was employed on a part-time basis at a halfway house

for psychiatric patients.    Petitioner wife was employed by a

school district.    Petitioners received combined wage income,

interest income, and dividends totaling $35,834, $40,979,

$48,001, and $47,970 in 1996, 1997, 1998, and 1999, respectively.

Thus, petitioners had modest but reliable sources of income

during the years in issue.    This factor favors respondent.

Elements of Personal Pleasure or Recreation

     A lack of profit objective may be indicated where there are

personal motives for carrying on the activity, especially where

the motive is personal pleasure or recreation.    Sec. 1.183-
                               - 13 -

2(b)(9), Income Tax Regs.    Profit need not be the only objective,

however, and personal motives may coexist with an actual and

honest intent to derive a profit.     Id.   Although petitioner was

personally interested in these activities, we do not find that

personal pleasure or recreation was a primary motive in carrying

out these activities.    This factor favors petitioners.

Conclusion

     We are convinced that petitioner engaged in certain

activities in the mental health field, that he held an interest

in and dedication to them, and that he devoted time to these

endeavors.   However, based on the objective facts in this case,

as discussed above in connection with the individual factors, we

must conclude that petitioner did not have an actual and honest

objective of earning a profit in these activities.     Sec. 1.183-

2(a), Income Tax Regs.    We therefore sustain respondent’s

determination with respect to the mental health services activity

and the developmental research activity.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                      Decision will be entered for

                                 respondent with respect to the

                                 deficiencies and for petitioners

                                 with respect to the penalties.
