                         T.C. Memo. 1997-247



                      UNITED STATES TAX COURT



         MORGAN L. LUCID AND MARY J. LUCID, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22933-95.                       Filed June 2, 1997.



     Harry J. Kaplan, for petitioners.

     Steven Walker, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Respondent determined income tax

deficiencies for 1990 and 1991 in the amounts of $20,334 and

$49,727, respectively.   Respondent also determined accuracy-

related penalties under section 6662(a)1 of $4,067 and $9,945 for

     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
                                                   (continued...)
                                   - 2 -


1990 and 1991, respectively.       The issues for our consideration

are:       (1) Whether, in 1990 and 1991, petitioners were engaged in

an activity for profit pursuant to section 183(a); and

(2) whether petitioners are liable for accuracy-related penalties

under section 6662(a) for the 1990 and 1991 taxable years.

                             FINDINGS OF FACT2

       Petitioners resided in Fresno, California, at the time the

petition in this case was filed.       Morgan L. Lucid (petitioner

husband) was a full-time plastic surgeon, and Mary J. Lucid

(petitioner wife) was a full-time psychotherapist licensed in

California until her retirement on June 30, 1986.

       Petitioner husband is an experienced sailor and served in

the Navy during World War II.       Petitioner husband has had

navigation experience with a sextant and the Geographical

Positioning System.       He has taken courses in navigation, metal

welding, and meteorology.       Petitioner husband has also made

engine, radar, and radio repairs, and was a certified scuba diver

and licensed ham radio operator.       Petitioner wife is an

experienced sailor and has taken courses in meteorology, coastal

navigation, ham radio, and first aid.       Petitioner wife has also


       1
      (...continued)
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
       2
       The parties' stipulation of facts and exhibits is
incorporated by this reference.
                                 - 3 -


lectured on subjects including cruising at sea, provisioning,

watch scheduling, cooking at sea, rescue equipment and its use,

safety at sea, and stowing a yacht.

     Petitioners have always experienced personal pleasure from

yachting.     For approximately 14 years, they owned a 34-foot

family yacht called Credence, which they used solely for personal

purposes.     Their travels on Credence included trans-Atlantic,

trans-Pacific, east coast, west coast, and Caribbean offshore

cruises.     In 1976, petitioner husband skippered Credence to

Hawaii and back, employing celestial navigation for the 45-day

trip.     From September 1979 to March 1980, petitioners took time

off from their respective professions to sail Credence from San

Francisco to Florida via the Panama Canal.     In 1981 and 1982,

petitioners took the summer months off to sail the Chesapeake Bay

and the coast of Maine.     In 1983, petitioners sailed Credence,

with their son and niece, to the Azores, Ireland, and England,

utilizing only a sextant and a radio directional finder.

Overall, petitioners cruised at least 20,000 miles on Credence.

During 1984, petitioners sold Credence.

        In early 1985, petitioners began using stationery printed

with the letterhead “Lucid Cruising, Offshore Outfitters and

Advisors”.     Subsequently, they met with an accountant and an

attorney to discuss the formation of a corporate entity to sell

yachts and boating equipment under the name “Lucid Cruising”.
                                - 4 -


Neither the attorney nor the accountant was experienced in

selling yachts.    During March 1987, petitioners formed, in order

to protect themselves from liability, a subchapter C corporation

called “Lucid Cruising, Inc.”   It was a wholly owned subsidiary

of Dr. Lucid's medical corporation, Morgan L. Lucid, M.D. Inc.,

which was incorporated on September 5, 1974.   During October

1988, Lucid Cruising, Inc., was merged into its parent, Morgan L.

Lucid, M.D., Inc.; eventually, the merged corporation was renamed

“Morgan L. Lucid, Inc. Lucid Cruising” (Lucid Cruising), and S

corporation status was elected. Petitioners were the sole

shareholders of Lucid Cruising.

     On December 30, 1985, petitioners indicated an interest in

pursuing a contract to be the sole west coast representative of

Kanter Yachts Corp. (Kanter Yachts).    Petitioners believed that

steel and aluminum yachts afforded much more protection than

wooden or fiberglass yachts.

     In 1986, petitioners became interested in acquiring a metal-

hulled sailboat.   After examining and sailing in Lake Superior a

particular type of yacht, an Atlantic 45-foot owned by a Mr.

Donaldson, petitioners decided to lengthen the hull by 5 percent.

With the help of the architect who designed Mr. Donaldson's

yacht, petitioners made other changes to the vessel's design.    On

June 6, 1986, petitioners requested that Kanter Yachts build a

yacht based on the detailed plans drawn by the architect.
                                - 5 -


     In a June 6, 1986, letter to Kanter Yachts, petitioners

inquired as follows:

     Would you agree to list us as West Coast
     representatives of your line, this being a month to
     month agreement in which either party could cancel with
     thirty days notice and in which our commission would be
     protected to any potential buyer we had written to you
     about for ninety days. We would agree to show the boat
     at “In the Water Shows” here on the West Coast.

     On June 23, 1986, Kanter Yachts replied that it would agree

to make the extensive changes required by petitioners.   The

letter also contained the statement:

     We also thank you for your offer to represent us on the
     West Coast and we would be pleased to offer a 5%
     finder's fee for any future contacts resulting in a
     sale.

If petitioners had made successful referrals, they would have

made approximately $15,000 Canadian per referral.

     In September 1986, petitioners and Kanter Yachts signed a

contract to build, for $296,894.11 Canadian,3 an Atlantic 47-foot

steel-hulled sailboat named “Brendan” based on petitioners’

architect’s design.    During construction, Kanter Yachts suggested

lengthening the yacht by 1 foot, and Lucid Cruising agreed.

     On October 9, 1986, petitioners informed Kanter Yachts:

     We * * * appreciate that as your West Coast
     representatives you will provide us with fliers and
     assist us with our first boat shows on the East Coast.
     You have an excellent product and we find it easy to be

     3
       The parties stipulated the amount shown in this opinion;
however, the contract reflects $283,430 Canadian. The Court has
chosen to follow the parties’ stipulated amount.
                              - 6 -


     enthused. For our part, we will plan on showing the
     boat in Stamford [Connecticut] and Annapolis [Maryland]
     in late summer and early fall of 1987. We would
     appreciate any help you can provide in improving our
     skills of showing a boat, obtaining space at the shows,
     etc.

     On December 30, 1986, petitioner husband noted that a

contract with Kanter Yachts had been signed on August 21, 1986.

The notes further stated:

     The officers of Lucid Cruising met with the Kanters on
     August 9th and came to an agreement that Lucid Cruising
     would be the representative of Kanter Yachts on the
     West coast. Mr. Kanter promised that he would be on
     hand for the first show on the West Coast. He will pay
     for the registration at this show. In turn this
     company will receive 5 % of the cost of every yacht
     sold as a result of our showing the yacht. The 5 %
     will cover both the cost of the yacht and the extra
     equipment on it.

     Beginning in 1987, petitioners were becoming dissatisfied

with Kanter Yacht's handling of the contract to build Brendan.

In February 1987, Kanter Yachts was behind schedule in

constructing Brendan, and petitioners visited Kanter Yacht's

Canadian factory during February, April, June, and July 1987 in

order to verify the quality of workmanship and to ensure that the

yacht was being built according to the specifications.   Each

factory visit was followed by a letter by petitioners,

summarizing the results of their visit and providing

specifications on how they wanted the Brendan to be built.

During that time, relations between petitioners and the owner of

Kanter Yachts deteriorated to the point that the parties were not

speaking to each other.
                                 - 7 -


     The July 31, 1987, Lucid Cruising corporate minutes

mentioned the “decided strained feelings” with Kanter Yachts, and

that:   “[Petitioners’] * * * dependence upon having a good

seaworthy yacht that is attractive to show is most important in

making this corporation solvent.”    Petitioners decided to begin

an advertising campaign for the upcoming Seattle boat show

because Kanter Yachts would be responsible for the advertising

and registration for the Annapolis boat show.

     In September 1987, petitioners took possession of the

Brendan in Canada but damaged it the next day while sailing.     The

vessel was returned to Kanter Yachts for repairs.    Petitioners'

insurance policy covered the damage to the sailboat.   The

insurance contract was entitled, “The Travelers Personal Yacht

Policy” from The Travelers Insurance Companies.   The policy read,

in part:

     Private Pleasure Use Only

     We do not provide any coverage under this policy while
     the insured yacht is used for charter, hire, or any
     other commercial purpose, unless approved by us in
     writing.

The Brendan was returned to petitioners in January 1988.     It was

shipped overland from Port Stanley, Ontario, Canada, to Seattle,

Washington.   The sailboat was damaged by the trucking company in

transit.   The damage was repaired, and petitioners showed the

Brendan at the Seattle boat show from January 16, 1988 through

February 28, 1988.   Petitioners distributed their business cards

and brochures that were supplied by Kanter Yachts.   Approximately
                                - 8 -


33 people signed the visitors' book.     The February 28, 1988,

Lucid Cruising corporate minutes contained the statement that

petitioners reminded Kanter Yachts that, if someone purchased a

yacht after viewing Brendan, they expected a 5-percent fee.

     For the next 12 months, petitioners spent time equipping

Brendan for their projected cruise to New Zealand, which was

scheduled for May 1989.   However, petitioners discovered problems

with Brendan and requested that Kanter Yachts rectify the

situation.   In June 1988, petitioners took a cruise for a week to

the San Juan Islands in Washington State.

     On July 12, 1988, petitioner wife, as a representative of

Lucid Cruising, wrote to Kanter Yachts regarding the planned

arrival of Brendan in Redwood City, California.     The letter

states:

     It is Morgan's hope that BRENDAN will be the yacht that
     he has planned and looked forward to having. He
     believes that after the leaks have been repaired, the
     decks primed and recalked and epoxy that was spilled
     next to the bulwarks cleaned he will forget the
     problems that have plagued Brendan since her delivery
     in Seattle and truly begin to enjoy her.

Additionally, petitioner wife stated that she was interested in

having the boat “returned to original value” and taking all steps

to protect their investment.

     Sometime in July 1988, petitioners sailed Brendan for 5 days

from Washington State to Redwood City, California, where

petitioners docked Brendan.    Until January 1989, Brendan was

permanently docked in Redwood City.     This location was

approximately 50 minutes from petitioners' residence.
                               - 9 -


     The July 31, 1988, Lucid Cruising corporate minutes contain

a statement that petitioners, as the corporate officers, were

concerned over the problems with Brendan.   Petitioners believed

that they “have not really had the opportunity to show [the

Brendan] * * * and realize some profit for the corporation.”

     On August 31, 1988, petitioners wrote a letter to a magazine

that had covered the boat show and clarified that Brendan was not

for charter.   The letter contains the statement that petitioners

“are representing Kanter [Y]achts on the West Coast and believe

that steel and aluminum yachts are the wave of the future for the

safety factor”.   In August 1988, petitioners informed Kanter

Yachts that they had confidence that the shipyard would be able

to effect the repairs to Brendan, and “look[ed] forward to

enjoying BRENDAN for years to come.”

     In September 1988, petitioners demonstrated Brendan at a

boat show in Alameda, California.   Petitioners maintained a

visitors log for those who viewed the yacht, and over 300 people

signed it.   At that time, petitioners distributed fliers

advertising Kanter Yachts, as well as their own business cards.

Prior to the show, petitioners advertised the showing of the

Brendan in two boating magazines.

     The total time petitioners spent cruising on Brendan from

1987 through 1989 was as follows:   (1) A 5-day cruise from

Seattle, Washington, to the San Juan Islands in Washington State

in 1988; (2) a 5-day cruise from Washington State to Coyote Point

in Redwood City, California, in 1988; (3) a day cruise from
                                - 10 -


Coyote Point down the coast to the South San Francisco area in

1988; (4) a day cruise from Coyote Point to display the yacht at

the Alameda Boat show in the fall of 1988; and (5) a day cruise

from Coyote Point to San Francisco Boat Yard for repairs.

     During January 1989, petitioners came to believe that

Brendan was dangerous and unseaworthy due to improper welding by

Kanter Yachts during construction.       In February 1989, petitioners

demanded that Kanter Yachts purchase Brendan.         However, Kanter

Yachts offered, instead, to repair the sailboat.        On February 27,

1989, in corporate minutes subsequent to a meeting with the

representatives of Kanter Yachts, it was recorded:        “Mrs. Lucid

explained that both her husband and she could not consider making

ocean passages in the yacht.”

     On March 9, 1989, petitioners also wrote to Kanter Yachts:

     We have studied your proposal #2 very carefully. We do
     not enjoy the prospect of being without a boat for six
     months, especially during the summer sailing season;
     nor the trips at each stage of construction. However,
     if we can reach an agreement I assure you that we will
     do our utmost to assure a cordial working relationship.
     The main or core problem is in the welding and as I
     have learned aluminum is a very difficult metal to work
     with.

           *      *      *        *        *      *        *

     * * * [The proposed agreement] assumes that Lucid
     Cruising Inc. continues to represent Kanter Yacht
     Corporation on the west coast. * * *

     On April 1, 1989, to resolve the dispute, Kanter Yachts made

an agreement with Lucid Cruising, Inc.      In the contract, Kanter

Yachts agreed to build petitioners a new yacht, named “Trinity”,
                              - 11 -


based on the same plans as Brendan.    The agreement stated in

part:

     6. Upon completion of the new yacht Kanter at its
     expense (including payment of any custom charges and
     duty) shall transport it to San Francisco and
     commission the yacht in the water. Sea trials if
     required by Lucid shall be paid for by Lucid. Lucid
     shall transfer title of Brendan to Kanter and in
     exchange Kanter shall transfer title of the new yacht
     to Lucid. * * *

            *      *      *     *       *      *      *

     14. It is understood that since Kanter has agreed to
     replace the hull of Brendan by constructing a new
     yacht, it is the intent that the new yacht's
     specifications and equipment in every case must meet
     but not exceed those for the yacht Brendan. * * *

     On July 19, 1989, petitioners informed Kanter Yachts that

they were anxious to put the problems involving Brendan behind

them.   Petitioners stated:

     We were at a Marine Medicine meeting last week at Univ.
     of Calif. Med school which was very good and raised our
     urgency about getting back on the water and cruising.
     Our winds have been delightful this summer and we miss
     not sailing. There will be so many things that will
     need to be done befroe [sic] we can cast off our lines
     but we will continue to be patient.

     By 1989, petitioners were no longer enthusiastic with

respect to the professionalism or acumen of Kanter Yachts.   To

ensure that Kanter Yachts did not build the new boat, Trinity,

with the same flaws as Brendan, petitioners: (1) Hired an

independent third party to inspect the new hull during

construction as well as to inspect the factory; (2) flew from San

Francisco to Canada on a monthly basis to personally inspect the

ongoing construction of the new vessel; and (3) wrote
                               - 12 -


approximately 12 letters to Kanter Yachts, detailing how they

wanted Trinity to be built.    By October 1989, petitioners

considered requesting their attorney to intervene in the dispute

because they believed Kanter Yachts was unreceptive.

     Petitioners anticipated receiving Trinity by October 1989,

pursuant to the contract signed between them and Kanter Yachts.

Petitioners were upset when Trinity was not completed in early

1990.   In April 1990, petitioners canceled their registration to

show Trinity at the boat show in Alameda, California.

     Also during April 1990, Trinity was shipped overland via

truck to petitioners.    The sailboat was damaged in transit when

it hit an underpass in Berkeley, California.   The hull of the

Trinity was seriously damaged.   The ensuing repairs took

approximately 6 weeks.

     Upon receipt of the Trinity, petitioners ceased contact with

Kanter Yachts.   An adversarial relationship grew when petitioners

believed that the Trinity had various flaws.    For example, the

keel bottom was not painted, there was no cover for the linear

drive, the batteries were dead, the head intake leaked, the guard

rail around the stern of the boat was unstable and needed

reinforcement.   Additionally, the exhaust pipe was not properly

fitted, which caused waste water to spill into the boat.

     Petitioners paid for the repairs in connection with the

Trinity.   In July 1990, the repairs on the Trinity were

completed, and petitioners launched the vessel.   Petitioners

discovered that the propeller shaft-fitting leaked, and it had to
                              - 13 -


be repaired in dry dock.   They requested that Kanter Yachts pay

for the repairs, and on July 18, 1990, Kanter Yachts' attorney

refused to undertake the repairs or to reimburse petitioners for

the repair costs.   The attorney for Kanter Yachts advised

petitioners that:

          With respect to the list of items referred to in
     your letter, our client has carefully reviewed each
     item and has determined that due to the picayune nature
     of the items nothing further will be done.

In August 1990, petitioners wrote to their accountant, stating in

part:

     We are also thinking of about [sic] closing the company
     of Lucid Cruising since we feel at this time that in
     all honesty we cannot endorse or represent the Kanter
     Yacht, Inc., with the history that they have had with
     us the past 3½ years. * * *

     On November 20, 1990, petitioners' attorney wrote to Kanter

Yachts requesting $15,000 to settle their dispute.   Petitioners

did not receive a response to their proposal from the attorney

representing Kanter Yachts.

     Ultimately, petitioners decided that the cost of prosecuting

a lawsuit against Kanter Yachts, a Canadian company, would be

prohibitive.   The dispute between petitioners and Kanter Yachts

was never resolved.

     In July 1991, petitioners dissolved their corporation.

After the dissolution, petitioners modified Trinity at a cost of

$11,000 so that they could solely manage the vessel at sea.    They

explained that they did not sell Trinity because sailboat prices
                                      - 14 -


were depressed and they would have received approximately one-

half of their cost.

       In October 1991, petitioner husband retired from the

practice of plastic surgery and sold his business.                          In the same

month, petitioners began a 5-year retirement cruise on Trinity to

the South Pacific, including New Zealand and Australia.                               There

was no business purpose for the cruise.

       By 1991, Lucid Cruising had incurred $496,827 in yacht

acquisition costs and operating expenses.                  Lucid Cruising also

reported on its Federal income tax returns the following items:
             3/16/87        1987
             7/31/87        1988                 1988             1989               1990
1991

Income            0          $942         $500                0                 0             0
Expenses     $3,848       $11,631      $19,683          $65,649          $71,576        $10,819
                                                                          1
Net Loss      3,848        10,689       19,183           65,649             71,576        10,819
       1
         In the stipulation, this figure appears to contain a typographical error.
The Court has chosen to follow the figure in the tax return.


Petitioners deducted substantially all the expenses related to

the Brendan as a business expense of Lucid Cruising in 1987 and

1988, respectively.        In 1990, petitioners deducted substantially

all the expenses related to the Trinity as a business expense of

Lucid Cruising.        Petitioners used the loss from Lucid Cruising to

offset their gross income from 1988 through 1991.

       Petitioners' reported gross income without reference to

losses from Lucid Cruising or other activities was as follows:
                              - 15 -


                Year           Gross Income

                1988             $325,213
                1989              346,593
                                  1
                1990                321,265
                                  1
                1991                229,757
          1
            The parties’ stipulation does not comport with
     the amounts reflected in the tax returns. The Court
     has chosen to follow the figures in the returns.

     Kanter Yachts primarily relied on advertising to sell

yachts.   The company expended approximately $51,000 to $74,000 in

advertising per year.   Kanter Yachts had not sold a boat in any

of the 12 boat shows attended from 1987 through 1991.   Manfred

Kanter (Kanter), proprietor of Kanter Yachts, did not believe

that petitioners represented Kanter Yachts during 1990.

                              OPINION

     We must first decide whether petitioners were involved in

activities that were “not engaged in for profit” within the

meaning of section 183(c).   Section 183(a), generally, provides

that, if an activity engaged in by an individual is not engaged

in for profit, no deduction attributable to such activity shall

be allowed, except as provided in section 183(b).4   Section

183(c) defines an 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


     4
       In the case of an activity not engaged in for profit, sec.
183(b)(1) allows a deduction for expenses that are otherwise
deductible without regard to whether the activity is engaged in
for profit. Sec. 182(b)(2) allows a deduction for expenses that
would be deductible if such activity were engaged in for profit,
but only to the extent the total gross income derived from the
activity exceeds the deductions allowed by sec. 183(b)(1).
                                - 16 -


paragraph (1) or (2) of section 212.”      Section 162 allows a

deduction for all ordinary and necessary expenses paid or

incurred in carrying on a business.      Section 212 allows a

deduction for all the ordinary and necessary expenses paid or

incurred for the production or collection of income, or for the

management, conservation, or maintenance of property held for the

production of income.

     Whether deductions are allowable under sections 162 or 212

depends on whether the taxpayer engaged in the activity with the

objective of making a profit.    Ronnen v. Commissioner, 90 T.C.

74, 91 (1988); Dreicer v. Commissioner, 78 T.C. 642, 645 (1982),

affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).      The

taxpayer's expectation of profit need not be a reasonable one;

however, the taxpayer must have a bona fide objective to make a

profit.   Hulter v. Commissioner, 91 T.C. 371, 393 (1988); Beck v.

Commissioner, 85 T.C. 557, 569 (1985); Allen v. Commissioner, 72

T.C. 28, 33 (1979); Dunn v. Commissioner, 70 T.C. 715, 720

(1978), affd. 615 F.2d 578 (2d Cir. 1980).

     Whether a taxpayer has the requisite profit objective is a

question of fact to be resolved on the basis of all of the facts

and circumstances of the particular case at hand.      Golanty v.

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

opinion 647 F.2d 170 (9th Cir. 1981); Dunn v. Commissioner, supra

at 720.   The taxpayer here bears the burden of proof on this

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

Greater weight is given to objective facts than a taxpayer's
                               - 17 -


statement of intent.    Independent Elec. Supply, Inc. v.

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

Commissioner, T.C. Memo. 1984-472; Beck v. Commissioner, supra at

570; Thomas v. Commissioner, 84 T.C. 1244, 1269 (1985), affd. 792

F.2d 1256 (4th Cir. 1986); Dreicer v. Commissioner, supra.

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

nonexclusive list of factors relevant to the issue as to whether

the taxpayer has the requisite profit objective.    These factors

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

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

(3) the time and effort expended by the taxpayer in carrying on

the activity; (4) the expectation that the assets utilized by the

taxpayer 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) whether

elements of personal pleasure or recreation are involved.     Not

all of these factors are applicable in every case.    Brannen v.

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

471 (1982); Taube v. Commissioner, 88 T.C. 464, 479-480 (1987);

Abramson v. Commissioner, 86 T.C. 360, 371 (1986); Allen v.

Commissioner, supra at 34.    No one factor nor a majority of the

factors is necessarily determinative, and we do not reach our

conclusion by simply counting the factors that support each
                               - 18 -


party's position.    Taube v. Commissioner, supra at 480; Dunn v.

Commissioner, supra at 720.

     The Manner in Which the Taxpayer Carries On the Activity.

Generally, the fact that a taxpayer carries on an activity in a

businesslike manner and maintains complete and accurate books and

records may indicate that the activity is engaged in for profit.

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

     Petitioners advertised in various boating magazines and

journals.    They attended two boat shows in Seattle, Washington,

and Alameda, California, respectively, in 1988.    Petitioners,

however, had no written business plan and did not take reasonable

steps to implement their stated objectives.   Petitioners'

principal contention is that they could not carry on their yacht-

related activities because they lacked a demonstration boat to

represent Kanter Yachts and display or sell boating equipment.

We are not convinced that the lack of either Brendan or Trinity

formed an insuperable barrier to selling boating equipment or

yachts.

     Petitioners failed to conduct even a basic investigation of

the profitability of selling yachts and boating equipment before

entering into the activity.   Their business plan assumed that

they would earn income through the sales of yachts and boating

equipment.   Petitioners' primary method of selling Kanter Yachts

was through boat shows.   Petitioner husband testified that he was

hoping to eventually sell three yachts per year.    However,

despite the fact that Brendan was demonstrated in both the
                                - 19 -


Seattle and Alameda boat shows in 1988 and over 300 people signed

the visitors' log, there were no sales.    Kanter testified that

his company, Kanter Yachts, relies primarily on advertising to

sell yachts, and that it had not sold a boat in any of the 12

boat shows they attended from 1987 through 1991.

     Petitioners' stated intention to make a profit did not

comport with the fact that Lucid Cruising had nearly half a

million dollars of accumulated costs by 1991.    If petitioners had

sold the three yachts projected, per year, for a commission of

$15,000 Canadian on each yacht, it would have taken nearly 11

years of consistent sales merely to recover their costs already

incurred.5

     Other than the self-serving statements in the corporate

minutes, there is nothing in the record showing that petitioners

were authorized dealers or representatives of boating and/or

boating equipment manufacturers.    The record does not reflect any

sales of boating equipment that would have ameliorated the length

of time necessary to break even.

     Petitioners' marketing and advertising activities were

minimal.     Although petitioners advertised in various magazines,

they did not promote their activities between September 1988

through July 1991.    Petitioners ceased their selling activity



     5
       Five hundred thousand dollars of capitalization divided by
$15,000 commission per yacht multiplied by three yachts per year
equals nearly 11 years. Although the parity between U.S. and
Canadian currency varied during this period, we provide these
figures for illustrative purposes only.
                               - 20 -


several weeks after the Alameda Boat show in September 1988.

That was when Brendan began experiencing problems which sidelined

petitioners' plans.   Moreover, petitioners could not recall their

advertising budget.   In comparison, Kanter Yachts' annual

advertising budget ranged from $51,000 to $74,000.    In 1990 and

1991, petitioners did not pursue any of the 300 visitors to their

yacht from the Seattle and the Alameda boat shows.

     Finally, the record demonstrates that petitioners did not

objectively treat Brendan or Trinity as business assets.

Petitioners used the yachts for personal sailing.    In this

regard, Brendan was not commercially insured.    After the

dissolution of petitioners' corporation, Lucid Cruising, they

retained Trinity and used it for extensive personal sailing.

     The Expertise of the Taxpayer or His Advisers.    Petitioners

were experienced sailors, and petitioner husband had experience

maintaining yachts.   However, petitioners had no experience with

selling yachts or sailboat equipment.

     Time and Effort Expended by the Taxpayer in Carrying On the

Activity.   Petitioners spent minimal time carrying out the

activity in 1990 and 1991.   The fact that a taxpayer devotes

little time to the activity may indicate a lack of profit motive.

Sec. 1.183-2(b)(3), Income Tax Regs.    Here, petitioners did not

actively promote or advocate their yacht-related activity between

September 1988 through 1991.   Also, petitioner husband worked

full-time as a plastic surgeon until his retirement in October
                                - 21 -


1991.     Around the same time, petitioners chose to terminate the

activity.

     Petitioners spent several months in 1990 and 1991 addressing

issues with Kanter Yachts.     We find that petitioners were

genuinely motivated by the desire to maintain their investment in

the yachts.     On the other hand, we think that the minimal amount

of time petitioners spent in this activity does not support their

contention that they were engaged in this activity with a profit

objective in 1990 or 1991.

     Expectations That Assets Used in the Activity May Appreciate

in Value.     Petitioners did not present any evidence that the

yachts used in their activity would appreciate in value or that

the yachts were obtained for such purposes.     In fact, petitioners

testified that the market for yachts was depressed in 1991.

Petitioners assert that this was the reason they did not dispose

of Trinity after their corporation, Lucid Cruising, was dissolved

in 1991.

        The Success of the Taxpayer in Carrying On Other Similar or

Dissimilar Activities.     Petitioners have not presented any

evidence that they had been previously engaged in activities

consisting of selling yacht equipment or yachts themselves.       Sec.

1.183-2(b)(5), Income Tax Regs.     Petitioners, however, were

financially successful in their business professions.
                               - 22 -


     The Taxpayer's History of Income and Losses With Respect to

the Activity.   Petitioners' yacht-related activity generated

losses over a period of 5 years, which petitioners used to offset

taxable income from other sources.      A record of substantial

losses over many years and the unlikelihood of achieving a

profitable operation are important factors bearing on the

taxpayer's intention regarding the activity.      Cannon v.

Commissioner, 949 F.2d 345, 352 (10th Cir. 1991), affg. T.C.

Memo. 1990-148; Golanty v. Commissioner, 72 T.C. at 426-427.       The

presence of such losses in the formative years of a business is

not inconsistent with an intent to achieve a later profitable

level of operation; however, the goal must be to realize a profit

on the entire operation, which presupposes sufficient future net

earnings from the activity to recoup the losses.      Golanty v.

Commissioner, supra at 427.

     In the present case, petitioners reported operating losses

over 5 years totaling $496,827.   Petitioners contend that the

losses were attributable to unforeseen circumstances that were

beyond petitioners' control.   Sec. 1.183-2(b)(6), Income Tax

Regs.   Generally, losses sustained because of unforeseen

circumstances beyond the control of the taxpayer do not

necessarily indicate that the activity was not engaged in for

profit.   Engdahl v. Commissioner, 72 T.C. 659, 669 (1979); sec.

1.183-2(b)(6), Income Tax Regs.   However, the overall picture

reveals that petitioners did not operate an activity for profit

during the taxable years at issue, 1990 and 1991.      They made no
                               - 23 -


attempts to change their operating methods to become profitable.

They did not advertise or pursue potential customers.

Petitioners took no measures to reduce their expenditures for

unprofitable activities.

     The Financial Status of the Taxpayer.     When petitioners

purchased Brendan and Trinity, they were receiving significant

professional income.    Petitioners earned gross income of:   (1)

$325,213 in 1988; (2) $346,593 in 1989; (3) $321,265 in 1990, and

(4) $229,757 in 1991.    Petitioner husband's income as a plastic

surgeon allowed petitioners to maintain the activity, and upon

his retirement, petitioners dissolved their S corporation, Lucid

Cruising, and terminated their activity.     At that point, there

was no need to shelter petitioners' income by means of the yacht

activities’ claimed losses.

     The Presence of Elements of Personal Pleasure or Recreation.

     Although there were many self-serving business-type

statements in Lucid Cruising's corporate minutes, it is readily

apparent that petitioners were highly motivated by the pleasure

and recreation from these activities.    They were seasoned

recreational sailors for at least 14 years, prior to acquiring

Trinity.   Both Brendan and Trinity were custom-built according to

specifications for petitioners.    Petitioners have not shown that

business was the primary purpose for acquiring the yachts.

     We accordingly hold that petitioners have failed to prove

that they were engaged in the activity of selling boating
                                - 24 -


equipment and yachts during 1990 and 1991 with the bona fide

objective of making a profit.

     Respondent also determined accuracy-related penalties under

section 6662(a) for 1990 and 1991.       Section 6662(a) provides for

a penalty of 20 percent of any portion of the underpayment

attributable to the taxpayer's negligence or disregard of the

rules or regulations.    Sec. 6662(a).

     Petitioners contend that they are not liable for the penalty

because they had substantial authority for their deductions.

They argue, generally, that the weight of the authorities

supports their position that their yacht activity was carried on

for profit.    Specifically, petitioners rely on Pryor v.

Commissioner, T.C. Memo. 1991-109.       In Pryor, we found that the

taxpayer was engaged in his sailboat charter activity with a

profit motive in part because he carried on the activity in a

business like manner.    He made a written 12-year projection that

was essentially a cash-flow analysis before entering into the

activity.     He also anticipated appreciation in the residual value

of his sailboats.    However, a portion of the taxpayer's losses

were attributable to unanticipated expenses of repairs to his

sailboats.

     In contrast, petitioners here possessed no written business

plan.   Their expectations of a profit from their activity were

based more on their own self-serving and unrealistic

expectations.    They did not consult with others in yacht and

boating equipment sales.    Petitioners did not attempt to assuage
                                - 25 -


their losses by changing their approach.     Hence, Pryor v.

Commissioner, supra, is distinguishable.

     Petitioners also rely on Dickson v. Commissioner, T.C. Memo.

1983-723, in which we found that despite losses, due to economic

conditions, the taxpayer was engaged in the business of

chartering his boat with a profit motive.     We also found that the

taxpayer actually and honestly expected his boat to appreciate.

However, this case is inapposite; petitioners did not purchase

and hold Brendan or Trinity in order to derive gains from long-

term appreciation.    There is also nothing on the record from

which we can conclude that the value of the yachts would have

increased.

     Petitioners also cite Jackson v. Commissioner, 59 T.C. 312

(1972).   In Jackson, we determined that the taxpayer was in the

trade or business of renting his yacht.     Despite bad weather and

damage to the yacht, which forced the taxpayer to cancel most

charters, he took other steps to carry on his activity for

profit.   For example, the taxpayer changed the venue of his

activity to the Virgin Islands, where his sailing vessel was in

demand.   The taxpayer also began a national advertising campaign.

In that regard, he engaged a celebrity to advertise his business

throughout the nation.     We find petitioners' reliance on Jackson

to be distinguishable.     Here, petitioners did not take alternate

steps to carry on their yacht-related activity in a profit-

oriented manner.     Petitioners' cessation of their activity
                              - 26 -


between 1988 and 1991 militates against the notion that

petitioners sought to derive profit from that activity.

     These cases do not represent authority for petitioners'

position.   Accordingly, respondent's determination regarding the

accuracy-related penalty is sustained.



                               Decision will be entered for

                          respondent.
