                  T.C. Summary Opinion 2006-175



                     UNITED STATES TAX COURT



              ANKE LUNSMANN-NOLTING, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13214-05S.            Filed October 24, 2006.


     Anke Lunsmann-Nolting, pro se.

     Michelle L. Maniscalco, for respondent.



     DEAN, 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, subsequent section references are to the Internal

Revenue Code as in effect for the year at 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.
                                - 2 -

     Respondent determined for 2002 a deficiency in petitioner’s

Federal income tax of $3,595.   After a concession,1 the issue for

decision is whether petitioner engaged in her rental real estate

activity in 2002 with the objective of making a profit.

                           Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.   At the time the

petition in this case was filed, petitioner resided in New York,

New York.

     During 2002, petitioner was employed as an assistant dean at

Columbia University Medical Center (CUMC).   Petitioner, among

other things, organized fundraising events for CUMC and

maintained alumni and student relations.   One of the locations at

which petitioner conducted her fundraising events was Lubec,

Maine.

History of the Cottages

     In 1979, petitioner visited Lubec, a small town located in a

remote area of Maine near the Canadian border.   Lubec has a

depressed economy because it does not have an industry.   Lubec

also is not viable as a tourist attraction because it is located

far from major transportation and population centers.

Petitioner, nevertheless, saw potential in Lubec and conceived


     1
      Petitioner concedes that she is required to include in her
income for 2002, an additional tax refund of $475 from New York
State.
                                - 3 -

the idea of creating a “think tank” and a laboratory where

scientists from CUMC could gather and conduct their research.

     From 1980 to 1987, petitioner and a number of scientists

from CUMC visited Lubec every summer to work on projects.     During

these visits, petitioner and the scientists rented and stayed at

places like old barns, broken down houses, and old factories.

Eventually, some of petitioner’s colleagues purchased houses in

Lubec.    In 1987, petitioner purchased a large Victorian house

there, which she used as her “base” whenever she and her guests

visited the town in the summer.

     Subsequently, it was suggested to petitioner that Lubec

might be used as a vehicle to raise funds for the benefit of

CUMC.    The plan was to invite potential donors to Lubec for an

opportunity to meet personally with the scientists.     Petitioner,

anticipating housing issues, purchased two cottages (lot Nos.

128A and 129) near her Victorian house in 1990.     Petitioner

planned to repair and improve the cottages and to rent them to

visiting donors and scientists.

     In 1990, the cottage on lot No. 128A was occupied by tenants

who were unable to pay their rent.      Petitioner eventually evicted

the tenants, but the tenants left the cottage in poor condition.

In the winter of 1996, squatters occupied and vandalized the

cottage on lot No. 129.    As a result, both cottages were
                                - 4 -

uninhabitable, and petitioner had no expectation of renting

either in 2002.

     Petitioner claimed on her Schedule E, Supplemental Income

and Loss, for 2002, cleaning and maintenance costs of $280 and

taxes of $236 for a “One Family Cottage at 18 Upper, Lubec,

Maine, Lot 128A”.    Petitioner also claimed cleaning and

maintenance costs of $280 and taxes of $531 for a “One Family

Cottage at Lot #129, Lubec, Maine, Lot 129”.

     In 1997, petitioner purchased a cottage (lot No. 126) near

her Victorian house, again with the plan of repairing and

improving the cottage and renting it to visiting donors and

scientists.   The cottage on lot No. 126 was complete and ready

for rental in 2001.    On petitioner’s Schedule E, for 2002, she

reported rental income of $500 and claimed depreciation of $4,596

for “2 Lots of Land Next To And, Lubec, Maine, Lot 126”.

Petitioner also claimed for lot No. 126 cleaning and maintenance

costs of $2,501, insurance of $145, repairs of $600, supplies of

$51, taxes of $821, and utilities of $327.

2002 Deficiency

     Petitioner filed for 2002 a Form 1040, U.S. Individual

Income Tax Return.    Respondent issued to petitioner a statutory

notice of deficiency disallowing a deduction of $9,868,

representing the sum of the rental real estate losses that

petitioner claimed for lot Nos. 126, 128A, and 129 on her
                               - 5 -

Schedule E.   Respondent determined that petitioner was not

entitled to the deduction because she did not engage in the

rental real estate activity with the objective of earning a

profit.

                            Discussion

     The Commissioner’s determinations are presumed correct, and

generally, the taxpayer bears the burden of proving otherwise.

Welch v. Helvering, 290 U.S. 111, 115 (1933).2

     Tax deductions are a matter of legislative grace with the

taxpayer bearing the burden of proving entitlement to the

deductions claimed.   Rule 142(a)(1); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992).

Section 183

     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 that

otherwise are allowable regardless of profit objective.   Section

183(b)(2) allows those deductions that 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 an


     2
      Petitioner has not raised the issue of sec. 7491(a), which
shifts the burden of proof to the Commissioner in certain
situations. This Court concludes that sec. 7491 does not apply
because petitioner has not produced any evidence that establishes
the preconditions for its application.
                                 - 6 -

“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.”

     An activity is engaged in for profit if the taxpayer

entertained an actual and honest, even though unreasonable or

unrealistic, profit objective in engaging in the activity.

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

Commissioner, 90 T.C. 74, 91 (1988) (taxpayer’s objective of

making a profit must be bona fide); sec. 1.183-2(a), Income Tax

Regs.

     The determination of whether an activity is engaged in for

profit is to be made by reference to objective standards, taking

into account all the facts and circumstances of each case.

Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982), affd.

without opinion 702 F.2d 1205 (D.C. Cir. 1983); Jasionowski v.

Commissioner, 66 T.C. 312, 319 (1976); sec. 1.183-2(b), Income

Tax Regs.   Greater weight is given to the objective facts than to

the taxpayer’s own statements of intent.   Sec. 1.183-2(a), Income

Tax Regs.

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

nonexclusive list of factors that should normally be taken into

account in determining whether the requisite profit objective has

been shown.   The factors are:   (1) Manner in which the taxpayer

carries on the activity; (2) the expertise of the taxpayer or his
                                - 7 -

advisers; (3) the time and effort expended by the taxpayer; (4)

expectation that assets used in activity may appreciate in value;

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

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

losses 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.    No single factor is determinative.   Sec. 1.183-2(b),

Income Tax Regs.

     Lot Nos. 128A and 129

     In 2002, the cottages on lot Nos. 128A and 129 had been

uninhabitable for several years, and petitioner had no

expectation of renting either cottage.    Therefore, petitioner was

not holding lot Nos. 128A and 129 in connection with any activity

for profit.

     Petitioner claimed for lot Nos. 128A and 129 cleaning and

maintenance costs and taxes on Schedule E.    Generally, no

deduction is allowed for personal, living, or family expenses.

Sec. 262(a).    Accordingly, petitioner is not entitled to claim a

deduction for cleaning and maintenance costs.

     State and local real property taxes, however, are allowed as

a deduction for the taxable year within which they were paid.

Sec. 164(a)(1).    Section 164(a)(1) allows the owner of property a

deduction for real property taxes regardless of whether they were

paid or incurred in a trade or business.    See sec. 183(b)(1);
                               - 8 -

Tschetter v. Commissioner, T.C. Memo. 2003-326; sec. 1.183-

1(d)(3), Example (ii), Income Tax Regs.   Respondent does not

dispute that petitioner paid real property taxes for lot Nos.

128A and 129 in 2002.   The Court holds that petitioner is not

entitled to claim a deduction for real property taxes paid in

2002 on Schedule E, but she is entitled to claim a deduction for

such taxes on Schedule A, Itemized Deductions.

     Lot No. 126

     Petitioner contends that she is entitled to deduct expenses

and depreciation for the cottage on lot No. 126, asserting that

she intended to profit on the property by renting the cottage to

local citizens and visiting scientists.   Respondent disagrees,

asserting that petitioner is not entitled to any deductions

claimed under Schedule E in excess of $500.3   Respondent

determined that petitioner did not hold the property with a

profit objective.

     The Court has reviewed the evidence presented by petitioner

and respondent and concludes that petitioner has not sufficiently

shown that she held the property with the objective to derive a

profit from the cottage during 2002.

     Petitioner did not carry on the activity in a businesslike

manner.   Although petitioner claims to have had an interest in


     3
      Respondent has allowed a deduction of $500 under sec.
183(b)(2), which represents the gross income attributable to the
activity.
                                - 9 -

renting the cottage for either year-round or summer rentals, she

did not advertise in the local papers or on the Internet.

Petitioner advertised the availability of her cottage by word of

mouth from the local community and by posting 8-1/2- by 11-inch

sheets of white cardboard by her cottage’s front door, by her

cottage’s back door, by her caretaker’s door, and by the door of

her Victorian house.    All of these doors were located within two

blocks of each other.

     In an e-mail from petitioner in response to a friend’s

inquiry about the possibility of renting the cottage, petitioner

expressed a desire to avoid renting to citizens from the local

area.   This calls petitioner’s profit objective into question

since petitioner advertised only in Lubec.

     Moreover, petitioner insisted that prospective tenants be

interviewed either by her or by her caretaker who lives two

blocks from the cottage.   Petitioner asserts that this was

necessary because of her bad experiences with undesirable tenants

and squatters on lot Nos. 128A and 129.   Petitioner, however, had

limited time available to interview potential tenants in Lubec.

Even though petitioner claims that her “home” was in Maine, she

lived and worked in New York during 2002.

     In 2002, petitioner spent 1 week vacationing in Lubec.

Petitioner also made several business trips to Lubec, but each

trip lasted no longer than “a couple of days”.   Petitioner did

not hire a professional to manage the rental of her cottage in
                              - 10 -

her absence, and petitioner’s caretaker did not rent the cottage

on petitioner’s behalf in 2002.

     Petitioner testified that during the week that she was in

Lubec in 2002, she rented her cottage to a couple for 1 week for

$500.   The couple drove into town and discovered the cottage’s

availability from their inquiries in town.    Petitioner did not

sign a lease, claiming that it was not the practice in Lubec to

sign leases for rentals.   Petitioner did not maintain a record of

the rental or any business books and records relating to the

rental of the cottage.

     Petitioner admits that she has no expertise in real estate

and that she had neither hired nor sought advice from a real

estate professional prior to purchasing the cottage.    Petitioner

has never earned a profit in the rental real estate activity, and

her expenses far exceeded income in 2002 as well as in the years

prior to and subsequent to that year.    There is also little

expectation that the cottage will appreciate in value because

Lubec is an isolated and economically depressed town.

     Elements of personal pleasure or recreation may signal the

absence of a profit objective.    Sec. 1.183-2(b)(9), Income Tax

Regs.   Petitioner described the cottage on lot No. 126 as

“beautiful” and her “pride and joy”, and she clearly enjoyed and

obtained pleasure from being in Lubec and having the cottage

available for use by donors and colleagues.    This, together with
                                - 11 -

petitioner’s general reluctance to advertise the availability of

the cottage, indicates a lack of profit objective.

     Petitioner did not withdraw from her job as assistant dean

of CUMC to pursue the rental real estate activity.     Petitioner

received a salary from CUMC and access to an on-campus apartment

from CUMC.    To the extent that petitioner expended time and

effort in Maine, the focus of her efforts was not to rent out the

cottage but to plan and build a research laboratory on her

Victorian house property for the benefit of CUMC.     Petitioner

testified that she was planning to use the cottage as an

incentive for scientists with families to come and work at the

laboratory.

     For an activity to constitute a trade or business, “the

taxpayer’s primary purpose for engaging in the activity must be

for income or profit.”     Commissioner v. Groetzinger, 480 U.S. 23,

35 (1987).     Even though petitioner testified that she intended to

charge the scientists rent, her primary objective was not to make

a profit.     Rather, the evidence is more consistent with the

conclusion that petitioner wished to further the objective of her

job; i.e., fundraising.

     The Court sustains respondent’s determination that

petitioner did not engage in the activity for profit within the

meaning of section 183(c).     Petitioner is not entitled to claim a

deduction for real property taxes paid in 2002 for lot No. 126 on

Schedule E, but she is entitled to claim a deduction for such
                                 - 12 -

taxes on Schedule A.    Secs. 164(a)(1), 183(b)(1).    Petitioner’s

deductions for depreciation and the remaining expenses claimed on

Schedule E, to the extent not conceded by respondent, are

disallowed under section 183(a).

Section 162

       Although not raised by either party, the Court will briefly

examine whether petitioner may claim the deductions relating to

the cottage as unreimbursed employee business expenses under

section 162(a).

       Taxpayers may deduct “ordinary and necessary” expenses paid

or incurred during the taxable year in carrying on a trade or

business.     Sec. 162(a).   Services performed by an employee

constitute a trade or business for this purpose.      O’Malley v.

Commissioner, 91 T.C. 352, 363-364 (1988).      An employee cannot

deduct trade or business expenses to the extent that the employee

is entitled to reimbursement from her employer for expenditures

related to her status as an employee.      Lucas v. Commissioner, 79

T.C. 1, 6 (1982).

       An “ordinary” expense is one that is common and acceptable

in the particular business.      Welch v. Helvering, 290 U.S. at 113-

114.    A “necessary” expense is an expense that is appropriate and

helpful in carrying on a trade or business.      Heineman v.

Commissioner, 82 T.C. 538, 543 (1984).      Whether an amount claimed

constitutes an ordinary and necessary expense as an employee

business expense is a question of fact to be determined from the
                               - 13 -

evidence presented.    Rule 142(a); Welch v. Helvering, supra at

115.

       The evidence does not support a finding that deductions

relating to the cottages are ordinary and necessary.    While it

may be helpful to petitioner’s job as a fundraiser to have

lodging available for donors and scientists during events in

Maine, it is not common or appropriate for a fundraiser or an

employee of a medical school to purchase and maintain real

property for that purpose.

       Reviewed and adopted as the report of the Small Tax Case

Division.



                                          Decision will be entered

                                     under Rule 155.
