                       T.C. Memo. 2000-197



                     UNITED STATES TAX COURT



          JOHN R. AND LOIS J. MCCARTHY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 3179-99.                       Filed June 29, 2000.


     John R. McCarthy, pro se.

     Jonathan Sloat, for respondent.


                       MEMORANDUM OPINION


     NAMEROFF, Special Trial Judge:    Respondent determined

deficiencies in petitioners’ 1993, 1994, and 1995 Federal income

taxes in the amounts of $2,512, $2,325, and $7,734, respectively.

     The issues for decision are:   (1) Whether petitioners

properly reported certain types of income as Schedule C income;

(2) whether John R. McCarthy (petitioner) conducted his writing

activity with the objective of making a profit within the meaning
                               - 2 -

of section 183;1 and if so, (3) whether petitioners have

substantiated the ordinary and necessary expenses claimed with

respect to the writing activity.

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time the petition

was filed, petitioners resided in Simi Valley, California.

     For all years in issue, petitioners filed with their joint

returns Schedules C, Profit or Loss From Business, for

petitioner’s activities.   On the Schedules C, petitioner listed

his principal business or profession as writing, investing, job

shopping, art, engineering, science, consulting, teaching,

photography, and research.   All of the expenses listed on the

Schedules C were only with regard to petitioner’s writing

activity, and this is the only activity in which petitioner

engaged with any regularity.   Therefore, we consider the

Schedules C as pertaining only to petitioner’s writing activity.

For convenience, we combine the findings of fact and opinion for

each issue.




     1
        Unless otherwise indicated, 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. All amounts have been rounded to the nearest dollar
for convenience.
                                 - 3 -

Character of Income

     Petitioners reported income on the 1993 Schedule C of $198.

This amount is attributable to royalties petitioner received for

consulting work he had performed prior to 1993 for an educational

video.   Petitioner had provided information on anthropology and

agreed to accept as part of his compensation a percentage from

the future sales of the video.

     For 1994, petitioner reported Schedule C income of $4,697

consisting of video royalties of $313, $9 for performing

unspecified research, $2,500 as a refund of legal expenses, and

$1,877 of interest.    Prior to the years at issue, petitioner had

assisted an individual with his invention.   A legal dispute arose

between the parties.   Petitioner retained counsel in 1993 and

paid him an amount in excess of $2,500.   In 1994, the matter more

or less disappeared, and petitioner’s counsel refunded $2,500 to

petitioner.   Petitioner included the $2,500 in Schedule C income

because he had claimed a Schedule C deduction for legal expenses

in 1993.2




     2
        Petitioners claimed a deduction of $4,398 for legal and
professional services on the 1993 Schedule C. It is not apparent
whether this entire amount was paid to petitioner’s counsel
concerning the invention matter. Respondent concedes that the
$2,500 is not includable in income in 1994 and the $2,500 is not
a deductible expense for 1993, irrespective of whether we
determine that petitioner’s activity was not entered into for
profit.
                                - 4 -

     The interest item represents petitioner’s 50 percent of the

interest earned on a savings account funded by the estate of

petitioner’s mother.    The account is in the name of petitioner’s

sister, who wires amounts to petitioner on a monthly basis.

Petitioner considers this as business income since he uses these

funds for expenses for his writing activity.

     In 1995, petitioner reported income of $8,350 on his

Schedule C.   This amount consists of $267 of video royalties,

interest of $8,022 from his sister, and $60 for services he

performed as a guest lecturer for an anthropology class.

     None of this income was related to the writing activity.

Respondent determined that the above described income is not

properly reportable on a Schedule C pertaining to the writing

activity.

     “A taxpayer may not determine the nature of his income

merely by using a particular form or by labeling it as he wishes,

but must report his income based on the economic realities of the

situation.”   Upham v. Commissioner, 923 F.2d 1328, 1335 (8th Cir.

1991), affg. T.C. Memo. 1989-253; Walker v. Commissioner, 101

T.C. 537, 544 (1993) (citing Frank Lyon Co. v. United States, 435

U.S. 561 (1978)).

     Petitioner agrees that none of this income was derived from

his writing activity.   Petitioner testified that he knew he had

to report all income received and the Schedule C seemed like the
                                 - 5 -

proper place.   Furthermore, petitioner is of the opinion that

since he spent some of the income on his writing activity it

should be reported on Schedule C.

     The various income items are not properly reportable on

Schedule C pertaining to the writing activity.   Indeed, these

income items were derived from separate activities or

transactions apart from petitioner’s writing activity.

Therefore, income from other activities cannot be offset by

expenses from petitioner’s writing activity.   The compensation

received from the video production and the lecturing fee are

properly reportable as “Other income” on line 21 of Form 1040.3

The interest income is properly reportable on Schedule B,

Interest and Dividend Income.4




     3
        For an activity to be considered a trade or business, the
taxpayer must be engaged in the activity with continuity and
regularity. See Commissioner v. Groetzinger, 480 U.S. 23, 35
(1987). The income derived from consulting and lecturing was not
earned from activities in which petitioner engaged with
continuity and regularity. Therefore, this income would not be
reported on separate Schedules C for each activity.
     4
        After trial, respondent moved to amend his pleadings to
conform to the evidence and to seek an increased deficiency. See
sec. 6214(a); Rule 41. Petitioners had no objection, and the
motion was granted. Based upon respondent’s amendment to answer,
the deficiency for 1993 is unchanged, the deficiency for 1994 is
increased to $2,888, and the deficiency for 1995 is decreased to
$6,362. This is based on the recharacterization of the income
claimed on Schedules C and a pension income adjustment for 1995
in petitioners’ favor. There are also Social Security benefit
adjustments which are computational.
                                - 6 -

Writing Activity

     After serving 2 years in the military, petitioner was

employed by Rocketdyne, Inc., as a scientist and engineer for 35

years.    As part of his employment, petitioner wrote technical and

scientific proposals.   Petitioner retired from Rocketdyne in

1990.    Following retirement, petitioner continued employment as a

scientist and engineer to Rocketdyne and other defense

contractors on an independent contractor basis during 1990 and

1991.

     While employed by Rocketdyne, petitioner wrote articles for

the public in his spare time.   Petitioner submitted the articles

to various periodicals and publishers, but none of them were

chosen for publication.   According to records provided by

petitioner, he has been submitting articles since 1978.

Petitioner desired to write novels, but he did not have the time.

Petitioner decided to pursue his writing activity, including

writing novels, on a full time basis in 1992.   During the years

in issue, petitioner continued to write and submit articles;

however, none were chosen for publication.   Many of the articles

petitioner wrote contained contemporary political commentary.

Petitioner also wrote articles about guns and travel.    In

researching for the gun articles, petitioner purchased guns and

gun-related supplies, such as bullets, powder, a chronograph

device (which measures the velocity of bullets when fired from a
                                - 7 -

gun), a scope and mount for rifles, and cleaning supplies.

Petitioner has had an interest in guns since he was a child.

Petitioner tested the performance of the guns and wrote articles

on his findings.   Petitioner submitted the articles to the

National Rifle Association and various gun-related publications.

There was no interest in petitioner’s articles.5

     Petitioner was interested in selling a novel because he

thought it would pay a lot more than articles.     In late 1992,

petitioner submitted two novels (or portions thereof) to literary

agents.   Petitioner did not have a contract with either agent.

One agent passed on the novel submitted to him, and the other

agent recommended that petitioner finish the novel and resubmit

it with $400.   Petitioner completed the novel and resubmitted it

with $400, which was against petitioner’s policy of paying out

money to agents.   It was not selected for publishing.

     In doing research for the articles and novels, petitioner

traveled to various places.   Petitioner would research the area

and take pictures.   Petitioner’s wife often accompanied him on

these trips.    Petitioner occasionally took courses related to the

topics he wanted to write about.

     There is a lot of competition in the literary field.

Petitioner believes he could have been published without pay, but



     5
        The National Rifle Association informed petitioner that
they have their own technical staff to conduct gun testing.
                                - 8 -

he sought to receive compensation for his articles.    Petitioner

attended a writing conference “early on”, but he did not find it

helpful.    Petitioner did not consult with any experts in the

writing field about conducting a profitable writing activity.    He

did not take any courses on writing fictional material or writing

for the public.    Petitioner did not belong to any literary

organizations.    Petitioner studied on his own by analyzing

Writer’s Digest.

     Petitioner regularly analyzed literary agents and publishers

to determine where he would send his material.     Petitioner wrote

to various publishers seeking employment either freelance or as a

staff writer.    He did not obtain any employment from the

agencies.

     On Schedules C filed with petitioners’ 1993, 1994, and 1995

returns, petitioners claimed the following expenses with respect

to his writing activity:

   Expense                     1993         1994          1995
   Car and truck             $1,220         $618        $1,234
   Commissions and fees       1,056          170           187
   Depreciation               2,567        5,430        17,569
   Insurance                  1,238        1,398         1,795
   Legal and professional     4,398          293         1,107
   Office                       462          375           987
   Rent- business prop          284          349           392
   Repairs and maint.         1,790          220           -0-
   Supplies                   2,196        3,124         1,273
   Taxes and licenses           265          199           186
   Travel                       -0-          720           920
   Publications                 552          734         1,848
     Total1                  16,028       13,630        27,498
                               - 9 -
     1
       Our totals differ slightly from the totals on petitioners’
returns due to our rounding of the numbers. We also note that
there is a mathematical error in the return for tax year 1995.


     Up to the time of trial, petitioner has not sold any of his

articles or novels.   One article on the rocket industry was

published in a history book in 1997 without pay.

     Petitioner reported no income from his writing activities.

Respondent contends that petitioner is not entitled to claim any

deductions because petitioner’s writing activity was not engaged

in for profit.

     Section 183(a) generally provides that if an activity

engaged in by an individual is not entered into for profit, no

deduction attributable to the activity shall be allowed, except

as otherwise provided in section 183(b).    Section 183(c)

provides:   “For purposes of this section, the term ‘activity not

engaged in for profit’ means 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.”

“Profit” for purposes of section 183(a) means economic profit,

independent of tax savings.   See Antonides v. Commissioner, 91

T.C. 686, 694 (1988), affd. 893 F.2d 656 (4th Cir. 1990); Hulter

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

     Although a reasonable expectation of profit is not required,

the facts and circumstances must indicate that the taxpayer

entered into the activity or continued the activity with the
                               - 10 -

actual and honest objective of making a profit.     See Keanini v.

Commissioner, 94 T.C. 41, 46 (1990); 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.     In making this

determination, more weight is accorded to objective facts than to

the taxpayer’s statement of intent.     See 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 engaged

in an activity with the objective to make a profit.    See 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 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

loss 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.   See id.   No single factor is controlling.   Rather,

the facts and circumstances of the case taken as a whole are

determinative.   See Abramson v. Commissioner, 86 T.C. 360, 371

(1986); sec. 1.183-2(b), Income Tax Regs.
                              - 11 -

     Taking into account the above factors and considering the

facts and circumstances relating to petitioner’s writing

activity, as discussed more fully below, we are not persuaded

that during the years in issue petitioner engaged in that

activity with the objective to make a profit.

     1. Manner in Which Activity Conducted

     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 was engaged in for profit.

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

     Petitioner managed some aspects of this activity in a

businesslike fashion.   He maintained records of his expenses and

regularly researched and submitted articles and novels to the

various periodicals and literary agents.     Some of petitioner’s

activities belied any profit objective.    For instance, the

income-producing potential of petitioner’s gun experiments seemed

to be of little concern to petitioner.    Petitioner was not an

expert in gun testing, yet he incurred gun-related expenses to

conduct his tests without first researching whether there would

be an interest in such findings from a lay person.     Petitioner

decided to conduct gun testing, incurring expenses, regardless of

the amount of income he could objectively expect from a gun

article.
                               - 12 -

     Petitioner stated at trial that selling articles did not pay

well, and he offered no indication as to how much he could

receive from the sale of an article.    Petitioner testified that

the sale of a novel would pay well, but no amount was offered nor

has he had a contract with a literary agent since he started the

activity.    Petitioner did not explain how he expected to recoup

the $57,156 in losses.

     Petitioner argues that he did have a profit objective since

he submitted articles only to periodicals that offered

compensation.   However, petitioner’s articles were not accepted

for publication for a number of years (at least since 1978), and

it does not appear that petitioner attempted to develop a

strategy to get published or made changes in order to succeed.

     Petitioner did submit his two novels to two literary agents

prior to the years at issue.    Petitioner did not enter into any

contracts with the agents.    It is not clear from the record

whether petitioner submitted any novels to agents during the

years at issue.

     2. Expertise of Petitioner and His Advisers

     Preparation for an activity by extensive study or

consultation with experts may indicate a profit objective where

the taxpayer conducts the activity in accordance with such study

or advice.    See sec. 1.183-2(b)(2), Income Tax Regs.
                              - 13 -

     Petitioner did not seek expert advice on how to start or

maintain a business as a fiction writer or as a writer of

political commentary or about guns.    Petitioner did not consult

with anyone on the economics of conducting a writing activity.

While petitioner had writing skills, they were in the technical

field of engineering and science.   Although his articles about

guns were rather technical, petitioner did not have a background

on gun testing.   Petitioner did not join any literary

organizations to learn more about the industry.   Petitioner did

attend a writing conference “early on”, but he did not find it

helpful.

     3. Time and Effort Expended

     The fact that the taxpayer devotes much of his or her

personal time and effort to carrying on an activity, particularly

if the activity does not have substantial personal or

recreational aspects, may indicate a profit objective.   See sec.

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

     We do not question the amount of time petitioner expended in

carrying on the writing activity.   Suffice it to say that he

devoted a great deal of time researching, testing, and writing

about the topics that interested him.
                               - 14 -

     4. Expectation That Assets May Appreciate

     An expectation that assets used in the activity will

appreciate in value may indicate a profit objective.    See sec.

1.183-2(b)(4), Income Tax Regs.

     Petitioner contends that the guns he purchased will

appreciate in value.   This was based on petitioner’s own

estimation, and he offered no evidence to support his contention

that the value of the guns is sufficient to recoup the

accumulated losses.    In any event, it would seem that collecting

guns is a different activity from writing about them.

     5. Past Success in Similar or Dissimilar Activities

     A taxpayer’s past success in similar or dissimilar

activities is relevant in determining a profit objective.     See

sec. 1.183-2(b)(5), Income Tax Regs.

     Petitioner contends that he was successful as a writer for

Rocketdyne and that he considers himself a professional writer

because of his employment with Rocketdyne.    When employed by

Rocketdyne, petitioner wrote technical or scientific proposals

for the company.   Presumably, petitioner was a skilled and

talented technical writer.   This is quite different from writing

articles and novels for the public.     Furthermore, petitioner did

not have to market the writing that he performed for Rocketdyne.
                               - 15 -

     6. The Activity’s History of Income and/or Loss

     An activity’s history of income or loss may reflect whether

the taxpayer has a profit objective.    See sec. 1.183-2(b)(6),

Income Tax Regs.    Unless explained by customary business risks or

unforeseen or fortuitous circumstances beyond the taxpayer’s

control, a record of continuous losses beyond the period

customarily required to obtain profitability may indicate that

the activity is not engaged in for profit.    See id.

     Petitioner has not earned any income from the writing

activity, and he has incurred substantial losses during the 3

years in issue.    It is not clear from the record the amount of

losses that were claimed in prior years.6    During the years in

issue, petitioners deducted $57,156 of losses attributable to the

writing activity.    The magnitude of the activity’s losses in

comparison with the lack of revenues is an indication that

petitioner did not have a profit motive with respect to the

activity.   See Smith v. Commissioner, T.C. Memo. 1997-503; Burger

v. Commissioner, T.C. Memo. 1985-523.    Furthermore, many

businesses do experience losses in their startup years, but they

typically have a goal to realize a profit including enough net

earnings to recoup the losses.


     6
        Petitioner stated that he wrote and submitted articles on
a part-time basis from 1978 to 1991, after which he focused on
his writing activity full time. However, it is not clear from
the record when petitioner started treating his activity as a
Schedule C business.
                               - 16 -

     7. Amount of Occasional Profits

     The amount of occasional profits, if substantial in relation

to losses incurred or the taxpayer’s investment, may indicate a

profit objective.    See sec. 1.183-2(b)(7), Income Tax Regs.

     In this case, petitioner has never earned a profit from his

activity, and the evidence suggests that any future net profits

are unlikely.

     8. Taxpayer’s Financial Status

     Substantial income from sources other than the activity,

particularly if the losses from the activity generate substantial

tax benefits, may indicate that the activity is not engaged in

for profit, especially if there are personal or recreational

elements involved.    See sec. 1.183-2(b)(8), Income Tax Regs.

     During the years in issue, petitioners received Social

Security benefits, pension, interest, and dividend income.

Petitioners were by no means wealthy; however, the losses from

the activity greatly reduced their tax liability.

     9. Elements of Personal Pleasure

     The existence of personal or recreational elements in an

activity may indicate that the activity is not engaged in for

profit; on the other hand, where an activity lacks any appeal

other than profit, a profit objective may be indicated.    See sec.

1.183-2(b)(9), Income Tax Regs.
                               - 17 -

     It is obvious that petitioner enjoyed writing and derived

personal satisfaction in sharing his opinions and research.

Petitioner acknowledged that he conducted tests on guns and wrote

about guns because that is a personal interest of his.

Petitioner and his wife also traveled for his research, which has

elements of personal pleasure.   Where the possibility of profit

is small (given all the other factors) and the possibility for

gratification is substantial, it is clear that the latter

possibility constitutes the primary motivation for the activity.

See Smith v. Commissioner, supra (citing Burger v. Commissioner,

supra).

     Because petitioner’s writing activity was not an activity

engaged in for profit, the activity cannot be considered a trade

or business for purposes of section 162(a).   Petitioners are not

allowed deductions for the expenses claimed for all years in

issue.    In view of the foregoing, we need not consider the third

issue of whether petitioners’ Schedule C expenses are ordinary

and necessary and whether they have been substantiated.

     Based on the foregoing,

                                          Decision will be entered

                                     under Rule 155.
