                         T.C. Memo. 2011-224



                       UNITED STATES TAX COURT



                 WILLIAM L. WELLER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6429-09.                Filed September 20, 2011.



     William L. Weller, pro se.

     Patsy A. Clarke, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:    Respondent determined deficiencies in

petitioner’s Federal income taxes and penalties as follows:

                                            Penalty
               Year        Deficiency     Sec. 6662(a)

               2005          $4,874             $974.80
               2006           5,007            1,001.40
               2007           1,250              250.00
                               - 2 -

     The issues for decision are:   (1) Whether petitioner engaged

in his glider plane-related activities during the years in issue

with the objective of making a profit within the meaning of

section 183; (2) whether petitioner is entitled to deductions for

unreimbursed employee expenses that he claimed for 2006; and (3)

whether petitioner is liable for accuracy-related penalties under

section 6662(a).   All section references are to the Internal

Revenue Code for the years in issue, and all Rule references are

to the Tax Court Rules of Practice and Procedure.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner resided in the State of Washington at the time the

petition was filed.

     In 2002, petitioner was laid off from The Boeing Co.

(Boeing).   Subsequently, he believed there was an opportunity in

the Pacific Northwest to offer high-performance glider training.

He received his training in high-performance gliders in Arizona

and learned that others seeking this training had also traveled

away from the Pacific Northwest to Arizona, California, and

Florida.

     Petitioner is licensed by the Federal Aviation

Administration (FAA) as a Certified Flight Instructor Airplane,

Certified Flight Instructor Instruments, and Certified Flight
                                - 3 -

Instructor Glider.    Petitioner performed flight instruction for

the Boeing Employees Soaring Club.

     On August 1, 2003, petitioner formed Northwest Eagle

Soaring, L.L.C. (Northwest), in Washington.   Northwest provides

private glider flight instruction and glider plane rides.

Petitioner did not prepare a business plan for Northwest.   During

the years in issue, Northwest had no employees.

     In late 2003, petitioner used money he inherited to complete

his purchase of a DG-1000 high-performance glider plane for

$180,000, and he placed it in service on November 22, 2003.

     Northwest conducts its activities primarily on weekends from

March through November.   Glider flights are restricted to times

of good visibility.   For business promotion, Northwest maintains

a Web site, distributes marketing flyers to locations such as

airports and aviation-related businesses, and advertises in a

flying publication.

     Petitioner maintained flight logs for the glider activities

as required by the FAA.   The glider flight hours logged were

68.6, 81.6, and 75.18 for 2005, 2006, and 2007, respectively.

The FAA regulations, 14 C.F.R. sec. 91.409(2)(b), in effect for

the years in issue, required an aircraft to receive an additional

annual inspection if it carried persons for hire or for flight

instruction beyond 100 hours.
                                - 4 -

     In 2004 petitioner focused his time on the Northwest

activities and did not have other employment.   On his 2004

Federal income tax return, petitioner reported wages of $1,735

and a loss of $54,359 from his Northwest activities.

     In January 2005, petitioner started working full time for

Harbour Homes, Inc.    Petitioner reported wages of $34,734 on his

2005 Form 1040, U.S. Individual Income Tax Return, and claimed

unreimbursed employee business expenses of $13,180 on Schedule A,

Itemized Deductions.    On a Schedule C, Profit or Loss From

Business, prepared for Northwest, petitioner reported gross

receipts of $12,000 and total expenses of $45,920 that included a

deduction for depreciation of $35,423 for the glider.    This

depreciation deduction was calculated on Form 4562, Depreciation

and Amortization (Including Information on Listed Property),

using a cost basis of $180,000, a 7-year recovery period, the

200-percent declining balance method, and the mid-quarter

convention.   Petitioner reported no tax due for 2005.

     Petitioner continued working full time for Harbour Homes,

Inc., until February 2006 when he began a full-time job with

Boeing as an engine build-up mechanic.   On his 2006 Form 1040,

petitioner reported wages of $56,498 and claimed unreimbursed

employee business expenses of $9,415 on Schedule A.    On the

Northwest Schedule C, petitioner reported gross receipts of

$10,950 and total expenses of $37,773 that included a
                               - 5 -

depreciation deduction of $25,302.     Petitioner reported no tax

due for 2006.

     In 2007 petitioner worked full time for Boeing.     On his 2007

Form 1040, petitioner reported wages of $64,474 and claimed

unreimbursed employee expenses of $6,723.     On the Northwest

Schedule C, petitioner reported gross receipts of $12,030 and

total expenses of $27,523 that included a depreciation deduction

of $18,073.   Petitioner did not carry insurance on the glider in

2007, reducing his reported expenses by approximately $5,000 as

compared to 2005 and 2006 when he carried insurance.     Petitioner

did not claim the 2007 Northwest loss on his Form 1040 because of

an issue he attributed to the computer software he used to

prepare his tax return.   Petitioner reported tax due of $3,340

for 2007.

     The IRS audited petitioner’s 2005, 2006, and 2007 income tax

returns and determined that the Northwest activities during the

years in issue did not satisfy the objective of making a profit

within the meaning of section 183.     Accordingly, the examiner

determined that for each of those years petitioner was not

entitled to deduct the claimed Northwest Schedule C expenses,

except to the extent of Schedule C gross receipts; that

petitioner’s Northwest Schedule C gross receipts should be

reported as “other income” on his Form 1040 and the Schedule C

expenses should be reported as “other miscellaneous expenses” on
                               - 6 -

Schedule A; and petitioner’s unreimbursed employee business

expenses should be disallowed and reported as Schedule A

expenses.   These determinations by the examiner were included in

the notice of deficiency sent to petitioner on December 12, 2008.

                              OPINION

     Under section 183(a), if an activity is not engaged in for

profit, then no deduction attributable to that activity is

allowed except to the extent provided by section 183(b).       In

pertinent part, section 183(b) allows those deductions that would

have been allowable had the activity been engaged in for profit

only to the extent of gross income derived from the activity

(reduced by deductions attributable to the activity that are

allowable without regard to whether the activity was engaged in

for profit).

     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

paragraph (1) or (2) of section 212.”     An activity is engaged in

for profit if the taxpayer’s “predominant, primary or principal

objective” in engaging in the activity was to realize an economic

profit independent of tax savings.      Wolf v. Commissioner, 4 F.3d

709, 713 (9th Cir. 1993), affg. T.C. Memo. 1991-212.     The

expectation of making a profit need not be reasonable.     Beck v.

Commissioner, 85 T.C. 557, 569 (1985); Dreicer v. Commissioner,
                               - 7 -

78 T.C. 642, 644-645 (1982), affd. without published opinion 702

F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.

     “The proper focus of the test * * * is the taxpayer’s

subjective intent. * * * However, objective indicia may be used

to establish that intent.”   Skeen v. Commissioner, 864 F.2d 93,

94 (9th Cir. 1988), affg. Patin v. Commissioner, 88 T.C. 1086

(1987); see also Wolf v. Commissioner, supra at 713; Indep. Elec.

Supply, Inc. v. Commissioner, 781 F.2d 724, 726 (9th Cir. 1986),

affg. Lahr v. Commissioner, T.C. Memo. 1984-472.     Greater weight

is given to objective facts than to a taxpayer’s self-serving

statement of intent.   See King v. Commissioner, 116 T.C. 198, 205

(2001); sec. 1.183-2(a) and (b), Income Tax Regs.

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

nonexclusive list of relevant factors to be weighed when

considering whether a taxpayer is engaged in an activity for

profit.   The relevant factors are:    (1) The manner in which the

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

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

taxpayer in carrying on the activity; (4) the expectation that

the assets used in the activity may appreciate in value; (5) the

success of the taxpayer in carrying on other activities for

profit; (6) the taxpayer’s history of income or losses with

respect to the activity; (7) the amount of occasional profits, if

any, that are earned from the activity; (8) the financial status
                               - 8 -

of the taxpayer; and (9) whether elements of personal pleasure or

recreation are involved in the activity.   None of these factors

is controlling in and of itself, and a decision as to a

taxpayer’s intent is not governed by a numerical preponderance of

the factors.   Indep. Elec. Supply, Inc. v. Commissioner, supra at

726-727; Golanty v. Commissioner, 72 T.C. 411, 426-427 (1979),

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

sec. 1.183-2(b), Income Tax Regs.   A final determination is made

only after considering all facts and circumstances.   Indep. Elec.

Supply, Inc. v. Commissioner, supra at 727; Golanty v.

Commissioner, supra at 426.

     Respondent determined that petitioner did not engage in the

glider activities with an intent to derive a profit and therefore

disallowed the Schedule C loss deductions.   Petitioner counters

that he did engage in the glider activities with an intent to

realize a profit.   We address the nine nonexclusive factors in

section 1.183-2(b), Income Tax Regs., in determining petitioner’s

intent objectively.

     Carrying on the activity in a businesslike manner and

maintaining complete and accurate books and records may indicate

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

Businesslike conduct is characterized by careful and thorough

investigation of the profitability of a proposed venture,

monitoring of a venture in progress, and attention to problems
                                - 9 -

that arise over time.   See Ronnen v. Commissioner, 90 T.C. 74, 93

(1988); Taube v. Commissioner, 88 T.C. 464, 481-482 (1987).

     Petitioner did not maintain thorough books and records for

his glider activities beyond his flight logs, but the absence of

accurate books and records does not conclusively establish the

lack of a profit objective.   See De Boer v. Commissioner, T.C.

Memo. 1996-174.   The purpose of maintaining books and records is

more than to memorialize for tax purposes the existence of the

subject transactions; it is to facilitate a means of periodically

determining profitability and analyzing expenses such that proper

cost saving measures might be implemented in a timely and

efficient manner.   Golanty v. Commissioner, supra at 430; Burger

v. Commissioner, T.C. Memo. 1985-523, affd. 809 F.2d 355 (7th

Cir. 1987).   Petitioner did not prepare budgets, income

statements, balance sheets, forecasts, or other financial

statements.   However, petitioner did review Northwest’s expenses

and elected to discontinue carrying insurance for the glider in

2007 to reduce expenses.   Petitioner also purposely did not

exceed 100 hours of glider flight time to avoid the additional

costly glider inspection each year.

     Petitioner held himself out as a glider instructor and

actively promoted Northwest through various marketing efforts,

primarily Northwest’s Web site, to secure clients for glider

rides and/or for instruction.   Although petitioner could and
                              - 10 -

should have kept better business records for Northwest, what

efforts he did undertake to make a financial success of his

glider activities tend to show a profit objective.

     A taxpayer’s extensive study of the accepted business and

economic practices of an activity, as well as the taxpayer’s

consultation with experts, may indicate a profit objective.     Sec.

1.183-2(b)(2), Income Tax Regs.   Petitioner secured the

appropriate licenses and training to satisfy the FAA requirements

to operate as a glider flight instructor.   Additionally, he

provided flight instruction at the Boeing Employees Soaring Club.

However, petitioner did not provide information that he had

consulted with accountants, lawyers, or business advisers about

the economic aspects of his activities.   This factor is neutral.

     The fact that a taxpayer devotes much personal time and

effort to carrying on an activity may indicate a profit

objective, particularly where the activity does not involve

substantial personal or recreational aspects.   Sec. 1.183-

2(b)(3), Income Tax Regs.   Petitioner started the Northwest

glider activities after he lost his full-time job with Boeing and

continued the activities part time after resuming full-time

employment.   During the years in issue, petitioner generally

devoted all of his weekends to the glider activities.

     Respondent emphasizes that petitioner worked full time for

Harbour Homes and then Boeing during the years in issue,
                               - 11 -

suggesting that petitioner’s glider activities could not rise to

the level of a trade or business because he also had a full-time

job.    But petitioner’s having full-time employment does not

preclude the possibility that his glider activities constituted a

separate trade or business.    We have recognized that a taxpayer

may engage in more than one trade or business at any one time.

See Gestrich v. Commissioner, 74 T.C. 525, 529 (1980), affd.

without published opinion 681 F.2d 805 (3d Cir. 1982); Christine

v. Commissioner, T.C. Memo. 2010-144.

       A taxpayer’s expectation that assets used in an activity

will appreciate in value to create an overall profit may indicate

a profit objective as to that activity.    Golanty v. Commissioner,

supra at 427-428; sec. 1.183-2(b)(4), Income Tax Regs.

Northwest’s only asset during the years in issue was the glider.

There is nothing in the record regarding the value of the glider

during the years in issue to demonstrate appreciation.    Thus

nothing shows petitioner’s expectation as to whether appreciation

of the glider would bring about an overall profit.    See sec.

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

       A taxpayer’s success in carrying on other similar or

dissimilar activities is a factor that may show a profit

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

offered no evidence regarding success in carrying on comparable

activities.    Petitioner contends that he conducted a successful
                              - 12 -

part-time business venture in kitchen and bathroom remodeling, a

dissimilar activity.   However, he did not supply information

regarding the operations or financial aspects of this business.

     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 during the startup

period of an activity is not necessarily an indication that the

activity is not engaged in for profit, bearing in mind, however,

that the objective must be to realize a profit on the entire

operation--future net earnings and also enough earnings to recoup

losses that have been incurred in intervening years.      Bessenyey

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

Cir. 1967).

     Petitioner reported losses on his tax return for Northwest

for 2004 and for the years in issue.   Petitioner contends that

the losses reported were “paper losses” because they were

primarily a result of depreciating the glider using a 7-year

recovery period.   He asserts that if depreciation is not included

in the Northwest expenses, that Northwest had profits of $1,503

and $2,580 in 2005 and 2007, respectively, and a loss of $1,521

in 2006.   “Depreciation, however, is a reflection of the

apportioned use of an asset over a period of more than 1 year and

cannot be ignored in a true profit analysis.”   Best v.
                              - 13 -

Commissioner, T.C. Memo. 1990-20; see also Peacock v.

Commissioner, T.C. Memo. 2002-122.

     Petitioner’s first full year of the glider operations was in

2004.   The glider activities were reasonably within the startup

period during the years in issue.    We treat this factor as

neutral.

     While substantial income from sources other than the

activity may indicate that the activity is not engaged in for

profit, a taxpayer’s lack of substantial income from sources

other than the activity tends to indicate that an activity is

engaged in for profit.   Sec. 1.183-2(b)(8), Income Tax Regs.   The

legislative history of the Tax Reform Act of 1969, Pub. L. 91-

172, 83 Stat. 487, discloses a particular concern about wealthy

individuals attempting to generate paper losses for the purpose

of sheltering unrelated income.   See H. Rept. 91-413 (1969),

1969-3 C.B. 200, 244-245.   We have no such concerns with respect

to petitioner.

     A taxpayer’s enjoyment of an activity does not demonstrate a

lack of profit objective if the activity is, in fact, conducted

for profit as shown by other factors.    See Jackson v.

Commissioner, 59 T.C. 312, 317 (1972); sec. 1.183-2(b)(9), Income

Tax Regs.   “[A] business will not be turned into a hobby merely

because the owner finds it pleasurable; suffering has never been
                              - 14 -

made a prerequisite to deductibility.”    Jackson v. Commissioner,

supra at 317.

     It is not contested that petitioner’s glider flight hours

logged during the years in issue were attributable to paying

customers, with a few solo flights taken for FAA license

requirements.   Moreover, petitioner worked in the aviation field

until he was laid off from Boeing in 2002 and started working

full time for that company again in 2006.   Petitioner’s enjoyment

of flying does not change the result of whether he is in the

trade or business of providing glider flights and instruction.

     These nonexclusive factors and the facts and circumstances

of this case lead us to conclude that petitioner engaged in the

glider activities with the primary purpose and intent of

realizing an economic profit independent of tax savings during

the years in issue.

Unreimbursed Employee Business Expenses

     Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   The term “trade or business” as

used in section 162(a) includes the trade or business of being an

employee.   Primuth v. Commissioner, 54 T.C. 374, 377-378 (1970).

The determination of whether an expenditure satisfies the

requirements for deductibility under section 162 is a question of

fact.   Commissioner v. Heininger, 320 U.S 467, 475 (1943).    To
                              - 15 -

deduct unreimbursed employee expenses, a taxpayer must not have

received reimbursement and must not have had the right to obtain

reimbursement from his or her employer.   Orvis v. Commissioner,

788 F.2d 1406, 1408 (9th Cir. 1986), affg. T.C. Memo. 1984-533.

     Petitioner concedes that he is not entitled to the

unreimbursed employee business expense deductions that he claimed

for 2005 and 2007.   Petitioner has not provided sufficient

evidence regarding the expenses claimed for 2006 or whether he

received reimbursement or had the right to obtain reimbursement

from his employer.   Thus, petitioner is not entitled to the

deduction claimed for unreimbursed employee business expenses for

2006.

Section 6662(a) Accuracy-Related Penalties

     Respondent determined that petitioner is liable for section

6662(a) accuracy-related penalties for the years in issue.

Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer may be

liable for a penalty of 20 percent of the portion of an

underpayment of tax attributable to (1) negligence or disregard

of rules or regulations or (2) a substantial understatement of

income tax.   A substantial understatement exists if the

understatement exceeds the greater of (1) 10 percent of the tax

required to be shown on the return for a taxable year or (2)

$5,000.   See sec. 6662(d)(1)(A).
                              - 16 -

     Under section 7491(c), the Commissioner bears the burden of

production with regard to penalties and must come forward with

sufficient evidence indicating that it is appropriate to impose

penalties.   See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

However, once the Commissioner has met the burden of production,

the burden of proof remains with the taxpayer, including the

burden of proving that the penalties are inappropriate because of

reasonable cause or substantial authority.    See Rule 142(a);

Higbee v. Commissioner, supra at 446-447.

     Respondent has not come forward with sufficient evidence to

indicate that petitioner was negligent.   See sec. 6662(a) and

(b)(1).

     Respondent determined the amounts of tax required to be

shown on petitioner’s 2005, 2006, and 2007 tax returns to be

$4,874, $5,007, and $4,590, respectively.    Petitioner reported

total tax due of zero for 2005 and 2006 and $3,340 for 2007.     We

do not sustain respondent’s disallowance of the expense

deductions claimed for Northwest on the basis of respondent’s

determination that Northwest was not engaged in for profit.

However, petitioner conceded that the claimed unreimbursed

employee business expense deductions for 2005 and 2007 were

improper, and we concluded that he is not entitled to those

claimed for 2006.   If the Rule 155 calculation for any year shows

that a substantial understatement of income tax exists under
                              - 17 -

section 6662(d)(1)(A), petitioner is liable for the section

6662(a) accuracy-related penalty for that year.   Petitioner has

not argued that the penalties are inappropriate because of

reasonable cause or substantial authority.   See sec. 6664(c)(1);

Higbee v. Commissioner, supra at 446-447.

     We have considered all arguments made, and, to the extent

not mentioned, we conclude that they are moot, irrelevant, or

without merit.   To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.
