                         T.C. Memo. 1996-166



                       UNITED STATES TAX COURT


       DERRIL O. LAMB, JR. AND JOYCE LAMB, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17253-94.                      Filed April 1, 1996.


     Thomas J. Van Meer and D. Kelley Young, for petitioners.

     Paul Colleran and David N. Brodsky, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:     Respondent determined deficiencies in

petitioners’ Federal income taxes and accuracy-related penalties

as follows:


                                 Accuracy-Related Penalty
        Year        Deficiency         Sec. 6662(a)
                               -2-

         1990      $9,560                $1,288
         1991       6,561                   878


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

O. Lamb’s tuna fishing activity was engaged in for profit within

the meaning of section 183;1 and, if not, (2) whether petitioners

are liable for accuracy-related penalties pursuant to section

6662(a) for negligence or substantial disregard of rules or

regulations.


                        FINDINGS OF FACT


     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.   Petitioners resided in

Bowdoinham, Maine, at the time they filed their petition.


Mr. Lamb’s Tuna Fishing Activity


     Petitioner Derril Lamb was born in 1925.     Mr. Lamb began

harpooning tuna in 1958 when he constructed his own fishing boat

and learned how to harpoon from the most successful and

experienced fishermen on Bailey Island in Maine.     From 1958

through 1960, Mr. Lamb harpooned 4, 8, and 16 tuna, respectively.

Beginning in 1961 and continuing for a number of years

     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                  -3-

thereafter, Mr. Lamb harpooned approximately 50 tuna per year.

From 1958 through 1982, Mr. Lamb also built and sold one or two

fishing boats per year.

     In 1982, Mr. Lamb was diagnosed with diabetes.    Due to a

decline in his health, Mr. Lamb sold his fishing boat and also

stopped building fishing boats.    In 1986, Mr. Lamb suffered a

major heart attack, which left him hospitalized for 2 weeks.

     From 1983 through 1987, Mr. Lamb would go out on boats owned

by young fishermen, who sought to learn from Mr. Lamb the skill

of harpooning tuna.   Mr. Lamb did not receive any compensation

for his services, nor did he claim any deductions for expenses

from these activities on his Federal income tax returns for these

years.

     During this same time, the price of Atlantic bluefin tuna

was rising significantly.   The increase was largely attributable

to the increased demand for fresh bluefin tuna from Japan, a

principal consumer of U.S. Atlantic bluefin tuna.2

     Due to this significant increase in tuna prices, on January

6, 1988, Mr. Lamb purchased the Lu-Joy, a 35-foot, 300-horsepower

diesel fiberglass vessel, which was originally built in 1986 as a

lobster boat.   After purchasing the Lu-Joy, Mr. Lamb had it


     2
      To illustrate, the price of Atlantic bluefin tuna was
approximately 20 cents per pound during the early 1970's. By
1993, the average price for Atlantic bluefin tuna in the United
States was $10.10 per pound, and, in 1994, the price rose to
nearly $11 per pound.
                                 -4-

rigged specifically for harpooning tuna.    Mr. Lamb obtained the

funds for this purchase in the form of a personal advance from

Marriner Lumber Co.    Based upon his years of tuna fishing

experience, Mr. Lamb believed that he would be able to make a

substantial profit in the rising market.

     On June 10, 1988, Mr. Lamb obtained a Federal Fisheries

permit, which allowed him to harpoon Atlantic bluefin tuna.    This

permit allowed Mr. Lamb to harpoon an unlimited number of tuna

per day until a total of 50 tons was caught by the tuna fishing

community.

     The tuna fishing season begins in mid-June and ends in late

September.   From June 1 through July 2, 1989, Mr. Lamb was in

Africa on a big game hunt.    When he returned to Maine on July 3,

the quota for tuna had already been filled.    This was the first

time that the quota had been filled so early.    Therefore, Mr.

Lamb was unable to do any tuna fishing for the remainder of the

season.   Mr. Lamb did not report any income or claim any

deductions for his tuna fishing activity on his Federal income

tax return for 1989.    Mr. Lamb’s accountant, Gerald P. Nadeau,

informed Mr. Lamb that he was entitled to a depreciation

deduction for the Lu-Joy for 1989, but Mr. Lamb refused because

of his failure to do any fishing for that year.

     In an attempt to eliminate the quota problem he encountered

in 1989, on June 7, 1990, Mr. Lamb changed his Federal Fisheries

permit for Atlantic bluefin tuna to the “general category”.    This
                                 -5-

new permit allowed Mr. Lamb to catch one tuna per day until 350

tons were caught by the community.

     The tuna fishing season in Maine typically begins on June 15

and ends on September 30.    However, generally there are only 15

to 20 days per season when the weather and sea conditions are

appropriate for harpooning tuna.    During the 1990 season, Mr.

Lamb fished on 15 days; in 1991, he fished on 12 days.     Mr. Lamb

was accompanied on his fishing trips by a mate who steered the

Lu-Joy and performed various other duties.    The mate’s

compensation consisted of a one-third share of any fish caught by

the boat.   In 1990, Mr. Lamb harpooned one tuna weighing 294

pounds and sold it for $1,250.    Mr. Lamb did not catch any tuna

in 1991.

     Tuna harpooned by Mr. Lamb in prior years generally ranged

from 175 pounds to 980 pounds in weight and averaged around 450

pounds.    The price per pound for bluefin tuna is generally

dependent upon the fat content of the fish.

     During 1990 and 1991, Mr. Lamb maintained a log with

corresponding entries for each day that he fished and loran

coordinates for areas where Mr. Lamb spotted tuna in order to

assist him later in returning to good fishing locations.    Mr.

Lamb also maintained a separate bank account for his tuna fishing

activity.

     In 1990 and 1991, Mr. Lamb’s health began to deteriorate and

his diabetes was affecting his eyesight, which, in turn, affected
                                    -6-

his harpooning skills.    Mr. Lamb has received three laser

treatments on his left eye and two laser treatments on his right

eye in the hope of slowing the progression of diabetic

retinopathy.

       For the taxable years 1988 through 1993, the following gross

receipts, expenses, and losses from Mr. Lamb’s tuna fishing

activity are reflected on Schedule C of petitioners’ Federal

income tax returns:


            Gross      Depreciation        Other
Year       Receipts     Deductions        Expenses       Losses
                                                         1
1988        $2,460        $15,709          $8,293         $22,349
               2             2                2                2
1989
1990         1,025         20,239           2,649            21,863
1991          --           14,156             897            15,053
1992          --           10,111           1,080            11,191
1993          --           10,204           1,008            11,212

  Total     $3,485        $70,419         $13,927        $81,668

       1
       The total loss figure is slightly greater than the total of
its components. This discrepancy is unexplained.
     2
       No Schedule C was attached to petitioners’ 1989 Federal
income tax return.


Mr. Lamb did not conduct any commercial tuna fishing after 1993.

Petitioners did not report Mr. Lamb’s tuna fishing as a business

activity on their 1994 income tax return.


 Mr. Lamb’s Other Business Ventures


       On August 5, 1965, Mr. Lamb incorporated Marriner Lumber Co.

(Marriner Lumber) in Brunswick, Maine.      Marriner Lumber’s
                                -7-

business activity includes the manufacture and retail sale of

lumber and building products.   On December 31, 1986, Marriner

Lumber made an election to be taxed as a “small business

corporation” (S corporation) under section 1366.    In 1990 and

1991, Marriner Lumber had approximately 50 employees and gross

receipts of $5,244,932 and $4,491,418, respectively.    During this

same time, Mr. Lamb was president of Marriner Lumber and owned

50.6670 percent of its outstanding stock.    Neil Lamb, Mr. Lamb’s

son, owned the remaining stock outstanding.   Mr. Lamb worked at

Marriner Lumber approximately 15 to 20 hours per week during 1990

and 1991 and received an annual salary of $31,772.    For the

taxable years 1990 and 1991, Mr. Lamb’s shares of the subchapter

S profits from Marriner Lumber were $23,831 and $25,610,

respectively.

     In 1989, Mr. Lamb acquired the Oregon Bow Co. (Oregon Bow)

in Junction City, Oregon.   During 1990, Mr. Lamb spent 4 weeks

actually working in Oregon.   The remainder of his work for Oregon

Bow was conducted by telephone from Maine.    Mr. Lamb received a

salary from Oregon Bow of $21,302.16 for 1990.

     On March 26, 1990, Mr. Lamb incorporated Marriner Lumber

Home Centers, Inc. (MLHC), in Brunswick, Maine.    On the same

date, MLHC elected to be taxed as an S corporation.    MLHC’s

business activity involves the retail sale of lumber and other

building products.   During 1990 and 1991, Mr. Lamb was president

of MLHC, owned 75 percent of its stock outstanding, and devoted
                                 -8-

20 to 25 hours per week to the business during the summer months.

Neil Lamb owned the remaining stock outstanding.   MLHC had gross

receipts in 1990 and 1991 of $3,387,549 and $4,231,685,

respectively.   In 1990, Mr. Lamb had a nonpassive loss from MLHC

in the amount of $3,132; in 1991, his share of the subchapter S

profits was $34,396.

     During 1990 and 1991, Mr. Lamb held a 50-percent interest in

the profits, losses, and capital of the D and N Partnership (D

and N), in Brunswick, Maine.   D and N reported losses in 1990 and

1991 of $8,554 and $2,957, respectively.   In addition, Mr. Lamb

had a 50-percent interest during 1990 in the profits, losses, and

capital of the GLS Partnership (GLS) in Brunswick, Maine.   GLS

had income for the year of $60,655.


                               OPINION


     The primary issue for decision is whether Mr. Lamb’s tuna

fishing activity was an activity that was “not engaged in for

profit” within the meaning of section 183(c).   Section 183(a)

provides generally that if an activity is not engaged in for

profit, no deduction attributable to such activity shall be

allowed, except as otherwise provided in section 183(b).3

     3
      Sec. 183(b)(1) permits a deduction for expenses that are
otherwise deductible without regard to whether or not the
activity is engaged in for profit, such as interest and personal
property taxes. Sec. 183(b)(2) permits a deduction for expenses
that would be deductible only if the activity were engaged in for
                                                   (continued...)
                                -9-

Section 183(c) defines an activity not in 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.”

     Deductions are allowed under section 162 for the ordinary

and necessary expenses of carrying on an activity that

constitutes the taxpayer’s trade or business.   Deductions are

allowed under section 212 for expenses paid or incurred in

connection with an activity engaged in for the production or

collection of income, or for the management, conservation, or

maintenance of property held for the production of income.   With

respect to either section, however, the taxpayer must demonstrate

a profit objective for the activities in order to deduct

associated expenses.   Jasionowski v. Commissioner, 66 T.C. 312,

320-322 (1976); sec. 1.183-2(a), Income Tax Regs.   The profit

standards applicable to section 212 are the same as those used in

section 162.   See Agro Science Co. v. Commissioner, 934 F.2d 573,

576 (5th Cir. 1991), affg. T.C. Memo. 1989-687; Antonides v.

Commissioner, 893 F.2d 656, 659 (4th Cir. 1990), affg. 91 T.C.

686 (1988); Allen v. Commissioner, 72 T.C. 28, 33 (1979); Rand v.

Commissioner, 34 T.C. 1146, 1149 (1960).




     3
      (...continued)
profit, but only to the extent that the gross income derived from
the activity exceeds the deductions allowed by sec. 183(b)(1).
                               -10-

     Whether the required profit objective exists is to be

determined on the basis of all the facts and circumstances of

each case.   Hirsch v. Commissioner, 315 F.2d 731, 737 (9th Cir.

1963), affg. T.C. Memo. 1961-256; Golanty v. Commissioner, 72

T.C. 411, 426 (1979), affd. without published opinion 647 F.2d

170 (9th Cir. 1981); sec. 1.183-2(a), Income Tax Regs.    While the

focus of the test is on the subjective intention of the taxpayer,

greater weight is given to the objective facts than to the

taxpayer’s mere statement of his or her intent.     Independent

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

1986), affg. T.C. Memo. 1984-472; Dreicer v. Commissioner, 78

T.C. 642, 645 (1982), affd. without published opinion 702 F.2d

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

Petitioners bear the burden of proving that they possessed the

requisite intention and that respondent’s determination that an

activity was not engaged in for profit is erroneous.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933)

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

relevant factors for determining whether an activity is engaged

in for profit.   No one factor is controlling.    Brannen v.

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

471 (1982); Golanty v. Commissioner, supra at 426.     The relevant

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

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

advisers; (3) the time and effort expended by the taxpayer in
                                 -11-

carrying on the activity; (4) the expectation that assets used in

the activity may appreciate in value; (5) the success of the

taxpayer in carrying on other similar or dissimilar activities;

(6) the taxpayer’s history of income or losses with respect to

the activity; (7) the amount of occasional profits, if any, which

are earned; (8) the financial status of the taxpayer; and (9) the

presence of elements of personal pleasure or recreation.     Sec.

1.183-2(b), Income Tax Regs.


     (1)     Manner in Which the Taxpayer Carries on the Activity


     Respondent argues that Mr. Lamb did not maintain adequate

books and records for his tuna fishing activity.     We disagree.

Mr. Lamb established a separate bank account (the Lu-Joy account)

at Casco Northern Bank in Bowdoinham, Maine, which enabled him to

segregate the income and expenses from his tuna fishing

activity.4    In addition, Mr. Lamb maintained a log recording the

weather and tide conditions on the days that he fished, as well

as the loran coordinates of each tuna that Mr. Lamb spotted so

that he could return to that location in the future to fish for

tuna.

     Respondent also contends that Mr. Lamb did not conduct his

tuna fishing activity in a businesslike manner, because Mr. Lamb


     4
      We note that respondent has not argued that Mr. Lamb has
failed to substantiate the amount and nature of any of the
expenses he claimed in connection with his tuna fishing activity.
                                -12-

did not participate in the 1989 tuna fishing season.    We

disagree.    The tuna fishing season in Maine begins around June 15

and concludes around September 30; however, the season can be

shortened if the quota of tuna is caught prior to the traditional

end of the season.    Mr. Lamb traveled to Africa on June 1, 1989.

When he returned to Maine on July 3, 1989, the quota of tuna for

Mr. Lamb’s permit had already been filled, thereby precluding him

from doing any fishing during the remainder of 1989.

     Mr. Lamb testified at trial that July 4 is traditionally

regarded as the date when the Maine tuna fishing season begins in

earnest and that the quota had never been filled this early

before, nor has it since.    We conclude that this is a reasonable

explanation for Mr. Lamb’s failure to do any fishing during

1989.5   We also note that Mr. Lamb took steps to change his

fishing permit so that he could avoid this problem in future

years.


     (2)    The Expertise of the Taxpayer or His Advisers


     Mr. Lamb learned how to harpoon tuna in 1958 from

experienced fishermen on Bailey Island in Maine.    He successfully

harpooned tuna and built fishing boats until 1982.    Mr. Lamb is

obviously an individual with substantial experience and expertise

     5
      We note, too, that since he did no fishing in 1989, Mr.
Lamb refused the advice of his accountant, who advised Mr. Lamb
that he was still entitled to take a depreciation deduction for
the Lu-Joy.
                                -13-

in the tuna fishing business.   Between 1983 and 1987, Mr. Lamb

was not engaged in the business of fishing but continued to go

out on the sea with young fishermen who sought to learn from Mr.

Lamb the skill of harpooning tuna.     In 1988, rising tuna prices

enticed Mr. Lamb to purchase the Lu-Joy and return to the sea to

harpoon tuna.


     (3) Time and Effort Expended by the Taxpayer in Carrying on
the Activity


     On brief, respondent points out that Mr. Lamb’s log

indicates that he made only 15 and 12 fishing trips in 1990 and

1991, respectively.   However, Mr. Lamb testified that although

the tuna fishing season in Maine typically runs from June 15

through September 30, there are usually only 15 to 20 days per

season when the weather conditions are such that it would be

worthwhile to go out on the sea to harpoon tuna.    As Mr. Lamb

testified:   “The rest of the time you could go for a boat ride,

you could go hope you could see a fish jump, [but] you wouldn’t

have a ghost of a chance of catching a fish, and I just wouldn’t

go those days.”


     (4) Expectation That Assets Used in the Activity May
Appreciate in Value


     There is no evidence in the record that Mr. Lamb held the

Lu-Joy with any expectation that it would appreciate in value.
                               -14-

     (5) The Success of the Taxpayer in Carrying on Other
Similar or Dissimilar Activities


     The record reveals that Mr. Lamb has been quite successful

in the lumber and building supply business.   Marriner Lumber had

gross receipts of $5,244,932 and $4,491,418 in 1990 and 1991,

respectively.   In addition, MLHC acquired two building supply

stores in 1990 for $1,500,000 and had gross receipts of

$3,387,549 and $4,231,685 in 1990 and 1991, respectively.    Mr.

Lamb and his son hold all the stock outstanding in these two

companies.

     During 1990 and 1991, Mr. Lamb also held a 50-percent

interest in the D and N Partnership.    However, D and N had a loss

of $8,554 in 1990 and $2,957 in 1991.   In addition, in 1990, Mr.

Lamb owned a 50-percent interest in the GLS Partnership.    GLS had

income for the year of $60,655.
                                 -15-

     (6) The Taxpayer’s History of Income and Losses With
Respect to the Activity, and (7) the Amount of Occasional
Profits, if any, Which Are Earned


     Mr. Lamb reentered the tuna fishing business in 1988, and

this activity generated the following losses:


                 Year                   Loss

                 1988               $22,349
                 19891                  --
                 1990                21,863
                 1991                15,053
                 1992                11,191
                 1993                11,212

                   Total            $81,668

     1
      Mr. Lamb did not conduct any commercial fishing activity
during 1989 or after 1993.


     A record of substantial losses over several years is

generally indicative of the absence of a profit objective.

Golanty v. Commissioner, 72 T.C. at 426.        The record indicates

that Mr. Lamb purchased the Lu-Joy and reentered the tuna fishing

business in 1988 with the belief that he “was going to make a

killing”, given the rising prices for tuna.        The record also

clearly indicates that Mr. Lamb was an accomplished fisherman

with many years of experience.    We do not believe that a

fisherman with Mr. Lamb’s expertise would have caught only one

fish in 2 years if he had been healthy.        Unfortunately, Mr.

Lamb’s eyesight, which is obviously so vital to a harpoon
                                -16-

fisherman’s success on the sea, deteriorated due to his diabetic

retinopathy.


     (8)    The Financial Status of the Taxpayer


     The regulations provide that “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.”    Sec. 1.183-2(b)(8),

Income Tax Regs.    On their 1990 Federal income tax return,

petitioners reported wages from Marriner Lumber and Oregon Bow

totaling $53,074, interest income of $29,653, dividend income of

$686, capital gains of $64,583, and miscellaneous income of

$4,539.    On their 1991 return, petitioners reported wages from

Marriner Lumber of $31,772, interest income of $29,454, dividend

income of $557, taxable refunds of State and local income taxes

totaling $1,708, capital gains of $23,398, Schedule E income of

$44,633, and miscellaneous income of $5,331.    Petitioners clearly

received a tax benefit from the losses generated by Mr. Lamb’s

tuna fishing activity.


     (9) The Presence of Elements of Personal Pleasure or
Recreation


     The “fact that the taxpayer derives personal pleasure from

engaging in the activity is not sufficient to cause the activity
                                -17-

to be classified as not engaged in for profit”.     Sec. 1.183-

2(b)(9), Income Tax Regs.   Congress did not require that

taxpayers dislike an activity as a prerequisite to a finding that

they are engaged in the activity for profit.      Crail v.

Commissioner, T.C. Memo. 1993-40.      The Lu-Joy was equipped as a

commercial fishing boat, and Mr. Lamb did not use the Lu-Joy for

recreational purposes.   We believe that Mr. Lamb was a fisherman

whose purpose was to earn money from the sale of tuna.

     Based on a consideration of all the above factors and having

heard Mr. Lamb’s testimony at trial, we believe that his primary

objective for engaging in fishing activity during 1990 and 1991,

was to make a profit.    Takahashi v. Commissioner, 87 T.C. 126,

132 (1986); Thomas v. Commissioner, 84 T.C. 1244, 1269 (1985),

affd. 792 F.2d 1256 (4th Cir. 1986); Seaman v. Commissioner, 84

T.C. 564, 588 (1985); Allen v. Commissioner, 72 T.C. at 33; Dunn

v. Commissioner, 70 T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d

Cir. 1980); Jasionownski v. Commissioner, 66 T.C. at 319.     Rising

tuna prices enticed Mr. Lamb to purchase the Lu-Joy and reenter

the tuna fishing business in 1988.     We find Mr. Lamb’s testimony

that he thought he “was going to make a killing” credible.

Unfortunately, Mr. Lamb’s eyesight deteriorated due to his

diabetic retinopathy.6

     6
      At trial, Mr. Lamb testified that “I’d come in and talk
with some of the other fishermen on the dock at night and they
had seen fish, a school of fish here and a school of fish
                                                   (continued...)
                               -18-

     We find that Mr. Lamb’s tuna fishing activity was an

activity engaged in for profit within the meaning of section

183(c).   Petitioners’ deduction of the losses associated with

this activity is, therefore, not subject to the limitations

imposed by section 183(b).   It follows that the penalty

provisions of section 6662(a) do not apply.


                                        Decision will be entered

                                  for petitioners.




     6
      (...continued)
there[,] and I hadn’t seen any fish.”
