                    T.C. Summary Opinion 2011-15



                       UNITED STATES TAX COURT



     SHAWN COLLEEN AND DAVID LEE BLANCHETTE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9742-09S.              Filed February 17, 2011.



     Shawn C. and David L. Blanchette, pro sese.

     Mark Schwarz, for respondent.



     LARO, Judge:   This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1   Pursuant to section 7463(b), the decision

to be entered is not reviewable by any other court, and this

opinion shall not be treated as precedent for any other case.



     1
      Subsequent section references are to the applicable
versions of the Internal Revenue Code. Rule references are to
the Tax Court Rules of Practice and Procedure.
                                - 2 -

     Petitioners petitioned the Court to redetermine deficiencies

of $3,945, $1,875, and $2,858 in their Federal income taxes for

2005, 2006, and 2007, respectively.     We decide whether petitioner

Shawn Colleen Blanchette’s (Ms. Blanchette) activity of selling

science fiction memorabilia was an “activity not engaged in for

profit” under section 183.    We hold that Ms. Blanchette was not

engaged in her activity for profit.

                              Background

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

The stipulated facts and the exhibits submitted therewith are

incorporated by this reference.

     Petitioners David Lee Blanchette (Mr. Blanchette) and Ms.

Blanchette resided in Las Vegas, Nevada, when their petition was

filed.   Mr. Blanchette was a software engineer who earned

$77,145, $82,925, and $86,238 in 2005, 2006, and 2007,

respectively.   Ms. Blanchette became an avid reader of science

fiction literature in 1976.    Since that time, her passion for

science fiction has grown steadily, and she has now been a

collector of related memorabilia for more than 20 years.     As

early as 1987, Ms. Blanchette has bought and sold science fiction

memorabilia retail.

     In 1992 Ms. Blanchette formed and operated a proprietorship

under the name A Wrinkle in Time (AWIT).    From 1992 through 1995

Ms. Blanchette operated AWIT as a retail store in Santa Clara,
                               - 3 -

California, leasing space and obtaining a business license to do

so.   Ms. Blanchette was the primary business owner and was

intimately involved with all aspects of the business.   On

average, she worked at her store 14 hours per day, 7 days a week.

Ms. Blanchette aggressively promoted AWIT locally with newspaper

advertisements and regionally at science fiction conventions.

Although Ms. Blanchette adopted a business plan in 1993 to

transform AWIT into a partnership that could further penetrate

the science fiction memorabilia market, she never executed that

plan.   Despite Ms. Blanchette’s efforts, her collectibles

activity generated losses from 1992 through 1995.

      In 1996 Ms. Blanchette relocated to Sunnyvale, California,

where she operated AWIT as a retail store in leased space until

2001.   During that time, Ms. Blanchette developed a Web site to

sell her collection to online customers.   Although she adopted a

second business plan in 2000 to rebrand AWIT’s online image, Ms.

Blanchette did not bring that plan to fruition.   She continued to

incur losses from 1996 through 2001.

      In 2001 Ms. Blanchette relocated to Las Vegas, Nevada.   From

2002 through 2005 Ms. Blanchette sold science fiction memorabilia

mostly online and at conventions.   During that time Ms.

Blanchette rented warehouse space to store her collection; and

although the warehouse was generally not open to the public, she
                                - 4 -

would sometimes show that collection to potential customers.    Ms.

Blanchette incurred losses from 2002 through 2005.

     In 2005 petitioners inherited real estate (second home) from

Mr. Blanchette’s mother.   Ms. Blanchette subsequently moved her

collection from the warehouse to the second home and used that

home exclusively as a storage unit for her collection.    Ms.

Blanchette continued to add to her collection while also selling

items online and at conventions with the help of Mr. Blanchette.

     Ms. Blanchette valued the collection in 2005, 2006, and 2007

at $279,369, $294,166, and $299,560, respectively.    She provided

a generalized list of the items making up that collection, a

sampling of which is as follows:

                             2005         2006         2007
       Description         Quantity     Quantity     Quantity

     Art                     922            922        874
     Autographs            5,000          5,500      6,000
     Bumper stickers       2,170          2,170      2,100
     Comic books           7,700          7,175      6,475
     Keychains               420            420        360
     Magazines               420            490        525
     Miniatures              468            468        468
     Needlework patterns     500            500        500
     Photos               17,907         18,807     19,207
     Postcards             3,226          3,226      2,664
     Record albums           428            428        428
     Stickers                380            425        370
     Trading card sets       405            405        410
     Trading cards       175,000        175,000    175,000
     T-shirts             10,889         11,353     11,641

Ms. Blanchette did not insure her collection and states that some

of the comic books and trading cards are worthless.
                                 - 5 -

     During 2005, 2006, and 2007 (subject years) Ms. Blanchette’s

collectibles activity generated gross receipts of $78,094,

$82,428, and $89,525, respectively.       Petitioners claimed losses

from the operation of their collectibles activity on the

Schedules C, Profit or Loss From Business, attached to their

Federal income tax returns as follows:

                                 2005        2006       2007

     Gross receipts            $78,094     $82,428    $89,525
     Cost of goods sold         57,097      49,526     57,718
     Other income                  283         -0-        -0-
     Gross income               21,280      32,902     31,807
     Operating expenses         47,577      48,683     59,881
     Income/(Loss)             (26,297)    (15,781)   (28,074)

Ms. Blanchette’s collectibles activity has not yielded a net

financial profit during any year from 1992 through 2007, and

total losses are estimated to be between $300,000 and $350,000.2

     During the subject years, Ms. Blanchette devoted between 6

and 8 hours per day, 7 days a week, to her collectibles activity.

On average, Ms. Blanchette would spend 200 days per year working

out of her home, during which time she processed orders,

responded to customers’ inquiries, verified inventory, and

prepared for conventions.    On average, petitioners attended 18

conventions per year.     In 2005, 2006, and 2007 petitioners spent

119, 78, and 96 days, respectively, driving to and selling at

various conventions.    On average, they drove 650 miles per day


     2
      In 2008 and 2009 petitioners reported profits in their
collectibles activity of $745 and $319, respectively.
                               - 6 -

for 14 hours per day in order to attend these conventions.    Once

there, petitioners would typically work 11.5 hours per day taking

no breaks for meals.   Petitioners would display the collection on

two to five tables and paid approximately $300 per table.

     For the subject years Ms. Blanchette kept spreadsheets of

the income and expenses related to her collectibles activity.

She also maintained a separate checking account and credit card

though she did not engage in direct advertising.   Ms. Blanchette

presented various State tax forms and statements which she

received between 2007 and 2009.

     Respondent issued to petitioners a notice of deficiency

dated January 22, 2009, disallowing petitioners’ deductions for

Schedule C expenses for each of the subject years.   Respondent

determined that the expenses reported on Schedules C were not

allowable as trade or business expenses because petitioners did

not establish that AWIT was a bona fide business venture entered

into for profit.   Petitioners petitioned the Court, and on

October 27, 2010, a trial was held in Las Vegas, Nevada.    Ms.

Blanchette was the only witness to testify.

                            Discussion

     Respondent disallowed petitioners’ Schedule C expense

deductions for the subject years because respondent determined

that Ms. Blanchette’s collectibles activity was an activity not

engaged in for profit within the meaning of section 183.
                                - 7 -

Petitioners argue generally that those expenses were deductible

as section 162 ordinary and necessary business expenses incurred

in connection with Ms. Blanchette’s trade or business.    For the

reasons set forth below, we hold for respondent.

     The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden of

proving that those determinations are in error.    Rule 142(a)(1);

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

section 7491(a), the burden of proof as to factual matters may

shift to the Commissioner under certain circumstances.

Petitioners have not alleged that section 7491(a) applies, nor

have they established their compliance with the substantiation

and recordkeeping requirements of the Internal Revenue Code.      See

sec. 7491(a)(2)(A) and (B).    Accordingly, petitioners bear the

burden of proof.3

     Section 183, which applies to activities engaged in by

individuals, generally limits deductions for an activity not

entered into for profit to the amount of the activity’s gross

income.   Sec. 183(b).   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.”


     3
      Sec. 183(d) provides for a statutory reversal of the burden
of proof if petitioners meet certain criteria. Petitioners do
not meet those criteria.
                               - 8 -

     Section 162 allows as a deduction all the ordinary and

necessary expenses paid or incurred in carrying on an activity

which constitutes a trade or business of the taxpayer.   Section

212 allows as a deduction all the ordinary and necessary expenses

paid or incurred in carrying on an activity which is for the (1)

production or collection of income, or (2) management,

conservation, or maintenance of property held for the production

of income.

     The Court of Appeals for the Ninth Circuit, to which an

appeal in this case would lie but for the provisions of section

7463(b), has held that for a taxpayer’s expenses to be deductible

under section 162 or 212 (and thereby avoid the limitations of

section 183), the taxpayer must demonstrate that his or her

“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 taxpayer’s expectation of profit

need not be reasonable, but it must be bona fide.   See sec.

1.183-2(a), Income Tax Regs.   The existence of such a profit

objective is a question of fact to be determined based on the

surrounding facts and circumstances.   Golanty v. Commissioner, 72

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

170 (9th Cir. 1981); see also sec. 1.183-2(b), Income Tax Regs.

While such an analysis necessarily requires an inquiry into the
                              - 9 -

subjective intent of the taxpayer, we may also look to objective

indicia to determine the taxpayer’s true intent.    See Indep.

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

1986), affg. Lahr v. Commissioner, T.C. Memo. 1984-472; see also

sec. 1.183-2(a), Income Tax Regs.

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

nonexclusive list of nine factors to be considered when

ascertaining a taxpayer’s intent.   These factors are:    (1) The

manner in which the taxpayer carries on the activity; (2) the

expertise of the taxpayer in carrying on the activity; (3) the

time and effort expended by the taxpayer in 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 loss with respect to the

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

earned by the taxpayer; (8) the financial status of the taxpayer;

and (9) elements of personal pleasure or recreation.     No single

factor is conclusive, and we may accord certain factors greater

weight than others.   Golanty v. Commissioner, supra at 426; Allen

v. Commissioner, 72 T.C. 28, 34 (1979); see also sec. 1.183-2(b),

Income Tax Regs.

     Ms. Blanchette testified that she had an honest objective in

making a profit from her collectibles activity.    She also
                               - 10 -

testified that she has reinvented her business to make the

collectibles activity more profitable.    In determining whether

Ms. Blanchette had the requisite profit objective to avoid the

limitations of section 183, we give limited weight to her

testimony and greater weight to the objective factors listed

above.    Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer

v. Commissioner, 78 T.C. 642 (1982), affd. without published

opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income

Tax Regs.    We discuss each of the enumerated factors in turn.

     1.     Manner in Which the Activity Is Conducted

     That a taxpayer carries on an activity in a businesslike

manner, maintains complete and accurate books and records, and

changes operating methods to increase profitability may indicate

that an activity is engaged in for profit.    Engdahl v.

Commissioner, 72 T.C. 659, 666-667 (1979); sec. 1.183-2(b)(1),

Income Tax Regs.

     Petitioners separated their personal finances from Ms.

Blanchette’s collectibles activity and kept records of the income

and expenses associated with that activity.    Those records,

however, basically served to substantiate the expenses which

petitioners claimed on their Federal income tax returns.    The

existence of a separate bank account and credit card, we believe,

facilitated the ease of recordkeeping.    However, as we have

previously recognized:
                                - 11 -

          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. * * * [Burger v. Commissioner, T.C. Memo.
     1985-523, affd. 809 F.2d 355 (7th Cir. 1987).]

Ms. Blanchette undertook no such financial analysis.     She did not

prepare budgets, income statements, balance sheets, forecasts, or

any other financial statement which would lead us to believe that

she used her accounting records to improve her bottom line.      The

lack of financial analysis weighs against the existence of a

trade or business during the subject years.     See Filios v.

Commissioner, T.C. Memo. 1999-92, affd. 224 F.3d 16 (1st Cir.

2000); Sullivan v. Commissioner, T.C. Memo. 1998-367, affd.

without published opinion 202 F.3d 264 (5th Cir. 1999).

     Petitioners contend that the online expansion of Ms.

Blanchette’s collectibles activity demonstrates that she sought

to improve the profitability of her activity during the subject

years.    We disagree.   The adaptation of Ms. Blanchette’s

collectibles activity online occurred some time between 1996 and

2000.    Since she moved her collectibles activity online, we have

found no significant undertakings on the part of Ms. Blanchette

to improve her overall profitability.     To the contrary, she

continued to add to her inventory without due regard for the

losses she repeatedly incurred.     This factor favors respondent.
                              - 12 -

     2.   Ms. Blanchette’s Expertise

     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.

     Ms. Blanchette testified that she consulted with other

science fiction memorabilia collectors about her activity.

However, she never consulted with accountants, lawyers, or

business advisers about her activity.     The failure to procure

objective business advice is a negative factor while her

consultation with other collectors is a positive consideration.

This factor is neutral.

     3.    Ms. Blanchette’s Time and Effort

     The fact that a taxpayer devotes much personal time and

effort to carrying on an activity may indicate a profit

objective, particularly where that activity does not involve

substantial personal or recreational aspects.     Sec. 1.183-

2(b)(3), Income Tax Regs.   That Ms. Blanchette devoted

significant personal time and effort to collecting science

fiction memorabilia supports her claim that she entered into the

collectibles activity with a profit objective.     See id.   However,

as we discuss below, collecting science fiction memorabilia has

substantial personal or recreational aspects for Ms. Blanchette.

See id.   Thus, this factor is neutral.
                                - 13 -

     4.     Expectation That Assets Will Appreciate in Value

     A taxpayer’s expectation that assets used in an activity may

appreciate in value to create an overall profit may indicate a

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

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

     Our decision in Kling v. Commissioner, T.C. Memo. 2001-78,

is illustrative.    Therein, we decided whether a taxpayer who

collected sports memorabilia with the hope that his collection

would appreciate in value was engaged in a trade or business.

Over the years, Mr. Kling sold only a few items from his

collection and retained much more than he sold.    As compared with

his purchases, the selling of memorabilia was sporadic.    Mr.

Kling amassed items for his collection (including thousands of

baseball photographs and programs) without any plan to sell those

items at any date in the foreseeable future and without

consideration for the costs of paying to store those items.

Balancing the factors of section 1.183-2(b), Income Tax Regs., we

held that Mr. Kling’s memorabilia activity did not rise to the

level of a trade or business.

     Similar to Mr. Kling, petitioners effectively argue that the

losses Ms. Blanchette has sustained over the years do not

indicate a lack of profit objective because she intended to earn

a profit on the overall appreciation of her collection.    We

disagree.    First, even though a portion of Ms. Blanchette’s
                               - 14 -

collection was worthless, she did not liquidate those items and

reinvest the proceeds in other collectibles with potential for

real appreciation.

     Second, Ms. Blanchette’s expectation of future appreciation

in her collection is vague.    Petitioners presented a generalized

list of Ms. Blanchette’s collection but did not include an

itemized list of the individual memorabilia making up that

collection.    The failure to introduce such an itemized list or to

provide testimony as to the value of specific components of the

collection creates a presumption that no such list was kept or

that it was not favorable to petitioners’ position.    See Wichita

Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),

affd. 162 F.2d 513 (10th Cir. 1947).    Without such a list, Ms.

Blanchette had no apparent means of tracking appreciation in

individual items such that she knew which items to hold and which

assets to sell.

     Finally, we believe that if Ms. Blanchette engaged in the

collectibles activity for long-term appreciation, she would have

insured her collection, as she had done in the late 1990s and

early 2000s.    No such insurance policy was maintained, suggesting

that Ms. Blanchette was not concerned with protecting her

investment.    Such behavior is inconsistent with investment for

long-term appreciation.    This factor favors respondent.
                                - 15 -

     5.    Ms. Blanchette’s Success in Similar Activities

     Although an activity is unprofitable, the fact that a

taxpayer has previously converted similar activities from

unprofitable to profitable may show a profit objective.     Sec.

1.183-2(b)(5), Income Tax Regs.    Petitioners offered no evidence

regarding the success of Ms. Blanchette in comparable activities.

Thus, this factor is neutral.

     6.    Activity’s History of Income and/or Losses

     The fact that a taxpayer incurs a series of losses beyond an

activity’s startup stage may indicate the absence of a profit

objective as to that activity unless the losses can be blamed on

unforeseen or fortuitous circumstances beyond the taxpayer's

control.   Hildebrand v. Commissioner, 28 F.3d 1024, 1027 (10th

Cir. 1994), affg. Krause v. Commissioner, 99 T.C. 132 (1992);

sec. 1.183-2(b)(6), Income Tax Regs.

     Petitioners contend that their gradual increase in gross

receipts and profits in recent years evidences a bona fide profit

objective.   We disagree.   First, while the increase in gross

receipts in isolation may demonstrate growth in a business, Ms.

Blanchette’s operation of the collectibles activity in a net loss

position and her failure to take any remedial measures to correct

those losses evidence a lack of profit objective.    Second, the

effort and time which Ms. Blanchette has expended on her

collectibles activity, when weighed against the nominal profits
                              - 16 -

earned, do not reflect a predominant, primary, or principal

profit objective.   Ms. Blanchette worked on the collectibles

activity between 2,100 and 2,800 hours per year.    Thus, even in

the most profitable of years, she earned between 27 cents and 36

cents per hour for her efforts, not to mention the time and

effort spent by Mr. Blanchette.4   But for the corresponding tax

benefit to offset Mr. Blanchette’s salary, we believe there was

no profit objective in Ms. Blanchette’s behavior.

     Third, petitioners present no forecasts, budgets, or other

financial analyses to support Ms. Blanchette’s blanket assertion

that she expects future growth in her collectibles activity

sufficient to recoup losses sustained in prior years.   See

Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), affd. 379

F.2d 252 (2d Cir. 1967).   Even assuming arguendo that Ms.

Blanchette continued to earn profits commensurate with her

highest grossing year, it would take Ms. Blanchette approximately

400 years to recoup the losses incurred between 1992 and 2007.5

Ms. Blanchette testified at trial, without elaboration, that the

losses which she sustained in operating AWIT were attributable to

a number of factors beyond her control.   The record does not




     4
      Ms. Blanchette’s hourly wage is calculated by dividing the
profit she reported in 2008 by the total hours worked.
     5
      The recoupment period is determined by dividing estimated
losses of $300,000 by net income of $745.
                               - 17 -

support the existence of any such fortuitous circumstances, and

we decline to infer them.    This factor favors respondent.

     7.     The Amounts of Occasional Profits

     The amount of profits earned in relation to the amount of

losses incurred, the amount of the investment, and the value of

the assets in use may indicate a profit objective.      See sec.

1.183-2(b)(7), Income Tax Regs.

     Between 1992 and 2007 Ms. Blanchette failed to realize a

profit on her collectibles activity.      Even the nominal profits

earned in 2009 and 2010 were substantially disproportionate to

the amount of time and effort she expended on her collectibles

activity.    We do not believe that the promise of annual profits

of $745 is sufficient to outweigh the absence of profits for 16

years.    See McKeever v. Commissioner, T.C. Memo. 2000-288.       This

factor favors respondent.

     8.     Taxpayer’s Financial Status

     That a taxpayer has substantial income from sources other

than the activity may indicate that the activity is not engaged

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

especially so where losses from the activity generate substantial

tax benefits or where there are personal or recreational elements

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

     During the subject years, Mr. Blanchette earned a steady

salary as a software engineer on which petitioners subsisted.
                              - 18 -

Mr. Blanchette’s salary enabled Ms. Blanchette to pursue her

longtime passion of collecting science fiction memorabilia while

the reported losses from that activity were used to reduce their

taxable income.   See Giles v. Commissioner, T.C. Memo. 2005-28.

This factor favors respondent.

     9.   Elements of Personal Pleasure

     The presence of personal pleasure or recreation from an

activity may indicate the absence of a profit objective.   Sec.

1.183-2(b)(9), Income Tax Regs.   The mere fact that a taxpayer

derives personal pleasure from an activity, however, does not

necessarily mean that the taxpayer lacks a profit objective with

respect to that activity.   “[A] business will not be turned into

a hobby merely because the owner finds it pleasurable; suffering

has never been made a prerequisite to deductibility.”    Jackson v.

Commissioner, 59 T.C. 312, 317 (1972).

     Ms. Blanchette is passionate about science fiction, and she

derives great pleasure from her collectibles activity.   This

enjoyment, however, cannot overcome the complete disregard for

profit objective with which she has conducted her activity.

Given the small profit potential and significant satisfaction

derived from the collectibles activity, we are confident that it

is Ms. Blanchette’s quest for personal gratification that keeps

her going and not any bona fide profit objective.   See Betts v.

Commissioner, T.C. Memo. 2010-164; cf. Maximoff v. Commissioner,
                               - 19 -

T.C. Memo. 1987-155 (relying on the taxpayer’s abandonment of an

unprofitable business venture as proof that the taxpayer was

engaged in a trade or business).    This factor favors respondent.

       Balancing the above factors and the facts and circumstances

in this case, we conclude that Ms. Blanchette did not pursue her

collectibles activity during the subject years with a

predominant, primary, or principal profit objective.    Petitioners

are therefore not entitled to a deduction under section 162 or

212.    It follows naturally that section 183 limits the allowable

deductions to the amount of gross income generated from that

activity.    We have considered all arguments made by the parties

and to the extent that we have not specifically addressed them,

we conclude that they are without merit.

       To reflect the foregoing,

                                           Decision will be entered

                                     for respondent.
