                  T.C. Summary Opinion 2001-126



                     UNITED STATES TAX COURT


                MELVIN W. GARRETT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 1533-00S.                     Filed August 16, 2001.


     Melvin W. Garrett, pro se.

     Dustin M. Starbuck, for respondent.


     POWELL, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.1    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.




1
   Unless otherwise indicated, subsequent section references are
to the Internal Revenue Code in effect for the years in issue.
                                 - 2 -

     Respondent determined deficiencies and penalties under

section 6662(a) for negligence in petitioner’s 1996 and 1997

Federal income taxes as follows:

     Year        Deficiency                 Penalty

     1996        $3,336                     $667.20
     1997         2,524                      504.80

     The issues are whether petitioner is entitled to:      (1)

Dependency exemption deductions for his mother (Dorothy Garrett)

and his brother (Neil Garrett) for the years in issue; (2) head

of household filing status for the years in issue; (3) Schedule C

loss deductions of $15,254 and $10,363 for 1996 and 1997,

respectively; and (4) whether petitioner is liable for the

penalties under section 6662(a) for the years in issue.

Petitioner resided in Roanoke, Virginia, at the time he filed the

petition in this case.

     Petitioner is a school teacher.      During 1996 petitioner

taught in the Alexandria, Virginia, school system.      During 1997

petitioner taught in the Alexandria and Roanoke, Virginia, school

systems, but it is unclear when he went to Roanoke.      Petitioner

rented his residence in Alexandria.      According to petitioner,

when in Alexandria, he would go to Roanoke every weekend and stay

at a house his mother owned and occupied and that his brother

also occupied.   Presumably when he was employed in Roanoke, he

stayed in the same house.     For 1996 and 1997, petitioner reported
                               - 3 -

wage income of $29,594 and $20,024, respectively.     During 1997

petitioner also received unemployment compensation of $3,390.

      Petitioner’s mother received Social Security benefits of

$5,598 and $5,7602 for 1996 and 1997, respectively.    She also

received retirement benefits of $1,754 for each year.

Petitioner’s brother also received Social Security benefits, but

the amounts do not appear in the record.

      Petitioner claimed his mother and brother as dependents and

also claimed head of household filing status based on their

dependency exemptions.   Respondent disallowed both dependency

exemption deductions and determined that petitioner could not

claim head of household filing status.

      Petitioner was also engaged in an activity that he described

as follows:

           Well, I do self esteem workshops, I do consulting on
      problems, social issues, I do behavior modification if
      people are having problems with the kids.

      *         *         *        *         *           *          *

           Well, see, I sell products, too, fragrances, oils,
      incense, and things like that.

Petitioner commenced this activity in 1986, and, according to

petitioner, the activity has never shown a profit.     Petitioner

did not maintain a separate checking account for this activity




2
    Figure rounded to the nearest dollar.
                                  - 4 -

and kept no ledgers or other accounting records concerning the

activity.

     On his 1996 amended Schedule C, Profit or Loss From

Business, petitioner reported the following:

     Gross receipts                              $1,209
     Cost of goods sold                           1,020
     Gross income                                   189

     Less:
             Advertising            $580
             Car expenses          1,890
             Insurance               400
             Mortgage              6,540
             Other interest        1,368
             Rent                  1,680
             Repairs               1,250
             Taxes                   250
             Utilities             1,296         15,254

     Loss                                        15,065

The amount deducted as a “mortgage” expense in 1996 was for rent

petitioner paid in Alexandria.     None of the other items were

specifically identified.      For the 1997 taxable year, petitioner

filed electronically, and the only figure in the record is a

claimed Schedule C loss deduction in the amount of $10,174.

Respondent disallowed the deduction claimed for each year.

                               Discussion

A. Dependency Exemptions and Filing Status

     Section 151(c) allows a taxpayer to deduct an exemption

amount for each dependent as defined in section 152.      Section

152(a) defines a dependent, inter alia, as a brother or mother

“over half of whose support, for the calendar year in which the
                                - 5 -

taxable year of the taxpayer begins, was received from the

taxpayer”.   In determining whether petitioner supplied over half

of the support, Social Security benefits received by the brother

or mother are considered.    See Carter v. Commissioner, T.C. Memo.

1998-243, affd. per curiam without published opinion 187 F.3d 640

(8th Cir. 1999).

     When petitioner was asked how much support he provided, his

answer was “Over half their income. * * *   It was over * * *

$7,000" for each.    Putting aside the fact that we simply do not

believe that petitioner spent $14,000 on his brother and mother,3

there is nothing in the record to indicate what the total support

was for either.    Accordingly, petitioner has not established that

either his brother or his mother received more than half of their

support from petitioner.    Respondent’s determination with respect

to the dependency exemption issue is sustained.

     Petitioner calculated his 1996 and 1997 Federal income tax

liabilities using the head of household filing status based on



3
   For example, for 1996 petitioner reported income of $29,594
and a loss of $15,065 from Schedule C, Profit or Loss From
Business, for a total income of $14,529. He had approximately
$2,500 withheld for Social Security and medicare taxes, $1,138
withheld for State income taxes, and $3,326 withheld for Federal
income taxes. If he had paid $14,000 for the support of his
brother and mother, the total amounts withheld and paid to them
($20,964) would have exceeded his total income. When this was
pointed out, petitioner then claimed that he also received
approximately $30,000 in disability benefits from the Department
of Veterans Affairs. There is nothing in the record, except
petitioner’s naked testimony, to support this claim.
                                - 6 -

his brother and mother being his dependents.       Section 2(b)(1)(A)

and (B), in pertinent part, defines a head of household as an

unmarried individual who

      maintains as his home a household which constitutes for more
      than one-half of such taxable year the principal place of
      abode, as a member of such household, of–-

      *         *          *        *          *           *            *

                 (ii) any * * * dependent of the taxpayer, if the
            taxpayer is entitled to a deduction for the taxable
            year for such person under section 151 * * *

           (B) maintains a household which constitutes for such
      taxable year the principal place of abode of the father or
      mother of the taxpayer, if the taxpayer is entitled to a
      deduction for the taxable year for such father or mother
      under section 151.

      Ignoring the question whether petitioner even maintained a

residence for his brother and/or his mother, as we have already

discussed, petitioner is not entitled to claim either as a

dependent, and we sustain respondent’s determination that

petitioner is not entitled to head of household filing status for

the years in issue.

B.   Schedule C Losses

      Section 162(a) allows a deduction for ordinary and necessary

expenses paid or incurred in carrying on a trade or business.

Generally, under section 183(a) and (b) an individual is not

allowed deductions attributable to an activity “not engaged in

for profit” except to the extent of gross income generated by the

activity.   Section 183(c) defines an activity “not engaged in for
                               - 7 -

profit” as any activity other than one for which deductions are

“allowable * * * under section 162 or under paragraph (1) or (2)

of section 212.”   Essentially, the test for determining whether

an activity is engaged in for profit is whether the taxpayer

engages in the activity with the primary objective of making a

profit.   Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir.

1990), affg. 91 T.C. 686 (1988).   Although the expectation need

not be reasonable, the expectation must be bona fide.       See Hulter

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

resolving the question, greater weight is given to the objective

facts than to the taxpayer’s statement of intentions.       See Thomas

v. Commissioner, 84 T.C. 1244, 1269 (1985), affd. 792 F.2d 1256

(4th Cir. 1986).

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

nonexclusive list of factors to be used in determining whether an

activity is engaged in for profit.     These factors are:   (1) The

manner in which the taxpayer carries 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 assets used in the activity may appreciate

in value; (5) the success of the taxpayer in carrying on similar

or dissimilar activities; (6) the history of income or losses

with respect to the activity; (7) the amount of occasional

profits, if any; (8) the financial status of the taxpayer; and
                               - 8 -

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

factor, nor simple numerical majority of factors, is controlling.

See Cannon v. Commissioner, 949 F.2d 345, 350 (10th Cir. 1991),

affg. T.C. Memo. 1990-148.

     From what is in the record, we have great reservations

whether there was even a trade or business activity here, to say

nothing of a trade or business entered into for profit.    There

are no records or other indicia of a business operation.

Furthermore, from petitioner’s brief description of the activity,

the deductions claimed (e.g., repairs, utilities, etc.) would

seem not to have any nexus with that activity.   The “mortgage”

expense was for the rent of petitioner’s lodging in Alexandria

where he was employed.   This is nothing more than a disingenuous

subterfuge for deducting personal living expenses.   Cf. sec. 262.

     Even if this activity were a trade or business, the history

of losses belies any notion that it was operated for profit.

While a person may start out with a bona fide expectation of

profit, even if it is unreasonable, there is a time when, in

light of the recurring losses, the bona fides of that expectation

must cease.   See Filios v. Commissioner, 224 F.3d 16 (1st Cir.

2000), affg. T.C. Memo. 1999-92.   Ten years is time enough.   This

is particularly pertinent here where there is nothing in the

record to reasonably suggest that the activity, as petitioner
                                  - 9 -

operated it during the years in issue, had been, or would ever

be, profitable.

C.   Negligence

      Section 6662(a) provides that, if the section applies, there

is imposed a penalty in an amount equal to 20 percent of the

portion of the underpayment.      The penalty applies, inter alia, to

an underpayment due to negligence or disregard of the rules or

regulations.      See sec. 6662(b)(1).    The term “disregard” includes

“any careless, reckless, or intentional disregard.”       Sec.

6662(c).    Negligence includes “any failure to make a reasonable

attempt to comply” and also includes any failure by the taxpayer

to keep adequate books and records or to substantiate items

properly.   Id.; sec. 1.6662-3(b)(1), Income Tax Regs.

      While petitioner’s returns appear to have been prepared by a

professional tax return preparing organization, the information

was derived from petitioner.      We are quite convinced that

petitioner was not very candid with the return preparer.         We

point to petitioner’s claim of a deduction on his Schedule C for

his rent while employed in Alexandria, his total lack of adequate

books and records concerning the Schedule C activity, and his

total unawareness of the details of his claims of dependents.

This is nothing more that a careless, reckless, and intentional

disregard of the rules and regulations.       Respondent’s
                             - 10 -

determination with respect to the penalties under section 6662(a)

for the years in issue is sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                        Decision will be entered

                                   for respondent.
