                         T.C. Memo. 2011-37



                       UNITED STATES TAX COURT



  WILLARD JAMES COLLINS AND BARBARA N. COLLINS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9268-08.                 Filed February 9, 2011.



     Willard James Collins and Barbara N. Collins, pro se.

     Elke E. Franklin, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PARIS, Judge:    Respondent determined deficiencies of $5,863

and $6,341 in petitioners’ Federal income taxes for 2004 and

2005, respectively.   After concessions1 the issues before this

Court are:   (1) Whether petitioners are entitled to their claimed


     1
      Petitioners conceded that they received dividend income of
$21 and interest income of $127 in 2005.
                                    - 2 -

tax credit under section 292 for the domestic production and sale

of fuel derived from nonconventional sources for 2004 and 2005,

respectively; (2) whether petitioners can deduct payments of

$4,691 and $5,061 made in 2005 and 2006, respectively, as

expenses of a trade or business under section 162 or as

investment expenses under section 212; and (3) whether

petitioners can deduct as theft losses under section 165 for 2004

or 2005 the payments made to Gas Recovery Partners 2GP in 2005

and 2006.

                              FINDINGS OF FACT

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

Petitioners are husband and wife.        They timely filed joint

Federal income tax returns for 2004 and 2005.        Petitioners

resided in Texas at the time they filed the petition.

            For 20 years petitioners used the tax preparation services

of Mr. Tax of America, owned by Edward Wayne Adams.        Mr. Adams

prepared their tax returns for those years, including 2004 and

2005.        In March 2005, while preparing petitioners’ 2004 tax

return, Mr. Adams recommended claiming tax credits for the

production and sale of fuel from a nonconventional source (FNS

tax credit) to reduce the tax petitioners owed for that year.

Mr. Adams provided documents discussing energy credits and Gas


        2
      All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
                               - 3 -

Recovery Partners 2GP’s landfill gas rights and assignments.    Yet

none of those documents concerned the landfills in which

petitioners later invested.

     On April 9, 2005, petitioners issued a check for $4,691 to

Gas Recovery Partners 2GP, which cashed it on April 18, 2005.

Mr. Adams provided the “Support Statement for Section 29 FNS Tax

Credits” that stated that Gas Recovery Partners 2GP owned biomass

gas wells in Puerto Rico (Puerto Rico wells) and that Mr. Collins

was entitled to a section 29 tax credit.    The statement

identified the Puerto Rico wells’ Environmental Protection Agency

(EPA) designation as PRD98051213 ERC #QF98-71-RD 874 7.3 Hoyo

Mula Wad and calculated the allowable FNS tax credit using Mr.

Collins’ 0.001794511 share ownership interest in that landfill.

Petitioners did not inquire into Gas Recovery Partners 2GP’s

activities or the purported source of the FNS tax credits.     Nor

did Mr. Adams and petitioners ascertain whether Gas Recovery

Partners 2GP was the owner of the landfill that was supposedly

generating the nonconventional fuel.   Furthermore, no contract

was executed to document the transaction.

     Petitioners followed Mr. Adams’ advice and claimed the FNS

tax credit for 2004.   Petitioners timely filed a 2004 joint

Federal income tax return indicating that they earned $46,636 of

taxable income and owed $6,279 of tax and claiming a $5,863 FNS

tax credit and $4,569 of Federal income tax withholding.    On the
                                - 4 -

basis of that information petitioners would receive a refund of

$4,153.

     For 2005 petitioners again followed Mr. Adams’ advice but

claimed the FNS tax credit for a landfill in Ohio (Ohio

landfill).    On April 3, 2006, petitioners issued a check for

$5,061 to Gas Recovery Partners 2GP, which cashed it on April 14,

2006.    Mr. Adams provided the “Support Statement for Section 45

FNS Tax Credits”3 that indicated that Gas Recovery Partners 2GP

owned the biomass gas wells and that petitioners were entitled to

the section 45 tax credit.    The statement also identified the EPA

designation of the Ohio landfill as Ottawa Co. LF#12693-1189 Port

Clinton, Montgomery Co.    Again, Mr. Adams did not provide any

other information on whether Gas Recovery Partners 2GP owned the

Ohio landfill petitioners claimed as the purported source for the

production of the qualifying fuel, and petitioners did not

inquire into Gas Recovery Partners 2GP’s activities or its

ownership of the Ohio landfill.    Mr. Adams also advised

petitioners to file a Schedule C, Profit or Loss From Business,

reflecting a profit or loss from a business and indicating that



     3
      The Energy Policy Act of 2005, Pub. L. 109-58, sec. 1322,
119 Stat. 1011, redesignated sec. 29 as sec. 45K, effective for
fuel produced and sold from nonconventional resources after Dec.
31, 2005. However, sec. 45K or 29 differs from sec. 45, because
sec. 45 generally allows a tax credit for electricity generated
from certain renewable resources. All supporting documents
attached to petitioners’ 2005 return cite sec. 45 as the
authority for claiming the FNS tax credit for 2005.
                               - 5 -

they operated an “alternative energy” activity at their home

despite the fact that they never engaged in such an activity.

Petitioners timely filed their 2005 joint Federal income tax

return, stating that they earned $53,142 of taxable income and

owed $7,239 of tax and claiming a $6,326 FNS tax credit and

$4,171 of Federal income tax withholding.    Although petitioners

never received any income from the “alternative energy” activity,

their Schedule C indicated that from the activity they earned

gross income of $1,960 and incurred “other expenses” of $1,901,

resulting in net income of $59.   Those expenses consisted of a

production cost of $1,695, a gas blower expense of $47, an air

compressor expense of $35, an office expense of $6, a shop cost

of $22, a utilities expense of $73, a testing cost of $19, and a

line fee of $4.   On the basis of that information, petitioners

would receive a refund of $3,258.

     By 2007 petitioners became suspicious of Mr. Adams and the

venture and terminated their relationship with him.   Petitioners

did not know that what they had purchased was a sham.   By notice

dated March 14, 2008, respondent determined deficiencies of

$5,863 and $6,341 in petitioners’ Federal income taxes for 2004

and 2005, respectively.   That notice informed petitioners that

their FNS tax credit was disallowed because they had failed to

establish their entitlement to the credit.
                                - 6 -

     The Puerto Rico landfill did not produce or sell any

qualifying fuels for 2004 and 2005.       Also, for 2004 and 2005,

neither petitioners nor Gas Recovery Partners 2GP had an

ownership interest in the Puerto Rico and Ohio landfills.

                                OPINION

     Generally, the Commissioner’s determination of a Federal tax

deficiency is presumed correct, and the taxpayers must bear the

burden of proving otherwise.    See Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933).

I. Section 29 and 45K Credit

     Subject to various limitations, former section 29,

redesignated section 45K for years ending after December 31,

2005, provided a credit for producing fuel from a nonconventional

source.   The credit is based on the fuel produced and

attributable to the taxpayer.    Because neither petitioners nor

the person they dealt with or the partnership they paid had an

interest in a fuel-producing source and no fuel was produced, the

complexities of the credit provision need not be explored here.

See generally S/V Drilling Partners v. Commissioner, 114 T.C. 83

(2000); Nielson-True Pship. v. Commissioner, 109 T.C. 112, affd.

sub nom. True Oil Co. v. Commissioner, 170 F.3d 1294 (10th Cir.

1999).
                               - 7 -

      Petitioners stipulated that they did not own the landfills

in either Puerto Rico or Ohio and that the Puerto Rico landfill

in which they allegedly invested did not produce any alternative

fuels.   On the basis of the stipulated facts, petitioners are not

entitled to the FNS tax credits under section 29 for 2004 and

2005.

II.   Deductions Under Sections 162 and 212

      Section 162 provides for a deduction for all ordinary and

necessary expenses paid or incurred during the year in carrying

on any trade or business.   Section 212 allows a deduction for all

ordinary and necessary expenses incurred during the year for the

production or the collection of income.   Although these two

sections provide for deductions of ordinary and necessary

expenses, they are considered in pari materia, requiring

petitioners to engage in those activities with a profit-seeking

motive, independent of tax savings.    See Beck v. Commissioner, 85

T.C. 557, 569-570 (1985); sec. 1.183-2(b), Income Tax Regs.

Otherwise, any expenses incurred in an activity entered into

without a profit-objective would be reviewed under section 183.

The profit-objective analysis under section 183 governs

particular shelter investments.   See Beck v. Commissioner, supra

at 569 n.6; Schwartz v. Commissioner, T.C. Memo. 1991-380.     While

a reasonable expectation of profit is not required, petitioners’

objective of making a profit must be bona fide.    Fox v.
                                 - 8 -

Commissioner, 80 T.C. 972, 1006 (1983), affd. without published

opinion 742 F.2d 1441 (2d Cir. 1984), affd. sub nom. Barnard v.

Commissioner, 731 F.2d 230 (4th Cir. 1984), affd. without

published opinion sub nom. Hook v. Commissioner, Kratsa v.

Commissioner, Leffel v. Commissioner, Rosenblatt v. Commissioner,

Zemel v. Commissioner, 734 F.2d 5, 6-7, 9     (3d Cir. 1984).

Whether petitioners possessed the requisite profit objective is a

question of fact to be resolved on the basis of all the facts and

circumstances.     See Beck v. Commissioner, supra at 570.   Although

no one factor is determinative, greater weight must be given to

objective facts than to petitioners’ mere statement of their

intent.   See id.

     No deduction is here allowable for petitioners’ $6,341

payment made in 2006 because that payment was not made during the

years at issue.     As for the 2005 payment, the Court finds that

this payment is not deductible under either section 162 or

section 212.   The record indicates that petitioners did not

engage in the activity for the primary purpose of seeking a

business profit.    Petitioners had no knowledge regarding the

partnership, nor did they attempt to inquire into the fuel

production activity or seek expert advice on the production of

nonconventional fuel.    Petitioners relied on Mr. Adams

exclusively for tax advice.     Although petitioners claimed expense

deductions for operating a Schedule C activity at their home, the
                                 - 9 -

record does not indicate that petitioners actually operated such

an activity at their home or received any income from such an

activity.    For those reasons, respondent conceded that

petitioners are not subject to tax on $59 of income attributed to

an “alternative energy” activity reported on Schedule C.

Furthermore, petitioners did not assume any risk or incur net

expenses as a result of claiming a credit for 2005.    They paid

Gas Recovery Partners 2GP less than their claimed FNS tax credit.

Petitioners engaged in this activity primarily for tax purposes--

to offset their income.     The 2005 payment is not allowable as a

deduction under section 162 or section 212.

III. Loss Deduction Under Section 165

     Section 165(a) provides a deduction for any loss sustained

during the taxable year and not compensated for by insurance or

otherwise.   Section 165(c) limits the losses to those incurred in

a trade or business, those incurred in transactions entered into

for profit but not connected with a trade or business, and those

losses of property due to fire, storm, shipwreck, or other

casualty or from theft.   As discussed above, petitioners did not

operate a trade or business or engage in an activity with a

profit objective, so petitioners instead seek a deduction under

the theft loss provision.    Section 165(e) provides that any loss

arising from the theft shall be treated as sustained during the

taxable year in which the taxpayer discovers such loss.
                             - 10 -

     Petitioners’ losses of the payments made in 2005 and 2006

cannot be deducted as theft losses under section 165(e) for 2004

and 2005, respectively, because there is no evidence that they

discovered the losses during 2004 and 2005.

     To reflect the foregoing,


                                        Decision will be entered

                                   for respondent.
