                  T.C. Memo. 1998-307



                UNITED STATES TAX COURT



           WALTER J. PISZCZEK, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 14735-94.                    Filed August 24, 1998.




Ronald O. W. Ylitalo, for petitioner.

William F. Hammack, for respondent.


     P, an airline pilot, spent several years and
substantial sums attempting to develop a wind-powered
distillery for the production of ethanol. For 1988
through 1990, P claimed research and experimentation
deductions under sec. 174, I.R.C., in the amounts of
$44,905, $14,894, and $13,780 respectively. R
disallowed these deductions based on a determination
that P did not expend these amounts in connection with
a trade or business, since P lacked a profit objective.
Held: P's wind-powered distillery activity was not
profit motivated.
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               MEMORANDUM FINDINGS OF FACT AND OPINION



     LARO, Judge: Walter J. Piszczek petitioned the Court to

redetermine deficiencies in his 1988 through 1990 Federal income

taxes, an addition to tax, and accuracy-related penalties as

follows:

                                     Addition       Penalties
                                       Sec.            Sec.
     Year        Deficiencies         6653(a)          6662

     1988           $15,910              $796              ---
     1989             6,207               ---            $1,196
     1990             5,310               ---               944

Respondent reflected these determinations in a notice of

deficiency issued to petitioner on May 20, 1994.

     We must decide the following issues:

     1.    Whether petitioner engaged in a Windmill Distillery

activity with an actual and honest objective of making a profit.

We hold he did not.

     2.    Whether petitioner is entitled to deduct certain other

items in amounts greater than the amounts respondent determined

were proper.    We hold he is not.

     3.    Whether petitioner is liable for the addition to tax for

negligence and accuracy-related penalties for negligence

determined by respondent.     We hold he is.

                          FINDINGS OF FACT

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

The stipulated facts and the exhibits submitted therewith are
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incorporated herein by this reference.   All section references

are to the Internal Revenue Code in effect for the years in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure, unless otherwise indicated.

     Petitioner resided in Osceola, Wisconsin, when he filed the

petition in this case.    He was employed as a pilot for Northwest

Airlines, flying out of Minneapolis, Minnesota, during the years

in issue.   Osceola, Wisconsin, is approximately 60 miles from

Minneapolis, Minnesota.

     Petitioner conceived the idea of a wind-powered distillery

in 1977 to produce ethanol, an alcohol-based fuel.    In 1980, he

began his efforts to construct such a distillery on a parcel of

land across the road from his residence.   The only building

permit petitioner has secured for the property in question is one

which allows him to construct a single family residence.

Petitioner has not sought permits from the Bureau of Alcohol,

Tobacco and Firearms (ATF) to produce alcohol.   ATF has informed

petitioner that he may not commence alcohol production without

ATF approval.   Petitioner did not seek approval from the State of

Wisconsin to store ethanol fuel on his property despite being

informed by a State inspector that approval was required for

underground storage tanks such as the ones he was maintaining on

his property.

     Petitioner has degrees in aeronautical engineering and law.

He attended, but did not earn a degree from, Massachusetts
                                - 4 -


Institute of Technology, and was, at one time, employed as an

engineer by the National Aeronautics and Space Administration.

     For the period 1981 through 1994, petitioner has reported

minimal income, and expenses approximating $225,000, in

connection with his Windmill Distillery activity.    He did not

maintain a separate bank account for the activity.

     Petitioner sought to determine the economic viability of his

Windmill Distillery approach to producing ethanol by preparing a

series of calculations based on data drawn from Government

publications and other publicly available literature and by

informally surveying local farmers about costs of "distressed

corn" that he might use for feedstock.   He also attempted to grow

Jerusalem Artichokes in order to test their viability as a

possible alternate feedstock.   He concluded that with the proper

facilities, he could produce alcohol at a cost of $1.04 per

gallon.   Petitioner never conducted any formal research as to the

marketability of the product he hoped to produce or as to the

cost and availability of necessary raw materials.

     During the years petitioner worked on this project, his

duties as an airline pilot generally required him to work 1-to

2-weeks at a time and allowed him to be off work during

alternating 1- to 2-week periods.   Petitioner's salary as a pilot

for the years 1988 through 1990, was $133,117, $132,978, and

$146,537, respectively.   Petitioner devoted significant amounts

of time to his Windmill Distillery activity during the years in

issue.
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     Petitioner discussed his project with an architect, but did

not retain him because the architect considered the project "too

risky".   In 1977, petitioner had a patent lawyer conduct a

patentability search relating to "contoured objects such as

airfoils".    The attorney advised him that there were "several

patents purportedly achieving similar results."         Following that

consultation in 1977, petitioner did not contact any patent

lawyer.

     Through the end of 1994, the Windmill Distillery was not

operational and had produced no alcohol.

     For the years in issue, petitioner reported no gross income

while claiming the following deductions related to his Windmill

Distillery activity:

                                        1988        1989      1990

Research
  & development                     $44,905        $14,894   $13,780
Car & truck expense                      81           ---      ---
Depreciation                            387            387       440
Dues & publications                      80           ---       ---
Insurance                                55          1,863      ---
Legal & professional                  1,640            309      ---
Office expense                          389            581      ---
Allowable meals
  & entertainment                            9         ---      ---
Postage                                    ---          33        71

     For 1988 through 1990, petitioner claimed business-related

meal expenses in excess of employer reimbursements in the amounts

of $609, $1,464 and $589 respectively.         Respondent allowed

petitioner's meal expense deductions to the extent they were

reimbursed.   Respondent disallowed the excess deductions.
                               - 6 -


     For 1990, petitioner deducted eyeglass expense of $208 and

an attorney license fee of $983 as unreimbursed employee business

expenses.

                              OPINION

Wind-Powered Distillery Activity

     The first issue for decision is whether petitioner is

entitled to the deductions he claimed in 1989 through 1990 with

respect to the wind-powered distillery project.     Petitioner must

prove respondent's determination was in error.    Rule 142(a);

Welch v. Helvering, 290 U.S. 111 (1933).   Petitioner argues that

he made the expenditures in connection with his trade or business

of inventing, and therefore section 174 allows him to deduct them

currently.   Respondent argues that none of the deductions claimed

are allowable since petitioner failed to establish that any of

the expenditures were made in connection with a trade or

business.

     In litigation concerning earlier tax years, petitioner was

found to have carried on his Windmill Distillery activity without

a profit objective.   Piszczek v. United States, 75 AFTR 2d 95-

966, 95-1 USTC par. 80,185 (W.D. Wis. 1995), affd. in part, revd.

and remanded in part on unrelated issue by unpublished order

76 AFTR 2d 95-7807, 96-1 USTC par. 50,016 (7th Cir. 1995).

Petitioner has not substantially changed the way he conducts this

activity so as to justify a contrary finding for the years in

issue.
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     Under section 174, a taxpayer may deduct research or

experimental expenditures.   To be eligible to claim this

deduction, the taxpayer must pay or incur the expenditures during

the taxable year in connection with his or her trade or business.

Sec. 174(a)(1).   Furthermore, section 174 does not apply to

expenses that are for acquiring or improving land or depreciable

property even though the land or property is to be used in

connection with a research or experimentation activity.     Sec.

174(c).

     The Supreme Court, in Snow v. Commissioner, 416 U.S. 500

(1974), clarified the meaning of the term "in `connection with

his trade or business".   In Snow, the Supreme Court compared the

"in `connection with his trade or business * * *" language of

section 174 with the "in carrying on a trade or business"

language of section 162 (Emphasis added); the latter section

allows an immediate deduction for ordinary and necessary business

expenses.    The Court concluded that in contrast with section 162,

section 174 does not require that the taxpayer be currently

producing or selling any product in order to claim a deduction.

     Following Snow v. Commissioner, supra, this Court has held

that the trade or business requirement is not eliminated under

section 174.   Rather, section 174 requires that the taxpayer's

activities be aimed at engaging in a trade or business at some

point.    Green v. Commissioner, 83 T.C. 667, 686 (1984).

     Petitioner contends that he entered into the Windmill

Distillery activity for profit and should, therefore, be allowed
                                - 8 -


to deduct his expenditures currently.    Respondent contends that

petitioner lacked the necessary profit objective.    Respondent

further contends that even if petitioner engaged in the Windmill

Distillery activity for profit, his expenditures were to acquire

or improve land or depreciable property and, therefore,

petitioner is not entitled to any deduction under section 174.

Since we agree with respondent that petitioner did not engage in

the activity for profit, we do not reach the question whether

petitioner's expenditures were to acquire or improve land or

depreciable property.

     In determining whether an activity is engaged in for profit

for purposes of section 174, courts have found it helpful to

consider the regulations issued, and cases that have arisen,

under section 183.   See, e.g., Nickeson v. Commissioner, 962 F.2d

973 (10th Cir. 1992), affg. Brock v. Commissioner, T.C. Memo.

1989-641; Independent Elec. Supply, Inc. v. Commissioner, 781

F.2d 724 (9th Cir. 1986), affg. T.C. Memo. 1984-472.    The section

183 cases indicate that whether an individual engages in an

activity for profit depends on whether he or she entertains an

actual and honest profit objective in engaging in the activity.

The taxpayer's expectations do not have to be reasonable or

realistic, but simply honest.     Burger v. Commissioner, 809 F.2d

355, 358 (7th Cir. 1987), affg. T.C. Memo. 1985-523.     Whether a

taxpayer conducts an activity with the requisite profit intent

rests on the facts of the case.     Golanty v. Commissioner, 72 T.C.

411, 426 (1979), affd. without published opinion 647 F.2d 170
                                - 9 -


(9th Cir. 1981).    "A taxpayer's mere statement of intent is given

less weight than the objective facts of the case."       Burger v.

Commissioner, supra at 358.

     In deciding whether an activity is engaged in for profit, we

may take into account the following nonexclusive factors:

(1) The manner in which the taxpayer carries on the activity;

(2) the expertise of the taxpayer or his or her adviser; (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 taxpayer's

history of income or losses in the activity; (7) the amount of

occasional profits, if any, that are earned; (8) the financial

status of the taxpayer; and (9) the elements of personal pleasure

or recreation.    Sec. 1.183-2(b), Income Tax Regs.   None of these

factors is dispositive, in and of itself, and a decision does not

rest on the number of factors satisfied.    Golanty v.

Commissioner, supra at 426; sec. 1.183-2(b)(3), Income Tax Regs.

     In applying these factors in the context of section 174, we

are mindful that the taxpayer's current activities need only be

aimed at enabling the taxpayer to engage in a trade or business

"at some time".    Green v. Commissioner, supra at 686.    With that

focus in mind, we will concentrate our analysis on the first five

factors mentioned above and on factors eight and nine.

     Petitioner contends he is in the trade or business of being

an inventor.   He argues, therefore, that the analysis of the
                              - 10 -


preceding factors should somehow be made differently in his case.

However, petitioner has submitted no evidence that he holds or

has applied for any patents or that he has ever developed for

profit any new device, process, or technology aside from the

Windmill Distillery activity in issue here.    To prevail,

petitioner must demonstrate an honest objective to profit by

developing his Windmill Distillery.

     We turn to a review of the relevant factors:

1.   Manner in Which the Activity Is Conducted

      Objective facts showing that a taxpayer carries on an

activity in a businesslike manner indicate a profit objective.

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

      In several respects, petitioner did not conduct his activity

in a businesslike fashion.

      The only evidence that petitioner ever attempted to

investigate the potential profitability of the venture consists

of a series of calculations he did at one point which indicated

that under some circumstances it would be possible to produce

alcohol for fuel at a cost of $1.04 per gallon.     In 14 years of

increasingly heavy expenditures, there is no indication

petitioner revisited those calculations in light of what he had

learned from his endeavors.   His investigation of costs for raw

materials was sketchy and informal.    Petitioner seems to have

done little more than telephone a few local farmers at one point

in this long-term project to find out the price at which

distressed corn was then selling. Though costs of competing fuels
                               - 11 -


were constantly fluctuating, petitioner seems to have been

indifferent to the realities of the marketplace.



     Petitioner did not secure any of the required permits for

the type of building he was constructing or the type of operation

he was conducting.   Petitioner did not even take the minimal step

of maintaining a separate bank account for this activity.

     This factor does not support a conclusion that petitioner's

activity was profit motivated.

2.   Expertise of Petitioner

      We consider the expertise of petitioner and the

professionals he consulted with respect to the technology he

sought to develop and with respect to his prospects for doing so

profitably.   Sec. 1.183-2(b)(2), Income Tax Regs; see Underwood

v. Commissioner, T.C. Memo. 1989-625; Burger v. Commissioner,

T.C. Memo. 1985-523, affd. 809 F.2d 355 (7th Cir. 1987).

      Petitioner had some relevant engineering experience, but he

lacked the expertise he would need to turn a workable device into

a commercially viable venture.   He did not consult with

professional advisers who would have been able to fill in the

gaps in his knowledge.

      This factor does not support a conclusion that petitioner's

activity was profit motivated.

3.   Time and Effort Spent in Conducting the Activity

      The fact that a taxpayer devotes much of his or her own time

to an activity may indicate a profit objective if the activity
                               - 12 -


does not have a substantial element of recreation.    The failure

of a taxpayer to devote substantial time to an activity may weigh

against a profit objective, unless, for example, the taxpayer

employs capable personnel to conduct the activity in his or her

stead.     Sec. 1.183-2(b)(3), Income Tax Regs.

     As an airline pilot working 1- to 2-weeks on and then 1- to

2-weeks off, petitioner had substantial blocks of time available

to devote to his Windmill Distillery activity.    He testified that

at certain points he "tried" to spend 35 to 40 hours a week on

the project, although he did not state how much time he actually

spent.    At certain points, he retained construction crews and

other workmen whose activities he oversaw.    Overall, it appears

petitioner devoted significant amounts of time and energy to his

project.    This factor supports a conclusion that petitioner's

activity was profit motivated.

4.   Expectation That the Assets Will Appreciate in Value

      The term "profit" includes the appreciation in the value of

assets used in an activity.    Sec. 1.183-2(b)(4), Income Tax Regs.

Petitioner has not established that he expected the assets he

used or created to increase in value so as to produce an overall

profit.    This factor does not support a conclusion that

petitioner's activity was profit motivated.

5.   Taxpayer's Success in Similar or Dissimilar Activities

      Although an activity is unprofitable, we may take into

account whether the taxpayer previously converted similar

activities from unprofitable to profitable enterprises.     Sec.
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1.183-2(b)(5), Income Tax Regs.     There is no evidence petitioner

had previously engaged in the business of developing or

profitably exploiting new technologies of the sort involved in

this matter.

     This factor does not support a conclusion that petitioner's

activity was profit motivated.

8 & 9.     Financial Status of Taxpayer and Elements of Personal

Pleasure

         Substantial income from sources other than an activity,

particularly if the activity's losses generated substantial tax

benefits, may indicate that the activity is not engaged in for

profit.     This is especially true where there are personal or

recreational elements involved.     Sec. 1.183-2(b)(8) and (9),

Income Tax Regs.     Petitioner's average salary as a pilot for the

period 1988-90 was over $137,500.     During the first 14 years of

the project, petitioner's outlays were approximately $16,000 a

year, approximately 11 percent of his earnings for the years in

issue.     This is not out of line with what a person in

petitioner's income bracket might spend on a hobby or

recreational activity.     Petitioner was driven more by a desire to

satisfy his intellectual curiosity and to vindicate his theories

than by the potential for deriving a profit.     Thus there is a

considerable element of personal pleasure or satisfaction in

petitioner's efforts.

     These factors do not support a conclusion that petitioner's

activity was profit motivated.
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Conclusion

     On the basis of our discussion above, we conclude that

petitioner engaged in his Windmill Distillery activity without an

actual and honest objective of making a profit.    In light of our

conclusion that taxpayer did not have sufficient profit motive to

satisfy the requirements of section 174, we also conclude he did

not meet the requirements of section 162 and may not deduct

amounts he claimed as ordinary and necessary business expenses in

connection with his Windmill Distillery activity.

Other Disallowed Deductions, Additions to Tax, and Penalties

     Petitioner presented no evidence at trial and made no

arguments in his brief with respect to respondent's disallowance

of deductions for meal expenses, eyeglasses, and the attorney

licensing fees.   Similarly, at trial and on brief, petitioner did

not address the 1988 addition to tax for negligence or the 1989

and 1990 accuracy-related negligence penalties.    The burden of

proof is on petitioner to show that respondent's determinations

set forth in her notice of deficiency are incorrect.    Rule

142(a); Welch v. Helvering, 290 U.S. at 115.    Petitioner has not

met his burden with respect to these issues; accordingly we

affirm respondent's determinations.

                                           Decision will be

                                      entered for respondent.
