                         T.C. Memo. 1999-399



                       UNITED STATES TAX COURT



               JOHN SHACKELFORD FAIRBANKS, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14863-98.                      Filed December 8, 1999.



     John Shackelford Fairbanks, pro se.

     Thomas A. Vidano, for respondent.


                          MEMORANDUM OPINION


     GOLDBERG, Special Trial Judge:    Respondent determined a

deficiency in petitioner's 1995 Federal income tax of $3,654 and

an accuracy-related penalty pursuant to section 6662(a) of $731.

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.
                                 - 2 -

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

engaged in the trade or business of consulting in 1995, and, if

so, whether petitioner is entitled to claim Schedule C expenses

relating to the consulting activity for the 1995 tax year; and

(2) whether petitioner is liable for an accuracy-related penalty

pursuant to section 6662(a).

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

The stipulation of facts and the exhibits submitted at trial are

incorporated herein by this reference.     At the time the petition

was filed, petitioner resided in San Diego, California.

     In 1991, petitioner began working as an engineer for Silicon

Systems (Silicon) in Orange County, California, and he was laid

off from Silicon in 1992.   Thereafter, in the same year,

petitioner established Fairbanks Laboratories (Fairbanks) as a

sole proprietorship to provide state-of-the-art consulting

services to the communications industry.    In connection

therewith, petitioner eventually installed several computers and

communication lines in his home.

     Petitioner’s first consulting contract in 1992 was with

Silicon, his former employer, in connection with the relocation

of its manufacturing facility.    Petitioner earned $17,431 in 1992

from his consulting activity and reported gross receipts of

$17,431 and net profit of $5,630 on Schedule C attached to his

1992 Federal income tax return.
                                - 3 -

     During 1993, petitioner obtained a subcontracting consultant

job with TV Comm., Inc.   Although petitioner earned $5,400 as a

consultant in 1993 and reported this amount as gross receipts on

Schedule C, he also reported a net loss of $7,016 for 1993.

During 1993, petitioner attempted to find additional clients but

was unsuccessful.

     In 1993, petitioner was employed as a full-time engineer at

Pacific Communication Sciences, Inc. (PCSI), working between 45

and 55 hours per week.

     Petitioner enrolled in graduate engineering courses at the

University of California-San Diego (UCSD), which were paid for by

PCSI.   Petitioner attended a graduate course at UCSD in the fall

of 1995 and attended an additional two or three courses in

electrical engineering per semester in 1996.   Petitioner

continued to work full time at PCSI until March 1996, when he was

laid off.   Petitioner enrolled full time in UCSD's doctoral

program in 1997.

     Petitioner generated no income for his consulting activity

for the 1994, 1995, and 1996 tax years.   Petitioner was unable to

provide consulting services in either 1994 or 1995 because of the

long hours he worked at PCSI.   Even though petitioner worked full

time, he attempted to find clients that he could accommodate

taking into account his busy work schedule.    He was unsuccessful.

     Petitioner reported no gross receipts from consulting
                                 - 4 -

activities in 1994, 1995, and 1996 on Schedules C, but reported

$14,161, $16,389, and $12,533 of net Schedule C losses for the

1994, 1995, and 1996 tax years, respectively.   On his Schedule C

attached to his 1995 Federal income tax return, petitioner

reported no gross receipts and claimed the following expenses:

         Advertising                   $91.27
         Car/truck expenses          2,949.14
         Depreciation/section 179    2,755.33
         Supplies                      131.21
         Travel expense                229.17
         Meals/entertainment           190.62
         Other expenses              1,760.86   $8,107.60

         Business use of home                    8,281.35

                Total expenses                  16,388.95

     In 1997, petitioner obtained a consulting contract with L

Three Communications, a local aerospace company, but was not paid

until 1998.

     In a notice of deficiency dated June 3, 1998, respondent

determined that petitioner was not entitled to Schedule C

expenses of $16,389 for the year in issue because he (1) was not

engaged in an activity for profit pursuant to section 183, and

(2) failed to substantiate his claimed 1995 Schedule C

deductions.   Respondent also determined that petitioner was

entitled to additional itemized deductions for real estate taxes

and interest expenses in the amount of $3,361 for 1995.

     As an initial matter, we deal with an issue raised by

petitioner concerning respondent's conduct during audit and
                                 - 5 -

administrative appeal.    As we understand it, petitioner contends

that respondent acted in an unreasonable manner by failing to

meet with him in a timely manner during the audit and

administrative appeal process.    Petitioner cites Don Casey, Co.

v. Commissioner, 87 T.C. 847 (1986), and asks this Court for

relief.   The Don Casey, Co. case involved the award of costs and

certain fees pursuant to section 7430, and it is apparently under

this section that petitioner seeks relief.

     A motion for litigation and administrative costs under

section 7430 must be made pursuant to Rule 231.   Since the

request for relief is premature and there is no motion pending at

this time, we need not address this matter.

Section 183

     Section 162 allows deductions for ordinary and necessary

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

For a taxpayer to be engaged in a trade or business, the

taxpayer's primary purpose for engaging in the activity must be

for income or profit, and he must be involved in the activity

with continuity and regularity.    See Commissioner v. Groetzinger,

480 U.S. 23, 35 (1987).   If an individual engages in an activity

without the objective of profit, section 183 generally limits

allowable deductions attributable to the activity to the extent

of gross income generated by such activity.   See sec. 183(b).
                                - 6 -

     Whether a taxpayer is engaged in the activity for profit

depends on whether he undertook this activity with an actual and

honest objective of making a profit.    See Elliott v.

Commissioner, 90 T.C. 960, 970 (1988), affd. without published

opinion 899 F.2d 18 (9th Cir. 1990).    Whether a taxpayer had an

actual and honest profit objective is a question of fact to be

resolved from all relevant facts and circumstances.      See Golanty

v. Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981).    Greater weight is given to

objective facts than to a taxpayer's statement of intent.     See

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

1256 (4th Cir. 1986).

     Section 183(d) provides a rebuttable presumption that a

taxpayer is engaged in an activity for profit if the gross income

derived from the activity exceeds the deductions attributable to

the activity for 3 or more of the taxable years in a 5-year

period.    Petitioner contends that he qualifies for such a

presumption by arguing that Fairbanks is only the latest in a

series of businesses started in 1986 by petitioner and his ex-

spouse Deborah M. Fairbanks (Ms. Fairbanks) while they were

married.

     Beginning in 1986, Ms. Fairbanks apparently conducted

various profitable business activities which were eventually

consolidated under the name Integrative Learning Designs.
                               - 7 -

Petitioner contends that this Court should view Fairbanks as part

of a continuing business enterprise begun in 1986 and therefore

take into account tax years prior to 1992 when considering

Fairbanks' history of profits and losses.   Petitioner is

attempting to attribute earlier Schedule C profits purportedly

reported by Integrative Learning Designs to Fairbanks' consulting

activity and thereby qualify for the section 183(d) presumption.

     Petitioner has failed, however, to establish any connection

between the business activities of Fairbanks and Integrative

Learning Designs.   Petitioner started Fairbanks in 1992, and its

financial history, therefore, begins from that date.   Since the

gross income derived from petitioner's consulting activity does

not exceed the deductions attributable to his activity for 3 or

more of the taxable years in a 5-year period, petitioner does not

qualify for a section 183(d) presumption.

     Since petitioner does not qualify for a presumption that he

engaged in his consulting activity for profit under section

183(d), we turn to section 1.183-2(b), Income Tax Regs., which

provides the following nonexclusive list of factors which may be

considered in determining whether an activity is engaged in with

the requisite profit objective:   (1) The manner in which the

taxpayer carries on the activity; (2) the expertise of the

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

carrying on the activity; (4) the expectation that assets used in
                               - 8 -

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)

elements of personal pleasure or recreation.   No single factor is

controlling, but rather it is an evaluation of all the facts and

circumstances in the case, taken as a whole, which is

determinative.   See Weber v. Commissioner, 103 T.C. 378, 387

(1994), affd. per curiam 60 F.3d 1104 (4th Cir. 1995).

     Petitioner alleges that he conducted his consulting activity

in a businesslike manner, but this allegation is belied by the

facts.   We note that (1) petitioner did not keep

contemporaneously written business or marketing plans, (2)

petitioner did not keep income or expense projections for his

consulting activity and failed to keep books and records

detailing Fairbanks' financial information, and (3) petitioner

failed to maintain a separate checking account or separate

finances for his consulting activity during the year in issue.1

     Additionally, though petitioner was aware that Fairbanks had

generated no gross receipts for the 1994, 1995, and 1996 tax

years, petitioner did not appreciably change his method of



1
     Petitioner started a commercial checking account for
Fairbanks in 1996.
                                - 9 -

conducting the consulting activity.     Petitioner did not alter his

method of business or engage in new methods of finding

prospective clients.   Petitioner's only substantiated

advertisement for the year in issue was an entry in the 1994-95

edition of the American Electronics Association directory.

Petitioner conceded that he continued to buy new computer

equipment every year despite Fairbanks' mounting losses and a

dearth of clients.

     Before 1992, the year petitioner started Fairbanks,

petitioner had no experience as a computer consultant.    Yet,

despite this lack of expertise, petitioner failed to seek out

expert business advice on how to conduct Fairbanks as a

profitable activity.   Petitioner contends that he continually

strove to gain expertise in the computer consulting field by

reading books, attending meetings, and speaking with venture

capitalists.   Petitioner's testimony on this point, however, is

vague.

     Petitioner also failed to establish that he expended

significant time or effort in conducting the consulting activity

during the year in issue.   At trial, petitioner conceded that he

was unable to provide consulting services in 1995 because of the

long hours he worked at PCSI.   In addition to the time spent

working for PCSI, petitioner spent significant amounts of time at

home with his children and attended engineering classes at UCSD.
                              - 10 -

     Petitioner has also failed to establish that any of

Fairbanks' assets will appreciate in value.    Petitioner claims

that Fairbanks' assets are its intellectual property and not its

computer equipment.   At trial, petitioner claimed to have

invented four devices while conducting his consulting activity.

Petitioner consented to discuss only one invention at trial, a

remote-controlled pool heating unit.   Petitioner explained that

he would not discuss his other three inventions because he had

not yet applied for patent protection.2

     Petitioner estimated that his pool heating unit would earn

him $1 milliion in profit once it was produced and marketed.

Petitioner alleges that this invention alone sustains his

contention that Fairbanks' intellectual property will appreciate

in value.

     Petitioner, however, has failed to establish any connection

between his consulting activity and his inventions.    Indeed,

petitioner listed "consulting" as Fairbanks' principal business

on his Schedule C for the 1992-97 tax years.

     Even if we accept petitioner's claim that Fairbanks' assets

are its intellectual property and we further accept that

petitioner's inventions are somehow connected to his consulting

activity, petitioner has still failed to establish that


2
     Petitioner applied for patent protection for the pool
heating unit in February 1999, over 3 years after the year in
issue.
                                      - 11 -

Fairbanks' intellectual property will appreciate in value.

       Petitioner conceded that he has never built a working

prototype of the pool heating unit.                Petitioner's forecast of

million-dollar profits is therefore based upon mere speculation.

Petitioner has also failed to produce any projected revenue

stream studies or to substantiate the cost of producing even one

remote-controlled pool heating unit.

       Petitioner's financial status also indicates a lack of

profit motive in his consulting activity.                 From the record, it is

clear that the only year Fairbanks showed a net profit was 1992,

the first year Fairbanks provided consulting services.

Petitioner reported the following gross receipts and net losses

from Fairbanks on Schedule C for the 1992-97 tax years:
                   1992      1993       1994           1995        1996         1997

Gross receipts    $17,431   $5,400        -              -           -            -
Profit/loss         5,630   (7,015)    ($14,161)      ($16,389)   ($12,532)   ($19,296)


Petitioner also reported the following wage and capital gains

income for the 1992-97 tax years:
                   1992      1993        1994           1995        1996         1997

Wages and        $13,816    $37,453     $69,464       $80,046     $49,617      $51,401
capital gains


       The record clearly reflects that petitioner used large net

losses from Fairbanks to offset wage and capital gains income.

In the context of section 183 "profit" means an economic profit,

independent of tax savings.           See Surloff v. Commissioner, 81 T.C.

210, 233 (1983).
                             - 12 -

     From 1992 to 1997, petitioner has reported net losses of

only $69,313 while generating a net profit of $5,630. Such a

history of successive and consistent losses does not support

petitioner's contention that he was engaged in a trade or

business for profit for the year in issue.   "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.

     At trial, petitioner expressed great satisfaction in owning

the sophisticated computer hardware and software which he had

purchased between 1992 and 1997.   Petitioner stated that he

sometimes used the computers for personal reasons, such as to

"interface" with his children.

     Petitioner continued to buy new equipment every year even

though Fairbanks was consistently generating large losses.     These

tax losses offset petitioner's wage and capital gains income,

and, in effect, subsidized petitioner's yearly purchases of new

and more sophisticated computer equipment.

     In sum, we find that petitioner did not conduct his

consulting activity in a businesslike manner or with continuity

and regularity for the 1995 tax year.   On the basis of the

record, we find that petitioner did not engage in his consulting
                              - 13 -

activity for profit and was not engaged in the trade or business

of consulting in 1995.   Respondent is sustained on this issue.

Schedule C Expenses

     As stated above, a taxpayer must show that he engaged in an

activity with the objective of making a profit in order to deduct

expenses incurred under either section 162 or section 212.    See

Golanty v. Commissioner, 72 T.C. 411, 425 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981).   Where an

activity is not engaged in for profit, section 183(b)(1) allows

deductions that are not dependent on profit objectives, e.g.,

certain interest and State and local taxes.   Additional

deductions are allowed under section 183(b)(2) as if the activity

were engaged in for profit, but such deductions are allowed only

to the extent that gross income from the activity exceeds

deductions already allowed under section 183(b)(1).

     As stated above, petitioner has failed to establish that he

engaged in the consulting activity in 1995 with the objective of

making a profit.   Additionally, petitioner failed to earn any

gross income in the consulting activity for the year in issue.

Since petitioner earned no consulting income in 1995, he is

unable to deduct any Schedule C expenses pursuant to section

183(b), and we need not address the substantiation issue.
                                - 14 -

Section 6662(a)

     The last issue for decision is whether petitioner is liable

for a penalty pursuant to section 6662(a).       Section 6662(a)

imposes a penalty of 20 percent of the portion of the

underpayment which is attributable to negligence or disregard of

rules or regulations.     See sec. 6662(b)(1).    Negligence is the

lack of due care or failure to do what a reasonable and

ordinarily prudent person would do under the circumstances.        See

Neely v. Commissioner, 85 T.C. 934, 947 (1985).       The term

"disregard" includes any careless, reckless, or intentional

disregard.   Sec. 6662(c).    No penalty shall be imposed if it is

shown that there was reasonable cause for the underpayment and

the taxpayer acted in good faith with respect to the

underpayment.     See sec. 6664(c).

     At trial, petitioner failed to establish that he acted in

good faith with respect to his 1995 underpayment.       Petitioner

failed to comply with section 183 and disregarded rules and

regulations by deducting excessive losses for the 1995 tax year.

On the basis of the record, we hold that petitioner is liable for

the accuracy-related penalty under section 6662(a).

     To reflect the foregoing,

                                           Decision will be entered

                                      for respondent.
