                              T.C. Memo. 2016-187



                           UNITED STATES TAX COURT



                     HERB VEST, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 15351-13, 15352-13,              Filed October 6, 2016.
                  15353-13.



      Herb Vest, pro se.

      Tanya S. Wang and Duy P. Tran, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: In these consolidated cases the Internal Revenue Service

(IRS or respondent) determined the following deficiencies in petitioner’s Federal

income tax:
                                        -2-

[*2]

                                Year        Deficiency
                                2008        $1,096,171
                                2009          1,409,469
                                2010          1,485,659

       Petitioner initially contended that the notice of deficiency for 2008 was

barred by the period of limitations under section 6501,1 but he conceded that issue

at trial. The issues remaining for decision are: (1) whether petitioner’s investiga-

tion of the circumstances surrounding his father’s death was an activity “not en-

gaged in for profit” within the meaning of section 183; and (2) whether the sale of

assets between related partnerships petitioner controlled was ineligible for install-

ment sale treatment under section 453(g) because the transaction had a principal

purpose of avoiding Federal income tax. We resolve both questions in respon-

dent’s favor.

                               FINDINGS OF FACT

       The parties filed a stipulation of facts and accompanying exhibits that are

incorporated by this reference. Petitioner is a certified public accountant who


       1
        All statutory references are to the Internal Revenue Code (Code) in effect
for the years at issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. We round all monetary amounts to the nearest dollar.
                                         -3-

[*3] resided in Texas when he filed his petitions. In 1983 he founded a very

successful financial services firm; in 2001 the shareholders sold that business for

$127.5 million. This yielded petitioner a very substantial profit. He then em-

barked on two sets of activities that gave rise to this tax controversy.

A.    Section 183 Issue

      In 1946, when petitioner was two years old, his father was found hanging by

the neck in the bathroom of his shop in Gainesville, Texas. The death was origi-

nally ruled a suicide. In 2003 petitioner received an anonymous letter asserting

that unidentified residents of Gainesville had murdered his father and staged it to

look like a suicide. Having realized a large gain on the sale of his business, peti-

tioner had the means to devote significant time and resources to investigating the

circumstances of his father’s death.

      Beginning in 2003 petitioner caused partnerships he controlled to pay at

least $6.4 million to private investigators, forensic experts, morticians, and writers

to assist him in solving this mystery and reporting the results. In January 2006 one

of his investigators wrote a report concluding that his father’s death had in fact

been a homicide. The report found, however, that no plausible suspects among

Gainesville residents could be identified; that no further leads existed; and that ad-

ditional time spent investigating the homicide would not prove fruitful.
                                         -4-

[*4] Undeterred, petitioner continued his investigation. His focus shifted to the

possibility that his father had been killed by government agents in the wake of

World War II. He spent considerable effort gathering information, a major feat

given how much time had elapsed since the relevant events occurred. Petitioner

believed that, if he gathered enough credible evidence, the story of his father’s

death could be successfully adapted into a book or a movie.

      In November 2007 petitioner hired a writer to draft a manuscript. Nine

months later petitioner received a 96-page partial draft describing the known cir-

cumstances of his father’s death. This draft was never completed. There is no

evidence that petitioner or anyone else did any further work on this draft during

2008-2010, the tax years at issue.

      Before 2008 petitioner worked with a public relations firm to publicize his

story and look for a buyer interested in commercializing it. There was apparently

some interest; his father’s death was the subject of one episode of a television

show. Although this episode generated some publicity, it produced no revenue.

      By January 2008 petitioner had been investigating his father’s death for five

years. As of that time, his investigative activities had not generated a single dollar

of revenue. Those activities generated no income during 2008, 2009, or 2010, and

petitioner had no reasonable prospect of generating future income. Petitioner
                                        -5-

[*5] never developed a business plan for commercializing his father’s story. He

has no professional background in writing, book publishing, or media. He did not

modify the scale or scope of his investigative activities during 2008-2010 in an

effort to minimize the substantial losses he was incurring.

      From 2003 onwards petitioner conducted his investigative activities through

various partnerships that he controlled. The initial entity was HD Vest Investiga-

tions, LLC, of which petitioner owned 99%. That entity reported losses of ap-

proximately $1.1 million from homicide-related investigative activities during

2003-2005.

      In October 2003 petitioner created Truebeginnings, LLC (TB), which was

principally owned by petitioner and his then wife. TB’s major activity was opera-

tion of a dating website. It separately incurred losses of $610,000 from homicide-

related investigative activities during 2005-2007.

      In August 2006 petitioner created Harold E. Vest, H.W. Powers & Son LLC

(HVPS), which he owned 100% directly or via passthrough partners. During

2008-2010 HVPS was principally engaged in investigating the circumstances of

petitioner’s father’s death. HVPS reported aggregate losses of approximately $3.8

million from these investigative activities during 2008-2010. All of these losses

flowed through to petitioner.
                                        -6-

[*6] B.      Installment Sale Issue

      TB at all times has been taxed as an accrual-basis partnership. During

2008-2010 petitioner and his then wife owned 85% of TB’s membership interests,

giving him control of its operations. TB in turn owned 100% interests in two

other partnerships, H.D. Vest Advanced Systems, LLC (VAS), and Metric, LLC

(Metric).

      In the course of its activities TB developed technology that helped optimize

the delivery of Internet ads. In January 2008 TB sold to VAS and Metric compu-

ter equipment with appraised values of $454,825 and $412,000, respectively; after

accounting for cost bases and depreciation, these sales produced an aggregate

gross profit of $338,683. TB concurrently sold to VAS intangible assets with an

appraised value of $2,885,175; because TB had a cost basis of zero in these assets,

that sale produced a gross profit of $2,885,175.

      In exchange for the transferred assets, VAS and Metric issued to TB

promissory notes bearing an annual interest rate of 10%. Interest was to accrue

annually, with the entire principal plus accrued interest payable in January 2018.

TB received no payments of principal or interest from VAS or Metric during 2008,

2009, or 2010.
                                         -7-

[*7] On its Form 1065, U.S. Return of Partnership Income, for 2008, TB report-

ed on the installment basis its gain from the asset sales to VAS and Metric. TB in-

cluded in its return Forms 6252, Installment Sale Income, reporting aggregate

gross profit of $338,683 from the sales of computer equipment and gross profit of

$2,885,175 from the sale of intangible assets. On line 6 of its Form 1065 for 2008,

TB reported net gain from Forms 4797, Sales of Business Property, in the aggre-

gate amount of $29,798 (apparently representing depreciation recapture).2 For

their part, VAS and Metric claimed stepped-up bases in the transferred assets of

$3,340,000 (i.e., $2,885,175 + $454,825) and $412,000, respectively, which

yielded them amortization deductions of $192,345 and $22,579, respectively, for

each of the taxable years 2008, 2009, and 2010.

      In August 2012 petitioner filed a bankruptcy petition in the U.S. District

Court for the Eastern District of Texas. As a result, petitioner’s shares of the part-

nership items of TB and HVPS were converted to nonpartnership items. That

conversion was effective as of the date the bankruptcy petition was filed. See sec.

6231(c)(1)(E); sec. 301.6231(c)-7(a), Proced. & Admin. Regs.




      2
       TB reported no gain from the asset sales to VAS or Metric on its Form
1065 for 2009 or 2010.
                                         -8-

[*8] C.      The IRS Audit

      The IRS examined TB’s and HVPS’ returns for 2008-2010 and disallowed

the deductions relating to petitioner’s homicide-related investigative activity on

the ground that this activity was “not engaged in for profit.” See sec. 183(a).

During the examination of TB’s returns the IRS also concluded that TB’s asset

sales to VAS and Metric did not qualify for installment sale treatment. The IRS

determined that TB, VAS, and Metric were “related persons” under section

453(g)(1) and that petitioner had failed to establish that the transaction “did not

have as one of its principal purposes the avoidance of Federal income tax.” See

sec. 453(g)(2).

      For all three years at issue petitioner had net operating losses (NOLs) that

were sufficient to eliminate his regular tax liabilities. However, the Code signifi-

cantly limits a taxpayer’s NOL deduction for purposes of computing the alterna-

tive minimum tax (AMT). See sec. 56(a)(4), (d). After disallowing the losses

from his investigative activities and the claimed installment sale reporting of TB’s

$3.2 million gain, the IRS determined that petitioner had substantial alternative

minimum taxable income (AMTI) for each year. Specifically, the IRS determined

AMTI of $4,267,029 for 2008, $5,772,075 for 2009, and $5,597,946 for 2010.
                                         -9-

[*9] Applying the applicable AMT rates, the IRS determined AMT liabilities and

tax deficiencies as follows:

                Item                       2008            2009             2010
 AMT                                    $1,189,884      $1,614,431       $1,565,675
 Less: credit                               -0-              (2,000)          (2,000)
 Plus: self-employment tax                  -0-              19,024            6,513
 Less: AMT per return                       (93,713)      (221,986)         (84,529)
 Deficiency                               1,096,171       1,409,469       1,485,659

      On September 20, 2012, respondent issued petitioner timely notices of defi-

ciency for 2008-2010.3 After the automatic bankruptcy stay was lifted, see 11

U.S.C. sec. 365(a)(8) (2012), petitioner timely filed his petitions in these three

cases, which were consolidated for trial, briefing, and opinion.

                                      OPINION

      The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer bears the burden of proving those determina-

tions erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The



      3
        Petitioner initially filed petitions in this Court in response to notices of
final partnership administrative adjustment issued to TB and HVPS. Because
petitioner’s August 2012 bankruptcy filing converted his shares of all partnership
items to nonpartnership items, he no longer had an interest in those proceedings,
and those cases were subsequently dismissed.
                                        - 10 -

[*10] taxpayer bears the burden of proving his entitlement to deductions allowed

by the Code and of substantiating the amounts of claimed deductions. INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a), Income Tax Regs.

Petitioner does not contend that the burden of proof should shift to respondent

under section 7491(a) as to any issue of fact; if he had advanced that contention it

would be unpersuasive because he did not “introduce[] credible evidence” with re-

spect to the relevant factual issues. See sec. 7491(a)(1). The burden of proof thus

remains on petitioner.

A.    Section 183 Issue

      Section 162(a) allows as a deduction “all the ordinary and necessary ex-

penses paid or incurred during the taxable year in carrying on any trade or busi-

ness.” To be entitled to deductions under this section, the taxpayer must show that

he engaged in the activity with an actual and honest objective of making a profit.

Hulter v. Commissioner, 91 T.C. 371, 392 (1988). If an activity is not engaged in

for profit, no deduction attributable to it is allowed except to the extent of gross

income derived therefrom (reduced by deductions that would be allowable regard-

less of whether the activity was engaged in for profit). Sec. 183(b). Thus, losses

are not allowable for an activity that a taxpayer carries on primarily for sport, as a

hobby, or for recreation. Sec. 1.183-2(a), Income Tax Regs.
                                        - 11 -

[*11] Petitioner bears the burden of proving that he conducted his investigation

into the circumstances of his father’s death with the principal objective of making

a profit. See Giles v. Commissioner, T.C. Memo. 2005-28, 89 T.C.M. (CCH) 770,

775. Although a reasonable expectation of profit is not required, the taxpayer

must conduct the activity with the dominant hope and good-faith intention of

earning positive income. Hulter, 91 T.C. at 392; sec. 1.183-2(a), Income Tax

Regs. We determine whether the taxpayer has the requisite profit motive on the

basis of all surrounding facts and circumstances. Golanty v. Commissioner, 72

T.C. 411, 426 (1979), aff’d without published opinion, 647 F.2d 170 (9th Cir.

1981); sec. 1.183-2(b), Income Tax Regs. In making this determination, we ac-

cord greater weight to objective facts than to the taxpayer’s subjective statement of

intent. Keanini v. Commissioner, 94 T.C. 41, 46 (1990); sec. 1.183-2(a), Income

Tax Regs.4

      The regulations set forth a nonexclusive list of nine factors relevant in as-

certaining whether a taxpayer conducts an activity with the intent to earn a profit.


      4
        Where a partnership is involved, the analysis of profit motive must be made
at the partnership level. Hulter v. Commissioner, 91 T.C. 371, 393 (1988);
Brannen v. Commissioner, 78 T.C. 471, 501-505 (1982), aff’d, 722 F.2d 695 (11th
Cir. 1984). Since petitioner controlled all the partnerships and was the only
significant actor, the partnership’s objectives cannot meaningfully be
distinguished from his own.
                                        - 12 -

[*12] Sec. 1.183-2(b), Income Tax Regs. The factors listed are: (1) the manner in

which the taxpayer conducts the activity; (2) the expertise of the taxpayer or his

advisers; (3) the time and effort spent 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; (8) the financial status of the taxpayer; and (9) elements

of personal pleasure or recreation. Ibid.

      No factor or group of factors is controlling, nor is it necessary that a major-

ity of factors point to one outcome. See Keating v. Commissioner, 544 F.3d 900,

904 (8th Cir. 2008), aff’g T.C. Memo. 2007-309; Engdahl v. Commissioner, 72

T.C. 659, 666 (1979); sec. 1.183-2(b), Income Tax Regs. Certain factors may be

accorded more weight in a particular case because they have greater salience or

persuasive value as applied to its facts. See Crile v. Commissioner, T.C. Memo.

2014-202, 108 T.C.M. (CCH) 372, 379; Green v. Commissioner, T.C. Memo.

1989-436, 57 T.C.M. (CCH) 1333, 1343 (noting that all nine factors do not

necessarily apply in every case).

      None of the regulatory factors weighs meaningfully in petitioner’s favor.

For the following reasons, we conclude that he did not engage in the investigation
                                          - 13 -

[*13] of his father’s death with the primary and genuine purpose of making a

profit.

          (1) Petitioner has never earned an annual profit from his homicide-related

investigative activity. See Golanty, 72 T.C. at 427 (noting that a series of substan-

tial losses suggests the lack of a profit motive); sec. 1.183-2(b)(6), Income Tax

Regs. Indeed, petitioner did not generate a single dollar of revenue from this ac-

tivity in any year from 2003 through 2010. Over that time, petitioner’s reported

losses were continuous and substantial. This strongly suggests that he did not

engage in this activity to make a profit.

          (2) Petitioner did not conduct his activity in a businesslike manner. He had

no professional training or experience in writing, publishing, or media. He had no

budget or business plan. See Bronson v. Commissioner, T.C. Memo. 2012-17,

103 T.C.M. (CCH) 1112, 1116 (“Characteristics of a businesslike operation

include the preparation of a business plan[.]”), aff’d, 591 F. App’x 625 (9th Cir.

2015). Before 2008 he engaged public relations professionals and hired a writer to

produce a manuscript, but no further work on that manuscript was ever done.

Although he devoted many hours to this project, he showed little interest in

actually making it profitable. See Johnson v. Commissioner, T.C. Memo. 2012-

231, 104 T.C.M. (CCH) 178, 181-182. Rather, he pursued his investigation with
                                        - 14 -

[*14] no apparent concern about the magnitude of his losses or the future revenues

he would have to generate in order to recoup those losses. An “opportunity to earn

a substantial ultimate profit in a highly speculative venture” may indicate a profit

motive despite current losses. Sec. 1.183-2(b)(7), Income Tax Regs. Petitioner

introduced no evidence suggesting that his book publishing venture had an

unusually high profit potential.

      (3) Petitioner did not adjust the scale or direction of his activities as a pro-

fit-maximizing person would do. See sec. 1.183-2(b)(1), Income Tax Regs. He

did not modify his operations as his losses mounted. After his investigator in 2006

found the anonymous letter to be a dead end, petitioner did not curtail his expendi-

tures or abandon the project to cut losses. See Crile, 108 T.C.M. (CCH) at 380

(noting that a taxpayer’s change of operating methods or abandonment of unprofit-

able activities may indicate a profit objective). Instead he doubled down: He in-

curred several million dollars of additional investigative expenses during 2007-

2010 and reported losses even larger than those he had reported previously.

Although petitioner had earlier been successful in his financial planning business,

we do not find those accomplishments to be a good predictor of success as an

author, book publisher, or producer. Cf. sec. 1.183-2(b)(5), Income Tax Regs.
                                         - 15 -

[*15] (4) Petitioner had no expectation that assets used in his investigative

activity would appreciate in value. Cf. sec. 1.183-2(b)(4), Income Tax Regs.

Indeed, that activity did not deploy or develop any meaningful assets apart from

the research he accumulated and the 96-page manuscript, which remained an in-

complete draft. The possibility that these assets would appreciate in value was

extremely small.

      (5) Petitioner had strong personal motives for conducting his activity, and

the circumstances suggest that it was essentially a pastime. See sec. 1.183-2(b)(9),

Income Tax Regs. After the sale of his business in 2003, petitioner had significant

financial resources and leisure time available. He was naturally interested in

learning more about his father’s death and proving that it was a murder rather than

a suicide. Aside from this family aspect, petitioner clearly found the mystery sur-

rounding his father’s death to be very engaging, as he expended significant finan-

cial resources pursuing multiple theories. When the chance for profit is small rela-

tive to the potential for gratification or self-fulfillment, the latter emerge as the

taxpayer’s likely motivations. See White v. Commissioner, 23 T.C. 90, 94 (1954),

aff’d per curiam, 227 F.2d 779 (6th Cir. 1955). We conclude that petitioner’s in-

vestigative efforts were the product of a personal desire to uncover the cause of his

father’s death, not an attempt to engage in a profitable business.
                                        - 16 -

[*16] In sum, we find and hold that petitioner did not incur the expenses related to

the investigation of his father’s death in an activity conducted with the genuine

purpose of making a profit. Under section 183, the amount of allowable deduc-

tions attributable to his investigative activity is thus limited to the gross income he

derived therefrom. Because he derived no gross income from that activity during

2008-2010, he is not entitled to any deductions.

B.    Installment Sale Issue

      Generally, gain from the sale of property is taxed to the seller in the year of

the sale. Secs. 61(a)(3), 1001(c). Section 453 provides an exception to this rule,

allowing income from an installment sale to be reported as payments are received.

The purpose of the installment method of reporting income is to alleviate the hard-

ship on taxpayers who would otherwise recognize the entire gain in year one,

without receiving enough cash to pay the resulting tax. See Shelton v. Commis-

sioner, 105 T.C. 114, 117-118 (1995). Under the installment method, the tax due

is instead matched with the payments received.

       Section 453(a) provides that income from an installment sale shall be taken

into account for purposes of taxation under the installment method. Section

453(b) defines an installment sale as a “disposition of property where at least 1

payment is to be received after the close of the taxable year in which the disposi-
                                        - 17 -

[*17] tion occurs.” Section 453(c) provides that “the income recognized for any

taxable year from a disposition * * * [shall be] that proportion of the payments

received in that year which the gross profit (realized or to be realized when

payment is completed) bears to the total contract price.”

      Installment sale treatment allows an accrual-basis taxpayer (such as TB) to

defer the reporting of gain during the period of the installment note--here, ten

years--thus minimizing current tax. However, section 453(g)(1) provides that this

treatment generally is not available “[i]n the case of an installment sale of depre-

ciable property between related persons.” In the case of a related-party sale of

depreciable property, installment sale treatment is available only “if it is estab-

lished to the satisfaction of the Secretary that the disposition did not have as one

of its principal purposes the avoidance of Federal income tax.” Sec. 453(g)(2).

      TB, VAS, and Metric were clearly “related persons”: TB owned 100% of

VAS and Metric, and petitioner controlled all three entities. The computer equip-

ment and intangible assets that TB sold to VAS and Metric constituted “depreci-

able property” within the meaning of section 453(g) because they were subject to

allowances for depreciation and/or amortization. See secs. 167(a), 197(a), (f)(7).

Petitioner thus bears the burden of proving that tax avoidance was not among the

principal purposes of the asset sale transaction.
                                        - 18 -

[*18] Section 453(g)(2) resembles other Code sections providing that certain tax

treatment will be available only if the taxpayer establishes that the plan or trans-

action did not have “as one of its principal purposes the avoidance of Federal

income tax.” See, e.g., secs. 306(b)(4), 453(e)(7). We have ruled that a taxpayer

in such cases can satisfy his burden of proof only by submitting “evidence [that]

clearly negate[s] an income-tax-avoidance plan.” Tecumseh Corrugated Box Co.

v. Commissioner, 94 T.C. 360, 381-382 (1990) (addressing section 453(e)(7)),

aff’d, 932 F.2d 526 (6th Cir. 1991). We have described the taxpayer’s burden in

such cases as “a heavy one.” Pescosolido v. Commissioner, 91 T.C. 52, 56 (1988)

(addressing section 306(b)(4)), aff’d, 883 F.2d 187 (1st Cir. 1989). In ascertaining

the true purpose of the transaction, we accord more weight to objective facts than

to the taxpayer’s “mere denial of tax motivation.” Id. at 60. We also consider the

enhanced depreciation deductions available to the related buyer in deciding whe-

ther the seller had a principal purpose of avoiding tax. Guenther v. Commissioner,

T.C. Memo. 1995-280, 69 T.C.M. (CCH) 2980, 2983.

      The substance of the transaction at issue clearly reveals a principal purpose

of tax avoidance. Notwithstanding the asset sale, petitioner through TB retained

full control over the ad-optimization business. By use of installment reporting, TB

aimed to defer for 10 years virtually all the tax on its $3.2 million gain, while VAS
                                          - 19 -

[*19] and Metric would receive stepped-up bases in, and be able to claim

correspondingly large depreciation or amortization deductions on, the assets

transferred. See Guenther, 69 T.C.M. (CCH) at 2983.

        This tax-avoidance purpose is particularly clear with respect to the intan-

gible assets sold to VAS. Those assets had a zero cost basis in TB’s hands, thus

yielding zero amortization deductions to it. But VAS claimed a stepped-up basis

in those assets of $2,885,175, yielding amortization deductions of $192,345 an-

nually. The enhanced amortization deductions claimed by VAS and Metric, total-

ing $644,772 for 2008-2010 alone, dwarf the $29,798 gain that TB reported for

2008.

        Petitioner testified at trial that the asset sale had a valid business purpose,

namely, to isolate distinct assets in three separate partnerships as a prelude to a

possible sale. This rationale is unconvincing: It is not clear why a potential buyer

would care in which entity the assets happened to be located. In any event, the

existence of a valid business purpose for a transaction does not negate the conclu-

sion that “one of its principal purposes” was the avoidance of tax. Sec. 453(g)(2);

Tecumseh Corrugated Box Co., 94 T.C. at 381.

        Petitioner also urged that he could not have had a tax-avoidance purpose be-

cause he had sizable NOLs for each year. But while these NOLs eliminated his
                                          - 20 -

[*20] regular tax liability, they left him vulnerable to the AMT. See supra pp. 8-9.

The combination of deferring tax on TB’s $3.2 million gain and securing $214,926

of additional annual amortization deductions in VAS and Metric operated to re-

duce substantially petitioner’s AMT liabilities for 2008, 2009, and 2010. This is

evidence of a tax-avoidance purpose. Considering the significant and undeserved

tax benefits that petitioner, VAS, and Metric received, petitioner has failed to

satisfy his burden of establishing that tax avoidance was not one of the principal

purposes of the asset-sale transaction.

      To reflect the foregoing,


                                                   Decisions will be entered

                                          for respondent.
