                        T.C. Memo. 2010-208



                      UNITED STATES TAX COURT



         ROBERT G. AND RHONDA L. SANDOVAL, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1305-09.             Filed September 23, 2010.



     David R. Emerich, for petitioners.

     Nicholas D. Doukas, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency in

petitioners’ 2004 Federal income tax of $43,346.   The issue for

decision after concessions1 is whether petitioners are entitled




     1
      Petitioners concede a $963 charitable contribution
deduction.
                                 - 2 -

to a casualty loss deduction pursuant to section 1652 for the

uninsured fire loss of a cabin in 2004.

                         FINDINGS OF FACT

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

The stipulation of facts, together with the attached exhibits, is

incorporated herein by this reference.    At the time petitioners

filed their petition, they resided in California.

Construction Business

     From 1999 to 2006 petitioners owned and operated a

successful construction business, Robert Sandoval Construction,

Inc., that paid petitioners wages reported on Form W-2, Wage and

Tax Statement, of over $1.5 million in 2004 which resulted in

adjusted gross income reported on the return of $1,561,166.

Petitioners were responsible for all business aspects of their

construction business, including managing and hiring employees,

purchasing supplies and equipment, scheduling and bidding for

projects, obtaining licenses from municipal governments,

conducting background investigations of subcontractors, and

advertising.   Petitioners rented vacant land next to their home

to their construction company.




     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
                               - 3 -

Church Activities

     From before 2004 to December 4, 2009, petitioner Robert

Sandoval (Mr. Sandoval) was the pastor at United Pentecostal

Church in Reedley, California (UPC).   Petitioners have attended

services at UPC since at least 1996.   Mr. Sandoval’s father was

the previous pastor at UPC, and petitioners’ children attend UPC

services.   Petitioners’ son-in-law, Allen Nielsen, began

attending services at UPC in 2002 and has served as UPC’s youth

leader since 2003.

     Mr. Sandoval’s duties as the pastor of UPC included

overseeing the operation of the church, conducting church

services, providing counseling services, and leading discussions

and Bible studies.   Petitioner Rhonda Sandoval (Ms. Sandoval)

assisted her husband with operating the church, including

offering counseling services and planning meetings.   Petitioners

also helped organize church-related trips to Disneyland and

conferences for UPC parishioners.

     Petitioners paid for all manner of church expenses from

their personal checking account.    In 2004 petitioners wrote 107

checks totaling over $30,000 from their personal checking account

to cover UPC’s expenses.   The expenses included such items as

Sunday school tables, the remodeling of the church’s basement,

trash hauling, advertising, and ministry dinners.   Petitioners

were not reimbursed for these expenses and claimed charitable
                                 - 4 -

contribution deductions for them on their income tax return for

2004.

Property

     On or about August 20, 2004, petitioners purchased property

in Dunlap, California (the Dunlap property), for $177,800 via a

personal check.    The property consisted of a cabin and the

surrounding land.

     One of petitioner’s primary motivations in purchasing the

Dunlap property was to use the cabin for UPC retreats.    Several

other churches in the area were also interested in using the

cabin for retreats.    Additionally, Ms. Sandoval held discussions

with women from UPC about holding women’s church retreats at the

cabin.

     Petitioners began improving the cabin after they purchased

the Dunlap property.    Eight parishioners from UPC helped

petitioners improve the cabin.    The parishioners were not paid

for their labor.    Petitioners paid for improvements to the cabin

from their personal checking account and with personal credit

cards.

     In August or September of 2004 Henry Torres, a neighbor and

acquaintance of petitioners for 30 years, hauled supplies and

equipment to the Dunlap property for the petitioners.    During

this trip Mr. Torres told Mr. Sandoval that he would be

interested in renting the Dunlap property for use as a retreat
                                - 5 -

for his business.    Mr. Sandoval and Mr. Torres never discussed

any specific rental terms.

     On August 15, 2004, at the suggestion of their certified

public accountant, petitioners signed a document purporting to be

a lease renting the Dunlap property to UPC for an undefined

“rental session”.    The lease was signed by petitioners as both

the potential future owners of the Dunlap property and

representatives of UPC.    The lease stated that the Dunlap

property would be leased to UPC for a “teen camp, men’s retreat &

women’s retreat.”    The lease did not contain any rental terms or

firm obligations.

     The Dunlap property has always been titled in petitioners’

name and was not insured against loss by fire or other casualty.

Before or during 2004 petitioners did not develop a written

business plan for the property, advertise it for rent or hire a

rental agent, prepare promotional materials, or form a business

entity for the property.    Petitioners did not maintain a separate

checking account.    No rent from the property was ever received.

     During 2004 petitioners owned property in Goshen, California

(Goshen property).    The Goshen property is a single-family

residence that petitioners have owned since approximately 1987.

Before 2002 petitioners used the Goshen property as their primary

residence.   During 2004 petitioners rented the Goshen property to

a family member monthly.    No lease was executed.   Petitioners
                                - 6 -

received $4,200 in rent for the Goshen property in 2004.      Aside

from the single-family house in Goshen, their home and the

adjacent land, and the property at issue, petitioners did not own

any other real property in 2004.

Fire and Aftermath

     On October 10, 2004, a fire swept through the Dunlap

property.    The fire caused damages of $100,000 to the cabin on

the property and $50,000 to the contents of the cabin.

     After 2004 the property was used for church group retreats

and camping trips.    Petitioners charged no rent for these

activities.

     Petitioners laid a foundation for a new house at the Dunlap

property in December 2006.    Petitioners began framing the new

house in 2007.    As of December 4, 2009, the new house had not

been completed.    Petitioners have done most of the construction

work associated with the new house.

Deficiency

     Petitioners filed a joint income tax return for 2004.     On

their return petitioners claimed a casualty loss deduction of

$119,304 resulting from the fire.

     On October 16, 2008, respondent issued a statutory notice of

deficiency to petitioners that disallowed the claimed casualty

loss deduction.    On January 15, 2009, petitioners filed a
                                 - 7 -

petition with this Court.    On December 4, 2009, a trial was held

in San Francisco, California.

                                OPINION

     Respondent determined that petitioners did not engage in

rental activity on the Dunlap property with an intent to derive a

profit and therefore disallowed petitioners’ casualty loss.

Petitioners contend that they purchased and improved the Dunlap

property with an intent to derive a profit from church and

corporate retreat rental activities and are therefore entitled to

deduct from their gross income the casualty loss relating to the

property.

     Subject to certain limitations, any loss sustained during

the taxable year and not compensated for by insurance or

otherwise is deductible.    See sec. 165(a).   In the case of

individuals, the losses deductible under section 165(a) are

limited to (1) losses incurred in a trade or business, see sec.

165(c)(1), (2) losses incurred in any transaction entered into

for profit, though not connected with a trade or business, see

sec. 165(c)(2), and (3) with respect to property not connected

with a trade or business or a transaction entered into for

profit, a casualty or theft loss, see sec. 165(c)(3).     Subsection

(h) of section 165 limits an allowable personal casualty loss

under section 165(c)(3) to the amount by which the loss exceeds

(1) $100 and (2) the sum of personal casualty gains plus 10
                                 - 8 -

percent of the adjusted gross income of the individual.

Petitioners’ alleged casualty loss of $119,304 does not exceed 10

percent of their adjusted gross income of $1,561,581.

Accordingly, they are precluded from obtaining a deduction under

section 165(c)(3).

     Petitioners bear the burden of proving that they are

entitled to a loss under section 165.     Remler v. Commissioner,

T.C. Memo. 2005-265, affd. 255 Fed. Appx. 196 (9th Cir. 2007);

see Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).3

     In the case of an individual, section 165(c)(1) allows a

deduction for an uncompensated loss incurred in a trade or

business.   To be engaged in a trade or business, an individual

must be involved in an activity with continuity and regularity,

and the primary purpose for engaging in the activity must be for

income or profit.    Commissioner v. Groetzinger, 480 U.S. 23, 35

(1987).   A sporadic activity, a hobby, or an amusement diversion

does not qualify.    Id.   Whether an individual is carrying on a




     3
      The burden of proof with respect to a factual issue
affecting a taxpayer’s liability for tax may shift to the
Commissioner under sec. 7491(a) if the taxpayer introduces
credible evidence regarding the issue and establishes compliance
with the requirements of sec. 7491(a)(2)(A) and (B) by
substantiating items, maintaining required records, and fully
cooperating with the Secretary’s reasonable requests. As
discussed below, we find that petitioners have failed to present
credible evidence of an income-producing purpose for their Dunlap
property activities or maintain adequate records. The burden of
proof, therefore, does not shift to respondent under sec.
7491(a).
                               - 9 -

trade or business requires an examination of the facts involved

in each case.   Higgins v. Commissioner, 312 U.S. 212, 217 (1941).

     Section 165(c)(2) authorizes a deduction for losses, in the

case of an individual, which are not compensated for by insurance

or otherwise which are “incurred in any transaction entered into

for profit, though not connected with a trade or business”.     The

Court of Appeals for the Ninth Circuit, to which an appeal in

this case would lie absent stipulation to the contrary, has held

that an activity is engaged in for profit if the taxpayer’s

“predominant, primary or principal objective” in

engaging in the activity was to realize an economic profit

independent of tax savings.   Wolf v. Commissioner, 4 F.3d 709,

713 (9th Cir. 1993), affg. T.C. Memo. 1991-212.    Section 1.183-

2(b), Income Tax Regs., sets forth a nonexclusive list of factors

to be considered in evaluating a taxpayer’s profit objective:

(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 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, from the activity; (8) the financial

status of the taxpayer; and (9) elements of personal pleasure or
                                - 10 -

recreation.   Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d

724, 726-727 (9th Cir. 1986), affg. Lahr v. Commissioner, T.C.

Memo. 1984-472; Antonides v. Commissioner, 91 T.C. 686, 694 n.4

(1988), affd. 893 F.2d 656 (4th Cir. 1990); Golanty v.

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

opinion 647 F.2d 170 (9th Cir. 1981).    No single factor or group

of factors is determinative.    Golanty v. Commissioner, supra at

426; Dunn v. Commissioner, 70 T.C. 715, 720 (1978), affd. 615

F.2d 578 (2d Cir. 1980); sec. 1.183-2(b), Income Tax Regs.    A

final determination is made by considering all facts and

circumstances.   Indep. Elec. Supply, Inc. v. Commissioner, supra

at 727; Antonides v. Commissioner, supra at 694; Golanty v.

Commissioner, supra at 426.

     “The proper focus of the test * * * is the taxpayer’s

subjective intent. * * * However, objective indicia may be used

to establish that intent.”     Skeen v. Commissioner, 864 F.2d 93,

94 (9th Cir. 1988), affg. Patin v. Commissioner, 88 T.C. 1086

(1987); see also Wolf v. Commissioner, supra at 713; Indep. Elec.

Supply, Inc. v. Commissioner, supra at 726.    The expectation of

making a profit need not be reasonable.     Beck v. Commissioner, 85

T.C. 557, 569 (1985); Dreicer v. Commissioner, 78 T.C. 642, 645

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983);

Golanty v. Commissioner, supra at 425-426.    However, greater

weight is given to objective facts than to a taxpayer’s self-
                               - 11 -

serving statement of intent.   Indep. Elec. Supply, Inc. v.

Commissioner, supra; Antonides v. Commissioner, supra at 694;

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

1256 (4th Cir. 1986).   To make our determination, we address the

nine factors found in section 1.183-2(b), Income Tax Regs.     See

Lowe v. Commissioner, T.C. Memo. 2010-129.

1.   The Manner in Which the Taxpayer Carries On the Activity

     The fact that the taxpayer carries on the activity in a

businesslike manner may indicate that the activity is engaged in

for profit.   Sec. 1.183-2(b)(1), Income Tax Regs.   Three common

inquiries are considered in this context:    (1) Whether the

taxpayer maintained complete and accurate books and records for

the activity; (2) whether the taxpayer conducted the activity in

a manner substantially similar to those of other comparable

activities that were profitable; and (3) whether the taxpayer

changed operating procedures, adopted new techniques, or

abandoned unprofitable methods in a manner consistent with an

intent to improve profitability.   Giles v. Commissioner, T.C.

Memo. 2005-28; sec. 1.183-2(b)(1), Income Tax Regs.

     Maintaining complete and accurate books and records may

indicate that an activity is a trade or business and engaged in

for profit.   Rozzano v. Commissioner, T.C. Memo. 2007-177.

Petitioners did not keep any books or records of the rental

activity.   The only records introduced into evidence consisted of
                                - 12 -

exhibits showing the purchase of the Dunlap property, the damage

caused by the fire, and a purported “lease” between petitioners

and UPC with no specified rental payments.     Thus, petitioners

have not shown that they maintained complete and accurate books

and records of a Dunlap property rental activity.

     Conducting an activity in a manner substantially similar

to those of other activities of the same nature which are

profitable may indicate that the activity is a trade or business

and engaged in for profit.     Remler v. Commissioner, T.C. Memo.

2005-265.   Evidence of such similarity may include “advertising,

maintaining a separate business bank account, the development of

a written business plan, and having a plausible strategy for

earning a profit.”   Id.    Petitioners did not advertise, maintain

separate bank accounts for a rental business, or develop a

business plan.   They did not prepare any advertisements or

promotional materials.     Petitioners bought the Dunlap property

using personal checks and credit cards, and always titled the

Dunlap property in their name.     Accordingly, they have not shown

that they conducted a rental activity in a manner similar to

those of other such activities that are profitable.

     Changing operating methods, adopting new techniques, or

abandoning “unprofitable methods in a manner consistent with an

intent to improve profitability” may indicate that the activity
                              - 13 -

is engaged in as a trade or business for profit.     Giles v.

Commissioner, supra; see also sec. 1.183-2(b)(1), Income Tax

Regs.   Petitioners’ Dunlap property rental activity has never

been profitable.   After the cabin was damaged in the fire,

petitioners did not attempt to rent out the remainder of the 160-

acre grounds.   Petitioners used the Dunlap property only for

charitable activities such as youth fishing trips and UPC men’s

retreats, activities which, although admirable, did not yield a

pecuniary benefit.   Petitioners have not shown an intent to

improve profitability, nor have they shown that they carried on a

Dunlap property rental activity in a businesslike manner.

2.   The Expertise of the Taxpayer or His Advisers

     “Preparation for the activity by extensive study of its

accepted business, economic, and scientific practices, or

consultation with those who are expert therein, may indicate that

the taxpayer has a profit motive where the taxpayer carries on

the activity in accordance with such practices.”   Sec. 1.183-

2(b)(2), Income Tax Regs.

     Petitioners did not conduct an extensive study or consult

with professionals before purchasing the Dunlap property.       Before

2004 petitioners’ only experience related to the rental retreat

business was renting vacant land next to their home to their

construction business and renting the Goshen property to

relatives.
                              - 14 -

3.   The Time and Effort Expended by the Taxpayer in Carrying
     On the Activity

     The fact that the taxpayer devotes much of his
     personal time and effort to carrying on an activity,
     particularly if the activity does not have substantial
     personal or recreational aspects, may indicate an
     intention to derive a profit. A taxpayer’s withdrawal
     from another occupation to devote most of his energies
     to the activity may also be evidence that the activity
     is engaged in for profit. * * * [Sec. 1.183-2(b)(3),
     Income Tax Regs.]

     Petitioners’ primary occupation in 2004 was managing their

lucrative construction business.

4.   The Expectation That Assets Used in the Activity May
     Appreciate in Value

     “The term ‘profit’ encompasses appreciation in the value of

assets, such as land, used in the activity.”   Sec. 1.183-2(b)(4),

Income Tax Regs.   Petitioners did not argue or produce evidence

to show that they bought the Dunlap property with the expectation

that it would appreciate in value.

5.   The Success of the Taxpayer in Carrying on Other Similar
     or Dissimilar Activities

     “The fact that the taxpayer has engaged in similar

activities in the past and converted them from unprofitable to

profitable enterprises may indicate that he is engaged in the

present activity for profit, even though the activity is

presently unprofitable”.   Sec. 1.183-2(b)(5), Income Tax Regs.

     Petitioners conducted limited rental activities by leasing

property for long periods to relatives and their construction
                               - 15 -

business.    No agreement was ever made to rent out the Dunlop

property.4

     Petitioners’ construction business was extremely profitable,

but dissimilar to their planned Dunlap property rental activity.

As discussed above, petitioners did not carry on a Dunlap

property rental activity for profit.

6.   The Taxpayer’s History of Income or Losses With Respect
     to the Activity

     A series of losses during the initial or start-up stage
     of an activity may not necessarily be an indication
     that the activity is not engaged in for profit.
     However, where losses continue to be sustained beyond
     the period which customarily is necessary to bring the
     operation to profitable status such continued losses,
     if not explainable, as due to customary
     business risks or reverses, may be indicative that the
     activity is not being engaged in for profit. * * *
     [Sec. 1.183-2(b)(6), Income Tax Regs.]

     Petitioners never profited from the Dunlop property.

7.   The Amount of Occasional Profits, if Any, From the
     Activity

     “The amount of profits in relation to the amount of losses

incurred, and in relation to the amount of the taxpayer’s

investment and the value of the assets used in the activity, may

provide useful criteria in determining the taxpayer’s intent.”

Sec. 1.183-2(b)(7), Income Tax Regs.    “[A]n opportunity to earn a


     4
      Mr. Sandoval’s retreat rental business plan was to rent the
cabin and land on the Dunlap property to various churches and
corporations for one-time events, each consisting of a lease term
of several days or perhaps weeks. This is distinct from renting
a residence or business site to a single entity for several
months or years at a time.
                                 - 16 -

substantial ultimate profit in a highly speculative venture is

ordinarily sufficient to indicate that the activity is engaged in

for profit even though losses or only occasional small profits

are actually generated.”   Id.

     Petitioners paid $177,800 for the Dunlap property in 2004

and then spent substantial sums improving it.     Petitioners never

made a profit on the Dunlap property, but their conversations

with UPC parishioners and other church officials led them to

believe that the area would be desirable as a destination for

church and corporate retreats.     Petitioners also used the

property to host various church retreats after 2004.     However,

petitioners never attempted to earn income to offset their

investment in the property, even after hosting several successful

camping trips on the site and having several years in which to

repair damage done to the property by the fire.

8.   The Financial Status of the Taxpayer

     “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.

     Petitioners earned over $1.5 million in wages from their

construction business in 2004.     Those wages constitute
                              - 17 -

substantial income.   After 2004 petitioners used the property for

church retreats and other charitable activities without charging

rent, thus indicating that petitioners’ activities regarding the

Dunlap property fostered some personal or recreational elements.

9.   Elements of Personal Pleasure or Recreation

     “The presence of personal motives in carrying on of an

activity may indicate that the activity is not engaged in for

profit, especially where there are recreational or personal

elements involved.”   Sec. 1.183-2(b)(9), Income Tax Regs.

Although arduous labor is not a prerequisite to deductibility,

see Jackson v. Commissioner, 59 T.C. 312, 317 (1972), “the

gratification derived from an occupation worth doing, possibly

beneficial to others, and probably requiring long hours of

arduous labor, must still not be confused with an intention to

return a profit”, White v. Commissioner, 23 T.C. 90, 94 (1954),

affd. 227 F.2d 779 (6th Cir. 1955).

     Petitioners have not shown that they have used the property

in any way other than for the benefit of UPC and petitioners’

community.   Petitioners drew up a purported “lease” of Dunlap

property to UPC which listed no form of payment and have let

church groups use the property for retreats and camping trips on

several occasions without charging rent.   Ultimately, petitioners

have not shown that their actions with regard to the Dunlap

property were primarily intended to turn a profit.
                                - 18 -

     After considering all of the above factors as applied to the

facts and circumstances of this case, we conclude that

petitioners’ Dunlap property activity did not rise to the level

of a trade or business pursuant to section 165(c)(1), and was not

entered into with the intent to derive a profit pursuant to

section 165(c)(2).

                           Conclusion

     As petitioners have not shown that they meet the

requirements of any of the subsections of section 165(c), they

are not entitled to deduct the loss resulting from the fire on

the Dunlap property for 2004.

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      for respondent.
