                       T.C. Memo. 1999-350



                     UNITED STATES TAX COURT



                GILBERT J. AREVALO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13815-98.                   Filed October 21, 1999.



     Gilbert J. Arevalo, pro se.

     Andrew Moore, for respondent.



                       MEMORANDUM OPINION

     WOLFE, Special Trial Judge:     Respondent determined a

deficiency in petitioner's Federal income tax in the amount of

$7,428 for the taxable year 1996.    Unless otherwise indicated,

section references are to the Internal Revenue Code in effect for

the year in issue, and Rule references are to the Tax Court Rules

of Practice and Procedure.
                               - 2 -

     After concessions made by respondent, the remaining issues

for decision are:   (1) Whether petitioner's consulting activity

was an activity engaged in for profit within the meaning of

section 183, and (2) whether petitioner has substantiated the

nature and amount of various deductions he claimed on the

Schedules C attached to his 1996 Federal income tax return.1

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioner resided in San

Jose, California, when the petition in this case was filed.

     During 1996, petitioner was employed full time as an

engineer for Ultratech Stepper, Inc. (Ultratech).   In 1996,

petitioner received wages from his employment with Ultratech in

the amount of $41,537.   Petitioner contends that he worked for

Ultratech, 40 hours per week and that he spent all of his spare

time conducting a consulting business.   Petitioner asserts that

his consulting activity involved instructing clients in personal

investment strategies, including a covered option trading

technique.   Petitioner contends that he spent 30 to 40 hours each

week engaged in the consulting activity.


1
     In his trial memorandum, respondent concedes that petitioner
is liable for self-employment tax only in the amount of $221 and
that petitioner is entitled to a self-employment tax deduction in
the amount of $110. Petitioner's liability for self-employment
tax and an adjustment to his corresponding deduction are
computational adjustments that depend on the resolution of the
issues in dispute in this case.
                                - 3 -

     Petitioner did not have a separate office to conduct his

consulting activity.    Rather, petitioner asserts that he met

clients at restaurants and that he used space in his home to

prepare client presentations and to perform administrative tasks.

Petitioner further contends that he rented space to store the

activity's records.    Petitioner failed to present the records at

trial.   Instead, petitioner testified that he has discarded the

activity's records.    Petitioner did not maintain a separate

business telephone line or a separate business bank account.

     On the Schedule C attached to his 1996 Federal income tax

return, petitioner listed his business activity as "Instructor".

For 1996, petitioner reported gross receipts for the consulting

activity in the amount of $1,563 and claimed the following

deductions:

           Expenses

           Advertising                          $650
           Car & truck                         7,327
           Depreciation                        6,201
           Legal & prof. services                275
           Office expense                        773
           Repairs & maintenance                 529
           Supplies                               27
           Travel                              1,511
           50% meals & entertainment           2,101
           Business gifts                        203
           Cleaning                              138
           Demos, training                       507
           Dues, publications                    473
           Educational supp.                     150
           Field accommodations                  175
           Incentive/awards                      425
           Postage                               102
           Storage                             1,249
                               - 4 -

          Telephone                              123

             Total                           22,939

     Petitioner received a bachelor of arts degree with a major

in optical engineering and a minor in mathematics.     Petitioner

does not have a license to trade securities; he has not taken any

formal education in the trading of securities.

     Respondent determined that petitioner's consulting activity

was not an activity engaged in for profit.   In the alternative,

respondent determined that petitioner's claimed Schedule C

expenses were personal expenses and not ordinary and necessary

business expenses.

     Section 183 provides that if an activity engaged in by an

individual is not engaged in for profit, no deduction

attributable to such activity shall be allowed, except as

provided in section 183(b).   In the case of an activity not

engaged in for profit, section 183(b)(1) allows a deduction for

expenses that are otherwise deductible without regard to whether

the activity is engaged in for profit.   Section 183(b)(2) allows

a deduction for expenses that would be deductible only if the

activity were engaged in for profit, but only to the extent that

the total gross income derived from the activity exceeds the

deductions allowed by section 183(b)(1).

     An "activity not engaged in for profit" is any activity for

which deductions would not be allowed under section 162 or under
                                - 5 -

paragraph (1) or (2) of section 212.    Sec. 183(c).   Section 162

allows a deduction for all the ordinary and necessary expenses

paid or incurred in carrying on a trade or business.     Section 212

allows a deduction for all the ordinary and necessary expenses

paid or incurred for the production or collection of income, or

for the management, conservation, or maintenance of property held

for the production of income.   The profit standards applicable to

section 212 are the same as those applicable to section 162.      See

Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir. 1990),

affg. 91 T.C. 686 (1988).

     For a taxpayer to deduct expenses of an activity pursuant to

section 162, the taxpayer must show that he or she engaged in the

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

See sec. 183; Ronnen v. Commissioner, 90 T.C. 74, 91 (1988);

Fuchs v. Commissioner, 83 T.C. 79, 97-98 (1984); Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.

Although a reasonable expectation of profit is not required, the

taxpayer's profit objective must be bona fide.    See Hulter v.

Commissioner, 91 T.C. 371, 393 (1988); Beck v. Commissioner, 85

T.C. 557, 569 (1985).   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 Carter v.

Commissioner, 645 F.2d 784, 786 (9th Cir. 1981), affg. T.C. Memo.
                               - 6 -

1978-202; Hulter v. Commissioner, supra at 393; 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

Beck v. Commissioner, supra at 570; Thomas v. Commissioner, 84

T.C. 1244, 1269 (1985), affd. 792 F.2d 1256 (4th Cir. 1986); sec.

1.183-2(a), Income Tax Regs.

     Section 1.183-2(b), Income Tax Regs., provides a

nonexclusive list of factors that should be considered in

determining whether an activity is engaged in with the requisite

profit objective.   The nine factors are:   (1) The manner in which

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

taxpayer or his or her advisers; (3) the time and effort expended

by the taxpayer in carrying on the activity; (4) the expectation

that the assets used by the taxpayer 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, which are earned; (8) the

financial status of the taxpayer; and (9) whether elements of

personal pleasure or recreation are involved.   No single factor,

nor the existence of even a majority of the factors, is

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

circumstances in the case, taken as a whole, which is
                                - 7 -

determinative.   These factors are not applicable or appropriate

in every case.   See Abramson v. Commissioner, 86 T.C. 360, 371

(1986).

     Based upon the above factors as applied to the circumstances

of this case, we find that petitioner did not engage in the

consulting activity for profit.

     First, petitioner's consulting activity was not conducted in

a businesslike manner.   Petitioner did not maintain a separate

bank account, formal accounts, or books for the consulting

activity.   He did not even have his own telephone line for this

activity but used a roommate's line.    Petitioner's failure to

keep client lists and business records supports the conclusion

that he did not conduct the activity in question in a manner

calculated to produce a profit.

     Petitioner also has failed to convince us of his claim that

he expended virtually all of his nonemployment hours carrying on

the consulting activity.    We find that petitioner's claims

regarding the amount of time he spent pursuing the consulting

activity are exaggerated.    Furthermore, petitioner's reliance on

his diary to substantiate the amount of time he spent pursuing

the activity is unconvincing.    Petitioner has conceded that his

diary entries were not even written contemporaneously.    The

record as a whole is consistent with the conclusion that

petitioner's investment advisory activity was a spare time
                               - 8 -

activity that consumed only a modest portion of petitioner's work

week.

     Petitioner has also failed to demonstrate any expertise in

the securities industry.   Petitioner does not have a license to

trade securities or any formal training in investing.    He has no

employment history in the brokerage business or in any aspect of

the securities and investment consulting field.    He has shown no

experience in the area of his alleged consulting activity.

     Petitioner had substantial income from sources other than

the investment consulting activity.    During the year at issue,

petitioner was employed full time as an engineer.    In 1996,

petitioner received wages from his employment as an engineer in

the amount of $41,537.

     Lastly, petitioner has not provided us with evidence that

demonstrates that he has a history of generating income from this

investment consulting activity.   Accordingly, based upon the

above factors we hold that petitioner did not engage in the

consulting activity for profit.   On the contrary, the record, and

particularly the substantial claimed expenses, indicates that the

activity, such as it was, was conducted for the purpose of

supporting a claim to offset Schedule C losses against wages

earned in an entirely separate employment activity.

     Our finding that petitioner did not engage in the consulting

activity for profit does not end our inquiry.    For 1996,
                                - 9 -

petitioner reported gross receipts from the consulting activity

in the amount of $1,563.   Section 183(b)(2) allows a deduction

for expenses that would be deductible only if the activity were

engaged in for profit, but only to the extent that the total

gross income derived from the activity exceeds the deductions

allowed by section 183(b)(1).   Therefore, we must decide whether

petitioner has substantiated the expenses he claimed on the

Schedule C attached to his 1996 Federal income tax return.

     Respondent determined that petitioner's claimed Schedule C

expenses were personal in nature and not ordinary and necessary

expenses of petitioner's purported investment activity.   In

general, where an expenditure is primarily associated with

business purposes, and where personal benefit is distinctly

secondary and incidental, the expenditure may be deducted under

section 162.   See International Artists, Ltd. v. Commissioner, 55

T.C. 94, 104 (1970).   Conversely, if an expenditure is primarily

motivated by personal considerations, generally no deduction will

be allowed.    See Henry v. Commissioner, 36 T.C. 879, 884 (1961).

An expenditure is not "ordinary and necessary" unless the

taxpayer establishes that it is directly connected with, or

proximately related to, the taxpayer's activities.   See Bingham's

Trust v. Commissioner, 325 U.S. 365, 370 (1945).

     Taxpayers are required to keep sufficient records to enable

the Commissioner to determine their correct tax liability.     See
                                - 10 -

sec. 6001.    Under certain circumstances, where a taxpayer

establishes entitlement to a deduction but does not establish the

amount of the deduction, the Court is permitted to estimate the

amount allowable.    See Cohan v. Commissioner, 39 F.2d 540 (2d

Cir. 1930).    However, there must be sufficient evidence in the

record to permit the Court to conclude that a deductible expense

was incurred in at least the amount allowed.    See Williams v.

United States, 245 F.2d 559, 560 (5th Cir. 1957).    In estimating

the amount allowable, the Court bears heavily against the

taxpayer whose inexactitude is of his or her own making.      See

Cohan v. Commissioner, supra at 544.

     Section 274(d) overrides the Cohan doctrine in the case of

travel expenses, meals and lodging while away from home, and

"listed property".     Sanford v. Commissioner, 50 T.C. 823, 827

(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-

5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985).   Section 274(d) imposes stringent requirements to which

taxpayers must strictly adhere.    Under section 274, a taxpayer

must substantiate the amount, time, place, and business purpose

of the expenditures and must provide adequate records or

sufficient evidence to corroborate his own statement.    See sec.

1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985).     Adequate records are defined as an account book,

diary, log, statement of expense, trip sheets, or similar
                               - 11 -

records.   See sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50

Fed. Reg. 46017 (Nov. 6, 1985).     Passenger automobiles are listed

property under section 280F(d)(4)(A)(i).

     As discussed above, petitioner's consulting activity was not

carried on in a businesslike manner.     Petitioner did not maintain

a separate business bank account, formal books, or accounts of

the activity's transactions.     Instead, to substantiate his

claimed Schedule C expenses, petitioner presented this Court with

a group of receipts.   Contrary to petitioner's assertions, most

of the receipts do not establish the business purpose of

petitioner's claimed expenses.     However, petitioner reported

gross receipts from his consulting activity for 1996 in the

amount of $1,563.   We find that in regard to the expenses claimed

that are not subject to section 274(d), there is sufficient

evidence in the record to allow deductions up to the amount of

gross receipts.   Accordingly, we hold that petitioner is entitled

to deductions for Schedule C expenses in the amount of $1,563.

See sec. 183(b)(2).

     To reflect the foregoing,



                                      Decision will be entered

                                 under Rule 155.
