                              T.C. Memo. 2019-120



                        UNITED STATES TAX COURT



  WP REALTY, LP, OLYMPIA REALTY, INC., TAX MATTERS PARTNER,
   Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 27213-16.                        Filed September 16, 2019.



      Steven Todd Miller, Jeremy M. Fingeret, and Robert G. Wonish II, for

petitioner.

      Candace M. Williams, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      KERRIGAN, Judge: This case was commenced in response to a Notice of

Final Partnership Administrative Adjustment (FPAA), dated September 26, 2016,

issued to Olympia Realty, Inc. (Olympia), as the tax matters partner of WP Realty,

LP (WP Realty), for tax years 2011, 2012, 2013, and 2014 (years in issue). In the
                                        -2-

[*2] FPAA the Internal Revenue Service (IRS or respondent) disallowed

deductions for losses from a trade or business of $3,137,519, $2,876,390,

$3,991,889, and $4,329,800 for tax years 2011, 2012, 2013, and 2014,

respectively.

      The sole issue for our consideration is whether WP Realty engaged in the

activity of operating a golf course with the objective of making a profit under

section 183. Unless otherwise indicated, all section references are to the Internal

Revenue Code (Code) in effect for the tax years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure. We round all monetary

amounts to the nearest dollar.

                                 FINDINGS OF FACT

      Some of the facts have been stipulated, and the stipulation of facts and

attached exhibits are incorporated herein by this reference. When the petition was

timely filed, WP Realty’s principal place of business was in Texas.

      WP Realty is a limited partnership formed under the laws of the State of

Texas. It operates as the owner and developer of Whispering Pines Golf Club

(Whispering Pines). WP Realty elected to be treated as a partnership for Federal

income tax purposes for the years in issue.
                                       -3-

[*3] Olympia is the general partner of WP Realty and owns a 1% interest.

Corbin Robertson is the limited partner and owns the remaining 99% interest.

Olympia, a Texas corporation, is an S corporation for Federal tax purposes and is

wholly owned by Olympia Enterprises, Inc. (OE). Robertson is the sole owner of

OE, an S corporation for Federal tax purposes.

I.    Robertson’s Background

      During the years in issue Robertson served as the chief executive officer

and chairman of the board of directors of two companies publicly traded on the

New York Stock Exchange: Quintana Energy Services, Inc., an oil field service

company, and Natural Resource Partners, LP, a master limited partnership. During

the years in issue Robertson’s adjusted gross income was as follows:

                          Year     Adjusted gross income

                          2011          $28,789,672
                          2012          106,622,871
                          2013            37,351,629
                          2014            20,046,983

      Robertson made investments in real estate during his business career. From

1969 until 1983 he was the director of the Cullen Center, a mixed-use real estate

development which included a hotel, near downtown Houston, Texas. The
                                         -4-

[*4] development was a family-owned investment consisting of 2.5 million square

feet of office space and hotel rooms. The hotel was never profitable the entire

time Robertson’s family owned the property. However, the Cullen Center,

including the hotel, was sold at a profit in 1983.

      Robertson was also a partner in and director of Northwest Crossing near

Houston. He installed the infrastructure and sold off parcels for individual

development. Robertson profited from selling lots at Northwest Crossing.

      In 1983 Robertson began developing Davenport Ranch, a golf course and

residential community in Austin, Texas. In designing the golf course at Davenport

Ranch, Robertson worked with course architect Pete Dye, an accomplished golf

course architect, to understand the contours of routing the course in accord with

the topography of the land. Austin Country Club moved its operations to

Davenport Ranch, and it had approximately 700 members, including well-known

professional golfers.

      Having Austin Country Club operate on Davenport Ranch provided a

profitable membership base. Members of Austin Country Club were interested in

purchasing residential lots. The sale of the residential lots took longer than

expected because of the economic downturn in Texas in the 1980s. The project
                                         -5-

[*5] was not debt financed, and Robertson believes that is why the project did not

fail. The final residential lots were sold in the late 1990s.

      Robertson also was a joint developer of Bear Creek Community (Bear

Creek), a residential community adjacent to two public golf courses in Houston.

Bear Creek took approximately 10 years to be profitable.

II.   Background of Whispering Pines

      In 1968 Robertson and a friend founded Camp Olympia, an overnight camp

for inner-city youth, in Trinity County, Texas, a rural area roughly 90 miles north

of Houston. This area was isolated and underdeveloped. Two years later

Robertson purchased over 660 adjacent acres, which became the site of

Whispering Pines.

      Golf has been taught at Camp Olympia since the 1970s. In the early 1990s

timber was removed from the adjacent acreage and Camp Olympia used a portion

of that tract to practice golf. A golf adviser to Camp Olympia suggested that the

tract could be turned into an 18-hole golf course. Three holes were built, and

Robertson did more research about developing a golf course.

      Chet Williams of Jack Nicklaus Productions was hired to formally lay out

and design an 18-hole championship golf course. Williams has designed more

than 30 golf courses. Course construction was completed in 2000, and
                                         -6-

[*6] Whispering Pines officially opened. During course construction Robertson

contacted a developer to discuss the routing of the course for future residential

development.

      Robertson wanted to promote amateur golf and create an international

amateur golf championship. To further these efforts he created World Health and

Golf Association, which changed its name to Spirit Golf Association (SGA) in

2011. SGA was incorporated on April 7, 1999, as a nonprofit corporation under

the laws of the State of Texas. At this point Robertson planned on donating the

land, including the golf course, to charity.

      In June 1999 SGA applied to the IRS for tax-exempt status under section

501(a) as a corporation that would foster national and international amateur

competition by conducting an amateur golf championship and supporting and

developing amateur athletes. The application explained that excess funds would

be used to promote charitable and educational activities within the meaning of

section 501(c)(3). On January 13, 2000, the IRS denied SGA’s application for

tax-exempt status, determining that a substantial purpose of the organization was

providing a club facility rather than exclusively supporting charitable or

educational purposes. On February 11, 2000, SGA protested that it was organized

and would be operated exclusively to foster national and international amateur
                                         -7-

[*7] golf. The protest letter stated there was no potential for real estate

development adjacent to the golf course.

       After further discussions the IRS approved SGA’s tax-exempt status in

April 2000. The approval reflected a compromise between the IRS and SGA.

SGA would focus solely on charitable activities, including hosting the Spirit

World Amateur Golf Championship (Spirit Golf Tournament) and other amateur

events and distributing funds to the Texas Medical Center. SGA would not own

or operate assets of the golf course. To reflect the compromise SGA and Olympia

would enter into a nonexclusive lease agreement in which SGA would have access

to the golf course and facilities. On June 1, 2000, Olympia entered into separate

lease agreements with SGA and Camp Olympia.

III.   WP Realty

       After an agreement was made regarding the charitable status of SGA,

Robertson changed his plans for Whispering Pines. It was now going to be a for-

profit course. In August 2001 Robertson and Olympia formed WP Realty. As the

limited partner Robertson contributed a promissory note of approximately $16

million. Olympia contributed to WP Realty the golf course, which consisted of

approximately 520 acres, the golf house, maintenance buildings, and related

equipment.
                                       -8-

[*8] Since 2005 Robertson made the following capital contributions to WP

Realty:

                         Year      Capital contributions

                         2005              $2,726,679
                         2006               2,253,322
                         2007               3,102,446
                         2008               4,797,843
                         2009               2,756,914
                         2010               2,572,096
                         2011               3,251,232
                         2012              10,933,256
                         2013              22,497,000
                         2014              11,616,953
                         2015               9,895,626
                         2016                476,752
                                       1
                          Total            76,880,119

      1
      The parties stipulated that Robertson’s total capital contributions were
approximately $101 million.

      On September 19, 2001, Olympia assigned both the SGA and the Camp

Olympia lease to WP Realty. For the years in issue SGA and Camp Olympia paid

rent to WP Realty as follows:
                                       -9-

[*9]                                             Rent paid by
                    Year   Rent paid by SGA     Camp Olympia

                    2011        $500,000             $175,000
                    2012         500,000              175,000
                    2013         500,000              175,000
                    2014         558,335              175,000

       A.    SGA Membership

       Eric Fredricksen was director of SGA during the years in issue. His role

was to run the Spirit Golf Tournament and to manage the SGA membership

program at Whispering Pines. He reported to the founder, Robertson, and SGA’s

board of governors, which consisted of a mix of individuals who had experience

with charities or golf.

       An SGA membership was required to play golf at Whispering Pines.

Members of SGA paid annual membership fees that entitled them to a set number

of rounds of golf at Whispering Pines. Fifty percent of each annual membership

fee was acknowledged as a charitable contribution.

       The set number of rounds allotted for each membership category was

calculated by dividing half of the membership fee by the cost per round of golf

negotiated between WP Realty and SGA in the lease agreement. For 2007-10 an
                                       - 10 -

[*10] individual membership cost $10,000, and the member was entitled to 33

rounds of golf. For the years in issue an individual membership cost $12,000, and

the member was entitled to 40 rounds of golf. In 2015 the cost of an individual

golf membership increased to $15,000, resulting in 45 rounds of golf.

      After reaching the threshold of allotted golf rounds, members had the option

to either reduce their charitable contributions by additional rounds of golf played

or pay set fees for additional rounds. For 2007-13 members reduced their

charitable contributions by $150 per round after reaching the number of rounds

allotted or paid $150 per round. For 2014-15 members paid $250 per additional

round.

      SGA offered various types of memberships, including individual, national,1

and corporate. A corporate membership allowed up to eight employees to be

designated as members of SGA. Membership revenue was $660,000 in 2000 and

increased each year. The table below provides an annual summary of individual

membership costs, the number of individual members, national membership costs,

the number of national members, corporate membership costs, the total number of

members, and total revenue from membership:


      1
     Starting around 2007 the criteria for a national member changed. It became
a membership for those who were not Texas residents.
                                                      - 11 -

[*11]                         Number                      Number
                Individual       of         National         of         Corporate                      Total
               membership    individual    membership     national     membership       Total        membership
   Year            cost       members         cost        members         cost         members1       revenue


   2003          $5,000         186            n/a           n/a         $25,000           201        $1,395,000

   2004          10,000           80         $5,000            10          25,000          113         1,435,000

   2005          10,000           81          5,000            31          25,000          135         1,555,000

   2006          10,000           69          5,000            46          25,000          149         1,560,000

   2007          10,000           70          6,000            46          25,000          161         1,695,500

   2008          10,000           73          6,000            51          25,000          172         1,845,500

   2009          10,000           82          6,000            65          25,000          183         1,817,000

   2010          10,000           82          6,000            70          25,000          196         2,030,000

   2011          12,000           82         10,000            45          30,000          165         2,284,000

   2012          12,000           82         10,000            45          30,000          174         2,522,000

   2013          12,000         128            n/a           n/a           30,000          178         2,724,000

   2014          12,000         129            n/a           n/a           30,000          182         2,814,000

   2015          15,000         118            n/a           n/a           35,000          170         3,307,500

   2016          15,000         153            n/a           n/a           35,000          220         4,067,500

   2017          15,000         145            n/a           n/a           35,000          214         4,122,500

   Total                                                                                              35,174,500

           1
          This table does not include (1) all types of memberships offered, (2) the number of members in each
category, or (3) the cost of each membership type.

           SGA also offered sponsorships of the Spirit Golf Tournament, which it had

hosted since 2001. SGA was responsible for the operation of the Spirit Golf

Tournament, which occurred every other year. These sponsorships include rounds

of golf at Whispering Pines, and SGA allocated funds to WP Realty for these
                                        - 12 -

[*12] rounds of golf. The following table summarizes the total number of

sponsors and sponsorship revenue SGA received:

                            Total number of      Total sponsorship
                    Year       sponsors               revenue


                    2005           36                $506,500
                    2007           59                 592,200
                    2009           53                 532,000
                    2011           50                 751,000
                    2013           79                 929,500
                    2015           80               1,499,500
                    2017           44                 788,286

      B.    Relationship Between WP Realty and SGA

      The SGA board (board) consisted of individuals with a variety of

experience. The board had a lease committee that made recommendations to the

full board on the amount of the base rent and the cost per round. Two members of

the board were chosen to represent WP Realty’s interest in lease negotiations. WP

Realty did not have representation independent from SGA during the lease

negotiations. Robertson did not participate in the lease negotiations. As part of

the compromise with the IRS Robertson recused himself from the discussion and
                                        - 13 -

[*13] the vote on the lease arrangement between SGA and Olympia.2 The

agreement also required that the board be expanded so that a majority of the board

members were independent.

      The initial lease assigned to WP Realty was a nonexclusive lease that

included a base rent of $800,000 per year and a usage fee of $130 for each round

of golf played by an SGA member, a guest, or an invitee. WP Realty surveyed

top-rated golf courses to determine the rate of a round of golf. The initial lease

was amended and restated on June 1, 2004, and it stated that Whispering Pines

was developed to be the home of SGA and the Spirit Golf Tournament. It

provided a base rent of zero. Pursuant to the terms of the lease WP Realty would

pay all operating expenses. The lease provided no fee per round of golf played by

a member.

      During the years in issue the 2004 lease agreement as amended on February

23, 2007, was in effect. The base rent remained zero and the lease included a

usage fee of $150 for each round of golf played by an SGA member, a guest, or an

invitee. The 2007 amended lease was not updated until 2014, and the second

amended and restated lease was effective as of June 1, 2014. The 2014 lease

provided a base rent of $600,000 per year and the usage fee was increased to $165.

      2
          Olympia assigned the lease to WP Realty.
                                      - 14 -

[*14] An amendment to the 2014 lease was made on January 1, 2016. This

amendment increased the rent to $350,000 per month and provided a formula for

indexing the rent for inflation. No change was made to the usage fee.

      Even though the lease provided for a base rate of zero during the years in

issue, SGA paid rent to WP Realty each year. In addition to the base rent and

usage fee per round, guest green fees were paid to WP Realty. During the years in

issue SGA paid the following to WP Realty:3

                       Rounds of golf SGA members       Total SGA paid for base
 Year      Base rent    played at Whispering Pines      rent and rounds of golf

 2011      $500,000               4,010                        $1,161,650
 2012       500,000               4,574                         1,254,710
 2013       500,000               4,735                         1,281,279
 2014       558,335               5,297                         1,432,340

      C.     Business Plans

      WP Realty did not borrow money to fund the operations of Whispering

Pines. It received revenue from sources besides the rent that it received from SGA

and Camp Olympia. For years 2005-16 Whispering Pines received revenue as

follows:


      3
        The parties agreed to the numbers in this table, which were taken from
stipulated exhibits.
                                      - 15 -

[*15]
  Year     Green fees     Food & beverage      Golf merchandise      Cottages

                                                                       1
  2005      $182,499         $108,391             $114,320                 -0-
  2006       204,502          172,700               139,325          $166,461
  2007       683,011          148,085               206,804           186,285
  2008       738,932          142,325               238,310           205,079
  2009       758,478          242,224               277,665           196,250
  2010       862,104          292,143               309,415           212,885
  2011       849,923          279,067               338,600           203,858
  2012       963,753          299,203               351,162           212,730
  2013       975,228          319,396               441,434           217,770
  2014     1,123,249          305,440               408,021           211,808
  2015     1,168,540          404,400               458,218           227,407
  2016             (2)        500,647               589,389           572,040
  Total    8,510,219        3,214,021             3,872,663         2,612,573

      1
         Revenue from cottages was not reported on WP Realty’s 2005 profit and
loss statement.
       2
         Revenue from green fees was not available for 2016.

      Once the decision was made that Whispering Pines would be run as a for-

profit business, Robertson was unsure whether it was going to work because of its

rural location so he decided to make improvements gradually. WP Realty had

business plans for Whispering Pines drafted for 2004, 2007, and 2015-18. The

business plans addressed ways to improve Whispering Pines’ revenue streams.
                                        - 16 -

[*16] The mission of WP Realty according to the 2004 business plan was “[t]o

provide a World-Class recreational experience for the Members and Guests of the

WHGA and Whispering Pines with a philanthropic Spirit to benefit the health and

well-being of all who participate”. The membership goal was to grow and

maintain a number of members no greater than 1% below capacity. It identified

growth in individual membership as one of WP Realty’s areas of opportunity and

stated that WP Realty wanted to reach 80 individual members and 20 corporate

members by March 2004. The construction goals were to build and sell six

cottages and complete construction of a clubhouse and town center. The financial

goal was to break even between SGA and WP Realty while contributing to charity.

The plan addressed increasing guest fees and cottage rates.

      The 2007 future expansion business plan (2007 business plan) stated that

the strategic plan “will solidify the foundation and infrastructure for the future of

Whispering Pines Golf Club moving forward on a profitable self-sustaining basis”.

The 2007 business plan covered the years in issue. It included a section entitled

“Alignment with WP Realty’s Goals and Expectations”, which listed the

following: establish a membership that fosters an environment that projects a

philanthropic endeavor and spirit; build, manage, and operate a first-class golf

facility; operate a program to teach youth life skills through the game of golf; and
                                        - 17 -

[*17] promote amateur golf for philanthropic purposes. It identified challenges

pertaining to Whispering Pines’ infrastructure, including the lack of cottages, a

small golf house, and lack of a short game practice facility. The 2007 business

plan also identified weaknesses, including the size of the kitchen space within the

clubhouse and the lack of capacity to host overnight guests when occupancy levels

were high.

      The “Growth and Marketing Opportunities to Realize Additional Revenue”

section of the 2007 business plan listed increasing corporate membership to 40.

The corporate membership in 2007 was 18. It also suggested adding a new

membership category, national member, for individuals living outside Texas. This

membership would cost less than an individual membership. Another revenue

growth opportunity identified was increasing cottage rental rates.

      Unfortunately, after the 2007 business plan was in place, the economy

struggled and the golf industry was affected. Not all of the goals of the 2007

business plan could be met. The town center, first proposed in the 2004 business

plan, has not yet been built. However, building a town center is still a goal.

      WP Realty’s mission according to the 2015-18 business plan was “[t]o

provide a world-class experience for the Members and Guests of the SGA and

Whispering Pines with a philanthropic Spirit to benefit the health and well-being
                                       - 18 -

[*18] of all who participate”. An opportunity identified in the plan was the

potential of increasing membership to expand the customer base. It included

revenue goals that addressed increasing the number of rounds of golf played on

the 18-hole course and the new 9-hole course completed in 2013, the allocated

round amount, the guest paid amount, the number of cottages on site, and the rates

charged for cottages. It called for increasing the rounds played on the 18-hole

course by 12% per year and increasing the number of rounds played on the 9-hole

course to one-third of the rounds played on the 18-hole course. Allocated round

amounts were to increase by 10% every two years, and the guest paid amount was

to increase by 5% annually. Rates for cottages were to increase by 5% annually.

      Whispering Pines was a destination golf course because it is over 90 miles

from a significant population center. Each of the business plans described how

WP Realty could increase revenue by increasing its capabilities to host destination

meetings, seminars, and corporate retreats. The 2004 business plan identified

“corporate meetings and outings destination” as an opportunity for growth. The

2007 business plan called for marketing to businesses about the “increased

capabilities for destination meeting[s, and] seminars”.
                                       - 19 -

[*19] D.     Improvements

      Since 2007 numerous improvements have been made to Whispering Pines

and the course itself. Between 2007 and 2009 the golf maintenance facilities were

updated at a cost of $708,000. A new 8,750-square-foot administration building

provided offices and lockers as well as a chemical room and an irrigation room.

This building also included a golf cart barn. In 2009 WP Realty constructed an

indoor golf teaching facility for approximately $38,000.

      In 2010 WP Realty began constructing a nine-hole, par-three course that

would allow guests to sharpen their short-game skills and increase the number of

players per day that Whispering Pines could host. The construction of this nine-

hole course was part of the 2007 business plan. Williams, who designed the 18-

hole course, also designed the 9-hole course, which became known as the Needler.

It cost over $5 million and was completed in 2013. With the addition of the

Needler, WP Realty decided to improve and expand its irrigation facilities with the

construction of the Gristmill in 2013. WP Realty spent $1,249,000 to build the

Gristmill, which served as a pump house for both courses. The Gristmill, which is

at the halfway point of the 18-hole course, also allowed golfers a place to rest and

purchase food and beverages.
                                        - 20 -

[*20] WP Realty built the Roost in 2013, which was an outdoor pavilion next to

the Gristmill. Construction costs for the Roost were $816,000. The Roost

provided a place for Whispering Pines to host events and serve food and

beverages.

      The 2007 business plan identified the need to improve the kitchen and

dining facilities. Whispering Pines initially had a clubhouse with a kitchen that

could accommodate only 32 guests. Spirit Hall, the new dining facility, was

designed and built between 2012 and 2015 at a cost of $5.5 million. Spirit Hall

can accommodate approximately 100 guests and has a commercial kitchen that is

much larger than the original kitchen facility.

      Throughout the years improvements were made to the 18-hole course. In

2012 renovations were made to the bunkers at a cost of $852,000. WP Realty

invested $740,000 to improve the driving range and bunker practice area.

Renovations were also made to the putting greens at cost of $145,000.

      The 2004 and 2007 business plans identified the lack of accommodations

for overnight guests as an area for improvement. In 2002 Olympia built 4 cottages

on land it owned adjacent to the golf course and put in place infrastructure for

approximately 18 cottages. Members of SGA were able to rent the cottages. In
                                       - 21 -

[*21] marketing materials for Whispering Pines the cottages were featured in a

brochure that advertised Whispering Pines as a destination for corporate retreats.

      In 2015 WP Realty renovated the cart paths along the 18-hole course. The

cost of the renovation was $425,223. Williams designed the layout of the

renovated cart paths. The cart paths were renovated to connect tees to greens,

which increased playing by allowing play on the course when it was wet.

      In or around 2015 WP Realty and SGA created the Village Partner Program

allowing SGA members and sponsors to fund the construction of new cottages at

the Village at Whispering Pines in exchange for priority booking privileges and

discounted room rates for 10 years. WP Realty solicited contributions of $20,000

each from 36 SGA members to build two new cottages between 2015 and 2016.

The Village Partner Program covered approximately half of the construction costs.

The goal of the Village Partner Program was to raise enough revenue to build four

additional cottages.

      E.     Role of Employees

      WP Realty consistently hired experienced people to consult in planning,

managing, and marketing Whispering Pines. In August 2004 Chris Rowe was

hired as Whispering Pines’ director of golf. Upon graduating from college in 1992

Rowe participated in Professional Golf Association educational programs. Before
                                       - 22 -

[*22] joining Whispering Pines he was a golf pro at another golf club where he

taught an average of 600 lessons per year.

      In addition to providing lessons and clinics at Whispering Pines, Rowe

invited course raters to visit Whispering Pines to help increase the course’s

ranking. He was involved with hosting SGA’s Spirit Golf Tournament, held every

other year. The Spirit Golf Tournament has been televised on the Golf Channel

and NBC. It was played on the 18-hole course, and the participants were housed

at Camp Olympia. Rowe also helped WP Realty host the 2004 National Collegiate

Athletic Association (NCAA) Southland Conference Championship and the Men’s

NCAA Big 12 Conference Tournaments that were held in 2005, 2008, 2010, 2012,

2014, and 2016. WP Realty sought out the hosting of these other tournaments to

increase Whispering Pines’ national and international exposure in the golf

community.

      In an effort to increase Whispering Pines’ brand recognition, course

reputation, and customer base, every spring the Robertson Invitational

(Invitational) was held at Whispering Pines. Rowe invited golf pros from 16 clubs

around the country to participate in the Invitational. Each golf pro brought three

guests, and the foursome played as a team.
                                       - 23 -

[*23] In January 2001 Golf Digest ranked Whispering Pines third on its list of 10

best new private golf courses around the country. In 2011 Whispering Pines was

ranked 11th in Golf Digest’s Index of “America’s 50 Greatest Golf Retreats”. The

Dallas Morning News listed Whispering Pines as the number one golf course in

Texas from 2006 to 2010. Whispering Pines’ location made it difficult to attract

raters. Rowe helped Whispering Pines achieve these course rankings by

contacting the rating publications and inviting course raters to come play at the

course.

      Derek Severns was Whispering Pines’ first general manager. Before his

employment at Whispering Pines Severns had been a golf club manager. Chad

McCormick was hired in 2006 to replace Severns. Before joining Whispering

Pines, McCormick had more than 10 years of experience working for different

golf clubs around Texas. As general manager McCormick directed approximately

120 employees. He was responsible for putting together the 2007 business plan.

After McCormick developed the 2007 business plan, he and Robertson discussed

capital improvements and the timing of when to implement each project.

McCormick identified certain challenges that Whispering Pines faced in attracting

guests. Without sufficient overnight accommodations it was difficult to attract the
                                       - 24 -

[*24] membership numbers needed to achieve profitability or raise revenue

through food and beverage sales or more rounds of golf.

      Each year McCormick put together an annual budget that included a budget

from each department at Whispering Pines. Together McCormick and Robertson

used those budgets as a guide for implementing projects identified in the 2007

business plan. They also relied on the profit and loss statements and other books

and records kept by WP Realty’s accounting department. Robertson reviewed the

monthly profit and loss statements.

      WP Realty hired Michael Dieckhoff as golf course superintendent in 2003.

His experience included working at a Jack Nicklaus Productions course and

Augusta National. Since 2001 Paula Johnson had served as controller for

Whispering Pines. Previously, she worked at a golf club for five years. Johnson

and her accounting team kept financial records for WP Realty, including general

ledgers, balance sheets, profit and loss statements, book-to-tax reconciliations, and

capital accounts. An executive chef was hired to oversee the food operations of

Whispering Pines.

      F.     Robertson Area

      The only homesite at Whispering Pines is referred to as the “Robertson

Area”, which consists of multiple houses and buildings used exclusively by
                                      - 25 -

[*25] Robertson and his family. The table below summarizes the buildings at the

Robertson Area and their costs:

                             Name                  Cost

                   Hedrick house                $1,119,348
                   Lake house                    3,584,433
                   Main house                   23,841,315
                   Storage building                299,059
                   Pool                            935,075
                    Total                       29,779,230

      The main house and pool were completed in 2015. Before the completion

of the main house Robertson used a Victorian house, referred to as the “Hedrick

house” in the above table, that he had moved to the property in 1978. Robertson

used the main house as a personal residence.

      Robertson spent a considerable amount of time at Whispering Pines

directing staff and accommodating the needs of SGA members and guests.

Robertson’s family used the Robertson Area approximately four to six times per

year. Robertson did not pay rent, nor was he charged for the use of the Robertson

Area. WP Realty billed and received reimbursement from Robertson for expenses
                                        - 26 -

[*26] it paid on his behalf on a monthly basis. All expenses related to the

Robertson Area were treated as personal expenses.

        The lease between WP Realty and SGA, effective June 1, 2014, includes

language addressing the Robertson Area. The lease provides that a portion of the

premises was developed by WP Realty for the personal use of Robertson and his

family. This area is not to be used by SGA, the lessee. At any time during the

term of the lease WP Realty may unilaterally remove the Robertson Area from the

premises, and the lease would be “automatically and unilaterally amended to

exclude the Robertson area”.

        During the years in issue Robertson played 39 total rounds of golf, but he

played only three of those rounds at Whispering Pines--once in 2012 and twice in

2013.

        G.    Future Development

        The formal layout of Whispering Pines kept open as an option the

possibility of future homesites along the course. In anticipation of future

homesites WP Realty installed the infrastructure to support residential

development. In July 2014 Robertson engaged an appraiser. The appraisal was

not completed until 2015.
                                       - 27 -

[*27] In August 2014 Robertson commissioned Roy Bechtol to design a master

plan for the development of homesites along the golf course. Bechtol has

completed more than 20 golf course and land development projects, including the

master plan at Davenport Ranch. Bechtol’s master plan for Whispering Pines was

completed in October 2014 and allowed for 273 single-family units around the

golf course. The plan also included a layout for roads, a practice course, and a

town center. No work has been done to implement the master plan.

IV.   Tax Returns

      WP Realty timely filed Forms 1065, U.S. Return of Partnership Income, for

the years in issue. WP Realty realized and recognized ordinary business losses for

tax years 2004-16 as shown in the following table, which summarizes the annual

gross income, deductions, depreciation, and ordinary business income or loss from

WP Realty’s Forms 1065 from 2004 through 2016:4




      4
      The numbers in this chart were taken from WP Realty’s Forms 1065. The
“Deductions” column includes the deduction for depreciation for each year.
                                        - 28 -

[*28]                                                           Ordinary business
          Year   Gross income   Deductions       Depreciation     income (loss)


          2005      $691,757    $3,523,935         $615,841       ($2,832,178)
          2006       802,341     3,766,934          507,630         (2,964,593)
          2007     1,341,627     4,209,411          534,572         (2,867,784)
          2008     1,906,288     4,838,043          518,716         (2,931,755)
          2009     1,935,334     4,699,779          643,888         (2,764,445)
          2010     2,302,440     4,781,666          633,722         (2,479,226)
          2011     2,101,187     5,238,706          625,611         (3,137,519)
          2012     2,274,118     5,150,508          692,793         (2,876,390)
          2013     2,331,552     6,323,441          869,606         (3,991,889)
          2014     2,531,030     6,860,830        1,109,469         (4,329,800)
          2015     2,758,959     7,642,156        1,012,659         (4,883,197)
          2016     6,542,886     6,986,338        1,190,598          (443,452)

WP Realty’s losses flowed through to Robertson as the 99% limited partner in WP

Realty and the ultimate sole owner of Olympia.

        On May 15, 2014, respondent notified WP Realty of the audit of its tax

returns for 2011-12. On April 21, 2015, respondent issued a draft notice of

proposed adjustment notifying Olympia that losses realized in 2011-13 would be

disallowed under section 183 because Whispering Pines was an activity not

engaged in for profit. On September 26, 2016, respondent issued the FPAA

disallowing WP Realty’s reported losses for 2011-14 pursuant to section 183.
                                        - 29 -

[*29]                                OPINION

        Respondent determined that WP Realty’s ownership and operation of

Whispering Pines was an activity not engaged in for profit within the meaning of

section 183 and disallowed deductions for the years in issue. Respondent

contends that Whispering Pines remained in operation only because of the

contributions of Robertson. Respondent’s position is that Robertson operated WP

Realty to the benefit of SGA and his motive was philanthropy and not profit.

Petitioner counters that WP Realty operated Whispering Pines with an intent to

realize a profit. The weakness in its position is the magnitude of losses. To

prevail, petitioner must show a profit objective.

I.      Burden of Proof

        Generally, the Commissioner’s determinations in an FPAA are presumed

correct, and the taxpayer bears the burden of proving that those determinations are

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

Plaza Props. P’ship v. Commissioner, 107 T.C. 94, 104 (1996). Deductions are a

matter of legislative grace, and a taxpayer likewise bears the burden of proving his

or her entitlement to deductions allowed by the Code. INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934). Under section 7491(a), in certain circumstances the burden
                                        - 30 -

[*30] of proof may shift from the taxpayer to the Commissioner. Petitioner has

not claimed or shown that it meets the specifications of section 7491(a) to shift the

burden of proof to respondent as to any factual issue.

II.   Section 183

      Generally, section 162 allows a taxpayer to deduct ordinary and necessary

business expenses incurred in carrying on a trade or business. For an activity to

constitute a trade or business under section 162 it must be conducted with

continuity and regularity and with the primary purpose of realizing income or

profit. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); Westbrook v.

Commissioner, 68 F.3d 868, 875 (5th Cir. 1995) (holding that a taxpayer must

establish that he or she engaged in the activity with the primary purpose and intent

of realizing an economic profit independent of tax savings), aff’g T.C. Memo.

1993-634. The test for determining whether a taxpayer conducted an activity for

profit is whether the taxpayer entered into, or continued, the activity “with the

actual and honest objective of making a profit.” Dreicer v. Commissioner, 78 T.C.

642, 645 (1982), aff’d without published opinion, 702 F.2d 1205 (D.C. Cir. 1983).

The taxpayer’s expectation of profit need not be reasonable, but he or she must

have a good-faith objective of making a profit. Allen v. Commissioner, 72 T.C.

28, 33 (1979); sec. 1.183-2(a), Income Tax Regs.
                                         - 31 -

[*31] Whether the required profit objective exists is determined on the basis of all

the facts and circumstances in each case, independent of the tax consequences.

Allen v. Commissioner, 72 T.C. at 34; see also Agro Sci. Co. v. Commissioner,

934 F.2d 573, 576 (5th Cir. 1991), aff’g T.C. Memo. 1989-687. The taxpayer

bears the burden of proving the requisite profit intention. Rule 142(a); Boyer v.

Commissioner, 69 T.C. 521, 537 (1977). For partnerships, profit objective is

determined at the partnership level rather than at the partner level. Tallal v.

Commissioner, 778 F.2d 275, 276 (5th Cir. 1985), aff’g T.C. Memo. 1984-486;

Brannen v. Commissioner, 78 T.C. 471, 502-505 (1982), aff’d, 722 F.2d 695 (11th

Cir. 1984). Because Robertson was the only owner of WP Realty, we need not

separately determine the intent at the partnership level.

      A taxpayer may not fully deduct expenses of an activity under section 162 if

the activity is not engaged in for profit. Sec. 183(a). Pursuant to section 183(a), if

an activity is not engaged in for profit, no deduction attributable to that activity is

allowed except to the extent provided by section 183(b). Section 183(b) allows

deductions that would be allowed without regard to whether the activity was

engaged in for profit, but only to the extent that gross income derived from the

activity exceeds the deductions allowable without regard to profit.
                                         - 32 -

[*32] Section 1.183-2(b), Income Tax Regs., provides a nonexclusive list of

factors to be weighed when considering whether a taxpayer is engaged in an

activity for profit. These factors are: (1) the manner in which the taxpayer carried

on the activity; (2) the expertise of the taxpayer or the taxpayer’s advisers; (3) the

time and effort expended by the taxpayer in carrying on the activity; (4) the

expectation that the 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, that are earned from the activity; (8) the financial

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

are involved in the activity. We give greater weight to these objective factors than

to the taxpayer’s statement of intent. Sec. 1.183-2(a) and (b), Income Tax Regs.;

see also King v. Commissioner, 116 T.C. 198, 205 (2001).

      Evidence from years after the years in issue is relevant to the extent it

creates inferences regarding the taxpayer’s requisite profit objective in earlier

years. E.g., Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965) (“[T]he goal

must be to realize a profit on the entire operation, which presupposes not only

future net earnings but also sufficient net earnings to recoup the losses which have

meanwhile been sustained in the intervening years.”), aff’d, 379 F.2d 252 (2d Cir.
                                        - 33 -

[*33] 1967); Foster v. Commissioner, T.C. Memo 2012-207; Bronson v.

Commissioner, T.C. Memo. 2012-17, aff’d, 591 F. App’x 625 (9th Cir. 2015). All

facts and circumstances are to be taken into account, and no single factor or

mathematical preponderance of factors is determinative. Westbrook v.

Commissioner, 68 F.3d at 876.

      1.      Manner in Which Activity Is Conducted

      Carrying on an activity in a businesslike manner, such as by maintaining

complete and accurate books and records, conducting the activity in a manner

similar to other activities of the same nature that are profitable, and making

changes in operations to adopt new techniques or abandon unprofitable methods,

is a factor that may indicate a profit objective. Sec. 1.183-2(b)(1), Income Tax

Regs. Businesslike conduct is characterized by a careful and thorough

investigation of the profitability of a proposed venture, monitoring a venture’s

progress, and attention to problems that arise over time. See Ronnen v.

Commissioner, 90 T.C. 74, 93 (1988); Taube v. Commissioner, 88 T.C. 464, 481-

482 (1987).

      Complete and accurate books and records are more than the mere

maintenance of lists of and receipts for expenses. Keating v. Commissioner, T.C.

Memo. 2007-309, aff’d, 544 F.3d 900 (8th Cir. 2008). Rather, the term
                                       - 34 -

[*34] “businesslike manner” contemplates the use of cost accounting techniques

that provide the taxpayer with information to make informed business decisions.

Burger v. Commissioner, T.C. Memo. 1985-523, aff’d, 809 F.2d 355 (7th Cir.

1987).

      WP Realty’s accounting department kept complete and accurate books and

records, produced profit and loss statements, and kept track of and billed

Robertson for personal expenses incurred on his behalf. McCormick also put

together budgets with each department head and submitted those budgets to

Robertson for approval. Robertson and McCormick used WP Realty’s books and

records to make informed decisions about when to implement capital

improvements.

      Robertson approached the development of Whispering Pines in a manner

similar to the development of Davenport Ranch. He avoided debt financing to

fund the development of Whispering Pines. Instead, Robertson made significant

capital contributions to WP Realty to build the golf course and lay the

infrastructure for future development and expansion. He has focused his attention

on creating value and building a reputation. Whispering Pines is now a top-rated

golf course, both in Texas and nationally. The Spirit Golf Tournament has further

helped establish the brand Robertson sought to create.
                                        - 35 -

[*35] Numerous court opinions mention that a businesslike operation would

involve a business plan. See, e.g., Wesinger v. Commissioner, T.C. Memo. 1999-

372. Conversely, the fact that a taxpayer does not have a written business plan

does not negate a profit motive, as a business plan can be evidenced by actions.

Welch v. Commissioner, T.C. Memo. 2017-229, at *29; Annuzzi v.

Commissioner, T.C. Memo. 2014-233, at *16.

      Respondent contends that WP Realty’s 2004 and 2007 business plans were

deficient because they focused on philanthropy and provided only generalized

goals. Respondent’s position is that Robertson organized WP Realty to operate

Whispering Pines for the charitable benefit of SGA and the Spirit Golf

Tournament.

      The 2007 business plan outlined capital improvements that would

contribute to the growth of Whispering Pines. These improvements would not

have been necessary if Whispering Pines was used to meet the needs of only SGA.

The capital improvements were designed to attract members to SGA in order to

increase the number of rounds of golf played at Whispering Pines. The 2007

business plan addressed a profit motive. It stated that the “strategic plan will

solidify the foundation and infrastructure of Whispering Pines Golf Club moving

forward on a profitable self-sustaining basis”. After McCormick developed the
                                         - 36 -

[*36] 2007 business plan, he and Robertson discussed capital improvements and

the timing of when to implement each project. Robertson and McCormick

testified at trial that they waited to develop certain projects until demand justified

their development. Each project was specifically implemented to increase

capacity at and attract more guests to Whispering Pines.

         The Needler short course was built to increase the number of rounds per day

Whispering Pines could offer. Other improvements were made to ensure that

Whispering Pines would be a top-ranked golf course. The clubhouse was

expanded to accommodate more guests and allow for more food and beverage

sales.

         Perhaps the most important indication of whether an activity is being

performed in a businesslike manner is whether the taxpayer implements methods

for controlling losses, including efforts to reduce expenses and generate income.

See Foster v. Commissioner, T.C. Memo. 2012-207; Dodge v. Commissioner, T.C.

Memo. 1998-89, aff’d, 188 F.3d 507 (6th Cir. 1999). WP Realty made

improvements to reduce expenses and generate income. The 2007 business plan

outlined several capital projects. Whispering Pines would not be able to increase

its membership substantially until all the improvements were completed.
                                       - 37 -

[*37] All three of the business plans discuss the need to increase membership

numbers and the number of rounds of golf played. Specifically, the 2004 business

plan identified 80 individual members and 20 corporate members as its target. By

2007 the corporate membership goal was 40. The national membership category

was also added. The amount charged for allocated rounds was increased in 2007.

The number of golf rounds consistently increased throughout the years in issue.

Membership revenue grew from $660,000 in 2000 to $4,122,500 in 2017.

      The number of members was sensitive to membership fees. When the

individual membership fee was doubled in 2004, total membership dropped from

201 to 113. Again in 2011 membership declined from 196 to 165 when the

individual membership fee increased by $2,000. When the national membership

fee increased by $4,000 in 2011, national membership declined from 70 in 2010 to

45 in 2011. WP Realty tried to find the right balance for membership fees and the

amount allocated for a round of golf. If it charged too much for a round of golf, it

would hurt the bottom line. A higher number of golf rounds played increased food

and beverage and merchandise revenues.

      Throughout the years in issue revenue was raised from green fees, food and

beverage sales, golf merchandise, and rental income from the cottages. From 2011

to 2014 the revenue from green fees increased from $849,923 to $1,123,249, the
                                        - 38 -

[*38] revenue from food and beverages increased from $279,067 to $305,440, the

revenue from golf merchandise increased from $338,600 to $408,021, and the

revenue from the cottages increased from $203,858 to $211,808. At the end of

2014 not all the improvements identified in the 2007 business plan were

implemented. For 2015 and 2016 the revenue continued to increase. The income

from cottages more than doubled from 2015 to 2016 because of increasing

capacity with the addition of two cottages. For 2016 Robertson’s capital

contribution was significantly lower than it had been in previous years. Robertson

testified that SGA membership reached WP Realty’s goal of 300 members in

2018.

        Petitioner’s expert,5 Stephen Johnston, testified about the economic

difficulties that the golf industry faced. During the 1980s and 1990s there was a

boom of golf course construction. Between 1986 and 2005 the golf course supply

increased by 44%, outpacing growth in golf participation. For 2011-14, the

average net profit margin was negative for privately owned golf courses and

        5
       Pursuant to Fed. R. Evid. 702(a) a witness who is qualified as an expert by
knowledge, skill, experience, training, or education may testify if his or her
“specialized knowledge” will help the trier of fact to understand the evidence or
determine a fact in issue. We focus on the degree to which an expert’s opinion is
supported by the evidence. The reliability and relevancy standards embodied in
Fed. R. Evid. 702(a) apply equally to expert testimony that is not “scientific”.
Kumho Tire Co. v. Carmichael, 526 U.S. 137, 148 (1999).
                                         - 39 -

[*39] country clubs. According to Johnston golf course closures have increased

significantly since Whispering Pines opened in 2000. He testified that to build a

new golf course capable of achieving the highly marketable top-100 status

requires significant long-term planning and strategic thinking.

      WP Realty was facing an uphill battle to be profitable. The economic

downturn and the financial struggles of the golf course industry made it more

difficult. To overcome these obstacles WP Realty came up with a business plan to

increase revenues. WP Realty also undertook steps to make Whispering Pines

more marketable, which included having the course become a top-ranked course

and hosting tournaments not related to the Spirit Golf Tournament.

      WP Realty was in a unique situation because of its coexistence with SGA.

This coexistence was a result of a compromise with the IRS. Robertson testified

that he came up with a “plan B” to create a for-profit business. Robertson sought

to strike the right balance between SGA and WP Realty. He wanted to carry out

the goals of SGA while building a profitable golf course. We conclude that WP

Realty conducted the operation of Whispering Pines in a businesslike manner.

This factor strongly favors WP Realty.
                                       - 40 -

[*40] 2.     Expertise of the Taxpayer or Her/His Advisers

      The taxpayers’ expertise, research, and study of an activity, as well as their

consultation with experts, may be indicative of a profit motive. See sec. 1.183-

2(b)(2), Income Tax Regs. The type and quality of advice that a taxpayer seeks is

important to the analysis of the taxpayer’s consultation with experts. See Engdahl

v. Commissioner, 72 T.C. 659, 668 (1979) (noting that informal and continuous

consultations with experts in the field demonstrates an intent to engage in a

business for profit).

      Robertson not only has prior experience with real estate and golf course

development, but he also surrounded himself with experts in golf to create

Whispering Pines. He hired Jack Nicklaus Productions, a brand name in the world

of golf, to design and build the 18-hole championship course. Williams, the

course architect, also designed the Needler and the cart paths along the 18-hole

championship course.

      WP Realty’s employees have extensive experience in the golf industry.

Rowe was instrumental in helping Whispering Pines achieve national rankings.

McCormick had 10 years of golf course experience before coming to Whispering

Pines. Dieckhoff worked at a famous course before he was hired as the course

superintendent.
                                        - 41 -

[*41] We conclude that WP Reality relied upon experts. Robertson hired and

consulted with experts from the start of the construction of Whispering Pines and

continues to discuss improvements with experts. We find this factor favors WP

Realty.

      3.     Taxpayers’ Time and Effort Devoted to the Activity

      The taxpayers’ devotion of much of their personal time and effort to

carrying on an activity may indicate a profit motive, particularly if the activity

does not involve substantial personal or recreational aspects. Sec. 1.183-2(b)(3),

Income Tax Regs. A profit motive may also be indicated if taxpayers “employ[]

competent and qualified persons to carry on such activity.” Id. Robertson hired

experienced managers to oversee course operations, a renowned golf professional

to assist guests, and a top chef to prepare meals.

      Whispering Pines had approximately 120 employees on staff. Robertson

met weekly with McCormick to keep apprised of the ongoing operations at

Whispering Pines and discuss revenues and expenses. The employment of

“competent and qualified” people to carry on an activity when the taxpayers’ time

devoted to the activity is limited can indicate a profit motive. Id.; see also Welch

v. Commissioner, at *33; Annuzzi v. Commissioner, at *23. We conclude that this

factor favors WP Realty.
                                         - 42 -

[*42] 4.     Expectation That the Activity’s Assets May Appreciate

      An expectation that assets used in the activity will appreciate may indicate a

profit motive even if the taxpayer derives no profit from current operations. Sec.

1.183-2(b)(4), Income Tax Regs. “The term ‘profit’ encompasses appreciation in

the value of assets, such as land, used in the activity.” Id. A taxpayer’s

willingness to sustain continued operating losses because of his or her subjective

expectation that the assets used in the activity will increase in value is indicative

of a profit motive. Engdahl v. Commissioner, 72 T.C. at 669; see also Allen v.

Commissioner, 72 T.C. at 36.

      Respondent contends that Robertson indicated that Whispering Pines would

never become a real estate development. SGA sent a protest letter to the IRS when

it was denied charitable status, and this letter indicated that Whispering Pines

would not engage in real estate development. The circumstances regarding real

estate development changed when the IRS and Robertson reached an agreement

about the charitable status of SGA.

      Even though Robertson hired Bechtol in 2014 and had an appraisal

completed in 2015, no actions were taken to develop residential lots. Both the

hiring of Bechtol and the appraisal occurred after respondent began his audit of

WP Realty’s income tax returns for 2011 and 2012. Robertson referred to
                                       - 43 -

[*43] developing residential lots as a future plan. WP Realty produced no

evidence that showed anticipated appreciation of Whispering Pines’ assets would

be sufficient to overcome its losses. We conclude that this factor favors

respondent.

      5.      Taxpayer’s Success in Carrying on Other Similar or Dissimilar
              Activities

      If a taxpayer has previously engaged in similar activities and made them

profitable, this success may show that the taxpayer has a profit objective, even

though the current activity is presently unprofitable. Sec. 1.183-2(b)(5), Income

Tax Regs. A taxpayer’s success in other, unrelated activities may also indicate a

profit objective. Id.

      Robertson succeeded in developing two other projects similar to Whispering

Pines. Both Davenport Ranch and Bear Creek included real estate development,

but their profitability depended on the success of a golf course. Bear Creek took

approximately 10 years to reach profitability. Both Davenport Ranch and Bear

Creek differ from Whispering Pines because they included real estate

development. However, both projects provided Robertson with the opportunity to

gain experience in developing a golf course. In particular, from Davenport Ranch
                                        - 44 -

[*44] he learned how to structure a golf course for real estate development and

how the number of members affected the operations of a golf course.

      His previous experiences taught him the benefits of not using debt

financing. He testified about similar projects’ going bankrupt because of their

reliance on debt financing. From his experience he also understood the

importance of being patient because it may take time before a project is profitable.

We conclude this factor favors WP Realty slightly.

      6.     History of Income or Losses

      A history of continued losses with respect to the activity may indicate the

lack of a profit motive. See id. subpara. (6). While a series of losses during the

startup stage of an activity may not necessarily indicate a lack of profit motive, a

record of large losses over many years is persuasive evidence that a taxpayer did

not have such a motive. See Golanty v. Commissioner, 72 T.C. 411, 426 (1979),

aff’d, 647 F.2d 170 (9th Cir. 1981).

      WP Realty has sustained losses in each year of its operations. Its Forms

1065 reported an ordinary business loss each year. The losses ranged from

$3,137,519 to $4,329,800 during the years in issue. These losses were fairly
                                        - 45 -

[*45] consistent with losses in prior years. Losses increased in 2015 to

$4,883,197. However, for 2016 WP Realty had a net operating profit of $747,146.6

      Respondent contends that WP Realty did not charge SGA enough rent to

break even; from 2004 through 2014 SGA’s lease agreements had a stated base

lease of zero. However, SGA paid $500,000 in total base lease payments each

year from 2011 to 2014 in addition to the amount paid for rounds its members

played. Respondent contends that if WP Realty had an actual profit motive it

would have either negotiated for better lease terms with SGA or found a different

lessee for Whispering Pines.

      WP Realty contends that the large losses are due in part to the long-term

plan to develop Whispering Pines, which is similar to other golf course projects.

Robertson testified that it would take time to develop Whispering Pines and that it

has taken longer than he expected. He further testified that Whispering Pines has

reached its goal of 300 members and that the “level of revenue to be able to

conduct charity and to run the golf course in [sic] a profitable basis”.

      Another barrier to profitability is that Whispering Pines is at least 90 miles

from a significant population center. Robertson explained at trial that he knew


      6
        When depreciation is added back to the ordinary loss of $443,452 for 2016,
there is a net operating profit.
                                       - 46 -

[*46] Whispering Pines would have to be a destination course. To accommodate

overnight guests WP Realty had to invest in the infrastructure to support those

guests. Further, attracting the type of guests to Whispering Pines that Robertson

was targeting required building an excellent brand and reputation, both of which

take time to develop.

      WP Realty accomplished these goals by building the Needler, which

expanded the number of players it can host during a given day. The teaching

facility offers guests the opportunity to get instruction on improving their game.

Spirit Hall and the Roost allow WP Realty to increase revenue through increased

food and beverage sales. The national course ranking increases Whispering Pines’

reputation and prestige, allowing it to retain loyal members. Robertson and

McCormick both testified that WP Realty waited until there was enough demand

to support building out each of these projects.

      During the years in issue WP Realty was in the process of completing

projects in its 2007 business plan. The Needler and the Roost were not finished

until 2013. Spirit Hall and improvements to the cart paths were not finished until

2015. Robertson explained that it would be difficult to grow membership in SGA

and increase the rounds of golf played until the improvements were made.
                                        - 47 -

[*47] Because of the long history of losses this factor weighs in favor of

respondent. However, we are not convinced that these losses negate WP Realty’s

actual and honest intent to profit from the operation of Whispering Pines. WP

Realty’s recent financial improvements and business plan indicate achieving the

goal of making a profit. See Bessenyey v. Commissioner, 45 T.C. at 274.

      7.      Amount of Occasional Profits

      A taxpayer’s derivation of some profits from an otherwise money-losing

venture may support the existence of a profit motive. See sec. 1.183-2(b)(7),

Income Tax Regs. The regulation further states: “[A]n opportunity to earn a

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. Since WP Realty has neither

made a profit nor engaged in a highly speculative venture, this factor favors

respondent.

      8.      Taxpayer’s Financial Status

      Substantial income from sources other than the activity may indicate that the

activity is not engaged in for profit. Id. subpara. (8). Robertson had substantial

wealth not related to WP Realty. He contributed more than $101 million of his

own money for WP Realty’s capital. But wealth not associated with the activity in
                                         - 48 -

[*48] issue is not a bar to that activity’s being engaged in for profit. Welch v.

Commissioner, at *41.

      The receipt of a tax benefit does not alone establish that the taxpayer lacks a

profit objective. See Engdahl v. Commissioner, 72 T.C. at 670. Even though the

losses were large, Robertson had substantial income during the years in issue. The

tax benefits are not comparatively substantial enough to indicate that WP Realty

did not expect to make a profit. Cf. Golanty v. Commissioner, 72 T.C. at 428-430.

We conclude this factor is neutral.

      9.     Elements of Personal Pleasure or Enjoyment

      The presence of personal motives in conducting an activity may indicate a

lack of profit objective, especially if the activity involves personal or recreational

elements. Sec. 1.183-2(b)(9), Income Tax Regs. An activity is not classified as a

hobby simply because the taxpayer finds it pleasurable. Jackson v. Commissioner,

59 T.C. 312, 317 (1972). The analysis does not require that the activity be

engaged in with the exclusive intent of deriving a profit or even maximizing

profits. Sec. 1.183-2(b)(9), Income Tax Regs.

      Respondent contends that Robertson enjoyed golf and has unrestricted

access to Whispering Pines and its amenities. Robertson golfed at Whispering

Pines only three times during the years in issue. Respondent further contends that
                                        - 49 -

[*49] Robertson and his family’s exclusive use of the Robertson Area resulted in

personal pleasure.

       Camp Olympia required Robertson’s attention, and he had the Victorian

home moved to the Robertson Area more than 20 years before he developed

Whispering Pines or incorporated SGA. The new house in the Robertson Area

was not completed until after the years in issue.

       Respondent argues that Robertson’s passion for philanthropy, rather than

profit, is the driving force behind developing Whispering Pines and SGA.

Originally, Robertson wanted to develop a course and donate it to charity. Once

he learned that was not possible if SGA was to become a charitable organization,

he took a different approach, which was for Whispering Pines to be a for-profit

business. We conclude that this factor is neutral.

III.   Conclusion

       After a review of all the facts and circumstances and for the reasons stated

above, the Court finds that WP Realty was engaged in a for-profit activity for the

years in issue. Even though we agree with respondent that Robertson initially had

the goal of creating a charitable organization, we are convinced that WP Realty’s

predominant, primary, or principal objective was to realize an economic profit
                                       - 50 -

[*50] independent of tax savings. Once WP Realty was created, Robertson had

the intent to make a profit.

      Because SGA has now reached WP Realty’s membership goal of 300 and

the major improvements are completed, we expect that WP Realty has turned a

corner and will start to make a profit. However, if losses continue, WP Realty

may again find its profit motive before this Court.

      The Court has considered all of the arguments made by the parties, and to

the extent that they are not addressed herein, they are considered unnecessary,

moot, irrelevant, or without merit.

      To reflect the foregoing,


                                                Decision will be entered for

                                       petitioner.
