                        T.C. Memo. 2011-167



                      UNITED STATES TAX COURT



                 RONALD J. ZENZEN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 28268-09.               Filed July 12, 2011.



     Ronald J. Zenzen, pro se.

     Tracie M. Knapp, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies in

petitioner’s 2005, 2006, and 2007 Federal income taxes of $4,062,

$6,571, and $15,409, respectively.

     The issue for decision is whether petitioner’s drag racing

activity is to be treated as an activity engaged in for profit
                                - 2 -

under section 183(a).   The trial of this case was held on

February 28, 2011, in St. Paul, Minnesota.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                           FINDINGS OF FACT

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

the time his petition was filed, petitioner resided in Minnesota.

     For over 35 years and during the years in issue petitioner

worked full time as a mechanic for Xcel Energy (formerly known as

Northern States Power).    During the years in issue petitioner’s

annual salary was approximately $68,000.      The combined total

salaries of petitioner and his wife were $115,944 in 2005,

$116,979 in 2006, and $168,739 in 2007.

     Around 1970 petitioner began participating in drag racing as

a volunteer crew member and mechanic, volunteering with various

racing teams and gaining experience and knowledge.      Between 1970

and 1988 petitioner received no compensation for his drag racing

activities.   During these years petitioner owned a transporter

which he used to move drag racing cars to racing events.

     In 1988 petitioner purchased his first drag racing car and

began racing it himself.
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     In 1998 petitioner established his own drag racing team with

his two children.   Petitioner and his two children were the only

members of petitioner’s drag racing team and were the only

individuals who conducted maintenance on and raced petitioner’s

drag racing cars.

     In 1999 petitioner purchased a 1978 Chevrolet Corvette for

$10,000 to race.

     In 2004 petitioner purchased a 1989 Chevrolet IROC-Z28 for

$11,000, also to race.   Petitioner replaced this car’s engine

with a used 305 stock car motor, which cost petitioner $7,500.

In 2008 petitioner sold this car for $17,250.   Also in 2004

petitioner purchased a new transporter to haul his drag racing

cars to races and to use as an office and sleeping space when

petitioner’s racing team competed away from home.

     In 2005 petitioner made some improvements to his racing cars

and acquired various other assets to be used in connection with

his drag racing activity.

     At no time did petitioner have a written business plan for

his drag racing, and he did not maintain a general ledger, annual

budget and expense forecasts, or a separate bank account relating

to his drag racing activity.   Petitioner merely saved receipts

reflecting his drag racing expenses.
                                - 4 -

     At no time before 2005 or during the years in issue did

petitioner speak with a business adviser about ways to make a

profit in drag racing.

     Petitioner took several steps to improve his team’s

performance in local, regional, and national drag racing

competitions.   In 2007 petitioner purchased a 1987 Chevrolet

Camaro for $29,400 to race.   After purchasing this car,

petitioner established regular communication with the car’s

builder, who advised petitioner on improving the car’s

performance.    Petitioner communicated with Hi-Performance Engine

Services (Hi-Performance), a nationally regarded builder of race

car engines, for advice, parts, and service relating to his cars.

Petitioner did not pay Hi-Performance for its advice.

     During race seasons petitioner and his children would spend

about 30 hours per week preparing the race cars.   This time was

in addition to the time spent participating in weekend races.

     During the off-season petitioner and his children would

spend about 20 hours per week working on the race cars.

Occasionally, petitioner had the engines in his race cars

“refreshened” to increase performance.   Petitioner approximates

that $15,000 was spent in each of the years in issue to refresh

the engines.

     Through his drag racing activity, petitioner was able to

spend a significant amount of time with his children, which
                                 - 5 -

brought him personal pleasure.    Petitioner did not pay his

children for their involvement in petitioner’s drag racing

activity, and all winnings from race events were used in the

maintenance of the racing cars and the transporter.

     During the years in issue petitioner did not receive any

income from commercial sponsors for his drag racing cars.

However, petitioner’s drag racing cars each displayed 24 to 30

“contingency sponsor” decals.    The owner of a race car with that

number of contingency sponsor decals who wins a national drag

racing event would receive approximately $12,000, and for a

second-place finish, $4,500.    For a first-place finish at a

divisional event, the owner would receive approximately $4,000,

and for a second-place finish, $2,000.1

     During the years in issue the only income petitioner

received from his drag racing activity came from race winnings

which petitioner’s team occasionally won at various local,

divisional, and national racing events.    Petitioner did not

receive any income from contingency sponsors for any of the years

in issue.   The following table summarizes all of petitioner’s

drag racing income during the years in issue:




     1
      These amounts apparently reflect both contingency awards
and purse winnings from a race.
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                                                        Race
                Date             Type of Event         Income

               5/5/05            Local                  $100
              7/22/05            Local                   600
               9/5/05            Local                   150
              5/20/06            Local                   200
              6/23/06            Local                   250
              8/13/06            National                400
               9/2/06            Local                   100
              7/27/07            Local                   200
              8/23/07            Divisional              150

     Before filing his 2005 Federal income tax return, petitioner

spoke with his accountant, Joan Jaye, to determine whether to

file a Schedule C, Profit or Loss From Business, in connection

with his drag racing activity.       Specifically, petitioner and Ms.

Jaye discussed the nine factors under section 1.183-2(b), Income

Tax Regs.     As a result of this discussion, petitioner decided to

file a Schedule C in connection with his 2005, 2006, and 2007

Federal income tax returns.

     Petitioner timely filed his 2005, 2006, and 2007 Federal

income tax returns.     As noted, petitioner attached to each of

these returns a Schedule C claiming income and expenses relating

to petitioner’s drag racing activity as follows:

                                        Schedule C
                                                       Net Profit
       Year             Income              Expenses     or Loss

       2005             $850                $25,044    ($24,194)
       2006              950                 34,702     (33,752)
       2007              350                 60,064     (59,714)

     On audit respondent disallowed in full petitioner’s claimed

Schedule C drag racing losses on the basis that petitioner was
                               - 7 -

not engaged in the drag racing activity with the intent to make a

profit.   Respondent recharacterized expenses relating to

petitioner’s drag racing activity as nondeductible personal

expenditures.

                              OPINION

     Section 162(a) allows deductions for all ordinary and

necessary expenses paid or incurred during a taxable year in

carrying on a trade or business.    In the case of an activity not

engaged in for profit, section 183 generally limits allowable

deductions attributable to the activity to the extent of gross

income generated by the activity.   Sec. 183(b).

     The test for determining whether a taxpayer is carrying on

an activity for profit is whether the taxpayer’s actual and

honest objective in engaging in the activity is to make a profit.

See Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd.

without published opinion 702 F.2d 1205 (D.C. Cir. 1983).

Although the taxpayer’s expectation of profit need not be

reasonable, it must be a good-faith expectation.   See Allen v.

Commissioner, 72 T.C. 28, 33 (1979); sec. 1.183-2(a), Income Tax

Regs.   Greater weight is to be given to objective facts than to a

taxpayer’s statement of intent.    See Dreicer v. Commissioner,

supra at 645; sec. 1.183-2(a), Income Tax Regs.

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

nonexhaustive list of factors to be considered in determining
                                - 8 -

whether an activity is engaged in for profit.   No single factor

or set of factors is controlling, nor is the existence of a

majority of factors favoring or disfavoring a profit objective.

Keating v. Commissioner, 544 F.3d 900, 904 (8th Cir. 2008), affg.

T.C. Memo. 2007-309; see also Osteen v. Commissioner, 62 F.3d

356, 358 (11th Cir. 1995), affg. in part and revg. in part T.C.

Memo. 1993-519.    Petitioner bears the burden of proof on this

issue.2   See Rule 142(a); Golanty v. Commissioner, 72 T.C. 411,

426 (1979), affd. without published opinion 647 F.2d 170 (9th

Cir. 1981).

     We discuss below each factor as applied to petitioner’s drag

racing activity.

Manner in Which the Taxpayer Carried On the Activity--Sec. 1.183-
2(b)(1), Income Tax Regs.

     Elements relevant to this factor include whether the

taxpayer maintained complete and accurate books and records,

whether the taxpayer conducted the activity in a manner

substantially similar to comparable businesses that are

profitable, and whether changes were attempted in order to

improve profitability.    Engdahl v. Commissioner, 72 T.C. 659,

666-667 (1979); Emerson v. Commissioner, T.C. Memo. 2000-137.




     2
      Petitioner has neither claimed nor shown that he has
satisfied the requirements of sec. 7491(a) to shift the burden of
proof to respondent with regard to any factual issue.
                                 - 9 -

     Petitioner argues that in 2005 he attempted to convert his

racing activity into a for-profit business venture.3

Petitioner, however, did not maintain books or written records,

had no formal business plan, and did not create annual budget and

expense forecasts relating to drag racing.       Although a taxpayer

is not required to maintain a sophisticated system of accounting,

the taxpayer should keep documents that allow the taxpayer to

make informed business decisions.        Burger v. Commissioner, 809

F.2d 355, 359 (7th Cir. 1987), affg. T.C. Memo. 1985-523; see

also Whitener v. Commissioner, T.C. Memo. 1979-415 (taxpayer who

kept no business books or records did not conduct his stock car

racing activity in a businesslike manner).

     Petitioner saved receipts from expenses relating to his drag

racing; however, there is no evidence that petitioner used these

receipts as a management tool to reduce expenses or increase

profitability.   Petitioner offered no evidence of how comparable

profitable businesses operate.    This factor weighs against

petitioner.

Expertise of the Taxpayer or His Advisors--Sec. 1.183-2(b)(2),
Income Tax Regs.

     Petitioner had extensive experience with drag racing; he has

been involved in the activity in various capacities for over 40

years.   During the years in issue petitioner sought advice on


     3
      Petitioner concedes that before 2005 he engaged in the drag
racing activity essentially as a hobby.
                               - 10 -

ways to improve the performance of his drag racing cars.

However, the focus here is on expertise and preparation with

regard to the economic aspects of the activity.      Wesinger v.

Commissioner, T.C. Memo. 1999-372.      Petitioner has not shown that

he possessed the requisite expertise regarding the business

aspects of drag racing or that he relied on anyone who had that

expertise.   The fact that petitioner did not seek advice on the

economic aspects of his drag racing activity suggests that

petitioner lacked a profit objective.     See Filios v.

Commissioner, T.C. Memo. 1999-92, affd. 224 F.3d 16 (1st Cir.

2000).   This factor favors respondent.

Time and Effort Expended in Carrying On the Activity--Sec. 1.183-
2(b)(3), Income Tax Regs.

     Petitioner dedicated a significant amount of time and effort

to his drag racing activity.   While this fact tends to favor

petitioner’s position, petitioner also derived substantial

personal enjoyment from drag racing.     For over 30 years

petitioner considered drag racing a hobby--it is unlikely that in

2005, 2006, and 2007 petitioner ceased to derive similar

enjoyment from the activity.   Petitioner found personal pleasure

in traveling to weekend race events, watching his team

participate in events, and developing friendships with

individuals involved in drag racing.     The time petitioner devoted

to his drag racing activity was also time petitioner spent with

his children.   On balance, we find that this factor is neutral.
                              - 11 -

Expectation That Assets May Appreciate in Value--Sec. 1.183-
2(b)(4), Income Tax Regs.

     Petitioner claims that, as a result of maintenance and

improvements petitioner and his team made to petitioner’s drag

racing cars, petitioner expected his cars to appreciate in value.

Petitioner directs our attention to his Chevrolet IROC-Z28, which

petitioner purchased in 2004 for $11,000 and sold in 2008 for

$17,250.   Petitioner claims that he sold this car at a gain, even

after the cost of the replacement engine and other improvements

he made.   We have held, however, that when property’s

appreciation in value is independent of the claimed business

activity, the gain realized from a sale of the property will not

be a significant factor in evaluating the nature of the activity

in question.   Spear v. Commissioner, T.C. Memo. 1994-354; Wright

v. Commissioner, T.C. Memo. 1990-630; Ruben v. Commissioner, T.C.

Memo. 1986-260, affd. without published opinion 852 F.2d 1290

(9th Cir. 1988).   Petitioner has failed to show how the increase

in value of this car--or, for that matter, of any other asset--is

attributable to petitioner’s success in drag racing activity

rather than to the value of petitioner’s labor.   This factor

favors respondent.
                             - 12 -

Success of Taxpayer in Other Activities--Sec. 1.183-2(b)(5),
Income Tax Regs.

     Petitioner was not involved in any other business activities

apart from his employment with Xcel Energy.   This factor favors

respondent.

Taxpayer’s History of Income or Losses--Sec. 1.183-2(b)(6),
Income Tax Regs.

     A series of losses during the startup period of an activity

is not necessarily an indication that the activity is not engaged

in for profit, bearing in mind, however, that the objective must

be to realize a profit on the entire operation–-future net

earnings and also enough earnings to recoup losses that have been

incurred in intervening years.   Bessenyey v. Commissioner, 45

T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d Cir. 1967); Emerson

v. Commissioner, T.C. Memo. 2000-137.

     During the years in issue petitioner received only $2,150 in

cash awards while spending $117,660 on his racing activity.

Petitioner’s losses increased substantially from 2005 to 2006,

and even more substantially from 2006 to 2007.   On the basis of

petitioner’s record of significant losses, we find it unlikely

that petitioner will be able to recoup his expenditures.   This

factor favors respondent.
                               - 13 -

Amount of Occasional Profits, If Any--Sec. 1.183-2(b)(7), Income
Tax Regs.

     With the exception of the occasional small cash awards

petitioner received, petitioner’s drag racing activity produced

no income.

     An opportunity to earn a substantial ultimate profit in a

highly speculative venture may be sufficient to indicate that an

activity is engaged in for profit.      Sec. 1.183-2(b)(7), Income

Tax Regs.    Drag racing is unquestionably a highly speculative

venture.    Petitioner, however, has not convinced us that he had a

real opportunity to earn a profit in his drag racing activity.

     The losses petitioner incurred in connection with his drag

racing activity were over 54 times the amount of income earned.

This factor favors respondent.

Financial Status of the Taxpayer--Sec. 1.183-2(b)(8), Income Tax
Regs.

     “The rationale for this rule is that a taxpayer with

substantial income unrelated to the activity can more easily

afford to operate the activity as a hobby.”      Emerson v.

Commissioner, supra.

     During the years in issue petitioner worked full time at

Xcel Energy, earning an annual salary of $68,000, and the

combined total wages of petitioner and his wife during each of
                             - 14 -

the years in issue exceeded $115,000.4    Substantial income from

sources unrelated to the activity in question--particularly if

losses from the activity generate substantial tax benefits--may

indicate that an activity is not engaged in for profit.      Sec.

1.183-2(b)(B), Income Tax Regs.    This factor favors respondent.

Elements of Personal Pleasure--Sec. 1.183-2(b)(9), Income Tax
Regs.

     It is indisputable that petitioner obtained enjoyment from

his drag racing activity, especially considering the extra time

he was able to spend with his children.    This factor favors

respondent.

     On balance, we are not convinced that during the years in

issue petitioner engaged in the drag racing activity for profit.

To the contrary, we believe that petitioner was engaged in this

activity because of his long-held interest in drag racing,

derived substantial personal pleasure from the activity, and had

no good-faith expectation of making a profit.      Petitioner’s

losses are not deductible.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.



     4
      In 2007 the combined wages of petitioner and his wife were
$168,739, an approximately 44-percent increase from 2006.
Petitioner’s drag racing expenses in 2007 were $59,714, an
increase of over 75 percent from 2006.
