                          T.C. Memo. 1998-129



                       UNITED STATES TAX COURT



               STEVEN CARL AKERSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6784-94.                         Filed April 6, 1998.


        Held: P's resort activity constituted an activity
     engaged in for profit; sec. 183(a), I.R.C., not
     applicable.
        Held, further: Sec. 6662(a), I.R.C., accuracy-
     related penalties not applicable.


     Steven Carl Akerson, pro se.

     Emile L. Herbert III, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:     By notice of deficiency dated December 3,

1993, respondent determined deficiencies and penalties against

petitioner as follows:
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                                                 Penalty
             Year         Deficiency           Sec. 6662(a)
             1989           $3,771                 $754
             1990           32,683                6,537

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.

     The issues for decision are:      (1) Whether petitioner's

resort operations constituted an activity not engaged in for

profit within the meaning of section 183 and (2) whether

petitioner is subject to the section 6662(a) accuracy-related

penalty for 1989 and 1990.

                          FINDINGS OF FACT

     Some facts have been stipulated and are so found.        The

stipulation of facts, with attached exhibits, is incorporated

herein by this reference.

     At the time of filing the petition, petitioner resided in

Puntarenas, Costa Rica.

Background

     Petitioner is a physicist who is dedicated to the use and

promotion of solar energy.1   In 1980 and 1981, petitioner

chartered sailboats and installed solar equipment in Mexico and


1
     Petitioner holds United States patents on several inverter
designs. Inverters change DC electricity to AC electricity.
Solar energy panels produce DC electricity. Most homes use AC
electricity.
                                - 3 -

Costa Rica.    In 1984, while living in Costa Rica, petitioner

started a business, Heart Interface (Heart), to manufacture and

sell electronic and solar powered equipment.    Shortly thereafter,

Heart was incorporated in, and petitioner moved to, Washington

State.

     From 1984 through 1990, petitioner was president and part-

owner of Heart.    In 1988, petitioner decided that he wished to

end his involvement with Heart and move back to Costa Rica.

Thereafter, in 1988, petitioner signed a contract with Valley

Forge Corp. to sell his interest in, and phase out his employment

with, Heart.    The sale was completed in March 1990.   Heart

continued to employ petitioner until sometime in 1991.     For the

years 1988 through 1991, petitioner earned $105,632, $104,325,

$96,269, and $20,453, respectively, as an employee of Heart.

Playa de los Vivos

     Having determined that he would return to Costa Rica,

petitioner considered how he would earn a living there.     In 1988,

petitioner purchased an approximately 29-hectare improved tract

of bayfront real property in Puntarenas, Costa Rica.     Located on

the property was a hotel with five rooms, a kitchen, a

restaurant, and a swimming pool.    In 1989, petitioner purchased

approximately 10 additional, adjoining hectares.    Petitioner

named the 39 hectares "Playa de los Vivos" and, since 1988, has

operated a resort on the property (the resort or Playa de los

Vivos).   Petitioner kept computers and electronic equipment in
                               - 4 -

one of the hotel rooms, which he used for the development of

solar electronic equipment.   Petitioner bought four sailboats,

one in 1989, and three in 1990, to attract guests to the resort.

Petitioner intended to attract customers to the resort who were

interested in a healthy and naturalistic environment.

     Bernadette Hendricks (Hendricks) has been petitioner’s

companion since before the years in issue, and, during the years

in issue, Hendricks, her children, and petitioner's children

regularly helped operate the resort.   Petitioner hired Costa

Rican attorney Federico Alvarado (Alvarado) and his law firm,

Bufete, Robles, Lacle y Asociados, to provide legal services and

to assist in the maintenance of Playa de los Vivos when

petitioner was not present at the property.

     Petitioner kept accurate books and records of the resort

activity's income and expenses.   Petitioner printed brochures to

advertise the resort, and he offered the rooms for rent.   From

1988 through 1995, most of the repair and maintenance expenses

incurred at the resort were for parts and supplies, and not

labor, because petitioner minimized costs by doing all of the

repair work at the resort himself.

     By 1997, the land value of Playa de los Vivos had

appreciated substantially.

     Petitioner’s home in Costa Rica is located on a separate

piece of property from Playa de los Vivos.
                              - 5 -

External Factors Affecting Playa de los Vivos

     The tourist industry in Costa Rica was adversely affected by

international tension toward the end of 1990.   In addition,

although the Costa Rican Government promised to pave the roads

surrounding Playa de los Vivos and begin a new ferry service, by

as late as 1995, neither had been done, so it was hard for

tourists to reach the property.   Moreover, although the phone

company promised telephone service in 1988, Playa de los Vivos

did not have telephone service until 1996.

Solar Equipment

     In 1990, petitioner bought a solar powered ozone generator

to purify the water in the resort's swimming pool without the use

of chemicals, and a battery powered cart that he converted to

solar power and used at the resort.   An advertising brochure

describing Playa de los Vivos and the amenities available there

suggests that the resort was made possible through solar

electronic technology and that petitioner's intent is to continue

using such technology.

     Petitioner's first sale of solar electronic equipment in

Costa Rica subsequent to his purchase of Playa de los Vivos was

in 1992.

Petitioner's Tax Returns

     Petitioner reported the results of the resort activity on

Schedules C attached to his Federal income tax returns, Forms

1040, for his taxable (calendar) years 1988 through 1995.    For
                                   - 6 -

his taxable years 1988 through 1992, he described his principal

business as “hotel resort”; for his taxable years 1993 through

1995, he described his principal business activity as “hotel

resort, solar electronics manufacture & sale”.          He reported gross

income and expenses as follows:

      Year         Gross Income            Expenses        Net Gain/Loss
      1988                 $0               $14,642          $(14,642)
      1989                  0                34,049           (34,049)
      1990                  0                82,792           (82,792)
      1991                339                70,703           (70,364)
      1992              8,420                61,883           (53,463)
      1993             15,368                94,508           (79,140)
      1994            160,204               113,235            46,969
      1995            109,799                99,569            10,230

For those years, petitioner's gross income is broken down further

as follows:

                      Total        Gross Income         Gross Income
      Year         Gross Income    from Resort        from Solar Sales
      1988                $0             $0                     $0
      1989                  0             0                      0
      1990                  0             0                      0
      1991               339            339                      0
      1992            10,977          6,424                  4,553
      1993            16,021         11,891                  4,130
      1994           160,365         10,375                149,990
      1995           164,487          6,211                158,276


                                  OPINION

I.   Deficiencies

      A.     Section 183--For-Profit Requirement

      Section 183(a) provides:     "In the case of an activity

engaged in by an individual or an S corporation, if such activity

is not engaged in for profit, no deduction attributable to such

activity shall be allowed under this chapter except as provided
                                - 7 -

in this section."    Section 183(c) provides:   "For purposes of

this section, the term 'activity not engaged in for profit' means

any activity other than one with respect to which deductions are

allowable for the taxable year under section 162 or under

paragraph (1) or (2) of section 212."

     The question we must decide is whether petitioner's activity

of operating Playa de los Vivos constituted an activity "not

engaged in for profit".

     B.    Actual and Honest Profit Objective

     An activity is engaged in for profit if the taxpayer has an

"actual and honest objective of making a profit."      Keanini v.

Commissioner, 94 T.C. 41, 46 (1990) (quoting Dreicer v.

Commissioner, 78 T.C. 642, 644-645 (1982), affd. without opinion

702 F.2d 1205 (D.C. Cir. 1983)).    Although the expectation of

profit need not be reasonable, a bona fide profit objective must

exist.    Keanini v. Commissioner, supra at 46; Dreicer v.

Commissioner, supra; Golanty v. Commissioner, 72 T.C. 411,

425-426 (1979), affd. without published opinion 647 F.2d 170 (9th

Cir. 1981); sec. 1.183-2(a), Income Tax Regs.     Profit in this

context means economic profit, independent of tax savings.

Antonides v. Commissioner, 91 T.C. 686, 694 (1988), affd. 893

F.2d 656 (4th Cir. 1990); Hulter v. Commissioner, 91 T.C. 371,

393 (1988).    Petitioner's objective is a question of fact to be

determined from all the facts and circumstances, keeping in mind

that petitioner bears the burden of proof.      Rule 142(a); Keanini
                                 - 8 -

v. Commissioner, supra at 46; Golanty v. Commissioner, supra at

426; sec. 1.183-2(a), Income Tax Regs.

     The regulations promulgated under section 183 provide a

nonexclusive list of factors to be considered in determining

whether an activity is engaged in for profit.       Sec. 1.183-2(b),

Income Tax Regs.     No single factor is determinative, Keanini v.

Commissioner, supra at 47; Taube v. Commissioner, 88 T.C. 464,

479-480 (1987); sec. 1.183-2(b), Income Tax Regs.      Taking those

factors into account, and based on the record as a whole, we

conclude that the resort activity was an activity entered into

for profit.

     C.     Petitioner Had An Objective To Make a Profit

     The regulations provide:     "Although a reasonable expectation

of profit is not required, the facts and circumstances must

indicate that the taxpayer entered into the activity * * * with

the objective of making a profit."       Sec. 1.183-2(a), Income Tax

Regs.     Respondent contends that petitioner did not have a profit

objective with his resort activity and that he was engaged in the

activity only to shelter income.     We disagree.

     When petitioner bought Playa de los Vivos, he was in the

process of selling Heart, phasing out his employment at Heart,

and trying to find a source of income to replace the salary Heart

paid him.     At the same time that petitioner bought the resort, he

bought a home on a different piece of property than the resort.

Additionally, petitioner kept accurate books and records of the
                                - 9 -

resort activity's income and expenses.    He printed brochures to

advertise the resort, and he offered rooms for rent.      He expended

energy and minimized costs by doing all of the repair work

himself.    He hired Alvarado to provide legal services and to

assist in the maintenance of the resort when petitioner was not

present at the property.    Petitioner was experienced in operating

sailboats, so he bought sailboats to attract guests to the

resort.    Moreover, it was not unreasonable to expect that the

value of Playa de los Vivos would increase, given the property's

location and the promise of future infrastructure development.

     While the losses may have been greater than what they would

have been if petitioner had not tried to convert the resort

activity to solar power, that does not mean he was not trying to

operate it for profit.    Petitioner credibly testified that he had

a profit motive when he bought Playa de los Vivos and that he

continues to have one today.    Generally, a taxpayer's

unimpeached, competent, and relevant testimony "may not be

arbitrarily discredited and disregarded" by the Court.      Loesch &

Green Const. Co. v. Commissioner, 211 F.2d 210, 212 (6th Cir.

1954).    Respondent did not refute petitioner's testimony, and we

believe petitioner.

     Based on all the facts and circumstances, we conclude that

petitioner had a profit motive in operating his resort activity.
                                 - 10 -

      D.   One Activity or Two

      Respondent contends that petitioner operated two activities,

a resort activity with no profit motive and a solar equipment

activity with a profit motive.     Because we find that petitioner

engaged in the resort activity with a profit motive, it is not

necessary for us to decide whether the solar equipment business

was a separate activity.

      E.   Conclusion

      Petitioner's activity of operating Playa de los Vivos was

an activity engaged in for profit within the meaning of section

183(c).    Accordingly, petitioner's expenses attributable to that

activity are allowable as deductions.

II.   Negligence

      Respondent determined that petitioner is liable for the

accuracy-related penalty prescribed by section 6662 with respect

to 1989 and 1990.    Because we have not sustained respondent's

determination of tax deficiencies in petitioner's income tax for

the years in issue, there is no basis for the imposition of the

penalties determined by respondent.

      In light of the foregoing,


                                           Decision will be entered

                                      for petitioner.
