                          T.C. Memo. 1996-430



                        UNITED STATES TAX COURT


            GEORGE W. AND MARGARET L. GAGNON, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent


        Docket No. 8834-95.                Filed September 24, 1996.


        George W. Gagnon, pro se.

        Christal W. Hillstead, for respondent.


                           MEMORANDUM OPINION

        POWELL, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

        By notice of deficiency dated March 16, 1995, respondent

determined deficiencies in petitioners' Federal income taxes for

the taxable years 1991, 1992, and 1993 in the respective amounts

        1
         Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the years in issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
                                 - 2 -

of $4,604, $5,558, and $5,558.    At the time the petition was

filed, petitioners resided in Des Moines, Washington.

     The issue is whether petitioners are entitled to deduct

losses from their activities with respect to Gull Cottage Nursery

during the years 1991, 1992, and 1993.

     The facts may be summarized as follows.    In 1989, and during

the years in issue, petitioner George W. Gagnon (Mr. Gagnon or

petitioner) was employed full time as a salesman for Costco

Wholesale, and petitioner Margaret L. Gagnon (Mrs. Gagnon) was

employed full time as a secretary for the U.S. Department of

Transportation.   They resided in Des Moines, Washington, a suburb

of Seattle, Washington.

     During 1989, petitioners were looking for a place to which

they ultimately would retire and went to Long Beach, Washington.

Long Beach, Washington, is located approximately 160 miles south

of Des Moines, Washington, on the Pacific Ocean.    Petitioners

purchased a 50 foot by 100 foot lot with a two bedroom cottage

located at 509 North Oregon Street in Long Beach (the Oregon

Street property).   Shortly thereafter petitioners purchased a 100

foot by 100 foot lot (the Sixth Street property), across the

street from the Oregon Street property.    The Sixth Street

property improvements included a house that was not inhabitable

and a barn.   Petitioners paid $30,000 for the Sixth Street

property and approximately $40,000 for the Oregon Street
                                 - 3 -

property.2    Both properties are three blocks from the Pacific

Ocean.

     Mr. Gagnon conceived the idea that he could make some money

by starting a nursery for plants in Long Beach.     He obtained a

business license using the name Gull Cottage Nursery.     He started

by raising potted tulips and daffodils.     Mr. Gagnon believed that

the cost of the bulbs and pots would be approximately $1.47 each,

and he could sell the mature plants in the spring for $4 each to

grocery stores.     During 1991, he sold approximately 200 to 300

bulbs.    In 1992, he bought bulbs for $3,500 and set out 2,000

pots.    During this time he read the Bulb Forcer's Manual by an

unnamed professor at the University of North Carolina, and began

corresponding with the gentleman.     Petitioner then determined

that he would have to plant 5,000 pots to make a "maximum

profit".     He realized that he could not "handle" 5,000 pots.

Petitioner ceased potting bulbs after 1992.




     2
         Mr. Gagnon testified that they had approximately $72,000
invested in the Long Beach properties. They paid $40,000 for the
Oregon Street property and made substantial improvements to the
cottage, including new windows and doors, a stove, a
refrigerator, and fencing around the property.
                               - 4 -

     In addition, petitioner bought some bushes and trees from

wholesale dealers, and held them for sale on the Sixth Street

property while they matured.   If someone wanted to buy a tree or

bush during the week, he or she would tell a neighbor of

petitioner, take it, and petitioner would send the buyer a bill.

The record does not indicate the specifics of this aspect of the

nursery activity.

     Petitioners drove to Long Beach virtually every weekend and

holiday.   They substantially renovated the cottage on the Oregon

Street property in which they stayed.   While Mr. Gagnon was

occupied on the weekends with the nursery activity at least

during the bulb potting season, Mrs. Gagnon apparently was not

active with the nursery activity.

     The following items of income and expenses have been

stipulated as incurred with respect to the Long Beach properties

and the nursery activity:
                                   - 5 -

                           19901                   1991           1992            1993

Gross Sales               $1,547      $5,427          $5,594             $7,175
Cost of Goods Sold                     5,501           4,416              6,079
Income                       152         (74)          1,178              1,096
Expenses:
     Advertising                             122            143             143
     Car & Truck                           5,010          5,214           5,859
     Depreciation                          4,632          2,722           3,625
     Insurance                               308            475             260
     Interest - Mortgage                   1,312          2,859             -0-
     Interest - Other                      3,370          2,456           2,144
     Office Expense                          135             75             283
     Legal and
        Professional Fees                 250            311                425
      Repairs/Maintenance                 -0-            -0-                  9
      Supplies                            990            -0-              2,090
     Taxes/Licenses                       911          1,306                670
     Meals/Entertainment                3,042          3,068              3,302
     Utilities                          1,499          2,201              2,029
     Other Expenses                       677            692                658
     Equipment Rental                     -0-            127                101
Total                                  22,258         21,649             21,598
                                       2              2              2
Loss                      19,495        22,184            20,471      20,502
       1
       The record does not contain a detail of the expenses for
1990. We assume that they are generically the same as those
incurred in the later years.
     2
       We recognize that these amounts do not correspond with the
losses petitioners claimed on their 1991, 1992, and 1993 Federal
income tax returns. This discrepancy, however, is not material
to our decision.

       Petitioner enjoys growing plants and working in a garden.

He is not a horticulturist and had no experience in the nursery

business.    His concept of an activity making a profit did not

include the cost of land and other indirect costs.                 In entering

into the nursery activity, petitioner made no financial studies

of the business, other than he thought he could sell the potted

plants for $4 each, and that his cost would be $1.47.
                                - 6 -

     Petitioner did not have a separate bank account for the

nursery activity.   However, he kept records of income and

expenses in journals for each year.     These journals reveal that

petitioner, inter alia, treated the following items as related to

the nursery activity: Car insurance, cable television fees, local

and cellular telephone charges, all utility costs, taxes and

repairs on the Oregon Street and Sixth Street properties,

automobile club dues, tools (such as router bits and scroll

saws), local newspapers, etc.   In computing the car and truck

expenses petitioner kept mileage records and used the standard

mileage figures for the years in question.    Virtually all of the

mileage was incurred in traveling to and from Long Beach.

Petitioner computed his meal expenses by taking the number of

days he was at Long Beach and multiplying that amount by $26.

Petitioners did not deduct meal expenses for Mrs. Gagnon because

"she's not a hard worker."

     On their joint Federal income tax returns for 1991, 1992,

and 1993, petitioners deducted losses with respect to the nursery

activity in the respective amounts of $16,464, $19,857, and

$19,842.   For the taxable year 1991, petitioners filed an amended

return claiming an additional loss of $5,260 based on expenses

not originally claimed.   This primarily consisted of car and

truck expenses not originally claimed.    On examination respondent

disallowed the loss deductions for all the years in issue.
                               - 7 -

     Section 162(a) allows taxpayers to deduct the ordinary and

necessary expenses of carrying on a trade or business.   Where a

taxpayer conducts an activity not as a trade or business, section

183 allows deductions generally to the extent the activity

generates gross income.   To be engaged in a trade or business

within the meaning of section 162, "the taxpayer must be involved

in the activity with continuity and regularity and * * * the

taxpayer's primary purpose for engaging in the activity must be

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

35 (1987).

     In determining whether an activity is engaged in for profit,

the taxpayer must show an actual and honest objective of making a

profit.   Surloff v. Commissioner, 81 T.C. 210, 233 (1983);

Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982), affd.

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

determination whether petitioner had an actual and honest

objective of making a profit requires an examination of all the

surrounding facts and circumstances of the case.    Golanty v.

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

opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(b), Income Tax

Regs.   We give greater weight to the objective facts than to

petitioner's mere statement of intent.   Dreicer v. Commissioner,

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

     Section 1.183-2(b), Income Tax Regs., sets forth some of the

relevant factors for determining when an activity is engaged in
                                 - 8 -

for profit.     No one factor is controlling.   Abramson v.

Commissioner, 86 T.C. 360, 371 (1986); Golanty v. Commissioner,

supra at 426.    Such relevant factors include (1) the manner in

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

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

taxpayer in carrying on the activity; (4) the taxpayer's history

of income or loss with respect to the activity; (5) the amount of

occasional profits, if any, that are earned; (6) the financial

status of the taxpayer; and (7) whether elements of personal

pleasure or recreation are involved.

     Petitioner contends that the nursery activity was a trade or

business that he operated for profit.     But, it is perfectly

obvious that when all of the costs that petitioner associates

with the Long Beach properties and the travel to and from that

area are considered as expenses of the nursery, the venture could

never produce a profit, and there could not have been an actual

and honest objective of a profit.     Indeed, even if petitioner

could have produced 5,000 pots of tulips (the "maximum profit"),

he still would not have made a profit.3

     In reality, however, many of the expenses that petitioner

attempts to associate with the nursery are expenses of a

nonbusiness activity, i.e., a second home to be used on weekends,


     3
        Indeed, while some of the factors listed in sec. 1.183-
2(b), Income Tax Regs., may be neutral, none of those factors
really favor petitioner's position.
                                - 9 -

holidays, and possibly for retirement.     This is quite obvious

from petitioner's testimony.    Petitioners went to Long Beach in

search of a second home, not to invest in a business.     The idea

of the nursery was an afterthought.     The tail of the nursery

cannot wag the dog of the second home.

     Expenses associated with a vacation home are personal and

nondeductible except as otherwise expressly provided in the Code.

Sec. 262(a).   Furthermore, section 280A(a) limits the deductions

that may be allowed "with respect to the use of a dwelling unit

which is used by the taxpayer during the taxable year as a

residence."    During the years in question, petitioners used, at

least, the cottage on the Oregon Street property as a residence.

     It may not necessarily flow from this scenario that the

nursery activity was not entered into for profit.     See Hughes v.

Commissioner, T.C. Memo. 1995-202.      We have no question that

petitioner may have devoted many arduous hours to the nursery

activity.   Based on the record before us, it is virtually

impossible to separate the ordinary and necessary expenses of the

nursery activity from the personal expenses of the second home.

For example, petitioners claimed deductions for utilities and

interest expenses, but we have no evidentiary basis on which to

allocate these expenses between business and personal.     It may be

argued that, for example, the car and truck expenses are solely

associated with the nursery activity.     But, we simply cannot

accept that there were no personal motivations in the travel to
                               - 10 -

and from Long Beach.    Business licenses and advertising expenses

seem to be the only expenses that we can definitively identify as

directly related to the nursery activity.

     Under these circumstances, petitioners have failed to

establish an actual and honest objective of making a profit from

the nursery activity.   We do not have an accurate financial

picture of that activity.    In litigating this case, petitioners

chose this all-or-nothing approach, and they have the burden of

establishing that respondent's determinations were incorrect.

Rule 142(a).   Petitioners have not carried that burden.

                                          Decision will be entered

                                     for respondent.
