UNITED STATES TAX COURT

T.C. Memo. 1995-574

UNITED STATES TAX COURT

BERNARD MICHAEL REED, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23518-93.

Filed December 4, 1995.

Bernard Michael Reed, pro se.

Paul L. Dixon, for respondent.

MEMORANDUM OPINION

GOLDBERG, Special Trial Judge:

This case was heard pursuant

to section 7443A(b)(3) and Rules 180, 181 and 182.1

Respondent

determined a deficiency in petitioner's 1991 Federal income tax

in the amount of $1,504, and an accuracy-related penalty pursuant

to section 6662(b)(1) in the amount of $300.80.

The issues for decision are:

(1) Whether petitioner's real

estate and water purifier activities were engaged in for profit

1

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for 1991, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

2

within the meaning of section 183, and, if so, whether petitioner

can substantiate claimed business expenses; and (2) whether

petitioner is liable for an accuracy-related penalty.

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

The stipulation of facts and attached exhibits are incorporated

by this reference.

Petitioner resided in Stateline, Nevada, at

the time the petition was filed in this case.

During the past 20 years, petitioner purports to have been

an accountant, a principal in an architectural firm, a real

estate investor, a taxi driver, a bank auditor, and a salesperson

of water purifiers.

During 1991, petitioner drove a taxi for

Whittlesea Cabs, ran a water purifier franchise, and operated a

real estate investment firm under the name of NSA.

Petitioner

conducted both the water purifier business and NSA from his onebedroom apartment at the Desert Club in Nevada.

Petitioner's water purifier franchise was based on a

"pyramid" incentive system, whereby participants earn income

through direct sales and through the recruitment of additional

franchisors.

The primary objective is to recruit additional

salespersons, with the sale of individual units used as one

method of recruitment.

Petitioner was unable to sell any of the

water purifiers and, after giving several away, disposed of

several units at a garage sale held in November 1991.

He did not

include the aggregate proceeds from the garage sale ($30-$40) in

his gross income for the taxable year at issue.

3

In 1990, petitioner formed NSA, and, according to his

testimony, began looking for real estate investments.

In 1991,

petitioner passed his real estate agent examination and

associated NSA with Marilyn Taylor, a real estate broker.

Petitioner did not invest in, sell, or renovate any real estate

during 1991.

On November 8, 1991, while on disability leave from

Whittlesea Cabs and receiving worker's compensation, petitioner

traveled to Alaska for the purported purpose of investing in real

estate.

From November 12 until November 19, 1991, petitioner stayed

at the Best Western Hotel in Juneau, Alaska.

On November 26,

petitioner entered into a 6-month lease with Patrick Macksey as

co-tenant for a three-bedroom house at a monthly rent of $1,100.

Under the terms of the lease, petitioner agreed not to paint,

paper, or otherwise redecorate or make alterations to the

premises without prior written consent of the owner.

The initial

payment, including security deposit and first month's rent, was

$1,883.33.

Due to a lack of available treatment for his ongoing medical

problems, petitioner departed Alaska on December 24 and returned

to Nevada on or about December 27, 1991.

Petitioner did not

invest in any real estate or attend any business meetings with

bankers or realtors while in Alaska.

On Schedule C attached to his 1991 Federal income tax

return, petitioner claimed the following business deductions:

4

Expense

Amount Claimed

Car and truck

Employee benefit program

Insurance

Rental of business property

Travel

Utilities

Bank service charges

Miscellaneous

Total

$329

1,413

1,246

8,890

515

1,899

337

1,241

$15,870

On a revised Schedule C dated October 17, 1992, petitioner

increased his deductions for travel expenses claimed to

$5,931.30, and claimed additional expenses for entertainment

($202.94) and meals ($1,014.70).

Petitioner reported no income

in 1991 other than the wages and tips he earned while driving a

taxi-cab for Whittlesea Cabs.

Respondent determined that petitioner's business activities

were not engaged in for profit, and therefore disallowed all of

the deductions claimed attributable thereto.2

Alternatively,

respondent determined that petitioner failed to substantiate the

deductions and to prove that the expenditures were ordinary and

necessary to his businesses.

The determinations of respondent

are presumed correct, and petitioner bears the burden of proving

otherwise.

Rule 142(a).

All taxpayers are required to keep sufficient records to

enable respondent to determine their correct tax liability.

2

Sec.

Although not addressed in the notice of deficiency, respondent

also disputes the additional expenses claimed on petitioner's

revised Schedule C.

5

6001; Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).

Moreover, deductions are strictly a matter of legislative grace,

and a taxpayer has the burden of establishing that he or she is

entitled to any deduction claimed on a return.

Deputy v. du

Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).

Section 162(a) allows as a deduction "all the ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on any trade or business".

Where an individual

conducts an activity that is not engaged in for profit, section

183 limits the allowable deductions.

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).

Whether petitioner engaged in the water purifier or real

estate business for profit depends on whether the activity was

undertaken with an "actual and honest objective" of making a

profit.

Elliott v. Commissioner, 90 T.C. 960, 970 (1988), affd.

without published opinion 899 F.2d 18 (9th Cir. 1990); Fuchs v.

Commissioner, 83 T.C. 79, 98 (1984); Dreicer v. Commissioner, 78

T.C. 642, 644-645 (1982), affd. without opinion 702 F.2d 1205

(D.C. Cir. 1983).

While a reasonable expectation of a profit is

not required, petitioner must have entered into the activity, or

6

continued it, with the bona fide objective of making a profit, as

judged by all the facts and circumstances.

Taube v.

Commissioner, 88 T.C. 464, 478-479 (1987); Poast v. Commissioner,

T.C. Memo. 1994-399; sec. 1.183-2(a), Income Tax Regs.

The regulations set forth nine non-exclusive factors for

consideration in determining whether an activity is engaged in

for profit.

are:

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

These factors

(1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the activity

may appreciate in value; (5) the success of the taxpayer in

carrying on other activities; (6) the taxpayer's history of

income or losses with respect to the activity; (7) the amount of

occasional profit, if any, which is earned; (8) the financial

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

pleasure or recreation are involved.

Furthermore, if a taxpayer

has substantial income from sources other than the activity in

question, it may be an indication that the activity is not

engaged in for profit, particularly if the losses from the

activity generate substantial tax benefits.

Sec. 1.183-2(b)(8),

Income Tax Regs.

No single factor is controlling.

Abramson v. Commissioner,

86 T.C. 360, 371 (1986); Golanty v. Commissioner, 72 T.C. 411,

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

7

Cir. 1981).

The taxpayer's stated intention to make a profit is

not determinative; greater weight is given to objective factors

rather than the taxpayer's mere statement of intent.

Engdahl v.

Commissioner, 72 T.C. 659, 666 (1979).

Section 262 precludes a taxpayer from deducting personal,

living, or family expenses that are not incurred in the conduct

of a trade or business or for the production of income.

Based upon the record in this case, we find that petitioner

lacked the requisite profit objective in carrying on his business

activities.

Petitioner claims to have operated a water purifier

franchise, yet he failed to produce any receipts for inventory

purchases, advertisement, or related records.

He was also unable

to sell any of the units; in fact, he testified at trial that he

eventually gave units away at no charge.

Petitioner operated NSA in a similarly offhand manner.

While he presented a ledger at trial, it failed to differentiate

between personal and business expenses.

Furthermore, although

petitioner substantiated the expense of the real estate agent

examination and the payment to the State Industrial Insurance

System, he offers no evidence, such as business cards, a

telephone listing, a client list, or documentation of previous

investments, that he was actively engaged in the real estate

business, or that he conducted the activity with a profit motive.

Petitioner contends that the only expenses he deducted were

ordinary and necessary to his business activities.

However, his

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"business expenses" include his annual rent for his one-bedroom

apartment at the Desert Club, complete with clubhouse, theatre,

and meeting facilities (rental of business property), the entire

phone, cable, and utilities bills every month (utilities), the

cost of his dental work (employee benefit program), numerous

meals at local restaurants (meals and entertainment), auto

insurance and maintenance costs on his only vehicle (insurance

and car and truck expenses), and the entire cost, including

lodging, of his trip to Alaska (travel).

With respect to his trip to Alaska, petitioner claimed that

the initial payment on the house in Juneau was an "investment" in

a lease with an option to purchase, and he intended to renovate

the property for resale.

However, the documentation produced by

petitioner clearly indicates that the property was to be used

solely for residential purposes.

The lease included no option to

purchase and prohibited any alteration or renovation.

It is well settled that we are not required to accept selfserving testimony in the absence of corroborating evidence.

Lerch v. Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989),

affg. T.C. Memo. 1987-295; Niedringhaus v. Commissioner, 99 T.C.

202, 212 (1992).

Based on the foregoing, we conclude that

petitioner's activities were not engaged in for profit.

Petitioner is not entitled to deduct the Schedule C expenses he

claimed for 1991.

9

The second issue for decision is whether petitioner is

liable for a penalty under section 6662(a).

This section, in

conjunction with subsection (b)(1), imposes an accuracy-related

penalty equal to 20 percent of the portion of any underpayment of

tax that is due to negligence.

Under section 6662(c), negligence

is any failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code.

Petitioner failed to maintain regular and consistent records

of his activities, attempted to deduct personal items under the

guise of "business expenses", failed to substantiate a portion of

the deductions claimed, and misrepresented the purpose behind the

expenditures at trial.

On this record, we conclude that

petitioner was negligent within the meaning of section 6662(b)(1)

with respect to the entire underpayment of tax and is liable for

an accuracy-related penalty under section 6662(a).

Respondent is

sustained on this issue.

To reflect the foregoing,

Decision will be entered

for respondent.