# Petition for Writ of Certiorari — Warden v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_1765%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1998 - **Citation:** 522 U.S. 1109 ## Text ‘if Supreme Court. U.S. FILED 97 845 NOV 1 8 1997 No. OFFICE OF THE @LERK IN THE SUPREME COURT OF THE UNITED STATES October Term, 1997 LEW WARDEN and NADJA J. WARDEN, Petitioners, . COMMISSIONER OF INTERNAL REVE™TE. On Petition For Writ Of Certiorari To The United States Court Of Appeals For The Ninth Circuit PETITION FOR WRIT OF CERTIORARI Lew Warden Nadja J. Warden Petitioners Pro Se. 12120 East Snyder Road Tucson, Arizona 85749 (520) 760-2809 r 10 i) , A. QUESTIONS PRESENTED FOR REVIEW 1. Does the equal protection component of the due process clause of the Fourth Amend- ment, combined with the status of the Tax Court of the United States as a court of national jurisdiction, mandate that the tax laws of the United States, in this case sections 162, 183, and 212 of the Internal Internal Revenue Code, be applied uniformly throughout the United States irrespective of contrary and conflicting opinions of and between the several Circuit Courts of Appeals? 2. Must a judge of the Tax Court follow Opinions of panels of the Court of Appeals to which an appeal may be taken, that in cases arising under sections 162, 183, and 212 of the Internal Revenue Code, the burden is on the taxpayer to prove that his primary or dominant purpose in entering into an acti- vity was to "profit", rather than applying the Tax Court’s established standard that it is sufficient compliance with these sec- tions that he prove an "actual and honest" intent" to profit? 3. Does Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987), direct that in order to qualify as a business, the primary and domi- nant purpose of the taxpayer in commencing an activity must be to "profit", as distinct from and to the exclusion of "producing income"? 4. In determining whether the "primary" purpose of the taxpayer is to "profit", where the taxpayer has multiple motives for commencing an activity, is it the burden of the taxpayer to "convince" the trial court that his primary intent was to profit, or, once multiple motives have been shown to exists, should the trial court, as held by this Court in Commissioner v. Soliman, 506 U.S. 168, 174-175 (1993), undertake a con- parative analysis of such motives to deter- mine which was primary? x * ii B. TABLE OF CONTUNTS page PETITION FOR WRIT OF CERTIORARI 1 OPINIONS BELOW 1 JURISDICTION 1 CONSTITUTIONAL PROVISIONS, STATUTES AND REGULATIONS INVOLVED IN THE CASE 2 STATEMENT OF THE CASE 2 REASONS FOR GRANTING THE WRIT 7 A. SUBSTANTIAL CONFLICT EXISTS BETWEEN THE DECISIONS OF THE NINTH CIRCUIT AND THE DECISIONS OF AT LEAST SEVEN OTHER CIRCUITS AS TO THE CORRECT STANDARD TO BE APPLIED TO THE DETERMINATION OF WHETHER AN ACTIVITY IS A "TRADE OR BUSINESS" UNDER I.R.C. SEC. 167 7 B. THE COURT SHOULD MANDATE A PROCEDURE WHEREBY THE TAX COURT MAY EFFICIENTLY FULFILL ITS OBLIGATIONS AS A COURT OF NATIONAL JURISDICTION WITHOUT CHALLENGING THE OBLIGATIONS OF THE CIRCUIT COURTS OF APPEALS TO DECLARE THEIR VIEWS ON TAX LAW 12 C. THE COURT SHOULD AFFIRM THAT ITS STATEMENTS IN COMMISSIONER vs GROET- ZINGER WERE NOT INTENDED TO ESTABLISH "PRIMARY INTENT TO PROFIT" AS A STAND- ALONE TEST FOR DETERMINING WHETHER AN ACTIVITY IS A TRADE OR A BUSINESS OR iii A MEANS OF PRODUCING INCOME, BUT RATHER AS AN METHOD OF DISTINGUISHING HOBBY-TYPE ACTIVITIES 17 D. THE COURT SHOULD DECLARE THAT IN DETERMINING WHETHER A QUESTIONED ACTIVITY IS A TRADE OR BUSINESS OR INCOME PRODUCING ACTIVITY, AS DISTINCT FROM A HOBBY OR AMUSEMENT DIVERSION, THE COURTS BELOW SHOULD UNDERTAKE A COMMISSIONER vs SOLIMAN COMPARATIVE ANALYSIS TO DETERMINE WHICH ACTIVITY IS PRIMARY 18 CONCLUSION ‘ 20 C. TABLE OF AUTHORITIES United States Constitution Amendment IV 2 Supreme Court Opinions Commissioner v. Groetzinger, 480 U.S. 23 (1987) a) w. aey Aa 18 Commissioner v. Soliman, 506 U.S. 168 (1993) Ry) -F of Bo £0 19,° 20 Helvering v. National Grocery Co., 304 U.S. 282 (1938) 8 Portland Golf Club v. Commissioner, 497 U.S. 154 (1990) 12 Rochin v. California, 342 U.S. 165 (1951) > 3 United States v. Correll, (1967) 389 U.S. 299 A3 iv a Courts of Appeals Opinions Antonides v. C.I.R., 893 F.2d 656 (4th Cir. 1990) ’ 274 F.2d 96 (9th Cir. 1959) Bur 809 F.2d 355 (7th Cir. 1987) ; 797 F.2d 1049 (D.C. Cir. 1986) Doggett v. Burnett, 62 App. D.C. 103, 65 F.2d 191 (1933) Dreicer v. C.I.R., 665 F.2d 1292 (DC Cir. 1981) va ; 908 F.2d 369 (8th Cir. 1990) rgu Vo fo at ’ 29 F.3d 98, 102 (2nd Cir. 1994) Hendricks v. C.I.R., 32 F.3d 94 (4th Cir. 1994) irsc e. is 315 F.2d 731 (9th Cir. 1963) Mercer v. C.I.R., 376 F.2d 708 (9th Cir. 1967) Osteen v. C.I.R., 62 F.2d 356 (11th Cir. 1995) Ranciato v. C.I.R., 52 F.3d 23 (2nd Cir. 1995) Smith v. C.1.R., 937 F.2d 1089 (6th Cir. 1991) Snyder v. U.S., 674 F.2d 1359 (10th Cir. 1982) Tax Court Opinions Estate of Willis Edward Clack, 96 TC 4562 (1966) 13 Christos Coutsoubelis, 66 TCM 935 (1993) 20 Lynn Crawford, 65 TCM 2540 (1993) 20 Ruth Giesbrecht, 69 TCM 2149 (1995) 20 Golsen v. C.1.R., 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971) ‘3, &6 2 ’ 103 TC 29, (1993) 13 Lardas v. C.I.R., 99 TC 490 (192) 14 Lawrence v. C.I.R., 27 T.C. 713 (1957), revd. on other grounds 258 F.2d 562 (9th Cir. 1958) i3, 28 Peat Oil & Gas Associates v. C.I.R., 100 TC 271 (1993), also 65 TCM 2250 (1993) GO, 229 (13 ‘4, 26; 17, 20 Dennis A. Pryor, 61 TCM 2139 (1991) 11 Owen A. Steinberg, 69 TCM 2121 (1995) 20_ Statutes 26 U.S.C. Sec. 162 2,3, 6, & Appendix F, p. 44 Sec. 167 7 Appendix F, p. 44 Sec. 183 2, 3 Appendix F, p. 44 Sec. 212 a, 3) BS Appendix F, p. 46 Secs. 7481-7483 7 28 U.S.C. sec. 1254(1) 1 vi page Supreme Court Rule 10 1 Treasury Regulaticns 26 CFR 1.183-2, 2 Appendix F, p. 46 1.212.1(c) 2, 10, 18 Appendix F, p. 48. Other Authorities Florida Bar Journal (March 1989) 8 D. OPINIONS BELOW Order of United States Court of Appeals for the Ninth Circuit, No. 95-70896, denying petition for rehearing and rejecting suggestion for rehearing en banc, filed August 20, 1997. Not for publication. Appendix A, p. 1. Memorandum opinion of United States Court of Appeals for the Ninth Circuit, No. 95-70896, filed April 2, 1997. Not for publication. Appendix B, p. 2. Memorandum of Opinion of United States Tax Court, Docket no. 4829-92, T.C. Memo. 1995-176, filed April 17, 1995. Appendix C, p. 12. ELIE OS, IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1997 PETITION FOR WRIT OF CERTIORARI Petitioners respectfully pray that a writ of certiorari issue to review the judgment below. OPINIONS BELOW The Memorandum opinion of the United States Court of Appeals, no. 95-70896, filed April 2, 1997 appears at Appendix B, Pp. 3, to the petition and is unpublished. The Memorandum of Opinion of the United States Tax. Court, no. 4829-92, filed April 17, 1995, appears at Appendix C to the peti- tion, p. 12, and is published as T.C. Memo. 1995-176. JURISDICTION The opinion of the Ninth Circuit Court Of Appeals, sought to be reviewed was filed April 2, 1997. Petitioners filed timely petition for rehearing with suggestion for rehearing en banc, which petition was denied by unpublished order filed August 20, 1997, appearing herein as Appendix A. Jurisdiction exists by reason of Rule 10, and 28 U.S.C. sec. 1254(1). -l- CONSTITUTIONAL PROVISIONS, STATUTES AND REGULATIONS INVOLVED IN THE CASE Amendment IV, United States Constitution: No person shall be deprived of life, liberty, or property, with- out due process of law. Internal Revenue Code, Title 26, U.S.C. Sec. 162, Appendix F, p. 44. Sec. 167, Appendix F, p. 44. Sec. 183, Appendix F, p. 44. Sec. 212, Appendix F, p. 46. Treasury Regulations 26 CFR 1.183-2, Appendix F, p. 46. 1.212.1(c), Appendix F, p. 48. STATEMENT OF THE CASE This petition involves conflicts between between the Ninth Circuit and at least seven of the other Circuit courts of appeal, con- flicts between the Tax Court and panels of the Ninth Circuit, and conflicts between the judges of the Tax Court. The focus of these conflicts is whether, in determining if a particular activity qua- lifies as a "trade or business" under I.R.C. sec. 162, the test or standard by which the taxpayer’s intent to profit is determined, the taxpayer had an “actual and honest" in- tent to profit, which is the rule of the Tax Court and the Second, Fourth, Sixth, Seventh, Eighth, Eleventh, and District of Columbia Circuits, or the "primary and dominant" intent to profit test applied by a dissenting Tax Court judge in the instant case and upheld -2- by a panel of the Ninth circuit, and the related issue of whether a taxpayer’s sub- jective intent should be a matter of judi- cial concern at all. A second issue involves the duties of the Tax Court and the Internal Revenue Ser- vice to apply the tax laws uniformly among the several states, and the correlative right of the individual taxpayer, under the equal protection component of the Due Pro- cess Clause to the uniform application of the tax laws. 4 third issue involves the scope and application of this Court’s opinions in i i Vv. i , 480 U.S. 23, 35 (1987) ana issi iman, 506 U.S. 168, 174-175 (1993) to sections 162, 183, and 212 of the Internal Revenue Code, and the proper resolution of the question of how the trial court Should determine which, of multiple taxpayer’s motivations, are primary. The facts of this case, for the purposes of this petition, are Substantially as set forth in the Tax Court’s Memorandum of Opi- nion. (Appendix C, pp. 13-25.) We briefly review them to orient the Court to the plight petitioners found themselves in as a conse- quence of a failed business venture. Petitioner Lew Warden (herein Lew) is a is a retired attorney, and petitioner Nadja Warden (herein Nadja) is his wife. In 1986 Lew, then 66 years Old, sought to withdraw from the practice of law and to earn petiti- oners’ livelihood in the charterboat business. -3- To this end the Wardens purchased a 55-foot sailboat, which they named Rocking Chair, from Windships, Inc., a yacht brokerage firm in Oakland, California, and, in 1987, placed the yacht in service in Windships’ charter department. Within a matter of months--because Wind- ships was not performing its obligations to commission the yacht, to provide warranty support to remedy the numerous mechanical problems which developed, and to provide petitioners with the volume of charters it had represented petitioners could expect-~- it became apparent to petitioners that their project was in jeopardy. In order to extri- cate themselves from this situation, petiti- oners did most of the commissioning and re- pair work themselves and put the yacht up for sale. In 1988, under the impact of declining yacht sales due to changes in policy by the Commissioner, Windships went out of business, Rocking Chair continued to have major mecha- nical failures which made it inoperable for for extended periods of time, and Lew moved out of his apartment and onto the yacht in order to reduce expenses and to be close to the work which he and others were doing on the yacht, and continued listing it for sale. (At the time, Nadja was living in the family home in San Luis Obispo, California. ) In 1989, Lew moved the yacht to Southern California in search of a better sale market and chartering opportunities. There he con- tinued working to repair the boat’s defects, obtained a few charters, and experienced fur- Se ther major mechanical failures. In 1989, petitioners sold their property in San Luis Obispo, and purchased a home in Castro Valley, California. In late 1990, the yacht’s mechanical pro- blems still persisting, Lew gave up any fur- ther efforts to charter the yacht, filed a lawsuit (ultimately successful) against Wind- ships and the yacht’s Taiwanese builder, and brought the yacht back to Northern California for major repairs. After this work was done, Lew again pla- ced the yacht for sale with a yacht broker, but withdrew the offering when a marine sur- veyor reported that although the yacht still had a substantial value, because of its his- tory of problems and petitioners’ obligation to fairly disclose such problems to prospec- tive buyers, for all practical purposes it was unmarketable. The trial judge, in an effort to divine petitioners’ profit intent at the time they first purchased the yacht, extensively revi- ewed their post-purchase activities, placed his own interpretation of these events and concluded that petitioners had failed to "convince" him that their "primary" intent was to profit. (Appendix C, p. 34.) The trial judge applied this test, at the behest of counsel for respondent, in lieu of the Tax Court’s long-established more len- ient "actual and honest" standard, because the case was appealable to the Ninth Cir- cuit. (Appendix C, p. 27.) Crucial to petitioners’ appeal to the Ninth Circuit and this petition are the fol- lowing findings by the trial judge: 1. Petitioners "honestly hoped that their yachting activity would generate a pro- fit." (Appendix C, p. 32.) 2. "Profit was one objective of their activity." (Ibid. ) 3. To prevail, “petitioners must show that their yachting activities were engaged in primarily for the purpose of making a profit." (Ibid. ) 4. Petitioners "were ready to retire and wanted to live in a pleasant, recrea- tional setting." (Appendix C, p. 33.) 5. “Based upon the entire record, we are not convinced that petitioners’ primary objective was to make a profit." (Ibid. ) 6. “Rather, the evidence is more con- sistent with the conclusion that petitioners wished to retire from the practice of law, had a desire to sail, had the financial re- sources to pursue that desire, and had some hope that they could combine their dream re- tirement with an income-producing venture." (Ibid. ) In reaching his conclusion, the Tax Court judge did not undertake the kind of objective comparative analysis mandated by this Court in Commissioner v. Soliman, 506 U.S. 168, 174- 175 (1993), but rather based his determination on petitioners’ failure to sustain their burden | to "convince" him that their intent to profit was their primary motivation in entering into the charterboat business. Pursuant to the provisions of 26 0.8.C. secs. 7481-7483, petitioners appealed to the Court of Appeals for the Ninth Circuit from the Memorandum of Opinion of the Tax Court (Appendix C) upholding determinations by res- pondent Commissioner of Internal Revenue dis- allowing petitioners claimed deductions for the tax year 1989. The Court Of Appeals, while recognizing that other circuits fol- lowed a different rule, affirmed on the gro- und that the Ninth Circuit followed the pri- mary intent to profit standard. (Appendix B, Pp. 5-7.) The Court of Appeal also rejected petitioners’ contentions made herein that the Tax Court, as a court of national jurisdic- tion, was obliged to apply its own rule ab- sent binding precedent, and that its failure to apply a uniform standard denied petition- ers due process of law. (Appendix B, pp. 10- ai) REASONS FOR GRANTING THE WRIT A SUBSTANTIAL CONFLICT EXISTS BETWEEN THE DECI- SIONS OF THE NINTH CIRCUIT AND THE DECISIONS OF AT LEAST SEVEN OTHER CIRCUITS AS TO THE CORRECT STANDARD TO BE APPLIED TO THE DETER- MINATION OF WHETHER AN ACTIVITY IS A "TRADE OR BUSINESS" UNDER I.R.C. SEC. 167 Although sec. 167 of the Internal Reve- nue Code does not expressly so provide, it has long been judicially established that -7- the intent to profit is an essential element in the determination of whether a particular activity is a "trade or business" under sec. 162. As Judge Swift, in his concurring opi- nion in Peat Oil_& Gas Associates. et al.. v. v. C.I.R., 65 TCM 2259 (1993)*, at p. 14, fn 2, noted: "[Tjhe primary coaninell first appeared as a judicial gloss on the statutory language of section 165(c)(2) in Helvering v. National Grocery Co., 304 U.S. 282 (1938)". Until recently, the Tax Court almost in- variably followed the rule, first approved by the District of Columbia Circuit Court of Appeals in Doggett v. Burnett, 62 App. D.C. 103, 65 F.2d 191 (1933), that the question of whether a taxpayer had the requisite "intent to profit" was to be determined by whether he had "an actual and honest" intent to pro- fit. Hence, we, as do professional practi- tioners see "Equine Endeavors: Hobby v. Busi- ness", Florida Bar Journal (March 1989), pp. 33, 36 n. 4) refer to the "actual and honest" * Also reported as Peat Oil and Gas Associa- tes v. C.I.R. (1993) 100 T.C. 271. Peat is a very significant case as it sets forth the differing views of the several Tax Court judges on the issues raised herein, views which help explain the differences between the several Circuits and underline the need for this Court to exercise its supervisory powers and to settle important questions of federal tax law. All of the issues presented herein, save the constitutional issue, are discussed and highlighted by the several Tax Court judges in Peat. -8- test as the Tax Court’s rule. The Tax Court also often cites , 665 F.2d 1292 (DC Cir. 1981) as authority for its rule. In 1959, a panel of the Ninth Cir- cuit, citing , supra, held that a "good faith" intent to profit was sufficient to establish the requisite profit fit motive, and reversed a Tax Court ruling against the taxpayer. ( C.I.R.,_ 274 F.2d 96 (9th Cir. 1959).) Four years later another panel of the Ninth Circuit, also citing Doggett v. Burn- ett, supra, sustained a Tax Court’s ruling against the taxpayer and, by way of dicta, stated that the test was whether the taxpayer had entered into the questioned activity in "good faith, with the dominant hope and in- tent of realizing profit, i.e., taxable in- come". (Hirsch v. C.I.R., 315 F.2a 731, 736- 737 (9th Cir. 1963).) As indicated by the Ninth Circuit’s opinion herein (Appendix B P- 5), in subsequent opinions the concepts of "good faith", "hope", and "income" were dropped and the Ninth Circuit’s test, as dis- tinguished from that of the Tax Court and the several other circuits referred to herein, became simply the "primary or dominant intent to profit". Further, as applied by the trial judge herein, and affirmed by the Court of Appeals, this test became a stand-alone, virtually in- Surmountable obstacle to the taxpayer, not a test requiring objective judicial compari- son with other taxpayer motivations, as indi- cated by this Court in Commissioner v. Groet- oe zinger, 480 US 23, 35-36 (1987) and Treasury Regulations sec. 1. 212.1(c). (Appendix E, pp. 47-48.) See Commissioner v. Soliman, 506 U.S. 168, 174-175 (1993) where this Court in a closely analogous situation calling for the judicial determination of primacy, held that the trial court must make a comparative ana- lysis of the alternative factors. The following cases from the Second, Fourth, Sixth, Seventh, Eighth, Eleventh, and District of Columbia circuits, all apply- ing the Tax Court’s traditional "actual and honest" intent to profit standard, and being, according to our latest research, the latest published opinions of these circuits, high- light the differences between the Ninth Circuit and these other cir uits: Ranciato v. C.I.R., 52 F.3d 23, 25 (2nd Cir. 1995); cf._Ferguson v. C.I.R., 29 F.3d 98, 102 (2nd Cir. 1994). endri Vv , 32 F.3d 94, 97 (4th Cir. 1994); cf. “Antonides v. C.I.R., 893 F.2d 656, 659 (4th Cir. 1990). Smith v. O.2 Ris 937 F.2d 1089, 1093 (6th Cir. 1991). Burger v. C.I.R., 809 F.2d 355, 358 (7th Cir. 1987). Evans v. C.I.R., 908 F.2d 369, 1373 (8th Cir. 1990). Osteen v. C.I.R., 62 F.2d 356, 358 (11th Cir. 1995). Cornfield v. C.I.R., 797 F.2d 1049 (D.C. Cir. 1986). We have also collected, in Appendix D, pp. 39-41, a random sampling of some 42 post- ‘Commissioner v. Groetzinger Tax Court cases -10- (from some 229 sec. 183 cases reported by Commerce Clearing House), all appealable to the Ninth Circuit, and only four of which mentioned the Ninth Circuit’s rule, much less indicated an obligation to be bound by it. Although most of these recent Tax Court cases do not suggest that other judges of the Tax Court are about to abandon the traditional "actual and honest" test, the fact that some judges feel obliged to cite both standards or to otherwise equivocate on the issue, suggests some uncertainty, blurs the essential distinc- tion between the two tests, and obscures the rights of the parties. The distinction between these two tests not only is emphasized by the outcome of pe- titioners’ case, but also is demonstrated by a post- issi in opinion by the same Tax Court judge as here and where, on remarkably parallel facts--although in our biased: opinion, we believe we had much the stronger case--the court upheld the tax- payer against the Commissioner by applying the "actual and honest" test. ( j Pryor, 61 TCM 2139 (1991). Compare Judge Swift’s plea in Peat Oil ssoci Vv. C.I.R. (1993) 100 T.c. 271, 285-286, that the Tax Court, the forum most likely to be adversely impacted by the resolution of such a subjective matter as a taxpayer’s primary intent, be spared such burdens. If judicial standards are too ephe- meral, decisions become "ad hoc and episodic", and contravene accepted due process princi- ples. (Rochin v. California, 342 U.S. 165, 172 (1951).) -lli- In concluding this section, we note that in Portland Golf Club v. Commissioner, 497 U.S. 154 (1990), Justice Kennedy, in a parti- ally concurring opinion, joined in by Justice O’Connor and Justice Scalia, wrote that he saw "no justification for making the profit-motive requirement more demanding than necessary to distinguish trades and businesses from other activities pursued by taxpayers." B THE COURT SHOULD MANDATE A PROCEDURE WHEREBY THE TAX COURT MAY EFFICIENTLY FULFILL ITS OBLIGATIONS AS A COURT OF NATIONAL JURIS~- DICTION WITHOUT CHALLENGING THE OBLIGATIONS OF THE CIRCUIT COURTS OF APPEALS TO DECLARE THEIR VIEWS ON TAX LAW With 12 Circuit Courts of Appeal, most often acting through lesser panels, faced with the responsibility for resolving appeals from a flood of Tax Court decisions by indi- vidual Tax Court judges, not to speak of appeals from the many District Courts within their respective jurisdictions, it is small wonder that basic conflicts on points of tax law develope within the system. However, while the federal court system and the complexity of the tax laws necessar- ily create diversity of opinion, it is not seemly that the Internal Revenue Service and the Tax Court should complicate the process by themselves advancing diverse points of view. In theory, uniformity of opinion on matters of law is imposed upon the Internal -12- Revenue Service by the Treasury Regulations. (United States v. Correll (1967) 389 U.S. 299, 305-306.) But in fact, the Internal Revenue Service has never felt the const- raints of "petty consistency", and takes its victories wherever and however it can find them. The Tax Court has a policy--of some 40 years duration and restated from time to time--whereby it may assert its views on a particular point of tax law against contrary opinion by a particular Circuit court. Thus, in Peat Oil and Gas Associates Vv. C.I.R. (1993) 100 T.C. 271, a remarkably illuminating opinion in which all 15 of the Tax Court judges made their views known on the issues of "profit" motives and conflicts between the Tax Court and the Courts of Appeals, the Court spoke to its policy of refusing to defer to contrary Circuit opinion unless the Tax Court had first been reversed on precisely the same point, and to hold to its opinion until the matter has been ruled upon by this Court. This policy, flowing from its status as a court of national jurisdiction and its duty to apply the tax laws uniformly, has been articulated in numerous other Tax Court cases, e.g., 27 T.C. 713, 716-717 (1957), revd. on other grounds 258 F.2d 562 (9th Cir. 1958); Vv 2, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971); L113 Gdward Clack, 96 TC 4562 (1966); Krumhorn v. C.I.R., 103 TC 29, -13- 30-31 (1993), an opinion by same trial judge who deferred to 9th Circuit dicta herein; Lardas v. C.I.R., 99 TC 490, 494 (1992). This policy, as set forth in the Tax Court’s majority opinion in Peat, is as follows: (1) The Tax Court will "follow a Court of Appeals decision which is squarely in point where the appeal from our decision lies to that Court of Appeals and that court alone." (Golsen v. C.I.R., 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).) (2) If appeal from the Tax Court’s deci- Sion "lies to a Court of Appeals that does not have a decision squarely in point, we, as a court of national jurisdiction, must thorough- ly reconsider an issue in light of the reason- ing of a reversing appellate court and, if still of the opinion that our original result was right, follow our own beliefs until the Supreme Court decides the point." (Lawrence | y, ©, 348.1, 27 F.Cae i. 2732+ 746-717 €2967), revd. on other grounds 258 F.2d 562 (9th Cir. 1958). However, and for reasons not disclosed in its opinion, this policy manifestly was not followed by the Tax Court judge in peti- tioners’ case. Indeed, the opinions of the Ninth Circuit relied upon by the judge in his opinion (Appendix C, p. 27) and cited by the Ninth Circuit panel herein (Appendix B, p. 5) did not involve reversals of Tax Court deci- sions but rather were opinions sustaining the Tax Court’s decisions on their facts, facts -14- SIA rca iinet which were entirely unrelated to those of petitioners’ case. Nor did the Tax Court judge or the Ninth Circuit panel herein re- cognize the existence of two Ninth Circuit holdings which reversed Tax Court decisions by applying the "good faith" intent to profit test to facts which are similar to the facts herein. (Brooks v. C.I.R., 274 F.2d 96 (9th Cir. 1959); Mercer v. C.I.R., 376 F.2d 708 (9th Cir. 1967).) The willingness of the Tax Court judge in this case to break ranks with the Tax Court’s policy of defending its national jurisdiction in the interest of uniformity of tax law, Suggests that other devices may be required to assure such uniformity. Our review of the many appeals from Tax Court determinations in this area of law, per- Suades us that rarely do the Courts of Appeal take issue with the Tax Court on matters of tax law, and that rarely do the decisions of the Tax Court involve varying interpretations of law. Rather, Tax Court trials usually are are fact-finding proceedings, and the Courts of Appeal, quite appropriately, extend great deference to those fact determinations. Thus it does not seem appropriate, even though theoretically within their jurisdic- tion, that the Circuit courts~--particularly panels of those courts--should challenge the Tax Court in its determinations of tax law in the usual case. Indeed, we might reason- ably suppose that it is of no great moment to the orderly administration of the tax laws and the national fisc that the Tax Court should be left free to follow its -15- rule that an individual taxpayers intent to profit--if such indeed must be a requirement of sec. 162--is established if he has shown an "actual and honest" intent to profit. However, the contrary is not true. It is of great moment to the trial judge and to the individual taxpayer if the taxpayer must "convince" the trial judge, or, more appro- priately, prove by a preponderance of evid- ence, that his "primary" motivation was to make a profit. For in such case the court and the parties--as this case well illustra- tes--are at sea in a welter of testimony and evidence subject to all manner of interpre- tation and conflict. It is for this reason that Judge Swift pleads for respite. (Peat Oil and Gas Associates v. C.I.R. (1993) 100 T.C. 271, 285-286. ) We submit that this Court should craft a rule which will complement the Tax Court’s policy, a rule which would recognize the ob- ligations of both the Tax Court and the Cir- cuit Courts of Appeals, and yet reduce the potential for conflict between the several circuits and the Tax Court. We submit that the Court, on the one hand, should approve the Tax Court’s policy while directing that the individual tax judges should not resolve individual cases on points of law upon which a majority of Tax Court judges have not ag- reed, and, on the other hand, directing that the Circuit courts follow a correlative pol- icy of declining to review Tax Court opinions which are based upon principles of tax law upon which the Tax Court has not "spoken as one voice", and should reverse such opinions with directions that the Tax Court reconsider -16- the matter and reach uniformity of opinion on the particular point of tax law. The Tax Court struggles to establish uniformity of tax law, as is its mandate, but under the pressures of the enormous volume of cases it processes, it must rely on decisions by individual judges, a number of whom do not share the same views, and some of whom may be so convinced of the merit of their own views as to proceed with ad hoc rulings designed to advance such views. Certainly, it appears from Peat that the Tax Court judges are seriously divided on this profit issue--which has a far wider range of application than merely to hobby cases--and could well use a cla- rifying opinion by this Court. As matters now stand, the Tax Court does not appear to have any mechanism whereby a litigant, caught up in this con- troversy, can move the Tax Court to estab- lish uniformity of opinion on matters of tax law among its several judges prior to hav- ing an adverse decision by an individual judge passed on to a court of appeals for review, a process which contributes to div- ersity of opinion, conflict, and the unequal application of the federal tax laws. Cc THE COURT SHOULD AFFIRM THAT ITS STATEMENTS IN Vv e) WERE NOT INTENDED TO ESTABLISH "PRIMARY INTENT TO PROFIT" AS A STAND-ALONE TEST FOR DETERMINING WHETHER AN ACTIVITY IS A TRADE OR A BUSINESS OR A MEANS OF PRODUCING INCOME, BUT RATHER AS A METHOD -17=- OF DISTINGUISHING HOBBY-TYPE ACTIVITIES It seems apparent, from the paucity of Tax Court opinions mentioning Commissioner v. Groet Zinger, 40 U.S. 23 (1987), that the Tax Court judges are having difficulties in fitting all of that opinion into the overall picture of tax cases impacted by profit-motive questions. However, the Court of Appeal herein cited Groetzinger (see Appendix B, p. 5)--although notably the Tax Court did not--as support for its "primary" intent to profit rule. But pe- titioners do not believe that this Court in- tended that its comments on primacy have such sweeping applications. It appears abundantly clear that the sense in which this Court used the expression "pri- mary" was merely to distinguish a business or income-producing activity from a "hobby or an amusement diversion". (Ibid. at pp. 35-35.) Which is completely in accord with I.R.C. sec. 212 and Treasury Regulation 1.212.1(c). (Appendix E, pp. 45, 47-48.) D THE COURT SHOULD DECLARE THAT IN DETERMINING WHETHER A QUESTIONED ACTIVITY IS A TRADE OR BUSINESS OR INCOME PRODUCING ACTIVITY, AS DISTINCT FROM A HOBBY OR AMUSEMENT DIVERSION, THE COURTS BELOW SHOULD UNDERTAKE A_COMMIS-_ SIONER vs SOLIMAN COMPARATIVE ANALYSIS TO DETERMINE WHICH ACTIVITY IS PRIMARY The manner in which the primary intent rule should be applied is an important is- issue of novel impression. No Ninth Circuit -18- decision stating the rule has explored its parameters or discussed how this stringent and highly subjective test is to be applied. Nor did the Court of Appeals herein mention our discussion of j j . 506 U.S. 168, 174-175 (1993), and contention that it should be applied to the Tax Court ’s findings in this case. In Soliman this Court discussed the analogous issue of whether a physician’s home or the hospitals in which he practiced was his "principal place of business", and held that the determination of this ques- tion requires a court to make a comparative analysis of "the relative importance of the activities performed at each business loca- tion and the time spent at each place." Similarly, courts cannot objectively assess whether any one purpose is primary or dominant without comparing it to the other purpases which motivated the tax- payer to enter into or continue a questioned activity. And since, as shown by the inst- ant case, the determination of the tax- payer’s intent is determined by his actions rather than his own statements, it follows that the actions taken to show one purpose or another must be analysed, weighed, and compared before the ultimate conclusion is reached. Although petitioners have not been able to establish that the Soliman rule of analysis has received appellate court con- Sideration in this context (cf. : U.S., 674 F.2a 1359, 1363-1364 (10th Cir. 1982), the Tax Court on several recent -19- occasions has discussed and applied this rule in precisely the sense in which petitioners contend it ought to be applied: Lynn Crawford, 65 TCM 2540, 2544 (1993). Christos Coutsoubelis, 66 TCM 935, 938-939 (1993). Ruth Giesbrecht, 69 TCM 2149, 2151 (1995), appealable to 9th Circuit. Peat Oil & Gas Associates, 65 TCM 2259, 2264-2265 (1993). Qwen A. Steinberg, 69 TCM 2121, 2136 (1995). Even the trial judge herein had pre- viously recognized that Soliman, taken in the profit context, requires the court to undertake a comparative analysis of alter- native motives (Peat Oil & Gas Associates v. C.I.R., 100 TC 271, 291 (1993), he omit- to do so in the instant case. CONCLUSION Petitioners respectfully urge the Court to grant certiorari to review these impor- tant tax matters. The institutional pres- sures all tend toward diversity and conflict. And only this Court is positioned to estab- lish uniformity, a daunting picture for one seeking the Court’s attention. But the vol- ume of tax cases is so great, and the invi- tation to litigate engendered by conflicting, confusing, and uncertain court decisions so alluring, that surely a great positive gain can be anticipated from a ruling of this Court that will not only remove uncertainty and diversity from the narrower issues at hand, but also from the institutional sug- -20- gestions we have raised herein to limit conflict between the Tax Court and the Courts of Appeals. Respectfully submi Of November, 1997. this 17th day Lew Wa Pe ~*~, rd&n, titioner. - Warden, Petitioner No. IN THE SUPREME COURT OF THE UNITED STATES October Term, 1997 LEW WARDEN and NADJA J. WARDEN, Petitioners, Vv. COMMISSIONER OF INTERNAL REVENUE. On Petition For Writ Of Certiorari To The United States Court Of Appeals For The Ninth Circuit APPENDICES TO PETITION FOR WRIT OF CERTIORARI Lew Warden Nadja J. Warden Petitioners Pro Se. 12120 East Snyder Road Tucson, Arizona 85749 (520) 760-2809 INDEX TO APPENDICES page APPENDIX A - Order, 9th Circuit Court of Appeals, denying peti- tion for rehearing and rejecting suggestion for rehearing en banc, filed August 20, 1997 1 APPENDIX B - Memorandum opinion, 9th Circuit Court of Appeals, filed April 2, 1997 3 APPENDIX C Memorandum Opinion, Tax Court, filed April 17, 1995 pe APPENDIX D Tax Court Decisions: 1. Recent Tax Court decisions, appealable to the 9th Circuit, where the Tax Court has applied the "actual and honest" intent to profit test 39 2. Recent Tax Court decisions, appealable to the 9th Circuit, where the Tax Court has equi- vocated as to the proper test 40 4. Tax Court Cases Hold- ing That an Activity En- tered into for The Pur- pose of Supplementing Retirement Income Is An Activity for Profit 41 APPENDIX E - Internal Revenue Code Sections and Regulations 43 Sec. 162 43 Sec. 167 43 Sec. 183 43 Sec. 212 45 26 CFR 1.183-2 45 1.212-1(c) 47 ii APPENDIX A NOT FOR PUBLICATION FILED Aug 20 1997 Cathy A. Caterson, Clerk U.S. Court of Appeals IN THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT LEW WARDEN and NADJA J. WARDEN, No. 95-70896 Appellants, Tax Court No. 4829-92 v % COMMISSIONER OF INTERNAL REVENUE, ORDER Respondent. Pe Nee ee ee Ne ee ee Ne ee es ee Before: SCHROEDER AND O’SCANNLAIN, Circuit Judges, and KELLEHER, * District Judge. The panel as constituted above has *Honorable Robert J., Kelleher, Senior United States District Judge for the Central District of California, sitting by designation. voted to deny the petition for rehearing and to reject the suggestion for re- hearing in banc. The full court has been advised of the suggestion for a rehearing en banc and no judge of the court has requested a vote on the suggestion for rehearing en banc. Fed. R. App. P. 35. The petition for rehearing is denied and the suggestion for rehearing en banc is rejected. (N.B. No date or signature provided. ) APPENDIX B NOT FOR PUBLICATION FILED Apr 2 1997 Cathy A. Caterson, Clerk U.S. Court of Appeals IN THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT LEW WARDEN and NADJA J. WARDEN, No. 95-70896 Appellants, Tax Court No. 4829-92 Vv. COMMISSIONER OF INTERNAL, REVENUE, MEMORANDUM Respondent. Pe Ne ae ee ee es as es a Appeal from the United States Tax Court Robert P. Ruwe, Tax Court Judge, Presiding Argued and Submitted February 13, 1997 San Francisco, California Before: SCHROEDER AND O’SCANNLAIN, Circuit Judges, and KELLEHER,** District Judge. * This disposition is not appropriate for publication and may not be cited to or by -3- i Mr. and Lew Warden and Mrs. Nadja Warden ("Appellants") challenge the find- ings of the U.S. Tax Court. In its Memo- randum Opinion of April 17, 1995, the Tax Court held that expense deductions taken by Appellants--alleged to have been incur- red in relation to a yacht chartering bus- iness--were improper. See I.R.C. secs. 162; 183. The Tax Court, applying the "primary" or "dominant" purpose test, de- termined that the yachting activity was not engaged in with the primary purpose of making a profit. Appellants contend that the Tax Court incorrectly applied the pri- mary purpose test in lieu of the more len- ient "good faith" test. Appellants further contend that even under the primary purpose test, the Tax Court’s finding was clearly erroneous. Because the Ninth Circuit pre- cedent is clear that the primary purpose test governs, and because Appellants have not shown clear error, we affirm the judg- ment of the Tax Court. Decisions that are asserted to have misapplied a given "profit" rule are to be reviewed de novo. Club v. Commissioner, 877 F.2d 750, 755 (9th Cir. 1989). There can be no question, the courts of this circuit except as pro- vided by Ninth Circuit Rule 36-3. ** Honorable Robert J., Kelleher, Senior United States District Judge for the Central District of California, sitting by designation. a however, as to whether the Tax Court app- lied the correct rule. Section 183 deals with attempted deductions for activities not engaged in with the proper profit mo- tive. See I.R.C. sec. 183. Sec. 162, for its part, deals with allowable deductions as to activities that are engaged in with the proper profit motive. This section allows the deduction of Ordinary and nec- essary expenses paid or incurred in connec- tion with the operation of a trade or busi- ness. See I.R.C. sec. 162. For an activity to generate deductions under section 162, we have Clearly stated that a taxpayer must show "that the acti- vity was entered into with the dominant hope and intent of realizing a profit." j j , 933 F.2d 757, 758 (9th Cir.) cert. denied, 502 U.S. 984 (1991). We have held that "(p)rofit must be the predominant, primary or principal objective .... ." issi , 4 F.3d 709, 713 (9th Cir. 1993); see also , 820 F.2d 321, 323 (9th Cir. 1987); , 781 F.2d 724, 728-29 (9th Cir. 1986) ("Independent Electric"); Car- issi , 645 F.2d 784, 786 (9th Cir. 1981); issi , 315 F.2d (9th Cir. 1963). Though other cir- cuits may apply a different standard, our holdings in this area are in line with those of the Supreme Court. See Commis- | i , 480 U.S. 23, 25 | (1987); j j n- Gowment, 477 U.S. 105, 110 n.1 (1986). The correct test having been applied =-5— —EEE————E by the Tax Court, our second duty is to evaluate its conclusion that the yachting activity did not carry with it the requi- site profit motive. We have held that "[a] finding of to profit motive must be affirmed on appeal absent clear error." Wolf, 4 F.3d at 712 (citing Independent Elec., 781 F.2d at 727). We must uphold the Tax Court’s finding unless we are “left with the definite and firm conviction that a mistake has been committed." Id. Further "{i]jf the [Tax Court’s] account of the evidence is plausible in the light of the record viewed in its entirety, the court of appeals may not rev- erse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently." tical Practices Comm’n, 955 F.2d 1312, 1317 n.7 (9th Cir.), cert. denied, 505 U.S. 1230 (1992). The Tax Court determined that the engagement in a trade or business--though possibly a purpose--was not the primary purpose of the yachting enterprise. The Tax Court concluded its findings as to pro- fit motive by writing: Based on the entire record, we are not convinced that petitioners’ primary objective was to make a profit. See Snyder v. United States, 674 F.2d 1359, 1362-64 (10th Cir. 1982). Rather, the evidence is more consistent with the conclusion that petitioners wished to retire from the practice of law, had a desire to sail, had the financial resour- ces to pursue that desire, and had some -6- CO hope that they could combine their dream retirement with an income-producing ture. Appellants essentially contend that the Tax Court gave certain pieces of evidence too much or too little weight. Without offering explanation or support in the case law, Appellants first assert that several findings of fact were not supported by “substantial evidence". These six factors are: that Appellants had the financial re- sources to retire, that the yacht was used for alternative purposes other than char- tering, that Appellants took long trips on the yacht, that mechanical failures could have been foreseen had proper research been performed, that Appellants should have pre- pared a written business plan, and that both Appellants loved to Sail. Appellants assert that there not "substantial" evidence to support the Tax Court’s implicit find- ings of fact as to each of these facts. yet employing the "clearly erroneous" standard of review, we find that as there was a basis 1. Facts that Appellants suggest were not considered but do appear in the Tax Court’s opinion are as follows: (i) that Appel- lants had attempted to acquire an interest (ii) that mechanical failures caused the losses related to the yacht; (iii) that Appellants engaged in some business-like activity; (iv) that Appellants prosecuted ~ os for each of the findings--that is, each is supported by the record--we must affirm the judgment of the Tax Court. Appellants then list several facts that they assert that Tax Court did not properly consider. This assertion is patently absurd given that a majority of the facts are specifically referenced in the Tax Court’s memorandum and the remain- der of the facts are expressly noted in Mr. Warden’s Trial Memorandum--which was admitted into evidence in lieu of direct testimony by Mr. Warden--and are nonethe- less dealt with in the Tax Court judgment in some fashion. (fn 2.) Given that each fact was present in the record before the Tax Court and most were referenced expli- citly in the Tax Court opinion, there is no basis for us to presume that these facts were not considered. In assessing a sim- ilarly situated taxpayer’s previous chal- lenge to a Tax Court’s findings, we wrote litigations against the manufacturers and sellers of the yacht; and (v) that real losses, beyond mere depreciation expenses were felt. 2. Facts that the court did not specifi- cally reference but were either present in Mr. Warden’s testimony or summarized in slightly different terms include: (i) that there was a 12 year absence between Appel- lants’ ownership of their prior boat and their ownership of the Rocking Chair in 1986 (the opinion instead stated that Mr. -8- that "[a]t best... appellants manage only to show that their activities might have had a profit motive; they do not show that the Tax Court was clearly erroneous ... - " Independent Electric, 781 F.2d at 727. Furthermore, the fact that some evidence Shows manifestations of a business does not merit a reversal of the Tax Court’s deci- sion. See Carter, 645 F.2d at 786-87 (facts showing that the taxpayers did not engage in yachting activities primarily for profit significantly outweighed facts indi- cating that taxpayers’ activities had some manifestations of a business). Appellants bring to our attention the Same facts that were before the Tax Court. Appellants have made no argument whatsoever as to why we Warden’s previous ownership of boats began in 1947 and went on for twenty years-- which certainly displays an understanding on the part of the Tax Court that no yachts were owned between 1974 and 1986); (ii) that Mr. Warden had found replacement coun- sel for all but two of his Clients (the opinion states merely that Mr. Warden con- tinued to operate his law firm); (iii) that the cost of additional insurance was double the cost of having only personal insurance (the opinion, however, does reference the need for additional insurance in general terms); and (iv) that Ms. Warden was deathly afraid of sailing on the ocean (this was clear in the admitted testimony of Mr. Warden but not referenced in the opinion itself). should find that the Tax Court’s decision should be overturned for clear error. Appellants make two other brief con- tentions on appeal--both of which are with- out merit. First, Appellants argue that the Tax Court’s use of the word "convince," in relation to Appellant’s burden of proof, indicates that the Tax Court required a level of proof beyond the preponderance of the evidence. In its opinion, the Tax Court did state that "[b]Jased on the en- tire record, we are not convinced that pe- titioners’ primary objective was to make a profit." Yet this statement in no way indicates a movement away from the prepon- derance of the evidence standard. In fact, the Tax Court implicitly referenced such a standard when it stated that Appel- lants carried the burden of proof, but that the evidence was "more consistent" with the profit motive being just one, and not the primary, consideration. Second, and distinct from their argu- ment that the Tax Court misapplied the pri- mary purpose test, Appellants make a brief argument that the application of the Ninth Circuit rule was both inconsistent with the practice of the Tax Court and violative of their constitutional rights. Appellants argue that the Tax Court, as a court of national jurisdiction, should follow its own rules and not the rules set out by the Ninth Circuit. Appellants, however, cannot point to Ninth Circuit case law supporting this notion and otherwise provide no cases where the Tax Court has expressly rejected binding precedent of the relevant circuit -10- in favor of the Tax Court rule. To the contrary, a brief review of recent Tax Court opinions instructs that the Tax Court regularly defers to the Ninth Circuit when the Ninth Circuit has provided a clear rule of law. See, e.g., Beaver Bolt Inc. v. Com- missioner, 1997 WL 28676 (U.S. Tax Ct.); Sun- issioner, 72 T.C.M. (CCH) 1606 (1997). In extending its weak argument, Appel- lants next contend that by following the Ninth Circuit, the Tax Court denied Appel- lants due process and violated the equal protection clause in that taxpayers not un- der the jurisdiction of the Ninth Circuit are treated more favorably. Appellants provide no support for this theory that the application of a rule by a United States Court of Appeals (as well as by the courts reviewable by that Court) can be unconsti- tutional where the underlying rule confl- icts with a more favorable rule by another circuit. Where we follow clear Supreme Court precedent, but other circuit or trial courts do not, a constitutional violation cannot be said to have occurred with regard to the person against whom a correct rule of law has been applied. For the foregoing reasons, we affirm the Tax Court’s judgment finding deficien- cies in Appellants’ federal income taxes in the amount of $28,344 and adding an "addi- tion to tax" under I.R.c. sec. 6662(b)(2) of $4,725. AFFIRMED. -ll- APPENDIX C T.C. Memo. 1995-176 UNITED STATES TAX COURT LEW WARDEN and NADJA J. WARDEN, Petitioners, Vv. COMMISSIONER OF INTERNAL REVENUE, Respondent. Docket No. 4829-92. Filed April 17, 1995. Lew Warden, for petitioners. Debra K. Estrem, for respondent. MEMORANDUM OPINION RUWE, Judge: Respondent determined deficiencies in petitioners’ Federal income taxes and additions to tax as follows: Addition to Tax Year Deficiency Sec. 662(b)(2) 1986 5.17338 -- 1989 28,344 $4,725 -12- After concessions, (fn 1) the primary issue for decision is whether petitioners’ yacht-related activities were engaged in for profit within the meaning of section 183. Subsidiary issues are: (1) Whether petitioners properly deferred recognition of a gain pursuant to section 1033; (2) whether petitioners are entitled to offset 1989 income by net operating losses that were allegedly incurred in 1987 and 1988; and (3) whether petitioners are liable for the addition to tax for substantial understatement of income tax pursuant to section 6662(b)(2) for the taxable year 1989. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The first stipulation of facts, second stipulation of facts, and at- tached exhibits are incorporated herein by this reference. Petitioners resided in Castro Valley, California, when they filed their petition. 1. At trial, petitioners conceded the defi- ciency determinations for the taxable year 1986. 2. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. 3. Hereinafter, petitioners will be refer- -13- Beginning in 1953, through the years in issue, petitioner Lew Warden practiced law as a sole proprietor in Alameda County California. Petitioner Nadja Warden (fn 3) worked in her husband’s law office keep- ing the books, but she received no pay or benefits. She held no other jobs. Mr. Warden retired from his law practice in 1993. In 1974, petitioners acquired a one- sixth interest in an abandoned tennis and swim club in Pleasanton, California, from Mr. Warden’s client, Julius Kahn. The re- maining five-sixths of the property was held by Julius and his two brothers. As a result of controversies between the three brothers, the property had fallen into dis- repair, and petitioners and Julius planned to reconstruct and operated the property as a recreational facility. Petitioners hoped to retire from the practice of law and spend their retirement years working in the "congenial and pleasant surroundings" of a recreational club. Petitioners moved onto the property and, until about 1980, attemp- ted to repair it. However, the property never operated as a tennis and swim club. Around 1980, the Kahn brothers contem- plated partitioning the property. Ensuing litigation resulted in a 1980 judgment by the Alameda County Superior Court, which ordered the property sold and the proceeds red to as Mr. Warden or Mrs. Warden where necessary for clarification. -14- partitioned between petitioners and the Kahn brothers. The property was sold in 1980 for $316,000; petitioners received $183,642.15 of the sale proceeds, and the remainder was distributed to the Kahn bro- thers. In 1981, petitioners appealed from the partition judgment. In 1984, while the appeal was still pending, petitioners filed suit against various parties involved in the partition sale, alleging that the sale was fraudulent. The appeal and lawsuits alleging a fraudulent sale continued until 1989; at that time, all petitioners claims regarding the Pleasanton property were set- tled for $170,000. Petitioners thus rece- ived $353,642.15 from the disposition of the Pleasanton Property ($170,000 plus prior payments of $183,642.15). For tax purposes, petitioners assumed that the use of the Pleasanton property was 50 percent business and 50 percent residen- tial, and treated the disposition of the property as having commenced in 1981 and concluded in 1989. On their 1989 Federal income tax return petitioners treated the business portion of the gain received from the Pleasanton property ($85,000) as "rol- led over" into the cost of a yacht they had previously purchased in 1986. In March 1986, petitioners ordered a 1986 Tayana model 55-foot, sailing yacht, with a 120 horsepower, freshwater-cooled diesel engine. It was to be built in Tai- wan by Ta Yang Yacht Building Co. and sold through Windships, Inc., of Oakland, Cali- fornia (Windships). Petitioners prepared detailed specifications for the construc- -15- tion of the yacht, which were attached to the purchase agreement with Windships. The name of the yacht was Rocking Chair. Rock- ing Chair was spacious, nicely equipped, and furnished. It had a saloon, a galley, two bathrooms, and could comfortably sleep ten. It also had a telephone, a microwave oven, a coffeemaker, and a library, which contained periodicals, books, and video- tapes. The total cost of Rocking Chair was $231,667, which included the cost of acces- sories and commissioning. Petitioners paid a deposit of $46,333 on March 24, 1986. The yacht was delivered to petitioners on December 29, 1996, 6 months later than promised by the seller. Upon delivery, pe- titioners discovered many defects and fail- ures to complete the yacht according to their specifications. Windships represented that it would correct the defects but did not do so in a timely manner. As a result, petitioners performed much of the work to prepare the yacht for commissioning. After the yacht was commissioned, petitioners continued to experience various equipment failures, including problems with the bat- tery system, autopilot, and refrigerator as well as a transmission failure. Petition- ers brought suit in 1989 for breach of con- tract, breach of warranty, and fraud aga- inst Windships, Ta Yang Yacht Building Co., and the owners of Windships. In 1992, pe- titioners obtained a default judgment against Windships in the amount of $153,164.50 and against Ta Yang Yacht Building Co. in the amount of $212,764.50. In 1993, the Superior Court also entered judgment against the owners of Windships, finding them person- -16- ally liable for the acts of Windships. Mr. Warden was an experienced sailor, who had taken courses in nautical naviga- tion, boat handling, disaster control, and diesel engine maintenance. At the age of 17, he was a seaman on a Swedish oil tanker. He had also been an Air Force navigator and pilot, performing both combat and instruc- tional work. After purchasing their first Sailboat in 1947, petitioners engaged in extensive cruising and yacht racing in the San Francisco Bay and offshore. They con- tinued boating for the next 20 years, dur- ing which time they purchased and built or rebuilt three sailboats. At the time petitioners purchased Rock- ing Chair, they were looking forward to en- joying life in somewhat warmer climates than the San Francisco Bay Area presented. Mr. Warden, then age 66, was becoming increas- ingly dissatisfied with the practice of law and sought to earn a living in a more plea- Sant recreational Setting. The purchase of ir was part of his Plan for imp- lementing this desire, and as a part of his plan, he intended to charter the yacht. At the time petitioners purchased j air they had a net worth of approximately $1,027,000. Prior to purchasing j ir, peti- tioners had no experience with chartering. Petitioners’ preparation for entering the chartering activity consisted of talking to friends, clients, and other acquaintances engaged in chartering activities; going out on a charterboat during a bar association -17- meeting in Jamaica; studying yachting maga- zines; and talking with people at resorts, such as Club Med. From this they learned of the going rates for different types of charters and decided that the most profit- able and least burdensome type of charter- ing activity would be to conduct day-sail- ings as opposed to overnight or extended cruises. Petitioners did not prepare a written business plan prior to purchasing Rocking Chair. Although Mr. Warden claimed to be very knowledgeable about the expenses in- volved in operating and maintaining a yacht, he claimed no such expertise with regard to income from chartering activities. The yacht salesmen at Windships represented to petitioners that they could earn substantial income chartering boats--about $36,000 per season as estimated by the salesmen. Al- though Mr. Warden was aware, prior to pur- chasing Rocking Chair, that there was a 55- foot yacht in Windships’ marina that was being chartered by Windships, he never dis- cussed the profitability of chartering with the owner of the yacht, nor did he check Windships’ chartering records to verify the salesmen’s statement. He simply concluded from several months of spending time at the harbor and watching the charter boat come and go, that "They were getting charters." Windships informed petitioners of the chartering arrangement between it and the owners of the other 55-foot yacht that it was chartering. This arrangement involved Windships’ maintaining the yacht and re- ceiving 60 percent of the chartering reve- -18- nues, leaving the owners only 40 percent of the revenues. Petitioners desired a differ- ent arrangement, where they would perform most of the labor and maintain insurance on the yacht and receive 60 percent of the re- venues rather than 40 percent. Mr. Warden prepared a detailed charter/lease agreement to this effect, which included charter rate schedules; however, the agreement was never Signed by Windships. Petitioners did, in fact, perform most of the labor in cleaning and maintaining the yacht and kept a detailed log reflecting the use and maintenance of the yacht. In June 1988, after Rocking Chair’s transmission failed, Mr., Warden moved onto the yacht, using it as his residence. On June 19, 1987, petitioners filed a business tax declaration with the city of Oak- terly state, local, and district sales and use tax returns with the State of California, which covered the periods between January 1987 and December 1989. Petitioners obtained an employer identification number in the name of Rocking Chair Cruises from the Internal Revenue Service on June 30, 1987. Using this number, petitioners filed a Form 941 (Emplo- yer’s Quarterly Federal Tax return) and re- mitted the required withholding tax for two employees who worked for them on a few occa- sions during 1987. These employees helped to Clean the yacht and cut and lay carpet for the yacht. Petitioners determined that it was not feasible to continuing hiring people for such maintenance work and ceased using employees. Petitioners Opened a separate -19- checking account in the name of Rocking Chair and drew checks on this account for expenses relating to Rocking Chair. However, most of the checks that were issued for yacht-related expenses were drawn on Mr. Warden’s law prac- tice account or on Mrs. Warden’s personal account. Petitioners maintained a telephone on the yacht, the account for which was in the name of Rocking Chair, from April 14, 1987, through July 19, 1989. Petitioners also obtained additional insurance coverage for chartering activities but dropped this additional coverage in 1991. Petitioners obtained a Coast Guard certificate of docu- mentation dated November 19, 1988, for rec- reational use only. Petitioners made attempts to advertise Rocking Chair for charter. They ran an ad in the classified section of "Latitude 38" during March, April, and May 1988, and they ran an ad in the 1987 Pacific Bell Oakland Yellow Pages. Rocking Chair was only chartered on a few occasions. In 1987, petitioners received three charters through Windships. In 1988 Rocking Chair was not chartered at all. In 1989, Mr. Warden took Rocking Chair south to Santa Barbara, where he listed it for sale with a broker. While there, he met a charter- boat operator who was doing business as Sun- set Kidd Sailing Charters (Sunset Kidd). Pe- titioners obtained three charters through Sunset Kidd in 1989. In 1990, petitioners chartered the yacht once and have not chart- ered it since. Around 1989 or 1990, Mr. Warden attempted to enter into a working relationship with Mr. -20- Neil Weinberg, who owned a Tayana boat fran- chise. Mr. Warden anticipated starting a pro- gram to sell standardized Tayana boats, using i ir as a pilot for the program. As @ part of the proposed sales program, custo- mers would be taken on a cruise to Mexico where they would learn the details and tech- niques of Sailing their new boats. This plan never materialized. Petitioners attempted to sell Chair after they encountered defects and mech- anical problems. Petitioners entered into various agency listing agreements, authorizing the agents to sell j ir. Petitioners entered into five such agreements in all; the first agreement was dated September - 1989, (fn 4) and the most recent agreement was dated October 14, 1992. Petitioners ran an ad in "SAIL" magazine for 2 months at the end of 1990 offering the yacht for sale, and they ran an ad in the classified section of "Latitude 38" from June 1991 through January 1992. Petitioners reported large net losses on their Federal income tax returns (Schedule C) come, expenses, and net losses Claimed by petitioners with respect to chartering acti- vities: 4. Although the evidence contains a central agency listing agreement that petitioners purportedly entered into with Gary Helms on Oct. 1, 1988, the agreement is not signed. -21- Taxable Gross Expenses** Net Income ear income {Loss ) 1987 $2,118 $75,712 ($73,594) 1988 5,429* 47,536 ( 42,107) 1989 8,189* 75,343 ( 67,154) 1990 638 81,876 ( 81,238) 1991 153 60,552 ( 60,399) 1992 0 45,885 ( 45,885) *In each of the taxable years 1988 and 1989, $5,429 represents an amount that Mr. War- den allocated for his living on the yacht; it is not charter income. **These expenses include depreciation clai- med in each of the taxable years 1987 through 1992 of $40,225, $33,573, $38,139, $41,184, $40,496, and $34,626, respectively. During these years, Mr. Warden continued to operate his law practice. The following sun- mary reflects the gross income, expenses, and net income (losses) claimed by petitioners with respect to the law practice: Taxable Gross Expenses** Net Income ear Income (Loss ) 1986 $146,027 $121,922 $24,105 1987 60,119 89,490 (29,371) 1988 163,021 65,297 97,724 1989 92,248 64,249 27,999 1990 63,880 41,278 22,602 1991 108,946 63,781 45,165 1992 4,720 12,939 O* *Although reported expenses exceed reported gross income, indicating that petitioners =-22- incurred an operating loss in 1992, they reported a net income (loss) of zero. Petitioners maintained detailed con- puter records of the capital expenditures, depreciation, other expenses, and revenues generated by the yacht-related activities. Of 35 pages of records covering the years 1987 through 1990, 33 pages pertain to ex- penses, while only two pages pertain to income. During the years in issue, petitioners admitted to using j ir on at least a few occasions for reasons unrelated to their chartering activities. These trips, however, do not appear in their operating log. The only trips that appear in petiti- oners’ log were reflected as charters or as linked to testing or repairing the yacht and its equipment. Petitioners’ maintenance log reflects the following trips through 1990: ate Port/Purpose of Trip 5/24/87 Golden Gate Bridge charter 5/31/87 Guest sail 6/6/87 Guest sail/promotion 6/13/87 Charter 8/14/87 Charter - 2 days 9/4/87 Depart for Sacramento shakedown cruise. Anchor at Angel Island. 9/5/87 Leave Angel Island; anchor in Lockport. 9/6/87 Leave Lockport; anchor in Sacra- mento. Stayed for 4 days. De- part for home on 9/10/87. 1/7/88 Depart for Puerto Rico for Ocean Navigator Instructional cruise. -23- 7/2/88 7/3/88 7/4/88 4/29/89 7/10/89 7/11/89 7/12/89 7/13/89 7/14/89 7/16/89 9/3/89 9/10/89 9/11/89 10/8/89 11/7/89 11/20/89 11/24/89 12/1/89 12/3/89 12/5/89 Stayed for 12 days. Depart for Delta shakedown cruise. Anchor at Angel Island. Leave Angel Island; anchor in Antioch. Leave Antioch; anchor in Mande- ville Cut. Stayed for 2 days. Depart for home on 7/6/88. Sail to Sausalito for purpose of testing a potential crew member. Begin trip south. Anchor at Sausalito. Leave Sausalito; anchor at Half Moon Bay. Leave Half Moon Bay; anchor at Santa Cruz. Leave Santa Cruz; anchor at Monterey. Leave Monterey; anchor at San Simeon. Stayed for 2 days. Leave San Simeon; anchor at Pt. San Luis. Stayed until 9/3/89. Leave Pt. San Luis; anchor at Santa Barbara. Sail to Santa Cruz Island for the purpose of demonstrating the yacht, and testing Sunset Kidd charter boat operator. Return to Santa Barbara. Charter - 3 days. Sail to Marina del Rey to re- pair water maker. Returned the next day. Charter. Charter. Depart for Newport. Ventura. Leave Ventura; anchor at Oxnard. Leave Oxnard; anchor at Marina Anchor at -24- ieeeeeeererememnnentiiisiiiiiiaiiaailiitia dail iaaitiial del Rey. 12/6/89 Leave Marina del Rey; anchor at Long Beach. Stayed for almost 1 month. 1/2/90 Leave Long Beach; anchor at New- port. Stayed for almost 2 months. 2/25/90 Leave Newport; anchor at Dana Point. 2/26/90 Leave Dana Point; anchor at San Diego. 2/28/90 Leave San Diego; anchor at Ense- nada, Mexico. 3/1/90 Leave Ensenada. Travelled north reaching Ventura again on 3/24/90. Stayed for 4 months. 7/2/90 Move from Ventura to Oxnard to check out Marina Sailing per- sonnel. Stayed for almost 4 months. 10/28/90 Depart for Santa Barbara. 11/6/90 Leave Santa Barbara; anchor at Santa Cruz. 11/9/90 Leave Santa Cruz; arrive back in San Francisco. At the time of trial, Mr. Warden had taken the yacht to Mexico, and Mrs. Warden was planning to move to Mexico to join him. OPINION We must first decide whether petition- ers’ ownership and Operation of Rocking Chair were activities that were "not engaged in for profit" within the meaning of section 183(c). Section 183(a) provides generally that if an activity is not engaged in for profit, no deduction attributable to such activity shall be allowed, except as otherwise provided in -25- section 183(b). (fn 5) Section 183(c) de- fines an activity not engaged in for pro- fit as "any activity other than one with respect to which deductions are allow- able for the taxable year under section 162 or under paragraph (1) or (2) of sec- tion 212." Deductions are allowed under section 162 for the ordinary and necessary expenses of carrying on an activity which constitutes the taxpayer’s trade or business. Deductions are allowed under section 212 for expenses paid or incurred in connection with an activity engaged in for the production or collection of income, or for the management, conserva- tion, or maintenance of property held for the production of income. With respect to either section, however, the taxpayer must demons- trate a profit objective for the activities in order to deduct associated expenses. Jas- ionowski v. Commissioner, 66 T.C. 312, 320-322 (1976); sec. 1.183-2(a), Income Tax Regs. The profit standards applicable to section 212 are the same as those used in section 162. See Agro Science Co. v. Commissioner, 934 F.2d 573, 576 (Sth Cir. 1991), affg. T.C. Memo. 5. Sec. 183(b)(1) permits a deduction for ex- penses that are otherwise deductible without regard to whether or not the activity is en- gaged in for profit, such as interest and per- sonal property taxes. Sec. 183(b)(2) permits a deduction for expenses that would be deduc- tible only if the activity were engaged in for profit, but only to the extent of the total gross income derived from the activity -26- 1989-687; Vv. Commissioner, 893 F.2q 656, 659 (4th Cir. 1990), affg. 91 T.c. 686 (1988); Allen v. Commissioner, 72 T.c. 28, 33 (1979); Rand v. Commissioner, 34 T.c. 1146, 1149 (1960). Respondent argues that for purposes of section 183, a taxpayer must prove that profit was the primary purpose for engaging in the activity. This case is appealable to the Ninth Circuit Court of Appeals. The primary purpose standard has been followed by the Court of Appeals for the Ninth Circuit in determining whether the requisite profit ob- jective exists. See issi . 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C. Memo. 1991-212; Polak YC issioner, 820 F.2d 321 (9th Cir. 1987), aft¢ge :TiCi Memo. 1985-197; Indepe dent ec. S 4 Pe Commissioner, 781 F.2d 724 (9th Cir. 1986) affg. T.C. Memo. 1984-472; = missioner, 645 F.2d 784 (9th Cir. 1981) affg. T.C. Memo. 1978-202 (disallowing deductions related to yacht chartering and writing acti- vities under section 183); Hi is- sioner, 315 F.2d (9th Cir. 1963), affg. T.C. Memo. 1961-256. Whether the required profit motive exi- sts is to be determined on the basis of all the facts and circumstances of each case. irsc - Commissi , 315 F.2d at 373; an Vv. Commissi 1 72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(a), less deductions allowed by sec. 183(b)(1). -27- Sea a are ce eel Income Tax Regs. While the focus of the test is on the subjective intention of the tax- payer, greater weight is given to the objec- tive factors than to the taxpayer’s mere statement of his intent. Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d at 726; Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without published opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183- 2(a), Income Tax Regs. Petitioners have the burden of proving that they had the requisite intention and that respondent’s determination that the activities were not engaged in for profit is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). Section 1.183-2(b), Income Tax Regs., sets forth some relevant factors for de- termining whether an activity is engaged in for profit. No one factor is controlling. Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir. 1984), affg. 78 T.C. 471 (1982); Golanty v. Commissioner, 72 T.C. at 426. The relevant factors are: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his ad- visers; (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 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, which are earned; the financial status of the taxpayer; and (9) the presence of elements of personal pleasure or recreation. Sec. 1.183-2(b), Income Tax Regs. { Fy -23- — (1) i 3 ivi We recognize that there are some manifestations of a business in petitioners’ yacht-related activities. Petitioners kept records of the income and expenses and a detailed log reflecting the use and maintenance of the yacht. Peti- tioners opened a separate checking account in the name of Rocking Chair; however most of the checks that were issued for yacht- related expenses were drawn on Mr. Warden’s law practice account or on Mrs. Warden’s personal account. Petitioners also filed a business tax declaration, obtained a seller’s permit, filed sales and use tax returns, ob- tained an employer identification number, ob- tained additional insurance, and maintained a telephone on the yacht. Petitioners adver- tised the yacht’s availability for charter in the classifieds and the yellow pages; however, attempts to publicize the chartering activi- ties were not Significant. Petitioners also attempted -to sell the yacht when they encoun- tered defects and mechanical problems. Petitioners did not prepare a written business plan prior to purchasing Rocking Chair. Petitioners relied on representations by the yacht salesmen at Windships that they could expect revenue of about $36,000 per sea- son chartering the yacht. Petitioners did not check Windships’ chartering records to verify the salesmen’s statement, nor did they attempt to determine whether the represented income of $36,000 would be sufficient to cover antici- pated expenses. Petitioners did not discuss -29°- ked to acquaintances in the chartering busi- ness and studied yachting magazines prior to purchasing Rocking Chair, there has been no showing of the specific nature of the infor- mation and advice they received from these sources. Even though petitioners kept records of their income and expenses, there has been no showing that they used these records to improve the profitability of the operation. (2) The expertise of the taxpayer or his advisers. Mr. Warden was an experienced sailor, and he had experience maintaining and building yachts. However, petitioners had no experience with chartering. While they clai- med to have gained knowledge of the charter- ing business through talking with acquaint- ances in the business and studying yachting magazines, no reliable evidence exists to show the specific nature of the information and advice that petitioners received from these sources. (3) j ax- payer in carrying on the activity. Petition- ers spent a good deal of time cleaning and maintaining the yacht; however, these activi- ties are also consistent with use of the yacht for recreation. (4) Expectation that assets used in the activity would appreciate in value. Petition- ers argue that they thought the yacht would appreciate in value because of inflation and the declining value of the dollar. Petitioners did not offer any evidence as to their meas- urement of the yacht’s expected appreciation. (5) The success of the taxpayer in car-_ -30- Similar or dissimilar activi- ties. Petitioners have not previously enga- ged in yacht-chartering activities. (6) ’ isto of income and losses with respect to the activity, and (7) which are earned. Petitioners’ chartering activities generated substantial losses over a period of six years, which petitioners used to offset taxable income from other sources. A record of substantial losses over many years and the unlikelihood of achieving a profitable operation are important factors bearing on the taxpayer’s intention. issioner 949 F.2d 345, 352 (10th Cir. 1991), affg. T.Cc. Memo. 1990-148; Golanty v. Commissioner, 72 T. C. at 426-427. The presence of such losses in the formative years of a business is not in- consistent with an intent to achieve a later profitable level of operation; however, the goal must be to realize a profit on the en- tire operation, which presupposes sufficient future net earnings from the activity to re- coup the losses. Vv. issioner, Supra at 427. In the present case, petition- ers reported losses over 6 years of operation totaling $370,377. (8) The financial status of the tax- payer. When petitioners purchased Rocking Chair, their net worth was approximately $1,027,000. During the period in which peti- tioners operated Rocking Chair, they received income from Mr. Warden’s law office and other sources such as interest. While such non~-chartering income was not overwhelming, petitioners did obtain a tax benefit from the losses generated by the chartering acti- -31- vities. (9) The presence of elements of perso~_ j Mr. Warden was no longer happy in his practice of law, and he was of an age where he was ready to re- tire. Petitioners wanted to live in a more pleasant, recreational setting. They clearly enjoyed sailing and had engaged in sailing activities for recreation for at least 20 years prior to purchasing Rocking Chair. The yacht was custom built and was equipped with all the amenities. Beginning in 1988, Mr. Warden lived on the yacht and used it as his residence. Petitioners admittedly used Rocking Chair for activities unrelated to chartering but did not document these trips in their operating log. Petitioners’ documented trips on Rocking Chair were to locations such as Sacramento, Santa Cruz, Monterey, Santa Barbara, Newport, San Diego, and Ensenada, Mexico. Petitioners often stayed for extended periods of time at these locations. Based on a consideration of all the above factors and having heard petitioners’ testimony at trial, we believe that they honestly hoped that their yachting activity would generate a profit. Profit was one ob- jective of their activity. However, to pre- vail, petitioners must show that their yachting activities were engaged in primar- ily for the purpose of making a profit. Petitioners argue that they would not have purchased Rocking Chair unless their primary objective was to offer it for char- ter and thereby earn a livelihood. Peti- -32- tioners argue that due to limited finances, they could not have used Rocking Chair pri- marily for personal purposes. However, at the time petitioners purchased Rocking Chair, they had an estimated net worth of over $1 million, and Mr. Warden was still genera- ting income from the law practice. We can- not overlook the significant recreational elements associated with the yacht. Peti- tioners loved to sail. They were ready to retire and wanted to live in a pleasant, re- creational setting. They did, in fact, travel to many locations. These factors strongly indicate a personal objective. Petitioners contend that the losses sus- tained as a result of their chartering acti- vities were attributable to unforeseen cir- cumstances, consisting of repeated equipment failures and failures of the seller and man- ufacturer to correct the yacht’s defects. Losses sustained because of unforeseen or fortuitous circumstances beyond the control of the taxpayer do not necessarily indicate that the activity was not engaged in for pro- fit. j i » 72 T.C. 659, 669 (1979); sec. 1.183-2(b)(6), Income Tax Regs. There is evidence that some of peti- tioners’ problems stemmed from mechanical defects. However, petitioners failed to con- duct the type of preliminary investigations that one would expect from someone who was motivated primarily by a profit objective. Further inquiry might have given petitioners into the likelihood off many of the problems they encountered. See issi 84 T.C. 1244, 1278 (1985), affd. 792 F.2a 1256 (4th Cir. 1986). -33- Where taxpayers have both personal and profit objectives for engaging in an activ- ity, it is our task to determine which was "primary". Based upon the entire record, we are not convinced that petitioners’ primary objective was to make a profit. See v. United States, 674 F.2d 1359, 1362-1364 (10th Cir. 1982). Rather, the evidence is more consistent with the conclusion that petitioners wished to retire from the prac- tice of law, had a desire to sail, had the financial resources to pursue that desire, and had some hope that they could combine their dream retirement with an income-producing venture. Based on this record, we simply do not believe that petitioners’ profit ob- jective was the primary or dominant reason for engaging in the activity in question. We hold that petitioners’ yacht-related activities were not engaged in for profit within the meaning of section 183(c). Peti- tioners’ deduction of the loss associated with these activities is, therefore, sub- ject to the limitations set forth in section 183(b). Respondent disallowed the entire loss that petitioners claimed in 1989 regarding the yacht. As noted previously, section 183(b)(1) permits a deduction for expenses that are otherwise deductible without regard to profit objective, such as interest and taxes. Included in petitioners’ claimed loss was an interest expense deduction of $15,782 and a tax deduction of $3,908. Respondent makes no claim that these amounts were not paid. Rather, respondent’s position in both the notice of deficiency and on brief is that -34- ———————————————— petitioners were not engaged in the charter- ing activity for a profit. Petitioners are, therefore, entitled to deduct these items pursuant to section 183(b)(1). (fn 6) Be- cause these deductions exceed the total gross income reported from the activity, (i.e., $8,189), petitioners are not allowed any deduction pursuant to section 183(b)(2). Next, we must determine whether petiti- oners may defer recognition of the gain on the disposition of the Pleasanton property pursuant to section 1033. Section 1033(a) provides that if property is compulsorily or involuntarily converted "as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof", then the gain from the conversion shall not be recognized, provided the converted property is replaced by property that is "similar or related in service or use" within a specified time period. 6. Respondent disallowed the entire loss, or the difference between the gross income and the total expenses, claimed by petiti- oners with regard to yacht-chartering acti- vities. Because this calculation subtracts out an amount equal to the gross income from the activity, petitioners have already been allowed a "deduction" of $8,189. Therefore, petitioners’ total expenses of $19,690 for interest and taxes must be reduced by the $8,189 already taken into account, leaving an allowable deduction of $11,501. -35- Whether replacement property is similar or related in service or use depends upon whether the taxpayer’ s use of the replace- ment property is similar to his use of the original A eee Filippini v. United States, 318 F.2d 841, 844 (9th Cir. 1963); ankarst, eeenhonhianis 58 T.C. 459, 463 (1972). Petitioners have conceded that if we find that their yacht related activities do not constitute a trade or business, they are not entitled to roll over the business portion of the gain from the Pleasanton pro- perty into the cost of Accordingly, we uphold respondent’s deter- mination on this issue. (fn 7) Alternatively, petitioners contend that pursuant to section 172(b)(1)(B), they are entitled to carry forward certain net operating losses for taxable years 1987 and 1988 to offset any taxable income for 1989. Petitioners argue that the net operating losses would fully absorb any income required to be recognized for 1989. 7. Even if the replacement property were Similar or related in service of use, there has been no involuntary conversion of the Pleasanton property within the meaning of sec. 1033. Petitioners contend that the court-ordered sale of the Pleasanton prop- erty, which petitioners challenged on appeal and later alleged to be fraudulent, consti- tuted a theft or seizure of their property within the meaning of sec. 1033(b). There has been no prior adjudication or admission of fraud, and petitioners have presented no -36- a Petitioners did not claim any net opera- ting loss carryover on their 1989 Federal in- come tax return; this issue was first raised in the petition. Petitioners bear the bur- den of proving that they are entitled to a net operating loss carryover. Rule 142(a). Other than their 1987 and 1988 returns, peti- tioners have offered no evidence that they Sustained losses in these years. (fn 8) An entry on a tax return does not prove prove the existence of losses. - Sioner, 7 T.C. 245 (1946), affd. 175 F.2d 500 (2d Cir. 1949); is- Sioner, T.C. Memo. 1994-402. Therefore, petitioners have not met their burden of proof on this issue. (fn 9) Respondent determined that petitioners evidence that the court-ordered sale was fraudulent or constituted theft as that term is used in the Internal Revenue Code. See j = S woe 1020, 1034-1035 (1971), affd. 471 F.2a 738 (3d Cir. 1973). 8. We note that petitioners’ reported net operating losses from the taxable years 1987 and 1988 arose in large part from the losses from their yacht-chartering activities. 9. Even had petitioners met their burden of proving the existence of net operating losses, they have not shown that they made a proper election to relinquish the 3-year carryback period, such that they would be entitled to Carry any net operating loss forward. Sec. 172(b)(3)(C). -37- are liable for the addition to tax under sec- tion 6662(b)(2) for the taxable year 1989. Section 6662, which is applicable to returns due after December 31, 1989, imposes an addi- tion to tax in an amount equal to 20 percent of the portion of any underpayment attribut- able to a substantial understatement of in- come tax. Sec. 6662(a), (b)(2). An under- statement is substantial if it exceeds the greater of 10 percent of the correct tax or $5,000. Sec. 6662(d)(1)(A). Petitioners bear the burden of proving that respondent’s determination of an addi- tion to tax is erroneous. Rule 142(a). Petitioners presented no evidence to rebut respondent’s determination, and they made no argument in brief separately challenging their liability for the section 6662(b)(2) addition to tax for the taxable year 1989. Accordingly, respondent’s determination is sustained. Decision will be entered under Rule 155. -38- APPENDIX D TAX COURT DECISIONS 1. Recent Tax Court Decisions, Post Com- , 480 U.S. 23 (1987), and All Appealable to the Ninth Circuit, Where The Tax Court Has Applied the "Actual and Honest" Intent to Profit Test: Thomas J. Barnes, 64 TCM 1552 (1992). Jerome F. Bischoff , 69 TCM 1741, 1744 (1995). Frank Bizjak, 67 TCM 3142, 3143-3 (1994). Roland C. Briggs, 67 TCM 2484, 2994 (1994) David E. Buckner, 68 TCM 352, 354-355 (1994). Harris Cashman, 58 TCM 270, 272 (1989), aff’d 9th Circuit unpublished opinion 5/2/91. , 65 TCM 2371, 2372-2373 (1993), also citing Commissioner v. Groetzinger, supra. William James Courville, 71 TCM 2496, 2497 (1996). , 71 TCM 3147, 3147-3 (1996). - Dickerson, 73 TCM 2506, 2513 (1997). Elliott v. C.I.R., 90 T.C. 960, 970 (1988). Barbara Jean Crail, 65 TCM 1846, 1848 (1993). George W. Gagnon, 72 TCM 701, 703 (1996), also citing Commissioner v. Groet- zinger, supra. William B. Hart, 69 TCM 1822, 1823 (1995). Gerald K. Hilliard, 70 TCM 898, 900 (1995). Clarence A. Hunt, Jr. 2, 72 TCM 457 (1996). -39- Oe Richard L. Kaufman, 68 TCM 4, 6 (1994). Charles D. Keller, 66 TCM 682, 683 (1993). Keanini v. C.I.R., 94 TC 41, 46 (1990). William R. King, Jr., 65 TCM 2811, 2813 (1993). John H. Lewis, 64 TCM 269, 274 (1992). Joseph E. Machado,_70 TCM 1165, 1170 (1995). Mark Massingill, 71 TCM 2651, 2654 (1996). Hoolae Paoa, 66 TCM 377 (1993). Geraldine H. Pearson, 71 TCM 2109, 2112 (1996). Trilby Pederson, 68 TCM 1142, 1145 (1994). Bernard Michael Reed, 70 TCM 1485, 1486 (1995), also citing Commissioner v. Groetzinger, supra. Dennis W. Schillinger, 60 TCM 1470, 1477 (1990), aff’d by Order 9th Circuit, 91-70386, 8/12/93, "For the reasons given by the Tax Court in its opinion Sheldon M. Sisson, 68 TCM 1078, 1083 (1994). Kenneth A. Smith, 65 TCM 2289, 2295 (1993). Joseph Spear, 68 TCM 238, 240 (1994). wa wood, 58 TCM 731, 734 (1989). Lee W. Yates, 72 TCM 1193, 1195 (1996). 2. Recent Tax Court Decisions, All Appeal- able to the Ninth Circuit, Where the Tax Court Has Equivocated As to the Proper Test: Arrowhead Mountain Getaway, Ltd., 69 TCM 1805, 1818 (1995): “Whether the participants must have profit as their ‘primary purpose’, or whether it suffices that they have an ‘actual and honest’ profit objective, does not matter. In the case at hand, petitioner and intervenor have shown neither." -40- William T. Heywood, 68 TCM 1240, 1242 (1994). No standard mentioned. , 70 TCM 150, 152 (1995): Tax Court declined to apply the primary profit intent rule on the the ground that it could not predict that the 9th Circuit would apply a particular rule. John J. Shell, 67 TCM 2692, 2694 (1994): "good faith purpose of making a profit"; "a sporadic activity, a hobby, or an amusement diversion does not qualify", citing Commissioner v. Groetzinger, supra. Lester R. Westphal, 68 TCM 1038, 1041 (1994): "basic or dominant motive to realize a profit or taxable income"; "expectation of profit need not be reasonable"; "must be a good faith objective of making a profit". (Covering all bases!) 3. Tax Court Cases Holding That an Activity Entered into for the Purpose of Supplementing Retirement Income Is An Activity for Profit. David E. Buckner, 68 TCM 352, 354-355 (1994). (Citing "actual and honest" test. ) Ro W. ickson, 47 TCM 509, 511, 512, 514 (1983). (Citing “actual and honest" test.) Robert Scott Cronhardt, 52 TCM 287, 288, 291, 292 (1986). (Citing "actual and honest" test, and appealable to the 9th Circuit. ) Engdahl_v. C.I.R., 646 TC 659, 661, 666 (1979). (Citing "predominant purpose" and "bona fide and good faith" tests. Edwin B. Feldman, 55 TCM 450, 451, 452 (1988). -41- (Citing both "actual and honest" and "primary profit motive" tests. ) D.K. Hatch, 57 TCM 280, 281, 282 (1989). (Citing “actual and honest" test. ) William Hellings, 67 TCM 1988, 1989, 1991 (1994), citing “actual and honest" test. ) ~42- APPENDIX E Internal Revenue Code Sections and Regulations Title 26, U.S.C. Sec. 162. Trade or business expenses (a) In general.-- There shall be allowed as a deduction all the ordinary and nec- essary expenses paid or incurred during the taxable year in carrying on a trade or business. * *& * Sec. 167 - Depreciation (a) General rule.-- There shall be allo- wed as a depreciation deduction a reason- able allowance for the exhaustion, wear and tear (including a reasonable allow- ance for obsolescence) -- 1. of property used in the trade or business, or 2. of property held for the production of income. oe. 8-2 Sec. 183. iviti > ed for profit (a) General rule.-- In the case of an activity engaged in by an individual or an S corporation, if the activity is not engaged in for profit, no deduction att- ributable to such activity shall be -43- allowed under this chapter except as provided in this section. (b) Deductions allowable.-- In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed-- (1) the deductions which would be allow- able under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and (2) a deduction equal to the amount of the deductions under this chapter for the taxable year only if such activity was engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1). (c) Activity not engaged in for profit defined.-- 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. (ad) Presumption.-- If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deduc- tions attributable to such activity (determined without regard to whether -44- Sec. or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for the purposes of this chapter for such taxable year to be an activity engaged in for profit. In the case of such an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substi- tuting "2" for "3" and "7" for "5", * *& 212. Expenses for production of income. In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year-- (1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income . . 2:2: @ TREASURY REGULATIONS 26 CFR 1.183-2 Activity not engaged in for profit defined. (a) In general. For purposes of section 183 and the regulations thereunder, the term activity not engaged in for profit profit means any activity other than one with respect to which deductions -~45- are allowable for the taxable year under section 162 or under paragraph (2) or (2) of section 212. Deductions are allowable under section 162 for expenses of carrying on activities which consti- tute a trade or business of the taxpayer and under section 212 for expenses incur- red in connection with activities engaged in for the production or collection of income or for the management, conserva- tion or maintenance of property held for the production of income. Except as provided in section 183 and sec. 1.183-1, no deductions are allowable for expenses incurred in connection with activities which are not engaged in for profit. Thus, for example, deductions are not allowable under section 162 for activi- ties which are carried on primarily as a sport, hobby, or for recreation. The determination whether an activity is engaged in for profit is to be made by reference to objective standards, tak- ing into account all of the facts and circumstances of each case. Although a reasonable expectation of profit is not required, the facts and circun- stances must indicate that the taxpayer entered into the activity, or continued the activity, with the objective of mak- ing a profit. * * * In determining whe- ther an activity is engaged in for pro- fit, greater weight is given to objec- tive facts than to the taxpayer’s mere statement of his intent. x eke (9) Elements of personal pleasure or recreation. The presence of personal -46- motives in carrying on an activity may indicate that the activity is not eng- aged in for profit, especially where there are recreational or personal ele- ments involved. On the other hand, a profit motivation may be indicated where an activity lacks any appeal other than profit. It is not, however, necessary that an activity be engaged in with the exclusive intention of deriving a profit or with the intention of maximizing profits. For example, the availability of other investments which would yield a higher return, or which would be more likely to be profit- able, is not evidence that an activity is not engaged in for profit. An ac- tivity will not be treated as not enga- ged engaged in for profit merely because the taxpayer has purposes or motivations other than solely to make a profit. Also, the fact that the taxpayer deri- ves personal pleasure from engaging in the activity is not sufficient to cause the activity to be classified as not en- gaged in for profit if the activity is in fact engaged in for profit as evi- denced by other factors whether or not listed in this paragraph. > 2 1.212.1(c) - The question of whether or not a transaction is carried on primarily for the production of income or for the management, conservation, or main- tenance of property held for the produc- tion of income, rather than primarily as a sport, hobby, or recreation, is not to be determined solely from the -47- oo intention of the taxpayer but rather from all the circumstances of the case. For example, consideration will be given to the record of prior gain or loss of the taxpayer in the activity, the relationship between the type of activity and the principal occupation of the taxpayer, and the uses to which the property or what it produces is put by the taxpayer. x ke -48- --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_1765%3A1. Public record. Not legal advice.