T.C. Memo. 1996-430
UNITED STATES TAX COURT
GEORGE W. AND MARGARET L. GAGNON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8834-95. Filed September 24, 1996.
George W. Gagnon, pro se.
Christal W. Hillstead, for respondent.
MEMORANDUM OPINION
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1
By notice of deficiency dated March 16, 1995, respondent
determined deficiencies in petitioners' Federal income taxes for
the taxable years 1991, 1992, and 1993 in the respective amounts
1
Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the years in issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
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of $4,604, $5,558, and $5,558. At the time the petition was
filed, petitioners resided in Des Moines, Washington.
The issue is whether petitioners are entitled to deduct
losses from their activities with respect to Gull Cottage Nursery
during the years 1991, 1992, and 1993.
The facts may be summarized as follows. In 1989, and during
the years in issue, petitioner George W. Gagnon (Mr. Gagnon or
petitioner) was employed full time as a salesman for Costco
Wholesale, and petitioner Margaret L. Gagnon (Mrs. Gagnon) was
employed full time as a secretary for the U.S. Department of
Transportation. They resided in Des Moines, Washington, a suburb
of Seattle, Washington.
During 1989, petitioners were looking for a place to which
they ultimately would retire and went to Long Beach, Washington.
Long Beach, Washington, is located approximately 160 miles south
of Des Moines, Washington, on the Pacific Ocean. Petitioners
purchased a 50 foot by 100 foot lot with a two bedroom cottage
located at 509 North Oregon Street in Long Beach (the Oregon
Street property). Shortly thereafter petitioners purchased a 100
foot by 100 foot lot (the Sixth Street property), across the
street from the Oregon Street property. The Sixth Street
property improvements included a house that was not inhabitable
and a barn. Petitioners paid $30,000 for the Sixth Street
property and approximately $40,000 for the Oregon Street
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property.2 Both properties are three blocks from the Pacific
Ocean.
Mr. Gagnon conceived the idea that he could make some money
by starting a nursery for plants in Long Beach. He obtained a
business license using the name Gull Cottage Nursery. He started
by raising potted tulips and daffodils. Mr. Gagnon believed that
the cost of the bulbs and pots would be approximately $1.47 each,
and he could sell the mature plants in the spring for $4 each to
grocery stores. During 1991, he sold approximately 200 to 300
bulbs. In 1992, he bought bulbs for $3,500 and set out 2,000
pots. During this time he read the Bulb Forcer's Manual by an
unnamed professor at the University of North Carolina, and began
corresponding with the gentleman. Petitioner then determined
that he would have to plant 5,000 pots to make a "maximum
profit". He realized that he could not "handle" 5,000 pots.
Petitioner ceased potting bulbs after 1992.
2
Mr. Gagnon testified that they had approximately $72,000
invested in the Long Beach properties. They paid $40,000 for the
Oregon Street property and made substantial improvements to the
cottage, including new windows and doors, a stove, a
refrigerator, and fencing around the property.
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In addition, petitioner bought some bushes and trees from
wholesale dealers, and held them for sale on the Sixth Street
property while they matured. If someone wanted to buy a tree or
bush during the week, he or she would tell a neighbor of
petitioner, take it, and petitioner would send the buyer a bill.
The record does not indicate the specifics of this aspect of the
nursery activity.
Petitioners drove to Long Beach virtually every weekend and
holiday. They substantially renovated the cottage on the Oregon
Street property in which they stayed. While Mr. Gagnon was
occupied on the weekends with the nursery activity at least
during the bulb potting season, Mrs. Gagnon apparently was not
active with the nursery activity.
The following items of income and expenses have been
stipulated as incurred with respect to the Long Beach properties
and the nursery activity:
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19901 1991 1992 1993
Gross Sales $1,547 $5,427 $5,594 $7,175
Cost of Goods Sold 5,501 4,416 6,079
Income 152 (74) 1,178 1,096
Expenses:
Advertising 122 143 143
Car & Truck 5,010 5,214 5,859
Depreciation 4,632 2,722 3,625
Insurance 308 475 260
Interest - Mortgage 1,312 2,859 -0-
Interest - Other 3,370 2,456 2,144
Office Expense 135 75 283
Legal and
Professional Fees 250 311 425
Repairs/Maintenance -0- -0- 9
Supplies 990 -0- 2,090
Taxes/Licenses 911 1,306 670
Meals/Entertainment 3,042 3,068 3,302
Utilities 1,499 2,201 2,029
Other Expenses 677 692 658
Equipment Rental -0- 127 101
Total 22,258 21,649 21,598
2 2 2
Loss 19,495 22,184 20,471 20,502
1
The record does not contain a detail of the expenses for
1990. We assume that they are generically the same as those
incurred in the later years.
2
We recognize that these amounts do not correspond with the
losses petitioners claimed on their 1991, 1992, and 1993 Federal
income tax returns. This discrepancy, however, is not material
to our decision.
Petitioner enjoys growing plants and working in a garden.
He is not a horticulturist and had no experience in the nursery
business. His concept of an activity making a profit did not
include the cost of land and other indirect costs. In entering
into the nursery activity, petitioner made no financial studies
of the business, other than he thought he could sell the potted
plants for $4 each, and that his cost would be $1.47.
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Petitioner did not have a separate bank account for the
nursery activity. However, he kept records of income and
expenses in journals for each year. These journals reveal that
petitioner, inter alia, treated the following items as related to
the nursery activity: Car insurance, cable television fees, local
and cellular telephone charges, all utility costs, taxes and
repairs on the Oregon Street and Sixth Street properties,
automobile club dues, tools (such as router bits and scroll
saws), local newspapers, etc. In computing the car and truck
expenses petitioner kept mileage records and used the standard
mileage figures for the years in question. Virtually all of the
mileage was incurred in traveling to and from Long Beach.
Petitioner computed his meal expenses by taking the number of
days he was at Long Beach and multiplying that amount by $26.
Petitioners did not deduct meal expenses for Mrs. Gagnon because
"she's not a hard worker."
On their joint Federal income tax returns for 1991, 1992,
and 1993, petitioners deducted losses with respect to the nursery
activity in the respective amounts of $16,464, $19,857, and
$19,842. For the taxable year 1991, petitioners filed an amended
return claiming an additional loss of $5,260 based on expenses
not originally claimed. This primarily consisted of car and
truck expenses not originally claimed. On examination respondent
disallowed the loss deductions for all the years in issue.
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Section 162(a) allows taxpayers to deduct the ordinary and
necessary expenses of carrying on a trade or business. Where a
taxpayer conducts an activity not as a trade or business, section
183 allows deductions generally to the extent the activity
generates gross income. To be engaged in a trade or business
within the meaning of section 162, "the taxpayer must be involved
in the activity with continuity and regularity and * * * the
taxpayer's primary purpose for engaging in the activity must be
for income or profit." Commissioner v. Groetzinger, 480 U.S. 23,
35 (1987).
In determining whether an activity is engaged in for profit,
the taxpayer must show an actual and honest objective of making a
profit. Surloff v. Commissioner, 81 T.C. 210, 233 (1983);
Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982), affd.
without opinion 702 F.2d 1205 (D.C. Cir. 1983). The
determination whether petitioner had an actual and honest
objective of making a profit requires an examination of all the
surrounding facts and circumstances of the case. Golanty v.
Commissioner, 72 T.C. 411, 426 (1979), affd. without published
opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(b), Income Tax
Regs. We give greater weight to the objective facts than to
petitioner's mere statement of intent. Dreicer v. Commissioner,
supra at 645; sec. 1.183-2(a), Income Tax Regs.
Section 1.183-2(b), Income Tax Regs., sets forth some of the
relevant factors for determining when an activity is engaged in
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for profit. No one factor is controlling. Abramson v.
Commissioner, 86 T.C. 360, 371 (1986); Golanty v. Commissioner,
supra at 426. Such relevant factors include (1) the manner in
which the taxpayer carries on the activity; (2) the expertise of
the taxpayer or advisers; (3) the time and effort expended by the
taxpayer in carrying on the activity; (4) the taxpayer's history
of income or loss with respect to the activity; (5) the amount of
occasional profits, if any, that are earned; (6) the financial
status of the taxpayer; and (7) whether elements of personal
pleasure or recreation are involved.
Petitioner contends that the nursery activity was a trade or
business that he operated for profit. But, it is perfectly
obvious that when all of the costs that petitioner associates
with the Long Beach properties and the travel to and from that
area are considered as expenses of the nursery, the venture could
never produce a profit, and there could not have been an actual
and honest objective of a profit. Indeed, even if petitioner
could have produced 5,000 pots of tulips (the "maximum profit"),
he still would not have made a profit.3
In reality, however, many of the expenses that petitioner
attempts to associate with the nursery are expenses of a
nonbusiness activity, i.e., a second home to be used on weekends,
3
Indeed, while some of the factors listed in sec. 1.183-
2(b), Income Tax Regs., may be neutral, none of those factors
really favor petitioner's position.
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holidays, and possibly for retirement. This is quite obvious
from petitioner's testimony. Petitioners went to Long Beach in
search of a second home, not to invest in a business. The idea
of the nursery was an afterthought. The tail of the nursery
cannot wag the dog of the second home.
Expenses associated with a vacation home are personal and
nondeductible except as otherwise expressly provided in the Code.
Sec. 262(a). Furthermore, section 280A(a) limits the deductions
that may be allowed "with respect to the use of a dwelling unit
which is used by the taxpayer during the taxable year as a
residence." During the years in question, petitioners used, at
least, the cottage on the Oregon Street property as a residence.
It may not necessarily flow from this scenario that the
nursery activity was not entered into for profit. See Hughes v.
Commissioner, T.C. Memo. 1995-202. We have no question that
petitioner may have devoted many arduous hours to the nursery
activity. Based on the record before us, it is virtually
impossible to separate the ordinary and necessary expenses of the
nursery activity from the personal expenses of the second home.
For example, petitioners claimed deductions for utilities and
interest expenses, but we have no evidentiary basis on which to
allocate these expenses between business and personal. It may be
argued that, for example, the car and truck expenses are solely
associated with the nursery activity. But, we simply cannot
accept that there were no personal motivations in the travel to
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and from Long Beach. Business licenses and advertising expenses
seem to be the only expenses that we can definitively identify as
directly related to the nursery activity.
Under these circumstances, petitioners have failed to
establish an actual and honest objective of making a profit from
the nursery activity. We do not have an accurate financial
picture of that activity. In litigating this case, petitioners
chose this all-or-nothing approach, and they have the burden of
establishing that respondent's determinations were incorrect.
Rule 142(a). Petitioners have not carried that burden.
Decision will be entered
for respondent.