Griesmer v. Commissioner

T.C. Memo. 1999-147

UNITED STATES TAX COURT

WILBUR KENNETH GRIESMER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15785-98. Filed April 30, 1999.

Wilbur Kenneth Griesmer, pro se.

Anita A. Gill, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

ARMEN, Special Trial Judge: This case was heard pursuant to

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

182.1

1
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.
 - 2 -

Respondent determined deficiencies in petitioner's Federal

income taxes for the taxable years 1995 and 1996 in the amounts

of $3,484 and $3,311, respectively, and accuracy-related

penalties under section 6662(a) in the amounts of $697 and $662,

respectively.

After a concession by petitioner,2 the issues remaining for

decision are as follows:

(1) Whether petitioner engaged in his meteorite and pyrite

collection activity for profit during 1995 and 1996. We hold

that he did not.

(2) Whether petitioner's net capital loss for 1995 should

be limited to $282, as opposed to $2,864 as claimed on

petitioner's Schedule D for that year. We hold that it should.

(3) Whether petitioner is liable for accuracy-related

penalties under section 6662(a) for 1995 and 1996. We hold that

he is.

Adjustments relating to the taxable amount of petitioner's

Social Security benefits for the years in issue are purely

mechanical matters, the resolution of which is dependent on our

disposition of the disputed issues.

2
Petitioner concedes that he received Social Security
benefits for the taxable year 1996 in the amount of $12,402.
 - 3 -

FINDINGS OF FACT3

Petitioner resided in Cleveland, Ohio, at the time that his

petition was filed with the Court.

After graduating from high school, petitioner worked for 2

years as a seaman on various oreboats owned and operated by the

Great Lakes Fleet of U.S. Steel Corporation. Petitioner spent

the balance of his working life at a factory job for Warner

Swasey Co. He retired in 1985.

After retiring, petitioner commenced an activity involving

the collection of various rocks and minerals. In particular,

petitioner combed the beaches of Lake Erie searching for what he

considered to be meteorites, and in particular Martian

meteorites, which he believed were quite valuable.4 He would

then clean what he collected and, on occasion, paint it gold. He

would not offer the specimen for sale, but rather added it to his

collection.

3
The parties did not enter into a stipulation of facts as
required by the Court's Standing Pre-Trial Order and Rule 91.
4
Petitioner explained the presence of Martian meteorites
on the shore of Lake Erie as follows:

Now, as the big meteors or comets land on Mars,
they splash this brown and black stuff up in the air,
and with the light gravity on Mars, it takes off into
space. Now, it floats around in space. Now, it's
drawn by the gravity of the sun towards our direction.
 - 4 -

Petitioner also collected various pyrites, which he regarded

as precious metals.5 According to petitioner, "I purchase maybe

tons and tons of this stuff * * * from Europe, Greenland, South

America". Petitioner has not made any attempt to sell his

pyrites, but rather regards his collection as his legacy to

certain individuals.6

Petitioner did not maintain any records for his meteorite

and pyrite collection activity.

Petitioner filed Federal income tax returns (Forms 1040) for

1995 and 1996, disclosing his occupation as "self-employed

physicist". Petitioner attached to each of his returns a

Schedule C (Profit or Loss From Business) in the name of "The

5
"Pyrites", according to Webster's Unabridged Third New
International Dictionary, at 1853 (1993), are "any of various
metallic-looking sulfides of which pyrite is the commonest",
whereas "pyrite" is "a common mineral that consists of iron
disulfide FeS2 * * * and is burned in making sulfur dioxide and
sulfuric acid".
6
The following colloquy at trial reveals petitioner's
intent:

THE COURT: * * * What is your hope for this
material?

PETITIONER: Well, I got maybe grandchildren or
possible grandchildren that live next door to me.
They're possible grandchildren; I'm not sure. I want
them to be able to enjoy life as well as I enjoy life.
 - 5 -

T.O.E. Co."7 Petitioner reported gross income and claimed

expenses and net losses on his Schedules C as follows:

1995 1996

Gross income $1,383 $209
Less: expenses
Office expense 305 ---
Supplies 56 2,106
Salvage from salvagers 83,994 64,035
Net loss 82,972 65,932

Petitioner did not derive any gross income from the sale of

meteorites or pyrite in 1995 or 1996. Rather, the gross income

that he reported on his Schedules C represented interest from

bank accounts that may have been maintained in the name of The

T.O.E. Co.

Petitioner also attached to his income tax return for 1995 a

Schedule D (Capital Gains and Losses). On his Schedule D,

petitioner claimed a net capital loss in the amount of $2,864.

Petitioner used the net losses claimed on his Schedules C

for 1995 and 1996, as well as the net capital loss claimed on his

Schedule D for 1995, to completely offset his reported income

from other sources, such as interest, dividends, and pension and

IRA distributions. Thus, petitioner reported adjusted gross

income for 1995 and 1996 in the amounts of negative $52,949 and

7
"T.O.E." is short for "Treasures on Earth".
 - 6 -

negative $40,112, respectively, and accordingly did not report

any income tax liability for those years.

In the notice of deficiency, respondent determined that

petitioner did not engage in his meteorite and pyrite collection

activity for profit within the meaning of section 183.

(Alternatively, respondent determined that petitioner failed to

substantiate the expenses claimed.) Respondent also

recharacterized the gross income reported on petitioner's

Schedules C as interest income properly reportable on Schedules B

and line 8a of Forms 1040.

OPINION

Respondent contends that petitioner is not entitled to the

claimed Schedule C losses because petitioner's meteorite and

pyrite collection activity was not engaged in for profit. In the

alternative, respondent contends that petitioner failed to

substantiate the claimed losses.

Under section 183(a), if an activity is not engaged in for

profit, then no deduction attributable to that activity is

allowable except to the extent provided by section 183(b). In

pertinent part, section 183(b) allows deductions to the extent of

gross income derived from such activity.8

8
As previously stated, petitioner did not derive any gross
income from the sale of meteorites or pyrite in 1995 or 1996;
rather, the gross income that he reported on his Schedules C
(continued...)
 - 7 -

Section 183(c) defines an activity not engaged in for profit

as "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." Deductions are allowable

under section 162 or under section 212(1) or (2) only if the

taxpayer is engaged in the activity with the "actual and honest

objective of making a profit." See Ronnen v. Commissioner, 90

T.C. 74, 91 (1988); Dreicer v. Commissioner, 78 T.C. 642, 645

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).

The existence of the requisite profit objective is a

question of fact that must be decided on the basis of the entire

record. See Benz v. Commissioner, 63 T.C. 375, 382 (1974).

The regulations set forth a nonexhaustive list of factors

that may be considered in deciding whether a profit objective

exists. These factors are: (1) The manner in which the taxpayer

carries on the activity; (2) the expertise of the taxpayer or his

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

8
(...continued)
represented interest from bank accounts that may have been
maintained in the name of The T.O.E. Co. Accordingly, petitioner
did not derive any gross income from his meteorite and pyrite
collection activity because there was no "organizational and
economic interrelationship" between that activity and the
production of interest from bank accounts. See sec. 1.183-
1(d)(1), Income Tax Regs. In other words, petitioner's meteorite
and pyrite collection activity and the production of interest
from bank accounts were not facets of the same "activity".
Therefore, if petitioner's activity were not engaged in for
profit, sec. 183(b) would not serve to allow any deductions.
 - 8 -

carrying on the activity; (4) the expectation that the 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; (8) the financial status of the taxpayer;

and (9) any elements indicating personal pleasure or recreation.

See sec. 1.183-2(b), Income Tax Regs.

In the present case, none of the factors indicates that

petitioner carried on his meteorite and pyrite collection

activity with the requisite profit objective. The ultimate goal

of an activity engaged in for profit must be to realize a net

profit from the activity so as to recoup losses sustained in

prior years. See Bessenyey v. Commissioner, 45 T.C. 261, 274

(1965), affd. 379 F.2d 252 (2d Cir. 1967). In this regard,

petitioner did not have a single dollar of gross receipts from

this activity, nor did he even offer any part of his collection

for sale. See sec. 1.183-2(b)(6) and (7), Income Tax Regs. This

factor indicates the lack of a profit objective.

Further, petitioner did not carry on his meteorite and

pyrite collection activity in a businesslike manner. He did not

maintain any books or records of his income and expenses. See

sec. 1.183-2(b)(1), Income Tax Regs. Petitioner also does not

have any special skill or expertise with regard to meteorites or
 - 9 -

pyrite. See sec. 1.183-2(b)(2), Income Tax Regs. In addition,

petitioner generated significant tax benefits by offsetting

losses from his meteorite and pyrite collection activity against

his income from interest, dividends, and other sources and

thereby reported no Federal income tax liability. See sec.

1.183-2(b)(8), Income Tax Regs. All of these factors favor

respondent's position that petitioner's activity was not engaged

in with the requisite profit objective.

In addition to concluding that petitioner engaged in his

meteorite and pyrite collection activity without the requisite

profit objective, we agree with respondent that petitioner failed

to substantiate the expenses claimed on his Schedules C.

Taxpayers are required to prove their entitlement to any

deduction claimed, including the fact of payment. See Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976). Petitioner would have us believe that he

paid $83,994 in 1995 and $64,035 in 1996 as "salvage from

salvagers".9 However, petitioner's testimony was bizarre if not

9
In testimony before the Court in his case involving the
taxable years 1992, 1993, and 1994, petitioner described the
"salvagers" as junior high school students who sold minerals to
him after he had disclosed the minerals' location to the
students.
 - 10 -

fanciful, completely unsupported by any documentary evidence, and

not otherwise corroborated. In addition, the record includes

indications contrary to petitioner's assertions. For example, we

are not convinced that petitioner had the financial resources to

incur expenses of the magnitude claimed on his Schedules C.

In view of the foregoing, we sustain respondent's

determination on this issue.

Next, we consider whether petitioner's net capital loss

should be limited to $282 as opposed to $2,864, as claimed on his

1995 Federal income tax return. Respondent contends that the

discrepancy is due to a math error made by petitioner, changes in

petitioner's cost basis, and the omission of certain

transactions. Petitioner failed to produce any evidence,

including testimony, regarding this matter. In light of

petitioner's complete failure of proof, we sustain respondent's

determination on this issue. See Rule 142(a); INDOPCO, Inc. v.

Commissioner, supra; Welch v. Helvering, supra.

Finally, we consider whether petitioner is liable for the

accuracy-related penalty under section 6662(a) for 1995 and 1996.

Section 6662(a) and (b)(1) provides that if any portion of

an underpayment of tax is attributable to negligence or disregard

of rules or regulations, then there shall be added to the tax an

amount equal to 20 percent of the amount of the underpayment that

is so attributable. The term "negligence" includes any failure
 - 11 -

to make a reasonable attempt to comply with the statute, and the

term "disregard" includes any careless, reckless, or intentional

disregard. Sec. 6662(c). Petitioner bears the burden of proving

that the negligence penalty is inapplicable. See Rule 142(a);

INDOPCO, Inc. v. Commissioner, supra; Welch v. Helvering, supra;

cf. Girsis v. Commissioner, T.C. Memo. 1992-244.

At trial, petitioner did not offer any evidence to suggest

that he was not negligent, nor did he argue that he should not be

held liable for the penalty. Cf. Girsis v. Commissioner, supra.

In any event, petitioner did not maintain any books or records

regarding the matters in issue. The negligence penalty may be

justified if the taxpayer fails to keep adequate records. See

Lysek v. Commissioner, 583 F.2d 1088, 1094 (9th Cir. 1978), affg.

T.C. Memo. 1975-293; Crocker v. Commissioner, 92 T.C. 899, 916

(1989). Further, failure to maintain adequate records indicates

disregard of the rules and regulations requiring taxpayers to

maintain permanent records sufficient to establish their gross

income and deductions. See Crocker v. Commissioner, supra at

917. We therefore sustain respondent's determination on this

issue.

To reflect our disposition of the disputed issues, as well

as petitioner's concession,

Decision will be entered

for respondent.