Peacock v. Comm'r

T.C. Memo. 2002-122

UNITED STATES TAX COURT

JAMES R. AND MYRTICE L. PEACOCK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6111-00. Filed May 15, 2002.

Robert N. Reynolds and Ronald Cutler, for petitioners.

Felicia Branch and Benjamin De Luna, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Petitioners petitioned the Court to

redetermine deficiencies in their 1995, 1996, and 1997 Federal

income taxes, an addition to their 1997 tax under section

6651(a)(1), and accuracy-related penalties under section 6662(a).

Respondent determined for the respective years deficiencies of

$132,801, $40,330, and $97,992 and accuracy-related penalties of
 - 2 -

$26,560, $8,066, and $19,598. Respondent also determined for

1997 a $24,498 addition to tax under section 6651(a)(1).

Following concessions, we must decide:

1. Whether petitioners’ deep-sea tournament fishing

activity (fishing activity) was an “activity not engaged in for

profit” under section 183. We hold it was.

2. Whether petitioners may deduct a certain bad debt. We

hold they may not.

3. Whether petitioners are liable for the accuracy-related

penalties and the addition to tax. We hold they are.

Unless otherwise indicated, section references are to the

applicable versions of the Internal Revenue Code. Rule

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

Dollar amounts are rounded.

FINDINGS OF FACT1

The parties have stipulated some of the facts. We

incorporate herein by this reference the parties’ stipulation of

facts and the exhibits submitted therewith. We find the

1
The Court directed each party to file an opening brief and
an answering brief, the latter limited to making any objection to
the opposing party’s proposed findings of fact. Petitioners have
not filed an answering brief. We conclude they have conceded
respondent’s proposed findings as correct except to the extent
that their opening brief contains proposed findings inconsistent
therewith. Morgan v. Commissioner, T.C. Memo. 2000-231, affd. 23
Fed. Appx. 813 (9th Cir. 2001); Fankhanel v. Commissioner, T.C.
Memo. 1998-403, affd. without published opinion 205 F.3d 1333
(4th Cir. 2000).
 - 3 -

stipulated facts accordingly. James R. Peacock (Mr. Peacock) and

Myrtice L. Peacock (Ms. Peacock) are husband and wife, and they

filed joint Federal income tax returns for the subject years.

They resided in Ponce Inlet, Florida, when they filed their

petition with the Court.

Mr. Peacock has worked in the automobile industry for

approximately 20 years, and he has owned various automobile

dealerships. One of those dealerships, Speedway Dodge, Inc.,

formerly known as Hurley Dodge, Inc. (the dealership), was

located on Florida’s east coast. In or about 1993, Mr. Peacock

spoke to an acquaintance (the acquaintance) living on Florida’s

west coast about working for the dealership as its general

manager. Mr. Peacock persuaded the acquaintance to accept the

position by causing the dealership to lend $50,000 to the

acquaintance to use as a downpayment on a condominium near the

dealership. Mr. Peacock believed that the acquaintance would pay

the money back to the dealership when the acquaintance had the

money to do so.

In October 1993, Mr. Peacock sold 51 percent of his 100-

percent ownership interest in the dealership to spend more time

with his wife in an activity, fishing, that they had both enjoyed

since their childhood. At or about the time of sale, the

acquaintance moved back to Florida’s west coast without having

made any payments on the loan. When the acquaintance moved back
 - 4 -

to Florida’s west coast, the acquaintance transferred the

condominium to Mr. Peacock subject to a mortgage.2 Mr. Peacock

later sold the condominium but never transferred any of the money

to the dealership.

The dealership, an S corporation for Federal income tax

purposes, claimed a $50,000 bad debt deduction for 1995 on

account of the loan. Respondent disallowed that deduction. On

May 18, 1998, the dealership’s 51-percent shareholder agreed to

the disallowance. At that time, Mr. Peacock continued to own the

remaining stock of the dealership.

Petitioners organized Profitable Management Services, Inc.

(PMSI), an S corporation, on December 2, 1993. PMSI’s president

and only shareholder was Ms. Peacock. Both she and Mr. Peacock

were paid employees of PMSI. But for services connected with the

fishing activity, the only service that Ms. Peacock performed for

PMSI was answering its telephones. From 1994 through 1997, PMSI

paid the following amounts to petitioners and to its other

employees:

Year Mr. Peacock Ms. Peacock Other employees

1994 -0- -0- -0-
1995 $7,000 $7,000 $30,098
1996 26,000 19,500 72,439
1
1997 23,000 25,500
1
The record does not disclose this amount.

2
The record does not disclose either the value of the
condominium or the amount of the mortgage.
 - 5 -

On its tax return, PMSI reported its principal business

activity as providing consultation on automobile dealerships,

and, during the relevant years, it had a consulting arrangement

with approximately three automobile dealerships. For 1994

through 1997, PMSI’s primary activity involved petitioners’

participation in numerous deep-sea fishing tournaments (the

tournaments). Petitioners decided together after consulting with

other members of their tournament team that they and the team

would participate in the tournaments through PMSI. Petitioners

have fished recreationally since their childhood and began

tournament fishing for pleasure sometime in 1988 or 1989.

The tournaments were mostly part of the Billfish (in this

case, blue or black marlin) Series, a series of tournaments held

throughout the world with contestants representing a wide range

of countries. The Billfish Series tournaments generally awarded

trophies and cash prizes to the contestants who within an

allotted time caught at the tournament one of the four largest

billfish and/or the four contestants who within that time caught

the most billfish. The total purse of each of the Billfish

Series tournaments generally ranged from $100,000 to $2.5

million, and the individual prizes awarded to the contestants

generally ranged from $150,000 to $1.2 million. PMSI did not win

any cash prizes in 1994 but won two cash prizes in 1997. PMSI

won one or two cash prizes in each of 1995 and 1996.
 - 6 -

The tournaments were hosted by marinas worldwide in exotic,

resortlike places such as the Bahamas, Cabo San Lucas (Mexico),

Tahiti, Mauritius, and St. Thomas and presented a social setting

that included cocktail parties and dinners, with camaraderie

among contestants. Petitioners participated in the tournaments

held in the Bahamas, Cabo San Lucas, and St. Thomas, mainly from

April through July. Between 25 and 80 teams participated in each

tournament, and approximately 15 of those teams, including

petitioners’ team, participated in the same circuit of

tournaments every year.

The tournaments had an atmosphere resembling that of a

college spring break and took place in some of the world’s most

beautiful locations. During the tournaments, the sunny,

crystal-clear blue water vacation destinations were the backdrop

to sunglassed, beach-attired men and women, five-star

restaurants, free-flowing alcoholic beverages, and swarms of

revelers consisting mainly of contestants and spectators. The

contestants generally fished during the day and danced and

celebrated through the night. The celebrations occurred at or

near the expensive, posh accommodations where the contestants

generally stayed during the tournaments.
 - 7 -

Ms. Peacock generally fished at the tournaments from

petitioners’ luxurious yacht.3 She was part of a four-person

team working together on the yacht to catch and land the desired

fish. The team consisted of a captain, two mates, and an angler.

The captain remained on the bridge of the yacht during the

tournaments, and he was responsible for operating and maintaining

the yacht. The angler and the mates worked in the yacht’s

cockpit. Ms. Peacock was her team’s angler, and she was the

team’s most important member. She was responsible for single-

handedly landing each billfish after it had been caught.4 Mr.

Peacock was not a member of the four-person team, but he

accompanied the team aboard the yacht during the tournaments and

handled the management and financial side of the fishing

activity. Each team member’s compensation was based primarily on

a portion of the team’s tournament winnings; i.e., generally, the

captain was paid 10 percent of the winnings, the mates were paid

10 percent of the winnings, and petitioners were entitled to keep

the rest.

The atmosphere on petitioners’ yacht during the tournaments

varied from that of a hardworking, dedicated, and skilled group

3
At the tournaments held in Mexico, petitioners chartered a
yacht because it was too expensive and hazardous for them to sail
their yacht to Mexico through the Panama Canal.
4
The tournaments’ rules provided that only the angler could
catch the fish.
 - 8 -

of team members to that of a smiling, celebratory group of

individuals who shared in the spirit of competition and the

pursuit of the team’s goal to catch the desired fish. Sometimes,

celebrations aboard the yacht included the consumption of

alcohol. Other times, the captain’s wife accompanied him aboard

the yacht, and they and petitioners (and possibly other

individuals) dined aboard the yacht on fish caught during the

day. Petitioners allowed friends and family members to accompany

them aboard the yacht during the tournaments.

Both petitioners are extremely knowledgeable about the

techniques of fishing and are experts in catching a desired fish.

Petitioners won the 1993 Bahamas Billfish Championship, Ms.

Peacock won the 1994 World Billfish Series, and Ms. Peacock

placed second in the 1995 World Billfish Series. Ms. Peacock has

caught during her lifetime approximately 75 billfish and has been

featured approximately 50 times in various sportfishing

magazines. On one occasion in 1993, Ms. Peacock caught an

885-pound blue marlin which, at that time, was the second largest

fish caught in the Bahamas and which, she claims, is displayed at

Ripley’s Believe It or Not in Niagra Falls, New York.

PMSI reported for the relevant years the following income

items, total deductions, and ordinary income (loss):

1994 1995 1996 1997

Tournament winnings -0- $123,000 $109,270 -0-
Consulting fees -0- 242,997 249,200 -0-
 - 9 -

Trailer park income -0- 159,483 54,555 -0-
Loss on sale of condo. -0- (9,896) -0- -0-
Loss on sale of land -0- -0- (5,600) -0-
1
Gross receipts 337,412 -0- -0- 531,422
Cost of goods sold -0- -0- -0- (198,809)
Total income 337,412 515,584 407,425 332,613

Total deductions 314,109 820,559 655,972 330,542

Ordinary income (loss) 23,303 (304,975) (248,547) 2,071
1
The 1994 gross receipts include $116,135 of income
attributable to the fishing activity. (The record does not
disclose the specific source of that income.) The 1997 gross
receipts include tournament winnings of $117,954.

PMSI’s expenses related to the fishing activity’s income were as

follows:

Expense 1994 1995 1996 1997

Tournament fees $65,645 $49,375 $71,975 $59,350
Boat supplies 7,010 8,079 16,451 5,946
Tackle & bait 2,203 11,439 6,314 -0-
Marina fees 11,786 17,146 19,611 8,855
Fuel 14,489 14,300 32,109 16,011
Lodging & travel 12,623 27,407 26,359 29,380
Contract labor 7,650 6,555 725 10,236
Professional fees 54,711 24,394 -0- -0-
Depreciation 66,277 119,298 98,139 84,616
Insurance 41,723 5,985 8,637 -0-
Interest expense -0- 42,150 33,609 25,561
Meals/entertainment -0- 3,022 -0- -0-
Officer compensation -0- 7,000 19,500 25,500
Permits -0- 567 658 -0-
Salaries -0- 9,800 39,100 66,531
Repairs & maintenance -0- 21,746 22,727 25,030
Taxes -0- 2,263 4,482 -0-
Charter fees -0- 9,814 3,615 2,500
Miscellaneous -0- 13,415 12,275 7,619
Total 284,117 393,755 416,286 367,135

PMSI’s claimed losses from the fishing activity were $168,042 for

1994, $270,755 for 1995, $307,016 for 1996, and $249,181 for

1997. In late 1997, PMSI stopped participating in the
 - 10 -

tournaments because Ms. Peacock suffered a knee injury that

caused her to decide to discontinue her participation.

PMSI did not prepare a business plan for the fishing

activity. Petitioners kept and coded invoices, receipts,

canceled checks, and a ledger which was given to their accountant

to prepare their and PMSI’s annual tax returns. Neither

petitioners nor PMSI had a balance sheet, income projection, or

other financial statement for the fishing activity until the end

of the taxable year, and they were not able to ascertain the

fishing activity’s financial status for a year until they

received the tax returns reporting the activity for that year.

Petitioners studied the fishing activity from the point of view

of ascertaining the best way that they could catch the desired

fish. They did not study the fishing activity from the point of

view of catching the fish at a cost that would be less than the

anticipated revenues which would be connected therewith.

Petitioners’ net worth was at least $1 million in each of

the subject years. They had income and cash receipts from

activities other than PMSI as follows:

Source 1995 1996 1997

Interest income $16,328 $12,828 $1,513
Sale of stock 271 -0- 300,000
Interest in the dealership 171,198 -0- -0-
Interest in another entity 72,971 90,386 114,361
Total 260,768 103,214 415,874
 - 11 -

They also received loan repayments from PMSI of $240,590 in 1995

and $60,815 in 1996.

Petitioners’ individual income tax return for 1997 was due

on October 15, 1998. The return was prepared in March 1999 and

filed on May 13, 1999.

OPINION

A shareholder in an S corporation must take into account his

or her pro rata share of the corporation’s income or loss. Sec.

1366(a). PMSI is a subchapter S corporation, and Ms. Peacock is

its only shareholder. We must determine the extent of PMSI’s

deductions for its fishing activity that enter into the

computation of its income or loss. Respondent denied some of

those deductions, determining that the fishing activity was not

engaged in for profit. Respondent also determined that

petitioners could not deduct the claimed bad debt and that they

were liable for the addition to tax and the accuracy-related

penalties mentioned above.

Petitioners have not argued that either section 7491(a) or

(c) applies to this case. Moreover, the record does not indicate

that respondent’s examination of the subject years commenced

after July 22, 1998. Seeing that section 7491 applies only to

court proceedings arising from examinations commencing after

July 22, 1998, Internal Revenue Service Restructuring and Reform

Act of 1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727, we
 - 12 -

conclude that neither section 7491(a) nor (c) applies here.

Section 7491(a) places the burden of proof upon the Commissioner

in specified circumstances. Section 7491(c) places the burden of

production upon the Commissioner as to an individual’s liability

for a penalty or an addition to tax.

1. Fishing Activity

Section 183, which applies to activities engaged in by

individuals or S corporations, generally limits the deductions

for an “activity not engaged in for profit” to the amount of

income received from the activity. Sec. 183(a) and (b). 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.”5 An activity is engaged in

for profit if the taxpayer entertained an actual and honest, even

though unreasonable or unrealistic, profit objective in engaging

in the activity. Osteen v. Commissioner, 62 F.3d 356, 358 (11th

Cir. 1995), affg. on this issue T.C. Memo. 1993-519; Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion

702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.

5
Sec. 162 deals with “trade or business expenses”, which
are limited to “ordinary and necessary expenses paid or incurred
* * * in carrying on any trade or business”. Sec. 212(1) and(2)
deals with expenses for the “production or collection of income”
or “management, conservation, or maintenance of property held for
the production of income”.
 - 13 -

Petitioners bear the burden of proving that PMSI entered into and

remained in the fishing activity with the requisite profit

objective.6 Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,

115 (1933); Beck v. Commissioner, 85 T.C. 557, 570 (1985).

Section 183 applies at the corporate level with respect to the

activities of an S corporation. Sec. 1.183-1(f), Income Tax

Regs. For that purpose, however, Ms. Peacock’s intent is

attributable to PMSI, her wholly owned S corporation. See Eppler

v. Commissioner, 58 T.C. 691, 696-699 (1972), affd. without

published opinion 486 F.2d 1406 (7th Cir. 1973); Butler v.

Commissioner, 36 T.C. 1097 (1961); see also Sousa v.

Commissioner, T.C. Memo. 1989-581 (and the cases cited therein).

Section 1.183-2(b), Income Tax Regs., sets forth a

nonexclusive list of factors to be considered when ascertaining a

taxpayer’s intent. 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 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

6
Sec. 183(d) provides a statutory reversal of the burden of
proof if petitioners meet specified criteria. Petitioners do not
meet those criteria.
 - 14 -

profits, if any; (8) the financial status of the taxpayer; and

(9) elements of personal pleasure or recreation. All facts and

circumstances must be taken into account, and no single factor or

mathematical preponderance of factors is determinative. Osteen

v. Commissioner, supra at 358; Golanty v. Commissioner, 72 T.C.

411, 426 (1979), affd. without published opinion 647 F.2d 170

(9th Cir. 1981); Allen v. Commissioner, 72 T.C. 28, 34 (1979);

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

Petitioners rely solely on their testimony to establish all

of their proposed findings of disputed facts. As to the issue at

hand concerning the fishing activity, petitioners testified that

they aimed to earn money from that activity and that they could

win millions of dollars in the activity. According to

petitioners, PMSI would have reported a profit for each subject

year except that two fish got away and one did not. As to the

first fish, Mr. Peacock testified that they would have won

$300,000 in 1995 had it not got away. Mr. Peacock animatedly

described the events surrounding this fish as follows during his

direct testimony at trial:

A. It was in 1995.

Q. And where were you located?

A. Cabo San Lucas, Mexico.

* * * * * * *

A. So about two or three o’clock, we hook up with
this fish and it just takes off running. And Myrtice
 - 15 -

gets in the chair and gets strapped down. We get the
cockpit clear, meaning you have to take in all other
lines, all the teasers, and all the time, this fish is
running and taking line. You’ve got your drag backed
all the way off.

The reel has built-in pressure. And that’s why
you can catch a big fish with 80-pound test is you have
to back off and let the fish run and when you realize
that he’s not running, or whatever, you’ve got to reel
like * * * [crazy] to get that line in, until he starts
running again.

This fish takes off and he’s running and he jumps
and we know it’s a 400-pound fish. I mean, we’ve
caught enough fish, we know, you know, we’re not going
to say a one-pound bass is a five-pound bass. We know
what the size is.

An Myrtice works on the fish and works on the fish
and works on the fish and we’re backing down on the
fish and he takes off for his last run and everything
went slack. And we said, you know, what * * *
happened? Well, when we reel it in, the dead line,
the hook, the knot came untied.

As to the second fish, Mr. Peacock testified that

petitioners would have won $350,000 in 1996 had it not got away.

Ms. Peacock described the events giving rise to that misfortune

as follows during her direct testimony at trial:

A. we’re fishing. It was a spring day.

THE COURT: What year? * * *

THE WITNESS: ‘96. There was only a few boats
that actually fished out in this area. It was kind of
like a little secret type thing. You could catch large
fish out there. You might not get a bunch of hits,
but, you know, there were large fish.

This other boat radios over and said, You’re not
going to believe what we just saw. They were cleaning
out the refrigerator and threw a bucket of clam chowder
over. Well, right in the mess of clam chowder, comes
 - 16 -

this humongous blue marlin. Everybody’s kind of
guessing at 1,200 pounds. I mean, they just worked and
worked and never could get it to back up.

So they radio us to be on the lookout for it and
said, You know, if you find her, you know, you–-if
anybody can catch her, you all can. Because we were
kind of noted for catching large fish.

So we troll around out there for, I’m guessing,
about an hour or so and just, out of the blue, she’s
right there at the back of the boat. I mean, she’s
huge. And everybody’s just kind of standing there with
their mouth wide open, looking at this fish that’s
right here. And she is as wide, I mean, as long as the
boat’s wide. And that boat had a 16.3 beam on it. I
mean, this fish was huge.

So she kind of looks around in the spread. We’ve
got a couple of teasers out, both short and long lures
out there. And she just kind of has to look around.
No big deal. And then she comes up and spots a bumper.

* * * * * * *

Q. * * * describe what it [a bumper] is.

A. It’s normally used to hang off a boat, you
know, on a dock or something. What we did with them
was, they were painted up with dolphin-type colors.
They were supposed to represent a fish.

Q. Go ahead.

A. And it’s hanging probably ten, twelve feet off
on I would say a thousand pound leader. Well, she
just, you know, just casually eats this thing. So
we’re, you know, everybody’s going bananas. And then
she just comes back over and looks at this lure. And I
guess it was dessert. That’s why I got to calling her
Miss Piggy.

And you know, the reel’s singing and we’re
just--oh, you want me to stop. I’m sorry. I got into
my fish story.

Q. Well, no. What happened to Miss Piggy?
 - 17 -

A. We stood there kind of awestruck, you know,
not doing anything?

Q. Was she on your line?

A. Oh, yes, she was on the line.

Q. How did she get off your line?

A. We got in the chair, she’s running, you know,
we’re reeling; we’re backing up, and then she starts to
jump. And it was so amazing to see this fish and I
quit reeling.

Q. Did she snap the lines?

A. Yes, she came down, broke the line, angler
error.

As to the third fish, Mr. Peacock testified that petitioners

would have won $150,000 in 1997 had it only got away. Mr.

Peacock animatedly described the events surrounding this fish as

follows during his direct testimony at trial:

A. * * * we was in Grey Harbour, which is in the
lower part of the Harbour Island, which is in the lower
part of the Bahamas. And we were out, it was either
the third or the fourth day of the tournament. I can’t
remember which one.

But we was sitting on a 683-pound fish that we
knew was going to be a tournament winner. But the
tournament winner is not only predicated on the largest
fish, it’s the total pound of fish. It’s two separate
categories. The winner is based on pounds of fish.

And there was a boat out of Fort Lauderdale that
had caught a fish that morning. And it wasn’t that big
a fish. It was about 300 or so pounds. And so we’re
sitting on this 683-pound fish, that we had caught
right in the middle of the day. And we just absolutely
knew that we not only had the tournament won, we had
the daily won.
 - 18 -

So what happens is, there’s about 20 minutes to
go. And we hear on the radio that this boat is hooked
up–-

Q. Let me stop you, please. When you say,
there’s 20 minutes to go, what significance does that
have to you?

A. Well, you have a starting time and a finishing
time. You can’t put the lines in the water--we’re
already on patrol by tournament headquarters. You
can’t put the lines in the water until they call you
and say, Okay, lines in. And so everybody, at one
time, throughout the tournament area, puts their lines
in the water. By the same token, at the end of the
day, they call the end of the day. And if you show the
tape, you will see what happens when we get to the end
of the day.

* * * * * * *

But it was 20 minutes to go in the fishing day.
We knew we had it won. If somebody caught a big fish,
there was no way that they was going to be able to get
it in time to get the lines out of the water, to get to
the dock. And, all of a sudden, we hear that this
boat, they called in a hook-up. And they said, You
know, we got about a 300-, 350-pound fish. And we
said, Ah, no problem.

Well, this fish takes off running, as we find out
later, when we get to the dock, because ten minutes
later, they call in and they say, We got the fish in
the boat. And we all say, How * * * did they get that
fish in the boat in ten minutes? I mean, that just
don’t happen with a killable fish.

You can back down on a little fish. I mean, you
just run the boat backwards as fast as you got the
backbone to run it backwards with the water pouring in
on you, but you don’t do that with a live fish, because
that fish will just run away from you.

How’d they get the fish in that quick? Well, when
we get back to the dock, we find out. This fish hooks
up, while they’re clearing all the lines, don’t even
start, he takes off running and he’s skipping across
 - 19 -

the water and runs right into the side of a * * *
cruise ship. Bam!

Takes his bill off, knocks himself out, and he’s
just kind of floating on top of the water, flopping.
They backed down on him, just nice and easy, reach over
and get him and put in the boat. $150,000. Boom!

Just that easy, because the fish knocked itself
out. They would have never got him in. We had a
683-pound fish. That’s a * * * fish. But because of
what he had caught that morning and what he caught that
afternoon, their combined weight was more than the
weight of our fish.

They won the daily and the tournament. We came in
second in the tournament, with a trophy fish, 683
pounds. All because this cruise ship just happened, *
* * it just happened to come by as this fish, who is
fearing for his life, is running just as fast as he
can, runs into the side of the boat. * * *

We give petitioners’ uncorroborated testimony little weight

in determining whether PMSI had the requisite profit objective.

Petitioners testified that they had a profit objective as to the

fishing activity. Mr. Peacock, in particular, as a successful

businessperson, showed some appreciation for making a profit. In

determining whether PMSI’s participation in the fishing activity

was permeated with the honest and actual profit objective,

however, we give greater weight to the nine objective factors set

forth above than we do to petitioners’ expressions of subjective

intent. Osteen v. Commissioner, 62 F.3d at 358; Keanini v.

Commissioner, 94 T.C. 41, 46 (1990); Dreicer v. Commissioner, 78

T.C. at 645; sec. 1.183-2(a), Income Tax Regs. We turn to those

factors and discuss them seriatim.
 - 20 -

i. Manner in Which the Activity Is Conducted

The fact that a taxpayer carries on an activity in a

businesslike manner and maintains complete and accurate records

on the activity may indicate that the activity is engaged in for

profit. Sec. 1.183-2(b)(1), Income Tax Regs. A change in

operating procedures, adoption of new techniques, or the

abandonment of unprofitable methods may also indicate a profit

motive. Id.

Petitioners argue that this factor weighs in their favor.

We disagree. PMSI neither carried on the fishing activity in a

businesslike manner nor maintained complete and accurate records

for the activity. PMSI never set forth a statement of corporate

purpose as to the fishing activity in, for example, its articles

of incorporation, by-laws, or board minutes. Nor did PMSI ever

prepare a business plan, budget, balance sheet, income

projection, or other financial statement. We also are unable to

find that petitioners kept a separate set of books and records on

the fishing activity. Petitioners did keep invoices, receipts,

canceled checks, and a ledger on and for the activity.

Petitioners, however, never used those records or the data

reflected therein to evaluate or improve the fishing activity’s

financial performance.7 Burger v. Commissioner, 809 F.2d 355,

7
In this regard, petitioners are unable to state with any
specificity the costs which they incurred in each tournament and
(continued...)
 - 21 -

359 (7th Cir. 1987), affg. T.C. Memo. 1985-523; Connolly v.

Commissioner, T.C. Memo. 1994-218, affd. without published

opinion 58 F.3d 637 (5th Cir. 1995). Nor did petitioners ever

undertake a meaningful effort to make the fishing activity more

profitable. Mr. Peacock is an accomplished and successful

businessperson who for many years has been directly involved with

the requirements of business, including the need to keep complete

and accurate records. As an individual who had the skills

necessary to make his automobile dealerships profitable and

successful, we believe that he was, or should have been,

sufficiently familiar with business practices to allow him to

conduct the fishing activity in a manner evidencing a profit

objective had he had one. Instead, the manner in which he and

Ms. Peacock fished at the tournaments suggests that they were

participating in the tournaments recreationally. See Connolly v.

Commissioner, supra. This factor favors respondent.

ii. Petitioners’ Expertise

A taxpayer’s expertise, research, and study of an activity,

as well as his or her consultation with experts, may be

indicative of a profit intent. Sec. 1.183-2(b)(2), Income Tax

Regs.

7
(...continued)
the amount of money that could be won there.
 - 22 -

Petitioners argue that this factor weighs heavily in their

favor. We disagree. Although petitioners studied tournament

fishing and competitions from the point of view of a contestant,

and were very good fishers at that, they never undertook a basic

investigation of the factors that affected the profitability of

the fishing activity. See Underwood v. Commissioner, T.C. Memo.

1989-625. Petitioners were aware of the large cash prizes which

could be won at the tournaments and believed that they could win

many of those prizes because their skills were superior to those

of other contestants. Petitioners, however, never seriously

studied tournament fishing from a businessperson’s point of view;

e.g., they never researched or solicited advice on the magnitude

of expenses which they were likely to incur in attempting to win

the prizes. In fact, we are unable to find in the record that

petitioners ever performed any meaningful economic study on the

profit potential of tournament fishing.8 See Vallette v.

Commissioner, T.C. Memo. 1996-285. Petitioners’ expertise and

experience in fishing is counterweighed by their lack of

knowledge on the economics of tournament fishing. This factor is

neutral.

8
By contrast, petitioners did solicit advice on the best
way to catch the desired fish and hired a seasoned crew to help
reach that goal. The fact that they solicited such advice and
hired the crew, but never requested advice on the economics of
the fishing activity, reinforces our conclusion that petitioners’
participation in the fishing activity was recreational.
 - 23 -

iii. Time and Effort Spent Conducting the Activity

The fact that a taxpayer devotes much of his or her personal

time to an activity may indicate a profit intent, especially

where the activity does not involve substantial personal or

recreational aspects. Also, a taxpayer’s withdrawal from another

occupation to devote his or her time and effort to an activity

may indicate a profit motive. Burleson v. Commissioner, T.C.

Memo. 1983-570; sec. 1.183-2(b)(3), Income Tax Regs.

Petitioners argue that this factor weighs in their favor.

We disagree. Although petitioners devoted their time to the

activity during the tournaments, they spent only approximately 3

months of the year on that activity. Moreover, not all of that

time was devoted to the fishing activity. The record reveals

that contestants at the tournaments spent much of their time

frolicking and reveling with family and friends, and we are

unable to find in the record credible evidence that would

indicate that such was not the case with petitioners. We also

note that Mr. Peacock’s stated reason for leaving the automobile

industry in 1993 was to spend more time with his wife rather than

to devote his time to another business. This factor is neutral.

iv. Expectation That Assets Will Appreciate in Value

“Profit” encompasses appreciation in the value of assets.

Sec. 1.183-2(b)(4), Income Tax Regs. Therefore, in evaluating a

taxpayer’s intent, we also look to the taxpayer’s expectation
 - 24 -

that the assets used in an activity may appreciate in value. The

potential for asset appreciation is usually associated with land

and other tangible assets.

Petitioners make no argument as to this factor. Nor have

they offered any evidence that indicates that any assets used in

the fishing activity would appreciate in value. This factor

favors respondent.

v. Taxpayer’s Success in Similar or Dissimilar Activities

Although an activity is unprofitable, the fact that a

taxpayer has previously converted similar activities from

unprofitable to profitable enterprises may show a profit intent

with respect thereto. Sec. 1.183-2(b)(5), Income Tax Regs.

Petitioners argue that this factor weighs in their favor.

We disagree. Although Mr. Peacock has been a successful

entrepreneur in the automobile industry, the record does not

reveal that his work in that industry had any bearing on

petitioners’ ability to conduct PMSI’s fishing activity

profitably. Moreover, the record reveals that petitioners

conducted the fishing activity as a means to participate jointly

in a recreational and social pursuit. In fact, PMSI terminated

the activity when Ms. Peacock was no longer able to participate

in it. This factor favors respondent.
 - 25 -

vi. An Activity’s History of Income and/or Losses

A series of losses beyond the startup stage may be

indicative of the absence of a profit motive unless the losses

can be blamed on unforeseen or fortuitous circumstances beyond

the taxpayer’s control. Sec. 1.183-2(b)(6), Income Tax Regs.

Petitioners argue that this factor weighs in their favor.

We disagree. Notwithstanding that their tournament winnings

totaled almost $500,000 in 1994 through 1997, PMSI reported

losses from the fishing activity of $168,042 for 1994, $270,755

for 1995, $307,016 for 1996, and $249,181 for 1997. In total,

PMSI incurred almost $1.5 million of expenses to win

approximately $500,000, producing an approximate loss of $1

million. The record, moreover, contains no credible evidence to

suggest that PMSI ever expected to recoup any of these losses.

The fact that the fishing activity suffered losses year after

year and that petitioners took no meaningful action to reverse

the tide supports a finding that they were indifferent as to

whether the losing trend could be reversed. Ranciato v.

Commissioner, 52 F.3d 23, 25-26 (2d Cir. 1995), vacating T.C.

Memo. 1993-536. Although it is true that petitioners aspired in

the tournaments to win large cash prizes, the mere fact that they

so aspired and were qualified to win those prizes does not mean

that PMSI entered into the fishing activity with the requisite

profit objective. This factor favors respondent.
 - 26 -

vii. Amounts of Occasional Profits

Occasional profits may indicate a profit motive. The

absence of profits, however, is not determinative of a lack of

profit motive. Petitioners need only have an actual and honest

profit objective. Absent actual profits generated from the

activity, an opportunity to earn a substantial ultimate profit in

a highly speculative venture may be sufficient to indicate that

the activity is engaged in for profit. Sec. 1.183-2(b)(7),

Income Tax Regs. “Profit” means economic profit independent of

tax consequences. Antonides v. Commissioner, 91 T.C. 686,

693-694 (1988), affd. 893 F.2d 656 (4th Cir. 1990); Dreicer v.

Commissioner, 78 T.C. at 644-645.

The fishing activity has never earned a profit, and

petitioners have not persuaded us that PMSI had a chance either

to make a profit or to recoup their losses. Whereas petitioners

testified that the nonoccurrence of three misfortunes would have

resulted in PMSI’s reporting a profit for each subject year, we

are unpersuaded that such would have been the case. Among other

things, we are unpersuaded that petitioners would have won the

claimed amounts of money had the misfortunes not occurred. The

record lacks any objective evidence to establish the specific

prizes which petitioners would have won had those misfortunes not

occurred, or the net amount of those prizes which would have
 - 27 -

ultimately been realized by PMSI.9 This factor favors

respondent.

viii. Taxpayer’s Financial Status

Substantial income from sources other than the activity

(particularly if the losses from the activity generate

substantial tax benefits) may indicate that the activity is not

engaged in for profit. This is especially true where there are

personal or recreational elements involved. Sec. 1.183-2(b)(9),

Income Tax Regs.

Petitioners argue that this factor weighs in their favor.

We disagree. Petitioners had substantial income and cash

receipts from activities other than PMSI, and their net worth

exceeded $1 million. Petitioners’ financial status allowed them

to finance the fishing activity and to use the activity’s losses

to reduce significantly their income tax liability. To be sure,

but for those losses, PMSI would have reported (and Ms. Peacock

would have been required to recognize) large amounts of ordinary

income in each subject year. By participating in the fishing

activity, however, petitioners aim to reduce their income while,

at the same time, participating jointly in an expensive activity

9
We find as a fact that the Billfish Series tournaments
awarded individual contestants prizes generally ranging from
$150,000 to $2 million. We are unable to find, however, the
amount of the specific prizes which were paid by the tournaments
in which petitioners participated. Nor are we able to find the
specific prizes payable by the tournaments in which the
misfortunes occurred.
 - 28 -

that they both enjoy with a subsidy from the fisc. This factor

favors respondent.

ix. Elements of Personal Pleasure

Although the mere fact that a taxpayer derives personal

pleasure from a particular activity does not mean that he or she

lacks a profit intent with respect thereto, the presence of

personal motives may indicate that the activity is not engaged in

for profit. This is especially true where there are recreational

elements involved. Id. “[T]he fact that the taxpayer derives

personal pleasure from engaging in the activity is not sufficient

to cause the activity to be classified as not engaged in for

profit if the activity is in fact engaged in for profit as

evidenced by other factors”. Id.

Petitioners argue that this factor weighs in their favor.

We disagree. Petitioners began tournament fishing for pleasure

sometime in the late 1980s and focused their participation in

tournaments on ones held in exotic, resortlike locations.

Although a taxpayer’s participation in a tournament fishing

activity may sometimes qualify as an activity engaged in for

profit, e.g., Busbee v. Commissioner, T.C. Memo. 2000-182, such

is not the case here. Petitioners’ pursuit of competitive

excellence was not motivated primarily by the pursuit of profit.

On the basis of our evaluation of the record as a whole,

including our viewing of an approximately 1-hour video on the
 - 29 -

1994 World Billfish Series, a segment of which was devoted to

petitioners and their team, we conclude that petitioners

participated in the tournaments for pleasure and recreation

rather than the pursuit of business. This factor favors

respondent.

x. Conclusion

On the basis of our careful review of the record and our

evaluation of the nine aforementioned factors, we conclude that

PMSI did not engage in the fishing activity with an actual and

honest objective of making a profit. We sustain respondent’s

determination.

2. Bad Debt

Respondent determined that petitioners were not entitled to

the claimed bad debt deduction. Petitioners assert that the

dealership could deduct the $50,000 loan in 1995 as a bad debt

because the loan was never repaid. Petitioners assert that the

condominium when Mr. Peacock received it was worth less than the

balance on the loan and that Mr. Peacock reported on his personal

income tax return the proceeds which he received when he later

sold the condominium.

Section 166(a)(1) allows a deduction for any debt that

becomes worthless within the taxable year. A nonbusiness bad

debt is deductible only in the year it becomes totally worthless.

A deduction is not allowed for partial worthlessness. Black v.
 - 30 -

Commissioner, 52 T.C. 147, 151 (1969). To qualify for a bad debt

deduction, a taxpayer must show that “some event occurred during

the year in which the deduction is sought that rendered the debt

uncollectible.” Greenberg v. Commissioner, T.C. Memo. 1992-292.

The law and the facts do not support petitioners’ claim to

this bad debt deduction. Among other things, petitioners have

not proven: (1) That the amount of the loan was uncollectible

from the acquaintance or (2) that the equity in the condominium

which Mr. Peacock received did not exceed the loan balance. We

sustain respondent’s denial of this deduction.

3. Accuracy-Related Penalties and Addition to Tax

Respondent determined that petitioners are liable for

accuracy-related penalties under section 6662(a) for, among other

things, negligence and intentional disregard of rules or

regulations. Petitioners argue that they reasonably believed

that the fishing activity was a business and that they reasonably

relied upon their tax return as prepared by their accountant.

Section 6662(a) and (b)(1) imposes a 20-percent

accuracy-related penalty on the portion of an underpayment that

is due to negligence or intentional disregard of rules or

regulations. Negligence includes a failure to attempt reasonably

to comply with the Code. Sec. 6662(c). Disregard includes a

careless, reckless, or intentional disregard. Id. An

underpayment is not attributable to negligence or disregard to
 - 31 -

the extent that the taxpayer shows that the underpayment is due

to the taxpayer’s having reasonable cause and acting in good

faith. Secs. 1.6662-3(a), 1.6664-4(a), Income Tax Regs.

Reasonable cause requires that the taxpayer have exercised

ordinary business care and prudence as to the disputed item.

United States v. Boyle, 469 U.S. 241 (1985); see also Neonatology

Associates, P.A. v. Commissioner, 115 T.C. 43, 98 (2000). The

good faith reliance on the advice of an independent, competent

professional as to the tax treatment of an item may meet this

requirement. United States v. Boyle, supra; sec. 1.6664-4(b),

Income Tax Regs. Whether a taxpayer relies on advice and whether

such reliance is reasonable hinge on the facts and circumstances

of the case and the law applicable thereto. Sec. 1.6664-

4(c)(1)(i), Income Tax Regs. The taxpayer must prove that: (1)

The adviser was a competent professional who had sufficient

expertise to justify reliance, (2) the taxpayer provided

necessary and accurate information to the adviser, and (3) the

taxpayer actually relied in good faith on the adviser’s judgment.

Ellwest Stereo Theatres, Inc. v. Commissioner, T.C. Memo.

1995-610; see also Rule 142(a)(1).

We are unable to conclude that petitioners have met their

burden of proof as to this issue. First, we are unable to find

that petitioners reasonably believed that the fishing activity

was actually a business. Mr. Peacock, a successful
 - 32 -

businessperson, knew, or at least should have known, that the

manner in which he conducted the fishing activity was

dramatically different from the manner in which he conducted his

automobile ventures. Nor do we believe that petitioners can

escape the reach of the accuracy-related penalties by asserting

baldly that they relied reasonably upon their accountant.

Petitioners never called their accountant to testify as to the

preparation of any of the returns. Petitioners also never

attempted to meet any of the requirements of the Ellwest test.

We sustain respondent’s determination of the accuracy-related

penalties under section 6662(a).

As to respondent’s determination under section 6651(a),

petitioners are liable for that addition to tax unless they prove

that their failure to file the 1997 Federal income tax return

timely was: (1) Due to reasonable cause and (2) not due to

willful neglect. Sec. 6651(a)(1); Rule 142(a)(1); United States

v. Boyle, supra at 245. A failure to file timely a Federal

income tax return is due to reasonable cause if the taxpayer

exercised ordinary business care and prudence and, nevertheless,

was unable to file his or her return within the prescribed time.

Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect

means a conscious, intentional failure or reckless indifference.

United States v. Boyle, supra at 245.
 - 33 -

Once again, petitioners have presented no persuasive

evidence on this issue, and the record does not otherwise

establish that their failure to file timely returns was due to

reasonable cause and not due to willful neglect. In this regard,

we find unpersuasive petitioners’ claim that they should be

relieved of the addition to tax because their new accountant for

1997 was unable to timely receive information from the former

accountant as to the basis of certain stock that they sold. We

see no reason why the return was not filed timely. We sustain

respondent’s determination under section 6651(a).

All arguments made by petitioners but not discussed herein

have been considered and have been found to be without merit.

Accordingly,

Decision will be entered

under Rule 155.