MORRISSEY v. COMMISSIONER

T.C. Summary Opinion 2005-86

UNITED STATES TAX COURT

JOHN E. AND VICKI D. MORRISSEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5073-04S. Filed July 13, 2005.

John E. and Vicki D. Morrissey, pro sese.

Douglas S. Polsky, for respondent.

KROUPA, Judge: This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

effect at the time the petition was filed. The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.

1
All section references are to the Internal Revenue Code in
effect for the years at issue, unless otherwise indicated.
 -2-

Respondent determined deficiencies of $6,225 for 1999,

$6,687 for 2000, and $5,866 for 2001 in petitioners’ Federal

income taxes. The issue to be decided is whether petitioner John

E. Morrissey (petitioner) operated his automobile drag racing

activity for profit during 1999, 2000, and 2001 (the years at

issue). We hold that he did.

Background

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference. Petitioners resided in Wetmore,

Kansas, at the time they filed the petition in this case.

Petitioner has been interested in cars throughout his life

and has been involved from time to time in some type of

automobile racing since 1969.

Petitioner graduated from Emporia State University in 1970

with a degree in business administration. His studies included

courses in marketing and mathematics. During the years at issue,

petitioner was the senior vice president and chief financial

officer of Kansas State Bank of Holton, Kansas (the bank), a

full-time position.2 He earned a salary of approximately $58,000

during each of the years at issue. Petitioner also served on the

board of directors of the bank. Petitioner oversaw the bank’s

financial planning, budgeting, and statistical analysis

2
Petitioner Vicki D. Morrissey was also employed full time
at the Wetmore, Kansas, branch of the bank during the years at
issue.
 -3-

functions. Petitioner also served on the loan committee and

designed the review mechanism by which the members of the bank’s

loan committee assessed loan applicants.

Petitioner believed that his business degree and technical

skills could be an advantage to him in drag racing. Petitioner

began competing about 1974, beginning with a relatively simple

car and then moving up. Petitioner applied his extensive

knowledge of mechanics, mathematics, and physics to make

important technical modifications to his car. For example,

petitioner installed electronic equipment intended to fine-tune

the car’s reaction time. Petitioner is a skilled mechanic and

was able to perform almost all of the work on his car himself.

Petitioner also kept detailed computer records of his car’s

performance during each race, including weather conditions, heat

times, and records of opponents’ performances. Petitioner

thought these records would help him identify the ideal

attributes of his car to enable him to win races. Petitioner

also often spoke to other competitors and assessed their

strategies. Petitioner also examined less successful competitors

in an attempt to determine why those competitors were not

successful. Petitioner began winning rounds of competition in

1991 and races in 1993.

Petitioner carefully organized his racing schedule to

compete in races where he had the greatest chance of success.

During the years at issue, petitioner raced mainly at

unsanctioned or “outlaw” racetracks, which had lower entry fees
 -4-

and typically more prize money. Although the National Hot Rod

Association (NHRA) licensed petitioner in the Super Comp

category, petitioner viewed NHRA-sanctioned events merely as

opportunities to gain exposure for his sponsor. The entry fees

at NHRA-sanctioned events were higher, the prizes were not as

large, and there were many more competitors.

Petitioner prepared detailed budget forecasts and expense

estimates for his racing activity for the years at issue, which

he modified throughout each year as circumstances changed.

Petitioner also kept a separate checking account for his racing

activity.

Petitioner entered eight drag races in 1999, eight drag

races in 2000, and six drag races in 2001. Petitioner’s son also

raced petitioner’s car at some races during the years at issue.

Although the bank employed petitioner full time during the years

at issue, petitioner was able to take the time to attend to the

necessary aspects of his racing, such as repairing his car,

contacting sponsors, and participating in races. The amount of

time these activities took varied according to, for example, the

amount of repairs needed after a race. Petitioner’s wife and son

also assisted petitioner with these activities on occasion.

Petitioner believed that he owned a quality car and used

quality parts in its maintenance. Petitioner hoped that his car

would hold its value as much as possible but did not expect that
 -5-

his car would appreciate in value. Petitioner instead focused on

keeping his car in as good a condition as possible so that it

would retain most of its value.

Petitioner knew that a substantial sponsor was essential to

be profitable in drag racing. While some sponsors pay small sums

of money to racers to display the sponsors’ logos on their cars,

petitioner was instead interested in cultivating a mutually

beneficial relationship with a sponsor on a larger scale.

Petitioner successfully secured sponsorship in 1998 by the Sac

and Fox Casino (Sac and Fox) of $15,000 for the year. In

connection with the sponsorship, petitioner purchased a new body

for his car and painted Sac and Fox’s logo on the car.

Petitioner performed various duties for Sac and Fox,

including acting as a representative of Sac and Fox at races, car

shows, and various other public appearances. Petitioner met

patrons and handed out coupons, flyers, and key chains for Sac

and Fox at several public appearances. Petitioner also

coordinated with the Cameron, Missouri, reserve track to sponsor

a race, adding $500 to the purse. Petitioner promoted this race

as the Sac and Fox Casino Quick Eight Race. At the end of the

year, petitioner provided Sac and Fox a detailed race report

listing each of the events petitioner attended as a

representative of Sac and Fox, with notations about each event.

This report indicates petitioner undertook some activity on

behalf of Sac and Fox on 31 days during 1998. Despite

petitioner’s efforts on behalf of Sac and Fox in 1998, Sac and
 -6-

Fox did not renew petitioner’s sponsorship for 1999 nor any later

year. Petitioner expected this sponsorship relationship to

continue and did not foresee the termination of Sac and Fox’s

marketing director, who was his primary contact at Sac and Fox.

Petitioner tried to get another sponsorship. Petitioner

contacted Sac and Fox and two other local casinos seeking

sponsorship but was ultimately unsuccessful. Petitioner

continued to race in 1999 despite lacking a sponsor.

Petitioner determined in 2000 that he could not profitably

continue the drag racing operations without sponsorship and

therefore limited his racing activity and offered his car for

sale, intending to liquidate. Much of petitioner’s racing

activity during 2000 and 2001 was intended to market his car to

sell it. Petitioner also offered his car for sale in the

National Dragster Magazine in 2001.

While there were some elements of personal enjoyment in the

drag racing activity, petitioner also indicated there were

aspects to it that he did not enjoy, including the significant

heat on the track and the multiple layers of protective clothing

required.

Petitioner’s drag racing activity produced a loss for each

year from 1991 through 1997. In 1998, petitioner earned a profit

of $587 on gross receipts of $1,400 plus the $15,000 sponsorship.

Petitioner forecasted a profit of $13,040 for 1999 assuming the

Sac and Fox sponsorship would continue and assuming $5,000 of

race winnings. Petitioner had gross receipts of $550 and a net
 -7-

loss of $20,348 in 1999, gross receipts of $225 and a net loss of

$22,197 in 2000, and gross receipts of $25 and a net loss of

$18,826 in 2001.

Petitioners deducted expenses relating to the drag racing

activity on their tax returns for the years at issue. Respondent

disallowed the deduction of petitioner’s losses in a notice of

deficiency dated February 5, 2004, determining that petitioner

did not engage in the drag racing activity for profit under

section 183. Petitioners timely filed a petition with this Court

seeking redetermination of the disallowed deductions and

asserting that petitioner entered the drag racing activity with

the intent of making a profit, and that, when he was not able to

make a profit as anticipated, he liquidated the activity.

Discussion

A. Whether Petitioner Operated the Drag Racing Activity for
Profit During the Years at Issue

The sole issue for decision is whether petitioner operated

the drag racing activity for profit during the years at issue

within the meaning of section 183. Section 183(a) provides

generally that if an individual engages in an activity and “if

such activity is not engaged in for profit, no deduction

attributable to such activity shall be allowed under this chapter

except as provided in this section.” Deductions that would be

allowable without regard to whether the activity is engaged in

for profit shall be allowed under section 183(b)(1), and

deductions that would be allowable only if the activity is
 -8-

engaged in for profit shall be allowed under section 183(b)(2),

but only to the extent that the gross income from the activity

exceeds the deductions allowable under section 183(b)(1).

Petitioner has the burden of proving that his actual and

honest objective in engaging in the activity was to make a

profit. See Evans v. Commissioner, 908 F.2d 369, 373 (8th Cir.

1990), revg. T.C. Memo. 1988-468; Dreicer v. Commissioner, 78

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

1205 (D.C. Cir. 1983).

We begin with the burden of proof. We ruled at trial that

the burden of proof did not shift to respondent under section

74913 because petitioner failed to provide respondent the general

ledgers he maintained during the years at issue as well as his

tax returns for the years prior and subsequent to the years at

issue. Therefore, the burden remains with petitioner.

We now focus on whether petitioner had an actual and honest

profit objective in drag racing. Whether a taxpayer has an

actual and honest profit objective is determined on the basis of

all surrounding facts and circumstances. Dreicer v.

Commissioner, supra at 645; sec. 1.183-2(b), Income Tax Regs.

While a taxpayer’s expectation of profit need not be reasonable,

there must be a good faith objective of making a profit. Allen

v. Commissioner, 72 T.C. 28, 33 (1979); sec. 1.183-2(a), Income

3
Sec. 7491 applies to examinations commencing after July 22,
1998, and therefore applies here. See Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3001,
112 Stat. 726.
 -9-

Tax Regs. We give greater weight to objective facts than to a

taxpayer’s statements of intent. Dreicer v. Commissioner, supra

at 645; sec. 1.183-2(a), Income Tax Regs.

We structure our analysis around nine nonexclusive factors.

Sec. 1.183-2(b), Income Tax Regs. The nine factors are: (1) The

manner in which the taxpayer carried on the activity; (2) the

expertise of the taxpayer or his or her advisers; (3) the time

and effort expended by the taxpayer in 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 loss 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) whether elements of

personal pleasure or recreation are involved. Id.

No factor or set of factors is controlling, nor is the

existence of a majority of factors favoring or disfavoring a

profit objective necessarily controlling. Hendricks v.

Commissioner, 32 F.3d 94, 98 (4th Cir. 1994), affg. T.C. Memo.

1993-396; Brannen v. Commissioner, 722 F.2d 695, 704 (11th Cir.
1984), affg. 78 T.C. 471 (1982); sec. 1.183-2(b), Income Tax

Regs. The individual facts and circumstances of each case are

the primary test. Keanini v. Commissioner, 94 T.C. 41, 46

(1990); Allen v. Commissioner, supra at 34; sec. 1.183-2(b),

Income Tax Regs.
 -10-

B. Application of the Factors

1. The Manner in Which the Taxpayer Carried On the
Activity

We begin by examining the manner in which petitioner carried

on the drag racing activity. The fact that a taxpayer carries on

the activity in a businesslike manner may indicate a profit

objective. Sec. 1.183-2(b)(1), Income Tax Regs. In determining

whether a taxpayer conducted an activity in a businesslike

manner, we consider whether the taxpayer maintained complete and

accurate books and records, whether the activity was conducted in

a manner substantially similar to those of comparable businesses

that are profitable, and whether changes were attempted in an

effort to earn a profit. Engdahl v. Commissioner, 72 T.C. 659,

666-667 (1979); sec. 1.183-2(b)(1), Income Tax Regs.

Petitioner conducted the drag racing activity in a

businesslike manner during the years at issue. Petitioner kept a

separate checking account for the drag racing activity, out of

which he paid his expenses and into which he deposited his

earnings. Petitioner also prepared budget forecasts and expense

estimates for each of the years at issue and modified these

projections throughout the year as circumstances changed.

Petitioner had a specific, concrete business plan to profit

from drag racing, the details of which he explained to the Court

in his testimony. Cf. Spear v. Commissioner, T.C. Memo. 1994-354
(taxpayer alluded in testimony to a plan to realize profit but

did not provide details). Petitioner’s business plan called for

him to obtain substantial sponsorships, to enter NHRA-sanctioned
 -11-

races as a means of gaining exposure for his sponsor, and

otherwise to enter unsanctioned races where he had the best

chance of success and the opportunity to win larger prizes.

Petitioner was successful in making a profit as predicted in the

business plan during 1998. Petitioner was not able to earn a

profit as predicted in the business plan, however, during the

years at issue, largely because he had lost his sponsorship and

was unsuccessful in persuading other local businesses to sponsor

him.

When petitioner realized that he was not able to earn a

profit on the drag racing activity as predicted in his business

plan, he decided to liquidate his business and sell his race car.

See Engdahl v. Commissioner, supra at 667; Canale v.

Commissioner, T.C. Memo. 1989-619 (taxpayer’s decision to leave

racing because of its unprofitability supported claim of entering

racing with a profit objective). During the years at issue,

petitioner decreased the number of races he entered and testified

he entered them mainly to market his car. The separate checking

account, specific business plan, budget and expense forecasts,

and decision to modify the activity when it became unprofitable

support petitioner’s contention that he carried on the drag

racing activity in a businesslike manner during the years at

issue.

2. The Expertise of the Taxpayers or Their Advisers
We next consider petitioner’s expertise (or the expertise of

his advisers) in the drag racing activity. Preparing for the
 -12-

activity by extensive study of its accepted business, economic

and scientific practices and consulting with experts in these

matters may indicate that a taxpayer has a profit objective when

the taxpayer follows that advice. Sec. 1.183-2(b)(2), Income Tax

Regs.

There is no question that petitioner has significant

expertise in drag racing. Petitioner has been involved in drag

racing since 1969 and began winning rounds of competition in

1991. Petitioner is a skilled mechanic and was able to perform

most of the required work on his car himself. Petitioner studied

the performances of his car and his opponents’ cars (and kept

records of these performances) to determine the ideal

characteristics for his car. Petitioner also often consulted

with competitors to learn about their tactics and strategies.

Petitioner also has considerable business knowledge. He was

the senior vice president and chief financial officer of the bank

during the years at issue. While pursuing his degree in business

administration, petitioner took courses in marketing and

mathematics. These skills proved valuable to petitioner in

creating business plans and budget forecasts and doing the

necessary marketing to obtain a sponsor.

Petitioner has demonstrated that he has significant

knowledge and expertise both in drag racing itself and in the

business world. Petitioner has also shown that he consulted

others to further his knowledge and improve his prospects of

success.
 -13-

3. The Time and Effort Expended by the Taxpayer in
Carrying On the Activity

We next consider the time and effort petitioner expended in

carrying on the drag racing activity. A taxpayer’s devotion of

much time and effort to conducting an activity, particularly if

the activity does not have substantial personal or recreational

aspects, may indicate an intention to derive a profit. Sec.

1.183-2(b)(3), Income Tax Regs. The fact that a taxpayer devotes

a limited amount of time to an activity does not necessarily

indicate a lack of profit motive where the taxpayer employs

competent and qualified persons to carry on the activity. Id.

Petitioner expended an adequate amount of time on the drag

racing activity during the years at issue. Petitioner competed

in eight races in 1999 and 2000 and six races in 2001. When

petitioner was unable to race, petitioner’s son raced

petitioner’s car. Petitioner testified that he limited the

number of races in which he competed because he did not have

sponsorship and was trying to minimize costs. Petitioner’s

report to Sac and Fox for 1998, however, indicates he undertook

some activity on behalf of Sac and Fox on 31 days during that

year. See Canale v. Commissioner, supra (taxpayer decreased the
number of races entered after the taxpayer decided to leave

racing but had devoted substantial time to racing in previous

years). Petitioner introduced no evidence regarding the number

of hours per week he spent on drag racing but indicated it

varied, depending on, for example, the level of repairs needed

after a race. Petitioner’s schedule, although full-time, was
 -14-

flexible enough to permit him to devote time to his racing as

needed. Petitioner’s wife and son also assisted petitioner in

doing the required work.

4. The Expectation That the Assets Used in the Activity
May Appreciate in Value

We next examine the expectation that the assets used in

petitioner’s drag racing activity may appreciate in value. A

taxpayer may intend, despite the lack of profit from current

operations, that an overall profit will result when appreciation

in the value of assets used in the activity is realized.

Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), affd. 379

F.2d 252 (2d Cir. 1967); sec. 1.183-2(b)(4), Income Tax Regs.

Although petitioner believed he had a quality car and used

quality parts in his car, he did not expect the assets he used in

the drag racing activity to appreciate in value. Petitioner

concentrated on maintaining his car in as good a condition as

possible to minimize repair and upgrade costs, not because he

thought that doing so would cause the value of the car to

increase.

5. The Success of the Taxpayer in Carrying On Other
Similar or Dissimilar Activities

We next examine petitioner’s success in carrying on other

similar or dissimilar activities. If a taxpayer has previously

engaged in similar activities and made them profitable, this

success may show that the taxpayer has a profit objective, even

though the current activity is presently unprofitable. Sec.

1.183-2(b)(5), Income Tax Regs. A taxpayer’s success in other,
 -15-

unrelated activities also may indicate a profit objective.

Daugherty v. Commissioner, T.C. Memo. 1983-188. A taxpayer who

was able to start a business and turn it into a relatively large

and profitable enterprise through the taxpayer’s diligence,

initiative, foresight, and other qualities that generally lead to

success in other business activities has shown evidence of a

profit objective. Id.

Petitioner is an experienced businessman. During the years

at issue, petitioner was the senior vice president and chief

financial officer of the bank. Petitioner’s activities in his

position included serving on the loan committee, which required

petitioner to assess the needs and attributes of businesses

applying for loans and to oversee the bank’s financial planning,

budgeting, and statistical analysis functions. Petitioner also

served on the board of directors of the bank, helping to make

important business decisions and oversee the bank’s direction.

Petitioner’s success in the banking field indicates that he has

considerable business skills. See id.

6. The Taxpayer’s History of Income or Loss With Respect
to the Activity
We next examine petitioner’s history of income or loss with

respect to the activity. A history of substantial losses may

indicate that the taxpayer did not conduct the activity for

profit. Golanty v. Commissioner, 72 T.C. 411, 427 (1979), affd.

without published opinion 647 F.2d 170 (9th Cir. 1981); sec.

1.183-2(b)(6), Income Tax Regs. Losses during the initial or

startup stage of an activity do not necessarily indicate,
 -16-

however, that the taxpayer did not conduct the activity for

profit, but losses that continue to be sustained beyond the

period that customarily is necessary to bring the operation to

profitable status may indicate the taxpayer did not engage in the

activity for profit. Engdahl v. Commissioner, 72 T.C. at 668;

sec. 1.183-2(b)(6), Income Tax Regs. Losses due to unforeseen

circumstances beyond the taxpayer’s control do not indicate that

the taxpayer did not engage in the activity for profit. Sec.

1.183-2(b)(6), Income Tax Regs. Abandoning an activity after

indications that the activity will be unprofitable signifies that

the taxpayer engaged in the activity for profit. Canale v.

Commissioner, T.C. Memo. 1989-619.

Petitioner sustained losses from the drag racing activity

each year from 1991 to 1997 while he was beginning and developing

the drag racing activity. During 1998, petitioner successfully

attracted a sponsor and earned a profit, albeit small.

Petitioner testified that during 1998 he also incurred some one-

time expenses related to the sponsorship, such as painting the

sponsor’s logo on his car. Petitioner sustained further losses

during the years at issue, but these losses were due first to the

unforeseen event of his contact at Sac and Fox being terminated

that led to his losing his sponsorship and next to the winding up

and liquidation of his business. Petitioner attempted to

minimize his losses during the years at issue by cutting costs

and entering fewer races.
 -17-

7. The Amount of Occasional Profits, If Any, Which Are
Earned

We next consider the amounts of occasional profits, if any,

petitioner earned. Occasional profits the taxpayer earned from

the activity, in relation to the amount of losses incurred, the

amount of the taxpayer’s investment, and the value of the assets

used in the activity provide useful criteria in determining the

taxpayer’s intent. Sec. 1.183-2(b)(7), Income Tax Regs. A

practical possibility that a taxpayer could earn enough money in

a year to exceed expenses also can indicate a profit objective.

Bolt v. Commissioner, 50 T.C. 1007, 1014 (1968).

Petitioner obtained a substantial sponsorship in 1998 and

expected the sponsorship to continue during the years at issue.

Petitioner incurred one-time costs related to the sponsorship in

1998, such as painting the sponsor’s logo on his car, but did

make a small profit during that year.

Respondent contends that petitioner would have had a net

loss even with a $15,000 sponsorship during the years at issue.

We do not give respondent’s hypothetical situation great weight.

Petitioner organized his affairs during the years at issue around

the reality that he did not have a sponsor. If petitioner had

had a sponsor during the years at issue, his income and expenses

might have been considerably different. Petitioner might have

competed in more races (incurring more entry fees but also

creating more opportunities to win prize money) to gain more

exposure for his sponsor. In fact, petitioner’s 1999 budget

projection with a $15,000 sponsorship and $5,000 race winnings
 -18-

anticipated a profit of $13,040 for 1999. Petitioner also

decided to liquidate in 2000 and therefore minimized costs and

entered fewer races. Petitioner has shown that he could earn

enough money in a year to cover his expenses; he accomplished

that in 1998.

8. The Financial Status of the Taxpayer

We next examine petitioner’s financial status. If a

taxpayer does not have substantial income or capital from sources

other than the activity in question, it may indicate that the

taxpayer engages in the activity for profit. Sec. 1.183-2(b)(8),

Income Tax Regs. Conversely, substantial income from sources

other than the activity, especially if the losses generate large

tax benefits, may indicate that the taxpayer is not conducting

the activity for profit. Id. Those with substantial income from

other sources have a much greater tax incentive to incur large

expenditures in a hobby type of business. Jackson v.

Commissioner, 59 T.C. 312, 317 (1972).

During the years at issue, petitioners’ financial status was

stable. Petitioner earned a good salary from the bank but not in

six figures. Both petitioners used some of their income from

their full-time jobs at the bank to help support the drag racing

activity during the startup phase. While petitioners’ financial

status was stable, their income was not so substantial that it

would indicate a great tax incentive to incur large losses from

the drag racing activity.
 -19-

9. Whether Elements of Personal Pleasure or Recreation Are
Involved

We next examine whether elements of personal pleasure or

recreation were involved in the activity. The presence of

recreational or pleasurable motives in conducting an activity may

indicate that the taxpayer is not conducting the activity for

profit. Sec. 1.183-2(b)(9), Income Tax Regs. The 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, however, if the activity is, in fact,

conducted for profit as shown by other factors. Jackson v.

Commissioner, supra; sec. 1.183-2(b)(9), Income Tax Regs.

Petitioner has been interested in cars throughout his life

and obviously enjoys drag racing. Petitioner also testified,

however, that there were aspects of the activity that he did not

enjoy, including the heat on the track and the multiple layers of

protective clothing he was required to wear. Petitioner further

emphasized that, when he was unable to produce a profit from the

activity, he stopped the activity. He testified that he did not

enjoy it enough to continue without the possibility of financial

gain. Although petitioner may have derived some pleasure from

the drag racing activity, this factor does not outweigh the other

factors indicating that petitioner engaged in the drag racing

activity for profit.

10. Conclusion
Considering all of the facts and circumstances of this case,

we find that petitioner has proved that he engaged in the drag
 -20-

racing activity with the actual and honest intent to earn a

profit. Accordingly, we do not sustain respondent’s

determination in the statutory notice of deficiency.

To reflect the foregoing,

Decision will be entered

for petitioners.