T.C. Summary Opinion 2006-120
UNITED STATES TAX COURT
THOMAS W. AND PAMELA A. HILL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7307-05S. Filed July 31, 2006.
Thomas W. and Pamela A. Hill, pro se.
Alisha M. Harper, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect when the petition was filed.1
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
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Respondent determined a deficiency in petitioners’ Federal
income tax of $3,108 for taxable year 2001. The sole issue for
decision is whether the tournament bass fishing activity of
Thomas W. Hill (petitioner) was an activity not engaged in for
profit within the meaning of section 183.2
Some of the facts were stipulated and are so found. The
stipulation of facts and the accompanying exhibits are
incorporated herein by reference. At the time the petition was
filed, petitioners’ legal residence was Lexington, Kentucky.
Petitioner began bass fishing for recreation when he was a
child. In 1977, petitioner was appointed general manager of
School Supply, Inc., a wholesale distributor and retailer of
school and teaching supplies. He terminated that employment in
1978 and incorporated Fayette School Service, Inc. (Fayette), a
wholesale school supply company that he operated through 1987.
About the time petitioner incorporated Fayette, he began
participating in competitive bass fishing. His involvement in
that activity continued until 1985, when he and a partner started
127 Sportsman’s Supply, Inc. (Sportsman’s Supply), a retailer of
sporting goods and fishing tackle. After sustaining losses for 2
2
Generally, the burden of proof is on the taxpayer. Rule
142(a)(1). Under sec. 7491(a), the burden of proof shifts to the
Commissioner if the taxpayer introduces credible evidence with
respect to any factual issue relevant to ascertaining the
taxpayer’s liability. The facts of this case do not, in the
Court’s view, shift the burden of proof to respondent.
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years, that business was terminated in 1987. That same year,
petitioner changed careers and began working for Grogan’s
Healthcare Supply, Inc. (Grogan’s), a medical products
distribution company.
Petitioner remained with Grogan’s when he resumed tournament
bass fishing in 1992. He qualified for the American Scholarship
Championship that year. Thereafter, petitioner, while continuing
his employment with Grogan’s, participated in bass fishing
tournaments on weekends through the year in issue. He placed in
several tournaments, qualified for the Red Man All American in
1997, and received some prize money for his efforts. Petitioner
also started a Web site (thebassschool.com) as a means of
generating income by offering personal guidance to fishermen;
however, this project was abandoned when the site failed to
receive any hits.
After considering the potential payout associated with
winning a major bass fishing tournament, petitioner decided,
after consulting with his accountant, that he had devoted
sufficient time, effort, and attention in traveling to and
participating in competitive bass fishing that he was engaged in
a trade or business activity. Beginning in 1997 and continuing
through 2001, the year at issue, petitioner included a Schedule
C, Profit or Loss From Business, with his Federal income tax
return for each year, reporting the income, expenses, and profit
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or loss from his tournament bass fishing activity. His reported
receipts, expenses, and net profit or loss on Schedule C of his
income tax returns for his tournament bass fishing activity from
1997 through 2001 were as follows:
Gross Receipts Expenses Profit or Loss
1997 $1,470 $ 7,729 ($ 6,259)
1998 779 9,571 (8,792)
1999 871 7,550 (6,679)
2000 1,117 8,134 (7,017)
2001 892 11,303 (10,411)
Petitioner spends 60 to 70 days a year fishing, occasionally
taking time from his employment with Grogan’s to compete in one
of the 10 to 12 fishing tournaments in which he participates
annually. In an attempt to limit participation to those
tournaments with the biggest prize payouts, petitioner’s efforts
focus on competing in tournaments operated by the Bass Angler’s
Sportsman’s Society (B.A.S.S.) or FLW Outdoors, Inc. (FLW
Outdoors).3 Most tournaments petitioner attends are in the tri-
State area of Ohio, Kentucky, and Tennessee, thus generally
requiring less than 200 miles of travel each way for these annual
tournaments. Aside from the time spent fishing, petitioner
3
With a membership base of more than 500,000 people,
B.A.S.S., a wholly owned subsidiary of ESPN, is the world’s
largest sports fishing organization, sanctioning more than 20,000
tournaments worldwide. FLW Outdoors is the world’s leading
marketer of competitive fishing, and it administers eight
national tournament circuits, including the Wal-Mart FLW Tour.
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devotes a substantial portion of his spare time to activities
related to tournament bass fishing, such as upkeep of his boat
and tackle; studying bass fishing from available books,
magazines, videos, and television shows; physical conditioning;
and maintaining books and records.
During the year at issue, petitioner purchased a new fishing
boat for approximately $28,000. Although petitioner already
owned a fishing boat, the new boat is better equipped for
tournament fishing and handling the various waters a bass
fisherman encounters. Despite receiving some prize money from
his fishing activity, petitioner’s expenses for each taxable year
from 1997 through 2001 have exceeded his gross receipts,
resulting in an unbroken series of losses. Prior to 2003,
petitioner did not maintain a separate bank account for his
fishing activity, although he did maintain books and records to
substantiate his income and expenses. Petitioner has never had a
sponsor or sponsors for his activity, and he has funded the bass
activity solely with the earnings from his employment with
Grogan’s. At trial, petitioner could not estimate when his
tournament bass fishing would realize a profit.
In addition to carrying on the bass fishing activity and
their full-time careers, petitioners own three rental properties
and own an interest in Medical Multimedia Group, a partnership.
Those properties realized net losses.
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In his position with Grogan’s, petitioner typically works 40
to 45 hours per week, Monday through Friday, as director of sales
operations. He reported gross income of $59,696.08 on his 2001
joint Federal income tax return from this employment. Pamela A.
Hill was employed by the Fayette County Clerk’s Office in 2001,
and she had a salary of $31,060.59 as deputy county clerk. On
Schedule C of petitioners’ income tax return for 2001, they
reported gross receipts of $892, expenses of $11,303, and a net
loss of $10,411 from the tournament bass fishing activity. In
the notice of deficiency, respondent determined that the bass
fishing activity was not an activity engaged in for profit within
the meaning of section 183. The $892 reported as gross receipts
from the fishing activity was reclassified as “Other Income”, and
the entirety of the claimed Schedule C expenses of $11,303 was
disallowed.4 Thus, the net adjustment was an increase in
petitioners’ taxable income of $11,303.
The issue for decision is whether petitioner’s bass fishing
activity was an activity not engaged in for profit under section
183(a). Section 183(a) generally disallows any deductions
4
According to the notice of deficiency:
The expenses incurred in connection with fishing are
allowable in the amount of $892.00 in 2001 as miscellaneous
itemized deductions. Further, miscellaneous itemized
deductions are only deductible to the extent that they
exceed two percent of your adjusted gross income. Due to
the adjustments herein which increase adjusted gross income,
miscellaneous itemized deductions are not allowable * * *.
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attributable to activities not engaged in for profit. Section
183(b)(1), however, provides that deductions that are allowable
without regard to whether the activity is engaged in for profit
shall be allowed. Section 183(b)(2) further provides that
deductions that would be allowable only if the activity were
engaged in for profit shall be allowed, “but only to the extent
that the gross income derived from such activity for the taxable
year exceeds the deductions allowable by reason of” section
183(b)(1). Accordingly, $892 of the expenses incurred in
petitioner’s fishing activity should have been allowed as an
offset to the $892 of income received from the activity.
Section 183(c) defines an “activity not engaged in for
profit” as any activity other than one for which deductions are
allowable under section 162 or under paragraph (1) or (2) of
section 212 for the taxable year. The standard for determining
whether the expenses of an activity are deductible under either
section 162 or section 212(1) or (2) is whether the taxpayer
engaged in the activity with the “actual and honest objective of
making a profit”. 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). While a reasonable
expectation of profit is not required, the taxpayer’s profit
objective must be bona fide. Hulter v. Commissioner, 91 T.C. 371
(1988); sec. 1.183-2(a), Income Tax Regs. Whether a taxpayer had
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the requisite profit objective is a question of fact to be
resolved from all relevant 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. In resolving this factual question, greater
weight is given to the objective facts than the taxpayer’s mere
statement of his intent. Siegel v. Commissioner, 78 T.C. 659,
699 (1982); sec. 1.183-2(a), Income Tax Regs.
The determination whether an activity is engaged in for
profit is made by reference to objective standards, taking into
consideration the facts and circumstances of the case. Sec.
1.183-2(a), Income Tax Regs. Section 1.183-2(b), Income Tax
Regs., provides a nonexclusive list of nine objective factors to
be considered in ascertaining a taxpayer’s intent. The 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 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. Not all
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factors are applicable in every case, and no single factor, nor
even the existence of a majority of factors favoring or
disfavoring the existence of a profit objective, is controlling.
Abramson v. Commissioner, 86 T.C. 360, 371 (1986); sec. 1.183-
2(b), Income Tax Regs.
The manner in which a taxpayer carries on the activity is
one factor to consider in determining whether a profit objective
exists. Maintaining complete and accurate books and records,
carrying on the activity in a manner similar to other activities
that are profitable, and changing operating methods to adopt
new techniques or abandon unprofitable methods in a manner
consistent with an intent to improve profitability indicate that
a taxpayer conducted an activity for profit. See sec. 1.183-
2(b)(1), Income Tax Regs. Although petitioner did not maintain a
separate checking account for his fishing activity until 2003, he
maintained adequate books and records to determine the income and
expenses associated with his tournament bass fishing.
In response to respondent’s request for information,
petitioner prepared a Business Overview detailing the aims and
objectives of his bass fishing activity. The document
articulated the potential revenue that any participant who
competed in and won 12 of the biggest bass fishing tournaments
held by B.A.S.S. and FLW Outdoors might earn; however, the
document did not include a financial projection with respect to
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petitioner’s activity. Petitioner claims that sustained
profitability could come from a single win at a major tournament,
but he has not conducted any type of break-even analysis or
attempted to discern how much time and money should be invested
and dedicated to the activity to make it profitable. There is no
evidence that petitioner changed meaningfully his operating
methods to adopt new techniques or abandoned unprofitable methods
of conducting the activity that might lead to a profitable
result. Petitioner’s continued losses appear to indicate that a
timeframe for profit is irrelevant. The Court concludes that
petitioner has merely continued a childhood fishing hobby with a
hope that he may, by chance, derive some profit from tournament
bass fishing.
Possession of expertise in the activity by either the
taxpayer or his advisers may indicate a profit motive. Sec.
1.183-2(b)(2), Income Tax Regs. Petitioner began bass fishing as
a child. Notwithstanding his lack of winning a major bass
fishing competition, he received prize money for his performance
in a number of bass fishing tournaments, appeared on ESPN, and
published a fishing article. Additionally, petitioner has
striven to overcome any lack of expertise by consulting with
several successful individuals in the industry about improving
financial returns from the fishing activity. In his free time,
petitioner regularly watches programs on bass fishing, reads
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literature in magazines, and accesses articles on the Internet to
improve his performance in bass fishing tournaments. Aside from
discussions with his accountant about the bass fishing activity,
petitioner has never consulted any financial advisers or persons
outside the bass fishing industry. His failure to seek objective
advice about the activity is a negative consideration;
nevertheless, his consistent and continued consultation with
successful tournament fishermen coupled with his regular study of
the bass fishing industry is a positive consideration.
If a taxpayer devotes significant time and effort to an
activity, it may indicate that there is a profit objective. Sec.
1.183-2(b)(3), Income Tax Regs. Although petitioner was not
prepared to leave his full-time employment with Grogan’s for an
activity that had no guarantee of success, he consistently
devoted free time and energy to the activity. Since petitioner
was working 40 to 45 hours per week in his regular job, he was
limited in the time and effort he could spend bass fishing.
During the 26 weeks of the year that he fished, petitioner spent
approximately 40 hours per week on the fishing activity. His
time was divided among many different functions, including
studying ways to improve his performance in tournaments, physical
conditioning, practice fishing, maintaining his boat and tackle,
and actual tournament competition. The Court believes that
petitioner devoted significant time and effort to the activity.
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None of the assets used in petitioner’s bass fishing
activity are likely to appreciate in value, and, for that matter,
petitioner did not accumulate any assets with the expectation
that they would appreciate in value. Sec. 1.183-2(b)(4), Income
Tax Regs.
A taxpayer’s previous success in other entrepreneurial
activities similar or dissimilar to the activity in question may
indicate that a profit objective exists. Sec. 1.183-2(b)(5),
Income Tax Regs. Petitioner experienced some financial success
with Fayette, a school supply company that he formed in 1977 and
operated through 1987. More notable, however, are petitioner’s
entrepreneurial activities associated with the bass fishing
activity at issue. Petitioner completely terminated Sportsman’s
Supply, a retailer of sporting goods and fishing tackle, when the
entity failed to generate net earnings in its first 2 years of
operation. Similarly, petitioner created a Web site in the hope
of enhancing profitability yet abandoned this project when the
site did not produce anticipated activity. Even though
petitioner’s bass fishing activity has never generated net
earnings, he has nevertheless continued the activity since 1997.
Given petitioner’s history of promptly ending unprofitable
business ventures, his unwillingness to cease tournament bass
fishing, an activity that produced losses exclusively, indicates
that the bass fishing activity was not engaged in for profit.
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A history of substantial losses indicates that the taxpayer
did not conduct the activity for profit. Sec. 1.183-2(b)(6),
Income Tax Regs. Petitioner started filing a Schedule C with his
Federal income tax return for the 1997 tax year with regard to
the bass fishing activity. The Court cannot ignore the fact that
petitioner realized only nominal gross receipts and never
realized a profit from the activity over the period from 1997 to
2001 and thereafter. Instead, petitioner’s bass fishing activity
generated an average loss of $7,831.60 each year from 1997 to
2001. More importantly, petitioner seemed unconcerned about
minimizing his expenses when he stated at trial: “when you say
what the prize monies are, how much that you can win, versus --
my expenses, I’m not minimizing those, but again they’re
relatively small. This is * * * not huge numbers here that the
taxpayer’s taking a hit on.” A taxpayer does not generally enter
into a recreational activity to generate income in excess of
deductions. Petitioner’s choice to continue sustaining losses
suggests the lack of a profit objective.
The amount of occasional profits, if any, which are earned
is also considered in the determination of whether an activity is
not engaged in for profit. Sec. 1.183-2(b)(7), Income Tax Regs.
Although petitioner has had some gross receipts in connection
with the activity, his expenses have always exceeded this income,
resulting in net losses each year. By participating only in
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those tournaments sponsored by B.A.S.S. or FLW Outdoors with the
largest prize payouts, petitioner has chosen to limit his
possibilities for income to the most prestigious bass fishing
competitions. The unfortunate, yet foreseeable, result of this
self-imposed limitation is that petitioner has never earned a
profit from his bass fishing activity, and there is no indication
as to when or whether he will ever attain a profit.
A taxpayer’s financial status may imply whether an activity
is conducted for profit. Sec. 1.183-2(b)(8), Income Tax Regs.
Petitioners reported wage income for taxable year 2001 of $90,757
and $518 in interest income. Substantial income from other
sources might indicate a tax incentive for incurring expenditures
related to a recreational business. Jackson v. Commissioner, 59
T.C. 312, 317 (1972). While it is unclear that the tournament
bass fishing activity was conducted to generate tax savings,
petitioners’ income indicates that they possessed sufficient
disposable income to sustain such losses each year from the
activity and realize tax savings therefrom.
Finally, the presence of personal motives may indicate that
the activity is not engaged in for profit. Sec. 1.183-2(b)(9),
Income Tax Regs. Petitioner’s bass fishing activity has allowed
him to devote a substantial portion of his spare time to a hobby
he has loved since childhood. Further, the activity has
permitted petitioner to test his fishing skills against other
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tournament fishermen. Petitioner’s fishing activity is
occasionally demanding and exhausting. The Court is convinced,
however, that petitioner’s bass fishing was akin to a hobby
enjoyed in his spare time and which, as a bonus, provided him an
opportunity for occasional income and less income tax.
The Court has considered all other arguments advanced by the
parties, and, to the extent such arguments have not been
specifically addressed, the Court concludes they are without
merit. Each factor set out in section 1.183-2(b), Income Tax
Regs., was considered; while some of the factors support a profit
objective, other factors discussed outweigh the profit motive.
The Court, therefore, is not convinced that petitioner was
engaged in a trade or business for profit. Respondent,
therefore, is sustained. However, as noted earlier, supra note
4, respondent allowed petitioner a miscellaneous itemized
deduction of $892 for expenses incurred in the activity. As an
itemized deduction, the 2-percent floor of section 67(a) would be
applicable. Respondent erred in the treatment of the $892 in
this fashion. Under section 183(b)(2), the $892 is allowable as
an offset to the gross receipts, thus eliminating the 2-percent
limitation.
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.