T.C. Summary Opinion 2008-29
UNITED STATES TAX COURT
DORA MARGARET BENSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7781-06S. Filed March 13, 2008.
Dora Margaret Benson, pro se.
Michael W. Lloyd, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined deficiencies in petitioner’s Federal
income taxes for 2002 and 2003 of $3,011 and $6,942,
respectively. The central issue for decision is whether
petitioner’s activities were engaged in with a profit objective
as contemplated by section 183.2 For the reasons discussed
below, we hold for respondent.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ extensive
stipulation of facts and accompanying exhibits.
At the time the petition was filed, Dora Margaret Benson
resided in Colorado.
In 2000 petitioner, a registered nurse, won $4 million in
the Colorado lottery. She received $2,720,000, and to honor her
late mother, set up a memorial/Christian counseling center, the
Lila Osborne Memorial. In addition to running the memorial,
petitioner continued her employment as a nurse.
In 2000 petitioner acquired a building for the memorial.
Petitioner’s family helps her with the building without
compensation. Her sister helps her run the building, and
2
To the extent not discussed herein, other issues are
computational in nature and flow from our decision in this case.
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petitioner’s nephew helps her maintain the building and its
grounds.
The building has nine offices, a waiting room, and a
bathroom. Petitioner’s two brothers play videogames and use
their computers in one of the building’s offices. Another office
is used as a prayer room by a volunteer missionary who provides
free counseling services. Still another office houses a reading
room with books on religion and a computer on which visitors can
access and view six different versions of the Bible. Petitioner
provides reflexology and mortgage broker services in other rooms
of the building; according to her testimony, she provides these
services to maintain income for the memorial. Petitioner also
thought these activities would be good ways to provide for her
retirement.
From 2000 through late 2002, petitioner’s activities
reported on Schedule C, Profit or Loss from Business, were
operated under the trade name of Lila Osborne Memorial
(Memorial). The Schedules C for the Memorial, however, reflect
only a single activity, reflexology services. Petitioner
testified that it was her intent that the Memorial be an umbrella
organization for all of her various activities.3
3
Although petitioner created Benson Exposition, Inc., an S
corporation, in late 2002 to be the umbrella organization for the
memorial and her various activities, she continued to report
income and expenses on Schedules C listing Lila Osborne Memorial.
(continued...)
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In 2002 and 2003, petitioner’s Schedules C showed combined
expenses of $55,301 and gross receipts of $445. Respondent
denied expense deductions beyond the gross receipts earned.
Discussion
I. The Burden of Proof
Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving those
determinations wrong. Rule 142(a); INDOPCO, Inc. v Commissioner,
503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115
(1933). Under section 7491, the burden of proof may shift from
the taxpayer to the Commissioner if the taxpayer produces
credible evidence with respect to any factual issue relevant to
ascertaining the taxpayer’s tax liability. Sec. 7491(a)(1). In
this case there is no such shift because petitioner neither
alleged that section 7491 was applicable nor established that she
fully complied with the requirements of section 7491(a)(2). The
burden of proof remains on petitioner.
II. The Period of Limitations
Petitioner expressed concern in her petition that the period
3
(...continued)
Benson Exposition, Inc. has not filed a corporate return since
its inception. Although there is some confusion as to whether
the activities in this case were conducted by Benson Exposition,
Inc., or by petitioner herself doing business as Lila Osborne
Memorial, the analysis remains the same. See sec. 1.183-1(f),
Income Tax Regs. (explaining that a taxpayer’s intent is
attributable to his or her wholly owned S corporation); see also
sec. 1.183-1(d)(1), Income Tax Regs.
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of limitations on assessment had expired on her 2002 taxable
year.
Generally, an income tax must be assessed within 3 years
after the applicable return is filed. Sec. 6501(a). In this
case, petitioner timely filed her 2002 Federal income tax return
on April 15, 2003. April 15, 2006, was 3 years after that date.
As the notice of deficiency was sent on January 25, 2006, the
period of limitations on petitioner’s 2002 taxable year remained
open at the time the notice was sent.4
III. Petitioner’s Lack of Profit Objective
Section 183 specifically precludes deductions for activities
not engaged in for profit except to the extent of the gross
income derived from such activities. Sec. 183(a) and (b)(2).
Given that petitioner had gross receipts of only $445 for the 2
years at issue, the remainder of her Schedule C expenses are only
deductible if we find that petitioner engaged in her activities
with the requisite profit objective. For reasons discussed more
fully below, we find that petitioner was not engaged in the
activities at issue with the necessary profit objective, and
consequently, we hold for respondent.
4
See also sec. 6501(h) as it relates to petitioner’s loss
carryforward, discussed infra, and sec. 6503(a)(1) regarding
suspending the running of the period of limitations upon the
issuance of a notice of deficiency and filing of a petition for
redetermination.
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For a taxpayer’s expenses in an activity to be deductible
under section 162, Trade or Business Expenses, or section 212,
Expenses for Production of Income, and not subject to the
limitations of section 183, a taxpayer must show that he or she
engaged in the activity with an actual and honest objective of
making a profit. Hulter v. Commissioner, 91 T.C. 371, 392
(1988); Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd.
without opinion 702 F.2d 1205 (D.C. Cir. 1983); Hastings v.
Commissioner, T.C. Memo. 2002-310. Profit means an economic
profit apart from any tax consequences. See Surloff v.
Commissioner, 81 T.C. 210, 233 (1983). Although a reasonable
expectation of a profit is not required, the taxpayer’s profit
objective must be actual and honest. Dreicer v. Commissioner,
supra at 645; sec. 1.183-2(a), Income Tax Regs. Whether a
taxpayer has an actual and honest profit objective is a question
of fact to be answered from all the relevant facts and
circumstances. Hulter v. Commissioner, supra at 393; Hastings v.
Commissioner, supra; sec. 1.183-2(a), Income Tax Regs. Greater
weight is given to objective facts than to a taxpayer’s mere
statement of intent. Dreicer v. Commissioner, supra at 645; sec.
1.183-2(a), Income Tax Regs. The taxpayer bears the burden of
establishing he or she had the requisite profit objective. Rule
142(a); Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Hastings
v. Commissioner, supra.
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The regulations set forth a nonexhaustive list of factors
that may be considered in deciding whether a profit objective
exists. These factors are: (1) The manner in which the taxpayer
carries on the activity; (2) the expertise of the taxpayer or his
advisers; (3) the time and effort expended by the taxpayer in
carrying on the activity; (4) the expectation that the assets
used in the activity may appreciate in value; (5) the success of
the taxpayer in carrying on other similar or dissimilar
activities; (6) the taxpayer’s history of income or losses with
respect to the activity; (7) the amount of occasional profits, if
any, which are earned; (8) the financial status of the taxpayer;
and (9) any elements indicating personal pleasure or recreation.
See sec. 1.183-2(b), Income Tax Regs.
No single factor, nor even the existence of a majority of
factors favoring or disfavoring the existence of a profit
objective, is controlling. See id. Rather, the relevant facts
and circumstances of the case are determinative. See Golanty v.
Commissioner, 72 T.C. 411, 426 (1979), affd. without published
opinion 647 F.2d 170 (9th Cir. 1981).
In this case, petitioner did not maintain accurate books and
records for any of her activities. See sec. 1.183-2(b)(1),
Income Tax Regs. In fact, it is unclear from the record what
percentage of her expenses should have been attributed to any
activity other than reflexology services.
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Petitioner also failed to develop a budget or a business
plan for any of her activities. Although budgets and business
plans are not required, a lack of information upon which to make
educated business decisions tends to belie a taxpayer’s
contentions that an activity was pursued with the objective of
making a profit. Dodge v. Commissioner, T.C. Memo. 1998-89,
affd. without published opinion 188 F.3d 507 (6th Cir. 1999).
A taxpayer’s history of income or losses with respect to the
activity can also indicate whether a profit objective was
present. Sec. 1.183-2(b)(6), Income Tax Regs. Here, petitioner
reported only losses from the activities and never made a profit
from any of them.
Using the same analytic framework set out in the
regulations, it is clear that the Lila Osborne Memorial building
was not held with a profit objective; petitioner did not charge
admission, nor did she charge her brothers rent for their use of
space in the building. She had no tenants. Only two of the
rooms were used for activities that might generate income.
Similarly, it is clear that the free reading room and free
spiritual counseling were offered to the public with no profit
objective. Therefore, we focus the rest of our discussion on the
mortgage and reflexology services offered by petitioner.
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A. Mortgage Services
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 objective. Sec. 1.183-2(b)(2), Income Tax
Regs. Despite taking a mortgage broker class, petitioner
demonstrated confusion surrounding the basic difference between
being a mortgage broker and a mortgage lender. For example, she
testified at trial that the reason she had not done any business
as a mortgage broker was that she was concerned about her
obligations should the borrower go into default. Petitioner did
make some personal loans to friends and relatives which were
reported on her Schedule B, Interest and Ordinary Dividends, but
these were not made as part of the activities at issue here. She
also provided no indication that she was a licensed or registered
mortgage broker in the State of Colorado, or that she had
consulted others who were either successful mortgage brokers or
mortgage lenders for assistance and advice.
Even if we were persuaded, arguendo, that petitioner
intended to engage in this activity with the necessary profit
objective, any expenses attributable to it would not be
deductible pursuant to section 162.
Section 162(a) permits a deduction for the ordinary and
necessary expenses of carrying on a trade or business. In order
for a taxpayer to deduct expenses under section 162(a), the
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expenses must relate to a trade or business functioning at the
time the expenses were incurred. See, e.g., Hardy v.
Commissioner, 93 T.C. 684, 687 (1989), affd. in part and remanded
in part per order (10th Cir., Oct. 29, 1990). A taxpayer is not
carrying on a trade or business for section 162(a) purposes until
the business is functioning as a going concern and performing the
activities for which it was organized. Richmond Television Corp.
v. United States, 345 F.2d 901, 907 (4th Cir. 1965). Carrying on
a trade or business requires a showing of more than initial
research into or investigation of business potential. Dean v.
Commissioner, 56 T.C. 895, 902 (1971); McKelvey v. Commissioner,
T.C. Memo. 2002-63, affd. 76 Fed. Appx. 806 (9th Cir. 2003).
Business operations must have actually commenced. Dean v.
Commissioner, supra at 902; McKelvey v. Commissioner, supra.
As noted above, petitioner has not brokered any mortgages.
Although she did take a class, any efforts petitioner made to
establish her mortgage services as a business and an activity
engaged in for profit are more appropriately described as startup
activities, or investigative activities, and not the activities
of a going concern such that any of her expenses in this arena
would be considered properly deductible under section 162.5
5
Startup expenditures must be capitalized and may be
amortized under sec. 195 once the activity begins.
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B. Reflexology Services
Petitioner studied reflexology, and was well situated to
provide such services based on her many years as a trained and
skilled nursing professional. See sec. 1.183-2(b)(2), Income Tax
Regs. In addition, she did earn some income, however modest,
from the activity. See sec. 1.183-2(b)(6), Income Tax Regs. In
the 2 years at issue, her gross receipts totaled $445. However,
petitioner’s losses have been substantial, totaling $55,301 in
that same period. See id.
The goal of an activity engaged in for profit “must be to
realize a profit on the entire operation, which presupposes not
only future net earnings but also sufficient net earnings to
recoup the losses which have meanwhile been sustained”.
Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), affd. 379
F.2d 252 (2d Cir. 1967); see also Nissley v. Commissioner, T.C.
Memo. 2000-178; sec. 1.183-2(b)(7), Income Tax Regs. Petitioner
has not demonstrated that she has taken any steps to minimize
losses or increase earnings in order to recoup the sizable losses
she has sustained. Accordingly, we are not persuaded that
petitioner has engaged in this activity with a profit objective
sufficient to satisfy section 183.
Even if we were to have found that petitioner’s reflexology
activity was engaged in for profit, petitioner did not meet her
burden to provide sufficient evidence that the expenses reflected
on her Schedules C were ordinary and necessary for the operation
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of that activity. See sec. 162; Rule 142(a); INDOPCO Inc. v.
Commissioner, 503 U.S. at 84; Welch v. Helvering, 290 U.S. at
115.
IV. The Loss Carryforward
Petitioner’s 2002 Federal income tax return reflects a loss
carryforward of $16,192 from prior years. The Schedule C
activities from those prior years giving rise to the loss are the
same ones at issue in this case. Respondent denied petitioner’s
claimed loss deduction on the basis of sections 183 and 162.
At the outset, we note that section 172 permits taxpayers to
carry net operating losses (NOLs) from one taxable year to
another, but generally requires that taxpayers first carry such
losses back 2 years. Sec. 172(b)(1)(A) and (2). Taxpayers may
elect only to carry forward their NOLs, but the statute requires
an express and irrevocable election. Sec. 172(b)(3). Petitioner
did not provide the Court with any information as to whether
such an election had been made.
Further, as we find that petitioner’s activities were not
engaged in with the requisite profit objective to meet the
standard set out in section 183, and as petitioner has failed to
demonstrate that any expenses incurred were reasonable and
necessary to carrying on an active trade or business pursuant to
section 162, we hold for respondent on this issue.
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Conclusion
For the reasons discussed above, and on the basis of all of
the facts and circumstances present in this case, we hold that
petitioner was not engaged in any of the activities at issue with
the profit objective contemplated by section 183. See also Rule
142(a); INDOPCO, Inc. v. Commissioner, supra at 84; Welch v.
Helvering, supra at 115. Accordingly, we find for respondent.
To reflect our disposition of the disputed issues,
Decision will be entered
for respondent.