Rowden v. Comm'r

T.C. Memo. 2009-41

UNITED STATES TAX COURT

ROBERT L. ROWDEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17510-06. Filed February 19, 2009.

Orin Christopher Meyers, for petitioner.

G. Chad Barton and Garrett D. Gregory, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Respondent determined deficiencies of $5,074

and $7,396 in petitioner’s 2002 and 2003 Federal income taxes and

accuracy-related penalties under section 66621 of $1,015 and

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
(continued...)
 - 2 -

$1,479, respectively. After concessions2 the issues for decision

are:

(1) Whether petitioner was in the trade or business of

environmental consulting and aircraft maintenance during 2002 and

environmental aviation during 2003;

(2) whether petitioner substantiated deductions claimed on

Schedules C, Profit or Loss From Business; and

(3) whether petitioner is liable for the accuracy-related

penalties under section 6662.

FINDINGS OF FACT

The parties have stipulated some of the facts, which we

incorporate in our findings by this reference. Petitioner

resided in Oklahoma when his petition was filed.

During 2002 and 2003 petitioner was employed full time as an

environmental engineer by Engineering and Environment, Inc.

(EEI), a government contractor. He earned $52,611 and $60,889,

respectively. Petitioner’s employment contract was renewable

annually. During 2002 petitioner also performed environmental

1
(...continued)
Procedure. Monetary amounts are rounded to the nearest dollar.
2
Petitioner concedes that he is not entitled to deduct the
$9,829 depreciation expense for 2003 and unreimbursed employee
expenses of $6,596 and $5,083, before application of the 2-
percent floor of sec. 67(a), for 2002 and 2003, respectively.
After the latter concession petitioner’s remaining miscellaneous
itemized deductions do not exceed the 2-percent floor of sec.
67(a) and therefore also are not at issue.
 - 3 -

consulting services that were an outgrowth of services he had

performed and been paid for before 2002.

Petitioner grew up in a family of pilots and enjoys working

on and being around airplanes. Petitioner has been a licensed

pilot for about 25 years. In the 1980s petitioner completed a 2-

year program at the Spartan School of Aeronautics in Tulsa,

Oklahoma. After passing written and oral Federal Aviation

Administration (FAA) tests, petitioner obtained a mechanic’s

certificate with airframe and powerplant ratings.3 In 2000,

after passing another FAA test, petitioner obtained an inspection

authorization.4 Petitioner also attended specialized aviation-

related seminars; in August 2002 petitioner attended a seminar on

aircraft rigging held by the Cessna Pilots Association.

On August 25, 2002, petitioner purchased a 50-percent

interest in a 1975 Cessna 182P aircraft (Cessna) from DenRow

3
A certified mechanic may perform or supervise the
maintenance, preventive maintenance, or alteration of an aircraft
or a part thereof for which he is rated. 14 C.F.R. sec. 65.81(a)
(2003). A certified mechanic with an airframe rating may also
approve and return to service an airframe or related part or
appliance after he has performed, supervised, or inspected its
maintenance or alteration. 14 C.F.R. sec. 65.85 (2003). A
certified mechanic with a powerplant rating has similar
additional privileges with respect to a powerplant, propeller, or
any related part. See 14 C.F.R. sec. 65.87 (2003).
4
In general, a holder of an inspection authorization may
inspect and approve for return to service any aircraft or related
part after a major repair or major alteration; he may also
perform certain other types of inspections. See 14 C.F.R. sec.
65.95 (2003).
 - 4 -

Limited, L.C. (DenRow), for $30,000 using loan proceeds. DenRow

is owned by petitioner’s brother, William J. Rowden (Mr.

Rowden),5 a commercial airline pilot, and Mr. Rowden’s wife.

DenRow retained the other 50-percent interest in the Cessna. The

Cessna continued to be hangared at the Prague, Oklahoma,

municipal airport, although occasionally it was stored at the

Lawton, Oklahoma, municipal airport where in 2003 petitioner

rented hangar space.

Under the purchase agreement, petitioner was responsible for

one-half of the maintenance, repair, storage, and operation costs

of the Cessna. When petitioner purchased his interest in the

Cessna, it was not in airworthy condition because its engine

required a major overhaul.6 At some point during the years at

issue, petitioner sent the engine to an outside shop for an

overhaul, at a cost of approximately $25,000.

5
At the time of trial Mr. Rowden held a mechanic’s
certificate with airframe and powerplant ratings and an
inspection authorization, and he was a flight instructor for
single-engine and multi-engine aircraft and instruments and a
commercial glider pilot. Mr. Rowden bought undervalued
airplanes, used them for charter and instruction, and then sold
them. DenRow purchased the 1975 Cessna 182P (Cessna) in 2000 for
$43,000. During the years at issue petitioner was not a partner,
member, or agent of DenRow, and he was not involved in making any
of its business decisions.
6
Airworthy means that the aircraft conforms to its type
design and is in a condition for safe operation. 14 C.F.R.
3.5(a) (2008). Overhaul is a type of aircraft maintenance. 14
C.F.R. 1.1 (2003) (defined under the word “maintenance”).
 - 5 -

During the years at issue petitioner spent 20 to 30 hours

weekly working on the Cessna, on airplanes owned by other people,

and on related matters. Neither Mr. Rowden nor DenRow paid

petitioner for work he performed on the Cessna.

During the years at issue the Cessna was for sale.

Petitioner followed market prices using various sources for

aircraft valuation, such as trade periodicals. In 2007 the

Cessna was appraised at $93,000. As of the date of trial Mr.

Rowden did not believe the Cessna could be sold at a profit.

Petitioner timely filed his 2002 and 2003 Forms 1040, U.S.

Individual Income Tax Return (2002 and 2003 returns). On the

2002 return he reported two businesses on two Schedules C (2002

Schedules C1 and C2). The 2002 Schedule C1 described

petitioner’s business as “Env [Environmental] Consulting”, and

the 2002 Schedule C2 described petitioner’s other business as

“Aircraft Maintenance”. Petitioner reported one business on a

Schedule C attached to the 2003 return (2003 Schedule C) and

described his business as “Environmental Aviati[on]”. On his

Schedules C petitioner reported gross income and expenses and net

profit or loss, as shown in the following table:
 - 6 -

Net profit
Schedule C Gross income Expenses or (loss)
2002 Schedule C1 -0- $9,780 ($9,780)
2002 Schedule C2 $450 11,364 (10,914)
2003 Schedule C 2,238 27,531 (25,293)

The following table compares the adjusted gross income (AGI) that

petitioner would have reported if he had not engaged in his

activities with the AGI that he actually reported on his 2002 and

2003 returns:

AGI without
Year the activities AGI reported
2002 $53,807 $33,113
2003 63,137 37,844

In the notice of deficiency respondent disallowed all 2002

Schedule C1 and 2003 Schedule C deductions. Respondent also

disallowed deductions for tools, parts, and training expenses

totaling $8,744 claimed on the 2002 Schedule C2.7 Respondent

disallowed these Schedule C deductions for the following reason:

“Your deductions * * * have been adjusted to reflect the amount

verified as paid or incurred for business purposes.” Because

respondent disallowed the deductions for business use of home of

$511 and $504 claimed on the 2002 Schedule C1 and 2003 Schedule

C, respondent allowed additional home mortgage interest

deductions of $511 and $504 for 2002 and 2003, respectively.

7
Respondent contends that in the notice of deficiency he
erroneously allowed the 2002 Schedule C2 deductions totaling
$2,620, but he does not assert an increased deficiency for 2002.
 - 7 -

Respondent made computational adjustments to self-employment tax

for 2003 and determined that petitioner was liable for accuracy-

related penalties under section 6662 of $1,015 and $1,479 for

2002 and 2003, respectively.

OPINION

The Commissioner’s determinations are presumed correct, and

the taxpayer ordinarily bears the burden of proving that those

determinations are erroneous. Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). Moreover, deductions are a matter of

legislative grace, and the taxpayer bears the burden of proving

that he is entitled to any deduction claimed. INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992). Petitioner does not

contend that section 7491(a) shifts the burden of proof to

respondent, and petitioner has not established that he satisfies

the section 7491(a)(2) requirements.

Respondent contends that petitioner may not deduct his

Schedule C expenses because none of the Schedule C activities was

a trade or business.8 Section 162(a) allows a taxpayer to deduct

8
In the notice of deficiency respondent disallowed the
deductions as not verified as paid or incurred for business
purposes. At trial respondent argued that petitioner did not
engage in the trade or business of environmental consulting and
aircraft maintenance during 2002 and environmental aviation
during 2003. Petitioner does not contend that the argument
represents a new issue on which respondent should have the burden
of proof. See Rule 142(a). In addition, petitioner listed the
profit-motive issue with respect to the aviation-related
activities in his trial memorandum as one for decision.
 - 8 -

ordinary and necessary expenses of carrying on the taxpayer’s

trade or business. To be engaged in a trade or business with

respect to which deductions are allowable under section 162, “the

taxpayer must be involved in the activity with continuity and

regularity”, and “the taxpayer’s primary purpose for engaging in

the activity must be for income or profit.” Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987). A sporadic activity or a

hobby does not qualify. Id.

I. The Environmental Consulting Activity in 20029

Petitioner testified that he engaged in the environmental

consulting activity “when available” and that the aviation

activity had become his priority. During 2002 petitioner

reported no gross income from the activity and only performed

followup services; he attended two client meetings and conducted

online research related to the activity. Petitioner did not

introduce any evidence regarding how much time he spent on the

activity. We conclude petitioner failed to establish that in

9
Although respondent states in his reply brief that
petitioner has conceded the issue of the environmental consulting
activity because he failed to address it on brief, petitioner in
his opening brief continues to challenge the full amount of
deficiency and identifies the 2002 Schedule C1 amounts as still
in dispute. Nevertheless, we agree with respondent that
petitioner does not address the environmental activity elsewhere
in briefs, and we note that petitioner also agrees with
respondent’s proposed finding of fact that “Petitioner failed to
introduce credible evidence that he was in the environmental
consulting business in 2002.” We address the environmental
consulting activity for the sake of completeness.
 - 9 -

2002 he engaged in the environmental consulting activity with the

requisite continuity and regularity. See id. Consequently, we

do not need to address whether petitioner engaged in the

environmental consulting activity for profit and whether he

substantiated deductions claimed on the 2002 Schedule C1.

II. Aircraft Maintenance Activity in 2002 and Environmental
Aviation Activity in 2003

A. In General

Section 162 allows deductions for ordinary and necessary

expenses of carrying on an activity which constitutes the

taxpayer’s trade or business. To be engaged in a trade or

business under section 162(a), “the taxpayer’s primary purpose

for engaging in the activity must be for income or profit.”

Commissioner v. Groetzinger, supra at 35. Section 212 allows

deductions for expenses paid or incurred in connection with an

activity engaged in for the production or collection of income,

or for the management, conservation, or maintenance of property

held for the production of income. The profit standards

applicable to section 212 are the same as those used in section

162. See Allen v. Commissioner, 72 T.C. 28, 33 (1979).

Petitioner contends that respondent has conceded the profit-

motive issue. We disagree. Respondent has not conceded the

issue; respondent argued during trial and on brief that to

establish that petitioner was engaged in a trade or business

petitioner must prove he engaged in an activity with continuity
 - 10 -

and regularity and with the primary purpose of making a profit.

See Commissioner v. Groetzinger, supra at 35. We begin our

analysis of whether petitioner’s aircraft maintenance activity or

environmental aviation activity was a trade or business by

examining whether petitioner engaged in either activity with the

requisite profit motive.

Section 183, which restricts taxpayers from deducting losses

from an activity that is not engaged in for profit, is often

applied to determine whether an alleged trade or business is

conducted with the requisite profit motive. Cannon v.

Commissioner, 949 F.2d 345, 348 (10th Cir. 1991), affg. T.C.

Memo. 1990-148; Krause v. Commissioner, 99 T.C. 132, 168 (1992),

affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024 (10th

Cir. 1994). Section 183(c) defines any “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.”

Absent a stipulation to the contrary, see sec. 7482(b)(2),

this case is appealable to the Court of Appeals for the Tenth

Circuit, which has applied the dominant or primary objective

standard to test whether an alleged business activity is

conducted for profit, Hildebrand v. Commissioner, 28 F.3d at
 - 11 -

1027; Cannon v. Commissioner, supra at 350;10 Oswandel v.

Commissioner, T.C. Memo. 2007-183. Under the standard applied by

the Court of Appeals for the Tenth Circuit, a taxpayer’s dominant

or primary objective in conducting the activity must be to earn a

profit. Whether an activity was engaged in for profit is a

factual determination to be resolved on the basis of all the

surrounding facts and circumstances. Hildebrand v. Commissioner,

28 F.3d at 1027.

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

nonexclusive list of factors to be considered in determining

whether a taxpayer has the requisite profit objective. 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 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)

10
In both Hildebrand v. Commissioner, 28 F.3d 1024, 1027
(10th Cir. 1994), affg. Krause v. Commissioner, 99 T.C. 132
(1992), and Cannon v. Commissioner, 949 F.2d 345, 350 (10th Cir.
1991), affg. T.C. Memo. 1990-148, the Court of Appeals for the
Tenth Circuit applied the dominant or primary objective test at
the partnership level in analyzing whether a partnership was
engaged in an activity for profit under sec. 183.
 - 12 -

elements of personal pleasure or recreation. No single factor is

determinative. See id.

While the taxpayer’s expectation of profit need not be

reasonable, it must be in good faith. Allen v. Commissioner,

supra at 33. We give greater weight to the surrounding objective

facts than to the taxpayer’s mere statement of intent. Cannon v.

Commissioner, supra at 351 n.8; Dreicer v. Commissioner, 78 T.C.

642, 645 (1982), affd. without published opinion 702 F.2d 1205

(D.C. Cir. 1983).

B. Nature of the Environmental Aviation Activity in 2003

Petitioner testified that the environmental aviation

activity reported on the 2003 Schedule C combined two activities:

Environmental consulting and aircraft maintenance. Petitioner

received his 2003 Schedule C gross income from two clients for

performing annual inspections in the course of the aircraft

maintenance activity.11 The record establishes that most 2003

Schedule C expenses, such as interest on the aviation loan, the

Cessna insurance, and parts expenses, were incurred for

petitioner’s aircraft maintenance activity. Consequently, for

purposes of this opinion we treat the environmental aviation

11
While petitioner’s testimony is not clear as to whether
such annual inspections were performed in the course of
environmental consulting services or aircraft maintenance
services, petitioner contends in his brief that his 2003 Schedule
C gross income was derived from “aircraft activities”.
 - 13 -

activity as a continuation of the 2002 aircraft maintenance

activity.

C. Applying the Factors

1. Manner in Which Petitioner Conducted the Activity

In deciding whether a taxpayer has conducted an activity in

a businesslike manner we consider: (1) Whether complete and

accurate books and records were maintained; (2) whether the

activity was conducted in a manner substantially similar to those

of other activities of the same nature that were profitable; and

(3) whether changes in operating methods, adoption of new

techniques, or abandonment of unprofitable methods were done in a

manner consistent with an intent to improve profitability. See

Engdahl v. Commissioner, 72 T.C. 659, 666-668 (1979); sec. 1.183-

2(b)(1), Income Tax Regs.

Petitioner’s recordkeeping was disorganized and unreliable.

For example, although petitioner retained all receipts for his

expenses, petitioner’s files mistakenly contained receipts for

unrelated years. Petitioner did not introduce any records

pertaining to gross income, such as copies of customer work

orders, logbooks, or customer invoices. Petitioner testified

that approximately 25 percent of the parts he purchased were used

for airplanes other than the Cessna and that he kept records for

larger inventory items. However, petitioner did not introduce

any inventory records into evidence.
 - 14 -

We are not convinced that petitioner’s recordkeeping

represented anything other than an effort to substantiate

expenses claimed on his return. For a taxpayer’s books and

records to indicate a profit motive, the taxpayer should use

books and records for measuring profits, cutting expenses, and

evaluating the overall performance of the operation. Golanty v.

Commissioner, 72 T.C. 411, 430 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981). Petitioner’s records,

however, consisted of a collection of receipts. Petitioner

presented no evidence that he used them to evaluate the

profitability of his operations.

Petitioner testified that he had engaged in the aircraft

maintenance activity since 1996. However, he offered no evidence

regarding the past performance of the activity and whether he

considered changes in his operating methods.

We conclude that during the years at issue petitioner did

not conduct his aircraft maintenance activity in a businesslike

manner. This factor favors respondent’s position.

2. Expertise of Petitioner or His Advisers

Preparation for an activity by an extensive study of its

accepted business, economic, and scientific practices or

consultation with those who are experts therein may indicate a

profit objective. Engdahl v. Commissioner, supra at 668; sec.

1.183-2(b)(2), Income Tax Regs. Efforts to gain experience and a
 - 15 -

willingness to follow expert advice may indicate a profit motive.

Engdahl v. Commissioner, supra at 668. Petitioner established

that he had acquired technical expertise by completing studies at

the Spartan School of Aeronautics and by obtaining FAA

certifications. However, petitioner did not establish that he

had had experience or had acquired expertise in running a

profitable business. This factor is neutral.

3. Time and Effort Devoted to the Activity

The fact that a taxpayer devotes personal time and effort to

carrying on an activity may indicate an intention to derive a

profit, particularly where there are no substantial personal or

recreational elements associated with the activity. Sec. 1.183-

2(b)(3), Income Tax Regs. Petitioner testified that he spent

between 20 and 30 hours weekly working on the Cessna and his

clients’ airplanes.12 However, the time petitioner spent working

on the Cessna is consistent with the use of the Cessna for

recreation. See Warden v. Commissioner, T.C. Memo. 1995-176

(finding that the time the taxpayers spent on cleaning and

maintaining their yacht was consistent with the use of the yacht

for recreation), affd. without published opinion 111 F.3d 139

(9th Cir. 1997). Petitioner did not introduce any evidence

regarding what portion of 20-30 hours per week he spent working

12
Petitioner also testified that he spent between 20 and 40
hours weekly on the aircraft maintenance activity.
 - 16 -

on clients’ airplanes. Although petitioner testified that at the

time of trial he spent less than 20 hours annually flying

(predominantly using the Cessna), he did not introduce any

evidence regarding how much of his use of the Cessna (after the

repairs during the years at issue) was for personal flying and

how much was for income-producing activities. Given the lack of

evidence regarding the appropriate allocation, we conclude this

factor is neutral.

4. Expectation That Assets Used in the Activity May
Appreciate

The term “profit” encompasses appreciation of assets used in

the activity. Sec. 1.183-2(b)(4), Income Tax Regs. An activity

may produce an overall economic profit, even if there is no

operational profit, when appreciation of the assets of the

activity is taken into account. Id.

Petitioner claims that his business’s value increased

because the Cessna appreciated after the overhaul and because the

Cessna ownership provided his business additional client

exposure. The only evidence in the record that the Cessna was an

advertising tool is petitioner’s uncorroborated testimony, which

we are not required to accept. See Tokarski v. Commissioner, 87

T.C. 74, 77 (1986). As to petitioner’s expectations regarding

the appreciation of the Cessna, although both petitioner and his

brother testified that the Cessna had always been for sale and

they had hoped to sell it at a profit, petitioner did not offer
 - 17 -

into evidence any listing prices for the Cessna or comparable

aircraft or any other credible evidence in support of his claim

that he had a good-faith expectation of selling the Cessna at a

profit.

Even if we were to conclude, however, that petitioner had a

good-faith expectation of selling the overhauled Cessna at a

profit, we must still examine whether petitioner had a good-faith

expectation of realizing a profit on his entire operation.

Bessenyey v. Commissioner, 45 T.C. 261, 275 (1965), affd. 379

F.2d 252 (2d Cir. 1967). Such an expectation should be based on

analyzing estimated future earnings from the activity, the likely

appreciation of the Cessna, and whether the resulting amount

would be sufficient to recoup losses from the activity. Because

an airplane is generally a wasting asset, we fail to see how

petitioner could expect in good faith to recoup his $30,000 cost

of a one-half interest in the Cessna, the capital expenditures

for the overhaul and repair of the Cessna, and his accumulated

operating losses. Petitioner’s expectation of making a profit

was not based on careful analysis, and it is not supported by

credible evidence. This factor favors respondent.

5. Success in Carrying On Other Similar or Dissimilar
Activities

The fact that a taxpayer has engaged in similar activities

and converted them from unprofitable to profitable enterprises

may indicate that the taxpayer is engaged in the present activity
 - 18 -

for a profit, even though the activity is presently unprofitable.

Sec. 1.183-2(b)(5), Income Tax Regs. Although petitioner

testified he engaged in the environmental consulting activity

before the years in issue, he offered no evidence regarding his

success in the activity. This factor is neutral.

6. Petitioner’s History of Income or Loss From the
Activity

A taxpayer’s history of income or loss with respect to any

activity may indicate the presence or absence of a profit

objective. See Golanty v. Commissioner, 72 T.C. at 426; sec.

1.183-2(b)(6), Income Tax Regs. However, “a series of startup

losses or losses sustained because of unforeseen circumstances

beyond the control of the taxpayer may not indicate a lack of

profit motive.” Kahla v. Commissioner, T.C. Memo. 2000-127

(citing Engdahl v. Commissioner, 72 T.C. at 669, and section

1.183-2(b)(6), Income Tax Regs.), affd. without published opinion

273 F.3d 1096 (5th Cir. 2001).

Petitioner testified that he had been providing maintenance

services, such as aircraft maintenance, rigging, inspection,

sale, and refurbishing since 1996. However, petitioner

introduced no credible evidence regarding the financial

performance of his aircraft maintenance activity before the years

at issue. The failure to introduce such evidence raises a

presumption that the evidence would be unfavorable to petitioner.

See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158,
 - 19 -

1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). This factor

favors respondent’s position.

7. Amount of Occasional Profits

The amount of profits earned in relation to the amount of

losses incurred, the amount of the investment, and the value of

the assets in use may indicate a profit objective. See sec.

1.183-2(b)(7), Income Tax Regs. The opportunity to earn

substantial profits in a highly speculative venture may be

sufficient to indicate that the activity is engaged in for profit

even though only losses are produced. See id.

During 2002 and 2003 the aircraft maintenance activity

generated net losses which significantly reduced petitioner’s

AGI. Petitioner offered no credible evidence regarding what

profits, if any, his aircraft maintenance activity generated

between 1996 and 2001. Failure of a party to introduce evidence

within his possession which, if true, would be favorable to him

gives rise to the presumption that such evidence is unfavorable.

Wichita Terminal Elevator Co. v. Commissioner, supra at 1165.

This factor favors respondent’s position.

8. Petitioner’s Financial Status

The fact that a taxpayer does not have substantial income or

capital from sources other than the activity in question may

indicate that the activity is engaged in for profit. See sec.

1.183-2(b)(8), Income Tax Regs. Substantial income from sources
 - 20 -

other than the activity (especially if the losses from the

activity generate substantial tax benefits) may indicate a lack

of profit motive, particularly where elements of personal

pleasure or recreation are involved. See id.

During 2002 and 2003 petitioner was employed as an

environmental engineer, earning $52,611 and $60,889,

respectively. Petitioner is single and has no children.

Although the income did not support a lavish lifestyle, it

provided petitioner with a comfortable living and allowed him to

conduct the aircraft maintenance activity at a loss. This factor

favors respondent’s position.

9. Elements of Personal Pleasure or Recreation

The presence of personal pleasure or recreation relating to

the activity may indicate the absence of a profit objective. See

sec. 1.183-2(b)(9), Income Tax Regs. An activity is not treated

as an activity not engaged in for profit merely because the

taxpayer also has purposes or motivations other than to make a

profit. Id.

Petitioner grew up around airplanes and has been a licensed

pilot for 25 years. He enjoys working on airplanes and takes

pride in his workmanship and in his family’s aviation history.

We cannot overlook significant elements of recreation and

pleasure that petitioner derived from working on airplanes. This

factor favors respondent’s position.
 - 21 -

D. Petitioner’s Argument

Petitioner relies on Doggett v. Burnet, 65 F.2d 191 (D.C.

Cir. 1933), revg. 23 B.T.A. 744 (1931), to suggest that a profit

motive exists if a taxpayer enters into and carries on an

activity with a good-faith intention to make a profit or with the

belief that a trade or business can be profitable. However, in

determining a taxpayer’s intent, the Court of Appeals for the

Tenth Circuit gives less weight to the taxpayer’s statement of

intent than to objective factors. Cannon v. Commissioner, 949

F.2d at 351 n.8. Moreover, such reliance on objective factors is

consistent with section 1.183-2(a), Income Tax Regs., providing:

The determination whether an activity is engaged in for
profit is to be made by reference to objective
standards, taking into account all of the facts and
circumstances of each case. Although a reasonable
expectation of profit is not required, the facts and
circumstances must indicate that the taxpayer entered
into the activity, or continued the activity, with the
objective of making a profit. * * * [Emphasis added.]

After a review of the objective factors discussed above, we

are not convinced that petitioner engaged in his aircraft

maintenance activity with the objective of making a profit.

E. Conclusion

After considering the factors listed in section 1.183-

2(b), Income Tax Regs., and the facts and circumstances of

this case, we conclude that petitioner has not established

that he engaged in the aircraft maintenance activity with

the primary or dominant objective of making a profit.
 - 22 -

Accordingly, we hold that petitioner’s aircraft maintenance

activity did not constitute a trade or business or profit-

seeking activity in 2002 or 2003.

F. Deductibility of the 2002 Schedule C2 and 2003
Schedule C Expenses

Because we have sustained respondent’s determination

that petitioner’s aircraft maintenance activity was not a

trade or business under section 162, we must decide what

deductions, if any, he may claim under section 183(b).

Section 183(b)(1) permits deductions which are otherwise

allowable without regard to whether the activity is engaged

in for profit, such as State and local taxes and casualty

losses. Section 183(b)(2) allows deductions that would be

allowable if the activity were engaged in for profit, but

only to the extent of gross income received from the

activity, reduced by deductions under section 183(b)(1).

With respect to the 2002 Schedule C2, respondent

allowed $2,620 in deductions. This amount exceeds

petitioner’s $450 gross income from the activity.

Consequently, no additional deductions are allowed for 2002.

For 2003 petitioner did not claim any deductions that

are allowable under section 183(b)(1). In his brief

respondent concedes that “If the Court finds that petitioner

was in the trade or business of environmental aviation in

2003, petitioner has substantiated the following expenses to
 - 23 -

be ordinary and necessary business expenses”. Respondent

lists the following expenses as substantiated:

Expense Amount substantiated
Insurance $529
Office expense 186
Rent of other business
property 1,200
Supplies 1,020
Tools 1,570
Training certifications 313
Professional subscription 110
Total 4,928

Although we hold that in 2002 and 2003 petitioner’s aircraft

maintenance activity did not constitute a trade or business

under section 162 or an activity for the production of

income under section 212, under section 183(b)(2)

petitioner’s substantiated expenses from the activity are

deductible for 2003 to the extent of $2,238, the gross

income generated by the activity.

III. Accuracy-Related Penalty Under Section 6662

Respondent contends that petitioner is liable for the

accuracy-related penalty on the grounds of substantial

understatement of income tax under section 6662(a) and

(b)(2) for 2002 and 2003 or, alternatively, negligence or

disregard of rules or regulations under subsection (b)(1).13

13
Respondent argues that petitioner has conceded the issue
of penalties because petitioner does not address it in his brief.
We address the issue for the sake of completeness because

(continued...)
 - 24 -

Section 6662(a) and (b)(2) authorizes the Commissioner

to impose a 20-percent penalty if there is a substantial

understatement of income tax. An understatement is

substantial if the amount of the understatement for the

taxable year exceeds the greater of 10 percent of the tax

required to be shown on the return or $5,000. Sec.

6662(d)(1)(A).

The Commissioner bears the initial burden of production

with respect to the taxpayer’s liability for the section

6662(a) penalty and must produce sufficient evidence

indicating that it is appropriate to impose the penalty.

See sec. 7491(c). Respondent established that for both

years at issue the amount of the understatement exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000. Because respondent has met his burden of

production, petitioner must produce sufficient evidence to

prove that respondent’s determination is incorrect. See

Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

The accuracy-related penalty is not imposed with

respect to any portion of the underpayment if the taxpayer

can establish that he acted with reasonable cause and in

good faith. Sec. 6664(c)(1). The taxpayer bears the burden

13
(...continued)
petitioner lists the issue as one for decision in his reply
brief.
 - 25 -

of producing evidence to demonstrate reasonable cause under

section 6664(c)(1). See Higbee v. Commissioner, supra at

446-448. We determine reasonable cause and good faith on a

case-by-case basis, taking into account all pertinent facts

and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.

In his posttrial briefs petitioner did not address why

the penalties should not be imposed. Petitioner did not

contend that he was not negligent or that he had reasonable

cause or acted in good faith. Therefore, we sustain

respondent’s determination to impose the section 6662(a) and

(b)(2) accuracy-related penalty for 2002 and 2003.

We have considered all arguments raised by either

party, and to the extent not discussed, we find them to be

irrelevant, moot, or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.