			Net Operating
Year	Gross receipts	Expenses	Loss
1962			$25,134.12
1963			21,374.48
1964			31,085.60
1965			36,065.05
1966	$35,163.50	$59,415.60	24,252.10
1967	31,291.00	59,021.80	27,730.80
1968	33,887.00	70,276.95	36,389.95
1969	39,789.00	70,114.00	30,325.00
1970	25,752.50	82,646.61	56,894.11
1971	30,311.00	77,745.45	47,434.45
1972	32,720.00	94,510.92	61,790.92
1973	37,001.00	108,007.68	71,006.68
1974	54,675.00	117,992.00	63,317.00
1975	20,660.00	70,318.00	49,658.00
1976		44,678.00	44,678.00
1977		27,925.00	27,925.00
1978		20,036.00	20,036.00

It has been stipulated that petitioner maintained complete and accurate records with respect to the operation of the Alcuin. Respondent also does not contest that petitioner did not deduct as business expenses the cost of food he consumed while on the charter trips. *252

Since the construction of the Alcuin, petitioner has had no employment other than his work in chartering the boat. His continual losses from the charter boat operation have not meant, however, that he has received no income in these years. His losses from the boat operation were used to offset, completely or in large part, trust and dividend income received in these years. During the years 1966 through 1978, petitioner received trust and dividend income in the following amounts:

	Trust and
Year	Dividend Income
1966	$47,286.11
1967	49,791.04
1968	49,842.00
1969	54,451.00
1970	56,897.53
1971	57,696.80
1972	58,151.88
1973	56,853.74
1974	60,807.00
1975	106,634.00
1976	78,304.53
1977	106,790.00
1978	119,925.00

For each of the taxable years in issue, petitioner filed a Federal individual income tax return. However, the returns for the years 1970 through 1976 were not filed timely. The following table lists the due dates and the dates the returns were filed:

Taxable		Date Return
Year	Due Date	Filed
1970	6/15/71	10/ 1/72
1971	6/15/72	5/30/74
1972	6/15/73	5/ 3/74
1973	6/15/74	9/29/75
1974	4/15/75	3/22/78
1975	4/15/76	3/22/78
1976	4/15/77	3/22/78

On *253 audit, respondent disallowed the net operating losses attributable to the operation of the Alcuin, which petitioner had deducted on his returns in the years at issue. The reason for disallowing these claimed deductions was respondent's determination that the operation of the boat was not an activity engaged in for profit.

ULTIMATE FINDING OF FACT

Petitioner's operation of the Alcuin was not an activity engaged in for profit during the years in issue.

OPINION

The question to be considered is whether petitioner had an actual and honest profit objective in owning the canal boat, Alcuin, and making it available for charters during the years in issue, so that he may deduct all the expenses and depreciation incurred in owning and operating the boat.

Initially, we note that this case is dissimilar from many of the other cases relating to the existence of a profit motive because the type of activity undertaken by petitioner here would not normally be characterized as a hobby. Certainly, a charter boat operation, if carried on in a businesslike fashion, is the type of activity that may constitute a trade or business for which deductions are allowed under section 162. *255 Here, the activity *254 had many of the characteristics of a true business. Petitioner kept adequate books and records and ran the charter trips in a professional but accommodating manner, which evidently impressed enough of his passengers so that many returned for subsequent trips or recommended the Alcuin to others. Furthermore, petitioner unquestionably worked hard on the charter trips, particularly after he assumed the duties of chef. There is simply nothing to support respondent's contention that, because he apparently enjoyed his work as chef, petitioner's activities during the charters were predominately pleasure rather than work. A taxpayer's enjoyment of the type of job commonly performed for pay cannot automatically transform it into a hobby. Jackson v. Commissioner,59 T.C. 312">59 T.C. 312, 317 (1972). However, the existence of characteristics of a business such as those discussed above does not conclusively establish whether petitioner had an objective to derive a profit from the activity. Carter v. Commissioner,645 F.2d 784">645 F.2d 784, 786 (9th Cir. 1981), affg. a Memorandum Opinion of this Court; Bolt v. Commissioner,50 T.C. 1007">50 T.C. 1007, 1013 (1968).

The test to be applied is whether the taxpayer was engaged in the activity with the predominate purpose and objective of making a profit. Allen v. Commissioner,72 T.C. 28">72 T.C. 28 (1979); accord, Golanty v. Commissioner,72 T.C. 411">72 T.C. 411 (1979), affd. per order 647 F.2d 170">647 F.2d 170 (9th Cir. 1981); Engdahl v. Commissioner,72 T.C. 659">72 T.C. 659 (1979). The taxpayer's expectation of profit need not be a reasonable one, but the taxpayer must enter into, or continue, the activity with the objective of making a profit. Dreicer v. Commissioner,78 T.C. 642">78 T.C. 642, 645 (1982), on appeal (D.C. Cir. June 1, 1982), Golanty v. Commissioner,supra at 425-426; Churchman v. Commissioner,68 T.C. 696">68 T.C. 696 (1977); section 1.183-2(a), Income Tax Regs.

Here, petitioner had the burden of showing an objective to make a profit from his ownership and operation of the Alcuin during the years 1970 through 1978. Boyer v. Commissioner,69 T.C. 521">69 T.C. 521, 537 (1977); Benz v. Commissioner,63 T.C. 375">63 T.C. 375 (1974); Rule 142(a), Tax Court Rules of Practice and Procedure. Yet, he introduced no evidence that he ever projected receipts and expenses. ^{*256 of the years in issue, petitioner had suffered net operating losses for 10 consecutive years, a fact that should have spurred any entrepreneur either to take drastic action to revamp his operation so that the possibility of such recurring losses would be reduced or to abandon the enterprise altogether. See Wittstruck v. Commissioner,T.C. Memo. 1980-62, affd. per curiam 645 F.2d 618">645 F.2d 618 (8th Cir. 1981). ^{*257 1972. Furthermore, after 1971 petitioner evidently made no substantial operational changes, even though his expenses and net operating losses rose dramatically over the next few years. *258 have produced gross receipts of $51,000 had he succeeded in securing charters for all possible weeks. This amount would have been far less than what would have been needed to defray even the prior year's expenses of $70,114. Moreover, petitioner should have expected expenses to rise because of inflation and his failure to institute any substantial cost saving measures. Even if we assume that petitioner could have secured nine passengers for all these charters, his gross receipts would have been increased by only $11,900, leaving gross receipts still over $7,000 below expenses. Listed below are similar computations for the other years in issue during which charters were offered. They are also based on the assumptions, highly favorable to petitioner, that the Alcuin would be chartered for 17 weeks per year, that there would be nine passengers on each cruise, and that expenses would equal those of the prior year.}}

	Projected Gross	Projected	Projected Net
Year	Receipts	Expenses	Operating Loss
1971	$62,900	^*259 $64,647	$1,747
1972	62,900	77,745	14,845
1973	71,400	94,511	23,111
1974	79,900	108,008	28,108
1975	96,900	117,992	21,092

These objective computations, based on assumptions that would have been used only by an incorrigible optimist, are overwhelming evidence of the absence of a profit motive, and we believe they should be accorded far more weight than petitioner's own statements that his motivation was "to make a living" and that it was his opinion that he was operating a business. *261 See Dreicer v. Commissioner,supra;Churchman v. Commissioner,supra at 701. Our determination that it was objectively impossible *260 to anticipate making a profit is in accord with what really occurred in this situation. We note that petitioner had a long history of unexplained losses in his operation of the Alcuin, a factor generally seen as persuasive evidence of the absence of profit motivation. Golanty v. Commissioner,supra at 427; Allen v. Commissioner,supra at 34. Nor can we overlook the fact that petitioner used the Alcuin as his personal residence for the entire year, not just when it was chartered. We note, too, that petitioner had an independent source of substantial income during the years in issue and that the deductions claimed with respect to the Alcuin were used to offset his income, a factor consistent with a finding that profit motive was lacking. See Golanty v. Commissioner,supra at 428-429.

The early years, 1960 through 1969, are not before the Court and we make no determination as to petitioner's original intent. It is important, however, to realize that this early period was more than sufficient as a "start-up" period, continued his charter operation after 1969 with the requisite profit motive, in view of the 10-year history of losses. By 1970, petitioner knew that his then operational methods could not produce a profit. He must also have known that the rather minor reductions in cost achieved in 1970 and 1971 could not, even under the most favorable assumptions, convert the annual loss into a profit. Continuation of an activity under these circumstances creates at least a clear inference that profits were irrelevant, hence that no profit motive existed. *262 we must conclude that petitioner has failed to establish that his ownership and operation of the Alcuin was a profit-oriented trade or business for which expenses and depreciation may be deducted under sections 162 and 167. Therefore, we agree with respondent that only those deductions that are allowed by other I.R.C. provisions, including section 183, *263 may be taken in the years in issue.

Having disposed of the primary issue as to the existence of a profit motive, we turn now to an examination of whether respondent was justified in determining additions to the tax under section 6651(a). Petitioner claims that his failure to timely file his returns was due to his inability to get access at any one time to all his books and records, which were stored with various friends and acquaintances in Nijmegen and Paris. However, petitioner himself testified that he "simply didn't have the time" to file his returns, a totally meritless argument, particularly in view of the fact that he had no job other than his work on the Alcuin during the charter season. That his records may have been stored in different places, a situation entirely of his own making, provides him with no excuse for his failure to timely file his returns.Therefore, we find that petitioner is liable for all the additions to the tax set forth in the notices of deficiency with respect to the years 1970 through 1976.

Decisions will *264 be entered for the respondent.

Footnotes

*. This case was tried before Judge Cynthia H. Hall, who has resigned from the Court. By order of the Chief Judge, the case was reassigned to Judge Meade Whitaker ↩ for disposition.
1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended.↩
2. We assume that petitioner did not deduct his direct personal expenses, such as food, during the remainder of the year when the boat was not on charter. The record does not reflect the extent to which operation and maintenance expenses of the boat incurred in periods outside the charter season were deducted.
3. Compare Jackson v. Commissioner,59 T.C. 312">59 T.C. 312 (1972), and McLarney v. Commissioner,T.C. Memo 1982-461">T.C. Memo. 1982-461; with Martin v. Commissioner,50 T.C. 341">50 T.C. 341 (1968), and Rand v. Commissioner,34 T.C. 1146">34 T.C. 1146↩ (1960).
4. Compare McLarney v. Commissioner,supra.↩
5. See also Worley v. Commissioner,T.C. Memo. 1981-51↩.
6. Petitioner tried to characterize the losses in the years in issue as not anticipated but due to unforeseen fluctuations in currency exchange rates and political attitudes. In view of the track record of losses throughout the 1960's and our objective computations set forth below, we find this argument to be devoid of merit.↩
7. Because, as we have previously discussed, petitioner reduced his crew size in 1971, we have allowed a reduction of $18,000 in anticipated expenses. The $18,000 figure was arrived at by taking expenses on the Schedule C for 1970 for crew salaries, taxes, food and other expenses, and by multiplying such crew expenses by three-sevenths, to reflect the reduction in the size of the crew from its maximum of seven persons on an annual basis to three on an annual basis and two hired during the charter season only. Because the Schedule C and other evidence in the record did not allocate food, liquor, wine and similar expenses between the crew, petitioner, and passengers, we reduced the overall food, liquor, etc. expenses of $15,659.40 by approximately $5,000 for purposes of this corporation.
8. Petitioner's statement that he was motivated by a desire "to make a living" related to his motive in 1960 for having the Alcuin built and starting a charter operation. When he expressed his opinion that he was operating a business when he ran the Alcuin, he was not referring to any particular year. Thus, the slight weight to be given to these statements is even further reduced by the fact that they do not necessarily refer to the years in issue.
9. See Worley v. Commissioner,supra.↩
10. See Wittstruck v. Commissioner,T.C. Memo. 1980-62, affd. per curiam, 645 F.2d 618">645 F.2d 618↩ (8th Cir. 1981).
11. SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT.
(a) General Rule.--In the case of an activity engaged in by an individual or an electing small business corporation (as defined in section 1371(b)), 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.
(b) Deductions Allowable.--In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed--
(1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and
(2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).

Document Info

Docket Number： Docket Nos. 255-80, 15780-80.

Filed Date： 8/31/1982

Precedential Status： Non-Precedential

Modified Date： 11/21/2020

Authorities (2)

Charles H. Carter and Virgie Ann Carter v. Commissioner of ... ( 1981 )

James E. And Barbara Wittstruck v. Commissioner of Internal ... ( 1981 )

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