Xia v. Comm'r , 2007 Tax Ct. Summary LEXIS 9 ( 2007 )

T.C. Summary Opinion 2007-10
UNITED STATES TAX COURT
JUN XIA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13411-05S. Filed January 17, 2007.
Jun Xia, pro se.
Michael T. Sargent, for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time 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 years in
issue.
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The relevant facts may be summarized as follows. On
Schedules C, Profit or Loss From Business, attached to
petitioner’s 2002 and 2003 Federal income tax returns, petitioner
claimed the following deductions:
2002 2003
Car & truck expenses $5,228 $5,100
Advertising 1,000 600
Supplies 1,239 92
Commission & fees 655 73
Insurance 601 350
Legal & professional
services 310 95
Office expenses 948 1,237
Rent of equipment 1,300 1,220
Repairs 550 547
Travel 789 884
Meals & entertainment 124 513
Utilities 683 643
Home office expenses 1,312 682
Respondent disallowed the deductions and determined deficiencies
in petitioner’s 2002 and 2003 Federal income taxes of $2,423 and
$1,980. At the time the petition was filed, petitioner resided
in the Commonwealth of Pennsylvania.
Petitioner is a pharmacist employed by Rite-Aid. In
addition, petitioner testified:
Well, I guess, I give you a comprehensive idea. What I
develop mainly is pharmaceutical product.
* * * * * * *
[B]efore I work for Rite Aid I was a research scientist,
worked for several pharmaceutical companies. That’s what I
have my graduate training in, in this area, and I was an
inventor also. I developed pharmaceutical products,
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specifically the formulation work, and also analytical work
which involves instruments. I have instruments that were--
for the--analyzes for handling chemicals in drugs solutions.
THE COURT: How long will it take you to produce these
drugs, this drug?
THE WITNESS: It’s very hard to say because research and
development can fail easily * * *.
Petitioner earned no income from these endeavors for the
years before the Court, and it does not appear that he has ever
realized income from this work, except when employed by a
pharmaceutical company.
Discussion
Section 162(a) allows a deduction for ordinary and necessary
expenses paid or incurred in carrying on a trade or business.
Petitioner claims to be in the trade or business of research, and
we are, therefore, faced with the initial question of whether he
is in a trade or business within the meaning of section 162. In
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987), the Supreme
Court held that “if one’s * * * activity is pursued full time, in
good faith, and with regularity, to the production of income for
a livelihood, and is not a mere hobby, it is a trade or
business”. We are willing to assume that petitioner did devote
hours in research with some degree of regularity. We are not
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satisfied, however, that petitioner looked to this activity for a
production of income for his livelihood.2
Furthermore, generally, under section 183(a) and (b) an
individual is not allowed deductions attributable to an activity
“not engaged in for profit” except to the extent of gross income
generated by 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.” Essentially the test for
determining whether an activity is engaged in for profit is
whether the taxpayer engages in the activity with the primary
objective of making a profit. See Antonides v. Commissioner, 893
F.2d 656, 659 (4th Cir. 1990), affg. 91 T.C. 686 (1988).
Although the expectation need not be reasonable, the expectation
must be bona fide. See Hulter v. Commissioner, 91 T.C. 371, 393
(1988). Furthermore, in resolving the question, greater weight
is given to the objective facts than to the taxpayer’s statement
of intentions. See Thomas v. Commissioner, 84 T.C. 1244, 1269
(1985), affd. 792 F.2d 1256 (4th Cir. 1986).
Section 1.183-2(b), Income Tax Regs., contains a
nonexclusive list of factors to be used in determining whether an
activity is engaged in for profit. These factors are: (1) The
2
We note that petitioner did not argue or establish that he
satisfied the requirements of sec. 7491(a).
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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 similar
or dissimilar activities; (6) the history of income or losses
with respect to the activity; (7) the amount of occasional
profit, if any; (8) the financial status of the taxpayer; and (9)
any elements of personal pleasure or recreation. No single
factor, nor simple numerical majority of factors, is controlling.
See Cannon v. Commissioner, 949 F.2d 345, 350 (10th Cir. 1991),
affg. T.C. Memo. 1990-148.
Petitioner presented little evidence concerning many of the
factors contained in the regulations. We, therefore, focus on
the factors that form our decision.
What concerns us most is the history of losses. While a
person may start with a bona fide expectation of profit, even if
it is unreasonable, there is a time when, in light of the
recurring losses, the bona fides of that expectation must cease.
See Filios v. Commissioner, 224 F.3d 16 (1st Cir. 2000), affg.
T.C. Memo. 1999-92. This is particularly pertinent here where
petitioner could not estimate when the activity might become
profitable. Moreover, there is nothing in the record to
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reasonably suggest that the activity, as petitioner operated it
during the years in question, would ever be profitable.
Also, petitioner did not maintain the type of books and
records that one would generally associate with a trade or
business. It appears to us that, while certainly laudable,
petitioner’s activity seems to be more an intellectual pastime
rather than an actual trade or business.
In sum, we do not find that petitioner’s research activity
constituted a trade or business or an activity entered into for
profit.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.