TURNER v. COMMISSIONER

CHARLIE DANIEL TURNER, JR. AND SANDRA LOVELL TURNER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent TURNER v. COMMISSIONER No. 13082-99S United States Tax Court T.C. Summary Opinion 2003-6; 2003 Tax Ct. Summary LEXIS 6; January 24, 2003, Filed *6 PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE. Charlie Daniel Turner, Jr. & Sandra Lovell Turner, pro sese. Linda J. Wise, for respondent. Carluzzo, Lewis R. Carluzzo, Lewis R. CARLUZZO, 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. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the years in issue. The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority. Respondent determined deficiencies in and an addition to petitioners' Federal income taxes as follows: Year Deficiency Sec. 6651(a)(1) 1994 $ 10,909 -- 1995 11,571 $ 2,322 1996 6,828 -- [3] The issues for decision are: (1) Whether expenses listed on Schedule C, Profit or Loss From Business, included with petitioners' Federal income tax return for each year in*7 issue were incurred in an activity for profit; (2) whether income received and expenses incurred during 1994 by petitioners' daughter are properly reportable on petitioners' return for that year; and (3) whether petitioners had reasonable cause for failing to file a timely 1995 return. Background Some of the facts have been stipulated and are so found. Petitioners are husband and wife. They filed a joint Federal income tax return for each year in issue. At the time the petition was filed, petitioners resided in Ardmore, Alabama. References to petitioner are to Charlie Daniel Turner. Petitioner has a doctorate in aerospace engineering. At all relevant times he was employed on a full-time basis as an aerospace engineer by Nichols Research Corporation (Nichols Research). He was required to travel extensively in connection with this employment. His traveling expenses, including transportation expenses, were paid or reimbursed by his employer. During the summer of 1991, several close friends of petitioners' son were killed in an automobile accident. Petitioners' son was supposed to have been with his friends at the time, but wasn't. In December of that year, petitioners' residence and*8 much of its contents were destroyed by fire. These two events had a significant effect on petitioners' lives and lifestyle. Petitioner described the above tragedies as "an unhappy string of events" that led him and his wife "to the conclusion that * * * [they] needed to get more out of life before it was too late." Petitioners' catharsis began with an "automotive buying spree" that included several "performance" cars, including a 1965 Mustang and two Firebirds, one for petitioner and one for his son.1 Petitioner's interest in performance cars, especially Ford Mustangs, led him to open-road racing,2 a form of automobile racing that he first learned about in a magazine article. In 1992, petitioner established Turtle Performance, an unincorporated association, in order to pursue his interests in performance automobiles and, apparently, speed. At first, petitioner maintained a separate checking account and credit card account*9 for Turtle Performance; however, by the years in issue, expenditures attributable to Turtle Performance were paid from or charged to petitioners' personal accounts. During the years in issue, a typical open-road race event required an entry fee of $ 600 (more or less), but there were no cash prizes for the class winners. Entrants apparently competed for trophies and "bragging rights". Eventually, petitioner founded the National Open Road Race Association (NORRA) to publicize the sport. Steeda Autosports (Steeda) is one of several nationally known after-market performance tuners of Ford automobiles. Steeda is located in Pompano Beach, Florida, and offers its products and services to the general public. In November 1992, in what is described as an "uncharacteristic surge of spontaneity", *10 3 petitioner ordered a 1993 Mustang Cobra from a Ford dealer, but had the car shipped directly from Ford's Dearborn assembly plant to Steeda. Petitioner intended to compete in open-road racing with this car and to this end directed that Steeda make certain modifications to the stock Mustang. The modifications were made and sometime during 1993 the Mustang was delivered to petitioner. The Mustang was street legal and used by petitioners for personal purposes, but it was modified by Steeda pursuant to petitioner's specifications so that it could be used to compete in open-road racing. Petitioner decided that the value of the Mustang, or similarly modified Mustangs, depended upon the car's ability to perform. Petitioner's goal was to set the land speed record for a street-legal car on a public highway. To this end, he entered the Mustang in various open-road racing events during the years in issue. At first the events were few and far in between -- twice a year on desert highways in Nevada. Later, the*11 events were held three or four times a year on rural highways in Texas as well as in Nevada. Petitioner lived in Alabama at the time. He owned a trailer and tow vehicle (Chevrolet Suburban) capable of transporting the Mustang, and he either drove or towed his Mustang to the racing events. Occasionally, petitioner leased the Suburban and trailer to others, mostly friends or acquaintances who used the equipment to transport cars to various racing or track testing events. From time to time the location of a racing event coincided with a business trip that petitioner was required to make as an employee of Nichols Research. When this occurred petitioner was reimbursed for his traveling expenses by his employer. Petitioner attempted to generate publicity for his modified Mustang by writing articles and info-ads for various automobile periodicals. Following the years in issue, he offered the Mustang for sale. In one advertisement, petitioner indicated that he had invested $ 38,000 in the car and would "consider reasonable [offers]". Later, after the examination that led to this case began, petitioner advertised the car for sale at prices that varied depending upon the anticipated speed*12 achievements of the car. For example, if the car was sold "ready for its next test run" then the price would be $ 250,000, but if the car set the record sought by petitioner, it would be offered for sale at $ 1,000,000. According to an article in the August 1998 edition of Car and Driver, the current version of a Steeda modified Mustang (then designated the "Steeda Q") sold for approximately $ 41,000, including the cost of the Mustang and Steeda modifications. See Webster, Car and Driver, 60 (Aug. 1998). On August 6, 1996, petitioner was seriously injured in a motorcycle accident. He was hospitalized until October 15, 1996. He was unable to walk without assistance until December 31, 1996, the date of his daughter's wedding. He returned to work for Nichols Research sometime in January 1997. In November 1996, shortly after petitioner was released from the hospital, Mrs. Turner was diagnosed with a serious illness. She was involved with planning her daughter's wedding at the time. She received medical attention for her illness until the middle of 1997. Petitioners' 1994 and 1996 joint Federal income tax returns were timely filed. Taking into account extensions, their 1995 joint Federal*13 income tax return was due on or before October 15, 1996, but it was not filed until March 25, 1997. Each return includes a Schedule C for Turtle Performance. The following items are reported on the Schedules C: Year 1994 1995 1996 Income $ 15,294 $ 22,505 $ 18,060 Total expense (59,739) (73,079) (56,727) deductions Net profit (44,445) (50,574) (38,667) or (loss) The income for 1994 is attributable to leasing fees charged for the use of petitioners' tow vehicle and trailer. For the most part, the incomes reported for 1995 and 1996 consist of travel expense reimbursements petitioner received from Nichols Research. Some of the travel expense deductions claimed on the Schedules C involve those trips when an open-road racing event coincided with petitioner's travel obligations as an employee of Nichols Research. On Schedules C included with their Federal income tax returns from 1992, the year that Turtle Performance was established, through the years in issue, until 1999, petitioners reported net losses totaling over $ 405,000 from that activity. *14 The activity did not generate a profit in any of those years. In 1994 petitioners' daughter was employed to some extent as a model and actress. The income and expenses attributable to petitioners' daughter's employment are reported on petitioners' 1994 return. The examination of petitioners' returns for the years in issue began not later than October 23, 1997.4 In the notice of deficiency that resulted from the examination of those years respondent disallowed the loss attributable to Turtle Performance claimed for each year because, according to respondent, the activity was not engaged in for profit in any of those years. For 1994, respondent also determined that petitioners improperly included their daughter's income and expenses on their return. Respondent further determined that petitioners did not have reasonable cause for failing to file a timely 1995 return. Discussion According to petitioners, Turtle performance is, and was at all relevant*15 times, a trade or business. Therefore, petitioners argue, the expenses and/or losses incurred in that activity are deductible under section 162 and/or section 165.5 Respondent argues that Turtle Performance was not a trade or business during any of the years in issue because petitioner did not engage in that activity with the requisite profit objective. According to respondent, expenditures attributable to that activity are only deductible as allowed by section 183.6 For the following reasons, we agree with respondent. *16 The term "trade or business" is not precisely defined in the Internal Revenue Code or the regulations promulgated thereunder; however, it is well established that in order for an activity to be considered a taxpayer's trade or business for purposes relevant here, the activity must be conducted "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). After careful consideration, we are not persuaded that petitioner's primary purpose for engaging in Turtle Performance was for income or profit. The test of whether a taxpayer conducted an activity for profit is whether he or she entered into, or continued, the activity with the actual or honest objective of making a profit. See Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982), affd. without published opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs. The taxpayer's profit objective for each year in which the activity is conducted must be bona fide, taking into*17 account all of the facts and circumstances. See Keanini v. Commissioner, supra at 46; Dreicer v. Commissioner, supra at 645; Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without opinion 647 F.2d 170 (9th Cir. 1981); Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d Cir. 1967); sec. 1.183-2(a) and (b), Income Tax Regs. More weight is given to objective facts than to the taxpayer's statement of his intent. See Engdahl v. Commissioner, 72 T.C. 659, 666 (1979); sec. 1.183-2(a), Income Tax Regs. The following factors, which are nonexclusive, are considered in the determination of whether an activity is engaged in for profit: (1) The manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his or her 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 losses with respect*18 to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. See sec. 1.183-2(b), Income Tax Regs. No one factor is determinative in and of itself, and our conclusion with respect to petitioner's profit objective does not depend upon merely counting those factors that suggest the presence of a profit objective and comparing that number to the number of factors that indicate the opposite. See id. We see little benefit in specifically discussing each factor. Instead, attached as an Appendix to this opinion is the article from Mustang Monthly, previously cited in this opinion. The article discusses petitioner's background, the circumstances surrounding the acquisition of his modified Mustang, open-road racing in general, petitioner's involvements and achievements in the sport, and to some extent, petitioner's future plans. The article was received into evidence as petitioners' exhibit and compels us to reject their contention that Turtle Performance was a trade or business during the years in issue. Petitioners point to the amount of time and*19 money petitioner has spent in connection with Turtle Performance and argue that both are indicative of a profit objective. As we view the matter, the time that petitioner put into the activity, given his obvious interest in performance cars, is no more indicative of a profit objective than a passionate pastime. Similarly, the money expended suggests little other than to confirm what is commonly acknowledged; that is, car racing at any level is an expensive proposition.7 Lastly, giving little weight to petitioner's offer to sell the Mustang at prices that increased based upon the accomplishments achieved, we have serious doubts whether the value of the Mustang would ever exceed the cumulative losses incurred by petitioners over the history of Turtle Performance. It follows that respondent's adjustments disallowing the net loss claimed on the Schedule C for Turtle Performance for each year in issue are sustained. *20 Petitioners' 1994 return also includes a Schedule C reporting income earned and expenses incurred by their minor child. Respondent determined that neither the income nor the expenses are properly reported on petitioners' joint return. We agree. In general, amounts received in respect of services rendered by a child are includable in the child's income and not in the income of the child's parents. Sec. 73(a). Furthermore, expenditures attributable to such income are generally treated as paid or incurred by the child. Sec. 73(b). Respondent's adjustments in this regard are therefore sustained. Taking into account successive extensions, petitioners' 1995 joint Federal income tax return was due on or before October 15, 1996, but not filed until March 25, 1997. See secs. 6072, 6081. According to petitioners, the addition to tax that would otherwise result from their failure to file a timely return is not applicable because the failure was due to reasonable cause, namely the poor health of each, and not due to willful neglect. See sec. 6651(a)(1). Petitioner was seriously injured in a motorcycle accident shortly before petitioners' 1995 return was due. Furthermore, at about the same time, *21 Mrs. Turner was diagnosed with and treated for a life-threatening illness. We appreciate the severity of petitioners' health problems during the relevant time and recognize that a serious illness can constitute reasonable cause for the failure to file a timely return. See, e. g., Fambrough v. Commissioner, T.C. Memo. 1990-104. Nevertheless, in this case, we note that petitioners' health problems did not prevent them from performing or maintaining other activities. For example, during the period between the due date and filing date, petitioner returned to work, Mrs. Turner apparently remained employed, and the wedding of petitioners' daughter was planned and took place. Petitioners obviously had competing demands on their time around the due date of their 1995 return, and they were entitled to prioritize those demands in a manner that best suited their interests. However, as we noted in Wilkinson v. Commissioner, T.C. Memo. 1997-410, "a taxpayer's selective inability to meet his or her tax obligations when he or she can carry on normal activities does not excuse a late filing." Respondent's imposition of the addition to tax under section 6651(a)(1) for 1995*22 is sustained. Reviewed and adopted as the report of the Small Tax Case Division. To reflect the foregoing, Decision will be entered for respondent. Footnotes 1. See Lawrence, "Mustang Lifestyles: Terminal Velocity", Mustang Monthly, 94 (Oct. 1994).↩ 2. This is a form of car racing that involves driving over a 90 mile stretch of a public highway that has been closed to traffic. In the unlimited class, the car that completes the course in the least amount of time is the winner.↩ 3. See id.↩ 4. The provisions of sec. 7491↩ are therefore not applicable. 5. In general, sec. 162 allows a deduction for all ordinary and necessary expenses incurred in carrying on a trade or business. In the case of an individual, sec. 165(c)(1)↩ generally allows a deduction for any losses incurred in a trade or business. 6. In relevant part, sec. 183 states: (a) General Rule. -- In the case of an activity engaged in by an individual or an S corporation, 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). (c) Activity Not Engaged In For Profit Defined.--For purposes of this section, the term "activity not engaged in for profit" means 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. We note that for years 1995 and 1996 income reported on the Schedules C actually includes employee business expense reimbursements improperly characterized as income from Turtle Performance.↩ 7. The late Colin Chapman, founder and guiding force of Lotus Cars, Ltd., is rumored to have said that he made a small fortune from automobile racing. The problem, according to Mr. Chapman, was that when he started racing he had a large fortune.↩