United States Tax Court

T.C. Memo. 2023-81

DONALD E. SWANSON,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 21701-18. Filed June 29, 2023.

—————

Christopher S. Crago, Andrew Simister (student), and Greg Spurgetis

(student), for petitioner.

Adriana E. Vargas, Daniel G. Kempland, and Melissa D. Lang, for 

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PUGH, Judge: Respondent determined the following deficiencies, 

additions to tax, and accuracy-related penalties with respect to Donald 

Swanson’s federal income tax for years 2014–16 (years in issue):

Year Deficiency

Additions to Tax / Penalties

§ 6651(a)(1) § 6662(a)

2014 $16,135 $4,034 $3,227

2015 38,762 9,691 7,752

2016 4,299 — 860

Deficiencies resulted largely from respondent’s determination

that Mr. Swanson’s fishing charter activity was not a business for profit

Served 06/29/23
2

[*2] within the meaning of section 1831 and that he was not entitled to 

business expense deductions. Respondent also made various other 

income adjustments and reduced or disallowed some itemized 

deductions.

In the Second Stipulation of Facts the parties conceded certain 

adjustments for each year in issue.

Tax Year 2014

Respondent conceded that Mr. Swanson (1) is not liable for an

accuracy-related penalty of $3,227 and (2) is entitled to a noncash 

charitable contribution deduction of $199. Mr. Swanson conceded that 

he is not entitled to (1) a tax expense deduction of $2,288 (admitting that 

his deduction is $1,306 as determined in the notice of deficiency) and 

(2) a car and truck expense deduction of $1,993.

Tax Year 2015

Respondent conceded that Mr. Swanson is not liable for an 

accuracy-related penalty of $7,752. Respondent also conceded that Mr. 

Swanson is entitled to (1) a noncash charitable contribution deduction 

of $200; (2) a cash charitable contribution deduction of $1,362; (3) a 

supplies expense deduction of $1,389; and (4) an insurance expense 

deduction of $1,259. Mr. Swanson conceded that he is not entitled to (1) a 

mortgage interest expense deduction of $9,777; (2) a car and truck 

expense deduction of $1,250; (3) a utilities expense deduction of $600; 

and (4) an advertising expense deduction of $640. Mr. Swanson also 

conceded that his gross receipts reported on Schedule C, Profit or Loss 

From Business, should be increased by $155 for income received for tax 

preparation services he provided.

Tax Year 2016

Respondent conceded that Mr. Swanson is not liable for an 

accuracy-related penalty of $860. He also conceded that Mr. Swanson is 

entitled to (1) a cash charitable contribution deduction of $670; (2) an 

insurance expense deduction of $1,244; (3) an advertising expense 

1 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the 

Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and 

Rule references are to the Tax Court Rules of Practice and Procedure. We round all 

monetary amounts to the nearest dollar.
3

[*3] deduction of $2,256; and (4) an other expense deduction of $8,487. 

Mr. Swanson conceded that he is not entitled to (1) a charitable 

contributions carryover of $3,724; (2) a medical and dental expense 

deduction of $409; (3) a car and truck expense deduction of $1,714; and 

(4) a meals and entertainment expense deduction of $74.

In his Opening Brief respondent stated that after concessions, the 

issues for consideration are whether Mr. Swanson: (1) engaged in a 

fishing charter activity with the objective of making a profit within the 

meaning of section 183; (2) is entitled to deductions for expenses 

reported on the Schedules C attached to his federal income tax returns

for the years in issue; (3) is entitled to deductions reported on Schedules

A, Itemized Deductions, attached to his federal income tax returns for 

the years in issue; (4) had income in excess of the amounts reported on 

his federal income tax returns for the years in issue; (5) had capital gains 

from the sale of real property in excess of the amounts reported on his 

federal income tax return for 2015; (6) is entitled to charitable 

contribution deductions in amounts greater than allowed by respondent 

for the years in issue; (7) is entitled to expense deductions reported on 

Schedules E, Supplemental Income and Loss, in amounts greater than

respondent allowed for 2014 and 2015; and (8) is liable for section 

6651(a)(1) additions to tax for failure to timely file federal income tax

returns for 2014 and 2015.

The two issues that Mr. Swanson challenged at trial and in his 

posttrial briefs are whether his fishing charter trip activity was a 

business or a hobby within the meaning of section 183 and whether he 

is entitled to deductions for certain expenses related to his activity in 

2015 (boat and airplane expenses) and 2016 (boat expenses). Because 

one of the issues involves unreported income, on which respondent bears 

the burden of proof, we must decide whether respondent has met his 

burden. Respondent has the burden of production as to the additions to 

tax. See § 7491(c). We deem Mr. Swanson to concede all other issues 

because he did not challenge them at trial or in his briefs, and we sustain 

respondent’s determinations with respect to those issues. We make no 

separate findings of fact related to those conceded issues.

FINDINGS OF FACT

The facts we find are derived from the pleadings, the trial 

testimony, and the documents admitted into evidence and include the 

stipulated facts and documents. Mr. Swanson resided in Alaska when 

he timely filed his Petition.
4

[*4] I. Happy Jack Charters

Mr. Swanson is an avid fisherman and has been fishing in Alaska 

for more than 30 years. In 2010, after retiring from two jobs (loading 

cargo and driving a city bus), he decided to establish Happy Jack 

Charters and acquired a boat designed to fish for halibut. Mr. Swanson

wanted to show people where to fish and how to fish. His boat, a 22-foot 

Boulton Sea skiff, was made in Oregon.

During the years in issue Mr. Swanson lived in Anchorage, 

Alaska, but his plan was to take people on halibut fishing trips in 

Homer, Alaska. His life partner’s children lived in Homer, and they let

Mr. Swanson store his boat, camper, truck, and other things on their 

property. This allowed Mr. Swanson to reduce his expenses. He hoped 

to retire eventually, buy a cabin, and fish in Homer. In 2015, to shorten 

his travel time between Anchorage and Homer, Mr. Swanson acquired 

a plane. Although he also wanted to use the plane to transport 

customers, he was not allowed to do that during the years in issue

because he had only a student license.

Mr. Swanson did not own a commercial fishing permit for halibut 

fishing but rented one in 2015 and 2016. The State of Alaska requires 

fishermen to maintain a detailed log of fish caught daily. Because Mr. 

Swanson did not have a commercial fishing license in 2014, he did not 

take any fishing charter trips and did not file fishing logs with the 

Alaska Department of Fish and Game for that year. In 2015 and 2016

Mr. Swanson filed fishing logs with the Alaska Department of Fish and

Game reporting five fishing charter trips in 2015: on June 10 and 14, 

and on July 15, 21, and 25; and six fishing charter trips in 2016: on July 

2, 12, 14, 16, and 22, and on August 18. Mr. Swanson also took his boat 

for personal fishing trips. During the years in issue he sometimes used 

the personal fishing trips to photograph people catching fish for 

advertisements to promote Happy Jack Charters. The halibut fishing 

season lasts from May to September.

A cancer diagnosis and treatment restricted Mr. Swanson’s

physical activities in 2013, but during the years in issue he did not have 

to travel for cancer treatments. In 2015 he suffered a knee injury in an 

automobile accident, but he was able to perform the duties of a captain 

after the injury. A boat fire in 2016 took his boat out of service for the 

week or two that the repairs took to complete.
5

[*5] Mr. Swanson did not rely on the income from operating Happy 

Jack Charters. His main sources of income for the years in issue were 

Social Security, pension, and rental income from his two real estate 

properties. He did not have a separate bank account, accounting or 

recordkeeping system, or income and expense journals for Happy Jack 

Charters for the years in issue. But he did keep expense receipts for tax 

purposes.

In 2014 the Internal Revenue Service (IRS) audited Mr. 

Swanson’s 2010 federal income tax return. Mr. Swanson explained that 

during the audit the IRS agent told him that he did not have “the right 

kind of insurance” and “the right kind of license.” Following the audit, 

Mr. Swanson purchased “commercial insurance” and a “commercial 

license.”2 In addition, he started using an application called “Square” to 

track his business income, and he joined the Chamber of Commerce.

During the years in issue Mr. Swanson traveled to several trade 

shows hoping to attract customers for his fishing charter activity. He did 

not land any customers from the shows in the years in issue, but he still 

hoped that they would come later.

II. Business Expenses (Schedule C)

Mr. Swanson produced copies of receipts for boat and airplane 

expenses for 2015 and 2016:

2015 Boat Expenses 2015 Airplane Expenses 2016 Airplane Expenses

Petro Marine $174.06 Avionics $95.00 Missionary $55.44

Petro Marine 126.03 No Li Avionics 56.30 Smon 77.61

Petro Marine 164.51 No Li Avionics 99.90 Northern Lights 78.65

Petro Marine 125.43 No Li Avionics 32.05 Northern Lights 7.55

Petro Marine 8.22 No Li Avionics 12.95 Ace 73.38

Petro Marine 75.97 No Li Avionics 55.90 Ace 80.77

Petro Marine 107.12 No Li Avionics 39.90 Ace 69.27

Petro Marine 142.13 No Li Avionics 678.45 Crowley Fuels 62.92

Petro Marine 92.89 Ace 35.06 Crowley Fuels 44.82

Petro Marine 115.99 Ace 48.10 Ace 38.44

Petro Marine 47.22 Ace 70.27 Crowley Fuels 50.53

Petro Marine 82.23 Ace 44.16 Ace 35.75

Petro Marine 58.54 Ace 26.12 Ace 63.66

2 The record does not indicate when Mr. Swanson bought the insurance, but 

we infer that it was after the IRS audit and before the years in issue.
6

[*6]

Petro Marine 81.41 Ace 48.66 Ace 57.75

Petro Marine 158.56 Ace 58.31 Ace 84.45

Petro Marine 29.71 Ace 64.03 Ace 40.81

Petro Marine 111.74 Ace 53.42 Ace 68.59

Petro Marine 90.96 Ace 39.20 Ace 41.17

Petro Marine 20.18 Ace 53.78 C2 Aviation 55.19

Petro Marine 39.53 Missionary 76.74 Seaplanes North 52.50

— — Ace 52.28 Ace 55.55

— — Ace 84.39 Crowley Fuels 46.44

— — Ace 61.21 Crowley Fuels 49.00

— — Ace 38.75 Crowley Fuels 9.28

— — C&J 20.00 Pathfinder 74.90

— — Ace 54.27 State of Alaska 210.00

— — Smokey Bay 45.49 LASA 165.00

— — Petro Marine 47.22 Sky Airports 35.00

— — Sky Airparts 61.68 Stoddards 8.00

— — Municipality 100.00 LASA 165.00

— — Bieg Big Studios 680.00 T&B Aircraft 715.00

— — Gary M 600.00 Seaplanes North 1,052.48

— — AMA 371.00 Seaplanes North 761.59

— — Ron Stafford 565.00 Seaplanes North 14.70

— — AMA 557.00 Seaplanes North 129.85

— — — — Seaplanes North 36.00

— — — — Seaplanes North 65.56

— — — — Avemco 612.75

— — — — Aviation Med. 173.40

— — — — Ron Stoffono 450.00

Total $1,852 $5,027 $5,969

III. Rental Income

Mr. Swanson owned two rental properties in Anchorage. He 

received rental income during the years in issue from these properties. 

In 2015 Mr. Swanson sold one of the properties for $279,900.

IV. Bank Deposits Analysis

Respondent’s revenue agent (RA) conducted a bank deposits

analysis for the years in issue. For 2014 the RA reviewed the Denali 

Alaskan Federal account ending in 5879 (account 5879), the Alaska USA 

Federal account ending in 1643 (account 1643), and the Alaska USA

Federal account ending in 1629 (account 1629). To determine Mr. 
7

[*7] Swanson’s gross receipts for the years in issue the RA used only 

accounts 5879 and 1643 because account 1629 is a joint account. The RA 

determined that in 2014 the total amount of bank deposits in the two 

accounts was $116,435. In 2014 Mr. Swanson reported $75,785 of 

income on his federal income tax return; therefore, the RA concluded 

that in 2014 Mr. Swanson had unreported income of $40,650.

The RA determined that in 2015 the total amount of bank 

deposits was $265,919. In 2015 Mr. Swanson reported $241,966 of 

income; therefore, the RA concluded that in 2015 Mr. Swanson had 

unreported income of $23,953. The RA classified the unreported income 

into three categories: (1) unexplained unreported income of $18,983; 

(2) income reportable on Schedule E, Line 3, Rents Received, of $4,820; 

and (3) income reportable on Schedule C for income earned as a tax 

professional of $150.

The RA determined that in 2016 the total amount of bank 

deposits was $68,988. In 2016 Mr. Swanson reported $53,042 of income;

therefore, the RA concluded that in 2016 Mr. Swanson had unreported 

income of $15,946. An error in the bank deposits analysis for 2016

resulted in an erroneous increase of $290 in the total deposits.

Mr. Swanson admitted that he received rental income and was 

paid as a tax professional for helping his friend to prepare a tax return 

on one occasion.

V. Federal Income Tax Returns 

Mr. Swanson filed Forms 1040, U.S. Individual Income Tax 

Return, for 2014 and 2015 on August 15, 2017. He filed Form 1040 for 

2016 on June 5, 2017.

For 2014 Mr. Swanson reported $1,500 of gross receipts and 

$1,993 of business expenses from his fishing charter activity. For 2015 

he reported $2,345 of gross receipts and $36,960 of business expenses

from his fishing charter activity. And for 2016 Mr. Swanson reported 

$3,709 of gross receipts and $25,631 of business expenses from his 

fishing charter activity. Mr. Swanson filed federal income tax returns 

reflecting income and business expense deductions for his fishing 

charter activity for 2010 and 2012 through 2016. He reported net 

business losses for each of those years, totaling $131,105.
8

[*8] OPINION

The main issue in this case is whether during any of the years in 

issue Mr. Swanson entered into or carried on his fishing charter activity

for profit and whether the associated deductions were proper.

I. Burden of Proof

Generally, the taxpayer bears the burden of proving that the 

Commissioner’s determinations are erroneous. Rule 142(a); Welch v. 

Helvering, 290 U.S. 111, 115 (1933). Under section 7491(a)(1), “[i]f, in 

any court proceeding, a taxpayer introduces credible evidence with 

respect to any factual issue relevant to ascertaining the liability of the 

taxpayer for any tax imposed by subtitle A or B, the Secretary shall have 

the burden of proof with respect to such issue.” See Higbee v. 

Commissioner, 116 T.C. 438, 442 (2001). Mr. Swanson does not contend 

that the burden of proof should shift to respondent under section 

7491(a), and we conclude that section 7491(a) does not apply here.

In cases involving unreported income, the Commissioner must 

establish an evidentiary foundation connecting the taxpayer to the 

income-producing activity, Weimerskirch v. Commissioner, 596 F.2d 

358, 361 (9th Cir. 1979), rev’g 67 T.C. 672 (1977), or demonstrate that 

the taxpayer actually received income, Edwards v. Commissioner, 680 

F.2d 1268, 1270–71 (9th Cir. 1982). Once the Commissioner has met this 

threshold burden, the burden shifts to the taxpayer to show that the

Commissioner’s determination of income was arbitrary or erroneous. 

Hardy v. Commissioner, 181 F.3d 1002, 1004–05 (9th Cir. 1999), aff’g

T.C. Memo. 1997-97.

II. For-Profit Business

Taxpayers are generally allowed deductions for business and 

investment expenses. See §§ 162, 212. Under section 183(a), individuals 

are not allowed a deduction attributable to an activity “if such activity 

is not engaged in for profit” except to the extent provided by section 

183(b). Section 183(b) allows deductions that would have been allowable 

had the activity been engaged in for profit but only to the extent of gross 

income derived from the activity (reduced by deductions attributable to 

the activity that are allowable without regard to whether the activity 

was engaged for profit).

Section 183(c) defines an activity not engaged in for profit as “any 

activity other than one with respect to which deductions are allowable 
9

[*9] for the taxable year under section 162 or under paragraph (1) or (2) 

of section 212.” For expenses to be fully deductible under section 162 or 

212, taxpayers must show that they are engaged in the activity with the 

primary objective of making a profit. Wolf v. Commissioner, 4 F.3d 709, 

713 (9th Cir. 1993), aff’g T.C. Memo. 1991-212; see also Westbrook v. 

Commissioner, 68 F.3d 868, 875 (5th Cir. 1995), aff’g T.C. Memo. 1993-

634.

The expectation of a profit need not be reasonable, but the 

taxpayer must conduct the activity with the actual and honest objective 

of making a profit. Keating v. Commissioner, 544 F.3d 900, 904 (8th Cir. 

2008), aff’g T.C. Memo. 2007-309. Greater weight is given to objective 

facts than to the taxpayer’s self-serving statement of intent. King v. 

Commissioner, 116 T.C. 198, 205 (2001); Treas. Reg. § 1.183-2(a) and (b).

The regulations provide a nonexhaustive list of nine factors that 

should be considered: (1) the manner in which the taxpayer carries on 

the activity; (2) the expertise of the taxpayer or the taxpayer’s 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 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) whether 

elements of personal pleasure or recreation are involved. Treas. Reg. 

§ 1.183-2(b). Neither a single factor, nor the existence of even a majority 

of the factors is controlling; rather all the facts and circumstances should 

be evaluated. See Golanty v. Commissioner, 72 T.C. 411, 426–27 (1979), 

aff’d without published opinion, 647 F.2d 170 (9th Cir. 1981).

A. Manner in Which the Taxpayer Carries on the Activity

Carrying on an activity in a businesslike manner, as by 

maintaining complete and accurate books and records, conducting the 

activity in a manner similar to other activities of the same nature that 

are profitable, and making changes in operations to adopt new 

techniques or abandon unprofitable methods, is a factor that may 

indicate a profit objective. Treas. Reg. § 1.183-2(b)(1). Businesslike 

conduct is characterized by carefully and thoroughly investigating the 

profitability of a proposed venture, monitoring the venture’s progress, 

and attending to problems that arise over time. See Ronnen v. 

Commissioner, 90 T.C. 74, 93 (1988); Taube v. Commissioner, 88 T.C. 

464, 481–82 (1987). An important indication of whether an activity is 
10

[*10] being performed in a businesslike manner is whether the taxpayer 

implements methods for controlling losses, including efforts to reduce 

expenses and generate income. See Foster v. Commissioner, T.C. Memo. 

2012-207, 2012 WL 3000350, at *6; Dodge v. Commissioner, T.C. Memo. 

1998-89, 1998 WL 88175, at *5, aff’d, 188 F.3d 507 (6th Cir. 1999).

For section 183 purposes, the key question is not whether the 

taxpayer keeps records, but whether the taxpayer uses his records to 

improve profitability and take steps to control expenses and increase

income. See Golanty, 72 T.C. at 430. Mr. Swanson explained that he kept 

various receipts for tax purposes that he would hand to his accountant 

at the end of the year “to figure it out.” Mr. Swanson did not have a 

separate bank account for Happy Jack Charters; instead, he used

Square to track his income from the fishing charter activity. Mr. 

Swanson did not explain whether and how he used the data about his 

income and expenses to make his activity profitable. Neither did he keep 

complete records of his Happy Jack Charters activity. His maintenance 

of receipts of various expenses is insufficient. See Keating, T.C. Memo. 

2007-309 (holding that complete and accurate books and records are 

more than the mere maintenance of lists of, and receipts for, expenses). 

And we are skeptical about the accuracy of Mr. Swanson’s income 

tracking using Square as respondent’s bank deposits analysis 

demonstrated significant discrepancies between his reported income on 

his federal income tax returns and his deposits into his bank accounts. 

Mr. Swanson did not have a business plan and made no 

significant changes to reduce expenses and generate income the entire 

time he operated Happy Jack Charters. He experienced significant 

losses not only during the years in issue but from the beginning of his 

fishing charter activity in 2010. 

Mr. Swanson explained that he implemented some changes after 

respondent’s audit of his 2010 federal income tax return. He explained 

that he obtained a fishing license and commercial insurance, started 

using Square, and engaged in advertising with the Chamber of 

Commerce. He also attended trade shows hoping eventually to land new 

clients. Some of these changes had nothing to do with increasing 

profitability or reducing expenses but instead were necessary to comply 

with applicable laws and regulations (maintaining a valid fishing license 

and commercial insurance). Advertising generally indicates a profit 

motive, but Mr. Swanson’s explanation of how advertising helped him 

increase profitability of Happy Jack Charters was vague and

unpersuasive. He mentioned that his first client from trade show 
11

[*11] advertising was in 2017. During the three years in issue Mr. 

Swanson had only 11 fishing trips. Despite the apparent lack of clients

and income, Mr. Swanson purchased an airplane and incurred 

significant expenses related to storing, maintaining, and operating it. 

Over the seven years of operating Happy Jack Charters, Mr. Swanson 

never made changes that enhanced his prospect for making a profit.

Because Mr. Swanson did not maintain complete business 

records, did not have a business plan, and did not respond to losses by 

changing how he conducted his fishing charter activity, we find that he 

did not conduct the activity in a businesslike manner. Therefore, this 

factor weighs against Mr. Swanson.

B. The Expertise of the Taxpayer or His Advisers

The taxpayer’s expertise, research, and study of an activity, as 

well as his consultation with experts, may be indicative of a profit 

motive. Treas. Reg. § 1.183-2(b)(2). The type and quality of advice that 

a taxpayer seeks is important to the analysis of the taxpayer’s 

consultation with experts. See Engdahl v. Commissioner, 72 T.C. 659, 

668 (1979) (noting that informal and continuous consultations with 

experts in the field demonstrate an intent to engage in a business for 

profit).

We do not doubt Mr. Swanson’s fishing expertise, but he did not 

demonstrate to us that he had any expertise in running a business, 

much less a fishing charter business. When he first started, he did not 

have a commercial fishing license or commercial insurance; only after 

the IRS audit did he rectify these omissions. Mr. Swanson did not 

demonstrate how he prepared for running a fishing charter business, 

whether he did any research or study, or whether he consulted with 

experts or received any other advice about operating a fishing charter

business. 

Mr. Swanson testified that he joined the Chamber of Commerce 

but did not explain whether or how it better equipped him to run a 

profitable fishing charter business. He testified only that he viewed it as 

another avenue for advertising.

Because Mr. Swanson lacked expertise in running a fishing 

charter business and did not consult any advisers to compensate for his 

lack of business expertise, this factor weighs against him. 
12

C. The Time and Effort Expended by the Taxpayer in Carrying 

On the Activity

The taxpayer’s devotion of much of his personal time and effort to 

carrying on an activity may indicate a profit motive, particularly if the 

activity does not involve substantial personal or recreational enjoyment. 

Treas. Reg. § 1.183-2(b)(3).

Mr. Swanson did not take any charter fishing trips in 2014 and 

had only five and six trips in 2015 and 2016, respectively. He testified 

that health issues restricted his physical activities in 2013 but did not 

indicate how his health problems affected his activities in the years in 

issue. Rather, the main reason Mr. Swanson did not take any fishing 

trips in 2014 was that he did not have a commercial fishing license or 

commercial insurance. Mr. Swanson did not explain why he had only 11 

trips in 2015 and 2016. 

The limited time that Mr. Swanson spent on fishing charter trips 

in the years in issue indicates a lack of intent to make a profit from the 

fishing charter activity. We find that this factor weighs against Mr. 

Swanson. 

D. Expectation that Assets Used May Appreciate in Value

An expectation that assets used in an activity will appreciate may 

indicate a profit motive even if the taxpayer derives no profit from 

current operations. Id. subpara. (4).

Mr. Swanson did not address this factor at trial or in posttrial 

briefs, and offered no other evidence to show any assets used in the 

fishing charter activity will appreciate in value. Accordingly, this factor 

is neutral. 

E. The Success of the Taxpayer in Carrying On Similar or 

Dissimilar Activities

If a taxpayer has previously engaged in similar activities and 

made them profitable, this success may show that the taxpayer has a 

profit objective, even if the current activity is unprofitable currently. Id.

subpara. (5).

Mr. Swanson did not address this factor at trial or in posttrial 

briefs, and offered no other evidence to establish his success in other 

businesses. Respondent notes that Mr. Swanson engaged in the 

[*12]
13

[*13] management of rental properties which also generated losses for 

all years in issue. We find that this factor weighs against Mr. Swanson. 

F. The Taxpayer’s History of Income or Losses with Respect to 

the Activity

A history of continued losses in an activity may indicate the lack 

of a profit motive. Id. subpara. (6). While a series of losses during the 

startup stage of an activity may not necessarily indicate a lack of profit 

motive, a record of large losses over many years is persuasive evidence 

that a taxpayer did not have that motive. See Golanty, 72 T.C. at 426.

Mr. Swanson started Happy Jack Charters in 2010 and 

experienced a loss for every year through 2016. Over the course of these 

seven years he reported more than $130,000 in losses. Mr. Swanson 

contends that unforeseen circumstances caused him to experience 

losses.

We sympathize with Mr. Swanson’s setbacks, but we do not think 

that those issues were the main reason his fishing charter activity was 

unprofitable. Mr. Swanson testified that despite his health problems he 

was able to perform the duties of a boat captain and that he did not have 

to travel for treatment during the years in issue. The 2015 automobile

accident also did not keep Mr. Swanson from performing his fishing 

charter activity. He testified that despite the accident, he was able to 

work that season. Lastly, the 2016 boat fire interrupted Mr. Swanson’s 

fishing charter activity for only a week or two, the time it took to make 

the necessary repairs.

Mr. Swanson’s continuous and significant losses indicate a lack of 

a profit motive, and this factor weighs against him. 

G. The Amount of Occasional Profits, if Any, Which Were 

Earned

A taxpayer’s generation of some profits from an otherwise moneylosing venture may support the existence of a profit motive. Treas. Reg. 

§ 1.183-2(b)(7).

Mr. Swanson did not address this factor at trial or in posttrial 

briefs, and he stipulated that Happy Jack Charters experienced losses 

for the seven years from its launch through the years in issue. Neither 

did he attempt to show that there is potential for significant profit in the 

future. We find that this factor weighs against Mr. Swanson.
14

H. The Financial Status of the Taxpayer

Substantial income from sources other than the activity may 

indicate that the activity is not engaged in for profit. Id. subpara. (8).

Mr. Swanson did not rely on income from Happy Jack Charters 

as his main source of income, although he hoped that one day he would.

Mr. Swanson received income from a retirement pension, Social Security 

retirement, and rental properties. He used his purported losses from the

fishing charter activity to reduce his income from other sources. Because 

Mr. Swanson did not receive substantial income from his fishing charter 

activity, he was spending his income from other sources to fund it. This 

factor also weighs against Mr. Swanson. 

I. Elements of Personal Pleasure or Recreation

The presence of personal motives for conducting an activity may 

indicate lack of a profit objective, especially if the activity involves 

personal or recreational aspects. Id. subpara. (9). An activity is not 

classified as a hobby simply because the taxpayer finds it pleasurable. 

Jackson v. Commissioner, 59 T.C. 312, 317 (1972). The analysis does not 

require that the activity be engaged in with the exclusive intent of 

deriving a profit or even maximizing profit. Treas. Reg. § 1.183-2(b)(9).

That said, “where the possibility for profit is small . . . and the possibility 

for gratification is substantial, it is clear that the latter possibility 

constitutes the primary motivation for the activity.” Dodge v. 

Commissioner, 1998 WL 88175, at *7 (quoting Burger v. Commissioner, 

T.C. Memo. 1985-523, aff’d, 809 F.2d 355 (7th Cir. 1987)).

We have no doubt that Mr. Swanson finds fishing pleasurable. 

Mr. Swanson used his boat for personal fishing trips. He denied some 

personal use and admitted some too. He could not adequately explain 

the number of times that he had to refuel the boat that had no 

corresponding charter booking. In addition Mr. Swanson testified that 

his retirement plan has been to retire to Homer and fish.

A review of the entire record and the testimony at trial persuades 

us that Mr. Swanson’s personal motives and the recreational or personal 

aspects of his fishing charter activity outweighed his desire for profit.

This factor weighs against Mr. Swanson.

[*14]
15

J. Conclusion

While Mr. Swanson testified credibly about the time he spent on 

Happy Jack Charters and the obstacles he faced, he did not demonstrate 

that his fishing charter activity was more than a retirement hobby. 

Considering the evidence as a whole, we are convinced that Mr. Swanson 

wanted his fishing charter activity to succeed and he devoted time to it, 

but he was not operating it as a business.

We therefore find that during the years in issue Mr. Swanson did 

not operate his fishing charter activity with the requisite profit intent. 

Consequently, he is entitled to deductions attributable to that activity 

only to the extent allowed by section 183(b). 

III. Unreported Income: Bank Deposits Analysis

Gross income includes “all income from whatever source derived.”

§ 61(a). A taxpayer must maintain books and records establishing the 

amount of his gross income. § 6001. If a taxpayer fails to maintain and 

produce the required books and records, the Commissioner may 

determine the taxpayer’s income by any method that clearly reflects 

income. See § 446(b); Petzoldt v. Commissioner, 92 T.C. 661, 693 (1989); 

Treas. Reg. § 1.446-1(b)(1). The Commissioner’s reconstruction of 

income “need only be reasonable in light of all surrounding facts and 

circumstances.” Petzoldt, 92 T.C. at 687.

The bank deposits method is a permissible method of 

reconstructing income. See Clayton v. Commissioner, 102 T.C. 632, 645

(1994); see also Kudo v. Commissioner, T.C. Memo. 1998-404, aff’d, 11 

F. App’x 864 (9th Cir. 2001). Bank deposits constitute prima facie 

evidence of income. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). 

The Commissioner need not show the likely source of a deposit treated 

as income but “must take into account any nontaxable source or 

deductible expense of which [he] has knowledge” in reconstructing 

income using the bank deposits method. Clayton, 102 T.C. at 645–46. He 

need not follow any “leads” suggesting that a taxpayer has deductible 

expenses. DiLeo v. Commissioner, 96 T.C. 858, 872 (1991), aff’d, 959 F.2d 

16 (2d Cir. 1992). After the Commissioner reconstructs the taxpayer’s 

income and determines a deficiency, the taxpayer bears the burden of 

proving that the bank deposits analysis is unfair or inaccurate. See 

Clayton, 102 T.C. at 645; see also DiLeo, 96 T.C. at 883. The taxpayer 

must prove that the reconstruction is in error and may do so by proving 

that all or part of a deposit is not taxable. See Clayton, 102 T.C. at 645. 

[*15]
16

[*16] Because Mr. Swanson did not maintain books and records 

sufficient to establish his income and expenses, the RA reconstructed 

Mr. Swanson’s income using the bank deposits method. To support the 

analysis, respondent produced bank records. Further, respondent 

proved at least a few likely sources of income—Mr. Swanson admitted 

that he received rental income as well as one payment for preparing a 

friend’s tax return. Respondent’s analysis is well supported, and we 

accept the reconstruction of income and expenses as reasonable and 

accurate. Thus, we conclude that respondent has met his burden of 

proof.

Mr. Swanson did not argue that respondent’s reconstruction was 

unfair or inaccurate and thus did not meet his evidentiary burden. We 

therefore sustain respondent’s determinations with respect to 

unreported income for the years in issue.

IV. Additions to Tax

Respondent determined additions to tax under section 6651(a)(1)

for 2014 and 2015. Respondent bears the burden of production with 

respect to additions to tax and must produce evidence that they are 

appropriate. See § 7491(c); Higbee, 116 T.C. at 446–47.

Section 6651(a)(1) imposes an addition to tax for failure to file a 

return on or before the due date (including extensions) unless the 

taxpayer can establish that such failure was “due to reasonable cause 

and not due to willful neglect.” To demonstrate reasonable cause, a 

taxpayer must show that he exercised ordinary business care and 

prudence but was nevertheless unable to file on time. United States v. 

Boyle, 469 U.S. 241, 246 (1985); Treas. Reg. § 301.6651-1(c)(1).

Respondent produced evidence of late filing, which Mr. Swanson 

did not dispute. Neither did he argue that the failure to timely file his 

2014 and 2015 tax returns was due to reasonable cause. Thus, we 

conclude that respondent met his burden of production with respect to 

the additions to tax. 

To reflect the foregoing and respondent’s concessions, 

Decision will be entered under Rule 155.