# United **States Tax Court**

T.C. Memo. 2023

- 81

DONALD E. SWANSON

, Petitioner

v

.

COMMISSIONER OF INTERNAL REVENUE, Respondent

—————

Docket N o. 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 f ederal income tax for years 2014

– 16 (years in issue):

Year Deficiency Additions to Tax / Penalties
§ 66 51(a)(1) § 66 62(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 determin ation

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



### Served 06/29/232

[* 2 ] within the meaning of section 183 1 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 penalt y 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

h is 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 b y $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 ot herwise 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 refe rences 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 charita ble 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 an d entertainment expense deduction of $74.

I n his O pening B rief respondent stated that after conce ssions

, 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 Schedule s C attached to his federal income tax returns
for the years in issue ; ( 3) is entitled to deductions reported on Schedule s A, Itemized Deductions , attached to his federal income tax returns for
the years in issue; (4) had income in excess of the amounts report ed 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 th an allowed by respondent
fo r 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 th e 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

. W e make no separate findings of fact related to those conceded issues.

FINDINGS OF FACT

The fact s 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

. I n 2010, after retiring from two jobs (loading cargo and driving a city bus) , he decided to establish Happy Jack
Charters and acquire d a boa t 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 live d in Anchorage,
Alaska

, but his plan was to take people on halibut fishing trips in Homer, Alaska. His life partner’s children live d 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, t o 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 i ssue because he had only a student license

.

Mr. Swanson did not own a co mmercial 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 Alask a Department of Fish and Game reporting five fishing charter trips in 2 015 : 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 f ishing 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 treatmen ts. 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 year s 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 ke e p expense receipts for tax

purposes

.

In 2014 the Internal Revenue Service (IRS) audited Mr.
Swanson’s 2010 f ederal 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 year s in issue Mr. Swanson traveled to several trade shows hoping to attract customers for his fishing charter activity. H e did

not land any customers from the shows in the years in issue

, but he still hoped tha t they w ould 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 E xpenses

P etro 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 44.8 2

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 T he record does n ot 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 6 1.68 Stoddards 8.00

— — Municipality 100.00 LASA 165.00

— — Bieg Big Studio s 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 re ntal properties in Anchorage

. He
received rental income during the year s in issue from t hese properties.
In 2015 Mr. Swanson sold one of the propert ies for $279,900

.

IV. Bank Deposit s Analysis

Respondent’s revenue agent (RA) conducted a bank deposit s 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 i n 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 dete rmined 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 201 5 Mr. Swanson had unreported income of $ 23,953

. The RA classified the unreported income
into three c ategories: (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 201 6 Mr. Swanson reported $ 53,042 of income ; therefore, the RA concluded that in 201 6 Mr. Swanson had unreported
income of $ 15,946

. An error in the bank deposit s analysis for 2016
resulted in an erroneous i ncrease 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 Form s 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 $2 5 ,631 of business expenses from his fishing charter act ivity

. Mr. Swanson filed f ederal 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 conte nd 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, 100 4

– 0 5 (9th Cir. 1999), af f’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

i s 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 (redu ced 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 allowable9

[* 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. Mem o. 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 p rofit. 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 Gola nt y 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 careful ly and thorough ly investigati ng the profitability of a proposed venture, monitoring the venture’s progress,
and atten ding 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 is10

[* 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. Commissi oner , 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 increas e 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 Charter s ; 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. Neithe r 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 o f list s of

, and receipts for

, expenses).
And w e are skeptical about the accuracy of Mr. Swanson’s income tracking using Square as respondent’s bank deposit s analysis
demonstrated significant discrepancies between his reported income on his federal income tax returns and his deposits in to 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 Charter s

. He experienced signif icant
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. H e explained
that he obt ained 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 indic ates a profit motive, but Mr. Swanson’s explanation of how advertising helped him increase profitability of Happy Jack Charter s was vague and unpersuasive. He mentioned that his first client from trade show11

[* 11 ] advertising was in 2017

. D uring the three ye ars 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 exp enses related to storing, maintaining

, and operating it. Over the seven years of operating Ha ppy Jack Charter s , 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 business like manner. Therefore, this
factor weighs against Mr. Swanson

.

B. The Expertise of the Taxpayer or His Advi sers

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 analys is 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 doub t 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 rectif y th ese 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 aven ue 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 enjoy ment

. 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, t he 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 indicate s a lack of intent to make a profit from the fishing charter activity . We fin d 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 operatio ns. 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 ] manageme nt 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
tha t a taxpayer did not have that motive. See Golanty , 72 T.C. at 426.

Mr. Swanson started Happy Jack Charter s in 2010 and experienced a loss for ever y year through 2016

. Over the course of these

seven year s he reported more than $130,00 0 in losses

. Mr. Swanson contends that unforeseen circumstances caused him to experience
losses

.

W e 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 auto mobile 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 gen eration of some profits from an otherwise money

losing 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 year s from its launch through the years in issue

. Neither
did he attempt to show that there is potential fo r 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 Charter s as his main source of income, although he hoped that one day he would.
Mr. Swanson received income from a retirement pension, S ocial S ecurity retirement, and rental properties. He used his purported losse s 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 f und 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 recrea tional 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
constitu tes 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 find s 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 activit y 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 Charter s 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 activit y only to the extent allowed by section 183(b).

III. Unreported Income: Bank Deposit s 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 incom e. § 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 deposit s method is a permissible method of reconstructing income. See Clayton v. Commissioner , 102 T.C. 6 32 , 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 in come. 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 reconstructin g 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 determine s a deficiency, the taxpayer bears the burden of proving that the bank deposit s analysis is unfair or inaccurate. See Clayton , 102 T.C. at 645; see also DiLeo , 96 T.C. at 883. The taxpayer
must p rove 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 incom e

— 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 me t 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 iss ue

.

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); Higb ee , 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 neg lect.” 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 pr oduced 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.