1 Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the years in

issue. 

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.
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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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2 We note that petitioner did not argue or establish that he

satisfied the requirements of sec. 7491(a).

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
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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.