T.C. Memo. 1995-510

UNITED STATES TAX COURT

JAY M. ANDERSON AND HELEN B. ANDERSON, Petitioners v.

 COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22524-93. Filed October 26, 1995.

Jay M. Anderson, pro se.

Jeanne Gramling, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARKER, Judge: Respondent determined a deficiency in

petitioners' Federal income tax in the amount of $12,870 and an

addition to tax under section 6651(a)(1) in the amount of $1,553

for the taxable year 1989 and a deficiency in the amount of

$2,867 for the taxable year 1990. 
 

1 Respondent conceded the issue of the sec. 6651(a)(1)

addition to tax for the taxable year 1989. Petitioners conceded

the following adjustments to income:

 1989 1990 

Capital gains $960 $13,350 

Depreciation-mortgage business (350) 825

Auto rental expense (51) --

Depreciation-rental property -- 381

Miscellaneous itemized deductions 3,534 2,096

Other car expenses 4,933 --

 

2 That decision also will determine petitioners' medical

expense deductions for 1989 and 1990, and the self-employment tax

for 1990, since the adjustments to these items are purely

computational.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years before

the Court, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

After concessions by both parties,1 the remaining issue for

decision is whether petitioners may deduct depreciation in the

amount of $33,333 in each of the taxable years 1989 and 1990 for

a prototype automobile built by petitioner Jay M. Anderson.2 In

reaching our decision, we must decide: (1) Whether petitioner

Jay M. Anderson was engaged in a trade or business related to the

automobile or held the automobile for production of income or,

conversely, whether the activity related to the automobile was

one "not engaged in for profit" within the meaning of section

183, and (2) whether petitioner has substantiated his basis in

the automobile.
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 FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulation of facts, supplemental stipulation of facts, and

the exhibits attached thereto are incorporated herein by this

reference. 

Petitioners resided in Roanoke, Virginia, at the time they

filed the petition in this case. The term petitioner in the

singular will refer to Jay M. Anderson.

In 1980, petitioner began working on a design for a high

fuel/mileage automobile, which he called the "J Morgan I" car

(the J car). In the preceding 5 years, he had read extensively

on the subject of automobile manufacturing and performance but

otherwise had no experience in the field. From his reading, he

perceived that there existed an interest in high mileage cars;

i.e., cars that would get 100 or more miles per gallon. He did

not, however, consult any automobile manufacturers or conduct any

market surveys or studies regarding the feasibility of or

interest in such a car. 

On May 21, 1981, petitioner purchased Williams Auto

Alignment (the auto shop) with $40,000 borrowed from First

National Bank of Roanoke. He operated the auto shop as a sole

proprietorship at first, but incorporated the business in 1984. 

The auto shop provided petitioner with a facility and personnel

to assist in building the car. The ongoing business of the auto

shop was to perform wheel alignments, for which it charged
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3 Petitioner testified that Virginia Polytechnic Institute

found the design to be "97 percent aerodynamically correct." 

Petitioner presented no documentation of these results and did

not explain what, if anything, such results meant in relation to

the ultimate manufacture or operation of the J car. Presumably

the aerodynamics of the body would affect its mileage per gallon

of fuel.

$18.50. Occasionally, the auto shop would replace ball joints or

straighten a frame; for the latter, the charge was $800 to $900. 

Petitioner testified that frame jobs were rare, occurring only

two or three times during the years he owned the auto shop. 

Petitioner began his construction of the J car by using the

frame of a 1965 Triumph Spitfire on which he built a fiberglass

body. Petitioner built the fiberglass body of the car by hand,

rather than from a mold. He did not hire anyone to design and

construct a mold first because he believed that the cost would be

prohibitive and that, since he could not draw, he would be unable

to convey to such a person what he had in mind as to the body

design. According to petitioner, once he was satisfied with the

body, he then had someone else prepare a drawing of the car. 

Petitioner did not produce this drawing at the trial, and the

record does not disclose the degree of accuracy or detail with

which the drawing was prepared. Petitioner indicated that he

sent this drawing to Virginia Polytechnic Institute for an

assessment of the car's aerodynamic qualities. Petitioner said

he was satisfied with the results of the assessment3 and left his

design as it was at that time. 
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By 1985, petitioner had completed about 80 to 90 percent of

the J car; only some body work remained to be done. A diesel

engine had been installed, and the mechanical and running gear

was installed and operative. The J car weighed 1,275 pounds and

had a fiberglass body, a Kubota diesel engine, 3-in-line

cylinders, a four-speed overdrive transmission, front disk brakes

and rear drum brakes, and Michelin radial tires. The rear end

came out of an old MG. Petitioner estimated that the car would

go 70 miles per hour at top speed, but it would have poor

acceleration characteristics. Petitioner tested the J car using

a meter gauge to determine its mileage per gallon, which

petitioner estimated to be 116.7 miles per gallon of diesel fuel. 

By 1985, 99 percent of the cost of building the J car had been

incurred. 

Petitioner testified that he paid for the expenses related

to the development of the J car by using 20 to 30 credit cards to

reimburse the auto shop and by borrowing money from several

sources. None of these expenses has been substantiated. In

1985, when the City of Roanoke experienced a flood, petitioner

lost his records related to the expenses for building the J car. 

Petitioner has not made an attempt to reconstruct those records. 

Petitioner did have the stubs to the auto shop's checkbook for

some portions of the period of May 29, 1981 through October 25,

1985. 
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4 Petitioner made several arithmetical errors in his

computations. The deposit amounts that petitioner read into the

record (which figures are the same figures the Court wrote down

during the trial) do not add up to petitioner's subtotal of

$27,489 in the transcript or his total of $44,566. Moreover, the

Court could not verify all of those deposit amounts from the

check stubs in evidence. Finally, the $44,566 and $18,038 sums

add up to $62,604, not $63,681, but since there are errors in

both of those sums, it serves no useful purpose to correct the

total figure.

At trial, petitioner opined that a large portion of the

costs of the J car could be determined by examining the deposits

into the auto shop's checking account as written on those check

stubs. However, the sources of the deposits were not indicated

on the stubs, only the dates and amounts. Petitioner suggested

that one easily could distinguish the deposits related to

petitioner's payments for car expenses, as their amounts were

substantially larger than the $18.50 normally received by the

shop for alignments. By this method, petitioner's tally of the

deposits he claimed were related to the J car totaled $44,566 for

42 months. From this, he determined an average per-month figure

of $1,061 and calculated the amounts spent during the months

missing from the check stubs to be another $18,038 ($44,566 ÷ 42

x 17) for 17 months, for a total of $63,681.4 However,

petitioner did not own the auto shop for 59 months. Petitioner

presented no supporting bank account or credit card statements. 

He also did not provide any evidence that the auto shop had paid

for the car expenses and, if the auto shop had paid such

expenses, that such had not been deducted either on petitioner's
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Schedules C for the auto shop or on the later corporate returns

of the auto shop.

In 1985, petitioner sold the auto shop. At that time he

drove the J car, without windows or a muffler, the 5 miles to his

home. This is the only mileage that has ever been put on the J

car. By the time the J car was moved to petitioner's home, some

99 percent of the costs of the car had been incurred. Thereafter

petitioner merely invested his time and labor in completing the

vehicle. 

On August 19, 1986, petitioner filed a petition in the

Bankruptcy Court for the Western District of Virginia seeking

relief under Chapter 13 of the Bankruptcy Code. Petitioner's

debts included unpaid withholding tax for the auto shop, bank

loans for real estate purchases, and some unsecured debts

possibly including unpaid credit card charges. In his bankruptcy

petition, petitioner listed among his personal property the J

car, describing it as a 1965 Spitfire worth $1,000. It was

listed according to its frame. The J car was never titled with

the State motor vehicle authority and has never been insured. In

August of 1986, the J car had been disassembled, and its parts

were lying all over petitioner's garage. Petitioner claims that

he valued the car at $1,000 because of its then disassembled

condition. 

From 1986 until 1989, petitioner worked on finishing the J

car at home. He reassembled the J car and put on the lacquer
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coating and wax. He broke two windshields and, as of the date of

the trial, had not solved this windshield problem. The J car is

now stored in petitioner's garage; he starts the engine every 6

weeks. 

The J car is only a prototype and is not intended for street

use. The design of the J car is unusual in that it has snap-out

upholstery, a dash that will lie flat, and a body attached by

only eight bolts. The body of the J car was intended to be used

to make a mold with which other car bodies can be made. 

Although petitioner estimated the cost of making such a mold to

be $3,500, a figure he termed "not a big expense", he never made

the mold needed to reproduce the body. Petitioner suggested that

today he could make the J car for about $7,500 per car. 

Petitioner explained that should someone purchase a copy of the J

car and the body of that vehicle be damaged, the owner could

order a new body from petitioner and easily reassemble the

vehicle. Petitioner suggested he could make such a replacement

fiberglass body for $300 to $350 in 1989 and $500 today. 

Petitioner has never sought and does not have a patent on

the J car's design or on any of its parts, nor does he have any

plans of that design drawn up or otherwise reproduced. Most of

the J car was constructed from old or new parts of other types of

automobiles. Petitioner's principal contribution appears to have

been in the unusual and attractive shape of the fiberglass body. 

The J car looks like an upscale two-seater sports car, but it
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5 The cost of the advertisement was determined by the number

of responses received, with no initial charge for placing the

advertisement. 

does not have sports car speed or acceleration characteristics. 

The unique characteristic of the J car is its purported fuel

efficiency, which petitioner attributes to its lightweight

fiberglass body and its gear ratios. The claimed 116.7 miles per

gallon has never been certified or otherwise verified.

In 1989, petitioner began making attempts to sell copies of

the car through personal contacts and advertisements. He

identified those radio stations that would charge for commercials

on a per-inquiry basis;5 petitioner testified that two or three

California radio stations ran his advertisements under this

arrangement. Petitioner also testified that he sent flyers to

numerous automobile magazines, both in the United States and

Europe. Supposedly, two magazines in Europe published the

information; however, petitioner could not remember the names of

the magazines. Nor could he remember the local publications with

which he had placed advertisements. The flyers listed the sales

price as $14,500, plus an additional $2,500 for a turbocharged

model. The flyers claimed the gas mileage was 116.7 miles per

gallon, although this mileage had not been certified or otherwise

established. Petitioner did not receive any orders for the car,

and no sales resulted from these advertisements or his personal

contacts.
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6 Petitioner's friend put him in contact with an individual

who had been dealing with the Brazilian company. That individual

had a patent on a new motor and was searching for a car in which

to use his motor. It is not clear whether petitioner dealt just

with that patent holder or dealt directly with a representative

from the Brazilian company.

Petitioner decided at some point that he would try to sell

or license the J car itself to an automobile manufacturer. He

wanted a flat sum, plus a certain amount per each unit the

manufacturer made. He received an inquiry from an individual in

Texas who had a corporate shell and was looking for an operating

business to place in his shell. That person thus was not

interested in petitioner's proposed venture. Petitioner related

that he declined the offer of a company in Brazil that wanted to

exchange $100,000 of its stock for the car, plus $50 per each car

made.6 Petitioner did not want stock that was not traded

publicly, and the company apparently would not guarantee that a

specific number of units would be manufactured. Petitioner

wanted a guarantee of a minimum of 1,000 units. This offer,

whatever its terms, was never put in writing. 

Petitioner testified that during the years at issue he spent

about 25 hours per week on the J car activity; however, the few

activities detailed above were rather brief and sporadic and

could not have consumed that much time. During this time,
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7 All amounts are rounded to the nearest whole dollar. This

rounding accounts for the apparent discrepancies in the totals.

petitioner also ran a mortgage loan business. Petitioners'

taxable income was derived from the following sources:7

Source 1989 1990

Interest $5,002 $2,011

Mortgage Business (3,567) 5,079

Rental Income (1,743) (1,196)

Capital Gains 107,737 18,215

Total Income $107,428 $24,108 

Petitioners filed joint Federal income tax returns for the

taxable years 1989, 1990, and 1991. In each of these years,

petitioner deducted $33,333 in depreciation for the J car on a

Schedule C. He reported no income from this activity in any of

the years. Respondent disallowed the depreciation deductions

related to the car on the ground that petitioner was not engaged

in a trade or business for profit or an activity for production

of income. The year 1991 is not before the Court.

OPINION

The issue is whether petitioner may deduct depreciation for

the J car in the amount of $33,333 per year for the taxable years

1989 and 1990. Petitioner contends that he was engaged in the

business of selling the car, or copies of it, during the years at

issue and that the car had a cost basis of $100,000. Respondent

disagrees with petitioner's position on both of these points.
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Petitioner's J Car Activity

If an activity is one "not engaged in for profit", section

183 limits the deductions allowed with respect to that activity. 

First, section 183(b)(1) allows the full amount of those

deductions available without regard to the profit objective of

the activity. Then, section 183(b)(2) allows those deductions

normally permitted only if such activity were engaged in for

profit, but limits them to the amount by which the gross income

from that activity exceeds any deductions taken under section

183(b)(1). Section 183(c) defines an activity not engaged in for

profit as any activity other than one with respect to which

deductions are allowable under section 162 or section 212. 

Whether deductions are allowable under section 162 or

section 212 depends upon whether the taxpayer engaged in that

activity with the "actual and honest objective of making a

profit." Ronnen v. Commissioner, 90 T.C. 74, 91 (1988); Dreicer

v. Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion

702 F.2d 1205 (D.C. Cir. 1983). The taxpayer's expectation of

profit need not be a reasonable one; however, the taxpayer must

have a bona fide objective to make a profit. Hulter v.

Commissioner, 91 T.C. 371, 393 (1988); Allen v. Commissioner, 72

T.C. 28, 33 (1979); Dunn v. Commissioner, 70 T.C. 715, 720

(1978), affd. without published opinion 607 F.2d 995 (2d Cir.

1979), affd. on another issue 615 F.2d 578 (2d Cir. 1980).
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8 These factors are: (1) Manner in which the taxpayer

carries on the activity; (2) the expertise of the taxpayer or his

advisors; (3) the time and effort expended by the taxpayer in

carrying on the activity; (4) expectation that assets used in

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 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. Sec. 1.183-2(b),

Income Tax Regs.

Whether a taxpayer has the requisite actual and honest

objective of making a profit is a question of fact to be resolved

on the basis of all of the facts and circumstances of the

particular case. Golanty v. Commissioner, 72 T.C. 411, 426

(1979), affd. without published opinion 647 F.2d 170 (9th Cir.

1981); Dunn v. Commissioner, 70 T.C. at 720. The taxpayer bears

the burden of proof on this issue. Rule 142(a). In resolving

this factual issue, greater weight is accorded to objective facts

than to a taxpayer's mere statement of intent. Thomas v.

Commissioner, 84 T.C. 1244, 1269 (1985), affd. 792 F.2d 1256 (4th

Cir. 1986); Dreicer v. Commissioner, 78 T.C. at 645; sec. 1.183-

2(a), Income Tax Regs.

Section 1.183-2(b), Income Tax Regs., sets out a

nonexclusive list of nine factors relevant to the issue as to

whether the taxpayer has the requisite actual and honest profit

objective.8 Not all of these factors are applicable in every

case, and no one factor is controlling. Taube v. Commissioner,

88 T.C. 464, 479-480 (1987); Abramson v. Commissioner, 86 T.C.
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360, 371 (1986); Allen v. Commissioner, 72 T.C. at 34; sec.

1.183-2(b), Income Tax Regs. No one factor nor a majority of the

factors is determinative, and we do not reach our decision by

merely counting the factors that support each party's position. 

Taube v. Commissioner, supra at 480; Dunn v. Commissioner, 70

T.C. at 720. 

Keeping in mind these factors, we review various aspects of

petitioner's activity. Petitioner had no design plans drawn or

otherwise reproduced, no patent, no mold for the production of

copies of the J car, and no records of the production expenses or

of his marketing activities or expenses. Other than his own

extensive reading on the production of automobiles, petitioner

had no background in the design and construction of an

experimental automobile. Petitioner consulted no experts on

design, manufacturing, or marketing. We cannot assume that the

auto shop mechanics, experienced in automobile alignments, had

expertise in the design and development of a car such as the one

at issue. The unique feature of the J car, its purported fuel

efficiency of 116.7 miles per gallon, has never been certified or

otherwise verified; the J car has been driven only 5 miles, from

the auto shop to petitioner's home.

Petitioner's marketing activities were minimal at best. He

ran radio advertisements only where they could be obtained on a

per-inquiry basis, a strangely miserly decision when he termed

the expense of $3,500 for a body mold "not a big expense". The
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two or three radio stations running these advertisements were in

California; petitioner and the J car were in Virginia. The

magazines that supposedly printed petitioner's flyers were

distributed in Europe. Petitioner provided no proof of these

purported sales efforts or of his marketing to manufacturers,

although the loss of his records occurred in 1985, not in 1989

and 1990 when he allegedly was spending 25 hours a week on his J

car-related activities. We doubt that the minimal marketing

activities that petitioner described consumed the 25 hours per

week he claims. 

The two inquiries that came to petitioner--the Texas man

with a corporate shell who was searching for an operating

business to put into his shell, and the individual with a patent

on a new motor who was looking for a car in which to put his new

motor and who had been dealing with a Brazilian company--seem to

have been wholly fortuitous and without any effort on

petitioner's part. Moreover, these were casual inquiries at best

and were never reduced to writing.

Petitioner made no profit, indeed no income, from this

activity. He was involved in no other similar activities. His

primary occupation was a mortgage loan business and real estate

investments. Petitioners' major sources of income during 1989

and 1990 were from the sale of real property and interest. While

it is unlikely petitioner entered into the J car activity with a
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9 This is the section in effect for property placed into

service during 1989. The section was later renumbered sec.

167(c) by sec. 11812(a)(1)and (2)of the Omnibus Budget

Reconciliation Act of 1990, Pub. L. 101-508, 104 Stat. 1388,

1388-534, for property placed into service after Nov. 5, 1990.

tax avoidance motive, the claimed depreciation would provide a

substantial offset to petitioners' other income.

Based on the record as a whole, we conclude that petitioner

was not engaged in any trade or business in regard to the J car

and was not engaged in any activity of selling the J car, or

copies of it, for profit. Thus, his depreciation deductions are

limited by section 183(b)(2) to zero, the amount of his gross

income from that activity in each of the years at issue. 

Moreover, petitioner has not established a cost basis in the J

car, even if the expense were otherwise deductible.

Cost Basis

The depreciation deduction is a reasonable allowance for the

exhaustion, wear and tear of property used in a trade or business

or an activity for profit. Sec. 167(a). The allowance is

that amount which should be set aside for the taxable

year * * * so that the aggregate of the amounts set

aside, plus the salvage value, will, at the end of the

estimated useful life of the depreciable property,

equal the cost or other basis of the property * * * 

Sec. 1.167(a)-1(a), Income Tax Regs. The basis to be used is

"the adjusted basis provided in section 1011 for the purpose of

determining gain on the sale or other disposition of such

property." Sec. 167(g).9 In the instant case, petitioner's
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10 A small number of the checks could have been payments

for auto parts, based on the notation on the stubs, where

present, or by the name of the payee. However, even those stubs

with notations do not specify that the parts were for

petitioner's J car.

basis is the cost of constructing the J car. Secs. 1011, 1012,

1016.

Petitioner alleges that he spent $100,000 to build the J

car. Respondent argues that petitioner has not substantiated his

basis in the J car and, therefore, cannot take the claimed

depreciation deduction. 

Petitioner has no records of the expenses he incurred in

building the car. At trial, he attempted to estimate those

expenses by producing the auto shop's check stubs. Stubs were

missing for some of the period that petitioner owned the auto

shop. None of the checkbook deposit entries was marked as to its

source. Petitioner offered no other financial records of the

auto shop, such as customer invoices or receipts, or account

statements, to correlate with these deposit notations. Although

petitioner says he used 20 to 30 credit cards to reimburse the

auto shop, petitioner offered no credit card receipts or

statements. He did not establish that the auto shop had paid the

expenses initially.10 Nor did he offer any proof of the loans he

says he obtained to finance his project.

Petitioner testified that he paid for the J car by what he

called "credit card loans" and other loans. He testified he used
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his and his wife's many credit cards to make purported charges at

the auto shop. If so, the auto shop would then have been paid by

the credit card company for the charges, less of course the usual

discounts or fees charged by a credit card company to the

merchant (i.e., the auto shop); petitioners however would still

be liable to the credit card company for the full amount of the

purported charges. Assuming these "credit card loans" generated

funds (through float, delays in payments, failure to pay the

credit card company, etc.), there is nothing in the record to

show that the deposits to the auto shop bank account came from

any such "credit card loans". Without some tracing of funds

through the auto shop records, without some evidence that the

auto shop paid the expenses of the J car and did not deduct such

expenses either on petitioner's Schedule C's when the business

was operated as a sole proprietorship or on the corporation's tax

returns once the business was incorporated, there are simply too

many uncertainties for the Court to accept petitioner's selfserving, generalized, and unsupported testimony.

The Court is satisfied that some expenses were incurred over

the years in designing and building the J car. The Court is not

satisfied that petitioner personally bore these expenses or has

any basis in the J car. The auto shop checkbook deposits cannot

with any reasonable certainty be tied to any costs that

petitioner incurred. As we have stated previously, 
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11 Thus, we need not address respondent's argument that it

is not possible to attribute a 3-year or other specific period of

useful life to the car. 

While it is within the purview of this Court to

estimate the amount of allowable deductions where there

is evidence that deductible expenses were incurred

(Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930)), we

must have some basis on which an estimate may be made. 

Williams v. United States, 245 F.2d 559 (5th Cir.

1957). * * *

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Since the

record contains no evidence from which the Court could make such

an estimate, we must find that petitioner failed to substantiate

the cost basis of the J car.11

Accordingly, we conclude that petitioner's deductions for

depreciation related to the J car must be disallowed.

To reflect the concessions and above holdings,

Decision will be entered

under Rule 155.