TAX COURT OPINION

Case: Paul Hunter & Janet Hunter
Docket Number: 19746-12
Judge: Buch
Opinion Type: bench
Filed: 06/24/2014
Pages: 8

UNITED STATES TAX COURT WASHINGTON, DC 20217 PAUL HUNTER AND JANET HUNTER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) Docket No. 19746-12. ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Ronald L. Buch at Detroit, Michigan, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Ronald L. Buch Judge Dated: Washington, D.C. June 24, 2014 SERVED JUN 2 6 2014 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Bench Opinion by Judge Ronald L. Buch June 11, 2014 Paul Hunter & Janet Hunter v. Commissioner Docket No. 19746-12 THE COURT: THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND OPINION MAY NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This opinion is in conformity with Internal Revenue Code Section 7459(b) and Rule 152(a) of the Tax Court Rules of Practice and Procedure. Any section references are to the Internal Revenue Code or the Treasury regulations in effect during the years in issue, and the Rule references are to the Tax Court Rules of Practice and Procedure. Background The Hunters traveled to antique stores, estate sales, thrift stores, and other such places to purchase items. In 2007, they began listing the items that they purchased for sale on eBay, hoping to make a profit. Instead, they incurred a loss. The parties have resolved all,,-1ssues other than whether the loss from this business in 2009 is deductible, as 24 well as some substantiation issues relating to that 25 loss. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 At the time that they started their resale business, the Hunters owned and worked at West Shore 3 Medical. Álthough Mr. Hunter quipped that as its 4 5 6 7 8 president, he did not work, the Hunters testified that they worked more than 40 hours per week at West Shore. The Hunters learned of selling items on eBay from their daughter. It is clear that the 9 Hunters had bought second-hand items for some time, 10 11 12 13 14 15 16 17 18 19 but in roughly 2007, they began to try to resell items. Mr. Hunter testified that all of their children had reached adulthood and were out of the house, and that this business was something to do for entertainment. Although for entertainment, the Hunters claim to have spent considerable time on their business. Although they also worked full time, they claim to have spent most of their evenings and weekends either shopping resale locations or 20 marketing and packaging items for sale. 21 22 23 24 25 From the Hunters testimony, it appears that they amassed considerable inventory, filling their basement, dining room, and living room. They had considered opening a resale shop and purchased racks to hold the merchandise. That plan has not come to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 fruition, and it appears that they no longer sell items on eBay, either. They continue to own the items that they bought for resale. In fact, they continue to visit estate sales and thrift shops. The Hunters did not keep books or track their expenses or profits and losses. When questioned about the bookkeeping, neither Mr. nor 8 Mrs. Hunter had a clear understanding of the finances 9 of their business. And when asked about how it was 10 11 12 13 14 15 that gross sales were a fraction of the cost of goods sold, Mr. Hunter speculated that the "cost of goods sold", represented the cost of goods purchased for resale. The Hunters did not research the items they bought to determine what they might sell for. 16 Although Mrs. Hunter said that she would use her 17 18 19 smartphone to research prices, that was not during the years in issue. Indeed, Mrs. Hunter had little idea about what was profitable. Mr. Hunter disagreed 20 with her views about profitability because much of 21 22 23 24 25 what she considered to be profitable, he considered to be unprofitable. The difference, apparently, was that Mrs. Hunter failed to take into account shipping costs for the items sold. Indeed, profitability does not seem to have been a concern, because other 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 expenses were also not considered. For example, they claimed travel expenses as part of their business expenses, but did not factor that in when considering what might be profitable. Further, although the business was operating at a loss during the years at issue, the Hunters did not change their practices in any meaningful way to generate a profit. The Hunters reported a loss from the business on their Schedule C, Profit or Loss from 10 Business. On May 7, 2012, respondent mailed the 11 Hunters a notice of deficiency that, among other 12 things, disallowed the claimed Schedule C loss. The 13 Hunters, while residing in Michigan, timely 14 15 16 17 18 19 20 21 22 23 24 25 petitioned. Discussion The Commissioner's determinations in the notice of deficiency are generally presumed correct, and taxpayers bear the burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Income tax deductions are a matter of legislative grace, and the burden of proving entitlement to any claimed deduction rests on the taxpayer. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); see also Rule 142(a). Respondent contends that the losses related 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 to the Hunters' business are not deductible because the activity was not engaged in for profit within the 3 meaning of Section 183. Section 183(a) generally 4 5 6 7 8 9 10 11 12 disallows deductions attributable to activities not engaged in for profit. An activity not engaged in for profit means "any activity other than one with respect to which deductions are allowable for the taxable year under Section 162 or under paragraph (1) or (2) of Section 212." Section 183(c). Section 1.183-2(b), Income Tax Regs., sets forth a nonexclusive list of factors to be considered in determining whether an activity is engaged in for 13 profit: (1) The manner in which the taxpayer carries 14 15 16 17 18 19 on the activity; (2) the expertise of the taxpayer or her advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar 20 activities; (6) the taxpayer's history of income or 21 22 23 24 25 losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned from the activity; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. No single factor or set of factors is 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 conclusive in determining whether an activity is engaged in for profit, nor is the number of these factors for or against the taxpayer necessarily conclusive in that respect. Golanty v. Commissioner, 72 T.C. 411, 426 (1979), aff'd without published opinion, 647 F.2d 170 (9th Cir. 1981); sec. 1.183- 2(b), Income Tax Regs. All facts and circumstances 8 with respect to the activity must be taken into 9 account. Sec. 1.183-2(b), Income Tax Regs. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The Hunters did not engage in the business of buying and reselling items for profit. The Hunters had no background or expertise in this area and they did not research the items they were buying or the appropriate price at which to list the item on eBay. They engaged in this activity in their free- time while maintaining full time jobs elsewhere. The Hunters also never returned a profit or tried to adapt their business plan to make their business profitable. Finally, although it is perfectly acceptable to take pleasure in your work, Mr. Hunter testified that they began the business as "entertainment" and there is no evidence to suggest that the business was anything more. After evaluating the factors, we are not persuaded that the Hunters' business was an activity 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 engaged in for profit. Accordingly, Respondent's determination to disallow the losses from their resale activity is sustained. Because of the parties various concessions, a decision will need to be entered under Rule 155. An appropriate order will be issued. (Whereupon, at 9:08 a.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com