Nickerson v. C.I.R., 82-1323
| Decision Date | 22 February 1983 |
| Docket Number | No. 82-1323,82-1323 |
| Citation | 700 F.2d 402 |
| Parties | 83-1 USTC P 9217 Melvin NICKERSON and Naomi W. Nickerson, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Edward A. Williams, Williams & Hubbard, Chicago, Ill., for petitioners-appellants.
Melvin Clark, Asst. Atty. Gen., Dept. of Justice, Tax Div., Washington, D.C., for respondent-appellee.
Before PELL and BAUER, Circuit Judges, and TIMBERS, Senior Circuit Judge. *
Petitioners appeal the judgment of the United States Tax Court finding that profit was not their primary goal in owning a dairy farm. Based on this finding the tax court disallowed deductions for losses incurred in renovating the farm. The sole issue presented for our review is whether the tax court's finding regarding petitioners' motivation was clearly erroneous.
Melvin Nickerson (hereinafter referred to as petitioner) was born in 1932 in a farming community in Florida. He worked evenings and weekends on his father's farm until he was 17. Petitioner entered the field of advertising after attending college and serving in the United States Army. During the years relevant to this case he was self-employed in Chicago, serving industrial and agricultural clients. His wife, Naomi W. Nickerson, was a full-time employee of the Chicago Board of Education. While petitioners were not wealthy, they did earn a comfortable living.
At the age of forty, petitioner decided that his career in the "youth oriented" field of advertising would not last much longer, and he began to look for an alternative source of income for the future. Petitioners decided that dairy farming was the most desirable means of generating income and examined a number of farms in Michigan and Wisconsin. After several years of searching, petitioners bought an 80-acre farm in Door County, Wisconsin for $40,000. One year later they purchased an additional 40 acres adjoining the farm for $10,000.
The farm, which had not been run as a dairy for eight years, was in a run-down condition. What little equipment was left was either in need of repair or obsolete. The tillable land, about 60 acres, was planted with alfalfa, which was at the end of its productive cycle. In an effort to improve this state of affairs petitioners leased the land to a tenant-farmer for $20 an acre and an agreement that the farmer would convert an additional ten acres a year to the cultivation of a more profitable crop. At the time of trial approximately 80 acres were tillable. The rent received from the farmer was the only income derived from the farm.
Petitioner visited the farm on most weekends during the growing season and twice a month the rest of the year. Mrs. Nickerson and the children visited less frequently. The trip to the farm requires five hours of driving from petitioners' home in Chicago. During these visits petitioner and his family either worked on their land or assisted neighboring farmers. When working on his own farm petitioner concentrated his efforts on renovating an abandoned orchard and remodeling the farm house. In addition to learning about farming through this experience petitioner read a number of trade journals and spoke with the area agricultural extension agent.
Petitioners did not expect to make a profit from the farm for approximately 10 years. True to their expectations, petitioners lost $8,668 in 1976 and $9,872.95 in 1977. Although they did not keep formal books of account petitioners did retain receipts and cancelled checks relating to farm expenditures. At the time of trial, petitioners had not yet acquired any livestock or farm machinery. The farm was similarly devoid of recreational equipment and had never been used to entertain guests.
The tax court decided that these facts did not support petitioners' claim that the primary goal in operating the farm was to make a profit. We will examine the tax court's reasoning in more detail after setting out the relevant legal considerations.
Section 162(a) of the Internal Revenue Code of 1954 allows deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Section 183, however, limits the availability of these deductions if the activity "is not engaged in for profit" to deductions that are allowed regardless of the existence of a profit motive and deductions for ordinary and necessary expenses "only to the extent that the gross income derived from such activity for the taxable year exceeds [otherwise allowable deductions]." I.R.C. Sec. 183(b)(2). The deductions claimed by petitioners are only allowable if their motivation in investing in the farm was to make a profit.
Petitioners bear the burden of proving that their primary purpose in renovating the farm was to make a profit. 1 Golanty v. Commissioner, 72 T.C. 411 (1979), aff'd mem., 647 F.2d 170 (9 Cir.1981); Allen v. Commissioner, 72 T.C. 28 (1979). In meeting this burden, however, "it is sufficient if the taxpayer has a bona fide expectation of realizing a profit, regardless of the reasonableness of such expectation." Golanty v. Commissioner, 72 T.C. at 425-26; Allen v. Commissioner, 72 T.C. at 33; Dunn v. Commissioner, 70 T.C. 715, 720 (1978), aff'd, 615 F.2d 578 (2nd Cir.1980). Although petitioners need only prove their sincerity rather than their realism the factors considered in judging their motivation are primarily objective. In addition to the taxpayer's statements of intent, which are given little weight for obvious reasons, the tax court must consider "all facts and circumstances with respect to the activity," including the following:
(1) Manner in which the taxpayer carries on the activity. The fact that the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records may indicate that the activity is engaged in for profit....
(2) The expertise of the taxpayer or his advisors. Preparation for the activity by extensive study of its accepted business, economic, and scientific practices, or consultation with those who are expert therein, may indicate that the taxpayer has a profit motive where the taxpayer carries on the activity in accordance with such practices....
(3) The time and effort expended by the taxpayer in carrying on the activity. The fact that the taxpayer devotes much of his personal time and effort to carrying on the activity, particularly if the activity does not have substantial personal or recreational aspects, may indicate an intention to derive a profit.... The fact that the taxpayer devotes a limited amount of time to an activity does not necessarily indicate a lack of profit motive where the taxpayer employs competent and qualified persons to carry on such 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....
(9) Elements of personal pleasure or recreation. The presence of personal motives in carrying on of an activity may indicate that the activity is not engaged in for profit, especially where there are recreational or personal elements involved. On the other hand, a profit motivation may be indicated where an activity lacks any appeal other than profit. It is not, however, necessary that an activity be engaged in with the exclusive intention of deriving a profit or with the intention of maximizing profits....
Treas.Reg. Sec. 1.183-2(b)(1)-(9). None of these factors is determinative, nor is the decision to be made by comparing the number of factors that weigh in the taxpayer's favor with the number that support the Commissioner. Id. There is no set formula for divining a taxpayer's true motive, rather Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933). Nonetheless, we are given some guidance by the enumerated factors and by the Congressional purpose in enacting section 183.
The legislative history surrounding section 183 indicates that one of the prime motivating factors behind its passage was Congress' desire to create an objective standard to determine whether a taxpayer was carrying on a business for the purpose of realizing a profit or was instead merely attempting to create and utilize losses to offset other income. Jasionowski v. Commissioner, 66 T.C. 312, 321 (1976).
Congressional concern stemmed from a recognition that S.Rep. No. 91-552, 91st Cong., 1st Sess., reprinted in 1969 U.S.Code Cong. & Ad.News 2027, 2376. With this concern in mind we will now examine the decision of the tax court.
The tax court analyzed the relevant factors and determined that making a profit was not petitioners' primary goal in engaging in farming. The court based its decision on a number of factors that weighed against petitioners. The court found that they did not operate the farm in a businesslike manner and did not appear to have a concrete plan for improving the profitability of the farm. The court believed that these difficulties were attributable to petitioners...
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