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An activity is not regarded as engaged in for profit unless
it is conducted by the taxpayer with an actual and honest
expectation of making a profit. Dreicer v. Commissioner, 78 T.C.
642, 645 (1982), affd. without published opinion 702 F.2d 1205
(D.C. Cir. 1983); Golanty v. Commissioner, 72 T.C. 411, 425-426
(1979), affd. without published opinion 647 F.2d 170 (9th Cir.
1981). An expectation of profit need not be reasonable. Id.
Petitioners have the burden of proof on this issue.1 Rule
142(a); Golanty v. Commissioner, supra at 426.
In considering whether a taxpayer engaged in an activity for
profit, greater weight is given to objective factors, taking into
account all of the facts and circumstances, than to a taxpayer’s
mere statement of intent. Beck v. Commissioner, 85 T.C. 557, 570
(1985); sec. 1.183-2(a), Income Tax Regs.
In section 1.183-2(b), Income Tax Regs., a nonexclusive list
of factors is provided for use in analyzing whether an activity
is engaged in for profit. Such factors include: (1) The manner
in which the taxpayer carried on the activity; (2) the expertise
of the taxpayer or his advisers; (3) the time and effort expended
1 Because the examination in this case commenced before
July 23, 1998, sec. 7491, which places the burden of proof with
respect to any fact issue on respondent where the taxpayer
maintains adequate records, satisfied applicable substantiation
requirements, cooperated with respondent, and produced credible
evidence with regard to the fact issue, does not apply. See
Internal Revenue Service Restructuring and Reform Act of 1998,
P.L. 105-206, sec. 3001, 112 Stat. 685, 726.
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Last modified: May 25, 2011