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The standard for determining whether an expense is
deductible under section 162 or 212, and not subject to the
limitations of section 183, requires a taxpayer to demonstrate
that the activity was carried on with the actual and honest
objective of making a profit. Dreicer v. Commissioner, 78 T.C.
642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir.
1983); sec. 1.183-2(a), Income Tax Regs. Although a reasonable
expectation of profit is not required, the facts and
circumstances must indicate that the taxpayer entered into the
activity, or continued the activity, with the actual and honest
objective of making a profit. Dreicer v. Commissioner, supra at
645. The taxpayer’s objective to make a profit must be analyzed
by looking at all the surrounding facts. Id. These facts are
given greater weight than the taxpayer’s mere statement of
intent. Id.
The regulations under section 183 provide a nonexclusive
list of relevant factors that should be considered in determining
whether the taxpayer has the requisite profit objective. Sec.
1.183-2(b), Income Tax Regs. The factors are: (1) The manner in
which the taxpayer carries on the activity; (2) the expertise of
the taxpayer; (3) the time and effort expended by the taxpayer in
carrying on the activity; (4) the expectation that the assets
used in the activity may appreciate in value; (5) the success of
the taxpayer in carrying on other similar or dissimilar
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Last modified: May 25, 2011