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4. The Expectation That Assets Would Appreciate in Value
The expectation that assets used in the activity will
eventually appreciate over time may indicate a profit motive.
Sec. 1.183-2(b)(4), Income Tax Regs. No appreciating assets were
devoted to Mrs. Smith’s activities. This factor is neutral.
5. The Taxpayer’s Success in Carrying On Other Activities
The fact that a taxpayer previously operated similar
activities profitably may show that the taxpayer has a profit
objective. Sec. 1.183-2(b)(5), Income Tax Regs. Far from
success, in the 2 years preceding the years at issue Mrs. Smith’s
direct marketing activities resulted in losses of $34,049 for
1998 and $47,493 for 1999. This factor favors respondent.
6. The Taxpayer’s History of Income and Loss
A history of substantial losses may indicate that the
taxpayer did not conduct the activity for profit. Golanty v.
Commissioner, 72 T.C. at 427; sec. 1.183-2(b)(6), Income Tax
Regs. Losses sustained in the initial stage of an activity,
however, do not necessarily indicate that an activity was not
conducted for profit. Engdahl v. Commissioner, 72 T.C. at 669.
Of course, a series of years where net income is realized would
be strong evidence that an activity is engaged in for profit.
Sec. 1.183-2(b)(6), Income Tax Regs.
In the years at issue, 2000, 2001, and 2002, Mrs. Smith
recorded losses of $26,856, $34,155, and $17,256 respectively.
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Last modified: November 10, 2007