Ronald J. Zenzen, Petitioner

T.C. Memo. 2011-167 UNITED STATES TAX COURT 1tONALD J. ZENZEN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 2ti268-09.

Filed July 12, 2011.

Ronald J. Zenzen, pro se.

Tracie M. Kna.pp, for respondent.

MEMOItANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge Respondent determined deficiencies in petitioner's 2005, 2006, and 2007 Federal income taxes of $4,062, $6 , 571, and $15 , 4 0 9 , respec t ive ly .

The issue for decision is whether petitioner' s drag racing activity is to be treated as an activity engaged in for profit SERVED JUL 1 2 2011 under section 183(a).

The trial of this case was held on February 28, 2011, in St . Paul, Minnesota.

Unless otherwise indicated, all section references are to the Internal, Revenue Code in ef fect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and . Procedure .

FINDINGS OF FACT Some of the facts have been stipulated and are so found. At the time his petition was filed, petitioner resided in Minnesota.

For over 35 years and during the years in issue petitioner worked full time as a mechanic for Xcel Energy (formerly known as Northern States Power) . During the years in issue petitioner'-s annual salary was approximately $68, 000 .

The combined .total salaries of petitioner and his wife were $115, 944 in 2005, $116, 979 in 2006, and $168, 739 in 2007.

Around 1970 petitioner began participating in drag racing as a volunteer crew member and mechanic, volunteering with variouse racing teams and gaining experience and knowledge .

, Between 1970 and 1988 petitioner received no compensation for his drag racing activitie's . During these years petitioner owned a transporter which he used tã move drag racing cars t'o racing events; In 1928 petitioper purchased his first drag ràcing car and began racing it himself .

-- 3 - In 1998 petitioner established his own~drag racing team with his two children. Petitioner-and his two children were the only members of petitioner's drag racing team and wëré the only individuals who conducted maintenance on and raced petitioner's drag rac ing -cars .

In 1999 petitioner purchased a 1978 Chevrolet Corvette for $10,000 to race.

C In 2004- petitioner purchased a 1989 Chevrolet IROC-Z28 for $11,000, also to race. Petitioner replaced this car's engine with a used 305 stocks caramotor which cost petitioner $7,500.

In 2008 petitioner- sold 'this car for *$17, 250 . Also in 2004 petitioner purchased a-n'ew transporter to, haul his drag racing cars to races and to use as an office and sleeping spacetwhen petitioner's racing teams competed away from home.

• In 2005 petitioner made some improvements to his racing*cars and acquiréd various other assets to'be used in connection with his drag racing-activity..

At no time did petitioner have a written business plán for his drag racing,a and he did not maintain a generaliledger,' añnuàl budget and expense forecasts, or a separate bank account relating to his drag racing activity. Petitioner merely saved receiýts reflecting his dr.ig racing expenses.

- a4 T At no time before. 2005 or eduring the years in. issue did petitioner speak swith a business advi-ser -about ways, to make a profit in-drag racing.

,Petitioner took several steps to :improve his team''s performance in local, regional, and national drag .racing competitions.

In 2007. petitioner ,purchased a 1987s Chevrolet Camaro for $29,400 to race. After purchasing this car; petitioner established regular. communication with the -car's builder, who advised petitioner onsimproving the -car's performance. Petitioner communicated with, HinPerformance Engine Services (Hi-Performance) , a nationally regardeds builder of race car engines, for advice, parts,- and service relating, to this cars Petitioner did not pay Hi-Performance foraits advice.

During race ,seasons petitioner and his children would. spend about 30 hours per week preparing othe race -cars .

. This time was in - addition .to the time spent part ic ipating -in weekend races .

During the off-season petitioner and his children would spend about, 20 hours per week working on, the -race cars .u Occasionally, petitioner had, therengines in his: race cars refreshened" to increase performance. Petitioner approximat es that $15, 000: was spent in each of the years in wissue toerefresh the engines .

e a a Through his drag racing activity, petitioner was able to spend a significant amount of time with his children, which brought him personal pleasure. Petitioner did not pay his children for their involvement in petitioner's drag racing activity, and alJ winnings from race events were used in the maintenance of the racing cars and the transporter.

During the years in issue petitioner did not receive any income from commercial sponsors for his drag racing cars.

However, petitior.er's drag racing cars each displayed 24 to 30 "contingency spor.sor" decals.

The owner of a race car with that number of contincency sponsor decals who wins a national drag racing event wou]d receive approximately $12,000, and for a second-place finish, $4,500.

For a first-place finish at a divisional event, the owner would receive approximately $4,000, and for a second-place finish, $2,000.

During the years in issue the only income petitioner received from his drag racing activity came from race winnings which petitioner's team occasionally won at various local, s divisional, and rational racing events. Petitioner did not receive any incore from contingency sponsors for any of the years in issue.

The fcllowing table summarizes all of petitioner's drag racing income during the years in issue:

IThese amounts apparently reflect both contingency awards and purse winnings from a race.

- 6 Date - Type of Event 5/5/05 7/22/05 9/5/05 5/20/06 6/23/06 8/13/06 9/2/06 7/27/0'7 8/23/07 Local Local Local Local Local . National Locai Local Divisional Race Income $100 Before filing his 2005 Federal income tax return, pet tioner spoke with his accountant, Joan Jaye, to determine whether to file a Schedule C, Profit or Loss From Business, in connection with his draú racing activity. Specifically, petitioner and Jaye discussed the nine factors under section 1.183-2 (b) , Income Tax Regs'.

As a~ result of this discussion, petitione decided to file a Schedule C in connection' with his 2005, 2006, and 2007 Federal income tax returns.

Pet-itioner' timely filed his 2005, 2006,' and'200Ý Federàl income tax returns ."

' As ' noted, * petitioner attached to- each*of these returns a Schedule C claiming income and expenses relàting to petitioner's drag racing activity as follows:

Year 2005 2006 2007 Schedule C Income Expenses $850 $25,044 34,702 60 , 064 Net. Profit or Loss ($24,194) (33 752) (59, 714) On audit respondent disallowed in full petitioner's claimed Schedule C drage racing losses on -the basis that petitioner was not engaged in tl-e drag racing activity with the int'ent to Nalde a profit.

,Respondent recharacterized expenses relating to ' petitioner' s drag racing activity as nondeductible persònal a expenditures .

OPINION

Section 162 (a) allows deductions for all ordiñary 'and necessary expenses paid or incurred during a taxable yea in carrying on a trade or business.

In the case of an'aåtlivity not engaged in for profit, section 183 generally limits allowable deductions attributable to the activity to the extent of eross income generated by the activity.

Sec. 183(b).

The test for determining whether a taxpayer is carrying on an activity for profit is whether the taxpayer's actual and honest objective in engaging in the activity is to make a profit.

See Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd.

without published opinion 702 F.2d 1205 (D.C. Cir. 1983) .

Although the taxpayer's expectation of profit need not be reasonable, it must be a good-faith expectation.

See Allen v.

Commissioner, 72 T.C. 28, 33 (1979); sec. 1.183--2(a), Income Tax Regs. Greater weight is to be given to objective facts than to a taxpayer's statement of intent.

See Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income Tax Regs.

Section 1.183 -2 (b) , Income Tax Regs .

, provides ~a nonexhaustive list of factors to be considered in determining a whe,ther an activity is- engaged in for profit.

-No single factor or set of factors is controlling, nor is the existenc'e of a majority of factors.favoring or disfavoring a.profit objective.

Keating v. Commissioner, 544 F.3d 900, 904 (8th Cir., 2008) ;aaffg.

T.C. Memo. 200'7-309; see also Osteen v. Commissioner, 62 F.3d 356 , (11t-h .Cir . 1995) af f g .

in part, and, revg .

in part T . C .

Memo. 1993-519. Petitioner bears the burden of proof on this is sue .

See Rule 142 (a) ; Golanty v . Commiss ioner , 72 T . C . 411 426 (1979) , affg. .w.ithout published opinion 647 F.2d 70 (9th a Cir . 1981) .

We discuss below each factor as applied to petitioner's drag racing activity.

Manner 2 (b) (1) , Income Tax Reqs .

in Which the Taxpayer Carried -On the Activity--Sec. 1 183- Elements relevant to this factor include whether the taxpayer maintained complete and accurate books and records, whether the taxpayer conducted the activity in a manner substantially similar to comparable businesses that are profitable and whether changes were attempted in order to improve profitability. Engdahl v. Commissioner, 72 T.C. 659, 666-667 (1979); Emerson v. Commissioner, T.C. Memo. 2000-137.

2Petitioner has neither claimed nor shown that he han satiefi'ed the requirements of sec.-7491(a) proof to respondent with regard to any factual issue.

to shift t-he bu den oÈ -. 9 - Petitioner argues that in 2005 he attempted to convert his racing activity into a for-profit business venture.³ Petitioner; however, did not maintain books or written records, had no formal business plan, and did not create annual budget and expense forecaste relating to drag racing. Although a taxpayer is not required to maintain a sophisticated system of accounting, the taxpayer should keep documents that allow the taxpayer to make informed business decisions. Burger v. Commissioner, 809 F.2d 355, 359 (7th Cir.-1987), affg. T.C. Memo. 1985-523; see also Whitener v. Commissioner, T.C. Memo. 1979-415 (taxpayer who kept no business books or records did not conduct his stock car racing activity in a businesslike manner).

Petitioner saved receipts from expenses relating to his drag racing; however, there is no evidence that petitioner used these receipts as a management tool to reduce expenses or increase profitability. Petitioner offered no evidence of how comparable profitable businesses operate.

This factor weighs against petitioner.

Expertise of Income Tax Regs.

the Taxpayer or His Advisors--Sec. 1.183-2(b) (2), Petitioner had extensive experience with drag racing;"he has been involved in the -activity in Various capacities for over 40 years. During the ,years in issue petitioner sought advice ou 3Petitioner concedes that before 2005 he engaged in the drag racing activity essentially as a hobby.

ways, to improve the performance of his drag racing cars However, the focus here is on expertise and preparation with regard to the economic aspects of the activity. Wesinger v.

Commissioner, T.C. Memo. 1999-372. Petitioner has not shown that he possessed the .requisite expertise regarding the. business aspects of drag racing or that he relied on anyones who had that expertise .

- The fact that petitioner did not seek, advice on -the economic aspects o'f his drag racing activity suggests that petitioner lacked a profit objective.

See Filios v.

Commissioner, T.C. Memo. 1999-92, affd. 224 F.3d 16 (1st Cir.

2000) . This factor favors respondent.

Time and Effort Expended in Carrying On the, Activity- Sect. 1.183- 2 (b) (3 ) Income Tax Reqs .

, Petitioner dedicated a significant amount of time and effort to his adrag racing activity. While this fact tends to favor petitioner's position, petitioner also derived substantial personal enjoyment from drag racing.

For over 30 years petitioner considered drag racing a hobby--it is unlikely that in 2005, 2006, and 2007 petitioner ceased to derive similar enjoyment from the activity. Petitioner found personal pleasure in atraveling to weekend race events, watching his team participate in events, and developing friendships with individuals involved in drag tracing.

The- time petitioner devoted to his drag racing activity was also time petitioner spent with his 'children. - On balance, we find that this factor is neuËral.

-'11 - Expectation That Assets May Appreciate in Value--Sec. 1.183--- 2 (b) (4 ) Income 'Éax Regs .

, Petitioner claims that, as a result of maintenance and improvements peti tioner -and his team a made to petitioner' s -drags racing cars, petitioner expected his cars to appreciate in va,lue.

Petitioner directs our attention to his Chevrolet IROC-Z²⁸; which petitioner purchased in 2004 for $11,000 and sold in 2008 for $17, 250 . Petiticner claims that he sold this car at a gain, even after the cost of the replacement engine and other improvements he made.

We have held, however, that when property's appreciation in value is independent of the claimed business activity, the gain realized from a sale of the property will not be a significant factor in evaluating the nature of the activity in question.

Spear v. Commissioner, T.C. Memo. 1994-354; Wright v. Commissioner, T.C. Memo. 1990-630; Ruben v. Commissioner, T.C.

Memo. 1986-260, affd. without published opinion 852 F.2d 1290 (9th Cir. 1988). Petitioner has failed to show how the increase in value of this car--or, for that matter, of any other asset--is attributable to petitioner's success in drag racing activity rather than to the value of petitioner's labor. This factor favors respondent.

-- 12 - Success of Taxpayer in Other Activities--Sëc. 1.183-2(b) (5) Inc ome Tax Regs .

Petitioner 'was not involved in any sother business activities apartefrom his employment with Excel Energy. Thistfactor-favors respondent.

Taxpayer's History of Income Tax Reqs.

Income or Losses--Sec 1.183 2(b) (6) A series of losses during the startup period of an activity is not necessarily an indication that the activity is not engaged in for profit, bearing in mind, however, that the objective müst be to realize a profit on the entire operation--future net earnings and also enough earnings to recoup losses that have been incurred in intervening years. Bessenvey v. Commissioner, 45 T.C. 261, 274 (1965) , affd. 379 F.2d 252 (2d Cir. 1967) ; Emerson v. Commissioner, T.C. Memo. 2000-137.

During the years in issue petitioner received only $2 150 lin cash awards while spending $117, 660 on his racing activity Petitioner's losses increased substantially from 2005 to 200 and even more substantially from 2006 to 2007.

On the basis öf petitioner's record of significant losses, we find it unlikely that petitioner will be able to recoup his expenditures .

This factor favors respondent .

Amount of Occasional Profits, If Any--Secs 1.183-2(b) (7), Tax Regs .

Income With the exception of the occasional small cash awards petitioner received, petitioner' s drag racing activity produced no income .

An opportun.i ty to earn a substantial ultimate profit in a highly speculative venture may be sufficient to indicate that an activity -is engaç ed in ifor profit .

Sec .

1 183-2 (b) (7) , Income Tax Regs . Drag racing is unquestionably a highly speculative venture . Petitic-ner, however, has not convinced 'us that- he 'had a real opportunity to earn a profit in his drag racing activity.

The losses petitioner incurred in connection with this drag racing activity were over -54 times the amount of income earned.

This factor favors respondent.s Financial Status of Reqs.

the Taxpayer--Sec. 1.183-2(b) (8), Income Tax "The rationale for this rule is that a taxpayer with substantial inco e unrelated to the activity can more easily afford to operat the activity as a hobby."

Emerson v.

Commissioner, su ra.

During the years in issue petitioner worked full time at Xcel Energy, earning an annual salary of $68, 000, and the combined total wages of petitioner and his wife during each of the years in issue exceeded $115,000.* Substantial incõme from sources unrelated to the activity in question--particularly if losses from the activity generate substantial tax benefits--may indicate that an activity is not engaged in for profit.

Sec.

1.183-2(b) (B), Income Tax Regs. This factor favors respondent.

Elements of Personal . Pleasure - -Sec . 1. 183 -2 (b) (9) , Reqs.

Income Tax It is indisputable that petitioner obtained. enjoyment,fröm his drag racing activity, especially considering the extras time he was.able to spend with his children.

This factor favors ur respondent .

On balance, we are not convinced that during the years in issue petitioner engaged sin the drag racing activity for pr.ofit To the contrary, we believe that petitioner was engaged in this activity because of his long-held interest in drag racing, derived substantial personal pleasure from the activity, and had no good-faith expectation of making a profit. Petitioner's losses are not deductible.

To reflect the foregoing Decision will beientered f or respondent .

'In 2007 the combined wages of petitioner and his wife were $1687,739, an approximately 44-percent Petitioner' s drag racing expenses in 2007 were $59, 714, an increase of over 75 percent increase from 2006.

from 2006.