T.C. Memo. 1997-168



                     UNITED STATES TAX COURT


        B. ALBERT AND BETTY M. HOLOWINSKI, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 4726-96.                       Filed April 7, 1997.


     Scott M. Estill, for petitioners.

     Robert A. Varra, for respondent.



                       MEMORANDUM OPINION

     POWELL, Special Trial Judge:   This case was assigned

pursuant to the provisions of section 7443A(b)(3) and Rules 180,

181, and 182.1




1
    Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 2 -


     Respondent determined deficiencies in petitioners' Federal

income taxes and accuracy-related penalties as follows:

           Years        Deficiencies        Sec. 6662(a) Penalties

           1992            $1,905                $381
           1993             3,570                 714
           1994             2,029                 406

     The issues are:    (1) Whether petitioners' antique glassware

sales activity was engaged in for profit within the meaning of

section 183, and (2) whether petitioners are liable for the

accuracy-related penalties pursuant to section 6662(a).

                             Background

     Petitioners resided in Littleton, Colorado, at the time they

filed their petition.    The facts may be summarized as follows.

     Petitioner Betty M. Holowinski obtained a high school degree

and attended 2 years of college where she studied political

science.   Petitioner B. Albert Holowinski served in the United

States military for many years and, after his military

retirement, worked in the aerospace industry.     During his

military service he obtained a bachelor's degree in business and

a master's degree in urban affairs.

     In 1992, both petitioners had retired.     Early that year,

Mrs. Holowinski became interested in buying and selling Victorian

glassware.   She thought they could make money and that they would

have fun traveling around to various antique shops and flea

markets looking for the glass.      To gain some background knowledge
                                 - 3 -


Mrs. Holowinski read a book entitled "How to Make Money in

Antiques".   Mr. Holowinski spoke with an accountant, Alan Myers

(Mr. Myers), about bookkeeping and tax matters.

     In April 1992, petitioners began buying antique glassware.

Petitioners continued to purchase antique glassware throughout

the years in issue, focusing primarily on glass produced by a

company named Westmoreland Glass (Westmoreland) that conducted

business from 1875 to 1985.   Petitioners traveled to antique

conventions and to antique shops throughout the central United

States in search of Westmoreland glassware.     Petitioners' travels

took them to various States including Kansas, Ohio, Tennessee,

Iowa, Nebraska, Oklahoma, Texas, Arkansas, and Illinois.

Petitioners envisioned purchasing glassware for approximately 40

to 50 percent of its potential resale value.     During the taxable

years 1992, 1993, and 1994 petitioners spent $7,173, $7,471, and

$4,144, respectively, for glassware.     Petitioners stored the

glassware in their home, placing the inexpensive pieces in their

basement and the more valuable pieces upstairs where the

temperature remained constant.    Some glassware was displayed on

the walls of various living areas of petitioners' home and in

china cabinets.

     Mrs. Holowinski spent approximately 40 hours per week on the

antique glassware sales activity, which petitioners called Albe's

Antiques, and Mr. Holowinski spent 20 to 30 hours per week.
                                - 4 -


Sales were generated by three methods:    (1) Through

advertisements in antique newsletters (newsletter sales); (2) at

antique conventions, by selling out of their hotel room and at

auctions (convention sales); and (3) by renting a showcase at the

Colorado Antique Gallery (showcase sales).    Sales were

approximately evenly divided between the three methods.    While

the bulk of the glassware collection was located in their home,

for security reasons petitioners never gave out their home

telephone number or address.    Rather, petitioners paid $50 a

month plus a commission equal to 10 percent of sales to rent the

showcase, which held approximately 100 pieces of merchandise.

For 1992, 1993, and 1994, petitioners' sales from the three

methods, before paying commissions on showcase sales, totaled

$264, $1,583, and $2,253, respectively.

       Petitioners kept detailed inventory records and a mileage

log.    They maintained a separate bank account for Albe's Antiques

in 1992 and part of 1993, but closed the account in 1993 to save

money on fees.    Petitioners insured their inventory on their

homeowners' policy.    Albe's Antiques was licensed to do business

and collect sales tax in Colorado.

       Petitioners did not prepare any financial statements or

income projections for Albe's Antiques.    At the end of each

taxable year, Mr. Myers prepared petitioners' tax returns based

on information petitioners provided to him.    Petitioners have not
                               - 5 -


prepared profit and loss statements for the years subsequent to

those before the Court.

     Mrs. Holowinski summarized the antique glassware sales

activity as follows:

     Very few people know that we deal in antiques. There's
     no sign at the house -- first of all, because of where
     we live, we couldn't have a business.

          So * * * [the business is] very low-keyed, we keep
     a low profile, and it's only through the mail or when
     we go on these conventions * * *.

     On their 1992, 1993, and 1994 Federal income tax returns,

petitioners reported losses from the antique glassware sales

activity in the amounts of $9,504, $12,734, and 11,664,

respectively.   In summary, the losses were computed as follows:

                                1992       1993       1994

Sales                           $264     $1,583     $2,253
Cost of Goods Sold               170        973      1,453
Gross Profit                      94        610        800
Expenses:
     Commissions and fees2        63        165        110
     Car, truck & travel       7,391     10,626      9,665
     All other expenses        2,144      2,553      2,689
Net Loss                      (9,504)   (12,734)   (11,664)

     In the notice of deficiency respondent determined that

petitioners were not entitled to deductions for the net losses

listed above because their antique glassware sales activity was



2
    The commission expenses are listed in the amounts reported on
petitioners' tax returns for the years in issue. We recognize
that these numbers do not square with the reported sales figures
and the formula provided by petitioners for computing commissions
on showcase sales. We speculate that petitioners may have sold
some items and incurred commissions at auctions and at antique
conventions they attended.
                                - 6 -


not engaged in for profit.   Respondent further determined that

petitioners were liable for an accuracy-related penalty for each

year in issue pursuant to section 6662(a) for negligence or

disregard of rules or regulations.      In addition, respondent made

certain computational adjustments as a result of the disallowance

of the Schedule C losses.3

                             Discussion

A. Activity for Profit

     Section 162(a) allows deductions for ordinary and necessary

expenses in carrying on a trade or business.     Section 183(a)

generally provides that an individual's deductions attributable

to an activity not engaged in for profit shall only be allowed to

the extent provided in section 183(b).     Section 183(b) generally

limits the deductions from an activity not engaged in for profit

to the sum of (1) otherwise allowable deductions, and (2) any

other deductions attributable to the activity to the extent the

gross income from the activity exceeds the otherwise allowable

deductions.    Section 183(c) defines an "activity not engaged in

for profit" as any activity other than one for which deductions

are allowable under section 162 or under paragraph (1) or (2) of

section 212.   The test for determining whether an individual is

carrying on a trade or business under section 162, or whether an



3
    The computational adjustments affect the amount of
petitioners' Social Security benefits that are taxable for
certain years, and petitioners' medical expense deduction for
1994.
                                 - 7 -


individual is engaged in an activity for the production or

collection of income or for the management, conservation, or

maintenance of property held for the production of income under

section 212, is whether the individual is engaged in the activity

with the predominant purpose and intention of making a profit.

Nickeson v. Commissioner, 

, 976 (10th Cir. 1992),

affg. Brock v. Commissioner, T.C. Memo. 1989-641; Allen v.

Commissioner, 

, 33 (1979).     While the taxpayer's

expectation need not be reasonable, it must be a good-faith

expectation.     Allen v. Commissioner, supra at 33.   In resolving

the factual question of the taxpayer's intent, greater weight is

given to the objective facts than to the taxpayer's statements of

intention.     Thomas v. Commissioner, 

, 1269 (1985),

affd. 

(4th Cir. 1986).

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

nonexclusive list of nine factors to be used to determine whether

an activity is engaged in for profit.    The factors are:   (1) The

manner in which the taxpayer carries on the activity; (2) the

expertise of the taxpayer or his advisers; (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 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
                               - 8 -


financial status of the taxpayer; and (9) elements of personal

pleasure or recreation.   No single factor, nor a simple numerical

majority of factors, is necessarily controlling.   Cannon v.

Commissioner, 

, 350 (10th Cir. 1991), affg. T.C.

Memo. 1990-148.

     Several factors weigh slightly in petitioners' favor.

First, petitioners generally carried on the activity in a

businesslike manner.   They maintained accurate inventory records,

obtained a Colorado business license, registered with the State

to collect sales tax, advertised in antique newsletters although

in a limited fashion, and rented a showcase at the Colorado

Antique Gallery.

     On the other hand, some factors weigh heavily in favor of

respondent.   Petitioners reported no profits, but rather

substantial losses for the years in issue.   See Golanty v.

Commissioner, 

, 427 (1979), affd. without published

opinion 

(9th Cir. 1981).   While losses in the early

years of an activity may not be indicative of the absence of a

profit motive, several facts convince us otherwise in this case.

First, petitioners reported losses of more than eight times the

total sales reported for the years in issue (total sales).

Petitioners incurred traveling expenses in excess of six times

the total sales.   Considering only cost of goods sold and direct

selling expenses (commission expenses and the $50 a month

showcase rental) petitioners posted a cumulative loss for the
                               - 9 -


years in issue.   Indeed, assuming petitioners liquidated all of

the inventory they purchased during the years in issue and that

they were able to purchase it at 40 percent of the hypothetical

sale value, the ensuing gross profit would not even cover the

cost of their traveling expenses.    Stated more bluntly,

petitioners' traveling expenses were so grossly in excess of

their total sales that petitioners had no prospect of ever

turning a profit.4

     Furthermore, we find it telling that for subsequent years

petitioners have not even prepared a profit and loss statement.

Surely, if a person were concerned with making a profit, she or

he would be interested in whether in fact there was or would be a

profit or loss from the activity.

     Finally, petitioners admittedly derived personal pleasure

from antique hunting and possibly from displaying their more

valuable pieces of antique glassware in their home.    We are

cognizant of the fact that there is no general prohibition on

pursuing a business that one enjoys.    See Larson v. Commissioner,

T.C. Memo. 1991-99.   We are also cognizant that the Federal fisc

should not help underwrite personal pursuits.   See Stanley v.

Commissioner, T.C. Memo. 1980-217.

     In sum, after considering all the relevant factors, we

conclude that, while petitioners may have intended to earn a


4
    We note that petitioners' travel records showed that of the
34 days traveling in 1993, 10 were spent in the Dallas/Fort Worth
area where petitioners' daughter lived.
                              - 10 -


profit on individual items of glassware, when the activity is

viewed in its entirety, petitioners did not engage in the antique

glassware sales activity for profit.

B. Penalties

     Section 6662(a) and (b)(1) impose a penalty equal to 20

percent of any portion of an underpayment attributable to

negligence or disregard of rules or regulations.    Negligence is

defined as the lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances.   Neely v. Commissioner, 

, 947 (1985).

Section 6664(c)(1) provides that no penalty shall be imposed

under section 6662(a) with respect to any portion of an

underpayment if it is shown that there was a reasonable cause for

such portion and the taxpayer acted in good faith.    Whether the

taxpayer acted with reasonable cause and in good faith is

determined on a case-by-case basis taking into account all of the

pertinent facts and circumstances.     Remy v. Commissioner, T.C.

Memo. 1997-72.   Relevant factors include the taxpayer's efforts

to assess his or her proper tax liability, the knowledge and

experience of the taxpayer, and reliance on the advice of a

professional, such as an accountant.     Drummond v. Commissioner,

T.C. Memo. 1997-71.   An honest misunderstanding of fact or law

that is reasonable in light of the experience, knowledge, and

education of the taxpayer may indicate reasonable cause and good

faith.   Remy v. Commissioner, supra.
                               - 11 -


     The determination of whether petitioners engaged in their

antique glassware sales activity for profit involves a difficult

factual question.    See, e.g., Cavalaris v. Commissioner, T.C.

Memo. 1996-308.     Petitioners substantiated all of the claimed

expenses and employed an accountant to prepare their tax returns

and advise them.    Nothing in the record suggests that their

reliance on Mr. Myers was less than reasonable, particularly

considering petitioners' lack of prior business experience and

educational backgrounds.5   Accordingly, we find that petitioners

acted with reasonable cause and in good faith, and, therefore,

the penalties do not apply.

                                     Decision will be entered for

                                respondent with respect to the

                                deficiencies, and decision will

                                be entered for petitioners with

                                respect to the penalties under

                                section 6662(a).




5
    While Mr. Holowinski did obtain his undergraduate degree in
business administration, he did so many years prior to those in
issue. His work experience did not focus on business or
financial skills, and he does not appear to have any special
training in accounting or tax matters.