Decision will be entered for respondent.
HAINES,
Some of the facts have been stipulated and are so found. The stipulation of facts, together with the attached exhibits, is incorporated herein by this reference. At the time petitioners filed their petition, they resided in California.
From 1999 to 2006 petitioners owned and operated a successful construction business, Robert Sandoval Construction, Inc., that paid petitioners wages reported on Form W-2, Wage and Tax Statement, of 2010 Tax Ct. Memo LEXIS 245">*246 over $1.5 million in 2004 which resulted in adjusted gross income reported on the return of $1,561,166. Petitioners were responsible for all business aspects of their construction business, including managing and hiring employees, purchasing supplies and equipment, scheduling and bidding for projects, obtaining licenses from municipal governments, conducting background investigations of subcontractors, and advertising. Petitioners rented vacant land next to their home to their construction company.
From before 2004 to December 4, 2009, petitioner Robert Sandoval (Mr. Sandoval) was the pastor at United Pentecostal Church in Reedley, California (UPC). Petitioners have attended services at UPC since at least 1996. Mr. Sandoval's father was the previous pastor at UPC, and petitioners' children attend UPC services. Petitioners' son-in-law, Allen Nielsen, began attending services at UPC in 2002 and has served as UPC's youth leader since 2003.
Mr. Sandoval's duties as the pastor of UPC included overseeing the operation of the church, conducting church services, providing counseling services, and leading discussions and Bible studies. Petitioner Rhonda Sandoval (Ms. Sandoval) 2010 Tax Ct. Memo LEXIS 245">*247 assisted her husband with operating the church, including offering counseling services and planning meetings. Petitioners also helped organize church-related trips to Disneyland and conferences for UPC parishioners.
Petitioners paid for all manner of church expenses from their personal checking account. In 2004 petitioners wrote 107 checks totaling over $30,000 from their personal checking account to cover UPC's expenses. The expenses included such items as Sunday school tables, the remodeling of the church's basement, trash hauling, advertising, and ministry dinners. Petitioners were not reimbursed for these expenses and claimed charitable contribution deductions for them on their income tax return for 2004.
On or about August 20, 2004, petitioners purchased property in Dunlap, California (the Dunlap property), for $177,800 via a personal check. The property consisted of a cabin and the surrounding land.
One of petitioner's primary motivations in purchasing the Dunlap property was to use the cabin for UPC retreats. Several other churches in the area were also interested in using the cabin for retreats. Additionally, Ms. Sandoval held discussions with women from UPC about holding 2010 Tax Ct. Memo LEXIS 245">*248 women's church retreats at the cabin.
Petitioners began improving the cabin after they purchased the Dunlap property. Eight parishioners from UPC helped petitioners improve the cabin. The parishioners were not paid for their labor. Petitioners paid for improvements to the cabin from their personal checking account and with personal credit cards.
In August or September of 2004 Henry Torres, a neighbor and acquaintance of petitioners for 30 years, hauled supplies and equipment to the Dunlap property for the petitioners. During this trip Mr. Torres told Mr. Sandoval that he would be interested in renting the Dunlap property for use as a retreat for his business. Mr. Sandoval and Mr. Torres never discussed any specific rental terms.
On August 15, 2004, at the suggestion of their certified public accountant, petitioners signed a document purporting to be a lease renting the Dunlap property to UPC for an undefined "rental session". The lease was signed by petitioners as both the potential future owners of the Dunlap property and representatives of UPC. The lease stated that the Dunlap property would be leased to UPC for a "teen camp, men's retreat & women's retreat." The lease did not contain 2010 Tax Ct. Memo LEXIS 245">*249 any rental terms or firm obligations.
The Dunlap property has always been titled in petitioners' name and was not insured against loss by fire or other casualty. Before or during 2004 petitioners did not develop a written business plan for the property, advertise it for rent or hire a rental agent, prepare promotional materials, or form a business entity for the property. Petitioners did not maintain a separate checking account. No rent from the property was ever received.
During 2004 petitioners owned property in Goshen, California (Goshen property). The Goshen property is a single-family residence that petitioners have owned since approximately 1987. Before 2002 petitioners used the Goshen property as their primary residence. During 2004 petitioners rented the Goshen property to a family member monthly. No lease was executed. Petitioners received $4,200 in rent for the Goshen property in 2004. Aside from the single-family house in Goshen, their home and the adjacent land, and the property at issue, petitioners did not own any other real property in 2004.
On October 10, 2004, a fire swept through the Dunlap property. The fire caused damages of $100,000 to the cabin 2010 Tax Ct. Memo LEXIS 245">*250 on the property and $50,000 to the contents of the cabin.
After 2004 the property was used for church group retreats and camping trips. Petitioners charged no rent for these activities.
Petitioners laid a foundation for a new house at the Dunlap property in December 2006. Petitioners began framing the new house in 2007. As of December 4, 2009, the new house had not been completed. Petitioners have done most of the construction work associated with the new house.
Petitioners filed a joint income tax return for 2004. On their return petitioners claimed a casualty loss deduction of $119,304 resulting from the fire.
On October 16, 2008, respondent issued a statutory notice of deficiency to petitioners that disallowed the claimed casualty loss deduction. On January 15, 2009, petitioners filed a petition with this Court. On December 4, 2009, a trial was held in San Francisco, California.
Respondent determined that petitioners did not engage in rental activity on the Dunlap property with an intent to derive a profit and therefore disallowed petitioners' casualty loss. Petitioners contend that they purchased and improved the Dunlap property with an intent to derive a profit from 2010 Tax Ct. Memo LEXIS 245">*251 church and corporate retreat rental activities and are therefore entitled to deduct from their gross income the casualty loss relating to the property.
Subject to certain limitations, any loss sustained during the taxable year and not compensated for by insurance or otherwise is deductible. See
Petitioners 2010 Tax Ct. Memo LEXIS 245">*252 bear the burden of proving that they are entitled to a loss under
In the case of an individual,
"The proper focus of the test * * * is the taxpayer's subjective intent. * * * However, objective indicia may be used to establish that intent."
The fact that the taxpayer carries on the activity in a businesslike 2010 Tax Ct. Memo LEXIS 245">*256 manner may indicate that the activity is engaged in for profit.
Maintaining complete and accurate books and records may indicate that an activity is a trade or business and engaged in for profit.
Conducting an activity in a manner substantially similar to those of other activities of the same nature which are profitable may indicate that the activity is a trade or business and engaged in for profit.
Changing operating methods, adopting new techniques, or abandoning "unprofitable methods in a manner consistent with an intent to improve profitability" may indicate that the activity is engaged in as a trade or business for profit.
"Preparation for the activity by extensive study of its accepted business, economic, and scientific practices, or consultation with those who are expert therein, may indicate that the taxpayer has a profit motive where the taxpayer carries on the activity in accordance with such practices."
Petitioners did not conduct an extensive study or consult with professionals before purchasing the Dunlap property. Before 2004 petitioners' only experience related to the rental retreat business was renting vacant land next to their 2010 Tax Ct. Memo LEXIS 245">*259 home to their construction business and renting the Goshen property to relatives.
The fact that the taxpayer devotes much of his personal time and effort to carrying on an activity, particularly if the activity does not have substantial personal or recreational aspects, may indicate an intention to derive a profit. A taxpayer's withdrawal from another occupation to devote most of his energies to the activity may also be evidence that the activity is engaged in for profit. * * *
Petitioners' primary occupation in 2004 was managing their lucrative construction business.
"The term 'profit' encompasses appreciation in the value of assets, such as land, used in the activity."
"The fact that the taxpayer has engaged in similar activities in the 2010 Tax Ct. Memo LEXIS 245">*260 past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for profit, even though the activity is presently unprofitable".
Petitioners conducted limited rental activities by leasing property for long periods to relatives and their construction business. No agreement was ever made to rent out the Dunlop property. 4
Petitioners' construction business was extremely profitable, but dissimilar to their planned Dunlap property rental activity. As discussed above, petitioners did not carry on a Dunlap property rental activity for profit.
A series of losses during the initial or start-up stage of an activity may not necessarily be an indication that the activity is not engaged in for profit. 2010 Tax Ct. Memo LEXIS 245">*261 However, where losses continue to be sustained beyond the period which customarily is necessary to bring the operation to profitable status such continued losses, if not explainable, as due to customary business risks or reverses, may be indicative that the activity is not being engaged in for profit. * * *
Petitioners never profited from the Dunlop property.
"The amount of profits in relation to the amount of losses incurred, and in relation to the amount of the taxpayer's investment and the value of the assets used in the activity, may provide useful criteria in determining the taxpayer's intent."
Petitioners paid $177,800 for the Dunlap property in 2004 and then spent substantial sums improving it. Petitioners never made a profit on the Dunlap property, but their conversations with UPC parishioners and 2010 Tax Ct. Memo LEXIS 245">*262 other church officials led them to believe that the area would be desirable as a destination for church and corporate retreats. Petitioners also used the property to host various church retreats after 2004. However, petitioners never attempted to earn income to offset their investment in the property, even after hosting several successful camping trips on the site and having several years in which to repair damage done to the property by the fire.
"Substantial income from sources other than the activity (particularly if the losses from the activity generate substantial tax benefits) may indicate that the activity is not engaged in for profit especially if there are personal or recreational elements involved."
Petitioners earned over $1.5 million in wages from their construction business in 2004. Those wages constitute substantial income. After 2004 petitioners used the property for church retreats and other charitable activities without charging rent, thus indicating that petitioners' activities regarding the Dunlap property fostered some personal or recreational elements.
"The presence of personal motives in carrying on of an activity may indicate that the activity is not engaged in for profit, especially where there are recreational or personal elements involved."
Petitioners have not shown that they have used the property in any way other than for the benefit of UPC and petitioners' community. Petitioners drew up a purported "lease" of Dunlap property to UPC which listed no form of payment and have let church groups use the property for retreats and camping trips on several occasions without charging rent. Ultimately, petitioners have not shown that their actions with regard to the Dunlap property were primarily intended to turn a profit.
After considering all of the above factors 2010 Tax Ct. Memo LEXIS 245">*264 as applied to the facts and circumstances of this case, we conclude that petitioners' Dunlap property activity did not rise to the level of a trade or business pursuant to
As petitioners have not shown that they meet the requirements of any of the subsections of
In reaching our holdings, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
1. Petitioners concede a $963 charitable contribution deduction.↩
2. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. Amounts are rounded to the nearest dollar.↩
3. The burden of proof with respect to a factual issue affecting a taxpayer's liability for tax may shift to the Commissioner under
4. Mr. Sandoval's retreat rental business plan was to rent the cabin and land on the Dunlap property to various churches and corporations for one-time events, each consisting of a lease term of several days or perhaps weeks. This is distinct from renting a residence or business site to a single entity for several months or years at a time.↩