STATE OF WISCONSIN
TAX APPEALS COMMISSION
24306 18th Street
Kansasville, WI 53139
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8933
Madison, WI 53708
|DOCKET NO. 99-I-24
DECISION AND ORDER
THOMAS M. BOYKOFF, COMMISSIONER:
This matter came before the Commission for a trial on May 13, 1999, in Madison, Wisconsin. Ivan Kevo ("petitioner") is represented by Lubomir Malesevich, accountant, Chicago, Illinois. Wisconsin Department of Revenue ("respondent") is represented by Attorney Veronica Folstad, Madison.
Having considered the entire record and the arguments of the parties, the Commission finds, concludes, and orders as follows:
FINDINGS OF FACT
1. Under date of December 1, 1997, respondent issued an assessment to petitioner for $3,554.79 (income tax, regular interest, and "underpayment interest") for tax years 1995 and 1996.
2. Under date of December 8, 1997, petitioner filed a petition for redetermination with respondent which, under date of December 7, 1998, respondent denied.
3. Petitioner has operated a machine shop in Chicago, Illinois, ("the machine shop") since 1980. He had a business partner until 1986, when he bought out his partner. Petitioner has since operated the shop as a sole proprietor.
4. In October 1994, petitioner moved to Wisconsin with his son and began working as a full-time salaried employee of a corporation in Wisconsin. The reason for the move was that petitioner was divorced, had two children, and wanted a job that provided health insurance. In addition, he continued operating the machine shop in Chicago, travelling there on weekends and on his days off from his corporate employment. His work in and for the machine shop included industrial repairs, welding, equipment repairs, and light construction. Driving from his Wisconsin house to the machine shop took 1½ hours each way.
5. Petitioner reported a net loss from the machine shop on his federal income tax return's Schedule C each year from 1990 to 1996. The losses in 1990 to 1994 ranged from about $12,000 to about $25,600; the losses in 1995 and 1996 were $13,763.42 and $8,447, respectively. Contributing to the losses each year were significant amounts for the "Cost of Goods Sold" and for the depreciation of equipment and the Chicago building in which the business was located.
6. Petitioner testified that prior to moving to Wisconsin in October 1994, he "made a living" from the machine shop. His full-time job in Wisconsin -- 5 days each week from 6:00 a.m. to 2:30 p.m. -- did not and does not allow him to spend much time at the machine shop. He stated that he retained the machine shop to make a profit, rather than merely to maintain his investment in the property as respondent asserts. However, petitioner terminated operation of the machine shop in either 1998 or 1999 because he believed he would not make a profit. He considered renting out the building but maintained ownership, in the event he wanted to start up the business again.
7. In 1995, after not paying three property tax installments, petitioner redeemed the machine shop building from a tax sale. In 1996, petitioner received a "Final Notice Prior to Disconnection" from his electricity provider; the amount was subsequently paid.
During 1995 and 1996, did petitioner operate his machine shop as a trade or business under § 162, Internal Revenue Code?
CONCLUSION OF LAW
Respondent properly determined that petitioner did not operate his machine shop as a trade or business in 1995 and 1996 within the meaning of § 162, Internal Revenue Code.
Section 162, Internal Revenue Code ("IRC"), allows deductions for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Thus, in order for an expense to be deductible, it must be necessary to the carrying on of a trade or business.
After acknowledging that the IRC does not define trade or business, the U.S. Supreme Court provided the following guidance:
We accept the fact that to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify.
Commissioner v. Groetzinger, 408 U.S. 107, 87-1 USTC ¶ 9191 at 87,287 (1987) (emphasis supplied).
This precept is further clarified in § 183, IRC:
ACTIVITIES NOT ENGAGED IN FOR PROFIT
Sec. 183. (a) GENERAL RULE.--In the case of an activity engaged in by an individual ..., if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.
* * *
(c) ACTIVITY NOT ENGAGED IN FOR PROFIT DEFINED.--For purposes of this section, the term "activity not engaged in for profit" means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 ["Trade or Business Expenses] or under paragraph (1) or (2) of section 212 ["Expenses for the production of income"].
(d) PRESUMPTION.--If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for the purposes of this chapter for such taxable year to be an activity engaged in for profit....
The Treasury Regulations adopted under § 183 provide a non-exhaustive list of factors to consider when determining whether an activity is engaged in for profit. Treas. Reg. § 1.183-2(b). We find the following factors relevant to this case:
Manner in which the taxpayer carries on the activity. Petitioner had a full-time job in 1995 and 1996 in Wisconsin. He drove 1½ hours each way to the machine shop on weekends and on some other days off. Working full-time in Wisconsin did not allow petitioner to spend much time at the machine shop. We cannot conclude that most profitable machine shops operated in such a manner, and petitioner offers no evidence to the contrary. This factor tends to show that the machine shop was not operated for a profit.
The time and effort expended by the taxpayer in carrying on the activity. Petitioner admitted that by holding full-time employment in Wisconsin, he had little time to operate the machine shop. This factor tends to show that the machine shop was not operated for a profit.
The taxpayer's history of income or losses with respect to the activity. In each year from 1990 through 1996, petitioner claimed deductions with respect to the machine shop in excess of his income. This factor tends to show that the machine shop was not operated for a profit.
The amount of occasional profits, if any, which are earned. As indicated above, petitioner claimed deductions in excess of income with respect to the machine shop in each year from 1990 through 1996. Since there were no occasional profits during this period, this factor tends to show that the machine shop was not operated for a profit.
The financial status of the taxpayer. The Treasury Regulation provides that if a taxpayer has substantial income from sources other than the activity, this may indicate that the activity was not engaged in for profit. This is particularly true in cases where the taxpayer seeks to deduct losses from the activity against his income. Treas. Reg. § 1.183-2(b)(8). While we could debate whether petitioner's income from his salaried employment was "substantial," it was clearly substantial relative to the income generated by the machine shop, which resulted in a Schedule C loss for each year. This factor also tends to show that the machine shop was not operated for a profit.
Each of these relevant factors tends to show that the machine shop was not operated for a profit and, therefore, was not a trade or business within the meaning of § 162. Petitioner has failed to meet his burden of proof by demonstrating any factors showing otherwise.
In addition, because petitioner's machine shop experienced a loss in all five of the years 1992 through 1996, it does not qualify for the "engaged in for profit" presumption in § 183(d), supra. It was, therefore, "not engaged in for profit" in spite of petitioner's sincerity and diligence in pursuing this activity.
Respondent's action on petitioner's petition for redetermination is affirmed.
Dated at Madison, Wisconsin, this 10th day of August, 1999.
WISCONSIN TAX APPEALS COMMISSION
Mark E. Musolf, Chairperson
Don M. Millis, Commissioner
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"