Is it a “Hobby” or “Business”?
Part 5
July 27, 2004
By Jim Harnsberger, Sr. Tax Analyst

SAN DIEGO – The sixth and seventh test criteria of the Nine-Point test are important for consideration in terms of how often profits are realized in the business activity. A clear definition with objective standards should be made in answering these two important questions.

The taxpayer's profit objective must be bona fide, taking into account all of the facts and circumstances. See Keanini v . Commissioner, supra at 46; Dreicer v. Commissioner, supra at 645; Golanty v. Commissioner [Dec. 36,111], 72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d 170 (9th Cir. 1981); Bessenyey v. Commissioner [Dec. 27,660], 45 T.C. 261, 274 (1965), affd. [67-2 USTC 9488] 379 F.2d 252 (2d Cir. 1967). Whether a taxpayer engaged in an activity with an actual and honest objective of realizing a profit must be determined year to year. See Golanty v. Commissioner, supra at 426; sec. 1.183-2(a) and (ii), Income Tax Regs. More weight is given to objective facts than to the taxpayer's statement of intent. See Engdahl v. Commissioner [Dec. 36,167], 72 T.C. 659, 666 (1979); sec. 1.183-2(a), Income Tax Regs.

6. Activity’s History of Income or Losses
An activity's history of income or loss may reflect whether the taxpayer has a profit objective. Sec. 1.183-2(b)(6), Income Tax Regs. Unless explained by unforeseen or fortuitous circumstances beyond the taxpayer's control, a record of continuous losses beyond the period customarily required to obtain profitability may indicate that the activity is not engaged in for profit. Golanty v. Commissioner , supra at 426; Bessenyey v. Commissioner , supra at 274; Hillman v. Commissioner , supra ; sec. 1.183-2(b)(6), Income Tax Regs.

A willingness to adopt new techniques or abandon unprofitable methods may indicate that a taxpayer has a profit motive. Sec. 1.183-2(b)(1), Income Tax Regs. A history of substantial losses may indicate that an activity was not conducted for profit. Golanty v. Commissioner, supra at 427; sec. 1.183-2(b)(6), Income Tax Regs.

This factor is especially important in terms of making operational changes to the business activity to demonstrate the intent of profit objectives and should include periodic meetings with the advisors.

7. Occasional Profits
The amount of any occasional profits, if large in relation to losses incurred or the taxpayer's investment, may indicate a profit objective. Sec. 1.183-2(b)(7), Income Tax Regs. The possibility of a substantial profit in a highly speculative venture may indicate a profit objective even where profits are occasional and small or nonexistent. Id . Small occasional profits with large continuous losses do not indicate that the taxpayer had a profit objective. Sec. 1.183-2(b)(7), Income Tax Regs. Losses caused by unforeseen circumstances do not necessarily indicate that a taxpayer lacked a profit objective. See Engdahl v. Commissioner, supra at 669; Phillips v. Commissioner , T.C. Memo. 1997-128; Briggs v. Commissioner , T.C. Memo. 1994-125; Leonard v. Commissioner , T.C. Memo. 1993-472; sec. 1.183-2(b)(6), Income Tax Regs.

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