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/* Section 1.183-1 of the Regulations of the Internal Revenue Service, regarding disallowance of hobby losses follows, with our sterling and decisive comments which explain the law. */ Section 1.183-1 Activities not engaged in for profit. (a) In general. Section 183 provides rules relating to the allowance of deductions in the case of activities (whether active or passive in character) not engaged in for profit by individuals and electing small business corporations, creates a presumption that an activity is engaged in for profit if certain requirements are met, and permits the taxpayer to elect to postpone determination of whether such presumption applies until he has engaged in the activity for at least 5 taxable years, or, in certain cases, 7 taxable years. Whether an activity is engaged in for profit is determined under section 162 and section 212(1) and (2) except insofar as certain as section 183(d) creates a presumption that the activity is engaged in for profit. If deductions are not allowable under sections 162 and 212(1) and (2), the deduction allowance rules of section 183(b) and this section apply. Pursuant to section 641(b), the taxable income of an estate or trust is computer in the same manner as in the case of an individual, with certain exceptions not here relevant. Accordingly, where an estate or trust engages in an activity or activities which are not for profit, the rules of section 183 and this section apply in computing the allowable deductions of such trust or estate. No inference is to be drawn from the provisions of section 183 and the regulations thereunder that any activity of a corporation (other than an electing small business corporation) is or is not a business or engaged in for profit. For rules relating to the deductions that may be taken into account by taxable membership organizations which are operate primarily to furnish services, facilities, or goods to members, see section 277 and the regulations thereunder. For the definitions of an activity not engaged in for profit, see 1-183-2. For rules relating to the election contained in section 183(e), see section 1.183-3. (b) Deductions allowable-- (1) Manner and extent. If an activity is not engaged in for profit, deductions are allowable under section 183(b) in the following order and only to the following extent: (i) Amounts allowable as deductions during the taxable year under chapter 1 of the Code without regard to whether the activity gives rise to such amounts was engaged in for profit are allowable to the full extent allowed by the relevant sections of the Code, determined after taking into account any limitations or exceptions with respect to the allowability of such amounts. For example the allowability-of-interest expenses incurred with respect to activities not engaged in for profit is limited by the rules contain in section 163(d). (ii) Amounts otherwise allowable as deductions during the taxable year under chapter 1 of the Code, but only if such allowance does not result in an adjustment to the basis of property, determined as if the activity giving rise to such amounts was engaged in for profit, are allowed only to the extent the gross income attributable to such activity exceeds the gross income attributable to such activity exceeds the deductions allowed or allowable under subdivision (i) of this subparagraph. (iii) Amounts otherwise allowable as deductions for the taxable year under Chapter 1 of the Code which result in (or if otherwise allowed would have resulted in) an adjustment to the basis of property, determined as if the activity giving rise to such deductions was engaged in for profit, are allowed only to the extent the gross income attributable to such activity exceeds the deductions allowed or allowable under subdivisions (i) and (ii) of this subparagraph. Deductions falling within this subdivision include such items as depreciation, partial losses with respect to property, partially worthless debts, amortization, and amortizable bond premium. (2) Rule for deductions involving basis adjustments-- (i) In general. If deductions are allowable under subparagraph (1)(iii) of this paragraph, and such deductions are allowed with respect to more than one asset, the deduction allowed with respect to each asset shall be determiners separately in accordance with the computation set forth in subdivision (ii) of this subparagraph. (ii) Basis adjustment fraction. The deduction allowed under subparagraph (1)(iii) of this paragraph is computer by multiplying the amount which would have been allowed, had the activity been engaged in for profit, as a deduction with respect to each particular asset which involves a basis adjustment, by the basis adjustment fraction-- (a) The numerator of which is the total of deductions allowable under subparagraph (1)(iii) of this paragraph, and (b) The denominator of which is the total of deductions which involve basis adjustment which would have been allowed with respect to the activities had the activity had the activity been engaged in for profit. The amount resulting from this computation is the deduction allowed under subparagraph (1)(iii) of this paragraph with respect to the particular asset. The basis of such asset is adjusted only to the extent of such deduction. (3) Examples. The provisions of subparagraphs (1) and (2) of this paragraph may be illustrated by the following examples: Example (1). A, an individual, maintains a herd of dairy cattle, which is an "activity not engaged in for profit" within the meaning of section 183(c). A sold milk for $ 1,000 during the year. During the year the year A paid $ 300 State taxes on gasoline used to transport the cows, milk, etc., and paid $ 1,200 for feed for the cows. For the year A also had a casualty loss attributable to this activity of $ 500. A determines the amount of his allowable deductions under section 183 as follows: (i) First, A computes his deductions allowable under subparagraph (1)(i) of this paragraph as follows: State gasoline taxes specifically allowed under section 164(a)(5) without regard to whether the activity is engaged in for profit ........... $ 300 Casualty loss specifically allowed under section 165(c)(3) without regard to whether the activity is engaged in for profit ($ 500 less $ 100 limitation) ........... $ 400 Deductions allowable under subparagraph (1)(i) of this paragraph ........... $ 700 (ii) Second. A computes his deductions allowable under subparagraph (deductions which would be allowed under Chapter 1 of the Code if the activity were engaged in for profit and which do not involve basis adjustment) as follows: Maximum amount of deductions allowable under subparagraph (1)(ii) of this paragraph: Income from milk sales .......... $ 1,000 __________________ Gross income from activity .......... $ 1,000 Less: deductions allowable under subparagraph (1)(ii) of this paragraph 700 __________________ Maximum amount of deductions allowable under subparagraph 300 __________________ Feed for cows 1,200 Deduction allowed under subparagraph (1)(ii) of this paragraph 300 $ 900 of the feed expense is not allowed as a deduction under section 183 because the total feed expense ($ 1,200), exceeds the maximum amount of deductions allowable under subparagraph (1)(ii) of this paragraph ($300). In view of these circumstances, it is not necessary to determine deductions allowable under subparagraph (1)(iii) of this paragraph which would be allowable under chapter 1 of the Code if the activity were engaged in for profit and which involve basis adjustment (the $ 100 of casualty loss not allowable under subparagraph (1)(i) of this paragraph because of the limitation in section 165(c)(3)) because none of such amount will be allowed as a deduction under section 183. Example (2). Assume the same facts in example (1), except that A also had income from sales of hay grown on the farm of $ 1,200 and that depreciation of $ 750 with respect to a barn, and $ 650 with respect to the activity had it been engaged in for profit. A determines the amount of his allowable deductions under section 183 as follows: (i) First, A computes his deductions allowable under subparagraph (1)(i) of this paragraph as follows: State gasoline taxes specifically allowed under section 164(a)(5) without regard to whether the activity is engaged in for profit .......... $ 300 Casualty loss specifically allowed under section 165(c)(3) without regard to whether the activity is engaged in for profit ($ 500 less $ 100 limitation) .......... 400 _________________ Deductions allowable under subparagraph (1)(i) of this paragraph .......... 700 (ii) Second, A computes his deductions allowable under subparagraph (1)(ii) of this paragraph (deductions which would be allowed under chapter 1 of the Code if the activity were engaged in for profit and which do not involve basis adjustment) as follows: Maximum amount of deductions allowable under subparagraph (1)(ii) of this paragraph: Income for milk sales .......... $ 1,000 __________________ Income from hay sales .......... 1,200 __________________ Gross income from activity .......... 2,200 __________________ Less: deductions allowable under subparagraph (1)(i) of this paragraph .......... 700 __________________ Maximum amount of deductions allowable under subparagraph (1)(ii) of this paragraph .......... 1,500 ___________________ Feed for cows 1,200 The entire $ 1,200 of expenses relating to feed for cows is allowable as a deduction under subparagraph (1)(ii) of this subparagraph, since it does not exceed the maximum amount of deductions allowable under such subparagraph. (iii) Last, A computes the deductions allowable under subparagraph (1)(iii) of this paragraph: Gross income from farming .......... $ 2,200 Less: Deductions allowed under subparagraph (1)(i) of this paragraph $ 700 Deductions allowed under subparagraph (1)(ii) of this paragraph 1200 1,900 __________ ___________________ Maximum amount of deductions allowable under subparagraph (1) (iii) of this paragraph .......... 300 (iv) Since the total of A's deductions under Chapter 1 of the Code (determined as if the activity was engaged in for profit) which involve basis adjustments ($ 750 with respect to the barn, $ 650 with respect to tractor, and $ 100 with respect to limitation on casualty loss) exceeds the maximum amount of the deductions allowable under subparagraph (1)(iii) of this paragraph ($ 300). A computes his allowable deductions with respect to such assets as follows: A first computes his basis adjustment fraction under subparagraph (2)(ii) of this paragraph as follows: The numerator of the fraction is the maximum of deductions allowable under subparagraph (1)(iii) of this paragraph which involve basis adjustments .......... $ 300 The denominator of the fraction is the total of deductions that involve basis adjustments which would have been allowed with respect to the activity had the activity been engaged in for profit .......... $ 1,500 The basis adjustment fraction is then applied to the amount of each deduction which would have been allowable if the activity were engaged in for profit and which involve a basis adjustment as follows: Depreciation allowed with respect to barn (300/ 1,500 x 750) .......... $ 150 Depreciation allowed with respect to tractor .......... 130 Deduction allowed with respect to limitation on casualty loss 300/1500 x 100) .......... 20 The basis of the barn and of the tractor are adjusted only by the amount of depreciation actually allowed under section 183 with respect to each (as determined by the above computation). The basis of the asset with regard to which the casualty loss was suffered is adjusted only to the extent of the amount of the casualty loss actually allowed as a deduction under subparagraph (1)(i) and (iii) of this paragraph. (4) Rule for capital gains and losses.-- (i) In general. For purpose of section 183 and the regulations thereunder, the gross income from any activity not engaged in for profit includes the total of all capital gains attributable to such activity determined without regard to the section 1202 deduction. Amounts attributable to an activity not engaged in for profit which would be allowable as a deduction under section 1202, without regard to section 183, shall be allowable as a deduction under section 183(b)(1) in accordance with the rules stated in this subparagraph. (ii) Cases where deduction not allowed under section 183. No deduction is allowable under section 183(b)(1) with respect to capital gains attributable to an activity not engaged in for profit if-- (a) Without regard to section 183 and the regulations thereunder, there is no excess of net long term capital gain over net short-term capital loss for the year, or, (b) There is no excess of net long-term capital gain attributable to the activity over net short-term capital loss attributable to the activity. (iii) Allocation of deduction. If there is-- (a) An excess of net long-term capital gain over net short-term capital loss attributable to an activity not engaged in for profit, and (b) Such an excess attributable to all activities, determined without regard to section 183 and the regulations thereunder, the deduction allowable under section 183(b)(1) attributable to capital gains with respect to each activity not engaged in for profit (with respect to which there is an excess of net long term capital gains over net short-term capital loss for the year) shall be an amount equal to the deduction allowable under section 1202 for the taxable year (determined without regard to section 183) multiplied by a fraction the numerator of which is the excess of the net long-term capital gain attributable to the activity over the net short-term capital loss for all activities with respect to which there is such excess. The amount of the total section 1202 deductions allowable for the year shall be reduced by the amount determined to be allocable to activities not engaged in for profit and accordingly to activities not engaged in for profit and accordingly allowed as a deduction under section 183(b)(1). (iv) Example. The provisions of this subparagraph may be illustrated by the following example: Example. A, an individual who uses the cash receipts and disbursement method of accounting and the calender year as the taxable year, has three activities not engaged in for profit. For his taxable year ending on December 31, 1973, A has a $ 200 net long-term capital gains from activity No. 1, a $ 100 net short-term capital loss from activity No. 2, and a $ 300 net long-term capital gain from activity No. 3. In addition, A has a $ 500 net long-term capital gain from another activity which he engages in for profit. A computes his deduction for capital gains for calendar year 1973 as follows: Section 102 deduction with regard to section 183 is determined as follows: Net long-term capital gain from activity No. 1 .......... $ 200 Net long-term capital gain from activity No. 2 .......... 300 Net long-term capital gain from activity engaged in for profit .......... 500 ___________________ Total net long-term capital gain from all activities 1,000 Less: Net short-term capital loss attributable activity No. 2 .......... 100 ___________________ Aggregate net long-term capital gain over net short-term capital loss from all activities 900 ___________________ ___________________ Section 1202 deductions determined without regard to section 183 (one-half of $ 900) 450 Allocation of the total section 1202 deduction among A's various activities: Portion allocable to activity No. 1 which is deductible under section 183(b)(1) (Excess net long-term capital gain attributable to all of A's activities with respect to which there is sic an excess ($ 1,000) times amount of section 1202 deduction ($ 450) .......... $ 90 Portion allocable to activity No. 3 which is deductible under section 183(b)(1) (Excess net long-term capital gain attributable to activity No. 3 ($ 300) over total excess of net long-term capital gain attributable to all of A's activities with respect to which there is such an excess ($ 1,000) times amount of section 1202 deduction ($ 450)) .......... 135 Portion allocable to all activities engaged in for profit (total section 1202 deductions ($ 450) less section 1202 deduction allowable to activities Nos. 1 and 3 ($ 225)) 225 __________________ Total section 1202 deduction deductible under sections 1202 and 183(b)(1) 450 __________________ __________________ (c) Presumption that activity is engaged in for profit-- (1) In general. If for-- (i) Any 2 of 7 consecutive taxable years, in the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, or (ii) Any 2 of 5 consecutive taxable years, in the case of any other activity, The gross income derived from an activity exceeds the deductions attributable to such activity which would be allowed or allowable if the activity were engaged in for profit, such activity is presumed, unless the Commissioner establishes to the contrary to be engaged in for profit. /* This is certainly not the only test. */ For purposes of this determination the deduction permitted by second 1202 shall not be taken into account. Such presumption applies with respect to the second profit year and all years subsequent to the second profit year within the 5- or 7- year period beginning with the first profit year. This presumption arises only if the activity is substantially the same activity for each of the relevant taxable years, including the taxable year in question. If the taxpayer does not meet the requirements of section 183(d) and this paragraph, no inference that the activity is not for profit shall arise by reason of the provisions of section 183. For purposes of this paragraph, a net operating loss deduction is not taken into account as a deduction. For purposes of this subparagraph a short taxable year constitutes a taxable year. (2) Examples. The provisions of subparagraph (1) of this paragraph may be illustrated by the following examples, in each of which it is assumed that the taxpayer has not elected, in accordance with section 183(e), to postpone determination of whether the presumption described in section 183(d) and this paragraph is applicable. Example (1). For taxable years 1970-1974, A, an individual who uses the cash receipts and disbursement method of accounting and the calendar year as the taxable year as the taxable year, is engaged in the activity in farming. In taxable years 1971, 1973, and 1974, A's deductible expenditures with respect to such activity exceed his gross income from the activity. In taxable years 1970 and 1972 A has income from the sale of farm produce of $ 30,000 for each year. In each out of such years A had expenses for feed for his livestock of $ 10,000, depreciation of equipment of $ 10,000, and fertilizer cost of $ 5,000 which he elects to take as a deduction. A also has a net operating loss carryover to taxable year 1970 of $ 6,000. A is presumed, for taxable years, 1972, 1973, and 1974, to have engaged in the activity of farming for profit, since for 2 years of a 5-consecutive period the gross income from the activity ($ 30,000 for each year) exceeded the deductions (computed without regard to net operating loss) which are allowable in the case o the activity ($ 25,000 for each year.) Example (2). For the taxable years 1970 and 1971, B, an individual who uses the cash receipts and disbursement method of accounting and the calendar year as taxable year, engaged in raising pure-bred Charolais cattle for breeding purposes. The operation showed a loss during 1970. At the end of 1971, B sold a substantial portion of his herd and the cattle operation showed a profit for that year. For all subsequent relevant taxable years B continued to keep a few Charolias bulls at stud. In 1972, B started to raise Tennessee Walking Horses for breeding and show purposes, utilizing substantially the same pasture land, barns, and (with structural modifications) the same stalls. The Walking Horse operations showed a small profit in 1973 and losses in 1972 and 1972 through 1976. (i) Assuming that under paragraph (d)(1) of this section the raising of cattle and raising of horses are determine to be separate activities, no presumption that the Walking Horse operation was carried on for profit arises under section 183(d) and this paragraph since this activity was not the same activity that generated the profit in 1971 and there are not, therefore, 2 profit years attributable to the horse activity. (ii) Assuming the same facts as in (1) above, if there were no stud fees received in 1972 with respect to Charolias bulls, but for 1973 stud fees with respect to such bulls exceed deductions attributable to maintenance of the bulls in that year, the presumption will arise under section 183(d) and this paragraph with respect to the activity of raising and maintaining Charolais cattle for 1973 and for all subsequent years within the 5-year period beginning with taxable year 1971, since the activity of raising and maintaining Charolais cattle is the same activity in 1971 and 1973, although carried on by B on a much reduced basis and in a different manner. Since it has been assumed that the horse and cattle operations are separate activities, no presumption will arise with respect to the Walking Horse operation because there are not 2 profit years attributable to such horse operation during the period in question. (iii) Assuming, alternatively, that the raising of cattle and raising of horses would be considered a single activity under paragraph (d)(1) of this section, B would receive the benefit of the presumption beginning in 1973 with respect to both the cattle and horses since there were profits in 1971 and 1973. The presumption would be effective through 1977 (and longer if there is an excess of income over deductions in the activity in 1974, 1975, 1976, or 1977 which would extend the presumption) if, under section 183(d) and subparagraph (3) of this paragraph, it was determined that the activity consists in major part of the breeding, training, showing or racing of horses. Otherwise, the presumption would be effective only through 1975 (assuming no excess of income over deductions in this activity in 1974 or 1975 which would extend the presumption. (3) Activity which consists in major part of the breeding, training, showing, or racing of horses. For purposes of this paragraph an activity consists in major part of the breeding, training, showing, or racing of horses for the taxable year if the average of the portion of expenditures attributable to breeding, training, showing, and racing of horses for the 3 taxable years preceding the taxable year (or, in the case of an activity which has not been conducted by the taxpayer for 3 years, for so long as it has been carried on by him) was at least 50 percent of the total expenditures to the activity for such prior taxable years. (4) Transitional rule. In applying the presumption described in section 183(d) and this paragraph, only taxable years beginning after December 31, 1969, shall be taken into account. Accordingly, in the case of an activity referred to in subparagraph (1)(i) or (ii) of this paragraph, section 183(d) does not apply prior to the second profitable taxable year beginning after December 31, 1969, since taxable years prior to such date are not taken into account. (5) Cross reference. For rules relating to section 183(e) which permits a taxpayer to elect to postpone determination of whether an activity shall be presumed to be "an activity engaged in for profit" by operation of the presumption described in section 183(d) and this paragraph until after the close of the fourth taxable year (sixth taxable year, in the case of activity which consists in major part of breeding, training, showing or racing of horses) following the taxable year in which the taxpayer first engages in the activity, see Section 1.183-3. (d) Activity defined- (1) Ascertainment of activity. In order to determine whether, and to what extent, section 183 and the regulations thereunder apply, the activity or activities of the taxpayer must be ascertained. For instance, where the taxpayer is engaged in several undertakings, each of these may be a separate activity or activities of the taxpayer must be ascertained. For instance, where the taxpayer is engaged in several undertakings, each of these may be a separate activity, or several undertakings may constitute one activity. In ascertaining the activity or activities of the taxpayer, all the facts and circumstances of the case must be taken into account. Generally, the most significant facts and circumstances of the case must be taken into account. Generally, the most significant facts and circumstances in making this determination are the degree of organization and economic interrelationship of various undertakings, the business purpose which is (or might be) served by carrying on the various undertakings separately or together in a trade or business or in an investment setting, and the similarity of various undertakings. Generally, the Commissioner will accept the characterization by the taxpayer of several undertakings either as a single activity or as separate activities. The taxpayer's characterization will not be accepted, however, when it appears that his characterization is artificial and cannot be reasonably supported under the facts and circumstances of the case. If the taxpayer engages in two or more separate activities, deductions and income are not aggregated either in determining whether a particular activity is engaged in for profit or in applying section 183. Where land is purchased or held primarily with the intent to profit from increase in its value, and the taxpayer also engages in farming on such land, the farming and the holding of the land will ordinarily be considered a single activity only if the income derived from farming exceeds the deductions attributable to the farming activity which are not directly attributable to the farming activity which are not directly attributable to the holding of the land (that is, deductions other than those directly attributable to the holding of the land such as interest on a mortgage secured by the land, annual property taxes attributable to the land and improvements, and depreciation of improvements to the land. (2) Rules for allocation of expenses. If the taxpayer is engaged in more than one activity, an item of deduction or income may be allocated between two or more of these activities. Where property is used in several activities, and one or more of such activities is determined not to be engaged for profit, deductions relating to such property must be allocated between the various activities on a reasonable and consistently applied basis. (3) Example. The provisions of this paragraph may be illustrated by the following example: Example. (i) A, an individual, owns a small house located near the beach in a resort community. Visitors come to the area for recreational purposes during only 3 months of the year. During the remaining 9 months of the year houses such as A's are not rented. Customarily, A arranges that the house will be leased for 2 months of 3-month recreational season to vacationers and reserves the house for his own vacation during the remaining month of the recreational season. For 1971, the expenses attributable to the house are $ 1,200 interest, $ 600 real estate taxes, $ 600 maintenance $ 300 utilities, and $ 1,200 which would have been allowed as depreciation had the activity been engaged in for profit. Under these facts and circumstances, A is engaged in a single activity, holding the because house primarily for personal purposes, which is an "activity not engaged in for profit"within the meaning of section 183(c). See paragraph (b)(9) of Section 1.183-2. (ii) SInce the $ 1,200 of interest and the $ 600 of real estate taxes are specifically allowable as deductions under sections 163 and 164(a) without regard to whether the beach house activity is engaged in for profit, no allocation of these expenses between the use of the beach house is necessary. However, since section 262 specifically disallows personal, living, and family expenses as deductions, the maintenance and utilities expenses and the depreciation from the activity must be allocated between the rental use and the personal use of the beach house. Under the particular facts and circumstances, 2/3 (2 months of rental use over 3 months of total use) of each of these expenses are allocated to the personal use as follows: Rental Personal use use 2/3-- expenses use 1/3-- allocated to expenses section 183(b)(2) allocatable to section 262 ________________________________________________________________ Maintenance expense $ 600 $ 400 $ 200 Utilities expense $ 300 $ 200 $ 100 Depreciation $ 1,200 $ 800 $ 400 ________________________________________________________________ Total $ 1400 $ 700 The $ 700 of expenses and depreciation allocated to the personal use of the beach house are disallowed as a deduction under section 262. In addition, the allowability of each of the expenses and the depreciation allocated to section 183(b)(2) is determined under paragraph (b)(1)(ii) and (iii) of this section. Thus, the maximum amount allowable as a deduction under section 183(b)(2) is $ 200 ($ 2,000 gross income from activity, less $ 1,800 deduction under section 183(b)(1)). Since the amounts described in paragraph (b)(1)(ii) of this section ($ 600) exceed such maximum amount allowable ($200), none of the depreciation (an amount described in paragraph (B)(i)(iii) of this section) is allowable as a deduction. (e) Gross income from activity not engaged in for profit defined. For purposes of section 183 and the regulations thereunder, gross income derived from an activity not engaged in for profit includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from such activity. The taxpayer may determine gross income from any activity by subtracting the cost of goods sold from the gross receipts so long as he consistently does so and follows generally accepted methods of accounting in determining such gross income. (f) Rule for electing small business business corporations. Section 183 and this section shall be applied at the corporate level in determining the allowable deductions of an electing small business corporation. Section 1.183-2 Activity not engaged in for profit defined. (a) In general. For purposes of section 183 and the regulations thereunder, 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 or under paragraph (1) or (2) of section 212. Deductions are allowable under section 162 for expenses of carrying on activities which constitute a trade or business and under section 212 for expenses incurred in connection with activities engaged in for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income. Except as provided in section 183 and Section 1.183-1, no deductions are allowable under section 162 or 212 for activities which are not engaged in for profit. Thus, for example, deductions are not allowable under 162 or 212 for activities carried on primarily as a sport, hobby, or for recreation. The determination whether an activity is engaged in for profit is to be made by reference to objective standards, taking into account all of the facts and circumstances of each case. Although a reasonable expectation of profit is not required, the facts and circumstances must indicate that the taxpayer entered into the activity, or continued the activity, with the objective of making a profit. In determining whether such objective exists, it may be sufficient that there is a small chance of making a large profit. Thus it may be found that an investor in a wildcat oil well who incurs very substantial expenditures is in the venture for profit even though the expectation of a profit might be considered unreasonable. In determining whether an activity is engaged in for profit, greater weight is given to objective facts than to the taxpayer's mere statement of intent. (b) Relevant factors. In determining whether an activity is engaged in for profit, all facts and circumstances with respect to the activity are to be taken into account. No one factor is determinative in making this determination. /* Sorry guys. I didn't determine to write that. */ In addition, it is not intended that only the factors described in this paragraph are to be taken into account in making this determination, or that a determination is to be made on the basis that the number of factors (whether or not listed in this paragraph) indicating a lack of profit objective exceeds the number of factors (whether or not listed in this paragraph) indicating a lack of profit objective exceeds the number of factors indicating a profit objective, or vice versa. Among the factors which should normally be taken into account are the following: (1) Manner in which the taxpayer carries on the activity. The fact that the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records may indicate that the activity is engaged in for profit. Similarly, where an activity is carried on in a manner substantially similar to other activities of the same nature which are profitable, a profit motive may be indicated. A change of operating methods, adoption of new techniques or abandonment of unprofitable methods in a manner consistent with an intent to improve profitability may also indicate a profit motive. (2) The expertise of the taxpayer or his advisors. 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. Where a taxpayer has such preparation or procures such expert advice, but does not carry on the activity in accordance with such practices, a lack of intent to derive profit may be indicated unless it appears that the taxpayer is attempting to develop new or superior techniques which may result in profit from the activity. (3) The time and effort expended by the taxpayer in carrying on the activity 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. The fact that taxpayer devotes a limited amount of time to an activity does not necessarily lack of profit motive where the taxpayer employs competent and qualified persons to carry on such activity. (4) Expectation that assets used in activity may appreciate in value. The term "profit" encompasses appreciation in the value of assets, such as land, used in the activity. Thus, the taxpayer may intend to profit from the operation of the activity, and may also intend that, even if no profit from current operations is derived, an overall profit will result when appreciation in the value of land used in the activity is realized since income from the activity is realized since income from the activity together with the appreciation of land will exceed expenses of operation. See, however, paragraph (d) of Section 1.183-1 for definition of an activity in this connection. (5) The success of the taxpayer in carrying on other similar or dissimilar activities. The fact that the taxpayer has engaged in similar activities in the 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. (6) The taxpayer's history of income or losses with respect to the activity. 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. 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 reserves, may be indicative that the activity is not being engaged in for profit. (7) The amount of occasional profits, if any, which are earned. 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. An occasional small profit from an activity generating large losses, or from an activity in which the taxpayer has made a large investment, would not generally be determinative that the activity is engaged in for profit. However, substantial profit, though only occasional, would generally be indicate that an activity is engaged in for profit, where the investment or losses are comparatively small. Moreover, an opportunity to earn a substantial ultimate profit in a highly speculative venture is ordinarily sufficient to indicate that the activity is engaged in for profit even though losses or occasional small profits are actually generated. (8) The financial status of the taxpayer. The fact the taxpayer does not have substantial income or capital from source other than the activity is engaged in for profit. Substantial income from source 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. (9) Elements of personal pleasure or recreation. The presence of personal motives in carrying on of an activity may indicate that the activity is engaged in for profit, especially where there are recreational or personal elements involved. On the other hand, a profit motivation may be indicated where an activity lacks any appeal other than profit. It is not, however, necessary that an activity be engaged in with the exclusive intention of deriving a profit or with the intention of maximizing profits. For example, the availability of other investments which would yield a higher return, or which would be more likely to be profitable is not evidence that an activity is not engaged in for profit. An activity will not be treated as not engaged in for profit merely because the taxpayers has purposes or motivation other than solely to make a profit. Also, the fact that the taxpayer derives personal pleasure from engaging in the activity is not sufficient to cause the activity to be classified as not engaged in for profit as evidenced by other factors whether or not listed in this paragraph. (c) Examples. The provisions of this section may be illustrated by the following examples: Example (1). The taxpayer inherited a farm from her husband in an area which was becoming largely residential, and is now nearly all so. The farm had never made a profit before the taxpayer inherited it, and the farm has since had substantial losses in each year. the decedent from whom the taxpayer inherited the farm was a stockholder, and he also left the taxpayer substantial stock holdings which yield large income from dividends. The taxpayer lives on an area of the farm which is set aside exclusively for living purposes. A farm manager is employ to operate the farm, but modern methods are not used in operating the farm. The taxpayer was born and raised on a farm, and express a strong preference for living on a farm. The taxpayer's activity of farming, based on all the facts and circumstances, could be found not to be engaged in profit. Example (2). The taxpayer is a wealthy individual who is greatly interested in philosophy. During the last 30 years he has written and published at his own expense several pamphlets, and he has engaged in extensive lecturing activity, advocating and disseminating his ideas. He has made a profit from these activities in only occasional years, and the profits in those years were small in relation to the amount of the losses in all other years. The taxpayer has very sizable income from securities (dividends and capital gains) which constitutes the principal source of his livelihood. The activity of lecturing, publishing pamphlets, and disseminating his ideas is not an activity engaged in by the taxpayer for profit. Example (3). The taxpayer, very successful in the business of retailing soft drinks, raises dogs and houses. He began raising a particular breed of dog many years ago in the belief that the breed was in danger of declining, and he has raised and sold the dogs in each year since. The taxpayer recently began raising and racing thoroughbred horses. The losses from the taxpayer's dog and horse activities have increased in magnitude over the years, and he has not made a profit on these operations during any of the last 15 years. The taxpayer generally sells the dogs only to friends, does not advertise the dogs for sale, and shows the dogs only infrequently. The taxpayer races his horses only at the "prestige" tracks at which he combines his racing activities with social and recreational activities. The horse and dog operations are conducted at a large residential property on which the taxpayer also lives, which includes substantial living quarters and attractive recreational facilities for the taxpayer and his family. Since (i) the activity of raising dogs and horses and racing the horses is of a sporting and recreational nature, (ii) the taxpayer has substantial income from his business activity of retailing soft drinks, (iii) the horse and dog operations are not conducted in a businesslike manner, and (iv) such operations have a continuous record of losses, it could be determined that the horse and dog activities of the taxpayer are not engaged in for profit. Example (4). The taxpayer inherited a farm of 65 acres from his parents when they died 6 years ago. The taxpayer moved to the farm from his house in a small nearby town, and he operates it in the same manner as his parents operated the farm before they died. The taxpayer is employed as a skilled machine operator in a nearby factory, for which he is paid approximately $ 8,500 per year. The farm has not been profitable for the past 15 years because of rising costs of operating farms in general, and because of the decline in the price of the produce of this farm in particular. The taxpayer consults the local agent of the State agricultural service from time to time, and the suggestions of the agent have generally been followed. the manner in which the farm is operated by the taxpayer is substantially similar to the manner in which farms of similar size, and which grow similar crops in the area, are operated. Many of these other farms do not make profits. The taxpayer does much of the required labor around the farm himself, such as fixing fences, planting crops, etc. The activity of farming could be found, based on all the facts and circumstances, to be engaged in by the taxpayer for profit. Example (5). A, an independent oil and gas operator, frequently engages in the activity of searching for oil on undeveloped land which is not near proven fields. He does so in a manner substantial similar to that of others who engage in the same activity. The chances, based on the experience of A and others who engaged in this activity, are strong that A will not find a commercially profitable oil deposit when he drills on land not established geologically to be proven oil bearing land. However, on the rare occasions that these activities do result in discovering a well, the operator generally realizes a very large return form such activity. Thus, there is a small chance that A will make a large profit from his soil exploration activity. Under these circumstances, A is engaged in the activity of oil drilling for profit. Example (6). C, a chemist, is employed by a large chemical company and is engaged in a wide variety of basic research projects for his employer. Although he does no work for his employer in respect to the development of new plastics, he has always been interested in such development and has outfitted a workshop in his home at his own expense which he uses to experiment in the field. He has patented several developments at his own expense but as yet has realized no income from his inventions or from such patents. C conducts his research on a regular, systematic basis, incurs fees to secure consultation on his projects from time to time, and makes extensive efforts to "market" his developments. C has devoted substantial time and expense in an effort to develop a plastic sufficiently hard, durable, and malleable that it could be used in lieu of sheet steel in many major applications, such as automobile bodies. Although there may be only be a small chance that C will invent small plastics, the return from any such development would be so large that it induces C to incur the costs of his experimental work. C is sufficiently qualified by his background that there is some reasonable basis for his experimental activities. C's experimental work does not involve substantial personal or recreational aspects and is conducted in an effort to find practical applications for his work. Under these circumstances, C may be found to be engaged in the experimental activities for profit.