Respondent disallowed the deduction involved in this case because petitioner's former spouse lacked the necessary profit objective. Even under prior section 6013(e), where the spouse claiming relief was required to prove lack of knowledge of the item, we said that "the taxpayer claiming innocent spouse *** [relief] must establish that he or she is unaware of the circumstances that give rise to error on the tax return, and not merely be unaware of the tax consequences." Bokum v. Commissioner, 94 T.C. 126, 145-146 (1990) (emphasis added), affd. 992 F.2d 1132 (11th Cir. 1993). As previously indicated, Congress was attempting to expand relief from joint liability when it enacted section 6015. When a spouse elects relief under section 6015(c), the burden of proving the spouse's actual knowledge of the item in order to deny relief is on the Commissioner.5 We therefore hold that the proper application of the actual knowledge standard in section 6015(c)(3)(C), in the context of a disallowed deduction, requires respondent to prove that petitioner had actual knowledge of the factual circumstances which made the item unallowable as a deduction. Consistent with Cheshire, such actual knowledge does not include knowledge of the tax laws or knowledge of the legal consequences of the operative facts.6 The factual basis for respondent's determination in this case was the lack of required profit objective on the part of petitioner's former spouse. Section 183(a) disallows any deductions attributable to activities not engaged in for profit except as provided under section 183(b). Section 183(c) defines an activity not engaged in for profit as "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." This case is appealable to the Court of Appeals for the Fourth Circuit. The standard for determining whether expenses of an activity are deductible under either section 162 or section 212(1) or (2) in the Court of Appeals for the Fourth Circuit is whether the taxpayer engaged in the activity primarily for the purpose of making 5 See Culver v. Commissioner, 116 T.C. 189 (2001) (the Commissioner's burden of proof under sec. 6015(c)(3)(C) is met by a preponderance of the evidence). 6 We note that in Cheshire v. Commissioner, 115 T.C. 183 (2000), the spouse claiming relief was found to have actual knowledge of factual circumstances that caused the items of omitted income to be taxable and that her omission was based on her misunderstanding of the law. a profit. See Hendricks v. Commissioner, 32 F.3d 94, 97 n.6 (4th Cir. 1994), affg. T.C. Memo. 1993-396. While a reasonable expectation of profit is not required, a taxpayer's profit objective must be bona fide. See Hulter v. Commissioner, 91 T.C. 371 (1988). Whether a taxpayer is primarily engaged in the activity for profit is a question of fact to be resolved from all relevant facts and circumstances. See id. at 393; Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d 170 (9th Cir. 1981). In resolving this factual question, greater weight is given to objective facts than to the taxpayer's after-the-fact statements of intent. See Siegel v. Commissioner, 78 T.C. 659, 699 (1982); sec. 1.1832(a), Income Tax Regs. Thus, several factors are taken into consideration in determining whether an activity is engaged in primarily for profit under section 183. Generally, these factors, set out in section 1.183-2(b), Income Tax Regs., include: (1) The manner in which the activity is conducted, (2) the taxpayer's expertise, (3) the time and effort expended in the activity, (4) an expectation that the assets used in the activity may appreciate in value, (5) the success of the taxpayer in other similar or dissimilar activities, (6) the history of income or losses of the activity, (7) the taxpayer's financial status, and (8) elements indicating personal pleasure or recreation associated with the activity. These factors are relevant in the context of this case to the extent they may indicate whether petitioner knew or believed that her former spouse was or was not engaged in the cattle-raising activity primarily for profit. The question in this case, therefore, is not whether petitioner knew the tax consequences of a not-for-profit activity but whether she knew or believed that her former spouse was not engaged in the activity for the primary purpose of making a profit. Thus, in determining whether petitioner had actual knowledge of an improperly deducted item on the return, more is required than petitioner's knowledge that the deduction appears on the return or that her former spouse operated an activity at a loss. Whether petitioner had the requisite knowledge is an essential fact respondent was required to establish under section 6015(c)(3)(C). Respondent failed in this regard. The Court is satisfied that petitioner's knowledge of the activity in question was that it was an activity that she knew was not profitable but that she hoped and expected would become profitable at become profitable at some point. Respondent presented insufficient evidence to show that petitioner knew that her former spouse did not have a primary objective of making a profit with his cattle-raising activity. Petitioner, therefore, is entitled to relief from the tax liability arising out of this activity under section 6015(c). Since the activity was an activity attributable solely to her former spouse, the relief to petitioner extends to the full amount of the deficiency. Decision will be entered for petitioner. SAM H. PATTON, PETITIONER v. COMMISSIONER OF Docket No. 16428-99. Filed April 13, 2001. For 1995, P elected, under sec. 179, I.R.C., to expense a Hugh T. Echols, Sr., for petitioner. OPINION 1 GERBER, Judge: Respondent determined a deficiency in petitioner's 1995 Federal income tax of $26,526, a penalty pursuant to section 6662(a) 2 of $5,305, and a late-filing addition to tax pursuant to section 6651(a)(1) of $5,305. After concessions,3 the issue remaining for our consideration is 1 This case was submitted fully stipulated under Rule 122 of this Court's Rules of Practice and Procedure. 2 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable periods under consideration, and all Rule references are to the Tax Court Rules of Practice and Procedure. 3 Petitioner concedes that he is liable for the accuracy-related penalty pursuant to sec. 6662(a) for the 1995 taxable year. Respondent concedes that petitioner is not liable for an addition to tax pursuant to sec. 6651(a)(1) for the 1995 taxable year. Several other agreements and conces whether respondent abused his discretion in refusing to grant consent to petitioner to revoke (modify or change) his 1995 election to expense depreciable business assets under section 179. Background Sam H. Patton (petitioner) resided in Houston, Texas, on October 22, 1999, the date his petition was filed. Petitioner was self-employed as a welder during the 1995 calendar year. Petitioner timely filed his 1995 Federal income tax return (1995 return) and reported a business loss in the amount of $36,271 and a total loss of $38,829. As part of the 1995 return, petitioner elected to expense a plasma torch under section 179 in the amount of $4,100. At the time petitioner filed his 1995 return, he was unable to deduct the $4,100 section 179 expense because of the reported business loss. In connection with the examination of petitioner's 1995 return, respondent reconstructed petitioner's income by means of a bank deposit analysis. The analysis resulted in respondent's determination that petitioner failed to report $135,638 of gross receipts from the welding business on Schedule C. Petitioner reduced income by classifying as "materials and supplies" the following items: (1) Miller 450 amp reach; (2) extended reach feeder; and (3) Webb turning roller. Respondent determined that these were capital assets that should have been depreciated as tangible business property as follows: As a result of respondent's determinations, petitioner's welding business would have a profit in excess of $17,500 instead of a loss. Petitioner sought respondent's consent to revoke, amend, or modify his section 179 election so as to expense the three assets respondent determined were depreciable. Respondent denied petitioner's request to modify his sions made by the parties in the stipulation of facts are accepted and should be reflected in the final disposition of this case. original section 179 election to include the three assets that were recharacterized as depreciable. Discussion Petitioner made a section 179 election, in conjunction with his original 1995 return, to expense the cost of a depreciable business asset. The expense could not be utilized in the 1995 year because the asset was used in a business activity that reported a loss for the 1995 year. See sec. 179(b)(3)(A). After examination, respondent reclassified three assets as depreciable business assets and made other adjustments, which collectively resulted in 1995 taxable income for petitioner's business. For the 1995 tax year, petitioner had classified the three assets as "materials" or "supplies" and reduced income by their cost. In response to respondent's determination, petitioner sought respondent's consent to modify his original section 179 election by adding the three reclassified depreciable business assets. With respondent's consent, petitioner would be able to offset the profit determined by respondent. Respondent declined petitioner's request for consent to revoke or modify the original election. Petitioner contends that it was respondent's reclassification of the assets that triggered the availability or possibility of treating them as section 179 expenses and that he should be entitled to add those assets to his election. Section 179(a) generally allows a taxpayer to elect to treat the cost of section 179 property as a current expense in the year the property is placed in service, within certain dollar limitations. See sec. 179(b). The election must specify the items of section 179 property to which the election applies and the portion of the cost of each item which is to be taken into account under section 179(a). See sec. 179(c)(1)(A); sec. 1.179-5(a)(1) and (2), Income Tax Regs. Moreover, a section 179 election must be made on the taxpayer's first income tax return (whether or not the return is timely) or on an amended return filed within the time prescribed by law (including extensions) for filing the original return for such year. See Genck V. Commissioner, T.C. Memo. 1998-105; sec. 4 The parties agree that the assets would have qualified as sec. 179 property if petitioner had made an election with respect to them on his original 1995 return. The parties also agree that petitioner had sufficient income from the welding business to have deducted $17,500, the maximum amount allowable under sec. 179 for the 1995 tax year. |