CHECKLIST C105

 Factors in Establishing a Profit Motive ^1,2

(Not an all inclusive list)

____________________________                                               ______________________________

                        Name                                                                                               Social Security No.

Although an activity must be engaged in for profit to avoid the hobby loss rules, a predictable or highly probable expectation of profit is not required. For example, a taxpayer may well have a profit motive for investing in a very risky venture (e.g., wildcat oil drilling or providing capital to start-up businesses). The circumstances should indicate that the taxpayer entered into or continued the activity with the objective of making a profit, but even risky investments can be considered made for profit motive.

The following factors should be considered in establishing the existence of a profit motive [Reg.1.183-2(b)]. “Yes” answers to the questions tend to indicate the existence of a profit motive.

                                                                                                                       YES        NO      COMMENTS

1. Manner in which activity is conducted:

a.  Is there a legitimate profit or gain motive?                        _____     ____      _________

b.  Are complete and accurate books and records
    maintained?                                                                   _____     ____   ______

2. Taxpayer’s or advisers expertise:

a.  Does taxpayer have prior expertise in the business?        _____     ____     _________

b.  Does taxpayer seek advice from qualified advisers?       _____    ____     __________

c.  If adviser’s advice is not followed, are reasons   
     documented?                                                                          _____    ____     _________

3. Time and effort:

a.  Does taxpayer devote substantial time to the activity?   _____    ____     _________

b.  Are others employed to carry on the activity?                 _____    ____     __________

4. Is there a reasonable expectation of asset appreciation (in
   lieu of operating profits?)                                                            _____    ____     __________
5. Has the taxpayer previously turned an unsuccessful
   business into a profitable one?                                                   _____   ____     __________
6. Has the activity previously generated significant profits?    _____   ____     __________
7. Are profits substantial in relation to any losses and the
   taxpayer’s investment?                                                                _____   ____    __________
8. Is the activity a meaningful part of the taxpayer’s overall
   sources of income?                                                                      _____   ____    __________
9. Do profit motives outweigh any elements of personal pleasure
   or recreation associated with the activity?                               _____   ____    __________

NOTES:

1.       While these factors should be considered, other factors not listed may also need to be considered. No single factor is determinative, and the final decision does not depend on the number of factors indicating a “for profit” activity versus the number indicating a “not for profit activity.”