1Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years at issue. All

Rule references are to the Tax Court Rules of Practice and

Procedure.

T.C. Memo. 1996-302

UNITED STATES TAX COURT

RICHARD A. STASEWICH, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17547-94. Filed July 2, 1996.

Richard A. Stasewich, pro se.

Linda C. Grobe, for respondent.

MEMORANDUM OPINION

DEAN, Special Trial Judge: This case was assigned pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1
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2In the notice of deficiency, respondent disallowed

deductions for auto, entertainment, and transportation

expenditures for 1988 and also determined that petitioner had

unreported interest income for 1990. Petitioner presented no

testimony or other evidence on these issues, and we deem them to

be conceded.

Respondent determined deficiencies in, additions to, and an

accuracy-related penalty on petitioner's Federal income taxes as

follows:

 Additions to Tax Penalty

 Sec. Sec. Sec. Sec.

Year Deficiency 6651(a) 6653(a)(1) 6654 6662(a)

1988 $2,591 $586 $130 -- --

1989 4,039 985 -- $15 --

1990 5,287 1,322 -- 294 --

1991 7,586 -- -- -- $1,517

After concessions by the parties,2 the issues for decision

are: (1) Whether petitioner's artist activity was "not engaged

in for profit" within the meaning of section 183(c); (2) whether

petitioner can substantiate claimed expenses; and (3) whether

petitioner is liable for the additions to tax and an accuracyrelated penalty as determined by respondent. The resolution of

issue (1) will necessarily determine whether the income from

petitioner's artist activity is properly classified as gross

income derived from business or as miscellaneous income and

short-term capital gain.

Some of the facts have been stipulated and are so found. 

The stipulation of facts and the attached exhibits are
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incorporated herein by this reference. Petitioner resided in

Chicago, Illinois, at the time he filed his petition.

Background

Petitioner is a certified public account who attended

Northern Illinois University in the early 1970's, earning

sufficient credits to have a major in art and minor in

accounting, although he did not graduate. From 1978 until the

present, petitioner has been employed in various positions

utilizing his accounting background.

In 1984, petitioner began his own accounting practice as a

sole proprietor, operating out of rented space on the first floor

of the building in which he lives. Petitioner has reported the

results of his accounting business on Schedule C of his Federal

income tax returns, although he has not filed a return every

year. For each of the years at issue, the net profit from

petitioner's accounting business is as follows:

Year Net Profit

1988 $9,518

1989 16,824

1990 19,977

1991 26,930

At the same time that he began his accounting business,

petitioner also began to develop himself as an artist. Indeed,

petitioner's purpose in leaving his former employer was to use

the accounting business to "pay the rent" while at the same time

devoting more effort to his artistic endeavors. Petitioner has

reported the results of his artist activity on a separate
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3The Schedule C figures for the artist and accounting

activities for 1989 and 1990 are taken from Forms 1040 that

petitioner provided during the course of respondent's examination

of petitioner's 1988 through 1991 taxable years.

Schedule C for those returns that he has filed. For the years at

issue3 the relevant figures are:

 1988 1989 1990 1991 Total

Gross receipts $1,811 $1,539 $474 $434 $4,258

Cost of goods sold 552 942 323 0 1,817

Deductions 9,218 28,235 27,451 27,364 92,268

Profit (Loss) (7,959) (27,638) (27,300) (26,930) (89,827)

Petitioner received an extension for filing his 1988 Federal

income tax return until October 15, 1989, and filed that return

on December 7, 1990. Petitioner received an extension for filing

his 1989 return until October 15, 1990, but never filed that

return. Petitioner received an extension for filing his 1990

return until October 15, 1991, but never filed that return. 

Petitioner received an extension for filing his 1991 return until

October 15, 1992, and filed that return on October 19, 1992.

Respondent determined that petitioner's artist activity was

not engaged in for profit and therefore disallowed all of the

deductions claimed attributable thereto. Alternatively,

respondent determined that petitioner failed to substantiate the

deductions or to prove that the expenditures were ordinary and

necessary to either his artist or accounting activity and

accordingly disallowed all of the claimed deductions. In

accordance with this determination, respondent also reclassified
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4Sec. 183(b)(1) permits a deduction for expenses that are

otherwise deductible without regard to whether the activity is

engaged in for profit, such as interest and personal property

taxes. Sec. 183(b)(2) permits a deduction for expenses that

would be deductible only if the activity were engaged in for

profit, but only to the extent that the gross income derived from

the activity exceeds the deductions allowed by sec. 183(b)(1).

petitioner's income from the artist activity as miscellaneous

income from the sale of drawings and short-term capital gain

from the sale of art supplies.

Discussion

General Requirements

The threshold issue for decision is whether petitioner's

artist activity was "not engaged in for profit" within the

meaning of section 183(c). Section 183(a) provides generally

that if an activity is not engaged in for profit, no deduction

attributable to such activity shall be allowed, except as

otherwise provided in section 183(b).4 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."

Deductions are allowed under section 162 for the ordinary

and necessary expenses of carrying on an activity that

constitutes the taxpayer's trade or business. Deductions are

allowed under section 212 for expenses paid or incurred in

connection with an activity engaged in for the production or
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collection of income, or for the management, conservation, or

maintenance of property held for the production of income. With

respect to either section, however, the taxpayer must demonstrate

the requisite profit objective for the activities in order to

deduct associated expenses. Jasionowski v. Commissioner, 66 T.C.

312, 320-322 (1976); sec. 1.183-2(a), Income Tax Regs. The

profit standards applicable to section 212 are the same as those

used in section 162. See Agro Science Co. v. Commissioner, 934

F.2d 573, 576 (5th Cir. 1991), affg. T.C. Memo. 1989-687;

Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir. 1990),

affg. 91 T.C. 686 (1988); Allen v. Commissioner, 72 T.C. 28, 33

(1979); Rand v. Commissioner, 34 T.C. 1146, 1149 (1960).

Whether the required profit objective exists is to be

determined on the basis of all the facts and circumstances of

each case. Hirsch v. Commissioner, 315 F.2d 731, 737 (9th Cir.

1963), affg. T.C. Memo. 1961-256; Golanty v. Commissioner, 72

T.C. 411, 426 (1979), affd. without published opinion 647 F.2d

170 (9th Cir. 1981); sec. 1.183-2(a), Income Tax Regs. While the

focus of the test is on the subjective intention of the taxpayer,

greater weight is given to the objective facts than to the

taxpayer's mere statement of his or her intent. Independent

Elec. Supply, Inc. v. Commissioner, 781 F.2d 724, 726 (9th Cir.

1986), affg. T.C. Memo. 1984-472; Dreicer v. Commissioner, 78

T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C.

Cir. 1983); sec. 1.183-2(a), Income Tax Regs. Petitioner bears
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the burden of proving that he possessed the requisite objective

and that respondent's determination that an activity was not

engaged in for profit is erroneous. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). 

Relevant Factors

Section 1.183-2(b), Income Tax Regs., sets forth some

relevant factors for determining whether an activity is engaged

in for profit. No one factor is controlling. Brannen v.

Commissioner, 722 F.2d 695, 704 (11th Cir. 1984), affg. 78 T.C.

471 (1982); Golanty v. Commissioner, supra at 426. The relevant

factors include: (1) The manner in which the taxpayer carries on

the activity; (2) the expertise of the taxpayer or his or her

advisers; (3) the time and effort expended by the taxpayer in

carrying on the activity; (4) the expectation that assets used in

the activity may appreciate in value; (5) the success of the

taxpayer in carrying on other similar or dissimilar activities;

(6) the taxpayer's history of income or losses with respect to

the activity; (7) the amount of occasional profits, if any, which

are earned; (8) the financial status of the taxpayer; and (9) the

presence of elements of personal pleasure or recreation. Sec.

1.183-2(b), Income Tax Regs.

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. 

Sec. 1.183-2(b)(1), Income Tax Regs. Generally speaking, a
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taxpayer who maintains good records may be genuinely interested

in using the records to develop a profitable business. 

Respondent argues that petitioner did not maintain adequate books

and records for his artist activity. We agree.

The only business record petitioner placed in evidence was a

cash receipts journal. The internal revenue agent who audited

petitioner for 1988 through 1991, James M. Johnson, testified at

trial that he disallowed the expenses related to the artist

activity because petitioner's records consisted of a shoe box

full of credit card statements and various receipts that did not

reconcile with petitioner's cash disbursements journal. We find

that petitioner did not maintain adequate books and records.

Furthermore, petitioner has offered no evidence to show that

he conducted his artist activity in a businesslike manner. He

did not use the limited records that he did keep on the activity

to monitor expenses or to assess the activity's profitability. 

He did not maintain a budget for the activity or make any sort of

financial projections. Nor did he even maintain a separate

checking account for the activity.

Similarly, a taxpayer's failure to implement any operating

changes after continued losses may indicate the lack of intent to

make a profit. Brodrick v. Derby, 236 F.2d 35, 38 (10th Cir.

1956); Lewis v. Commissioner, T.C. Memo. 1992-420; Stubblefield

v. Commissioner, T.C. Memo. 1988-480. There is no evidence in

the record that petitioner has ever earned a profit from his
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artist activity since its inception in 1984. Indeed, in addition

to the 1988 through 1991 years at issue here, petitioner also

reported losses for every year during the 1984 through 1987 and

1992 through 1993 periods. Petitioner has presented no evidence

of a change in operating methods to reverse his uninterrupted

history of losses, tending to indicate that he is content to

sustain those losses for purely personal reasons. Breckenridge

v. Commissioner, T.C. Memo. 1983-66.

The large unabated expenditures, the absence even at this

late date of any concrete business plans to reverse the losses,

and the manner in which petitioner conducted his artist activity

lead to the conclusion that this was not an activity engaged in

for profit. Eppler v. Commissioner, 58 T.C. 691, 697 (1972),

affd. without published opinion 486 F.2d 1406 (7th Cir. 1973).

Although the mere fact that a taxpayer derives personal

pleasure from a particular activity does not mean that he or she

lacks a profit objective with respect thereto, the presence of

personal motives may indicate that the activity is not engaged in

for profit. Glenn v. Commissioner, T.C. Memo. 1995-399. This is

especially true where there are recreational or other personal

elements involved. Sec. 1.183-2(b)(9), Income Tax Regs. As this

Court has stated, with respect to this factor:

Unquestionably, an enterprise is no less a "business"

because the entrepreneur gets satisfaction from his

work; however, where the possibility for profit is

small (given all the other factors) and the possibility

for gratification is substantial, it is clear that the
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latter possibility constitutes the primary motivation

for the activity. * * * [Burger v. Commissioner, T.C.

Memo. 1985-523, affd. 809 F.2d 355 (7th Cir. 1987); fn.

ref. omitted.]

We find that petitioner engaged in the artist activity

because of the satisfaction, pride, and prestige it afforded him. 

Although it is not required that a taxpayer dislike an activity

before it will be considered a business and not a hobby, Jackson

v. Commissioner, 59 T.C. 312, 317 (1972), petitioner has shown no

evidence of a profit objective with respect to his artist

activity.

Substantial income from sources 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. Sec. 1.183-2(b)(8), Income Tax

Regs. In general, a taxpayer with substantial income unrelated

to the activity can more readily afford a hobby.

Petitioner did have an independent source of income (from

his accounting business) and did not rely on his artist activity

to support himself. Additionally, we note that for 1991 and 1993

(although the 1993 year is not at issue) petitioner reported a

loss from his artist activity exactly equal to the income from

his accounting activity. Such an unlikely coincidence indicates

that petitioner may be using his artist activity as a device to

eliminate Federal income tax on the income from his accounting
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business. This weighs against finding a profit objective because

no trade or business exists if the primary purpose of the

activity is to generate tax deductions rather than produce an

economic profit, Hagler v. Commissioner, 86 T.C. 598, 624 (1986);

Wheeler v. Commissioner, T.C. Memo. 1983-385, or other tax

benefits, Ferrell v. Commissioner, 90 T.C. 1154, 1181 (1988);

Mosesian v. Commissioner, T.C. Memo. 1990-415, affd. without

published opinion 967 F.2d 588 (9th Cir. 1992).

Based on our careful review of the record, we conclude that

petitioner has not carried his burden of proving that he was

carrying on his artist activity during the years at issue with

the objective of earning a profit. Respondent is sustained on

this issue and on the reclassification of petitioner's income

from the artist activity as miscellaneous income from the sale of

drawings and short-term capital gain from the sale of art

supplies.

Artist Activity as Advertising or Promotion

Petitioner made an alternative argument at trial that his

artist and accounting activities are really one inseparable

activity. Specifically, petitioner stated that most of his

accounting clients are acquaintances from the artist community

who chose him as their accountant because he is a fellow artist.

Petitioner is in essence arguing that some of his expenses

from his artist activity are deductible under section 162 as

ordinary and necessary business expenses of his accounting
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business (essentially as a form of advertising or promotional

expense). The basis for this contention is that his socializing

at art functions and his activity as an artist afforded him an

opportunity to meet potential clients and promote his accounting

practice.

To prevail on this theory, petitioner must show that the

expenditures were made primarily for business purposes. Hahn v.

Commissioner, T.C. Memo. 1979-429. Also, it must be shown that

there is a proximate rather than a remote or incidental

relationship between the expenditures and the business concerned. 

Henry v. Commissioner, 36 T.C. 879 (1961); Boomershine v.

Commissioner, T.C. Memo. 1987-384; Hahn v. Commissioner, supra. 

The mere fact that engaging in an activity affords contact with

possible future customers or clients is in and of itself

insufficient to justify deducting the cost of the activity as a

business expense. Hahn v. Commissioner, supra.

Petitioner has not shown a business purpose for the

expenditures or that there was a proximate relationship between

the expenditures from his artist activity and his accounting

business. Accordingly, none of these expenditures are deductible

under section 162 as ordinary and necessary business expenses of

his accounting business.

Substantiation

Although petitioner's artist activity was "not engaged in

for profit" within the meaning of section 183(c), petitioner may
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nonetheless, pursuant to section 183(b), deduct the related

expenses to the extent of the gross income from the activity. 

The final issue to be resolved before such deductions can be

allowed is whether petitioner has substantiated the expenses

claimed.

All taxpayers are required to keep sufficient records to

enable the Commissioner to determine their correct tax liability. 

Sec. 6001; Meneguzzo v. Commissioner, 43 T.C. 824, 831-832

(1965). Moreover, deductions are a matter of legislative grace,

and petitioner bears the burden of proving that he is entitled to

any deduction claimed. Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering, 290 U.S.

at 115. This includes the burden of substantiation. Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).

Petitioner provided no documentary evidence substantiating

the deductions claimed with respect to his artist activity. 

Petitioner testified concerning his expenses and elicited

testimony from another witness concerning some of his expenses. 

We have held that if the record provides sufficient evidence that

the taxpayer has incurred a deductible expense, but the taxpayer

is unable to adequately substantiate the amount of the deduction

to which he is otherwise entitled, the Court may estimate the

amount of the expense and allow the deduction to that extent. 

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). In
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such cases we are cautioned to bear heavily against the taxpayer

"whose inexactitude is of his own making." Id. at 544.

Accordingly, based solely on testimony at trial, we find

that petitioner paid expenses connected with his artist activity

equal to the income reported therefrom for each of the 1988-91

taxable years. Such expenses are deductible pursuant to section

183(b).

Additions to Tax

Finally, respondent made further determinations of additions

to tax under section 6651(a) for 1988 thorough 1990, section

6653(a)(1) for 1988, and section 6654 for 1989 and 1990, and an

accuracy-related penalty under section 6662(a) for 1991. As to

these matters, the burden of proof is upon petitioner. Rule

142(a); Welch v. Helvering, supra at 115. Petitioner presented

nothing on these subjects at trial and, accordingly, we sustain

respondent.

To reflect the foregoing,

Decision will be entered

under Rule 155.