TAX COURT OPINION

Case: Rosemary Love
Docket Number: 6575-09
Judge: Colvin
Opinion Type: bench
Filed: 01/22/2010
Pages: 15

UNITED STATES TAX COUR T WASHINGTON , DC 2021 7 ROSEMARY LOVE, Petitioner v . ) Docket No . 6575-09 . COMMISSIONER OF INTERNAL REVENUE , Respondent O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to Petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge David Gustafson at New York, New York, on January 13, 2010, containing his oral findings of fact and opinion rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, decision will be entered for respondent . (Signed ) David Gustafson Judg e Dated : Washington, D .C . January 22, 2010 EFVED JAN 2 5 2010 3 1 BENCH OPINION BY JUDGE DAVID GUSTAFSON 2 ROSEMARY LOVE V . COMMISSIONER DOCKET NO . : 6575-09 3 January 13, 201 0 4 The Court has decided to render ora l 5 Findings of Fact and opinion in this case, and th e 6 following represents the Court's oral Findings of Fact 7 and Opinion . The oral Findings of Fact and Opinio n 8 shall not be relied on as precedent in any other case . 9 This Bench Opinion is made pursuant to the 10 authority granted by section 7459(b) of the Internal 11 Revenue Code of 1986, as amended, and Rule 152 of the 12 Tax Court Rules of Practice and Procedure . 13 By a statutory notice of deficiency dated 14 December 9, 2008, the Internal Revenue Service (IRS) 15 determined a deficiency of $213 in the Federal income 16 tax of petitioner Rosemary Love for the year 2006 . 17 The issue for decision is whether Ms . Love's art 18 activity was an activity not engaged in for profi t 19 pursuant to section 183 . We find that Ms . Love's art 20 activity was not engaged in for profit . 21 Some of the facts have been stipulated and 22 are so found . The stipulation of facts and th e 23 attached exhibits 1-J through .20-P are incorporated 24 herein by this reference, with the exhibits al l 25 admitted into evidence, in some cases over Heritage Reporting Corporation (202) 628-4888 4 1 respondent's hearsay and relevance objections . Trial 2 of this case was held in New York City on January 12, 3 2010 . Ms . Love testified . We find the followin g 4 facts : 5 Ms . Love supports herself by temp work and 6 word processing, and during some times she lives on 7 her savings . However, Ms . Love is also an artistic 8 person . She has taken a "photoshop" class at Queen s 9 College, though she does not have Photoshop on her own 10 computer (but must use a computer at Kinko's o r 11 elsewhere to do photoshop) . She has taken no other 12 training or classes in art . 13 Ms . Love would like to use her art to reach 14 and serve others--"to create for other people"--and to 15 that end she commenced about ten years ago an activity 16 that she conducts under the name "Galleries Plus" . 17 She has developed-designs for two types of greeting 18 cards and a calendar . (Stip . 11 .) She has a website 19 with the address www .galleriesplus .com . She ha s 20 opened an "eBay" account for online sales . For the 21 ten years she has operated "Galleries Plus", she has 22 claimed business expenses from it on her individual 23 tax returns . 24 In the ten years she has operated Galleries 25 Plus, she has not had a single sale of any product . Heritage Reporting Corporatio n (202) 628-4888 5 1 (Stip . 12-13 .) By her admission she has not "actively 2 advertised" . (See also Stip . 17 .) She has no 3 customer list . She has begun to create a mailing list 4 of potential customers to whom she would like to send 5 postcards, but she did not offer the list int o 6 evidence . She made general statements to the effect 7 that she spends time on the art activity (even to the 8 point of stopping other work in 2006 to have more time 9 for art), but she did not describe exactly how (o r 10 even generally how) she spends her time when she i s 11 engaged in that activity . She did not allege that she 12 makes calls on potential customers, or that she shows 13 her work at art shows . 14 Ms . Love operates her art activity from her 15 home, but she did not describe the way that she uses 16 space in her home for that activity, nor did she 17 present a diagram or detailed description to show what 18 percentage of the home is actually used for the ar t 19 activity . On her tax return for 2006 (Ex . 1-J , 20 Form 8829), and in her testimony at trial, she claimed 21 that she used 50 percent of her space for the ar t 22 activity, and she therefore deducted 50 percent of her 23 rent and utilities as business expenses (see Stip . 18 ; 24 Ex . 1-J, Schedule C), but it had no effect on he r 25 liability, as is explained below . Heritage Reporting Corporation (202) 628-4888 6 1 Ms . Love had a land-line phone in her home 2 and a cell phone . She did not deduct the land-line 3 phone cost as a business expense, but she did deduct 4 the full expense of the cell phone . She was able , 5 with apparent difficulty, to name only a few types of 6 business calls that she makes on the cell phone, and 7 she acknowledged that she also uses it for persona l 8 calls . 9 Her family owns some undeveloped property in 10 Ithaca, New York, which she visits from time to time 11 to mow and tend . She hopes someday to build a studio 12 at this location . She has collected flowers ther e 13 that she has painted, and she has painted outdoo r 14 scenes from that location . For several trips that she 15 took to Ithaca during 2006, she deducted half of the 16 travel expense (transportation and hotel) as related 17 to her art activity . We find that the Ithaca property 18 has no significant objective connection to the ar t 19 activity, and that its only relation to that activity 20 is in Ms . Love's passive dreams about a possibl e 21 future . 22 On Ms . Love's 2006 return the principal 23 income item was $10,500 reported on line 16 a s 24 "Pensions and annuities" . She reported a loss of 25 $2,215 from her Schedule C for Galleries Plus, and Heritage Reporting Corporatio n (202) 628-4888 7 1 combined with her standard deduction on line 40 and 2 her personal exemption of $3,300, she reported no 3 taxable income . (Her claimed loss of $2,215 omitted 4 her home office expenses that totaled $3,780 .10 (see 5 Schedule C, line 30), but the reporting of a greater 6 loss that included the home office expenses would not 7 have further reduced her 2006 income, since it wa s 8 already zero . ) 9 The IRS issued its notice of deficiency on 10 December 9, 2008 . It determined that her taxabl e 11 income was not zero but $2,155 and that her income tax 12 liability was $213 . Ms . Love timely mailed he r 13 petition commencing this suit on March 7, 2009 . At 14 that time Ms . Love resided in New York . (Stip . 1 .) 15 OPINION 16 A taxpayer who is carrying on a trade or 17 --business may deduct ordinary and necessary expenses 18 incurred in connection with the operation of th e 19 business . Sec . 162(a) . However, a taxpayer cannot 20 reduce her taxable income by claiming as deductions 21 the expenses she incurs for her hobby or other non- 22 profit activity . Section 183(a) provides generally 23, that if an activity is not engaged in for profit, no 24 deduction attributable to that activity shall be 25 allowed except as provided in section 183(b) . Heritage Reporting Corporation (202) 628-4888 8 1 Generally, the IRS's deficiency determinations se t 2 forth in a notice of deficiency are presumed correct, 3 and the taxpayer bears the burden of showing the 4 determinations are in error . Rule 142(a) ; Welch v . 5 Helvering , 290 U .S . 111, 115 (1933) . Thus, if the IRS 6 determines that a given activity is not engaged in for 7 profit, then that determination is presumed correct , 8 and the taxpayer has the burden to prove otherwise . 9 That burden of proof is unaffected in this 10 case by the correspondence that Ms . Love received from 11 an IRS agent before the IRS issued the notice o f 12 deficiency . Apparently the agent initially proposed 13 adjustments that were smaller than those eventually 14 made in the notice of deficiency . A Form .454 9 15 attached to a letter proposed disallowances that seem 16 not to have included, most significantly, the hom e 17 office expenses ., (Ex . 3-J .) However, the agent did 18 not offer to enter into a binding agreement wit h 19 Ms .-Love (such as a closing agreement or a 20 Form 870-AD) . As a result, even if Ms . Love accepted 21 the agent's proposal (which Ms . Love seems to allege), 22 the IRS would not have been prohibited from late r 23 determining a deficiency . 24, Section 183(c) defines an "activity no t 25 engaged in for profit" as "any activity other than one Heritage Reporting Corporatio n (202) 628-4888 9 1 with respect to which deductions are allowable for the 2 taxable year under section 162 or under paragraph (1) 3 or (2) of section 212 ." An activity constitutes a 4 "trade or business" within the meaning of section 5 162--and it escapes the limitation of section 183--if 6 the taxpayer's actual and honest objective is t o 7 realize a profit . Osteen v . Commissioner , 62 F .3d 356, 8 358 (11th Cir . 1995), affg . in part and revg . in part 9 T .C . Memo . 1993-519 . The expectation of profit nee d 10 not have been reasonable ; however, the taxpayer must 11 have entered into the activity, or continued it, with 12 the objective of making a profit . Hulter v . 13 Commissioner , 91 T .C . 371, 393 (1988) ; 26 C .F .R . sec . 14 1 .183-2(a), Proced . & Admin . Regs . Whether the 15 requisite profit objective exists is determined by 16 looking at all the surrounding facts an d 17 circumstances . Keanini v . Commissioner , 94 T .C . 41, 18 46 (1990) ; 26 C .F .R . sec . 1 .183-2(b) . Greater weight 19 is given to objective facts than to a taxpayer's mere 20 statement of intent . Thomas v . Commissioner , 84 T .C . 21 1244, 1269 (1985), affd . 792 F .2d 1256 (4th Cir . 22 1986) ; 26 C .F .R . sec . 1 .183-2(a) . 23 26 C .F .R . section 1 .183-2(b) provides a list 24 of factors to be considered in the evaluation of a 25 .taxpayer's profit objective : (1) The manner in which Heritage Reporting Corporatio n (202) 628-4888 1 0 1 the taxpayer carries on the activity ; (2) th e 2 expertise of the taxpayer or her advisers ; (3) the 3 time and effort expended by the taxpayer in carrying 4 on the activity ; (4) the expectation that assets used 5 in the activity may appreciate in value ; (5) th e 6 success of the taxpayer in carrying on other similar 7 or dissimilar activities ; (6) the taxpayer's history 8 of income or losses with respect to the activity ; (7) 9 the amount of occasional profits, if any, from th e 10 activity ; (8) the financial status of the taxpayer ; 11 and (9) elements of personal pleasure or recreation . 12 This list is nonexclusive, and the number of factors 13 for or against the taxpayer is not necessaril y 14 determinative, but rather all facts and circumstances 15 must be taken into account, and more weight may b e 16 given to some factors than to others . Id . ; see Dunn 17 v . Commissioner , 70 T .C . 715, 720 (1978), affd . 615 18 F .2d 578 (2d Cir . 1980) . 19 We now address these 9 factors . 20 1 . Manner in Which the Activity Is Conducted . 21 The fact that a taxpayer carries on the 22 activity in a business-like manner and maintains 23 complete and accurate books and records may indicate a 24 profit objective . 29 C .F .R . sec . 1 .183-2(b)(1) . 25 Ms . Love's record-keeping methods seem adequate for a Heritage Reporting Corporatio n (202) 628-4888 1 1 1 tiny activity like hers, but it is not possible t o 2 call her operation business-like . It is almost devoid 3 of visible activity, and she apparently has n o 4 specific plan, written or unwritten, to develop th e 5 business . She has only general hopes for success . We 6 find that she sincerely enjoys thinking about the 7 prospect of future growth and success, involvin g 8 Internet marketing of her hoped-for products ; but she 9 shows no investment of time and energy into actua l 10 work toward making those dreams come true . 11 We conclude that this factor--the manner in 12 which the activity is conducted--is not in Ms . Love's 13 favor and tends to indicate that she did not have the 14 requisite profit motive . 15 2 . Expertise of the Taxpayer and Her Advisers . 16 A taxpayer's expertise, research, and study 17 of an activity, as well as her consultation wit h 18 experts, may be indicative of a profit intent . 19 26 C .F .R . sec . 1 .183-2(b)(2) . Ms . Love seems to have 20 an artistic and lively personality, but the recor d 21 includes no evidence of her possessing either artistic 22 skill or business acumen for running an art-base d 23 business . She has taken no art classes, and she put 24 on no evidence of any business training . She gave no 25 testimony as to her obtaining help from exper t Heritage Reporting Corporation (202) 628-4888 1 consultants . 2 We conclude that this factor--expertise--is 3 not in Ms . Love's favor and indicates that she did not 1 2 4 have the requisite profit motive . 5 3 . Time and effort expended . 6 It is not at all clear that Ms . Love spends 7 substantial time on the .art activity . He r 8 descriptions of what she does are very spare, even 9 terse . And her application to the work seems to be 10 fleeting, since she seemed to imply that he r 11 conducting of this lawsuit has distracted her from the . 12 work of Galleries Plus., We certainly do not diminish 13 the demands of even a small lawsuit ; however, someone 14 determined to make a profit from a business would not 15 have been diverted from her vocation by a lawsuit over 16 $213 . If this lawsuit put Galleries Plus on hold , 17 then it evidently does not take much to distract 18 Ms . Love from the art activity . This factor is 19 adverse in assessing Ms . Love's profit motive . 20 = 4 . The Expectation That Assets May Appreciate 21 in Value . 22 Ms . Love gave no testimony to the effect 23 that the art activity has any assets that ma y 24 appreciate in value . The Ithaca property has n o 25 important relation to the art business, and she gave Heritage Reporting Corporatio n (202) 628-4888 1 3 1 no testimony about its value . This factor-- 2 expectation that assets may appreciate--is at best 3 neutral . 4 5 5 . The Taxpayer's Success in Similar or Dissimilar Activities . 6 Ms . Love gave no testimony to the effect 7 that she has succeeded in similar ventures . W e 8 conclude that this factor is negative and indicates 9 that she did not have the requisite profit motive . 10 6-7 . History of Income or Loss / Amount of Gain . 11 In all the years Ms . Love has engaged in the 12 art activity, she has never had a single sale and has 13 therefore had an unbroken string of losses . A record 14 of substantial losses over several years may b e 15 indicative of the absence of a profit motive . Golanty 16 v . Commissioner , 72 T .C . 411, 426 (1979), affd ., 647 17 F .2d 170 (9th Cir . 1981) . It is true that a series of 18 losses during the startup phase of an activity may not 19 necessarily be an indication that the activity is not 20 engaged in for profit, see section 1 .183-2(b)(6) ; but 21 after 10 years Ms . Love's art activity has made n o 22 evident progress toward anything other than what i t 23 has been, and it appears that there is not in fact any 24 real business goal for which the 2006 activity could 25 be called a start-up . Heritage Reporting Corporation (202) 628-4888 1 4 1 8 . Financial Status of the Taxpayer . 2 A lack of income from sources other than the 3 activity in question may indicate that an activity is 4 engaged in for profit . Substantial income from sources 5 other than the activity in question, particularly i f 6 offset by substantial tax benefits, may indicate the 7 activity is not engaged in for profit . 26 C .F .R . sec . 8 1 .183-2(b)(8) . Ms . Love, on the other hand, has very 9 modest income ; and the sheltering of her taxabl e 10 income by the art activity expenses saved her only 11 $213 in the suit year--not an impressive amount . 12 Thus, this factor tends in favor of Ms . Love's claim 13 of a profit motive, but it is but one factor and is 14 not determinative of the outcome . 15 9 . Elements of Personal Pleasure . 16 The absence of personal pleasure o r 17 recreation relating to the activity in question may 18 indicate the presence of a profit objective . 2 6 19 C .F .R . Sec . 1 .183-2(b)(9) . Ms . Love, however, does 20 enjoy her art . She does not describe any arduous or 21 unpleasant tasks associated with it, and it seems that 22 the activity gives her pleasure of the sort that one 23 might pursue whether or not profit was a motive . We 24 conclude that this factor--lack of elements o f 25 personal pleasure--is negative for Ms . Love and Heritage Reporting Corporatio n (202) 628-4888 1 5 1 indicates that she did not have the requisite profi t 2 motive . 3 When we weigh all these factors, we conclude 4 that Ms . Love did not engage in the art activity t o 5 make a profit . 6 Moreover, even if she had proved a profit 7 motive, many of the expenses she claimed would be 8 disallowed nonetheless because she did not show that 9 they bear any significant relation to the ar t 10 activity . . She alleged but did not really show what 11 portion of the space in her home is actually devoted 12 to the art business . If the "Utilities" expenses on 13 line 25 of Schedule C are utilities for her home, then 14 they fail for the same reason (and she did not sho w 15 that they do not duplicate the "Utilities" on line 20 16 of Form 8829) . She did not prove that the travel and 17 other expenses related to the Ithaca property wer e 18 "ordinary and necessary" expenses for the art 19 activity . 20 Conclusion 21 We conclude that Ms . Love did not have an 22 objective of making a profit when she engaged in the 23 art activity during 2006, and that section 183 applies 24 to disallow the losses in this case . 25 To reflect the foregoing, decision will be Heritage Reporting Corporatio n (202) 628-4888 1 6 1 entered for respondent . 2 This concludes the Court's oral Findings of 3 Fact and opinion in this case . 4 (Whereupon, at 9 :25 a .m ., the bench opinion 5 in the above-entitled matter was concluded . ) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 // Heritage Reporting Corporation (202) 628-4888