TAX COURT OPINION

Case: Steven Yates & Lynne A. Yates
Docket Number: 4387-15S
Judge: Goeke
Opinion Type: bench
Filed: 06/30/2016
Pages: 13

UNITED STATES TAX COURT WASHINGTON, DC 20217 STEVEN YATES & LYNNE A. YATES, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 4387-15S. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is 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 Joseph Robert Goeke at Albuquerque, New Mexico on June 23, 2016, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. June 30, 2016 SERVED JUL - 1 2016 Capital Reporting Company 3 Bench Opinion by Judge Joseph Robert Goeke June 23, 2016 Steven Yates & Lynne A. Yates v. Commissioner Docket No. 4387-15S THE COURT: The Court has decided to render oral findings of fact and opinion in this case. And the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This case was heard pursuant to the provisions of Section 7463 in effect when the petition was filed. Pursuant to Section 7463(b), the decision to be entered is not reviewable by any other court. In this opinion, section references are to the Internal Revenue Code, and rule references are to the Tax Court Rules of Practice and Procedure. This opinion is rendered pursuant to the authority granted in Rule 152 and Section 7459(b). At the time the petition was filed in this case, the Petitioners resided in New Mexico. And when they filed their petition, they elected status under Section 7463. The Petitioners filed joint Federal Income 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Tax Returns for 2010 and 2011. And Respondent determined deficiencies in Federal Income Tax for those years and issued a Notice of Deficiency, which was timely petitioned and resulted in the present case. We have jurisdiction to review the case because Petitioners timely submitted a petition for review of the Notice of Deficiency. Attached to the petition was a succinct review of the factual allegations Petitioners made. We quote this review because it is an apt summary of the testimony of Petitioner Steven Yates at the trial of this case. "I am in the business of providing museum curatorial, photographic art, writing, and lecturing services. My work demands travel three or more times a year to Eastern Europe and Russia, sometimes Asia. My curatorial comes from over 40 years of research, teaching, and lecturing with the public museum in higher educational institutions. "I have worked with the Museum of Modern 21 Art in New York, the University of New Mexico, and 22 23 24 25 the University of Nebraska. As an employee, I was a museum curator, establishing the first photography collection and program for the Museum of New Mexico (1980-2000). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 "I have over 20 years of experience as a three-time Fulbright Scholar -- 1991, 1995, and 2007 -- in several countries of the former USSR, including Russia, Ukraine, Lithuania, Latvia, and Belarus. The business cycle of a curator is five to seven years, sometimes ten years. "In 2007 when I left the University of New 8 Mexico to be an independent contractor, I knew it 9 would be a number of years before my work would reap 10 11 12 13 14 15 16 17 18 19 20 21 22 23 a profit. In 2010, after three years of discussion regarding the design and state of the art technology, my specialty design study, research library, digital printing studio and prints archive were completed. "At that time, I began archiving over 40 years of individual photographic work (chemical dark room generated) in printing future exhibitions with large digital printing technologies. The scanning and cataloging of the archive was completed in 2014. "During 2010 and 2011, work was dedicated to two contracts as curator and author for well- established international traveling exhibition organizations. The unexpected global depression and international events in 2011 occurred at the time two 24 major exhibits were set to open." 25 The parties have stipulated a great deal of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 information about Petitioner's background and history as a scholar in photography. They've also stipulated basic financial information about the Petitioner's Schedule C business activities, which are the crux of the dispute in the present case. Respondent has disallowed losses Petitioner claimed with respect to the business activity described above. The Petitioner began reporting activities on Schedule C and including those activities in the joint Federal Income Tax return filed with Mrs. Yates in 2006. That reporting has continued all the way to the present. The parties' stipulated information for the years 2006 through 2014, which we will set forth below. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Gross Receipts Net Before Expenses Depr & (less depr) Home Office 7 Depreciation Office Home Net Income 2006 $34,002 $34,180 $(178) $986 $(1,164) 2007 $500 $7,087 $(6,587) $959 $(7,546) 2008 $1, 397 $30, 581 $ (29, 184) $919 $ (30, 103) 2009 $1,500 $32,322 $(30,822) $877 $(31,699) 2010 $674 $16,355 $(15,681) $5,043 $11,094 $(31,818) 2011 $2,000 $26,811 $(24,811) $8,242 $7,290 $(40,343) 2012 $21,544 $(21,544) $5,438 $7,754 $(34,736) 2013 $250 $28, 121 $ (27, 871) $4, 849 $7, 582 $ ( 40, 302) 2014 $5,169 $19, 573 $ (14, 404) $3, 918 $5, 467 $ (23, 789) TOTAL $45, 492 $216, 574 $ (171, 082) $27, 490 $42, 928 $ (241, 500) 2 3 4 6 7 8 9 10 11 12 14 1 6 17 18 19 20 21 22 23 2 4 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 Mr. Yates, in his testimony, indicated that the gross receipts for 2015 were approximately $5,000. During the years at issue, Mr. Yates opened a library where he stored his research information and purchased equipment to scan his photographs in order to properly keep track of them. He testified that the expenses he incurred over the years in his business were paid for from the 10 retirement money he received from the State of New 11 Mexico. 12 13 The lifestyle that he and his wife pursued and their other expenses were financed largely from 14 money she had inherited, an income that was reported 15 16 17 18 19 20 21 22 23 24 25 on their return from the sale of stocks and other investments. A large segment of Mr. Yates' business expenses relate to travel, and that travel included trips every year to an association of museum curators, which was held at different venues around the world, which Mr. Yates made a point of attending every year. He also went on trips to do research and often incorporated in those trips lectures, and occasionally he was reimbursed and even sometimes 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 9 1 2 3 received stipends for the lectures. Mr. Yates stated in his description of the fac4 and the petition, which he filed with 4 Mrs. Yates, had entered into two contracts, which he 5 6 7 8 hoped would generate funds, or at least would be the basis for exhibits at museums in the United States involving Russian photography. These activities did not materialize because of changes in policy in the 9 Russian Government. 10 11 12 13 14 However, the income associated with these activities when estimated by the Court to include the additional travel expense Mr. Yates would have incurred relative to these activities was unlikely to yield a profit given the other expenses associated 15 with Mr. Yates' activities. 16 17 18 19 20 21 22 23 24 25 Regarding the burden of proof in this case, the taxpayer generally bears the burden of proving the Commissioner's determinations are erroneous, Rule 142(a). The burden of proof may shift to the Commissioner if the taxpayer satisfies certain additions. Section 7491(a). However, we decide the Section 183 issue in the present case based upon the preponderance of the evidence, and therefore, the burden of proof is not relevant. See Estate of Bomgard v. Commissioner, 124 T.C. 95 111 (2005). 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 Section 183 limits the Section 162, trade or business expense deductions, a taxpayer may claim for expenses attributable to an activity not engaged in for profit. Taxpayers may not deduct such expenses to the extent they exceed income generated by the activity less deductions attributable to the 7 activity allowable without regard to whether the 8 9 10 11 12 13 taxpayer engaged in the activity for profit. Section 183(b). Taxpayers engaged in an activity for profit when they entertain an actual and honest profit objective in engaging in the activity. Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affirmed 14 without opinion 702 F.2d 1205 (D.C. Circuit 1983); 15 16 17 18 19 20 21 22 23 24 25 Section 1.183-2(a), Income Tax Regs. Whether the requisite profit objective exists is determined by looking at all the surroundings facts and circumstances. Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Section 1.183-2(b) Income Tax Regs. We give greater weight to objective facts than to a taxpayer's mere statement of intent, Thomas v. Commissioner, 84 T.C. 1244, 1269 (1985), affirmed 792 F.2d 1256 (4th Circuit 1986); Section 1.183-2(a) Income Tax Regs. Evidence from years after the years in issue is relevant to the extent it creates 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 inferences regarding the taxpayer's requisite profit objective in every yes; e.g. Foster v. Commissioner, T.C. Memo 2012, 2007. We note in this regard the cases cited by 5 Petitioners which indicate that in the case of 6 artists selling their work, the historical efforts to 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 generate profits may not necessarily resolve the question of whether the artistic activity is entered into with a profit motive. See for example, Crile v. Commissioner, T.C. Memo 2014-202. Section 1.183-2(b) Income Tax Regs, provides a list of factors to consider in evaluating the taxpayer's profit objective: (1) The manner in which the taxpayer carried on the activity; (2) The expertise of the taxpayer or his or her advisors; (3) The time and effort expended by the taxpayer in carrying on the activity; (4) The expectation that the asset 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 loss with respect to the activity; (7) The amount of occasional profits earned, if any; (8) The financial of the T7 taxpayer; and whether elements of personal pleasure or recreation are involved. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 No single factor controls. Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affirmed 3 without published opinion 647 F.2 170 (9th Circuit, 4 5 6 7 8 9 10 11 12 13 14 15 1981) . We note that these factors are not to be read as determinative based upon a simple adding up of the factors, and that the factors may or may not have actual relevance to any specific taxpayer. Specifically, we note the Supreme Court's observations about the analysis of the concept of trade or business. In the case of Commissioner of Internal Revenue v. Groetzinger, 480 U.S. 23, 35 (1987) the Supreme Court noted that the concept of a trade or business is a common sense concept. Likewise, the question of whether an 16 activity is engaged in for profit must be viewed from 17 18 19 20 21 22 23 24 25 the perceptive of common sense and the factors enunciated in the regulations must be applied in a common sense way. A review of those factors would indicate that Mr. Yates clearly was a scholar, clearly was engaged in a serious enterprise, about which he kept reasonable records and that he was, without question, an expert in the area of artistic photography, especially as it relates to Russian photographers. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 On the other hand, the evidence is overwhelming that the activities in which Mr. Yates engaged provided no reasonable likelihood of ever generating an overall profit and were not likely to generate a profit in any given year given the sunk cost associated with Mr. Yates' storage library and the travel expenses associated with his activities, for which he was generally not reimbursed by the persons providing him stipends. Mr. Yates would have us look to the potential that he would sell photographs as support for profitability in the future, which might generate actual profits. However, he has yet to try to sell a photograph since his retirement from the University of New Mexico, and it is not likely such sales would generate income to offset the losses associated with his research and other activities. We appreciate that Mr. Yates is a very serious scholar and is devoted to the study of photography, especially Russian photography. We are not convinced that Mr. Yates is actually a professional photographer or artistic photographer, because he's never seriously tried to sell his photographs, and whether those photographs would actually generate a profit is mere speculation. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 This creates the dilemma that while 2 Mr. Yates is seriously pursuing the activities for 3 which he reported losses on the joint Federal Income 4 5 Tax returns he filed with his wife beginning in 2006, he is unlikely to ever generate a profit from those 6 activities. We believe he was well aware of that and 7 8 9 10 11 12 13 14 not unrealistic about his expectations. However, we believe his enthusiasm and his lifelong pursuit of scholarship in this area were his main motivations as opposed to a profit motive. And we find no evidence that these activities were engaged in for profit. Therefore, we sustain Respondent's arguments that Section 183 would be applicable to limit the deductible expenses from the Schedule C 15 activities. 16 17 18 19 20 21 22 23 24 25 Because the parties have resolved another issue in the case of a computational nature, and because of our uncertainty of whether Petitioners have been properly allowed their Schedule A expenses as outlined in the Notice of Deficiency, a Rule 155 computation will be required. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:00 a.m., the above- entitled matter was concluded. 866.488.DEPO www.CapitalReportingCompany.com