Court Opinion

ID: 9893383
Source: CourtListenerOpinion
Date Created: 2023-10-26 19:02:26.075627+00
Date Added: 2024-06-11T09:02:59.687917
License: Public Domain

United States Tax Court

                                T.C. Memo. 2023-128

                     WOLFGANG FREDERICK KRASKE,
                              Petitioner

                                              v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                       —————

Docket No. 27574-15.                                             Filed October 26, 2023.

                                       —————

Wolfgang Frederick Kraske, pro se.

Alexander D. DeVitis and Christine A. Fukushima, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

     GALE, Judge: Respondent determined the following deficiencies
and accuracy-related penalties with respect to petitioner’s federal
income tax for taxable years 2011 and 2012:

                         Year    Deficiency        Penalty § 6662(a) 1
                         2011      $11,464                  $2,293
                         2012       11,403                   2,281

        1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are
to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,
and Rule references are to the Tax Court Rules of Practice and Procedure. We round
all monetary amounts to the nearest dollar.

                                   Served 10/26/23
                                    2

[*2] We consider the penalties in a separate opinion also filed today,
Kraske v. Commissioner, No. 27574-15, 161 T.C. (Oct. 26, 2023). The
other issues for decision are (1) whether petitioner engaged in a business
activity with the objective of making a profit within the meaning of
section 183; (2) whether petitioner incurred startup expenses that were
required to be capitalized under section 195; and (3) whether petitioner
is entitled to deduct home office expenses of $12,840 for each taxable
year 2011 and 2012.

                         FINDINGS OF FACT

      Some of the facts are stipulated and are so found. The First
Stipulation of Facts, First Supplemental Stipulation of Facts, and the
attached Exhibits are incorporated herein by this reference. Petitioner
resided in California when he timely filed his Petition.

I.    Petitioner’s Education and IT Career

       Petitioner is an internet technology (IT) professional with a Ph.D.
in electrical engineering from the University of Southern California
(USC). During the years at issue petitioner was employed by SRA OSS,
Inc. (SRA OSS), a Japanese consulting company with an office in San
Jose, California, and received income reported on Forms W–2, Wage and
Tax Statement. Per petitioner’s timesheets, he worked over 50 hours
per week for SRA OSS, on average. SRA OSS contracted with third
parties for the provision of petitioner’s services as a cloud computing
engineer. SRA OSS did not provide office space for petitioner at its San
Jose location. Before his work with SRA OSS, petitioner worked at
e-commerce and telecommunications companies.

II.   Petitioner’s Schedule C Activity

       In addition to working for SRA OSS during the years at issue,
petitioner purportedly conducted an activity that he reported as a
business activity on Schedules C, Profit or Loss From Business.
Petitioner conducted this activity before, during, and after the years at
issue and at various times referred to it as either RoboSphere or as
                                         3

[*3] Ovium. 2 As petitioner used the terms interchangeably, for
simplicity we will hereinafter refer to the activity as Ovium. 3

        Petitioner started Ovium in 2004. Before the years at issue,
petitioner created a “Strategic Business Plan” and “Business Overview”
for Ovium. The Strategic Business Plan describes Ovium as effecting a
shift from silicone-based computing to carbon-based computing. As part
of this model, Ovium planned three generations of 36-month product
development plans, with the first culminating in creating and
manufacturing nanocomputers, the second culminating in nanorobots,
and the third culminating in a bacterial computer. The Strategic
Business Plan described Ovium as focused on developing “self
organizing nanocomponents,” a “quantum computer,” and “communities
of protein ‘nanorobots’” for the “construction and maintenance of the
nanocomputer.”

      To capitalize on this development, Ovium planned to have five
product lines: nanocomputers, proteomics, genomics, quantum
computing, and a “Community Agent Programming and Operating
System.” The nanocomputer products would include supercomputer
systems, quantum computer processing, quantum computers contained
within bacterial cells that could function as sensor arrays, and nanotube
“holographic immersion” virtual reality displays. As part of the
nanocomputer breakthroughs, Ovium projected developments in
“quantum phenomenon, such as entanglement and teleportation.”

      The proteomics products would include protein simulation and
knowledge systems, programmable protein assays that could be used to
diagnose diseases and to “destroy cancers,” contamination detectors,
and “intelligent active aromatic arrays.” The genomics products would
include DNA analysis and knowledge systems, programmable DNA and
RNA, DNA manufacturing systems, and biometric sensors. The
quantum computing products would include quantum cryptography
with teleportation, and neural networks composed of quantum
components that would be a “true embodiment of artificial intelligence.”
Finally, the community agent products would include terrorist activity

        2 For example, RoboSphere is reported as the name for the activity on

petitioner’s 2011 Schedule C, while Ovium is reported as the name on his 2012
Schedule C. The principal business for each is listed as “Internet Technology Product
Development” on the 2011 and 2012 Schedules C. Petitioner explained at trial that
the nomenclature was insignificant to him.
      3 We note in addition that petitioner did not proffer any business plan for

RoboSphere.
                                   4

[*4] prediction services, equities projection analysis, and protein
community simulation, powered by a self-organizing algorithm
“embodied by neural networks.”

        To accomplish these scientific breakthroughs and roll out the
wide range of products, the Business Overview dedicated one page to the
manufacturing process using a “fullerene scaffold assembly.” The
Strategic Business Plan also identified Ovium’s management team,
including petitioner as the chief executive officer and chief technology
officer, Wennie Wu as the president and chief operating officer, William
Manger as chief counsel, and Irving Reed as chief consultant.

       Mr. Manger was an attorney with corporate, franchise, and
securities law experience. Mr. Reed was a retired professor of electrical
engineering at USC, best known for creating error correcting
communications codes and the logical design of digital computers. The
Strategic Business Plan does not describe the roles of, or work performed
by, Mr. Manger or Mr. Reed.

       Ms. Wu was a scientist with teaching experience in protein
crystallization and nanometer protein imaging techniques, and
professional experience in optical computing and satellite
communications. Ms. Wu met frequently with petitioner during the
years at issue, on most occasions having dinner and attending a movie
with him on weekend nights.

      In 2010 Ovium entered into a consulting contract with
International Innovative Institute Corp. (IIIC), an entity for which
Ms. Wu was “Chairman and CEO.” The contract provided that Ovium
would provide IIIC with consulting services, while requiring petitioner
to maintain a home office. The contract required IIIC to pay Ovium a
minimum of $1,000 per year but did not set hourly or project-based rates
of pay and stated the contract would continue “until payments do not
continue.”

       Ms. Wu wrote a check to petitioner individually, dated June 15,
2009, for $1,350. The memo line on the check indicates it was for
“Website of III.” A November 28, 2011, cashier’s check for $500, payable
to Ms. Wu, was jointly endorsed by her and petitioner and deposited into
petitioner’s personal account on January 3, 2012. A cashier’s check for
$1,070 dated October 5, 2012, and payable to petitioner was deposited
into his personal account on that date. Two $1,000 checks written by
Ms. Wu to petitioner dated November 1 and December 1, 2012, were
                                        5

[*5] deposited into his personal account near those dates. Other than
the check written in 2009, none of the checks carried any indication of
its purpose on the memo line. None of the foregoing checks was reported
as Schedule C gross receipts for taxable year 2009, 2011, or 2012.

III.     Petitioner’s Residence

       During the years at issue petitioner maintained two apartments:
one in northern California and one in southern California. Petitioner
spent approximately 70% of his time in northern California. The
remainder of his time, often weekends, was spent in southern California,
where he maintained a home office. For the southern California
apartment lease, petitioner paid $19,000 in rent in 2011 and $20,025 in
rent in 2012.

IV.      Petitioner’s Income Tax Returns

       Petitioner timely filed his federal income tax returns for 2011 and
2012. He reported his occupation as “information engineer” and “data
scientist” on his 2011 and 2012 returns, respectively.

       For taxable years 2005 through 2015, petitioner reported the
following amounts on his federal income tax returns:

                                  Cost of              Home
                       Gross               Total                  Profit/
  Year      Wages                 Goods                Office
                      Receipts            Expenses                (Loss)
                                   Sold               Expense
  2005                            Unknown                        ($32,466)
  2006        —        $21,650    $1,390    $24,145   Unknown      (3,885)
  2007      $39,769     21,800       678      9,742    $11,380      -0-
  2008       59,632      —          —        15,256     —         (15,256)
  2009        —          —          —        20,483     —         (20,483)
  2010       17,500      —          —        19,057     —         (19,057)
  2011      120,307      —          —        30,208     —         (30,208)
  2012      134,068      —          —        33,142     —         (33,142)
  2013      157,903      9,275      —        45,675     —         (36,400)
  2014      137,517     22,125      —        52,080     —         (29,955)
  2015        —         16,000      —        15,687     —            313

       On Schedule A, Itemized Deductions, attached to his 2011 return,
petitioner claimed $19,176 in miscellaneous itemized deductions,
including $6,296 in unreimbursed employee expenses, $40 in tax
preparation fees, and $12,840 in “office” expenses. On Schedule A
                                    6

[*6] attached to his 2012 return, petitioner claimed $24,387 in
miscellaneous itemized deductions, including $6,947 in unreimbursed
employee expenses, $40 in tax preparation fees, and $17,400 in “office”
expenses. Of the amount reported as “office” expenses for each year at
issue, $12,840 reflects the rent expense for the southern California
apartment.

V.    Examination of Petitioner’s Returns

      Respondent selected petitioner’s 2011 return for examination in
2013, and in 2014 the examination was expanded to include the 2012
return.    During the examination petitioner provided undated
spreadsheets documenting travel and entertainment expenses and a
mileage log. Petitioner also provided an undated list of meetings he
attended, including locations, the names of other attendees, and the
business purposes. Additionally, he provided receipts and credit card
statements for the expenses.

       Respondent subsequently issued a notice of deficiency disallowing
(1) all of petitioner’s reported Schedule C expenses on the basis that
petitioner was not engaged in an active trade or business for profit and
(2) $12,840 in “office” expenses claimed as Schedule A miscellaneous
itemized deductions on the basis that they were personal rent expenses.

                                OPINION

I.    Burden of Proof

       Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer bears the burden of
showing those determinations to be erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of
legislative grace, and a taxpayer likewise bears the burden of proving
his or her entitlement to deductions allowed by the Code. INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). Because respondent determined
that petitioner did not engage in the Ovium activity for profit, petitioner
bears the burden of proving otherwise. Petitioner does not contend that
the burden of proof should shift to respondent under section 7491(a).

II.   For-Profit Business

      Section 162 generally allows deductions for ordinary and
necessary business expenses incurred in carrying on a trade or business.
                                    7

[*7] An activity must be conducted with continuity and regularity and
with the primary purpose of realizing income or profit in order to
constitute a trade or business under section 162. Commissioner v.
Groetzinger, 480 U.S. 23, 35 (1987); Wolf v. Commissioner, 4 F.3d 709,
713 (9th Cir. 1993) (holding that profit means economic profit,
independent of tax savings), aff’g T.C. Memo. 1991-212. Absent a profit
motive, no deduction attributable to such activities is allowed, except as
permitted by section 183(b). § 183(a). Section 183(b) allows deductions
that would be allowable without regard to whether the activity was
engaged in for profit, and a deduction equal to the amount of deductions
that would be allowable only if such activity were engaged in for profit,
but only to the extent that the gross income derived from such activity
exceeds the deductions allowable without regard to profit motive.

       An activity not engaged in for profit is “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.” § 183(c).
For expenses to be fully deductible under section 162 or 212, a taxpayer
must demonstrate that he is engaged in the activity with the
“predominate, primary or principal” objective of making a profit. Wolf v.
Commissioner, 4 F.3d at 713. The taxpayer’s expectation of profit need
not be reasonable but must be held in good faith. Allen v. Commissioner,
72 T.C. 28, 33 (1979); Treas. Reg. § 1.183-2(a).

       The regulations provide a nonexclusive list of factors to be
weighed when considering whether a taxpayer is engaged in an activity
for profit. Treas. Reg. § 1.183-2(b). These factors are (1) the manner in
which the taxpayer carries on the activity; (2) the expertise of the
taxpayer or the taxpayer’s advisers; (3) the time and effort the taxpayer
expends in carrying on the activity; (4) the expectation that the assets
used in the activity may appreciate in value; (5) the success of the
taxpayer in carrying on other similar activities; (6) the taxpayer’s
history of income or losses with respect to the activity; (7) the amount of
occasional profits, if any, that are earned from the activity; (8) the
taxpayer’s financial status; and (9) elements of personal pleasure or
recreation involved in the activity. Id. Greater weight is given to these
objective factors than to the taxpayer’s statement of intent. King v.
Commissioner, 116 T.C. 198, 205 (2001); Treas. Reg. § 1.183-2(a) and (b).
No single factor is determinative of intent. Westbrook v. Commissioner,
68 F.3d 868, 876 (5th Cir. 1995), aff’g T.C. Memo. 1993-634.
                                    8

[*8]   A.    Manner in Which the Taxpayer Carries On the Activity

      The taxpayer’s carrying on an activity in a businesslike manner,
through maintaining complete and accurate books and records,
conducting the activity in a manner similar to profitable activities of the
same nature, and making adjustments in operations to adopt new
techniques or abandon unprofitable methods, is a factor that may
indicate a profit objective. Treas. Reg. § 1.183-2(b)(1).

      In conducting his Ovium activity, petitioner did not maintain
complete and accurate records. There is no evidence that he maintained
a separate bank account for the activity. He failed to maintain books of
account or business records. Rather, petitioner presented spreadsheets
that did not purport to have been created at or around the time the
transactions recorded occurred. At trial petitioner contended that his
actual losses for 2011 and 2012 were $59,130 and $52,060, respectively,
rather than the $30,208 and $33,142 reported on his 2011 and 2012
returns, respectively. He explained that he had lost track of various
payments.

       A businesslike operation typically involves a business plan. See,
e.g., Wesinger v. Commissioner, T.C. Memo. 1999-372. Businesslike
conduct is characterized by a thorough investigation of the profitability
of a proposed venture, as well as adjustments to improve profitability as
issues arise over time. See Ronnen v. Commissioner, 90 T.C. 74, 93
(1988); Taube v. Commissioner, 88 T.C. 464, 481–82 (1987).

       Before the years at issue, petitioner prepared a “Strategic
Business Plan” and “Business Overview” for Ovium. Neither document
included more than industry buzzwords and general aspirations. At
various points the Strategic Business Plan describes Ovium as a
“nanotechnology      enterprise”    developing     “self   organizing
nanocomponents,” “focused on the development of a quantum computer”
using “communities of protein ‘nanorobots’” for the “construction and
maintenance of the nanocomputer.” The Strategic Business Plan
projected rapid technological breakthroughs: the completion of a
quantum computer prototype within one year, a nanorobot assembly
prototype within two years, a nanocomputer prototype within three
years, and a bacterial computer within five years.

       The Business Overview discusses Ovium’s projected successes
across multiple widely varying areas of study, including the creation of
“[h]olographic immersion systems for a new generation of virtual
                                            9

[*9] reality,” “stealthy antennae designs of unsurpassed jamming
resistance,” nanocomputer-produced antibodies, programmable DNA,
and artificial intelligence.   While full of projected technological
advances, the Strategic Business Plan and Business Overview fall short
with respect to providing a roadmap for their completion, managing
losses before profitability, or providing insight into what exactly
petitioner’s business was accomplishing. The Strategic Business Plan
likewise did not provide budgets or analyses demonstrating active
financial management. See Foster v. Commissioner, T.C. Memo.
2012-207.

       In five of the six years preceding the years at issue petitioner
reported substantial losses totaling $91,147. (In the remaining year—
2007—he reported breaking even.)4 For the years at issue he reported
even greater losses: $30,208 for 2011 and $33,142 for 2012. 5 After
reporting gross receipts of just over $20,000 in both 2006 and 2007, he
reported no gross receipts from 2008 through the years at issue. 6

       Petitioner’s failure to produce any significant revenue underlay
his failure to earn a profit. See Foster v. Commissioner, T.C. Memo.
2012-207; Dodge v. Commissioner, T.C. Memo. 1998-89, aff’d, 188 F.3d
507 (6th Cir. 1999) (unpublished table decision). He did not provide
testimony or other evidence showing that he examined the profitability
of his venture, despite years of losses. Nor did petitioner testify that he
spent any time adjusting his system or adopting new methods to

        4 At trial petitioner claimed that a $1,350 check Ms. Wu wrote him in June

2009 that was deposited into his personal account represented overlooked gross
receipts for the Ovium activity. Even if we accepted petitioner’s claim, the losses for
2009 would still exceed $89,000.
        5 As noted, at trial petitioner claimed these losses were even greater: $59,130

for 2011 and $52,060 for 2012.
        6 At trial petitioner contended that a November 28, 2011, cashier’s check for

$500 made out to Ms. Wu, which was endorsed by her and petitioner jointly and
deposited into petitioner’s personal bank account on January 3, 2012, was overlooked
gross receipts attributable to 2011. Similarly, petitioner contended that a cashier’s
check and two checks drawn on Ms. Wu’s bank account, totaling $3,070, that were
deposited into his personal account, represented overlooked gross receipts in that
amount for 2012. Even if we were to accept petitioner’s claims, our view of the evidence
would not change for two reasons. First, the amount of the purportedly overlooked
gross receipts is insignificant in relation to the losses reported for those years. Second,
these overlooked gross receipts came to light only when petitioner’s 2011 and 2012
returns were being examined. Consequently, they have no bearing on whether
petitioner had a good faith expectation of profit for the years at issue when he filed his
returns for those years.
                                   10

[*10] improve profitability. Petitioner’s apparent indifference to the
activity’s mounting losses and lack of revenue, as of the years at issue,
weighs heavily against any finding that petitioner had a good faith
expectation of profit in those years. On balance we are not persuaded
that petitioner carried on his Ovium activity in a businesslike manner.
This factor favors respondent.

      B.     Expertise of the Taxpayer and His Advisers

       The taxpayer’s extensive study of the activity’s accepted business
practices, or consultation with experts, may indicate a profit objective
where the taxpayer conducts the activity in accordance with such
practices. Treas. Reg. § 1.183-2(b)(2). The type and quality of advice
that a taxpayer seeks from experts is important to the analysis. See
Engdahl v. Commissioner, 72 T.C. 659, 668 (1979) (observing that
informal and continuous consultations with experts demonstrate an
intent to conduct a business for profit).

       Petitioner has a Ph.D. in electrical engineering and wrote his
Ph.D. dissertation on the “theoretical foundations for the
implementation of quantum spin in computational algorithms for
compression, error correction and cryptographic coding.” Petitioner
introduced receipts for the purchase of two books covering subjects
relevant to Ovium’s work, suggesting petitioner spent additional time
studying the subject matter, but the record does not indicate that
petitioner spent an extensive amount of time studying the subject
matters for Ovium’s work.

       During the years at issue petitioner maintained frequent contact
with Ms. Wu, who had teaching experience in protein crystallization and
nanometer protein imaging techniques, and professional experience in
optical computing and satellite communications. But petitioner’s
testimony and trial exhibits failed to illuminate the nature of his
relationship with Ms. Wu, professionally or personally. The Strategic
Business Plan does not outline the work she was to perform. On brief
petitioner describes Ms. Wu as Ovium’s “most persistent client” but also
as an “unpaid participant in soliciting investors.” Petitioner conceded
that most of his reported entertainment expenses related to Ms. Wu
involved movie tickets on weekend nights and that he and Ms. Wu were
friends. The evidence petitioner presented fails to provide a clear
picture regarding Ms. Wu’s status as a client, an employee, or a personal
friend, and what role she filled for Ovium.
                                   11

[*11] Petitioner also provided a list of meetings he held during the
years at issue, including the participants and the business purposes.
While the business purposes listed often overlap with objectives
identified in the Strategic Business Plan, we have been presented with
no information regarding the participants’ expertise or business
experience. This factor favors respondent.

      C.     Time and Effort Expended by the Taxpayer in Carrying On
             the Activity

       The taxpayer’s devotion of time and effort to carrying on an
activity may indicate a profit motive, particularly where the activity
lacks substantial personal or recreational aspects.          Treas. Reg.
§ 1.183-2(b)(3). Petitioner did not testify regarding the hours he worked
on the Ovium activity during the years at issue, but he provided
timesheets for his employment with SRA OSS, which indicate he worked
there, on average, in excess of 50 hours per week. In contrast petitioner
provided no testimony or supporting evidence regarding his work for
Ovium, or that he hired any individuals to work on his behalf. Rather,
petitioner testified about his frequent travel between the Bay Area and
southern California, as well as the meals, movies, and events he
attended with Ms. Wu. This factor favors respondent.

      D.     Expectation that Assets Used in Activity May Appreciate in
             Value

       An expectation that assets used in the activity will appreciate
may indicate a profit motive even if the taxpayer derives no profit from
current operations. Id. subpara. (4). “The term ‘profit’ encompasses
appreciation in the value of assets, such as land, used in the activity.”
Id. A profit motive, however, may be inferred from anticipated
appreciation of the activity’s assets only where the appreciation exceeds
operating expenses and would be sufficient to recoup the accumulated
losses from prior years. See Golanty v. Commissioner, 72 T.C. 411,
427–28 (1979), aff’d, 647 F.2d 170 (9th Cir. 1981) (unpublished table
decision).

      The only significant assets held by Ovium were computer servers
and networking components. Petitioner presented no reason to suggest
Ovium’s assets would appreciate in value, nor did he express an
expectation that they would do so. This factor favors respondent.
                                      12

[*12] E.      Success of the Taxpayer in Carrying On Similar or
              Dissimilar Activities

      “The fact that the taxpayer has engaged in similar activities in
the past and converted them from unprofitable to profitable enterprises
may indicate that he is engaged in the present activity for profit, even
though the activity is presently unprofitable.”              Treas. Reg.
§ 1.183-2(b)(5). Petitioner is a successful IT professional with years of
experience in the field and a relevant educational background. While
he has employment and consulting experience with for-profit
enterprises as an IT professional, petitioner’s work experience does not
span all areas of expertise covered by Ovium’s proposed work. With
respect to profitability, petitioner has not provided evidence to the effect
that he has ever operated a business or turned an unprofitable business
towards profitability. This factor is neutral.

       F.     Taxpayer’s History of Income or Losses with Respect to the
              Activity

        “A series of losses during the initial or start-up stage of an activity
may not necessarily be an indication that the activity is not engaged in
for profit.” Id. subpara. (6). Sustained losses continuing beyond the
customary period necessary to bring the operation to profitable status,
if not explainable, may indicate a lack of profit motive. Id. While losses
during the startup stage of an activity may not necessarily indicate the
absence of a profit motive, a history of large losses over many years is
persuasive evidence that the taxpayer lacked a profit motive. Golanty,
72 T.C. at 426; Foster, T.C. Memo. 2012-207.

       For taxable years 2005 through 2015, petitioner incurred losses
totaling $220,539, while reporting zero gross receipts from 2008 through
2012. Petitioner did generate $21,650 and $21,800 in gross receipts for
2006 and 2007, respectively. He again reported gross receipts for 2013
through 2015 in amounts similar to, or less than, those generated in
2006 and 2007. Between 2007 and 2014, with one exception, petitioner’s
expenses grew each year. The lack of an upward trajectory in gross
receipts to match or outpace the upward trajectory in expenses belies
the notion that petitioner was experiencing losses only during a startup
period or that profits might recoup his losses from prior years. This
factor favors respondent.
                                    13

[*13] G.     Amount of Occasional Profits, if Any, Which Were Earned

       The amount of profits in relation to the amount of losses incurred
may provide useful criteria in determining the taxpayer’s intent. Treas.
Reg. § 1.183-2(b)(7). The regulation further provides: “[A]n opportunity
to earn a substantial ultimate profit in a highly speculative venture is
ordinarily sufficient to indicate that the activity is engaged in for profit
even though losses or only occasional small profits are actually
generated.” Id.

       Petitioner did not earn a profit during either of the years at issue;
indeed, he did not report any gross receipts at all for 2011, and for 2012,
only $3,070—if one accepts his claim that he overlooked gross receipts
in that amount when he filed his return. For taxable years 2005 through
2015 petitioner earned a profit for only 2015—of $313. This factor favors
respondent.

      H.     Financial Status of the Taxpayer

       Substantial income from sources other than the activity may
indicate that the activity is not engaged in for profit. Id. subpara. (8).
In the five years preceding the years at issue, petitioner’s wage income
fluctuated; in two of these years, he had no wage income. For the years
at issue, however, he had wage income of $120,307 and $134,068 for
2011 and 2012, respectively. Thus, the losses from the Ovium activity
in those years generated substantial tax benefits. This factor favors
respondent.

      I.     Elements of Personal Pleasure or Recreation

       Personal motives and recreational elements enjoyed in carrying
on an activity may indicate that the activity is not engaged in for profit.
Id. subpara. (9). Satisfaction from the work, rather than a profit motive,
may account for a taxpayer’s persistence in certain loss-generating
activities. See Foster, T.C. Memo. 2012-207. An activity is not classified
as a hobby simply because the taxpayer finds it pleasurable. Jackson v.
Commissioner, 59 T.C. 312, 317 (1972).

      Petitioner provided a substantial number of receipts for his
Ovium activity for the years at issue. The receipts are for fast food and
restaurants, coffee shops, bakeries, grocery stores, movie theaters, and
hockey games. The receipts further reflect that petitioner made retail
purchases at Walmart, Uniqlo, the North Face, REI, and BevMo!, and
took a trip to Japan. Petitioner has failed to demonstrate a business
                                          14

[*14] purpose for these abundant expenditures for food, entertainment,
and travel. By contrast, we searched in vain for any receipts for
purchases of raw materials or equipment necessary for Ovium’s
purported business activity. We conclude that a significant portion of
the expenditures for the Ovium activity was personal. This factor favors
respondent.

        J.      Conclusion

       Considering all the facts and circumstances and weighing the
factors analyzed above, we hold that petitioner did not conduct his
Ovium activity in a businesslike manner and he did not engage in that
activity with the requisite profit objective during the years at issue. We
accordingly sustain respondent’s determination that petitioner is not
entitled to deductions under section 183(b) for his reported Schedule C
expenses for 2011 and 2012. 7

III.    Home Office Deductions

       Generally, the expenses of maintaining a household, including
amounts paid for rent, water, utilities, and the like, are not deductible.
Treas. Reg. § 1.262-1(b)(3). Section 280A(a) provides that “no deduction
otherwise allowable under this chapter shall be allowed with respect to
the use of a dwelling unit which is used by the taxpayer during the
taxable year as a residence.” If, however, a portion of the residence is
used as a place of business, a share of the expenses properly attributable
to the portion of the property used for the business may be deductible as
a business expense, subject to the rules of section 280A. § 280A(c).

       No deduction is allowed with respect to a home office unless
“allocable to a portion of the dwelling unit which is exclusively used on
a regular basis” as the taxpayer’s principal place of business. § 280A(a),

        7 Respondent argues, in the alternative, that even if petitioner intended to earn

a profit from Ovium, his expenses should be amortized as startup expenses. See
§§ 195(a), (b), and (c)(1), 162(a); Jackson v. Commissioner, 86 T.C. 492, 514 (1986)
(finding no deduction under section 162 unless related to an ongoing business), aff’d,
864 F.2d 1521 (10th Cir. 1989). We need not address this argument because, as
explained above, we find that petitioner did not conduct the Ovium activity for profit;
therefore, petitioner’s expenses are not eligible for amortization as section 195 startup
expenses. See § 195(b)(1), (c)(1)(A) (providing amortization is allowed only for expenses
that are incurred to create new trade or business); Commissioner v. Groetzinger,
480 U.S. at 35 (finding that a profit motive is required to have a trade or business);
Wilmot v. Commissioner, T.C. Memo. 2011-293 (finding amortization under section 195
need not be addressed where activity is not conducted for a profit).
                                          15

[*15] (c)(1). If a taxpayer fails to provide the Court with evidence of the
extent to which he or she used a portion of the home exclusively, we
cannot estimate the deductible portions of his expenses. See Sam
Goldberger, Inc. v. Commissioner, 88 T.C. 1532, 1556–57 (1987).

       Petitioner deducted $12,840 in rent expenses for his southern
California apartment as “office” expenses under Schedule A
miscellaneous itemized deductions for 2011 and 2012. At various points,
petitioner has argued that the “office” expense was a Schedule C expense
incurred in connection with Ovium, 8 and at other points he has argued
that it was a Schedule A expense incurred in connection with his
employment at SRA OSS. 9 We may consider each of these activities,
because expenses attributable to the use of a home office may be
deductible in conducting two or more separate business activities.
Hamacher v. Commissioner, 94 T.C. 348, 356 (1990). However, if any
activity conducted in the home office fails to meet the requirements of
section 280A(c)(1), none of the activities meets the exclusive use
requirement for the home office. Hamacher, 94 T.C. at 356.

       With respect to the Ovium activity, petitioner may deduct only an
expense allocable to a portion of the apartment that is exclusively used
on a regular basis as (1) the principal place of business for any trade or
business of the taxpayer or (2) a place of business which is used by
patients, clients, or customers in meeting or dealing with the taxpayer
in the normal course of his or her trade or business. § 280A(c)(1)(A)
and (B). We have held that the Ovium activity lacked a profit motive; it
is therefore not a trade or business. See Commissioner v. Groetzinger,
480 U.S. at 35. As both factors under section 280A(c)(1) require the
existence of a trade or business, we hold that petitioner’s use of the home

        8 In this regard, we note petitioner testified that the Ovium activity was

conducted from his southern California apartment. However, the business addresses
listed for the activity on the Schedules C for 2011 and 2012 were in Palo Alto,
California, and Pasadena, California, respectively.
        9 Petitioner also asserts on brief that he was an independent contractor for SRA

OSS, not a W–2 employee, and that expenses incurred in connection with SRA OSS
should therefore be reflected on his Schedules C. However, petitioner’s work
agreement with SRA OSS, which he signed, reflects his status as a W–2 employee, and
petitioner also stipulated his employee status with SRA OSS. A stipulation is treated
as a conclusive admission by the parties, and may not be contradicted, except as justice
requires. Rule 91(e); Bail Bonds by Marvin Nelson, Inc. v. Commissioner, 820 F.2d
1543, 1547 (9th Cir. 1987) (“A stipulation will generally be enforced unless manifest
injustice would result.”), aff’g T.C. Memo. 1986-23. Accordingly, petitioner is precluded
from claiming he was not an employee of SRA OSS for the years at issue.
                                   16

[*16] office in connection with his Ovium activity does not comply with
section 280A(c)(1).

       Because the Ovium activity fails to meet the requirements of
section 280A(c)(1), any other activity conducted in the same space would
fail to meet the exclusive use requirement. Petitioner claims to have
used the home office of his southern California apartment for both the
Ovium activity and his employment with SRA OSS. Therefore,
petitioner’s use of his home office in connection with his employment at
SRA OSS does not comply with section 280A(c)(1).

       Petitioner has not satisfied the exclusivity requirement of
section 280A(c)(1), and pursuant to section 280A(a), his home office
deductions are not permitted. We therefore sustain respondent’s
determination that petitioner’s home office deductions are not permitted
under either Schedule A or C.

IV.   Conclusion

       We have considered all remaining arguments the parties made
and, to the extent not addressed, we conclude they are irrelevant, moot,
or meritless.

      To reflect the foregoing,

      Decision as to the deficiencies will be entered for respondent.