Court Opinion

ID: 9395318
Source: CourtListenerOpinion
Date Created: 2023-05-17 19:02:30.056724+00
Date Added: 2024-06-11T17:19:07.435540
License: Public Domain

United States Tax Court

                               T.C. Memo. 2023-63

                       JOSEPH WILLIAM SHERMAN,
                               Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 22276-19.                                            Filed May 17, 2023.

                                     —————

Joseph William Sherman, pro se.

Kimberly A. Santos and Nora Demirjian, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

        JONES, Judge: Pursuant to section 6213(a), 1 Joseph William
Sherman, M.D. (Dr. Sherman) seeks redetermination of a deficiency in
federal income tax determined by the Internal Revenue Service (IRS) for
taxable year 2015. After concessions, the issues for decision are
(1) whether Dr. Sherman’s activities associated with Songswell were
entered into for profit, and, if so, whether he is entitled to deduct
purported business expenses associated with those activities;
(2) whether Dr. Sherman is entitled to deduct purported business
expenses associated with his medical practice; (3) whether Dr. Sherman
is liable for an addition to tax under section 6651(a)(1); and (4) whether
Dr. Sherman is liable for an addition to tax under section 6651(a)(2).

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

Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulatory references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
All monetary amounts are rounded to the nearest dollar unless indicated otherwise.

                                 Served 05/17/23
                                       2

[*2] We hold that Dr. Sherman did not engage in Songswell activities
for profit, and, therefore, he is not entitled to deduct the purported
business expenses associated with Songswell for taxable year 2015. We
also hold that Dr. Sherman failed to substantiate his purported medical
practice business expenses for taxable year 2015, except to the extent
conceded by respondent. Consequently, he is not entitled to deduct those
additional amounts under section 162(a). Finally, we hold that Dr.
Sherman is liable for additions to tax under section 6651(a)(1) and (2).

                           FINDINGS OF FACT

       This case was tried on October 4, 2022, during the Los Angeles,
California, trial session. The parties filed a Stipulation of Settled Issues,
a First Supplemental Stipulation of Facts with Exhibits, and a First
Amended First Stipulation of Facts with accompanying Exhibits. We
incorporate by this reference the stipulations of settled issues and facts,
the stipulated exhibits, and any exhibits admitted at trial, except to the
extent set forth herein.

      Dr. Sherman resided in California when he timely petitioned this
Court. Although Dr. Sherman resides in California, he maintains an
apartment in Tacoma, Washington, for tax and medical licensure
purposes.

I.     Background

       A.     Dr. Sherman’s Medical Career

        Dr. Sherman is a physician who practices emergency medicine.
He graduated from medical school in 1984 and maintains a medical
license in the state of Washington. During taxable year 2015, Dr.
Sherman worked under his Washington medical license at federal
facilities in Arizona. Although he has previously worked in other
medical settings, he worked exclusively in Arizona emergency rooms in
2015.

      Dr. Sherman works 12- to 24-hour shifts in the emergency room,
and he sometimes works up to 40 hours at a time. He estimates that he
works approximately 120 hours per month as a physician. 2 However, he

       2Dr. Sherman testified that he worked 120 hours per week as a physician,
working 12- to 24-hour shifts. It is apparent from the record, however, that Dr.
Sherman intended to state that he worked 120 hours per month, not per week.
                                    3

[*3] does not work every week as a physician. In weeks when he is not
working in emergency rooms, Dr. Sherman claims that he spends his
time on activities associated with Songswell.

      B.     Songswell Activities

       In addition to medical training, Dr. Sherman’s exposure to and
training in music began at an early age. His father was head of a music
school, and his brother is also engaged in the music industry as a cellist
and guitarist. As a result of these connections, Dr. Sherman took courses
in music during college and learned to play the guitar.

      Dr. Sherman used his musical training to help pay expenses
associated with university and medical school in the 1970s and 1980s.
He played music at various events, earning enough cash to pay bills and
other expenses. He never received any documentation of the cash he
earned, and he never made large sums of money playing music.

       According to Dr. Sherman, he decided to launch a film company,
Songswell, to “scale” his interest in music and to potentially make a
large profit. Dr. Sherman did not identify when his Songswell activities
began, but he “guesstimated” that he spends 200 to 300 hours per month
on Songswell activities, in addition to his work as a physician. There is
no evidence before the Court regarding whether Songswell is licensed as
a business in any state. Dr. Sherman does not have a business plan for
Songswell, and there is no evidence before the Court that activities
associated with Songswell have resulted in a profit.

       The precise nature of the activity conducted through Songswell—
and when that activity was conducted—is not readily apparent from the
record before the Court. Dr. Sherman testified that Songswell is (1) a
film production company that combines music and film; (2) a website
that owns copyrights and other digital assets; and (3) a blog created to
give individuals a community to comment and discuss digital assets.

       According to Dr. Sherman, Songswell activities include
“composing, scriptwriting, filming, editing, computer building, [and] IT
maintenance.” On brief, Dr. Sherman repeats these claims and adds
some additional details, claiming that he is “involved in all aspects of
[the] Songswell film production company from filming, acting, music
creation, website creation, blog creation, costume design[,] compositing,
editing, subtitle creation, and script writing.”
                                         4

[*4] With regard to the film production activities of Songswell, Dr.
Sherman hopes that, by combining music and film, he can one day make
a large profit. He filmed a skit and music video, but there is no evidence
regarding when that filming occurred or whether it was associated with
Songswell activity in 2015. Further, it is not clear what, if any, film
production activities associated with Songswell occurred in 2015.

       Dr. Sherman purchased film and camera equipment for
Songswell activities, including some in taxable year 2015. In connection
with these purchases, he consulted several vendors regarding what
equipment to purchase and technology to use. Dr. Sherman purchased
this equipment and technology with money he earned as a doctor, not
from a profit he earned through Songswell.

       With respect to the copyright and digital assets activities, Dr.
Sherman claimed that, through Songswell, he is creating methods to sell
music and film. He also stated that he obtains certain digital assets to
“be able to sell them worldwide” and “to create methods to sell music
and film that scale.” However, there is no evidence regarding whether
Songswell owns any digital assets or the value of those digital assets.

       Finally, Dr. Sherman maintains a website for Songswell. He owns
an Internet domain named “songswell.com,” as well as a blog named
“blog.songswell.com.” Dr. Sherman created the blog so that “people can
comment and discuss digital assets and have a community.” Dr.
Sherman stated that he coded and created the website for Songswell,
hosting the blog on a server that he also built and maintains. There is
no evidence before the Court regarding how the Songswell website or
blog appeared in 2015, but Dr. Sherman testified that the website
changed between 2015 and the time of trial.

II.    Examination, Substitute for Return, and Notice of Deficiency

      The IRS received information returns from Medical Doctor
Associates and AB Staffing Solutions regarding Dr. Sherman’s
nonemployee compensation for taxable year 2015. 3 The parties agree

        3 Medical Doctor Associates issued one 2015 Form 1099–MISC, Miscellaneous

Income, to Dr. Sherman. AB Staffing Solutions issued two 2015 Forms 1099–MISC
reporting, on each, that it paid Dr. Sherman $43,337 of nonemployee compensation.
Respondent conceded that AB Staffing Solutions issued duplicate 2015 Forms
1099–MISC in error. Thus, Dr. Sherman is required to include in his 2015 income only
$43,337 of nonemployee compensation from AB Staffing Solutions.
                                      5

[*5] that Dr. Sherman’s total nonemployee compensation for taxable
year 2015 is $143,162.

       The IRS began an audit in 2019, after Dr. Sherman failed to file
a return for taxable year 2015. Dr. Sherman claims that he transmitted
a return in August 2018, but respondent denies that the IRS received
any such return. Further, Dr. Sherman did not respond to the IRS’s
inquiry regarding his return for 2015. Thus, on August 12, 2019, the IRS
prepared a substitute for return (SFR) for taxable year 2015 based on
the information returns filed by Medical Doctor Associates and AB
Staffing Solutions.

      On October 15, 2019, the IRS issued a notice of deficiency based
on the SFR. In the notice of deficiency, the IRS determined a deficiency
in tax for 2015 totaling $59,339, with additions to tax under section
6651(a)(1) and (2) and section 6654. Respondent now concedes that Dr.
Sherman is not liable for the section 6654 addition to tax.

III.   The October 30, 2019, Unfiled Return and Reported Expenses

       On October 30, 2019—after the SFR was prepared and the notice
of deficiency was issued—Dr. Sherman transmitted a 2015 Form 1040,
U.S. Individual Income Tax Return, to the IRS. The IRS did not accept
or process the 2015 Form 1040.

       The 2015 Form 1040 included the following attachments
(1) Schedule C, Profit or Loss From Business, for reported expenses
related to Songswell and (2) a second Schedule C for Dr. Sherman’s
reported expenses related to his emergency medical practice. Each
schedule is discussed in turn below.

       A.    Reported Songswell Expenses

      We infer from the record that Songswell did not have any income.
Dr. Sherman identified the following expenses related to Songswell:

                              Category                       Expense
        Rent or Lease (Vehicles, Machinery, and Equipment)      $921
        Meals & Entertainment                                  9,640
        Wages                                                  6,523
        Other                                                 87,674

Dr. Sherman did not present any receipts for the rent, meals and
entertainment, or wages.
                                       6

[*6]   The category labeled “other” consisted of the following expenses:

                                Item              Expense
               Asus Z 79 Motherboard                 $483
               Intel                                6,291
               Custom Enclosure                       619
               Alexa Mini Camera                   51,489
               Alex Mini Accessories               19,684
               Nuke Composition                     5,120
               Film Light Plug-In                   1,000
               Total Code Studio                    2,073
               Mobee Gimbal                           515

       Dr. Sherman was unable to produce any documentation or
receipts for most of the expenses listed in the “other” category for
purported expenses associated with Songswell.

     Further, although Dr. Sherman purchased some camera
equipment and accessories in 2015, the amounts on the receipts do not
match the expenses reported on Schedule C. Additionally, many of his
equipment purchases occurred outside the 2015 taxable year.

       Finally, the “other” category of expenses does not total $87,674,
as reported on Dr. Sherman’s Schedule C. Regardless, Dr. Sherman
reported $104,758 in expenses associated with his Songswell activities,
all of which is disputed by the IRS on the grounds that Dr. Sherman’s
Songswell activity was not entered into for profit.

       B.     Claimed Medical Practice Expenses

     Dr. Sherman claimed the following expenses related to his
medical practice:

            Category              Claimed     Conceded       Disputed
Advertising                        $3,350         -0-         $3,350
Insurance                           9,430         -0-          9,430
Legal and Professional Services     3,150         -0-          3,150
Office Expense                      8,324        $176          8,148
Travel                             18,360       8,451          9,909
Meals and Entertainment             6,235         -0-          6,235
“Other” Expenses                    3,750       1,926          1,824

      In total Dr. Sherman reported $52,599 in expenses associated
with his medical practice. On brief respondent concedes $10,554 of the
                                           7

[*7] expenses, 4 leaving $42,045 in dispute. Respondent’s concessions are
based on Dr. Sherman’s partial bank statements. Next, we discuss each
category of expenses.

               1.      Advertising

       Dr. Sherman reported $3,350 in advertising expenses associated
with his medical practice. When asked why an emergency room doctor
would have advertising expenses, Dr. Sherman stated that “sometimes
. . . you need to promote yourself.” However, he did not offer any
testimony regarding how he promoted himself or the source of the
reported advertising expenses.

               2.      Insurance

       Dr. Sherman also reported $9,430 in professional liability
insurance expenses and $3,150 in expenses for legal and professional
services. However, Dr. Sherman testified that he does not have any
records or documentation to support these expenses. He also admitted
that he was estimating the cost of the insurance.

               3.      Office

       Dr. Sherman also reported $8,324 in office expenses. After
concessions, $8,148 of office expenses remain in dispute. Dr. Sherman
did not maintain a separate physical office for his medical practice.
Rather, the expense represents rent for Dr. Sherman’s residences in
California and Washington.

               4.      Travel

      Dr. Sherman also reported $18,360 in travel expenses and $6,235
for meals and entertainment. The IRS conceded $8,451 in travel
expenses on the basis of bank statements produced by Dr. Sherman. No
concessions were made for meals and entertainment, leaving $16,144 in
dispute for travel, meals, and entertainment. Dr. Sherman did not
present any receipts supporting these expenses.

         4 The conceded amount in the parties’ stipulation is incorrect. At trial and on

brief, respondent noted that the amount in the stipulation contained a computational
error. Instead of $8,628 in concessions for Dr. Sherman’s medical practice expenses,
respondent conceded $10,554. Further, respondent acknowledged that he conceded the
same expense twice, but the error is in Dr. Sherman’s favor.
                                       8

[*8]          5.     Other

      Finally, Dr. Sherman reported “other” expenses totaling $3,750,
representing amounts for medical license fees, continuing education
courses, and laundry. Respondent conceded $1,926, leaving $1,824 in
dispute. Dr. Sherman did not present any documentation to support the
remaining expenses.

                                  OPINION

I.     Burden of Proof

       The determinations in a notice of deficiency bear a presumption
of correctness, see Welch v. Helvering, 290 U.S. 111, 115 (1933), and the
taxpayer generally bears the burden of proving them erroneous in
proceedings in this Court, see Rule 142(a)(1).

II.    Credibility of Witness

        In deciding whether a taxpayer has carried his burden of proof,
witness credibility is an important consideration. Ishizaki v.
Commissioner, T.C. Memo. 2001-318, 2001 WL 1658189, at *7. “[T]he
distillation of truth from falsehood . . . is the daily grist of judicial life.”
Diaz v. Commissioner, 58 T.C. 560, 564 (1972). “As a trier of fact, it is
our duty to listen to the testimony, observe the demeanor of the
witnesses, weigh the evidence, and determine what we believe.” Kropp
v. Commissioner, T.C. Memo. 2000-148, 2000 WL 472840, at *3.

       Generally, we found Dr. Sherman’s testimony to be self-serving,
and, at times, lacking in credibility and candor. His testimony failed to
corroborate the alleged business activities of Songswell or the reported
business expenses associated with his medical practice. Each category
of expenses will be discussed in turn.

III.   Songswell Activity

       First, we determine whether Dr. Sherman’s activities related to
Songswell were engaged in for profit and, if so, whether Dr. Sherman is
entitled to any deductions for expenses associated with Songswell.

       A.     Analytical Framework

      Section 183(a) provides generally that, if an activity is not
engaged in for profit, “no deduction attributable to such activity shall be
                                    9

[*9] allowed,” except as provided in section 183(b). See Hendricks v.
Commissioner, 32 F.3d 94, 97 (4th Cir. 1994), aff’g T.C. Memo. 1993-396.
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.”

       An appeal in this case would lie in the U.S. Court of Appeals for
the Ninth Circuit. See § 7482(b); see also Golsen v. Commissioner, 54
T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971); Lardas v.
Commissioner, 99 T.C. 490, 494–95 (1992). The Ninth Circuit has held
that for a deduction to be allowed under section 162 or 212(1) or (2), a
taxpayer must establish that he engaged in the activity in good faith
with the predominant, primary, or principal objective and intent of
realizing an economic profit, independent of tax savings. See Wolf v.
Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), aff’g T.C. Memo. 1991-
212; Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d 724, 726 (9th
Cir. 1986), aff’g Lahr v. Commissioner, T.C. Memo. 1984-472.

       The Ninth Circuit also has held that the focus of this test is the
taxpayer’s subjective intent, but “objective indicia may be cited to
establish the taxpayer’s true intent.” Indep. Elec. Supply, Inc. v.
Commissioner, 781 F.2d at 726 (citing Treas. Reg. § 1.183-2(a)). The
expectation of profit need not be reasonable, but it must be bona fide.
See Golanty v. Commissioner, 72 T.C. 411, 425–26 (1979), aff’d without
published opinion, 647 F.2d 170 (9th Cir. 1981).

       Whether the requisite profit objective exists is determined by
looking at the surrounding facts and circumstances. Id. at 426; see also
Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Treas. Reg. § 1.183-2(b).
“Greater weight is given to objective facts than to a taxpayer’s mere
after-the-fact statement of intent.” Prieto v. Commissioner, T.C. Memo.
2001-266, 2001 WL 1196201, at *6, aff’d, 59 F. App’x 999 (9th Cir. 2003);
Treas. Reg. § 1.183-2(a) (“In determining whether an activity is engaged
in for profit, greater weight is given to objective facts than to the
taxpayer’s mere statement of his intent.”).

       The factors listed in Treasury Regulation section 1.183-2(b) are
relevant to an analysis of the objective facts surrounding the taxpayer’s
activities. See Indep. Elec. Supply, Inc., 781 F.2d at 726–27 (noting that
section 183 generally is not applicable until it is determined the activity
at issue is not engaged in for profit, but the factors nonetheless are
relevant in conducting the profit-motive analysis under section 162).
                                     10

[*10] The relevant factors are (1) the manner in which the taxpayer
carries on the activity; (2) the expertise of the taxpayer or his advisors;
(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
loss with respect to the activity; (7) the amount of occasional profits, if
any, which are earned from the activity; (8) the financial status of the
taxpayer; and (9) elements of personal pleasure or recreation. See Treas.
Reg. § 1.183-2(b).

       These factors are nonexclusive, and no one factor—or number of
factors—is dispositive. Hendricks v. Commissioner, 32 F.3d at 98;
Golanty, 72 T.C. at 426. Instead, all facts and circumstances must be
considered, and more weight may be given to some factors than to
others. See Dunn v. Commissioner, 70 T.C. 715, 720 (1978), aff’d, 615
F.2d 578 (2d Cir. 1980).

       Generally, the taxpayer bears the burden of proving the IRS’s
deficiency determination is incorrect. Rule 142(a); Baxter v.
Commissioner, 816 F.2d 493, 495 (9th Cir. 1987), aff’g in part, rev’g and
remanding in part T.C. Memo. 1985-378. Thus, if the Commissioner
determines that a given activity is not engaged in for profit, that
determination is presumed correct, and the taxpayer must prove
otherwise. See Skeen v. Commissioner, 864 F.2d 93, 94 (9th Cir. 1989)
(“The burden of proving the requisite profit motive is on the taxpayer.”),
aff’g Patin v. Commissioner, 88 T.C. 1086 (1987).

      B.     Application of the Caselaw and Regulatory Factors

        This is not a difficult case. Although our analysis is focused on Dr.
Sherman’s subjective intent, it is informed by the objective indicia set
forth in the regulations and outlined above. See Wolf v. Commissioner,
4 F.3d at 713. Aside from Dr. Sherman’s self-serving testimony that the
Songswell activity was conducted for profit, little else counsels in favor
of a finding of a profit motive. Given the caselaw and the nine factors set
forth in the regulations, and on the basis of all the facts and
circumstances of this case, we conclude that the Songswell activities
were not engaged in for profit during taxable year 2015.

      We now turn to explaining our conclusion in greater detail,
examining the nine factors in the regulations and the relevant
precedent.
                                   11

[*11]         1.    Manner in Which Activity Is Conducted

       A taxpayer who works in a “businesslike manner” and “maintains
complete and accurate books and records” is more likely to have a profit
motive. Treas. Reg. § 1.183-2(b)(1). A “businesslike manner” can be
inferred from the taxpayer’s maintenance of “complete and accurate
books and records,” id., and a reasonable business plan, Den Besten v.
Commissioner, T.C. Memo. 2019-154, at *20 (“Having a business plan
may suggest that a taxpayer conducted the activity in a businesslike
manner.”). Additionally, whether the taxpayer conducts the activity “in
a manner substantially similar to other activities of the same nature
which are profitable” and whether the taxpayer changes “operating
methods, adopt[s] . . . new techniques or abandon[s] . . . unprofitable
methods in a manner consistent with an intent to improve profitability”
are questions we consider in analyzing this factor’s application to the
instant case. Treas. Reg. § 1.183-2(b)(1).

      The record demonstrates that Dr. Sherman did not conduct
Songswell in a businesslike manner. Dr. Sherman admitted that he does
not have a business plan for Songswell. No evidence was presented
regarding when Songswell activities began, nor precisely what activity
occurred in taxable year 2015. Additionally, there is no evidence that
Songswell is a licensed business, further indicating that Songswell was
not conducted in a businesslike manner. See, e.g., Dirkse v.
Commissioner, T.C. Memo. 2000-356, 2000 WL 1706720, at *6
(observing that the failure to obtain necessary business license is
evidence of failing to carry on activities in businesslike manner).

      Dr. Sherman also failed to keep complete and accurate books and
records related to Songswell activities and its purported business
expenses. He was unable to produce substantiation for most of his
reported expenditures associated with Songswell. Further, many of his
expenses did not match the receipts that were provided.

       Finally, there is no evidence before the Court regarding whether
Dr. Sherman conducts Songswell activities in a manner similar to other
activities that are profitable, nor is there any evidence regarding how—
or whether—Dr. Sherman abandoned unprofitable techniques in favor
of profitable techniques.

        Thus, this factor weighs heavily against Dr. Sherman.
                                   12

[*12]         2.    Expertise of the Taxpayers or Their Advisers

      A taxpayer’s preparation for an activity by extensive study of its
accepted business, economic, and scientific practices, or consultation
with experts in the activity, may indicate that the taxpayer has a profit
motive where the taxpayer carries on the activity in accordance with
such practices. Treas. Reg. § 1.183-2(b)(2). Where the taxpayer has such
knowledge or advice but does not carry on the activity in accordance with
good practice, a lack of intent to derive profit may be indicated. Id

      Dr. Sherman was exposed to music at a young age and used his
music experience to earn money to pay for college and medical school
approximately 40 years ago. However, there is no evidence that Dr.
Sherman has engaged in extensive studies regarding operating a film
production company, a digital assets company, or a blog.

       Nor does it appear that Dr. Sherman consulted experts regarding
operating a film production company, a digital assets company, or blog.
Consulting with industry experts and studying accepted business
practices when preparing to engage in an activity may suggest a profit
motive. See Treas. Reg. § 1.183-2(b)(2). Although Dr. Sherman testified
that he consulted experts, he admitted that the experts he referenced
were the vendors who sold him equipment. There is no evidence that
these vendors offered consultation regarding how to operate a business.

        This factor weighs against Dr. Sherman.

              3.    Taxpayer’s Time and Effort

       When a taxpayer devotes considerable time and effort to an
activity, “particularly if the activity does not have substantial personal
or recreational aspects,” that devotion may indicate that the taxpayer
had a profit motive. Treas. Reg. § 1.183-2(b)(3). Further, when a
taxpayer “withdraw[s] from another occupation to devote most of his
energies to the activity,” that also may support a finding that the
taxpayer had a profit motive. Id. Even when a taxpayer devotes only
limited time to an activity, if the taxpayer “employs competent and
qualified persons to carry on such activity,” then that too may indicate
a profit motive. Id.

      Dr. Sherman testified that he spent 200 to 300 hours per month
on activities associated with Songswell. We found Dr. Sherman’s
testimony regarding the amount of time he spent on Songswell to be self-
serving, particularly given that he also worked 120 hours as an
                                    13

[*13] emergency room physician during the same period. Further, Dr.
Sherman admitted that he estimated these claimed hours. There is no
evidence that Dr. Sherman stepped away from his occupation as a
physician to operate Songswell, nor is there evidence that Dr. Sherman
employed others to continue operating Songswell when he was working
as a physician.

      This factor also weighs against Dr. Sherman.

             4.     Expectation of Appreciation in Value

       Although a taxpayer receives no income from operating his
enterprise, he may intend to derive a profit from the potential
appreciation of his business assets. See Treas. Reg. § 1.183-2(b)(4).
There is no evidence that Dr. Sherman’s camera equipment would
appreciate, and we infer that such equipment would instead experience
wear and tear over time and thus depreciate in value. Wesley v.
Commissioner, T.C. Memo. 2007-78, 2007 WL 968731, at *2 (inferring
that recording equipment would experience wear and tear over time and
depreciate).

      Accordingly, this factor also weighs against Dr. Sherman.

             5.     Success of the Taxpayer in Carrying On Other
                    Similar 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 . . . .”
Treas. Reg. § 1.183-2(b)(5). Dr. Sherman did not present any evidence
demonstrating that he has had business success in similar activities,
turning them from unprofitable to profitable.

       To the extent Dr. Sherman’s testimony about earning money to
perform music while attending school can be construed as supporting
this factor, we do not find this factor to be persuasive. There is no
evidence that Dr. Sherman’s activities related to playing music while in
school involved sound and customary business practices that can be
transferred to a film production company, a digital assets company, or a
blog.

      Accordingly, this factor weighs against Dr. Sherman.
                                    14

[*14]         6.    History of Income or Losses

       A series of losses during the startup stage of an activity may not
necessarily prove that an activity is not engaged in for profit. See Treas.
Reg. § 1.183-2(b)(6). However, prolonged periods of losses following the
initial startup phase of an activity may indicate that the taxpayer did
not have a profit motive when he decided to enter into the activity. Id.
Nonetheless, where losses are due to “customary business risks or
reverses” or to “unforeseen or fortuitous circumstances which are
beyond the control of the taxpayer,” then this inference does not
typically arise. Id. Examples of “fortuitous circumstances” include
“drought, disease, fire, theft, weather damages, . . . or depressed market
conditions.” Id.

      Dr. Sherman did not present any evidence demonstrating
Songswell’s history of income or loss. However, Dr. Sherman admitted
that he purchased all of Songswell’s camera equipment and claimed
expenses with money he earned as a physician. Further, Dr. Sherman
reported $104,758 in losses for Songswell for taxable year 2015. This
evidence supports an inference that Dr. Sherman did not make a profit
from Songswell, and he reported substantial losses associated with
Songswell activities.

        Thus, this factor also weighs against Dr. Sherman.

              7.    Amount of Occasional Profit

       In an otherwise money-losing venture, a taxpayer’s derivation of
some profits may support the existence of a profit motive. See Treas.
Reg. § 1.183-2(b)(7). An “occasional small profit from an activity
generating large losses, or from an activity in which the taxpayer has
made a large investment, would not generally be determinative that the
activity is engaged in for profit.” Id. Here, there is no evidence that Dr.
Sherman has ever earned a profit related to Songswell activities.

        This factor weighs against Dr. Sherman.

              8.    Taxpayer’s Financial Status

       When a taxpayer has substantial income or capital at his disposal
from sources other than the activity in question, such evidence may
indicate that he did not enter into that activity with a profit motive. See
Treas. Reg. § 1.183-2(b)(8). This is particularly true if the losses from
the activity generate substantial tax benefits. Id.
                                    15

[*15] Dr. Sherman earned a substantial income of $143,162 in taxable
year 2015. His reported losses from Songswell—in addition to his
medical practice expenses—would produce a substantial tax benefit,
essentially zeroing out any tax obligation he owed.

      Thus, this factor weighs heavily against Dr. Sherman.

             9.     Elements of Personal Pleasure or Recreation

       Finally, when a taxpayer derives personal pleasure from an
activity or finds it recreational, such evidence may suggest that the
taxpayer entered into the activity for reasons other than profit. See
Treas. Reg. § 1.183-2(b)(9). However, this factor is not necessarily
dispositive, as “suffering has never been made a prerequisite to
deductibility.” Jackson v. Commissioner, 59 T.C. 312, 317 (1972).

       That said, “where the possibility for profit is small . . . and the
possibility for gratification is substantial, it is [often] clear that the
latter possibility constitutes the primary motivation for the activity.”
Dodge v. Commissioner, T.C. Memo. 1998-89, 1998 WL 88175, at *7
(quoting Burger v. Commissioner, T.C. Memo. 1985-523, aff’d, 809 F.2d
355 (7th Cir. 1987)), aff’d without published opinion, 188 F.3d 507 (6th
Cir. 1999). Further, “[a]lthough musical and artistic endeavors
generally have personal and recreational elements, a taxpayer’s
personal enjoyment in pursuing the activity is not sufficient to negate a
profit motive if” the other factors listed above indicate that the taxpayer
engaged in the activity with a profit motive. Wesley v. Commissioner,
2007 WL 968731, at *3.

       The personal and recreational elements inherent in Dr.
Sherman’s Songswell activities are readily apparent. The Songswell
activities involve recreational activities related to music, film
production, and a blog. Dr. Sherman’s Songswell activities arose out of
his childhood exposure to music, including learning to play the guitar as
a result of his father’s and brother’s musical influences. In short, a
review of the entire record and the testimony at trial persuades us that
Dr. Sherman’s personal motives and the recreational or personal
elements of his Songswell activities outweighed the desire for profit.
This factor also weighs against Dr. Sherman.

      In sum, on the basis of the foregoing analysis, we find that Dr.
Sherman did not engage in Songswell activities with the primary
motivation of earning a profit. Accordingly, we sustain the IRS’s
                                         16

[*16] disallowance of alleged business expense deductions associated
with Songswell.

IV.    Medical Practice Expenses

       Next, we determine whether Dr. Sherman is entitled to deduct
additional purported business expenses associated with his medical
practice.

      Section 162(a) permits a deduction for ordinary and necessary
expenses paid to carry on a trade or business during the taxable year.
An “ordinary” expense is one that is common and acceptable in the
particular business. Welch v. Helvering, 290 U.S. at 113–14. Moreover,
the main function of the word “ordinary” in section 162(a) is to clarify
the distinction between expenses that are currently deductible and
expenses that are capital. Commissioner v. Tellier, 383 U.S. 687, 689–
90 (1966). A “necessary” expense under section 162(a) is an expense that
is appropriate and helpful in carrying on the trade or business.
Heineman v. Commissioner, 82 T.C. 538, 543 (1984).

       Taxpayers bear the burden of substantiating the amount of any
claimed deduction by maintaining the records needed to establish
entitlement to such a deduction. See § 6001; Hradesky v. Commissioner,
65 T.C. 87 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976). The
taxpayer must substantiate the amount and the purpose of the expense
underlying the deduction. Higbee v. Commissioner, 116 T.C. 438, 440
(2001). A taxpayer must also maintain adequate records to demonstrate
the propriety of any deduction claimed. Id.; see also § 6001. “A taxpayer’s
self-serving declaration is generally not a sufficient substitute for
records.” Fine v. Commissioner, T.C. Memo. 2013-248, at *4.

       Dr. Sherman failed to present any evidence substantiating the
reported expenses associated with his medical practice or showing that
those expenses were ordinary and necessary. The lack of documentary
evidence substantiating the amounts and purpose of these alleged
expenses is pervasive. Dr. Sherman has failed to introduce sufficient
and credible evidence, and therefore did not meet his burden of proof on
this issue. 5 Given Dr. Sherman’s failure to meet his burden associated

       5 Even if Dr. Sherman had produced some documentation for his expenses,

many of the claimed deductions are subject to heightened substantiation standards or
are otherwise disallowed. For example, section 274(d) provides that no deduction
claimed under section 162 shall be allowed for any traveling expense (including meals
                                           17

[*17] with his medical practice, we sustain the IRS’s determination
disallowing the remaining purported business expense deductions.

      If a taxpayer is unable to substantiate the amount of a deduction,
the Court may nonetheless allow it (or a portion thereof) if there is an
evidentiary basis for doing so. See Cohan v. Commissioner, 39 F.2d 540,
543–44 (2d Cir. 1930). To apply the Cohan rule, the Court must have a
reasonable basis upon which to make an estimate. Vanicek v.
Commissioner, 85 T.C. 731, 742–43 (1985). Dr. Sherman failed to
properly establish that the alleged expenses—to the extent not conceded
by respondent—were ordinary and necessary business expenses. Thus,
application of the Cohan rule would be inappropriate in this case. 6

V.      Additions to Tax

        Finally, the parties dispute whether, for taxable year 2015, Dr.
Sherman is liable for failure to file and failure to pay additions to tax
under section 6651(a)(1) and (2), respectively. Under section 7491(c), the
Commissioner bears the burden of production with respect to the
liability of an individual for any addition to tax imposed. Higbee, 116
T.C. at 446.

and lodging while away from home) unless the taxpayer satisfies certain heightened
substantiation requirements. Those requirements permit a deduction for travel
expenses only to the extent the taxpayer proves (1) the amount of each expenditure
while away from home; (2) the date of departure and return for each trip and the
number of days spent on business; (3) the destination or locality of travel; and (4) the
business reason for travel or the expected benefit to be derived from such travel. See
Temp. Treas. Reg. § 1.274-5T(b)(2). Claimed entertainment expenses require similar
heightened substantiation. Id. subpara. (3). In this case, Dr. Sherman failed to offer
evidence to meet the heightened substantiation requirements. Accordingly, his claimed
expense deductions for meals, travel, and entertainment are disallowed for this
additional reason.
        Additionally, as a general rule taxpayers are unable to claim deductions with
respect to the business use of a dwelling unit that is used by the taxpayer as a residence
during the taxable year. § 280A(a). Section 280A(c)(1)(A) provides an exception to the
general rule to the extent that a taxpayer uses a portion of the dwelling unit, on a
regular basis, exclusively as the principal place of business for any trade or business of
the taxpayer. The term “dwelling unit” includes apartments. § 280A(f)(1)(A). In this
case, Dr. Sherman offered no evidence that any portions of his apartments were used
exclusively as the principal place of business for his medical practice. Thus, the claimed
office expense deductions associated with his apartments are disallowed for this
additional reason.
        6 We also note that Dr. Sherman did not invoke the Cohan rule as an

alternative position.
                                   18

[*18] A.     Failure to Timely File Under Section 6651(a)(1)

       First, the IRS determined that Dr. Sherman is liable for the
failure to file addition to tax under section 6651(a)(1). Under section
6651(a)(1), when a taxpayer fails to file any required return on the date
prescribed for filing:

      [U]nless it is shown that such failure is due to reasonable
      cause and not due to willful neglect, there shall be added
      to the amount required to be shown as tax on such return
      5 percent of the amount of such tax if the failure is for not
      more than 1 month, with an additional 5 percent for each
      additional month or fraction thereof during which such
      failure continues, not exceeding 25 percent in the
      aggregate . . . .

       Dr. Sherman admitted that he did not timely file a return for
taxable year 2015, but he claims he transmitted his 2015 tax return in
August 2018. Dr. Sherman produced no evidence—beyond his own self-
serving statements—demonstrating that he filed his 2015 tax return in
2018. Further, the IRS account transcript record shows that no return
was filed before 2019, when the IRS prepared the SFR.

       Moreover, there is nothing in the record indicating that Dr.
Sherman’s failure to timely file his return was due to reasonable cause.
See § 6651(a)(1). Dr. Sherman appears to argue that he had reasonable
cause because he purportedly needed a corrected 2015 Form 1099–MISC
from AB Staffing Solutions before he could file his tax return. But we
find Dr. Sherman’s argument to lack credibility, particularly because he
also testified that he requested a corrected 2015 Form 1099–MISC after
the State of California began investigating his tax return for taxable
year 2015. Regardless, an alleged lack of records did not relieve Dr.
Sherman from the obligation to file a tax return. See, e.g., Jones v.
Commissioner, T.C. Memo. 1995-472, 1995 WL 579285, at *3 (finding
that the taxpayer did not have reasonable cause where necessary tax
return documents may not have been available).

       Because Dr. Sherman failed to timely file his 2015 return, and
because he did not present any evidence that his failure to timely file
was due to reasonable cause and not willful neglect, the amount of tax
required to be shown on his return is subject to an addition to tax under
section 6651(a)(1).
                                    19

[*19] B.     Failure to Pay Under Section 6651(a)(2)

       Next, the IRS determined that Dr. Sherman is liable for the
failure to pay addition to tax under section 6651(a)(2). Section 6651(a)(2)
imposes an addition to tax on taxpayers for their failure to timely pay
the amount of tax shown on a return. See also § 6651(g)(2). When a
taxpayer has not filed a valid return, the section 6651(a)(2) addition to
tax may not be imposed unless the Commissioner has prepared a
substitute for return that satisfies the requirements of section 6020(b).
See Cabirac v. Commissioner, 120 T.C. 163, 170–72 (2003), aff’d per
curiam, No. 03-3157, 2004 WL 7318960 (3d Cir. Feb. 10, 2004).

       Respondent met his burden of production by showing that he
prepared the SFR, which meets the requirements of section 6020(b), on
behalf of Dr. Sherman for taxable year 2015, and Dr. Sherman has failed
to pay his federal income tax for 2015. Dr. Sherman has not shown
reasonable cause for his failure to pay his income tax, nor has he
demonstrated a lack of willful neglect. Thus, we will sustain the addition
to tax pursuant to section 6651(a)(2). See also Lloyd v. Commissioner,
T.C. Memo. 2020-92, at *19–21, aff’d, No. 20-73387, 2022 WL 10449695
(9th Cir. Oct. 18, 2022).

VI.   Conclusion

      In conclusion, we hold that (1) Dr. Sherman did not conduct
Songswell activities with a profit motive, and he is not entitled to deduct
purported business expenses associated with Songswell for taxable year
2015; (2) Dr. Sherman is not entitled to deduct additional purported
business expenses associated with his medical practice for taxable year
2015; and (3) Dr. Sherman is liable for additions to tax under section
6651(a)(1) and (2).

       We have considered all of the arguments made by the parties, and
to the extent not mentioned above, we conclude that they are moot,
irrelevant, or without merit.

      To reflect the foregoing,

      Decision will be entered under Rule 155.