T.C. Summary Opinion 2004-94
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T.C. Summary Opinion 2004-94
UNITED STATES TAX COURT
N. JOSEPH CALARCO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1530-03S.
Filed July 20, 2004.
N. Joseph Calarco, pro se.
Kimberly J. Webb, for respondent.
HOLMES, Judge:
“Taxation! Wherein?
And what taxation?”
Henry VIII act I, sc. 2.1
1
This case was heard pursuant to the provisions of Internal
Revenue Code section 7463. Section citations are all to that
Code. This decision is not reviewable by any other court, nor
should the opinion or its literary references be cited as
precedent in future proceedings.
- 2 Prologue
It is a truth little remarked on by scholars that tax law
has been a fount of literature for 5,000 years.
The oldest
literary work still extant--the Epic of Gilgamesh--is a long
narrative of a friendship begun during a protest against
government exactions.2
In more recent times, some of our
language’s most notable authors have used fiction to delve into
tax policy: consider Shakespeare’s criticism of the supply-side
effects of a 16-percent tax rate;3 Swift’s precocious suggestion
of a system of voluntary self-assessment;4 and Dickens’ trenchant
observation on the problems of multijurisdictional taxing
coordination:
[The town’s] people were poor, and many of them were
sitting at their doors, shredding spare onions and the
like for supper, while many were at the fountain,
washing leaves, and grasses, and any such small
2
David Ferry, “Gilgamesh, A New Rendering In English
Verse”, 14-15 (Farrar, Straus, and Giroux 1992).
3
Shakespeare, “Henry VIII”, act I, sc. ii. (“A sixt part
of each? / A trembling contribution! Why, we take / From every
tree, lap, bark and part o’ th’ timber; / And, though we leave it
with a root, thus hack’d, / the air will drink the sap.”)
4
Jonathan Swift, Gulliver’s Travels, A Voyage to Laputa,
Etc. 162 (W. W. Norton & Co., Inc., New York, 1964) (1726). (“The
highest tax was upon men who are the greatest favourites of the
other sex, and the assessment according to the number and natures
of the favours they have received; for which they are allowed to
be their own vouchers. . . . The women were proposed to be taxed
according to their beauty, and skill in dressing; wherein they
had the same privilege with the men, to be determined by their
own judgment.”) See generally Levmore, “Self-Assessed Valuation
Systems For Tort and Other Law”, 68 Va.L.Rev. 771, 779 (1982).
- 3 yieldings of the earth that could be eaten. Expressive
signs of what made them poor, were not wanting; the tax
for the state, the tax for the church, the tax for the
lord, tax local and tax general, were to be paid here
and to be paid there, according to solemn inscription
in the little village, until the wonder was, that there
was any village left unswallowed.5
Taxation has also sparked creativity in newer literary
genres.
See It’s a Privilege on Urinetown: The Musical (RCA
Victor) (musical re excise tax); J. Kornbluth, Love and Taxes
(staged monologue re income tax) (unpublished manuscript, 2003).
Tax collecting jobs have helped finance the careers of such
notable revenue agents as Chaucer,6 Paine,7 and Hawthorne.8
And
tax records are a famously important source of information for
5
Charles Dickens, “A Tale of Two Cities” 119 (Everyman’s
Library, Knopf, 2002) (1859).
6
While Controller of the Customs, “[t]here was great
variety in what [Chaucer] had to do, and he came in contact with
a variety of people. He must have seen infinite venality,
witnessed colorful subterfuges, heard improbable and ridiculous
dodges and lies and excuses.” Donald Howard, “Chaucer” 212
(1987).
7
“I act myself in the humble station of an officer of
excise, though somewhat differently circumstanced to what many of
them are, and have been a principal promoter of a plan for
applying to Parliament this session for an increase in salary.”
Letter of Thomas Paine to Oliver Goldsmith, December 21, 1772,
Reprinted in George Hindmarch, “Thomas Paine: The Case of the
King of England And His Officers of Excise”, Published by the
Author in 1998, Surrey, England.
8
Indeed, it is reported that Hawthorne once contemplated
writing sketches entitled “Romance of the Revenue Service” and
“an ethical work in two volumes on the subject of Duties”, though
sadly neither project was ever undertaken. Randall Stewart,
“Nathaniel Hawthorne, A Biography” 53 (Archon Books, 1970).
- 4 scholars of both ancient civilizations9 and modern authors.10
This case follows in that long, but little-noted,
tradition.
Petitioner, N. Joseph Calarco, is a respected
professor of theater at Wayne State University in Detroit.
also writes plays.
He
On his 1997 tax return, he deducted his
playwriting expenses as a Schedule C business loss.
Respondent
disallowed both the loss and several itemized deductions that
petitioner took on his Schedule A.
These disallowances created a
deficiency of $3,869 to which respondent added an accuracyrelated penalty of $774.
Petitioner, following the lead of Henry
VIII’s first Queen Katherine,11 filed a timely petition in this
Court.
Act I.
Background
Petitioner has at least four times filed petitions
contesting respondent’s disallowance of deductions that he
claimed.
The issues before the Court for those years were mostly
whether specific deductions were allowable.
In this case,
9
See, e.g., Tonia Sharlach, “Provincial Taxation and the Ur
III State” (2004).
10
See A. L. Rowse, “William Shakespeare, A Biography” 280281 (1963) (use of obscure records to trace author’s movements);
Vitale v. Commissioner, T.C. Memo. 1999-131 (use of obscene
records to trace author’s movements).
11
“These exactions, whereof my sovereign would have note,
they are most pestilent to the bearing; and, to bear’ em the back
is sacrifice to the load.” “Henry VIII”, I. ii. 11. 47-50.
- 5 respondent tries to sweep the stage of all his deductions by
denying that petitioner’s playwriting is a trade or business.
The parties were unable to negotiate a very extensive
stipulation, and petitioner arrived at trial with an abundance of
documentation for his 1997 expenditures.
This threatened to
force the Court into an item-by-item examination.12
To make
review more efficient, the parties were ordered to file a
supplemental stipulation.
Even with an extension, it became clear that the parties
would be unable to agree, so petitioner was ordered to file a
supplemental statement of facts organizing and explaining his
claimed expenses by category.
Respondent was then ordered to
file comments.
We must address three issues:
1)
Was petitioner’s playwriting an activity entered into
for profit?
2)
If it was, did petitioner meet his burden in
substantiating each expense and its relationship to his
playwriting activities as required under the Code?
3)
12
Does petitioner owe an accuracy-related penalty?
Such work has been known to spark a change in careers.
See I Wanna be a Producer on “The Producers” (Sony Classical)
(describing relative attraction of theater life to dealing with
accounting details).
- 6 Act II.
A.
Discussion
Did Petitioner Carry on His Playwriting With a Profit
Motive?
Respondent noted in his pretrial memorandum that petitioner
is aggressive in claiming deductions:
Year
Sch. C Receipts
1993
$
Sch. C Expenses
0.00
$ 27,924.00
1996
0.00
23,353.00
1997
0.00
24,703.00
1998
0.00
33,093.00
1999
0.00
27,128.00
Petitioner argues that this is nothing more than a
consequence of the long time it takes many artists to realize a
return on their investment of time and money.
He contends that
he has consistently intended to profit from his playwriting.
At
trial he offered evidence of various rewards he has already
received, including cash bonuses, an increase in salary, travel
opportunities, and professional recognition.
He maintains that
he expects to achieve even more dramatic success, and he was
sincerely buoyed in his hopes by many now-famous artists who
achieved renown posthumously.13
Respondent, noting that the deductions seem to offset most
13
Petitioner also suggested that the deductions at issue
were unreimbursed employee expenses, but he did not fully develop
this argument at trial. Those expenses we identify as deductible
we allow as playwriting expenses.
- 7 of petitioner’s other income, argues that petitioner’s claim of a
profit motive for his playwriting is pretextual.14
Section 183 disallows deductions for an activity not engaged
in for profit, except to the extent it produces income.
Regulations exist that list a number of factors for us to
consider in deciding whether a taxpayer was seeking to make a
profit.
Sec. 1.183-2(b), Income Tax Regs.
These factors are not
exclusive, and we do not decide the issue on the basis of a
single factor or a mathematical preponderance of factors.
Holmes
v. Commissioner, 184 F.3d 536, 544 (6th Cir. 1999), revg. on
other grounds; Osteen v. Commissioner, 62 F.3d 356, 358 (11th
Cir. 1995), affg. in part and revg. in part T.C. Memo. 1997-401;
Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without
opinion 702 F.2d 1205 (D.C. Cir. 1983).
This Court has previously recognized that artists must be
judged with an eye to posterity.
In Churchman v. Commissioner,
68 T.C. 696 (1977), we allowed deductions claimed by a sculptor
14
A celebrated monologist has related that his own tax
trouble prompted a former IRS Commissioner to suggest a more
colloquial characterization. “[Y]ou know what a pisher is? A
pisher is a guy who feels entitled to all of the benefits of
civilization, but feels no obligation to pay his fair share.”
Kornbluth, supra (quoting S. Cohen). See generally Kozinski and
Volokh, Lawsuit, Schmawsuit, 103 Yale L.J. 463 (1993) (describing
use of Yiddish to “add spice” to legal opinions, noting
prevalence of chutzpah in much litigation); and see specifically
id. at 463 n.4 (suggesting schnorrer as more appropriate
characterization).
- 8 who had not yet achieved profitability, but nevertheless
maintained a studio and gallery and participated in shows.
We
recognized then that economic success in the world of fine art
frequently takes longer to achieve than success in other fields.
The same is true of literature.
Id. at 701-702.
In Vitale v.
Commissioner, T.C. Memo. 1999-131, affd. 217 F.3d 843 (4th Cir.
2000), we allowed the taxpayer to deduct many of his expenses of
researching a book, despite the fact that he had not yet achieved
profitability as an author.
Petitioner’s activity is reminiscent
of Vitale’s--he has likewise engaged in extensive research,
generated large losses, and claimed his intent was ultimately to
achieve a profit.
With this special lens in place, we look at each of the
factors listed in the relevant regulation.
The first is whether
the activity was run in a businesslike way.
Sec. 1.183-2(b)(1),
Income Tax Regs.
In Churchman, we listed six reasons for finding
that her activity was: (1) she designed an art gallery and
maintained it for a year; (2) she kept a mailing list to announce
her shows; (3) she traveled to out-of-town locations to show her
art; (4) she had published a book; (5) in the face of poor sales,
she tried to change her material to meet public demand; and (6)
she had kept records of her sales and expenses, albeit not
complete books and records.
Professor Calarco has shown similar indications of business-
- 9 like activity.
The marketing of art--because it may take the
form of gallery shows and sales--is more readily visible than the
marketing of drama or musical theater; nevertheless, a parallel
exists between the marketing of sculpture in Churchman and
petitioner’s strenuous efforts to get his various plays produced.
For example, the petitioner had a play read in Lincoln Center as
early as 1990.
In 1997--the year at issue--he was almost
completely unsuccessful in marketing his work.
But, in a real-
life peripeteia, his long-developing play “Beethoven is . . . .”
won first-prize (from among hundreds of entries) in a National
New Play Competition sponsored by Humboldt State University.
This won the play a production at the university, and entitled
petitioner to a two-week residency including travel and a $1,000
royalty.
He also received various administrative benefits from
Wayne State (including a sabbatical) that both recognized and
furthered his playwriting.
He traveled to get his play before
audiences both in full performance and for readings.
He also
worked at adapting “Beethoven is . . . .” into a screenplay, as
well as creating a stage version suited to smaller theaters.
He
kept records of many of his various expenses, such as travel logs
and receipts.15
15
Thus, we find that petitioner did in fact carry
We look to those successes and activities from later
years as part of the examination of “all facts and circumstances”
required by Sec. 1.183-2(b), Income Tax Regs. Cf. Regan v.
Commissioner,T.C. Memo. 1979-340.
- 10 on his playwriting in a businesslike manner.
The second factor that the regulation lists is the expertise
of the taxpayer or his advisers.
Regs.
Sec. 1.183-2(b)(2), Income Tax
We cannot imagine an individual better qualified for the
playwriting trade than petitioner.
He has a Ph.D. in drama and
has published numerous pieces on dramatic criticism and theory,
as well as his own poetry.
His educational and professional
background meet and perhaps exceed the level of taxpayer
expertise we found in Churchman.
(Though we also note that
academic employment is no prerequisite for expertise in
writing,16 as the achievements of insurance executives,17 nurses,18
and shut-ins19 attest.)
The third factor is the time and effort expended by the
taxpayer in carrying on the activity.
Tax Regs.
Sec. 1.183-2(b)(3), Income
The sheer extent of petitioner’s documentation
supports the proposition that he approached his playwriting in a
businesslike manner.
Furthermore, petitioner has been
16
Dana Gioia, “Can Poetry Matter?” 267 The Atlantic 94-95
(May 1991) decrying “migration of American literary culture to
the university.”
17
See Harold Bloom, “Wallace Stevens, A Comprehensive Study
Guide” 16 (2003).
18
See Frances Winwar, “American Giant, Walt Whitman and His
Times” 253 (1941).
19
Richard B. Sewall, “The Life Of Emily Dickinson” 474
(Harvard University Press Paperback Edition, 1994).
- 11 professionally involved with dramatic production for almost 40
years, and his interest in the activity can hardly be said to be
passing or casual.
The fourth factor, the expectation that assets used in the
activity will appreciate in value, sec. 1.183-2(b)(4), Income Tax
Regs., is not relevant here.
The fifth factor, the success of the taxpayer in carrying on
other similar or dissimilar activities, sec. 1.183-2(b)(5),
Income Tax Regs., seems largely neutral.
While petitioner has
had a long and successful academic career in drama and has gained
recognition from several well-known theaters and universities, he
has not managed a truly profitable business activity.
The sixth factor, petitioner’s history of income or loss
from the activity, sec. 1.183-2(b)(6), Income Tax Regs., would
appear to bear heavily against petitioner, since he apparently
has never had a net gain from his playwriting.
As noted in
Churchman, however, this is not decisive:
Such a history of losses is less persuasive in the art
field than it might be in other fields because the
archetypal ‘struggling artist’ must first achieve public
acclaim before her serious work will command a price
sufficient to provide her with a profit.
Churchman, 68 T.C. at 701-702.
Further, under section 1.183-
2(a), Income Tax Regs., an activity may be found to be engaged in
for profit if there exists a “small chance of making a large
profit.”
The example given in the regulations is of a wildcat
- 12 oil well; courts have found this legitimate profit motive to
exist in a variety of cultural contexts, see, e.g. Dwyer v.
Commissioner, T.C. Memo. 1991-123 (sponsorship expenses of NASCAR
racing were reasonable given potential prize money); Plunkett v.
Commissioner, T.C. Memo. 1984-170 (same for truck-pulling
competitions).
However, the Code, like postmodern literary
theory, does not privilege any boundary between high and popular
culture--that petitioner entertained similar expectations of
ultimately achieving a large profit with his work is enough.
The seventh factor, the amount of occasional profits earned
through the activity, sec. 1.183-2(b)(4), Income Tax Regs.,
weighs heavily in favor of petitioner’s having a profit motive.
In years after 1997, he won both a fully paid sabbatical and an
additional $7,000 research grant to reward and aid his
playwriting.
See Grommers v. Commissioner, T.C. Memo. 1992-343
(subsequent years relevant to section 183 analysis).
While this
is not income from an activity in the usual sense of sales
revenue, it certainly is an economic benefit that petitioner
received from his playwriting.
The eighth factor is the financial status of the taxpayer.
Sec. 1.183-2(b)(8), Income Tax Regs.
The regulations provide
- 13 that an absence of substantial income to the taxpayer from other
sources may indicate a profit motive, while the presence of other
substantial income may indicate a lack of profit motive.
This is
particularly true if the activity has personal or recreational
elements.
This factor does weigh against petitioner, as his
primary income is from his teaching position, and allowing his
playwriting deductions would largely offset his teaching wages.
The ninth factor is whether there are elements of personal
pleasure or recreation present in the activity.
2(b)(9), Income Tax Regs.
petitioner enjoys.
Sec. 1.183-
Clearly playwriting is something
Nevertheless, pleasure is not irreconcilable
with a profit motive.
Schwartz v. Commissioner, T.C. Memo. 2003-
86.
Considering these factors together, we find that petitioner
has carried on his playwriting with the objective of making a
profit: both the documentary and testimonial evidence show
petitioner’s goal was not merely posthumous renown but profit in
the here-and-now.
deductions.
Section 183 does not therefore limit his
Professor Calarco is a playwright, not a pisher.
See Kozinski & Volokh, supra, 103 Yale L.J. at 465 n.14.
B.
Has Petitioner Substantiated His Expenses?
All taxpayers, even playwrights, are allowed to deduct the
ordinary trade or business expenses they incur during the year.
Sec. 162(a).
But this often leads to temptation.
Our
- 14 predecessor, the Board of Tax Appeals, recognized more than 60
years ago that without firm limits, taxpayers would seek to
deduct
The fee to the doctor, but for whose healing
service the earner of the family income could not
leave his sickbed; the cost of the laborer's
raiment, for how can the world proceed about its
business unclothed; the very home which gives us
shelter and rest and the food which provides
energy, might all by an extension of the same
proposition be construed as necessary to the
operation of business and to the creation of
income. [Citations omitted.]
Smith v. Commissioner, 40 B.T.A. 1038-1039 (1939) (citation
omitted), affd. 113 F.2d 114 (2d Cir. 1940).
In extreme cases, this can even lead to a kind of deduction
fever:
“Itemizing?
What's that, Satan?”
“Well, you see, Josh, now that you're not just a
salaried copy editor but also a freelance
television critic, you can file a Schedule C and
deduct your legitimate business expenses....
So I went home, waded as usual through the pot
smoke of my roommates, shut the door, and looked
around my room. What was a “legitimate business
expense”? Okay, I’m a television critic, so... the
television! Yes! Because I need something to
criticize!
Okay, so the television ... And then--yeah, the
VCR, because I can’t watch every episode of “T.J.
Hooker.” ...
And, of course, the videotapes. ... And the
replacement labels for the tapes, which I get from
Radio Shack. ... Oh!--and the TV Guide, which
guides me to the television! ... And the books of
television criticism I've bought. And actually,
- 15 the books I've bought that aren’t television
criticism: they've still informed my criticism of
the television. ... Oh!--and the chair I sit in,
of course: very important what your posture is when
you criticize a television. And the food I eat-which literally makes up the cells that form the
critic of the television....
Kornbluth, supra.
Petitioner has fallen victim--at least at times--to this
fever, claiming many quotidian activities, such as reading
newspapers and renting movies, to be “business-related”.
at some level of abstraction, no doubt correct.
administer the tax laws as they are.
He is,
But we must
Having decided that
petitioner intended to profit from his playwriting, we must sift
through the specific deductions that he claims so as to determine
their allowability.
Petitioner’s Schedule C deductions fall into fifteen
categories, named as follows on the 1997 return:20 (1) mileage;
(2) automobile depreciation; (3) interest; (4) legal and
professional services; (5) supplies; (6) travel; (7) books,
recordings, and video; (8) “business cellular;” (9) Internet;
(10) software; (11) “tickets to various performances, viewing;”
(12) “the business portion of phone expense (70 percent);”
(13) “miscellaneous from cash (ATM);” (14) periodicals; and
20
Unfortunately, the categories in petitioner’s posttrial
submission do not match the categories on the return. We discuss
the categories as they appear on the return.
- 16 (15) copy services.21
Section 6001 and its regulations require taxpayers to
maintain records sufficient to permit verification of income and
expenses.
See sec. 1.6001-1(a), Income Tax Regs.
The burden is
on petitioner to demonstrate his right to the deductions.
Sec.
7491(a); Rule 142(a); Underwood v. Commissioner, 56 F.2d 67 (4th
Cir. 1932).
But the IRS will generally accept certain proofs of
expenditures as adequate substantiation.
1992-2 C.B. 437.
See Rev. Proc. 92-71,
Petitioner must in all cases provide evidence
to establish a sufficient connection between the deduction and
his trade or business.
344.
Gorman v. Commissioner, T.C. Memo. 1986-
This substantiation may vary by circumstance.
Welch v.
Helvering, 290 U.S. 111, 115 (1933).
Certain deductions, moreover, require enhanced
substantiation under sections 274 and 280F.22
These include
travel, food and entertainment expenses, and any expenses
21
In a number of these categories, respondent initially
allowed the deductions (provided that the section 183 issue was
resolved in petitioner’s favor) in the notice of deficiency.
Generally, respondent bears the burden of proof when introducing
a new issue. Rule 142(a); Sundstrand v. Commissioner, 96 T.C.
226, 347-348 (1991). Respondent has not shown any specific
reason for a departure from his original position, so in those
categories where respondent has already allowed deductions in
excess of the documented amounts we will grant petitioner the
benefit of the original allowance.
22
See Master of the House on Les Miserables: Original
Broadway Cast (Geffen Records) (suggesting benefits of enhanced
substantiation requirements for certain innkeepers).
- 17 relating to certain forms of “listed property.”
For these items,
taxpayers must show that an expense was “directly related” to
business activity, and must provide the business purpose, amount,
and time and place of the expenditure.
Sec. 1.274-5T(b)(2),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
We consider petitioner’s claimed deductions in this context.
1.
Mileage
Section 280F(d)(4)(A)(i) makes a personal automobile “listed
property”, and thus subject to enhanced substantiation
requirements.
Section 1.274-5T(c)(1), Temporary Income Tax
Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985) describes those
requirements, and provides that “[w]ritten evidence has
considerably more probative value than oral evidence alone.
In
addition, the probative value of written evidence is greater the
closer in time it relates to the expenditure or use.” Sec. 1.2745T(c)(1).
Section 1.274-5T(c)(2)(ii)(C)(2), Temporary Income Tax
Regs., 69 Fed. Reg. 32782 (June 10, 2004), specifically
identifies “a record of the business use of listed property, such
as a computer or automobile, prepared in a computer memory device
with the aid of a logging program” as an adequate written record.
Petitioner has provided just such a record.
Section 1.274-5T(b)(2), Temporary Income Tax Regs., lists
the information a taxpayer’s records must contain to substantiate
travel away from home.
These are: (1) the amount of the
expenditure; (2) the date of each departure and return and number
- 18 of days spent away, (3) destination, and (4) the business purpose
of the travel.
Petitioner’s log contains all of this data,
always in the form of the amount, the date of the travel, the
destination (either the University of Michigan library in Ann
Arbor, the Detroit Public Library, or the Purdy Library at Wayne
State23), and the purpose (always recorded as “Research
Beethoven”).
This travel log, however, raises significant issues of
credibility.
It records that, from January to May 1997,
petitioner spent every Tuesday and Thursday (with the exception
of May 22, 1997), conducting research at either the Purdy Library
or the Detroit Free Library.
This seems to correlate with
petitioner’s testimony regarding his teaching schedule during the
1997 spring semester at Wayne State University.
The uniformity
of schedule, however, strongly suggests that petitioner merely
ascribed mileage deductions to his nonteaching days, without
regard to actual events.
That petitioner claimed a mileage
deduction for July 4th and Memorial Day, days when many libraries
are closed and most people do not work, also suggests this.
Further, petitioner testified at trial that there were two
23
It is not clear from the record whether these libraries
are “temporary work locations” for purposes of exempting this
travel from commuting expense treatment. See Walker v.
Commissioner, 101 T.C. 537 (1993); Daiz v. Commissioner, T.C.
Memo. 2002-192 (2002); Rev. Rul. 90-23, 1990-1 C.B. 28; Rev. Rul.
94-47, 1994 C.B. 18. Since we have in any event decided to
disallow the mileage expenses, we need not reach this issue.
- 19 rehearsal periods during the year when his responsibilities
encompassed periods of seven-day weeks of 14 hours a day.
Yet,
an examination of his travel log indicates no break in his
research activities of longer than three days, with one exception
during the first week in December.
We thus find that petitioner’s log is inadequate
substantiation because it is not credible.
We have no doubt that
petitioner engaged in extensive research for his play, and that
he did travel significant distances to conduct that research.
But we are unable to allow deductions for that mileage based on
the evidence he submitted.
In many instances, when confronted
with deficient evidence, courts may resort to the rule of Cohan
v. Commissioner, 39 F.2d 540 (2d Cir. 1930)(the Cohan rule)24 and
estimate the proper deduction amount.
This rule is not
available, however, when dealing with “listed property” under
section 274.
Sanford v. Commissioner, 50 T.C. 823, 827 (1968),
affd. 412 F.2d 201 (2d Cir. 1969).
Thus, we disallow
petitioner’s claimed mileage deductions in full.
24
Although best known to tax lawyers for his rule, George
M. Cohan was also a playwright, actor, and songwriter, who wrote
such stage classics as “The Man Who Owned Broadway.” His life
outside tax litigation was the source material for the classic
Jimmy Cagney film, Yankee Doodle Dandy (Warner Bros. 1942). (We
also note that this year marks the centennial of Cohan’s breakout
role in Little Johnny Jones, featuring Yankee Doodle Boy (I’m a
Yankee Doodle Dandy) and Give My Regards to Broadway.)
- 20 2.
Automobile Depreciation
Having decided that petitioner failed to substantiate his
mileage, we are compelled to disallow petitioner’s claimed
depreciation deduction as well--to claim any deduction related to
use of his personal automobile, petitioner must meet the enhanced
substantiation requirements.
Whalley v. Commissioner, T.C. Memo.
1996-533.
3.
Interest
Petitioner claimed $7,392 in interest expenses.
To the
extent that this amount reflects otherwise deductible mortgage
interest, respondent allowed its deduction in the notice of
deficiency, and we sustain that allowance.
Petitioner also submitted documentation of $4,880 in
interest expenses from his various credit cards.
In Exhibit 17-
P, petitioner showed that the proper percentage of credit card
interest allocable to his Schedule C expenses is 78 percent.
We
believe this amount is overly generous to petitioner, especially
in light of the excess claims we find he made in the supply
category.
See infra.
Still, petitioner has shown that he paid
substantial interest charges on many consumer credit cards for
expenses properly attributable to his Schedule C activities.
Under the Cohan rule, when presented with some factual basis upon
which to rely, we are allowed to estimate the amount of interest
deductions properly allowable.
Memo. 1996-336.
Schroeder v. Commissioner, T.C.
We estimate that 65 percent of the claimed
- 21 $4,880, or $3,172, is properly deductible by petitioner.
4.
Legal and Professional Services
In the notice of deficiency, respondent allowed $171 in
professional expenses.
Petitioner submitted documentation of
$221 in legal expenses.
We find that amount to be deductible.
The remainder of the claimed $468 of legal and professional
expenses deduction is unsupported by any evidence and so we deny
it.
5.
Supplies
On his Schedule C, petitioner claimed a deduction for $3,797
in supplies.
$2,544.
Respondent, in the notice of deficiency, allowed
Petitioner’s posttrial submission details only $2,864
for supplies.
This number must be reduced by the expenses that
represent copying (which we discuss separately) that were
originally included in supplies.
Further, the number must also
be reduced by petitioner’s cable and Internet expenses for which
petitioner has offered no credible business purpose, let alone
documentation of business use.
These reductions bring the
documented amounts well below the original amount allowed in the
notice of deficiency, and we sustain the finding in the notice
that only $2,544 is allowable.
6.
Travel
Petitioner claimed a deduction of $801 for his travel
expenses to the Stratford Drama Festival and to Ann Arbor to
conduct research.
We find that he has satisfied the requirements
- 22 of sections 274 and 280F for deducting his drama festival
expenses by documenting the date, cost, and purpose of his visit.
But as we noted above, we do not credit petitioner’s travel log,
and so it does not support his position that he spent $171.31 in
Ann Arbor on business purposes on November 16, 1997.
disallow that deduction.
As such, we
The log does indicate, and we find to
be believable, an expense for $189.04 at the Courtyard Marriott
in Ann Arbor on March 16, 1997.
We allow that deduction.
His
estimates of cash expenditures at fast-food outlets and other
establishments do not meet the requirements of sec. 274, and are
thus disallowed.
7.
Books, Recordings, Videos
Petitioner claimed deductions for books, recordings, and
video in the amount of $3,324.
His posttrial submission details
$4,358 of expenses in this category.
A number of these items,
however, must be fully disallowed or considered in a different
category.
These include expenses for software, video, and
newspaper subscriptions.
The removal of these items results in
$2,440.25 for this category.
The category’s other expenses are more ambiguous.
Some are
no doubt legitimate, and respondent has not identified any
specific legal theory for their disallowance.
But allowing all
the deductions would be ignoring some obvious questions raised by
a great number of nonspecific items, such as large drug store
receipts.
Under the Cohan rule, we may estimate the proper
- 23 amount of allowable deductions based on the evidence and our view
as to the credibility of the witnesses.
Commissioner, T.C. Memo. 1956-214.
Feingold v.
We find that petitioner is
entitled to deduct 40 percent of the $2440.25 in this category
that has not otherwise been specifically addressed.
8.
“Business Cellular”
Under section 280F(d)(4)(A)(v), cellular phones are listed
property and thus subject to the heightened substantiation
requirements of section 274, which petitioner has failed to meet.
This category of deductions is entirely disallowed.
9.
Internet
Petitioner has offered no evidence of his business use of
the Internet.
We infer from his electronic banking records that
he used the internet to track his business (and personal)
expenses.
This Court has previously characterized internet
expenses as utility expenses.
2001-132.
Verma v. Commissioner, T.C. Memo.
Under the Cohan rule we may estimate the business
portion of utility expenses.
Memo. 1999-39.
See Pistoresi v. Commissioner, T.C.
We estimate that 20 percent of his internet
expenses were business-related.
10.
Software
There are $267.48 in software expenses listed in
petitioner’s posttrial submission.
Of this amount, $82 appears
to have been for multimedia programming, and we are satisfied
- 24 that a connection exists between that programming and
petitioner’s playwriting.
An additional $107.48 appears to be
for software related to business management.
are allowed.
These deductions
It is unclear what the rest are for; we disallow a
deduction for them.
11.
“Performances, Viewing”
Petitioner has submitted evidence of approximately one
hundred expenditures in this category, constituting his theater,
video rental, and other sundry expenses for the year.
Several
reasons exist as to why we must disallow these deductions.
One
is petitioner’s having undermined his own credibility in this
area.
At trial, in response to a direct question, petitioner
testified that every time he listens to a CD or watches a movie
he is engaged in playwriting and not recreation.
This suggests a
less than candid assessment of his business expenses.
Even assuming that petitioner were believable on this point,
these deductions would still be precluded under section 1.2742(c)(3)(i), Income Tax Regs., which provides that the taxpayer
must have more than a “general expectation” of deriving income
for an entertainment expense to be deductible.
Had petitioner
testified as to a particular difficulty with the plot or
characters or language of his play that he sought to fix by
watching a specifically selected play by someone else, that
specific expectation would perhaps justify a deduction.
broadening one’s horizons is not enough.
Merely
The credibility and
- 25 documentation issues, however, are merely elements of the
ultimate determinative factor--petitioner has not met his burden
under sections 274 and 280F for substantiating entertainment
expenses.
12.
Telephone
Section 262 provides that the first phone line into a
taxpayer’s home is not deductible.
Petitioner thus is unable to
deduct expenses relating to his phone line, absent a showing that
there was some service or feature of the line dedicated to his
business activities, a showing he did not make.
Cf. Popov v.
Commissioner, T.C. Memo. 1998-374, revd. on other grounds 246
F.3d 1190 (9th Cir. 2001).
13.
Miscellaneous Cash
We are not required to accept self-serving testimony from
petitioner regarding his estimates of cash spent on his
activities.
Even were we to accept his assertion of how much
cash he spent, we still would not be convinced that those amounts
went to business, as opposed to personal, expenses.
Thus, we
disallow the deduction of these amounts.
14.
Periodicals
On petitioner’s Schedule C, he claimed a deduction for
$1,055 in periodical expenses.
in his posttrial submission.
This entire amount is documented
The documentation, however, shows
that $838 of this total was spent on subscriptions to major
- 26 newspapers.
The cost of a “daily newspaper of general
circulation is inherently a nondeductible personal expenditure”,
Wheeler v. Commissioner, T.C. Memo. 1984-425 (quoting Wallendal
v. Commissioner, 31 T.C. 1249, 1252 (1959)), so we disallow these
amounts.
We also disallowed the $120 for subscriptions to PC
World, PC Magazine, and Byte.
Petitioner has not demonstrated to
our satisfaction that his purchase of these magazines had a
business purpose.
Thus, the only deductions that we allow in
this category are the $97 he spent to subscribe to Poetry and
Gramophone.
15.
Copy Services
As indicated in the notice of deficiency, respondent
originally allowed petitioner’s deduction in the amount of $586
for copy services.
While petitioner has submitted documentation
of copy expenses of only $213.95,25 it is quite reasonable for a
document intensive activity such as writing and research to incur
significant copy expenses, and we see no reason to depart from
respondent’s original allowance.
C.
Is Petitioner Subject to Penalties Under Sec. 6662?
“I said ‘Interest and penalties? Isn’t that kind of
Overkill? I mean: Hey--I get it!’”
Kornbluth, supra.
25
The assertion that petitioner submitted this number
warrants clarification; there is an amount of $169.43 entered on
the bottom line of a page in his submission with the words “copy
services” handwritten at the top. When combined with a $44.52
item in the “supplies” category that is listed as “photocopies”
a total of $213.95 results.
- 27 Respondent has asked for the imposition of penalties
pursuant to section 6662.
To the extent that petitioner’s case
fails, it does so largely because petitioner’s records bear
internal inconsistencies which make it difficult to rule in his
favor.
This is primarily a factual determination, and does not
indicate that petitioner has taken an “unreasonable position.”
Furthermore, petitioner did enter significant amounts of
documentation into evidence.
We take this factual documentation
into account in weighing whether a taxpayer should be subject to
section 6662 penalties.
Kluener v. Commissioner, 154 F.3d 630,
637-38 (6th Cir. 1998).
Additionally, section 1.6662-3(b)(2),
Income Tax Regs., specifically provides for an exception from
penalties in case of taxpayer reliance on any one of a number of
IRS-issued materials, including the information materials to
which petitioner frequently cited.
Nevertheless, we uphold part
of
Sec. 6664(c)(1).
the accuracy-related penalty.
The penalty
is properly applied to those portions of the deficiency relating
to the disallowed deductions from category 7 (books, recordings,
video); category 11 (performances, viewing); and category 13
(miscellaneous cash).
Despite petitioner’s good faith efforts in
other areas, it is not credible to assert that he did not realize
the significant elements of personal benefit and documentation
issues inherent in these disallowed amounts.
- 28 Epilogue
Dramatists used to finish with some rhymes,
Mostly iambs with a pinch of dactyly,
But in these more prosaic times
Works usually end more matter-of-factily.
In our Court, though, the oldest ways seem somehow to survive-A decision will be entered
under Rule 155.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.