United States Tax Court

United States Tax Court

T.C. Memo. 2026-13

JAMES D. SULLIVAN AND COLLEEN M. SULLIVAN,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket No. 15625-22.

Filed February 5, 2026.

__________

David A. Goldman, Daniel L. Cummings, and John. W Geismar, for

petitioners.

Michael E. D’Anello, Heather H. Lee, John F. Patton, and April A. Weeks,

for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JONES, Judge: Pursuant to section 6213(a), 1 petitioners, James

and Colleen Sullivan, seek redetermination of deficiencies in federal

income tax determined by the Internal Revenue Service for the 2017

through 2019 taxable years (years at issue). After concessions the issues

that remain in dispute are whether (1) petitioners’ activities associated

with Traders Abacus, LLC (Traders Abacus), including software

development and home construction, for all years at issue were engaged

in for profit under section 183, (2) petitioners’ activities associated with

Leaf-Cutter, an assumed name for a purported mulching business, in

tax year 2019 were engaged in for profit under section 183; and

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

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulatory 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.

Served 02/05/26

2

[*2] (3) petitioners are liable for accuracy-related penalties for 2018 and

2019 under section 6662(a). 2

Trial was held in this case only on the issue of whether the

Sullivans engaged in the disputed activities for profit. Whether the

Sullivans substantiated the expenses claimed from those activities and

are liable for section 6662(a) penalties will be addressed in subsequent

proceedings to the extent necessary. For the reasons set forth below, we

hold that the Sullivans engaged in the Traders Abacus software

development activities for profit, that they engaged in the Traders

Abacus home construction activities, in part, for profit, and that they did

not engage in the Leaf-Cutter mulching business for profit. Accordingly,

the Sullivans are entitled to deduct business expenses incurred in these

activities from 2017 to 2019, to the extent they are later substantiated,

as set forth below.

FINDINGS OF FACT

The trial in this case took place during a Boston, Massachusetts,

trial session. We incorporate by this reference the First Stipulation of

Facts, as amended, the First Supplemental First Stipulation of Facts,

and any Exhibits admitted at trial. The Sullivans resided in Maine when

they timely filed their Petition.

I.

Petitioners’ Background,

Construction Experience

Work

Experience,

and

Home

The Sullivans did not attend college, but they are intellectually

curious people and have extensive, self-taught knowledge and

experience in various fields. Before their marriage, Mr. Sullivan began

his career installing hardware for telecommunications systems.

The Sullivans were married in 1980 and moved to Minnesota in

1981. They have four children. While living in Minnesota, Mr. Sullivan

worked first as a staff engineer and then as director of engineering for

two cable television companies where he first gained experience with

cable-based advertising.

In or around 1985, the Sullivans began building a house that they

intended to be their primary residence while living in Minnesota. Mr.

2 Respondent conceded that petitioners are not liable for an accuracy-related

penalty for taxable year 2017. Still at issue is whether petitioners are liable for

accuracy-related penalties for the 2018 and 2019 taxable years.

3

[*3] Sullivan oversaw subcontractors, and Ms. Sullivan did landscaping

and general design work, and kept the site clean. The Sullivans operated

heavy equipment while working on the Minnesota residence. They sold

their Minnesota residence for a profit when they moved to Montana.

In 1987, the Sullivans moved to Montana as part of Mr. Sullivan’s

plan to launch North Broadcasting, a television station business for

which he had developed a business plan and raised funding while living

in Minnesota. Ultimately, North Broadcasting was never launched

because Mr. Sullivan’s business partner backed out.

Before moving to Montana, the Sullivans purchased 20 acres of

land in Montana on which they intended to build their primary

residence. In the course of building the Montana residence, the

Sullivans again managed subcontractors, performed architectural and

design work, operated heavy equipment, and completed various

construction-related tasks such as landscaping, masonry, carpentry,

and painting. The Sullivans sold their Montana residence at a loss when

they moved to the east coast.

In 1989, the Sullivans moved to Connecticut when Mr. Sullivan

accepted a job with Channelmatic as a traveling salesman of computer

equipment used to run television advertisements. A year later, the

Sullivans moved to Massachusetts when Mr. Sullivan started a different

job as general manager for Media Partners, a cable company in Boston,

Massachusetts. Then in 1993 or 1994, Mr. Sullivan was hired by

Continental Cable to serve as its director of engineering and operations.

His work with Continental Cable included facilitating installation of

infrastructure necessary to provide the first cable modem internet

access in and around Boston. Mr. Sullivan left his role with Continental

Cable in 2003. 3

The Sullivans rented for nearly ten years after moving to the east

coast, but in 1999 they decided to purchase a home in Hingham,

Massachusetts (Hingham residence). The Hingham residence was a

historic home and was in a state of disrepair. The Sullivans completed

significant repairs, renovations, and additions to the home. Mr. Sullivan

once again managed subcontractors, operated heavy machinery, and

performed architectural and design work; and the Sullivans completed

various construction tasks such as painting, installing windows, and

3 By this time Continental Cable had been the subject of a series of mergers

and acquisitions and was a business unit of Comcast.

4

[*4] building stairs. In 2018 they sold the Hingham residence for

$1.35 million, which was $350,000 more than the original purchase

price.

In or around 2005, following a break from regular employment to

pursue Traders Abacus’s first endeavor, Mr. Sullivan accepted a role as

the senior director of product marketing for Open TV, a company that

developed software used in planning and playing television

advertisements. His role with Open TV involved significant travel to

attend trade shows and meet with customers and other industry

participants. In or around 2009, Mr. Sullivan became a senior director

of sales with Open TV.

Imagine Communications (Imagine) acquired Open TV in 2014

and employed Mr. Sullivan through the years at issue. Mr. Sullivan’s

compensation in his sales role with Imagine was partially commission

based, and in some years he outearned the company’s chief executive

officer. In 2014, Mr. Sullivan and Imagine entered into an agreement

that protected Mr. Sullivan’s rights to ownership of intellectual property

relating to his software development ventures.

Mr. Sullivan served as Imagine’s vice president of sales in 2017,

2018, and, following a brief stint as the vice president of strategy in early

2019, during the latter half of 2019. He earned $355,734, $178,332, and

$226,857 in taxable wages from Imagine in 2017, 2018, and 2019,

respectively. Ms. Sullivan did not work outside the home at any time

during the years at issue.

II.

Traders Abacus’s Activities

A.

Software Development

Mr. Sullivan incorporated Traders Abacus as a single-member

limited liability company in or around 1995. In 2003, after a corporate

reorganization led Mr. Sullivan to leave his job with Continental Cable,

he began pursuing various independent projects. Mr. Sullivan was

Traders Abacus’s sole owner during the tax years at issue.

Traders Abacus’s first endeavor in 2003 was to develop software

that uses stock market data to assist traders of equity securities.

Traders Abacus employed software programmers to develop the trading

software and partnered with a Chicago-based equities trading firm that

funded an account to test the software. In 2005, after 18 unprofitable

5

[*5] months, Mr. Sullivan abandoned his pursuits with respect to

trading software.

In 2009, the Sullivans revived Traders Abacus to invest in Ms.

Sullivan’s music career. Ms. Sullivan is a talented musician, and the

Sullivans reported $30,493 of expenses that they claim she incurred

recording an album. Traders Abacus never earned a profit from its

recording activities.

In 2013 or 2014, 4 while working for Imagine, Mr. Sullivan revived

Traders Abacus once again to develop an internet-based application to

address what Mr. Sullivan perceived as the overwhelming use of

internet pornography. His perception was based on his experience

working for Continental Cable, where he learned that approximately

half of internet bandwidth was used for accessing pornography. Mr.

Sullivan also conducted surveys and read published research articles to

learn about the addictive nature of pornography.

Mr. Sullivan spent considerable time and money over the course

of 2015 and 2016 in his attempt to develop and monetize an application

that eventually took the name SelfChanger. 5 Mr. Sullivan researched

therapeutical methods that he could implement in SelfChanger. He also

hired individuals experienced with using TensorFlow, a program that

supports machine learning, that could assist in creating software that

would enable computers to read psychological interviews and generate

responsive therapeutic scripts. Mr. Sullivan halted the development of

SelfChanger in 2016 because he believed that the technology was not

advanced enough to smoothly automate a patient’s interactions with his

addiction therapy application.

Mr. Sullivan was not actively pursuing the development of

SelfChanger in 2017. In 2018, he reengaged his development efforts with

respect to SelfChanger, and he funded the renewed effort from the sale

of the Hingham residence, his wages from Imagine, and his retirement

savings. In his renewed efforts, Mr. Sullivan sought to simplify the

technology supporting the application by drafting content manually

rather than using machine learning.

4 The record reflects that Traders Abacus was dormant from 2009 to late 2013.

5 Mr. Sullivan’s pornography addiction therapy application took many different

names. Its first name was WAY, short for Who Are You. Then it was known as

PornHabit and then SelfChanger. We will refer to the application as SelfChanger.

6

[*6] Mr. Sullivan worked approximately 20 hours per week on his

renewed efforts to develop SelfChanger, including continuing his

research by reading published research on psychiatric treatment

methods and meeting with subject matter experts. Notably, he studied

and sought to implement the “five factors of personality” concept into

the application to accurately assess the personality type of prospective

patients and deliver a more tailored therapy experience.

In March 2019, Traders Abacus hired its first employee, Emily

Sirianni, to assist with the development of SelfChanger. Ms. Sirianni

holds a degree in sociology. Mr. Sullivan believed her to be a talented

artist with a grounded personality; qualities that he valued for a project

addressing a difficult and personal subject. Ms. Sirianni and Mr.

Sullivan continued surveying potential customers to inform their

product design choices, and they each developed written and visual

content for the application. Traders Abacus paid Emily Sirianni $10,354

in wages in 2019.

Also in 2019, Mr. Sullivan generated a business plan for

SelfChanger. The business plan contains his thoughts on the scope of

the addressable market, the psychiatric methods he sought to employ,

and a marketing-to-monetization strategy. Mr. Sullivan purchased

advertising space on popular pornography websites with the goal of

steering traffic to SelfChanger. The business plan also included results

of surveys regarding potential consumers’ pornography consumption

habits. Further, Mr. Sullivan generated financial projections for the

monetization of the SelfChanger application. His activities pertaining to

SelfChanger generated no income from 2013 to 2019.

Throughout the years at issue, Traders Abacus maintained a

general ledger and its own bank account separate from the Sullivans’

personal accounts. The Sullivans regularly made transfers between

their personal bank accounts and the business’s account. Occasionally

they used Mr. Sullivan’s personal credit card for Traders Abacus-related

transactions.

Early prototypes of the SelfChanger application were functional

during the first quarter of 2020. Also around this time, Mr. Sullivan

hired two full-time software engineers to further develop the

application. With the help of the software engineers, Mr. Sullivan

revamped what he called an ungraceful “scratch version” of the

application into a smoother, more user-friendly iteration of the

application using Amazon Web Services.

7

[*7] Mr. Sullivan initially sought to monetize SelfChanger through

the solicitation of donations from the application’s users. When this

proved unsuccessful, Mr. Sullivan pivoted to a subscription-based

model. Mr. Sullivan offered subscriptions to SelfChanger for $9.99 per

month, which would result in $5.95 of profit to Traders Abacus.

Mr. Sullivan once again halted development of SelfChanger in

early 2022. He ceased operations because of an inability to retain

customers. As of the time of trial, Mr. Sullivan had reduced

SelfChanger’s operating expenses to $35 per month to keep it active in

case he developed a new monetization strategy.

B.

Development of the Lincolnville Lot

In or around 2017, the Sullivans began searching for property

along the eastern seaboard on which they could develop a small group

of “passive homes”—homes that require minimal energy to operate and

do not need to be connected to the electricity grid. The Sullivans were

drawn to an approximately 51.6-acre lot in Lincolnville, Maine

(Lincolnville lot), because of its size, price, access to Boston, and frontage

on Route 1.

Pursuant to a pre-existing division, the Lincolnville lot comprised

two parcels: a 47.71-acre parcel and a 3.89-acre parcel. On October 13,

2017, the Sullivans personally, and through Traders Abacus, agreed to

purchase the Lincolnville lot for a total purchase price of $300,000,

subject to certain contingencies.

On December 27, 2017, the seller of the Lincolnville lot executed

two warranty deeds, one with the Sullivans with respect to the 47.71acre parcel, and one with Traders Abacus with respect to the 3.89-acre

parcel. The Sullivans closed on the sale of the Lincolnville lot on

February 8, 2018. The Sullivans and Traders Abacus each paid $150,000

for their respective parcels of the Lincolnville lot. On or around February

8, 2018, the Sullivans and Traders Abacus took out a mortgage for the

purchase of the Lincolnville lot using the lot as collateral.

In December 2017, the Sullivans purchased a Bobcat excavator

and a track loader to use on the Lincolnville lot. As part of the purchase

process, the Sullivans received online and in-person safety and

maintenance training specific to the machines they were purchasing.

The Sullivans took delivery of the excavator and the track loader at the

dealership in December 2017 and moved the equipment from the

dealership to the Lincolnville lot in February 2018. Also in late 2017,

8

[*8] the Sullivans purchased numerous shipping containers for use in

the development. When not in use, the Sullivans stored the heavy

equipment and the containers on the 47.71-acre parcel of the

Lincolnville lot to conceal them from the main road. Before moving to

the Lincolnville lot, the Sullivans used the shipping containers to store

personal items.

Before closing, the Sullivans performed certain acts of due

diligence on the Lincolnville lot. First, they engaged an engineering

firm, Gartley and Dorsky, to investigate the status of wetlands present

on the property and to identify appropriate locations for septic tanks in

order to assess its development potential. Second, the Sullivans

pursued, and received on December 17, 2017, a highway entrance permit

waiver from the State of Maine Department of Transportation.

Additionally, they extensively researched the applicable rules and

regulations, and maintained good relationships with Lincolnville town

officials, to ensure that their plans for development were in compliance

with local bylaws.

Throughout the years at issue, the Sullivans devoted most of Mr.

Sullivan’s salary to the development of the Lincolnville lot. The

Sullivans also drew upon their retirement savings and forwent spending

money on recreational pursuits or saving for retirement to further fund

the project.

The Sullivans worked weekends on the Lincolnville lot before

moving to it full time in August 2018. The Sullivans lived a spartan

existence on the Lincolnville lot; they slept in a pop-up tent with an

electric blanket and used the bathroom and shower facilities at a nearby

YMCA. In spring 2019, the Sullivans set up a more robust tent that

featured basic amenities. The Sullivans lived in this tent year round

from June 2019 until January 2025.

The Sullivans also hired laborers in connection with their home

construction activities. In or around 2018, they hired Wyatt Porter to

work on Ms. Sullivan’s grounds crew. Vincent Kwialkowski was also a

member of their grounds crew, and the Sullivans reported that they paid

him $280 in wages by check in 2019. Randall Rowling was a field crew

laborer, and the Sullivans reported that they paid him $4,864 in wages

by check in 2019. Each employee submitted his timesheet through

Gusto, a payroll processing software used by the Sullivans.

9

[*9]

1.

The 3.89-Acre Parcel

On April 9, 2018, Mr. Sullivan submitted a land use application

to the Town of Lincolnville with respect to the 3.89-acre parcel owned by

Traders Abacus. On the application, he described the proposed project

as consisting of a residence, a barn, and six temporary storage units. On

the application he indicated that the proposed project was not a

commercial building. A related wastewater disposal system application,

dated April 2, 2018, indicates that the Sullivans sought a system to

serve a four-bedroom, single-family dwelling.

Mr. Sullivan viewed the proposed residence and barn project as a

temporary reprieve from the less-than-ideal conditions of living in their

camp. However, rising building material prices put the project

financially out of reach for the Sullivans, and they ultimately never built

the proposed residence or barn. They continued residing on the 3.89-acre

parcel until they moved in January 2025.

2.

The 47.71-Acre Parcel

From 2017 to 2019, Ms. Sullivan led the Sullivans’ efforts to

develop the 47.71-acre parcel. Ms. Sullivan operated the Bobcat

equipment to clear the land and mulch trees, build access roads, dig

trenches, install a septic system, and clear debris. She worked outside

with the Bobcat equipment nearly every day, including birthdays,

anniversaries, and holidays, sometimes working over ten hours in a day.

Further, she joined the Maine Forestry Owners’ Association, which

provided helpful information specific to forestry work under local

conditions.

In spring 2018, the Sullivans identified a location for Traders

Abacus’s office on the 47.71-acre parcel. However, they did not begin

construction of the office until 2019. Mr. Sullivan designed the office to

be built by bolting together two modified shipping containers and

obtained the necessary building permits. He ultimately moved Traders

Abacus into the office in early 2020.

Ultimately, the passive homes never materialized. The Sullivans’

development efforts with respect to the 47.71-acre parcel culminated in

the construction of access roads on the property. In January 2025, the

Sullivans sold the 47.71-acre parcel of the Lincolnville lot for $565,000.

10

[*10] C.

Leaf-Cutter

Starting in or around 2019, Ms. Sullivan decided to use the

Bobcat excavator that they purchased to develop the Lincolnville lot to

operate a landscaping and mulching business under the name LeafCutter. Leaf-Cutter was not a separate entity; it was only a name under

which Ms. Sullivan operated the mulching business. Ms. Sullivan did

not keep track of the time she spent on Leaf-Cutter activities during

2019.

Mr. Sullivan handled Leaf-Cutter’s finances, which included

maintaining a general ledger. Leaf-Cutter used Traders Abacus’s tax

identification number and bank accounts, but activities attributable to

Leaf-Cutter consisted exclusively of forestry management and

development, including Ms. Sullivan’s purported mulching business.

After a couple of safety-related incidents, the Sullivans resolved that the

mulching attachment on the excavator was not safe, and they

abandoned the mulching business venture.

D.

Traders Abacus Tax Reporting

For each tax year at issue, the Sullivans filed Schedule C, Profit

or Loss From Business, for Traders Abacus. The Sullivans identified

design and management as Traders Abacus’s principal business or

profession for each year at issue. They reported that Traders Abacus

incurred the following expenses:

11

[*11]

Category

Advertising

Car and truck expenses

Contract labor 6

Depreciation and section

179 expense deduction

Insurance

Other interest

Legal and professional

services

Office expenses

Rent or lease

Repairs and maintenance

Supplies

Taxes and licenses

Travel

Deductible meals

Utilities

Wages

Other expenses

Total

2017

$3,512

7,091

—

2018

$2,077

—

25,878

2019

$5,033

—

158

268,879

110,253

50,039

—

10,737

4,965

4,160

—

3,529

6,021

1,150

5,486

1,060

28

1,047

22,949

—

2,250

—

—

—

—

—

$174,757

—

—

2,346

954

1,913

—

59

1,786

16,293

7,388 8

$94,984

—

—

—

—

4,865

2,816

970

371

448 7

$306,770

The Sullivans filed a separate Schedule C for Leaf-Cutter with

their 2019 Form 1040, U.S. Individual Tax Return. On that Schedule C

the Sullivans reported that the business incurred $87,550 of expenses

for 2019, consisting of $26,358 in contract labor, $2,623 in insurance,

$4,776 in other interest, $902 for repairs and maintenance, $39,970 in

supplies, $8,932 in utilities, and $3,989 in other expenses. 9

6 The parties do not dispute that Traders Abacus paid $25,878 and $158 in

contract labor expenses during 2018 and 2019, respectively.

7 The Sullivans reported that Traders Abacus incurred $448 of other expenses

for “fedex” for 2017.

8 The Sullivans reported that Traders Abacus incurred $1,012 and $6,376 of

other expenses for “due/subscription/fees” [sic] and “Web Software & Apps Expense,”

respectively, for 2019.

9 The Sullivans reported that Leaf-Cutter incurred $185 and $3,804 of other

expenses for “Bank Charges & Fees (LD)” and “De Minimis 1.263(a)-1(f) Tools &

Equipment under $2,500 (LD),” respectively, in 2019.

12

OPINION

[*12]

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). The taxpayer also bears

the burden of proving entitlement to any deduction claimed. INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Thus, a taxpayer claiming

a deduction on a federal income tax return must demonstrate that the

deduction is provided for by statute and must maintain records

sufficient to enable the Commissioner to determine the correct tax

liability. See § 6001; Interex, Inc. v. Commissioner, 321 F.3d 55, 58 (1st

Cir. 2003), aff’g T.C. Memo. 2002-57; Hradesky v. Commissioner, 65 T.C.

87, 89–90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Treas.

Reg. § 1.6001-1(a).

II.

Evaluation of Evidence

In deciding whether taxpayers have carried their 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 the Sullivans’ testimony to be credible. On

the basis of our evaluation of their demeanor at trial, we found much of

their testimony plausible. We found Mr. Sullivan to be an intellectually

curious man with diverse talents and interests. He and Ms. Sullivan

each have a strong work ethic; they presented a wholesome profile.

III.

Profit Motive in Petitioners’ Activities

A.

Analytical Framework

Generally, the Code allows deductions for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on a trade

or business or for the production of income. §§ 162(a), 212(1). Section

183(a) provides generally that, if an activity is not engaged in for profit,

“no deduction attributable to such activity shall be allowed,” except as

13

[*13] provided in section 183(b). Filios v. Commissioner, 224 F.3d 16, 21

(1st Cir. 2000), aff’g T.C. Memo. 1999-92. 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.”

“The determination whether an activity is engaged in for profit is

to be made by reference to objective standards, taking into account all of

the facts and circumstances of each case.” Estate of Power v.

Commissioner, 736 F.2d 826, 830 (1st Cir. 1984) (quoting Treas. Reg.

§ 1.183-2(a)). The factors listed in Treasury Regulation § 1.183-2(b) are

relevant to an analysis of whether a taxpayer engages in activity with

the objective of realizing a profit. Filios v. Commissioner, 224 F.3d at 21.

The 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 losses 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. § 1.1832(b).

These factors are nonexclusive, and no one factor—or number of

factors—is dispositive. Filios v. Commissioner, 224 F.3d at 21. Instead,

all facts and circumstances must be considered, and more weight may

be given to some factors than to others. Id. We accord greater weight to

objective facts than to subjective statements of intent. Treas. Reg.

§ 1.183-2(a). The taxpayer bears the burden of proving that the activity

was engaged in for profit. Estate of Power v. Commissioner, 736 F.2d

at 828 (citing Golanty v. Commissioner, 72 T.C. 411, 426 (1979), aff’d,

647 F.2d 170 (9th Cir. 1981) (unpublished table decision)).

“Evidence from years outside the years in issue can be relevant

if it provides context to evaluate the taxpayer’s overall requisite profit

motive.” Den Besten v. Commissioner, T.C. Memo. 2019-154, at *18; see

also § 6214(b). Nonetheless, “we look at the profit picture in respect of

the years at issue in terms of prior actual and anticipated future

operations as they appeared at those times; actual profits or losses in

those and subsequent years have probative, although not determinative,

significance in such evaluation.” Smith v. Commissioner, T.C. Memo.

1993-140, 1993 WL 99970, at *9.

14

[*14] B.

Ascertaining the Activities at Issue

Multiple undertakings of a taxpayer may be treated separately

when the undertakings are not sufficiently interconnected. Treas. Reg.

§ 1.183-1(d)(1). “The most important factors in making that

determination are the degrees of organizational and economic

interrelationships of the undertakings, the business purpose served by

carrying on the undertakings separately or together, and the similarity

of the undertakings.” Judah v. Commissioner, T.C. Memo. 2015-243,

at *21. “[T]he Commissioner generally accepts the taxpayer’s

characterization of two or more undertakings as one activity unless the

characterization is artificial or unreasonable.” Id. at *21–22.

The Sullivans engaged in software development, home

construction, and mulching activities under the Traders Abacus entity,

but the activities were predominantly separate and featured only

minimal interconnectivity. The activities did not provide inherent

benefits to each other beyond the ease and convenience of the occasional

commingling of funds and the shared use of the Bobcat equipment.

Under these circumstances, and because neither the Sullivans nor

respondent urge us to consider them together, we will examine the

factors as they relate to the Sullivans’ software development, home

construction activities, and mulching business independently.

C.

Application of the Caselaw and Regulatory Factors

This is a close case. Given the caselaw and the nine factors set

forth in the regulations, see supra Opinion Part III.A, and on the basis

of all the facts and circumstances, we conclude that Mr. Sullivan

engaged in software development activities with a profit motive for each

taxable year. With respect to the Sullivans’ home construction activities

for each year at issue, we find that the Sullivans held a profit motive

with respect to the 47.71-acre property, but not the 3.89-acre parcel.

With respect to Leaf-Cutter, Ms. Sullivan’s mulching business, we

readily find that the Sullivans have failed to carry their burden of

establishing that the activity was engaged in for profit. The Sullivans

testified that the business was both established and terminated because

of safety concerns in 2019. Ms. Sullivan testified that the biggest

difference between Leaf-Cutter and their own development of the

Lincolnville lot was that Ms. Sullivan would be completing work for

clients for pay, and that she performed tree removal for others.

15

[*15] Ms. Sullivan’s assertion that she was hired by others is

unsupported by the documentary evidence in this case. It is further

belied by the facts that the Sullivans reported no income, but significant

expenses, from the Leaf-Cutter venture in 2019 and that she did not

record the time she spent in furtherance of the business. She testified

that she spent approximately 50 hours per week on Leaf-Cutter

activities in 2019, but we do not find this part of her testimony credible,

considering the amount of time she and Mr. Sullivan were dedicating to

development of the Lincolnville lot during the same timeframe.

Under these circumstances we find that Ms. Sullivan did not

engage in a mulching business for profit in 2019, and respondent’s

disallowance of deductions reported on the corresponding 2019

Schedule C is sustained. We now turn to explaining our conclusions with

respect to SelfChanger and the development of the Lincolnville lot in

greater detail, examining the nine factors in the regulations and the

relevant precedent.

1.

The Manner in Which the Taxpayer Carries On the

Activity

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, T.C.

Memo. 2019-154, at *20 (“Having a business plan may suggest that a

taxpayer conducted the activity in a businesslike manner.”).

One of the most important indications of whether an activity is

being carried on in a businesslike manner is whether the taxpayer

implements methods for controlling losses, including efforts to reduce

expenses and generate income. Carmody v. Commissioner, T.C. Memo.

2016-225, at *21–22 (citing Dodge v. Commissioner, T.C. Memo. 199889, 1998 WL 88175, at *5, aff’d, 188 F.3d 507 (6th Cir. 1999)

(unpublished table decision)). Working in a businesslike manner

includes 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,” questions

we consider in analyzing this factor’s application to the instant case.

Treas. Reg. § 1.183-2(b)(1).

16

[*16]

a.

Software Development Activities

Our review of the record makes clear that Mr. Sullivan engaged

in his software development activities in a businesslike manner. Mr.

Sullivan created a business plan, conducted surveys to identify the

consumer base, hired employees to assist him in developing the app, and

ran advertisements, all of which are reasonable actions businesses take

to generate income. Although there were instances of commingling of

business and personal funds, the Sullivans testified that they held

separate bank accounts and maintained ledgers for Traders Abacus’s

activities.

Mr. Sullivan testified that he ceased development of SelfChanger

at various times from 2005 through 2019, and during the years at issue

he decided to simplify the application to make it more marketable.

Further, following the years at issue Mr. Sullivan once again halted

activities relating to development of SelfChanger because he felt that

the application’s inability to retain customers would prevent it from

becoming a commercial success. Mr. Sullivan testified further that

because he was not actively pursuing its development, he had reduced

its operating expenses to approximately $35 per month in case he ever

felt the venture might become profitable.

Mr. Sullivan’s reasonable business decisions to adopt new ideas

for SelfChanger and to entirely shelve its development at times he felt

it had no profitable outlook are consistent with having a profit motive.

See Carmody, T.C. Memo. 2016-225, at *21 (“Perhaps the most

important indication of whether an activity is being carried on in a

businesslike manner is whether the taxpayer implements methods for

controlling losses, including efforts to reduce expenses and generate

income.”); Treas. Reg. § 1.183-2(b)(1). Despite much of the Sullivans’

evidence on this factor occurring outside the years at issue, the evidence,

in conjunction with their activities during the years at issue, indicates

that Mr. Sullivan ran SelfChanger in a businesslike manner. Thus, this

factor favors the Sullivans with respect to their software development

activities.

b.

Home Construction Activities

The Sullivans funded their home construction activities from Mr.

Sullivan’s wages and their retirement savings. As with Mr. Sullivan’s

software development, the Sullivans hired employees to work as

laborers for their home construction projects and used software to

17

[*17] organize and track payroll expenses. Although they did not

produce a formal, written business plan, Mr. Sullivan testified about

how various aspects of the Lincolnville lot aligned with their plan to

develop a minor subdivision of passive homes. The absence of a formal,

written business plan is not determinative, especially when the

taxpayer had some form of business plan and pursued it consistently.

See Annuzzi v. Commissioner, T.C. Memo. 2014-233, at *16.

On the other hand, the Sullivans generally treated the 3.89-acre

parcel as their primary residence upon moving to the Lincolnville lot.

Mr. Sullivan testified that they viewed the entire Lincolnville lot as a

nice place to live for most, if not the rest, of their lives, and Mr. Sullivan

had promised Ms. Sullivan a house on the property within five years.

The Sullivans provided a driveway permit waiver, a land use

application, and a wastewater disposal system application as evidence

of their profit motive regarding the development of the Lincolnville lot.

These applications, however, relate to the 3.89-acre parcel specifically,

the portion of the property the Sullivans treated as their primary

residence. Further, the land use application describes the project as a

residence, and the wastewater disposal system application indicates

that it is intended to serve a single-family dwelling unit with four

bedrooms, not apartments or the passive homes that the Sullivans

purportedly sought to build.

This factor—the manner in which the taxpayer carried on the

activity—favors the Sullivans with respect to their home construction

activities on the 47.71-acre parcel, but not the 3.89-acre parcel.

2.

The Expertise of the Taxpayer and His or Her

Advisors

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.

a.

Software Development Activities

Mr. Sullivan has extensive experience in the fields of sales, digital

advertising, and communications. Though he is neither a psychologist

nor a psychiatrist, Mr. Sullivan testified that he spent significant time

18

[*18] reading research papers and speaking with industry experts about

topics relating to human psychology and addiction. Beyond identifying

the database he used to research the academic literature, he did not

specify which resources or experts he consulted. See Stettner v.

Commissioner, T.C. Memo. 2017-113, at *11 (finding this factor neutral

where taxpayer failed to specify which online resources he researched,

but the Commissioner otherwise did not convince the Court that

taxpayer lacked requisite expertise to conduct activity profitably).

Additionally, Mr. Sullivan hired employees to help develop the

SelfChanger application at various points. See Wondries v.

Commissioner, T.C. Memo. 2023-5, at *8–10 (finding that hiring an

expert and deferring to their knowledge is indicative of profit motive).

He first hired individuals with knowledge of machine learning before

ceasing the application’s development in 2016. In March 2019, after

reviving his efforts with respect to SelfChanger with a simpler business

plan, he again hired an employee, Ms. Sirianni, who worked on site and

provided assistance drafting conversation scripts and conducting

surveys. Ms. Sirianni holds a degree in sociology, and Mr. Sullivan

believed her personality was fit to work on sensitive issues such as

pornography addiction. Further, following the years at issue, Mr.

Sullivan hired two software programmers to work on SelfChanger full

time in 2020.

Mr. Sullivan’s successful business career in the broadcast

technology industry, his time and effort spent self-studying human

psychology, and the fact that he hired skilled employees to assist in

technical aspects of SelfChanger’s business all indicate that he acted

with sufficient experience with respect to the software development

activities. This factor favors the Sullivans with respect to those

activities.

b.

Residential Construction Activities

The Sullivans, despite having no formal training or education on

the subject, have extensive experience with home construction. Since

they were married, each time they moved the Sullivans either

significantly remodeled their home or constructed a new one. Two of

their three homes—the one in Minnesota and the Hingham residence—

sold for a profit following the Sullivans’ construction projects. Further,

the Sullivans hired subcontractors to complete portions of each project

that they felt they lacked the skills to complete.

19

[*19] Ms. Sullivan testified that she relied on advice about developing

real estate in Maine from members of the Maine Forestry Owners’

Association. Like Mr. Sullivan with respect to his consultation of

industry experts, Ms. Sullivan did not specify whom she spoke to or what

specific advice she received from her acquaintances at the Maine

Forestry Owners’ Association. See Stettner, T.C. Memo. 2017-113,

at *11.

Respondent argues that the nature and scale of the Sullivans’

plan to build passive homes on the 47.71-acre parcel of the Lincolnville

lot was not consistent with their prior projects and that the Hingham

residence was remodeled over the course of 20 years, which is a timeline

not consistent with a profit motive. Under the circumstances, we find

that the Sullivans’ prior experience and success remodeling and

constructing homes indicate that they had sufficient experience to

possess a profit motive with regard to the Lincolnville lot. This factor

favors the Sullivans with respect to their home construction activities.

3.

The Time and Effort That the Taxpayer Spent

Carrying On the Activity

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.

a.

Software Development Activities

Mr. Sullivan spent considerable time developing SelfChanger. In

2018 and 2019 he spent approximately 20 to 30 hours per week on the

venture in addition to his full-time job with Imagine. Mr. Sullivan

testified that in 2018 he transitioned to a less demanding role with

Imagine in order to spend more time with his family and develop his

projects. In 2019, Mr. Sullivan transitioned back into a demanding sales

role with Imagine, but he testified that during that time he continued

devoting approximately 30 hours per week to SelfChanger. Further, Mr.

Sullivan’s decision to hire Ms. Sirianni to assist with the development

20

[*20] indicates that he was dedicating requisite time and effort to

achieving profitability. This factor favors the Sullivans with respect to

their software development activities.

b.

Residential Construction Activities

Ms. Sullivan dedicated nearly all of her free time to their plans

for developing the Lincolnville lot. The Sullivans sold the Hingham

residence and moved to live in a tent on the Lincolnville lot so that they

could allocate more time to its development. Ms. Sullivan testified she

worked through holidays, birthdays, and anniversaries in furtherance

of developing the Lincolnville lot. This factor heavily favors the

Sullivans with respect to their home construction activities.

4.

The Expectation That Assets Used in the Activity

May Appreciate in Value

Even if 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).

A profit motive may be inferred if the appreciation of assets plus future

income are expected to be sufficient to recoup accumulated losses of prior

years. Himmel v. Commissioner, T.C. Memo. 2025-35, at *19 (citing

Carmody, T.C. Memo. 2016-225, at *28).

a.

Software Development Activities

Mr. Sullivan expected the SelfChanger application to appreciate

in value. He conducted research on the addressable market, attempted

to attract and retain customers through advertisements, and adopted

new approaches to development of the application that he thought would

make it more marketable. Mr. Sullivan sustained years of losses

throughout the venture’s startup phase. See WP Realty, LP v.

Commissioner, T.C. Memo. 2019-120, at *42 (“A taxpayer’s willingness

to sustain continued operating losses because of his or her subjective

expectation that the assets used in the activity will increase in value is

indicative of a profit motive.” (citing Engdahl v. Commissioner, 72 T.C.

659, 669 (1979))).

Respondent argues that Mr. Sullivan never obtained an appraisal

of the app, which indicates a lack of an expectation of an increase in

value. However, on the basis of his research of the market, his

experience with digital marketing, and his extensive career in sales, we

conclude that Mr. Sullivan had a reasonable expectation that an

21

[*21] application he was developing could appreciate in value.

Moreover, that Mr. Sullivan took steps to protect the intellectual

property associated with his software development activities, see supra

Findings of Fact Part II.A, further suggests he expected the assets of the

business to appreciate in value.

b.

Residential Construction Activities

The Lincolnville lot was acquired with the expectation that it

would appreciate in value. “[E]ven if no profit from current operations

is derived, an overall profit will result when appreciation in the value of

land used in the activity is realized since income from the activity

together with the appreciation of land will exceed expenses of

operation.” Treas. Reg. § 1.183-2(b)(4); see also Walters v. Commissioner,

T.C. Memo. 2022-17, at *13. Here, the Sullivans planned to develop a

small subdivision of homes on the Lincolnville lot, an activity in which

taxpayers cannot expect current income.

Further, Mr. Sullivan testified about finding the Lincolnville lot’s

price favorable when considering its access to Boston and that the area

was growing. The Sullivans ultimately sold the 47.71-acre parcel in

January 2025 for significantly more than their purchase price. This

factor heavily favors the Sullivans with respect to their home

construction activities.

5.

Success in Carrying On Other 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 . . . .”

Treas. Reg. § 1.183-2(b)(5).

a.

Software Development Activities

Mr. Sullivan’s lack of success with respect to software

development stretches as far back as his trading software business,

which he shelved in 2005, and continued with SelfChanger, which he

started in 2014. Despite halting and restarting development of multiple

software development projects, Mr. Sullivan was never able to earn a

profit. This factor favors respondent with respect to the Sullivans’

software development activities.

22

b.

[*22]

Residential Construction Activities

The Sullivans displayed extensive past success in home

construction. They sold for a profit two out of three of their prior homes,

which they either built or significantly remodeled. The Sullivans did

much of the work themselves with respect to their prior homes, and

hired contractors for tasks they did not have the skills or equipment to

complete themselves, which was also true with respect to their plans for

the Lincolnville lot. This factor favors the Sullivans with respect to their

home construction activities.

6.

History of Income or Losses with Respect to the

Activity

A series of losses during the startup stage of an activity may not

necessarily prove that an activity is not engaged in for profit. Treas. Reg.

§ 1.183-2(b)(6). However, if losses continue to be sustained beyond the

period which customarily would be necessary to bring the operation to

profitable status, such continued losses, if not explainable as due to

customary business risks or reverses, may indicate that the activity is

not engaged in for profit. Id. Nonetheless, where losses are due 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. Further, “[i]f

an activity’s cumulative losses are of such magnitude that an overall

profit on the entire operation, including recoupment of past losses, could

not possibly be achieved, the activity’s history of losses is compelling

evidence of a lack of intention to make a profit.” Carmody, T.C. Memo.

2016-225, at *25 (first citing Bessenyey v. Commissioner, 45 T.C. 261,

274 (1965), aff’d, 379 F.2d 252 (2d Cir. 1967); and then citing Foster v.

Commissioner, T.C. Memo. 2012-207, 2012 WL 3000350, at *8).

a.

Software Development Activities

The Sullivans argue that the losses they sustained during the

years at issue from SelfChanger were within the project’s startup period.

There was no evidence presented as to the customary startup period for

software development, but the disputed losses were incurred only five

years after Mr. Sullivan began pursuing the development of

SelfChanger. Further, there were times at which Mr. Sullivan was not

pursuing development of SelfChanger; and when he reengaged his

efforts, he employed new business strategies that extended the time

23

[*23] required to develop the application. We view five years as a

reasonable startup period for a software business of Traders Abacus’s

scale, given Mr. Sullivan’s varied level of engagement with SelfChanger

throughout the period. Considering that the purported startup period

featured times at which Mr. Sullivan was not diligently pursuing

development of SelfChanger, we do not view five years as an

unreasonably long startup period for a software business operating at

Traders Abacus’s scale. Thus, we find that the losses sustained during

the years at issue were within Traders Abacus’s startup period. This

factor favors the Sullivans with respect to their software development

activities.

b.

Residential Construction Activities

The Sullivans’ history of building or remodeling homes and

selling them for a profit indicates that they likely had a profit motive

when they decided to pursue the project on the Lincolnville lot. We have

found that a construction business of 17 years is not within its startup

period, Verrett v. Commissioner, T.C. Memo. 2012-223, at *10, but that

five years was within the startup period for a land-clearing business, see

Leonard v. Commissioner, T.C. Memo. 1993-472, 1993 WL 406424, at *6.

The Sullivans’ plans with respect to the Lincolnville lot required

clearing lots to prepare for eventual construction. The losses in the years

at issue with respect to the development of the Lincolnville lot were

incurred within three years of their acquiring the land. We thus view

the losses as being incurred within the project’s startup period. Our

analysis on this factor is further supported by the fact that the Sullivans

sold a portion of the Lincolnville lot for profit after the years at issue.

This factor favors the Sullivans with respect to their home construction

activities.

7.

Amount of Profits, if Any, Which Are Earned

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.

a.

Software Development Activities

The Sullivans argue that SelfChanger was a prototypical highly

speculative venture that carried the possibility of significant profit if it

24

[*24] ultimately succeeded. Respondent argues that Mr. Sullivan’s

history of sustained losses in software development and lack of any

profit whatsoever demonstrates that the venture was not being entered

into for profit during the years at issue. Under these circumstances, we

find that this factor weighs in respondent’s favor.

b.

Residential Construction Activities

The record establishes that the Sullivans derived profit from the

sale of homes that they constructed or significantly remodeled. Mr.

Sullivan testified that in addition to using them as their primary

residences, they also sought to profit from their construction work on

their prior homes. This includes the sale of their Minnesota residence

upon moving to Montana in 1987, and the Hingham residence, which

they renovated and ultimately sold for a profit in 2018. This factor favors

the Sullivans with regard to their home construction activities.

8.

Financial Status of Petitioners

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.

Mr. Sullivan earned significant wages working at the executive

level for Imagine Communications during the years at issue. He earned

$355,734 in 2017, $178,332 in 2018, and $226,857 in 2019. The losses

generated by the Sullivans’ Schedule C activities thus provided tax

benefits in the form of deductions to offset Mr. Sullivan’s wage income.

On the other hand, the Sullivans used the proceeds from the sale

of the Hingham residence, and took early distributions from their

retirement accounts, to pursue their software and home construction

activities. Further, Mr. Sullivan’s significant income did not translate to

a lavish lifestyle. Quite the opposite. For much of the time at issue, they

lived in a tent that they moved around depending on where on the

Lincolnville lot they were working, and forwent leisure and recreational

pursuits in order to continue their work. We find this factor to favor the

Sullivans with regard to their software and home construction activities.

25

[*25]

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).

“The fact that the taxpayer derives personal pleasure from

engaging in the activity is not sufficient to cause the activity to be

classified as not engaged in for profit if the activity is in fact engaged in

for profit as evidenced by other factors.” Young v. Commissioner, T.C.

Memo. 2025-95, at *39. 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, 1998 WL 88175, at *7 (quoting

Burger v. Commissioner, T.C. Memo. 1985-523, aff’d, 809 F.2d 355 (7th

Cir. 1987)).

a.

Software Development Activities

There is little evidence in the record pertaining to Mr. Sullivan’s

personal enjoyment of software development. His general sense of

curiosity and ingenuity paired with his background in digital

communications indicates that regardless of any enjoyment derived, he

possessed the ability to monetize his skills and knowledge in these

related fields. This factor favors the Sullivans with respect to the

software development venture.

b.

Home Construction Activities

The Sullivans testified extensively about enjoying the challenges

that come with developing land and building things and about how they

sought to have a place to live and a project to which they could dedicate

the rest of their lives. However, these ventures were physically taxing.

In addition to living in less-than-ideal conditions to save time and

resources, the Sullivans testified to the extensive labor required to clear

trees, install a road, and otherwise prepare to build structures from raw

land. In the end, the Sullivans derived minimal personal enjoyment or

benefit with respect to their efforts to develop the 47.71-acre parcel.

With respect to the 3.89-acre parcel, however, the Sullivans

derived extensive personal benefit; namely by treating the parcel as

26

[*26] their primary residence for much of the years at issue. Further,

documentary evidence in the record and their testimony indicate that

their plans with respect to the 3.89-acre parcel included a residence and

a barn structure to be used for storage, rather than a series of passive

homes like those they sought to build on the 47.71-acre parcel. We find

this factor favors the Sullivans with respect to the development of the

47.71-acre parcel.

IV.

Conclusion

In sum, on the basis of the foregoing analysis, we find that the

Sullivans engaged in the software development activities for profit, and

that they held a profit motive with respect to a portion of their home

construction activities. Specifically, we find that the Sullivans held a

profit motive with respect to the 47.71-acre parcel of the Lincolnville lot,

but that aspects of personal use and the lack of a plan to commercialize

the 3.89-acre parcel suggest they did not hold a profit motive with

respect to it.

Because of the commingling of, and inability to clearly allocate

amongst, the parcels, and the time, effort, and resources spent

developing each, we find that allocating the Sullivans’ Schedule C home

construction expenses in proportion to the total land area of each parcel

would be improper and arbitrary. In other words, we do not believe the

Sullivans incurred expenses in proportion to the total land area of each

parcel of the Lincolnville lot. To arrive at an allocation we believe

properly reflects the extent of expenses the Sullivans incurred in

developing the 47.71-acre parcel, we start with a division proportional

to the relative land area of the parcels and make a special allocation that

takes into consideration the fact that the Sullivans used the same

construction equipment and human capital to develop both parcels and

did not keep separate books and records that would enable them to

clearly identify to which parcel certain expenses were related. The

Sullivans’ lack of recordkeeping and any resulting inexactitude weigh

heavily against them in our making the special allocation. See Cohan v.

Commissioner, 39 F.2d 540, 544 (2d Cir. 1930).

On one hand, it appears that most of the time, effort, and

resources the Sullivans expended were in furtherance of developing the

3.89-acre parcel for which there was no profit motive. The Sullivans

viewed the Lincolnville lot as the place where they would retire and live

most of the rest of their lives. Much of the documentary evidence in the

record showcases their efforts to build a residence and barn on the

27

[*27] 3.89-acre parcel. Moreover, when staying at the Lincolnville lot

and after moving there permanently, the Sullivans resided on the 3.89acre parcel.

On the other hand, the fruits of their development efforts

culminated primarily on the 47.71-acre parcel. On it, they placed the

Traders Abacus office and built access roads, and they eventually sold it

for a significant profit after the years at issue. Further, the Sullivans

testified credibly about their lifelong goal to build a development of

homes, which indicates that such a development was a compelling

motivation for their decision to move to and develop the Lincolnville lot.

The 3.89-acre portion makes up approximately 7.5% of the total

land area of the Lincolnville lot. With that starting point in mind, and

considering the Sullivans’ extensive personal use of the 3.89-acre parcel

and their lack of recordkeeping, and that their documentary evidence

primarily pertained to residential projects on the 3.89-acre parcel, we

find it appropriate to allocate 25% of their total home construction

expenses to the 3.89-acre parcel. Accordingly, we hold the Sullivans are

entitled to deductions for all expenses incurred to develop SelfChanger,

and 75% of all expenses incurred to develop the Lincolnville lot to the

extent, absent an agreement of the parties, that the Court finds the

expenses are substantiated in further proceedings in this case.

In reaching our conclusions, we have considered all arguments

made by the parties, and to the extent not mentioned or addressed, they

are irrelevant or without merit.

To reflect the foregoing,

An appropriate order will be issued.