# United States Tax Court

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URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A847bcce088ee75dd

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A847bcce088ee75dd. Public record. Not legal advice.