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T.C. Memo. 2023-63

JOSEPH WILLIAM SHERMAN,

Petitioner

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 22276-19.

Filed May 17, 2023.

—————

Joseph William Sherman, pro se.

Kimberly A. Santos and Nora Demirjian, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JONES, Judge: Pursuant to section 6213(a), 1 Joseph William

Sherman, M.D. (Dr. Sherman) seeks redetermination of a deficiency in

federal income tax determined by the Internal Revenue Service (IRS) for

taxable year 2015. After concessions, the issues for decision are

(1) whether Dr. Sherman’s activities associated with Songswell were

entered into for profit, and, if so, whether he is entitled to deduct

purported business expenses associated with those activities;

(2) whether Dr. Sherman is entitled to deduct purported business

expenses associated with his medical practice; (3) whether Dr. Sherman

is liable for an addition to tax under section 6651(a)(1); and (4) whether

Dr. Sherman is liable for an addition to tax under section 6651(a)(2).

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

Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulatory references

are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant

times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

All monetary amounts are rounded to the nearest dollar unless indicated otherwise.

Served 05/17/23

[*2] We hold that Dr. Sherman did not engage in Songswell activities

for profit, and, therefore, he is not entitled to deduct the purported

business expenses associated with Songswell for taxable year 2015. We

also hold that Dr. Sherman failed to substantiate his purported medical

practice business expenses for taxable year 2015, except to the extent

conceded by respondent. Consequently, he is not entitled to deduct those

additional amounts under section 162(a). Finally, we hold that Dr.

Sherman is liable for additions to tax under section 6651(a)(1) and (2).

FINDINGS OF FACT

This case was tried on October 4, 2022, during the Los Angeles,

California, trial session. The parties filed a Stipulation of Settled Issues,

a First Supplemental Stipulation of Facts with Exhibits, and a First

Amended First Stipulation of Facts with accompanying Exhibits. We

incorporate by this reference the stipulations of settled issues and facts,

the stipulated exhibits, and any exhibits admitted at trial, except to the

extent set forth herein.

Dr. Sherman resided in California when he timely petitioned this

Court. Although Dr. Sherman resides in California, he maintains an

apartment in Tacoma, Washington, for tax and medical licensure

purposes.

Background

Dr. Sherman’s Medical Career

Dr. Sherman is a physician who practices emergency medicine.

He graduated from medical school in 1984 and maintains a medical

license in the state of Washington. During taxable year 2015, Dr.

Sherman worked under his Washington medical license at federal

facilities in Arizona. Although he has previously worked in other

medical settings, he worked exclusively in Arizona emergency rooms in

2015.

Dr. Sherman works 12- to 24-hour shifts in the emergency room,

and he sometimes works up to 40 hours at a time. He estimates that he

works approximately 120 hours per month as a physician. 2 However, he

2 Dr. Sherman testified that he worked 120 hours per week as a physician,

working 12- to 24-hour shifts. It is apparent from the record, however, that Dr.

Sherman intended to state that he worked 120 hours per month, not per week.

[*3] does not work every week as a physician. In weeks when he is not

working in emergency rooms, Dr. Sherman claims that he spends his

time on activities associated with Songswell.

Songswell Activities

In addition to medical training, Dr. Sherman’s exposure to and

training in music began at an early age. His father was head of a music

school, and his brother is also engaged in the music industry as a cellist

and guitarist. As a result of these connections, Dr. Sherman took courses

in music during college and learned to play the guitar.

Dr. Sherman used his musical training to help pay expenses

associated with university and medical school in the 1970s and 1980s.

He played music at various events, earning enough cash to pay bills and

other expenses. He never received any documentation of the cash he

earned, and he never made large sums of money playing music.

According to Dr. Sherman, he decided to launch a film company,

Songswell, to “scale” his interest in music and to potentially make a

large profit. Dr. Sherman did not identify when his Songswell activities

began, but he “guesstimated” that he spends 200 to 300 hours per month

on Songswell activities, in addition to his work as a physician. There is

no evidence before the Court regarding whether Songswell is licensed as

a business in any state. Dr. Sherman does not have a business plan for

Songswell, and there is no evidence before the Court that activities

associated with Songswell have resulted in a profit.

The precise nature of the activity conducted through Songswell—

and when that activity was conducted—is not readily apparent from the

record before the Court. Dr. Sherman testified that Songswell is (1) a

film production company that combines music and film; (2) a website

that owns copyrights and other digital assets; and (3) a blog created to

give individuals a community to comment and discuss digital assets.

According to Dr. Sherman, Songswell activities include

“composing, scriptwriting, filming, editing, computer building, [and] IT

maintenance.” On brief, Dr. Sherman repeats these claims and adds

some additional details, claiming that he is “involved in all aspects of

[the] Songswell film production company from filming, acting, music

creation, website creation, blog creation, costume design[,] compositing,

editing, subtitle creation, and script writing.”

[*4] With regard to the film production activities of Songswell, Dr.

Sherman hopes that, by combining music and film, he can one day make

a large profit. He filmed a skit and music video, but there is no evidence

regarding when that filming occurred or whether it was associated with

Songswell activity in 2015. Further, it is not clear what, if any, film

production activities associated with Songswell occurred in 2015.

Dr. Sherman purchased film and camera equipment for

Songswell activities, including some in taxable year 2015. In connection

with these purchases, he consulted several vendors regarding what

equipment to purchase and technology to use. Dr. Sherman purchased

this equipment and technology with money he earned as a doctor, not

from a profit he earned through Songswell.

With respect to the copyright and digital assets activities, Dr.

Sherman claimed that, through Songswell, he is creating methods to sell

music and film. He also stated that he obtains certain digital assets to

“be able to sell them worldwide” and “to create methods to sell music

and film that scale.” However, there is no evidence regarding whether

Songswell owns any digital assets or the value of those digital assets.

Finally, Dr. Sherman maintains a website for Songswell. He owns

an Internet domain named “songswell.com,” as well as a blog named

“blog.songswell.com.” Dr. Sherman created the blog so that “people can

comment and discuss digital assets and have a community.” Dr.

Sherman stated that he coded and created the website for Songswell,

hosting the blog on a server that he also built and maintains. There is

no evidence before the Court regarding how the Songswell website or

blog appeared in 2015, but Dr. Sherman testified that the website

changed between 2015 and the time of trial.

II.

Examination, Substitute for Return, and Notice of Deficiency

The IRS received information returns from Medical Doctor

Associates and AB Staffing Solutions regarding Dr. Sherman’s

nonemployee compensation for taxable year 2015. 3 The parties agree

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

Income, to Dr. Sherman. AB Staffing Solutions issued two 2015 Forms 1099–MISC

reporting, on each, that it paid Dr. Sherman $43,337 of nonemployee compensation.

Respondent conceded that AB Staffing Solutions issued duplicate 2015 Forms

1099–MISC in error. Thus, Dr. Sherman is required to include in his 2015 income only

$43,337 of nonemployee compensation from AB Staffing Solutions.

[*5] that Dr. Sherman’s total nonemployee compensation for taxable

year 2015 is $143,162.

The IRS began an audit in 2019, after Dr. Sherman failed to file

a return for taxable year 2015. Dr. Sherman claims that he transmitted

a return in August 2018, but respondent denies that the IRS received

any such return. Further, Dr. Sherman did not respond to the IRS’s

inquiry regarding his return for 2015. Thus, on August 12, 2019, the IRS

prepared a substitute for return (SFR) for taxable year 2015 based on

the information returns filed by Medical Doctor Associates and AB

Staffing Solutions.

On October 15, 2019, the IRS issued a notice of deficiency based

on the SFR. In the notice of deficiency, the IRS determined a deficiency

in tax for 2015 totaling $59,339, with additions to tax under section

6651(a)(1) and (2) and section 6654. Respondent now concedes that Dr.

Sherman is not liable for the section 6654 addition to tax.

III.

The October 30, 2019, Unfiled Return and Reported Expenses

On October 30, 2019—after the SFR was prepared and the notice

of deficiency was issued—Dr. Sherman transmitted a 2015 Form 1040,

U.S. Individual Income Tax Return, to the IRS. The IRS did not accept

or process the 2015 Form 1040.

The 2015 Form 1040 included the following attachments

(1) Schedule C, Profit or Loss From Business, for reported expenses

related to Songswell and (2) a second Schedule C for Dr. Sherman’s

reported expenses related to his emergency medical practice. Each

schedule is discussed in turn below.

Reported Songswell Expenses

We infer from the record that Songswell did not have any income.

Dr. Sherman identified the following expenses related to Songswell:

Category

Claimed

Conceded

Disputed

Advertising

Insurance

Legal and Professional Services

Office Expense

Travel

Meals and Entertainment

“Other” Expenses

$3,350

9,430

3,150

8,324

18,360

6,235

3,750

-0-0-0$176

8,451

-01,926

$3,350

9,430

3,150

8,148

9,909

6,235

1,824

In total Dr. Sherman reported $52,599 in expenses associated

with his medical practice. On brief respondent concedes $10,554 of the

[*7] expenses, 4 leaving $42,045 in dispute. Respondent’s concessions are

based on Dr. Sherman’s partial bank statements. Next, we discuss each

category of expenses.

Advertising

Dr. Sherman reported $3,350 in advertising expenses associated

with his medical practice. When asked why an emergency room doctor

would have advertising expenses, Dr. Sherman stated that “sometimes

. . . you need to promote yourself.” However, he did not offer any

testimony regarding how he promoted himself or the source of the

reported advertising expenses.

Insurance

Dr. Sherman also reported $9,430 in professional liability

insurance expenses and $3,150 in expenses for legal and professional

services. However, Dr. Sherman testified that he does not have any

records or documentation to support these expenses. He also admitted

that he was estimating the cost of the insurance.

Office

Dr. Sherman also reported $8,324 in office expenses. After

concessions, $8,148 of office expenses remain in dispute. Dr. Sherman

did not maintain a separate physical office for his medical practice.

Rather, the expense represents rent for Dr. Sherman’s residences in

California and Washington.

Travel

Dr. Sherman also reported $18,360 in travel expenses and $6,235

for meals and entertainment. The IRS conceded $8,451 in travel

expenses on the basis of bank statements produced by Dr. Sherman. No

concessions were made for meals and entertainment, leaving $16,144 in

dispute for travel, meals, and entertainment. Dr. Sherman did not

present any receipts supporting these expenses.

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

brief, respondent noted that the amount in the stipulation contained a computational

error. Instead of $8,628 in concessions for Dr. Sherman’s medical practice expenses,

respondent conceded $10,554. Further, respondent acknowledged that he conceded the

same expense twice, but the error is in Dr. Sherman’s favor.

[*8]

Other

Finally, Dr. Sherman reported “other” expenses totaling $3,750,

representing amounts for medical license fees, continuing education

courses, and laundry. Respondent conceded $1,926, leaving $1,824 in

dispute. Dr. Sherman did not present any documentation to support the

remaining expenses.

OPINION

Burden of Proof

The determinations in a notice of deficiency bear a presumption

of correctness, see Welch v. Helvering, 290 U.S. 111, 115 (1933), and the

taxpayer generally bears the burden of proving them erroneous in

proceedings in this Court, see Rule 142(a)(1).

II.

Credibility of Witness

In deciding whether a taxpayer has carried his burden of proof,

witness credibility is an important consideration. Ishizaki v.

Commissioner, T.C. Memo. 2001-318, 2001 WL 1658189, at *7. “[T]he

distillation of truth from falsehood . . . is the daily grist of judicial life.”

Diaz v. Commissioner, 58 T.C. 560, 564 (1972). “As a trier of fact, it is

our duty to listen to the testimony, observe the demeanor of the

witnesses, weigh the evidence, and determine what we believe.” Kropp

v. Commissioner, T.C. Memo. 2000-148, 2000 WL 472840, at *3.

Generally, we found Dr. Sherman’s testimony to be self-serving,

and, at times, lacking in credibility and candor. His testimony failed to

corroborate the alleged business activities of Songswell or the reported

business expenses associated with his medical practice. Each category

of expenses will be discussed in turn.

III.

Songswell Activity

First, we determine whether Dr. Sherman’s activities related to

Songswell were engaged in for profit and, if so, whether Dr. Sherman is

entitled to any deductions for expenses associated with Songswell.

Analytical Framework

Section 183(a) provides generally that, if an activity is not

engaged in for profit, “no deduction attributable to such activity shall be

[*9] allowed,” except as provided in section 183(b). See Hendricks v.

Commissioner, 32 F.3d 94, 97 (4th Cir. 1994), aff’g T.C. Memo. 1993-396.

Section 183(c) defines an “activity not engaged in for profit” as “any

activity other than one with respect to which deductions are allowable

for the taxable year under section 162 or under paragraph (1) or (2) of

section 212.”

An appeal in this case would lie in the U.S. Court of Appeals for

the Ninth Circuit. See § 7482(b); see also Golsen v. Commissioner, 54

T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971); Lardas v.

Commissioner, 99 T.C. 490, 494–95 (1992). The Ninth Circuit has held

that for a deduction to be allowed under section 162 or 212(1) or (2), a

taxpayer must establish that he engaged in the activity in good faith

with the predominant, primary, or principal objective and intent of

realizing an economic profit, independent of tax savings. See Wolf v.

Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), aff’g T.C. Memo. 1991212; Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d 724, 726 (9th

Cir. 1986), aff’g Lahr v. Commissioner, T.C. Memo. 1984-472.

The Ninth Circuit also has held that the focus of this test is the

taxpayer’s subjective intent, but “objective indicia may be cited to

establish the taxpayer’s true intent.” Indep. Elec. Supply, Inc. v.

Commissioner, 781 F.2d at 726 (citing Treas. Reg. § 1.183-2(a)). The

expectation of profit need not be reasonable, but it must be bona fide.

See Golanty v. Commissioner, 72 T.C. 411, 425–26 (1979), aff’d without

published opinion, 647 F.2d 170 (9th Cir. 1981).

Whether the requisite profit objective exists is determined by

looking at the surrounding facts and circumstances. Id. at 426; see also

Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Treas. Reg. § 1.183-2(b).

“Greater weight is given to objective facts than to a taxpayer’s mere

after-the-fact statement of intent.” Prieto v. Commissioner, T.C. Memo.

2001-266, 2001 WL 1196201, at *6, aff’d, 59 F. App’x 999 (9th Cir. 2003);

Treas. Reg. § 1.183-2(a) (“In determining whether an activity is engaged

in for profit, greater weight is given to objective facts than to the

taxpayer’s mere statement of his intent.”).

The factors listed in Treasury Regulation section 1.183-2(b) are

relevant to an analysis of the objective facts surrounding the taxpayer’s

activities. See Indep. Elec. Supply, Inc., 781 F.2d at 726–27 (noting that

section 183 generally is not applicable until it is determined the activity

at issue is not engaged in for profit, but the factors nonetheless are

relevant in conducting the profit-motive analysis under section 162).

[*10] The relevant factors are (1) the manner in which the taxpayer

carries on the activity; (2) the expertise of the taxpayer or his advisors;

(3) the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the activity may

appreciate in value; (5) the success of the taxpayer in carrying on other

similar or dissimilar activities; (6) the taxpayer’s history of income or

loss with respect to the activity; (7) the amount of occasional profits, if

any, which are earned from the activity; (8) the financial status of the

taxpayer; and (9) elements of personal pleasure or recreation. See Treas.

Reg. § 1.183-2(b).

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

factors—is dispositive. Hendricks v. Commissioner, 32 F.3d at 98;

Golanty, 72 T.C. at 426. Instead, all facts and circumstances must be

considered, and more weight may be given to some factors than to

others. See Dunn v. Commissioner, 70 T.C. 715, 720 (1978), aff’d, 615

F.2d 578 (2d Cir. 1980).

Generally, the taxpayer bears the burden of proving the IRS’s

deficiency determination is incorrect. Rule 142(a); Baxter v.

Commissioner, 816 F.2d 493, 495 (9th Cir. 1987), aff’g in part, rev’g and

remanding in part T.C. Memo. 1985-378. Thus, if the Commissioner

determines that a given activity is not engaged in for profit, that

determination is presumed correct, and the taxpayer must prove

otherwise. See Skeen v. Commissioner, 864 F.2d 93, 94 (9th Cir. 1989)

(“The burden of proving the requisite profit motive is on the taxpayer.”),

aff’g Patin v. Commissioner, 88 T.C. 1086 (1987).

Application of the Caselaw and Regulatory Factors

This is not a difficult case. Although our analysis is focused on Dr.

Sherman’s subjective intent, it is informed by the objective indicia set

forth in the regulations and outlined above. See Wolf v. Commissioner,

4 F.3d at 713. Aside from Dr. Sherman’s self-serving testimony that the

Songswell activity was conducted for profit, little else counsels in favor

of a finding of a profit motive. Given the caselaw and the nine factors set

forth in the regulations, and on the basis of all the facts and

circumstances of this case, we conclude that the Songswell activities

were not engaged in for profit during taxable year 2015.

We now turn to explaining our conclusion in greater detail,

examining the nine factors in the regulations and the relevant

precedent.

[*11]

Manner in Which Activity Is Conducted

A taxpayer who works in a “businesslike manner” and “maintains

complete and accurate books and records” is more likely to have a profit

motive. Treas. Reg. § 1.183-2(b)(1). A “businesslike manner” can be

inferred from the taxpayer’s maintenance of “complete and accurate

books and records,” id., and a reasonable business plan, Den Besten v.

Commissioner, T.C. Memo. 2019-154, at *20 (“Having a business plan

may suggest that a taxpayer conducted the activity in a businesslike

manner.”). Additionally, whether the taxpayer conducts the activity “in

a manner substantially similar to other activities of the same nature

which are profitable” and whether the taxpayer changes “operating

methods, adopt[s] . . . new techniques or abandon[s] . . . unprofitable

methods in a manner consistent with an intent to improve profitability”

are questions we consider in analyzing this factor’s application to the

instant case. Treas. Reg. § 1.183-2(b)(1).

The record demonstrates that Dr. Sherman did not conduct

Songswell in a businesslike manner. Dr. Sherman admitted that he does

not have a business plan for Songswell. No evidence was presented

regarding when Songswell activities began, nor precisely what activity

occurred in taxable year 2015. Additionally, there is no evidence that

Songswell is a licensed business, further indicating that Songswell was

not conducted in a businesslike manner. See, e.g., Dirkse v.

Commissioner, T.C. Memo. 2000-356, 2000 WL 1706720, at *6

(observing that the failure to obtain necessary business license is

evidence of failing to carry on activities in businesslike manner).

Dr. Sherman also failed to keep complete and accurate books and

records related to Songswell activities and its purported business

expenses. He was unable to produce substantiation for most of his

reported expenditures associated with Songswell. Further, many of his

expenses did not match the receipts that were provided.

Finally, there is no evidence before the Court regarding whether

Dr. Sherman conducts Songswell activities in a manner similar to other

activities that are profitable, nor is there any evidence regarding how—

or whether—Dr. Sherman abandoned unprofitable techniques in favor

of profitable techniques.

Thus, this factor weighs heavily against Dr. Sherman.

[*12]

Expertise of the Taxpayers or Their Advisers

A taxpayer’s preparation for an activity by extensive study of its

accepted business, economic, and scientific practices, or consultation

with experts in the activity, may indicate that the taxpayer has a profit

motive where the taxpayer carries on the activity in accordance with

such practices. Treas. Reg. § 1.183-2(b)(2). Where the taxpayer has such

knowledge or advice but does not carry on the activity in accordance with

good practice, a lack of intent to derive profit may be indicated. Id

Dr. Sherman was exposed to music at a young age and used his

music experience to earn money to pay for college and medical school

approximately 40 years ago. However, there is no evidence that Dr.

Sherman has engaged in extensive studies regarding operating a film

production company, a digital assets company, or a blog.

Nor does it appear that Dr. Sherman consulted experts regarding

operating a film production company, a digital assets company, or blog.

Consulting with industry experts and studying accepted business

practices when preparing to engage in an activity may suggest a profit

motive. See Treas. Reg. § 1.183-2(b)(2). Although Dr. Sherman testified

that he consulted experts, he admitted that the experts he referenced

were the vendors who sold him equipment. There is no evidence that

these vendors offered consultation regarding how to operate a business.

This factor weighs against Dr. Sherman.

Taxpayer’s Time and Effort

When a taxpayer devotes considerable time and effort to an

activity, “particularly if the activity does not have substantial personal

or recreational aspects,” that devotion may indicate that the taxpayer

had a profit motive. Treas. Reg. § 1.183-2(b)(3). Further, when a

taxpayer “withdraw[s] from another occupation to devote most of his

energies to the activity,” that also may support a finding that the

taxpayer had a profit motive. Id. Even when a taxpayer devotes only

limited time to an activity, if the taxpayer “employs competent and

qualified persons to carry on such activity,” then that too may indicate

a profit motive. Id.

Dr. Sherman testified that he spent 200 to 300 hours per month

on activities associated with Songswell. We found Dr. Sherman’s

testimony regarding the amount of time he spent on Songswell to be selfserving, particularly given that he also worked 120 hours as an

[*13] emergency room physician during the same period. Further, Dr.

Sherman admitted that he estimated these claimed hours. There is no

evidence that Dr. Sherman stepped away from his occupation as a

physician to operate Songswell, nor is there evidence that Dr. Sherman

employed others to continue operating Songswell when he was working

as a physician.

This factor also weighs against Dr. Sherman.

Expectation of Appreciation in Value

Although a taxpayer receives no income from operating his

enterprise, he may intend to derive a profit from the potential

appreciation of his business assets. See Treas. Reg. § 1.183-2(b)(4).

There is no evidence that Dr. Sherman’s camera equipment would

appreciate, and we infer that such equipment would instead experience

wear and tear over time and thus depreciate in value. Wesley v.

Commissioner, T.C. Memo. 2007-78, 2007 WL 968731, at *2 (inferring

that recording equipment would experience wear and tear over time and

depreciate).

Accordingly, this factor also weighs against Dr. Sherman.

Success of the Taxpayer in Carrying On Other

Similar Activities

“The fact that the taxpayer has engaged in similar activities in

the past and converted them from unprofitable to profitable enterprises

may indicate that he is engaged in the present activity for profit . . . .”

Treas. Reg. § 1.183-2(b)(5). Dr. Sherman did not present any evidence

demonstrating that he has had business success in similar activities,

turning them from unprofitable to profitable.

To the extent Dr. Sherman’s testimony about earning money to

perform music while attending school can be construed as supporting

this factor, we do not find this factor to be persuasive. There is no

evidence that Dr. Sherman’s activities related to playing music while in

school involved sound and customary business practices that can be

transferred to a film production company, a digital assets company, or a

blog.

Accordingly, this factor weighs against Dr. Sherman.

[*14]

History of Income or Losses

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

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

Reg. § 1.183-2(b)(6). However, prolonged periods of losses following the

initial startup phase of an activity may indicate that the taxpayer did

not have a profit motive when he decided to enter into the activity. Id.

Nonetheless, where losses are due to “customary business risks or

reverses” or to “unforeseen or fortuitous circumstances which are

beyond the control of the taxpayer,” then this inference does not

typically arise. Id. Examples of “fortuitous circumstances” include

“drought, disease, fire, theft, weather damages, . . . or depressed market

conditions.” Id.

Dr. Sherman did not present any evidence demonstrating

Songswell’s history of income or loss. However, Dr. Sherman admitted

that he purchased all of Songswell’s camera equipment and claimed

expenses with money he earned as a physician. Further, Dr. Sherman

reported $104,758 in losses for Songswell for taxable year 2015. This

evidence supports an inference that Dr. Sherman did not make a profit

from Songswell, and he reported substantial losses associated with

Songswell activities.

Thus, this factor also weighs against Dr. Sherman.

Amount of Occasional Profit

In an otherwise money-losing venture, a taxpayer’s derivation of

some profits may support the existence of a profit motive. See Treas.

Reg. § 1.183-2(b)(7). An “occasional small profit from an activity

generating large losses, or from an activity in which the taxpayer has

made a large investment, would not generally be determinative that the

activity is engaged in for profit.” Id. Here, there is no evidence that Dr.

Sherman has ever earned a profit related to Songswell activities.

This factor weighs against Dr. Sherman.

Taxpayer’s Financial Status

When a taxpayer has substantial income or capital at his disposal

from sources other than the activity in question, such evidence may

indicate that he did not enter into that activity with a profit motive. See

Treas. Reg. § 1.183-2(b)(8). This is particularly true if the losses from

the activity generate substantial tax benefits. Id.

[*15] Dr. Sherman earned a substantial income of $143,162 in taxable

year 2015. His reported losses from Songswell—in addition to his

medical practice expenses—would produce a substantial tax benefit,

essentially zeroing out any tax obligation he owed.

Thus, this factor weighs heavily against Dr. Sherman.

Elements of Personal Pleasure or Recreation

Finally, when a taxpayer derives personal pleasure from an

activity or finds it recreational, such evidence may suggest that the

taxpayer entered into the activity for reasons other than profit. See

Treas. Reg. § 1.183-2(b)(9). However, this factor is not necessarily

dispositive, as “suffering has never been made a prerequisite to

deductibility.” Jackson v. Commissioner, 59 T.C. 312, 317 (1972).

That said, “where the possibility for profit is small . . . and the

possibility for gratification is substantial, it is [often] clear that the

latter possibility constitutes the primary motivation for the activity.”

Dodge v. Commissioner, T.C. Memo. 1998-89, 1998 WL 88175, at *7

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

355 (7th Cir. 1987)), aff’d without published opinion, 188 F.3d 507 (6th

Cir. 1999). Further, “[a]lthough musical and artistic endeavors

generally have personal and recreational elements, a taxpayer’s

personal enjoyment in pursuing the activity is not sufficient to negate a

profit motive if” the other factors listed above indicate that the taxpayer

engaged in the activity with a profit motive. Wesley v. Commissioner,

2007 WL 968731, at *3.

The personal and recreational elements inherent in Dr.

Sherman’s Songswell activities are readily apparent. The Songswell

activities involve recreational activities related to music, film

production, and a blog. Dr. Sherman’s Songswell activities arose out of

his childhood exposure to music, including learning to play the guitar as

a result of his father’s and brother’s musical influences. In short, a

review of the entire record and the testimony at trial persuades us that

Dr. Sherman’s personal motives and the recreational or personal

elements of his Songswell activities outweighed the desire for profit.

This factor also weighs against Dr. Sherman.

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

Sherman did not engage in Songswell activities with the primary

motivation of earning a profit. Accordingly, we sustain the IRS’s

[*16] disallowance of alleged business expense deductions associated

with Songswell.

IV.

Medical Practice Expenses

Next, we determine whether Dr. Sherman is entitled to deduct

additional purported business expenses associated with his medical

practice.

Section 162(a) permits a deduction for ordinary and necessary

expenses paid to carry on a trade or business during the taxable year.

An “ordinary” expense is one that is common and acceptable in the

particular business. Welch v. Helvering, 290 U.S. at 113–14. Moreover,

the main function of the word “ordinary” in section 162(a) is to clarify

the distinction between expenses that are currently deductible and

expenses that are capital. Commissioner v. Tellier, 383 U.S. 687, 689–

90 (1966). A “necessary” expense under section 162(a) is an expense that

is appropriate and helpful in carrying on the trade or business.

Heineman v. Commissioner, 82 T.C. 538, 543 (1984).

Taxpayers bear the burden of substantiating the amount of any

claimed deduction by maintaining the records needed to establish

entitlement to such a deduction. See § 6001; Hradesky v. Commissioner,

65 T.C. 87 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976). The

taxpayer must substantiate the amount and the purpose of the expense

underlying the deduction. Higbee v. Commissioner, 116 T.C. 438, 440

(2001). A taxpayer must also maintain adequate records to demonstrate

the propriety of any deduction claimed. Id.; see also § 6001. “A taxpayer’s

self-serving declaration is generally not a sufficient substitute for

records.” Fine v. Commissioner, T.C. Memo. 2013-248, at *4.

Dr. Sherman failed to present any evidence substantiating the

reported expenses associated with his medical practice or showing that

those expenses were ordinary and necessary. The lack of documentary

evidence substantiating the amounts and purpose of these alleged

expenses is pervasive. Dr. Sherman has failed to introduce sufficient

and credible evidence, and therefore did not meet his burden of proof on

this issue. 5 Given Dr. Sherman’s failure to meet his burden associated

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

many of the claimed deductions are subject to heightened substantiation standards or

are otherwise disallowed. For example, section 274(d) provides that no deduction

claimed under section 162 shall be allowed for any traveling expense (including meals

[*17] with his medical practice, we sustain the IRS’s determination

disallowing the remaining purported business expense deductions.

If a taxpayer is unable to substantiate the amount of a deduction,

the Court may nonetheless allow it (or a portion thereof) if there is an

evidentiary basis for doing so. See Cohan v. Commissioner, 39 F.2d 540,

543–44 (2d Cir. 1930). To apply the Cohan rule, the Court must have a

reasonable basis upon which to make an estimate. Vanicek v.

Commissioner, 85 T.C. 731, 742–43 (1985). Dr. Sherman failed to

properly establish that the alleged expenses—to the extent not conceded

by respondent—were ordinary and necessary business expenses. Thus,

application of the Cohan rule would be inappropriate in this case. 6

Additions to Tax

Finally, the parties dispute whether, for taxable year 2015, Dr.

Sherman is liable for failure to file and failure to pay additions to tax

under section 6651(a)(1) and (2), respectively. Under section 7491(c), the

Commissioner bears the burden of production with respect to the

liability of an individual for any addition to tax imposed. Higbee, 116

T.C. at 446.

and lodging while away from home) unless the taxpayer satisfies certain heightened

substantiation requirements. Those requirements permit a deduction for travel

expenses only to the extent the taxpayer proves (1) the amount of each expenditure

while away from home; (2) the date of departure and return for each trip and the

number of days spent on business; (3) the destination or locality of travel; and (4) the

business reason for travel or the expected benefit to be derived from such travel. See

Temp. Treas. Reg. § 1.274-5T(b)(2). Claimed entertainment expenses require similar

heightened substantiation. Id. subpara. (3). In this case, Dr. Sherman failed to offer

evidence to meet the heightened substantiation requirements. Accordingly, his claimed

expense deductions for meals, travel, and entertainment are disallowed for this

additional reason.

Additionally, as a general rule taxpayers are unable to claim deductions with

respect to the business use of a dwelling unit that is used by the taxpayer as a residence

during the taxable year. § 280A(a). Section 280A(c)(1)(A) provides an exception to the

general rule to the extent that a taxpayer uses a portion of the dwelling unit, on a

regular basis, exclusively as the principal place of business for any trade or business of

the taxpayer. The term “dwelling unit” includes apartments. § 280A(f)(1)(A). In this

case, Dr. Sherman offered no evidence that any portions of his apartments were used

exclusively as the principal place of business for his medical practice. Thus, the claimed

office expense deductions associated with his apartments are disallowed for this

additional reason.

6 We also note that Dr. Sherman did not invoke the Cohan rule as an

alternative position.

[*18] A.

Failure to Timely File Under Section 6651(a)(1)

First, the IRS determined that Dr. Sherman is liable for the

failure to file addition to tax under section 6651(a)(1). Under section

6651(a)(1), when a taxpayer fails to file any required return on the date

prescribed for filing:

[U]nless it is shown that such failure is due to reasonable

cause and not due to willful neglect, there shall be added

to the amount required to be shown as tax on such return

5 percent of the amount of such tax if the failure is for not

more than 1 month, with an additional 5 percent for each

additional month or fraction thereof during which such

failure continues, not exceeding 25 percent in the

aggregate . . . .

Dr. Sherman admitted that he did not timely file a return for

taxable year 2015, but he claims he transmitted his 2015 tax return in

August 2018. Dr. Sherman produced no evidence—beyond his own selfserving statements—demonstrating that he filed his 2015 tax return in

2018. Further, the IRS account transcript record shows that no return

was filed before 2019, when the IRS prepared the SFR.

Moreover, there is nothing in the record indicating that Dr.

Sherman’s failure to timely file his return was due to reasonable cause.

See § 6651(a)(1). Dr. Sherman appears to argue that he had reasonable

cause because he purportedly needed a corrected 2015 Form 1099–MISC

from AB Staffing Solutions before he could file his tax return. But we

find Dr. Sherman’s argument to lack credibility, particularly because he

also testified that he requested a corrected 2015 Form 1099–MISC after

the State of California began investigating his tax return for taxable

year 2015. Regardless, an alleged lack of records did not relieve Dr.

Sherman from the obligation to file a tax return. See, e.g., Jones v.

Commissioner, T.C. Memo. 1995-472, 1995 WL 579285, at *3 (finding

that the taxpayer did not have reasonable cause where necessary tax

return documents may not have been available).

Because Dr. Sherman failed to timely file his 2015 return, and

because he did not present any evidence that his failure to timely file

was due to reasonable cause and not willful neglect, the amount of tax

required to be shown on his return is subject to an addition to tax under

section 6651(a)(1).

[*19] B.

Failure to Pay Under Section 6651(a)(2)

Next, the IRS determined that Dr. Sherman is liable for the

failure to pay addition to tax under section 6651(a)(2). Section 6651(a)(2)

imposes an addition to tax on taxpayers for their failure to timely pay

the amount of tax shown on a return. See also § 6651(g)(2). When a

taxpayer has not filed a valid return, the section 6651(a)(2) addition to

tax may not be imposed unless the Commissioner has prepared a

substitute for return that satisfies the requirements of section 6020(b).

See Cabirac v. Commissioner, 120 T.C. 163, 170–72 (2003), aff’d per

curiam, No. 03-3157, 2004 WL 7318960 (3d Cir. Feb. 10, 2004).

Respondent met his burden of production by showing that he

prepared the SFR, which meets the requirements of section 6020(b), on

behalf of Dr. Sherman for taxable year 2015, and Dr. Sherman has failed

to pay his federal income tax for 2015. Dr. Sherman has not shown

reasonable cause for his failure to pay his income tax, nor has he

demonstrated a lack of willful neglect. Thus, we will sustain the addition

to tax pursuant to section 6651(a)(2). See also Lloyd v. Commissioner,

T.C. Memo. 2020-92, at *19–21, aff’d, No. 20-73387, 2022 WL 10449695

(9th Cir. Oct. 18, 2022).

VI.

Conclusion

In conclusion, we hold that (1) Dr. Sherman did not conduct

Songswell activities with a profit motive, and he is not entitled to deduct

purported business expenses associated with Songswell for taxable year

2015; (2) Dr. Sherman is not entitled to deduct additional purported

business expenses associated with his medical practice for taxable year

2015; and (3) Dr. Sherman is liable for additions to tax under section

6651(a)(1) and (2).

We have considered all of the arguments made by the parties, and

to the extent not mentioned above, we conclude that they are moot,

irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

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