T.C. Memo. 1996-390
UNITED STATES TAX COURT
KATHLEEN A. CARR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6054-95. Filed August 21, 1996.
Kathleen A. Carr, pro se.
David R. Jojola, for respondent.
MEMORANDUM OPINION
NAMEROFF, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3)1 and Rules 180, 181, and
182. Respondent determined a deficiency in petitioner's 1991
Federal income tax in the amount of $1,819.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
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The sole issue for decision is whether various Schedule C
expenses were ordinary and necessary in carrying on petitioner's
business as a personal manager.
Some of the facts have been stipulated, and they are so
found. The stipulation of facts, the stipulation of settled
issues, and the attached exhibits are incorporated herein by this
reference. At the time of the filing of the petition, petitioner
resided in Los Angeles, California.
When she was 3 years old, petitioner became involved in the
entertainment industry as an actress with the Broadway touring
company production of "The Sound of Music". In 1985, petitioner
became a talent agent for Emerald Artists Agency (Emerald).2 In
1987, petitioner received a subagent franchise from the Screen
Actors Guild, Inc., which licensed petitioner as a talent agent
and allowed her to work under her own name rather than Emerald's
name. Petitioner was a successful talent agent.
2
A talent agent is a person or corporation who engages in
the occupation of procuring, offering, promising, or attempting
to procure employment or engagements for artists. In addition, a
talent agent may counsel artists in the development of their
professional careers. Cal. Lab. Code sec. 1700.4(a) (West 1989).
To procure employment for artists, the talent agent must obtain a
license from the California Labor Commissioner. Cal. Lab. Code
secs. 1700.4 and 1700.5 (West 1989). For this purpose the term
"artist" includes actors, actresses, radio artists, musical
artists, directors, writers, cinematographers, composers,
lyricists, arrangers, models, or others rendering professional
services in radio, movies, theater, or television. Cal. Lab.
Code sec. 1700.4(b) (West 1989).
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At the end of 1988, petitioner decided to leave Emerald to
start her own agency. At the beginning of 1989, petitioner left
Emerald and started K.C. & Co. Through K.C. & Co., petitioner
functioned as a personal manager for various artists.3
When she left Emerald, petitioner took six artists with her
and began looking for other artists to represent. By the end of
1990, petitioner had developed her own "stable" of artists,
including 17 artists who had signed contractual agreements with
K.C. & Co. In these contracts, K.C. & Co. agreed to advise,
counsel, and direct the development and enhancement of the
artists' careers in exchange for compensation of 10 percent of
the artists' gross earnings. Several artists did not sign
contracts with K.C. & Co. because they were newly referred to
petitioner and their relationship was on a trial basis.
Part of petitioner's role as personal manager was to promote
the careers of her artists. To promote her artists, petitioner
3
Unlike a talent agent, a personal manager is not covered
by the Talent Agencies Act, Cal. Lab. Code secs. 1700-1700.47
(West 1989), or any other statutory scheme and is not required to
obtain a license. The primary function of a personal manager is
that of advertising, counseling, directing, and coordinating the
artist in the development of the artist's career. This function
can include personal and business matters of the artist.
Waisbren v. Peppercorn Prods., Inc., 41 Cal. App. 4th 246, 253,
48 Cal. Rptr. 2d 437, 440 (1995). Personal managers may find
themselves in situations where they would like to procure
employment for their artists; however, to do so, the personal
manager must become a licensed talent agent or work in
conjunction with a licensed talent agent. Cal. Lab. Code secs.
1700.4, 1700.5, 1700.44; see Waisbren v. Peppercorn Prods., Inc.,
supra.
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used showcases4 to demonstrate their talents. Petitioner used
the showcases as a method to familiarize entertainment industry
professionals with the names, faces, and talents of petitioner's
artists so that they would be invited to interviews, and
ultimately, obtain a job in the entertainment industry. Numerous
casting people, directors, and producers who were involved in the
entertainment industry were invited to the showcases so that they
could see the work of petitioner's clients.
Petitioner put together a showcase in January 1991, at a
small theater in North Hollywood. The theater space was free and
held 26 people. The theater was filled by directors, producers,
and casting people who were invited by petitioner. Petitioner
also organized a showcase at the Coronet Theatre in La Cienega in
March 1991. The Coronet Theatre space was free because
petitioner knew someone who let her use the space. The 350-
person theater was filled with invited entertainment industry
people. Some of petitioner's artists obtained interviews or work
after this showcase.
In July 1991, petitioner and her artists were invited by
Steven Wright Productions to present a showcase at the Convention
Center in St. Louis, Missouri. Petitioner's artists were paid
4
As we understand it, a showcase is a production of short
skits, excerpts from theatrical works, musical numbers, or other
forms of entertainment which are performed by actors and
actresses.
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$1,000 for the showcase. In September 1991, petitioner organized
a country and western showcase at the Court Theatre in La
Cienega. The theater space was free. The theater was filled
with about 200 entertainment industry people. Some of
petitioner's artists obtained interviews and employment after
this showcase.
Petitioner incurred numerous expenses in connection with
these showcases. These expenses included advertising and
publicity photographs of the showcase which were mailed to
producers, directors, and casting agents to invite them to attend
the showcases. In addition, petitioner rented a tape recorder
and hired a musician, a choreographer, and a musical director to
work on the showcases. Petitioner also incurred costs for props
and sets for the showcases. Further, petitioner incurred dry
cleaning expenses in connection with borrowed costumes that were
worn by the artists during the showcases.
Petitioner incurred other expenses in connection with her
work as a personal manager. Specifically, petitioner incurred
expenses for resumes that contained background information on her
artists. These resumes were sent to entertainment industry
professionals to promote her artists. In addition, petitioner
incurred expenses for resumes for K.C. & Co. that were used to
advertise her services and to attract more artists to her agency.
In addition, petitioner incurred expenses for reference books and
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other materials that she used to find out about the latest trends
in the entertainment industry and to obtain information about
directors, producers, and casting people.
In 1991, petitioner received wages from Medcom Billing
Services of $25,157.05 and gross income from K.C. & Co. of
$3,229.75. On the Schedule C, petitioner claimed expenses
related to K.C. & Co. which totaled $26,913.43. In the notice of
deficiency, respondent disallowed all or part of the expenses
claimed, as follows:
Expense Claimed Allowed Disallowed
Advertising $2,500.00 -0- $2,500
Union dues 177.50 $147 30
Education 3,752.00 -0- 3,752
Photos 1,800.00 -0- 1,800
Resumes 53.00 -0- 53
Instrument rental 2,593.00 -0- 2,593
Props/sets 4,270.00 -0- 4,270
Education materials 354.75 -0- 355
Airline tickets 1,553.00 1,243 310
Dry cleaning 46.00 -0- 46
Car and truck 3,422.00 2,910 512
In the stipulation of settled issues and the stipulation of
facts, the parties stipulated that petitioner was entitled to
deduct a total of $3,422 for Schedule C car and truck expenses.
At trial, respondent's counsel stipulated that petitioner was
entitled to deduct an additional $30 for union dues and $310 for
airline tickets. Therefore, these amounts are no longer in
dispute.5
5
We note that petitioner claimed a Schedule C deduction
(continued...)
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Petitioner has substantiated the amounts in dispute. The
issue for decision is whether these expenses are ordinary and
necessary.
Preliminary Matters
In the stipulation of facts, respondent reserved objections
to several joint exhibits. Specifically, respondent objected on
the basis of relevancy to Joint Exhibit 4-D, a subagent franchise
agreement; Joint Exhibit 5-E, a directory from the Conference of
Personal Managers; and Joint Exhibit 10-J, a breakdown of
available jobs in the entertainment industry. In addition,
respondent objected on the basis of hearsay to Joint Exhibit 7-G,
excerpts from a book entitled "Managers', Entertainers', & Agents
Book"; Joint Exhibit 8-H, excerpts from a book entitled "How to
Manage Talent"; and Joint Exhibit 9-I, an excerpt entitled "But,
What Does a Personal Manager Do?" from the National Conference of
Personal Managers.
Proceedings in this Court are conducted in accordance with
the Federal Rules of Evidence. Sec. 7453; Rule 143. Relevant
evidence means evidence having any tendency to make the existence
of any fact that is of consequence to the determination of the
action more or less probable than it would be without the
5
(...continued)
for repairs and maintenance of $129.47 which was neither allowed
nor disallowed by the notice of deficiency and was not mentioned
in the stipulation of facts of stipulation of settled issues.
Thus, we will assume such amount is not in dispute.
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evidence. Fed. R. Evid. 401. Joint Exhibits 4-D and 5-E support
petitioner's testimony that she was a licensed talent agent and
that she offered her services as a talent agent. These facts are
relevant, and we overrule respondent's objection.
With respect to Joint Exhibit 10-J, which is an example of
the service petitioner used to find acting parts for her artists,
we sustain respondent's objection. The amount claimed by
petitioner for this service was allowed in the notice of
deficiency and is not in dispute. Therefore, this exhibit is not
relevant.
With respect to respondent's hearsay objections, we sustain
them. The Federal Rules of Evidence define hearsay as "a
statement, other than one made by the declarant while testifying
at the trial or hearing, offered in evidence to prove the truth
of the matter asserted." Fed. R. Evid. 801(c). Normally,
hearsay is excluded from evidence unless an exception to the
hearsay rule applies. Snyder v. Commissioner, 93 T.C. 529, 532
(1989). Joint Exhibits 7-G, 8-H, and 9-I are excerpts from
reference books and articles which were offered by petitioner to
show that her expenses were ordinary and necessary for personal
managers. Thus, these exhibits are hearsay.
An exception to the hearsay rule allows the introduction of
learned treatises in evidence when they have been established as
reliable authority by an expert witness at trial and have been
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either relied upon by an expert witness on direct examination or
called to his attention on cross-examination. Fed. R. Evid.
803(18). The certain implication from this exception is that
statements from treatises that (1) have not been established as
reliable authority, (2) were not relied on by an expert at trial,
or (3) were not called to an expert's attention at trial are not
admissible. Snyder v. Commissioner, supra. The excerpts in
issue were neither relied on nor referred to by an expert witness
at trial. They were not established as reliable authority by any
expert or by judicial notice. Thus, these excerpts are not
admissible under the exception to the hearsay rule for learned
treatises. None of the other exceptions to the hearsay rule
applies in this case. Accordingly, we sustain respondent's
objections to these exhibits.
Discussion
Deductions are strictly a matter of legislative grace, and
petitioner bears the burden of proving that she is entitled to
any deductions claimed. Rule 142(a); New Colonial Ice Co. v.
Helvering, 292 U.S. 435 (1934). Section 162(a) provides for the
deduction of all ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business.
The terms "ordinary" and "necessary" mean that the expenditure
must be normal, usual, and customary, as well as appropriate and
helpful to the operation of the business. Commissioner v.
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Tellier, 383 U.S. 687, 689 (1966); Commissioner v. Heininger, 320
U.S. 467, 471 (1943); Deputy v. du Pont, 308 U.S. 488, 495-496
(1940). This usually requires that the expenditure bear a
reasonably direct relationship to the taxpayer's trade or
business. Commissioner v. Heininger, supra at 470; Deputy v. du
Pont, supra at 495; Kennelly v. Commissioner, 56 T.C. 936, 941
(1971), affd. without published opinion 456 F.2d 1335 (2d Cir.
1972); Sholund v. Commissioner, 50 T.C. 503, 508 (1968); sec.
1.162-1(a), Income Tax Regs. The issue of whether the expenses
are ordinary and necessary is a question of fact. Commissioner
v. Heininger, supra at 475; Walliser v. Commissioner, 72 T.C.
433, 437 (1979).
Because the entertainment industry is visual, publicity is
extremely important. As a talent manager, petitioner guided the
careers of at least 17 artists. To get these artists work, and
generate income for her business, petitioner organized,
advertised, and put on showcases for directors, producers, and
casting people involved in the entertainment industry to
demonstrate the talents of her artists. Because her artists were
lesser known individuals, petitioner put together several
showcases in an effort to get her artists maximum exposure.
Showcases are a common method used by talent managers to get
their clients work in the entertainment industry.
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All of the expenses at issue were incurred in connection
with these showcases or petitioner's business as a talent
manager. We find that the expenses incurred by petitioner both
were "ordinary and necessary" within the meaning of section
162(a) and arose out of the conduct of petitioner's business. In
reaching our decision, we have relied on the testimony of
petitioner, whom we had an opportunity to observe at trial. We
found her testimony to be candid and credible, as well as
supported by the record. Accordingly, petitioner is entitled to
a deduction for the expenses at issue.
To reflect the foregoing resolution of the issues in this
case,
Decision will be
entered under Rule 155.