Miller v. Commissioner

T.C. Memo. 1998-463

UNITED STATES TAX COURT

EARL L. MILLER AND NANCY B. MILLER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 25828-96. Filed December 30, 1998.

James W. Childs, for petitioners.

Anita A. Gill, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CARLUZZO, Special Trial Judge: This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182. Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years 1993 and 1994.
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Rule references are to the Tax Court Rules of Practice and

Procedure.

Respondent determined deficiencies in petitioners' 1993 and

1994 Federal income taxes in the amounts of $4,788 and $3,423,

respectively. The issue for decision is whether Nancy B.

Miller's writing activity constituted a trade or business during

the years in issue.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Petitioners are husband and wife. They filed timely joint

Federal income tax returns for the years in issue. At the time

the petition was filed, petitioners resided in Akron, Ohio.

References to petitioner are to Nancy B. Miller.

Petitioner suffers from a condition known as Arnold-Chiari,

a neurological disorder which causes fatigue, lack of muscle

coordination, and blurred vision. She has been treated for these

symptoms, all of which are aggravated during times of stress,

since the 1970's. She was diagnosed with this affliction in 1989

and underwent brain surgery for the condition in 1994. She has

been receiving Social Security disability benefits as a result of

this illness since the early 1980's.

After graduating from the University of South Florida with a

bachelor's degree in psychology, petitioner was employed for

several years as a secretary and office manager for a travel
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agency in Miami. In 1989, she began working as a columnist for

the West Side Leader. In February 1993, she decided to become a

freelance writer, and since then all of her writing has been

conducted on that basis. Petitioner's articles focus primarily

on recreational travel and related subjects.

Petitioner joined Midwest Travel Writers Association and the

Outdoor Writers of America Association in 1990 and 1994,

respectively. To become eligible for membership in Outdoor

Writers of America Association, an individual must have at least

40 published articles. She is also a member of the Outdoor

Writers of Ohio. These organizations provide various benefits to

their members, including networking opportunities and press

passes that allow the holder access to certain events for free or

at a reduced cost.

At the time of trial, petitioner had written numerous

articles and had been published in approximately three dozen

publications. Petitioner was compensated for her writing on a

per article basis, the details of which are set forth in appendix

I.

Petitioner and her husband purchased a travel trailer in

1989 for $13,881. They purchased a class C motor home (the RV)

in 1994 for $34,537. During the years in issue, petitioners

traveled on numerous occasions as set forth in appendix II. Some

of the trips involved either the travel trailer or the RV.
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When traveling, petitioner or her husband normally take

photographs. She owns various pieces of 35mm single lens reflex

camera equipment that she uses in connection with her writing

activity. She does not carry all of her photographic equipment

on all of her trips.

Petitioner has amassed an inventory of 9,000 slides which

she intends to market at some future point in time.

Occasionally, petitioner includes individual slides or

photographs with articles submitted for publication. Some

publishers pay a higher fee for articles that include

photographs.

During 1993, petitioners attended the Second Annual Seminar

at Sea (the cruise) from July 31 to August 13. The cruise was

held aboard the Royal Princess, Princess Cruise Line's flagship.

The ship departed from Southampton, England, sailed to ports in

Scandinavia and Russia, then returned to England. As part of the

cruise, petitioners took ancillary land tours to St. Petersburg,

Moscow, and Copenhagen. Following the cruise, petitioners

remained in England for two additional days, touring London and

Bath.

The cruise was advertised as an educational seminar hosted

by travel writing and photography experts Carl and Ann Purcell.

Mrs. Purcell was unable to attend, and was replaced by Bill

Pekela, General Manager of Technical and Professional Services
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for the Photographic Division of Nikon. Petitioners met with Mr.

Purcell and Mr. Pekela informally at least twice a day to discuss

style and technique. Over the 2-week course of the cruise, there

was a total of 5 1/2 hours of formal instructions. During the

ancillary land tours, petitioners took approximately 900

photographs.

In a document prepared by petitioner and submitted to

respondent prior to the issuance of the notice of deficiency,

petitioner indicated that the purpose for the cruise "was to

study and apply [petitioners'] knowledge [in] obtaining excellent

photographic shots for future photography stock of European

ports." Petitioner originally considered the cruise to be

educational. However, she was not satisfied with the extent of

formal instructions given during the cruise and subsequently

decided that the cruise was more for research purposes than

educational purposes. The total cost of the cruise, including

meals, airfare, and ancillary land tours, was $12,067.75.

Petitioner had published one article related to the cruise, for

which she was paid $150.

Petitioner maintains detailed records of her expenditures,

the amounts of which are undisputed by respondent. She maintains

a separate log book and a separate bank account for her writing

activity. She pays for a majority of the expenses related to her

writing activity via credit card, the bills from which are

usually paid from petitioners' personal joint checking account.
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During 1993, petitioner did not reimburse her personal account

with funds from her writing activity account. Petitioners

consulted with an accountant in structuring their records and in

categorizing various expenses for Federal income tax purposes.

Petitioner's father died in 1993. Petitioner and her sister

were the sole beneficiaries of their father's estate, which was

worth about $1.5 million.

The following items of income were reported on petitioners'

Federal income tax returns for the years in issue:

1993 1994
Wages $57,466.00 $50,032.38
Interest income 37,185.93 45,998.54
(incl. tax-exempt int.)
Dividend income 14,748.32 6,516.50
Capital gain (loss) 17,307.15 (3,000.00)
Social Security benefits 6,187.20 6,349.20

Petitioners began treating her writing activity as a trade

or business in 1990. The income and expenses attributable to

that activity from that year on were reported on a Schedule C.

As of the date of trial, petitioner's writing activity had not

resulted in a profit for any year, as reflected in the following

table:

Year Net Loss

1990 $6,463.28
1991 7,732.60
1992 7,822.23
1993 17,064.66
1994 13,823.70
1995 11,047.00

Total 63,953.47
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For the years in issue, the income and expenses incurred in

connection with petitioner's writing activity were reported on

Schedules C as follows:
1993 1994

Gross receipts $1,130.31 $2,510.35

Expenses:
Advertising --- 52.06
Car & truck 1,731.52 1,854.61
Depreciation 3,405.87 6,172.33
Legal & prof. 130.00 30.00
Office expense 2,267.65 301.58
Supplies 641.03 1,335.66
Travel 8,213.54 2,348.36
Meals 1,177.49 1,907.64
Other 863.37 3,285.63

Net loss 17,064.66 13,823.70

Petitioners deducted 80 percent of the expenses (including

depreciation) attributable to the operation of their travel

trailer in 1993 and 75 percent of the expenses (including

depreciation) attributable to the operation of their RV in 1994.

Approximately one-half of the expenses attributable to the cruise

were deducted in 1993.

Petitioner characterized certain travel expenditures as

business related depending upon whether she had spoken with any

editors regarding her destination, whether any interviews were

scheduled or conducted during the trip, and the amount of

equipment she took along in her camera bag. Petitioner sometimes

made the decision upon returning from the trip.
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In the notice of deficiency sent to petitioners on October

7, 1996, for each year in issue respondent disallowed the net

losses reported on the Schedules C attributable to petitioner's

writing activity because "it has not been established that * * *

[petitioner's writing activity] was a business entered into for

profit." Because petitioners' 1994 Federal income tax liability

was increased as a result of the disallowance, respondent

increased the foreign tax credit claimed on petitioners' 1994

Federal income tax return. In an amendment to answer, respondent

further alleged that the deduction attributable to the cruise

should be disallowed pursuant to section 274(h)(2).

OPINION

In general, section 162(a) allows a deduction for all

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on a trade or business. The term "trade

or business" is not precisely defined in the Internal Revenue

Code or the regulations promulgated thereunder; however, it is

well established that in order for an activity to be considered a

taxpayer's trade or business for purposes of section 162, the

activity must be conducted "with continuity and regularity" and

"the taxpayer's primary purpose for engaging in the activity must

be for income or profit." Commissioner v. Groetzinger, 480 U.S.

23, 35 (1987).
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We are satisfied that petitioner's writing activity was

conducted with continuity and regularity during the years in

issue. Nevertheless, in order for an activity to be considered a

trade or business within the meaning of section 162, a taxpayer

must conduct the activity with the requisite profit motive or

intent. See Commissioner v. Groetzinger, supra.

Consistent with the manner in which petitioners reported the

income and expenses attributable to petitioner's writing activity

on their Federal income tax returns for the years in issue, they

argue that petitioner engaged in her writing activity with the

intent to make a profit, and therefore the activity constitutes a

trade or business.

Respondent argues that petitioner's writing activity does

not constitute a trade or business because she did not engage in

that activity with the requisite intent to profit. Consequently,

according to respondent, petitioners are only entitled to deduct

the expenses related to petitioner's writing activity as

allowable under section 183.

The test of whether a taxpayer conducted an activity for

profit is whether he or she entered into, or continued, the

activity with an actual or honest objective of making a profit.

Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer v.

Commissioner, 78 T.C. 642, 644-645 (1982), affd. without opinion

702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.
 - 10 -

Although a reasonable expectation of profit on taxpayer's part is

not required, the profit objective must be bona fide, as

determined from a consideration of the surrounding facts and

circumstances. Keanini v. Commissioner, supra at 46; Dreicer v.

Commissioner, supra at 645; Golanty v. Commissioner, 72 T.C.

411, 426 (1979), affd. without published opinion 647 F.2d 170

(9th Cir. 1981); Bessenyey v. Commissioner, 45 T.C. 261, 274

(1965), affd. 379 F.2d 252 (2d Cir. 1967).

Whether petitioner engaged in her writing activity with an

actual and honest objective of realizing a profit must be

redetermined year-to-year, taking into account all of the

relevant facts and circumstances. Golanty v. Commissioner, supra

at 426; sec. 1.183-2(a) and (b), Income Tax Regs. More weight is

given to objective facts than to petitioner's statement of her

intent. Engdahl v. Commissioner, 72 T.C. 659, 666 (1979); sec.

1.183-2(a), Income Tax Regs.

The following factors, which are nonexclusive, should be

considered in the determination of whether an activity is engaged

in for profit: (1) The manner in which the taxpayer carried on

the activity; (2) the expertise of the taxpayer or his or her

advisers; (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;
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(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; (8) the financial status of the taxpayer; and (9)

elements of personal pleasure or recreation. Sec. 1.183-2(b),

Income Tax Regs.

No one factor is determinative in and of itself, and our

conclusion with respect to petitioner's profit motive does not

depend upon merely counting up those factors that suggest the

presence of a profit motive and comparing the number to those

factors that indicate the opposite. Sec. 1.183-2(b), Income Tax

Regs.

Taking into account the above factors and considering the

facts and circumstances relating to petitioner's writing

activity, as discussed more fully below, we are not persuaded

that during the years in issue petitioner engaged in that

activity with the intent to profit that is necessary to consider

the writing activity a trade or business for purposes of section

162. The activity did generate income; however, not all income

producing activities constitute trades or businesses within the

meaning of section 162(a). Cf. Commissioner v. Groetzinger,

supra at 35.

In each year in issue, the great majority of expense

deductions attributable to petitioner's writing activity were

related to travel. We are particularly influenced by
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petitioner's failure to consider whether the income that could be

generated by a particular trip would be in excess of the expenses

related to the trip. In fact, the income-producing potential of

a particular trip seemed to be of little concern to petitioner.

It appears that petitioner would first decide upon a destination

and spend whatever was necessary to travel there, regardless of

the amount of income that she could objectively expect to earn

from the sale of articles resulting from the trip. This is

obvious during the years in issue from the relatively small

amount of income that petitioner received on a per-article basis.

For example, in 1993 and 1994, petitioner traveled to Las Vegas,

deducting expenses of $907.52 and $934.96, respectively. Even

though she sold three articles that resulted from the trips, she

recovered less than one-third of the expenses deducted. Similar

circumstances occurred regarding petitioner's travels to Miami,

Milwaukee, and Disney World. With few exceptions, petitioner did

not sell an article that generated more income than the expenses

attributable to the related trip.

Furthermore, the decision to deduct the expenses of a

particular trip was sometimes made after the fact. For example,

petitioners took a trip to Disney World in 1994, for which they

incurred expenses of $977.51. Although petitioner had not

planned on writing any articles about Disney World or contacted

any editors prior to the trip, upon returning home she decided
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that the expenses of the trip should be deducted in connection

with her writing activity because she had taken photos and

interviewed various people.

Petitioners enjoyed traveling and did so frequently. The

recreational aspects of their travel are apparent given many of

their destinations. The personal or recreational aspects of an

activity cannot be ignored in considering a taxpayer's profit

motive. Sec. 1.183-2(b)(9), Income Tax Regs. The fact that the

taxpayer enjoys his or her work does not necessarily indicate the

absence of an intent to profit; however, "where the possibility

for profit is small (given all the other factors) and the

possibility for gratification is substantial, it is clear that

the latter possibility constitutes the primary motivation for the

activity." Smith v. Commissioner, T.C. Memo. 1997-503 (citing

Burger v. Commissioner, T.C. Memo. 1985-523). Weighing the

personal pleasures derived from petitioner's travels against the

profit potential that could result, we are satisfied that the

writing activity was conducted more for the purpose of

subsidizing the costs of the trips than for profit.

Our conclusion on the point is further supported by the

history of losses incurred by petitioner since her writing

activity began. See sec. 1.183-2(b)(6), Income Tax Regs.

"[W]here losses continue to be sustained beyond the period which

customarily is necessary to bring the operation to profitable
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status such continued losses, if not explainable, * * * may be

indicative that the activity is not being engaged in for profit."

Sec. 1.183-2(b)(6), Income Tax Regs. During the years in issue,

petitioners deducted $30,888.36 of losses attributable to

petitioner's writing activity. The magnitude of the activity's

losses in comparison with its revenues is an indication that

petitioner did not have a profit motive with respect to the

activity. Smith v. Commissioner, supra; Burger v. Commissioner,

supra.

Petitioners contend that the losses are startup losses. We

recognize that losses in the early years of a business are not

necessarily inconsistent with a profit motive. However, the

taxpayer must demonstrate that enough profits will be earned in

the future to cover the losses in the startup years. Golanty v.

Commissioner, 72 T.C. at 426-427. Petitioners deducted losses

totaling $63,953 over the first 6-year period of the activity.

As of the date of trial, with few exceptions, petitioner had not

earned enough from an article to cover the cost of the related

trip. We are not convinced that petitioner will ultimately be

able to recover losses from prior years.

Because petitioner's writing activity was not an activity

engaged in for profit, the activity cannot be considered a trade

or business for purposes of section 162(a). Therefore, she is

only entitled to deduct the expenses incurred in that activity in
 - 15 -

accordance with section 183. It follows, and we hold, that

respondent's determination in this regard is sustained. In view

of the foregoing, we need not consider whether the provisions of

section 274(h) prohibit petitioners from deducting the expenses

related to the cruise.

In closing we note that our conclusion in this case is

limited to the years before us. Sec. 1.183-2(a) and (b), Income

Tax Regs. We also note that petitioner considers herself a

professional writer and is rightfully proud of her various

publication credits. To the extent that petitioner is paid for

the articles accepted for publication, her characterization of

herself as a professional writer is appropriate, and nothing in

this opinion should be interpreted as suggesting otherwise. Our

focus upon petitioner's writing activity as a trade or business

has been in the context of Federal income taxation and should be

so limited.

Based on the foregoing,

Decision will be

entered for respondent.
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Appendix I

Article1 Publisher Date Income
WAKC - Kill Fee --- 4/93 $125.00
Cruise Ships Take Akron Beacon 1/93 125.00
Travelers Find Camping Today 3/93 125.00
Ohio's Field Camping Today 11/93 75.00
Planning Your Natl. Focus 3/93 136.00
Biking Basics Focus 3/93 136.00
Experience Ohio Focus 6/93 136.00
Exercise Classes Focus 12/93 64.50
Skiing Offers Focus 12/93 64.50
Cruises are Travel Focus 12/93 37.50
Fascination Leader 1/93 20.00
Double Your Pleas. Leader 1/93 20.00
Anchors Aweigh Leader 1/93 20.00
Learn to Ski Leader 1/93 20.00
Metro Park Rpt. Leader 1/93 20.00
Chilli Open Leader 1/93 20.00
Cruises are for Leader 2/93 20.00
Metro Park Rpt. Leader 2/93 20.00
Fairlawn Parks Leader 3/93 20.00
Discover Ohio's Leader 6/93 20.00
RV Show Packed Leader 12/93 20.00
Campers Must Ohio O-O-D 4/93 25.00
The 5Ws of Car Ohio O-O-D 4/93 25.00
Kids Can Be Ohio O-O-D 4/93 25.00
Gifts for Outdoor Ohio O-O-D 9/93 25.00
Hints for Buying Ohio O-O-D 11/93 25.00
Winter Camping Ohio O-O-D 12/93 25.00
Sleeping Bags Ohio O-O-D 12/93 25.00

1
Titles were taken from Exhibit 13-M.
 - 17 -

Article Publisher Date Income
Derby City - Brim Akron Beacon 2/94 $150.00
Roman Around Akron Beacon 4/94 150.00
Las Vegas Seeks Akron Beacon 8/94 150.00
Miami is a Jungle Akron Beacon 8/94 150.00
Survival Hints Camping Today 2/94 100.00
Increasing Power Camping Today 2/94 75.00
Camping Word Falcon 2/94 100.00
Hitting the Trail Focus 1/94 67.50
Seniors Enjoy Focus 4/94 61.50
Malabar Farm Focus 5/94 61.50
MetroParks Accom. Focus 7/94 67.50
Lake FarmPark Focus 8/94 67.50
Metro Seeks Levy Focus 10/94 86.75
Summit Co. Metro Focus 10/94 86.75
RVs What's Hot Ohio O-O-D 1/94 25.00
UV or Not UV Ohio O-O-D 4/94 25.00
Malabar Farm Ohio O-O-D 5/94 25.00
Rent-A-Camp Ohio O-O-D 5/94 25.00
Quality Hunting Ohio O-O-D 7/94 25.00
Christmas Gifts Ohio O-O-D 10/94 25.00
Snowshoes Ohio O-O-D 12/94 25.00
Snowshoes Ohio O-O-D 12/94 35.00
Press Kit Simon Sign 6/94 350.00
First Aid Kits Winnebago 1/94 50.00
Binoculars Winnebago 3/94 100.00
2
Natl. Tour Winnebago 5/94 150.00
Akron: Much More Woodall's 3/94 89.20
Chadwick Inn Woodall's 5/94 59.25
Lake FarmPark Woodall's 7/94 66.30
Museum of Family Woodall's 11/94 41.95
Petit Center Woodall's 12/94 37.85
Milwaukee: Great Woodall's 12/94 111.25

2
Plus $11 for an attached photo.
 - 18 -

Appendix II

1993 - TRIPS FOR WHICH DEDUCTIONS WERE NOT CLAIMED ON A SCHEDULE C
Date Destination Deduction
5/15-19 Sag Harbor, New York n/a
6/18-20 Utica, New York n/a
7/1-4 Miami, Florida n/a

1993 - TRIPS FOR WHICH DEDUCTIONS WERE CLAIMED ON A SCHEDULE C
Date Destination Deduction
1/26-2/4 Miami $297.77
4/17-25 Las Vegas 907.52
5/21-23 Mt. Gilead 48.52
5/29-31 PierLon Campground 61.25
6/5-7/11 Portland, Oregon (OWAA) 747.31
7/8-18 NCHA Campvention 446.68
7/30-8/15 "Cruise" 6,088.10
9/17-19 Mansfield 79.84
10/1-3 Springfield 43.34
10/8-10 Louisville, Ohio 63.09
10/16-17 Punderson State Park 27.12
11/29-12/5 Louisville (RVIA Trade Show) 701.65

1994 - TRIPS FOR WHICH DEDUCTIONS WERE NOT CLAIMED ON A SCHEDULE C
Date Destination Deduction
2/12-16 Cedar Rapids, Iowa n/a
3/25-27 New Jersey n/a
5/27-30 Baylor Beach, Brewster n/a
6/17-19 Loudonville n/a
8/17-27 Suffern, New York n/a
9/16-18 Medina, Ohio; PierLon Camp. n/a
10/1 Put-in-Bay, Ohio n/a
11/24-27 Utica, New York n/a

1994 - TRIPS FOR WHICH DEDUCTIONS WERE CLAIMED ON A SCHEDULE C
Date Destination Deduction
3/4-16 Miami $315.95
3/18-25 Las Vegas 953.77
4/15-17 Loudonville 185.00
5/7-15 Orlando 977.51
5/20-22 Toledo; Maumee 100.65
6/26-27 Blue Rock, Ohio 67.46
7/2-4 Montville, Ohio 79.82
7/23-8/10 Boston, Mass. 682.81
11/13-23 Milwaukee 170.61
11/28-12/2 Louisville (RVIA Trade Show) 314.24
12/2-22 Milwaukee 329.25