Dickie v. Commissioner

T.C. Memo. 1999-138

UNITED STATES TAX COURT

PAUL F. DICKIE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

PAUL F. DICKIE AND SHERRY L. DICKIE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 9614-98, 9615-98. Filed April 26, 1999.

Leslie A. Anderson, for petitioners.

Gail K. Gibson, for respondent.

MEMORANDUM OPINION

PAJAK, Special Trial Judge: This case was heard pursuant to

section 7443A(b)(3) and Rules 180, 181, and 182. All section

references are to the Internal Revenue Code in effect for the
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years in issue. All Rule references are to the Tax Court Rules

of Practice and Procedure.

Respondent determined the following deficiencies and

accuracy-related penalties:

Accuracy-related Penalty
Year Deficiency Sec. 6662(a)
1994 $1,095 $219
1995 1,050 210

The issues we must decide are: (1) Whether the activity of

petitioner Paul F. Dickie (petitioner) as a musician was an

activity "not engaged in for profit" within the meaning of

section 183 for the taxable years at issue, (2) whether

petitioner is entitled to a medical expense deduction under

section 213 for taxable year 1994, and (3) whether petitioners

are liable for accuracy-related penalties for the taxable years

at issue.

Some of the facts have been stipulated are so found.

Petitioner filed a joint income tax return for 1994 in his name

and that of his deceased wife, Saundra G. Dickie (Saundra).

Petitioner resided in Prior Lake, Minnesota, at the time his

petition was filed. Petitioner filed a joint income tax return

for 1995 with his wife Sherry L. Dickie (Sherry). Petitioner and

Sherry resided in Prior Lake, Minnesota, at the time their

petition was filed.
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During 1994 and 1995, petitioner was employed full time as a

quality engineer with Illbruck, Inc. (Illbruck). Petitioner's

1994 and 1995 Forms W-2, Wage and Tax Statement, from Illbruck,

showed that petitioner earned wages in the amounts of $52,169.45

and $49,046.00, respectively. On petitioner's 1994 Form 1040,

U.S. Individual Income Tax Return, petitioner reported on line 7,

wages, salaries, tips, etc. in the amount of $52,169. Sherry's

1995 Form W-2 from Speak The Word Church and World Outreach

showed that she earned $29,355.28. On petitioners' 1995 Form

1040, U.S. Individual Income Tax Return, petitioners reported on

line 7, wages, salaries, tips, etc. in the amount of $78,401.

During 1994, petitioner was married to Saundra. In late

February or early March 1994, after about 18 months in remission,

Saundra's breast cancer recurred. Petitioner and Saundra sought

alternative medical therapy. In 1994, petitioner and Saundra

paid Natural Wellness $3,018 for consultation and dietary

"supplements". Natural Wellness was operated by Frank Charles.

Saundra died in August 1994.

Petitioner also is a musician. He began taking music

lessons when he was about 8 years old. Petitioner plays the

trumpet, keyboards, and guitar. During the taxable years at

issue, petitioner played electric and acoustic guitars with the

choir of Speak the Word Church and World Outreach (the Church)

located in Golden Valley, Minnesota. The choir, known as
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Positive Reaction, consisted of approximately 30 members, which

included 18 singers, 8 musicians, and 4 or 5 technical

assistants. On average, petitioner claimed he rehearsed with

Positive Reaction approximately 8 to 10 hours per week, and by

himself in his home studio approximately 5 to 6 hours per week.

Petitioner had no contractual relationship with Positive Reaction

or the Church.

Positive Reaction's repertoire consisted solely of

contemporary Christian music, "some rock, some country, some

rhythm and blues." Positive Reaction has performed in a number

of places including Orlando, Florida, Tulsa, Oklahoma, and areas

in the Twin Cities. The group played "mostly" in Golden Valley.

Positive Reaction has received local and national media

attention.

Positive Reaction recorded its music through High Praise

Productions (High Praise), a recording studio located at the same

address as the Church. Also, High Praise marketed Positive

Reaction's music through Christian bookstores, catalogues, radio,

and television. High Praise produced three compact discs on

which petitioner was acknowledged as a contributing guitarist.

Petitioner also was acknowledged as a contributing guitarist on a

compact disc with a 1996 copyright date, featuring Kevin Stevens

and copyrighted by Fresh Rain Music.
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On the 1994 and 1995 Schedules C, Profit or Loss From

Business, petitioner identified his principal business or

profession as musician, and listed his business name as "Positive

Reaction". For 1994 and 1995, petitioner reported $600 and zero

in gross income, $4,286 and $6,925 in expenses, and a net loss of

$3,686 and $6,925, respectively.

On the 1994 Schedule C for Shaklee Sales, petitioner claimed

$3,018 in expenses for supplies and a net loss for that business

of $10,663.

In the notices of deficiency, respondent determined that

petitioner's activity as a musician was not an activity engaged

in for profit under section 183 for both years, allowed $600 of

expenses up to the amount of income as a Schedule A deduction for

1994, disallowed the $3,018 in expenses for supplies claimed in

1994 because it had not been established that they were ordinary

and necessary business expenses, made automatic adjustments, and

imposed accuracy-related penalties for both years.

Deductions are a matter of legislative grace. New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Generally,

section 183(a) disallows any deductions attributable to

activities not engaged in for profit except as provided under

section 183(b). An activity not engaged in for profit means any

activity other than one with respect to which deductions are
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allowable for the taxable year under section 162 or under

paragraph (1) or (2) of section 212. Sec. 183(c).

The taxpayer must show that he engaged in the activity with

the actual and honest objective of making a profit. Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

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

The taxpayer's expectation of a profit need not be reasonable,

but it must be a bona fide expectation. Sec. 1.183-2(a), Income

Tax Regs. Whether a taxpayer is engaged in an activity with the

requisite profit objective is determined from all the facts and

circumstances. Dreicer v. Commissioner, supra at 645. Greater

weight is given to objective facts than to the taxpayer's mere

statement of his intent. Dreicer v. Commissioner, supra at 645;

sec. 1.183-2(a), Income Tax Regs.

Section 1.183-2(b), Income Tax Regs., provides a

nonexclusive list of relevant factors to be considered in

deciding whether an activity is engaged in for profit. These

factors are: (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

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

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

on similar or dissimilar activities; (6) the taxpayer's history

of income or losses with respect to the activity; (7) the amount
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of occasional profits, if any, which are earned; (8) the

financial status of the taxpayer; and (9) elements of personal

pleasure or recreation. These factors are not applicable or

appropriate in every case. Abramson v. Commissioner, 86 T.C.

360, 371 (1986).

Petitioner carried on his music activity in a nonbusiness

like manner. Petitioner claimed various expenses including car

and truck expenses, depreciation, and supplies. Petitioner

admitted that he failed to maintain any books or records, or a

separate business bank account. There also is no evidence that

petitioner carried on the activity in a manner similar to other

activities of the same nature which are profitable. Sec. 1.183-

2(b)(1), Income Tax Regs.

Although petitioner testified that he attempted to promote

his music activity by handing out compact discs, on which he was

listed as a contributing guitarist, to some people in the music

industry, petitioner did little else to promote or advertise his

availability as a musician for hire. Indeed, petitioner admitted

that he did not advertise in the local telephone directory,

distribute flyers, or obtain business cards. Petitioner was not

a member of any musicians' union. Petitioner made no reasonable

efforts to gain recognition as a musician playing Christian music

for hire.
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There is no credible evidence that petitioner consulted with

experts in the music industry in an effort to further his music

career. Sec. 1.183-2(b)(2), Income Tax Regs. We also note that

petitioner expected his musical instruments to depreciate in

value. Sec. 1.183-2(b)(2), (4), Income Tax Regs.

Notwithstanding petitioner's contention that he expended a

fair amount of time and effort in his music activity, we note

that petitioner was employed full time as an engineer, operated a

sales business in 1994, rendered personal care to Saundra who was

fatally ill in 1994, and raised his children during the years in

issue. We are not convinced that petitioner devoted as much time

to his music activity as he claimed he did.

The record also does not establish that petitioner was

successful in his music activity. For 1994 and 1995, petitioner

reported losses in the amounts of $3,686 and $6,925,

respectively. Although petitioner reported gross income in the

amount of $600 in 1994, petitioner reported related expenses in

the amount of $4,286. During 1994 and 1995, the Forms 1040

reported wages in the amounts of $52,169 and $78,401,

respectively. This helps to persuade us that petitioner's music

activity was only a hobby. Sec. 1.183-2((b)(8), Income Tax Regs.

We do not doubt petitioner's desire to "make it big enough

in the music business to make that a full-time profession."

However, viewing the record as a whole, we are satisfied that
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petitioner's music activity was an activity not engaged in for

profit within the meaning of section 183. Thus, respondent is

sustained on this issue.

We must next decide whether petitioner is entitled to a

deduction in the amount of $3,018 under section 213 for taxable

year 1994. As stated above, petitioner claimed $3,018 in

expenses for supplies attributed to his Shaklee Sales business in

1994. Petitioner concedes that he incorrectly claimed this

amount as expenses for supplies. He argues that it should have

been claimed as a medical expense deduction under section 213.

Section 213 allows a deduction for expenses paid during the

taxable year, not compensated for by insurance or otherwise, for

medical care of the taxpayer, his spouse, or a dependent. The

taxpayer must substantiate any deductions claimed under section

213 by furnishing the name and address of each person to whom

payment for medical expenses was made and the amount and date for

each such payment. Sec. 1.213-1(h), Income Tax Regs. Moreover,

the taxpayer must be prepared to substantiate any claimed

deductions by furnishing statements or itemized invoices from the

individual or entity to which payment for medical expenses was

made. Sec. 1.213-1(h), Income Tax Regs. These statements or

invoices should indicate the nature of the service rendered, and

to or for whom rendered. Sec. 1.213-1(h), Income Tax Regs.
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The parties stipulated that petitioner paid Natural Wellness

$3,018.29 with 11 checks in 1994, which were put in evidence.

Petitioner explained that this amount represented the cost of

consultations and dietary supplements. Petitioner testified that

Natural Wellness was operated by Frank Charles, a "naturopathic

doctor" who practiced in Excelsior, Minnesota. Naturopathy is a

system of treatment of disease emphasizing assistance to nature

and sometimes including the use of natural medical substances

such as herbs, vitamins, and salts, and certain physical means,

such as manipulation and electrical treatment. Webster's Third

New International Dictionary 1508 (unabridged) (1993).

Respondent argues that because the treatments provided

through Natural Wellness were not prescribed by a medical doctor,

and were not covered by an insurance company, the payments for

such treatments are not deductible under section 213. Respondent

on brief states that "it is reasonable to assume that the

insurance company's refusal to pay for [Charles'] treatments

reflects their [sic] informed opinion that his methods were not

suitable or effective in the treatment of cancer."

We disagree with respondent's position. The deductibility

of medical care payments under section 213 is not strictly

limited to traditional medical procedures, but it includes

payments made for the purpose of affecting any structure or
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function of the body. Sec. 213(d)(1)(A). As this Court stated

in Fischer v. Commissioner, 50 T.C. 164, 174 (1968):

The cases, the rulings, and the regulations make clear that
whether a service for which an expenditure is made
constitutes medical care will depend upon its therapeutic
nature to the individual, and not upon the title of the
person rendering the service, or whether the expense is
"medical" to all persons, or the general nature of the
institution in which the service is rendered. [Fn. refs.
omitted.]

This broad view of medical care allows medical expense deductions

for "nontraditional" medical care. Cf. Crain v. Commissioner,

T.C. Memo. 1986-138; Tso v. Commissioner, T.C. Memo. 1980-399.

More importantly, section 213 does not preclude deduction of

amounts expended for medical care even though such care was not

prescribed by a medical doctor.

But we are not persuaded on this record that the entire

amount in issue was expended only for the medical care of

Saundra. Using our best judgment, we allow petitioner to deduct

60 percent of the $3,018 or a total of $1,811 as medical expenses

under section 213 for the taxable year 1994. Cohan v.

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

Finally, we must decide whether petitioners are liable for

accuracy-related penalties for 1994 and 1995. Section 6662(a)

imposes an accuracy-related penalty in the amount of 20 percent

of the portion of an underpayment of tax attributable to

negligence or disregard of rules or regulations. Sec. 6662(a)
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and (b)(1). Negligence is any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

laws. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

Moreover, negligence is the failure to exercise due care or the

failure to do what a reasonable and prudent person would do under

the circumstances. Neely v. Commissioner, 85 T.C. 934, 947

(1985). Disregard includes any careless, reckless, or

intentional disregard of rules or regulations. Sec. 6662(c);

sec. 1.6662-3(b)(2), Income Tax Regs.

No penalty will be imposed with respect to any portion of

any underpayment if it is shown that there was a reasonable cause

for such portion and that the taxpayer acted in good faith with

respect to such portion. Sec. 6664(c). Where the taxpayer

claims reliance on an accountant who prepared the taxpayer's

return, the taxpayer must establish that the correct information

was provided to the accountant and that the item incorrectly

claimed or reported in the return was the result of the

accountant's error. Ma-Tran Corp. v. Commissioner, 70 T.C. 158,

173 (1978); Enoch v. Commissioner, 57 T.C. 781, 803 (1972).

Petitioner did not keep any records of his purported music

business and he did not have a separate bank account. He did not

carry on this activity in businesslike fashion, as we detailed

above. Other than asserting that he relied on the advice of his

accountant, petitioner presented no testimony or other evidence
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to establish that he provided his accountant with all of the

necessary information to prepare properly his returns or that he

received guidance from his accountant as to the propriety of the

claimed deductions. Moreover, petitioner did not call his

accountant as a witness to testify about the information

petitioner provided him for calculating his Federal income tax

liability. We cannot assume the testimony of the absent witness

would have been favorable to petitioner. Rather, the normal

inference is that it would have been unfavorable. Wichita

Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),

affd. 162 F.2d 513 (10th Cir. 1947). For the foregoing reasons,

we conclude that petitioners are liable for accuracy-related

penalties under section 6662(a) for 1994 and 1995.

Decisions will be entered

under Rule 155.