BUSH v. COMMISSIONER

T.C. Memo. 2002-33

UNITED STATES TAX COURT

CHRISTOPHER JOSEPH BUSH AND ROBIN LEIGH PICKERING, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7401-00. Filed February 4, 2002.

Christopher Joseph Bush and Robin Leigh Pickering, pro sese.

Michele A. Yates, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DEAN, Special Trial Judge: Respondent determined a

deficiency of $2,593 in petitioners’ 1996 Federal income tax.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the year in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.
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Respondent determined that certain deductions were not

ordinary and necessary expenses incurred while carrying on a

trade or business. We must decide whether petitioners are

entitled to deduct on Schedule C, Profit or Loss from Business,

cost of goods sold and various business expenses for 1996; we

hold that they are not. We must also decide whether respondent’s

notice of deficiency is valid; we hold that it is.

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

The exhibits received into evidence are incorporated herein by

reference. At the time the petition in this case was filed,

petitioners resided in Alexandria, Virginia. Petitioners are

husband and wife. References to petitioner in the singular are

to Christopher Joseph Bush unless otherwise noted.

FINDINGS OF FACT

In 1996, petitioner established Aspiring Artists, a sole

proprietorship whose stated purpose was to manage and develop

artistic talent. In this pursuit, petitioner represented a band

and entered into an agreement with his stepdaughter Jennifer

Hummer (sometimes Jennifer or petitioners’ daughter or

petitioner’s stepdaughter).

Petitioners filed a joint return in 1996. Petitioners

attached to their 1996 Federal income tax return a Schedule C on

which they reported $3,550 of gross receipts and claimed various

deductions relating to Aspiring Artists.
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Aspiring Artists’ only contract, entered into in October of

1996, was with petitioners’ daughter.1 Despite having entered

into this contract in October of 1996, petitioners deducted

expenses incurred throughout the entire calendar year.

Jennifer was a high school student at Salem High School

(Salem). In addition to the time she spent at Salem, Jennifer

worked three part-time jobs to help support the pursuit of her

ultimate career goal of becoming a successful ballerina. To help

attain her goals Jennifer trained at the Virginia School of the

Arts in Lynchburg (VSA). VSA serves as a training ground for

people hoping to develop careers in the fine arts, particularly

those interested in dance. VSA is an expensive place to receive

an education.

Petitioners shared Jennifer’s hope that one day she would

have a successful career as a ballerina. To support both their

daughter’s and their aspirations, petitioners helped Jennifer in

any way possible. To help save on room and board petitioners had

Jennifer live at their home and commute the 70 miles to and from

VSA six times each week. Petitioners paid for all expenses

related to Jennifer’s commute, including gasoline, oil changes,

service, and repairs. In addition, petitioners paid for

1
Jennifer turned 18 years old in July 1996. Prior to
attaining the age of majority, Jennifer and petitioner had a
tacit agreement that she would, in one manner or another, pay him
back for some of the money he spent supporting her pursuit of a
ballet career.
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supplies, pointe shoes, clothing, VSA’s tuition, and other

expenses. Essentially, petitioners took care of any expense

Jennifer had, including medical bills.

Jennifer’s contract with Aspiring Artists purports to be a

talent-agent agreement. The contract states petitioner’s

responsibility to pay for Jennifer’s supplies, commuting, dance

classes, and other expenses. According to its terms, the

contract required that Jennifer pay $488 a month to Aspiring

Artists to help pay for tuition at VSA and other related costs.

Petitioners’ daughter was allowed to pay less than $488 per month

if Aspiring Artists determined that she was “overburdened”.

Jennifer paid less than the $488 for the first 3 months of the

contract, October, November, and December of the year in issue,

because her parents decided that it was important for her to

spend her time focusing on end of the year performances.

Jennifer’s contract included a “four-year out” provision that

bound her to pay 10 percent of “gross dance-related income” over

the first 40 months (four 10-month dance seasons) of her ballet

career.

Petitioner contacted professionals in the dance industry

inquiring about the best method of getting an aspiring dancer a

permanent job with a dance company. Petitioner focused his

energies on securing a job for his stepdaughter. Petitioner,

however, failed to develop other aspects of Aspiring Artists such
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as drafting a business plan or long-term financial analysis of

the profitability of Aspiring Artists.

As a result of petitioner’s efforts and Jennifer’s hard work

and skill, the New York Theatre Ballet (NYTB) extended her an

offer of employment. Jennifer’s contract, entered into in August

of 1997, engaged her as an apprentice dancer from August through

December of 1997. The period of the contract included training

and rehearsal time as well as 3 weeks of “The Nutcracker Ballet”

performances. Both petitioners and Jennifer were overjoyed with

Jennifer’s success.

On April 5, 2000, respondent sent to petitioners, by

certified mail, a notice of deficiency. The notice of deficiency

informed petitioners that respondent determined that the

following $13,889 of Schedule C expenses petitioners deducted for

expenses related to their daughter’s dance education would not be

allowed:

Schedule C expenses deducted by petitioners Allowed

Mileage $3,640 $ 0
Advertising 200 200
Wages 525 525
Cost of goods sold 150 0
Depreciation 54 54
Employee benefits 900 0
Supplies 1,500 1,500
Meals 900 0
Utilities 500 500
Education and medical (other) 1,557 0
Travel 7,871 1,129
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OPINION

Schedule C Deductions

Petitioners maintain that all deductions were part of a

legitimate business whose primary objective was to earn a profit.

Respondent’s position is that the contested deductions are

unsubstantiated personal expenses.

Section 162(a) allows deductions for ordinary and necessary

expenses paid or incurred in carrying on a trade or business.

Generally, no deduction is allowed for personal, living, or

family expenses. Sec. 262.

In this case, petitioner’s agreement with his stepdaughter

was in furtherance of the personal desires of both parents and

daughter that Jennifer should prepare herself for a career as a

ballerina. Petitioners have not shown that payments for one’s

own daughter’s training and education conditioned upon the

commitment of her future earnings are ordinary and necessary

business expenses.

Generally, under section 183(a) and (b) individuals are not

allowed deductions attributable to an activity “not engaged in

for profit” except to the extent of gross income generated by the

activity. Section 183(c) defines an activity “not engaged in for

profit” as any activity other than one for which deductions are

“allowable * * * under section 162 or under paragraph (1) or (2)
 - 7 -

of section 212.” For deductions to be allowed under section 162

or section 212(1) or (2), taxpayers must establish that they

engaged in an activity with the actual and honest objective of

making an economic profit independent of tax savings. Antonides

v. Commissioner, 91 T.C. 686, 693-694 (1988), affd. 893 F.2d 656

(4th Cir. 1990); Dreicer v. Commissioner, 78 T.C. 642, 644-645

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).

The expectation of profit need not have been reasonable; however,

taxpayers must have entered into the activity, or continued it,

with the objective of making a profit. Hulter v. Commissioner,

91 T.C. 371, 393 (1988); sec. 1.183-2(a), Income Tax Regs.

Whether the requisite profit motive exists is determined by

evaluating all surrounding facts and circumstances. Keanini v.

Commissioner, 94 T.C. 41, 46 (1990); sec. 1.183-2(b), Income Tax

Regs. Greater weight is given to objective facts than to

taxpayers’ self-serving statements of intent. Westbrook v.

Commissioner, 68 F.3d 868, 875-876 (5th Cir. 1995), affg. T.C.

Memo. 1993-634; sec. 1.183-2(a), Income Tax Regs. Taxpayers bear

the burden of proving that they engaged in the activity with the

intent of making a profit.2 Rule 142(a).

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

nonexclusive list of factors to be used in determining whether an

2
We do not find that the burden shifting provisions of sec.
7491 apply.
 - 8 -

activity is engaged in for profit. These factors are: (1) The

manner in which the taxpayers carry on the activity; (2) the

expertise of the taxpayers or their advisers; (3) the time and

effort expended by the taxpayers in carrying on the activity; (4)

the expectation that assets used in the activity may appreciate

in value; (5) the success of the taxpayers in carrying on similar

or dissimilar activities; (6) the history of income or losses

with respect to the activity; (7) the amount of occasional

profit, if any; (8) the financial status of the taxpayers; and

(9) elements of personal pleasure or recreation. No single

factor, nor the existence of a majority of factors favoring or

disfavoring a profit objective, is necessarily controlling.

Cannon v. Commissioner, 949 F.2d 345, 350 (10th Cir. 1991), affg.

T.C. Memo. 1990-148.

Taking into account the relevant factors outlined above, and

considering the facts and circumstances relating to Aspiring

Artists’ activities, we are not persuaded that petitioner engaged

in those activities with the objective of making a profit.

Petitioner attempted to show that he managed some aspects of

Aspiring Artists in a businesslike fashion. Petitioner

maintained detailed records relating to car expenses including

repair costs, gasoline receipts, and miles traveled by his

stepdaughter. It appears, however, that those records were

maintained primarily to support tax deductions, not as a record
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of business operations. Petitioner maintained a separate

checking account for Aspiring Artists, but Jennifer's mother,

petitioner Robin Leigh Pickering, made some VSA tuition payments

out of her personal checking account. Commingling of funds

indicates that an activity is more closely related to a hobby

than a business. See Lundquist v. Commissioner, T.C. Memo. 1999-

83, affd. without published opinion 211 F.3d 600 (11th Cir.

2000). While petitioner claims to have advertised Aspiring

Artists’ services during the year in issue, this Court finds that

there is no evidence of “advertising” until August of 1997.

Petitioner’s “advertising” efforts consisted of soliciting

students interested in commuting to VSA for a fee. Had the

solicitations been effective, the fees would merely have

mitigated the cost of Jennifer’s auto expenses.

Additionally, petitioner failed to create any type of

business plan which outlined strategies ensuring a profitable

business venture. Petitioner failed to create any type of budget

or break-even analysis. Petitioner did not know when, or how, if

ever, he would make a profit, and there was no concerted or

articulated effort to make that a reality. Such lack of

information upon which to make educated business decisions tends

to belie a taxpayer’s contentions that an activity was pursued

with the primary objective of making a profit. Dodge v.

Commissioner, T.C. Memo. 1998-89, affd. without published opinion
 - 10 -

188 F.3d 507 (6th Cir. 1999); see also Nova v. Commissioner, T.C.

Memo. 1993-563. Thus, we find that petitioner did not operate

Aspiring Artists in a businesslike manner.

Petitioner spoke with two people who are involved in the

dance industry. It appears, from the record, that petitioner

spoke with each of the identified “experts” only once.

Petitioner solicited advice regarding securing auditions for his

stepdaughter. Petitioner testified that one expert advised him

to have Jennifer “go to a company class with a major company.

And she would be the only person dancing with the whole corps de

ballet.” Petitioner followed this advice.

Petitioners themselves, however, had no prior dance

experience. Petitioner states that because his stepdaughter has

taken dance classes for more than 10 years Ms. Pickering’s

knowledge and experience over those 10 years qualifies her as an

expert. But petitioner did not seek any advice on how to start

or maintain a business as a talent adviser. Petitioner did not

contact any “expert” regarding the standard business practices

and economics of running his own talent agency. See Burger v.

Commissioner, 809 F.2d 355, 359 (7th Cir. 1987), affg. T.C. Memo.

1985-523. While petitioners might have had some familiarity with

the dance industry, that experience does not translate into the

ability to operate a profitable business. Zidar v. Commissioner,

T.C. Memo. 2001-200. We are not persuaded by the evidence on the
 - 11 -

record that petitioner’s experience, or his scant contact with

“experts”, supports his contention that he entered this venture

with the objective of making a profit. McCarthy v. Commissioner,

T.C. Memo. 2000-135; DeMattia v. Commissioner, T.C. Memo. 1998-

87.

It is apparent from the record that petitioner had no reason

to expect appreciation in the value of his agreement with

Jennifer. See sec. 1.183-2(b)(4), Income Tax Regs. Petitioner

spent the majority of his money on the cost of tuition at VSA,

travel, and automobile expenses. The evidence shows that the

only opportunity for petitioner to recoup his investment was

through his agreement with Jennifer securing for himself 10

percent of her dance-related income.

The value of the agreement is at best, speculative.

Jennifer’s NYTB contract paid her approximately $5,200 for a 10-

month dance season.3 Respondent disallowed $13,889 of the

expenses petitioners claimed for Jennifer in 1996. Because her

agreement states that she will repay Aspiring Artists 10 percent

of her dance-related earnings, she would need to earn more than

3
This computation is based on Jennifer’s contract with NYTB
which compensated Jennifer as follows:

Your gross performance compensation will be as
follows: Nutcracker Tour ($300 per week), NYC
Nutcracker season (flat fee of $300). In addition,
during rehearsal periods you will be compensated at the
rate of $100 per week.
 - 12 -

$138,890 in the first 40 months of her dance career for

petitioner to break even on his investment. See DeMattia v.

Commissioner, supra; Nova v. Commissioner, supra.

Petitioner makes repeated references to the fact that he was

unable to afford to send his stepdaughter to VSA without her

working part-time jobs to help with expenses. Petitioner asserts

that as a result of his financial status this factor necessarily

falls in his favor. We disagree. Pearson v. Commissioner, T.C.

Memo. 1996-66. Petitioners’ income from wages in 1996 was

$21,584. In addition, petitioner received $11,700 in gross

receipts from activities related to his chess company.

Petitioners were by no means wealthy; however, the deductions

with respect to Aspiring Artists reduced their tax liability. In

addition, petitioners benefited from the personal pleasure

involved in watching their daughter grow into a ballerina. Even

if we were to find that this factor supported petitioners’

position, it would not outweigh the other factors.

The existence of personal or recreational elements in an

activity may indicate that the activity is not engaged in for

profit. Where an activity, however, lacks any appeal other than

profit, a profit objective may be indicated. See sec. 1.183-

2(b)(9), Income Tax Regs. Where the possibility of making of

profit is small (given the other factors) and the personal

satisfaction is substantial, it is clear that the latter
 - 13 -

possibility constitutes the greater motivation for the activity.

Stasewich v. Commissioner, T.C. Memo. 2001-30 (quoting Burger v.

Commissioner, T.C. Memo. 1985-523, affd. 809 F.2d 355 (7th Cir.

1987)).

Petitioner’s testimony throughout trial consistently refers

to the pride instilled in him by Jennifer’s hard work and

success. He indicated that Jennifer worked especially hard to go

to high school, work, and simultaneously attend VSA. Petitioner

was very pleased that all of his stepdaughter’s hard work paid

off with a contract with NYTB. The vast majority of the Schedule

C expenses claimed for the year in issue were attributable to

Jennifer’s training, attire, and travel for her dance education.

This fact, coupled with the factors enumerated above, indicates

that petitioner did not engage in this activity out of motivation

for profit. Instead, petitioner’s primary motivation was that of

pride and personal gratification. See Whalley v. Commissioner,

T.C. Memo. 1996-533.

It is plain to this Court that petitioner’s primary and

dominant motivation with respect to expenditures for Jennifer’s

ballet training was familial. The record shows that despite not

being an agent or employee of Aspiring Artists, Ms. Pickering

paid for some of Jennifer’s dance expenses. Petitioners wanted

what most parents want for their children, for them to be

successful in their chosen careers. McCarthy v. Commissioner,
 - 14 -

supra; DeMattia v. Commissioner, supra; Nova v. Commissioner,

T.C. Memo. 1993-563

Section 262(a) prohibits taxpayers from taking deductions

for expenses that are inherently personal, living or family

expenses. The purchase of school supplies, including pointe

shoes and other dance clothing is a nondeductible personal and

family expense. Werbianskyj v. Commissioner, T.C. Memo. 1975-93.

The cost of providing a ballet education is also a nondeductible

personal expense. See Cooper v. Commissioner, 264 F.2d 889, 891

(4th Cir. 1959), affg. per curiam T.C. Memo. 1958-169; Ates v.

Commissioner, T.C. Memo. 1985-469; sec 1.262-1(b)(9), Income Tax

Regs. We hold that the disallowed Schedule C deductions for

Jennifer’s pointe shoes, clothing, and dance tuition were all

nondeductible personal and family expenses. We hold further that

petitioners’ Schedule C deductions related to Jennifer’s dance

education are allowable up to $3,550, Aspiring Artists’ gross

receipts, less those deductions allowed irrespective of the lack

of a profit motive. Sec. 183(b)(2).

We similarly find that the cost incurred by petitioners for

Jennifer’s medical expenses is a personal family expense, the

deduction of which is prohibited by section 262, except as

allowed by section 213. Jennifer was covered by the health

insurance policy owned by her father. Petitioner purported to

create a “Self Insured Medical Plan Aspiring Artists Company”.
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Under the “plan”, petitioner agreed that Aspiring Artists would

pay up to the $500 deductible for Jennifer’s medical expenses not

covered by her father’s insurance policy. Petitioner signed the

handwritten document creating the “medical plan” agreement dated

August 1, 1996. There were, however, outstanding medical

expenses from March or earlier of 1996. From the record it

appears as though these expenses stem from a period of time prior

to their daughter's commencing her education at VSA. All the

payments made with respect to Jennifer’s medical expenses were

made by personal checks, most of them on checks drawn by Ms.

Pickering. This Court finds that Jennifer’s medical expenses are

not deductible on Schedule C as business expenses, but

petitioners may claim them on Schedule A, Itemized Deductions,

subject to the 7.5-percent limitation of section 213(a).

Validity of the Notice of Deficiency

Petitioners contend that the notice of deficiency issued by

respondent is invalid because it specified July 4, 2000, a legal

holiday, as the last day on which petitioners could file a

petition with the Tax Court. The notice of deficiency states

that if petitioners want “to contest this determination in court

before making any payment, you have 90 days from the date of this

letter * * * to file a petition with the United States Tax Court

for a redetermination of the deficiency.” Petitioners urge this

Court to hold that identifying a legal holiday as the last
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possible date on which petitioners could file a timely petition

with this Court renders the notice of deficiency invalid pursuant

to section 3463(a) of the Internal Revenue Service Restructuring

and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 767.

Petitioners’ research curiously failed to uncover section

7503, which states that “When the last day prescribed under

authority of the internal revenue laws for performing any act

falls on * * * a legal holiday, the performance of such act shall

be considered timely if it is performed on the next succeeding

day which is not a * * * legal holiday.”

Even when the Commissioner fails to state the petition date

on the notice of deficiency but the taxpayer nonetheless receives

the notice and, files a timely petition, the notice is valid.

Smith v. Commissioner, 114 T.C. 489, 492 (2000), affd. 275 F.3d

912 (10th Cir. 2001). Pursuant to section 7503, the final date

on which petitioners could have filed a timely petition with this

Court was Wednesday, July 5, 2000, one day later than the date on

the notice of deficiency. Petitioners filed their petition with

the Tax Court on July 3, 2000, within the time prescribed by

statute. Therefore, this Court rejects petitioners’ argument.

From an analysis of the facts and circumstances in this

case, we hold that petitioner did not operate Aspiring Artists’

relationship with his stepdaughter with the actual and honest

objective of making a profit. Thus, the activity cannot be
 - 17 -

considered a trade or business for purposes of section 162(a).

Accordingly, we sustain respondent’s determination that

petitioners are not allowed certain Aspiring Artists Schedule C

deductions for the expenses claimed for the year in issue in

excess of the gross income reported by the activity.

The Court has considered all other arguments advanced by

petitioners, and to the extent not discussed above, has found

those arguments to be irrelevant or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.