TRUDEL v. COMMISSIONER

T.C. Summary Opinion 2002-39

UNITED STATES TAX COURT

JOSEPH R. AND DIANA K. TRUDEL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4238-01S. Filed April 15, 2002.

Joseph R. Trudel, pro se.

Andrew R. Moore, for respondent.

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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority. Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the
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Tax Court Rules of Practice and Procedure.

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

Petitioners resided in Sunnyvale, California, when the petition

was filed. References to petitioner are to Joseph R. Trudel.

Respondent determined a deficiency of $2,100 in petitioners’

1997 Federal income tax. The issues for decision are: (1)

Whether petitioner’s writing and handyman activities during 1997

were engaged in for profit within the meaning of section 183; and

(2) whether petitioners are entitled to a deduction for self-

employed health insurance expenses under section 162(l).

Background

Petitioner has been employed as a computer programmer and

has worked in consumer affairs as an investigator of consumer

complaints at a state attorney general’s office. During the year

in issue, petitioner worked for about 6 months at Coast Personnel

Services. Petitioner has also engaged in a series of writing

activities and handyman, landscaping, and gardening activities

(handyman activities) that are the subject of this case.

Writing Activity

Petitioner became interested in writing while attending

Grossmont College in the early 1980s. He joined the staff of the

college newspaper and contributed articles as a staff writer. In

1983 petitioner founded a consumer newsletter that he named “San

Diego Scope”. The newsletter, which was published six times each

year, addressed various consumer-related issues such as rental
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housing, local automobile repair services, and restaurant

reviews. After approximately 9 months of operation, the

newsletter had 43 subscribers who each paid $9 for an annual

subscription. The newsletter never generated any significant

revenue, and petitioner discontinued publication after only a few

years. Petitioner was employed as a computer programmer

throughout the time he published the newsletter. After

terminating publication of his newsletter, petitioner began

contributing occasional film and theater reviews to local

newspapers. The newspapers paid him $50 per article. Petitioner

also claims that he made use of his writing ability in various

employments over the years.

During the summer of 1997, petitioner and his wife took an

8-week road trip from California to the east coast and back.

Petitioner claims that they took the trip so that he could write

a series of articles about various Civil War sites. His alleged

target audience was people who were interested in both traveling

and the Civil War. During the trip petitioner visited Civil War

sites and conducted several interviews. Petitioner wrote seven

3- to 5-page articles that he submitted to national magazines

including the National Geographic, AAA Magazine, Via Magazine,

and Travel & Leisure.

Petitioner failed to arrange publication of any of his

articles. Petitioner had no gross receipts from his writing

activity during 1997 and has never received any compensation for
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the articles he wrote during his trip in 1997.

Handyman Activity

In 1993 or 1994 petitioner began performing various handyman

services for compensation. Petitioner’s business card bears the

caption “Home Services” and advertises that petitioner performs

window washing, landscaping, gardening, trash removal, planting,

and yard work.

Tax Return

On the Schedule C, Profit or Loss From Business, of their

1997 Federal income tax return, petitioners grouped petitioner’s

writing activity and his handyman activity as a single business:

GARDENING SERVICE/TRAVEL WRITER. They reported the following

items on their Schedule C:

Income
Gross receipts --
Cost of goods sold --
Gross income1 $370

Expenses
Advertising $184
Office expense 118
Repairs and maintenance 455
Supplies 146
Taxes and licenses 20
Travel 6,768
Meals and entertainment2 1,527
Utilities 120
Other expenses3 3,764

Total expenses 13,102
Tentative loss (12,732)
Net loss4 --
1
All of the reported gross income derived from petitioner’s
handyman activity.
2
Petitioners reported meals and entertainment expenses of
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$3,054 but, pursuant to sec. 274(n)(1), claimed a deduction
for only $1,527 of such expenses.
3
The “Other expenses” consisted of business publication
expenses of $979 and automobile expenses of $2,785. The
automobile expenses were based on 8,843 miles of travel for
business purposes multiplied by the standard mileage rate of
$0.315 per mile.
4
Petitioners mistakenly did not make an entry on the return
line for net loss. Because petitioners did not report any
expenses under sec. 280A for business use at their home,
their net loss is equal to their tentative loss of $12,732.

On their 1997 Federal income tax return, petitioners also

claimed a deduction of $880 for self-employed health insurance

expenses. In the notice of deficiency, respondent disallowed all

of the expenses that petitioners reported in connection with

their Schedule C activities on the grounds that they had not

engaged in these activities for profit. Respondent also

determined that petitioners were not entitled to deduct any

amount paid for the costs of self-employed health insurance.

Discussion

I. Activity Not Engaged in for Profit

Section 183(a) provides that if an activity engaged in by an

individual is not engaged in for profit, no deduction

attributable to such activity shall be allowed, except as

provided in section 183(b). In the case of an activity not

engaged in for profit, section 183(b)(1) allows deductions for

expenses that would be allowable without regard to whether the

activity is engaged in for profit. Section 183(b)(2) allows a

deduction for expenses that would be deductible only if the

activity were engaged in for profit, but only to the extent that
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the gross income derived from the activity exceeds the deductions

allowed by section 183(b)(1).

An “activity not engaged in for profit” means any activity

other than one for which deductions are allowable for the taxable

year under section 162 or under paragraph (1) or (2) of section

212. Sec. 183(c). Section 162 allows a deduction for all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business. In the case

of an individual, section 212 allows a deduction for all the

ordinary and necessary expenses paid or incurred during the

taxable year for the production or collection of income or for

the management, conservation, or maintenance of property held for

the production of income.

To deduct the expenses of an activity under either section

162 or section 212, a taxpayer must show that he engaged in the

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

Ronnen v. Commissioner, 90 T.C. 74, 91 (1988); Fuchs v.

Commissioner, 83 T.C. 79, 98 (1984); sec. 1.183-2(a), Income Tax

Regs. Although a reasonable expectation of profit is not

required, the taxpayer’s profit objective must be bona fide.

Beck v. Commissioner, 85 T.C. 557, 569 (1985); Golanty v.

Commissioner, 72 T.C. 411, 425-426 (1979), affd. without

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

taxpayer has an actual and honest profit objective is a question

of fact to be resolved from all the relevant facts and
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circumstances. Elliott v. Commissioner, 84 T.C. 227, 236 (1985),

affd. without published opinion 782 F.2d 1027 (3d Cir. 1986);

sec. 1.183-2(b), Income Tax Regs. Greater weight is given to

objective facts than to a taxpayer’s statement of intent.

Elliott v. Commissioner, supra at 236-237; sec. 1.183-2(a),

Income Tax Regs.

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

nonexclusive list of factors which normally should be considered

in determining 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 advisers; (3) the time and

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

the expectation that the 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 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. No single factor, nor the existence of

even a majority of the factors, is controlling, but rather it is

an evaluation of all the facts and circumstances in the case,

taken as a whole, which is determinative.

Although petitioners reported the writing activity and the

handyman activity as a single business on their Schedule C, we

conclude that they are two distinct activities and must be
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analyzed separately for purposes of section 183. See Abbene v.

Commissioner, T.C. Memo. 1998-330; sec. 1.183-1(d)(1), Income Tax

Regs.

A. Handyman Activity

Petitioner began the handyman activity in 1993 or 1994.

With respect to this activity during 1997, petitioners reported

on their Schedule C gross income of $370 and total expenses of

approximately $1,100. On Schedule C petitioner did not allocate

his expenses between the handyman activity and the writing

activity. Nevertheless the record indicates that expenses for

supplies ($146), advertising ($184), business license ($20),

building materials ($118), and repairs and maintenance ($455) may

properly be allocated to the handyman activity.

Petitioners’ summary of expenses indicates that 592 miles

were driven in connection with the handyman activity.

Consequently, expenses of $186 (592 multiplied by $0.315) were

attributable to automobile mileage expenses of the handyman

activity. The automobile mileage expenses of this activity

amounted to more than half of petitioner’s gross receipts from

this activity.

At trial, when questioned as to why the gross receipts of

his handyman activity, including landscaping and gardening

services, were only $370 for the entire year, petitioner replied

“That’s just the seasonal nature of the business.” Petitioner

also attributed the modest amount of gross receipts to his
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preoccupation with other activities during 1997, including his 6-

month stint working as an independent contractor for Coast

Personnel Services and his 8-week trip to the east coast. These

excuses for petitioner’s failure to receive income from the

handyman and landscaping activity simply are not credible.

Given the relative simplicity of the activity and the fact

that petitioner has conducted it for several years, there is no

plausible explanation why petitioner’s total expenses are three

times his gross receipts if he was truly engaged in the activity

for profit. On this record, we conclude that petitioner’s

handyman activity during 1997 was not engaged in for profit

within the meaning of section 183. Consequently deductions from

the handyman activity are limited to the $370 income reported

from that activity.

B. Writing Activity

Petitioner’s writing activity is concerned entirely with an

8-week cross-country trip he took with his wife in the spring and

summer of 1997. Petitioner claims that he is a professional

writer, planned this trip to conduct research for a series of

travel articles, particularly concerning the Civil War, and kept

receipts and records showing his expenses of more than $12,000.

Petitioner is not trained as a professional writer. Prior

to 1997, he had dabbled at writing by preparing film and theater

reviews and submitting them to local newspapers for publication.

He was paid $50 for each of these occasional pieces. Petitioner
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has no training as a historian and no expertise concerning the

Civil War.

Petitioner made no advance arrangements to profit from his

proposed writings during the summer travel. He did not employ a

literary agent or contact publishers or magazines in advance.

Instead, during the trip he prepared a series of pieces,

apparently written quickly, since they are replete with spelling

and punctuation errors, and then submitted the unsolicited

articles to national magazines such as the National Geographic.

All the articles were rejected, some with the explanation that

the publication did not accept unsolicited material. Petitioner

did not receive any revenue at all from his writing with respect

to his travels in 1997.

Petitioner does not have background or training as a writer

or historian. He did not prepare for the activity in issue in a

businesslike way. He did not spend substantial time preparing or

marketing the writing. He has never supported himself by his

writing and has no history of success in professional writing

activities. The activity resulted in no income and substantial

expenses. Although petitioners are not wealthy people, they have

income from wages. During the year in issue, petitioners

reported wages of $44,559 and unemployment compensation of

$5,980. They claimed tax benefits by offsetting a loss of

$12,732 from their Schedule C activities against their income

from other sources.
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Petitioner agrees that there were personal and recreational

benefits to the cross-country travel. The record clearly shows

that the travel was a vacation trip. Petitioner enjoys writing

and does so without regard to profit or loss. We conclude that,

during the year in issue, petitioner’s writing activity was not

engaged in for profit within the meaning of section 183.

Conclusion

The filing of a Schedule C was an afterthought to

petitioners. Petitioner admits that he had never filed a

Schedule C prior to the year in issue, and that the reason he

decided to file a Schedule C for the year in issue was so that he

could deduct the travel expenses from his trip.

Because petitioner’s writing and handyman activities were

not engaged in for profit, petitioners may not deduct the

expenses of the activities under either section 162(a) or section

212. Rather, their deductions are limited to those allowed by

section 183. Section 183(b)(2) allows petitioners to offset

expenses against any income generated by an activity, despite the

fact that the activity is not an activity engaged in for profit.

On their Schedule C for 1997 petitioners claimed gross income of

$370 and total expenses of $13,102. Accordingly, $12,732 of

petitioners’ expenses are not deductible. In the notice of

deficiency, respondent disallowed petitioners’ total expenses of

$13,102, instead of disallowing only the $12,732 that petitioners

deducted as a business loss.
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II. Health Insurance Deduction

We next consider whether petitioners are entitled to deduct

self-employed health insurance expenses of $880. Section

162(l)(1) permits a self-employed individual to deduct 40 percent

of the “amount paid during the taxable year for insurance which

constitutes medical care for the taxpayer, his spouse, and

dependents.” The deduction, however, may not exceed the

“taxpayer’s earned income (within the meaning of section 401(c))

derived by the taxpayer from the trade or business with respect

to which the plan providing the medical care coverage is

established.” Sec. 162(l)(2)(A).

The term “earned income” is defined by section 401(c), in

part, as “the net earnings from self-employment (as defined in

section 1402(a))”. Sec. 401(c)(2)(A). Section 1402(a), in turn,

defines “net earnings from self-employment”, as relevant to this

case, as “the gross income derived by an individual from any

trade or business carried on by such individual, less the

deductions allowed by this subtitle which are attributable to

such trade or business”.

Because petitioners did not have net earnings from self-

employment within the meaning of section 1402(a), they did not

have earned income within the meaning of section 401(c), and,

consequently, are not entitled to a deduction for self-employed

health insurance expenses for the year in issue pursuant to

section 162(l)(2)(A).
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Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.