CALARCO v. COMISSIONER OF INTERNAL REVENUE

T.C. Summary Opinion 2004-94

UNITED STATES TAX COURT

N. JOSEPH CALARCO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1530-03S. Filed July 20, 2004.

N. Joseph Calarco, pro se.

Kimberly J. Webb, for respondent.

HOLMES, Judge:

“Taxation! Wherein? And what taxation?”

Henry VIII act I, sc. 2.1

1
This case was heard pursuant to the provisions of Internal
Revenue Code section 7463. Section citations are all to that
Code. This decision is not reviewable by any other court, nor
should the opinion or its literary references be cited as
precedent in future proceedings.
 - 2 -

Prologue

It is a truth little remarked on by scholars that tax law

has been a fount of literature for 5,000 years. The oldest

literary work still extant--the Epic of Gilgamesh--is a long

narrative of a friendship begun during a protest against

government exactions.2 In more recent times, some of our

language’s most notable authors have used fiction to delve into

tax policy: consider Shakespeare’s criticism of the supply-side

effects of a 16-percent tax rate;3 Swift’s precocious suggestion

of a system of voluntary self-assessment;4 and Dickens’ trenchant

observation on the problems of multijurisdictional taxing

coordination:

[The town’s] people were poor, and many of them were
sitting at their doors, shredding spare onions and the
like for supper, while many were at the fountain,
washing leaves, and grasses, and any such small

2
David Ferry, “Gilgamesh, A New Rendering In English
Verse”, 14-15 (Farrar, Straus, and Giroux 1992).
3
Shakespeare, “Henry VIII”, act I, sc. ii. (“A sixt part
of each? / A trembling contribution! Why, we take / From every
tree, lap, bark and part o’ th’ timber; / And, though we leave it
with a root, thus hack’d, / the air will drink the sap.”)
4
Jonathan Swift, Gulliver’s Travels, A Voyage to Laputa,
Etc. 162 (W. W. Norton & Co., Inc., New York, 1964) (1726). (“The
highest tax was upon men who are the greatest favourites of the
other sex, and the assessment according to the number and natures
of the favours they have received; for which they are allowed to
be their own vouchers. . . . The women were proposed to be taxed
according to their beauty, and skill in dressing; wherein they
had the same privilege with the men, to be determined by their
own judgment.”) See generally Levmore, “Self-Assessed Valuation
Systems For Tort and Other Law”, 68 Va.L.Rev. 771, 779 (1982).
 - 3 -

yieldings of the earth that could be eaten. Expressive
signs of what made them poor, were not wanting; the tax
for the state, the tax for the church, the tax for the
lord, tax local and tax general, were to be paid here
and to be paid there, according to solemn inscription
in the little village, until the wonder was, that there
was any village left unswallowed.5

Taxation has also sparked creativity in newer literary

genres. See It’s a Privilege on Urinetown: The Musical (RCA

Victor) (musical re excise tax); J. Kornbluth, Love and Taxes

(staged monologue re income tax) (unpublished manuscript, 2003).

Tax collecting jobs have helped finance the careers of such

notable revenue agents as Chaucer,6 Paine,7 and Hawthorne.8 And

tax records are a famously important source of information for

5
Charles Dickens, “A Tale of Two Cities” 119 (Everyman’s
Library, Knopf, 2002) (1859).
6
While Controller of the Customs, “[t]here was great
variety in what [Chaucer] had to do, and he came in contact with
a variety of people. He must have seen infinite venality,
witnessed colorful subterfuges, heard improbable and ridiculous
dodges and lies and excuses.” Donald Howard, “Chaucer” 212
(1987).
7
“I act myself in the humble station of an officer of
excise, though somewhat differently circumstanced to what many of
them are, and have been a principal promoter of a plan for
applying to Parliament this session for an increase in salary.”
Letter of Thomas Paine to Oliver Goldsmith, December 21, 1772,
Reprinted in George Hindmarch, “Thomas Paine: The Case of the
King of England And His Officers of Excise”, Published by the
Author in 1998, Surrey, England.
8
Indeed, it is reported that Hawthorne once contemplated
writing sketches entitled “Romance of the Revenue Service” and
“an ethical work in two volumes on the subject of Duties”, though
sadly neither project was ever undertaken. Randall Stewart,
“Nathaniel Hawthorne, A Biography” 53 (Archon Books, 1970).
 - 4 -

scholars of both ancient civilizations9 and modern authors.10

This case follows in that long, but little-noted,

tradition. Petitioner, N. Joseph Calarco, is a respected

professor of theater at Wayne State University in Detroit. He

also writes plays. On his 1997 tax return, he deducted his

playwriting expenses as a Schedule C business loss. Respondent

disallowed both the loss and several itemized deductions that

petitioner took on his Schedule A. These disallowances created a

deficiency of $3,869 to which respondent added an accuracy-

related penalty of $774. Petitioner, following the lead of Henry

VIII’s first Queen Katherine,11 filed a timely petition in this

Court.

Act I. Background

Petitioner has at least four times filed petitions

contesting respondent’s disallowance of deductions that he

claimed. The issues before the Court for those years were mostly

whether specific deductions were allowable. In this case,

9
See, e.g., Tonia Sharlach, “Provincial Taxation and the Ur
III State” (2004).
10
See A. L. Rowse, “William Shakespeare, A Biography” 280-
281 (1963) (use of obscure records to trace author’s movements);
Vitale v. Commissioner, T.C. Memo. 1999-131 (use of obscene
records to trace author’s movements).
11
“These exactions, whereof my sovereign would have note,
they are most pestilent to the bearing; and, to bear’ em the back
is sacrifice to the load.” “Henry VIII”, I. ii. 11. 47-50.
 - 5 -

respondent tries to sweep the stage of all his deductions by

denying that petitioner’s playwriting is a trade or business.

The parties were unable to negotiate a very extensive

stipulation, and petitioner arrived at trial with an abundance of

documentation for his 1997 expenditures. This threatened to

force the Court into an item-by-item examination.12 To make

review more efficient, the parties were ordered to file a

supplemental stipulation.

Even with an extension, it became clear that the parties

would be unable to agree, so petitioner was ordered to file a

supplemental statement of facts organizing and explaining his

claimed expenses by category. Respondent was then ordered to

file comments.

We must address three issues:

1) Was petitioner’s playwriting an activity entered into

for profit?

2) If it was, did petitioner meet his burden in

substantiating each expense and its relationship to his

playwriting activities as required under the Code?

3) Does petitioner owe an accuracy-related penalty?

12
Such work has been known to spark a change in careers.
See I Wanna be a Producer on “The Producers” (Sony Classical)
(describing relative attraction of theater life to dealing with
accounting details).
 - 6 -

Act II. Discussion

A. Did Petitioner Carry on His Playwriting With a Profit
Motive?

Respondent noted in his pretrial memorandum that petitioner

is aggressive in claiming deductions:

Year Sch. C Receipts Sch. C Expenses

1993 $ 0.00 $ 27,924.00
1996 0.00 23,353.00
1997 0.00 24,703.00
1998 0.00 33,093.00
1999 0.00 27,128.00

Petitioner argues that this is nothing more than a

consequence of the long time it takes many artists to realize a

return on their investment of time and money. He contends that

he has consistently intended to profit from his playwriting. At

trial he offered evidence of various rewards he has already

received, including cash bonuses, an increase in salary, travel

opportunities, and professional recognition. He maintains that

he expects to achieve even more dramatic success, and he was

sincerely buoyed in his hopes by many now-famous artists who

achieved renown posthumously.13

Respondent, noting that the deductions seem to offset most

13
Petitioner also suggested that the deductions at issue
were unreimbursed employee expenses, but he did not fully develop
this argument at trial. Those expenses we identify as deductible
we allow as playwriting expenses.
 - 7 -

of petitioner’s other income, argues that petitioner’s claim of a

profit motive for his playwriting is pretextual.14

Section 183 disallows deductions for an activity not engaged

in for profit, except to the extent it produces income.

Regulations exist that list a number of factors for us to

consider in deciding whether a taxpayer was seeking to make a

profit. Sec. 1.183-2(b), Income Tax Regs. These factors are not

exclusive, and we do not decide the issue on the basis of a

single factor or a mathematical preponderance of factors. Holmes

v. Commissioner, 184 F.3d 536, 544 (6th Cir. 1999), revg. on

other grounds; Osteen v. Commissioner, 62 F.3d 356, 358 (11th

Cir. 1995), affg. in part and revg. in part T.C. Memo. 1997-401;

Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without

opinion 702 F.2d 1205 (D.C. Cir. 1983).

This Court has previously recognized that artists must be

judged with an eye to posterity. In Churchman v. Commissioner,

68 T.C. 696 (1977), we allowed deductions claimed by a sculptor

14
A celebrated monologist has related that his own tax
trouble prompted a former IRS Commissioner to suggest a more
colloquial characterization. “[Y]ou know what a pisher is? A
pisher is a guy who feels entitled to all of the benefits of
civilization, but feels no obligation to pay his fair share.”
Kornbluth, supra (quoting S. Cohen). See generally Kozinski and
Volokh, Lawsuit, Schmawsuit, 103 Yale L.J. 463 (1993) (describing
use of Yiddish to “add spice” to legal opinions, noting
prevalence of chutzpah in much litigation); and see specifically
id. at 463 n.4 (suggesting schnorrer as more appropriate
characterization).
 - 8 -

who had not yet achieved profitability, but nevertheless

maintained a studio and gallery and participated in shows. We

recognized then that economic success in the world of fine art

frequently takes longer to achieve than success in other fields.

The same is true of literature. Id. at 701-702. In Vitale v.

Commissioner, T.C. Memo. 1999-131, affd. 217 F.3d 843 (4th Cir.

2000), we allowed the taxpayer to deduct many of his expenses of

researching a book, despite the fact that he had not yet achieved

profitability as an author. Petitioner’s activity is reminiscent

of Vitale’s--he has likewise engaged in extensive research,

generated large losses, and claimed his intent was ultimately to

achieve a profit.

With this special lens in place, we look at each of the

factors listed in the relevant regulation. The first is whether

the activity was run in a businesslike way. Sec. 1.183-2(b)(1),

Income Tax Regs. In Churchman, we listed six reasons for finding

that her activity was: (1) she designed an art gallery and

maintained it for a year; (2) she kept a mailing list to announce

her shows; (3) she traveled to out-of-town locations to show her

art; (4) she had published a book; (5) in the face of poor sales,

she tried to change her material to meet public demand; and (6)

she had kept records of her sales and expenses, albeit not

complete books and records.

Professor Calarco has shown similar indications of business-
 - 9 -

like activity. The marketing of art--because it may take the

form of gallery shows and sales--is more readily visible than the

marketing of drama or musical theater; nevertheless, a parallel

exists between the marketing of sculpture in Churchman and

petitioner’s strenuous efforts to get his various plays produced.

For example, the petitioner had a play read in Lincoln Center as

early as 1990. In 1997--the year at issue--he was almost

completely unsuccessful in marketing his work. But, in a real-

life peripeteia, his long-developing play “Beethoven is . . . .”

won first-prize (from among hundreds of entries) in a National

New Play Competition sponsored by Humboldt State University.

This won the play a production at the university, and entitled

petitioner to a two-week residency including travel and a $1,000

royalty. He also received various administrative benefits from

Wayne State (including a sabbatical) that both recognized and

furthered his playwriting. He traveled to get his play before

audiences both in full performance and for readings. He also

worked at adapting “Beethoven is . . . .” into a screenplay, as

well as creating a stage version suited to smaller theaters. He

kept records of many of his various expenses, such as travel logs

and receipts.15 Thus, we find that petitioner did in fact carry

15
We look to those successes and activities from later
years as part of the examination of “all facts and circumstances”
required by Sec. 1.183-2(b), Income Tax Regs. Cf. Regan v.
Commissioner,T.C. Memo. 1979-340.
 - 10 -

on his playwriting in a businesslike manner.

The second factor that the regulation lists is the expertise

of the taxpayer or his advisers. Sec. 1.183-2(b)(2), Income Tax

Regs. We cannot imagine an individual better qualified for the

playwriting trade than petitioner. He has a Ph.D. in drama and

has published numerous pieces on dramatic criticism and theory,

as well as his own poetry. His educational and professional

background meet and perhaps exceed the level of taxpayer

expertise we found in Churchman. (Though we also note that

academic employment is no prerequisite for expertise in

writing,16 as the achievements of insurance executives,17 nurses,18

and shut-ins19 attest.)

The third factor is the time and effort expended by the

taxpayer in carrying on the activity. Sec. 1.183-2(b)(3), Income

Tax Regs. The sheer extent of petitioner’s documentation

supports the proposition that he approached his playwriting in a

businesslike manner. Furthermore, petitioner has been

16
Dana Gioia, “Can Poetry Matter?” 267 The Atlantic 94-95
(May 1991) decrying “migration of American literary culture to
the university.”
17
See Harold Bloom, “Wallace Stevens, A Comprehensive Study
Guide” 16 (2003).
18
See Frances Winwar, “American Giant, Walt Whitman and His
Times” 253 (1941).
19
Richard B. Sewall, “The Life Of Emily Dickinson” 474
(Harvard University Press Paperback Edition, 1994).
 - 11 -

professionally involved with dramatic production for almost 40

years, and his interest in the activity can hardly be said to be

passing or casual.

The fourth factor, the expectation that assets used in the

activity will appreciate in value, sec. 1.183-2(b)(4), Income Tax

Regs., is not relevant here.

The fifth factor, the success of the taxpayer in carrying on

other similar or dissimilar activities, sec. 1.183-2(b)(5),

Income Tax Regs., seems largely neutral. While petitioner has

had a long and successful academic career in drama and has gained

recognition from several well-known theaters and universities, he

has not managed a truly profitable business activity.

The sixth factor, petitioner’s history of income or loss

from the activity, sec. 1.183-2(b)(6), Income Tax Regs., would

appear to bear heavily against petitioner, since he apparently

has never had a net gain from his playwriting. As noted in

Churchman, however, this is not decisive:

Such a history of losses is less persuasive in the art
field than it might be in other fields because the
archetypal ‘struggling artist’ must first achieve public
acclaim before her serious work will command a price
sufficient to provide her with a profit.

Churchman, 68 T.C. at 701-702. Further, under section 1.183-

2(a), Income Tax Regs., an activity may be found to be engaged in

for profit if there exists a “small chance of making a large

profit.” The example given in the regulations is of a wildcat
 - 12 -

oil well; courts have found this legitimate profit motive to

exist in a variety of cultural contexts, see, e.g. Dwyer v.

Commissioner, T.C. Memo. 1991-123 (sponsorship expenses of NASCAR

racing were reasonable given potential prize money); Plunkett v.

Commissioner, T.C. Memo. 1984-170 (same for truck-pulling

competitions). However, the Code, like postmodern literary

theory, does not privilege any boundary between high and popular

culture--that petitioner entertained similar expectations of

ultimately achieving a large profit with his work is enough.

The seventh factor, the amount of occasional profits earned

through the activity, sec. 1.183-2(b)(4), Income Tax Regs.,

weighs heavily in favor of petitioner’s having a profit motive.

In years after 1997, he won both a fully paid sabbatical and an

additional $7,000 research grant to reward and aid his

playwriting. See Grommers v. Commissioner, T.C. Memo. 1992-343

(subsequent years relevant to section 183 analysis). While this

is not income from an activity in the usual sense of sales

revenue, it certainly is an economic benefit that petitioner

received from his playwriting.

The eighth factor is the financial status of the taxpayer.

Sec. 1.183-2(b)(8), Income Tax Regs. The regulations provide
 - 13 -

that an absence of substantial income to the taxpayer from other

sources may indicate a profit motive, while the presence of other

substantial income may indicate a lack of profit motive. This is

particularly true if the activity has personal or recreational

elements. This factor does weigh against petitioner, as his

primary income is from his teaching position, and allowing his

playwriting deductions would largely offset his teaching wages.

The ninth factor is whether there are elements of personal

pleasure or recreation present in the activity. Sec. 1.183-

2(b)(9), Income Tax Regs. Clearly playwriting is something

petitioner enjoys. Nevertheless, pleasure is not irreconcilable

with a profit motive. Schwartz v. Commissioner, T.C. Memo. 2003-

86.

Considering these factors together, we find that petitioner

has carried on his playwriting with the objective of making a

profit: both the documentary and testimonial evidence show

petitioner’s goal was not merely posthumous renown but profit in

the here-and-now. Section 183 does not therefore limit his

deductions. Professor Calarco is a playwright, not a pisher.

See Kozinski & Volokh, supra, 103 Yale L.J. at 465 n.14.

B. Has Petitioner Substantiated His Expenses?

All taxpayers, even playwrights, are allowed to deduct the

ordinary trade or business expenses they incur during the year.

Sec. 162(a). But this often leads to temptation. Our
 - 14 -

predecessor, the Board of Tax Appeals, recognized more than 60

years ago that without firm limits, taxpayers would seek to

deduct

The fee to the doctor, but for whose healing
service the earner of the family income could not
leave his sickbed; the cost of the laborer's
raiment, for how can the world proceed about its
business unclothed; the very home which gives us
shelter and rest and the food which provides
energy, might all by an extension of the same
proposition be construed as necessary to the
operation of business and to the creation of
income. [Citations omitted.]

Smith v. Commissioner, 40 B.T.A. 1038-1039 (1939) (citation

omitted), affd. 113 F.2d 114 (2d Cir. 1940).

In extreme cases, this can even lead to a kind of deduction

fever:

“Itemizing? What's that, Satan?”

“Well, you see, Josh, now that you're not just a
salaried copy editor but also a freelance
television critic, you can file a Schedule C and
deduct your legitimate business expenses....

So I went home, waded as usual through the pot
smoke of my roommates, shut the door, and looked
around my room. What was a “legitimate business
expense”? Okay, I’m a television critic, so... the
television! Yes! Because I need something to
criticize!

Okay, so the television ... And then--yeah, the
VCR, because I can’t watch every episode of “T.J.
Hooker.” ...

And, of course, the videotapes. ... And the
replacement labels for the tapes, which I get from
Radio Shack. ... Oh!--and the TV Guide, which
guides me to the television! ... And the books of
television criticism I've bought. And actually,
 - 15 -

the books I've bought that aren’t television
criticism: they've still informed my criticism of
the television. ... Oh!--and the chair I sit in,
of course: very important what your posture is when
you criticize a television. And the food I eat--
which literally makes up the cells that form the
critic of the television....

Kornbluth, supra.

Petitioner has fallen victim--at least at times--to this

fever, claiming many quotidian activities, such as reading

newspapers and renting movies, to be “business-related”. He is,

at some level of abstraction, no doubt correct. But we must

administer the tax laws as they are. Having decided that

petitioner intended to profit from his playwriting, we must sift

through the specific deductions that he claims so as to determine

their allowability.

Petitioner’s Schedule C deductions fall into fifteen

categories, named as follows on the 1997 return:20 (1) mileage;

(2) automobile depreciation; (3) interest; (4) legal and

professional services; (5) supplies; (6) travel; (7) books,

recordings, and video; (8) “business cellular;” (9) Internet;

(10) software; (11) “tickets to various performances, viewing;”

(12) “the business portion of phone expense (70 percent);”

(13) “miscellaneous from cash (ATM);” (14) periodicals; and

20
Unfortunately, the categories in petitioner’s posttrial
submission do not match the categories on the return. We discuss
the categories as they appear on the return.
 - 16 -

(15) copy services.21

Section 6001 and its regulations require taxpayers to

maintain records sufficient to permit verification of income and

expenses. See sec. 1.6001-1(a), Income Tax Regs. The burden is

on petitioner to demonstrate his right to the deductions. Sec.

7491(a); Rule 142(a); Underwood v. Commissioner, 56 F.2d 67 (4th

Cir. 1932). But the IRS will generally accept certain proofs of

expenditures as adequate substantiation. See Rev. Proc. 92-71,

1992-2 C.B. 437. Petitioner must in all cases provide evidence

to establish a sufficient connection between the deduction and

his trade or business. Gorman v. Commissioner, T.C. Memo. 1986-

344. This substantiation may vary by circumstance. Welch v.

Helvering, 290 U.S. 111, 115 (1933).

Certain deductions, moreover, require enhanced

substantiation under sections 274 and 280F.22 These include

travel, food and entertainment expenses, and any expenses

21
In a number of these categories, respondent initially
allowed the deductions (provided that the section 183 issue was
resolved in petitioner’s favor) in the notice of deficiency.
Generally, respondent bears the burden of proof when introducing
a new issue. Rule 142(a); Sundstrand v. Commissioner, 96 T.C.
226, 347-348 (1991). Respondent has not shown any specific
reason for a departure from his original position, so in those
categories where respondent has already allowed deductions in
excess of the documented amounts we will grant petitioner the
benefit of the original allowance.
22
See Master of the House on Les Miserables: Original
Broadway Cast (Geffen Records) (suggesting benefits of enhanced
substantiation requirements for certain innkeepers).
 - 17 -

relating to certain forms of “listed property.” For these items,

taxpayers must show that an expense was “directly related” to

business activity, and must provide the business purpose, amount,

and time and place of the expenditure. Sec. 1.274-5T(b)(2),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

We consider petitioner’s claimed deductions in this context.

1. Mileage

Section 280F(d)(4)(A)(i) makes a personal automobile “listed

property”, and thus subject to enhanced substantiation

requirements. Section 1.274-5T(c)(1), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985) describes those

requirements, and provides that “[w]ritten evidence has

considerably more probative value than oral evidence alone. In

addition, the probative value of written evidence is greater the

closer in time it relates to the expenditure or use.” Sec. 1.274-

5T(c)(1). Section 1.274-5T(c)(2)(ii)(C)(2), Temporary Income Tax

Regs., 69 Fed. Reg. 32782 (June 10, 2004), specifically

identifies “a record of the business use of listed property, such

as a computer or automobile, prepared in a computer memory device

with the aid of a logging program” as an adequate written record.

Petitioner has provided just such a record.

Section 1.274-5T(b)(2), Temporary Income Tax Regs., lists

the information a taxpayer’s records must contain to substantiate

travel away from home. These are: (1) the amount of the

expenditure; (2) the date of each departure and return and number
 - 18 -

of days spent away, (3) destination, and (4) the business purpose

of the travel. Petitioner’s log contains all of this data,

always in the form of the amount, the date of the travel, the

destination (either the University of Michigan library in Ann

Arbor, the Detroit Public Library, or the Purdy Library at Wayne

State23), and the purpose (always recorded as “Research

Beethoven”).

This travel log, however, raises significant issues of

credibility. It records that, from January to May 1997,

petitioner spent every Tuesday and Thursday (with the exception

of May 22, 1997), conducting research at either the Purdy Library

or the Detroit Free Library. This seems to correlate with

petitioner’s testimony regarding his teaching schedule during the

1997 spring semester at Wayne State University. The uniformity

of schedule, however, strongly suggests that petitioner merely

ascribed mileage deductions to his nonteaching days, without

regard to actual events. That petitioner claimed a mileage

deduction for July 4th and Memorial Day, days when many libraries

are closed and most people do not work, also suggests this.

Further, petitioner testified at trial that there were two

23
It is not clear from the record whether these libraries
are “temporary work locations” for purposes of exempting this
travel from commuting expense treatment. See Walker v.
Commissioner, 101 T.C. 537 (1993); Daiz v. Commissioner, T.C.
Memo. 2002-192 (2002); Rev. Rul. 90-23, 1990-1 C.B. 28; Rev. Rul.
94-47, 1994 C.B. 18. Since we have in any event decided to
disallow the mileage expenses, we need not reach this issue.
 - 19 -

rehearsal periods during the year when his responsibilities

encompassed periods of seven-day weeks of 14 hours a day. Yet,

an examination of his travel log indicates no break in his

research activities of longer than three days, with one exception

during the first week in December.

We thus find that petitioner’s log is inadequate

substantiation because it is not credible. We have no doubt that

petitioner engaged in extensive research for his play, and that

he did travel significant distances to conduct that research.

But we are unable to allow deductions for that mileage based on

the evidence he submitted. In many instances, when confronted

with deficient evidence, courts may resort to the rule of Cohan

v. Commissioner, 39 F.2d 540 (2d Cir. 1930)(the Cohan rule)24 and

estimate the proper deduction amount. This rule is not

available, however, when dealing with “listed property” under

section 274. Sanford v. Commissioner, 50 T.C. 823, 827 (1968),

affd. 412 F.2d 201 (2d Cir. 1969). Thus, we disallow

petitioner’s claimed mileage deductions in full.

24
Although best known to tax lawyers for his rule, George
M. Cohan was also a playwright, actor, and songwriter, who wrote
such stage classics as “The Man Who Owned Broadway.” His life
outside tax litigation was the source material for the classic
Jimmy Cagney film, Yankee Doodle Dandy (Warner Bros. 1942). (We
also note that this year marks the centennial of Cohan’s breakout
role in Little Johnny Jones, featuring Yankee Doodle Boy (I’m a
Yankee Doodle Dandy) and Give My Regards to Broadway.)
 - 20 -

2. Automobile Depreciation

Having decided that petitioner failed to substantiate his

mileage, we are compelled to disallow petitioner’s claimed

depreciation deduction as well--to claim any deduction related to

use of his personal automobile, petitioner must meet the enhanced

substantiation requirements. Whalley v. Commissioner, T.C. Memo.

1996-533.

3. Interest

Petitioner claimed $7,392 in interest expenses. To the

extent that this amount reflects otherwise deductible mortgage

interest, respondent allowed its deduction in the notice of

deficiency, and we sustain that allowance.

Petitioner also submitted documentation of $4,880 in

interest expenses from his various credit cards. In Exhibit 17-

P, petitioner showed that the proper percentage of credit card

interest allocable to his Schedule C expenses is 78 percent. We

believe this amount is overly generous to petitioner, especially

in light of the excess claims we find he made in the supply

category. See infra. Still, petitioner has shown that he paid

substantial interest charges on many consumer credit cards for

expenses properly attributable to his Schedule C activities.

Under the Cohan rule, when presented with some factual basis upon

which to rely, we are allowed to estimate the amount of interest

deductions properly allowable. Schroeder v. Commissioner, T.C.

Memo. 1996-336. We estimate that 65 percent of the claimed
 - 21 -

$4,880, or $3,172, is properly deductible by petitioner.

4. Legal and Professional Services

In the notice of deficiency, respondent allowed $171 in

professional expenses. Petitioner submitted documentation of

$221 in legal expenses. We find that amount to be deductible.

The remainder of the claimed $468 of legal and professional

expenses deduction is unsupported by any evidence and so we deny

it.

5. Supplies

On his Schedule C, petitioner claimed a deduction for $3,797

in supplies. Respondent, in the notice of deficiency, allowed

$2,544. Petitioner’s posttrial submission details only $2,864

for supplies. This number must be reduced by the expenses that

represent copying (which we discuss separately) that were

originally included in supplies. Further, the number must also

be reduced by petitioner’s cable and Internet expenses for which

petitioner has offered no credible business purpose, let alone

documentation of business use. These reductions bring the

documented amounts well below the original amount allowed in the

notice of deficiency, and we sustain the finding in the notice

that only $2,544 is allowable.

6. Travel

Petitioner claimed a deduction of $801 for his travel

expenses to the Stratford Drama Festival and to Ann Arbor to

conduct research. We find that he has satisfied the requirements
 - 22 -

of sections 274 and 280F for deducting his drama festival

expenses by documenting the date, cost, and purpose of his visit.

But as we noted above, we do not credit petitioner’s travel log,

and so it does not support his position that he spent $171.31 in

Ann Arbor on business purposes on November 16, 1997. As such, we

disallow that deduction. The log does indicate, and we find to

be believable, an expense for $189.04 at the Courtyard Marriott

in Ann Arbor on March 16, 1997. We allow that deduction. His

estimates of cash expenditures at fast-food outlets and other

establishments do not meet the requirements of sec. 274, and are

thus disallowed.

7. Books, Recordings, Videos

Petitioner claimed deductions for books, recordings, and

video in the amount of $3,324. His posttrial submission details

$4,358 of expenses in this category. A number of these items,

however, must be fully disallowed or considered in a different

category. These include expenses for software, video, and

newspaper subscriptions. The removal of these items results in

$2,440.25 for this category.

The category’s other expenses are more ambiguous. Some are

no doubt legitimate, and respondent has not identified any

specific legal theory for their disallowance. But allowing all

the deductions would be ignoring some obvious questions raised by

a great number of nonspecific items, such as large drug store

receipts. Under the Cohan rule, we may estimate the proper
 - 23 -

amount of allowable deductions based on the evidence and our view

as to the credibility of the witnesses. Feingold v.

Commissioner, T.C. Memo. 1956-214. We find that petitioner is

entitled to deduct 40 percent of the $2440.25 in this category

that has not otherwise been specifically addressed.

8. “Business Cellular”

Under section 280F(d)(4)(A)(v), cellular phones are listed

property and thus subject to the heightened substantiation

requirements of section 274, which petitioner has failed to meet.

This category of deductions is entirely disallowed.

9. Internet

Petitioner has offered no evidence of his business use of

the Internet. We infer from his electronic banking records that

he used the internet to track his business (and personal)

expenses. This Court has previously characterized internet

expenses as utility expenses. Verma v. Commissioner, T.C. Memo.

2001-132. Under the Cohan rule we may estimate the business

portion of utility expenses. See Pistoresi v. Commissioner, T.C.

Memo. 1999-39. We estimate that 20 percent of his internet

expenses were business-related.

10. Software

There are $267.48 in software expenses listed in

petitioner’s posttrial submission. Of this amount, $82 appears

to have been for multimedia programming, and we are satisfied
 - 24 -

that a connection exists between that programming and

petitioner’s playwriting. An additional $107.48 appears to be

for software related to business management. These deductions

are allowed. It is unclear what the rest are for; we disallow a

deduction for them.

11. “Performances, Viewing”

Petitioner has submitted evidence of approximately one

hundred expenditures in this category, constituting his theater,

video rental, and other sundry expenses for the year. Several

reasons exist as to why we must disallow these deductions. One

is petitioner’s having undermined his own credibility in this

area. At trial, in response to a direct question, petitioner

testified that every time he listens to a CD or watches a movie

he is engaged in playwriting and not recreation. This suggests a

less than candid assessment of his business expenses.

Even assuming that petitioner were believable on this point,

these deductions would still be precluded under section 1.274-

2(c)(3)(i), Income Tax Regs., which provides that the taxpayer

must have more than a “general expectation” of deriving income

for an entertainment expense to be deductible. Had petitioner

testified as to a particular difficulty with the plot or

characters or language of his play that he sought to fix by

watching a specifically selected play by someone else, that

specific expectation would perhaps justify a deduction. Merely

broadening one’s horizons is not enough. The credibility and
 - 25 -

documentation issues, however, are merely elements of the

ultimate determinative factor--petitioner has not met his burden

under sections 274 and 280F for substantiating entertainment

expenses.

12. Telephone

Section 262 provides that the first phone line into a

taxpayer’s home is not deductible. Petitioner thus is unable to

deduct expenses relating to his phone line, absent a showing that

there was some service or feature of the line dedicated to his

business activities, a showing he did not make. Cf. Popov v.

Commissioner, T.C. Memo. 1998-374, revd. on other grounds 246

F.3d 1190 (9th Cir. 2001).

13. Miscellaneous Cash

We are not required to accept self-serving testimony from

petitioner regarding his estimates of cash spent on his

activities. Even were we to accept his assertion of how much

cash he spent, we still would not be convinced that those amounts

went to business, as opposed to personal, expenses. Thus, we

disallow the deduction of these amounts.

14. Periodicals

On petitioner’s Schedule C, he claimed a deduction for

$1,055 in periodical expenses. This entire amount is documented

in his posttrial submission. The documentation, however, shows

that $838 of this total was spent on subscriptions to major
 - 26 -

newspapers. The cost of a “daily newspaper of general

circulation is inherently a nondeductible personal expenditure”,

Wheeler v. Commissioner, T.C. Memo. 1984-425 (quoting Wallendal

v. Commissioner, 31 T.C. 1249, 1252 (1959)), so we disallow these

amounts. We also disallowed the $120 for subscriptions to PC

World, PC Magazine, and Byte. Petitioner has not demonstrated to

our satisfaction that his purchase of these magazines had a

business purpose. Thus, the only deductions that we allow in

this category are the $97 he spent to subscribe to Poetry and

Gramophone.

15. Copy Services

As indicated in the notice of deficiency, respondent

originally allowed petitioner’s deduction in the amount of $586

for copy services. While petitioner has submitted documentation

of copy expenses of only $213.95,25 it is quite reasonable for a

document intensive activity such as writing and research to incur

significant copy expenses, and we see no reason to depart from

respondent’s original allowance.

C. Is Petitioner Subject to Penalties Under Sec. 6662?

“I said ‘Interest and penalties? Isn’t that kind of
Overkill? I mean: Hey--I get it!’”
Kornbluth, supra.

25
The assertion that petitioner submitted this number
warrants clarification; there is an amount of $169.43 entered on
the bottom line of a page in his submission with the words “copy
services” handwritten at the top. When combined with a $44.52
item in the “supplies” category that is listed as “photocopies”
a total of $213.95 results.
 - 27 -

Respondent has asked for the imposition of penalties

pursuant to section 6662. To the extent that petitioner’s case

fails, it does so largely because petitioner’s records bear

internal inconsistencies which make it difficult to rule in his

favor. This is primarily a factual determination, and does not

indicate that petitioner has taken an “unreasonable position.”

Furthermore, petitioner did enter significant amounts of

documentation into evidence. We take this factual documentation

into account in weighing whether a taxpayer should be subject to

section 6662 penalties. Kluener v. Commissioner, 154 F.3d 630,

637-38 (6th Cir. 1998). Additionally, section 1.6662-3(b)(2),

Income Tax Regs., specifically provides for an exception from

penalties in case of taxpayer reliance on any one of a number of

IRS-issued materials, including the information materials to

which petitioner frequently cited. Nevertheless, we uphold part

of the accuracy-related penalty. Sec. 6664(c)(1). The penalty

is properly applied to those portions of the deficiency relating

to the disallowed deductions from category 7 (books, recordings,

video); category 11 (performances, viewing); and category 13

(miscellaneous cash). Despite petitioner’s good faith efforts in

other areas, it is not credible to assert that he did not realize

the significant elements of personal benefit and documentation

issues inherent in these disallowed amounts.
 - 28 -

Epilogue

Dramatists used to finish with some rhymes,
Mostly iambs with a pinch of dactyly,
But in these more prosaic times
Works usually end more matter-of-factily.

In our Court, though, the oldest ways seem somehow to survive--

A decision will be entered

under Rule 155.