T.C. Memo. 2011-14
UNITED STATES TAX COURT
DARRELL ROONEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13430-07. Filed January 18, 2011.
Brent E. Vallens, for petitioner.
Scott B. Burkholder, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined a $6,4601 deficiency
in petitioner’s 2003 Federal income tax. Petitioner timely filed
a petition contesting respondent’s determination. After
1
Monetary amounts are rounded to the nearest dollar.
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concessions2 the issues for decision are: (1) Whether respondent
is precluded from disallowing petitioner’s Schedule C
amortization3 expense deduction for 2003 because he allowed a
similar deduction during an audit of petitioner’s 1999 Form 1040,
U.S. Individual Income Tax Return; and (2) whether petitioner is
entitled to the Schedule C amortization expense deduction he
2
On brief respondent concedes that on the 2003 Schedule C,
Profit or Loss From Business, petitioner is entitled to deduct
depreciation of $2,618 with respect to assets petitioner acquired
in 1998 and 1999 and to deduct legal and professional fees of
$1,091. Although the parties included the depreciation of
archival photos and equipment of $412 and $22, respectively, in
the description of the disputed expense deductions contained in
stipulation 10 of the stipulation of facts, respondent states on
brief and the record establishes that petitioner deducted those
amounts as part of another category on his 2003 Schedule C, which
respondent allowed. Accordingly, we disregard stipulation 10 to
the extent described herein as inconsistent with the record. As
follows from the foregoing, only the cost recovery of assets that
petitioner acquired in 2000-2003 and included in calculating the
disputed deduction claimed on his Schedule C remains at issue.
3
Generally, depreciation is a reasonable allowance for
exhaustion, wear and tear, and obsolescence, sec. 167(a), I.R.C.,
and refers to the gradual reduction in the value of tangible
property, as opposed to intangible property, see Black’s Law
Dictionary 93, 473 (8th ed. 1999). With respect to intangible
assets, the Internal Revenue Code generally uses the word
“amortization”. See, e.g., sec. 197, I.R.C. Petitioner claimed
depreciation and amortization expenses in two categories on his
2003 Schedule C: (1) The depreciation and sec. 179, I.R.C.,
expense deduction category, and (2) the amortization expense
deduction category. Only the latter category is at issue. For
simplicity, we shall hereinafter refer to the disputed category
as the cost recovery deduction.
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claimed for 2003 under section 167(a)4 or any other cost recovery
section of the Code.
FINDINGS OF FACT
The parties have stipulated some of the facts, which we
incorporate in our findings by this reference. Petitioner
resided in California when he filed his petition.
I. Petitioner’s Professional Background
Petitioner is a film director, animator, writer, and
producer who was employed during 2003 by Walt Disney Pictures &
Television (Walt Disney). Petitioner studied animation, film,
and illustration in college and graduated with high honors. In
the 1980s petitioner took classes on directing, editing, acting,
writing, and screenwriting. During his studies petitioner
learned about the importance of a clippings file, or research
library,5 which is a collection of photographs and illustrations,
from magazines and books, of various images such as cars,
weather, animals, or people. Petitioner uses his research
library as a tool when designing scenes.
Since 1980 petitioner has been involved in the production of
animated TV series episodes and films for Walt Disney, Turner
4
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
5
In addition to the term “research library”, the parties
also sometimes use “reference library”.
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Feature Animation, and Universal Pictures. Petitioner has worked
on such projects in various capacities, including writer, editor,
layout artist, animator, storyboard artist, head of storyboards,
sequence director, producer, and director. In the 1990s
petitioner started writing screenplays, some of which he sold.
In the mid-1990s Walt Disney hired petitioner; petitioner’s
directing credits for Walt Disney include the animated films
“Mulan 2” (2004), “Lady and the Tramp II: Scamp’s Adventure”
(2001), “The Three Little Pigs” (1999), and “The Lion King II:
Simba’s Pride” (1998).
In addition to his employment with Walt Disney, petitioner
has worked on several independent projects over the years.
Petitioner has pitched some of the projects to studio executives
or production companies, and some pitches resulted in sales in
years before 2003. If a pitch did not result in a sale,
petitioner did not abandon the project; instead, he might pitch
it again when meeting a new producer or development executive.
Petitioner’s goal is to make himself a more valuable and
marketable director and to transition from directing animated
films to directing live action feature films.
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II. Petitioner’s Independent Projects and the Research Library
In 2003 petitioner had several open projects, many of which
he has been trying to market since the 1990s. The projects are
described below.6
A. Jean Harlow
In 2003 petitioner’s principal independent project involved
Jean Harlow (Ms. Harlow), a movie star of the 1930s, who died in
1937 at the age of 26. Petitioner has been fascinated with Ms.
Harlow since the 1970s. When petitioner started writing a
screenplay about Ms. Harlow in the early 1990s,7 he realized that
he lacked necessary information; and he started to expand his
research library on Ms. Harlow, which was limited at that time to
inexpensive reprint photos.
As of the trial date petitioner’s research library on Ms.
Harlow contained more than 65 three-ring binders of printed
materials. The binders are organized chronologically. Most of
the materials in the binders are from 1933 through 1936 because
those were pivotal years in Ms. Harlow’s life. The binders
6
In addition to the projects described in this section, in
2003 petitioner started work on the Fish Out of the Water and
Vikings projects. Although petitioner bought books for these
projects in 2003, the record reflects that he did not claim
deductions for the cost of the books on his 2003 Schedule C.
Accordingly, we do not discuss these projects and petitioner’s
purchases related to them.
7
The record does not establish that petitioner ever finished
the Harlow screenplay.
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contain articles from newspapers and movie magazines, books,
loose pages from books, and magazine covers.
Petitioner’s research library also contains 25 binders of
photographs of Ms. Harlow and other materials, including letters,
historical documents, contracts, personal mementos, contact
information of fellow researchers and professional associations
relating to Ms. Harlow, films, and vintage radio recordings on
tape and CD and in transcript form. The photographs vary in
quality and include reprints, copies of photographs,
nonprofessional candid photographs, archival and autographed
photographs, and production stills. Petitioner keeps his binder
materials in archival plastic sleeves.
Petitioner purchased most of the materials on Ms. Harlow
either at movie memorabilia shows or on eBay. Petitioner looks
for materials that were written about her while she was alive and
that were not changed by studio press or magazine editors.
Petitioner considers his collection an “encyclopedia” of Ms.
Harlow’s life. Petitioner intends to continue acquiring
historical material, photos, letters, and other items that
illuminate Ms. Harlow’s private life. His goal is to collect a
research library that is so extensive that he is the first person
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contacted regarding the availability of items related to Ms.
Harlow.8
In 1992 petitioner met Mark Vieira (Mr. Vieira), a
photographer and writer, who, as of the trial date, had written
and published seven books on Hollywood history. Mr. Vieira
worked with petitioner in various ways in the process of writing
three of the books. Mr. Vieira obtained materials on Hollywood
history from petitioner, such as photographs or quotations about
the subjects in the books, and petitioner was credited in the
books. Before 2003 Mr. Vieira also used two photographs from
petitioner’s research library for one of his books for which he
paid petitioner approximately $80.9
In late 2002 Mr. Vieira asked petitioner whether he would be
interested in collaborating on a book about Ms. Harlow, and Mr.
Vieira and petitioner prepared a proposal for a publisher. In
May 2003 Mr. Vieira met with the publisher’s marketing personnel,
but the publisher was not interested.10
8
Petitioner also claims he intends to write a screenplay and
a book and create a film about Ms. Harlow. As of the trial date,
he had not done any of these things.
9
After Mr. Vieira rents photographs for use in his books,
generally he is not obligated to pay a royalty when the book is
published.
10
Since then petitioner has expanded his research library to
include rare photographs of Ms. Harlow from a sitting in Griffith
(continued...)
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B. Titanic Survivors
In the late 1980s and 1990s petitioner met 11 survivors of
the sinking of the Titanic, several descendants of survivors, and
one Titanic cross-channel passenger, and he interviewed them on
film. Petitioner testified that in the 1990s subsidiaries of
Twentieth Century Fox and several other production companies
licensed some part of the footage. In the mid-1990s petitioner
also sold some Titanic travelogue documentaries.11 Petitioner’s
research library concerning the Titanic contains photographs of
the people he interviewed and footage of the interviews. It also
contains materials from magazines and books relating to the
Titanic, its passengers and crew, and interview materials.
C. Cass Elliot
In 1994 petitioner started his Cass Elliot project, which
contemplates the development of a full-length musical feature
film based on the life of singer Cass Elliot of the Mamas & the
Papas, a popular musical group of the mid-1960s. Petitioner
interviewed people who knew Cass Elliot, and he collected
materials on her, including books, magazines, and audio
10
(...continued)
Park. However, the record is not clear whether petitioner
acquired these photographs in 2003 or later.
11
With the centennial of the sinking of the Titanic coming
up in 2012, petitioner hopes to repackage and sell the
documentary footage.
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materials. Petitioner also had occasional meetings with writers
or producers on this project in years before 2003.
D. Calamity Jane
The Calamity Jane project, which petitioner began in 1995,
contemplates the creation of an animated musical film about
Calamity Jane. Petitioner pitched the project to a studio
sometime before 2000, but the studio later abandoned the project
and he resumed developing his original idea. In 2000 petitioner
pitched the project to two additional studios without success.
Petitioner acquired materials for the project, including DVDs,
VHS tapes, books, magazines, and photographs of Calamity Jane,
her contemporaries, and the wild west of the 19th century.
E. Joan of Arc
In 1997 petitioner began his Joan of Arc project, which he
envisions making into an animated, full-length production.
Petitioner’s research library on Joan of Arc contains books,
films, photographs, and illustrations. In 2000 petitioner
unsuccessfully pitched the project to Walt Disney Television
Animation.
F. The Black Donnellys
In 1998 petitioner began the Black Donnellys project, which
envisions the development of a full-length feature film. The
project focuses on an infamous family of Irish immigrants who
moved to Southern Ontario, Canada, in the early to mid 19th
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century. Petitioner acquired books, photographs, magazine
articles, and other materials related to the project and visited
London, Ontario, where the Black Donnellys lived. In 2001
petitioner unsuccessfully pitched the project to Walt Disney
Pictures.
III. Audit of Petitioner’s 1999 Return
In 2001 respondent began examining petitioner’s 1999 return
(1999 audit). On his 1999 Schedule C petitioner deducted
depreciation and amortization expenses of $3,745. In the course
of the 1999 audit, respondent accepted petitioner’s Schedule C
depreciation and amortization deduction as reported.
IV. Petitioner’s 2003 Return
Petitioner’s accountant, Judy Vargas (Ms. Vargas), prepared
his 2003 return, and petitioner timely filed it. Petitioner
reported $308,373 in wages for his work as a director for Walt
Disney. Petitioner attached to his 2003 return a Schedule C on
which he described his principal business as that of a producer
and filmmaker. The Schedule C reported no income or gross profit
and a $20,843 loss. As part of the Schedule C expenses,
petitioner deducted $17,556 as the cost recovery deduction. See
supra note 3. Petitioner depreciated or amortized most assets on
a straight-line, 5-year basis.12
12
The record indicates that of the categories remaining at
issue, petitioner amortized “Promotion” as a 5-year property
(continued...)
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Of the $17,556 cost recovery deduction reported on
petitioner’s Schedule C that respondent disallowed, the following
components remain at issue:
Year Cost
Description acquired basis 2003 Deduction
Furniture/fixtures 2000 $10,558 $2,112
Goodwill/promotion 2000 6,877 1,375
Artist supply 2000 1,098 220
Research/tapes/theater 2000 938 188
Goodwill 2001 2,091 418
Dues and periodicals 2001 2,511 352
Books 2001 4,202 588
Promotion 2001 2,991 477
Salary promotion 2001 6,934 1,387
Animation art 2001 1,838 257
Photos 2001 1,448 203
Research library 2002 5,145 1,029
Research photo 2002 19,808 3,962
Promotion/goodwill 2002 411 82
Goodwill 2002 3,029 606
Reference library 2002 6,554 1,311
Reference library 2003 16,781 280
Vint. magazine/library 2003 5,467 91
Total 98,681 14,938
Because petitioner recovered the cost of most of the assets
using a 5-year cost recovery period, his 2003 depreciation
schedule included several assets that petitioner had acquired in
1998 and 1999 but had not fully depreciated or amortized. The
2003 depreciation schedule also included categories of assets
purchased after 1999, which are similar to the categories on the
1999 depreciation schedule, such as research photos and library
12
(...continued)
using the 200-percent declining balance, mid-quarter convention
method.
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research acquired in 2002 and promotion/goodwill expenditures in
2000 and 2002.
Respondent audited petitioner’s 2003 return and issued a
notice of deficiency that disallowed in full the $17,556 cost
recovery deduction and made certain computational adjustments.
In the Form 886-A, Explanation of Items, attached to the notice
of deficiency, respondent stated that the deduction is disallowed
because “This item is not an allowable deduction.”
OPINION
I. Burden of Proof
The Commissioner’s determinations are presumed correct, and
the taxpayer ordinarily bears the burden of proving a
determination is erroneous. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933). Moreover, deductions are a matter of
legislative grace, and the taxpayer bears the burden of proving
that he is entitled to any claimed deduction. INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). Petitioner does not
contend that section 7491(a) shifts the burden of proof to
respondent, and the record does not permit us to conclude that
the requirements of section 7491(a) are met. Accordingly,
petitioner bears the burden of proving that he is entitled to the
claimed deduction.
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II. The Parties’ Arguments
A. Respondent
Respondent does not argue that petitioner was not in the
trade or business of being a producer and filmmaker, nor does
respondent contest that petitioner actually spent the amounts he
claimed to have spent. Respondent contends instead that (1)
petitioner’s expenditures, at least those related to the Ms.
Harlow project, were personal because the expenditures were to
enhance petitioner’s personal collection rather than to carry on
his business as a producer and filmmaker, (2) even if the
relevant expenses were business expenses, the amounts spent on
items related to Ms. Harlow were not reasonable, and (3) even if
we were to conclude that depreciating the assets was proper,
petitioner incurred the costs in the process of creating long-
lived assets (the created assets) and he should have capitalized
the expenses under section 263A, which permits a taxpayer to
recover costs only when the taxpayer places the created assets in
service.
Respondent’s section 263A argument was raised for the first
time in his opening brief. Petitioner anticipated the argument
because he refers to it in his opening brief,13 filed
13
In his opening brief petitioner lists but does not address
other issues such as whether the expenses were reasonable and
necessary, whether the expenses are subject to the hobby loss
rules of sec. 183, and whether petitioner may deduct expenses
(continued...)
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concurrently with respondent’s, and does not assert that the
argument is a new matter that either shifts the burden of proof
to respondent or precludes our consideration of the argument.
However, we do not need to consider respondent’s section 263A
argument because we deny petitioner’s cost recovery deductions on
other grounds.
B. Petitioner
Petitioner’s posttrial briefs focus primarily on one issue
--the effect of the 1999 audit on respondent’s adjustments to
petitioner’s Schedule C cost recovery deductions. Petitioner’s
principal argument in his opening brief is that the 1999 audit
resulted in an agreement on which petitioner is entitled to rely
in subsequent years. Even in his reply brief petitioner focuses
solely on the effect of the 1999 audit.14 As a result
petitioner’s opening and reply briefs are not particularly
helpful in deciding the issues.
13
(...continued)
with respect to creative projects “which are under development,
but which have not yet been produced and sold”.
14
Petitioner also asserts that the legal issues during trial
were different from the issues that were in dispute during the
2003 audit. According to petitioner, during the audit and at the
Appeals level respondent argued that the assets should be
depreciated on a 15-year basis with a midyear convention.
Petitioner also alleges that, after the case was docketed,
respondent changed course and claimed that petitioner incurred
the expenses in pursuit of a hobby. Petitioner, however, does
not allege any prejudice or unfair surprise, and we conclude
there is none. Respondent confirmed during trial and in his
reply brief that sec. 183 is not at issue.
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In his opening brief petitioner states that he was prepared
to present evidence regarding whether the expenditures were
“ordinary and necessary”15 but abbreviated his presentation in
response to comments by the Court during the trial. While
petitioner’s point is not entirely clear, he appears to imply
that he was misled by the Court into abbreviating his case at
trial. He is mistaken. We warned petitioner on more than one
occasion during trial that he had the burden of proof and that he
needed to introduce evidence to show that the requirements for
claiming cost recovery deductions for the items in question were
satisfied. For the most part, petitioner did not come to trial
with the evidence he needed to support the disputed deduction.
Moreover, petitioner had ample opportunity to address
respondent’s arguments in his posttrial briefs but made a
deliberate decision not to do so, relying instead on the 1999
audit. Having decided how to try his case and prepare his
posttrial briefs, petitioner must live with the consequences of
his decisions and cannot now complain that any failure of proof
rests on anyone’s shoulders but his own.
15
In his pretrial memorandum respondent relies on sec. 162
and argues that petitioner failed to show that the research
library expenses were ordinary, necessary, and reasonable.
However, respondent does not explain how sec. 162 is relevant to
deductions under the cost recovery sections of the Code. Cf.
Noyce v. Commissioner, 97 T.C. 670, 688-689 (1991)
(distinguishing sec. 168, the authority for deducting an
allowance for depreciation in that case, from sec. 162).
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III. The Effect of the 1999 Audit
Petitioner contends that on his 1999 Schedule C he
depreciated assets similar to those on the 2003 Schedule C and
that respondent considered the issue during the 1999 audit and
allowed the deductions. Petitioner suggests that at the
conclusion of the 1999 audit he and respondent entered into a
settlement agreement pursuant to which he would depreciate the
assets on a 5-year straight-line basis and that he relied on the
settlement agreement in computing his 2003 Federal income tax
liability. Petitioner contends that respondent may not repudiate
the settlement agreement and is barred from disallowing the
depreciation deductions with respect to the similar categories of
assets. We disagree.
The record does not support a finding that the parties
entered into a settlement agreement with respect to the 1999
audit. The record simply reflects that the 1999 audit was closed
without change.16 Moreover, the result of a prior audit
ordinarily does not bind the Commissioner because each tax year
is to be considered separately. United States v. Skelly Oil Co.,
394 U.S. 678, 684 (1969). Although reliance on a prior audit may
establish reasonable cause and good faith, see sec. 6664(c), for
the purpose of determining whether the section 6662 accuracy-
16
The record contains respondent’s Letter 1156 to petitioner
dated Aug. 6, 2002, showing no adjustments to the 1999 Schedule C
and no deficiency for 1999.
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related penalty applies, see, e.g., De Boer v. Commissioner, T.C.
Memo. 1996-174, the Commissioner’s failure to challenge a
position in a prior audit does not bar a subsequent challenge
with respect to a similar position, see Rose v. Commissioner, 55
T.C. 28, 32 (1970); Tesar v. Commissioner, T.C. Memo. 1997-207.
Accordingly, we hold respondent is not estopped from disallowing
the disputed cost recovery deduction in 2003 for expenses similar
to those that he had allowed in the 1999 audit.17
IV. Petitioner’s Evidence at Trial
The record contains Exhibit 34-J, which consists of
summaries of receipts for items petitioner purchased in 2003.
Petitioner coded most items to show whether the purchase related
to a specific project or was “General ongoing research”.
Petitioner explained that Exhibit 34-J was the cover sheet from
his box of records for 2003, and the box itself contained
receipts and a detailed description of each item. Although
petitioner claims that the boxes of receipts for the 2000-2002
purchases had similar cover sheets, he did not introduce either
the summaries or the original receipts into evidence at trial,
nor did he bring the summaries or receipts to trial.
17
Respondent conceded depreciation deductions with respect
to assets purchased in 1998 and 1999 that were examined during
the 1999 audit and for which petitioner claimed a depreciation
deduction in 2003. See supra note 2.
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Petitioner asserts on brief that before trial his counsel
proposed that the boxes of receipts for 1998-2003 be offered as
evidence at trial. According to petitioner, respondent’s counsel
said that the introduction of those boxes of receipts was
“unnecessary and inappropriate because the documentation of the
expenditures was not an issue in dispute in the case.”
Petitioner claims that, on the basis of this representation, he
did not offer as evidence the boxes of receipts for 2000-2002, he
brought to trial only the box of receipts for 2003, and he
introduced in evidence only the cover sheet from the 2003 box of
receipts. Respondent denies that he prevented petitioner in any
way from introducing evidence.
At no point during trial did petitioner assert that
respondent misled him in any way with respect to the records for
2000-2002, even when we expressed concern that petitioner was not
proving how his purchases were connected to his Schedule C
activity. For example, during trial we stated that petitioner’s
depreciation schedule reflects categories and that petitioner was
not explaining “what actually * * * [was] in each one of these
categories”. During Ms. Vargas’ testimony, we expressed concerns
about the lack of testimony on how the assets related to
petitioner’s Schedule C activity. At the conclusion of the trial
we again stated that the record contained no detail regarding
petitioner’s purchases with the exception of purchases made
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during 2003. At no point after we gave these warnings did
petitioner’s counsel explain why he did not bring the documents
to trial or why he did not attempt to introduce them into
evidence, nor did he ask us to keep the record open to submit
them.
Petitioner also states that during trial his counsel
realized that the issues being considered by the Court were not
the same as the issues raised by the parties. Petitioner claims
his counsel abbreviated his presentation of evidence on the issue
of whether the expenditures were “ordinary and necessary” and
switched to presenting evidence on the effect of the 1999 audit.
The effect of the 1999 audit was one of the issues in this case,
and our questioning the parties regarding one issue does not
render other arguments of the parties moot or irrelevant.
Moreover, because we repeatedly called petitioner’s counsel’s
attention to the kind of evidence that would be helpful in
deciding whether petitioner was entitled to the cost recovery
deductions he claimed, petitioner’s posttrial argument regarding
abbreviating his presentation of evidence at trial lacks merit.
V. Petitioner’s Cost Recovery Deduction
A. Cost Recovery in General
Although petitioner characterized the disputed cost recovery
deduction as an amortization deduction, the parties seem to agree
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that petitioner claimed it under section 167.18 Section 167(a)
allows as a depreciation deduction a reasonable allowance for
exhaustion, wear and tear, and obsolescence of property if the
taxpayer uses such property in a trade or business or other
income-producing activity. See also sec. 1.167(a)-1(a), Income
Tax Regs. Section 168 provides that except as otherwise provided
therein, the depreciation deduction authorized by section 167(a)
for any tangible property shall be determined by using (1) the
applicable depreciation method, (2) the applicable recovery
period, and (3) the applicable convention. The depreciation
system set forth in section 168 as in effect for 2003 is known as
the modified accelerated cost recovery system (MACRS).
Depreciation is an accounting device that recognizes that
the physical consumption of a capital asset in a business
activity is a true cost of doing business, since the asset is
being depleted. Commissioner v. Idaho Power Co., 418 U.S. 1, 10
(1974). A depreciation deduction allows a taxpayer to recover
his investment in an income-producing asset over the useful life
of the asset. Liddle v. Commissioner, 103 T.C. 285, 289 (1994),
affd. 65 F.3d 329 (3d Cir. 1995). As the process of consumption
18
Sec. 1.162-6, Income Tax Regs., allows a taxpayer to claim
as deductions the cost of supplies used by him in the practice of
his profession, including amounts paid for books and furniture
with short useful life. Petitioner does not claim deductions
under sec. 1.162-6, Income Tax Regs., nor does the record permit
us to conclude that any of contested expenses qualified for a
deduction under sec. 162.
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continues, and depreciation is claimed and allowed, the asset’s
adjusted basis is reduced to reflect the distribution of its cost
over time. Commissioner v. Idaho Power Co., supra at 10.
“‘[The] purpose of depreciation accounting is to allocate the
expense of using an asset to the various periods which are
benefited by that asset.’” Id. at 10-11 (quoting Hertz Corp. v.
United States, 364 U.S. 122, 126 (1960)).
Under the cost recovery provisions of the Code, which have
changed considerably over time and are quite complex, a taxpayer
may under certain circumstances depreciate or amortize an asset
used in the active conduct of a trade or business. The
circumstances vary depending on, among other things, the type of
property involved and the date on which the property is placed in
service. Different types of property are subject to different
sets of rules, and there are several systems of cost recovery
that may apply, e.g., the Accelerated Cost Recovery System (ACRS)
(generally in effect for property placed in service during 1981-
1986), MACRS (generally effective for property placed in service
beginning after 1986), and section 167.19 Assuming for the
19
The rules with respect to the amortization of certain
kinds of intangible property are set forth in sec. 197 and in
other provisions of the Code. See, e.g., sec. 169 (pollution
control facilities). Neither party contends that the
expenditures in question were sec. 197 intangibles or that other
amortization provisions apply.
- 22 -
moment that section 26320 and section 263A,21 which postpone cost
recovery under certain circumstances, do not apply, any analysis
of the propriety of a cost recovery deduction must take into
account the type of property for which a taxpayer is claiming a
cost recovery allowance deduction and whether the property is
subject to wear and tear, decay or decline from natural causes,
exhaustion, and/or obsolescence during the time that the property
is used in the taxpayer’s business. See, e.g., secs. 167, 168,
197 (and related regulations). If property is not subject to
wear and tear, to decay or decline from natural causes, to
exhaustion, and/or to obsolescence, no allowance for depreciation
is deductible. Sec. 1.167(a)-2, Income Tax Regs. The
regulations under section 167 provide that personal property is
depreciable under section 167 if the taxpayer established the
useful life of the property. See sec. 1.167(a)-1(a) and (b),
Income Tax Regs. No depreciation under section 167 is allowed
with respect to museum pieces of indeterminable useful life. See
Harrah’s Club v. United States, 228 Ct. Cl. 650, 661 F.2d 203
20
Sec. 263(a) provides that no deduction shall be allowed
for any amount (1) “paid out for new buildings or for permanent
improvements or betterments made to increase the value of any
property or estate” or (2) “expended in restoring property or in
making good the exhaustion thereof for which an allowance is or
has been made.”
21
Sec. 263A provides for the capitalization of certain costs
of property produced by the taxpayer. See sec. 263A(a)(1)(B),
(2), (b).
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(1981). We have held that a painting displayed for business
purposes that suffers no wear and tear is not depreciable under
ACRS when the taxpayer failed to prove a determinable useful
life. See Clinger v. Commissioner, T.C. Memo. 1990-459. Under
ACRS, however, once the taxpayer establishes that an asset is
subject to exhaustion, wear and tear, or obsolescence, the
taxpayer does not need to show the useful life of the asset.
Liddle v. Commissioner, supra at 296-297; Selig v. Commissioner,
T.C. Memo. 1995-519.
Even if property might otherwise be subject to the cost
recovery provisions because the property is adversely affected by
use or by the passage of time, generally no deduction for
personal, living, or family expenses is allowed, sec. 262(a), and
no depreciation deduction is allowed for personal use property,
cf. sec. 1.167(a)-1(a), Income Tax Regs. Moreover, under section
274(a)(1)(A) no deduction otherwise allowable is permitted for
any entertainment item “With respect to an activity which is of a
type generally considered to constitute entertainment, amusement,
or recreation” unless the taxpayer establishes that the item was
directly related to the active conduct of the taxpayer’s trade or
business.
The taxpayer claiming a cost recovery deduction such as
depreciation or amortization ordinarily has the burden of proving
that the expenditure is depreciable and/or is not a personal
- 24 -
expense and that the requirements of the applicable cost recovery
system have been met. See Rule 142(a). For the reasons set
forth below, petitioner has failed to carry his burden of proof.
B. Whether Petitioner’s Assets Were Depreciable or
Personal22
1. Expenditures With Respect to Assets Purchased
in 2003
Petitioner’s depreciation schedule indicates that in 2003
petitioner acquired two categories of assets that were included
in calculating the disputed cost recovery deduction: Reference
library and vintage magazine-library materials. The reference
library items were archival photographs of Jean Harlow that
petitioner purchased in 2003. The vintage magazine-library
materials23 consisted of (1) over 200 vintage magazines related
to Ms. Harlow, (2) items designated as “General ongoing
research”, which included a photo, magazines, and newspapers, and
(3) several uncategorized items.
The items included in the categories described above can
fairly be divided into Harlow items and non-Harlow items. The
22
Respondent’s brief is unclear as to whether respondent
contends that all of petitioner’s expenditures, including those
not related to the Harlow project, were personal. We address
other expenses because respondent did not concede the
depreciation amount with respect to other assets, except as
discussed supra note 2.
23
We understand that the “Vint. magazine-library” category
of the depreciation schedule correlates with the “Dues and
periodicals” category of Exhibit 34-J.
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Harlow items include the archival photographs of Ms. Harlow and
the vintage magazines containing Harlow material.24 The non-
Harlow items consist of other items purchased in 2003 that were
unrelated to Ms. Harlow and were included in the calculation of
the disputed deduction.
Respondent argues that the Harlow items were part of an
extensive collection of Harlow-related items that petitioner
should not be permitted to depreciate. Respondent argues that
the items in question have an indefinite economic life and are
not properly subject to a cost recovery allowance.
Petitioner wanted to build a research library on Ms. Harlow
that is so comprehensive it will be the first place a person
interested in Ms. Harlow will go for information. Petitioner
purchased the vintage magazines and the Harlow photographs to add
24
Petitioner failed to explain how groups in Exhibit 34-J
relate to the two categories of assets petitioner acquired in
2003 that are on petitioner’s Schedule C depreciation schedule.
However, we were able to discern how Exhibit 34-J relates to
petitioner’s depreciation schedule by totaling amounts for each
group in Exhibit 34-J and matching those totals with categories
on petitioner’s depreciation schedule. This exercise revealed
that petitioner also spent (1) $5,762 on books for his projects
and for general research and (2) $7,360 on three autographed
photos of Ms. Harlow, but deducted depreciation with respect to
these items on his Schedule A, Itemized Deductions. Respondent
made no adjustments to petitioner’s Schedule A except a
computational adjustment and has not raised any issue regarding
the propriety of splitting cost recovery deductions with respect
to assets related to Ms. Harlow between the 2003 Schedule A and
Schedule C. Exhibit 34-J also reveals that petitioner spent
$2,493 on photos and $5,467 on magazines mostly from the 1930s,
but it is not clear whether petitioner claimed any deductions
with respect to these materials.
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to his already extensive collection of Harlow material.
Petitioner did not prove that the photographs or magazines he
acquired in 2002 and 2003, which he kept in archival sleeves, are
assets that have a limited economic useful life or are subject to
wear and tear, decay, or obsolescence as a result of their use,
if any, in petitioner’s Schedule C activity. Moreover, while the
items that petitioner added to his Harlow library related to one
of petitioner’s existing projects, petitioner has failed to
demonstrate how those items were “used” in his business.25 The
record simply establishes that petitioner acquired the items to
add to his Harlow library and that the items may be of use to
petitioner in his Schedule C activity if, as, and when he is able
to market his idea for a Harlow book, film, script, or
screenplay. In short, petitioner, who bears the burden of proof,
see Rule 142(a), has failed to convince us that the assets in
question were not acquired primarily for his personal use and
enjoyment, that the assets were actually placed into service in
his Schedule C activity, or that the assets were depreciable or
amortizable.
25
Mr. Vieira credibly testified that he turned to
petitioner’s research library (in years before 2003) for
photographs and quotes from the Harlow period when he worked on
his books about Hollywood history and that he actually
compensated petitioner, to the tune of $80, for the right to use
some of petitioner’s Harlow materials. We infer from the record,
however, that the items used were not the items acquired in 2002
and 2003 that are at issue here.
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With respect to the non-Harlow items designated “General
ongoing research”, petitioner did not introduce evidence to
identify specifically what these items were or how the items were
used, if at all, in his Schedule C business activity. At the
same time, the descriptions of items, for example, “Magazine” or
“Photo” were generic and suggest that the purchased items could
have been for amusement and entertainment rather than for
business. Without meaningful evidence identifying with
specificity the items purchased and their connection with
petitioner’s Schedule C business activity, we simply cannot
conclude that the items in question were properly depreciated or
amortized during 2003. Accordingly, we sustain respondent’s
disallowance of the cost recovery deduction with respect to items
designated “General ongoing research”. See sec. 262(a); sec.
1.167(a)-1(a), Income Tax Regs.
The last group, the uncategorized items, included several
items: Two admission tickets to a Titanic exhibition, a $7
admission to the Rose Bowl Swap Meet, a $190 warranty for a TV, a
$34 Sears maintenance bill for a vacuum cleaner, two admissions
totaling $60 to Knott’s Berry Farm, and $325 for gym membership
dues.26 With the possible exception of the Titanic exhibition
26
Petitioner asserts that none of those items were included
in the Schedule C deductions. However, the total for the
category “Dues and periodicals” appears to include these items,
and the total for that group on Exhibit 34-J in turn, equals the
(continued...)
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tickets, there is no credible evidence in the record that any of
these expenditures were for business assets that are depreciable.
With respect to the Titanic exhibition tickets, although
petitioner credibly testified that he had sold documentary
footage involving the Titanic and that he continues to pursue his
Titanic project, he did not show (1) how the two admission
tickets were related, if at all, to the project, and (2) whether
the tickets were property for which a depreciation or
amortization deduction was appropriate. In addition, the
purchase of the second ticket suggests the exhibition visit was
social, and petitioner failed to offer any credible evidence
regarding the business purpose of the visit.
We sustain respondent’s determination with respect to the
deductions relating to assets acquired in 2003.
2. Expenditures With Respect to Assets Purchased in
2000-2002
a. Promotion, Goodwill, and Promotion/Goodwill
(2000-2002)27
Ms. Vargas testified that the promotion/goodwill category
included self-promoting parties, meals, and other forms of
building petitioner’s business. Petitioner testified generally
26
(...continued)
cost basis for the category “Vint. magazine-library” on the
depreciation schedule.
27
The years in parenthesis indicate when petitioner acquired
the particular category of assets. The headings correspond to
the lines on the depreciation schedule.
- 29 -
that the 2001 promotion category included the costs of flowers,
wine, and “things to build relationships.” On the basis of the
very sparse and general record, we are unable to conclude that
the expenditures included in this category directly relate to
petitioner’s business and are not personal or that the
expenditures generated depreciable assets. We sustain
respondent’s determination with respect to this category.
b. Furniture and Fixtures (2000)
Petitioner testified that in 2000 he purchased bookshelves
and filing cabinets, but he did not testify what these items were
used for; nor did he introduce any receipts to substantiate the
nature of the items purchased. The record contains no evidence
to establish that petitioner used the items in his business and
not as household items. Accordingly, we sustain respondent’s
determination with respect to this category. See sec. 262(a);
sec. 1.167(a)-1(a), Income Tax Regs.
c. Salary Promotion (2001), Research Library
(2002)
Petitioner offered no testimony regarding these expenditure
categories. Because petitioner did not prove what items he
acquired or their relationship, if any, to his Schedule C
activity, we sustain respondent’s determination with respect to
these categories.
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d. Books (2001)
Although petitioner did not introduce into evidence the list
of books he purchased in 2001, he testified that his research
library contains books about the Titanic, Calamity Jane, The
Black Donnellys, and Joan of Arc. When testifying about the
expenditures categorized as “books” purchased in 2001, petitioner
stated that this category includes “all the books that I’ve just
described earlier.” However, the record contains no specifics on
the assets purchased. The record does not allow us to conclude
that the books purchased were not for amusement and entertainment
or for general personal use. Accordingly, we sustain
respondent’s determination with respect to this category.
e. Artist Supply (2000), Research/Tapes/Theater
(2000), Photos (2001), Dues and Periodicals
(2001), Animation Art (2001), Research Photo
(2002), Reference Library (2002)
Petitioner testified with varying degrees of certainty what
expenses were grouped under these categories. With respect to
artist supplies purchased in 2000, petitioner testified that the
category includes items to generate design work, characters, and
backgrounds. Petitioner also testified that the category
“photos”, reflecting items purchased during 2001, consisted of
modern prints, with the cost of up to $25 and that the category
“Research/tapes/theater”, reflecting expenditures made during
2002, included CDs and films of the period and movie theater
admissions (I “[was] going to the movie theater and studying what
- 31 -
I’m watching.”) With respect to the animation art category,
petitioner testified that the category may include cells from
past animated features that he would use for his projects, but he
only loosely connected the category with the Calamity Jane
project.28
Petitioner’s testimony regarding dues and periodicals and
animation art acquired in 2001 was even less certain. He
testified that dues and periodicals probably consisted of
newspapers and magazines for his research library. Petitioner
offered no evidence whatsoever to identify the items he purchased
in 2002 and depreciated under the research photo category; he
testified only that the items in question were probably archival
photographs acquired for specific projects. Petitioner testified
that the items acquired in 2002 and categorized as “reference
library” probably included magazine articles, looseleaf articles,
or newspaper articles.
Although petitioner described in detail his various projects
and testified generally that his research library contains
photographs, books, magazines, audio materials, and DVDs related
to his projects, he did not introduce any evidence identifying
the specific items he acquired and how those items related to his
business. On this sparse and unhelpful record we cannot find
28
Petitioner testified that “Animation art * * * may be
cells from past animated features that would be used in
conjunction with something like Calamity Jane.”
- 32 -
that these expenditures were directly related to petitioner’s
business and were not personal expenses or costs of general
amusement, entertainment, or recreation, which ordinarily are not
deductible. See secs. 262, 274(a). Petitioner’s broad testimony
that he was engaged in projects and that his research library
contains materials related to them does not prove that the
unknown assets included in these categories were business assets
that were properly depreciated or amortized. Because
petitioner bears the burden of proof, see Rule 142(a), and failed
to carry it, we sustain respondent’s determination.
VI. Conclusion
We have considered all remaining arguments made by the
parties, and to the extent not discussed above, we reject those
arguments as irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.