T.C. Memo. 2012-4
UNITED STATES TAX COURT
MICHAEL S. OROS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19400-09. Filed January 5, 2012.
Michael S. Oros, pro se.
Amy B. Ulmer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a $5,030 deficiency
in petitioner’s Federal income tax for 2006 and a $1,006
accuracy-related penalty under section 6662(a).1 The issues for
1
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.
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decision are: (1) Whether petitioner was in the trade or
business of being a book author in 2006, thereby entitling him to
deduct related expenses under section 162;2 and (2) whether
petitioner is liable for an accuracy-related penalty under
section 6662(a).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
Oregon when the petition was filed.
Petitioner is, and was during 2006, a full-time employee of
Intel Corp. (Intel). Petitioner has a marketing background and
holds a bachelor of science degree in international business
administration and a master’s degree in international business
administration.
Before 2006 petitioner had no experience writing or
publishing books. In 2006 petitioner completed a business plan
to write and self-publish a book about his upcoming worldwide
trip and the planning and execution of such a trip. Petitioner,
although not professionally trained, is an experienced
photographer and intended to use the photographs he took during
his trip as a focal point of his book.
2
Respondent’s determination with respect to petitioner’s
itemized deductions is a computational adjustment that will be
resolved under Rule 155.
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Petitioner’s Trip
On November 20, 2006, petitioner began a 4-month trip during
which he visited South America, Asia, Africa, and Australia.
During 2006 petitioner traveled exclusively throughout South
America. During 2007 he traveled to Asia, Africa, and Australia.
Throughout the entire trip petitioner was on either a paid
vacation or a paid sabbatical from Intel.
Petitioner spent an average of 3 days in each South American
country he visited. On several occasions petitioner would return
to a country in order to photograph different events. While in
South America he took 4,542 photographs of businesses, temples,
monuments, natural wonders, and wildlife. Petitioner maintained a
contemporaneous journal in which he wrote about his different
experiences.
Petitioner’s Travel Book
As of March 2011 petitioner had not published or completed a
book about his worldwide trip. Petitioner had written an “early
draft” of the book consisting of approximately 100 to 150 pages.
Petitioner did not produce a draft or outline of the book at
trial.
2006 Tax Return
In preparing his 2006 tax return petitioner consulted his
tax return preparer. The preparer had more than 36 years of
experience, and petitioner had used him for several years before
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2006. The preparer advised petitioner on the tax treatment of
the expenses associated with his worldwide trip.
Petitioner timely filed his Form 1040, U.S. Individual
Income Tax Return, for 2006. He attached a Schedule C, Profit or
Loss From Business, which listed his principal business as “book
author”. He reported no business gross receipts or income and
claimed $17,294 in travel expenses, $1,474 in meals expenses, and
$372 in telephone expenses for a total loss of $19,140.
Respondent subsequently disallowed petitioner’s travel and meals
expenses. At trial petitioner introduced receipts and credit
card statements for expenses incurred on his 2006 trip.
OPINION
I. Deductions for Travel and Meals
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proving that he is entitled to any
claimed deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). Pursuant to section 162(a), a taxpayer is entitled to
deduct all of the ordinary and necessary business expenses paid
or incurred during the taxable year in carrying on a trade or
business. In contrast, except where specifically enumerated in
the Code, no deductions are allowed for personal, living, or
family expenses. Sec. 262(a).
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Whether a taxpayer is engaged in a trade or business is
determined using a facts and circumstances test under which
courts have focused on the following three factors that indicate
the existence of a trade or business: (1) Whether the taxpayer
undertook the activity intending to earn a profit; (2) whether
the taxpayer is regularly and actively involved in the activity;
and (3) whether the taxpayer’s activity has actually commenced.
See McManus v. Commissioner, T.C. Memo. 1987-457, affd. without
published opinion 865 F.2d 255 (4th Cir. 1988).
To prove regular and active involvement in a trade or
business, the taxpayer must show extensive business activity over
a substantial period as opposed to a one-time venture or
investment. Id. A taxpayer may have more than one trade or
business. Wright v. Commissioner, 31 T.C. 1264, 1267 (1959),
affd. 274 F.2d 883 (6th Cir. 1960). Specifically, writing can
qualify as a trade or business even if it is not the sole
activity of the taxpayer. Id. However, “there must be some
conscientious intent and effort to engage in and continue in the
writing field for the purpose of producing income and a
livelihood in order to have writing qualify as a trade or
business within the meaning of section 162(a) of the Code.” Id.
Some of the facts in the record suggest that petitioner was
engaged in a trade or business. Petitioner had a business plan
regarding his book. He took thousands of pictures and kept a
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detailed journal while on his trip. He arranged his itinerary
based on events he wanted to photograph for his book.
Additionally, respondent has not questioned petitioner’s profit
motive.
On the other hand, petitioner has failed to present
convincing proof of many of the other relevant factors. He has
failed to present any evidence of continuous or repeated activity
as an author. As of March 2011 petitioner had not published or
completed the travel book or any other book. Petitioner
testified that he plans to write other books, but there is no
evidence that he has begun working on those books.
Petitioner admits that before 2006 he was not in the trade
or business of being an author and that his travel book would
have been his first book. We do not mean to say that an initial
publication can never be considered part of a trade or business.
However, petitioner has failed to prove that he was engaged in
the writing field for the purposes of producing income and a
livelihood.
Additionally, during 2006 petitioner was a full-time
employee of Intel. Although “writing need not be the sole
activity of a taxpayer to qualify as a trade or business, the
fact that * * * [the taxpayer] devoted time to another job must
be considered.” Hawkins v. Commissioner, T.C. Memo. 1979-101,
affd. without published opinion 652 F.2d 62 (9th Cir. 1981); see
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also Trans v. Commissioner, T.C. Memo. 1999-233 (taxpayer’s wages
from full-time employment strongly suggested that he was
regularly and actively involved in his full-time employment
rather than his claimed computer consulting trade or business).
Petitioner failed to produce evidence to show some intent or
effect on his part to engage in and continue in the writing field
with substantial regularity and with the purpose of producing
income and a livelihood. In Hawkins v. Commissioner, supra, we
noted that the taxpayer’s published book of poetry “could just as
easily be an isolated venture for the personal satisfaction of
* * * [the taxpayer] seeing * * * [her] poetry in print as it
could be a product of trade or business.” Id. The same could be
said of petitioner; his planned travel book could just as easily
be an isolated venture for the personal satisfaction of taking a
worldwide trip and seeing his travel adventures in print as it
could be a product of a trade or business.
Petitioner fails to meet his burden of proving that his
writing activities qualified as a trade or business within the
meaning of section 162(a). Consequently, the expenses incurred
in connection with the trip are not deductible as ordinary and
necessary expenses of a trade or business.
Moreover, assuming petitioner was in the trade or business
of being an author, he fails to meet the strict substantiation
requirements of section 274(d). In general, section 274(d)
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disallows any deduction for certain types of expenses, including
travel and entertainment expenses, unless the taxpayer
substantiates by adequate records or sufficient evidence
corroborating the taxpayer’s own testimony the amount, time,
place, business purpose, and business relationship of the
expenses. Respondent agrees that petitioner has established the
amount, time, and place of $18,054 of his claimed expenses, but
he has not established the business purpose of each of those
expenses. At trial petitioner testified broadly to his trip’s
overall business purpose. However, his blanket statement that
all expenses incurred on his trip had a business purpose is not
sufficient. See Shaller v. Commissioner, T.C. Memo. 1984-584
(“the business purposes of each expenditure must be substantiated
by written statement unless it is obvious from the context”),
affd. without published opinion 813 F.2d 403 (4th Cir. 1986).3
II. Accuracy-Related Penalty
Respondent determined that petitioner is liable for a
section 6662(a) accuracy-related penalty for 2006. Pursuant to
section 6662(a) and (b)(1) and (2), a taxpayer may be liable for
a penalty of 20 percent of the portion of an underpayment of tax
3
Under sec. 195(b), in the taxable year in which a taxpayer
begins an active trade or business, the taxpayer may elect to
amortize startup expenditures. Because petitioner has not shown
that his trade or business actually commenced in 2006, he is not
entitled to deduct or begin amortizing any portion of his 2006
expenses under sec. 195.
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attributable to (1) negligence or disregard of rules or
regulations or (2) a substantial understatement of income tax.
Negligence “includes any failure to make a reasonable attempt to
comply with the provisions of this title”, and disregard
“includes any careless, reckless, or intentional disregard.”
Sec. 6662(c). “Negligence” includes any failure by the taxpayer
to keep adequate books and records or to substantiate items
properly. Sec. 1.6662-3(b)(1), Income Tax Regs. An
“understatement” is the difference between the amount of tax
required to be shown on the return and the amount of tax actually
shown on the return. Sec. 6662(d)(2)(A). A “substantial
understatement” of income tax exists if the understatement
exceeds the greater of (1) 10 percent of the tax required to be
shown on the return for a taxable year or (2) $5,000. See sec.
6662(d)(1)(A). The burden of production is on respondent to
produce evidence that it is appropriate to impose the relevant
penalty. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438,
446 (2001).
Because we have sustained respondent’s adjustment, the
amount of tax required to be shown on petitioner’s 2006 return is
$17,494. Petitioner reported total tax of $12,464 for 2006.
Accordingly, petitioner understated his 2006 tax liability by
$5,030. Petitioner’s understatement constitutes a “substantial
understatement” of income tax because it exceeded the greater of
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(1) 10 percent of the tax required to be shown on the return for
the taxable year, or (2) $5,000. Respondent has therefore met
his burden of production.
The accuracy-related penalty under section 6662(b)(1) or (2)
is not imposed with respect to any portion of the underpayment as
to which the taxpayer shows that he acted with reasonable cause
and in good faith. Sec. 6664(c)(1); Higbee v. Commissioner,
supra at 448. Reliance on the advice of a tax professional may
establish reasonable cause and good faith. See United States v.
Boyle, 469 U.S. 241, 250 (1985). A taxpayer claiming reliance on
professional advice must show that: (1) The adviser was a
competent professional who had sufficient expertise to justify
reliance, (2) the taxpayer provided necessary and accurate
information to the adviser, and (3) the taxpayer actually relied
in good faith on the adviser’s judgment. Neonatology Associates,
P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221
(3d Cir. 2002).
In preparing his 2006 tax return, petitioner consulted a tax
return preparer with more than 36 years of experience. The
preparer advised petitioner on the tax treatment of the expenses
associated with his worldwide trip. Petitioner relied upon his
return preparer’s advice in claiming deductions on his Schedule C
for his 2006 trip expenses. On the record before us, we find
that petitioner has carried his burden of proving that there was
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reasonable cause for, and that he acted in good faith with
respect to, the underpayment in this case. Because the
reasonable cause and good faith exception is a defense to both
negligence and a substantial understatement of income tax, the
section 6662 penalty does not apply. See sec. 6664(c)(1).
Accordingly, we hold that petitioner is not liable for an
accuracy-related penalty under section 6662(a).
To reflect the foregoing,
Decision will be entered
under Rule 155.