DocketNumber： Docket No. 2308-94.
Judges： WELLS
Filed Date： 8/12/1996
Status： Non-Precedential
Modified Date： 11/20/2020
*383 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS,
| Additions to Tax and Penalties | |||
| Year | Deficiency | Sec. 6651(a)(1) | Sec. 6662(a) |
| 1990 | $ 2,906 | $ 164 | $ 581 |
| 1991 | 4,908 | 1,049 | 982 |
| 1992 | 4,646 | -- | 929 |
Unless otherwise noted, all section references are to the Internal Revenue Code (Code) as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions, the following issues remain for decision: (1) Whether petitioner's photography activity constituted an activity not engaged in for profit within the meaning of
FINDINGS OF FACT
Some of the facts and certain*384 exhibits have been stipulated for trial pursuant to Rule 91. *385 her part-time job from 5:30 p.m. until as late as 10 p.m. Monday through Thursday and from 9:30 a.m. until as late as 4 p.m. Saturday.
Petitioner was involved in photography prior to the years in issue. Members of her family had worked in the photography field as well. Petitioner photographed, inter alia, weddings, family reunions, and graduations. Petitioner also made portraits and photographed rock bands and musicians. She did not charge for her photography work until 1987 and, until then, did not treat the activity as a business for tax purposes. Beginning with her 1987 Federal income tax return, she included the activity on Schedule C of her returns, claiming losses for each of the taxable years 1987, 1988, and 1989.
Petitioner did not maintain a dark room and sent her film to a processing lab for developing. Petitioner did not have formal training in photography during the years in issue. Petitioner, however, had the quality of her photographs analyzed and critiqued. During 1991, petitioner joined the Professional Photographers of California and the Professional Photographers of the Monterey Bay Area (PPMBA), which held monthly meetings at which other photographers would lecture*386 on technical and business matters connected with photography. Petitioner learned certain things about pricing her work at these meetings. If, however, petitioner was aware that a customer was suffering financial hardship, she attempted to accommodate the customer and did not charge her standard price. Furthermore, if a wedding couple did not have the funds to purchase petitioner's photographs, she allowed them to acquire the photographs up to a year after the ceremony, after their other bills had been paid. Petitioner could not afford to, and did not, advertise in the Yellow Pages during the years in issue. Instead, petitioner relied on flyers and word-of-mouth to promote her activity. Petitioner also placed an advertisement in a softball team's program. Most of petitioner's customers during the years in issue were her coworkers at the Santa Cruz Health Services Agency. Petitioner would meet with coworkers during breaks, or at lunch or dinner time at restaurants near the agency's offices, and she claimed tax deductions for the cost of the meals. Additionally, petitioner met people at her home and deducted the cost of groceries.
Petitioner's parents and brother resided in Los Angeles, *387 California. During 1991, petitioner arranged to photograph the wedding of certain of her friends in Los Angeles, which was 340 miles from her home in Soquel. In connection with that engagement, petitioner made five trips to Los Angeles to: (1) Make arrangements for photographing the event, (2) do the photography, (3) deliver prints and reprints of the wedding photographs, and (4) review reprint orders. At least four of those trips lasted several days each. During certain of those trips, petitioner also photographed or delivered prints of her brother's wedding. Petitioner purchased a gift, a card, and ribbon for her friends' wedding. Petitioner received approximately $ 843 in connection with photographing her friends' wedding, from which petitioner paid the cost of film and developing, which was at least $ 568. Petitioner also attributed her cost of meals in restaurants, including a meal she purchased for her friends, to that job.
During 1992, petitioner was paid $ 50 to assist another photographer in taking pictures at a party. Petitioner attributed a grocery store bill of $ 54.19 and the cost of meals at restaurants to the job. Also during that year, petitioner photographed a family*388 reunion. Petitioner paid the cost of developing the photographs and of renting equipment and attributed the cost of meals in restaurants, including meals with the person from whom she rented equipment and the persons ordering the photographs, to the job.
On her 1990 Federal income tax return, petitioner reported wage income of $ 27,569, interest income of $ 92, and dividend income of $ 2. Petitioner claimed itemized deductions of $ 5,325. On Schedule C of the return, petitioner reported gross receipts of $ 1,141 (rounded), consisting of: (1) $ 454.75 received for accounting services, (2) $ 65.15 in commissions, (3) $ 165.74 received for miscellaneous services, (4) $ 76 received for merchandise orders, and (5) $ 380.60 received for photography. On the Schedule C, petitioner claimed a cost of goods sold of $ 301 and business expenses of $ 20,122, resulting in a net loss of $ 19,282. Petitioner reported a tax due for 1990 in the amount of $ 47. Petitioner's 1990 Federal income tax return was filed on May 28, 1991.
On her 1991 Federal income tax return, petitioner reported wage income of $ 31,567, interest income of $ 47, and refunds of State and local taxes of $ 393. Petitioner claimed*389 itemized deductions of $ 5,285 and an IRA deduction of $ 1,200. On Schedule C of the return, petitioner claimed gross receipts and gross income of $ 3,007, at least $ 19.50 of which was received for accounting services, at least $ 50 of which was received as rent, and at least $ 2,423.07 of which was received for photography. On the Schedule C, petitioner claimed business expenses of $ 19,230, resulting in a net loss of $ 16,223. Petitioner reported a tax due for 1991 in the amount of $ 1,069. Petitioner's 1991 Federal income tax return was filed on December 15, 1992.
On her 1992 Federal income tax return, petitioner reported wage income of $ 32,345 and interest income of $ 29. Petitioner also reported itemized deductions of $ 6,343 and an IRA deduction of $ 1,200. On Schedule C of the return, petitioner reported gross receipts and gross income of $ 3,015, consisting of $ 1,304 received for the rental of space in her home and $ 1,711 received for photography. On the Schedule C, petitioner reported business expenses of $ 17,636, resulting in a net loss of $ 14,621. Petitioner reported a tax due for 1992 in the amount of $ 1,189. Petitioner's 1992 Federal income tax return was filed*390 on April 12, 1993.
For the years in issue, petitioner deducted a variety of expenses on the grounds that they were connected to her photography activity. Petitioner deducted the cost of repairing earthquake damage to her home and the cost of removing some infested trees from her yard. Petitioner deducted as "educational supplies" her purchases of recordings of the music of certain of the bands she had photographed. Petitioner deducted the full cost of her 1992 membership in the California State Automobile Association, even though she had only one car and did not use it exclusively for business purposes. Petitioner deducted the cost of taking her cousin and the cousin's husband to Disneyland. Petitioner deducted the cost of a watchband.
During the years in issue, petitioner paid $ 50 per month to each of Temple Trust and United Sovereigns and deducted those amounts. Temple Trust provided record-keeping advice to small businesses. United Sovereigns was a marketing organization from which members, including petitioner, received commissions for enrolling new members. It provided members with a newsletter on money and tax matters, an income tax preparation service, representation during*391 audits of their returns, and estate planning assistance. Petitioner does not know who owns United Sovereigns.
During relevant years, United Sovereigns provided petitioner with a workbook that she filled out and returned to the organization and which United Sovereigns in turn forwarded to a return preparer to be used in filling out petitioner's income tax returns. Other than filling out the workbook, petitioner did not perform any of the computations required to complete her returns. United Sovereigns sent petitioner's workbooks to Bill Webber, who prepared petitioner's Federal income tax returns for the years in issue. Mr. Webber also represented petitioner during the audit of her returns. Mr. Webber does not contact the taxpayers whose workbooks are sent to him prior to preparing their returns, and he accepts the information set forth in those workbooks.
Petitioner did not investigate the qualifications of any of the persons owning and operating United Sovereigns prior to enlisting them to prepare her tax returns, nor was she aware of Bill Webber's credentials, although she had met him.
OPINION
We first consider whether petitioner's photography*392 activity was engaged in for profit within the meaning of
In order to carry that burden, a taxpayer must show that he or she had an actual and honest objective of making a profit from the activity.
Based on our consideration of the record in the instant case, we conclude that petitioner has not demonstrated that her photography activity was carried on with the actual and honest objective of making a profit. Although the activity had some of the trappings of a business, those "trappings" are insufficient to demonstrate that the activity was carried on for profit. Although petitioner maintained meticulous records, and respondent has conceded that all of the items of expense noted in her summaries have been substantiated, such records may represent nothing more than a conscious attention to detail.
Rather, it appears that the principal purpose of petitioner's records was to substantiate claimed deductions from income for tax purposes. Analysis of petitioner's records reveals that her activity was operated with little or no regard for the level of expense incurred in relation to the small amount of income yielded by the activity. Petitioner frequently incurred costs for restaurant meals and groceries in connection with her photography activity, explaining that she and the people she met had to eat anyway, and so would meet over a meal to discuss photography. We note that many of petitioner's clients during the years in issue were coworkers, friends, and family, and petitioner has not convinced us that many of the meals did not have significant personal or social aspects for her. Indeed, the meetings and other contacts with persons in connection with her photography activity recorded by petitioner largely*396 appear consistent with ordinary social activities.
Petitioner has not established that she did not use her photography activity as a means of deducting personal expenses and the cost of social activities. For instance, in 1991 petitioner photographed the wedding of certain friends in Los Angeles, making five trips from her home in Soquel, 340 miles away. On at least four of the trips, petitioner stayed in Los Angeles several days, apparently with her parents, who resided in Los Angeles. One of the trips was made so that petitioner could personally deliver, as opposed to mailing, developed photographs of the wedding. *397 On another occasion, petitioner also received $ 50 for photographic work, yet admits that she deducted a $ 54.19 grocery bill that she claimed related to the work. Petitioner also admits that she deducted the cost of: (1) Groceries, (2) a watchband, (3) removing infested trees from her yard, (4) recordings of bands that she photographed, and (5) an automobile club membership. Petitioner also admits she deducted the cost of a trip to Disneyland with her cousin and cousin's husband, and the cost of tickets to a concert she attended with her cousin and persons described as "clients". Although petitioner claims that there was a business purpose for the foregoing expenditures, she has not shown that they did not have significant personal aspects as well.
Other circumstances also suggest that petitioner's photography activity was not operated in a businesslike manner. It does not appear that petitioner made any significant changes in the manner in which she operated her activity, such as reducing expenses, in an effort to achieve profitability during the years in issue. Those circumstances, as well as others in the record, such as the fact that petitioner generally did photography for*398 coworkers, friends, and relatives, indicate to us that personal, rather than business, considerations influenced the manner in which petitioner conducted her photography activity.
Although petitioner claims that she learned about pricing her services as a photographer from attending lectures given at meetings of the PPMBA, and changed her practices as a result, it does not appear that the change caused any significant improvement in the financial results of the activity. Moreover, although petitioner claimed to have a mentor, that person's advice appeared to concern the technical quality of her photography rather than the business aspects of the activity. We are not persuaded that petitioner made any concerted effort to obtain advice as to how to make her photography activity profitable.
Petitioner also had limited time to devote to her photography activity, inasmuch as she was employed full time as an account clerk and worked as few as 12 hours to as many as 17 hours per week, from Monday through Thursday during the evening and during the day on Saturday, as a telephone bill collector. Although petitioner claimed to devote to photography much of the time that was not occupied by*399 her jobs, we are not convinced that petitioner's motivation was not primarily social and recreational in taking meals with coworkers, friends, and relatives, and in association with the rock bands and musicians she photographed during the time she pursued her photography activity. Petitioner also has not shown that any of the assets used in her photography activity, or the photographs that she took, would appreciate in value, or that she was successful in carrying on similar or dissimilar activities.
Petitioner has consistently incurred losses in her photography activity from 1987, the first year she treated it as a business for tax purposes, through 1992, the last year in issue, and has never reported a profit from the activity. For each year in issue, petitioner reported a substantial loss that was apparently attributable to her photography activity. *400 but claimed expenses of $ 17,636.
While losses incurred during the early stage of an activity might not necessarily indicate that the activity is not engaged in for profit, continued losses after the period customarily required to bring an operation to profitability, if not explainable by ordinary business reverses, may indicate that the activity is not engaged in for profit.
We are not persuaded that substantial elements of personal pleasure and recreation were not present in petitioner's photography activity. Petitioner had been involved in photography prior to claiming the activity was a business. She stated in her opening statement at trial that "photography is as much a part of me as my eyes, my hands, and my heart". She further testified that almost everything she does is related to photography. At trial, petitioner indicated that she had photographed musicians and their performances most of her life, that she had had contact with persons in the music industry for a long period of time, and that she had purchased recordings by the bands that she photographed. Petitioner appears to have derived personal pleasure from the *402 contact with the music industry afforded by her photography activity. We also think it reasonable to infer that petitioner derived personal satisfaction from photographing her coworkers, friends, and family at their weddings, graduations, and other events and that the activity facilitated petitioner's social activities. While there is no requirement that profit-oriented work be onerous and unpleasant,
Based on the record in the instant case, we hold that, during the years in issue, petitioner has not met her burden of proving that her photography activity was not an activity not engaged in for profit within the meaning of
Respondent determined that petitioner was liable for the addition to tax provided by
The parties stipulated that petitioner's 1990 Federal income tax return was filed on May 28, 1991. Petitioner alleges on brief that she filed a Form 4868 requesting an extension of time to file that return. Statements in briefs, however, are not evidence, Rule 143(b), and there is no such request attached to the copy of petitioner's return that is in the record, nor is such a request otherwise in evidence. We conclude that petitioner's 1990*405 Federal income tax return was due on April 15, 1991. Sec. 6072(a). The parties have stipulated that petitioner's 1991 Federal income tax return was filed on December 15, 1992. That return was due on April 15, 1992. Sec. 6072(a). Petitioner concedes that her 1991 return was not filed timely.
Except as noted above, petitioner does not attempt to explain the reason for the failures to file timely. Petitioner on brief states that she was not asked to give an explanation; however, petitioner bears the burden of proving reasonable cause for her failure to file timely, and it is her responsibility to present any explanation she may have for her conduct. We accordingly sustain respondent's determinations pursuant to
Respondent determined that petitioner was liable for the accuracy-related penalty provided by
The accuracy-related penalty does not apply to any portion of an underpayment with respect to which it is shown that there was a reasonable cause and that the taxpayer acted in good faith.
On brief, petitioner contends that she believed in good faith that the expenses that*407 she claimed were allowable. Good faith on the part of a taxpayer, however, does not always negate negligence. Taxpayers are required to take reasonable steps to determine the law and to comply with it.
To reflect the foregoing*408 and concessions,
1. Respondent objected to admission of certain exhibits pertaining to years subsequent to the years in issue on grounds of materiality and relevance. We sustain respondent's objection.
2. Petitioner testified that she had agreed to personally deliver the photographs, instead of mailing them.↩
3. Petitioner has not attempted to show whether any of the expenses claimed on the Schedules C related to the income reported on those schedules that was realized from her activities besides photography.↩
4. We note that petitioner has not established the amount of any cost of goods sold or deductible expenses attributable to the other activities the income from which is reported on her Schedules C for the years in issue.↩