                        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.
                              - 2 -

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.
                                - 3 -

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”.
                               - 4 -

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.
                                - 5 -

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.
                               - 6 -

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
                                 - 7 -

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...)
                                 - 8 -

     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.
                                - 9 -

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
                                 - 10 -

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...)
                                - 11 -

     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.
                              - 12 -

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.
                                - 13 -

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...)
                              - 14 -

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.
                                - 15 -

     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).
                                - 16 -

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.
                              - 17 -

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.
                              - 18 -

     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
                                - 19 -

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
                                - 20 -

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.
                                - 21 -

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).
                                - 23 -

(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.
                             - 25 -

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.
                               - 26 -

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.
                               - 27 -

     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...)
                             - 28 -

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.
                               - 30 -

                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.
