  THIS OPINION APPEARS AS AMENDED BY ORDER DATED JULY 19, 1999.




                          T.C. Memo. 1999-131



                      UNITED STATES TAX COURT



             RALPH LOUIS VITALE, Jr., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 346-97.                Filed April 21, 1999.



     Ralph Louis Vitale, Jr., pro se.

     William J. Gregg and Judith C. Cohen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FAY, Judge:   Respondent determined deficiencies in peti-

tioner's 1993 and 1994 Federal income taxes in the respective

amounts of $4,256 and $6,702, and accuracy-related penalties
                                -2-

under section 6662(a)1 in the respective amounts of $851 and

$1,751.

     The issues for decision are:     (1) Whether petitioner was in

the trade or business of being an author during the years in

issue; if so, (2) whether expenses that petitioner incurred are

deductible as ordinary and necessary under section 162 and

whether he has adequately substantiated under section 274(d) his

travel expenses;2 and (3) whether petitioner is liable for

penalties for negligence or substantial understatement of tax

under section 6662(a).   In the notice of deficiency, respondent

disallowed petitioner's medical expense deduction for 1994

because of the increase in the amount of adjusted gross income

determined.   The correctness of this adjustment depends upon our

resolution of the issues stated above.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and second stipulation of facts,

together with the exhibits attached thereto and exhibits offered



     1
      All section references are to the Internal Revenue Code in
effect for the taxable years in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
     2
      Although respondent did not raise the substantiation issue
under sec. 274 in the notice of deficiency or in the pleadings,
it was tried by both parties and without objection by petitioner.
See Rule 41(b)(1).
                                -3-

at trial, are incorporated herein by this reference.   Petitioner

resided in Arlington, Virginia, when he filed his petition.

     Petitioner holds a bachelor's degree in marketing and adver-

tising from the University of Maryland.   Towards completion of

that degree, he earned more than 24 credit hours of study in

English, journalism, and speech.   Petitioner worked 40 hours per

week for the U.S. Department of the Treasury (hereinafter

Treasury) as a budget analyst until January 1997, when he retired

after more than 35 years of service.   He had been employed at a

GS-12 pay grade.   As part of his job, he was required to "write

budget justifications, procedures, and other written material by

applying professional level writing ability to create high

quality written work."3   In an office staffed mostly by


     3
      This describes one of the six critical elements of peti-
tioner's job as a budget analyst at the U.S. Department of the
Treasury. In a report of petitioner's performance for the period
Jan. 1 to Dec. 31, 1994, he was given a rating of "outstanding"
in meeting this element. The level of performance required for
an outstanding rating exceeds the requirements for an "excellent"
rating. A rating of excellent was described in the report as
follows:
     Writes budget justifications, statistical reports,
     procedures, guidelines, and other written materials in
     a manner that is clear, concise and correct. Particu-
     lar attention must be given to grammar, spelling, etc.
     The written product must be able to communicate ideas
     in an effective manner. Demonstrates a special talent
     for writing narratives. Ideas are concise and clear in
     their presentation, as indicated by few follow-up
     questions being asked by recipients. Grammar and
     spelling are excellent. Paragraphs and sentences are
                                                   (continued...)
                                    -4-

accountants, petitioner was often the one delegated to perform

writing-based tasks, such as contributing to the Federal

Managers' Financial Integrity Act report, in which agencies

evaluate their internal control and accounting systems.      At some

point during his employment, petitioner also served as editor of

an in-house newsletter of the Treasury.

       In 1992, approximately 2 years before petitioner became

eligible to retire, he began writing outside of his full-time

job.       At trial, petitioner testified that he was "fearful of the

concept of retirement" and began writing in 1992 with the hope of

making it his second career.      The first book-length manuscript he

began writing was a fictional piece titled "Lightning at Dawn".

Later that same year, petitioner wrote a collection of short

stories called "Boys and Girls Together".       Before marketing these

manuscripts for publication, petitioner had an idea for another

book——a story about the experiences of two men who travel cross-

country to patronize a legal brothel in Nevada.      In early 1993,



       3
        (...continued)
       correctly structured. Works independently in drafting
       all material and seeks guidance only when goals have
       changed. The employee's success at this level is also
       measured in the ability of justifications to be well
       received and acted upon. No more than 1 revision is
       required for the finished product. [Emphasis added.]
By signing the report, petitioner acknowledged its contents,
including the mark of outstanding that he received for his
writing ability on the job.
                                -5-

petitioner wrote an 18,000-word draft of this basic story line,

which he submitted for copyright protection in June.4   In order

to authenticate the story and develop characters for the book,

petitioner visited numerous legal brothels in Nevada by acting as

a customer for prostitutes.

     In a journal describing his experiences at the brothels,

petitioner recorded the brothels he visited, the dates (and

sometimes the hours) of his visits, the prostitutes he met, and

the amount of cash he paid each one.   For each entry, petitioner

wrote about his visit with the prostitute and about the happen-

ings at brothels in general.   For example, he described the

manner in which he selected her, the house rules of the brothel,

the manner in which he negotiated a price for her time, their

dialogue, and the type of clothing worn by her.   He also included

personal information on the prostitute, including her age,

physical characteristics, city or State of residence, religious

background, ethnicity, level of education, and the name and age

of her offspring, if any.   The journal indicates that, at some

point during these meetings, petitioner told the prostitutes that

he was writing a book about Nevada's legal brothels and that he

wished to use them as characters in his book.   The journal shows

that, during 1993, petitioner spent, on average, 3 days per month


     4
      Petitioner's two previous works, "Lightning at Dawn" and
"Boys and Girls Together", were also copyrighted in 1993.
                                 -6-

(except during the months of February, May, and December) meeting

with prostitutes at the brothels.

     Using the material that he gathered during these meetings

(hereinafter sometimes referred to as interviews), petitioner

produced a manuscript called "Searchlight, Nevada" which he

submitted for publication.   On October 13, 1993, petitioner

entered into an agreement for its publication with Northwest

Publishing, Inc. (Northwest).5   In pertinent part, the agreement

provided that,

          (1) Petitioner was to pay Northwest $4,375 to publish

     10,000 copies of his book;6




     5
      Before submitting his manuscript to Northwest Publishing,
Inc. (Northwest), petitioner consulted "Writer's Market '93" a
publication describing various publishers. In it, Northwest is
described as a book publisher that,
     Publishes hardcover, trade paperback and mass market
     originals and reprints. Publishes 40-50 titles/year.
     Receives 700-800 queries and 500 * * * [manuscripts]/
     year. 85% of * * * [manuscripts] from first-time
     authors, 95% from unagented writers. Pays 10-15%
     royalty on retail price. Publishes book 4 months
     after acceptance of * * * [manuscript].
     6
      In a letter to petitioner confirming receipt of this pay-
ment, Rick Devey, the marketing director of Northwest, described
it as a "joint-venture payment". In another letter to peti-
tioner, Jim Perkins, Northwest's operations officer, explained
that "the payment you made of $4,375 (your share of the joint
venture) represents approximately one fourth of the total cost of
producing and marketing ten thousand copies of your book".
                               -7-

          (2) of the 10,000 copies printed, Northwest would

     (a) give 100 free copies to petitioner; (b) give away 200

     copies to major bookstores and book reviewers; (c) sell

     2,500 copies through its "test market program"; and (d) sell

     the remaining books in the retail marketplace;

          (3) petitioner would be paid 40% of the retail amount

     of each book sold through the test market program, and a

     royalty equal to 15% of the retail price of any remaining

     books sold to bookstores and wholesalers;

          (4) Northwest was to pay royalties on January 31 and

     July 31 of each year, along with interest penalties for late

     payments;

          (5) Northwest was to do a certain amount of sales

     promotion, advertising, and publicity; and

          (6) Northwest was to have exclusive rights to the book.

Representatives of Northwest had told petitioner that his book

would probably earn him at least $20,000 in royalties.

     "Searchlight, Nevada" was published by Northwest and

released in December 1995 at a retail price of $7.95.    The book

is 131 pages long and has an international standard book number.

It was available for immediate purchase at Barnes & Noble Book-

sellers in Boynton Beach, Florida, and Falls Church, Virginia,

and at Super Crown Books, store #106.   The book could also be
                                 -8-

purchased by special order at Borders Books and Music in Baileys

Crossroads, Virginia.

     Prior to the book's being released, petitioner played an

active role in all stages of its publication.       In 1994, after

reviewing the first galley proofs, petitioner inquired about

adding two additional chapters to the novel.    Then by letter

dated February 27, 1995, petitioner made detailed suggestions for

the book's cover design and attached pictures of how he thought

the characters on the cover should look.   Petitioner closed the

letter with the following words:

          Any additional assistance I can provide will be
     done gladly. I realize that the cover design is as
     important as the story on the inside. It doesn't
     matter if the story is good if we fail to motivate the
     reader into purchasing [sic] the book.

     *        *         *    *         *        *          *

          Perhaps with our joint venture on "Searchlight,
     Nevada" we can add a hot seller to * * * [Northwest's]
     catalog. I'd like us to sell over 100,000 copies.

     Petitioner also actively participated in the promotion of

his book.7   He provided Northwest's public relations department

with mailing lists and telephone numbers of bookstores, news-

papers, magazines, and radio and motion picture companies.

Petitioner, on his own, mailed about 60 complimentary copies of


     7
      A marketing plan distributed by Northwest to its authors
advises that "the more effort you are willing to put forth in
promoting your book, the more successfully your book will sell."
                                 -9-

his book, along with individualized letters, to bookstores,

newspapers, magazines, and hotels.     He worked with a marketing

expert at Northwest to get his book stocked by distributors, and

to set up book signings at major bookstores.     When petitioner was

unhappy with the contents of his press release, he rewrote it and

sent his changes to Northwest.   Moreover, when petitioner became

dissatisfied with Northwest's marketing efforts, he wrote a

letter demanding that the publishing company comply with the

terms of its agreement.

     By letter dated January 22, 1996, Northwest's account

executive informed petitioner that 6,800 copies of his book had

been ordered and shipped,8 and that another 2,500 copies had been

ordered by the Books By Millions chain.     The letter also stated

that Northwest's royalty statements would be mailed in approxi-

mately 3 weeks.   On his 1996 Federal income tax return, peti-

tioner reported $2,600 in gross royalties from his writing

activity.

     In late 1993, after petitioner had signed an agreement with

Northwest to have "Searchlight, Nevada" published, he began

research on another book, "Nevada Nights, San Joaquin Dawn".     He

wanted to document the difficulties that women face in their

attempt to break free from a life of prostitution, because, as


     8
      The letter failed to identify who placed the order(s) for
these books or to whom they were shipped.
                               -10-

"the story's never been done before to any degree of authentic-

ity", he thought it commercially viable.   After discovering that

the rooms at the brothels were equipped with listening devices,

he began meeting the women at other locations on "out calls,"

which he paid for by personal credit card.    In 1994, during the

months of January, February, April, May, June, and July, peti-

tioner spent anywhere from 1 to 6 days per month in Nevada on out

calls with prostitutes.   He successfully encouraged 10 prosti-

tutes to leave their profession.   As of the trial date, peti-

tioner had not yet completed "Nevada Nights, San Joaquin Dawn".

     Some time after a contract had been signed for the publica-

tion of "Searchlight, Nevada", petitioner submitted another

manuscript to Northwest for consideration; i.e., "Lightning at

Dawn", which was about 450 pages in length.   He was under the

impression that Northwest required a joint venture payment for

first novels only, and that, if Northwest agreed to publish

"Lightning at Dawn", he would have to pay nothing.   Petitioner

also attempted to market "Boys and Girls Together", but he ceased

his efforts when he was told that there was no need or market for

short stories at that time.

     On May 1, 1996, 4 months after "Searchlight, Nevada" had

been on the market, Northwest filed for bankruptcy protection.9


     9
      Northwest filed for reorganization under ch. 11 of the U.S.
                                                   (continued...)
                                -11-

The corporation had been the subject of a continuing investiga-

tion by State authorities.    On November 8, 1996, petitioner filed

a proof of claim with the U.S. Bankruptcy Court for the District

of Utah in the amount of $17,854 for unpaid royalties and breach

of contract.

     After securing the return of his rights in "Searchlight,

Nevada", petitioner began soliciting other publishing houses to

have his book published a second time.     Petitioner received

several responses, including a request by the president of

Regnery Publishing, Inc., and an invitation by the editor-in-

chief of Farrar, Straus & Giroux, Inc., to submit his manuscript

for review.    He also began to send letters to literary agents

soliciting their interest in his book.10    At the time of trial,

petitioner had since rewritten parts of "Searchlight, Nevada" and

had sent his revised manuscript to Paladin Press of Boulder,

Colorado, at its request.    Petitioner also received a letter from


     9
      (...continued)
Bankruptcy Code. The bankruptcy court had since converted the
case to a ch. 7 liquidation.
     10
      Literary agents act on behalf of authors to get publishers
to buy the rights to their clients' works. In exchange, agents
usually collect a commission based on what the author earns from
his work's eventual sales.
     Petitioner did not engage a literary agent for the first
publication of "Searchlight, Nevada". Instead, he chose to study
the book market and identify publishers which he thought might be
interested in his work. For the book's second publication,
though, petitioner did attempt to have an agent represent him.
                                -12-

Neal Sperling, a Hollywood script agent, requesting that he

submit a plot summary of his book for consideration as a made-

for-television movie or feature film.     Petitioner is presently a

member of Washington Independent Writers, The Authors Guild,

Poets and Writers, and Writers Market Book Club.     During the

years in issue, petitioner spent approximately 25-35 hours per

week on his writing activity.

     Apart from that activity, petitioner reported the following

income on his Federal income tax returns:

                                       1993            1994

     Wages                        $53,076           $54,243
     Dividend income                6,111             4,847
     State/local tax refund           174               999
     Capital gain (loss)           (3,000)           (3,000)
           Total                   56,361            57,089

     In 1993, petitioner began treating his writing activity as a

trade or business.    From that year on, he began filing a Schedule

C (Profit or Loss From Business), in which he listed his princi-

pal business or profession as author.     As of the date of trial,

petitioner's writing activity had not resulted in a profit for

any year, as reflected in the following table:

                     Year          Net Loss

                     1993         $15,190
                     1994          23,517
                     1995           9,177
                     1996           8,183
                                    -13-

     For the years in issue, petitioner reported no income from

his writing activity but claimed the following as deductible

expenses on his Schedules C:11

                                           1993        1994

          Advertising                    --           $100
          Commissions and fees           $40            80
          Office expense                 420           600
          Supplies                       150           --
          Travel                       4,230         9,195
          Meals and entertainment      2,520           786
          Utilities                      --            657
          Other expenses               7,830        12,099
             Total                    15,190        23,517

For 1993, the item denominated "other expenses" consists of a

$4,350 joint venture payment to Northwest and $3,480 in cash

payments to prostitutes.     For 1994, other expenses consist of the

following:     $2,349 for the purchase of a computer, supplies, and

furniture; $480 for mailing expenses; $313 for membership dues;

$5,660 for credit card expenses on out calls; $1,295 for tuition

and books; $500 for sponsoring a race car team; and $1,502 for

miscellaneous other expenses.

     Petitioner's travel and meal deductions include expenditures

for airfares, rental car expenses, food, and lodging in


     11
      Petitioner filed two amended returns (Forms 1040X) for tax
year 1994, one on June 15, 1995, and the other on July 7, 1995.
Each amended return had a new Schedule C attached, in which
petitioner adjusted the amount of expenses that he claimed in
connection with his profession as an author. The figures for
1994 represented in the table reflect the Schedule C expenses on
the amended return filed July 7, 1995.
                               -14-

connection with his travels to Nevada.   For the years in issue,

the record contains documentary evidence of petitioner's travel

and meal expenses; i.e., airline tickets and travel schedules,

and hotel, restaurant, rental car, and credit card receipts.

     With respect to petitioner's interviews, he characterized

the amounts he paid to the prostitutes as business related

depending upon whether information gleaned from the interviews

was used in his books.   Petitioner has personal credit card

receipts for 1994 supporting the expenditures he incurred to

interview prostitutes away from the brothels.   Petitioner does

not have receipts of his cash expenditures in 1993 for the

interviews that took place at the brothels.   Nor does petitioner

have records supporting his deductions for advertising, commis-

sions and fees, office expenses, supplies, utilities, or those

expenses comprising "other expenses" for 1994 (with the exception

of the interviews).

     Around the time of the parties' preparation of a stipulation

of facts, petitioner prepared a five-page reconstruction of his

expenditures, using information reflected on airline tickets and

itineraries, hotel and rental car bills, credit card receipts,

and petitioner's own memory.   This included summary statements

for 1993 and 1994, a flight log, and a log of his interviews.

     In the notice of deficiency, respondent disallowed under

sections 162 and 183 all of the expenses claimed on petitioner's
                                -15-

Schedules C for the years in issue because "it has not been shown

that * * * [petitioner] either started a trade or business or

entered into an activity for profit. * * * [Nor has he] estab-

lished that any amount was for an ordinary and necessary business

expense".

                               OPINION

     Section 162(a) generally allows a deduction for all ordinary

and necessary business expenses paid or incurred during the

taxable year in carrying on any trade or business.    To be engaged

in a trade or business within the meaning of section 162, "the

taxpayer must be involved in the activity with continuity and

regularity and * * * the taxpayer's primary purpose for engaging

in the activity must be for income or profit."    Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987).

     We are satisfied that petitioner's writing activity was

conducted with continuity and regularity during the years in

issue.    Nevertheless, in order for an activity to be considered a

trade or business within the meaning of section 162, a taxpayer

must conduct the activity with the requisite profit motive or

intent.   See id.

     Petitioner argues that he engaged in his writing activity

with the intent to make a profit and that his Schedule C expenses

for tax years 1993 and 1994 were ordinary and necessary to his

endeavor as an author.   Respondent does not dispute that amounts
                                 -16-

were in fact expended, but rather contests their deductibility.

Respondent maintains petitioner was not engaged in the trade or

business of being an author, and, accordingly, expenses incurred

for the writing (and publication of one) of his books are not

business expenses deductible under section 162(a).   Rather, he

argues, they are deductible only to the extent of the income

derived from the activity under section 183.12   Alternatively, if

the activity is found to have been entered into for profit,

respondent asserts that the claimed expenses were not properly

deductible as ordinary and necessary under section 162 and that

certain expenses were not adequately substantiated under section

274(d).   At trial, respondent conceded that, with respect to

section 274(d), the only element of substantiation lacking in

this case is business purpose.

     Petitioner bears the burden of proving by a preponderance of

the evidence that he was engaged in writing for profit.   Rule

142(a).   The test of whether a taxpayer engaged in an activity

for profit is whether he entered into, or continued, the activity

with an actual and honest objective of making a profit.   See

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



     12
      Sec. 183 was enacted to codify the distinction between a
business and a hobby and to prohibit a taxpayer from obtaining a
loss from an activity considered to be a hobby which was then
used to offset other income. See S. Rept. 91-552, at 104 (1969),
1969-3 C.B. 423, 490.
                               -17-

opinion 702 F.2d 1205 (D.C. Cir. 1983).   Although the taxpayer's

expectation of profit need not be reasonable, it must be bona

fide, as determined from all the surrounding facts and circum-

stances.   See Keanini v. Commissioner, 94 T.C. 41, 46 (1990);

Dreicer v. Commissioner, supra at 645.    Thus, whether the

requisite profit motive exists is a factual question that must be

determined upon the record, see Benz v. Commissioner, 63 T.C.

375, 382 (1974), with more weight given to objective facts than

to petitioner's statement of intent.   See Engdahl v. Commis-

sioner, 72 T.C. 659, 666 (1979); sec. 1.183-2(a), Income Tax

Regs.

     The Treasury regulations list nine factors as an aid in

making the profit objective determination.   They include:

(1) The manner in which the taxpayer carried on the activity;

(2) the expertise of the taxpayer or his advisers; (3) the time

and effort expended by the taxpayer in carrying on the activity;

(4) the expectation that the assets used in the activity may

appreciate in value; (5) the success of the taxpayer in carrying

on other similar or dissimilar activities; (6) the taxpayer's

history of income or loss with respect to the activity; (7) the

amount of occasional profits that are earned; (8) the financial

status of the taxpayer; and (9) whether elements of personal

pleasure or recreation are involved.   No one factor is conclu-

sive, and we do not reach our decision herein by merely counting
                                -18-

the factors that support each party's position.    See sec. 1.183-

2(b), Income Tax Regs.    Moreover, certain factors are given more

weight than others because they are more meaningfully applied to

the facts in this case.    Respondent concedes that the fourth

element, the expectation that assets used in the activity may

appreciate in value, is inapplicable to the present case.

     Taking into account the above factors and considering the

record as a whole, we conclude that, during the years in issue,

petitioner had a bona fide intention to derive a profit from his

writing activity.   In addition to petitioner's testimony, which

we found to be credible and forthright, the evidence in the

record shows an intent and effort by petitioner to engage in and

continue in the writing field with the purpose of producing

income and a livelihood.

     We first look to the manner in which petitioner carried on

the activity.    Petitioner managed some aspects of this activity

in a businesslike fashion.    He kept bills, receipts, and sched-

ules for his traveling expenses, and he kept a contemporaneous

journal to substantiate cash expenditures that he incurred to

interview prostitutes at the brothels, for which receipts were

not available.   Petitioner was able to use his records, including

credit card statements, to compile logs for 1993 and 1994,

showing his travel dates, the dates, times, and places of his

interviews, the names of the prostitutes he interviewed, the per
                                -19-

hour charges he negotiated, and his method of payment.    While

petitioner may not have kept a separate checking account or a

well-organized set of books, he did attempt to keep an accurate

account of the expenses he incurred to research his books.13      The

record also indicates that, after signing a contract for the

publication of "Searchlight, Nevada", petitioner made concerted

efforts to promote his book.    He took steps to gain maximum

personal benefit from Northwest by working closely with its

public relations department to ensure that his book was widely

advertised and readily available in bookstores.    Petitioner then

supplemented Northwest's efforts by adopting various methods of

his own, while, at the same time, remaining active as an author

by writing other manuscripts.    Furthermore, when Northwest filed

for bankruptcy protection, petitioner did not abandon his writing

activity; rather, he sought the return of his rights in

"Searchlight, Nevada", and began an extensive search for a new

publisher.   He had rewritten and revised his manuscript, in an

effort to make it more salable to the public, and thus, more

attractive to prospective publishers.    As an alternative

marketing technique, petitioner also made attempts to engage a

literary agent.   In sum, although petitioner could have been more



     13
      A comparison of petitioner's journal entries to the
contents of "Searchlight, Nevada" reveals that, indeed, the book
is based almost entirely on real people and events.
                                -20-

organized in keeping track of his expenditures, his efforts to

make a financial success of his writing activity show a profit

objective.

     The fact that petitioner did not seek expert advice on how

to start or maintain a business as a fiction writer does weigh

against his argument that he carried on the activity in a

businesslike manner.   While petitioner had writing skills, it

appears that they were mainly in the technical field of budget

analysis.    However, it is important to consider that petitioner

used his writing skills extensively in his job at Treasury, where

he worked for more than 30 years.      Moreover, by virtue of his job

assignments and performance rating, petitioner was led to believe

that writing was his strong point.     Although his success at

Treasury is not a reasonable predictor of his success as a

fiction writer, his prior writing experience is not unrelated to

his anticipated performance as a writer in another field.     We

also note that petitioner has a bachelor's degree in marketing

and advertising, which suggests that he has more than a basic

familiarity with the business side of his writing activity.      It

is apparent from the record that petitioner took great interest

in the commercial aspects of his endeavor.

     The third factor in the regulations focuses on the time and

effort expended by the taxpayer in carrying on the activity.

There is little question that, during the years at issue,
                                -21-

petitioner spent numerous hours per week on his writing activity;

i.e., doing research, writing manuscripts, soliciting publishers,

and conferring in the early stages of publication.    Respondent

emphasizes that petitioner worked 40 hours per week as a budget

analyst and suggests that his writing activity could not rise to

the level of a trade or business because he also had a full-time

job.    We disagree with respondent.   Petitioner's employment at

Treasury does not preclude the possibility that his writing

activity constituted a separate trade or business.    We have

recognized that a taxpayer may engage in more than one trade or

business at any one time.    See Gestrich v. Commissioner, 74 T.C.

525, 529 (1980), affd. without published opinion 681 F.2d 805 (3d

Cir. 1982); Sherman v. Commissioner, 16 T.C. 332, 337 (1951).       It

is also well settled that the term "trade or business" includes

the arts.    Snyder v. United States, 674 F.2d 1359, 1363 (10th

Cir. 1982).    Furthermore, as we stated in Dickson v. Commis-

sioner, T.C. Memo. 1986-182, "[Taxpayer's] maintaining a full-

time job * * * in addition to his profit-seeking activities is a

positive factor reflecting his motivation, rather than respon-

dent's attempt at negative inference from the fact that peti-

tioner devoted time to other activities."

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

other similar or dissimilar activities, does not influence our

analysis because petitioner has not previously engaged in a
                                -22-

writing activity.    We accept petitioner's testimony at trial that

he was best known at Treasury for his writing ability and that he

was often called upon to perform writing-based tasks.   This may

have contributed to petitioner's belief that he could make money

as an author.   Moreover, we are convinced that petitioner viewed

his agreement with Northwest as offering a real potential for

generating profit.

      The next two factors, the taxpayer's history of income or

losses with respect to the activity and the amount of occasional

profits, if any, which are earned, are examined in tandem.

Respondent argues that petitioner's continuous record of losses

from his activity is persuasive evidence that he was not engaged

in this activity for profit.   Petitioner argues that, while his

efforts as an author have not proved profitable up to this time,

his hard work will be rewarded with substantial income when his

search for a new publisher proves successful.

     It is undisputed that petitioner did report a loss in each

year of operation.   However, there are two important facts in

this case which should be considered with respect to these

losses.

     First, section 1.183-2(b)(6), Income Tax Regs., states that

losses incurred during the startup phase of a business are not

necessarily indicative of a lack of profit motive.   Because

petitioner did not begin treating his writing activity as a trade
                                  -23-

or business until 1993, the tax years in issue mark the initial

stages of his activity.     A significant amount of petitioner's

total deductions for 1993 and 1994 were travel expenses, which he

incurred to collect material for his books.     Now that such

material has been amassed and incorporated in the manuscripts,

petitioner, as a published author, expects his writing activity

to be profitable.     To remedy the unforeseeable circumstance of

his publisher's going bankrupt, petitioner has demonstrated that

he has ideas and plans for future publications which would enable

him to recoup not only his expenses, but also to make a profit.

See Golanty v. Commissioner, 72 T.C. 411, 427 (1979) ("The goal

must be to realize a profit on the entire operation, which

presupposes * * * sufficient net earnings to recoup the losses"

(quoting Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),

affd. 379 F.2d 252 (2d Cir. 1967))), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981).

     Second, these losses should be viewed in the context of the

nature of petitioner's activity.     Works of fiction are difficult

to write and to market.     We are persuaded by petitioner's state-

ment that first-time authors are not normally offered cash

advances.14     It is not surprising then, that, for the first 2

years of his writing activity, petitioner sustained losses.        This



     14
          Advances are payments to an author before publication.
                               -24-

field appears to pay large amounts of money to those who succeed

in it and "an opportunity to earn a substantial ultimate profit

in a highly speculative venture is ordinarily sufficient to

indicate that the activity is engaged in for profit even though

losses or only occasional small profits are actually generated."

Sec. 1.183-2(b)(7), Income Tax Regs.    Likewise, we are not

inclined to give much weight to the seventh factor, the amount of

occasional profits, if any, that are earned, because only the

first 2 years of petitioner's writing activity are in issue.

     Respondent argues that the next factor, the financial status

of the taxpayer, negates petitioner's profit motive because his

independent sources of income are such that the writing activity

generated tax benefits for him.   We disagree with respondent.   We

do not believe that petitioner's income was so high as to make

tax savings his primary objective.    We also do not find it

unlikely that petitioner, aware of his upcoming retirement and of

the change in his pre and postretirement income, would choose to

embark on something new.   No doubt the fact that he began his

writing activity during his preretirement years contributed to

his ability to try his hand at it.    Nothing in the record,

however, indicates that writing then became a hobby for him.

Rather, we find it clear from his testimony and from the

objective evidence that petitioner was a writer who desired

success and who intended to make a profit from his work.
                                -25-

     The last factor looks to elements of personal pleasure or

recreation.    It is obvious that petitioner enjoyed writing and

derived personal satisfaction in helping prostitutes seek a new

way of life.   Nevertheless, "the fact that the taxpayer derives

personal pleasure from engaging in the activity is not sufficient

to cause the activity to be classified as not engaged in for

profit if the activity is in fact engaged in for profit as

evidenced by other factors".    Sec. 1.183-2(b)(9), Income Tax

Regs.

     Petitioner has succeeded in proving that he engaged in his

writing activity with a profit objective.    There are admittedly

some factors in this case which indicate the absence of a profit

motive:   Petitioner has a history of losses, he did not seek any

expert advice, and, arguably, there is a recreational element in

his writing.   These factors, however, are outweighed by the facts

demonstrating that petitioner did engage in writing for profit.

And though his writing venture may have been speculative and his

expectation of profit unreasonable, that alone does not preclude

us from finding that petitioner was in the trade or business of

being an author during the years before us.

     Respondent next asserts that, for 1993 and 1994, peti-

tioner's claimed expenses were not ordinary and necessary
                                 -26-

business expenses.15    Section 162(a) allows a deduction for all

ordinary and necessary expenses incurred in carrying on a trade

or business.     Whether an expense is deductible under section 162

is ultimately a question of fact.       See Commissioner v. Heininger,

320 U.S. 467, 475 (1943).    An ordinary and necessary expense is

one which is appropriate or helpful to the taxpayer's business

and which results from an activity which is a common and accepted

practice.    See Boser v. Commissioner, 77 T.C. 1124, 1132 (1981),

affd. by order (9th Cir. 1983).    No deduction, however, is

allowed for personal, living, or family expenses, even if related

to one's occupation.     See sec. 262; Fred W. Amend Co. v. Commis-

sioner, 55 T.C. 320, 325 (1970), affd. 454 F.2d 399 (7th Cir.

1971).

     Deductions are strictly a matter of legislative grace, and

petitioner bears the burden of providing supporting evidence to

substantiate the claimed deductions.      See Rule 142(a); INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992).      A taxpayer must

keep sufficient records to establish their amount.      See sec.

6001.     Except in the case of expenses subject to section 274, if

the taxpayer's records are inadequate or there are no records,

the Tax Court may still allow a deduction based on a reasonable

estimate, see Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d


     15
      Respondent makes no claim that these amounts, if otherwise
allowable, must be capitalized rather than deducted currently.
                                -27-

Cir. 1930), provided the taxpayer establishes that he is entitled

to some deduction, see Williams v. United States, 245 F.2d 559,

560 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 743

(1985).   In making an estimate, the Court may bear heavily

against the taxpayer "whose inexactitude is of his own making".

Cohan v. Commissioner, supra at 544.

     On his Schedules C for the years in issue, petitioner

claimed deductions for advertising, commissions and fees, office

expense, supplies, and utilities.      Petitioner presented no proof,

such as bills, receipts, or canceled checks, or offered any

testimony to establish that he incurred these expenses.     The

record does show, however, that, during 1993 and 1994, petitioner

completed one manuscript and submitted it for publication.     The

Court is satisfied that petitioner incurred office expenses in

this respect.16   Applying Cohan v. Commissioner, supra, and

"bearing heavily" against petitioner, we allow an office expense

deduction of $400 for each of the years in question.     Petitioner

is not entitled to deductions for advertising, commissions and

fees, supplies, and utilities for 1993 and 1994.

     Petitioner claimed "other expenses" not included above in

the amounts of $7,830 and $12,099, respectively, for 1993 and



     16
      Sec. 280A limits the deductibility of expenses of a home
office; respondent, however, did not raise the applicability of
that section. We, therefore, do not consider it.
                                 -28-

1994.     The amount for 1993 consists of a joint venture payment to

Northwest and cash payments to prostitutes at Nevada's legal

brothels.     Petitioner produced a canceled check reflecting his

payment to Northwest and a contemporaneous journal supporting his

deductions for amounts paid to prostitutes to research his book.

The amount for 1994 consists of a variety of expenses, for which

petitioner has provided no documentary or testimonial evidence,

with the exception of his expenses to interview prostitutes on

out calls, which he substantiated by personal credit card

receipts.

     We allow petitioner to deduct the joint venture payment of

$4,350 for 1993.     However, no deduction is allowed for the

interview expenses.     We find that the expenditures incurred by

petitioner to visit prostitutes are so personal in nature as to

preclude their deductibility.     In evaluating whether certain

expenses are personal or qualify as business expenses under

section 162, the Court has found that some expenses are so

"inherently personal" that they almost invariably are held

to come within the ambit of section 262.17    Fred W. Amend Co. v.

Commissioner, supra.     All the other items constituting "other

expenses" for 1993 and 1994 are disallowed for lack of sub-

stantiation.


     17
      Sec. 262 provides that "no deduction shall be allowed for
personal, living, or family expenses."
                               -29-

     Respondent next asks us to find that petitioner has not

adequately substantiated under section 274(d) his travel

expenses.   Section 274(d) overrides the Cohan doctrine with

respect to expenses of travel away from home (including meals and

lodging).   See Sanford v. Commissioner, 50 T.C. 823, 827-828

(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-

5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985).   A taxpayer must substantiate the amount, time, place, and

business purpose of the expenditures, using adequate records or

sufficient evidence corroborating his own statement.   See sec.

1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985).

     Respondent conceded at trial that petitioner substantiated

the amount, time, and place, but not the business purpose, of his

travel expenses.   In view of our holding that petitioner's inter-

view expenses are nondeductible personal expenses, we find that

his trips to Nevada served a dual purpose. This dual purpose

warrants an allocation of travel expenses between business and

nonbusiness use.   While the evidence in this case does not permit

an exact allocation, there is a basis for some allowance–if

necessary, by drawing upon petiitoner’s own method of allocating

his interview expenses.   Petitioner characterized the money he

paid to prostitutes as business related if he incorporated the

material from the interviews in his book.   According to
                               -30-

petitioner’s figures, approximately three fifths of the total

amount that he paid for interviews was deducted as business

expenses.   Although the Court disallows any part of these

interview expenses, we find that petitioner’s allocation might

well apply in determining the portion of his travel expenses

attributable to business.   Accordingly, for 1993 and 1994, we

allow petitioner to deduct three fifth of his claimed travel

expenses (including meals and lodging) under section 274(d).     We

sustain respondent’s disallowance of the claimed deductions to

the extent of two fifths thereof.

     Finally, under section 6662, respondent determined that

petitioner was liable for a negligence penalty for 1993 and a

substantial understatement of income tax penalty for 1994.     As

relevant herein, section 6662(a) imposes an accuracy-related

penalty equal to 20 percent of any underpayment that is

attributable to negligence or a substantial understatement of

income tax.   An underpayment for purposes of this section is

essentially the same as a deficiency.   Compare sec. 6664(a) with

sec. 6211(a).   Although the instant case presents many issues,

the only one giving rise to respondent's determination of

penalties under section 6662 relates to whether petitioner

properly deducted expenses that he incurred while writing books.

     Negligence under section 6662 is the lack of due care or

failure to do what a reasonable and ordinarily prudent person
                                 -31-

would do under the circumstances.       See Neely v. Commissioner, 85

T.C. 934, 947 (1985).    It includes the failure to make a reason-

able attempt to comply with the Internal Revenue Code.      See sec.

6662(c).    In claiming deductions for expenses related to his

writing activity, petitioner has failed to establish his

entitlement to certain expenses.    On the basis of the record,

though, we are satisfied that petitioner's underpayment for 1993

was not due to negligence but, rather, solely to an honest

misunderstanding of the law.    Petitioner has demonstrated that he

made a reasonable attempt to comply with the internal revenue

laws.   He had sought the advice of Internal Revenue Service

representatives and of professional tax preparers on how to

deduct expenses incurred as an author.       Petitioner was a credible

witness, and it is our opinion that he acted reasonably and in

good faith.    For these reasons, we decline to impose the

negligence penalty for 1993.

     For 1994, the deficiency notice determined an accuracy-

related penalty against petitioner for the substantial under-

statement of income tax.    Respondent did not pursue the matter at

the trial or on brief, and we presume that respondent has aban-

doned it.    Accordingly, we hold for petitioner on this issue.

     To reflect the foregoing,

                                        Decision will be entered under

                                 Rule 155.
