                          T.C. Memo. 2007-78



                      UNITED STATES TAX COURT



               DANON EUGENE WESLEY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 407-06.                 Filed April 2, 2007.



     Danon Eugene Wesley, pro se.

     Bryan E. Sladek, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined a deficiency of $8,936

with regard to petitioner’s Federal income tax liability for 1996

and a 25-percent addition to tax under section 6651(a)(1) for

failure to file his tax return timely.    After a concession by

petitioner, the issues for decision are whether petitioner was
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engaged in the trade or business of recording and producing music

during 1996 and whether he is liable for the addition to tax.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

     Petitioner resided in Detroit, Michigan, at the time he

filed his petition.   Petitioner’s primary employment for the year

in issue was as an engineer.

     Petitioner has written and recorded music since at least

1985.   Between 1985 and 1996, petitioner occasionally sent taped

recordings of his music to various record companies in the hopes

of obtaining a recording contract.     Petitioner recorded these

tapes at a local recording studio.     Petitioner saved receipts

from some of these visits to the recording studio, specifically

those from late 1987 and early 1988, which total approximately

$615.   In 1996, petitioner spent $20,462 to purchase and install

professional recording equipment in his home.

     Petitioner filed his Form 1040, U.S. Individual Income Tax

Return, for 1996 on January 8, 2004.     Petitioner reported gross

wages of $95,246 from his employment as an engineer in 1996.       He

claimed the $20,462 that he spent to purchase and install the

home recording equipment as an expense related to his business as
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a recording studio/producer on his Schedule C, Profit or Loss

From Business, for 1996.    Petitioner received no income from his

recording activity in 1996 and thus reported a net business loss

of $20,462 for that year.   As of the time of trial of this case

in September 2006, petitioner had not received any income from

his recording activity.

                               OPINION

     Section 162 permits a taxpayer to deduct ordinary and

necessary expenses incurred during the taxable year in carrying

on any trade or business.   Section 183 generally limits the

amount of deductions for an activity not entered into for profit

to the amount of the activity’s income.    See sec. 183(b).   The

notice of deficiency determined that the costs of petitioner’s

recording activities were startup expenses not currently

deductible.   The parties agree, however, that the controlling

issue is whether petitioner was engaged in a trade or business

with regard to his recording activity during 1996.    We decide

that issue on the preponderance of the evidence, regardless of

the burden of proof.

     In order to establish that he was engaged in a trade or

business, the taxpayer must be continuously and regularly

involved in the activity for the primary purpose of making a

profit.   Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); see

also sec. 1.183-2(a), Income Tax Regs.    Whether the taxpayer
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engages in an activity with the primary purpose of making a

profit is a question of fact to be resolved based on all the

facts and circumstances in a particular case.     Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(a), Income Tax

Regs.   While the focus of the test for whether a taxpayer engaged

in an activity with the intention of making a profit is on the

subjective intention of the taxpayer, greater weight is given to

the objective facts than is given to the taxpayer’s mere

statement of his intent.   See Stasewich v. Commissioner, T.C.

Memo. 2001-30; sec. 1.183-2(a), Income Tax Regs.

     Section 1.183-2(b), Income Tax Regs., provides a

nonexclusive list of relevant factors to be weighed when

considering whether a taxpayer engaged in an activity for profit.

No one factor is determinative of whether an activity is engaged

in for profit.   Brannen v. Commissioner, 722 F.2d 695, 704 (11th

Cir. 1984), affg. 78 T.C. 471 (1982); Golanty v. Commissioner,

supra at 426; sec. 1.183-2(b), Income Tax Regs.    The relevant

factors are:   (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 activities for profit; (6) the taxpayer’s
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history of income or losses with respect to the activity; (7) the

amount of occasional profits, if any, that are earned from the

activity; (8) the financial status of the taxpayer; and

(9) whether elements of personal pleasure or recreation are

involved in the activity.   Sec. 1.183-2(b), Income Tax Regs.

     The maintenance of complete and accurate books and records,

and other indications that petitioner conducted his recording

activity in a businesslike manner, would indicate that petitioner

may have engaged in the activity for profit.   See sec. 1.183-

2(b)(1), Income Tax Regs.   Petitioner did not, however, carry on

his recording activity in a businesslike manner.   Petitioner did

not keep regular records of expenses and has presented to the

Court only a few receipts for studio time in the latter part of

1987 and early 1988, 8 years before the year in issue.    There is

no evidence that his expenditure of $20,462 was an ordinary and

necessary business expenditure for a profit-seeking recording

artist in a similar situation.    See Dickie v. Commissioner, T.C.

Memo. 1999-138.

     A taxpayer’s substantial investment of time and effort in

carrying on an activity, especially if the activity does not have

many personal or recreational aspects, may indicate that the

taxpayer has a profit objective.    See sec. 1.183-2(b)(3), Income

Tax Regs.   Even if a taxpayer devotes little time and effort to

the activity, a profit objective may be indicated by his
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employment of qualified persons to conduct the activity for him.

See id.   There is no evidence regarding how much time petitioner

spent pursuing his recording activity during the year in issue.

Petitioner’s effort with regard to his recording activity in

prior years consisted of occasionally sending taped submissions

to record companies in the hopes of attaining a recording

contract.    There is no evidence of regular or continuous steps to

promote his recording endeavors prior to or during the year in

issue.    Petitioner did not devote the time and effort

commensurate with the profit-seeking pursuit of developing a

recording business.    See McMillan v. Commissioner, T.C. Memo.

1989-441.

     Although a taxpayer receives no income from operating his

enterprise, he may intend to derive a profit from the potential

appreciation of his business assets.    See sec. 1.183-2(b)(4),

Income Tax Regs.    There is no evidence that petitioner’s

recording equipment would potentially appreciate, and we infer

that such equipment would instead experience wear and tear over

time and thus depreciate in value.

     A taxpayer’s success in carrying on similar activities and a

history of income with respect to his current activity may be

evidence of a profit-seeking motivation in engaging in the

activity.    See sec. 1.183-2(b)(5) through (7), Income Tax Regs.

Although petitioner had engaged in his recording activity since
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at least 1985, petitioner received no income and had no success

from his endeavors in or prior to the year in issue.   In the

decade since the taxable year in issue, petitioner has received

no income from his recording activity.

      Substantial income from sources other than the activity may

indicate that the activity is not engaged in for profit.     See

sec. 1.183-2(b)(8), Income Tax Regs.    A taxpayer with substantial

income unrelated to the activity can more readily afford a hobby.

See Stasewich v. Commissioner, supra.    Petitioner earned a

substantial income in 1996 from his employment as an engineer and

had the financial means to make a large expenditure for an

unrelated personal pursuit or hobby.

      Finally, the presence of personal motives and recreational

elements in carrying on an activity may indicate that the

activity is not engaged in for profit.   Sec. 1.183-2(b)(9),

Income Tax Regs.   Although musical and artistic endeavors

generally have personal and recreational elements, a taxpayer’s

personal enjoyment in pursuing the activity is not sufficient to

negate a profit motive if the other factors listed in section

1.183-2(b), Income Tax Regs., indicate such profit motive.     See

id.   The economic factors discussed above collectively support

the conclusion that petitioner was not engaged in his recording

activity for profit.   The personal and recreational elements

inherent in that activity are the most compelling factors in this
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case.   The preponderance of the evidence leads to the conclusion

that the activity was not engaged in for profit.

     Petitioner relies on Gestrich v. Commissioner, 74 T.C. 525

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

1982), for support of his position that his attempts at obtaining

a recording contract amount to an active trade or business.    In

that case, we held that the taxpayer was engaged in the trade or

business of being an author because his primary effort was

directed toward his self-employment as a writer, he spent a

significant amount of time working on his book, he had been paid

for his works in prior years, and he was actively attempting to

have his book published.   Gestrich v. Commissioner, supra at 529.

For the reasons set forth above, petitioner’s case is

distinguishable from Gestrich.

     Petitioner also relies on a case in which the Court of

Appeals for the Tenth Circuit reversed a lower court’s oral

finding that a taxpayer was not engaged in a trade or business as

a photographic journalist or author, where the taxpayer spent 30

hours per week on his nature photography project, shot 200 rolls

of film, produced 3,000 slides, submitted his work unsuccessfully

to several publishers, and maintained detailed technical records

regarding his endeavor to produce a photographic book.   Snyder v.

United States, 674 F.2d 1359, 1362-1363 (10th Cir. 1982).     The

appellate court in that case did not make its own finding that
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the taxpayer was engaged in a trade or business with regard to

his photographic endeavor, but remanded the case to the trial

court to resolve the questions of whether the taxpayer was

primarily motivated by his love of photography as a hobby or by a

good faith expectation of profit and whether the taxpayer devoted

enough time over a substantial period to be engaged in a trade or

business.   Id. at 1364.   The District Court was warned on remand

that the mere fact that a taxpayer author has not yet produced a

book does not necessitate the conclusion that he is not engaged

in a trade or business.    Id. at 1363.

     The Court of Appeals for the Tenth Circuit in Snyder

emphasized that a taxpayer must both possess a good faith profit-

making purpose and spend a substantial amount of time over a

significant period engaged in the activity in order for that

activity to be considered a trade or business.    Id. at 1364.   For

the reasons stated above, including the minimal time and effort

disclosed in the record, we conclude that petitioner was not

engaged in a trade or business with regard to his recording

activity.

     Respondent also determined an addition to tax for late

filing pursuant to section 6651(a)(1) because petitioner did not

file his 1996 return until January 8, 2004.   There is no evidence

that petitioner applied for an extension of time to file his

return.
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     The parties have stipulated that petitioner filed his 1996

return late.   The stipulation satisfies respondent’s burden of

production under section 7491(c) with respect to additions to tax

and penalties.   To avoid the addition to tax for late filing,

petitioner has the burden of proving that the failure to file did

not result from willful neglect and was due to reasonable cause.

See United States v. Boyle, 469 U.S. 241, 245 (1985).   To prove

reasonable cause, a taxpayer must show that he or she exercised

ordinary business care and prudence but nevertheless could not

file the return when it was due.   See Crocker v. Commissioner, 92

T.C. 899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin.

Regs.

     Because petitioner failed to present any explanation for his

late filing, respondent’s determination with regard to the

section 6651(a)(1) addition to tax is sustained.

     To reflect the foregoing,



                                         Decision will be entered

                                    for respondent.
