                         T.C. Summary Opinion 2013-65


                         UNITED STATES TAX COURT



                THOMAS ALLEN GULLION, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 15560-12S.                         Filed August 14, 2013.



      Thomas Allen Gullion, pro se.

      Robert M. Romashko, for respondent.



                              SUMMARY OPINION


      KERRIGAN, Judge: This case was heard pursuant to section 7463 of the

Internal Revenue Code in effect when the petition was filed. The decision to be

entered is not reviewable by any other court, and this opinion shall not be treated

as precedent for any other case.
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      Respondent determined deficiencies and penalties as follows:

                                                                  Penalty
            Year                     Deficiency                 sec. 6662(a)
            2008                       $9,652                       $1,930
            2009                        8,582                        1,716

      Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure. We round all monetary amounts to

the nearest dollar.

      The issues for consideration are (1) whether petitioner engaged in musical

activities with the objective of making a profit within the meaning of section 183

and (2) whether petitioner is liable for accuracy-related penalties under section

6662(a).

                                    Background

      Petitioner resided in Wisconsin when he filed the petition.

      Petitioner began performing on the saxophone at the age of eight. He has

played professionally since the age of 16. He attended Indiana University, where

he studied under David Baker, a distinguished professor of music and jazz

education. He also toured with J.J. Johnson, a master of bebop trombone.
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      In 1995 petitioner moved to Chicago, Illinois, and worked solely as a

musician. In 2002 petitioner moved to Wisconsin and started working as a

computer programer, but he continued to play the saxophone. Since moving to

Wisconsin petitioner has organized the Driftless Jazz Festival in Southwestern

Wisconsin and has recorded four compact disks (CDs), including “Catharsis” in

2006 and “Carswell” in 2009. “Carswell” was advertized in the May 2010 edition

of JAZZed Magazine.

      For 2008 petitioner and his wife reported $43,642 in wages, as well as

$70,223 of income on a Schedule C, Profit or Loss From Business, from a

specialized design services firm. According to information returns for 2008,

$42,951 of these wages was attributable to petitioner. For 2009 petitioner and his

wife reported $133,245 in wages, of which $131,897 was attributable to petitioner.

      Petitioner reported activities related to his music on a second Schedule C for

2008 (Schedule C-1) and a Schedule C for 2009. For 2008 petitioner reported

gross receipts of $2,625 and expenses of $35,541 from his activities as a musician.

For 2009 he reported gross receipts of $2,931 and expenses of $28,934 from his

musical activities. Petitioner did not profit from his musical activities from 2004

to 2010; however, petitioner showed a small profit in 2011. The following table

reflects his gross receipts and net losses from his musical activities:
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           Year                    Gross receipts                  Net loss
           2004                        $1,483                      $12,163
           2005                            530                      11,842
           2006                            983                      17,872
           2007                          1,615                      20,315
           2008                          2,625                      32,541
           2009                          2,931                      26,003
           2010                          3,154                        9,467
            Total                       13,321                     130,203

      Petitioner provided several documents during the examination of

petitioner’s joint 2009 and 2010 Federal income tax returns: an advertisement

from the May 2010 edition of JAZZed Magazine; a depreciation schedule; a copy

of an electronic press kit from the Web site for his musical activity; a mileage log

for 2008; and a copy of his 2011 Federal income tax return, which shows that he

made a profit of $647 from his musical activities.

                                     Discussion

I.    Musical activities

      In general the Commissioner’s determination set forth in the notice of

deficiency is presumed correct. Rule 142(a)(1); Welch v. Helvering, 290 U.S.

111, 115 (1933). In certain circumstances, however, the burden of proof shifts to
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the Commissioner. Sec. 7491(a)(1). Petitioner does not contend that the burden

of proof should shift to respondent.

      Section 162 permits a taxpayer to deduct ordinary and necessary expenses

incurred during the taxable year in carrying on a trade or business. Section 183

generally limits the amount of deductions for an activity that is not entered into for

profit to the amount of income that the activity generates. See sec. 183(b).

      To be engaged in a trade or business within the meaning of section 162(a),

an individual taxpayer must be involved in the activity with continuity, regularity,

and the primary purpose of deriving a profit. Commissioner v. Groetzinger, 480

U.S. 23, 35 (1987). Deciding whether the taxpayer is carrying on a trade or

business requires an examination of all of the facts in each case. Id. at 36.

      We are satisfied that petitioner’s musical activities were conducted with

continuity and regularity during the years in issue. Nevertheless, a taxpayer must

conduct the activity with the requisite profit motive or intent for the activity to be

considered a trade or business. See id.; see also Churchman v. Commissioner, 68

T.C. 696 (1977). The taxpayer generally bears the burden of proving that the

requisite profit objective existed. Westbrook v. Commissioner, 68 F.3d 868, 876

(5th Cir. 1995), aff’g T.C. Memo. 1993-634; see also Rule 142(a); Foster v.

Commissioner, T.C. Memo. 2012-207.
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      Petitioner contends that he engaged in his musical activities with the intent

to make a profit and that his expenses for the years in issue were ordinary and

necessary to his endeavor. Respondent maintains petitioner was not engaged in

the trade or business of being a musician, so the expenses he incurred relating to

his musical activities are not deductible expenses under section 162(a).

Respondent contends petitioner had no profit motive once he left Chicago.

      Although a reasonable expectation of profit is not required, the taxpayer’s

profit objective must be actual and honest. Dreicer v. Commissioner, 78 T.C. 642,

644-645 (1982), aff’d without published opinion, 702 F.2d 1205 (D.C. Cir. 1983);

sec. 1.183-2(a), Income Tax Regs. Whether a taxpayer has an actual and honest

profit objective is a question of fact to be answered from all of the relevant facts

and circumstances. Hastings v. Commissioner, T.C. Memo. 2002-310; sec. 1.183-

2(a), Income Tax Regs.

      The pertinent regulations set forth a nonexhaustive list of factors that may

be considered in deciding whether a profit objective exists. These factors include:

(1) the manner in which the taxpayer carries 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 assets used in the activity may

appreciate in value; (5) the success of the taxpayer in carrying on other similar or
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dissimilar activities; (6) the taxpayer’s history of income or losses with respect to

the activity; (7) the amount of occasional profits, if any, which are earned; (8) the

financial status of the taxpayer; and (9) the elements of personal pleasure or

recreation. Sec. 1.183-2(b), Income Tax Regs.; see also Golanty v. Commissioner,

72 T.C. 411, 426 (1979), aff’d without published opinion, 647 F.2d 170 (9th Cir.

1981). No single factor or group of factors is determinative. Golanty v.

Commissioner, 72 T.C. at 426. While the focus of the test for whether a taxpayer

engaged in an activity with the intent to make a profit is on the subjective intent of

the taxpayer, greater weight is given to objective facts rather than to the taxpayer’s

mere statement of his or her intent. Sec. 1.183-2(a), Income Tax Regs.; see also

Stasewich v. Commissioner, T.C. Memo. 2001-30. A final determination is made

only after a consideration of all of the relevant facts and circumstances.

      We do not believe it necessary to analyze each of the factors enumerated in

section 1.183-2(b), Income Tax Regs., to determine whether petitioner engaged in

his musical activities with an actual and honest objective of making a profit.

Rather, we focus on the factors we believe more important and applicable in this

case. Our analysis of these factors leads to the conclusion that petitioner’s musical

activities are a trade or business for purposes of section 162.
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      A.     Expertise of the taxpayer

      One of the factors is the expertise of the taxpayer. Sec. 1.183-2(b)(2),

Income Tax Regs. Petitioner has played the saxophone since the age of 8 and has

played professionally since the age of 16. Petitioner has studied under and

performed with well-known musicians. We conclude from his testimony that he

was knowledgeable of the music industry during the years in issue.

      B.     Taxpayer’s time and effort

      One of the factors is the time and effort expended by the taxpayer in

carrying on the activity. Sec. 1.183-2(b)(3), Income Tax Regs. Respondent

claims that petitioner worked full time as a software programmer and did not have

time for a music career. We disagree. Petitioner was dedicated to his music

career. He organized a jazz festival in Wisconsin and recorded four CDs,

including “Carswell” in 2009. Petitioner’s testimony was credible concerning the

time he spent on his music career. 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), aff’d without published opinion, 681

F.2d 805 (3d Cir. 1982). It is also well settled that the term “trade or business”

includes the arts. See Churchman v. Commissioner, 68 T.C. 696; Vitale v.
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Commissioner, T.C. Memo. 1999-131, aff’d without published opinion, 217 F.3d

843 (4th Cir. 2000).

      C.     Similar activities

      One of the factors is the success of the taxpayer in carrying on other similar

or dissimilar activities. Sec. 1.183-2(b)(5), Income Tax Regs. The fact that the

taxpayer has engaged in similar activities in the past and converted them from

unprofitable to profitable enterprises may indicate that he is engaged in the present

activity for profit, even though the activity is presently unprofitable. Id.

Petitioner earned a living from his music before moving to Wisconsin. Petitioner

testified that he intended to be profitable again and that he was profitable in 2011.

      Petitioner testified that the music industry has undergone changes over the

years and that it is now difficult to make a profit. He testified that many of the

jazz clubs closed in Chicago and that there were not that many opportunities. He

further testified that less money is made when a musician plays another artist’s

music. Petitioner contends that he made changes so he can become profitable.

Petitioner moved to Wisconsin in part because the cost of living was lower and

because he could continue to travel to Chicago and elsewhere. For instance he

will embark on a tour in Spain in summer 2013. He referred to his time in

Wisconsin as rebuilding years and stated that he would like to be able to leave the
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software industry and pursue music full time. In addition petitioner wanted to

change the course of his career, placing more emphasis on his own music and

focusing on composing. He wants to leave behind a legacy of work.

      D.     History of income or losses

      One of the factors is the taxpayer’s history of income or losses with respect

to the activity. Sec. 1.183-2(b)(6), Income Tax Regs. We have found that “a

history of losses is less persuasive in the art field than it might be in other fields”,

as economic success in the arts, frequently takes longer to achieve than success in

other fields. Churchman v. Commissioner, 68 T.C. at 701-702. We believe that

the arts include music. Petitioner had a series of losses from 2004 to 2010 and a

small profit in 2011. Respondent contends that petitioner’s small profit in 2011

could not offset years of sustained losses that total over $100,000; however,

petitioner was able to explain these losses. The music industry changed, and

petitioner’s focus moved from performance to original composition and other

aspects of music. Petitioner contends that he made adjustments and retooled his

career and that he was profitable in 2011. A result of this retooling was the CD

“Catharsis”, which includes his original compositions.
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      E.      Financial status of taxpayer

      One of the factors is the financial status of the taxpayer. Sec. 1.183-2(b)(8),

Income Tax Regs. The fact that the taxpayer does not have substantial income or

capital from sources other than the activity may indicate that the activity is

engaged in for profit. Id. Petitioner did not have substantial income or sources of

capital. Petitioner earned income for his work in the computer software industry;

however, the income was not considerable, and petitioner contends that he wants

to work full time on his music.

      F.      Elements of personal pleasure or recreation

      One of the factors is elements of personal pleasure or recreation. Sec.

1.183-2(b)(9), Income Tax Regs. 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. Id. Petitioner derives pleasure from his

music, but his goal is to make a profit. See Churchman v. Commissioner, 68 T.C.

at 702. Petitioner testified that he wants to work in the music industry full time.

Petitioner viewed himself as a professional musician, and his testimony supports

this claim.

      After considering all the facts and circumstances, we hold that petitioner

was engaged in the trade or business of music during the years in issue.
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II.   Other expenses and penalty

      A.     Expenses disallowed

      During trial it became clear that some of petitioner’s expenses did not

pertain to his professional career in music. Petitioner’s Schedule C-1 and

Schedule C for 2009 relate to petitioner’s musical activities; both Schedules C list

only petitioner’s name and report an expense for the depreciation of musical

instruments. Petitioner proffered a depreciation schedule from his accountant for

various instruments. The depreciation schedule includes a violin; however,

petitioner testified that his wife owned the violin and that he did not play the

violin. The depreciation deduction for petitioner’s wife’s violin should be

disallowed for 2008 and 2009.

      Petitioner testified that he taught a music class at Youth Initiative High

School. Petitioner’s mileage log for 2008 included expenses associated with

teaching a music class in jazz history. Petitioner’s expenses of commuting

between his home and Youth Initiative High School are personal expenses and are

not deductible. See Bowles v. Commissioner, T.C. Memo. 1993-222.

Therefore, expenses relating to entries recorded as “YIHS” on the 2008 mileage

log should be disallowed.
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      B.     Penalty

      Respondent determined that petitioner is liable for accuracy-related

penalties under section 6662(a) on the underpayments of tax for 2008 and 2009.

Section 6662(a) and (b)(1) imposes a 20% penalty on the portion of an

underpayment of tax attributable to negligence or disregard of rules or regulations.

      Petitioner was engaged in the trade or business of music during the years in

issue, and the only deductions that should be disallowed are minimal. Moreover,

there is no indication that petitioner was negligent with respect to the resulting

minimal underpayments of tax. Petitioner recognized his unfamiliarity with tax

law and approached a certified public accountant, who was also a part-time

musician, to prepare his 2008 and 2009 Federal income tax returns. Petitioner also

testified that he provided the certified public accountant with his receipts and

information regarding his expenses and income.

      Accordingly, petitioner is not liable for accuracy-related penalties under

section 6662(a) for the years in issue.

      To reflect the foregoing,


                                                        Decision will be entered

                                                   under Rule 155.
