                  T.C. Summary Opinion 2007-56



                      UNITED STATES TAX COURT



         MICHAEL D. AND SUZAN L. STORER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16243-05S.               Filed April 12, 2007.


     Michael D. and Suzan L. Storer, pro sese.

     Edward L. Walter, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    Pursuant to section

7463(b), 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.   Unless otherwise indicated, subsequent

section references are to the Internal Revenue Code in
                                   - 2 -

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

Tax Court Rules of Practice and Procedure.

       Respondent determined deficiencies in and penalties to

petitioners’ Federal income taxes as follows:

                                                Penalty
            Year      Deficiency              Sec. 6662(a)

            2000       $4,487                    $898

            2001       $2,832                    $567

       The issues for decision are whether petitioners’ photography

activity constituted an activity not engaged in for profit within

the meaning of section 183 during the years at issue and whether

petitioners are liable for the accuracy-related penalties

provided by section 6662 for the years at issue.

                                Background

       The stipulation of facts and the attached exhibits are

incorporated herein by reference.      At the time the petition was

filed, petitioners resided in Miamisburg, Ohio.

       During the years in issue, petitioners were both employed in

full-time jobs.    Petitioner-husband (Mr. Storer) worked as a

repairman for General Motors, Inc., and petitioner-wife (Mrs.

Storer) worked as a receptionist and bookkeeper for Harding ESE,

Inc.    Petitioners earned total wages of $92,639 and $96,191,

respectively, during the years in issue.

       Mr. Storer developed an affinity for photography as a young

person.    However, he first started habitually taking and
                                 - 3 -

developing his own photographs sometime in the early 1990s on his

physician’s advice that he take up a hobby to help him cope with

periodic episodes of depression.     At that time, Mr. Storer, who

holds a high school diploma, was working in the repair shop at

General Motors.

     Mr. Storer purchased many books on photography and film

developing, as well as photography magazines, some film cameras,

and film developing equipment.    Mr. Storer had not taken any

instruction in photography prior to and including the taxable

years at issue.   Mr. Storer did not have his skills as a

photographer or the quality of his photographs analyzed or

critiqued, or have his work juried, prior to or during the years

at issue.

     While he continued to take and develop his own pictures, Mr.

Storer became interested in photographic restoration, and he

purchased the equipment and supplies necessary to restore old

photographs.   Sometime in the early 1990s, Mr. Storer first

offered photographic restoration services to family members,

friends, and co-workers.   Around this time, he decided to try

selling some framed landscape photographs he had taken and

developed from earlier trips to landmarks such as Yosemite

National Park.    Around this time, petitioners set up a makeshift

photography studio and darkroom in the basement of their home.
                               - 4 -

     Starting in the early 1990s, Mrs. Storer assisted her

husband with his photographic pursuits by recording his expenses

in journals.   With an educational background in accounting from

the local community college, Mrs. Storer recorded these expenses

using the cash basis method of accounting.    Mrs. Storer has also

prepared State tax documents, including sales tax reports.

     In 1993, petitioners engaged a management consultant to

assist them in preparing a 5-year projection for turning their

photography activity into a business.    The management consultant

provided petitioners with a series of flexible budgets and

projections spanning through 2002.     The management company based

its projections on the assumption that by the year 2000,

petitioners would have $21,200 in gross sales, and that by 2002,

petitioners would have $21,500 in gross sales.

     Prior to 1993, Mr. Storer had purchased a large amount of

“analog” photography and darkroom equipment for the studio and

darkroom in the basement of petitioners’ home.    Between 1993 and

2002, petitioners began to replace their “analog” equipment with

new digital cameras, printers, scanners, and the supplies for

printing digital photographs; namely, paper and ink cartridges.

Petitioners completely dismantled their basement studio and

darkroom in the early 2000s.   Upon dismantling their basement

studio, petitioners set up a “digital darkroom” consisting of a
                               - 5 -

large table, desk, computer, and bureau in a spare room adjacent

to their bedroom.

     From 1998 through the years in issue, Mr. Storer suffered a

series of health setbacks requiring him to take off substantial

time from his job at General Motors.

     Petitioners maintained neither a separate bank account for

their photography activities nor a separate phone line for

customers.   Although petitioners had purchased a separate

insurance policy for their cameras and developing equipment in

the early 1990s, they combined this policy into their homeowners’

insurance in 1999.

     In 2001, petitioners made 14 sales transactions.   These

sales were made to friends and Mr. Storer’s co-workers at General

Motors.1   The nature of petitioners’ sales in 2002 is unknown.

     In preparation for trial, petitioner prepared a portfolio of

photography brochures, listing prices, and packages.    None of the

materials contained in the portfolio were created in or used as

marketing during the years in issue.   This portfolio included

examples of the types of landscape photographs that Mr. Storer

had taken from such places as Yosemite National Park, North

Dakota, Washington, Puerto Vallarta, Aruba, and San Juan.    The


     1
       Petitioners provided a summary of their 2001 invoices.
This 3-page summary lists 7 of the 14 buyers by first name only
as: “Jim; Hall; Steve; Al @ GM; Gary @ GM; ‘Lady’ @ GM; Bob @
GM.”
                               - 6 -

portfolio also included wedding photographs and photographs of

individuals and pets, some of which are dated from the late 1970s

and early 1980s, and none of which were taken during the taxable

years in issue.   Petitioners attached a business card to the

portfolio which reads: “Michael Storer Photographs, 1150 E.

Lindsey Ave., Miamisburg, Ohio 45342, Photo Restorations & More.”

The address and phone number listed on petitioners’ card are

those of their personal residence.

     Beginning with their 1993 Federal income tax return,

petitioners included the photography activity on Schedules C,

Profit or Loss From Business, of their returns.

     Petitioners reported gross receipts and claimed losses from

a 7-year period of the photography activity from 1996 through

2002, while maintaining full-time employment, as follows:

     Year     Gross Receipts   Total Expenses     Profit or/(Loss)

     1996            $1,060        $14,402          ($13,342)
     1997               316         13,375           (13,059)
     1998               435         20,439           (20,004)
     1999             1,366         15,027           (13,661)
     2000             1,474         21,421           (19,947)
     2001               855         16,050           (15,195)
     2002             1,575          9,586            (8,011)

     Totals        $7,081        $110,300           ($103,219)

     For the years in issue, petitioners claimed the following

deductions on their Schedules C:

        Item                         2000          2001
     Advertising                     $153           $98
     Car and truck                    112           202
     Depreciation                  13,350         8,215
                               - 7 -

     Legal and                         265           285
       professional
     Office2                             0             0
     Rent or lease                       0             0
     Repairs and                         0             0
       maintenance
     Supplies                     1,039            1,383
     Taxes and                        0                0
       licenses
     Travel                           0                0
     Utilities                        0               25
     Other                          154              103
     Expenses for business        6,348            5,739
       use of home

     Total expenses             $21,421          $16,050

     In the notice of deficiency, respondent disallowed

petitioners’ claimed Schedule C deductions for expenses on the

ground that petitioners were not engaged in a trade or business

activity for profit.   However, respondent allowed as additional

itemized deductions real estate taxes and mortgage interest

included in the computation of expenses of business use of home.

In addition, respondent allowed Schedule C expenses to the extent

of income reported from the activity.

                             Discussion

     The parties disagree as to whether petitioners engaged in

their Schedule C activity with an objective of making a profit

within the meaning of section 183.     Section 183(a) disallows



     2
       On their Schedules A, Itemized Deductions, petitioners
claimed that 44 percent of their home was used as office space.
They did not, however, upon request, allow respondent’s agent
into their home to survey this space, claiming that such a visit
would be “unnecessary and unwise.”
                                 - 8 -

deductions attributable to an activity not engaged in for profit.

Section 183(b) provides two exceptions to this general rule.       The

first, provided by section 183(b)(1), permits deductions that

otherwise would be allowable without regard to whether the

activity is engaged in for profit; the second, provided by

section 183(b)(2), permits deductions that would be allowable if

the activity were engaged in for profit to the extent that the

gross income from the activity exceeds the deductions allowable

pursuant to section 183(b)(1).    Section 183(c) defines an

“activity not engaged in for profit” as “any activity other than

one with respect to which deductions are allowable for the

taxable year under section 162 or under paragraph (1) or (2) of

section 212.”   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 the burden of proof shifts to respondent.

Sec. 7491(a)(1).   Petitioners do not contend that section 7491 is

applicable in this case, nor did they establish that the burden

of proof should shift to respondent.

     Petitioners bear the burden of establishing that their

photographic activity was engaged in for profit during the

taxable years at issue.   Rule 142(a).   In satisfying this burden,

taxpayers must show that they had an actual and honest objective

of making a profit from the activity.    Dreicer v. Commissioner,
                               - 9 -

78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205

(D.C. Cir. 1983).   The taxpayers’ expectation, however, need not

be a reasonable one.   Id. at 644-645; Golanty v. Commissioner, 72

T.C. 411, 425 (1979), affd. without published opinion 647 F.2d

170 (9th Cir. 1981); sec. 1.183-2(a), Income Tax Regs.   Whether

there is present the requisite intention of engaging in an

activity with the objective of making a profit is a question of

fact that is to be resolved upon a consideration of all relevant

circumstances, with the greatest weight being given to the facts

rather than the taxpayers’ expression of their intent.   Dreicer

v. Commissioner, supra at 645; Golanty v. Commissioner, supra at

426; sec. 1.183-2(a) and (b), Income Tax Regs.   Therefore,

irrespective of how ardently petitioners have stressed that they

always intended to make a profit from their photography activity,

whether or not their activity rose to a level that satisfies

their burden rests upon a consideration of all of the relevant

factors concerning their activity during the taxable years at

issue.

     Section 1.183-2(b), Income Tax Regs., sets forth the

following nonexclusive list of the relevant facts that we will

now consider: (1) The manner is which the taxpayers carry on the

activity; (2) the expertise of the taxpayers or their advisers;

(3) the time and effort expended by the taxpayers in carrying on

the activity; (4) the expectation that the assets used in the
                                - 10 -

activity may appreciate in value; (5) the success of the

taxpayers in carrying on similar or dissimilar activities; (6)

the taxpayers’ history of income or loss with respect to the

activity; (7) the amount of occasional profits; (8) the financial

status of the taxpayers; and (9) whether elements of pleasure or

recreation are involved.     Golanty v. Commissioner, supra at 426;

sec. 1.183-2(b), Income Tax Regs.

       Based on our consideration of these factors and in the light

of the copious record in this case, we conclude that petitioners

have not demonstrated that their photographic activity was

carried on with an actual and honest objective of making a profit

in the taxable years at issue.    In reaching our conclusion, we

view the following elements as being most persuasive:

Manner in Which the Taxpayers Carried On the Activity

       We believe that the manner in which petitioners carried on

their photography activity does not support a finding that it was

engaged in for profit.     In 2001, petitioners only made 14 sales

and of these, at least one-half were made to buyers identified on

petitioners’ records by first name only.    Several other entries

were identified by only the buyer’s first name plus the words “at

GM.”

       Petitioners testified that the 14 sales in 2001 were not

reflective of their manner of operations because they “actually

solicited to hundreds of potential customers” at various craft
                              - 11 -

and art shows during the years at issue.   We note, however, that

in a detailed calendar for 2001, which was submitted as an

exhibit and on which petitioners testified that they recorded all

of the time spent on training, marketing, and sales, there is not

one entry of any craft or arts show.   There are also no entries

showing preparation for any craft or arts shows.

     Although petitioners reported sales of $855 in 2001, there

is no evidence that petitioners actually made any sales in 2001

or to whom these sales were made.

     Petitioners did not use a separate bank account or telephone

number for their activity, and the insurance held on all of their

photography equipment was incorporated into their homeowner’s

policy.

     Mr. Storer testified that, as one example of the “highly

professional nature in which he carried on his business,” he only

used business cards printed by a commercial printer rather than

the type printed on an ink-jet printer “with those little

perforations on the sides.”   Upon examination of the two business

cards provided by petitioners with their exhibits, however, it is

clear that the cards have both the visible dot-matrix quality

akin to those printed on an ink-jet printer as well as perforated

edges.

     Although petitioners kept very extensive and detailed

records of their expenses, we believe that these records were
                              - 12 -

maintained solely for the purpose of substantiating their

considerable losses and not as a means for tracking costs so as

to reduce business-related expenses.   The extensiveness of the

records would be more meaningful if these records illustrated

that petitioners were tracking expenses while, at the same time,

making a bona fide effort to grow their photography enterprise.

These records primarily show us that petitioners were adept at

acquiring the latest digital photography technology and supplies.

What is conspicuously missing, however, is a same level of

extensive detail showing expenses and activities specifically

geared at growing the business.   For example, petitioners spent

thousands of dollars on digital cameras and supplies, yet

believed that it was unnecessary to spend more than $250 (which

included a $95 ad placed in the back of the local high school

yearbook) on the basic staples of marketing a business such as

advertisements, a listing in the yellow pages, or brochures.

Although petitioners submitted an extensive portfolio of flyers

as an exhibit, they admitted that the portfolio was not created

until shortly before time of trial.    Petitioners continually cite

activities such as additional sales made in storefronts, which

purportedly occurred in 2003 and 2004.   Not only did petitioners

not provide any evidence of these activities, but these years are

not in issue.   The Court is concerned only with petitioners’
                               - 13 -

activities in 2000 and 2001, and not with what petitioners have

or have not done in subsequent years.

Time and Effort Expended by the Taxpayers

     The numbers of hours spent cultivating his activity, as

testified to by Mr. Storer, is not only dubious but, if accurate,

is grossly inverse to the sales resulting from his efforts.    Mr.

Storer claimed that he spent nearly 1,200 hours working on his

activity in 2001, in addition to his full-time position at

General Motors.    If this claim was accurate, Mr. Storer would

have had to spend an average of more than 3 hours a day,3 every

day, on his photography, in addition to his full-time work,

commuting to and from his workplace, and eating and sleeping.      As

evidence of his daily activities, Mr. Storer submitted as an

exhibit a pocket calendar for 2001 in which he purportedly

handwrote the time he spent on his photography activity each day.

Our examination of this calendar has led us to conclude that

petitioners’ claims as to the time spent on the activity are not

accurate.

     First, we believe neither that the calendar was made

contemporaneous to the dates as recorded nor that it was an

accurate accounting of petitioners’ time.    For support of this

conclusion, we look to several instances where the calendar

contains entries for dates that simply do not exist.


     3
         (1,200/365 = 3.29 hours)
                              - 14 -

Specifically, the first week of September (beginning with

Saturday, September 1st), has entries starting on Tuesday of that

week (which would have actually been Tuesday, August 28th).    The

entry for “Wednesday” of this ‘added’ week reads: “In Focus Bk -

3 hrs.”   To reconcile the possibility that this “added” day was

not the same as the corresponding last Wednesday in August, we

turned to the entry for Wednesday, August 28th which reads:

“Exposure Bk - 4 hrs.”    We further note additional “added” days

and entries to the first week of the November calendar page that

do not correspond to the actual days and entries recorded on the

October calendar.4   Because there is more than one instance of

these “added” days, we do not believe that the calendar is an

accurate and truthful account of the time spent by petitioners in

cultivation of a business.

     Mr. Storer stressed that he did not take any vacation, and

that “for religious reasons” observed neither any religious nor

Federal holidays, which allowed him those days to work on his

photography.   Mr. Storer testified that he “used [all holidays]

to market his business, process orders, and make sales.”    The

2001 calendar, however, shows no activity recorded on April 15




     4
       On the November calendar page petitioners “inserted” 2
days at the beginning of the month, a Tuesday and a Wednesday,
that did not actually exist. Again, the entries recorded on
these “added” days also do not correspond with the entries listed
for the last 2 days of October.
                              - 15 -

(Easter), May 28 (Memorial Day), September 3 (Labor Day), or

November 22 (Thanksgiving Day).

     Our examination of the entire year’s worth of daily entries,

moreover, shows that almost 80 percent of Mr. Storer’s time was

spent either reading the monthly installments of a limited number

of photography magazines5 and books or shopping at retail stores.

     Finally, were we to believe that the entries accurately

reflect the time petitioners spent cultivating photography into a

viable business, the time spent is grossly inverse to the actual

sales made in the years at issue.

The Taxpayers’ History of Losses and Financial Status

     First, since 1996, petitioners’ claimed Schedule C business

losses have exceeded $13,000 in each year, while their gross

receipts from that same time never exceeded $1,600.   Petitioners

have never earned a profit.

     Petitioners cite our decision in Churchman v. Commissioner,

68 T.C. 696, 701 (1977), to support their contention that the

years of losses which preceded the years in issue should not

dictate our determination of whether their activity in 2000 and

2001 was conducted with the objective of making a profit.   As

further support, petitioners argue that their losses were offset



     5
       For example, in January 2001, petitioner spent 14 hours
reading “Shutterbug” magazine, 8 hours reading “Outdoor
Photography” magazine, and 8 hours shopping at Circuit City and
CompUSA.
                              - 16 -

in the years in issue because they sold a considerable portion of

their “analog” equipment while upgrading to newer, digital

technology.   Petitioners claim that their losses are further

justified by the difficult economic conditions which plagued

large “analog” photography businesses, such as Eastman-Kodak, as

more consumers switched from “analog” to digital photography.

     We do not find credence in petitioners’ arguments.    First,

petitioners do not claim to be engaged in the business of selling

photography equipment but, rather, taking photographs.    Second,

although we acknowledge the phenomenal growth in digital

photography throughout the past decade, petitioners were not in

the business of developing other people’s photographs.

Petitioners purported to be professional photographers.    The

effect of the digital photography boom on businesses such as

Eastman-Kodak resulted from consumers’ choosing to develop their

photographs at home rather than use traditional film developing

services.   It did not affect the demand for quality professional

photography services for the very types of portraiture and event

coverage which petitioners claimed was their focus; namely,

weddings, corporate prints, and senior portraits.   Similarly, the

boom in home developing did not affect the specialized services

that are often the hallmark of professional photographers, such

as portrait sittings, albums, restorations, DVDs, and videos.

Again, while the phenomenon of digital photography has made home
                              - 17 -

developing more accessible to amateur consumers, this newfound

ability for recreational “photogs” to take and develop their own

pictures has not changed the demand for quality, professional

photography.   If anything, the availability of high-quality

digital cameras has made the consumer more astute regarding both

resolution and composition aesthetic when selecting a

professional photographer.   To this end, had petitioners invested

more resources into education and training or sought professional

evaluation of their skills, we would be more convinced that their

activity was engaged in with the objective of making a profit.

     Petitioners argue that the income they earned in their

respective full-time jobs in 2000 and 2001 is irrelevant because

petitioners could not use their wages to pay for any of their

photography-related expenses but instead, used credit and gifts

from friends and family.   Petitioners claim that their wages were

almost completely exhausted by their household bills, mortgage,

and taxes.   With expenses totaling $23,000 in the years in issue,

we are doubtful that petitioners did not apply any of their wages

to this amount.   Moreover, we note that, if petitioners indeed

incurred debt of $23,000, the fact that they only took in $2,000

in sales supports our conclusion that petitioners’ activity in

these 2 years was not engaged in with the objective of making a

profit.
                              - 18 -

Elements of Recreation

     In sum, we believe that petitioners engaged in their

photography activity for the principal purpose of providing Mr.

Storer with the opportunity to take up a pleasurable hobby to

reduce his stress and anxiety.   It is evident from the

photographs showing the areas in their home used for this

activity that petitioners took great care and expense in setting

up a pleasant and well-stocked workspace.   Photography, however,

is highly subjective, and in great part, the success of a

photography business is dependent on both the skill and talent of

the photographer and the marketing and reputation cultivated

therefrom.   We are perhaps ultimately persuaded by petitioners’

decision to forgo any formal training or education in photography

in lieu of reading photography and trade magazines, and picture

books featuring works by famed landscape photographer Ansel

Adams.   While it is beyond our purview to comment on Mr. Storer’s

ability or potential, we think it unlikely, barring an

extraordinary talent, to become Ansel Adams through self-study.

Moreover, we believe that Mr. Storer, through educating himself

primarily with trade magazines that feature the most current

technologies, was compelled to purchase and, ultimately,

gratified by his acquisition of extremely expensive equipment.

Finally, we note that at the end of petitioners’ presentation

prepared for the Court, Mr. Storer lamented that he had to
                              - 19 -

“perform many, menial chores” and “has had to do many forms of

marketing including cold calls that can be unpleasant at times.”

While petitioners claim that they should not be required to

suffer as “a prerequisite to deductibility,” we cannot help

wondering how petitioners engaged in their activity with a profit

objective if they were opposed to performing the tasks essential

to business success; namely, marketing and sales calls.

     Finally, although we concede that on its face, petitioners’

photography activity did have some of the characteristics of a

business, we find these characteristics insufficient to

demonstrate that their activity was carried on for profit.

     Therefore, on the basis of all of the evidence in the

record, we conclude and hold that petitioners did not conduct

their photography-related activity in either 2000 or 2001 with a

profit objective within the meaning of section 183.   Accordingly,

petitioners are not entitled to the deductions claimed on their

Schedules C for the years in issue.

Section 6662(a) Penalty

     Respondent determined that petitioners are liable for the

accuracy-related penalty provided by section 6662(a) for each

year in issue.   Section 6662(a) imposes a 20-percent penalty on

the portion of an underpayment of tax that is attributable to,

inter alia, negligence or disregard of rules or regulations.    The

term “negligence” includes any failure to make a reasonable
                               - 20 -

attempt to comply with the provision of the Internal Revenue

Code, including failure to exercise due care or failure to do

what a reasonable person would do in the circumstances.       Sec.

6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.     The term

“disregard” includes any careless, reckless, or intentional

disregard of the Code or the temporary or final regulations

issued pursuant to the Code.    Sec. 6662(c); sec. 1.6662-3(b)(2),

Income Tax Regs.

     Section 7491(c) places on the Commissioner the burden of

producing evidence showing that it is appropriate to impose any

penalty or addition to tax.    Once the Commissioner meets that

burden, as in the instant case, the taxpayer must produce

evidence sufficient to show that the Commissioner’s determination

is incorrect.   Higbee v. Commissioner, 116 T.C. 438, 447 (2001).

Petitoners have not produced evidence sufficient to prove that

respondent’s determination in this case was incorrect.

     The accuracy-related penalty does not apply to any portion

of an underpayment with respect to which it is shown that there

was a reasonable cause and that the taxpayer acted in good faith.

Sec. 6664(c)(1).   The decision as to whether the taxpayers acted

with reasonable cause and in good faith depends upon all

pertinent facts and circumstances.      Sec. 1.6664-4(b)(1), Income

Tax Regs.   Generally, the most important factor is the extent of

the taxpayers’ efforts to assess the proper tax liability.       Id.
                                - 21 -

     Petitioners contend that they believed in good

faith that the expenses they claimed were allowable.       Good

faith on the part of taxpayers, however, does not always negate

negligence.     Taxpayers are required to take reasonable steps to

determine the law and to comply with it.     Niedringhaus v.

Commissioner, 99 T.C. 202, 222 (1992).     In this case,

petitioners have not shown that their claimed deductions for

expenses were made with any significant regard to whether they

were personal in nature, and the record supports the inference

that petitioners’ photography activity was used to deduct

personal expenses.     For the foregoing reasons, moreover, we do

not consider Mr. Storer to have acted reasonably with respect to

the deduction of those expenses claimed for his photography

activity.     Based on our consideration of the entire record, we

sustain respondent’s determinations with respect to the accuracy-

related penalties for negligence for the years in issue.

     To reflect the foregoing,


                                           Decision will be entered

                                      for respondent.
