                        T.C. Memo. 2001-201



                     UNITED STATES TAX COURT



                  JEFFREY TAMMS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8130-99.                        Filed August 1, 2001.


     Bela Roongta Eitel and Michael J. Cohn, for petitioner.

     J. Paul Knap, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes as follows:

                    Year             Deficiency

                    1993               $6,092
                    1994                6,883
                    1995                1,824
                                - 2 -

     After concessions, the issues for decision are:     (1) Whether

petitioner conducted his photography-related activity during 1993

and 1994 with the intent to make a profit within the meaning of

section 183, and (2) whether petitioner is entitled to deduct

$8,291 in unreimbursed employee expenses for taxable year 1995.

     All section references are to the Internal Revenue Code as

in effect for the years in issue.    All Rule references are to the

Tax Court Rules of Practice and Procedure.

                           FINDINGS OF FACT

     The parties have stipulated some of the facts, which we

incorporate in our findings by this reference.     When he

petitioned the Court, petitioner resided in Whitefish Bay,

Wisconsin.

     Since the mid-1970s, petitioner has been employed full time

as a computer and accounting consultant.      Since 1982, he has been

employed in this capacity by Compuware Corp. (Compuware) or its

predecessor in interest.    Over the years, petitioner has

developed a keen interest and expertise in photography, becoming

a member of numerous professional photography organizations.

     In 1982, petitioner formed JJT, Ltd. (JJT), a sole

proprietorship that he operated out of his home, without any

employees.   Petitioner formed JJT to provide support services to

Professional Services, Inc. (PSI), a corporation that was in the

business of selling foundry supplies and sand-blasting equipment.
                                - 3 -

Petitioner’s father, Kenneth Alvin Tamms (Mr. Tamms), was

president and a nonmajority shareholder of PSI.1    Because of ill

health, Mr. Tamms stopped working at PSI in October 1992.

Thereafter, petitioner operated PSI until its complete

liquidation in 1995.

       Beginning in 1982 and continuing until PSI’s liquidation in

1995, PSI retained JJT to:    (1) Provide back office support

(e.g., computerizing and processing accounts receivable and

payable), and (2) photograph and provide graphic representations

of PSI’s equipment for sales and to ensure PSI’s compliance with

OSHA regulations in operating the equipment.    From January 1993

through April 1995, JJT billed PSI $505 per month for its

services.    In May 1995, JJT reduced its monthly fee to $205

because PSI was in the process of closing the business and no

longer required the full range of JJT’s services.    Petitioner

never realized a net profit from the service arrangement with

PSI.

       In 1988, realizing that his father was aging and that PSI’s

business was in decline, petitioner sought to purchase a wedding

photography business, but, after a period of negotiations, the

would-be seller decided not to sell.    Subsequently, petitioner

began exploring the possibility of transitioning JJT into


       1
       The record indicates that other members of petitioner’s
family were also shareholders of Professional Services, Inc., but
does not otherwise reveal the ownership composition.
                               - 4 -

producing photography exhibitions as a means of earning revenue.

To do so, he believed he needed to enhance his reputation as a

photographer.   To that end, by 1992 petitioner was spending 60 to

80 hours per month building his own photography portfolio.    He

began entering his works in exhibitions, winning numerous

photography awards and achieving substantial acclaim.

     In 1993, petitioner was asked to take over the production

and management of an existing photography exhibition, the

Wisconsin International Exhibition of Photography, and he also

assisted the Wisconsin Area Camera Club Organization (WACCO) in

producing an existing international photography exhibition.

     In 1994, petitioner took over production of the exhibition

for WACCO.   In each of the years 1993, 1994, and 1995, petitioner

produced one exhibition.   Beginning in 1996 and continuing to the

present, petitioner has produced four exhibitions each year,

devoting approximately 800 to 1000 hours each year to this

activity.

     Petitioner’s activities in producing photography exhibitions

include, among other things, advertising the exhibition, drafting

and printing brochures, compiling mailing lists, inviting

photographers to participate, sending and receiving applications,

recruiting judges, creating a catalog of entries, obtaining

sponsors, purchasing awards, and performing marketing and

accounting functions.   These activities are a “year-round
                                 - 5 -

process”, commencing about a year before the opening of an

exhibition with the assembly of documentation to request

recognition by the Photographic Society of America and concluding

about a year later with the production of a catalog and returning

entries submitted.

     JJT pays all the costs associated with the exhibitions it

produces and is the sole recipient of the revenues generated.

Beginning in 1994 and continuing to the present, petitioner has

consistently realized modest net profits from producing the

photography exhibitions.   Petitioner has plans to increase JJT’s

revenues by increasing the number of exhibitions he produces each

year and by increasing entry fees.       In addition, petitioner has

been involved in efforts by the Photographic Society of America

to set standards for “electronic exhibitions”, which he

anticipates would reduce his operating costs for exhibitions and

thus increase his net profits.    Petitioner has also been asked to

begin teaching photography to select groups, and he anticipates

that such teaching opportunities will generate significant

additional revenues.   He also anticipates that he will continue

to offer his prints for sale, although he does not expect the

proceeds to be substantial.

     On his Federal income tax returns, petitioner reported net

losses from JJT’s activities every year from the inception of JJT

in 1982 until 1995, when JJT reported a small profit.      Since
                                    - 6 -

then, JJT has reported net profits every year, as summarized in

this table:2

                               Cost of                     Net Profit
Year          Receipts        Goods Sold    Expenses         or Loss

1988          $7,566            $5,149      $4,091          ($1,674)
1989           4,250             6,141       1,649           (3,540)
1990           6,060             9,188       2,081           (5,209)
1991           6,135             5,801       6,621           (6,287)
1992           7,805             6,109       4,802           (3,106)
1993           6,060             5,677       9,389           (9,006)
1994           7,019             5,493      12,051          (10,525)
1995           7,124              -0-        7,016              108
1996          13,470              -0-       12,294            1,176
1997          14,426              -0-       13,200            1,226
1998          13,075              -0-       11,936            1,139


       For the years in issue, JJT’s gross revenues were

attributable to PSI and other sources (principally photography

exhibitions) as follows:

                         Gross Income         Gross Income
       Year                from PSI         from Other Sources

       1993                $6,060                  --
       1994                 6,060                 $959
       1995                 2,460                4,664

For taxable years 1996 through 1998, producing photography

exhibitions was the sole source of revenue for JJT.

       For the years in issue, petitioner claimed the following

costs of goods sold and deductions on his Schedules C, Profit or

Loss From Business (Sole Proprietorship) (Schedule C):




       2
       The record does not indicate the amount of JJT’s losses or
other relevant tax information for years before 1988.
                                    - 7 -

          Item             1993              1994         1995

     Cost of goods
      sold                $5,677            $5,493          --
     Advertising             --                --         $928
     Car and truck           150               --           --
     Commissions
      and fees               --                --          130
     Depreciation          5,278             5,657          --
     Insurance               601               582          --
     Interest              1,630             1,584        1,481
     Legal and
      professional            56               --           --
     Office                  --                899        1,840
     Rent or lease           --                200          --
     Repairs and
      maintenance            263               321          137
     Supplies                719               824          993
     Taxes and
      licenses                  3               25         --
     Travel                  477             1,770         520
     Utilities               211               188         195
     Other                   --                --          792

     In the notice of deficiency, respondent disallowed all of

petitioner’s claimed Schedule C costs of goods sold and

deductions for expenses on the ground that petitioner was not

engaged in the Schedule C activity for profit.

                                  OPINION

Respondent’s Motion In Limine

     Respondent filed a motion in limine to exclude or limit the

testimony of petitioner’s proposed expert witness, Mark J. Spaeth

(Mr. Spaeth).    The Court permitted petitioner to make an offer of

proof and reserved ruling on the admissibility of the evidence.

     In large part, Mr. Spaeth’s expert report and testimony

reflect his legal opinion about the ultimate legal issue of
                               - 8 -

whether JJT was conducted for profit and to that extent do not

help us “to understand the evidence or to determine a fact in

issue” within the meaning of rule 702 of the Federal Rules of

Evidence.   Even if we were to grant respondent’s motion in toto,

however, we would find sufficient evidence elsewhere in the

record to sustain petitioner’s position that the subject activity

was conducted for profit.   Accordingly, we conclude that

respondent’s motion in limine is moot.

Activity Engaged in for Profit Under Section 183(c)

     The parties disagree as to whether petitioner engaged in his

Schedule C activity with an objective of making a profit within

the meaning of section 183.   The parties have stipulated that if

petitioner did have the requisite profit objective, then the

expenses, cost of goods sold, and receipts as stated in

petitioner’s Schedules C for the years in issue are “true and

correct”, with exceptions not pertinent here.3

     Under section 183(b)(2), if an individual engages in an

activity not for profit, deductions relating thereto are

allowable only to the extent gross income derived from the

activity exceeds deductions that would be allowable under section

183(b)(1) without regard to whether the activity constitutes a


     3
       Moreover, respondent has raised no issue as to whether, in
the event petitioner is found to have the requisite profit
objective for his Schedule C activity, any of the expenses in
question fail to constitute ordinary and necessary business
expenses within the meaning of sec. 162(a).
                               - 9 -

for-profit activity.   Allen v. Commissioner, 72 T.C. 28, 32-33

(1979).

     The taxpayer bears the burden of establishing that his or

her activities were engaged in for profit.4   Rule 142(a).    To

carry this burden, the taxpayer must show that he or she had a

“good faith expectation of profit.”    Burger v. Commissioner, 809

F.2d 355, 358 (7th Cir. 1987), affg. T.C. Memo. 1985-523; see

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

published opinion 702 F.2d 1205 (D.C. Cir. 1983).   The taxpayer’s

expectation, however, need not be reasonable.   Burger v.

Commissioner, supra; 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 the taxpayer

has the requisite profit motive is a question of fact, to be

resolved on the basis of all relevant circumstances, with greater

weight being given to objective factors than to mere statements

of intent.   See Dreicer v. Commissioner, supra; Golanty v.

Commissioner, supra at 426.



     4
       Sec. 7491, which is effective for examinations commenced
after July 22, 1998, shifts the burden of proof to the
Commissioner under certain circumstances. Petitioner has not
raised the application of this provision. Additionally, we
cannot ascertain from the record whether respondent’s examination
commenced after July 22, 1998. We therefore conclude that sec.
7491 does not operate to shift the bruden of proof in this case.
See Ashley v. Commissioner, T.C. Memo. 2000-376; Daya v.
Commissioner, T.C. Memo. 2000-360; Nitschke v. Commissioner, T.C.
Memo. 2000-230.
                               - 10 -

     The regulations under section 183 provide a nonexclusive

list of factors to be considered in determining whether an

activity is engaged in for profit.      The factors include:   (1) The

manner in which the taxpayer carries on the activity; (2) the

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

and effort the taxpayer expended in carrying on the activity; (4)

the expectation that assets used in the activity may appreciate

in value; (5) the taxpayer’s success in carrying on other

activities; (6) the taxpayer’s history of income or loss with

respect to the activity; (7) the amount of occasional profits, if

any, which are earned; (8) the taxpayer’s financial status; and

(9) whether elements of personal pleasure or recreation are

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

Commissioner, supra.

     On the basis of the totality of the evidence in the record,

we conclude that for the years in issue, petitioner had a good

faith expectation of profit from his Schedule C activity.      In

reaching this conclusion, we view the following factors as being

particularly persuasive:   Petitioner carried on his activity in a

businesslike manner, keeping, as respondent acknowledges on

brief, “fairly extensive financial records for his Schedule C

activity.”    Petitioner responded to JJT’s lack of profitability

in earlier years by developing a successful business plan to

expand JJT’s undertakings into producing photography exhibitions.
                              - 11 -

Since 1994, petitioner has regularly produced photography

exhibitions each year.   As a consequence, since 1995 JJT has

reported net profits each year.   Petitioner has devoted a

significant amount of time to his Schedule C activity, is a

member of numerous professional photography associations, and has

exhibited his photography in numerous exhibits, winning numerous

awards and critical acclaim for his photographic works.   Although

petitioner enjoys photography, we do not believe that he was

providing bookkeeping and photography services to PSI for

amusement, nor do we believe that personal gratification was

petitioner’s primary motivation for producing multiple

photography exhibitions each year.

     On balance, we believe that the factors described above

outweigh other factors that admittedly suggest the absence of a

profit motive.   Chief among these contrary factors is JJT’s long

history of losses during the 11 years preceding the years in

issue, when the only source of revenues for JJT was the billings

for its services to PSI--a factor given greater saliency by

petitioner’s family and personal ties to PSI.5   As previously

discussed, however, by 1993--the first year in issue--petitioner


     5
       Respondent has not explicitly argued that JJT’s dealings
with PSI were not at arm’s length. On brief, respondent alludes
to a “degree of suspicion” that PSI’s payments to petitioner were
merely gifts but seemingly overcomes this suspicion two sentences
later, stating: “It is not disputed that the Petitioner was
hired to perform accounting, computer, and ‘imaging’ services for
PSI.”
                              - 12 -

had begun to implement a plan to improve JJT’s profit-making

potential by expanding its undertakings into the production of

photography exhibits.   By 1995–-the last year in issue–-

petitioner was reporting small net profits from his Schedule C

activities.   In subsequent years, the net profits have increased.

     Respondent argues that on the basis of the net profits that

petitioner has reported for JJT since 1994, it will take an

inordinately long while for petitioner to recoup JJT’s past

losses.   We agree with respondent’s premise that the requisite

profit objective must be to “realize a profit on the entire

operation, which presupposes not only future net earnings but

also sufficient net earnings to recoup the losses which have

meanwhile been sustained in the intervening years.”   Bessenyey v.

Commissioner, 45 T.C. 261, 274 (1965), affd. 379 F.2d 252 (2d

Cir. 1967).   We are unpersuaded, however, that petitioner’s

profitability will be constrained to the levels reported on his

tax returns through 1998.   To the contrary, petitioner testified

credibly that he has a business plan to increase the number of

exhibitions he produces each year and to decrease his costs, thus

increasing his profits from exhibitions, as well as to earn

additional revenues from teaching photography courses and from

continuing to offer his prints for sale.

     Seemingly acknowledging that petitioner’s production of

photography exhibitions is a for-profit undertaking, respondent
                                - 13 -

argues for the first time on brief, with little elaboration, that

this undertaking was a “new and separate activity from what went

before and not simply * * * an improvement or change to the old

activity”.    Respondent relies on Pederson v. Commissioner, T.C.

Memo. 1994-555, for the proposition that petitioner cannot

support a profit motive in his photography activities by

“combining that activity on the same Schedule C with a legitimate

business activity.”

     Unlike Pederson, this is not a case where respondent

determined petitioner’s Schedule C activity to comprise separate

and distinct activities, as opposed to raising the issue for the

first time on brief.    As a general rule, we will not consider

issues raised for the first time on brief where surprise and

prejudice are found to exist.    See Sundstrand Corp. v.

Commissioner, 96 T.C. 226, 346-347 (1991); Seligman v.

Commissioner, 84 T.C. 191, 198 (1985), affd. 796 F.2d 116 (5th

Cir. 1986).    We believe that petitioner was surprised and

prejudiced in the development of his evidence by respondent’s

posttrial contentions in this regard.    In particular, if we were

to find that petitioner’s Schedule C activity comprised two or

more separate activities, it would be necessary to allocate

petitioner’s expenses among the separate activities.    See sec.

1.183-1(d)(2), Income Tax Regs.    By not being forewarned of

respondent’s posttrial contentions, petitioner has been denied
                                - 14 -

the opportunity to develop evidence regarding, among other

things, the appropriate allocation of expenses if we were to find

two or more separate activities--an issue as to which the record

currently is silent.

     In any event, even if we were to consider respondent’s new

“separate activity” argument, we would be unpersuaded of its

merits.    Section 1.183-1(d)(1), Income Tax Regs. (to which

respondent has not alluded), provides as follows:

          In order to determine whether, and to what extent,
     section 183 and the regulations thereunder apply, the
     activity or activities of the taxpayer must be
     ascertained. For instance, where the taxpayer is
     engaged in several undertakings, each of these may be a
     separate activity, or several undertakings may
     constitute one activity. In ascertaining the activity
     or activities of the taxpayer, all the facts and
     circumstances of the case must be taken into account.
     Generally, the most significant facts and circumstances
     in making this determination are the degree of
     organizational and economic interrelationship of
     various undertakings, the business purpose which is (or
     might be) served by carrying on the various
     undertakings separately or together in a trade or
     business or in an investment setting, and the
     similarity of various undertakings. Generally, the
     Commissioner will accept the characterization by the
     taxpayer of several undertakings either as a single
     activity or as separate activities. The taxpayer’s
     characterization will not be accepted, however, when it
     appears that his characterization is artificial and
     cannot be reasonably supported under the facts and
     circumstances of the case. * * * [Emphasis added.]

     We do not believe that petitioner’s characterization of his

Schedule C activities as one activity is “artificial and cannot

be reasonably supported under the facts and circumstances of the

case.”    Id.   The facts indicate substantial linkage between
                                - 15 -

petitioner’s providing photographic and other services to PSI,

his taking steps to build up his own reputation and expertise in

the field of photography, his marketing of his own prints, his

production of photography exhibitions, and his future plans to

expand into such areas as the teaching of photography.    We also

find it significant that in his books and records petitioner has

treated the various undertakings as one activity.

     In sum, on the basis of all the evidence in the record, we

conclude and hold that petitioner had a good faith expectation of

profit from his Schedule C activity during the years in issue.

Accordingly, petitioner is entitled to the Schedule C deductions

in issue, the parties having stipulated that the amounts claimed

are adequately substantiated.

Unreimbursed Employee Business Expenses

     On Schedule A, Itemized Deductions (Schedule A), of his 1995

Federal income tax return, petitioner claimed deductions for

“unreimbursed employee expenses” of $8,291, comprising $7,529 of

claimed automobile mileage expenses and $762 of claimed expenses

described on the Schedule A only as “other”.    Respondent has

disallowed the $8,291 claimed deduction on the ground that it is

inadequately substantiated.6    On brief, petitioner argues only



     6
       The parties have stipulated that petitioner is entitled to
specified amounts of “unreimbursed employee expenses” and “car
and truck expenses” that he claimed for taxable years 1993 and
1994.
                               - 16 -

that he is entitled to a deduction of $7,529, representing

automobile mileage expenses that he incurred in 1995 in

connection with his Compuware employment.    Accordingly, we find

that petitioner has conceded that he is not entitled to deduct

the $762 of claimed “other” expenses.    See, e.g., Theodore v.

Commissioner, 38 T.C. 1011, 1041 (1962).

     Section 274(d) imposes strict substantiation requirements

for deducting expenses relating to listed property, defined in

section 280F(d)(4)(A)(i) to include passenger automobiles.    See

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985).   Under these requirements, no deduction is

allowable on the basis of any approximation or the taxpayer’s

unsupported testimony.   Sanford v. Commissioner, 50 T.C. 823,

826-827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);

sec. 1.274-5T(a), Temporary Income Tax Regs., supra.

     To meet the heightened substantiation requirements of

section 274(d), the taxpayer must substantiate the claimed

deduction with adequate records, or by sufficient evidence

corroborating the taxpayer’s own statement, showing the amount of

the expense, the time and place of the use of the listed

property, and the business purpose.     Sec. 274(d); see also sec.

1.274-5T(b)(6), (c)(2), Temporary Income Tax Regs., 50 Fed. Reg.

46016, 46017 (Nov. 6, 1985).   Employee use of listed property is

not treated as satisfying the business use requirement unless the
                              - 17 -

use is for the convenience of the employer and is required as a

condition of employment.   See sec. 1.274-5T(b)(6) (flush

language), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov.

6, 1985); sec. 1.280F-6T(a)(1), Temporary Income Tax Regs., 49

Fed. Reg. 42713 (Oct. 24, 1984).

     Petitioner claimed mileage expense deductions based on his

application of the Federal standard mileage rates to miles he

alleges he drove in business travel.    Use of the Federal standard

mileage rates serves only to substantiate the amount of expenses

and not the remaining elements of time and business purpose.      See

Rev. Proc. 94-73, 1994-2 C.B. 816.

     Petitioner has offered into evidence a computer printout

(the mileage log) with daily listings, for almost every day of

1995, of multiple business trips identified only by abbreviations

under a column captioned “client”.7    Petitioner testified without

elaboration that all of the business miles listed on the mileage

log were “related” to his employment with Compuware.    Nowhere

does the record reveal, however, the nature of petitioner’s

purported travel for Compuware, much less the business purpose of

each trip recorded on the mileage log.    Having failed to show

that the use of the vehicle or vehicles in question was for the

convenience of Compuware and required as a condition of his



     7
       The record does not reveal what vehicle or vehicles were
involved in these business trips or who owned the vehicles.
                             - 18 -

employment, petitioner has failed to substantiate business

purpose as required by section 274.8

     In conclusion, petitioner has failed to satisfy the section

274 substantiation requirements for the $8,291 of unreimbursed

employee expenses that he claimed on his 1995 Schedule A.

Accordingly, he is not entitled to the claimed deduction.

     To reflect the foregoing and the parties’ concessions,


                                   Decision will be entered

                              under Rule 155.




     8
       We also note seeming irregularities involving petitioner’s
mileage log. Petitioner testified that none of the business
miles listed related to his Schedule C business, yet for many of
the business miles, the mileage log lists the client as “PSI”,
which we infer is the same PSI for which JJT performed services.
In addition, for those dates for which personal mileage is
recorded, the mileage log invariably lists either 4, 5, or (more
typically) 6 miles of personal travel for the day, for a total of
796 personal miles, compared with 25,096 total business miles
recorded. Consulting our own experience, it seems improbable
that petitioner’s daily personal use of his vehicle would be so
rigidly fixed and limited, especially in light of the much larger
number of business miles he recorded in 1995.
