                         T.C. Memo. 2001-30



                      UNITED STATES TAX COURT



               RICHARD A. STASEWICH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15480-99.            Filed February 12, 2001.



     Richard A. Stasewich, pro se.

     Naseem J. Khan, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Judge:   Respondent determined deficiencies and

accuracy-related penalties with respect to petitioner’s Federal

income tax as follows:
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                                        Penalty, I.R.C.
              Year       Deficiency       Sec. 6662(a)

              1992         $3,998            $800.00
              1993          2,860             572.00
              1994          4,852             970.00
              1995          3,064             612.80

The issues for decision are whether petitioner’s artist activity

was not engaged in for profit within the meaning of section

183(c) and whether petitioner is liable for accuracy-related

penalties pursuant to section 6662(a).

     Unless otherwise indicated, all section references are to

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

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

     Richard A. Stasewich (petitioner) resided in Chicago,

Illinois, at the time he filed his petition.      Petitioner attended

Northern Illinois University between 1971 and 1977, majoring in

art and minoring in accounting, but he did not graduate.      In

1978, petitioner was registered as a certified public accountant

by the University of Illinois, and, in 1983, he was licenced as a

public accountant by the State of Illinois.      Between 1978 and

1984, petitioner was employed in various positions utilizing his

accounting background.

     During the years in issue, petitioner operated both his

accounting and artist activities out of the same building, where

he also resided.   Beginning in 1984, petitioner treated his
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artist activity as a Schedule C, Profit or Loss From Business,

sole proprietorship for Federal income tax purposes.      Petitioner

reported net profits and losses for his two separate Schedule C

activities as follows:

                            Artist           Accounting
                Year       Activity           Activity

                1984         ($544)           ($3,272)
                1985        (1,966)             6,334
                1986          (617)             7,201
                1987        (1,978)            10,063
                1988        (7,959)             9,518
                1989       (27,638)            16,824
                1990       (27,300)            19,977
                1991       (26,930)            26,930
                1992       (31,774)            17,385
                1993       (13,419)            13,419
                1994       (18,384)            20,821
                1995       (10,922)            19,951
                1996          (934)            26,888
                1997        (1,586)            17,737
                1998        (4,071)              -0-

For the years in issue, the relevant figures for petitioner’s

artist activity were as follows:

        Artist Activity    1992       1993       1994     1995

        Gross receipts     $770     $320     $266     $357
        Less deductions (32,544) (13,739) (18,650) (11,279)
        Profit (Loss)   (31,774) (13,419) (18,384) (10,922)

During the years in issue, petitioner did not support himself

with the income that he received from his artist activity, but

instead supported himself with the income that he received from

his accounting practice.

     Petitioner provided adequate substantiation for the expenses

that he claimed on his tax returns.   During the years in issue,

he kept a spreadsheet of income and expenses, a cash receipts
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journal, and receipts for expenses.    Petitioner had a Certificate

of Registration in the State of Illinois that authorized him to

engage in the business of selling tangible personal property at

retail in Illinois.   For 1992 through 1994, petitioner filed

Forms ST-1, Sales and Use Tax Returns, with the Illinois

Department of Revenue.   In 1995, petitioner completed Forms W-2,

Wage and Tax Statements, for the art students that he employed.

Petitioner neither kept records of a budget or financial

projections for his artist activity nor kept a record of the

costs that he might incur in attempting to develop his artist

activity.

     Prior to 1992, petitioner decided to create a commercially

viable product from his nude drawings.   Petitioner tried fashion

illustrations and spent a lot of money on materials and props,

but he never secured a large client and never earned anything

from it.

     On or around 1992, petitioner’s artist activities changed

from nude drawings and fashion illustrations to portraitures and

installation art displays.   At a cost of about $1,200, he placed

two advertisements in his local newspaper on December 11 and 18,

1992, to solicit work as a commissioned artist of portraits.

Petitioner painted two portraitures between 1992 and 1995 that

generated about $850 in revenue.   During 1992 to 1995, petitioner

created four displays of installation art (consisting of peppers,

dolls, pumpkins, and cucumbers) that were displayed in front of
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his residence.    Petitioner’s installation exhibit that consisted

of dolls received media attention.      The exhibit was the subject

of two newspaper articles in September 1994 and was mentioned in

a newspaper article in September 1995.     Petitioner’s income from

the installation displays consisted of donations that totaled

$88.04.

                               OPINION

      Petitioner previously litigated the issue of whether his

artist activity was engaged in for profit within the meaning of

section 183(c) for 1988, 1989, 1990, and 1991.     In Stasewich v.

Commissioner, T.C. Memo. 1996-302, the Court held that

petitioner’s artist activity was not engaged in for profit within

the meaning of section 183(c) for 1988 through 1991.     Respondent,

in this case, determined that petitioner’s artist activity was

not entered into for profit under section 183(c) for 1992, 1993,

1994, and 1995.

I.   Activity Not Engaged in for Profit Under Section 183(c)

      The threshold issue presented is whether petitioner’s artist

activity was not engaged in for profit within the meaning of

section 183(c).   Section 183, in general, 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).

      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
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paragraph (1) or (2) of section 212.”   Deductions are allowed

under section 162 for the ordinary and necessary expenses of

carrying on an activity that constitutes the taxpayer’s trade or

business.    Deductions are allowed under section 212 for expenses

paid or incurred in connection with an activity engaged in for

the production or collection of income or for the management,

conservation, or maintenance of property held for the production

of income.   With respect to either section, however, the taxpayer

must demonstrate the requisite profit objective for the

activities in order to deduct associated expenses.   See

Jasionowski v. Commissioner, 66 T.C. 312, 320-322 (1976); sec.

1.183-2(a), Income Tax Regs.

     Whether the required profit objective exists is a question

of fact that must be determined on the basis of all of the facts

and circumstances of each case.   See 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 is on the subjective intention of the taxpayer,

greater weight is given to the objective facts than to the

taxpayer’s mere statement of his or her intent.   See Independent

Elec. Supply, Inc. v. Commissioner, 781 F.2d 724, 726 (9th Cir.

1986), affg. T.C. Memo. 1984-472; Dreicer v. Commissioner, 78

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

Cir. 1983); Churchman v. Commissioner, 68 T.C. 696, 701 (1977);

sec. 1.183-2(a), Income Tax Regs.
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     Section 1.183-2(b), Income Tax Regs., sets forth some

relevant factors for determining whether an activity is engaged

in for profit.   No one factor is controlling.    See Brannen v.

Commissioner, 722 F.2d 695, 704 (11th Cir. 1984), affg. 78 T.C.

471 (1982); Golanty v. Commissioner, supra at 426.     The relevant

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 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 dissimilar activities;

(6) the taxpayer’s history of income and loss 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.     See sec. 1.183-

2(b), Income Tax Regs.

     Objective facts showing that a taxpayer carried on his

activity in a businesslike manner and maintained complete and

accurate books and records may indicate that the activity is

engaged in for profit.   See sec. 1.183-2(b)(1), Income Tax Regs.

Generally speaking, a taxpayer who maintains good records may be

genuinely interested in using the records to develop a profitable

business.   See Stasewich v. Commissioner, supra.

     Petitioner contends that he maintained business records that

substantiated his income and expenses for his artist activity and
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hired art students as his employees.      Petitioner kept a

spreadsheet of income and expenses; a cash receipts journal;

receipts for expenses; Forms ST-1, Sales and Use Tax Returns;

Forms W-2, Wage and Tax Statements; and a Certificate of

Registration to sell tangible property in Illinois.      Although

petitioner’s artist activity had some of “the trappings of a

business”, such “trappings” are insufficient to demonstrate that

the activity was a business carried on for profit.       Golanty v.

Commissioner, supra at 430.    Petitioner’s maintenance of such

books and records may represent nothing more than a conscious

attention to detail.   See id.    Petitioner failed to show that the

books and records were kept for the purpose of cutting expenses,

increasing profits, and evaluating the overall performance of the

operation.   He did not maintain a budget for the activity or make

any sort of financial projections.       Petitioner has not persuaded

us that he conducted his artist activity in a businesslike

manner.

     Where losses continue to be sustained beyond the period that

customarily is necessary to bring the operation to profitable

status, such continued losses, if not explainable, as due to

customary business risks or reverses, may be indicative that the

activity is not being engaged in for profit.      See sec. 1.183-

2(b)(6), Income Tax Regs.   A taxpayer’s failure to implement any

operating changes after continued losses may indicate the lack of

intent to make a profit.    See Brodrick v. Derby, 236 F.2d 35, 38
                                 - 9 -

(10th Cir. 1956); Lewis v. Commissioner, T.C. Memo. 1992-420;

Stubblefield v. Commissioner, T.C. Memo. 1988-480.

     There is no evidence in the record that petitioner has ever

earned a profit from his artist activity.     In addition to the

losses reported during 1992 through 1995, the years in issue,

petitioner also reported losses for every year from 1984 through

1991.     Petitioner’s two advertisements to solicit work as a

commissioned artist of portraits in 1992 cost him about $1,200

and resulted in only two commissioned portraits that generated

about $850 in revenue.     Petitioner has demonstrated a change in

the type of artwork he creates, but he has not presented evidence

of a change in his operating methods that would allow him to

generate a profit from his artist activities.     Petitioner has not

reversed his uninterrupted history of losses, and such losses

tend to indicate that he was content to sustain those losses for

purely personal reasons.     See Breckenridge v. Commissioner, T.C.

Memo. 1983-66.

     The amount of profits in relation to the amount of losses

incurred may provide useful criteria in determining the

taxpayer’s intent.    See sec. 1.183-2(b)(7), Income Tax Regs.

Petitioner’s income from his artist activities consisted of

donations and commissions, and such income was insufficient to

offset any significant portion of the expenses resulting from

petitioner’s artist activity.    See Golanty v. Commissioner, supra

at 431.    The gross receipts from petitioner’s artist activity
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ranged from $266 to $770 annually, during the years in issue,

while expenses ranged from $11,279 to $32,544 annually.     Based on

the evidence, it appears that petitioner never expected to recoup

the large losses that he generated from his artist 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.    In general, a taxpayer with

substantial income unrelated to the activity can more readily

afford a hobby.    See Stasewich v. Commissioner, supra.

     Petitioner had an independent source of income, from his

accounting business, and did not rely on his artist activity to

support himself.    Additionally, for 1991 and 1993 (although 1991

is not in issue) petitioner reported a loss from his artist

activity exactly equal to the income from his accounting

activity.   Such an unlikely coincidence indicates that petitioner

may be using his artist activity as a device to eliminate Federal

income tax on the income from his accounting business.     This

pattern weighs against finding a profit objective.

     That a taxpayer derives personal pleasure from a particular

activity does not necessarily mean that he or she lacks a profit

objective with respect to the activity.   See Glenn v.

Commissioner, T.C. Memo. 1995-399, affd. without published

opinion 103 F.3d 129 (6th Cir. 1996); sec. 1.183-2(b)(9), Income

Tax Regs.   Where, however, there are recreational or other

personal elements involved, the personal motives may negate the
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profit objective.   See sec. 1.183-2(b)(9), Income Tax Regs.   We

previously stated, with respect to this factor:

     Unquestionably, an enterprise is no less a “business”
     because the entrepreneur gets satisfaction from his
     work; * * * however, where the possibility for profit
     is small (given all the other factors) and the
     possibility for gratification is substantial, it is
     clear that the latter possibility constitutes the
     primary motivation for the activity. * * * [Burger v.
     Commissioner, T.C. Memo. 1985-523, affd. 809 F.2d 355
     (7th Cir. 1987); fn. ref. omitted.]

     Based on the evidence, we conclude that petitioner did not

have a profit objective when he created his installation art

exhibits in the front of his residence.    Petitioner received only

nominal donations that totaled $88.04 from his installation art

exhibits, and such donations could not have compensated him for

the time or expense involved in creating his artwork.    Petitioner

did not seek to make a profit from his installation art exhibits,

but rather engaged in the artist activity because of the

satisfaction, pride, and prestige that it afforded him.

     In the previous case of Stasewich v. Commissioner, supra, we

held that petitioner’s artist activity was not entered into for

profit for 1988 through 1991.    Petitioner has not made any

significant changes in the operation of his artist activity,

during the years in issue here, that would create a market or

allow him to benefit from a market for his artwork or allow him

to make up for his substantial losses.    In Stasewich v.

Commissioner, supra, we explained our holding in language equally

applicable here:
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           The large unabated expenditures, the absence even
      at this late date of any concrete business plans to
      reverse the losses, and the manner in which petitioner
      conducted his artist activity lead to the conclusion
      that this was not an activity engaged in for profit.
      Eppler v. Commissioner, 58 T.C. 691, 697 (1972), affd.
      without published opinion 486 F. 2d 1406(7th Cir 1973).

      We sustain respondent’s determination that petitioner’s

artist activity was an activity not engaged in for profit within

the meaning of section 183(a).    Accordingly, the losses incurred

by petitioner during the years in issue are not deductible.

II.   Penalties Under Section 6662(a)

      Respondent determined that petitioner is liable for

accuracy-related penalties under section 6662(a) for 1992 through

1995.   Section 6662(a) imposes an accuracy-related penalty equal

to 20 percent of the portion of the underpayment attributable to,

among other things, negligence.

      Petitioner presented neither evidence nor argument on this

subject at trial.   In view of petitioner’s training and

experience, imposition of the accuracy-related penalty is

justified for all years in issue.

      To reflect the foregoing,

                                          Decision will be entered

                                     for respondent.
