Barr v. Commissioner, Docket No. 35987-85
| Decision Date | 14 February 1989 |
| Docket Number | 911-86.,Docket No. 35987-85 |
| Citation | 1989 TC Memo 69,56 TCM (CCH) 1255 |
| Parties | Sheldon P. Barr v. Commissioner. |
| Court | U.S. Tax Court |
Sheldon P. Barr, pro se. Robert W. Sadowski, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in petitioner's Federal income taxes:
Additions to Tax
Year Deficiency Sec. 6651(a)(1)1 Sec. 6659
1980 .......................... $20,696.81 $5,174.20 -
1981 .......................... 26,666.31 - $5,336.77
Respondent also determined that, under section 6621(d),2 the deficiency for each year was a substantial underpayment attributable to a tax-motivated transaction so that petitioner is liable for interest at 120 percent of the statutory rate. After concessions by the parties,3 we must determine whether petitioner was entitled to various deductions and to an investment tax credit with respect to an art publishing activity that he carried on during the years in issue.
Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by reference.
Petitioner resided in Baldwin, New York, at the time that he filed his petition. Petitioner received an extension of time to file his 1980 Federal income tax return to October 15, 1981, and an extension of time to file his 1981 Federal income tax return to October 15, 1982. He and his then wife filed a joint Federal income tax return for 1980 on June 23, 1982, and for 1981 on October 18, 1982, both with the Internal Revenue Service Center, Holtsville, New York.
Petitioner received a bachelor of business administration degree with an accounting major from the City College of New York in 1957. In addition, he has a law degree from Brooklyn Law School. As part of his work towards his undergraduate degree, he took basic art classes.
Beginning in 1978, and continuing through the years in issue, petitioner was engaged in an art publishing4 activity, in addition to practicing law. Petitioner had previously purchased artwork for his own collection and studied the art market by attending auctions and galleries after he decided to publish art. He also consulted individuals familiar with the field with respect to legal and financial arrangements common in the art industry.
Petitioner solicited artists to publish by advertisements in various publications. As a result, he entered into contracts with three artists. Under the contracts, petitioner engaged the artist to create a number of silkscreen plates that would be used to print an image.5 The artist transferred title to the plates and all of his copyright in the image to petitioner.6 In exchange, the artist received a cash downpayment and a nonrecourse, nonnegotiable 10-year promissory note payable solely out of the proceeds of the sales of the prints. Petitioner granted each artist a security interest in the screens and prints to secure payment of the notes. He paid all the cash due to the artists under the contracts; no payments were made on the notes.
A limited edition of prints, totalling approximately 300 prints and 60 artist's proofs,7 was to be made of each image. The prints were signed and numbered by the artist.
The specific terms of each contract with respect to each artist are as follows:
Number Number of Number of
Contract of Prints Proofsa
Date Artist Plates (Per plate) (Per plate) Cash Notes Total
8/31/78 Krzyztof Zarebski ................... 5 350 35 $1,500 $ 88,825b $ 90,325
12/27/79 Pat Hammerman ....................... 5 295 59 1,000 73,750c 74,750d
12/27/79 Linda Southworth .................... 5 295 59 1,000 129,060 130,060e
8/15/80 Linda Southworth .................... 3 350 70 750 88,125f 88,875
a Each artist was to receive 10 of the proofs, except Linda Southworth was to receive 9 under the 1979 contract only
b Dated November 1, 1978
c Dated December 28, 1979, as were the notes given Linda Southworth under the contract dated December 27, 1979
d Pat Hammerman received an additional $252, apparently for participating in the production of the prints. Petitioner
included this amount in the basis of the silkscreens
e Petitioner included an additional $1,477 in cash paid to Linda Southworth in the basis of these silkscreens
f Dated December 1, 1980
In addition, petitioner entered into a contract with Linda Southworth in 1981. Petitioner was unable to locate that contract and its terms are not otherwise in the record.
Petitioner planned to market the prints via mail-order sales, in a direct mailing offering either the prints he owned, his prints along with prints owned by other art publishers or his prints and other merchandise. He did not, however, actually carry out any of these direct mail plans. Petitioner did not advertise the works in trade journals or art publications, nor did he take advantage of any free publicity in such publications, to the extent that it was available to him.
On his Federal income tax returns, petitioner reported gross income from sales of artist's proofs of $5,000.00 in 1980 and $6,006.41 in 1981.8 He reported the following expenses from the art publishing activity:
1980 1981
Bank Charges ............... $ 11.88 $ 65.88
Car ........................ 3,348.00 3,526.00
Depreciation ............... 15,120.35 16,664.19
Insurance .................. - 169.00
Interest ................... - 137.32
Rent ....................... 815.33 257.00
Travel and
Entertainment ............ 2,285.96 420.00
Production supplies ........ - 3,331.13
Miscellaneous .............. 292.00 786.00
The bank charges were on petitioner's personal account, which he also used for the art publishing activity. The car expenses were based on the standard rate allowed by the regulations. Some of the mileage was for overnight trips, and some was connected with his law practice. The rent expense is based on a portion of the heat and utility expenses at his residence where he stored the prints.
Petitioner claimed a deduction for the depreciation of the screens. He claimed a 10-year useful life for those placed in service before and during 1980 and used the straight-line method of calculating the depreciation allowance. He claimed the silkscreens placed in service in 1981 were 5-year property for purposes of calculating the depreciation allowance under section 168. He claimed his basis was equal to the full contract price, without allocation between the silkscreens and the copyrights.9 On his 1980 Federal income tax return, petitioner reported the adjusted basis of the silkscreens placed in service before or during 1980 as $381,863, and on his 1981 Federal income tax return, he reported the adjusted basis of those placed in service before or during 1981 as $368,501. Petitioner claimed investment tax credits with respect to the silkscreens of $8,888.00 in 1980 and $2,428.80 in 1981.
OpinionThe primary issues for decision are whether petitioner's art publishing activity was an activity "not engaged in for profit" under section 183(a) and whether he adequately substantiated the expenses he claimed with respect to that activity.10
Whether an activity was engaged in for profit depends upon whether it was carried on with an "actual and honest objective of making a profit." Dreicer v. Commissioner Dec. 38,948, 78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983). Although the expectation need not be reasonable, it must be shown that a bona fide objective of making a profit did exist. Taube v. Commissioner Dec. 43,737, 88 T.C. 464, 478-479 (1987). Profit in this context, as a threshold matter,11 means economic profit, independent of tax savings. Drobny v. Commissioner Dec. 43,140, 86 T.C. 1326, 1341 (1986). Petitioner's objective is a question of fact to be determined from all of the facts and circumstances, Dreicer v. Commissioner, 78 T.C. at 645, and he bears the burden of proof. Taube v. Commissioner, 88 T.C. at 480; Rule 142(a).
The regulations promulgated under section 183 list nine factors that should be taken into account in determining whether an activity is engaged in for profit. Sec. 1.183-2(b)(1)-(9), Income Tax Regs. This is intended, however, as only a partial list. Sec. 1.183-2(b), Income Tax Regs. We see no need to discuss each factor; rather, we will deal with the entire record in the context of the parties' arguments. See Taube v. Commissioner, 88 T.C. at 478-481. Petitioner argues that the time and effort that he expended in the activity and the businesslike manner in which he ran it, combined with his knowledge of the art field (supplemented by consultation with claimed experts), leads to the conclusion that he was carrying on his art publishing activity for profit. Respondent argues that, on the contrary, little time and effort was expended, the activity was not carried on in a businesslike manner and petitioner did not consult experts in the field. Furthermore, according to respondent, the structure of the financing was such that the activity was clearly motivated by tax, rather than economic, profit considerations. We agree with respondent.
We note at the outset that petitioner testified to his general belief that he would be able to earn a profit in the art publishing business. Petitioner's belief, however, related only to the time before he began the activity, so it is only marginally relevant to determining whether he was carrying on his art publishing activity with an objective of earning a profit during 1980 and 1981. In any event, we can give little weight to his general belief,...
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