Callahan v. Commissioner

• Decision Date: 20 February 1996
• Docket Number: Docket No. 4863-94.
• Citation: 71 T.C.M. 2103
• Parties: Dudley Joseph Callahan v. Commissioner.
• Court: U.S. Tax Court

71 T.C.M. 2103

T.C. Memo. 1996-65

Dudley Joseph Callahan v. Commissioner.

Docket No. 4863-94.

United States Tax Court.

Filed February 20, 1996.

Myrna Dupuy Callahan, pro se.

Linda K. West, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WOLFE, Special Trial Judge:

This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182.¹ In a notice of deficiency, respondent determined deficiencies in petitioners' Federal income tax for the years 1989, 1990, and 1991 in the respective amounts of $4,226, $4,504, and $5,625, and accuracy-related penalties under section 6662(a) in the respective amounts of $845, $901, and $1,125.

The issues for decision are: (1) Whether petitioners are entitled to deduct expenses incurred in connection with Myrna Dupuy Callahan's writing activity as expenses of an activity engaged in for profit for taxable years 1989, 1990, and 1991; (2) whether petitioners have substantiated and are entitled to deduct casualty losses in the amounts of $13,233 and $13,835 for taxable years 1989 and 1990, respectively; (3) whether petitioners have substantiated and are entitled to deduct certain Schedule A expenses for taxable year 1991; (4) whether petitioners' medical expense deductions for taxable years 1989, 1990, and 1991 must be recalculated in accordance with any adjustments to petitioners' adjusted gross income; (5) whether petitioners are entitled to deduct State sales taxes in the amount of $1,964 for taxable year 1990; (6) whether petitioners have substantiated and are entitled to deduct charitable contributions in excess of $4,216 for taxable year 1990; and (7) whether petitioners are liable for penalties for negligence or disregard of rules or regulations under section 6662(a).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulated facts and attached exhibits are incorporated by this reference. Petitioners resided in Plaquemine, Louisiana, when their petition was filed.

Myrna Dupuy Callahan (petitioner) graduated from high school with honors and attended Our Lady of Lake College in Baton Rouge, Louisiana, where she took classes in general nursing, psychology, and chemistry. She eventually became a registered cosmetologist after an illness prevented her from completing her training in nursing. She operated Vogue Beauty Box for 13 years, and for 1 year during that period — when her daughter was old enough for kindergarten — she also opened and operated a neighborhood kindergarten. Subsequent to running Vogue Beauty Box, petitioner became a salesperson for Home Decorators, Inc., and two insurance companies, Lincoln National and Prudential.

Petitioner has engaged in two hobbies since the late 1970's: entering sweepstakes, and refunding and rebating with coupons. Over time petitioner developed a filing and recordkeeping system, plus various techniques or strategies designed to maximize the savings available from product coupons and rebate offers. She also developed a methodology intended to improve her chances of winning sweepstakes contests. After a friend suggested she document her refunding and rebating methodology, in 1982 petitioner wrote two manuals, Mrs. M.'s Quick & Easy Refund & Rebate System and Mrs. M.'s Winning Sweepstakes System. Sometime thereafter she placed a $5 advertisement in a coupon booklet for persons interested in testing her systems and also made inquiries with several publishers. Although no one was interested in publishing her manuals, some people did respond to her advertisement.

Petitioner copyrighted Mrs. M.'s Quick & Easy Refund & Rebate System in 1984 and self-published both manuals in 1992 under a name and logo of her own design, $'s Info Books. It is unclear from the record if and when Mrs. M.'s Winning Sweepstakes System was copyrighted. Each manual is printed on 8 1/2 inch by 11 inch paper, one-sided, and spiral bound on the left side. The refund and rebate guide is 15 pages in length, including an inside cover page, table of contents, 2 pages of comments from test marketers, and 2 pages of order forms. The sweepstakes manual is nine total pages, including an inside cover page, two pages of order forms, and two pages of comments from test marketers.

In 1992, 1993, and 1994, petitioner generated publicity for her manuals in the local print and broadcast media, and attended a number of autograph parties at local bookstores, libraries, and clubs. During those same years she wrote to published authors for advice, applied to newspapers and publishers for writing assignments, and sought financial assistance for her writing endeavors. In 1994 she acquired a local occupational license "to pursue and follow the Occupation of wholesale retail." Petitioner self-publishes her manuals on a prepaid basis only for $10.00 each, plus $1.00 for postage and handling. Her manuals have been listed on two databases compiled by R.R. Bowker Company (Bowker), Literary Market Place: A Directory of American Book Publishers and Books in Print.

The gross receipts, gross income, expenses, and losses attributed to $'s Info Books and as reported by petitioners on their Forms 1040, Schedules C for taxable years 1987 through 1992 are summarized as follows:

                Gross     Gross
                Year                                              Receipts   Income   Expenses     Loss
                1987 ..........................................     $ 80      $ 80    $ 6,061    $ (5,981)
                1988 ..........................................      -0-         3      6,333      (6,330)
                1989 ..........................................      -0-        33     13,059     (13,026)
                1990 ..........................................      134       124     23,287     (23,163)
                1991 ..........................................      -0-        27     21,641     (21,614)
                1992 ..........................................      432       (68)    25,411     (25,343)
                                                                    ____      ____    _______    ________
                Total .........................................      646       199     95,792     (95,457)
                                                                    ----      ----    -------    --------
                

The principal source of petitioners' receipts reported on Schedules C for 1987-1992 was prizes and sweepstakes winnings. Among the sources of petitioners' reported Schedule C losses were deductions for depreciation of an electric screwdriver and a weedwacker. Their Schedules C losses contributed to petitioners' receiving full tax refunds for 1989, 1990, and 1991.

In June of 1989, petitioners' house sustained damages from termite infestation as well as a tornado and flood caused by Tropical Storm Allison. Tropical Storm Allison was declared a major disaster that year, and petitioners were awarded a grant in the amount of $5,660 from the Federal Emergency Management Agency (FEMA) and the Louisiana State Individual and Family Grant (IFG) Program. Termite damage required repairs in 1990 as well.

OPINION

Respondent determined deficiencies in petitioners' 1989, 1990, and 1991 Federal income taxes in the amounts of $4,226, $4,504, and $5,625, respectively, and penalties pursuant to section 6662(a) for negligence in the amounts of $845, $901, and $1,125, respectively. Respondent's determinations are presumed correct, and petitioners have the burden of proving otherwise. Rule 142(a); Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111, 115 (1933).

1. Publishing Activity

Section 183 provides that if an activity engaged in by an individual is not engaged in for profit, no deduction attributable to such activity shall be allowed, except as provided in section 183(b).² An "activity not engaged in for profit" is any activity for which deductions would not be allowed under section 162 or under paragraph (1) or (2) of section 212. Sec. 183(c). Section 162 allows a deduction for all the ordinary and necessary expenses paid or incurred in carrying on a business. Section 212 allows a deduction for all the ordinary and necessary expenses paid or incurred for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. The profit standards applicable to section 212 are the same as those used in section 162. See Antonides v. Commissioner [90-1 USTC ¶ 50,029], 893 F.2d 656, 659 (4th Cir. 1990), affg. [Dec. 45,094] 91 T.C. 686 (1988).

For a taxpayer to deduct expenses of an activity pursuant to section 162, he must show that he engaged in the activity with an actual and honest objective of making a profit. Sec. 183; Ronnen v. Commissioner [Dec. 44,529], 90 T.C. 74, 91 (1988); Fuchs v. Commissioner [Dec. 41,349], 83 T.C. 79, 97-98 (1984); Dreicer v. Commissioner [Dec. 38,948], 78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs. Although a reasonable expectation of profit is not required, the taxpayer's profit objective must be bona fide. Hulter v. Commissioner [Dec. 45,014], 91 T.C. 371, 393 (1988); Beck v. Commissioner [Dec. 42,436], 85 T.C. 557, 569 (1985). "Profit" in this context means economic profit, independent of tax savings. Drobny v. Commissioner [Dec. 43,140], 86 T.C. 1326, 1341 (1986). Whether a taxpayer had an actual and honest profit objective is a question of fact to be resolved from all relevant facts and circumstances. Hulter v. Commissioner, supra at 393; Golanty v. Commissioner [Dec. 36,111], 72 T.C. 411, 426 (1979), affd. in an unpublished opinion 647 F.2d 170 (9th Cir. 1981). The burden of proving such objective is on petitioner. Rule 142(a); Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111 (1933). Greater weight is given to objective facts than to a taxpayer's statement of intent. Beck v. Commissioner, supra at 570; Thomas v. Commissioner [Dec. 42,136], 84 T.C. 1244, 1269 (1985), affd. [86-1 USTC ¶ 9465] 792 F.2d 1256 (4th Cir. 1986); sec. 1.183-2(a), Income Tax Regs.

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