Dreicer v. C. I. R., 80-1227

• Decision Date: 24 September 1981
• Docket Number: No. 80-1227,80-1227
• Citation: 665 F.2d 1292
• Parties: , 81-2 USTC P 9683 Maurice C. DREICER, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1292

665 F.2d 1292

214 U.S.App.D.C. 474, 81-2 USTC P 9683

Maurice C. DREICER, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 80-1227.

United States Court of Appeals District of Columbia Circuit.

Argued Jan. 26, 1981.

Decided Sept. 24, 1981.

Appeal from a Decision of the United States Tax Court.

Steven Kamerman, Mamaroneck, N. Y., for appellant.

Steven I. Frahm, Atty., Dept. of Justice, Washington, D. C., with whom M. Carr Ferguson, Asst. Atty. Gen., and Richard Farber, Atty., Dept. of Justice, Washington, D. C., were on the brief, for appellee. Ernest J. Brown, Atty., Dept. of Justice, Washington, D. C., also entered an appearance for appellee.

Before ROBINSON, Chief Judge, McGOWAN, Senior Circuit Judge, and RICHEY, District Judge. ^*

Opinion for the Court filed by Chief Judge SPOTTSWOOD W. ROBINSON, III.

SPOTTSWOOD W. ROBINSON, III, Chief Judge:

Maurice C. Dreicer appeals from a decision of the United States Tax Court disallowing deductions, in computation of two years' federal income taxes, for losses incurred assertedly in professional endeavors as a multimedia personality. The Tax Court found that the particular pursuits in which Dreicer sustained the reported losses were writing and lecturing, and concluded that he had not engaged in those activities for profit, as defined by Section 183 of the Internal Revenue Code ¹ and regulations promulgated thereunder, ² for the stated reason that he had no bona fide expectation of realizing a profit from them. ³

We perceive no basis for disturbing the Tax Court's finding on the nature of the undertakings generating the losses for which deductions are sought. We do not accept, however, the legal test that the court employed in ruling on deductibility. We hold that a taxpayer engages in an activity for profit, within the meaning of Section 183 and the implementing regulations, when profit is actually and honestly his objective though the prospect of achieving it may seem dim. Because the Tax Court applied a different standard, we reverse and remand for redetermination of Dreicer's deduction claims.

I

By virtue of Section 162 of the Internal Revenue Code, a taxpayer may deduct from gross income all ordinary and necessary expenses incurred in a business, ⁴ and, under Section 212, in the production or collection of income. ⁵ A corollary rule, embodied in Section 165, permits deduction of losses sustained in a trade or business, or in a transaction entered into for profit. ⁶ Section 183 qualifies these provisions by specifically disallowing, with limited exceptions not relevant here, deductions attributable to activities "not engaged in for profit." ⁷ Thus, a taxpayer claiming a deduction under Sections 162 or 212 for an expense, or under Section 165 for a loss, must be prepared to demonstrate an associated profit motive in order to avoid the ban of Section 183. ⁸ Appraising the facts salient in Dreicer's instance, which we need only summarize, ⁹ the Tax Court held that he did not.

Dreicer, a citizen of the United States, maintains his residence in the Canary Islands, Spain, and engages heavily in global travel. ¹⁰ He derives a substantial income as beneficiary of a family trust, ¹¹ and in the early 1950's, Dreicer began to focus his professional attention on the fields of tourism and dining. ¹² In 1955, he published The Diner's Companion, a compilation of his opinions on dining and on various restaurants throughout the world, ¹³ but the book was a commercial failure. ¹⁴ Undaunted, Dreicer conceived the idea of some day writing another book, this one to enshrine his reminiscence on a life dedicated to epicurism and travel. ¹⁵ In preparation for this sybaritic swan song, he spent the next twenty years traveling about the world, ¹⁶ staying in some of the finest hotels and dining in some of the best restaurants. ¹⁷ The material he gathered was also to be utilized in lectures before travel organizations and public appearances on radio and television. ¹⁸ By the mid-1970s, Dreicer had completed a rough draft of the second book-parts of which originally had appeared in The Diner's Companion ¹⁹-and titled it My 27 Year Search for the Perfect Steak-Still Looking. ²⁰ Two publishing houses to which he submitted the manuscript, however, returned it, ²¹ and seemingly he abandoned all hope of publishing. ²²

When Dreicer filed his federal income tax returns for 1972 and 1973, he claimed deductible losses of $21,795.76 and $28,022.05, respectively, for travel and other related business expenses. ²³ The Commissioner of Internal Revenue thereafter issued a notice of deficiency, disallowing the deductions on the ground that the losses arose from activities not pursued for profit, ²⁴ and the Tax Court agreed. ²⁵ The court disputed Dreicer's characterization of his professional self as a multi-media personality, finding instead that he was a writer-lecturer on tourism and dining. ²⁶ Having so defined his activity for Section 183 analysis, the court concluded that he had not entertained a bona fide expectation of profit from writing and lecturing, and on that account denied the deductions. ²⁷

Dreicer challenges the Tax Court's decision on two grounds. First, he contends that the court went amiss in finding that for purposes of Section 183 his professional activity was writing-lecturing rather than development as a public personality. ²⁸ He also argues that the court erred as a matter of law in confining the concept of a for-profit activity to one from which the taxpayer actually expects to make a profit. ²⁹ We consider each of these contentions in turn.

II

The Tax Court discounted several of Dreicer's diverse professional undertakings when it defined the activity in which he sustained his reported losses. Contesting the court's classification of that activity as writer-lecturer on tourism and dining, Dreicer points to other pursuits-such as consulting, endorsing consumer products, and participation in radio and television programs-as evidence that his ultimate goal was to become a multi-media personality and reap huge financial returns once he became famous. ³⁰

A Treasury regulation sets forth the considerations relevant in gauging the scope of a taxpayer's activity for purposes of ascertaining whether and to what extent Section 183 applies. It states:

Generally, the most significant facts and circumstances in making this determination are the degree of organizational and economic interrelationship of the 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. ³¹

The regulation additionally provides that although "the Commissioner will accept the characterization by the taxpayer of several undertakings either as a single activity or as separate activities," the taxpayer's designation will be rejected "when it appears that (it) is artificial and cannot be reasonably supported under the facts and circumstances of the case." ³²

The Tax Court agreed with the Commissioner that the activity pertinent to Section 183 analysis consisted in Dreicer's endeavors as a writer-lecturer on tourism and dining. ³³ Contrary to Dreicer's present contention, however, the court made clear that this activity encompassed the bulk of the other undertakings he associated with the asserted effort to promote his personality except his work in originating radio and television programs unconnected with his travel. ³⁴ Excluding the latter, the Court found that "any such activity ... would be wholly unrelated to (Dreicer's) writing and lecturing on travel and dining." ³⁵

We decline the invitation to overturn the court's findings as clearly erroneous. ³⁶ True it is that the court recognized that Dreicer continued to revise old ideas and develop new ones for radio and television programs during the 1960's and 1970's. ³⁷ But the record does not establish either an organizational or economic relationship of those activities to his writing and lecturing on tourism and dining. ³⁸ As the governing regulation makes clear, a taxpayer's description of his activities need not be accepted by the Commissioner-and surely not by the Tax Court-when in light of all other circumstances it appears artificial or lacking in reasonable support. ³⁹ Absent specific evidence that all of Dreicer's pursuits were merely parts of a larger integrated professional enterprise, the court cannot be faulted for the classification it gave them.

III

Dreicer also argues that even if the activity for which he claims deductions was no more than writing and lecturing, the Tax Court applied the wrong legal standard in determining whether he engaged in it for profit, as defined by Section 183, because the court predicated its result on his profit expectation rather than to his profit objective. We agree.

Addressing the losses that Dreicer deducted for the two tax years in question, the Tax Court made a searching inquiry into Dreicer's writing and lecturing pursuits in light of various factors set forth in the Treasury regulations pertinent. ⁴⁰ The court noted Dreicer's lengthy history of substantial losses in those endeavors; ⁴¹ his sizable independent income, which enabled him to continue writing and lecturing notwithstanding those losses; ⁴² the tax benefits he had obtained from deduction of such losses in earlier years; ⁴³ the unbusinesslike manner in which he had conducted his operations, including abandonment of efforts to get his second book published; ⁴⁴ his apparent lack of expertise on the subjects of tourism and dining; ⁴⁵ the pleasure he took in traveling and dining; ⁴⁶ and his failure to achieve commercial success as a writer-lecturer. ⁴⁷

We applaud the Tax Court for the thoroughness of its factual inquiry, but we cannot place the stamp of approval upon its eventual legal outcome. The court concluded that Dreicer's losses were...