Faura v. Comm'r of Internal Revenue
| Decision Date | 19 February 1980 |
| Docket Number | Docket No. 10041-77. |
| Citation | 73 T.C. 849 |
| Parties | FERNANDO FAURA and RITA FAURA, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner was in the trade or business of being an author. In 1974, while writing two books, he incurred expenses for office rent, postage, telephone, research, entertainment, and transportation. Held, the expenditures made by petitioner in his trade or business of being an author are deductible under sec. 162, I.R.C. 1954, as ordinary and necessary business expenses. Fernando Faura, pro se.
Michael R. Morris, for the respondent.
Respondent determined a deficiency of $1,946 in petitioners' Federal income tax for the year 1974. Concessions have been made by the parties. The only issue presented for decision is whether petitioner Fernando Faura, an author, may currently deduct under section 1621 certain expenses paid or incurred while writing two books, or whether such expenses should be capitalized pursuant to section 263.
Some of the facts have been stipulated and are so found. The stipulations of facts and attached exhibits are incorporated herein by this reference.
Fernando Faura (hereinafter petitioner) and Rita Faura maintained their legal residence in San Fernando, Calif., at the time they filed their petition in this case. Petitioner and his wife timely filed their joint Federal income tax return for the taxable year 1974.
Petitioner was in the trade or business of being an author in 1974 when he paid or incurred the following expenses in connection with the writing of two manuscripts:
(a) The cost of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year.
(b) Amounts expended for securing a copyright and plates, which remain the property of the person making the payments.
Section 461(a) provides that “the amount of any deduction * * * shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.” Section 1.461-1(a)(1), Income Tax Regs., provides:
Under the cash receipts and disbursements method of accounting, amounts representing allowable deductions shall, as a general rule, be taken into account for the taxable year in which paid. * * * (If, however) an expenditure results in the creation of an asset having a useful life which extends substantially beyond the close of the taxable year, such an expenditure may not be deductible, or may be deductible only in part, for the taxable year in which made. * * *
Respondent contends that expenses incurred by an author in producing a book constitute nondeductible capital expenditures because they result in the creation of an asset having a useful life extending beyond the taxable year. Under this view, the costs attributable to writing a book establish the author's basis under section 1012, and are available for future depreciation or amortization under section 167(a). Such a view, respondent argues, derives its support from Commissioner v. Idaho Power Co., 418 U.S. 1 (1974).
In Idaho Power, a public utility company claimed depreciation deductions under section 167(a) on all its transportation equipment, cars, and trucks, including that portion attributable to its use in constructing capital facilities. The Supreme Court, affirming an opinion of this Court, held that the equipment depreciation allocable to the taxpayer's construction of capital facilities must be capitalized under section 263(a)(1). It said (418 U.S. at 16):
The purpose of 263 is to reflect the basic principle that a capital expenditure may not be deducted from current income. It serves to prevent a taxpayer from utilizing currently a deduction properly attributable, through amortization, to later tax years when the capital asset becomes income producing. * * *
On the basis of Idaho Power, the respondent argues that the books written by petitioner have a productive life extending beyond the year in which the expenses are incurred, and thus the expenditures cannot be deducted currently but must be allocated, through depreciation deductions in future years, over the periods benefited by the asset.
Whether an expenditure may be currently deducted as an ordinary and necessary business expense or must be charged to capital has often presented a perplexing question to be decided upon the facts and circumstances of the particular case. As the Supreme Court observed in Welch v. Helvering, 290 U.S. 111, 115 (1933):
The issue of capitalization of a writer's expenses, or for that matter any producing artist's expenses, has had a long and varied history. The first case appears to be Doggett v. Burnett, 65 F.2d 191 (D.C. Cir. 1933). There the taxpayer arranged for the publication of religious books and, in doing so, expended some $38,000 for their printing, advertising, and sale. The expenses also included a salary for an assistant, travel costs, and advertising in newspapers and magazines. The Court of Appeals held that such expenditures were deductible.
In May v. Commissioner, 39 B.T.A. 946 (1939), the taxpayer was employed by Columbia Pictures and the Fox Film Corp. to serve as a motion picture director and as a collaborator and writer of motion picture scripts.3 We held that certain amounts expended for entertainment, automobile operating costs, telephone, telegraph, and cable charges were deductible as ordinary and necessary expenses in his trade or business of being a motion picture director and writer.
In Shumlin v. Commissioner, 16 T.C. 407 (1951), the taxpayer, a theatrical producer, had produced 25 stage plays during a period of about 20 years. His activities consisted of choosing plays for production, bringing together playwrights, actors, and other professional participants, and supervising financial and business arrangements. Rather than requiring capitalization into particular plays of his cash outlays for travel, entertainment, and other business expenses, this Court held that such expenditures were deductible. 4
In Kluckhohn v. Commissioner, 18 T.C. 892 (1952), the taxpayer was a newspaper correspondent and writer. His wife traveled to Australia and gathered material which he used in writing a book and an article. We allowed as a deduction a reasonable portion of the total amount expended by the wife in connection with the trip, i.e., that part attributable to the collection of information for use by the taxpayer in his business of writing.
The second appellate court opinion in the area was Brooks v. Commissioner, 274 F.2d 96 (9th Cir. 1959), in which a freelance research scientist incurred certain travel expenses in the course of her research. Although she did not expect to realize a present profit from the publication of her research, she argued that such expenditures were necessary to maintain her professional standing in order to be eligible for prospective salaried research appointments. The Commissioner contended that such expenses were not profit motivated and were therefore not ordinary and necessary business expenses. He also argued that the taxpayer's travel expenses resembled a capital expenditure—-that what she was in fact doing was equivalent to getting further education in order to increase her future profit potential rather than presently engaging in a profitable...
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...Co. v. United States, 582 F.2d 604, 609 (Ct.Cl.1978), cert. denied, 441 U.S. 905, 99 S.Ct. 1991, 60 L.Ed.2d 373 (1979); Faura v. Commissioner, 73 T.C. 849, 852 (1980). It is important to note that many expenses are deductible even though they have a prospective effect beyond the current tax......
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