WALTER C. DEMATTIA AND ELIZABETH J. CROUSE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 14267-96, 27239-96
UNITED STATES TAX COURT
Filed March 2, 1998
T.C. Memo. 1998-87
Eric R. Skinner, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: In two separate notices of deficiency dated June 11 and September 19, 1996, respondent determined deficiencies in petitioners’ Federal income tax for 1992 and 1993 in the amounts of $11,023 and $19,550, respectively, and an accuracy-related penalty under
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of fact and the exhibits submitted therewith are incorporated herein by this reference. Petitioners, husband and wife, resided in Farmington Hills, Michigan, when they petitioned the Court. Petitioners timely filed their joint Federal income tax returns for 1992 and 1993.
Walter C. DeMattia has four children from previous marriages. Constant is Dr. DeMattia‘s youngest child and the only child from his marriage to Fernande DeMattia nee Fernande Allain. Elizabeth J. Crouse is Constant‘s stepmother. Dr. DeMattia and his son Constant have maintained a very close
In September 1989, at 57 years old, Dr. DeMattia retired from his dentistry practice. Around the same time, Dr. DeMattia and Constant discussed Constant‘s playing golf professionally and Dr. DeMattia‘s sponsorship of Constant in this pursuit.
From 1990 through 1996, Dr. DeMattia and Constant entered into yearly sponsorship agreements. Each sponsorship agreement contained the following terms:
W.C. DeMattia shall act as agent, manager and coach of Constant A. DeMattia in his professional golf career. In addition to the above services[,] W.C. DeMattia agrees to furnish money and resources to or for the benefit of C.A. DeMattia‘s professional golf career during the calendar year * * *. The above shall include enabling living funds.
In return C.A. DeMattia Agrees to give W.C. DeMattia a percentage of his earnings based on the following schedule:
Earnings Btwn[:]1 W.C. DeMattia Receives[:]
$5,000 - $10,000 70% 10,000 - 15,000 60 15,000 - 50,000 50 50,000 - 100,000 40 100,000 + 30
The 1990 through 1995 sponsorship agreements were signed, respectively, on the following dates: May 1, 1990; January 3, 1991; January 4, 1992; December 30, 1992; January 5, 1994; and December 29, 1994.2 The 1990 through 1994 sponsorship agreements were virtually identical. The 1995 sponsorship agreement incorporated the following additional change: “It is understood that the word ‘Earnings’ as used in this contract[,] shall be interpreted to mean ‘Winnings from Golf Tournaments‘“. This addition stems from a change in Constant‘s financial circumstances. During 1992 through 1994, Constant had no source of income independent of his golfing activity, and his disposable funds came primarily from the sponsorship agreements. In 1995, Constant accepted a paid position as a golf instructor with Golf Digest. The 1995 sponsorship agreement stated that the parties “clarified” the meaning of “earnings” as a result of Constant‘s new employment position.
The sponsorship agreements did not impose any limits on Dr. DeMattia‘s potential liability for Constant‘s expenses or specify productivity goals for Constant, to include a tournament participation requirement. Prior to entering into these
In 1992, Dr. DeMattia made direct and indirect expenditures to or on behalf of Constant totaling $55,839.3 In 1993, Dr. DeMattia made like expenditures in the amount of $66,728.4 Some of the aforementioned expenditures included expenses incurred by Dr. DeMattia during trips to Florida. During 1992 and 1993, Dr. DeMattia made six to eight trips per year to Florida. During 1990 through the present, Dr. DeMattia‘s father lived in Ft. Lauderdale, Florida, approximately a 4-hour drive from Dr. DeMattia‘s son‘s apartment in Altamonte Springs, Florida. Dr. DeMattia made occasional trips to see his father while visiting Constant in Florida.
In an effort to enter the professional ranks, Constant attended the Professional Golf Association‘s (PGA) tour qualifying school in 1991 through 1994, and 1997.5 Constant also
| Year | Income | Expense | Loss |
|---|---|---|---|
| 1990 | $0 | $14,507 | $14,507 |
| 1991 | 0 | 45,316 | 45,316 |
| 1992 | 0 | 51,461 | 51,461 |
| 1993 | 1,113 | 69,160 | 68,047 |
| 1994 | 561 | 48,267 | 47,706 |
| 1995 | 0 | 25,728 | 25,728 |
| 1996 | 0 | 12,891 | 12,891 |
| Total | 1,674 | 267,330 | 265,656 |
The claimed expenses for each year include Constant‘s personal living expenses such as rent, food, nongolf related transportation and clothing, and entertainment. The claimed expenses also include Dr. DeMattia‘s travel expenses for trips to Florida and varied tournament locations.
Dr. DeMattia maintained a crude record of expenses relating to petitioners’ sponsorship agreements. He maintained a series of envelopes in which he stored receipts; for example, hotel bills were placed in the “hotel bill envelope“. At the end of each year, Dr. DeMattia would prepare a summary based on those receipts and the summaries were in turn used by his accountant to prepare petitioners’ Federal income tax returns. Dr. DeMattia did not maintain a separate bank account for the golf sponsorship activities, nor did he maintain records of tournament entries or prize money availability.
In the notices of deficiency, respondent determined that petitioners were not engaged in a golf sponsorship activity for profit within the meaning of
Dr. DeMattia testified that he had an honest objective of making a profit from the golf sponsorship agreements with his son. He further testified that he believed that he would make millions of dollars as a result of the sponsorship agreements. We give greater weight to objective factors than to Dr. DeMattia‘s uncorroborated testimony as to his intent in determining whether he had the requisite profit objective. Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer v. Commissioner, supra at 645;
1. Manner in Which the Activity is Conducted
That the taxpayer carried on the activity in a businesslike manner and maintained complete and accurate records may indicate that the activity is engaged in for profit.
Among other things, respondent argues that the following facts establish that Dr. DeMattia failed to conduct the activity
Petitioners argue that Dr. DeMattia entered into the agreements and conducted the activity in a businesslike manner. First, petitioners cite Dr. DeMattia‘s preliminary investigation into the feasibility of the sponsorship as evidence of the requisite intent. Dr. DeMattia testified that his decision to sponsor his son was based on extensive research. For example, in order to evaluate the investment‘s profitability potential, he talked to a number of knowledgeable people regarding his son‘s likelihood of playing on the PGA tour. Among others, Dr. DeMattia spoke to his son‘s college coach at Stetson University, the head golf instructor for Golf Digest, the golf coach at
Petitioners have not persuaded us that Dr. DeMattia conducted the sponsorship activity in a businesslike manner. First, the agreements fail to set any goals or financial conditions that had to be met. The agreements fail to specify any minimum number of tournament entries by Constant or place a cap on Dr. DeMattia‘s potential liability for Constant‘s yearly expenses. Second, we find Dr. DeMattia‘s investigation into the potential profitability of the golf sponsorship to be lacking. Among other things, Dr. DeMattia testified that he had not calculated what Constant‘s earnings would have to be in order for
Furthermore, Dr. DeMattia‘s failure to make any changes in the method of carrying on the activity in order to increase the activity‘s potential profitability is also evidence of a lack of
2. Expertise of Petitioners or their Advisors
A taxpayer‘s expertise, research, and study of an activity, as well as his or her consultation with experts, may be indicative of a profit intent.
Respondent argues that Dr. DeMattia lacked the requisite expertise to conduct the activity with a profit intent. In support, respondent cites the following facts: (1) Dr. DeMattia had never entered into any other sponsorship agreement with another professional athlete; (2) he had never acted as a sports agent; and (3) he had no formal training as a golf instructor.
We believe that Dr. DeMattia did indeed take steps to educate himself in matters relating to the sponsorship and management of a professional athlete. We also believe that Dr. DeMattia sought out experts for the purpose of increasing his son‘s likelihood of entering the professional ranks. What we do not find credible is that the aforementioned actions were done by Dr. DeMattia with a bona fide objective of deriving a profit from the sponsorship activity. We believe that in cultivating expertise and making use of experts to support his son‘s golfing career Dr. DeMattia was acting as a parent would and not to make a profit for himself. Cf. Nova v. Commissioner, T.C. Memo. 1993-563. This factor supports respondent‘s determinations.
3. Time and Effort Spent in Conducting the Activity
The fact that a taxpayer devotes much of his or her personal time to an activity may indicate a profit intent, especially where the activity does not involve substantial personal or recreational aspects. Also, a taxpayer‘s withdrawal from another occupation to devote his or her time and effort to an activity
Respondent argues that any direct time and effort spent on the activity by Dr. DeMattia is indicative of his love and affection for his son and the sport of golf. In support, respondent cites Dr. DeMattia‘s 20-year history of playing the game of golf and his history of playing the game with his son.
Petitioners argue that Dr. DeMattia‘s participation level indicates that he was engaged in the activity for profit. Dr. DeMattia testified that he spent a substantial amount of time, in excess of 30 hours a week, acting as his son‘s agent, coach, and manager. Among other things, Dr. DeMattia testified: As Constant‘s coach, he would accompany his son to tournaments and lessons, discuss quality of game play, and make suggestions on how to improve Constant‘s play; as Constant‘s manager, he would make Constant‘s travel arrangements, paid bills, and spent a significant amount of time reading varied publications which addressed all aspects of the professional golfer‘s game. Petitioners also cite Mr. DeMattia‘s retirement from his dental practice as evidence that he entered into the sponsorship activity with a profit motive. Dr. DeMattia testified that the sponsorship of his son‘s golfing activity was a significant factor in his decision to sell his dental practice.
4. Expectation That the Assets Will Appreciate in Value
“Profit” encompasses appreciation in the value of the assets.
Traditionally, the potential for asset appreciation is associated with land and other tangible assets. Here, petitioners argue that there is some potential for the value of the sponsorship agreements to increase. This argument is based
As an initial matter, the record does not support petitioners’ interpretation of the sponsorship agreements. Constant testified that he had not given much thought to whether or not each sponsorship agreement entitled his father to Constant‘s future earnings. Moreover, each sponsorship agreement‘s coverage is limited to the corresponding “calendar year“. As to Constant‘s transition into professional golf, the evidence does not establish that Constant was attaining any modicum of success and consequently that the sponsorship agreements had any inherent value. Constant testified that he played in three or four different tours9 in 1992, with only one PGA tournament appearance at the 1992 Canadian Open. However, no evidence was presented on the numbers of individual tournaments
5. Taxpayer‘s Success on Similar or Dissimilar Activities
Although an activity is unprofitable, the fact that a taxpayer has previously converted similar activities from unprofitable to profitable enterprises may show a profit intent with respect thereto.
Respondent argues that Dr. DeMattia‘s lack of involvement in any similar activity, either in the capacity of a sponsor, agent, manager, or golf instructor, indicates a lack of profit motive. In addition, respondent argues that Dr. DeMattia‘s prior success in establishing and running a dental practice has no applicability to his success in this type of activity. Petitioners concede that Dr. DeMattia had no prior experience or success in carrying on a similar activity; however, petitioners portray Dr. DeMattia as an experienced businessman having a number of successful businesses during his career, including a
We accept petitioners’ characterization of Dr. DeMattia as an astute businessman. However, given his prior experience in business dealings, we find that the manner in which he carried out this activity makes it less likely that he entered into the activity with a profit motive. This factor supports respondent‘s determinations.
6. An Activity‘s History of Income and/or Losses
A series of losses beyond the startup stage may be indicative of the absence of a profit motive unless such losses can be blamed on unforeseen or fortuitous circumstances beyond the taxpayer‘s control.
Respondent argues that $265,656 in losses over 7 years weighs against a profit intent. Petitioners argue that losses in the first few years are not indicative of the activity‘s potential profitability, especially since Constant was either ill or injured for a significant portion of 1994 through 1996.
Assuming that there were unforeseen circumstances beyond petitioners’ control, such as the series of illnesses and injuries suffered by Constant, petitioners failed to demonstrate a direct correlation between Constant‘s illnesses and injuries
7. Amounts of Occasional Profits
Occasional profits may indicate a profit motive. However, the absence of profits is not determinative of a lack of profit motive. Petitioners need only have an actual and honest profit objective. Absent actual profits generated from the activity, an opportunity to earn a substantial ultimate profit in a highly speculative venture is ordinarily sufficient to indicate that the activity is engaged in for profit.
In 7 years, petitioners’ sponsorship activity never generated a profit. Of greater significance, we find it highly unlikely that petitioners would have recognized a substantial ultimate profit given Constant‘s position as a golf instructor and his lack of success in tournament play. This factor supports respondent‘s determinations.
8. Financial Status of Taxpayer
Substantial income from sources other than the activity (particularly if the losses from the activity generate substantial tax benefits) may indicate that the activity is not engaged in for profit. This is especially true where there are personal or recreational elements involved.
In 1992, absent the losses generated by the sponsorship activity, petitioners had taxable income of $61,244. With the loss deductions, petitioners’ 1992 taxable income was $9,783. As to 1993, absent the losses generated by the sponsorship activity, petitioners had taxable income of $199,087. With the loss deductions, petitioners’ 1993 taxable income was $131,040.
9. Elements of Personal Pleasure
Although the mere fact that a taxpayer derives personal pleasure from a particular activity does not mean that he or she lacks a profit intent with respect thereto, the presence of personal motives may indicate that the activity is not engaged in for profit. This is especially true where there are recreational elements involved.
Respondent argues that the evidence establishes that Dr. DeMattia‘s primary purpose in entering into the sponsorship agreements was to assist Dr. DeMattia‘s son in pursuing a professional golf career and not an honest objective of making a profit within the meaning of
10. Conclusion
Based on our careful review of the record, and our evaluation of the nine aforementioned factors, we conclude that petitioners did not conduct their sponsorship activity with an “actual and honest” objective of making a profit.11
We have considered all other arguments made by petitioners and found them to be either irrelevant or without merit.
To reflect the foregoing,
Decisions will be entered for respondent as to the deficiencies in tax, and in accordance with respondent‘s