Lead Opinion
Taxpayers Paul and Helen Snyder (taxpayer)
Taxpayer, a practicing attorney, testified that he began work on a book of photographs of the Colorado high country in 1972. He expected to publish and sell the finished product. His photographic activities changed markedly as he pursued his book project. Prior to 1972, such activities consisted primarily of taking family snapshots with modest equipment that was inappropriate for a commercial enterprise. In order to produce commercial quality photographs for the book, however, taxpayer ac
After a year’s work, taxpayer had accumulated approximately 3,000 slides and began to send letters to publishers soliciting their interest in his book. He received replies from six or eight publishers who expressed interest, and he traveled to New York to discuss the book with some of them. He testified that the only purpose for his trip to New York was to promote publication of his book. He also traveled to San Francisco, at the expense of Scribners & Sons, to discuss the book with an editor for the Sierra Club. Taxpayer was encouraged by the publishers he met, but none of them offered to buy or publish his book.
Taxpayer’s joint tax returns show he reported adjusted gross income of $55,105.65 in 1972 and $37,012.45 in 1973. Almost all of this income was derived from the practice of law. Included among various current deductions claimed by taxpayer were depreciation and business expenses attributed to his “nature photography” activity, which amounted to $4,370.85 in 1972 and $8,401.11 in 1973. Taxpayer testified that the deductions constituted expenses necessary to his endeavor to produce his book. Nevertheless, the IRS concluded that taxpayers’ deductions attributable to the photography book were not allowable under either section 162 or section 212. Accordingly, the IRS found that additional taxes and other amounts of $6,913.41 were due for the years 1972 and 1973. Taxpayer paid that amount, filed a claim for refund, and timely sued to recover the amount paid.
At trial, the district court concluded that taxpayer was not engaged in the “trade or business” of producing a book. The court held that taxpayer’s claimed expenses were not appropriate deductions under section 162 or 212 and “at best” the expenses might be capitalized under section 212.
The trial judge delivered findings of fact and conclusions of law orally from the bench. He stated that they were intended to be “rough” findings and conclusions only and he requested that they be reduced to writing by counsel for the IRS. The judge noted that he hoped to make sufficient comments to permit formalized findings and conclusions to be drafted. Unfortunately, no such formalized findings were ever approved by the court and we are left with only the “oral, rough, findings.” Rec., vol. Ill, at 2.
The trial court stated in its oral findings that the taxpayer had “sincere hopes” of selling his photography book to many people, id. at 3, and “does hope to make a profit.” Id. at 4. Notwithstanding these factual findings of taxpayer’s profit motive, the trial court reached the conclusion that the taxpayer was not engaged in the “trade or business” of writing a book, but was trying to produce a literary capital asset.
No citation to any source was provided for these conclusions, and underlying facts other than profit motive were not elaborated upon. This poses a problem for us because the general test for whether a person is engaged in a “trade or business” under section 162 has variously been stated to be “whether the business was undertaken ‘in good faith for the purpose of making a profit,’ ” Malmstedt v. Commissioner,
Fed.R.Civ.P. 52(a) states that “[i]n all actions tried upon the facts without a jury . . . the court shall find the facts specially and state separately its conclusions of law thereon . . . . ” One important purpose
“Nor do we intimate that findings must be made on all of the enumerated matters or need be made on no others; the nature of the evidentiary findings sufficient and appropriate to support the court’s decision as to fairness or unfairness is for the trial court to determine in the first instance in the light of the circumstances of the particular case. We hold only that there must be findings, stated either in the court’s opinion or separately, which are sufficient to indicate the factual basis for the ultimate conclusion.”
(emphasis added). See also Schneiderman v. United States,
The trial court’s findings of fact in the present case are not sufficient to guide us in rendering a proper decision. We need further factual findings to determine whether the district court properly concluded that taxpayer was not in the “trade or business” of producing a book.
The IRS argued below and in this court that an author cannot be in the trade or business of writing if he has not yet produced a book, and it appears from the trial judge’s comments during trial that he may have accepted this assertion. If so, the trial judge made his decision based on an erroneous legal conclusion. We find no support for this contention and believe, as a policy matter, that such a position would have an unwarranted and undesirable chilling effect on budding authors who are serious in pursuing a writing career. Section 162 does not require such a result.
The IRS also emphasizes that taxpayer in this case spends 40 hours per week as a lawyer. But he also spent 30 hours a week working on his book in the tax years in question, and we have recognized “the indisputable legal premise that the [taxpayer] ... might be engaged in carrying on a number of trades or businesses.” Wiles v. United States,
The profit motive of the taxpayer is “only significant [under section 162] insofar as it affords a means of distinguishing between an enterprise carried on in good faith as a ‘trade or business’ and an enterprise merely carried on as a hobby.” Id. at 32 (footnote omitted). A taxpayer is clearly not engaged in a trade or business if his predominant purpose is recreation or a hobby. See, e.g., Carkhuff v. Commissioner,
“[w]here the activity is not the taxpayer’s principal means of livelihood and is of a sporting or recreational nature, then indeed, if he incurs losses in it, the question of motive becomes acute. The taxpayer is required to demonstrate that the appearance of a pleasure-seeking motive*1364 is misleading and that instead the motive for the activity was profit making. The difficulty inherent in so elusive a test as motive has resulted in the search for objective guideposts.”
Imbesi v. Commissioner,
Even where the taxpayer engages in the activity primarily for profit, such activity does not automatically constitute a “trade or business” under section 162:
“ ‘[t]he phrase “trade or business” [as used in the Tax Code] connotes something more than an act or course of activity engaged in for profit. * * * The phrase * * * must refer not merely to Acts engaged in for profit, but to extensive activity over a substantial period of time during which the Taxpayer holds himself out as selling goods or services.’ McDowell v. Ribicoff, 3 Cir., 1961,292 F.2d 174 , 178 (Biggs, C.J.). A taxpayer can show that his activities are a ‘business’ by demonstrating that he devotes a substantial portion of his time to the activities. Austin v. .Commissioner, 1960,35 T.C. 221 , aff’d., 2 Cir., 1962,298 F.2d 583 , or that there has been extensive or repeated activity over a substantial period of time, Wright v. Commissioner, 1959,31 T.C. 1264 , aff’d., 6 Cir., 1960,274 F.2d 883 .”
Stanton v. Commissioner,
In enacting section 212, Congress intended to place all income producing activities on equal footing. See United States v. Gilmore,
For purposes of our review, the trial judge’s conclusion that taxpayer’s expenses could “at best” be capitalized is also not adequately supported by factual findings or legal reasoning. Of course, sections 162 and 212 are subject to section 263
We have adopted the one-year rule under which an expenditure should be capitalized “ ‘if it brings about the acquisition of an asset having a period of useful life in excess of one year or if it secures a like advantage to the taxpayerColorado Springs National Bank v. United States,
If taxpayer in this case is in the “trade or business” of producing a book, he may currently deduct those items shown to be ordinary and necessary rather than capitalize them. See Stern, 71-1 U.S.Tax.Cas. (CCH) ¶ 9375; Faura,
Reversed and remanded.
Notes
. Helen Snyder is involved in this case only because she filed joint returns with Paul Snyder. Mr. Snyder will be referred to as the taxpayer.
. Section 162(a) provides in pertinent part:
“Trade or business expenses
“(a) In general. — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business
. Section 212 provides:
“Expenses for Production of Income
“In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax.”
. Section 263(a) provides in pertinent part: “Capital expenditures
“(a) General rule. — No deduction shall be allowed for—
(1) Any amount paid out for new buildings or for permanent improvements or better-ments made to increase the value of any property or estate. . . . ”
Dissenting Opinion
dissents:
I am of the view that the district court’s findings are sufficient and would not remand, but affirm.