Nature of the Case
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Facts
P holds a bachelor's degree in marketing and advertising where he earned more than 24 credit hours of study in English, journalism, and speech. P worked at the U.S. Department of the Treasury as a budget analyst until January 1997, when he retired after more than 35 years of service. P was required to 'write budget justifications, procedures, and other written material by applying professional-level writing ability to create high quality written work.' P was often the one delegated to perform writing-based tasks, such as contributing to the Federal Managers' Financial Integrity Act report, in which agencies evaluate their internal control and accounting systems. P also served as editor of an in-house newsletter of the Treasury. Approximately 2 years before he became eligible to retire, he began writing outside of his full-time job. P began writing with the hope of making it his second career. The first book-length manuscript he began writing was a fictional piece titled 'Lightning at Dawn.' P wrote a collection of short stories called 'Boys and Girls Together.' Before marketing these manuscripts for publication, P had an idea for another book -- a story about the experiences of two men who travel cross-country to patronize a legal brothel in Nevada. P wrote an 18,000-word draft of this basic storyline, which he submitted for copyright protection in June. In order to authenticate the story and develop characters for the book, P visited numerous legal brothels in Nevada by acting as a customer for prostitutes. P recorded the brothels he visited, the dates (and sometimes the hours) of his visits, the prostitutes he met, and the amount of cash he paid each one. P wrote about his visit with the prostitute and about the happenings at brothels in general. P described the manner in which he selected her, the house rules of the brothel, the manner in which he negotiated a price for her time, their dialogue, and the type of clothing worn by her. He also included personal information on the prostitute, including her age, physical characteristics, city or state of residence, religious background, ethnicity, level of education, and the name and age of her offspring, if any. At some point, P told the prostitutes that he was writing a book about Nevada's legal brothels and that he wished to use them as characters in his book. P spent 3 days per month meeting with prostitutes at the brothels. P produced a manuscript called 'Searchlight, Nevada' which he submitted for publication. P entered into an agreement for its publication with Northwest Publishing, Inc. P was to pay Northwest $4,375 to publish 10,000 copies of his book. Northwest would give away 200 copies to major bookstores and book reviewers, sell 2,500 copies through its 'test market program,' and sell the remaining books in the retail marketplace. P would be paid 40% of the retail amount of each book sold through the test market program, and a royalty equal to 15% of the retail price of any remaining books sold to bookstores and wholesalers. Northwest was to have exclusive rights to the book and would do sales promotion, advertising, and publicity. The book was published at a retail price of $7.95. P actively participated in the promotion of his book. P began research on yet another book about prostitutes. Four months after 'Searchlight, Nevada' had been on the market, Northwest filed for bankruptcy protection. P filed a proof of claim with the U.S. Bankruptcy Court for the District of Utah in the amount of $17,854 for unpaid royalties and breach of contract. P actively began soliciting other publishing houses and improving the book. P's writing activity had not resulted in a profit for any taxable year. D disallowed under sections 162 and 183 all of the expenses claimed on petitioner's Schedules C for the years in issue because 'it has not been shown that * * * P either started a trade or business or entered into an activity for profit. * * * P has not established that any amount was for an ordinary and necessary business expense.” P tried to write off the payment to Northwest and payments to the prostitutes. P petitioned the tax court.
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