Writing and research activities not engaged in for profit

A taxpayer could not deduct purported business expenses associated with writing and research activities held to be not engaged in for profit under Sec. 183.

Facts: For tax years 2018 through 2020, Debra Jones-Mazotti and Robert Mazotti filed joint returns that included Schedule C, Profit or Loss From Business, for “writer-researcher” activities engaged in by Jones-Mazotti. She claimed her writer-researcher activities included “writing books, articles, and commercials, as well as travel for research and photography.” Despite nearly 30 years as a professed writer-researcher, she did not keep formal books and records, had never run a profit-and-loss statement, and did not have a business plan.

With respect to her book-writing activities, Jones-Mazotti testified she could not recall submitting any specific books to publishers but rather wrote “mostly articles” during the tax years at issue. She also claimed to have self-published approximately six books. However, the purported books submitted as exhibits were at most two pages long.

Jones-Mazotti testified she published articles in newspapers and online sources. Local television stations, she asserted, had also aired her work. But she offered no evidence the alleged publications occurred during the tax years at issue. Furthermore, the published writings included opinion posts on TripAdvisor and Facebook posts on personal matters. Having reported just $30 and $15 of gross receipts related to her writer-researcher activities for 2018 and 2019, respectively, she could not recall any specific sources of income, other than that her 2018 amount “may have been from a Reader’s Digest article.”

Jones-Mazotti testified she wrote a national commercial for the medication Prevagen in 2018 or 2019 and appeared in the commercial when it was filmed in 2020. As support for this work, she produced only a spokesperson contract providing compensation in exchange for a testimonial she wrote about how Prevagen had helped her.

In relation to her research and photography activities, Jones-Mazotti testified she traveled to various locations to conduct research for books, articles, and “scavenger hunts.” Members of her family typically traveled with her on these trips. On one occasion, her research travel coincided with a high school football event for her son. She also claimed travel expenses related to her interest in researching missing persons. Stating that she did not want to “exploit” missing persons, she had not published articles on the topic.

Finally, Jones-Mazotti testified she wrote books used to help tutor students while she was employed at the Jefferson County, Colo., School District during the tax years at issue. Although she identified these books as self-published, they were created as part of her work as an educator and not in connection with her writer-researcher activities.

In 2018, the Mazottis reported on Schedule C for Jones-Mazotti’s writer-research activities $30 of gross receipts and $61,523 of total expenses; in 2019, $15 of gross receipts and $63,019 of total expenses; and in 2020, $1,000 of gross receipts and $62,470 of total expenses. Upon examination, the IRS determined that Jones-Mazotti’s writer-researcher activities were not engaged in for profit and that she failed to substantiate her expenses. The IRS also determined the Mazottis were liable for accuracy-related penalties due to negligence. In May 2022, the IRS issued a notice of deficiency. In response, the Mazottis timely petitioned the Tax Court.

Issues: Sec. 183(a) prohibits the deduction of expenses attributable to activities not engaged in for profit. Sec. 183(c) defines an activity not engaged in for profit as “any activity other than one with respect to which deductions are allowable” under Sec. 162 (trade or business activity) or 212 (activity associated with the production of income). A taxpayer is generally engaged in a trade or business if the “primary purpose of the activity is to make a profit” (Keeler, 243 F.3d 1212 (10th Cir. 2001), aff’g Leema Enterprises, Inc., T.C. Memo. 1999-18). Business expenses are deductible if the taxpayer can show the activity was “operated with an actual and honest profit objective” (Hildebrand, 28 F.3d 1024 (10th Cir. 1994), aff’g Krause, 99 T.C. 132 (1992)).

Regs. Sec. 1.183-2(b) offers a nonexclusive list of nine factors to be used in evaluating whether a taxpayer’s activities are engaged in for profit. The court determined that eight factors weighed against the Mazottis — three of them heavily. One factor was deemed neutral, and none weighed for them.

The first factor contemplates the way a taxpayer carries on the activity. An activity is more likely to have a profit motive when a taxpayer carries it on in “a businesslike manner” and “maintains complete and accurate books and records” (Regs. Sec. 1.183-2(b) (1)). Because Jones-Mazotti did not have a business plan and had never produced a profit-and-loss statement, the court determined she did not conduct her activity in a businesslike manner. She also failed to keep formal books and records for her activity. This factor weighed heavily against the Mazottis.

The second factor involves the expertise of a taxpayer or the taxpayer’s advisers. Profit motive may be inferred where there is evidence of preparation for the activity through study of accepted business practices or consultation with industry experts (Regs. Sec. 1.183-2(b)(2)). Besides self-serving testimony found to be not credible, the court identified no evidence that Jones-Mazotti engaged in the requisite studies about how to conduct a writing business. There was also no credible evidence that an author or any expert offered advice about operating a writer-researcher business. This factor weighed against the Mazottis.

Third, Regs. Sec. 1.183-2(b)(3) considers the time and effort a taxpayer devotes to the activity. An activity that does not involve “substantial personal or recreational aspects” is more likely to be construed as engaged in for profit. The court found this factor weighed against the Mazottis because the record contained little evidence about how much time Jones-Mazotti spent on writer-researcher activities during the tax years at issue. Though testimony described extensive travel for book research, the record shows she used her interest in writing as justification for claiming expenses from personal vacations as business deductions on her tax returns.

The fourth factor, an expectation of appreciation in value of business assets (Regs. Sec. 1.183-2(b)(4)), was neutral because Jones-Mazotti reported no business assets.

Fifth, Regs. Sec. 1.183-2(b)(5) evaluates the success of a taxpayer in carrying on similar or dissimilar activities. Even when an activity is currently unprofitable, a taxpayer may nonetheless be engaged in the activity for profit if they have previously carried out similar activities and turned them from unprofitable to profitable enterprises. This factor weighed against the Mazottis because Jones-Mazotti supplied no evidence of business success in similar activities after reversing a trend of unprofitability. The court found her testimony that she was paid as a spokesperson for a pharmaceutical commercial and worked for a local school district unpersuasive and unconnected to her writer-researcher activities.

The sixth factor centers on a taxpayer’s history of income or loss with respect to the activity. A lengthy, unexplained period of losses following an activity’s startup stage may indicate a lack of profit motive (Regs. Sec. 1.183-2(b)(6)). Jones-Mazotti’s testimony that she began her writer-researcher activities in the mid-1990s and first earned a profit nearly 30 years later weighed against the Mazottis.

Similar to the sixth factor, the seventh, Regs. Sec. 1.183-2(b)(7), concerns the amount of any occasional profit. For the tax years at issue, the Mazottis reported $1,045 in income and $187,012 in expenses, which the court concluded weighed heavily against them.

Regs. Sec. 1.183-2(b)(8) points to the taxpayer’s financial status. Where a taxpayer has substantial sources of other income offset by losses from the activity in question, it becomes less likely the activity was engaged in for profit. Although the Mazottis did not earn substantial income during the tax years at issue, their reported losses from the writer-researcher activities did generate a substantial tax benefit. This factor weighed against the Mazottis.

Finally, Regs. Sec. 1.183-2(b)(9) considers whether elements of personal pleasure or recreation are associated with the activity. The presence of personal motives may indicate the taxpayer entered into the activity for reasons other than profit. Citing Jones-Mazotti’s testimony that she feels writing is what she is “meant to do” and that her work involving missing persons is a “passion,” the court found personal and recreational elements inherent in her writer-researcher activities were readily apparent. It also referenced extensive vacations with her family, including to Hawaii, California, and Florida, for purported research in deciding these elements outweighed the desire for profit.

Holding: The Tax Court, relying on its analysis of the factors enumerated in Regs. Sec. 183-2(b), held that Jones-Mazotti did not engage in her writer-researcher activities for profit and sustained the IRS’s disallowance of the expenses associated with those activities. Concluding the Mazottis were negligent in failing to make reasonable attempts to comply with the tax law and to determine the correctness of deductions that “should have seemed too good to be true,” the court also held that the Mazottis were liable for accuracy-related penalties.

■ Mazotti, T.C. Memo. 2024-75

— Matthew Geiszler, Ph.D., is a lecturer in accounting in the Brooks School of Public Policy at Cornell University; Luke Richardson, CPA, J.D., is an associate professor of instruction and Kerkering Barberio fellow in accounting and taxation within the Muma College of Business at the University of South Florida; and John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business at Cornell University. To comment on this column, contact Paul Bonner, the JofA’s tax editor.