Gullion, Thomas Allen v. Commissioner, T.C. Summary Opinion 2013-65 (2013)

In Gullion v. Commissioner, the United States Tax Court addressed whether the taxpayer’s musical activities constituted a trade or business for purposes of deducting related expenses under Internal Revenue Code section 162, or whether the activity was a hobby subject to the limitations of section 183 (the “hobby loss” rules).

Key Facts:

• The taxpayer, Thomas Allen Gullion, was a professional saxophonist with a long history in music, including formal education and professional performance.
• After moving to Wisconsin and taking a job as a computer programmer, he continued his musical activities, organizing festivals, recording CDs, and performing.
• For the years at issue (2008 and 2009), Gullion reported significant losses from his music activities, with gross receipts far less than his claimed expenses. He had a history of losses from 2004 to 2010, but showed a small profit in 2011.

Legal Analysis:

• Under section 162, a taxpayer may deduct ordinary and necessary expenses incurred in carrying on a trade or business. Section 183 limits deductions for activities not engaged in for profit (i.e., hobbies) to the amount of income generated by the activity.
• The Court applied the multi-factor test from Treasury Regulation § 1.183-2(b) to determine whether Gullion’s musical activities were engaged in with an actual and honest profit motive. Relevant factors included:
  • The manner in which the activity was carried on
  • The taxpayer’s expertise
  • The time and effort expended
  • The taxpayer’s history of income or losses
  • The financial status of the taxpayer
  • Elements of personal pleasure or recreation

Court’s Findings:

• The Court found that Gullion’s musical activities were conducted with continuity and regularity, and that he had the requisite profit motive, despite a history of losses. The Court noted that a history of losses is less persuasive in the arts, where economic success often takes longer to achieve.
• The Court emphasized Gullion’s expertise, dedication, and credible testimony regarding his intent to make a profit and his efforts to adapt to changes in the music industry.
• The Court concluded that Gullion’s musical activities constituted a trade or business under section 162, allowing him to deduct ordinary and necessary expenses.

Disallowed Deductions:

• The Court disallowed certain expenses that were not related to the music business, such as depreciation for a violin owned by his wife and commuting expenses for teaching a music class, as commuting is a personal expense and not deductible.

Penalties:

• The IRS had asserted accuracy-related penalties under section 6662(a), but the Court declined to impose them, finding that Gullion was not negligent and had reasonably relied on a CPA for tax preparation.

Conclusion: The Tax Court held that Gullion’s musical activities were a trade or business, not a hobby, for the years in question. Thus, he was entitled to deduct his business expenses under section 162, except for certain personal or unrelated expenses. The Court also found he was not liable for accuracy-related penalties under section 6662(a).