T .C. Mem o. 2021-107
UNITED STATES TAX COURT
GAYLE GASTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25899-17. Filed Septem ber 2, 2021.
Joseph A. Broyles, for petitioner.
Michael K. Park, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determ ined incom e tax deficiencies of $59,872 and $57,717 for petitioner’s tax years 2013 and 2014, respectively, and an addition to tax under section 6651(a)(2) and a penalty under section 6662 for each Served 09/02/21 [*2] year.1
After concessions,2 the issues for decision are: (1) whether petitioner engaged in acting as a trade or business in the tax years at issue and, if so, whether petitioner is entitled to deduct any reported expenses relating to that trade or business, (2) whether petitioner engaged in jewelry sales as a trade or business in the tax years at issue and, if so, whether petitioner is entitled to deduct any claim ed flowthrough losses relating to that trade or business, and (3) whether petitioner is entitled to deduct contributions to an alleged qualified profit-sharing plan for the tax years at issue.
FINDINGS OF FACT
Petitioner is a form er national sales director for the Mary Kay, Inc (Mary Kay). She began working for Mary Kay in 1967 and reached the position of national sales director (NSD) in 1974. As an NSD, petitioner was entitled to participate in Mary Kay’s deferred com pensation program known as the Fam ily1 All section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. Som e m onetary am ounts have been rounded to the nearest dollar.2
Respondent has conceded the sec. 6651(a)(2) additions to tax and that he cannot m eet his burden of production under sec. 6751(b) with regard to the sec. 6662 penalties. Petitioner has conceded that she is not entitled to deductions claim ed on Schedule C, Profit or Loss From Business, for business use of her hom e or for any deduction to which the sec. 274(d) strict substantiation requirem e nts apply.
[*3] Security Program (FSP), which she joined in Septem ber 1991. The FSP im posed a m andatory retirem ent age of 65 and provided that, upon her retirem ent, petitioner would be paid a m onthly distribution scaled to a percentage of the average of her three highest com m ission years during the five years before retirem ent.3
In 2008, two years before she reached the m andatory retirem ent age, petitioner established the Gayle Gaston Sole Proprietor Profit Sharing Plan (plan). The plan was drafted by Dennis Mehringer and defined the term “plan sponsor” to m ean “Gayle Gaston”. The plan does not identify a specific line of business to which the plan relates, and Mr. Mehringer testified that the plan was not created with respect to any particular trade or business of petitioner. The plan went into effect on January 1, 2008, for “Gayle Gaston, a California Sole Proprietorship (the ‘Plan Sponsor’)”.
In 2010 petitioner retired from Mary Kay, having reached the FSP’s m andatory retirem e nt age. In her career with Mary Kay petition er was highly successful; accordingly, her annual distributions under the FSP were $518,779 and $513,284 for 2013 and 2014, respectively.3
For m ore details on the operation of the FSP, which are not determ inative of this case, see Peterson v. Com m issioner, 827 F.3d 968, 970-980 (11th Cir. 2016), aff’g in part, dism issing in part T.C. Mem o. 2013-271.
[*4] After her retirem ent from Mary Kay, petitioner took up a num ber of non-Mary Kay activities. First, through a wholly owned S corporation, Gayle Gaston, Inc., petitioner began to sell jewelry to her form er Mary Kay associates. This activity rem ained sm all, with petitioner devoting little m ore than 10 hours per week to its progress. After the Mary Kay organization prohibited form er national sales directors from selling to the Mary Kay cosm e tics sales force, petitioner attem pted to sell her jewelry to the general public but spent very little tim e or effort doing so, and she ceased her jewelry sales activity shortly thereafter. Petitioner’s jewelry sales activity generated losses in each year at issue. Second, petitioner also explored whether she could begin a hair care products venture that would m anufacture certain hair care products in Peru and then im port them to the United States for sale. Petitioner did not produce a product for sale, never m oving beyond the stage of designing her requirem ents for a future product. With the exception of two trips in 2013 and 2014 to Lim a, Peru, which also included personal leisure, petitioner devoted only a few hours per week to this activity.44
Petitioner did not address her hair care activity in her opening brief; consequently, we deem petitioner to have waived any argum ent with respect to the activity. See Mendes v. Com m issioner, 121 T.C. 308, 312-313 (2003). Moreover, even if the hair care activity were still at issue, the record regarding this activity is devoid of any credible evidence that the activity ever went beyond the prelim inary planning stage or evolved into a business for profit.
[*5] In addition to these two activities petitioner also decided to start acting. Petitioner had a prior history in the entertainm ent business, having engaged in som e production activity in the 1980s. Petitioner also has fam ily connections to the entertainm ent industry: Her son was an actor in Japan and later a cinem atographer, and her daughter is (and was during the years at issue) one of the m ost successful actresses in Hollywood.
To further her acting activity petitioner retained an assistant, Josline Giragossian, who helped her identify casting opportunities and m anage her applications. Petitioner also engaged various casting services, retained an agent and a business m anagem ent com pany, secured professional headshots, advertised her skills, and took acting and voice lessons. Petitioner devoted significant tim e to this activity. Between the preparatory work, securing auditions, and acting in roles she secured, petitioner personally spent at least 40 hours per week on her acting activity. Petitioner worked hard at this activity, but she also enjoyed acting. Although petitioner did not generate a profit from the acting activity in the years at issue or in subsequent years, by 2011 she had secured her first film credit. In 2013 petitioner perform ed in at least one feature-length film . By 2019 petitioner had secured at least 10 film credits and various other roles in com m e rcials.
[*6] Upon receiving her distributions from the FSP in 2013 and 2014, petitioner contributed $51,000 from each year’s distribution to the retirem ent plan she had established in 2008. On each of her 2013 and 2014 incom e tax returns, petitioner reported the distribution from the FSP as incom e from a sole proprietorship on a Schedule C and claim ed a deduction for the contribution to her retirem ent plan. On each Schedule C petitioner also claim e d deductions for num erous expenses relating to her acting activity. Additionally, in each year petitioner claim ed passthrough loss deductions from her S corporation on Schedules E, Supplem ental Incom e and Loss, which were generated by her jewelry sales activity. Petitioner’s 2013 and 2014 returns were selected for exam ination. On Septem ber 12, 2017, respondent issued a notice of deficiency that disallowed petitioner’s claim e d acting activity expense deductions, her claim ed passthrough loss deductions from her jewelry activity, and her claim ed deductions for retirem ent contributions and determ ined incom e tax deficiencies, additions to tax, and penalties for petitioner’s tax years 2013 and 2014. On Decem ber 12, 2017, petitioner, while residing in California, tim ely petitioned this Court for redeterm ination of the deficiencies, additions to tax, and penalties.
[*7] OPINION I. Petitioner’s Acting Activity Petitioner reported $83,041 and $98,818 in Schedule C expenses on her 2013 and 2014 returns, respectively. Petitioner contends that these expenses relate to her acting career and are ordinary and necessary business expenses within the m eaning of section 162. Respondent disallowed deductions for these expenses on the basis that petitioner cannot show that she engaged in her acting activity to m a ke a profit. Petitioner does not allege, nor has she proven, that the burden of proof should shift to respondent pursuant to section 7491(a), and petitioner bears the burden of proof as to all issues rem aining in dispute. See Rule 142(a). Whether a taxpayer m ay deduct an expense of an activity as an ordinary and necessary business expense turns on whether: (1) the taxpayer can establish that she engaged in the activity as a trade or business; i.e., the taxpayer engaged in the activity with the “predom inant, prim ary or principal objective” of m a king a profit, Wolf v. Com m issioner, 4 F.3d 709, 713 (9th Cir. 1993), aff ’g T.C. Mem o. 1991-212, and (2) the taxpayer can substantiate the reported expense as an ordinary and necessary business expense, see sec. 183; Dreicer v. Com m issioner, 78 T.C. 642, 645 (1982), aff’d without published opinion, 702 F.2d 1205 (D.C. Cir. 1983); see also sec. 6001; sec. 1.6001-1(a), Incom e Tax Regs. Respondent has conceded [*8] that petitioner actually paid the reported expenses. We therefore m ust determ ine only whether the expenses petitioner paid were ordinary and necessary expenses of a business activity in which she engaged with the predom inant, prim ary, or principal objective of m aking a profit.
A. Petitioner Intended To Profit From Her Acting Activity.
In determ ining whether a taxpayer engaged in an activity with “the predom inant, prim ary or principal objective” of m a king a profit, we consider all the facts and circum stances. See Wolf v. Com m issioner, 4 F.3d at 713; see also sec. 1.183-2(b), Incom e Tax Regs. We pay particular attention to the factors set out in section 1.183-2(a) and (b), Incom e Tax Regs.: (1) the m anner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his advisors; (3) the taxpayer’s tim e and effort expended in carrying on the activity; (4) the expectation that assets used in the activity m ay appreciate in value; (5) the taxpayer’s success in carrying on other sim ilar or dissim ilar activities; (6) the taxpayer’s history of incom e or losses with respect to the activity; (7) the am ount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) the presence of personal pleasure or recreation. No one factor is controlling, and we consider the totality of the facts, giving greater weight to the objective evidence than to the taxpayer’s statem ents of intent. Overall, however, [*9] the critical question is the presence or absence of the taxpayer’s intent to profit from the activity, not necessarily the taxpayer’s actual success in that regard. An objectively “reasonable expectation of profit is not required”. Dreicer v. Com m issioner, 78 T.C. at 645. We require only that the taxpayer engage in the activity with the prim ary purpose of m aking a profit. Wolf v. Com m issioner, 4 F.3d at 713.
Petitioner argues that she was engaged in the business of acting in com m ercials and film s. In support of her claim that she engaged in this activity for profit, petitioner testified that she decided to take up acting to help supplem ent her incom e after retiring from Mary Kay. Specifically, because her FSP paym ent would be less than her com pensation while actively working for Mary Kay, she wanted to have an acting career to fill the gap between her pre- and post-retirem ent incom e . Petitioner alleges that she approached the developm ent of her career in a businesslike way by retaining an assistant and a casting agency to help her identify and apply for auditions for roles. Finally, petitioner asserts that, while she did not generate significant revenue during the tax years at issue, in m ore recent years she has secured several film roles on the basis of her early efforts to establish herself during the years at issue.
[*10] Acting is a difficult career, with a high risk of failure but a rare and lucrative possibility of success. In our prior opinions discussing the profession we have noted that the industry is “highly speculative”, “high risk”, and “arduous”. Green v. Com m issioner, T.C. Mem o. 1989-599, 58 T.C.M. (CCH) 606, 608 (1989); Isenberg v. Com m issioner, T.C. Mem o. 1987-269, 53 T.C.M. (CCH) 946, 955 (1987); Vandenhoff v. Com m issioner, T.C. Mem o. 1987-116, 53 T.C.M. (CCH) 271, 277 (1987). This industry often requires its participants to m aintain a passion for the work because, without such a passion, a taxpayer likely “would not devote * * * [the necessary] tim e to its pursuit.” Green v. Com m issioner, 58 T.C.M. (CCH) at 608. Accordingly, that an individual enjoys acting will not foreclose a finding that the taxpayer also intended to profit from it. See id. (“[S] uffering has never been m ade a prerequisite to deductibility.” (quoting Jackson v. Com m issioner, 59 T.C. 312, 317 (1972))). When analyzing whether particular taxpayers have proven that they entered into acting activities with an intent to profit, we have considered such industry-specific factors as whether they: (1) belong to an acting network or union, (2) take classes or otherwise form ally develop their skills, (3) develop industry contacts, (4) seek or secure m ultiple auditions or roles, (5) advertise their services, (6) prepare headshots or a portfolio, (7) retain an agency or assistant to help secure roles, and (8) m aintain their efforts [*11] over tim e, given the nature of the industry. See Richards v. Com m issioner, T.C. Mem o. 1999-163, 77 T.C.M. (CCH) 2006, 2013 (1999); Green v.
Com m issioner, 58 T.C.M. (CCH) at 608; Regan v. Com m issioner, T.C. Mem o. 1979-340, 38 T.C.M. (CCH) 1330, 1332-1333 (1979).
In the light of these factors and those listed in section 1.183-2(b), Incom e Tax Regs., we conclude that petitioner intended to profit from her acting activity and that her intent to m ake a profit from acting was her principal objective. To start, petitioner secured roles in feature-length film s, including one during the years at issue. She testified credibly that she spent approxim ately 35 to 45 hours per week researching, applying, and auditioning for roles. She studied and trained to enhance her skills through acting and voice lessons, evincing her desire to increase her m arketability. She also m aintained subscriptions to various casting services, whereby her portfolio and headshots would be presented to industry casting directors. To assist her in securing roles, she retained an assistant and an agent to research and subm it her m aterials for opportunities to audition. Taken together, these actions indicate that petitioner carried on her affairs in a businesslike m anner, with substantial investm ent of tim e and effort, and that her activities in the years at issue increased her acting opportunities in later years.
[*12] Respondent’s argum ents to the contrary are unconvincing. Respondent argues that if petitioner truly had a profit m otive she could have secured far m ore bookings than she did sim ply by consulting with her daughter, one of the m ost successful actresses in Hollywood. Moreover, respondent contends that because her daughter is a successful actress, petitioner gained substantial enjoym e nt from working in the sam e industry and therefore could not have had a bona fide intent to m ake a profit. Finally, respondent notes that petitioner has never generated a profit from her acting activity, and so, respondent contends, she could not have engaged in the activity with an intent to profit.
We see no reason to require petitioner to bootstrap her daughter’s successes to secure her own. While consulting with experts in a given industry is one indication of a profit m otive, see sec. 1.183-2(b)(2), Incom e Tax Regs., petitioner’s desire to not involve her daughter in her career is understandable. Moreover, petitioner separately retained an agency to assist her in securing roles. Although it m ay be true that petitioner enjoyed acting and that she enjoyed working in the sam e industry as her daughter, we do not agree that this requires a finding that petitioner did not also intend to profit from her work. See Jackson v. Com m issioner, 59 T.C. at 317 (“Success in business is largely obtained by [*13] pleasurable interest therein.” (quoting Wilson v. Eisner, 282 F. 38, 42 (2d Cir. 1922))).
Finally, it is true that petitioner’s acting activity did not generate a profit during the years at issue or in later years. The acting activity generated a loss for each year that petitioner used to offset substantial incom e for each year at issue and for later years. While a history of losses is one factor that we consider in determ ining whether the taxpayer had the principal objective of m aking a profit from an activity, the presence or absence of profits is not determ inative. Petitioner need only show that m aking a profit from her acting activity was her principal objective in conducting that activity, and on this record, after considering all of the relevant factors, we conclude that she has done so and thus was engaged in the trade or business of acting during the years in issue.
B. Petitioner Has Not Substantiated All Reported Acting Activity Expenses.
We now turn to an analysis of whether petitioner has substantiated her reported expenses. Although we have found that petitioner engaged in her acting activity during the years at issue prim a rily to m ake a profit, her acting activity does not entitle her to deduct every expense she paid in the ordinary course of a work day.
[*14] Deductions are a m atter of legislative grace and a taxpayer m ust provide adequate substantiation to prove entitlem e nt to a deduction for a particular expense. INDOPCO, Inc. v. Com m issioner, 503 U.S. 79, 84 (1992). Section 162(a) perm its a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. A taxpayer is required to m aintain records sufficient to substantiate the item s underlying the deductions claim ed on the taxpayer’s return. See sec. 6001. If a taxpayer proves that she is entitled to som e deduction but cannot substantiate the full am ount claim ed, generally the Court m ay estim ate the am ount of the allowable expense deduction to the best of its ability, “bearing heavily * * * upon the taxpayer whose inexactitude is of * * * [her] own m aking.” Cohan v. Com m issioner, 39 F.2d 540, 544 (2d Cir. 1930) (Cohan rule). For the Court to estim ate the am ount of an expense, there m ust be a reasonable basis in the record to support that estim ate. Vanicek v. Com m issioner, 85 T.C. 731, 742-743 (1985).
The Cohan rule, however, does not apply to certain expenses delineated in section 274(d). See sec. 1.274-5T(a), Tem porary Incom e Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). For those expenses (e.g., expenses relating to travel, m eals and entertainm ent, gifts, or other “listed property” as defined in section 280F(d)(4)), a taxpayer m ust m eet the strict substantiation requirem ents set out in [*15] section 274. To satisf y the strict substantiation requirem ents, a taxpayer m ust introduce sufficient evidence to corroborate (1) the am ount of the expense or other item ; (2) the tim e and place of travel, entertainm ent, or use of the property; (3) the business purpose of the expense or other item ; and (4) the business relationship of the taxpayer to the persons entertained or using the property. See sec. 274(d). With respect to the use of listed property, the taxpayer m ust establish the am ount of business use and the am ount of total use. Sec. 1.274-5T(b)(6)(i), Tem porary Incom e Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Respondent has conceded that petitioner actually paid m ost of the expenses reported on her Schedule C for both tax years. Respondent disputes, however, that petitioner has proven that any of the reported expenses were ordinary and necessary expenses relating to her acting business. In her posttrial brief, petitioner conceded that she cannot m eet the strict substantiation requirem ents im posed by section 274 as they apply to any relevant reported expense. We therefore m ust exam ine the record to see whether petitioner has proved she is entitled to deduct any reported expense not subject to section 274, bearing in m ind the Cohan rule. Petitioner claim ed deductions for m yriad expenses, including som e that appear inherently connected with a career in acting and others that, absent specific proof, appear to be nondeductible personal expenses. For the sake of brevity, as to [*16] a ny reported expense that is not discussed specifically below, we conclude that petitioner has failed to carry her burden of proving that the expense was an ordinary and necessary expense of her acting activity business.
i. Expenses Inherently Connected With Acting As just noted, petitioner has reported som e expenses that on their face appear inherently connected with her acting activity.
One type of expense in this category is photography. Headshots and various other photography projects are a necessary elem ent of any actor’s portfolio, and we have recognized that such expenses are indicative of an intent to profit from acting. See Richards v. Com m issioner, 77 T.C.M. (CCH) at 2014 (“Expenses for * * * agent fees, photo session[s] , and duplicate photos are all ordinary and necessary expenses of an actress-m odel activity.”). Respondent disallowed petitioner’s reported photography expenses on the basis that she was not engaged in a trade or business. Because we found that she was engaged in the business of acting, we further conclude that the reported photography expenses were inherently connected with that business. Accordingly, we allow the reported photography expense deductions.55
Specifically, these are as follows: for tax year 2013, $140 paid to Better Photos, $153 to Hollywood Retouching, and $250 to an unidentified photographer (continued...)
[*17] Sim ilarly, we have concluded that fees paid to a casting agency are ordinary and necessary expenses for an actor. Id. For the sam e reasons just stated with respect to the photography expenses, we conclude that the am ounts petitioner paid to retain a casting agency are inherently connected with her acting activity. Accordingly, we allow those am ounts.6
Finally, another expense we have found to be ordinary and necessary for an actor is the cost of enhancing the individual’s acting skills. See Green v. Com m issioner 58 T.C.M. (CCH) at 608 (“[The taxpayer] continually hones and refines his skills.”). Petitioner retained the services of two individuals, John Deaver and Linda Valentino, to give her voice and dance lessons, and paid them $1,150 and $350, respectively, during 2013. We conclude that petitioner took these classes to enhance her range as an actor, and accordingly, we allow deductions for these am ounts.5
(...continued)
stipulated by the parties; and for tax year 2014, $292 to Sam m y’s Cam era.6 Specifically, we allow petitioner’s reported expense of $1,678 paid to casting agencies for 2013.
[*18] ii. Other Expenses a. Assistant Expenses Petitioner reported expenses of $28,219 and $29,565 on her Schedules C as com pensation to her personal assistant, Ms. Giragossian, for tax years 2013 and 2014, respectively. The parties have stipulated these am ounts and that they were in fact paid to Ms. Giragossian. As with the other expenses reported on petitioner’s Schedules C, respondent disallowed deductions for these am ounts on the basis that she was not engaged in a trade or business.
Because we have rejected respondent’s argum ent that petitioner was not engaged in a trade or business, we turn to petitioner’s contention that the full am ounts paid to Ms. Giragossian are ordinary and necessary business expenses. While we accept the parties’ stipulation as to the fact and am ounts of paym ents to Ms. Giragossian, this is not enough--on its own--to entitle petitioner to a deduction for the entirety of each of those am ounts. Petitioner m ust also prove the connection with her acting activity.
At trial petitioner credibly testified that Ms. Giragossian assisted her with her acting business during the years at issue. But petitioner also credibly testified that Ms. Giragossian assisted her with her jewelry sales activity and the potential hair care venture. As discussed below, we conclude that neither of those activities [*19] w as a trade or business. Accordingly, the tim e Ms. Giragossian spent on those m atters was spent on petitioner’s personal hobbies, and we m ust reasonably account for the tim e spent on nondeductible personal activities. Consequently, we cannot and do not allow petitioner to deduct the full am ount paid to Ms. Giragossian for either year as a business expense relating to her acting activity. Rather, because we believe that petitioner is entitled to som e deduction for the am ounts paid to her assistant, we apply the Cohan rule to approxim ate, as best we can with an eye toward petitioner’s own inexactitude, the appropriate deduction for each year. We find petitioner’s testim ony regarding Ms. Giragossian’s activities credible. We also find petitioner’s testim ony regarding the num ber of hours she spent each week on her acting business and other various activities to be credible. We therefore conclude that we have a reasonable basis to m ake a Cohan rule approxim ation because that testim ony provided a discernible--if im precise--allocation of Ms. Giragossian’s activities. See Vanicek v. Com m issioner, 85 T.C. at 742-743. Specifically, petitioner spent roughly 40 hours per week on her acting business, as well as 10 hours on her jewelry sales activity and fewer on her hair care products activity. We think it is reasonable to infer that her assistant’s tim e allocation tracked petitioner’s own, with tim e spent on actions relating to [*20] petitioner’s acting bus iness representing approxim ately 75% of her work.7 Accordingly, we find it reasonable to allocate the com pensation proportionately. We therefore allow as a deduction 75% of the com pensation claim ed for each year, and we disallow 25%.
b. Professional Service Expenses Petitioner reported professional service expenses relating to her acting business for each year at issue. Specifically, for tax year 2013 petitioner reported $440 in legal expenses, $235 in accounting expenses, and $1,325 in fees to a business m anagem ent com pany, and for tax year 2014 she reported $420 in legal expenses and $9,645 in fees to a business m anagem ent com pany. Respondent disallowed deductions for all reported expenses. We conclude that som e, but not all, of the reported professional services expenses are connected with petitioner’s acting activity, and therefore are properly deductible.
As with the reported assistant expenses, petitioner argues that the m ere fact that she engaged in acting as a business requires that all these reported expenses are properly deductible. Yet, petitioner m ust also prove the connection between7 To reach this num ber, we credit petitioner with working 40 hours per week on her acting business, 10 hours per week on her jewelry sales activity, and 3 hours per week on her hair care products activity. Reduced to a fraction, her acting business therefore represented 75.47% of her total activities.
[*21] the am ounts paid and her acting business. As with the assistant expenses, we agree that petitioner ran an acting business and paid som e am ounts of adm inistrative and professional expenses that are typical of any business. Accordingly, we again turn to the Cohan rule.
We start with her reported legal expenses. Petitioner testified that these expenses were paid for the drafting of m anagem ent contracts and to collect on a loan she issued to an individual to produce a film project. Petitioner further testified that the m a nagem ent contracts were related to the m anagem ent of a singer but offered little detail regarding petitioner’s alleged m anagem e nt activities. While these expenses appear to be tangential to her acting business, there is insufficient evidence in the record to firm ly establish a connection between these expenses and her acting business. Accordingly, we sustain respondent’s disallowance of these deductions.
We next address the accounting expenses that petitioner deducted on her 2013 Schedule C. Petitioner testified that the expenses related to “a black operative investigation” against her and that she paid the disputed am ount to have a consultant exam ine her com puter. While we appreciate that the world of espionage has provided fruitful ground for generations of actors and film m akers, we fail to see how the reported expense is connected with petitioner’s acting [*22] business. Accordingly , we sustain respondent’s disallowance of these expense deductions.
By contrast, there is sufficient evidence in the record to conclude that som e portion of petitioner’s expenses relating to her business m anagem ent com pany was connected to her acting business. Petitioner credibly testified that these expenses were paid to a com pany that paid her business’ bills, handled its bookkeeping, assisted in preparation of her tax returns, and other adm inistrative expenses that ordinarily arise in the course of any business. Moreover, petitioner’s business m anager also testified at trial about the nature and scope of her work, confirm ing petitioner’s own testim ony. Specifically, her business m anager credibly testified that she helped m anage expenses and accounting for three types of activities: petitioner’s acting business, her jewelry sales activity, and her hair care products activity. Just as we allocated the am ounts paid to petitioner’s assistant, we conclude that the am ounts paid to petitioner’s business m anager should also be allocated am ong the three activities in proportion to the tim e that petitioner and her business m anager presum ably spent on them . Accordingly, we allocate the am ounts paid to petitioner’s business m anagem ent com pany, Klein Mendelblatt, in the sam e proportion, allowing 75% of the reported expense deductions and disallowing the rem aining 25%.
[*23] II. Petitioner’s Jewelry Sales Activity In contrast to her acting activities petitioner has not proven that she engaged in her jewelry sales activity for profit. Accordingly, we sustain respondent’s determ ination disallowing the passthrough loss deductions from those activities claim ed on petitioner’s 2013 and 2014 Schedules E.
Petitioner deducted the expenses of her jewelry sales activity on S corporation returns for 2013 and 2014 and claim e d the resulting loss deductions on Schedules E of her individual incom e tax returns. Although section 183 applies at the corporate level with respect to the activities of an S corporation, sec. 1.183-1(f), Incom e Tax Regs., we exam ine the intent of petitioner, the S corporation’s sole shareholder, in deciding whether the S corporation had the requisite profit objective, see, e.g., Baldwin v. Com m issioner, T.C. Mem o. 2002-162, 83 T.C.M. (CCH) 1915, 1926-1927 (2002).
As noted above, in analyzing whether a taxpayer engages in an activity for profit we consider the totality of the circum stances surrounding that activity, with particular regard for the factors set forth in section 1.183-2(b), Incom e Tax Regs. The record does not indicate that petitioner carried on her jewelry sales activity in a businesslike m a nner or did anything m eaningful to elevate this activity to a business capable of generating a profit. Rather, the record indicates that [*24] petitioner’s jewelry sales activity was a haphazard, interm ittent affair. Petitioner testified that she spent only 10 hours per week on the activity. This is in stark contrast to her testim ony regarding the tim e she spent on her acting business, which com m anded 35 to 45 hours per week. Moreover, there is no indication that petitioner sought out expertise in the jewelry industry. Finally, we find it of particular note that even the interm ittent sales petitioner m a de were to form er associates from her Mary Kay career. Petitioner did not m ake a sustained effort to sell to the general public outside this network and ceased her jewelry sales activity when she could no longer sell to her form er Mary Kay associates. On this record, we conclude that petitioner did not operate her jewelry sales activity with the prim ary purpose of m a king a profit. Accordingly, we sustain respo ndent’s determ ination disallowing the passthrough loss deductions from the jewelry sales activity that petitioner claim ed on her Schedules E.
III. Retirem ent Contributions
Petitioner claim ed deductions of $51,000 for each year at issue for contributions m ade to her purported retirem ent plan from the FSP paym ents she received. Respondent disallowed the claim ed deductions on the basis that petitioner was retired and not engaged in any trade or business, Mary Kay-related or otherwise. Respondent further contends that no deduction is allowed because [*25] petitioner had no “earn ed incom e” within the m eaning of section 401(c)(2)(A).
Petitioner concedes that the revenues reported on her Schedules C as incom e from her trade or business actually represented paym ents from the Mary Kay FSP. Petitioner, accordingly, acknowledges that these revenues do not relate to the expenses reported on the Schedules C for petitioner’s acting business. Petitioner contends, however, that these revenues are not m erely retirem ent incom e that should have been reported as such. Rather, petitioner contends that these paym ents represented self-em ploym ent incom e subject to self-em ploym ent taxes. In support, petitioner cites our opinion in Peterson v. Com m issioner, T.C. Mem o. 2013-271, aff’d in part, dism issed in part, 827 F.3d 968 (11th Cir. 2016), where this Court held that FSP paym ents to a Mary Kay NSD were subject to self-em ploym ent taxes because they were self-em ploym ent incom e within the m eaning of section 1402(a) and (b). Building on this holding, petitioner argues that because this Court has held that FSP paym ents are taxable self-em ploym e nt incom e within the m eaning of section 1402(a) and (b), they m ust also be “earned incom e ” within the m eaning of sections 401(c)(2)(A) and 404(a)(8)(B). As a result, petitioner argues, the contributions she m ade from the FSP paym ents to her profit-sharing plan are deductible under sections 401 and 404.
[*26] Section 404(a) allows an em ployer to deduct certain contributions to deferred com pensation plans that are paid or accrued on account of an em ployee. With respect to self-em ployed individuals, section 404(a)(8)(C) pro vides that contributions to a plan are deductible “to the extent that such contributions do not exceed the earned incom e of such individual * * * derived from the trade or business with respect to which such plan is established”. Section 404(a)(8)(B) provides that “earned incom e” has the m eaning assigned by section 401(c)(2), which, in turn, provides that “earned incom e” m eans the net earnings from self-em ploym ent as defined by section 1402. However, for purposes of section 401(c), such net earnings are determ ined only with respect to a trade or business in which the personal services of the taxpayer are a m aterial incom e-producing factor. Sec. 401(c)(2)(A)(i).
Petitioner’s argum e nt rests on the prem ise that, because FSP paym ents are subject to self-em ploym ent taxes under section 1402, they m ust also qualify as “earned incom e” within the m eaning of sections 401 and 404. Although petitioner relies on Peterson v. Com m issioner, T.C. Mem o. 2013-271, for the proposition that her FSP paym ents were earned incom e subject to self-em ploym ent under section 1402, petitioner acknowledges on brief that “the Peterson case did not reach the question presented in this case”: whether FSP paym ents m ay be used to fund [*27] deductible contributio ns under sections 401 and 404 to a qualified retirem ent plan. Respondent’s argum ent is that because petitioner, in his view, was not engaged in any trade or business in the years at issue, there is no em ployer entitled to m ake contributions under section 401. Additionally, respondent contends that petitioner’s FSP paym ents are not “earned incom e ” within the m eaning of section 401(c)(2) because petitioner did not render any personal services to Mary Kay in the years at issue, even though personal services she rendered in prior years are undoubtedly a m aterial incom e-producing factor.
Whether petitioner’s FSP paym ents are “earned incom e” within the m eaning of sections 401 and 404 is only the second of two hurdles presented by section 404(a)(8)(C) that petitioner m ust clear in order for her contributions to the plan to be deductible. The first is that contributions are deductible only to the extent that they do not exceed the “earned incom e * * * derived from the trade or business with respect to which * * * [the] plan is established”. Sec. 404(a)(8)(C) (em phasis added). Petitioner has not shown that the plan was established with respect to her Mary Kay business, which is the undisputed source of the incom e at issue. The plan docum ent does not identify to which trade or business petitioner’s plan relates, and Mr. Mehringer credibly testified that the plan was not created with respect to any specific trade or business. Whether petitioner’s FSP incom e is [*28] “earned incom e” within the m eaning of sections 401 and 404 is a question we need not reach because petitioner has not proven that the plan was established with respect to her form er Mary Kay activity.
We conclude that petitioner m ay not deduct the contributions that she m ade to her allegedly qualified plan because she has not proven that the incom e contributed was derived from a trade or business with respect to which the plan was established. The only trade or business in which P engaged in during the years at issue was acting, which generated no taxable incom e. We therefore sustain respondent’s disallowance of her claim ed retirem ent contribution deductions. Decision will be entered under Rule 155.