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On the 1994 and 1995 Schedules C, Profit or Loss From
Business, petitioner identified his principal business or
profession as musician, and listed his business name as "Positive
Reaction". For 1994 and 1995, petitioner reported $600 and zero
in gross income, $4,286 and $6,925 in expenses, and a net loss of
$3,686 and $6,925, respectively.
On the 1994 Schedule C for Shaklee Sales, petitioner claimed
$3,018 in expenses for supplies and a net loss for that business
of $10,663.
In the notices of deficiency, respondent determined that
petitioner's activity as a musician was not an activity engaged
in for profit under section 183 for both years, allowed $600 of
expenses up to the amount of income as a Schedule A deduction for
1994, disallowed the $3,018 in expenses for supplies claimed in
1994 because it had not been established that they were ordinary
and necessary business expenses, made automatic adjustments, and
imposed accuracy-related penalties for both years.
Deductions are a matter of legislative grace. New Colonial
Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Generally,
section 183(a) disallows any deductions attributable to
activities not engaged in for profit except as provided under
section 183(b). An activity not engaged in for profit means any
activity other than one with respect to which deductions are
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