## Facts

- Ralph Louis Vitale, Jr. was a taxpayer who pursued fiction writing, including a novel focused on legal prostitution in Nevada.
- For tax years 1993 and 1994, he reported his writing activity on Schedule C as a trade or business and claimed deductions for research expenses.
- To research his book, he repeatedly visited legal Nevada brothels over roughly a year, averaging nearly three visits per month.
- He made detailed notes during these visits about the brothels’ rules, negotiations, dialogue, and the prostitutes’ characteristics, and he claimed the resulting payments and related costs as business research expenses.
- He completed a manuscript that became *Searchlight, Nevada* and entered an arrangement with a publisher requiring him to pay for publishing/marketing services.
- He received royalties in a later year before the publisher entered bankruptcy, after which he sought to recover unpaid royalties and continued efforts to market the book.
- The IRS issued notices of deficiency for 1993 and 1994, disallowing the brothel-related deductions and asserting accuracy-related penalties under I.R.C. § 6662(a).
- Vitale petitioned the Tax Court for redetermination.

## Issues

1. Whether Vitale’s writing activity was an activity engaged in for profit, constituting a trade or business for purposes of I.R.C. § 162 (and related § 183 analysis).
2. If so, whether payments to prostitutes and other brothel-related costs were deductible as ordinary and necessary business expenses under I.R.C. § 162(a), or nondeductible as personal expenses and/or on public policy grounds.
3. Whether accuracy-related penalties under I.R.C. § 6662(a) applied to the underpayments resulting from the disallowances.

## Decision

- The court found Vitale conducted his writing activity with a genuine profit objective and treated it as a trade or business.
- The court held the brothel-related expenditures (including payments to prostitutes) were nondeductible because they were so personal in nature that they could not qualify as business deductions.
- The court sustained the IRS’s disallowance of those deductions and determined resulting deficiencies for 1993 and 1994.
- The court addressed the asserted accuracy-related penalties under § 6662(a) in connection with the underpayments.

## Legal Principles

- A deduction under I.R.C. § 162(a) requires an expense that is ordinary and necessary, paid or incurred during the taxable year, and made in carrying on a trade or business.
- Whether an activity is engaged in for profit is determined by objective facts and circumstances commonly evaluated under § 183 factor analysis (including manner of operation, time and effort, expertise, marketing efforts, and income/loss history).
- Even if an expenditure has a claimed business purpose, it is not deductible if it is inherently personal in character.
- Deductions otherwise within § 162(a) may be denied where allowance would conflict with sharply defined public policy.

## Conclusion

The Tax Court concluded that Vitale’s writing constituted a for-profit trade or business, but it disallowed deductions for brothel and prostitute payments claimed as research because such expenditures were fundamentally personal and barred from deduction on personal-expense and public-policy grounds, resulting in sustained deficiencies for the years at issue.


Vitale v. Commissioner, T.C. Memo. 1999-131 (1999)