Sharon is single and a data-processing manager for the phone company. She also owns and operates a sports memorabilia store. Sharon goes to shows, subscribes to numerous magazines on sports memorabilia, and maintains a Web page on the Internet. She has been engaged in the activity for the last 5 years. During that time, she reported a net loss in two of the years and net income in the other three. Overall, her sports memorabilia activity has shown a slight loss, but the value of her collection over the 5 years has increased by 20%. Sharon rents a 600-square-foot storefront for $500 a month. Although the store is open only on Saturdays, she is usually in her office at the store 2 or 3 nights a week buying and selling sports memorabilia on the Internet. For the current year, she has an adjusted gross income of $42,000 before considering the following income and expenses related to her sports memorabilia activity:

Sale of memorabilia ........ $11,500

Cost of items sold ........... 3,725

Cost of new memorabilia acquired ... 1,500

Registration and booth fees ....... 750

Transportation to memorabilia shows .... 600

Meals attending shows .......... 250

Cost of magazines ........... 280

Cost of Internet connection ....... 240

Office utilities ............. 800

Phone ................. 400

Depreciation on computer ......... 200

a. What is the proper tax treatment of these items if Sharon is engaged in a trade or business?

b. What is the proper tax treatment of these items if she is engaged in a hobby?

c. What factors (e.g., facts, aspects) of Sharon’s sports memorabilia activity indicate that it is a hobby? a trade or business?