Facts:

The accounting firm where you work has recently obtained a new client, Ms. Unda Cheever. Your supervisor has assigned you to prepare her tax return for the current year.

Unda is a sculptor living in the Indianapolis area who has spent many years perfecting her craft. She is a graduate of the Crayola School of Art and frequently displays her works in both local and national exhibitions. Her self-described genre is neon-contemporary and her creations consist mainly of fluorescent Play-Doh works. Throughout the art world, she is nationally recognized: the prestigious Journal of the Elite has featured her work twice and Pretentious Quarterly has rated her as one of the top ten sculptors in the country. Critics also have praised her talents. In a recent interview, noted art expert Clive Highbrow called her work "a haunting and extraordinary reminder of simplistic virtues."

Despite Unda' growing recognition, her works have not experienced commercial success. For each of the past ten years, her tax returns have reported increasing losses from her activities as a sculptor. Undaunted by these losses, Unda nonetheless has continued to actively promote her sculpture for commercial purposes. She frequently exhibits her works in commercial galleries alongside such financially successful artists as Andy Warhalt, Jasper Johnson, and William Whyme. She also displays her creations in invitational one-person exhibitions at national museums.

Unda creates her artwork in a separate studio she rents for this activity. She works at her craft for six hours most weekdays. She maintains separate bank accounts for her business, and her financial records are meticulous.

Prior to the death of her uncle nine years ago, Unda financed her sculpturing activities with the small income she earned as an art instructor at the University of Indianapolis. After her uncle's death, however, her financial situation improved markedly. As one of ten beneficiaries of The Oliver Worthmore Trust, she began receiving annual distributions which more than adequately allowed her to devote full-time to her art.

Undas records this year for her artwork business indicate $25,000 of gross income and $60,000 of deductions, or a loss of $35,000.

Assignment:

Your task is to decide whether Unda can deduct the loss from her artwork business on this years tax return, and write a file memorandum to your supervisor to convince her that your conclusion is proper.