Topics: Tax, Internal Revenue Service, Taxation in the United States Pages: 12 (3496 words) Published: May 20, 2013
T.C. Memo. 2009-93



Docket No. 30077-07.

Filed April 30, 2009.

P alleges that during tax year 2004 he had a real estate investment and rental business. P deducted expenses associated with this activity as business expenses under I.R.C. sec. 162. R disallowed the business expense deductions. On the basis of this disallowance, R determined a deficiency in P’s Federal income tax for 2004. P petitioned this Court for redetermination of that deficiency. Held: P was not actively engaged in a real estate investment and rental business when he incurred and paid the expenses he deducted as Schedule C business expenses in 2004. Therefore, the costs P deducted are pre-operational start-up expenditures and may not be deducted as business expenses under I.R.C. sec. 162.

- 2 Bruce E. Gardner, for petitioner. Scott L. Little, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION GUSTAFSON, Judge: This case is before the Court on petitioner Thomas J. Woody’s petition for redetermination of his Federal income tax deficiency for 2004 which the Internal Revenue Service (IRS) determined to be $4,955. The issue for decision is

whether Mr. Woody is entitled under section 1621 to deductions claimed on his 2004 Schedule C, Profit or Loss From Business. As

a threshold matter, we must decide whether Mr. Woody was actively engaged in the trade or business of real estate investment and rental at the time he incurred and paid the expenses that he reported as business expenses. We find that he was not.

FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts filed October 16, 2008, and the attached exhibits are incorporated herein by this reference. At the time

Mr. Woody filed his petition, he resided in Washington, D.C. On or about February 15, 2004, Mr. Woody started investigating the real estate market so he could acquire real

Unless otherwise indicated, all citations to sections refer to the Internal Revenue Code of 1986 (26 U.S.C.), as amended, and all citations to Rules refer to the Tax Court Rules of Practice and Procedure.


- 3 estate for investment or rental. Throughout 2004 Mr. Woody

looked at many properties he was interested in buying for this real estate investment and rental business. He made multiple

offers to purchase properties but was out-bid on most of his offers. In May 2004 Mr. Woody entered into a contract to

purchase a property on Bradley Avenue in Camden, New Jersey. However, after a home inspection revealed many defects in the property, Mr. Woody canceled the contract because the seller was not willing to make the needed repairs. Mr. Woody did not purchase any investment or rental property until he purchased the property on Randolph Street in Camden, New Jersey, on December 30, 2004, i.e., the next to last day of the year at issue. At that time, there was no tenant in the

property, and he did not secure a tenant until sometime after 2004. Furthermore, there is nothing in the record to indicate

that Mr. Woody held the property out for rent in 2004. Throughout 2004 Mr. Woody performed many other tasks in conjunction with his alleged business. He created a name for his

endeavor–-Value Property Investments–-and began marketing his services via business cards, flyers, and word of mouth. 2004 Mr. Woody completed a business outline with “buying, remodeling, and renting property” being the stated purpose of Value Property Investments. On October 17, 2004, Mr. Woody paid In May

$21,490 to the Wealth Intelligence Academy for certain training

- 4 classes, which he subsequently attended to acquire real estate investment skills. After Mr. Woody took the Wealth Intelligence

Academy courses, his business plan shifted from merely buying, remodeling, and renting to also include what Mr. Woody referred to as “flipping” or...
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