Individual income Taxes Tax research Tax Research I. FACTS 6-4 Walter Hodges wanted to begin to invest in the field of real estate. In spring 2009,he completed a plan for his business. During this time, he also attended a skill-improved class by paying $25,000. On December 30,2009, he purchased the property which is rented on March 2010. On his form of 1040 for 2009,he asked for a deduction of $29,000. But unfortunately, IRS declined the requisition of deduction for the reason that he wasn’t in a trade of business in 2009. e received the license for the business on November. II. ISSUES The issue for decision is whether IRS should allow the deduction of $29,000 which include the cost of the training classes, automobile expenses, meals and entertainment, computer and software expenses, and supplies. III. CONCLUSIONS With reference to §162(a) , § 195and precedent tax cases, we reach the final conclusion that the $29,000should not be deducted, though Walter Hodges began investing in the real estate market and had a completed plan in early 2009,he was not activated trade or business during 2009.
IV. RATIONALE Section162 generally allows” a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Such expenses must be directly connected with or pertain to the taxpayer’s trade or business that is functioning as a business at the time the expenses were incurred. “According to sec162, a tax payer is not carrying on a trade or business until the business is functioning as a going concern and performing the activities for which it was organized. n the case, Mr. Walter Hodges was active in his trade on March, 2010. So the expenses incurred in 2009 didn’t satisfy the requirements of section162. Taxpayer isn’t entitled to business deduction for expense associated with his real investment and rental business incurred and paid during year that he purchased rental property on next-to-last day of year. Although substantiated, expenses failed to qualify as business expenses where testimony showed that taxpayer wasn’t actively carrying on trade or business at time they were incurred.
So in 2009,IRS didn’t allow the money Mr. , Walter Hodges spends for the property included in the business deductions. Notably, “mere purchase of property was insufficient to show existence of trade or business during subject year where property wasn’t held out for rent until the following year, and, in any event, all disputed expenses, including expenditure for workshops and training, were before purchase date and thus by definition were pre-operational startup expenses” . In 2009 Mr.
Walter Hodges spent in the classes designed to provide real estate investment skills, which was before the purchase date of the property, and the property which was purchased on the 31,December, 2009 and listed on the account in 2010 wasn’t successfully rented out until March, 2010. So he can just calculate the expenses as pre-operational startup expenses. The startup expenses may be deducted only over time under Section195(c)(1)(A)(iii). I refer to the case WOODY v. COMM,the court declines Mr.
WOODY’s requisition. And in Mr. Walter Hodges’ case, all the expense incurred from January 1 through December 30,2009 would be start-up expenses which are considered by section 195. since all the expenses at issue in the case were incurred in 2009,they wouldn’t be deductible for 2009 under section162 because their timing makes them subject to the provisions of section 195,and section 1095 start-up expenditures are not deductible under section 162. As mentioned above, Mr.
Walter Hodges wasn’t in active trade during 2009,the cost is just start-up expenses, and so IRS disallowed the $29,000 deductions. ——————————————– [ 1 ]. Section 162(a) permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business [ 2 ]. Thomas J. Woody v. Commissioner, TC memo2009-93 [ 3 ]. Code Sec. 162 [ 4 ]. Code sec 165 the expenses incurred before the day on which the active trade or business begins. [ 5 ]. Cite as 108 AFTR 2d 2011-5367,12/16/2010