IRS: Thomas J. Woody v. Commissioner of Internal Revenue - The petitioner, Mr. Woody, deducted on his 2004 income tax return various expenses he incurred in connection with certain real property he owned. The IRS audited Mr. Woody’s tax return and disallowed the deductions on the grounds that he had not yet begun his real estate rental business. The IRS claimed that the expenses should have been capitalized and amortized as start-up expenses under §195. Judge David Gustafson cited controlling law, a taxpayer is not carrying on a trade or business under section 162(a) until the business is functioning as a going concern and performing the activities for which it was organized. Glotov v. Commissioner, TC Memo 2007-147.
Thus, the issue for the Court was whether or not Mr. Woody was engaged in the business of real estate rentals at the time he incurred the expenses. In Mr. Woody’s business outline, dated May 10, 2004, he indicated that he was starting Value Property Investments “for the purpose of buying, remodeling and renting property. Therefore, until Mr. Woody began to buy, remodel, or rent–i.e., to perform the activities for which Value Property Investments was organized–he was not carrying on a trade or business as contemplated by section 162.
The Court agreed with the IRS and the deductions were disallowed, Mr. Woody’s activities in 2004 were, at most, start-up activities, because he had not yet commenced the activities for which Value Property Investments was organized, i.e., buying, selling, renting, or offering to rent property, or even “flipping” or “wholesaling”.
Planning Tip: If you are starting a new business, defer the payment of as much of your expenses as possible until after you have actually begun the regular operations of the business. By doing this you will make the expenditures deductible in full in the year in which they were paid.
Thus, the issue for the Court was whether or not Mr. Woody was engaged in the business of real estate rentals at the time he incurred the expenses. In Mr. Woody’s business outline, dated May 10, 2004, he indicated that he was starting Value Property Investments “for the purpose of buying, remodeling and renting property. Therefore, until Mr. Woody began to buy, remodel, or rent–i.e., to perform the activities for which Value Property Investments was organized–he was not carrying on a trade or business as contemplated by section 162.
The Court agreed with the IRS and the deductions were disallowed, Mr. Woody’s activities in 2004 were, at most, start-up activities, because he had not yet commenced the activities for which Value Property Investments was organized, i.e., buying, selling, renting, or offering to rent property, or even “flipping” or “wholesaling”.
Planning Tip: If you are starting a new business, defer the payment of as much of your expenses as possible until after you have actually begun the regular operations of the business. By doing this you will make the expenditures deductible in full in the year in which they were paid.
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