T.C. Summary Opinion 2004-64
UNITED STATES TAX COURT
RAYMOND J. DAVIS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4536-03S. Filed May 14, 2004.
Raymond J. Davis, pro se.
Jeremy L. McPherson, for respondent.
DEAN, Special Trial Judge: This case was heard under the
provisions of section 7463 of the Internal Revenue Code as in
effect at the time the petition was filed. Unless otherwise
indicated, all other section references are to the Internal
Revenue Code in effect for the years at issue. The decision to
be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
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Respondent determined deficiencies in petitioner's Federal
income taxes of $2,526 for 1999 and $3,819 for 2000. The issues
for decision are whether petitioner, for both years, properly
reported pension income and is entitled to claim trade or
business expense deductions. Respondent's adjustments to
petitioner's itemized deductions and the taxable amount of his
Social Security benefits are computational and will be determined
by the Court's resolution of the income and expense issues.
The stipulated facts and exhibits received into evidence are
incorporated herein by reference. At the time the petition in
this case was filed, petitioner resided in Sacramento,
California.
Background
There is no disagreement among the parties as to the facts
in this case, which are almost fully stipulated. Before his
retirement in 1990, petitioner was self-employed as an
independent insurance agent for the New York Life Insurance
Company (company). After a surgery, petitioner retired on
disability due to heart-related health problems. Upon his
retirement, the company transferred his clients to another
insurance agent and began paying pension distributions to
petitioner. There is no indication that there was any
understanding that he would return to his position as an agent
for the company.
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During 1999 and 2000, the company paid taxable pension
benefits to petitioner of $29,012.40 and $30,012.40,
respectively. The company issued to petitioner and the Internal
Revenue Service Forms 1099R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, Insurance
Contracts, etc.
For each of the years 1999 and 2000, petitioner attached a
Schedule C, Profit or Loss From Business, to his Federal income
tax return. On the 1999 schedule he describes his business or
profession as "LIFE INS SALES". The gross receipts that
petitioner reported on both Schedules C consisted of the pension
benefits paid to him by the company. Petitioner did not sell or
attempt to sell any insurance products during any part of 1999 or
2000.
Petitioner, however, did not remain idle during his
retirement. During the years at issue, petitioner maintained
contact with his former insurance clients, performing various
services such as assisting with changes to beneficiaries,
addresses, and income tax withholdings. Petitioner, however,
received no compensation for the services he performed. In
February of 2000 petitioner had another heart surgery and after a
year he found out that he would no longer be able to perform
services for his former clients.
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Upon examining petitioner's returns for the years in
contest, the Commissioner determined that petitioner's income was
reportable as pension income and not as Schedule C income.
Respondent also determined that because petitioner was not
engaged in a trade or business or an activity for the production
of income, he is not entitled to the deductions claimed on the
Schedules C.
Discussion
Because there is no factual dispute in this case, section
7491 is inapplicable.
Section 162 allows a deduction for certain expenses incurred
"in carrying on" a trade or business. During the years at issue,
petitioner was retired due to disability and not engaged in a
trade or business or an activity for profit. Petitioner received
only pension income; he did not receive any gross receipts or
sales amounts. But petitioner argues that he intended to reenter
the insurance business, at some point, and the expenses he
incurred are therefore deductible business expenses.
Petitioner's argument raises the issue of the "hiatus
principle", where the temporary cessation of a trade or business
does not preclude a determination that the taxpayer was "carrying
on" a trade or business during that period. See Haft v.
Commissioner, 40 T.C. 2, 6 (1963); Sherman v. Commissioner, T.C.
Memo. 1977-301 (and cases cited therein). Under the principle, a
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taxpayer must show that during the hiatus he intended to resume
the same trade or business. Gallo v. Commissioner, T.C. Memo.
1998-100.
Petitioner testified that upon his retirement he intended to
resume his insurance business as soon as he could. When
questioned as to his state of mind after the sixth, seventh or
eighth year of retirement, petitioner replied that he was still
too ill to return to work but was "hopeful" that he could return
eventually. In reply to the question as to his state of mind
after the 10th or 11th year of retirement, petitioner testified
that he still held out "hope", but he admitted that he "was
wondering about it".
The cases apply the hiatus principle to "temporary"
cessations of business. When, however, the cessation is
prolonged, with no continuing connection with the trade or
business or intent to actively carry on the trade or business,
the taxpayer is not "carrying on" his trade or business while on
"hiatus". See Estate of Rockefeller v. Commissioner, 762 F.2d
264, 270-271 (2d Cir. 1985), affg. 83 T.C. 368 (1984); Canter v.
United States, 173 Ct. Cl. 723, 354 F.2d 352 (1965) (4 years is
not "temporary"); Corbett v. Commissioner, 55 T.C. 884 (1971).
The Court finds petitioner to have been an exceptionally
conscientious insurance agent and genuinely loyal to his former
clients. But that does not mean that he was "carrying on" a
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trade or business during 1999 and 2000. The Court concludes that
what petitioner describes as an "intent" to return at some
indefinite future time to his former business was, in view of the
state of his health and the passage of time, more of a wish or
desire. Petitioner admitted that by then he "was wondering
about" whether he would ever be able to return. Even if
petitioner initially had the intent to return to his former
business after his retirement in 1990, by the time of the tax
years at issue here, his hiatus was no longer "temporary". The
Court concludes that petitioner was not engaged in a trade or
business or an activity for profit in 1999 and 2000.
The Court sustains respondent's determination that for 1999
and 2000, petitioner's pension income is not reportable on
Schedule C and petitioner did not incur ordinary and necessary
business expenses deductible on Schedule C.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be
entered for respondent.