T.C. Memo. 2007-147
UNITED STATES TAX COURT
YURI G. GLOTOV, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6228-06. Filed June 13, 2007.
Yuri G. Glotov, pro se.
Frederick Mutter and Carroll D. Lansdell, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined a deficiency in
petitioner’s 2003 Federal income tax of $4,721, as well as a
penalty under section 6662 of $944.1
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
(continued...)
- 2 -
The issues to be decided are: (1) Whether petitioner is
entitled to business deductions incurred in connection with his
software development activities in 2003; and (2) whether
petitioner is liable for the accuracy-related penalty under
section 6662.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in New
York, New York, at the time the petition was filed.
During 2003, petitioner was employed by various companies as
a computer programmer and/or consultant. In addition, in
September 2003 petitioner purportedly initiated the development
of a computer software business in which he was the sole
proprietor. In this capacity, he was interested in developing
software for use by financial companies.
Petitioner timely filed his Form 1040, U.S. Individual
Income Tax Return, for 2003. Petitioner’s Schedule C, Profit or
Loss From Business, for 2003 reported that his computer software
business had gross receipts of $17,149, incurred a car and truck
expense of $3,977, incurred a labor expense of $7,070, and
1
(...continued)
are rounded to the nearest dollar.
- 3 -
claimed a depreciation deduction of $3,4792 for the business use
of his 2001 Ford Taurus SES (Ford Taurus). Petitioner did not
elect to amortize these deductions as startup expenditures under
section 195(b).
In September 2005, respondent initiated an audit of
petitioner’s 2003 return. As part of the audit, respondent
requested petitioner to provide documentation to substantiate the
Schedule C car and truck expense of $3,977, the labor expense of
$7,070, and the depreciation deduction of $3,479 (business
deductions at issue).
At a meeting, on October 4, 2005, between respondent’s and
petitioner’s representatives, petitioner’s representative3 did
not provide any documentation to substantiate these deductions or
to show petitioner was carrying on a computer software business
in 2003. On October 24, 2005, petitioner provided respondent
with documentation in an attempt to substantiate the Schedule C
car and truck expense and the depreciation deduction but provided
no documentation to substantiate the labor expense or to show he
was carrying on a computer software business in 2003.
2
The deprecation deduction of $3,479 was determined using
the 200 percent declining balance method and half-year
convention. See sec. 168(b), (d).
3
Petitioner’s representative was not an enrolled return
preparer, did not sign as a preparer on petitioner’s 2003 return,
and was not admitted to practice before the Tax Court.
- 4 -
Respondent determined petitioner’s documentation did not
substantiate the business deductions at issue and on January 4,
2006, mailed petitioner a notice of deficiency disallowing these
deductions. Petitioner timely filed his petition on March 30,
2006.
On August 15, 2006, respondent’s counsel mailed petitioner a
letter requesting a meeting to discuss the case and any
documentation petitioner wanted considered. In response, on
August 17, 2006, petitioner mailed a letter stating that he would
not meet with respondent’s counsel before trial, that respondent
had failed to comply with the Paperwork Reduction Act, and that
respondent lacked the authority to assert income tax
deficiencies. On September 29, 2006, respondent’s counsel mailed
another letter to petitioner requesting a meeting to discuss the
case, discuss any additional information petitioner wanted
considered, and prepare a stipulation of facts. Petitioner did
not respond to the September letter or meet with respondent’s
counsel before trial. Petitioner signed the stipulation of facts
on the day of trial, October 25, 2006.
OPINION
I. Whether Petitioner Was Carrying On a Business in 2003
Petitioner contends the business deductions at issue were
directly related to the operation of his computer software
- 5 -
business in 2003 and asserts he is entitled to deduct the car and
truck expense of $3,977 and the labor expense of $7,070 under
section 162 and depreciation of $3,479 for the use of the Ford
Taurus under section 167.
Section 162(a) allows a deduction for the ordinary and
necessary expenses of carrying on a trade or business. For a
taxpayer to deduct expenses under section 162(a), the expenses
must relate to a trade or business functioning at the time the
expenses are incurred. Hardy v. Commissioner, 93 T.C. 684, 686
(1989), affd. in part and remanded in part per order (10th Cir.,
Oct. 29, 1990). 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. Richmond Television Corp. v. United States, 345 F.2d
901, 907 (4th Cir. 1965), vacated and remanded on other grounds
382 U.S. 68 (1965). Carrying on a trade or business requires a
showing of more than initial research into or investigation of
business potential. Dean v. Commissioner, 56 T.C. 895, 902
(1971); McKelvey v. Commissioner, T.C. Memo. 2002-63, affd. 76
Fed. Appx. 806 (9th Cir. 2003). Business operations must have
actually commenced. McKelvey v. Commissioner, supra. Petitioner
has the burden of proving he began operating his software
development business in 2003. See Rule 142(a).
- 6 -
The record clearly indicates petitioner did not carry on a
computer software business in 2003. Petitioner did not produce
documentation showing he operated a computer software business in
2003. Although on his 2003 Schedule C he reported gross receipts
of $17,149 from his business, the $17,149 was paid for work
unrelated to the purported software business.
For the foregoing reasons, this Court finds petitioner did
not carry on a trade or business as required under section 162.
Therefore, he is not entitled to deduct the car and truck expense
of $3,977 or the labor expense of $7,070. See McKelvey v.
Commissioner, supra; Reems v. Commissioner, T.C. Memo. 1994-253;
Estate of Miller v. Commissioner, T.C. Memo. 1991-515, affd.
without published opinion 983 F.2d 232 (5th Cir. 1993).
Petitioner also claimed a depreciation deduction under
section 167 of $3,479 for the use of his Ford Taurus in the
computer software business. For a taxpayer to depreciate
property under section 167, the property must be used in a trade
or business or held for the production of income. Porreca v.
Commissioner, 86 T.C. 821, 843 (1986); Flowers v. Commissioner,
80 T.C. 914, 931-932 (1983). The trade or business requirements
under section 167 are the same as those under section 162.
Lemmen v. Commissioner, 77 T.C. 1326, 1340 n.16 (1981); Miller v.
Commissioner, supra. Petitioner was not engaged in a trade or
business for purposes of section 162 in 2003. Accordingly, the
- 7 -
property he depreciated in connection with the same activity does
not satisfy the trade or business requirement of section 167.
Therefore, this Court finds petitioner is not entitled to the
depreciation deduction of $3,479.
The expenses petitioner purportedly incurred, if
substantiated, were at best start-up expenditures. Startup
expenses are not deductible unless an election is made to
amortize them under section 195(b) over a period starting when an
active trade or business begins. See sec. 195(a). Petitioner
did not make an election under section 195(b).
II. Tax-Protester Arguments
Petitioner also argued that respondent had not complied with
the Paperwork Reduction Act and lacked the authority to assert
income tax deficiencies. Petitioner’s arguments have been
rejected by this Court and other courts, and “We perceive no need
to refute these arguments with somber reasoning and copious
citation of precedent; to do so might suggest that these
arguments have some colorable merit.” Crain v. Commissioner, 737
F.2d 1417, 1417 (5th Cir. 1984); see, e.g., Wheeler v.
Commissioner, 127 T.C. 200, 204 n.9 (2006) (an allegation that
the requirement to file a tax return is in violation of the
Paperwork Reduction Act is contrary to well-established law);
Nunn v. Commissioner, T.C. Memo. 2002-250. This Court rejects
- 8 -
petitioner’s tax-protester arguments as frivolous and without
merit.
III. Section 6662 Penalty
Respondent contends petitioner is liable for a section 6662
penalty because the underpayment of tax was attributable to
negligence or disregard of rules or regulations.
Section 6662(a) imposes a 20-percent accuracy-related
penalty on the portion of any underpayment attributable to
negligence or disregard of rules or regulations. Sec. 6662(b).
The term “negligence” includes any failure to make a reasonable
attempt to comply with the provisions of the Internal Revenue
Code, including any failure by the taxpayer to keep adequate
books and records or to properly substantiate items, and the term
“disregard” includes any careless, reckless, or intentional
disregard. Sec. 6662(c); sec. 1.6662-3(b), Income Tax Regs.
Section 7491(c) provides that the Commissioner bears the burden
of production with respect to accuracy-related penalties. See
Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).
Although petitioner reported business costs incurred from
the operation of a computer software business in 2003, the
evidence shows that he was not carrying on a computer software
business in 2003. He failed to keep adequate books and records
and properly substantiate the reported expenses. Accordingly, he
was not entitled to the claimed business deductions.
- 9 -
Therefore, respondent has met the burden of production, and
petitioner, having failed to show reasonable cause or other basis
for reducing the underpayment on which the penalty is imposed, is
liable for the section 6662 penalty for negligence for 2003. See
sec. 1.6662-3(b)(3), Income Tax Regs. The Court, in reaching its
holding, has considered all arguments made and concludes that any
arguments not mentioned above are moot, irrelevant, or without
merit.
To reflect the foregoing,
Decision will be entered
for respondent.