46

1 Respondent determined a $100,003 deficiency for 1996, a $4,671,608 deficiency for 1998, a 

$3,385,533 deficiency for 1999, a $4,954,056 deficiency for 2000, and $3,395,214 for 2001. 

2Petitioners concede that the amortization period for the license acquired as part of the Michigan 2 acquisition should be 15 years and that the Schedule M–1 adjustment should be disallowed. Respondent concedes a sec. 1231 adjustment and all penalties set forth in the deficiency 

notice. Respondent also concedes that petitioners are entitled to recapture for 1998 $3,548,365 

of losses Alpine claimed in earlier years. 

ROBERT AND KIMBERLY BROZ, PETITIONERS v. 

COMMISSIONER OF INTERNAL REVENUE, 

RESPONDENT

Docket No. 21629–06. Filed September 1, 2011. 

Ps were shareholders in a wholly owned S corporation (S) 

engaged in providing wireless cellular service. S acquired 

wireless cellular licenses from the FCC and built networks to 

service the license areas. S never operated any on-air networks. Instead, P formed related holding companies to hold 

title to the licenses and equipment. Many issues raised questions of first impression because transactions were structured 

in this ever-changing technology industry. Our holdings on 

these issues include: 

1. Held: Ps were not sufficiently at risk for sec. 465, I.R.C., 

purposes when stock of a related corporation was pledged. 

2. Held, further, the mere grant of a license by the FCC is 

not sufficient for an activity to qualify as an active trade or 

business under sec. 197, I.R.C. 

Stephen M. Feldman and Eric T. Weiss, for petitioners. 

Meso T. Hammoud, Elizabeth Rebecca Edberg, and Steven 

G. Cappellino, for respondent. 

KROUPA, Judge: Respondent determined over $16 million of 

deficiencies 1 in petitioners’ Federal income tax for 1996, 

1998, 1999, 2000 and 2001 (years at issue). Respondent also 

determined that petitioners were liable for accuracy-related 

penalties of $563,042 for 1998, $386,489 for 1999, and 

$591,213 for 2000. 

After concessions, 2 we are asked to decide several issues, 

many of which present questions of first impression as they 

relate to the ever-evolving cellular phone industry. We must 

(46) BROZ v. COMMISSIONER 47

3 All section references are to the Internal Revenue Code (Code) in effect for the years in issue, 

and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise 

indicated. 

first decide a procedural issue, whether respondent is bound 

by equitable estoppel to a settlement offer made and subsequently withdrawn by respondent’s Appeals Office before the 

deficiency notice was issued. We find that respondent is not 

bound by the settlement offer. Second, we must decide 

whether petitioners properly allocated $2.5 million of the 

$7.2 million purchase price to depreciable equipment when 

the allocation in the purchase agreement remained 

unchanged despite a 2-year delay in closing the transaction. 

We find that petitioners’ allocation was improper. Third, we 

must determine whether petitioners had sufficient debt basis 

under section 1366 in stock of Alpine PCS, Inc. (Alpine), an 

S corporation, to claim flowthrough losses. We find that petitioners had insufficient debt basis and therefore cannot claim 

the flowthrough losses. Fourth, we must determine whether 

petitioners were at risk under section 465 3 and can therefore 

claim flowthrough losses from Alpine and related holding 

companies. We must decide whether petitioners’ pledge of 

stock in a related S corporation is excluded from the at-risk 

amount because it was ‘‘property used in the business.’’ This 

issue presents a question of first impression. We find that 

petitioners were not sufficiently at risk and therefore cannot 

claim the flowthrough losses because the stock they pledged 

was related to the business. Fifth, we must decide whether 

Alpine and Alpine PCS-Operating, LLC (Alpine Operating), an 

equipment holding company, were engaged in an active trade 

or business permitting them to deduct business expenses. We 

find that neither entity was engaged in an active trade or 

business and therefore may not deduct the expenses. Finally, 

we must decide whether the related license holding companies are entitled to amortization deductions for cellular 

licenses from the FCC upon the grant of the license or upon 

commencement of an active trade or business. This issue presents a question of first impression. We hold that they are 

not entitled to any amortization deductions upon the license 

grant because they were not engaged in an active trade or 

business during the years at issue. 

48 137 UNITED STATES TAX COURT REPORTS (46) 

FINDINGS OF FACT 

Some of the facts have been stipulated and are so found. 

We incorporate the stipulation of facts and the accompanying 

exhibits by this reference. Petitioners resided in Gaylord, 

Michigan, at the time they filed the petition. 

I. RFB Cellular, Inc. (RFB)

Robert Broz (petitioner) began his career as a banker 

before becoming involved with the cellular phone industry. 

He was president of Cellular Information Systems (CIS), a 

cellular company, for approximately seven or eight years in 

the 1980s. 

Petitioner decided to invest personally in the development 

of cellular networks in rural statistical areas (RSAs) in the 

1990s. Most large cellular service providers, like CIS, were 

focused on developing cellular networks in major statistical 

areas (MSA) and were less interested in RSA networks. The 

FCC began offering RSA licenses by lottery to any interested 

person to encourage development of cellular networks in 

rural areas. The RSA lotteries attracted an average of 500 

participants nationwide. 

Petitioner participated in approximately 400 lotteries for 

RSAs across the country. He won and purchased an RSA

license for Northern Michigan (the Michigan 4 license) in 

1991. 

A. The Organization of RFB

Petitioner organized RFB Cellular, Inc. (RFB), an S corporation, in 1991, the year he acquired the license. He contributed the Michigan 4 license and received in exchange 100 

percent of RFB’s issued and outstanding stock. Petitioner did 

not contribute any other money or property, nor did he make 

any loans to RFB from its inception through 2001. Petitioner 

was CEO of RFB and his brother, James Broz, served as CFO. 

Petitioner wife was involved in marketing. 

RFB received between $4 and $4.2 million in vendor 

financing from Motorola to cover startup expenses. Approximately two-thirds of the financing went to construct and 

install the cellular equipment. When Motorola constructed 

and installed the equipment, petitioner began operating the 

network and used the remaining funds for working capital. 

(46) BROZ v. COMMISSIONER 49

The Michigan 4 license that petitioner contributed to RFB

serviced the northern portion of the lower Michigan peninsula by providing analog cellular service during the years at 

issue. RFB acquired a second license, the Michigan 2 license, 

which serviced the eastern upper Michigan peninsula. Most 

of RFB’s revenue came from roaming charges for the use of 

two networks in Michigan. RFB also sold cellular phones to 

people to generate airtime. 

RFB made $241,500 of cash distributions to petitioner in 

1996, $613,673 in 2000 and $342,455 in 2001. RFB made Federal income tax payments on petitioners’ behalf in 1995 and 

1996. These tax payments were reflected as shareholder 

loans on RFB’s tax returns. No promissory notes were issued 

for the tax payments RFB made on petitioners’ behalf. 

B. The Michigan 2 Acquisition

RFB entered into a purchase agreement with Mackinac Cellular to acquire the Michigan 2 license and related equipment in 1994 (1994 purchase agreement). Mackinac Cellular 

had paid $1.6 million for the equipment in 1994. RFB

arranged to purchase the license and equipment by issuing 

promissory notes and assuming debt. 

The Michigan 2 acquisition by RFB was stalled for two 

years. It was stalled for various reasons but primarily 

because of a lawsuit petitioner’s former employer, CIS, filed 

against petitioner for usurpation of a corporate opportunity. 

The license and equipment were transferred to Pebbles Cellular Corporation (Pebbles), a wholly owned subsidiary of CIS, 

through the negotiations. Pebbles did not change or improve 

the equipment during these two intervening years. Pebbles 

sold the Michigan 2 assets to RFB. 

RFB and Pebbles entered into a purchase agreement in 

1996 (1996 purchase agreement) after the lawsuit was 

resolved. The parties again undertook a series of negotiations 

and made some adjustments to the transaction. Nevertheless, 

the purchase price and the allocations in the 1996 purchase 

agreement were the same as those in the 1994 agreement. 

Both purchase agreements allocated $2.5 million of the $7.2 

million purchase price to the equipment. Approximately 

$909,000 of the purchase price was allocated to costs 

50 137 UNITED STATES TAX COURT REPORTS (46) 

4The Alpine license holding entities were Alpine-California F, LLC, Alpine Michigan F, LLC, 

Alpine Hyannis F, LLC and Alpine Fresno C, LLC. 

incurred by Pebbles between 1994 and 1996. Yet there was 

no allocation for these costs. 

II. The Alpine Entities

Petitioners sought to expand RFB’s existing cellular business to new license areas. RFB’s lenders agreed to fund the 

expansion. The lenders required, however, that RFB form a 

new entity to isolate the liabilities to the thinly capitalized 

new business entities RFB would form to hold title only to the 

licenses. Petitioners formed various entities (the Alpine entities) to further this expansion.

A. Alpine

Petitioners organized Alpine, an S corporation, to bid on 

FCC licenses in RSA lotteries and to construct and operate digital networks to service the new license areas. Petitioner held 

a 99-percent interest in Alpine and his brother held the 

remaining one percent. 

Alpine bid on licenses for geographic areas with demographics similar to those of RFB’s existing network areas, and 

Alpine bid on licenses for areas in Michigan where RFB was 

already providing analog service. The FCC financed the purchase of most of the licenses Alpine won at auction. The FCC

required, however, as a condition for financing, that the 

license holder make services available to at least 25 percent 

of the population in the geographic license area within five 

years of the grant (build out requirement). The FCC licenses 

were issued for a period of ten years from the date of the 

grant. RFB and commercial lenders funded the bidding and 

constructed and operated the new networks. 

B. The Alpine License Holding Entities

Alpine successfully bid on 12 licenses during the years at 

issue. Alpine made downpayments on the licenses and issued 

notes payable to the FCC for the balance of the purchase 

prices. Alpine then transferred the licenses to various singlemember limited liability companies (collectively, the license 

holding companies) formed to hold the licenses and lease 

them to Alpine. 4 Petitioner held a 99-percent interest in each 

(46) BROZ v. COMMISSIONER 51

5The depreciation deductions were for leasehold improvements for a California office, furniture, fixtures, computers and vehicles. 

6The other deductions were for expenses such as salaries, office expenses, telephone and utilities, rent, insurance, and dues and subscriptions. 

7Such expenses included consulting expenses, travel and entertainment expenses, salaries, 

rent, legal fees, relocation expenses, contract labor, fringe benefits, and miscellaneous expenses. 

license holding entity and his brother owned the remaining 

one percent. Each Alpine license holding entity assumed the 

FCC debt in exchange for receiving the license. Alpine continued to make payments on the FCC debt even after the 

licenses were transferred to the Alpine license holding entities. Alpine maintained the books and records of Alpine, the 

Alpine entities and the Alpine license holding entities. 

No Alpine entities operated any on-air networks during the 

years at issue. RFB operated the only on-air networks. RFB

used Alpine’s licenses to provide digital service in geographic 

areas RFB’s analog licenses already covered. RFB provided 

digital service by adding digital equipment onto RFB’s 

existing cellular towers. RFB owned the equipment that serviced the Michigan licenses. RFB allocated income and 

expenses related to the licenses to Alpine. 

No Alpine license holding entities met the FCC’s build out 

requirements for any of its licenses. Consequently, the FCC

canceled two of the three licenses Alpine retained. Alpine 

returned the third license to the FCC and forfeited its 

$900,000 initial downpayment. 

The only income Alpine reported was income that RFB had 

allocated to Alpine from RFB’s use of Alpine’s licenses. Alpine 

did not report income during any of the other years at issue. 

Alpine claimed depreciation deductions 5 and other deductions. 6 Alpine deducted interest on debt owed to the FCC. 

Alpine also deducted interest on debt owed to RFB, even 

though Alpine never made any interest payments. Alpine 

amortized and deducted expenses for alleged startup costs 7

even though Alpine had not made a formal election under 

section 195(b). 

The only income any of the Alpine license holding entities 

reported was income allocated to them from RFB’s use of the 

licenses. The Alpine license holding entities each claimed 

amortization deductions related to the licenses and deducted 

interest paid on amounts borrowed from a related entity to 

service the FCC debt. 

52 137 UNITED STATES TAX COURT REPORTS (46) 

8 RFB initially recorded the advances in its books as ‘‘other assets’’. 

Alpine and the license holding entities ceased all business 

activities by the end of 2002. 

C. Alpine Operating and Alpine Investments, LLC

Petitioner formed Alpine Operating, a single-member limited liability company, to hold the digital equipment and 

lease it to Alpine. Petitioner wholly owned Alpine Operating, 

a disregarded entity for Federal income tax purposes. Alpine 

Operating reported no income and did not claim any depreciation deductions for the equipment during the years at 

issue. Alpine Operating claimed interest and automobile 

depreciation deductions for 1999 and 2000. 

Petitioner formed Alpine Investments, LLC (Alpine Investments), a single-member limited liability company, to serve 

as an intermediary for transferring money to the Alpine entities. Petitioner’s tax advisers advised petitioner that he 

needed to increase his bases in the Alpine entities. Additionally, CoBank prohibited the distribution of loan proceeds to 

an individual. Petitioner wholly owned Alpine Investments, a 

disregarded entity. 

III. The CoBank Loans

CoBank was the main commercial lender to RFB and the 

Alpine entities during the years at issue. RFB used CoBank 

loan proceeds to expand its existing business through Alpine 

and the related entities. CoBank specifically acknowledged 

that RFB would advance the proceeds directly or indirectly to 

the Alpine entities. Alpine allocated some of the funds to 

other Alpine entities. 

RFB refinanced the CoBank loan several times. Petitioner 

pledged his RFB stock as additional security but he never 

personally guaranteed the CoBank loan. The loan was 

secured by the assets of the Alpine license holding entities. 

Several of the Alpine entities also guaranteed the loan. 

RFB recorded the advances on its general ledger as 

‘‘advances to Alpine PCS.’’ 8 Alpine recorded the same 

advances as ‘‘notes payable.’’ Some of the advances to Alpine 

were allocated to other Alpine entities, which recorded the 

allocations as advances or ‘‘notes payable’’ on the general 

ledgers. RFB, Alpine and the other Alpine entities made yearVerDate 0ct 09 2002 13:55 May 31, 2013 Jkt 372897 PO 20009 Frm 00007 Fmt 3851 Sfmt 3851 V:\FILES\BROZ2.137 SHEILA
(46) BROZ v. COMMISSIONER 53

end adjusting entries reclassifying the advances as loans 

from a shareholder. Alpine reflected the advances as longterm liabilities on the returns for the years at issue. 

Promissory notes were executed between petitioner and 

RFB, and between petitioner and Alpine, to reflect accrued 

but unpaid interest on the purported loans. RFB indicated in 

financial statements for the years at issue that it would not 

demand repayment of any of the advances. No security was 

provided with respect to the promissory notes. No cash payments of either principal or interest were ever made by any 

of the parties with respect to the promissory notes. Petitioner 

nevertheless reported interest income and income expense 

from the promissory notes on his individual returns. 

Beginning in 1999, the advances from RFB were reclassified 

through yearend adjusting entries as loans from Alpine 

Investments. Alpine Investments assumed the promissory 

notes executed between petitioner and Alpine, and between 

petitioner and RFB. Alpine Investments executed promissory 

notes with the Alpine entities and RFB to document the purported loans. 

IV. IRS Appeals Proceeding

The Appeals case involved all five years at issue. Appeals 

Officer Thomas Dolce (Officer Dolce) was assigned to petitioners’ case and negotiated with petitioners’ attorney, Sean 

Cook (Mr. Cook). Petitioners, RFB and the Alpine license 

holding entities filed for bankruptcy protection in 2003. Petitioners’ bankruptcy proceedings ran concurrently with their 

IRS Appeals case. 

Officer Dolce and Mr. Cook exchanged several settlement 

offers over the course of the negotiations. Officer Dolce orally 

proposed a ‘‘sum certain settlement’’ (settlement offer) during 

a telephone conference in October 2005. The settlement offer 

made no changes to petitioners’ tax liabilities for the years 

at issue but increased petitioners’ tax liability for 2002, 

which was not under examination. 

Petitioners accepted the settlement offer. Officer Dolce 

informed petitioners that he needed his manager’s approval 

before the settlement could be finalized. He also advised Mr. 

Cook that the parties needed to draft a closing agreement to 

finalize the settlement. Mr. Cook provided Officer Dolce with 

54 137 UNITED STATES TAX COURT REPORTS (46) 

a draft closing agreement petitioners had reviewed, but 

Officer Dolce did not sign it. The parties did not enter into 

any written agreement regarding the settlement offer. 

Officer Dolce orally informed petitioners that he had 

obtained the necessary approval but later learned that the 

offer exceeded the scope of his settlement authority. His 

authority extended to litigation risk, not collectibility. He 

made the settlement offer because he determined petitioners 

could not afford to pay the entire outstanding liability rather 

than on the merits of the case. Officer Dolce decided to withdraw the settlement offer when he learned the offer had yet 

to be finalized. 

Officer Dolce informed Mr. Cook two weeks later that the 

offer was withdrawn. The parties waited to meet until 

December 2005 to discuss the withdrawal because they were 

in different areas of Michigan, not close to each other. 

V. The Deficiency Notice

Respondent issued petitioners the deficiency notice for the 

years at issue in 2006. Respondent determined that petitioners had insufficient debt basis in Alpine to claim 

flowthrough losses for the years at issue. Respondent also 

determined that petitioners were not at risk with respect to 

their investments in the Alpine license holding entities and 

Alpine Operating and were therefore not entitled to claim 

flowthrough losses. 

Respondent determined that Alpine was not entitled to 

interest, depreciation, startup expense, and other deductions 

because it was not engaged in an active trade or business 

during those years. Respondent also determined that Alpine 

Operating was not entitled to deduct interest and depreciation because it was not engaged in an active trade or business. Respondent determined that the Alpine license holding 

entities amortization deductions for the licenses were disallowed because they were not engaged in an active trade or 

business at the relevant time. 

Petitioners timely filed a petition. 

OPINION 

We are asked to resolve the tax consequences of the everevolving cellular phone industry with rapidly changing techVerDate 0ct 09 2002 13:55 May 31, 2013 Jkt 372897 PO 20009 Frm 00009 Fmt 3851 Sfmt 3851 V:\FILES\BROZ2.137 SHEILA
(46) BROZ v. COMMISSIONER 55

nology. Several issues raise questions of first impression. 

These include whether in an S corporation there is a separate definition in the at-risk rules involving whether the 

shareholder’s pledge of stock of a related corporation is 

excluded from the at-risk amount because it was property 

used in the business. We must also focus on when a cellular 

phone entity begins business for purposes of deducting beginning expenses and for amortization of the FCC license under 

section 197. Specifically, we must decide whether a cellular 

phone business begins upon the grant of the license from the 

FCC or when contracts for wireless services are sold. We 

address these substantive issues in turn. 

I. The Settlement Offer

We must first decide a procedural issue of whether 

respondent is bound to an oral settlement offer made and 

subsequently withdrawn by respondent’s Appeals Office 

before the deficiency notice was issued. Petitioners argue 

that the oral settlement offer is enforceable, notwithstanding 

the lack of a written closing agreement, because Officer 

Dolce’s supervisor approved the offer. They argue alternatively that respondent should be bound by equitable 

estoppel to the settlement offer because Officer Dolce recklessly withdrew the offer after petitioners had relied on it. 

Respondent denies that the oral settlement offer is enforceable because it was not memorialized in a written closing 

agreement. Respondent also argues that petitioners have not 

established the elements necessary for us to apply equitable 

estoppel. We address the parties’ arguments in turn.

A. Enforceability of the Settlement Offer

We begin with petitioners’ argument that the oral settlement offer is an enforceable agreement. The compromise and 

settlement of tax cases is governed by general principles of 

contract law. Dorchester Indus. Inc. v. Commissioner, 108 

T.C. 320, 330 (1997) affd. without published opinion 208 F.3d 

205 (3d Cir. 2000). The law for administrative, or pre-petition, settlement offers is well established. See Dormer v. 

Commissioner, T.C. Memo. 2004–167; Rohn v. Commissioner, 

T.C. Memo. 1994–244. The procedures for closing agreements 

and compromises are set forth in section 7121 (relating to 

56 137 UNITED STATES TAX COURT REPORTS (46) 

closing agreements), section 7122 (relating to compromises) 

and the regulations thereunder. See secs. 7121 and 7122; 

secs. 301.7121–1, 301.7122–1, Proced. & Admin. Regs. These 

procedures are exclusive and must be satisfied for a compromise or settlement to be binding on both a taxpayer and 

the Commissioner. Rohn v. Commissioner, supra; see also 

Urbano v. Commissioner, 122 T.C. 384, 393 (2004). Negotiations with the IRS are enforceable only if they comply with 

the procedures. Rohn v. Commissioner, supra. A settlement 

offer must be submitted on one of two special forms the 

Commissioner prescribes. Id.; sec. 301.7122–1(d)(1), (3), 

Proced. & Admin. Regs. Form 866, Agreement as to Final 

Determination of Tax Liability, is a type of closing agreement 

that is to be a final determination of a taxpayer’s liability for 

a past taxable year or years. Form 906, Closing Agreement 

on Final Determination Covering Specific Matters, is a 

second type of closing agreement that finally determines one 

or more separate items affecting the taxpayer’s liability. The 

parties never put the sum certain settlement in writing, let 

alone on one of the prescribed forms. Officer Dolce’s oral 

settlement offer is therefore not legally enforceable. 

B. Equitable Enforcement of the Settlement Offer

We now address whether equity principles nonetheless 

require us to enforce the settlement offer. Equitable estoppel 

is a judicial doctrine that requires finding the taxpayer relied 

on the Government’s representations and suffered a detriment because of that reliance. Estoppel precludes the IRS

from denying its own representations if those representations 

induced the taxpayer to act to his or her detriment. 

Hofstetter v. Commissioner, 98 T.C. 695, 700 (1992). The doctrine of equitable estoppel is applied against the Government 

with utmost caution and restraint. Boulez v. Commissioner, 

810 F.2d 209, 218 (D.C. Cir. 1987), affg. 76 T.C. 209 (1981); 

Kronish v. Commissioner, 90 T.C. 684, 695 (1988). 

The Court of Appeals for the Sixth Circuit, to which this 

case is appealable, requires a litigant to establish affirmative 

misconduct on the Government’s part as a threshold to 

proving estoppel. See United States v. Guy, 978 F.2d 934, 937 

(6th Cir. 1992). Affirmative misconduct is more than mere 

negligence. Id. It requires an affirmative act by the GovernVerDate 0ct 09 2002 13:55 May 31, 2013 Jkt 372897 PO 20009 Frm 00011 Fmt 3851 Sfmt 3851 V:\FILES\BROZ2.137 SHEILA
(46) BROZ v. COMMISSIONER 57

ment to either intentionally or recklessly mislead the taxpayer. Mich. Express, Inc. v. United States, 374 F.3d 424, 427 

(6th Cir. 2004). The taxpayer must also prove the traditional 

three elements of estoppel. These three traditional elements 

include (1) a misrepresentation by Government; (2) reasonable reliance on that misrepresentation by the taxpayer; and 

(3) detriment to the taxpayer. See Heckler v. Community 

Health Servs., 467 U.S. 51, 59 (1984). 

Petitioners’ equitable estoppel argument fails for several 

reasons. First and foremost, we find that petitioners failed to 

meet the threshold in the Sixth Circuit of showing any 

affirmative misconduct on respondent’s part. They argue that 

Officer Dolce’s failure to personally notify them for 40 days 

that the offer was withdrawn constituted ‘‘affirmatively reckless conduct.’’ We disagree. 

We find instead that the delay was due to the considerable 

geographical distance between Officer Dolce and petitioners 

rather than to any affirmative misconduct on the part of 

Officer Dolce. Moreover, even though Officer Dolce failed to 

notify petitioners in person for 40 days, Officer Dolce notified 

petitioners’ counsel, Mr. Cook, within two weeks that the 

offer was withdrawn. We find that Officer Dolce’s actions do 

not rise to the level of affirmative misconduct. 

Additionally, petitioners have failed to prove the traditional elements of equitable estoppel. Petitioners have failed 

to establish that Officer Dolce made any misrepresentations 

to them regarding the settlement offer. Officer Dolce made a 

conditional settlement offer to petitioners that needed to be 

approved by Officer Dolce’s supervisor. He withdrew the 

offer, which had yet to be finalized, upon realizing that a 

sum certain settlement was beyond his authority. Officer 

Dolce notified petitioners that the offer was withdrawn. He 

also explained to petitioners his reasons for withdrawing the 

offer. 

Petitioners’ reliance, if any, on the oral settlement offer 

was unreasonable. Petitioners knew that the settlement offer 

was not final until they entered into a written closing agreement. They discussed the need for a written closing

agreement with Mr. Dolce and reviewed a draft closing 

agreement Mr. Cook prepared. 

Finally, respondent did not induce petitioners to take any 

adverse action. Petitioners claim they conceded certain rights 

58 137 UNITED STATES TAX COURT REPORTS (46) 

9Petitioners also rely on the Michigan 4 acquisition as best evidence of the value of the Michigan 2 equipment. Petitioners estimated the value of the Michigan 4 equipment using only the 

costs they incurred and the vendor financing they received. They have not provided sufficient 

evidence of the equipment’s value. Moreover, petitioners have not established that the Michigan 

4 equipment is comparable to the Michigan 2 equipment. 

in the bankruptcy proceeding in reliance on the oral settlement offer. Petitioners have not established what rights, if 

any, they conceded attributable to the bankruptcy proceeding. 

Accordingly, we conclude that equitable estoppel principles 

do not require respondent to be bound by the sum certain 

settlement offer. 

II. Valuation of the Michigan 2 Acquisition

Next, we must determine whether petitioners properly allocated $2.5 million of the $7.2 million Michigan 2 purchase 

price to equipment for depreciation purposes. Petitioners 

relied on the allocations made in the Michigan 2 purchase 

agreement even though there was a 2-year delay in acquiring 

the equipment and license. 

RFB acquired both depreciable and nondepreciable property 

when it paid $7.2 million to acquire the cellular phone equipment and license from Pebbles, the seller. When a combination of depreciable and nondepreciable property is purchased 

for a lump sum, the lump sum must be apportioned between 

the two types of property to determine their respective costs. 

The cost of the depreciable property is used to determine the 

amount of the depreciation deduction. The relevant inquiry is 

the respective fair market values of the depreciable and nondepreciable property at the time of acquisition. Weis v. 

Commissioner, 94 T.C. 473, 482–483 (1990); Randolph Bldg. 

Corp. v. Commissioner, 67 T.C. 804, 807 (1977). Petitioners 

bear the burden of proving that respondent’s allocation is 

incorrect. See Rule 142(a); see Elliott v. Commissioner, 40 

T.C. 304, 313 (1963). 

Petitioners contend that the $2.5 million allocation to 

depreciable assets is proper. They first argue it is proper 

because it is the amount the parties agreed to in the 1994 

and 1996 purchase agreements. 9 An allocation in a purchase 

agreement is not necessarily determinative, however, if it 

fails to reflect a bargained-for amount. See Sleiman v. 

Commissioner, 187 F.3d 1352, 1361 (11th Cir. 1999), affg. 

(46) BROZ v. COMMISSIONER 59

T.C. Memo. 1997–530. Petitioners further argue that the $2.5 

million allocation to depreciable assets is proper because it 

represents the cost they would have to pay to replace the 

wireless cellular equipment. Petitioners have not provided 

any evidence beyond their own self-serving testimony to 

substantiate the replacement cost. We need not accept the 

taxpayer’s self-serving testimony when the taxpayer fails to 

present corroborative evidence. Beam v. Commissioner, T.C. 

Memo. 1990–304 (citing Tokarski v. Commissioner, 87 T.C. 

74, 77 (1986)), affd. without published opinion 956 F.2d 1166 

(9th Cir. 1992). 

Moreover, we find it implausible that the equipment had 

a value of $2.5 million at the time RFB acquired it from Pebbles. Mackinac’s original purchase of the Michigan 2 equipment for $1.6 million in 1994 indicates that the equipment 

was worth, at most, only $1.6 million when RFB purchased it 

in 1996. See Estate of Cartwright v. Commissioner, T.C. 

Memo. 1996–286. Moreover, petitioners testified that the 

equipment was rapidly depreciating on account of advancing 

cellular technology. In fact, some of the Michigan 2 equipment became obsolete between 1994 and 1996 and had to be 

decommissioned after RFB’s acquisition. Nevertheless, the 

allocation amount remained unchanged between the 1994 

and 1996 purchase agreements. Petitioners have not shown 

that they made any additions or improvements to explain 

why the allocation amount remained unchanged over the 2-

year period. We accordingly find that petitioners’ allocation 

of $2.5 million to equipment was improper and instead sustain respondent’s determination that $1.5 million be allocated to the equipment. 

III. Basis Limitations on Flowthrough Losses

We now turn to basis in Alpine. We must determine 

whether petitioners, shareholders of Alpine, an S corporation, 

had sufficient debt basis to claim flowthrough losses during 

the years at issue. Petitioners argue that the payments petitioner made to Alpine with the loan proceeds from CoBank 

gave them basis in Alpine. Respondent contends that the 

payments did not create basis. Instead, petitioners served as 

a mere conduit to the transfer of loan proceeds from RFB to 

Alpine. Respondent further asserts that petitioners did not 

60 137 UNITED STATES TAX COURT REPORTS (46) 

make any economic outlay that would entitle them to 

increase their basis in the S corporation.

A. Basis to S Corporation Shareholder

First, we state the general rules governing when a shareholder in an S corporation is entitled to deduct losses the S 

corporation sustained. A shareholder of an S corporation can 

directly deduct his or her share of entity-level losses in 

accordance with the flowthrough rules of subchapter S. See 

sec. 1366(a). The losses cannot exceed the sum of the shareholder’s adjusted basis in his or her stock and the shareholder’s adjusted basis in any indebtedness of the S corporation to the shareholder. Sec. 1366(d)(1)(A) and (B). This 

restriction applies because the disallowed amount exceeds 

the shareholder’s economic investment in the S corporation 

and, because of the limited liability accorded to S corporations, the amount does not have to be repaid. The shareholder bears the burden of establishing his or her basis. 

Estate of Bean v. Commissioner, 268 F.3d 553, 557 (8th Cir. 

2001), affg. T.C. Memo. 2000–355; Parrish v. Commissioner, 

168 F.3d 1098, 1102 (8th Cir. 1999), affg. T.C. Memo. 1997–

474. 

A shareholder who makes a loan to an S corporation generally acquires debt basis if the shareholder makes an economic outlay for the loan. The indebtedness must run 

directly from the S corporation to the shareholder and the 

shareholder must make an actual economic outlay for debt 

basis to arise. Kerzner v. Commissioner, T.C. Memo. 2009–76. 

When the taxpayer claims debt basis through payments 

made by an entity related to the taxpayer and then from the 

taxpayer to the S corporation (back-to-back loans), the taxpayer must prove that the related entity was acting on behalf 

of the taxpayer and that the taxpayer was the actual lender 

to the S corporation. Ruckriegel v. Commissioner, T.C. Memo. 

2006–78. If the taxpayer is a mere conduit and if the transfer 

of funds was in substance a loan from the related entity to 

the S corporation, the Court will apply the step transaction 

doctrine and ignore the taxpayer’s participation. Id.

A taxpayer makes an economic outlay for purposes of debt 

basis when he or she incurs a ‘‘cost’’ on a loan or is left 

poorer in a material sense after the transaction. Putnam v. 

(46) BROZ v. COMMISSIONER 61

10Petitioners substituted themselves for Alpine Investments, a disregarded entity they wholly 

owned, beginning in 1999. 

Commissioner, 352 U.S. 82 (1956); Estate of Bean v. Commissioner, supra at 558; Bergman v. United States, 174 F.3d 928, 

930 n.6 (8th Cir. 1999); Estate of Leavitt v. Commissioner, 

875 F.2d 420, 422 (4th Cir. 1989), affg. 90 T.C. 206 (1988). 

The taxpayer may fund the loan to the S corporation with 

money borrowed from a third-party lender in a back-to-back 

loan arrangement. Underwood v. Commissioner, 535 F.2d 

309, 312 n.2 (5th Cir. 1976), affg. 63 T.C. 468 (1975); 

Hitchins v. Commissioner, 103 T.C. 711, 718 & n.8 (1994); 

Raynor v. Commissioner, 50 T.C. 762, 771 (1968). The taxpayer has not made an economic outlay, however, if the 

lender is a related party and if repayment of the funds is 

uncertain. See, e.g., Oren v. Commissioner, 357 F.3d 854 (8th 

Cir. 2004), affg. T.C. Memo. 2002–172; Underwood v. 

Commissioner, supra at 312. 

B. Direct Loan From RFB

Against this background, we now address whether petitioner acquired basis in Alpine in the amount of the loan. 

Petitioners claim they advanced the CoBank loan proceeds to 

the Alpine entities as part of a back-to-back loan arrangement. 10 Petitioners have not established that they lent, 

rather than advanced, the CoBank loan proceeds to Alpine. 

See Yates v. Commissioner, T.C. Memo. 2001–280; Culnen v. 

Commissioner, T.C. Memo. 2000–139, revd. and remanded 28 

Fed. Appx. 116 (3d Cir. 2002). Petitioner never substituted 

himself as ‘‘lender’’ in the place of RFB. There is no evidence 

that the Alpine entities were indebted to petitioner rather 

than to RFB. Interest on the unsecured notes accrued and 

was added to the outstanding loan balances. No payments 

were ever made. Moreover, petitioners signed the promissory 

notes on behalf of all the entities, making it unlikely that 

any of the entities would seek payment from petitioners. See 

Oren v. Commissioner, supra at 859. The promissory notes, 

therefore, do not establish bona fide indebtedness between 

petitioners and Alpine. 

Moreover, the payments petitioners made to Alpine from 

the CoBank loan proceeds were characterized as advances, 

rather than loan distributions, at the time the payments 

62 137 UNITED STATES TAX COURT REPORTS (46) 

11Petitioners contend that they suffered actual economic loss with respect to the pledge of 

stock when the banks obtained RFB’s assets in the bankruptcy proceedings. The bankruptcy 

case was settled after the years at issue, however, and is therefore irrelevant for purposes of 

determining economic outlay at the time the payments were made. Petitioners also argue that 

they were left ‘‘poorer in a material sense’’ by RFB’s use of undistributed after-tax profits for 

advances to the Alpine entities. Petitioners’ argument is irrelevant because we have determined 

that RFB was not an ‘‘incorporated pocketbook’’ for petitioners. Cf. Yates v. Commissioner, T.C. 

were made. See Ruckriegel v. Commissioner, supra. The payments were recharacterized as loans only through yearend 

reclassifying journal entries and other documents. The loan 

ran from RFB to the Alpine entities, and petitioners served as 

a mere conduit for the funds. Accordingly, we find that the 

Alpine entities were not directly indebted to petitioners. 

Petitioners also have not shown that RFB made the payments to Alpine on petitioners’ behalf. We have found that 

direct payments from a related entity to the taxpayer’s S corporation constituted payments on the taxpayer’s behalf 

where the taxpayer used the related entity as an ‘‘incorporated pocketbook.’’ See Yates v. Commissioner, supra; 

Culnen v. Commissioner, supra. The term ‘‘incorporated 

pocketbook’’ refers to the taxpayer’s habitual practice of 

having his wholly owned corporation pay money to third parties on his behalf. See Ruckriegel v. Commissioner, supra. 

Whether an entity is an incorporated pocketbook is a question of fact. Id. Petitioners have not established that RFB

habitually or routinely paid petitioners’ expenses so as to 

make RFB an incorporated pocketbook. 

C. Economic Outlay

We now turn to the economic outlay requirement. Petitioners also contend that their pledge of RFB stock as collateral for the CoBank loan constituted an economic outlay 

justifying an increase in petitioners’ basis in their Alpine 

entities. A pledge of personal assets is insufficient to create 

basis until and unless the shareholder pays all or part of the 

obligation that the shareholder guaranteed. See Estate of 

Leavitt v. Commissioner, supra at 423; Maloof v. Commissioner, T.C. Memo. 2005–75, affd. 456 F.3d 645 (6th Cir. 

2006). Petitioners have not shown that they incurred any 

cost with regard to their pledge of RFB stock. 

Moreover, petitioners have not shown that they incurred a 

cost with respect to the loan or were otherwise left poorer in 

a material sense. 11 See Maloof v. Commissioner, supra. PetiVerDate 0ct 09 2002 13:55 May 31, 2013 Jkt 372897 PO 20009 Frm 00017 Fmt 3851 Sfmt 3851 V:\FILES\BROZ2.137 SHEILA
(46) BROZ v. COMMISSIONER 63

Memo. 2001–280; Culnen v. Commissioner, T.C. Memo. 2000–139, revd. and remanded 28 Fed. 

Appx. 116 (3d Cir. 2002). 

tioners never personally guaranteed or were otherwise 

personally liable on the CoBank loan. See id. Petitioners 

signed the promissory notes on behalf of all the entities, 

making it unlikely that any of the entities would seek payment from petitioners. See Oren v. Commissioner, supra at 

859. Furthermore, RFB indicated in its financial statements 

that it would not demand repayment on any advances made 

to petitioners. 

We therefore will apply the step transaction doctrine and 

ignore petitioners’ participation in the advances from RFB to 

Alpine. We find that petitioners had insufficient debt basis in 

Alpine to claim flowthrough losses during the years at issue. 

IV. At-Risk Limitation on Flowthrough Losses

We now focus on whether petitioners were at risk with 

respect to Alpine, Alpine Operating and the Alpine license 

holding entities because of the unique way the transactions 

were structured. We must decide for the first time whether 

stock in a related S corporation is property used in the business to preclude petitioners from being at risk for any pledge 

of property used in the business. 

We begin with an overview of the at-risk rules. The at-risk 

rules ensure that a taxpayer deducts losses only to the extent 

he or she is economically or actually at risk for the investment. Sec. 465(a); Follender v. Commissioner, 89 T.C. 943 

(1987). The amount at risk includes cash contributions and 

certain amounts borrowed with respect to the activity for 

which the taxpayer is personally liable for repayment. Sec. 

465(b)(2)(A). Pledges of personal property as security for borrowed amounts are also included in the at-risk amount. Sec. 

465(b)(2)(B). The taxpayer is not at risk, however, for any 

pledge of property used in the business. Id.

The parties disagree whether the RFB stock petitioners 

pledged constitutes property used in the business. Petitioners 

contend that RFB stock is not property used in the business 

for at-risk purposes because the stock represents an ownership interest in the business that can be sold or transferred 

without affecting corporate assets. According to petitioners, 

stock is therefore inherently separate and distinct from the 

64 137 UNITED STATES TAX COURT REPORTS (46) 

12Furthermore, the flush language of sec. 465(b)(2) provides that no property shall be taken 

into account as security for borrowed amounts if such property is directly or indirectly financed 

by indebtedness which is secured by the property. The RFB stock qualifies as ‘‘property * * * 

directly or indirectly financed by indebtedness’’ because RFB borrowed the funds from CoBank. 

Petitioners’ pledge of RFB stock therefore cannot be taken into account to determine whether 

petitioners were at risk. 

activities of a corporation and the pledge of stock of the 

related corporation should allow petitioners to be treated as 

at risk. We disagree. 

We reject petitioners’ narrow interpretation of property 

used in the business. Pledged property must be ‘‘unrelated to 

the business’’ if it is to be included in the taxpayer’s at-risk 

amount. See sec. 465(b)(2)(A) and (B); Krause v. Commissioner, 92 T.C. 1003, 1016–1017 (1989), affd. sub nom. 

Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994); 

Miller v. Commissioner, T.C. Memo. 2006–125. 12 The Alpine 

entities were formed by petitioner to expand RFB’s existing 

cellular networks. RFB also used some of Alpine’s digital 

licenses to provide digital service to RFB’s analog network 

areas. RFB then allocated income from the licenses back to 

Alpine. The RFB stock is related to the Alpine entities. Cf. 

sec. 1.465–25(b)(1)(i), Proposed Income Tax Regs., 44 Fed. 

Reg. 32244 (June 5, 1979). 

Moreover, even if the RFB stock is unrelated to the cellular 

phone business, petitioners were not economically or actually 

at risk with respect to their involvement with the Alpine 

entities. Petitioners contend that petitioner was the obligor of 

last resort on the CoBank loan. Petitioners were not actually 

at risk because they never personally guaranteed the 

CoBank loan, nor were they ever personally liable on the 

purported loans to the Alpine entities. Additionally, petitioners were not economically at risk. We have held that 

where the transaction has been structured so as to remove 

any realistic possibility of loss, the taxpayer is not at risk for 

the borrowed amounts. See Oren v. Commissioner, 357 F.3d 

at 859; Levien v. Commissioner, 103 T.C. 120, 126 (1994), 

affd. without published opinion 77 F.3d 497 (11th Cir. 1996). 

We have already determined that the structured transaction 

made it highly unlikely that petitioners would experience a 

loss. 

We find that petitioners’ pledge of RFB stock did not put 

them at risk in Alpine and the other Alpine entities to allow 

them passthrough losses. 

(46) BROZ v. COMMISSIONER 65

V. Business and Startup Expenses

A. Business Expenses

We now must decide whether Alpine and Alpine Operating 

were engaged in an active trade or business for purposes of 

deducting certain expenses. Alpine and Alpine Operating 

deducted interest, depreciation, startup and certain other 

business expenses (beginning expenses). Respondent argues 

that none of the Alpine entities are entitled to deductions for 

the beginning expenses because they were not involved in an 

active trade or business during the years at issue. Petitioners 

contend that the Alpine entities acquired licenses and related 

equipment to expand RFB’s existing cellular business and are 

therefore entitled to the deductions for the beginning 

expenses. We begin with the general rules for deducting business expenses. 

Taxpayers may deduct ordinary and necessary expenses 

paid or incurred during the taxable year in carrying on a 

trade or business. Sec. 162(a). The taxpayer is not entitled to 

deduct expenses incurred before actual business operations 

commence and the activities for which the trade or business 

was formed are performed. Johnsen v. Commissioner, 83 T.C. 

103, 114 (1984), revd. 794 F.2d 1157 (6th Cir. 1986). Whether 

the taxpayer is actively carrying on a trade or business 

depends on the facts and circumstances. Commissioner v. 

Groetzinger, 480 U.S. 23, 36 (1987). A taxpayer is not 

engaged in a trade or business even if he has made a firm 

decision to enter into business and over a considerable period 

of time spent money in preparing to enter that business. 

Richmond Television Corp. v. United States, 345 F.2d 901, 

907 (4th Cir. 1965). The taxpayer is not engaged in any trade 

or business until the business has begun to function as a 

going concern and has performed the activities for which it 

was organized. Id.

The determination of whether an entity is actively engaged 

in a trade or business must be made by viewing the entity 

in a stand-alone capacity and not in conjunction with other 

entities. See Bennett Paper Corp. & Subs. v. Commissioner, 

78 T.C. 458, 463–465 (1982), affd. 699 F.2d 450 (8th Cir. 

1983). RFB’s business therefore cannot be attributed to Alpine 

and Alpine Operating. Instead, we must examine the Alpine 

66 137 UNITED STATES TAX COURT REPORTS (46) 

13We find compelling that Alpine did not meet the FCC’s build out requirement to make service available to at least 25 percent of the population in any license areas within five years of 

the grant. The FCC canceled two of the three licenses Alpine retained, and Alpine returned the 

third license to the FCC and forfeited the downpayment. 

entities individually to determine whether they were engaged 

in a trade or business during the years at issue. We begin 

with Alpine. 

Petitioners organized Alpine to obtain FCC licenses and to 

construct and operate networks to service the new license 

areas. Petitioners claim that Alpine had two on-air networks 

in September 2001. Petitioners failed to provide any evidence 

beyond petitioner’s own self-serving testimony to substantiate this claim, however. Instead, the record reflects that the 

on-air networks were operated by RFB rather than Alpine. 

RFB used Alpine’s Michigan licenses and allocated any 

income earned from the licenses to Alpine or the Alpine 

license holding entities. 13 Petitioners failed to establish here 

that Alpine was engaged in an active trade or business 

during the years at issue, and it is not entitled to any deductions for beginning expenses. 

We now turn to Alpine Operating. Alpine Operating was 

formed for the sole purpose of serving Alpine’s business and 

depended on Alpine for revenue. We have already determined 

that petitioners failed to establish that Alpine was engaged 

in an active trade or business during the years at issue. We 

therefore find, by extension, that Alpine Operating was not 

engaged in an active trade or business and is not entitled to 

deduct any beginning expenses. 

B. Startup Expenses

Petitioners alternatively argue that they are entitled to 

amortize and deduct the beginning expenses as startup 

expenses. Taxpayers are entitled to amortize and deduct 

startup expenses only if they attach a statement to the 

return for the taxable year in which the trade or business 

begins. See sec. 195(b)(1), (c). Petitioners did not file the 

appropriate statement with their returns and are only now 

electing to amortize and deduct the expenses. We find therefore that they are ineligible to amortize and deduct the 

beginning expenses.

(46) BROZ v. COMMISSIONER 67

VI. Amortization of the FCC Licenses

We now turn to amortization of the FCC licenses. The parties agree that the licenses are amortizable but disagree on 

when amortization should begin. Their dispute is based on 

their different interpretations of section 197. Respondent contends that the licenses are amortizable upon commencement 

of a trade or business. Petitioners argue that the licenses are 

amortizable upon acquisition. We must decide for the first 

time whether section 197 requires that the taxpayer be 

engaged in a trade or business to claim amortization deductions. If we determine that section 197 imposes a trade or 

business requirement, we must also determine the extent of 

that requirement. We begin with the general rules for amortizing intangibles. 

Intangibles were amortized and depreciated under section 

167 before the enactment of section 197. Sec. 1.167(a)–3, 

Income Tax Regs. Taxpayers could claim depreciation deductions for intangible property used in a trade or business or 

held for the production of income if the property had a useful 

life that was limited and reasonably determinable. Id. There 

was some uncertainty, however, over what constituted an 

amortizable intangible asset and the proper method and 

period for depreciation. See Omnibus Budget Reconciliation 

Act of 1993, Pub. L. 103–66, sec. 13261, 107 Stat. 532. 

Congress enacted section 197 to resolve some of the 

uncertainty surrounding the regulation. H. Rept. 103–111, at 

777 (1993), 1993–3 C.B. 167, 353. An ‘‘amortizable intangible’’ is now defined as an intangible acquired by and held 

in connection with the conduct of a trade or business. Sec. 

197(c)(1). Such intangibles include ‘‘any license, permit or 

other right granted by a governmental unit or an agency or 

instrumentality thereof ’’ that is held in connection with the 

conduct of a trade or business. See sec. 197(c)(1)(B), (d)(1)(D). 

The cost of the intangible is amortizable over a fixed 15-year 

period. Sec. 197(a). 

Petitioners contend that section 197 lacks a specific trade 

or business requirement. Thus, petitioners argue that they 

may begin amortizing the FCC licenses upon grant even 

though no trade or business has begun. They argue that the 

statute lacks a specific trade or business requirement 

because the phrase ‘‘trade or business’’ does not appear in 

68 137 UNITED STATES TAX COURT REPORTS (46) 

subsection (a), which provides the general rule. They argue 

that the plain meaning of the statute permits them to begin 

amortizing the licenses in the month of the license grant 

regardless of whether any business had begun. 

We turn to the language of section 197. It is a central tenet 

of statutory construction that, when any provision of a 

statute is interpreted, the entire statute must be considered. 

See, e.g., Lexecon Inc. v. Milberg Bershad Hynes & Lerach, 

523 U.S. 26, 36 (1998); Huffman v. Commissioner, 978 F.2d 

1139, 1145 (9th Cir. 1992), affg. in part and revg. in part 

T.C. Memo. 1991–144. The phrase ‘‘trade or business’’ 

appears five times in section 197. An intangible is not 

amortizable under the general rule of subsection (a) unless it 

is an ‘‘amortizable section 197 intangible.’’ See sec. 197(a). An 

amortizable section 197 intangible is defined as an intangible 

that is held ‘‘in connection with the conduct of a trade or 

business.’’ See sec. 197(c)(1)(B). The statute requires that 

there be a trade or business for amortization purposes. Mere 

grant of an FCC license does not satisfy the requirement. 

Moreover, to interpret section 197 as allowing amortization 

without regard to the taxpayer’s trade or business ignores 

the purpose behind section 197. Section 197 was enacted to 

provide taxpayers acquiring intangible assets with a deduction similar to the depreciation deduction under section 167 

for tangible assets. Taxpayers are allowed a depreciation 

deduction for property used in a trade or business. See sec. 

167(a). There is no indication in the legislative history of section 197 that Congress intended to change depreciation principles established in section 167 to allow taxpayers to amortize intangible assets without regard to whether there was a 

trade or business. 

We now must determine the nature of the section 197 

trade or business requirement. Several Code sections impose 

an active trade or business requirement. For example, taxpayers are allowed to deduct business expenses incurred in 

carrying on a trade or business, sec. 162, depreciation 

expenses for tangible personal property used in a trade or 

business, sec. 167, and startup expenses for an ‘‘active trade 

or business’’, sec. 195. The taxpayer must be carrying on or 

engaged in a trade or business at the time of the expenditure 

to be eligible for the deduction. See Weaver v. Commissioner, 

T.C. Memo. 2004–108. In contrast, only a passive trade or 

(46) BROZ v. COMMISSIONER 69

14Moreover, regulations have been promulgated that reinforce the trade or business requirement in sec. 197. The regulations clarify that amortization under sec. 197 begins on the later 

of—

(A) The first day of the month in which the property is acquired; or 

(B) In the case of property held in connection with the conduct of a trade or business or in 

an activity described in section 212, the first day of the month in which * * * the activity begins. 

[Sec. 1.197–2(f)(1)(i), Income Tax Regs.] 

The regulations apply only to property acquired after Jan. 25, 2000. Nevertheless, the regulations further support our determination that intangible property cannot be amortized if the 

trade or business or activity to which it relates has yet to commence. See Frontier Chevrolet 

Co. v. Commissioner, 116 T.C. 289, 294 n.10 (2001). 

business is required for deductibility of research and development costs under section 174 (‘‘in connection with a trade or 

business’’). Moreover, the taxpayer claiming a research and 

development cost need not be engaged in a trade or business 

at the time of the expenditure to qualify for the deduction. 

Smith v. Commissioner, 937 F.2d 1089, 1097 n.9 (6th Cir. 

1991) (quoting Diamond v. Commissioner, 930 F.2d 372 (4th 

Cir. 1991)), revg. 91 T.C. 733 (1988). 

Petitioners argue that the trade or business requirement 

imposed by section 197 is similar to the less stringent 

requirement imposed by section 174. See Snow v. Commissioner, 416 U.S. 500 (1974). They argue that both sections 

174 and 197 contain the phrase ‘‘in connection with’’ and 

both should therefore have the same meaning. Petitioners’ 

interpretation fails, however, to consider the entire phrase. 

The entire phrase in section 197 is ‘‘in connection with the 

conduct of a trade or business.’’ (Emphasis added.) The inclusion of the word ‘‘conduct’’ indicates to us that the intangibles must be used in connection with a business that is being 

conducted. We find, therefore, that section 197 contains an 

active trade or business requirement similar to the requirement imposed by section 162. 14

We have already determined that Alpine was not engaged 

in an active trade or business. The Alpine license holding 

entities were formed for the sole purpose of serving Alpine’s 

business and depended on Alpine for revenue. We therefore 

find, by extension, that the Alpine license holding entities 

were not engaged in an active trade or business and are not 

entitled to amortization deductions for the licenses. 

We earlier issued an Opinion, Broz v. Commissioner, 137 

T.C. 25 (2011), in which we found for respondent as to the 

class life for depreciation purposes. 

70 137 UNITED STATES TAX COURT REPORTS (46) 

We have considered all arguments made in reaching our 

decision, and, to the extent not mentioned, we conclude that 

they are moot, irrelevant, or without merit. 

To reflect the foregoing, 

Decision will be entered under Rule 155. 

f