T.C. Sum m ary Opi ni on 20 13 -9 1

UNITED STAT ES TAX COURT GALE JORDAN, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

LORA A. JARRETT, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 3 05 8- 12 S, 30 59 -1 2S . Fi le d No ve m be r 18 , 20 13 . Lati f Odu ol a-Owo o, fo r pe ti ti on ers . Ch ris to ph er D. Brad le y , forres po nd en t.

SUMM ARY OPINION BUCH, Ju dg e: Thes e cas es were h eardpu rs ua ntto sec ti on 74 63 of t he In te rn al Rev enue Co de ineffe ctwhen th e p et it io ns were fi le d. Pur su an t t o 1 Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 (co nt in ue d...)- 2 -

se ct io n 7 46 3( b) , th e d eci si on s t o b e en te redare n otrev ie wab le by any ot he r co urt, an d t hi s o pi ni on m ay

no t b e tr eat edas p rece de ntforan y ot he r cas e. Res po nd en t d et erm in eda de fic ie nc y of $ 90 0 i n p et it io ne r Gal e Jo rd an ’s Fed eral in co m e ta x fo r 20 08 an d a n a ccu racy-rela te d p en al ty und er s ect io n 6 66 2( a) of $1 80 . Res po nd en t d et erm in eda de fic ie nc y of $ 3,3 85 inpe ti ti on er Lo ra A. Ja rret t’s Fe de ral in co m e ta x fo r 20 08 an d a n a ccu racy-rela te d p en al ty und er se ct io n 6 66 2( a) o f $6 77 . The i ss ue s fo r de ci si on are: (1) whet he r pe ti ti on ers were carry in g o n aren ta l p ro pe rty bu si ne ss in20 08 an d (2 ) whe th er p et it io ne rs are li ab le forth e acc ur acy-rela te d p en al ti es . W e fi ndth atth e p ro pe rty was n otpl aced in servi ce i n 2 00 8 a ndthus pe ti ti on ers m ay no t d educ t the ex pe ns es rel at in g t o t he pr op erty for20 08 . Furthe r, pe ti ti on ers are l iabl e fo r th ei r res pe ct iv e acc ur acyrel at edpe na lt ie s. Bac kg ro un d At the ti m e p et it io ne rs fil edth ei r pe ti ti on s, the y res id edinVirg in ia . Pet it io ne rs pu rch as eda si ng le -fam il y ho us e in Virg in iaon Aug us t 2 5, 2 00 8. Pet it io ne r Gal e Jo rd anm ad e rep ai rs of $ 3,5 00 an d re po rte d o th er ex pe ns es of $6 ,62 2 re la ti ng to th e p ro pe rty onhe r 20 08 Sch edul e E, Sup pl em en ta l In co m e an d (...co nt inue d) 1 Rev enue Co de (Co de ) in effe ctforth e y ear i n i ss ue , andall Ru le refe ren ces are t o th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e.- 3 -

Los s. Pet it io ne r Lor a A. Jarret t m ad e rep ai rs of $ 5,0 64 an d re po rte d o th er ex pe ns es of $ 8,6 14 rel at in g t o t he pro pe rty onhe r 20 08 Sch edul e E. Peti ti on ers pu rch as edth e h ou se with the in te ntto ren t i t, b utitwas n otactua ll y ren te d a t an y ti m e in 20 08 . Pet it io ne rs ’ so le ren ta l ap pl ic an t i n 2 00 8 app li edto ren t the ho us e o n Jul y 16 , 20 08 , whi ch was b efo re p et it io ne rs acqui redit . Howev er, p et it io ne rs di d n ot ch eckth e 2 00 8 app li can t’s cr ed it worth in es s u nt il Nov em be r 24 , 20 08 . As a res ul t of th atcred itch eck , pet it io ne rs de te rm in edth ey wou ldno t re ntth e h ou se to th e 20 08 ap pl ic an t. Pet it io ne rs ha d asec on d re nt al ap pl ic an t i n 2 00 9, a wo m anwho ap pl ie d t o ren t the ho us e o n J anua ry 30 , 20 09 . The 2 00 9 app li can t was eli gi bl e fo r Sec ti on 8 ho us in g a ss is ta nc e. Afterth e ap pl ic at io n, HUD se ntanin sp ect or , who st at edth at 2 ad di ti on al rep ai rs to th e h ou se were re qu ire d b efo re the ap pl ic an t co ul d re ntit . Pet it io ne r Lor a A. Jarret t t es ti fie d a t tria l re ga rd in g t he in sp ect io n, s ta ti ng :

The Sect io n 8 ho us in g p ro gr am un de r th e Uni te d S ta te s Ho us in g Actof 2 19 37 au th or iz es a pr iv at e la nd lo rdwho ren ts to a lo w-in co m e te na ntto rece iv e as si st an ce p aym en ts fro m th e Dep art m en t o f Hou si ng an d Urb anDeve lo pm en t (HUD) in anam ou ntcal cu la te d t o m ak e up t he di ffer en ce b etweenth e te na nt ’s ren t p aym en ts an d t he co nt ractren t ag reedup on by the lan dl or d a ndHUD. See Ci sn ero s v . Alb in e Ri dg e Grp ., 50 8 U.S. 1 0, 1 2 (1 99 3) ; s ee al so 42 U.S.C. sec . 14 37 f (2 00 6) .- 4 -

be cau se itwas Se ct io n 8 , at the ti m e th atsh e p utinhe r ap pl ic at io n an d we t ho ug htitok ay , Sect io n 8 sen t an in sp ect orou t, an d we h ada few ad di ti on al th in gs th atwe ha d t o d o b efo re the y wou ld --t oo k- - fin al ly app ro ve d h er ap pl ic at io n. So to us , y es , itwas [r eady forren t], un ti l the y cam e b ackan d s ai d, we n eedy outo do th es e th in gs . And we di d t he m , andth at ’s when sh e was ab le to m ov e in . The sec on d app li can t m ov edin to th e h ou se inMarc h 2 00 9. Pe ti ti on ers rep orte d a pl aced -in -s erv ic e d at e fo r th e h ou se of M arch1, 2 00 9, o n t he ir r es pe ct iv e 2 00 9 Fo rm s 4 56 2, Dep reci at io n a ndAm orti zat io n. On Dec em

be r 1, 2 01 1, re sp on de ntis su eda no ti ce o f de fic ie nc y to each pe ti ti on er d et erm in in g t ha t the ho us e was no t re ady an d a va il ab le to ren t i n 2 00 8 an d t hu s t he ex pe ns es pe ti ti on ers in cu rredforth e p ro pe rty sh ou ldhave be en cap it al iz ed . As a res ul t o f th atde te rm in at io n re sp on de ntrech arac te riz edth ei r cl ai m edreal est at e ta x p aym en ts an d m ortg ag e in te res t p aym en ts as i te m iz ed de du ct io ns . Thes e ad

jus tm en ts als o c au se d aco m pu ta ti on al ad

jus tm en t t o pe ti ti on er Lo ra A. Ja rret t’s re co ve ry reb at e cre di t. Ad di ti on al ly, res po nd en t de te rm in edanaccu racy-rela te d p en al ty for eac h p et it io ne r un de r se ct io n 6 66 2( a). Pet it io ne rs ti m el y

fil edpe ti ti on s d is pu ti ng res po nd en t’s d et erm in at io ns .

Dis cu ss io n Sect io n 1 62 (a) g en eral ly allo ws a d educ ti on forord in ary an d n eces sa ry ex pe ns es pa idinco nn ect io n wi th carry in g o n atra de or b us in es s. Sec ti on 21 2- 5 -

ge ne ral ly allo ws a d educ ti on forex pe ns es pa idor i nc urredinco nn ect io n wi th an act iv ity en ga ge d i n fo r th e p ro du ct io n o r co ll ect io n o f in co m e o r fo r th e m an ag em en t, co ns erv at io n, o r m ai nt en an ce o f pr op erty he ldfor th e p ro du ct io n o f in co m e. Su ch ex pe ns es , ho wev er, m us t b e as so ci at edwith atra de or b us in es s o r ot he r in co m e-p ro du ci ng act iv ity th atis fun ct io ni ng at t he ti m e th e ex pe ns es are in cu rred . A tax pa y er i s n otcarry in g o n atra de or b us in es s fo r se ct io n 1 62 (a)

3 pu rp os es un ti l the bu si ne ss is fun ct io ni ng as ago in g c on cern an d p erfo rm in g t he act iv it ie s fo r whi ch itwas o rg an iz ed . Bus in es s o pe rat io ns with re sp ectto th e 4 act iv ity m us t h av e actua ll y

co m m en ced . “ Unt il th atti m e, expe ns es rel at edto th at

5 act iv ity are n ot‘ or di na ry

an d n eces sa ry ’ expe ns es curren tl y de du ct ib le un de r se ct io n 1 62 (no r are th ey

de du ct ib le un de r se ct io n 2 12 ) bu t ra th er ar e ‘sta rt- up ’ or

Hardy v. Co m m is si on er, 9 3 T.C. 6 84 , 68 7 (1 98 9) , aff’d i n p art , rem an de d 3 in pa rt, 1 99 0 U.S. Ap p. LEXIS 1 96 70 (10 th Cir . Oct. 2 9, 1 99 0) ; s ee al so W oo dy v. Co m m is si on er, T.C. Mem o. 2 00 9- 93 , aff’d, 4 03 Fed . App x. 5 19 (D.C. Cir . 20 10 ); Glo to v v . Comm is si on er, T.C. Mem o. 2 00 7- 14 7. Ri ch m on d Tel ev is io n C or p. v . Uni te d S ta te s, 3 45 F.2d90 1, 9 07 (4t h C ir. 4 19 65 ), va cat edan d re m an de d o n o th er g ro un ds , 38 2 U.S. 6 8 (1 96 5) ; s ee al so Glo to v v . Comm is si on er, T.C. Mem o. 2 00 7- 14 7. McKe lv ey

v. Co m m is si on er, T.C. Mem o. 2 00 2- 63 , aff’d, 7 6 F ed . App x. 5 80 6 (9 thCir . 20 03 ).- 6 -

‘pre-o pe ni ng ’ ex pe ns es .” Startup e xp en se s, al th ou gh no t cu rren tl y de du ct ib le , 6 m ay ge ne ral ly be d educ te d o ve r ti m e p ur su an t t o s ect io n 1 95 . 7 Whe th er a t ax pay er’s act iv it ie s co ns ti tu te th e carry in g o n o f a trad e o r bu si ne ss requi res anex am in at io n o f th e fac ts an d c irc um st an ces of e ach cas e. 8 The Co urt h as foc us edon th ree f act or s t o i nd ic at e th e ex is te nc e o f a trad e o r bu si ne ss : (1 ) whe th er the tax pa y er u nd ert oo k the act iv it y in te nd in g t o e arna pr of it ; (2 ) whe th er the tax pa y er i s re gu la rly andact iv el y in vo lv edinth e act iv it y ; an d (3 ) whe th er the tax pa y er’s act iv it y ha s ac tu al ly comm en ced . 9 The pa rti es ha ve st ip ul at edto th e fi rs t fa ct or . W it h re sp ectto th e se co ndfact or , in20 08 pe ti ti on ers were n oty etreg ul arl y an d a ct iv el y

in vo lv edinth e act iv it y . Peti ti on ers ’ act iv it y was p ro pe rty rent al . To supp ort the ass ert io n t ha t the y were re gu larly andact iv el y in vo lv edinho ld in g o ut W oo dy v. Co m

m is si on er, T.C. Mem o. 2 00 9- 93 (ci ti ng Hardy v. 6 Co m m is si on er, 9 3 T.C. at68 7- 68 8) . W oo dy v. Co m

m is si on er, T.C. Mem o. 2 00 9- 93 . 7 W oo dy v. Co m

m is si on er, T.C. Mem o. 2 00 9- 93 ; s ee al so Co m mis si on er v . 8 Gro et zi ng er, 4 80 U.S. 23 , 36 (19 87 ); Hi gg in s v . Commis si on er, 3 12 U.S. 21 2 (1 94 1) ; O’Don ne ll v. Co m m is si on er, 6 2 T.C. 7 81 (19 74 ), aff’d wi th ou t p ub li sh ed op in io n, 5 19 F.2d14 06 (7th C ir. 1 97 5) . See Woo dy v. Co m

m is si on er, T.C. Mem o. 2 00 9- 93 ; s ee al so McM anus v. 9 Co m m is si on er, T.C. Mem o. 1 98 7- 45 7, af f’d wit ho utpubl is he d o pi ni on , 86 5 F .2d 25 5 (4 thCir . 19 88 ).- 7 -

th e h ou se forren t i n 2 00 8, p et it io ne rs st at e th atth ey en ga ge d i n wo rd -o f-m ou th adve rti si ng th ro ug ho ut20 08 . Howev er, the on ly evi de nc e o f act iv el y work in g t o ren t the pro pe rty is t he si ng le 20 08 ren ta l ap pl ic at io n tha t was co m pl et edm or e th ana m on th be fo re p et it io ne rs own edth e p ro pe rty. T he re i s n o e vi de nc e supp orti ng an y

adve rti si ng in20 08 aft er p et it io ne rs pu rch as edth e h ou se . Ins te ad , th e ev id en ce re fle ct s t ha t p et it io ne rs di d n otatt em ptto ren t the ho us e imm ed ia te ly aft er the y pu rch as edit ; ra th er, the y m ad e rep ai rs to it . It ap pe ars th e fi rs t t im e th ey tu rn edth ei r at te nt io n b ackto ren ti ng th e h ou se was No ve m be r 24 , 20 08 , when th ey ch eck edth e cre di two rth in es s o f th e fi rs t ap pl ic an t. Alt ern at iv el y , th e fac ts supp orti ng pe ti ti on ers ’ cl ai m th atth ey were re gu la rly acti ve ly eng ag edinren ti ng ou t the pro pe rty in 2 00 9 i nc lu de th e 2 00 9 app li cat io n, the co m m un ic at io ns with HUD for t he Sect io n 8 pro gr am , th e HUD in sp ect io n, the ad di ti on al rep ai rs requi redan d m ad e, an d t he 20 09 ap pl ic an t’s ac tu al ly rent in g t he ho us e st art in g i n Mar ch20 09 . The th irdfact orrequi res th atth e act iv it y ha s ac tu al ly comm en ced . The m ere p ur ch as e o f a p ro pe rty is n oten ou gh if t ha t p ro pe rty is n othe ldou t fo r ren t oractua ll y

ren te d. The fa ctth ata ta xp ay er was lo ok in g fo r orsec ur eda te na nt

1 0 be fo re ac tu al ly pur ch as in g t he pro pe rty is n otsu ffi ci en t t o i nd ic at e th e st artof a Ch arl to n v . Comm is si on er, 1 14 T.C. 33 3, 3 38 (20 00 ). 1 0- 8 -

bu si ne ss . There fo re, p et it io ne rs ’ wor d- of -m ou thadve rti si ng an d s ol ic it at io n o f 1 1 th e 2 00 8 app li cat io n b efo re the y own edth e h ou se do es no t ri se to th e le ve l o f st art in g abu si ne ss . A tax pay er i s n otcarryin g o n atra de or b us in es s u nd er s ect io n 16 2( a) unt il th e b us in es s i s fu nc ti on in g a s a g oi ng co nc ernan d p erfo rm in g t he act iv it ie s fo r whi ch itwas o rg an iz ed . There fo re, u nt il th e rep ai rs are co m pl et ed 1 2 an d t he ho us e is he ldou t fo r ren t o r actua ll y ren te d, p et it io ne rs ’ bu si ne ss is no t fu nc ti on in g a s a g oi ng co nc ern . It i s n ot ab le th atHUD requ ire d a dd it io na l re pa irs be fo re i t wo ul d a gr ee tha t the ho us e was su it ab le forren ta l b y th e 2 00 9 app li can t. Fro m th at , itis cle ar tha t the ho us e was no t re ady to be oc cupi edin20 08 . W e al so fin d i t n ot ewo rth y th atbo th pe ti ti on ers rep orte d apl aced -in -s erv ic e da te forth e h ou se of M arch 1, 2 00 9, o n t he ir 2 00 9 F ed eral in co m e ta x re tu rn s. 1 3 A rev ie w of t he reco rdrefl ect s t ha t p et it io ne rs were n otreg ul arl y an d act iv el y in vo lv edinren ti ng ou t the pro pe rty in 2 00 8. Th e act iv it y di d n ot co m m en ce u nt il so m et im e in 20 09 , whenth e 2 00 9 app li cat io n was subm it te d,

Jo hn se n v . Comm is si on er, 8 3 T.C. 1 03 (19 84 ), rev ’d on ot he r gr ou nd s, 1 1 79 4 F .2d11 57 (6th C ir. 1 98 6) ; Woo dy v. Co m mis si on er, T.C. Mem o. 2 00 9- 93 . Ri ch m on d Tel ev is io n C or p. v . Uni te d S ta te s, 3 45 F.2dat 9 07 ; s ee al so 1 2 Gol ot ov v. Co m

mis si on er, T.C. Mem o. 2 00 7- 14 7. See M en de s v . Comm is si on er, 1 21 T.C. 30 8, 3 12 (20 03 ) (fi nd in g t ha t 1 3 po si ti on s t ak enina ta x re tu rnsi gn edby a tax pa y er m ay be tre at edas a dm is si on s) .- 9 -

pe ti ti on ers ha d d eal in gs with HUD, th e h ou se was m ad e su it ab le foroc cupa nc y , an d t he ho us e was actua ll y ren te d. Pe ti ti on ers ha ve no t m etth ei r bu rd ento sh ow th atth e st artup ph as e was co m pl et edan d t ha t the bu si ne ss be ga n i n 2 00 8. Th us , th e rep ai rs an d o th er ex pe ns es rel at in g t o t he pro pe rty were no t o rd in ary an d ne ces sa ry bu si ne ss expe ns es for20 08 an d a re co ns id eredst artup expe ns es th at can no t b e cu rren tl y

de du ct ed . Accu racy-rela te d p en al ty Sect io n 6 66 2( a) an d (b )(1 ) im po se s a 2 0% p en al ty on a ny po rti on of a n un de rp aym en t tha t i s at tri bu tabl e to ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns . The term “ ne gl ig en ce” i nc lu de s an y fai lu re t o m ak e a rea so nabl e at te m ptto co m pl y with t he pro vi si on s o f th e Co de ; the term “ di sr eg ard ” in cl ud es an y care le ss , reck le ss , or i nt en ti on al di sr eg ard . Neithe r pe ti ti on er d is pu te d t he 1 4 pe na lty inhe r pe ti ti on or a n a m en de d p et it io n. Ru le 41 (b ) pr ov id es foris su es to be tri edby con se nt . Peti ti on ers ret ai ne d c ou ns el fortri al , bu t the y di d n otrai se th e is su e o f pe na lt ie s attri al . There fo re, eac h p et it io ne r is li ab le forth e acc ur acyrel at edpe na lty

for20 08 . 1 5

Sec. 6 66 2( c). 1 4 See Rul e 3 4( b) (4 ). 1 5- 10 - Co nc lu si on W e co nc lu de th atth e h ou se was n otpl acedinservi ce i n 2 00 8; th eref or e, pe ti ti on ers are n oten ti tl edto de du ctex pe ns es rel at edto th e h ou se on th ei r res pe ct iv e 2 00 8 S ch edul es E. Furthe r, pe ti ti on ers are l iabl e fo r th ei r res pe ct iv e accu racy-rela te d p en al ti es for20 08 . To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te redfor res po nd en t.