United States Tax Court

T.C. Summary Opinion 2024-17

KWAKU EASON AND ASHLEY L. LEISNER,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 18006-19S. Filed August 13, 2024.

—————

Kwaku Eason and Ashley L. Leisner, pro se.

Christine A. Fukushima, Nora Demirjian, Yervant P. Hagopian, and

Katherine Holmes Ankeny, for respondent.

SUMMARY OPINION

CARLUZZO, Chief Special Trial Judge: This case was heard 

pursuant to the provisions of section 74631 of the Internal Revenue Code 

in effect when the Petition was filed. Pursuant to section 7463(b), the 

decision to be entered is not reviewable by any other court, and this 

Opinion shall not be treated as precedent for any other case.

In a notice of deficiency dated July 12, 2019 (notice), respondent 

determined a deficiency in petitioners’ 2016 federal income tax and a 

section 6662(a) accuracy-related penalty. The issues for decision are 

whether petitioners (1) were engaged in a trade or business during 2016 

that would allow for the deductions shown on Schedule C, Profit or Loss 

1 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax 

Court Rules of Practice and Procedure.

Served 08/13/24
2

From Business, included with their 2016 federal income tax return 

(return), and (2) are liable for a section 6662(a) accuracy-related penalty.

Background

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

the Petition was filed, Kwaku Eason, an engineer, lived in California,

and Ashley L. Leisner, a nurse, lived in Michigan.

At the start of 2016 petitioners owned two residential properties. 

One was held for rent and rented out during that year, and the other 

was sold on June 28, 2016. Kwaku Eason lost his job shortly before or 

after the start of 2016. For personal and family reasons petitioners 

decided to explore various income-generating activities separate and 

apart from their educational and professional backgrounds.

Around that time Advanced Real Estate Education (Education) 

offered courses on business opportunities available through real estate 

ownership and investment. Education’s services came to petitioners’ 

attention through internet research and television programing. During 

2016 petitioners enrolled in two courses offered by Education and paid 

the company $41,934 to do so.

On July 29, 2016, petitioners formed Ashley & Makai Homes 

(Homes), a corporation that for 2016 made a valid election to be taxed 

under subchapter S of the Internal Revenue Code. See § 1362. As of the 

close of 2016, petitioners owned 100% of the stock of Homes. According 

to petitioners, Homes was formed to provide advice and guidance to real 

estate owners and investors, although the specific services that Homes 

intended to offer and/or provide to customers is unclear. Nothing in the 

record suggests that petitioners or Homes were required to obtain any 

federal, state, or local license before the intended business activity could 

begin. 

Petitioners had business cards and business stationery printed, 

and they attended some of the training sessions in connection with 

Education’s courses; but it is unclear what else, if anything, they did in 

connection with Homes’ intended purpose. As it turned out, Education 

defaulted on many of the services that petitioners expected to receive 

from the company. By the close of 2018 Education had gone out of 

business, and petitioners had abandoned whatever business activities 

they intended to conduct through Homes. 
3 

Expenses attributable to Homes, including the cost of the 

Education courses, are shown as deductions on a 2016 Form 1120S, U.S. 

Income Tax Return for an S Corporation, as well as on a Schedule C 

included with petitioners’ return. Neither the Form 1120S nor 

petitioners’ return shows any income attributable to the real estate 

services intended to be offered or offered by petitioners or Homes. Both 

the Form 1120S and petitioners’ Schedule C show a loss resulting from 

the deductions claimed on each document. 

Discussion

I. Schedule C Deductions

In the notice respondent disallowed all the deductions claimed on 

the Schedule C. Because petitioners did not claim a flowthrough loss 

from Homes, the deductions have not been duplicated. At trial 

petitioners acknowledged that the deductions should have been taken 

into account as petitioners’ pro rata shares of the loss incurred by 

Homes, see § 1366(d)(1), rather than claimed on the Schedule C. To keep 

things simple, however, we ignore the technicalities that govern the 

federal income taxation of an S corporation and its shareholders and 

focus on petitioners’ entitlement to the deductions as though the 

deductions were properly reportable as trade or business expenses on 

the Schedule C included with the return.

Respondent advances various reasons why petitioners are not 

entitled to any of the deductions claimed on the Schedule C; we need to 

focus on only one. According to respondent, petitioners are not entitled 

to the deductions because whatever business activity petitioners or 

Homes intended to carry on had not started by the close of 2016.

Generally, the Commissioner’s determination made in a notice of 

deficiency is presumed correct, and the taxpayer bears the burden of 

proving that the determination is erroneous. Rule 142(a); Welch v. 

Helvering, 290 U.S. 111, 115 (1933).2 As we have observed in opinions 

too numerous to count, deductions are a matter of legislative grace, and 

the taxpayer bears the burden of proving entitlement to any claimed 

deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 

84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

2 Petitioners do not claim, and the record does not otherwise demonstrate, that 

the provisions of section 7491(a) apply here, and we proceed as though they do not.
4 

Section 162(a) permits a deduction for ordinary and necessary 

expenses paid or incurred during the taxable year “in carrying on any 

trade or business.” An expense is deductible under section 162 only if it 

is paid or incurred while the taxpayer is “carrying on” a trade or 

business, not before. See § 195(a); see also Richmond Television Corp. v. 

United States, 345 F.2d 901, 907 (4th Cir. 1965), vacated and remanded 

per curiam on other grounds, 382 U.S. 68 (1965). A taxpayer has not 

“‘engaged in carrying on any trade or business’ within the intendment 

of section 162(a) until such time as the business has begun to function 

as a going concern and performed those activities for which it was 

organized.” See Richmond Television Corp., 345 F.2d at 907. 

Neither Homes nor petitioners reported any income from a 

business activity related to the disputed deductions, presumably 

because none was earned. The absence of income, in and of itself, does 

not compel a finding that a business has not yet started if other activities 

show that it has. Here, however, the absence of income coupled with the 

absence of any activity that shows that services were offered or provided 

to clients or customers during 2016 supports respondent’s position that 

the business had not yet started by the close of that year.

More likely than not, Education’s failure to fulfil its contractual 

obligations to petitioners frustrated their intention to start the business 

they had expected to conduct through Homes. Whatever the reason, 

petitioners have failed to demonstrate that they were carrying on a 

trade or business themselves or through Homes by the close of 2016. 

That being so, they are not entitled to the deductions claimed on the 

Schedule C, and respondent’s disallowance of those deductions is 

sustained. 

II. Section 6662(a) Penalty

 Respondent determined that petitioners are liable for a section 

6662(a) accuracy-related penalty. That section provides for a penalty if, 

among other reasons, the underpayment of tax required to be shown on 

a taxpayer’s return is attributable to a substantial understatement of 

income tax. See § 6662(b)(2), (d). The record shows that the amount of

the underpayment of tax required to be shown on petitioners’ 2016 

return is attributable to a substantial understatement of income tax. 

The record also shows that respondent has satisfied the obligations that 

allow him to impose the section 6662(a) penalty here in dispute. See

§§ 6751(b)(1), 7491(c). Nevertheless, respondent’s determination of the 

penalty is rejected because we find, for the reasons summarized below, 
5

that petitioners had reasonable cause with respect to the underpayment 

of tax and acted in good faith. See § 6664(c).

Unlike countless other cases where the imposition of a section 

6662(a) penalty is supported, at least in part, by the taxpayer’s claiming 

deductions that could not be substantiated, here there is no dispute that 

the expenses to which the disallowed deductions relate were paid. 

Further, reasonable minds could differ over the point in time, 

and/or the specific actions that establish when a business not subject to 

a licensing obligation begins. The Internal Revenue Code touches on the 

point, but little guidance is offered. For example, section 195(c)(2) 

provides, in relevant part, that “the determination of when an active

trade or business begins shall be made in accordance with such 

regulations as the Secretary may prescribe,” but there are no such 

regulations. 

Petitioners spent a considerable amount to enroll in Education’s

courses during 2016. They had business cards and stationery printed 

during 2016. But for the failure of Education to honor its contractual 

obligations to them, they might very well have taken additional actions 

to allow for a finding that the business started during 2016. We are 

satisfied that they believed in good faith that it did. They are not liable 

for a section 6662(a) penalty.

To reflect the foregoing, including the agreement between the 

parties with respect to Ashley L. Leisner’s entitlement to section 6015(f) 

relief, 

Decision will be entered under Rule 155.