Court Opinion

ID: 4338805
Source: CourtListenerOpinion
Date Created: 2018-11-14 04:05:10.942349+00
Date Added: 2024-06-11T10:10:01.342197
License: Public Domain

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 net-
                                               works. Instead, P formed related holding companies to hold
                                               title to the licenses and equipment. Many issues raised ques-
                                               tions 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
                                         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.
                                         2 Petitioners concede that the amortization period for the license acquired as part of the Michi-

                                      gan 2 acquisition should be 15 years and that the Schedule M–1 adjustment should be dis-
                                      allowed. 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.

                                      46

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                                      first decide a procedural issue, whether respondent is bound
                                      by equitable estoppel to a settlement offer made and subse-
                                      quently 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 peti-
                                      tioners 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 compa-
                                      nies 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 pre-
                                      sents 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.

                                        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.

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                                      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 corpora-
                                      tion, in 1991, the year he acquired the license. He contrib-
                                      uted 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. Approxi-
                                      mately 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.

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                                        The Michigan 4 license that petitioner contributed to RFB
                                      serviced the northern portion of the lower Michigan penin-
                                      sula 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 Fed-
                                      eral 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
                                             entered into a purchase agreement with Mackinac Cel-
                                           RFB
                                      lular to acquire the Michigan 2 license and related equip-
                                      ment 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 Cel-
                                      lular 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

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                                      50                 137 UNITED STATES TAX COURT REPORTS                                        (46)

                                      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 busi-
                                      ness 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 enti-
                                      ties) 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 dig-
                                      ital 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 demo-
                                      graphics 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 pur-
                                      chase 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 single-
                                      member 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
                                        4 The Alpine license holding entities were Alpine-California F, LLC, Alpine Michigan F, LLC,

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

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                                      (46)                            BROZ v. COMMISSIONER                                           51

                                      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 contin-
                                      ued to make payments on the FCC debt even after the
                                      licenses were transferred to the Alpine license holding enti-
                                      ties. 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 serv-
                                      iced 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 deduc-
                                      tions. 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.
                                         5 The depreciation deductions were for leasehold improvements for a California office, fur-

                                      niture, fixtures, computers and vehicles.
                                         6 The other deductions were for expenses such as salaries, office expenses, telephone and utili-

                                      ties, rent, insurance, and dues and subscriptions.
                                         7 Such expenses included consulting expenses, travel and entertainment expenses, salaries,

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

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                                        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 lim-
                                      ited 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 depre-
                                      ciation 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 Invest-
                                      ments), a single-member limited liability company, to serve
                                      as an intermediary for transferring money to the Alpine enti-
                                      ties. Petitioner’s tax advisers advised petitioner that he
                                      needed to increase his bases in the Alpine entities. Addition-
                                      ally, 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 year-
                                           8 RFB   initially recorded the advances in its books as ‘‘other assets’’.

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                                      end adjusting entries reclassifying the advances as loans
                                      from a shareholder. Alpine reflected the advances as long-
                                      term 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 pay-
                                      ments 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 pur-
                                      ported loans.
                                      IV. IRS Appeals Proceeding
                                         The Appeals case involved all five years at issue. Appeals
                                      Officer Thomas Dolce (Officer Dolce) was assigned to peti-
                                      tioners’ case and negotiated with petitioners’ attorney, Sean
                                      Cook (Mr. Cook). Petitioners, RFB and the Alpine license
                                      holding entities filed for bankruptcy protection in 2003. Peti-
                                      tioners’ 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

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                                      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 with-
                                      draw 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 peti-
                                      tioners 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 deprecia-
                                      tion because it was not engaged in an active trade or busi-
                                      ness. Respondent determined that the Alpine license holding
                                      entities amortization deductions for the licenses were dis-
                                      allowed 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 ever-
                                      evolving cellular phone industry with rapidly changing tech-

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                                      (46)                            BROZ v. COMMISSIONER                                          55

                                      nology. Several issues raise questions of first impression.
                                      These include whether in an S corporation there is a sepa-
                                      rate 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 begin-
                                      ning 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 alter-
                                      natively that respondent should be bound by equitable
                                      estoppel to the settlement offer because Officer Dolce reck-
                                      lessly withdrew the offer after petitioners had relied on it.
                                      Respondent denies that the oral settlement offer is enforce-
                                      able 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 settle-
                                      ment 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-peti-
                                      tion, 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

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                                      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 com-
                                      promise 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). Negotia-
                                      tions 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 det-
                                      riment 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 doc-
                                      trine 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 Govern-

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                                      ment to either intentionally or recklessly mislead the tax-
                                      payer. 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) reason-
                                      able 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 reck-
                                      less 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 tradi-
                                      tional 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 agree-
                                      ment. 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

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                                      58                 137 UNITED STATES TAX COURT REPORTS                                        (46)

                                      in the bankruptcy proceeding in reliance on the oral settle-
                                      ment offer. Petitioners have not established what rights, if
                                      any, they conceded attributable to the bankruptcy pro-
                                      ceeding.
                                        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 allo-
                                      cated $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 equip-
                                      ment and license from Pebbles, the seller. When a combina-
                                      tion 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 non-
                                      depreciable 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.
                                        9 Petitioners also rely on the Michigan 4 acquisition as best evidence of the value of the Michi-

                                      gan 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.

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                                      (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 Peb-
                                      bles. Mackinac’s original purchase of the Michigan 2 equip-
                                      ment 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 equip-
                                      ment 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 sus-
                                      tain respondent’s determination that $1.5 million be allo-
                                      cated 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 peti-
                                      tioner 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

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                                      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 share-
                                      holder 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 share-
                                      holder’s adjusted basis in his or her stock and the share-
                                      holder’s adjusted basis in any indebtedness of the S corpora-
                                      tion 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 corpora-
                                      tions, the amount does not have to be repaid. The share-
                                      holder 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 gen-
                                      erally acquires debt basis if the shareholder makes an eco-
                                      nomic 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 tax-
                                      payer 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.

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                                      (46)                            BROZ v. COMMISSIONER                                          61

                                      Commissioner, 352 U.S. 82 (1956); Estate of Bean v. Commis-
                                      sioner, 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 tax-
                                      payer 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 peti-
                                      tioner 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 arrange-
                                      ment. 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
                                        10 Petitioners substituted themselves for Alpine Investments, a disregarded entity they wholly

                                      owned, beginning in 1999.

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                                      62                 137 UNITED STATES TAX COURT REPORTS                                        (46)

                                      were made. See Ruckriegel v. Commissioner, supra. The pay-
                                      ments 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 pay-
                                      ments to Alpine on petitioners’ behalf. We have found that
                                      direct payments from a related entity to the taxpayer’s S cor-
                                      poration constituted payments on the taxpayer’s behalf
                                      where the taxpayer used the related entity as an ‘‘incor-
                                      porated 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 par-
                                      ties on his behalf. See Ruckriegel v. Commissioner, supra.
                                      Whether an entity is an incorporated pocketbook is a ques-
                                      tion 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. Peti-
                                      tioners also contend that their pledge of RFB stock as collat-
                                      eral 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. Commis-
                                      sioner, 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. Peti-
                                        11 Petitioners 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.

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                                      (46)                            BROZ v. COMMISSIONER                                          63

                                      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 pay-
                                      ment 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 busi-
                                      ness 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 invest-
                                      ment. 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 bor-
                                      rowed 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 owner-
                                      ship 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
                                      Memo. 2001–280; Culnen v. Commissioner, T.C. Memo. 2000–139, revd. and remanded 28 Fed.
                                      Appx. 116 (3d Cir. 2002).

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                                      64                 137 UNITED STATES TAX COURT REPORTS                                        (46)

                                      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. Commis-
                                      sioner, 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, peti-
                                      tioners 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.
                                        12 Furthermore, 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.

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                                      (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 busi-
                                      ness 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

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                                      66                 137 UNITED STATES TAX COURT REPORTS                                        (46)

                                      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 substan-
                                      tiate 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 deduc-
                                      tions 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 there-
                                      fore that they are ineligible to amortize and deduct the
                                      beginning expenses.

                                        13 We find compelling that Alpine did not meet the FCC’s build out requirement to make serv-

                                      ice 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.

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                                      (46)                            BROZ v. COMMISSIONER                                          67

                                      VI. Amortization of the FCC Licenses
                                         We now turn to amortization of the FCC licenses. The par-
                                      ties 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 con-
                                      tends 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 deduc-
                                      tions. 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 amor-
                                      tizing 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 deduc-
                                      tions 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 intan-
                                      gible’’ 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

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                                      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 deduc-
                                      tion 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 sec-
                                      tion 197 that Congress intended to change depreciation prin-
                                      ciples established in section 167 to allow taxpayers to amor-
                                      tize 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, tax-
                                      payers 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

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                                      (46)                            BROZ v. COMMISSIONER                                          69

                                      business is required for deductibility of research and develop-
                                      ment 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. Commis-
                                      sioner, 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 inclu-
                                      sion of the word ‘‘conduct’’ indicates to us that the intangi-
                                      bles 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 require-
                                      ment 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.
                                        14 Moreover, regulations have been promulgated that reinforce the trade or business require-

                                      ment 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 be-
                                      gins.
                                        [Sec. 1.197–2(f)(1)(i), Income Tax Regs.]
                                      The regulations apply only to property acquired after Jan. 25, 2000. Nevertheless, the regula-
                                      tions 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).

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                                      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

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